SEC Filing | Fennec Pharmaceuticals Inc.

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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 June 30, 2023


	☐ 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 August 2, 2023, there were 26,566,467 of the registrant's common shares outstanding.

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TABLE OF CONTENTS


	Page
PART I: FINANCIAL INFORMATION	3

Item 1. Condensed Consolidated Financial Statements	3

Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022	3

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2023 and 2022	4

Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Six Months Ended June 30, 2023, and 2022	5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2023 and 2022	6
Notes to the Condensed Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3. Quantitative and Qualitative Disclosures About Market Risk	28

Item 4. Controls and Procedures	28

PART II: OTHER INFORMATION	28

Item 1. Legal Proceedings	28

Item 1A. Risk Factors	28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3. Defaults Upon Senior Securities	29

Item 4. Mine Safety Disclosures	29

Item 5. Other Information	29

Item 6. Exhibits	29

Signatures	30

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PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements.

Fennec Pharmaceuticals Inc.

Condensed Consolidated Balance Sheets

(U.S. Dollars and shares in thousands)


	June 30, 2023		December 31,
	(Unaudited)		2022

Assets
Current assets
Cash and cash equivalents	$	14,958	$	23,774
Accounts receivable, net		2,445		1,545
Prepaid expenses		457		770
Inventory		1,439		576
Other current assets		32		63
Total current assets		19,331		26,728

Non-current assets
Deferred issuance costs, net of amortization		106		211
Total non-current assets		106		211
Total assets	$	19,437	$	26,939

Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	3,005	$	2,390
Accrued liabilities		773		2,219
Total current liabilities		3,778		4,609

Long term liabilities
Term loan		25,000		25,000
PIK interest		707		260
Debt discount		(321)		(361)
Total long term liabilities		25,386		24,899
Total liabilities		29,164		29,508

Commitments and contingencies (Note 6)

Stockholders’ deficit:
Common stock, no par value; unlimited shares authorized; 26,509 shares issued and outstanding (2022 ‑26,361)		143,345		142,591
Additional paid-in capital		60,381		56,797
Accumulated deficit		(214,696)		(203,200)
Accumulated other comprehensive income		1,243		1,243
Total stockholders’ deficit		(9,727)		(2,569)
Total liabilities and holders’ deficit	$	19,437	$	26,939

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

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Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Operations

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

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2023		2022		2023		2022

Revenue
PEDMARK product sales, net	$	3,325	$	—	$	5,002	$	—
Cost of products sold		(148)		—		(243)		—
Gross profit		3,177		—		4,759		—

Operating expenses:
Research and development		8		1,131		12		2,568
Selling and marketing		2,340		—		4,871		—
General and administrative		5,495		3,878		9,812		5,987

Total operating expenses		(7,843)		(5,009)		14,695		8,555
Loss from operations		(4,666)		(5,009)		(9,936)		(8,555)

Other (expense)/income
Unrealized foreign exchange gain/(loss)		5		1		14		(2)
Amortization expense		(73)		(8)		(145)		(15)
Unrealized loss on securities		—		(8)		(30)		(99)
Interest income		115		9		224		18
Interest expense		(825)		(57)		(1,623)		(115)
Total other expense		(778)		(63)		(1,560)		(213)
Net loss	$	(5,444)	$	(5,072)	$	(11,496)	$	(8,768)

Basic net loss per common share	$	(0.21)	$	(0.19)	$	(0.43)	$	(0.34)
Diluted net loss per common share	$	(0.21)	$	(0.19)	$	(0.43)	$	(0.34)
Weighted-average number of common shares outstanding basic		26,458		26,052		26,471		26,067
Weighted-average number of common shares outstanding diluted		26,458		26,052		26,471		26,067

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

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Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three and Six Months Ended June 30, 2023, and 2022

(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, 2022	26,361	$	142,591	$	56,797	$	(203,200)	$	1,243	$	(2,569)
Stock-based compensation - employees	—		—		1,089		—		—		1,089
Stock option exercise	49		213		—		—		—		213
Restricted stock release	1		—		(20)		—		—		(20)
Net loss	—		—		—		(6,052)		—		(6,052)
Balance at March 31, 2023	26,411		142,804		57,866		(209,252)		1,243		(7,339)
Stock-based compensation - employees	—		—		2,543		—		—		2,543
Stock option exercise	95		541		—		—		—		541
Restricted stock release	3		—		(28)		—		—		(28)
Net loss	—		—		—		(5,444)		—		(5,444)
Balance at June 30, 2023	26,509	$	143,345	$	60,381	$	(214,696)	$	1,243	$	(9,727)


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity
Balance at December 31, 2021	26,014	$	140,801	$	53,214	$	(179,486)	$	1,243	$	15,772
Stock-based compensation - employees	—		—		399		—		—		399
Stock-based compensation - consultants	—		—		34		—		—		34
Stock option exercise	26		31		(16)		—		—		15
Restricted stock release	—		—		—		—		—		—
Net loss	—		—		—		(3,696)		—		(3,696)
Balance at March 31, 2022	26,040		140,832		53,631		(183,182)		1,243		12,524
Stock-based compensation - employees	—		—		1,008		—		—		1,008
Stock-based compensation - consultants	—		—		35		—		—		35
Stock option exercise	19		90		(44)		—		—		46
Restricted stock release	8		—		—		—		—		—
Net loss	—		—		—		(5,072)		—		(5,072)
Balance at June 30, 2022	26,067	$	140,922	$	54,630	$	(188,254)	$	1,243	$	8,541

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

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Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in thousands)

(Unaudited)


	Six Months Ended
	June 30,		June 30,
	2023		2022

Cash flows (used in) provided by:
Operating activities:
Net loss	$	(11,496)	$	(8,768)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt access fees		113		14
Amortization of debt discount		32		1
Unrealized loss on securities		30		99
Stock-based compensation - consultants		—		69
Stock-based compensation - employees		3,632		1,407
Changes in operating assets and liabilities:
Accounts receivable		(900)		—
Prepaid expenses		313		544
Inventory		(863)		—
Other assets		—		5
Accounts payable		615		966
Accrued liabilities and PIK interest		(999)		(583)
Net cash used in operating activities		(9,523)		(6,246)

Financing activities:
Issuance of shares, options exercise		754		61
Cash paid for taxes on restricted share release		(47)		—
Net cash provided by financing activities		707		61

Decrease in cash and cash equivalents		(8,816)		(6,185)
Cash and cash equivalents - Beginning of period		23,774		21,100
Cash and cash equivalents - End of period	$	14,958	$	14,915

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

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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. (“Fennec,” “the Company,” “we,” “us,” or “our”) was originally formed as a British Columbia corporation under the name Adherex Technologies Inc. and subsequently changed its name on September 3, 2014. Fennec is a commercial stage specialty pharmaceutical company with one U.S. Food and Drug Administration (“FDA”) approved and European Commission approved product , PEDMARK^®, developed to reduce the risk of ototoxicity associated with cisplatin in pediatric patients one month of age and older with localized, non-metastatic solid tumors. The Company has four wholly owned subsidiaries: Oxiquant, Inc. (“Oxiquant”) and Fennec Pharmaceuticals, Inc., both Delaware corporations, Cadherin Biomedical Inc. (“CBI”), a Canadian corporation and Fennec Pharmaceuticals (EU) Limited (“Fennec Limited”), an Ireland company, collectively referred to herein as the “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 (“US 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 six months ended June 30, 2023, the Company incurred a loss from operations of $4,666 and $9,936, respectively. At June 30, 2023, it had an accumulated deficit of $214,696 and had experienced negative cash flows from operating activities during the six months ended June 30, 2023, in the amount of $9,523.

On August 1, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with Petrichor Opportunities Fund I LP (the “Investor”) in connection with the issuance of up to $45,000 of senior secured floating rate convertible notes (the “Notes”), issuable in multiple tranches (the “Note Financing”). On August 19, 2022, the Company closed on the initial tranche of $5,000 (the “First Closing Note”) which has an initial conversion price equal to $8.11 per share, which was calculated based on a 20% premium of the 5-day volume weighted average price of the Company’s common shares as traded on the Nasdaq Capital Market (the “VWAP”) immediately prior to the announcement of the SPA dated August 1, 2022. In connection with the first closing, the Company repaid in full its secured indebtedness with Bridge Bank in the amount of $5,000.

On September 23, 2022, the Company closed on the second tranche of the Note Financing in the amount of $20,000 the “Second Closing Note”), which has an initial conversion price equal to $7.89 per share, which was calculated based on a 20% premium of the 5-day VWAP immediately prior to September 20, 2022, which was the date the Company obtained FDA approval of PEDMARK®.

Subsequent to the funding of the Second Closing Note, and before December 31, 2023, the Company may draw up to $20,000 of additional financing under the SPA, in one or more tranches of $10,000 upon mutual agreement of the Company and the Investor (the “Subsequent Closing Notes”). The Subsequent Closing Notes will be convertible at a price per share equal to $7.89 per share, which price is calculated on the same basis as for the Second Closing Note.

A commitment fee of 2.0% of the Notes was payable under the SPA. Half of such fee was paid by the issuance on the first closing of warrants to purchase 55,498 Fennec common shares (“First Closing Warrant”) and half was payable in cash or warrants of 55,498 Fennec common shares (“Second Closing Warrant”), at the Company’s election, on the second closing. The warrants are exercisable at a price per share of $8.11 and will have a term of five years from the date of the grant. The Company elected to have all the commitment fee of the Notes payable in warrants.

The Company believes current funds, which include funds from the First Closing Note and the Second Closing Note, provide sufficient funding for the Company to carry out its planned activities, including the continuation of commercialization efforts of PEDMARK^® in the United States and preparation for commercialization of PEDMARK outside of the United States for at least the next twelve months.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with US 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 US 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, 2022. 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, 2022. 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. The results of operations for the three and six months ended June 30, 2023, are not necessarily indicative of results to be expected for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with US 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 consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include product sales discounts and allowances, allowance against trade receivables, measurement of stock-based compensation and estimates of the Company’s capital requirement over the next twelve months from the date of issuance of the consolidated financial statements. Actual results could differ from those estimates.

Segment and Geographic Information

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment principally in the United States. As of June 30, 2023, the Company has no assets located outside of the United States.

Stock-Based Compensation

Under the Company’s stock-based compensation programs, the Company periodically grants stock options and restricted stock to employees, directors, and consultants. The Company also issues shares under an employee stock purchase plan. The fair value of each award is recognized in the Company’s statements of operations over the requisite service period for such award.

The Company uses the Black-Scholes option pricing model to value stock option awards without market conditions, which requires the Company to make certain assumptions regarding the expected volatility of its common stock price, the expected term of the option grants, the risk-free interest rate and the dividend yield with respect to its common stock. The Company calculates volatility using its historical stock price data. Due to the lack of the Company’s own historical data, the Company elected to use the “simplified” method for “plain vanilla” options to estimate the expected term of the Company’s stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate used for each grant is based on the United States Treasury yield curve in effect at the time of grant for instruments with a similar expected life. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends and at present, has no intention to pay cash dividends.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

Inventory

Inventories are valued under a standard costing methodology on a first-in, first-out basis and are stated at the lower of cost or net realizable value. The Company capitalizes inventory costs related to products to be sold in the ordinary course of business. The Company makes a determination of capitalizing inventory costs for a product based on, among other factors, information regarding safety, efficacy and expectations relating to commercial sales and recoverability of costs. Capitalized costs of inventories mainly include third party manufacturing, logistics and distribution costs. The Company assesses the recoverability of inventory each reporting period to determine any write down to net realizable value resulting from excess or obsolete inventories. The manufacturing costs for PEDMARK^®prior to regulatory approval were not capitalized as inventory but were expensed as research and development costs. The Company expensed pre-launch inventory as it could not reasonably anticipate FDA approval of PEDMARK^®.

New Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU replaces the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates on certain types of financial instruments, including trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for the Company for fiscal years beginning after December 15, 2022, as the Company is a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K. We adopted ASU 2016-13 on January 1, 2023. Based on the composition of the Company’s accounts receivable, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures. Specifically, the Company’s estimate of expected credit losses as of June 30, 2023, using its expected credit loss evaluation process, resulted in no adjustments to the provision for credit losses and no cumulative effect adjustment to accumulated deficit on the adoption date of the standard.

Revenue Recognition

Under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company determines it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation(s). As part of the accounting for these arrangements, the Company must make significant judgments, including identifying performance obligations in the contract and estimating the amount of variable consideration to include in the transaction price.

Net Product Revenue

On September 20, 2022, the FDA approved PEDMARK^® in the United States to reduce the risk of ototoxicity associated with cisplatin in pediatric patients one month of age and older with localized, non-metastatic solid tumors. PEDMARK^® became commercially available on October 17, 2022. PEDMARK^® is the Company’s first commercial product. The Company sells its product through the following specialty distributors: Amerisource Specialty Distribution (“ASD”), McKesson Plasma and Biologics, McKesson Specialty, and Cardinal Health Specialty (collectively the “Customers” and each a “Customer”). Further, the Company sells directly to other customers without the use of specialty distributors. These Customers subsequently resell the Company’s products to health care providers and patients. In addition to distribution agreements with Customers, the Company enters arrangements with health care providers and payors that provide for government-mandated and/or privately- negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products. Revenues from product sales are recognized when the Customer obtains control of the Company’s

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

product, which occurs at a point in time, typically upon delivery to the Customer. The amount of revenue recognized is net of these discounts in an amount equal to the cash expected to be collected.

Product Sales Discounts and Allowances

The Company records revenues from product sales at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established primarily from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between the Company and its Customers, health care providers, payors and other indirect customers relating to the sales of its products. These reserves are based on the amounts to be claimed on the related sales and are classified as a contra-asset or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, forecasted Customer buying and payment patterns, and the Company’s historical experience that will develop over time as PEDMARK^® is the Company’s first commercial product. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of its contracts. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenues and earnings in the period such variances become known.

Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty distributor. Contracted customers, which currently consist of Public Health Service institutions and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to the Company the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by its contracted customer. The allowance for chargebacks is based on actual chargebacks received and an estimate of sales by the specialty distributor to its contracted customers.

Discounts for Prompt Payment: The Customers receive a discount of 0.65% for prompt payment. The Company expects its Customers will earn 100% of their prompt payment discounts and, therefore, the Company deducts the full amount of these discounts from total product sales when revenues are recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and other government programs. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. The Company’s estimates for the expected utilization of rebates are based on Customer and payor data received from the specialty distributors and historical utilization rates that will develop over time as PEDMARK^® is the Company’s first commercial product. Rebates are generally invoiced by the payor and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to the Customers, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust its accruals, which would affect net product revenues in the period of adjustment.

Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using Customer data provided by the third party that administers the copay program.

Other Customer Credits: The Company pays fees to certain of its Customers for account management, data management and other administrative services. To the extent the services received are distinct from the sale of products to its Customers, the Company classifies these payments in selling and marketing, general and administrative expenses in its Consolidated Statements of Operations.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

The following table summarizes net product revenues for PEDMARK^® in the United States and abroad earned during the three and six months ended June 30, 2023 and 2022, respectively:


	Three Months Ended				Six Months Ended
		June 30,		June 30,		June 30,		June 30,
In thousands		2023		2022		2023		2022
Product revenues:
Gross product revenues	$	3,711	$	—	$	5,606	$	—
Discounts and allowances		(386)		—		(604)		—
Net product revenues	$	3,325	$	—	$	5,002	$	—

The following table summarizes the percentage of total product revenues for PEDMARK^® in the United States and abroad by Customers who individually accounted for 10% or more of total product revenues earned in the three and six months ended June 30, 2023, and 2022, respectively:


	Three Months Ended				Six Months Ended
	June 30,		June 30,			June 30,		June 30,
Specialty Distributors	2023		2022			2023		2022
ASD	34	%	—	%		43	%	—
McKesson	12		—			11		—
Subtotal-Specialty Distributors	46		—			54		—
Direct Customers and those less than 10%	54		—			46		—
	100	%	—	%		100	%	—

The activities and ending allowance balances for each significant category of discounts and allowances for PEDMARK^® (which constitute variable consideration) for the six months ended June 30, 2023, was as follows:



	Chargebacks,		Rebates, Customer
	Discounts for		Fees/Credits
	Prompt pay and		and Co-Pay
In thousands	Other allowances		Assistance		Totals
Balance at December 31, 2022	$	71	$	163	$	234
Provision related to sales made in:
Current period		116		117		233
Prior periods		—		—		—
Payments and customer credits issued		(31)		(66)		(97)
Balance at March 31, 2023	$	156	$	214	$	370
Provision related to sales made in:
Current period		246		148		394
Prior periods		—		—		—
Payments and customer credits issued		(193)		(124)		(317)
Balance at June 30, 2023	$	209	$	238	$	447

The allowances for chargebacks, fees due to Customers, rebates and discounts for prompt payment are recorded as a contra-asset to accounts receivable, while Medicaid rebates and return allowances are in accrued liabilities in the accompanying Condensed Consolidated Balance Sheets.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

Trade Receivables

The Company records gross trade receivables at the time of product sale to its Customers. Amounts estimated for the associated chargebacks, cash discounts for prompt payment and any allowances for credit losses are booked as a reserve against accounts receivable and reduction of revenue. The Company determines its allowance methodology by pooling receivable balances at the customer level. The Company considers various factors, including loss history, individual credit risk associated to each Customer, and the current and future condition of the general economy. These credit risk factors are monitored on a quarterly basis and updated as necessary. To the extent that any individual debtor is identified whose credit quality has deteriorated, the Company establishes allowances based on the individual risk characteristics of such a customer. The Customers are mainly specialty distributors, and accordingly, the Company considers the risk of potential credit losses to be low. It is the policy of the Company to reserve 1% of its net sales to non-specialty distributors, as such the Company had an immaterial balance in allowance for doubtful accounts as of June 30, 2023.

Cost of Products Sold

Cost of products sold is related to the Company's product revenues for PEDMARK^® and consists primarily of product production costs associated with finished goods inventory and royalties (1% of net sales) the Company is required to pay to Oregon Health & Science University (“OHSU”) on all net sales of PEDMARK^®. The cost of products sold also consists of shipping and other third party logistics and distribution costs for the Company’s product. The Company considered regulatory approval of its product candidate to be uncertain and product manufactured prior to regulatory approval could not have been sold unless regulatory approval was obtained. As such, the manufacturing costs for PEDMARK^® incurred prior to regulatory approval were not capitalized as inventory but were expensed as research and development costs. After FDA approval in September 2022, the Company had various lots of PEDMARK^® in various stages of production in connection with the fourth quarter product launch. As of June 30, 2023, the Company capitalized approximately $1.4 million of costs as inventory on the Condensed Consolidated Balance Sheet. Of the items capitalized, $0.1 million was capitalized as raw materials, $0.6 million was capitalized as work in process, $0.7 million was capitalized into finished goods, with $0.2 million of that being reclassified to cost of products sold.

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 June 30, 2023, the Company had $14,958 in cash, savings and money market accounts ($23,774 at December 31, 2022). At June 30, 2023, the Company held $3,501 in cash of which $507 (as presented in U.S. dollars) was in Canadian dollars ($34 at December 31, 2022 as presented in U.S. dollars). At June 30, 2023, the Company held $11,457 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 June 30, 2023 and December 31, 2022 consist of cash and cash equivalents, accounts receivable, accounts payable and term loans, the carrying values of which approximate fair value due to their relatively short time to maturity or interest rates that approximate market interest rates. 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

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

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. Until the company is cash flow positive from operations, the Company has chosen to avoid investments of a trading or speculative nature.

Research and Development Costs and Investment Tax Credits

Research costs, including employee compensation, laboratory fees, lab supplies, and research and testing performed under contract by third parties, are expensed as incurred. Development costs, including drug substance costs, clinical study expenses and regulatory expenses are expensed as incurred.

Investment tax credits, which are earned as a result of qualifying research and development expenditures, are recognized when the expenditures are made and their realization is reasonably assured. They are applied to reduce related capital costs and research and development expenses in the year recognized.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents, and accounts receivable. The Company maintains deposits in highly-rated, federally-insured financial institutions in excess of federally insured limits. The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the high credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument.

The Company’s trade receivables: include amounts billed to Customers for product sales of PEDMARK^®. The Customers are a limited group of specialty distributors and select customers abroad, with substantial financial resources, and accordingly, the Company considers the risk of potential credit losses to be low.

Income Taxes

The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. The Company has deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. As of June 30, 2023, we maintained a full valuation allowance against our deferred tax assets.

The provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Uncertainty in Income Taxes, address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position.

Foreign Currency Transactions

The U.S. dollar is the functional currency for the Company’s consolidated operations. All gains and losses from currency transactions are included in results of operations.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted net loss per share is computed using the same method, except the weighted average number of common shares outstanding includes convertible debentures, stock options and warrants, if dilutive, as determined using the if-converted method and treasury methods. Accordingly, warrants to purchase 0.2 million of our common shares and options to purchase 4.9 million of our common shares at June 30, 2023, were not included in loss per share. Such instruments would have an antidilutive effect. During the same period in 2022, warrants to purchase 0.04 million of our common shares and options to purchase 4.3 million common shares were excluded from the computation of loss per share as their inclusion would have been antidilutive.

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 loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net loss 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 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:


	Six Months Ended June 30,
	2023	2022
Options to purchase common shares	4,887	4,337
Warrants to purchase common shares	150	39

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 six months ended June 30, 2023 and 2022, there were no warrants issued or exercised. Outstanding warrants have a weighted average life of 4.56 years, and a weighted average strike price of $7.79, on June 30, 2023.

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 6,627 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

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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 six month periods ended June 30, 2023 and 2022.


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2023		2022		2023		2022
Contractor options expense recognized	$	—	$	35	$	—	$	69
Employee options expense recognized		2,543		1,008		3,632		1,407
Total option expense recognized	$	2,543	$	1,043	$	3,632	$	1,476

Stock Option Activity

The following is a summary of option activity for the three and six months ended June 30, 2023 for stock options denominated in U.S. dollars. Since August of 2020, there have been no Canadian denominated options outstanding.


	Number of	Weighted-Average
Options	Options (thousands)	Exercise Price $USD
Outstanding at December 31, 2022	4,539	$	5.13
Granted	580		8.12
Exercised	(49)		4.36
Forfeited	(38)		6.98
Outstanding at March 31, 2023	5,032		5.43
Granted	125		8.80
Exercised	(95)		5.60
Forfeited	(175)		7.51
Outstanding at June 30, 2023	4,887	$	5.77

Of the 4,887 U.S. denominated options granted and outstanding at June 30, 2023, 3,870 are fully vested and exercisable.

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


		Valuation
		Assumptions
Black-Scholes Model Assumptions		June 30, 2023
Expected dividend		0.00%
Risk free rate		3.56 - 3.89%
Expected volatility		49 - 77%
Expected life		1.5 - 6.0 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 six months ended June 30, 2023. During the three and six months ended June 30, 2023, there were 1 and 4 RSU’s

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

released from restriction, respectively. During the three and six months ended June 30, 2023, there were 0 and 17 RSU’s forfeited by departing employees. RSU’s vesting vary from one to three years.


		Number of
		Restricted Share
RSUs Current Year		Units (thousands)
Outstanding at December 31, 2022		35
Awarded		264
Released		(1)
Outstanding at March 31, 2023		298
Awarded		98
Released		(3)
Forfeited		(17)
Outstanding at June 30, 2023		376

The value of RSU’s issued was estimated using the share price on the date of the award multiplied by the number of shares granted.

5. Fair Value Measurements

The Company has adopted ASC 820, the Fair Value Measurements and Disclosure Topic of the FASB. This Topic applies to certain assets and liabilities that are being measured and reported on a fair value basis. The Fair Value Measurements Topic defines fair value, establishes a framework for measuring fair value in accordance with US GAAP, and expands disclosure about fair value measurements. This Topic enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Topic requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.


	Fair Value Measurement at June 30, 2023 and December 31, 2022
	(in thousands)
	Quoted Price in Active
	Market for Identical						Significant Other				Significant
	Instruments						Observable Inputs				Unobservable Inputs
	Level 1						Level 2				Level 3					Total
	2023				2022			2023		2022		2023		2022		2023		2022
Assets
Cash and cash equivalents	$	3,501	⁽¹⁾	$	307	⁽¹⁾	$	11,457	$	23,467	$	—	$	—	$	14,958	$	23,774
Processa common shares	$	25	⁽²⁾	$	56	⁽²⁾	$	—	$	—	$	—	$	—	$	25	$	56

(1)	The Company held approximately $3,501 in cash as of June 30, 2023, of which approximately $507 was in Canadian funds (translated into U.S. dollars). As of December 31, 2022, the Company held approximately $307 in cash of which approximately $33 was in Canadian funds (translated into U.S. dollars).

(2)	The Company holds 51 unrestricted common shares of Processa Pharmaceuticals, Inc. (NASDAQ:PCSA), which it received as part of a royalty arrangement in 2020.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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

6. Commitments and Contingencies

Oregon Health & Science University Agreement

On February 20, 2013, Fennec entered into an exclusive license agreement with Oregon Health & Science University (“OHSU”) for exclusive worldwide license rights to intellectual property directed to thiol-based compounds, including PEDMARK, and their use in oncology (the “OHSU Agreement”). OHSU will receive certain milestone payments, royalty on net sales for licensed products and a royalty on any consideration received from sublicensing of the licensed technology.

On May 18, 2015, Fennec negotiated an amendment (“Amendment 1”) to the OHSU Agreement, which expands Fennec’s exclusive license to include the use of N-acetylcysteine as a standalone therapy and/or in combination with sodium thiosulfate for the prevention of ototoxicity induced by chemotherapeutic agents to treat cancers. Further, Amendment 1 adjusts select milestone payments in the OHSU Agreement including but not limited to the royalty rate on net sales for licensed products, royalty rate from sublicensing of the licensed technology and the fee payable upon the regulatory approval of a licensed product.

The term of the OHSU Agreement as amended by Amendment 1 expires on the date of the last to expire claim(s) covered in the patents licensed to Fennec or 8 years, whichever is later. In the event a licensed product obtains regulatory approval and is covered by the Orphan Drug Designation, the parties will in good faith amend the term of the agreement. PEDMARK is currently protected by methods of use patent that the Company exclusively licensed from OHSU that expire in the United States in 2038. The OHSU Agreement is terminable by either Fennec or OHSU in the event of a material breach of the agreement by either party after 45 days prior written notice. Fennec also has the right to terminate the OHSU Agreement at any time upon 60 days prior written notice and payment of all fees due to OHSU under the OHSU Agreement.

Securities Class Action Suit

Chapman v. Fennec Pharmaceuticals Inc., et al.

On September 3, 2020, plaintiff Jim Chapman filed a putative federal securities class action lawsuit against the Company, our Chief Executive Officer, Rostislav Raykov, and Chief Financial Officer, Robert Andrade, in the United States District Court for the Middle District of North Carolina, captioned Chapman v. Fennec Pharmaceuticals Inc., et al., Case No. 1:20-cv-00812. The complaint alleged that prior to our August 10, 2020 receipt of a CRL from the FDA concerning our NDA for PEDMARK^®, defendants made materially false or misleading statements and failed to disclose material facts about our third-party PEDMARK^® product manufacturing facility and the impact the facility would have on regulatory approval for PEDMARK^®. On December 3, 2020, the court appointed a lead plaintiff to represent the putative class. On February 1, 2021, the lead plaintiff filed an amended complaint. The amended complaint added members of our Board of Directors as defendants, asserted a putative class period from December 20, 2018 through August 10, 2020, made allegations similar to those in the original complaint, claimed that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and sought an unspecified amount of compensatory damages and attorneys’ fees and costs.

On March 3, 2021, defendants filed a motion to dismiss the amended complaint. On April 2, 2021, lead plaintiff filed an opposition to the motion to dismiss. On April 16, 2021, defendants filed a reply in support of the motion to dismiss, and on December 16, 2021, the Magistrate Judge entered an order recommending that defendants’ motion to dismiss be granted in its entirety. On January 24, 2022, lead plaintiff filed objections to the Magistrate Judge’s recommendation, and defendants filed their response on February 3, 2022. On March 2, 2022, the U.S. District Court Judge adopted the Magistrate Judge’s order and recommendation and entered an order and judgment dismissing the amended complaint with prejudice.

On March 30, 2022, lead plaintiff filed a motion for post judgment relief, seeking leave to file a second amended complaint. In his proposed second amended complaint, lead plaintiff sought to add allegations stemming from the receipt of a second CRL following our resubmission of our NDA for PEDMARK^®, which we received on November 29, 2021, among other things. Defendants filed an opposition to plaintiff’s motion for post judgment relief on April 20, 2022. On May 4, 2022,

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

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