FENNEC PHARMACEUTICALS INC. 10-Q

Item 1. Financial Statements Fennec Pharmaceuticals Inc. Condensed Consolidated Balance Sheets (U.S. Dollars and shares in thousands) September 30, 2020 December 31, (unaudited) 2019 Assets Current assets: Cash and cash equivalents $ 33,166 $ 13,650 Prepaid expenses 900 226 Other current assets 4 8 Total current assets 34,070 13,884 Non-current assets: Deferred issuance costs 466 326 Accumulated amortization of deferred issuance costs (466 ) (64 ) Total non-current assets: - 262 Total assets $ 34,070 $ 14,146 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,684 $ 1,612 Accrued liabilities 201 659 Total current liabilities 2,885 2,271 Commitments and Contingencies (Note 6) Stockholders' equity: Common stock, no par value; unlimited shares authorized; 25,810 shares issued and outstanding (2019-19,896) 139,732 106,392 Additional paid-in capital 49,112 48,271 Accumulated deficit (158,902 ) (144,031 ) Accumulated other comprehensive income 1,243 1,243 Total stockholders’ equity 31,185 11,875 Total liabilities and stockholders’ equity $ 34,070 $ 14,146 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 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, 2020 2019 2020 2019 Revenue $ - $ - $ - $ - Operating expenses: Research and development 1,368 795 3,882 4,435 General and administrative 4,491 1,068 10,657 4,921 Loss from operations (5,859 ) (1,863 ) (14,539 ) (9,356 ) Other (expense) income : Other (loss)/gain (8 ) 1 (4 ) (9 ) Amortization expense (355 ) (17 ) (402 ) (46 ) Interest income and other 22 70 74 246 Total other income/(expense), net (341 ) 54 (332 ) 191 Net loss $ (6,200 ) $ (1,809 ) $ (14,871 ) $ (9,165 ) Basic net loss per common share $ (0.24 ) $ (0.09 ) $ (0.64 ) $ (0.46 ) Diluted net loss per common share $ (0.24 ) $ (0.09 ) $ (0.64 ) $ (0.46 ) Weighted-average number of common shares outstanding, basic 25,598 19,896 22,969 19,896 Weighted-average number of common shares outstanding, diluted 25,598 19,896 22,969 19,896 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Fennec Pharmaceuticals Inc. Condensed Consolidated Statements of Cash Flows (U.S. Dollars in thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2020 2019 2020 2019 Cash flows used in: Operating activities: Net loss $ (6,200 ) $ (1,809 ) $ (14,871 ) $ (9,165 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred issuance cost 355 17 402 46 Stock-based compensation - contractors 21 21 63 395 Stock-based compensation - employees 1,238 314 2,151 2,204 Changes in operating assets and liabilities: Prepaid assets (734 ) (331 ) (674 ) (219 ) Other current assets - 1 4 1 Accounts payable (71 ) (440 ) 1,072 (244 ) Accrued liabilities (55 ) (8 ) (458 ) (488 ) Net cash used in operating activities (5,446 ) (2,235 ) (12,311 ) (7,470 ) Financing activities: Issuance of shares, net of issuance cost - - 31,967 - Capitalized deferred issuance cost (117 ) - (140 ) (71 ) Net cash (used in)/provided by financing activities (117 ) - 31,827 (71 ) (Decrease)/increase in cash and cash equivalents (5,563 ) (2,235 ) 19,516 (7,541 ) Cash and cash equivalents - Beginning of period 38,729 17,475 13,650 22,781 Cash and cash equivalents - End of period $ 33,166 $ 15,240 $ 33,166 $ 15,240 Non-cash deferred issuance cost (warrant value) $ - $ - $ - $ 255 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Fennec Pharmaceuticals Inc. Condensed Consolidated Statements of Stockholders' Equity Three and Nine-months Ended September 30, 2020 and 2019 (U.S. dollars and shares in thousands) (Unaudited) Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders’ Number (Note 5) Amount Capital Deficit Income Equity Balance at December 31, 2019 19,896 $ 106,392 $ 48,271 $ (144,031 ) $ 1,243 $ 11,875 Stock options issued to employees - - 391 - - 391 Stock options issued to contractors - - 21 - - 21 Net loss - - - (3,826 ) - (3,826 ) Balance at March 31, 2020 19,896 106,392 48,683 (147,857 ) 1,243 8,461 Stock options issued to employees - - 522 - - 522 Stock options issued to contractors - - 21 - - 21 Issuance of securities 5,460 31,967 - - - 31,967 Net loss - - - (4,845 ) - (4,845 ) Balance at June 30, 2020 25,356 138,359 49,226 (152,702 ) 1,243 36,126 Stock options issued to employees - - 1,238 - - 1,238 Stock options issued to contractors - - 21 - - 21 Exercise of options 454 1,373 (1,373 ) - - - Net loss - - - (6,200 ) - (6,200 ) Balance at September 30, 2020 25,810 $ 139,732 $ 49,112 $ (158,902 ) $ 1,243 $ 31,185 Balance at December 31, 2018 19,896 $ 106,392 $ 44,934 $ (131,256 ) $ 1,243 $ 21,313 Stock options issued to employees - - 221 - - 221 Stock options issued to contractors - - 43 - - 43 Warrants issued to consultants - - 255 - - 255 Net loss - - - (2,626 ) - (2,626 ) Balance at March 31, 2019 19,896 106,392 45,453 (133,882 ) 1,243 19,206 Stock options issued to employees - - 1,669 - - 1,669 Stock options issued to contractors - - 331 - - 331 Net loss - - - (4,730 ) - (4,730 ) Balance at June 30, 2019 19,896 106,392 47,453 (138,612 ) 1,243 16,476 Stock options issued to employees - - 314 - - 314 Stock options issued to contractors - - 21 - - 21 Net loss - - - (1,809 ) - (1,809 ) Balance at September 30, 2019 18,896 $ 106,392 $ 47,788 $ (140,421 ) $ 1,243 $ 15,002 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) 1. Nature of Business and Going Concern Fennec Pharmaceuticals Inc. (“Fennec,” the “Company,” “we,” “us,” or “our”) is a biopharmaceutical company focused on the development of PEDMARK TM (a unique formulation of sodium thiosulfate) for the prevention of platinum-induced ototoxicity in pediatric cancer patients. We incorporated under the Canada Business Corporations Act (“CBCA”) in September 1996. Effective on August 25, 2011, the Company continued from the CBCA to the Business Corporations Act (British Columbia) (the “Continuance”). The Continuance was approved by our shareholders at our June 2011 Annual and Special Meeting and by resolution of the Board of Directors on August 10, 2011. We have four wholly-owned subsidiaries: Oxiquant, Inc. and Fennec Pharmaceuticals, Inc., both Delaware corporations, Cadherin Biomedical Inc., a Canadian company and Fennec Pharmaceuticals (EU) Limited (“Fennec Limited”), an Ireland company formed in 2018. With the exception of Fennec Pharmaceuticals, Inc., all subsidiaries are inactive. These unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) that are applicable to a going concern which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. During the three and nine-months ended September 30, 2020, the Company incurred a loss from operations of $5,859 and $14,539, respectively. At September 30, 2020, the Company had an accumulated deficit of $158,902 and had experienced negative cash flows from operating activities during the three and nine-months ended September 30, 2020 in the amount of $5,446 and $12,311, respectively. On May 5, 2020, the Company announced the completion of an underwritten public offering of 4,800,000 common shares at a public offering price of $6.25 per share. In addition, Fennec 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 was $31,967 ($34,100 net of commissions, fees and issue costs). On February 1, 2019, Fennec entered into a Loan and Security Agreement with Bridge Bank, a division of Western Alliance Bank, an Arizona corporation, pursuant to which the Bank agreed to loan $12,500 to the Company, to be made available upon New Drug Application (NDA) approval of PEDMARK by no later than September 30, 2020. The proceeds from the loan will be used for working capital purposes and to fund general business requirements in accordance with the terms of the Loan and Security Agreement. Interest under the Term Loans shall bear interest, on the outstanding daily balance thereof, at a floating per annum rate equal to the Effective Interest Rate (as defined in the Loan and Security Agreement) which is equal to the sum of the Prime Rate published in the Wall Street Journal (currently 3.25%) plus one percent (1.00%). The debt facility is to have interest-only monthly payments due for the first eighteen months from the funding date and then monthly principal and interest payments are due through the remainder of the term which has a maturity date of October 1, 2023. In connection with the facility, Fennec granted Bridge Bank a warrant to purchase up to 39 common shares at an exercise price of $6.80 per common share, for a term of ten years from the date of issuance, subject to early termination under certain conditions. On June 26, 2020, Fennec announced an amendment to the Loan and Security Agreement with Bridge Bank. This amendment provides Fennec with an $18,000 debt facility comprised of two term loans. Term Loan A consists of $12,500 to be funded upon New Drug Application NDA approval of PEDMARK TM in the U.S. to be made available upon NDA approval of PEDMARK by no later than December 31, 2020 and Term Loan B consists of $5,500 to be funded upon the occurrence of a revenue event in 2021. 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 A, provided that Term Loan B is funded, and certain conditions are met. The fee in connection with Loan B, can either be 2.13% of the Loan B amount in cash, or the Company can issue a warrant with a value equal to 3.25% of the Loan B amount. On August 6, 2020, the Company paid cash for the extended facility. These statements reflect that fee being settled with cash instead of a warrant. Under Accounting Standards Codification ("ASC") 470-50, Modifications and Extinguishments, the amendment was considered a modification. As such, the Company had been amortizing the loan fee and the value of the warrant over the remainder of the loan term. Following the receipt of the U.S. Food and Drug Administration’s (FDA) Complete Response Letter (CRL), management decided to fully amortize the remining portions of the loan fee and the value of the warrants. 7 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) On August 10, 2020, the Company received a CRL from the FDA regarding its New Drug Application (NDA) for PEDMARK TM . According to the CRL, after recent completion of a pre-approval inspection of the manufacturing facility of our drug product manufacturer, the FDA identified deficiencies that are required to be resolved prior to the approval of PEDMARK TM . Importantly, no clinical safety or efficacy issues were identified during the review and there is no requirement for further clinical data. The Company plans to work closely with the third-party drug manufacturer and the FDA to fully address the CRL and plan to resubmit the NDA for PEDMARK TM as quickly as possible. As a result of the FDA’s CRL the anticipated product launch did not occur as of September 30, 2020 and thus the Bridge Bank Term Loan A has not yet been funded. The Company does not believe it will receive FDA approval by December 31, 2020 and thus has fully amortized the deferred asset associated with Term Loan A. Furthermore, the Company believes the delay in approval will mean it will not be able to meet the revenue target to fund Term Loan B. As such, the deferred asset associated with Term Loan B has been expensed. The Company is currently in negotiations with Bridge Bank to receive an extension on both Term Loan A and B. The Company believes the funds raised in the public offering which closed in May 2020, provides sufficient funding for the Company to carry-out its planned activities including potential NDA approval and the commencement of commercialization efforts for at least the next twelve months as it continues its strategic development of PEDMARK TM . These financial statements do not reflect the potentially material adjustments in the carrying values of assets and liabilities, the reported expenses, and the balance sheet classifications used, that would be necessary if the going concern assumption were not appropriate. 2. Significant Accounting Policies Basis of presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with US GAAP and are the responsibility of the Company’s management. These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by US GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2019. These unaudited interim condensed consolidated financial statements have been prepared in U.S. dollars. All amounts presented are in thousands except for per share amounts. Use of estimates The preparation of financial statements in conformity with 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 interim condensed consolidated financial statements and the reported amounts of expense during the reporting period. Actual results could differ from those estimates. In the opinion of management, these unaudited interim condensed consolidated financial statements include all adjustments, which are normal and recurring in nature, necessary for the fair presentation of the Company’s financial position at September 30, 2020 and to state fairly the results for the periods presented. The most significant estimates utilized during the quarter ended September 30, 2020 included estimates necessary to value grants of stock options to employees and various contractors, disclosed in Note 4. 8 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) New accounting pronouncements In August 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 ASU was effective for us on January 1, 2020, and interim periods within that fiscal year. Certain disclosures in ASU 2018-13 would need to be applied on a retrospective basis and others on a prospective basis. The Company concluded after evaluation, that the impact of ASU 2018-13 on our consolidated financial statements and disclosures was de minimis. In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which, among other things, provides guidance on how to account for contracts on an entity’s own equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the ASU eliminated the need for the Company to assess whether a contract on the entity’s own equity (1) permits settlement in unregistered shares, (2) whether counterparty rights rank higher than shareholder’s rights, and (3) whether collateral is required. In addition, the ASU requires incremental disclosure related to contracts on the entity’s own equity and clarifies the treatment of certain financial instruments accounted for under this ASU on earnings per share. This ASU may be applied on a full retrospective of modified retrospective basis. This ASU is effective January 1, 2022 and interim periods presented. Early adoption of the ASU is permitted by the Company effective January 1, 2021. The Company is in the process of assessing the adoption of the ASU on the Company’s financial statements. Cash and cash equivalents Cash equivalents consist of highly liquid investments with original maturities at the date of purchase of three months or less. The Company places its cash and cash equivalents in investments held by highly rated financial institutions in accordance with its investment policy designed to protect the principal investment. At September 30, 2020, the Company had $33,166 in cash, savings and money market accounts ($13,650 at December 31, 2019). At September 30, 2020, the Company held $19 in cash of which $11 (as presented in U.S. dollars) was in Canadian dollars ($24 at December 31, 2019 as presented in U.S. dollars). At September 30, 2020, the Company held $33,147 in money market investments. Money market investments typically have minimal risks. The Company has not experienced any loss or write-down of its money market investments since inception. 3. Earnings per Share Earnings per common share is presented under two formats: basic earnings per common share and diluted earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, plus the potentially dilutive impact of common stock equivalents (i.e. stock options and warrants). Dilutive common share equivalents consist of the incremental common shares issuable upon exercise of stock options and warrants. The following table sets forth the computation of basic and diluted net loss per share: Three Months Ended September 30, Nine-month Ended September 30, 2020 2019 2020 2019 Numerator: Net (loss) $ (6,200 ) $ (1,809 ) $ (14,871 ) $ (9,165 ) Denominator: Weighted-average common shares, basic 25,598 19,896 22,969 19,896 Dilutive effect of stock options - - - - Dilutive effect of warrants - - - - Incremental dilutive shares - - - - Weighted-average common shares, dilutive 25,598 19,896 22,969 19,896 Net (loss) per share, basic and diluted $ (0.24 ) $ (0.09 ) $ (0.64 ) $ (0.46 ) 9 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) The following outstanding options and warrants were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect: Three Months Ended September 30, Nine-month Ended September 30, 2020 2019 2020 2019 Options to purchase common stock 3,095 3,018 3,095 3,018 Warrants to purchase common stock 39 39 39 39 4. Stockholders' Equity Authorized capital stock The Company’s authorized capital stock consists of an unlimited number of shares of no-par common stock. Warrants to Purchase Common Stock During the three and nine-months ended September 30, 2020, there were no warrants issued or exercised. During the three and nine-months ended September 30, 2019, the Company issued warrants to purchase common stock priced in U.S. dollars with a weighted average price of $6.80. These warrants have not been exercised and have weighted average remaining life of 8.58 years as of September 30, 2020. The following table details the Company’s warrant activity from December 31, 2019: Investor Warrants Common Shares Issuable Upon Exercise of Outstanding Warrants Weighted-Average Exercise Price $USD Outstanding December 31, 2019 39 6.80 Issued - - Outstanding March 31, 2020 39 6.80 Issued - - Outstanding June 30, 2020 39 6.80 Issued - - Outstanding September 30, 2020 39 6.80 Total 39 6.80 Investor Warrants Common Shares Issuable Upon Exercise of Outstanding Warrants Weighted-Average Exercise Price $USD Outstanding December 31, 2018 - - Issued 39 6.80 Outstanding March 31, 2019 39 6.80 Issued - - Outstanding June 30, 2019 39 6.80 Issued - - Outstanding September 30, 2019 39 6.80 Total 39 6.80 The value of warrants issued was estimated using the Black-Scholes option pricing model using the following assumptions in the table below. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award. 10 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) Valuation Assumptions Black-Scholes Model Assumptions February 1, 2019 Expected dividend 0.00 % Risk free rate 2.70 % Expected volatility 179 % Expected life 10 years Stock option plan On June 22, 2020, shareholders of the Company approved a resolution adopting the Equity Incentive Plan (the “Plan”). This Plan replaces the Amended and Restated Stock Option Plan passed by shareholders in 2019. The Plan expands the types of instruments which may be issued as incentive compensation to employees, directors and designated contractors. In addition to stock options, the Plan may also issue: stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, cash-based awards and dividend equivalent rights. The Company believes this Plan gives it the ability to align incentives with strategic objectives. The Compensation Committee of the Board of Directors administers the Company’s Plan. The Compensation Committee designates eligible participants to be included under the Plan and approves the number of options to be granted from time to time under the Plan. Currently, the maximum number of option shares issuable is twenty-five percent (25%) of the total number of issued and outstanding shares of common stock. Based upon the current shares outstanding, a maximum of 6,452 options are authorized for issuance 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 for the three and nine-month periods ended September 30, 2020 and 2019. Three Months Ended September 30, Nine-month Ended September 30, 2020 2019 2020 2019 Contractor options expense recognized $ 21 $ 21 $ 63 $ 395 Employee options expense recognized 1,238 314 2,151 2,204 Total option expense recognized $ 1,259 $ 335 $ 2,214 $ 2,599 Stock option activity The following is a summary of option activity for each of the quarterly periods in fiscal year 2020 for stock options denominated in U.S. dollars: Number of Weighted-Average US Denominated Options Options (thousands) Exercise Price $USD Outstanding December 31, 2019 2,440 $ 3.59 Granted - - Outstanding at March 31, 2020 2,440 $ 3.59 Granted 475 6.97 Outstanding at June 30, 2020 2,915 $ 4.52 Granted 180 6.17 Outstanding at September 30, 2020 3,095 $ 4.62 During the three-month period ended September 30, 2020, there were 180 US denominated options issued. For the nine months ended September 30, 2020 there were 655 options issued. Of the 3,095 US denominated options granted and outstanding at September 30, 2020, 2,230 are fully vested and exercisable. The following is a summary of option activity for each of the quarterly periods in fiscal year 2019 for stock options denominated in U.S. dollars: Number of Weighted-Average US Denominated Options Options (thousands) Exercise Price $USD Outstanding December 31, 2018 1,850 $ 3.80 Granted - - Outstanding at March 31, 2019 1,850 $ 3.80 Granted 345 4.69 Outstanding at June 30, 2019 2,195 $ 3.94 Granted 175 4.74 Outstanding at September 30, 2019 2,370 $ 4.00 11 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) The following is a summary of option activity for the three and nine-month periods ended September 30, 2020 for stock options denominated in Canadian dollars: Number of Weighted-Average Canadian Denominated Options Options (thousands) Exercise Price $CAD Outstanding December 31, 2019 648 $ 2.43 Granted - - Outstanding at March 31, 2020 648 $ 2.43 Granted - - Outstanding at June 30, 2020 648 $ 2.43 Exercised (648 ) 2.43 Outstanding at September 30, 2020 - - For the three and nine-month periods ended September 30, 2020, there was no issuance activity related to Canadian dollar denominated options. During the period ended September 30, 2020, all 648 outstanding options denominated in Canadian dollars were fully exercised pursuant to a cashless exercise. As a result, the Company did not receive any cash and issued 454 shares. The following is a summary of option activity for the three and nine-month periods ended September 30, 2019 for stock options denominated in Canadian dollars: Number of Weighted-Average Canadian Denominated Options Options (thousands) Exercise Price $CAD Outstanding December 31, 2018 648 $ 2.43 Granted - - Outstanding at March 31, 2019 648 $ 2.43 Granted - - Outstanding at June 30, 2019 648 $ 2.43 Granted - - Outstanding at September 30, 2019 648 $ 2.43 Valuation assumptions The value of options granted were estimated using the Black-Scholes option pricing model using the following assumptions in the table below. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award. There were 180 options issued during the three months ended September 30, 2020, (175 for the same period in 2019). Assumptions for the valuation of the option grants are described in the table below: Three Months Ended September 30, Black-Scholes Model Assumptions 2020 2019 Expected dividend 0.00 % 0.00 % Risk free rate 0.69 % 1.63 % Expected volatility 141 % 151 % Expected life 10 years 10 years 12 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) 5. Fair Value Measurements The Company adopted the Fair Value Measurements and Disclosure Topic of the FASB in 2011. This Topic applies to certain assets and liabilities that are being measured and reported on a fair value basis. The Topic defines fair value, establishes a framework for measuring fair value in accordance with US GAAP, and expands disclosure about fair value measurements. This Topic enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Topic requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. Fair Value Measurement at September 30, 2020 and December 31, 2019 (in thousands) Quoted Price in Active Market for Identical Instruments Significant Other Observable Inputs Significant Unobservable Inputs Level 1 Level 2 Level 3 Total 2020 2019 2020 2019 2020 2019 2020 2019 Assets Cash and cash equivalents 19 (1) 347 (1) 33,147 (2) 13,303 (2) - - 33,166 13,650 (1) The Company held approximately $19 in cash as of September 30, 2020, of which approximately $11 was in Canadian funds (translated into U.S. dollars). As of December 31, 2019, the Company held approximately $347 in cash of which approximately $30 was in Canadian funds (translated into U.S. dollars). (2) These amounts are held in a Money Market account. 6. Commitments and Contingencies Oregon Health & Science University Agreement On February 20, 2013, Fennec entered into a new exclusive license agreement with OHSU for exclusive worldwide license rights to intellectual property directed to thiol-based compounds, including sodium thiosulfate and their use in oncology (the "OHSU Agreement"). OHSU will receive certain milestone payments, royalty on net sales for licensed products and a royalty on any consideration received from sublicensing of the licensed technology. On May 18, 2015, Fennec negotiated an amendment ("Amendment 1") to the OHSU Agreement, which expands Fennec’s exclusive license to include the use of N-acetylcysteine as a standalone therapy and/or in combination with sodium thiosulfate for the prevention of ototoxicity induced by chemotherapeutic agents to treat cancers. Further, Amendment 1 adjusts select milestone payments entered in the OHSU Agreement including but not limited to the royalty rate on net sales for licensed products, royalty rate from sublicensing of the licensed technology and the fee payable upon the regulatory approval of a licensed product. The term of the OHSU Agreement as amended by Amendment 1 expires on the date of the last to expire claim(s) covered in the patents licensed to Fennec or 8 years, whichever is later. In the event a licensed product obtains regulatory approval and is covered by the Orphan Drug Designation, the parties will in good faith amend the term of the agreement. Sodium thiosulfate is currently protected by methods of use patents that the Company exclusively licensed from OHSU that expire in Europe in 2021 and that expire in the United States in 2038. The OHSU Agreement is terminable by either Fennec or OHSU in the event of a material breach of the agreement by either party after 45 days prior written notice. Fennec also has the right to terminate the OHSU Agreement at any time upon 60 days prior written notice and payment of all fees due to OHSU under the OHSU Agreement. 13 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) Class Action Suit Following the U.S. Food and Drug Administration’s (FDA’s) Complete Response Letter (CRL) regarding its New Drug Application (NDA) for PEDMARK TM as described in Note 1, a putative lawsuit was filed against us purportedly on behalf of purchasers of the Company’s securities between February 11, 2020 and August 10, 2020. The lawsuit seeks to recover damages for Fennec investors under federal securities laws. While we believe that the lawsuit is without merit and intend to vigorously defend against it, the lawsuit is in its early stages and no assessment can be made as to their likely outcome or whether the outcome will be material to us. This litigation, and any other securities class actions that may be brought against us, could result in substantial costs and a diversion of our management’s attention and resources. Executive Severance In the event of his termination with us other than for cause, we will be obligated to pay Mr. Raykov a one-time severance payment equal to twelve months of salary (as of November 5, 2020, $430,000). In the event of his termination with us other than for cause, we will be obligated to pay Mr. Andrade a one-time severance payment equal to nine-months of salary (as of November 5, 2020, $155,875). In the event of her termination with us other than for cause, we will be obligated to pay Ms. Goel a one-time severance payment equal to three months of salary (as of November 5, 2020, $90,000) Leases We have an operating lease in Research Triangle Park, North Carolina utilizing small space within a commercial building. The operating lease has payments of $400 per month with no scheduled increases. This operating lease is terminable with 30 days’ notice and has no penalties or contingent payments due. On January 23, 2020, the Company entered into an Office Service Agreement (the “Office Service Agreement”) with Regus to lease office space at in Hoboken, New Jersey. Per the terms of the Office Service Agreement, the monthly rent payments are $1,150. The Company was required to pay a security deposit of $2,300, which is the equivalent to two months of rent. The Office Service Agreement commenced on January 27, 2020 and terminated on July 31, 2020, where it automatically renewed for a successive period equal to the original term. Either party is able to terminate the agreement by providing no less than three months' advance written notice of termination. COVID-19 The Company’s operations may be affected by the recent and ongoing outbreak of the coronavirus disease 2019 (COVID-19) which was declared a pandemic by the World Health Organization in March 2020. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible effects may include, but are not limited to, disruption to the Company’s product launch which includes the ability of sales reps to communicate with oncologists, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by the Company, including inventories, property and equipment, and marketable securities. COVID-19 has not had a material effect on the Company’s operations to date as the Company has historically had a workforce which works remotely, preparations for product launch have been under the assumption of a virtual launch and product supplies have not been impacted. Loan Security Agreement On February 1, 2019, the Company’s wholly owned subsidiary Fennec Pharmaceuticals Inc. entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Bridge Bank, a division of Western Alliance Bank, an Arizona corporation (the “Bank”), pursuant to which the Bank agreed to loan $12,500 to Fennec Pharmaceuticals, Inc., to be made available upon NDA approval of PEDMARK by no later than September 30, 2020. The proceeds from the loan will be used for working capital purposes and to fund general business requirements in accordance with the terms of the Loan and Security Agreement. Interest under the Term Loans shall bear interest, on the outstanding daily balance thereof, at a floating per annum rate equal to the Effective Interest Rate (as defined in the Loan and Security Agreement) which is equal to the sum of the Prime Rate published in the Wall Street Journal (currently 3.25%) plus one percent (1.00%). The debt facility is to have interest-only monthly payments due for the first eighteen months from the funding date and then monthly principal and interest payments are due through the remainder of the term which has a maturity date of October 1, 2023. In connection with the facility, Fennec granted Bridge Bank a warrant to purchase up to 39 common shares at an exercise price of $6.80 per common share, for a term of ten years from the date of issuance, subject to early termination under certain conditions. 14 Fennec Pharmaceuticals Inc. Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2020 (All dollar amounts shown in thousands) On June 26, 2020, Fennec announced an amendment to the Loan and Security Agreement with Bridge Bank. This amendment provides Fennec with an $18,000 debt facility comprised of two term loans. Term Loan A consists of $12,500 to be funded upon NDA approval of PEDMARK TM in the U.S. by no later than December 31, 2020 and Term Loan B consists of $5,500 to be funded upon the occurrence of a revenue event in 2021. 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 A, provided that Term Loan B is funded, and certain conditions are met. Under Accounting Standards Codification ("ASC") 470-50, Modifications and Extinguishments, the amendment was considered a modification. As such, the Company had been amortizing the loan fee and the value of the warrant over the remainder of the loan term. Following the receipt of the FDA’s CRL, management decided to fully amortize the remining portions of the loan fee and the value of the warrants. The combined value of the granted warrants and the associated costs to secure the loan facility (approximately $466 thousand) were capitalized on the balance sheet as a long-term asset. As a result of the CRL and delays with FDA approval and product launch, the Company does not believe it will meet the conditions to fund Term Loan A or B and thus has fully amortized all remaining unamortized value associated with the deferred issuance costs. During the quarter ended September 30, 2020, the Company recorded amortization expense of roughly $355 and a total of $466 has been amortized as of September 30, 2020. 7. Subsequent Events S-3 Registration and At The Market Facility On October 30, 2020, the Company filed a S-3 registration of common shares (File No. 333-249775) pursuant to which the Company may offer from time to time, shares of our common stock having an aggregate offering price of up to $90.0 million. Under the Sales Agreement, the Company may sell shares by any method permitted by law and deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, as amended, including sales made directly on the NASDAQ, on any other existing trading market for our common stock or to or through a market maker. The S-3 (File No. 333-249775) was declared effective on November 10, 2020. Further, on October 30, 2020, the Company entered into an At The Market Offering Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“HCW”), pursuant to which the Company may sell and issue its common shares (the “Shares”) from time to time through HCW, as the Company’s sales agent (the “ATM Offering”). The Company has no obligation to sell any of the Shares, and may at any time suspend offers under the Agreement or terminate the Agreement. The Shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-221093), which was declared effective on November 3, 2017. As of the date of this filing, there have been no such sales. 15