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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____ to ____

Commission File Number: 001-32295

FENNEC PHARMACEUTICALS INC.

(Exact Name of Registrant as Specified in Its Charter)

British Columbia, Canada

20-0442384

(State or Other Jurisdiction of
Incorporation or Organization

(I.R.S. Employer
Identification No.)

 

 

PO Box 13628, 68 TW Alexander Drive
Research Triangle Park, North Carolina
(Address of Principal Executive Offices)

27709
(Zip Code)

Registrant’s Telephone Number, Including Area Code: (919) 636-4530

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, no par value

FENC

Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES      NO 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  

 

Accelerated Filer

Non-Accelerated Filer

 

Smaller reporting company

 

 

 

Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES      NO 

As of November 9, 2021, there were 26,006,853 common shares outstanding.

Table of Contents

TABLE OF CONTENTS

Page

PART I: FINANCIAL INFORMATION

3

Item 1. Condensed Consolidated Financial Statements

3

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020

3

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020

4

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020

5

Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020

6

Notes to the Condensed Consolidated Financial Statements

7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

28

Item 4. Controls and Procedures

28

PART II: OTHER INFORMATION

29

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3. Defaults Upon Senior Securities

30

Item 4. Mine Safety Disclosures

30

Item 5. Other Information

30

Item 6. Exhibits

31

Signatures

32

2

Table of Contents

PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

Fennec Pharmaceuticals Inc.

Condensed Consolidated Balance Sheets

(U.S. Dollars and shares in thousands)

September 30, 2021

December 31, 

    

(Unaudited)

    

2020

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

24,335

$

30,344

Prepaid expenses

 

1,232

 

797

Other current assets

 

412

 

276

Total current assets

25,979

31,417

Non-current assets

Deferred issuance cost

508

466

Deferred issuance cost (amortization)

(473)

(466)

Total non-current assets

35

Total assets

$

26,014

$

31,417

 

  

 

  

Liabilities and Shareholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

1,154

$

1,571

Accrued liabilities

 

860

 

776

Total current liabilities

 

2,014

 

2,347

Long term liabilities

Term loan

5,000

Debt discount

(13)

Total long term liabilities

4,987

Total liabilities

 

7,001

 

2,347

 

  

 

  

Commitments and Contingencies (Note 6)

 

  

 

  

 

  

 

  

Shareholders’ equity:

 

  

 

  

Common stock, no par value; unlimited shares authorized; 26,007 shares issued and outstanding (2020 ‑26,003)

 

140,780

 

140,733

Additional paid-in capital

 

52,049

 

49,234

Accumulated deficit

 

(175,059)

 

(162,140)

Accumulated other comprehensive income

 

1,243

 

1,243

Total shareholders’ equity

 

19,013

 

29,070

Total liabilities and shareholders’ equity

$

26,014

$

31,417

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Table of Contents

Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Operations

(U.S. Dollars and shares in thousands, except per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

Revenue

$

$

$

$

 

  

 

  

 

  

 

  

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

 

1,242

 

1,368

 

4,458

 

3,882

General and administrative

 

2,931

 

4,491

 

8,558

 

10,657

 

  

 

  

 

  

 

  

Loss from operations

(4,173)

(5,859)

(13,016)

(14,539)

 

  

 

  

 

  

 

  

Other income/(expense):

 

  

 

  

 

  

 

  

Other income/(loss)

(1)

(8)

(9)

(4)

Amortization expense

(8)

(355)

(8)

(402)

Unrealized gain on securities

 

39

 

 

137

 

Interest income

 

13

 

22

 

41

 

74

Interest expense

(55)

(64)

Total other (expense)/income

 

(12)

 

(341)

 

97

 

(332)

 

  

 

  

 

  

 

  

Net loss

$

(4,185)

$

(6,200)

$

(12,919)

$

(14,871)

Basic net loss per common share

$

(0.16)

$

(0.24)

$

(0.50)

$

(0.64)

Diluted net loss per common share

$

(0.16)

$

(0.24)

$

(0.50)

$

(0.64)

Weighted-average number of common shares outstanding basic

26,007

25,598

26,004

22,969

Weighted-average number of common shares outstanding diluted

 

26,007

 

25,598

 

26,004

 

22,969

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Table of Contents

Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in thousands)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

Cash flows (used in) provided by:

 

  

 

  

  

 

  

 

Operating activities:

 

  

 

  

  

 

  

 

Net loss

$

(4,185)

$

(6,200)

$

(12,919)

$

(14,871)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

 

  

 

  

Amortization of deferred issuance costs

 

8

 

355

 

8

 

402

Unrealized (gain) on securities

(39)

(137)

Stock-based compensation - contractors

 

 

21

 

9

 

63

Stock-based compensation - employees

 

917

 

1,238

 

2,830

 

2,151

Changes in operating assets and liabilities:

 

  

 

  

 

  

 

  

Prepaid expenses

 

(823)

 

(734)

 

(435)

 

(674)

Other assets

 

(2)

 

 

 

4

Accounts payable

 

477

 

(71)

 

(417)

 

1,072

Accrued liabilities

 

689

 

(55)

 

84

 

(458)

Net cash used in operating activities

 

(2,958)

 

(5,446)

 

(10,977)

 

(12,311)

 

  

 

  

 

  

 

  

Financing activities:

 

  

 

  

 

  

 

  

Issuance of shares, options exercise

 

 

 

24

 

Issuance of shares, net of issuance costs

 

 

 

 

31,967

Proceeds from long-term debt

5,000

Debt discount

(14)

Capitalized deferred issuance costs

 

 

(117)

 

(42)

 

(140)

Net cash (used in)/provided by financing activities

 

 

(117)

 

4,968

 

31,827

(Decrease)/increase in cash and cash equivalents

(2,958)

(5,563)

(6,009)

19,516

Cash and cash equivalents - Beginning of period

27,293

38,729

30,344

13,650

Cash and cash equivalents - End of period

$

24,335

$

33,166

$

24,335

$

33,166

Non-cash investing and financing activities:

 

  

 

  

 

  

 

  

Deferred issuance cost (warrant value)

$

$

$

$

255

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three and Nine Months Ended September 30, 2021 and 2020

(U.S. dollars and shares in thousands)

(Unaudited)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance at December 31, 2020

26,003

$

140,733

$

49,234

$

(162,140)

$

1,243

$

29,070

Stock options issued to employees

 

 

 

587

 

 

 

587

Stock options issued to contractors

 

 

 

9

 

 

 

9

Net loss

 

 

 

 

(4,733)

 

 

(4,733)

Balance at March 31, 2021

 

26,003

$

140,733

$

49,830

$

(166,873)

$

1,243

$

24,933

Stock options issued to employees

 

 

 

1,326

 

 

 

1,326

Exercise of options

4

47

(24)

23

Net loss

 

 

 

 

(4,001)

 

 

(4,001)

Balance at June 30, 2021

 

26,007

$

140,780

$

51,132

$

(170,874)

$

1,243

$

22,281

Stock options issued to employees

 

 

 

917

 

 

 

917

Net loss

 

 

 

 

(4,185)

 

 

(4,185)

Balance at September 30, 2021

 

26,007

$

140,780

$

52,049

$

(175,059)

$

1,243

$

19,013

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance at December 31, 2019

19,896

$

106,392

$

48,271

$

(144,031)

$

1,243

$

11,875

Stock options issued to employees

 

 

 

391

391

Stock options issued to contractors

 

 

 

21

 

 

 

21

Net loss

(3,826)

(3,826)

Balance at March 31, 2020

19,896

$

106,392

$

48,683

$

(147,857)

$

1,243

$

8,461

Stock options issued to consultants

 

 

 

522

 

 

 

522

Stock options issued to employees

 

 

 

21

 

 

 

21

Issuance of securities

5,460

31,967

31,967

Net loss

 

 

 

 

(4,845)

 

 

(4,845)

Balance at June 30, 2020

 

25,356

$

138,359

$

49,226

$

(152,702)

$

1,243

$

36,126

Stock options issued to employees

1,238

1,238

Stock options issued to contractors

21

21

Exercise of options

454

1,373

(1,373)

Net loss

(6,200)

(6,200)

Balance at September 30, 2020

 

25,810

$

139,732

$

49,112

$

(158,902)

$

1,243

$

31,185

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

1.    Nature of Business and Going Concern

Fennec Pharmaceuticals Inc., a British Columbia corporation (“Fennec,” the “Company,” “we,” “us,” or “our”), is a biopharmaceutical company focused on the development of PEDMARKTM (a unique formulation of sodium thiosulfate) for the prevention of platinum-induced ototoxicity in pediatric cancer patients. We have four wholly-owned subsidiaries: Oxiquant, Inc. and Fennec Pharmaceuticals, Inc., both Delaware corporations, Cadherin Biomedical Inc., a Canadian company, and Fennec Pharmaceuticals (EU) Limited (“Fennec Limited”), an Ireland company. With the exception of Fennec Pharmaceuticals, Inc., all subsidiaries are inactive.

These unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) that are applicable to a going concern, which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business.

During the three and nine months ended September 30, 2021, the Company incurred a loss from operations of $4,173 and $13,016, respectively. At September 30, 2021, the Company had an accumulated deficit of $175,059 and had experienced negative cash flows from operating activities during the three and nine months ended September 30, 2021 in the amounts of $2,958 and $10,977, respectively.

On May 5, 2020, the Company announced the completion of an underwritten public offering of 4,800 common shares at a public offering price of $6.25 per share. In addition, Fennec issued an additional 660 common shares in connection with the partial exercise of the underwriters’ over-allotment option. The approximate total gross proceeds from the offering were $34,100 ($31,967 net of commissions, fees and issue costs).

On February 1, 2019, the Company’s wholly owned subsidiary Fennec Pharmaceuticals, Inc, entered into a Loan and Security Agreement (the “Bridge Bank Loan and Security Agreement”) with Bridge Bank, a division of Western Alliance Bank, an Arizona corporation (“Bridge Bank”), pursuant to which Bridge Bank agreed to loan $12,500 to Fennec Pharmaceuticals, Inc., to be made available upon New Drug Application (“NDA”) approval of PEDMARKTM by  the U.S. Food and Drug Administration (“FDA”) no later than September 30, 2020. The Bridge Bank Loan and Security Agreement was amended on June 26, 2020 to increase the total potential amount of the loan to $18,000 and to extend the outside date to receive NDA approval of PEDMARKTM to December 31, 2020. In connection with this facility, the Company issued Bridge Bank a warrant to purchase up to 39 of the Company’s common shares at an exercise price of $6.80 per share, with an exercise period of ten years from the date of issuance subject to certain early termination conditions. Under Accounting Standards Codification (“ASC”) 470-50, Modifications and Extinguishments, the amendment to the facility was considered a modification. As such, the Company had been amortizing the loan fee and the value of the warrant over the remainder of the loan term. Following receipt of the FDA’s Complete Response Letter (“CRL”) in August 2020, which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARKTM on the Company’s behalf, the Company decided to fully amortize the remaining portions of the loan fee and the value of the warrants. The warrant issued to Bridge Bank remains outstanding.

On June 24, 2021, the Company announced it had negotiated a second amendment to the Bridge Bank Loan and Security Agreement. This amendment provides Fennec with a $20,000 debt facility comprised of three term loans.  Term Loan A consists of $5,000, which was funded upon closing. Term Loan B consists of $7,500 to be funded upon NDA approval of PEDMARKTM in the U.S.  Term Loan C consists of $7,500 to be funded upon the Company achieving consolidated trailing six-month revenues of $11 million on or before December 31, 2022.  The interest-only period for the facility has the ability to be extended from 18 months to 24 months from the funding of Term Loan B, provided that Term Loan C is funded, and certain conditions are met.  The Company intends to use the proceeds from the loans to provide working capital for commercial readiness activities prior to NDA approval as well as commercialization activities for PEDMARKTM, if approved by the FDA.

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Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

The Company believes the funds raised in its May 2020 public offering, along with the funds from the Bridge Bank Loan and Security Agreement, provide sufficient funding for the Company to carry out its planned activities, including, if PEDMARKTM is approved by the FDA, the commencement of commercialization efforts, for at least the next twelve months as it continues its strategic development of PEDMARKTM.

These financial statements do not reflect the potentially material adjustments in the carrying values of assets and liabilities, the reported expenses, and the balance sheet classifications used, that would be necessary if the going concern assumption were not appropriate.

2.    Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The Company’s accounting policies are consistent with those presented in the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020. These unaudited interim condensed consolidated financial statements have been prepared in U.S. dollars. All amounts presented are in thousands except for per share amounts.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the interim condensed consolidated financial statements and the reported amounts of expense during the reporting period. Actual results could differ from those estimates.

In the opinion of management, these unaudited interim condensed consolidated financial statements include all adjustments, which are normal and recurring in nature, necessary for the fair presentation of the Company’s financial position at September 30, 2021 and to state fairly the results for the periods presented. The most significant estimates utilized during the three and nine months ended September 30, 2021 include estimates necessary to value grants of stock options to employees and various contractors, as disclosed in Note 4.

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Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

New accounting pronouncements

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). In this ASU, the FASB refines the scope of Topic 848 to clarify that certain optional expedients and exceptions therein for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition. Specifically, modifications related to reference rate reform would not be considered an event that requires reassessment of previous accounting conclusions. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in the ASU are effective immediately for all entities. Entities may choose to apply the amendments retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. The Company chose to apply amendments prospectively and concluded after evaluation that ASU 2021-01 has no significant effect on its condensed consolidated financial statements.

Cash and cash equivalents

Cash equivalents consist of highly liquid investments with original maturities at the date of purchase of three months or less. The Company places its cash and cash equivalents in investments held by highly rated financial institutions in accordance with its investment policy designed to protect the principal investment. At September 30, 2021, the Company had $24,335 in cash, savings and money market accounts ($30,344 at December 31, 2020). At September 30, 2021, the Company held $428 in cash of which $37 (as presented in U.S. dollars) was in Canadian dollars ($45 at December 31, 2020 as presented in U.S. dollars). At September 30, 2021, the Company held $23,907 in money market investments. Money market investments typically have minimal risks. While the Company has not experienced any loss or write-down of its money market investments, the amounts it holds in money market accounts are substantially above the $250 amount insured by the FDIC and may lose value.

Financial instruments

Financial instruments recognized on the balance sheets at September 30, 2021 and December 31, 2020 consist of cash and cash equivalents, accounts payable, accrued liabilities and long term debt, the carrying values of which approximate fair value due to their relatively short time to maturity. The Company does not hold or issue financial instruments for trading.

The Company’s investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Investments, when made, are made in U.S. or Canadian bank securities, commercial paper of U.S. or Canadian industrial companies, utilities, financial institutions and consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper.

The policy risks are primarily the opportunity cost of the conservative nature of the allowable investments. As the main purpose of the Company is research and development, the Company has chosen to avoid investments of a trading or speculative nature.

Revenue

The Company’s nominal historical revenue has been generated through sales of its intellectual property (“IP”). For the periods presented, there is no revenue. For periods when the Company has generated its revenue through one segment and the revenue recognized under each of the Company’s arrangements during those periods is described below. The terms of these agreements may contain multiple promised goods or services or optional goods and services, including licenses to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by the Company on behalf of the collaboration partner related to the licensed product candidates.

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Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

Revenue recognition

Revenue is recognized when control of the promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or providing services. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

When determining whether the customer has obtained control of the goods or services, the Company considers the point at which the customer may benefit from the goods or services. For sale of IP, revenue is recognized upon grant or transfer of the IP, as the Company’s IP is considered functional in nature.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s contracts may contain multiple performance obligations if a promise to transfer goods or services is separately identifiable from other promises in a contract and, therefore, is considered distinct. For contracts with multiple performance obligations, the Company determines the standalone selling price of each performance obligation and allocates the total transaction price using the relative selling price basis. The Company recognizes performance obligations based on their nature.

Significant payment terms

The Company’s revenue arrangements may include payments to the Company of one or more of the following: a non-refundable, upfront payment; milestone payments; and royalties on commercial sales of IP product candidates, if any. To date, the Company has received upfront payments and several milestone payments but has not received any license or option fees or earned royalty revenue as a result of product sales.

The Company estimates the amount of consideration to which it will be entitled in exchange for satisfying performance obligations. Based on the Company’s current contracts, variable consideration primarily exists in the following forms: development and regulatory milestones, royalties and sales-based milestones. The Company utilizes the “most likely amount” variable consideration method for estimating development and regulatory milestone consideration to include in the transaction price. The Company only includes an amount of variable consideration in the transaction price to the extent it is probable that a significant reversal in the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company refers to this as the variable consideration constraint.

Due to the uncertainty associated with the occurrence of any underlying events which would trigger development and regulatory milestone consideration under its revenue arrangements, with the exception of certain initial conditions precedent milestones, the Company has concluded the variable consideration associated with all development and regulatory milestones to be fully constrained as of September 30, 2021, and therefore has not included such consideration in the transaction price for any of its revenue arrangements. The Company will reassess this conclusion at each subsequent reporting period and will only include amounts associated with regulatory or development milestones in the transaction price when, or if, the variable consideration is determined to be released from the constraint.

The Company adjusts the transaction price for the effects of the time value of money if the timing of payments agreed to by the parties to the contract, explicitly or implicitly, provides the Company or its customer with a significant benefit of financing the transfer of goods or services. In relation to the royalties from the sale of Eniluracil to Elion (described under “Revenue arrangements” below), the Company concluded that its licensing and collaboration arrangements do not contain

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Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

a significant financing component because the payment structure of its agreements arise from reasons other than providing a significant benefit of financing.

Contract assets

The Company did not have any contract assets as of September 30, 2021 or December 31, 2020.

Contract liabilities

The Company did not have any contract liabilities as of September 30, 2021 or December 31, 2020.

Revenue arrangements

Elion

In May 2016, the Company sold Eniluracil to Elion Oncology, LLC (“Elion”). The agreement called for $40 in cash and 5% royalties to be paid to Fennec for any income derived from the sale of Eniluracil. The agreement was for the sale (not the license) of IP. In addition, the agreement did not call for any additional good or service beyond the transfer of IP and related assets (e.g. “all information and know-how”, documentation, etc.).

In August 2020, Elion entered into a license agreement with Processa Pharmaceuticals, Inc. (“Processa”). The license agreement called for equity and cash upon satisfying the Condition Precedent, along with development and regulatory milestone payments, sales milestone payments, and product royalties. The grant of the license was conditioned upon the “Condition Precedent” which was defined as (i) Processa’s closing of a public offering by October 30, 2020 in which Processa raised at least $15,000 and (ii) Processa’s shares being listed on NASDAQ. Upon satisfying the Condition Precedent, which occurred in October 2020, Elion was entitled to receive $100 in cash and 825 in shares of Processa of which the Company is entitled to 5%. As a result, in January 2021, the Company received $5 in cash and 41 restricted shares of Processa common shares. The event which triggered the receipt of cash and shares occurred in October of 2020. The revenue for this event was recognized in the fourth quarter ended December 31, 2020.

The agreement between Elion and Processa entitles Elion to the payments outlined in the table below. Fennec would be eligible to receive 5% of the following based on future milestone events:

Milestone Event

    

Milestone Payment ($)

1st Year Anniversary of Effective Date

 

100 Restricted Shares

2nd Year Anniversary of Effective Date

 

100 Restricted Shares

1st Patient in Dose Confirmation Study

 

100 Restricted Shares

NDA Submission

 

300 Restricted Shares

1st FDA Approval in US

$

5,000

2nd FDA Approval in US

$

3,000

1st Regulatory Approval Outside US

$

2,000

2nd Regulatory Approval Outside US

$

2,000

Since the Condition Precedent was achieved, and only the passage of time must occur in order for the 1st and 2nd Year Anniversary payments to become due, the Company concluded the 1st and 2nd Year Anniversary milestone payments are also probable of coming to fruition and thus were included in the transaction price during the fourth quarter ended December 31, 2020 along with the aforementioned Condition Precedent payments.

The arrangement with Elion contains consideration that is variable based on the Processa’s achievement of the above referenced development and regulatory milestones. The next milestone payment the Company may be entitled to receive is 5 restricted shares for 1st patient in Dose Confirmation Study and then another 15 restricted shares for the NDA

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Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

submission. These are considered variable consideration that is fully constrained due to the uncertainty associated with the achievement of the development milestone. The considerations related to royalties (first and second FDA approval in U.S. and first and second regulatory approval outside U.S.) are also variable consideration that are fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Processa and the Company has a present right to payment.

The Company recognized $200 in revenue associated with the aforementioned cash and shares it became entitled to for the year ended December 31, 2020. Due to the one year lockup provision on the Processa shares, the Company deemed it reasonable to apply a liquidity discount of 20% to the valuation of the shares associated with the achievement of the Condition Precedent. Shares associated with the one- and two-year anniversary milestones had a 30% and 40% liquidity discount applied to their fair market valuations. Recognizing the passage of time, the Company adjusted its liquidity discount to the original shares of 5% and then 20% and 25% for the one- and two-year anniversary tranches.

Subsequent changes to the fair value of the underlying securities are recognized as unrealized gains or losses on marketable equity securities within the condensed consolidated statement of operations. During the quarter ended September 30, 2021, the Company reported $39 in unrealized gain on the fair value of the underlying Processa shares. There is a total unrealized gain on the Processa shares of $137 for the nine months ended September 30, 2021.

3.    Loss per Share

Earnings per common share is presented under two formats: basic earnings per common share and diluted earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, plus the potentially dilutive impact of common stock equivalents (i.e. stock options and warrants). Dilutive common share equivalents consist of the incremental common shares issuable upon exercise of stock options and warrants. The following table sets forth the computation of basic and diluted net loss per share:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

Numerator:

  

  

  

  

Net loss

$

(4,185)

$

(6,200)

$

(12,919)

$

(14,871)

Denominator:

 

  

 

  

 

  

 

  

Weighted-average common shares, basic

 

26,007

 

25,598

 

26,004

 

22,969

Dilutive effect of stock options

 

 

 

 

Dilutive effect of warrants

 

 

 

 

Incremental dilutive shares

 

 

 

 

Weighted-average common shares, diluted

 

26,007

 

25,598

 

26,004

 

22,969

Net loss per share, basic and diluted

$

(0.16)

$

(0.24)

$

(0.50)

$

(0.64)

The following outstanding options and warrants were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

    

Options to purchase common shares

 

3,653

 

3,095

 

3,653

 

3,095

 

Warrants to purchase common shares

 

39

 

39

 

39

 

39

 

12

Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

4.    Stockholders’ Equity

Authorized capital stock

The Company’s authorized capital stock consists of an unlimited number of common shares, no par value per share.

Warrants to Purchase Common Stock

During the three and nine-months ended September 30, 2021 and 2020, there were no warrants issued or exercised. Outstanding warrants have a weighted average life of 7.35 years on September 30, 2021. The following tables detail the Company’s warrant activity for the three and nine months ended September 30, 2021 and 2020, respectively:

    

Common Shares

    

Issuable Upon Exercise

of Outstanding

Weighted-Average

Investor Warrants

Warrants

Exercise Price $USD

Outstanding December 31, 2020

 

39

 

6.80

Issued

 

 

Outstanding March 31, 2021

 

39

 

6.80

Issued

Outstanding June 30, 2021

39

6.80

Issued

Outstanding September 30, 2021

39

6.80

    

Common Shares

    

Issuable Upon Exercise

of Outstanding

Weighted-Average

Investor Warrants

Warrants

Exercise Price $USD

Outstanding December 31, 2019

 

39

$

6.80

Issued

 

 

Outstanding March 31, 2020

 

39

$

6.80

Issued

Outstanding June 30, 2020

39

$

6.80

Issued

Outstanding September 30, 2020

39

$

6.80

Stock option plan

Equity Incentive Plan

The Compensation Committee of the Board of Directors administers the Company’s equity incentive plan (the “Plan”). The Compensation Committee designates eligible participants to be included under the Plan and approves the number of equity instruments to be granted from time to time under the Plan. Currently, the maximum number of equity instruments issuable under the Plan, together with the Company’s prior stock option plan, is twenty-five percent (25%) of the total number of issued and outstanding common shares. Based upon the current shares outstanding, a maximum of 6,502 shares of common stock are authorized for issuance pursuant to stock options or other equity awards granted under the Plan. For all options issued under the Plan, the exercise price is the fair value of the underlying shares on the date of grant. All options vest within three years or less and are exercisable for a period of ten years from the date of grant. The Plan allows

13

Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

the issuance of Canadian and U.S. dollar grants. The table below outlines recognized contractor and employee expense from equity awards for the three and nine months period ended September 30, 2021 and 2020.

    

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2021

    

2020

    

2021

    

2020

Contractor options expense recognized

$

$

21

$

9

$

63

Employee options expense recognized

 

917

 

1,238

 

2,830

 

2,151

Total option expense recognized

$

917

$

1,259

$

2,839

$

2,214

Stock option activity

The following is a summary of option activity for the three and nine months ended September 30, 2021, and 2020 for stock options denominated in U.S. dollars. Since August of 2020, there have been no Canadian denominated options outstanding.

Number of 

Weighted-Average

US Denominated Options

Options (thousands)

    

Exercise Price $USD

Outstanding at December 31, 2020

 

2,952

$

4.82

Granted

 

 

Exercised

 

 

Outstanding at March 31, 2021

2,952

$

4.82

Granted

755

7.52

Exercised

(4)

5.91

Forfeited

(50)

8.09

Outstanding and exercisable at June 30, 2021

3,653

$

5.34

Granted

Exercised

Outstanding at September 30, 2021

 

3,653

$

5.34

During the three-month period ended September 30, 2021, there were no grants or exercises of U.S. denominated options. Of the 3,653 U.S. denominated options granted and outstanding at September 30, 2021, 2,586 are fully vested and exercisable.

The following is a summary of option activity for each of the quarterly periods in fiscal year 2020 for stock options denominated in Canadian dollars:

    

Number of

    

Weighted-Average

CAD Denominated Options

Options (thousands)

Exercise Price $USD

Outstanding at December 31, 2019

 

648

$

2.43

Granted

 

 

Exercised

 

 

Outstanding at March 31, 2020

648

$

2.43

Granted

Exercised

Outstanding and exercisable at June 30, 2020

648

$

2.43

Granted

Exercised

(648)

2.43

Outstanding at September 30, 2020

 

$

The value of options issued was estimated using the Black-Scholes option pricing model using the following assumptions in the table below. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award.

14

Table of Contents

Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

Valuation Assumptions

Black-Scholes Model Assumptions

June 30, 2021

Expected dividend

 

0.00%

Risk free rate

 

1.49 - 1.62%

Expected volatility

122%

Expected life

10 years

Restricted Share Units Activity

The Plan allows for the issuance of restricted share units (“RSU’s”). The following is a summary of RSU activity for the three and nine months ended September 30, 2021, for RSU’s denominated in U.S. dollars. Prior to June 2021, there was no activity involving RSU’s. Of the 55 RSU’s granted and outstanding, 0 are vested. All RSU’s vest over three years with 1/3 vesting on the first anniversary date of the grant and then 1/24 on the last day of each subsequent month.

Number of Restricted

US Denominated RSU's

Share Units (thousands)

Outstanding at December 31, 2020

 

Granted

 

Outstanding at March 31, 2021

Granted