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 "Risk Factors" section of this Annual Report, our actual results could differ materially from 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 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. We estimate in theU.S. andEurope that annually over 10,000 children with solid tumors are treated with platinum agents. The vast majority of these newly diagnosed tumors are localized and classified as low to intermediate risk in nature. These localized cancers may have overall survival rates of greater than 80%, further emphasizing the importance of quality of life after treatment. 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. 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 at critical stages of development lack speech language development and literacy, and older children and adolescents lack speech language development and literacy, and older children and adolescents lack social-emotional development and educational achievement.
In
We initiated our rolling New Drug Application ("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 in
December 2018 . We announced that we had submitted full completion of the NDA in
February 2020 . On April 13, 2020 , we announced that the FDA had accepted for
filing and granted Priority Review for our NDA. The FDA set a Prescription Drug
Fee Act ("PDUFA") target action date of August 10, 2020 for the completion of
the FDA's review. On August 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. In the fourth
quarter of 2020, we engaged in a Type A meeting with the FDA concerning the CRL
that we believe was constructive and collaborative. We are working closely with
our third-party drug manufacturer and the FDA to fully address the CRL, and we
plan to resubmit our NDA for PEDMARKTM in the second quarter of 2021.
47
InAugust 2018 , the Pediatric Committee ("PDCO") of theEuropean Medicines Agency ("EMA") accepted our pediatric investigation plan (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 Marketing Authorization Application ("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 Committee for Medicinal Products for Human Use ("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 Pediatric Use Marketing Authorization ("PUMA"). A PUMA is a dedicated marketing authorization covering the indication and 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$18.1 million for the year endedDecember 31, 2020 . We generated a net loss of approximately$12.8 million for the year endedDecember 31, 2019 . As ofDecember 31, 2020 , our accumulated deficit was approximately$162.1 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 subsidiaryFennec Pharmaceuticals, Inc. entered into a Loan and Security Agreement (the "Loan and Security Agreement") withBridge Bank , a division ofWestern Alliance Bank , anArizona corporation ("Bridge Bank "), pursuant to whichBridge Bank agreed to loan$12.5 million toFennec Pharmaceuticals, Inc. , to be made available upon NDA approval of PEDMARKTMby no later thanSeptember 30, 2020 . The Loan and Security Agreement was amended onJune 26, 2020 to increase the total potential amount of the loan to$18 million and to extend the outside date for us to receive NDA approval of PEDMARKTMtoDecember 31, 2020 . In connection with this facility, we issued theBridge Bank a warrant to purchase up to 39,000 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 the receipt of theFDA's CRL inAugust 2020 , we decided to fully amortize the remaining portions of the loan fee and the value of the warrants. The Loan and Security Agreement expired onDecember 31, 2020 as a result of us not obtaining NDA approval of PEDMARKTM by that date, with no amounts advanced under the facility prior to its termination. 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. 48 Results of Operations
Fiscal 2020 versus Fiscal 2019
Fiscal Year Ended Fiscal Year Ended Increase
In thousands of U.S. Dollars December 31, 2020 % December 31, 2019 % (Decrease) Revenue $ 170 $ - $ 170 Operating expenses: Research and development 5,105 29 % 5,607 43 % (502 ) General and administration 12,950 71 % 7,402 57 % 5,548 Total operating expense 18,055 100 % 13,009 100 % 5,046 Loss from operations 17,885 13,009 4,876 Amortization expense (402 ) (64 ) (338 )
Unrealized gain on securities 100 - 100 Other loss (9 ) (17 ) 8 Interest income and other, net 87
315 (228 )
Net loss $ (18,109 ) $ (12,775 ) $ (5,334 ) · Revenues reported represent royalties related to Elion deal with Processa
restricted shares of Processa Pharmaceuticals, Inc.
· Research and development expense decreased by
compared to fiscal 2019, primarily due to the shift from research and
development to pre-commercialization efforts for PEDMARKTM which took place in
the first nine months of 2020.
· The
to the increase in pre-commercialization expenses. Further there was a small
rise in compensation to officers, directors and key contract employees in
fiscal 2020 as compared to fiscal 2019.
· Amortization expense relates to the
origination fees were capitalized in fiscal 2019 and 2020. After receiving the
CRL from the FDA in
amounts associated with the loan facility. The facility expired on
2020.
· Interest income decreased in fiscal 2020 as compared to 2019, due to lower
interest rates on money market accounts for the comparable periods.
· There was an unrealized gain of
date acquired,
Processa shares will be marked to market at each balance sheet date. The resulting change in value will result in an unrealized gain or loss. Quarterly Information The following table presents selected consolidated financial data for each of the last eight quarters throughDecember 31, 2020 , as prepared under generally accepted accounting principles withinthe United States , orU.S. GAAP (dollars in thousands, except per share information). Basic Net (Loss)/Income Diluted Net Net (Loss)/Income for the per (Loss)/Income per Period Period Common Share Common Share March 31, 2019 (2,626 ) (0.13 ) (0.13 ) June 30, 2019 (4,730 ) (0.24 ) (0.24 ) September 30, 2019 (1,809 ) (0.09 ) (0.09 ) December 31, 2019 (3,610 ) (0.18 ) (0.18 ) 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 )
Quarter ended
Quarter Ended Quarter Ended Increase
In thousands of U.S. Dollars December 31, 2020 % December 31, 2019 % (Decrease)
Revenue $ 170 $ - $ 170
Operating expenses:
Research and development 1,223 36 % 1,172 32 % 51
General and administration 2,293 64 % 2,481 68 % (188 )
Total operating expense 3,516 100 % 3,653 100 % (137 )
Loss from operations 3,346 3,653 (307 )
Unrealized gain on securities 100 - 100
Interest income 13 69 (56 )
Amortization expense - (18 ) 18
Other(loss)/income, net (5 ) (8 ) 3
Net loss $ (3,238 ) $ (3,610 ) $ 372
49
Revenues reported represent royalties related to Elion deal with Processa
Pharmaceuticals, Inc. Fennec received $0.005 million in cash and 41,250 in
restricted shares of Processa Pharmaceuticals, Inc. We reported a loss from
operations of $3.3 million for the three months ended December 31, 2020 ,
compared to a loss from operations of $3.7 million for the same period in 2019.
Research and development expenses totaled $1.2 million for the three months
ended December 31, 2020 , which was the same for the same period in 2019. General
and administrative expenses decreased by $0.2 million in the three months ended
December 31, 2020 , as compared to the same period in 2019. The decrease arises
from our reduced pre-commercialization activities for PEDMARKTM as we focus on
preparing to resubmit our NDA application to the FDA. There was an unrealized
gain of $0.1 million on the Processa shares between the date acquired,
October 30, 2020 , and December 31, 2020 . Going forward, the Processa shares will
be marked to market at each balance sheet date. The resulting change in value
will result in an unrealized gain or loss.
As at As at
Selected Asset and Liability Data (thousands): December 31, 2020 December 31, 2019
Cash and equivalents $ 30,344 $ 13,650
Other current assets 1,073 234
Current liabilities 2,347 2,271
Working capital [current assets - current liabilities] 29,070 11,613
Selected Equity:
Common stock and additional paid in capital $ 189,967 $ 154,663
Accumulated deficit (162,140 ) (144,031 )
Shareholders' equity 29,070 11,875
Liquidity and Capital Resources
· There was a
million, as well as
cash used for operating activities. During the period ended
cash for 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
2019 primarily relates to the value of the Processa shares and an increase in
the prepaid amount for Director and Officer insurance premiums and costs
associated with our at the market offering agreement, which was disclosed on
· Current liabilities at
to
associated with our commercialization and manufacturing activities for the
production of PEDMARKTM and related regulatory expenses at year-end 2020.
· Working capital increased between
from stock option exercises and
related to the regulatory and pre-commercial development activities of
PEDMARKTM and general and administrative expenses.
Selected Cash Flow Data Year Ended Year Ended
(dollars and shares in thousands) December 31, 2020 December 31, 2019
Net cash used in operating activities $ (15,595 ) $ (9,060 )
Net cash provided from investing activities - -
Net cash provided by financing activities 32,289 (71 )
Net cash flow $ 16,694 $ (9,131 )
The net cash flow used in operating activities for the year endedDecember 31, 2020 was approximately$15.6 million as compared to$9.1 million in 2019. This increase relates to the commercial development of PEDMARKTM, preparation for product launch and regulatory activities. Net financing activities provided approximately$32.0 million from a public offering in May of 2020, and approximately$0.5 million from the exercise of stock options. 50 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, 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$30.3 million as ofDecember 31, 2020 . 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, 2020 , we had approximately$0.7 million in our cash accounts and$29.6 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 impact the financial statements. The following description of critical accounting policies, judgments and estimates should be read in conjunction with ourDecember 31, 2020 consolidated financial statements. 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, 2020 and 2019, we used the following weighted average assumptions: 51 Year Ended December Year Ended December 31, 2020 31, 2019 Expected dividend 0 % 0 % Risk-free interest rate 0.63 - 1.90 % 1.63 - 2.70 % Expected volatility 136 - 148 % 125 - 179 % Expected life 10.0 years 4.3 - 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
Outstanding Share Type December 31, 2020 December 31, 2019 Common shares 26,003 19,896
Warrants to purchase common shares 39
39
Options to purchase common shares 2,952
3,088 Total 28,994 23,023
Newly Adopted and Recent Accounting Pronouncements
InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. The Company adopted this ASU onJanuary 1, 2020 . Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. We concluded after evaluation that ASU 2018-13 has no significant effect on our consolidated financial statements. 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.
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