FENNEC PHARMACEUTICALS INC. CAUTIONARY STATEMENT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing at the end of this Annual Report. Some of
the information contained in this discussion and analysis or set forth elsewhere
in this Annual Report, including information with respect to our plans and
strategy for our business, includes forward looking statements that involve
risks and uncertainties. As a result of many factors, including those factors
set forth in the "Cautionary Note Regarding Forward-Looking Statements" and
"Risk Factors" section of this Annual Report, our actual results could differ
materially from
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the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
Our only product candidate in the clinical stage of development is PEDMARKTM (sodium thiosulfate (STS) anhydrous injection). We have announced results of two Phase 3 clinical trials for the prevention of cisplatin induced hearing loss, or ototoxicity in children including the pivotal Phase 3 study SIOPEL 6 , "A Multicentre Open Label Randomised Phase 3 Trial of the Efficacy of Sodium Thiosulfate in Reducing Ototoxicity in Patients Receiving Cisplatin Chemotherapy for Standard Risk Hepatoblastoma," and the proof of concept Phase 3 study "A Randomized Phase 3 Study of Sodium Thiosulfate for the Prevention of Cisplatin-Induced Ototoxicity in Children".
We continue to focus our resources on the development of PEDMARKTM.
We have licensed from OHSU intellectual property rights for the use of PEDMARKTM as a chemoprotectant and are developing PEDMARKTM as a protectant against the hearing loss often caused by platinum-based anti-cancer agents in children. Preclinical and clinical studies conducted by OHSU and others have indicated that PEDMARKTM can effectively reduce the incidence of hearing loss caused by platinum-based anti-cancer agents. Hearing loss among children receiving platinum-based chemotherapy is frequent, permanent and often severely disabling. The incidence of hearing loss in these children depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. In addition, adults undergoing chemotherapy for several common malignancies, including ovarian cancer, testicular cancer, and particularly head and neck cancer and brain cancer, often receive intensive platinum-based therapy and may experience severe, irreversible hearing loss, particularly in the high frequencies. In theU.S. andEurope , it is estimated that, annually, over 10,000 children may receive platinum-based chemotherapy. The incidence of ototoxicity depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. There is currently no established preventive agent for this hearing loss and only expensive, technically difficult and sub-optimal cochlear (inner ear) implants have been shown to provide some benefit. Infants and young children that suffer ototoxicity at critical stages of development lack speech language development and literacy, and older children and adolescents lack social-emotional development and educational achievement.
In
We initiated our rolling NDA for PEDMARKTM for the prevention of ototoxicity induced by cisplatin chemotherapy patients 1 month to < 18 years of age with localized, non-metastatic, solid tumors with the FDA inDecember 2018 . We announced that we had submitted full completion of the NDA inFebruary 2020 . The FDA set a PDUFA target action date ofAugust 10, 2020 for the completion of theFDA's review. OnAugust 10, 2020 , we announced that we received a CRL from the FDA regarding our NDA for PEDMARKTM, which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARKTM on our behalf. Importantly, no clinical safety or efficacy issues were identified during the review and there is no requirement for further clinical data. InMay 2021 , we announced the resubmission of our NDA for PEDMARKTM and inJune 2021 we further announced that the FDA accepted for filing the resubmission of our NDA and set a PDUFA target action date ofNovember 27, 2021 . OnNovember 29, 2021 , we announced that we received a CRL from the FDA regarding our NDA for PEDMARKTM, which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARKTM on our behalf. We are working closely with the FDA to fully address the CRL, and we plan to resubmit our NDA for PEDMARKTM in the first quarter of 2022. InAugust 2018 , the PDCO of the EMA accepted our PIP for sodium thiosulfate with the trade name Pedmarqsi for the condition of the prevention of platinum-induced hearing loss. An accepted PIP is a prerequisite for filing a MAA for any new medicinal product inEurope . The indication targeted by our PIP is for the prevention of platinum-induced ototoxic hearing loss for standard risk hepatoblastoma (SR-HB). Additional tumor types of the proposed indication will be subject to the CHMP assessment at the time of the MAA. No deferred clinical studies were required in the positive opinion given by PDCO. We were also advised that sodium thiosulfate (tradename to be determined) is eligible for submission of an application for a PUMA. A PUMA is a dedicated marketing authorization covering the indication and 62
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appropriate formulation for medicines developed exclusively for use in the pediatric population and provides data and market protection up to 10 years. Therefore, this decision allows us to proceed with the submission of a PUMA in theEuropean Union (EU) with incentives of automatic access to the centralized procedure and up to 10 years of data and market protection. InFebruary 2020 , we announced that we had submitted a MAA for the prevention of ototoxicity induced by cisplatin chemotherapy patients 1 month to < 18 years of age with localized, non-metastatic, solid tumors. We have not received and do not expect to have significant revenues from our product candidate until we are either able to sell our product candidate after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue. We generated a net loss of$17.4 million for the year endedDecember 31, 2021 . We generated a net loss of approximately$18.1 million for the year endedDecember 31, 2020 . As ofDecember 31, 2021 , our accumulated deficit was approximately$179.6 million . Our projections of our capital requirements are subject to substantial uncertainty, and more capital than we currently anticipate may be required thereafter. To finance our continuing operations, we may need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provide us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources. We may not be able to raise the necessary capital or such funding may not be available on financially acceptable terms if at all. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations. Our operating expenses will depend on many factors, including the progress of our drug development efforts and efficiency of our operations and current resources. Our research and development expenses, which include expenses associated with our clinical trials, drug manufacturing to support clinical programs, stock-based compensation, consulting fees, sponsored research costs, toxicology studies, license fees, milestone payments, and other fees and costs related to the development of our product candidate, will depend on the availability of financial resources, the results of our clinical trials, and any directives from regulatory agencies, which are difficult to predict. Our general and administration expenses include expenses associated with the compensation of employees, stock-based compensation, professional fees, consulting fees, insurance and other administrative matters associated in support of our drug development programs. OnMay 5, 2020 , we announced the completion of an underwritten public offering of 4,800,000 of our common shares at a public offering price of$6.25 per share. In addition, we issued an additional 660,204 common shares in connection with the partial exercise of the underwriters' over-allotment option. The approximate total gross proceeds from the offering were$34,100 ($32,189 net of commissions, fees and issue costs). OnFebruary 1, 2019 , our wholly owned subsidiary,Fennec Pharmaceuticals, Inc. , entered into a Loan and Security Agreement (the "Bridge Bank Loan and Security Agreement") withBridge Bank , a division ofWestern Alliance Bank , anArizona corporation ("Bridge Bank "), pursuant to whichBridge Bank agreed to loan$12,500 toFennec Pharmaceuticals, Inc. , to be made available upon NDA approval of PEDMARKTM by the FDA no later thanSeptember 30, 2020 . The Bridge Bank Loan and Security Agreement was amended onJune 25, 2020 to increase the total potential amount of the loan to$18,000 and to extend the outside date to receive NDA approval of PEDMARKTM toDecember 31, 2020 . In connection with this facility, we issuedBridge Bank a warrant to purchase up to 39 of our common shares at an exercise price of$6.80 per share, with an exercise period of ten years from the date of issuance subject to certain early termination conditions. Under Accounting Standards Codification ("ASC") 470-50, Modifications and Extinguishments, the amendment to the facility was considered a modification. As such, we had been amortizing the loan fee and the value of the warrant over the remainder of the loan term. Following receipt of theFDA's CRL inAugust 2020 , which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARKTM on our behalf, we decided to fully amortize the remaining portions of the loan fee and the value of the warrants. The warrant issued toBridge Bank remains outstanding. OnJune 24, 2021 , we entered into a second amendment to the Bridge Bank Loan and Security Agreement. This amendment providesFennec Pharmaceuticals, Inc. with a$20,000 debt facility comprised of three term loans. Term Loan A consists of$5,000 , which was funded upon closing. Term Loan B consists of$7,500 to be funded upon NDA approval of PEDMARKTM no later thanJanuary 31, 2022 . Term Loan C consists of$7,500 to be funded upon us 63
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achieving consolidated trailing nine-month revenues of$11 million on or beforeDecember 31, 2022 . The interest-only period for the facility has the ability to be extended from 18 months to 24 months from the funding of Term Loan B, provided that Term Loan C is funded, and certain other conditions are met. OnJanuary 27, 2022 , we entered into a third amendment to the Bridge Bank Loan and Security Agreement extending the outside date to receive NDA approval of PEDMARKTM toSeptember 30, 2022 . Among other customary events of default, failure to obtain NDA approval bySeptember 30, 2022 constitutes an event of default under the Bridge Bank Loan and Security Agreement, upon whichBridge Bank may declare the entire balance of the facility immediately due and payable. AlthoughBridge Bank has previously extended the deadline to receive NDA approval, there is no assurance that it will do so again if the NDA is not approved by the currentSeptember 30, 2022 deadline. We intend to use the proceeds from the loans to provide working capital for commercial readiness activities prior to NDA approval as well as commercialization activities for PEDMARKTM, if approved by the FDA. We believe that the funds raised in ourMay 2020 public offering provides us sufficient funding to carry-out our planned activities, including potential NDA approval and the commencement of commercialization efforts, for at least the next twelve months as we continue our strategic development of PEDMARKTM.
Results of Operations
Fiscal 2021 versus Fiscal 2020
Fiscal Year Ended Fiscal Year Ended Increase
In thousands of U.S. Dollars December 31, 2021 % December 31, 2020 % (Decrease)
Revenue $ - $ 170 $ (170)
Operating expenses:
Research and development 4,981 29 % 5,105 28 % (124)
General and administration 12,242 71 % 12,950 72 % (708)
Total operating expense 17,223 100 % 18,055 100 % (832)
Loss from operations 17,223 17,885 (662)
Unrealized (loss)/gain on securities (25)
100 (125)
Amortization expense (16) (402) 386
Other losses (136) (9) (127)Interest income and other, net 54
87 (33)
Net loss $ (17,346) $ (18,109) $ 763 We had no revenues in fiscal 2021. In fiscal 2020, revenues reported represent
royalties related to the
? Processa Pharmaceuticals, Inc. ("Processa") (see "Revenue arrangements" under
Note 2 of our consolidated financial statements appearing elsewhere in this
Annual Report). In 2020, we received
restricted shares of Processa.
? Research and development expense decreased by
compared to fiscal 2020.
The
compared to fiscal 2020 is attributed to the decrease in pre-commercialization
expenses. Many pre-commercialization expenses were completed in fiscal 2020 and
? did not need to be repeated. These savings were offset in fiscal 2021 by
increased legal expenses of
increased payroll expense of
increased non-cash equity compensation of
There was a negligible unrealized loss on the Processa shares for the year
ended
? gain of
Processa shares are marked to market at each balance sheet date with the resulting change in value being booked as an unrealized gain or loss.
Amortization expense was down sharply as in fiscal 2020, as we wrote off the
? entire capitalized amount associated with the Bridge Bank Loan and Security
Agreement origination costs. In fiscal 2021, we capitalized
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costs associated with the amended facility. The origination fees for the amended
facility in fiscal 2021were much lower than the original facility.
Other losses increased by
? expense. We pay interest on the financed D&O insurance policy and the
million of funded debt from
Interest income decreased in fiscal 2021 as compared to fiscal 2020, due to
? lower average balances and rates on money market accounts for the comparable
periods. Quarterly Information The following table presents selected consolidated financial data for each of the last eight quarters throughDecember 31, 2021 , as prepared under generally accepted accounting principles withinthe United States , orU.S. GAAP (dollars in thousands, except per share information). Net (Loss)/Income for the Basic Net (Loss)/Income per Diluted Net (Loss)/Income per Period Period Common Share Common Share March 31, 2020 $ (3,826) $ (0.19) $ (0.19) June 30, 2020 (4,845) (0.21) (0.21) September 30, 2020 (6,200) (0.24) (0.24) December 31, 2020 (3,238) (0.13) (0.13) March 31, 2021 (4,733) (0.18) (0.18) June 30, 2021 (4,001) (0.15) (0.15) September 30, 2021 (4,185) (0.16) (0.16) December 31, 2021 (4,427) (0.18) (0.18)
Quarter ended
Quarter Ended Quarter Ended Increase
In thousands of U.S. Dollars December 31, 2021 % December 31, 2020 % (Decrease)
Revenue $ - $ 170 $ (170)
Operating expenses:
Research and development 523 12 % 1,223 36 % (700)
General and administration 3,684 88 % 2,293 64 % 1,391
Total operating expense 4,207 100 % 3,516 100 % 691
Loss from operations 4,207 3,346 861Unrealized (loss)/gain on securities (162)
100 (262)
Interest income 13 13 -
Amortization expense (8) - (8)
Other (loss), net (63) (5) (58)
Net loss $ (4,427) $ (3,238) $ (1,189)
Revenues reported in the three months ended December 31, 2020 , represent
royalties related to the Elion transaction with Processa. On October 30, 2020 ,
we received $0.005 million in cash and 41,250 restricted shares of Processa. We
reported a loss from operations of $4.4 million for the three months ended
December 31, 2021 , compared to a loss from operations of $3.2 million for the
same period in 2020. Research and development expenses totaled $0.5 million for
the three months ended December 31, 2021 , down by $0.7 million over the same
period in 2020. General and administrative expenses increased by $1.4 million in
the three months ended December 31, 2021 , as compared to the same period in
2020. The increase arises from non-cash equity grants and our
pre-commercialization activities for PEDMARKTM as we prepared for potential NDA
approval by the FDA in November 2021 . There was an unrealized loss of $0.2
million on the Processa shares as of over fiscal year 2021. The Processa shares
will be marked to market at each balance sheet date.
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The resulting change in value will result in an unrealized gain or loss. Other loss increased by$0.06 million . This relates to interest expense for the funded debt of the loan security agreement. As at As at Selected Asset and Liability Data (thousands): December 31, 2021 December 31, 2020 Cash and equivalents $ 21,100 $ 30,344 Other current assets 1,287 1,073 Current liabilities 1,654 2,347 Working capital (1) 20,733 29,070
(1) [Current assets - current liabilities]
Selected Equity: Common stock and additional paid in capital 194,015 189,967 Accumulated deficit (179,486) (162,140) Shareholders' equity 15,772 29,070
Liquidity and Capital Resources
There was a
cash operating expenses, offset by the
?
option exercises. During the period ended
operations was used mainly on the pre-commercialization activities of PEDMARKTM
and regulatory submission activities relating to the NDA.
The increase in other current assets between
? 2020 primarily relates to an increase in the prepaid amounts for drug product
manufacturing and for Director and Officer insurance premiums.
Current liabilities at
?
with our commercialization and manufacturing activities for the production of
PEDMARKTM and related regulatory expenses at year-end 2021.
Working capital decreased between
?
negligible amounts received from stock option exercises and interest income.
Cash outflows related to the regulatory and pre-commercial development
activities of PEDMARKTM and other general and administrative expenses.
Selected Cash Flow Data Year Ended YearEnded
(dollars and shares in thousands)
(15,595)
Net cash provided by investing activities -
-
Net cash provided by financing activities 4,978
32,289 Net cash flow $ (9,244) $ 16,694
The net cash flow used in operating activities for the year endedDecember 31, 2021 was approximately$14.2 million as compared to$15.6 million in 2020. This decrease relates to slightly lower pre-commercial activities in 2021 as some of the activities were completed in 2020. Net financing activities in 2021 provided approximately$5.0 million from funding of the Bridge Bank Loan and Security Agreement, net of fees, and de minimis amounts arising from various option exercises. Financing activities in 2020 mainly consisted of$31.8 million from the public issuance of our common shares and$0.5 million from various option exercises. We continue to pursue various strategic alternatives including collaborations with other pharmaceutical and biotechnology companies. Our projections of further capital requirements are subject to substantial uncertainty. Our working capital requirements may fluctuate in future periods depending upon numerous factors, including: our ability to obtain additional financial resources; our ability to enter into collaborations that provide us with up-front payments, 66 Table of Contents milestones or other payments; results of our research and development activities; progress or lack of progress in our preclinical studies or clinical trials; unfavorable toxicology in our clinical programs, our drug substance requirements to support clinical programs; change in the focus, direction, or costs of our research and development programs; headcount expense; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our patent claims; competitive and technological advances; the potential need to develop, acquire or license new technologies and products; our business development activities; new regulatory requirements implemented by regulatory authorities; the timing and outcome of any regulatory review process; and commercialization activities, if any. We had cash and cash equivalents of approximately$21.1 million as ofDecember 31, 2021 . We currently anticipate that our available capital resources, including our existing cash and cash equivalents and accounts receivable balances, will be sufficient to meet our expected working capital and capital expenditure requirements as our business is currently conducted for at least the next 12 months. Financial Instruments We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. AtDecember 31, 2021 , we had approximately$0.1 million in our cash accounts and$21.0 million in savings and money market accounts. While we have never experienced any loss or write down of our money market investments since our inception, the amounts we hold in money market accounts are substantially above the$250,000 amount insured by theFDIC and may lose value. Our 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 may be made inU.S. or Canadian obligations and bank securities, commercial paper ofU.S. or Canadian industrial companies, utilities, financial institutions and consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper. The policy also provides for investment limits on concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months. This policy applies to all of our financial resources. The policy risks are primarily the opportunity cost of the conservative nature of the allowable investments. As our main purpose is research and development, we have chosen to avoid investments of a trading or speculative nature. We classify investments with original maturities at the date of purchase greater than three months which mature at or less than twelve months as current. We carry investments at their fair value with unrealized gains and losses included in other comprehensive income (loss); however, we have not held any instruments that were classified as short-term investments during the periods presented in this Annual Report.
Off-Balance Sheet Arrangements
Since our inception, we have not had any material off-balance sheet arrangements.
Contractual Obligations and Commitments
None.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. These estimates are based on assumptions and judgments that may be affected by commercial, economic and other factors. Actual results could differ from these estimates. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially 67
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impact the financial statements. The following description of critical
accounting policies, judgments and estimates should be read in conjunction with
our
Stock-based Compensation
The calculation of the fair values of our stock-based compensation plans requires estimates that require management's judgments. Under ASC 718, the fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model. The valuation models require assumptions and estimates to determine expected volatility, expected life, expected dividends and expected risk-free interest rates. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award. The risk-free interest rate assumption was based on the yield on zero-couponU.S. Treasury strips at the award grant date. We also used historical data to estimate forfeiture experience. In valuing options granted in the fiscal years endedDecember 31, 2021 and 2020, we used the following weighted average assumptions: Year Ended Year Ended December 31, December 31, 2021 2020 Expected dividend - % - % Risk-free interest rate 1.41 - 1.62 % 0.63 - 1.90 % Expected volatility 122 % 136 - 148 % Expected life 10.0 years 10.0 years Common shares and warrants
Common shares are recorded as the net proceeds received on issuance after deducting all share issuance costs and the relative fair value of investor warrants. Warrants are recorded at relative fair value and are deducted from the proceeds of common shares and recorded on the consolidated statements of shareholders' equity as additional paid-in capital.
Outstanding Share Information
Our outstanding comparative share data at
December 31, December 31,
Outstanding Share Type 2021 2020 Change
Common shares 26,014 26,003 11
Warrants 39 39 -
Stock options 4,259 2,952 1,307
Total 30,312 28,994 1,318
Newly Adopted and Recent Accounting Pronouncements
InJanuary 2021 , the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). In this ASU, the FASB refines the scope of Topic 848 to clarify that certain optional expedients and exceptions therein for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition. Specifically, modifications related to reference rate reform would not be considered an event that requires reassessment of previous accounting conclusions. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in the ASU are effective immediately for all entities. Entities may choose to apply the amendments retrospectively as of any date from the beginning of an interim period that includes or is subsequent toMarch 12, 2020 , or prospectively to new modifications from any date within an interim period that includes or is subsequent toJanuary 7, 2021 , up to the date that financial statements are available to be issued. The Company chose to apply amendments prospectively and concluded after evaluation that ASU 2021-01 has no significant effect on our consolidated financial statements. 68
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