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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, 2023

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 3, 2023, there were 26,634,676 of the registrant's 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 (Unaudited) as of September 30, 2023 and December 31, 2022

3

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022

4

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

5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 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

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

29

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

30

Signatures

31

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)

(Unaudited)

September 30, 

December 31, 

    

2023

    

2022

Assets

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

12,399

$

23,774

Accounts receivable, net

4,525

1,545

Prepaid expenses

 

247

 

770

Inventory

1,755

576

Other current assets

 

20

 

63

Total current assets

18,946

26,728

Non-current assets

ROU asset non-current

29

Deferred issuance costs, net of amortization

53

211

Total non-current assets

82

211

Total assets

$

19,028

$

26,939

 

  

 

  

Liabilities and stockholders’ deficit

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,941

$

2,390

Accrued liabilities

 

951

 

2,219

Operating lease liability - current

21

Total current liabilities

 

3,913

 

4,609

Non-current liabilities

Term loan

25,000

25,000

PIK interest

937

260

Debt discount

(298)

(361)

Operating lease liability - net of current portion

7

Total non-current liabilities

25,646

24,899

Total liabilities

 

29,559

 

29,508

 

  

 

  

Commitments and contingencies (Note 6)

 

  

 

  

 

  

 

  

Stockholders’ deficit:

 

  

 

  

Common stock, no par value; unlimited shares authorized; 26,635 shares issued and outstanding (2022 ‑ 26,361)

 

143,560

 

142,591

Additional paid-in capital

 

61,229

 

56,797

Accumulated deficit

 

(216,563)

 

(203,200)

Accumulated other comprehensive income

 

1,243

 

1,243

Total stockholders’ deficit

 

(10,531)

 

(2,569)

Total liabilities and holders’ deficit

$

19,028

$

26,939

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, 

    

2023

    

2022

    

2023

    

2022

Revenue

PEDMARK® product sales, net

$

6,515

$

$

11,517

$

Cost of products sold

(331)

(574)

Gross profit

6,184

10,943

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

 

12

 

846

 

24

 

3,414

Selling and marketing

3,384

8,255

General and administrative

 

3,805

 

7,053

 

13,617

 

13,040

 

  

 

  

 

  

 

  

Total operating expenses

 

7,201

 

7,899

 

21,896

 

16,454

Loss from operations

(1,017)

(7,899)

(10,953)

(16,454)

 

  

 

  

 

  

 

  

Other (expense)/income

 

  

 

  

 

  

 

  

Realized foreign exchange (loss)/gain

(11)

(4)

3

(6)

Amortization expense

(72)

(64)

(217)

(79)

Unrealized loss on securities

 

(13)

(27)

(43)

(126)

Interest income

 

102

24

326

42

Interest expense

(856)

(119)

(2,479)

(234)

Total other expense

 

(850)

 

(190)

 

(2,410)

 

(403)

Net loss

$

(1,867)

$

(8,089)

$

(13,363)

$

(16,857)

Basic net loss per common share

$

(0.07)

$

(0.31)

$

(0.50)

$

(0.65)

Diluted net loss per common share

$

(0.07)

$

(0.31)

$

(0.50)

$

(0.65)

Weighted-average number of common shares outstanding basic

26,596

26,108

26,523

26,105

Weighted-average number of common shares outstanding diluted

 

26,596

 

26,108

26,523

26,105

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, 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)

Stock-based compensation - employees

865

865

Stock option exercise

92

215

215

Restricted stock release

32

(17)

(17)

Net loss

(1,867)

(1,867)

Balance at September 30, 2023

26,633

$

143,560

$

61,229

$

(216,563)

$

1,243

$

(10,531)

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

Stock-based compensation - employees

1,853

1,853

Stock-based compensation - consultants

34

34

Warrants issued to creditor

441

441

Stock option exercise

151

387

(199)

188

Restricted stock release

20

(166)

(166)

Net loss

(8,089)

(8,089)

Balance at September 30, 2022

26,238

$

141,309

$

56,593

$

(196,343)

$

1,243

$

2,802

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)

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

Cash flows (used in) provided by:

  

 

  

 

Operating activities:

  

 

  

 

Net loss

$

(13,363)

$

(16,857)

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

 

 

Amortization of debt access fees

 

166

 

77

Amortization of debt discount

51

2

Unrealized loss on securities

43

126

Stock-based compensation - consultants

 

 

103

Stock-based compensation - employees

 

4,497

 

3,260

Changes in operating assets and liabilities:

 

 

Accounts receivable

(2,980)

Prepaid expenses

 

523

 

756

Inventory

(1,179)

Other assets

 

 

4

Accounts payable

 

551

 

1,756

Accrued liabilities and PIK interest

 

(592)

 

(483)

Net cash used in operating activities

 

(12,283)

 

(11,256)

 

  

 

  

Financing activities:

 

  

 

  

Long-term debt

25,000

Long-term debt paid

(5,000)

Issuance of shares, options exercise

 

969

 

249

Cash paid for taxes on restricted share release

(61)

(166)

Capitalized deferred issuance costs

 

 

(175)

Net cash provided by financing activities

 

908

 

19,908

Increase/(decrease) in cash and cash equivalents

(11,375)

8,652

Cash and cash equivalents - Beginning of period

23,774

21,100

Cash and cash equivalents - End of period

$

12,399

$

29,752

Non-cash investing and financing activities:

 

  

 

  

Capitalized lease asset

$

29

$

Warrants issued for long-term debt

$

$

441

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

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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 corporation existing under the laws of British Columbia (“Fennec,” the “Company,” “we,” “us,” or “our”), was originally formed 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. and Fennec Pharmaceuticals (EU) 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 nine months ended September 30, 2023, the Company incurred a loss from operations of $1,017 and $10,953, respectively. At September 30, 2023, it had an accumulated deficit of $216,563 and had experienced negative cash flows from operating activities during the nine months ended September 30, 2023, in the amount of  $12,283.

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 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. 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 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 approximately 0.05 Fennec common shares (“First Closing Warrant”) and half was payable in cash or warrants of approximately 0.05 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 condensed 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 nine months ended September 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 September 30, 2023, the Company had an operating lease in Ireland. This is the only asset 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 units to employees, directors, and consultants. 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®.

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 in the United States 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 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

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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)

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: 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. If actual program redemption varies from estimates, the Company may need to adjust its accruals, which would affect net product revenues in the period of adjustment.

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 Condensed Consolidated Statements of Operations.

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

In thousands

2023

2022

2023

2022

Product revenues:

Gross product revenues

$

6,919

$

$

12,525

$

Discounts and allowances

(404)

(1,008)

Net product revenues

$

6,515

$

$

11,517

$

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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 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 nine months ended September 30, 2023, and 2022, respectively:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

Specialty Distributors

2023

2022

2023

2022

ASD

16

%  

%  

24

%  

McKesson

19

16

Subtotal-Specialty Distributors

35

40

Direct Customers

65

60

100

%  

%  

100

%  

The activities and ending allowance balances for each significant category of discounts and allowances for PEDMARK® (which constitute variable consideration) for the nine months ended September 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:

246

148

394

Current period

Prior periods

Payments and customer credits issued

(193)

(124)

(317)

Balance at June 30, 2023

$

209

$

238

$

447

Provision related to sales made in:

Current period

 

334

180

514

Prior periods

Payments and customer credits issued

(307)

(71)

(378)

Balance at September 30, 2023

$

236

$

347

$

583

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.

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

11

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)

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 September 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 PEDMARK®. The Company considered regulatory approval of  PEDMARK® 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 product launch. As of September 30, 2023, the Company capitalized approximately $1.8 million of costs as inventory on the Condensed Consolidated Balance Sheet. Of the items capitalized, $0.1 million was capitalized as raw materials, $0.9 million was capitalized as work in process, $0.8 million was capitalized into finished goods, with $0.6 million 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 September 30, 2023, the Company had $12,399 in cash, savings and money market accounts ($23,774 at December 31, 2022). At September 30, 2023, the Company held $2,007 in cash of which $488 (as presented in U.S. dollars) was in Canadian dollars ($34 at December 31, 2022 as presented in U.S. dollars). At September 30, 2023, the Company held $10,392 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, 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 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.

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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 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 September 30, 2023, we maintained a full valuation allowance against our deferred tax assets.

The provisions of the 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.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“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

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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)

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 September 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.

In July 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280-General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. These updates were immediately effective and did not have a material impact on our financial statements.

In October 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-06 to amend various SEC paragraphs in the Accounting Standards Codification to primarily reflect SEC Release No. 33-10532, Disclosure Update and Simplification. ASU 2023-06 amends disclosure guidance over an entity’s accounting policy related to derivative instruments, material prior period adjustments upon a change in a reporting entity, earnings-per-share, encumbered assets, unused lines of credit and unfunded commitments, and liquidation preferences of preferred stock. The amendments are effective prospectively on the date each individual amendment is effectively removed from Regulation S-X or Regulation S-K.

3.    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 5.0 million of our common shares at September 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 anti dilutive

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:

Nine Months Ended September 30, 

    

2023

    

2022

    

Options to purchase common shares

 

5,005

4,466

 

Warrants to purchase common shares

 

150

150

 

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.

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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)

Warrants to Purchase Common Stock

During the three and nine months ended September 30, 2023 and 2022, there were no warrants issued or exercised. The company has 150 outstanding warrants have a weighted average life of 4.30 years, and a weighted average strike price of $7.79, on September 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 6,658 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 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 month periods ended September 30, 2023 and 2022.

Three Months Ended

Nine Months Ended

    

September 30, 

September 30, 

September 30, 

September 30, 

    

2023

2022

    

2023

2022

Contractor options expense recognized

$

$

34

$

$

103

Employee options expense recognized

 

865

 

1,853

4,497

3,260

Total option expense recognized

$

865

$

1,887

$

4,497