Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded based on their evaluation as of December 31, 2022 that our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are effective. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer and principal accounting officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and affected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Consolidated Financial Statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of Consolidated Financial Statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Consolidated Financial Statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making its assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in its 2013 Internal Control — Integrated Framework . Based on its assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
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Because we are a non-accelerated filer and smaller reporting company, Haskell & White LLP, our independent registered public accounting firm, is not required to attest to or issue a report on the effectiveness of our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control over financial reporting that occurred during the last fiscal quarter covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the name of each of our executive officers and directors, such person’s principal occupation or employment, all other positions with us held by such person, if any, the year in which such person became a director of Fennec and such person’s age.
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Our Board has an Audit Committee, a Compensation Committee, and a Governance Committee. The current members of such committees are noted in the table below:
Name and Province/State and
Country of Residence, Position
Current Principal Occupation and Principal Occupation
For Previous Five Years
Director Since
Age
Rostislav Raykov, New Jersey,
USA
Chief Executive Officer, Director
CEO of Fennec Pharmaceuticals Inc.; previously Portfolio Manager at Alchem Partners; previously Portfolio Manager at John Levin & Company
July 2009
46
Robert Andrade, Texas, USA
Chief Financial Officer
CFO of Fennec Pharmaceuticals; previously senior analyst at Magnetar Capital; previously Portfolio Manager at Millennium Partners
N/A
47
Chris A. Rallis, North Carolina,
USA
Director (1)(2)
Executive-in-residence at Pappas Capital; previously CEO of ImmunoBiosciences
August 2011
69
Marco Brughera, Milano, Italy
Director (2)(3)
Former Group CEO of Leadiant Biosciences SpA; previously Global Head Rare Disease and R&D at Sigma-tau; VP Preclinical Development at Nerviano Medical Sciences.
August, 2016
67
Adrian J. Haigh, Dublin, Ireland
Director (1)(3)
Former SVP, Head of International at PTC Therapeutics; previously Chief Operating Officer at Gentium GmbH; previously Regional VP Commercial Operations at Biogen Idec
April 2014
63
Khalid Islam, Lugano, Switzerland
Chairman of Board, Director (1)
Founder and Chairman of Gain Therapeutics ; previously Chairman and CEO of Gentium S.p.A.; previously CEO of Arpida AG
April 2014
67
Jodi A. Cook, PhD South Carolina, USA,
Director (2)(3)
CEO of Skylark Bio Inc, Former SVP, Head of Gene Therapy Strategy PTC Therapeutics, Inc, Former COO Agilis Biotherapeutics, Former Assistant Professor of Audiology Mayo Clinic
September 2019
55
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Governance Committee
Rostislav Raykov
Mr. Raykov has served as a director of Fennec since July 2009 and as Chief Executive Officer since July 2009. From January 2006 to December 2007, Mr. Raykov was a portfolio manager for Alchem Investment Partners and John Levin & Co. Prior to founding Alchem, Mr. Raykov was a portfolio manager and securities analyst for John A. Levin & Co. Event Driven Fund (2002-2005). Prior to joining John A. Levin & Co., Mr. Raykov was a securities analyst for the Merger Fund at Tiedemann Investment Group (1999-2002) and an investment banking analyst at Bear Stearns (1998-1999). Mr. Raykov earned a B.S. in Business Administration from the University of North Carolina at Chapel Hill. As a result of these and other professional experiences, Mr. Raykov has financial expertise and experience with the Corporation as it has developed within the drug development industry and, as such, is able to provide the Corporation with unique insight and guidance.
Robert Andrade
Mr. Andrade has served as Chief Financial Officer since November 2015. Mr. Andrade was previously Chief Financial Officer and Director of Fennec from September 2009 until August 2013. In addition to his role with Fennec, Mr. Andrade was a private investor in 2015, and a senior analyst at Magnetar Capital from 2013 - 2014. Mr. Andrade graduated from University of Southern California, where he earned a Masters of Arts degree and Bachelor of Arts degree in economics.
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Chris A. Rallis
Mr. Rallis has served as a director of Fennec since August 2011. Mr. Rallis has been an executive-in-residence at Pappas Capital, a life science venture capital firm since January 2008. Previously, Mr. Rallis was the President and Chief Executive Officer of ImmunoBiosciences, Inc. (“IBI”), a vaccine technology company formerly located in Raleigh, North Carolina from April 2006 through June 2007. Prior to joining IBI, Mr. Rallis served as an executive-in-residence (part-time) for Pappas Capital, and as a consultant for Duke University and Panacos Pharmaceuticals, Inc. Mr. Rallis is the former President and Chief Operating Officer (“COO”) and director of Triangle Pharmaceuticals, Inc., which was acquired by Gilead Sciences in January 2003 for approximately $465 million. Prior to assuming the role of President and COO in March 2000, he was Executive Vice President, Business Development and General Counsel. While at Triangle, Mr. Rallis participated in 11 equity financings generating gross proceeds of approximately $500 million. He was also primarily responsible for all business development activities which included a worldwide alliance with Abbott Laboratories and the in-licensing of ten compounds. Before joining Triangle in 1995, Mr. Rallis served in various business development and legal management roles with Burroughs Wellcome Co. over a 13-year period, including Vice President of Strategic Planning and Business Development. Mr. Rallis also serves on the board of Lung Cancer Initiative of NC, located in Raleigh, North Carolina. Mr. Rallis received his A.B. degree in economics from Harvard College and a J.D. from Duke University. As a result of these and other professional experiences, Mr. Rallis possesses particular healthcare industry knowledge and experience which strengthens the Board’s collective qualifications, skills, and experience.
Dr. Marco Brughera
Dr. Brughera has been a director of Fennec since August 2016. Currently, he is the founder at Brucon srls and Strategic Advisor at Essetifin. From 2011 until 2021, Dr. Brughera had been CEO of Lediant Biosciences and has held several positions for the Sigma-Tau Group, including CEO and Global Head of Sigma Tau Rare Disease, President of Sigma-Tau Research and President of Sigma-Tau Pharmaceuticals. He drove the commercial revival of a lead oncology product line resulting in its successful sale for a total of around $900M. He also successfully out-licensed the Defibrotide US rights to Jazz Pharmaceuticals. From 2004 to 2010, Dr. Brughera served as the Vice President of Preclinical Development at Nerviano Medical Sciences (NMS), a pharmaceutical oncology-focused integrated discovery and development company. He also served as the Managing Director at Accelera, an independent contract research organization with the NMS Group. From 1999 to 2004, Dr. Brughera held several senior level positions in the areas of research and development with Pharmacia and Pfizer. Prior to 1999, he held various positions at Pharmacia & Upjohn and Farmitalia Carlo Erba SpA, an Italian pharmaceutical company. He currently serves on the Board of Leadiant Biosciences Inc and Limited; advisor and biotech champion at Indaco Ventures Partners SGR. Previously was a Board member of Gentium, Exelead, Soligenix, Lee’s Pharmaceuticals and Naicons.
Dr. Brughera earned his degree in veterinary medicine from the University of Milan and is a European Registered Toxicologist. Dr. Brughera has wide-spread experience and knowledge of pharmaceutical drug development in international companies. His knowledge in particular, of clinical drug development in Europe, deepens the Board’s collective qualifications, skills and experience.
Adrian J. Haigh
Mr. Haigh has been a director of Fennec since April 2014. Mr. Haigh retired from PTC Therapeutics on Dec 31 st 2022, his last role at PTC was Senior Vice President and Head of International, he joined the company in 2014 as Head of EMEA and built the company’s international organization. Previously Mr. Haigh served as Chief Operating Officer at Gentium GmbH since March 2011. Prior to joining Gentium, Mr. Haigh served as Regional VP Commercial Operations at Biogen Idec where he managed several affiliates and also the global distributor business and prior to that was the General Manager of Amgen Nordic and Portugal. He served as the Executive Vice President of Global Marketing and Corporate Planning at EUSA Pharma and joined EUSA from Amgen where he led the international oncology franchise. Mr. Haigh previously has held senior commercial and marketing positions at SmithKline Beecham, Schering Plough, Organon and Novo Nordisk. He has been a Director of Fennec Pharmaceuticals Inc. since April 28, 2014. He received a Bachelor of Arts with Honors in Economic History from Huddersfield Polytechnic, West Yorkshire, England, a Diploma in Marketing from the Institute of Marketing and a Diploma in Company Direction from the Institute od Directors. As a result of these and other professional experiences, Mr. Haigh has extensive international oncology development expertise which strengthens the Board’s collective qualifications, skills and experience.
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Dr. Khalid Islam
Dr. Islam has been a director of Fennec since April 2014 and is our current Chairman of the Board. Dr. Islam was the Chairman and CEO of Gentium S.p.A. (a Nasdaq-listed company; 2009-2014) where he led the transition from a loss-making to a cash-flow positive and profitable company. Under his leadership, the company value increased from US$25 million leading to a successful all cash US$1 billion merger with Jazz Pharmaceuticals, plc. Subsequent to the sale of Gentium, Dr. Islam has been involved from both an advisory and board level in several public and private healthcare related companies. From 1999-2008, Dr. Islam was President and CEO of Arpida AG where he transitioned the early-stage start-up to a SWX-listed company and raised US$300 million in the IPO and follow-ons. From 1987-1999, he held various positions in HMR & MMD (now Sanofi-Aventis). From 1977-1987, Dr. Islam worked in academia at Imperial College (Univ. of London) and in Milan University, where he was a contract professor. Dr. Islam is a graduate of Chelsea College and received his Ph.D. from Imperial College, University of London. He holds several patents and has published over 80 articles in leading journals. He is an advisor to the venture group Kurma Biofund (Paris). He is a founder/co-founder of Gain Therapeutics Inc. (GANX), Sirius Healthcare Partners GmbH (Zurich), PrevAbr LLC (D.C.), BioAim LLC (L.A.) & Life Sciences Management GmbH (Zug). Dr. Islam is Board Chair at Minoryx Therapeutics (Spain) and Gain Therapeutics Inc. (GANX), a public company. . In the past, he has served on the Board of Directors of Immunomedics (USA), Processa Pahramacueticals (PCSA), Pcovery Aps (Denmark), Adenium Aps (Denmark), C10 Pharma AS (Norway), Karolinska Development (KDEV, Sweden) and MolMed S.p.A. (MLMI, Italy). Dr. Islam’s extensive international pharmaceutical expertise in transitioning companies from development to production strengthens the Board’s collective qualifications, skills and experience.
Dr. Jodi Cook
Dr. Cook has been a director of Fennec since September 2019. Dr. Cook is currently CEO of Skylark Bio Inc, an early-stage Company working on gene therapy for genetic disorders. Dr. Cook previously served as SVP and Head of Gene Therapy Strategy at PTC Therapeutics from August 2018 until February 2020. Previously she was one of the founding members and Chief Operating Officer of Agilis Biotherapeutics, a clinical-stage company focused on gene therapies for rare diseases of the central nervous system, from December 2013 until its acquisition by PTC Therapeutics in August 2018. While at Agilis she led the sale of the company to PTC in a deal that represented significant value to all parties. Dr. Cook’s career spans a wide range of experiences including VP of Clinical Research at InSound Medical and Director of Audiology at Songbird Hearing, both successful biotech start-up companies within the hearing industry. She has been Assistant Professor of Audiology and Director of the Hearing Aid Program at Mayo Clinic. Dr. Cook earned a BA from Loyola University in Maryland, M.Aud. from University of South Carolina, and PhD from Arizona State University in Hearing Science. She completed a clinical fellowship at Johns Hopkins School of Medicine in Baltimore, MD. Her extensive scientific, clinical and executive business experience strengthens the Board’s collective qualifications, skills and expertise.
Audit Committee
On behalf of the Board, the Audit Committee of the Board retains, oversees and evaluates our independent auditors, reviews the financial reports and other financial information provided by us, including audited financial statements, and discusses the adequacy of disclosure with management and the auditors. The Audit Committee also reviews the performance of the independent auditors in the annual audit and in assignments unrelated to the audit, assesses the independence of the auditors, and reviews their fees. The Audit Committee is also responsible for reviewing our internal controls over financial reporting and disclosure. The Audit Committee operates under a written charter adopted by the Board.
The directors have appointed an Audit Committee consisting of three directors: Chris A. Rallis, Khalid Islam and Adrian Haigh, each of whom is independent and financially literate within the meaning of National Instrument 52-110 – Audit Committees and is independent under Rule 5605(a)(2) of the Nasdaq listing standards. In addition, the Board has determined that Mr. Rallis qualifies as an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC based on his business and financial experience described above.
Code of Ethics
In February 2004, our Board adopted a Mandate of the Board of Directors, Corporate Governance Guidelines and a Code of Business Conduct and Ethics (the “Conduct and Ethics Code”) applicable to all of our officers, directors and
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employees. We are committed to adhering to applicable legal requirements and maintaining the highest standards of conduct and integrity. The Conduct and Ethics Code sets out the legal and ethical standards of conduct for our personnel and addresses topics such as: reporting obligations and procedures; honest and ethical conduct and conflicts of interest; compliance with applicable laws and Company policies and procedures; confidentiality of corporate information; use of corporate assets and opportunities; public disclosure and books and records; and non-retaliation. The Conduct and Ethics Code was updated in June of 2019 and is available on our website at www.fennecpharma.com.
We will post any amendment to this code, as well as any waivers that are required to be disclosed by the rules of the SEC, on our website promptly following the date of such amendment or waiver. We undertake to provide to any person without charge, upon request, a copy of the Conduct and Ethics Code by writing to Attn: Code of Ethics Request, Fennec Pharmaceuticals Inc., 68 TW Alexander Drive, PO Box 13628, Research Triangle Park, North Carolina 27709.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets out certain information respecting the compensation paid to our Chief Executive Officer, our Chief Financial Officer, and our former Chief Commercial Officer (“Named Executive Officers”) for the fiscal years ended December 31, 2022 and December 31, 2021.
Restricted Share
Option Awards
Name and Principal Position
Year
Salary ($)
Bonus ($)
Unit Awards ($) (2)
($) (1)
Total ($)
Rostislav Raykov, CEO
2022
503,436
110,725
—
—
614,161
2021
468,452
—
—
2,951,923
3,420,375
Robert Andrade, CFO
2022
364,698
64,221
—
—
428,919
2021
339,409
—
153,000
1,006,364
1,498,773
Shubh Goel, CCO
2022
8,637
—
—
—
8,637
2021
376,505
—
153,000
1,006,364
1,535,869
(1) Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Dollar value amounts are based on individual grants to each of Mr. Raykov, Mr. Andrade and Ms. Goel of 300,000, 250,000 and 75,000, 100,000 and 75,000, 100,000 options, respectively, on December 20, 2021 and June 2, 2021, at an exercise price of $4.08 and $7.53 per common share, respectively. On December 20, 2021, Mr. Andrade and Ms. Goel were also awarded 37,500 Restricted Share Units each. The December 20, 2021 awards and grants to the executives all vested conditionally upon FDA approval of PEDMARK ® in calendar year 2022 with executive still employed at the Company. All option grants expire 10 years after grant date. The June, 2021 grants vest in the following manner: one-third of these options shall vest and may be exercised one year after the grant date (the “Vesting Commencement Date”). The remaining two-thirds of the options shall vest monthly at a rate of 1/24 th of the remaining grant and shall be exercisable as of the last day of each following month after the Vesting Commencement Date. As of the third anniversary of the grant date, all of the options shall be vested.
Rostislav Raykov
Mr. Raykov has been employed by us since July 2009. Pursuant to an employment agreement dated May 3, 2010 between Mr. Raykov and Fennec, Mr. Raykov is employed as our Chief Executive Officer and: (a) received an initial annual salary in the amount of $140,000, subject to annual adjustment by our Board of Directors, (b) upon approval by shareholders of our amended stock option plan was granted options to purchase up to 5.0% of our common shares estimated by us to be outstanding upon completion of our 2010 rights offering, and (c) may receive annual bonuses at the sole discretion of the Board. If Mr. Raykov’s employment terminates due to a change of control of Fennec, Mr. Raykov’s remaining unvested options shall immediately vest and be fully exercisable. If Mr. Raykov is dismissed from employment by us for any reason other than “for cause,” we are obligated to pay Mr. Raykov severance compensation equal to twelve months of salary. The initial term of the agreement was for one year and the agreement automatically extends for additional one-year periods unless terminated by either party in accordance with the agreement. Effective December 31, 2022, Mr. Raykov’s salary is $513,400 per year.
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Robert Andrade
Mr. Andrade has been employed by us since November 2015. Pursuant to an employment agreement dated November 13, 2015, Mr. Andrade is employed as our Chief Financial Officer and: (a) received an initial annual salary in the amount of $165,000, and (b) may receive annual bonuses at the sole discretion of the Board. If Mr. Andrade’s employment terminates due to a change of control of the Fennec, Mr. Andrade’s remaining unvested options shall immediately vest and be fully exercisable. If Mr. Andrade is dismissed from employment by us for any reason other than “for cause,” we are obligated to pay Mr. Andrade severance compensation equal to six months of salary. Effective December 31, 2022, Mr. Andrade’s salary is $371,914 per year.
Shubh Goel
Ms. Goel commenced employment with us in September 2019. Pursuant to an employment agreement dated September 9, 2019, Ms. Goel was employed as our Chief Commercial Officer and: (a) received an initial annual salary in the amount of $360,000, subject to annual adjustment by our Board of Directors, and (b) was eligible to receive an annual bonus of up to 40% of her base salary per twelve month period, at the discretion of the CEO and the Board of Directors. If Ms. Goel’s employment was terminated by us for any reason other than “for cause”, we would have been obligated to pay Ms. Goel (i) severance in the amount of six months of employees base salary, (ii) prorated share of any target bonus earned by Ms. Goel and, (iii) accelerated vesting of stock options. The initial term of the agreement was for one year and the agreement automatically extended for additional one-year periods unless terminated by either party in accordance with the agreement. Ms. Goel tendered her resignation on January 31, 2022.
In addition to their employment agreements, Mr. Raykov, Mr. Andrade and Ms. Goel are a party to a confidentiality and intellectual property agreement with the Company.
In the employment agreements for each of Mr. Raykov, Mr. Andrade and Ms. Goel, “for cause” is generally defined as (1) material breach of the terms of the employment or intellectual property agreements; (2) failure to perform the duties inherent in their position in good faith and in a reasonable and appropriate manner; or (3) acts of fraud or embezzlement or other intentional misconduct which adversely affects our business.
Payments on Termination
The following table provides details regarding the estimated incremental payments from us to each of the Named Executive Officers assuming termination without cause on December 31, 2022. Ms. Goel’s resignation was voluntary and there is no severance owed.
Name
Severance
Estimated Bonus
Value of benefits
Rostislav Raykov, CEO
$
468,452
$
256,705
$
725,157
Robert Andrade, CFO
$
169,705
$
153,511
$
323,216
Shubh Goel, CCO
$
94,126
$
—
$
94,126
Payments on Change of Control
The following table provides details regarding the estimated incremental payments from us to each of the Named Executive Officers upon change of control.
Change of Control
Name
Multiple
Estimated Bonus (1)
Value of benefits
Rostislav Raykov, CEO
2 X
$
1,213,005
$
1,213,005
Robert Andrade, CFO
1.25 X
$
528,919
$
528,919
(1) Change of control payments are calculated based on the two-year annualized average salary plus cash bonus as calculated as of December 31, 2022.
In addition to the payments above, an incentive plan has been established pursuant to which, upon completion of a change in control transaction prior to December 31, 2023, 1% of the transaction value up to $350 million and 1.25% of the transaction value in excess of $350 million up to $400 million and 1.5% of transaction value in excess of $400 million,
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with 50% of such incentive pool being payable to the CEO, 30% to the CFO and the balance to other key personnel as determined by the CEO in consultation with the Compensation Committee.
Equity Grants, Exercises and Holdings
The following table sets forth information concerning the number and value of unexercised options held by each Named Executive Officer as of December 31, 2022. All executive awards, with the exception of those expiring 05/15/2030 and 06/02/2031, are exercisable immediately. Grants expiring 12/20/2031 fully vested upon FDA approval of PEDMARK ® . Our current stock option plan provides for equity awards and grants denominated in US and CAD dollars.
Number of Options
Name
Granted
Exercisable
Option Exercise Price
Expiration Date
Rostislav Raykov
300,000
300,000
USD$
4.08
12/20/2031
250,000
131,948
USD$
7.53
06/02/2031
250,000
222,224
USD$
6.93
05/15/2030
150,000
150,000
USD$
4.83
04/04/2029
100,000
100000
USD$
8.38
02/06/2028
100,000
100000
USD$
5.10
06/27/2027
150,000
150,000
USD$
2.45
07/05/2026
25,000
25,000
USD$
2.69
12/31/2024
83,333
83,333
USD$
1.59
01/24/2024
16,666
—
USD$
0.72
08/23/2023
50,000
—
USD$
1.05
11/20/2022
Robert Andrade
75,000
75,000
USD$
4.08
12/20/2031
100,000
52,779
USD$
7.53
06/02/2031
125,000
111,112
USD$
6.93
05/15/2030
80,000
80,000
USD$
4.83
04/04/2029
50,000
50,000
USD$
8.38
02/06/2028
50,000
50,000
USD$
5.10
06/27/2027
75,000
75,000
USD$
2.45
07/05/2026
Compensation of Directors
Director Compensation Table
The following table summarizes the compensation earned by our non-executive directors for the year ended December 31, 2022.
Name
Fees paid in Cash
Stock Awards
Option Awards (1)(2)
Total
Dr. Islam
85,000
—
83,692
168,692
Mr. Brughera
40,000
—
66,952
106,952
Mr. Haigh
40,000
—
66,952
106,952
Dr. Cook
35,000
—
66,952
101,952
Mr. Rallis
42,500
—
66,952
109,452
Total
$
242,500
$
—
$
351,500
$
594,000
(1) Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.
(2) Detail of option grants are presented in the following table:
Name
Date of Grant
Number of Options Granted
Option Exercise Price $USD
Mr. Rallis
June 14, 2022
20,000
5.59
Mr. Brughera
June 14, 2022
20,000
5.59
Mr. Haigh
June 14, 2022
20,000
5.59
Dr. Islam
June 14, 2022
25,000
5.59
Dr. Cook
June 14, 2022
20,000
5.59
Total
105,000
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The annual compensation considerations for non-executive directors also include the awarding of stock options. We believe that granting of options to the non-executive directors serves three primary purposes: (1) to recognize the significant time and effort commitments of being a member of our Board; (2) to provide long-term incentives for future efforts since the value of the options is directly dependent on our market valuation; and (3) to retain quality individuals. When determining whether and how many new option grants will be made, the Compensation Committee takes into account the amount and terms of any outstanding options. We do not require our non-executive directors to own a specific amount of our common shares.
Each of Adrian J. Haigh, Khalid Islam, Marco Brughera, Jodi Cook and Chris A. Rallis has entered into an Independent Director Agreement with the Company, which provides for cash compensation as set forth by the Compensation Committee commensurate with that member’s responsibilities. The Compensation Committee may also remunerate members in the form of a grant of options to purchase shares of our common shares. The options immediately vest when granted and are otherwise subject to the terms and conditions of our stock option plan, as amended. The Independent Director Agreements also provide for the reimbursement of such director’s reasonable travel and related expenses incurred in the course of attending board meetings.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding our common shares beneficially owned as of March 27, 2023 by: (i) each of our officers and directors; (ii) all officers and directors as a group; and (iii) each person known by us to beneficially own five percent or more of our outstanding common shares. Except as indicated below, the security holders listed possess sole voting and investment power with respect to the shares beneficially owned by that person. Except as otherwise indicated below, the address for each listed shareholder is c/o Fennec Pharmaceuticals Inc., 68 TW Alexander Drive, PO Box 13628, Research Triangle Park, North Carolina 27709.
Common shares
Common shares
Purchase
Options
Warrants
Total Stock and
Exercisable
Exercisable
Stock Based
%
Name
Common shares
Within 60 Days
Within 60 Days
Holdings (1)
Ownership (1)
Adrian J. Haigh
—
273,579
—
273,579
1.03
%
Dr. Khalid Islam
—
363,825
—
363,825
1.36
%
Robert Andrade
149,721
518,891
—
668,612
2.48
%
Marco Brughera
—
155,545
—
155,545
0.59
%
Jodi Cook
—
80,000
—
80,000
0.30
%
Chris A. Rallis
32,077
189,186
—
221,263
0.83
%
Rostislav Raykov
217,838
1,318,061
—
1,535,899
5.54
%
All Officers and Directors as a Group
399,636
2,899,087
—
3,298,723
10.97
%
Southpoint Capital Advisors, LP. (2)
4,077,214
—
—
4,077,214
15.44
%
Essetifin SpA (3)
3,993,694
—
—
3,993,694
15.12
%
Sonic Fund II, LP. (4)
2,578,134
—
—
2,495,753
9.77
%
Avaro
1,670,000
—
—
1,670,000
6.32
%
(1) For purposes of this table “beneficial ownership” is determined in accordance with Rule 13d-3 under the Exchange Act, pursuant to which a person or group of persons is deemed to have “beneficial ownership” of any common shares that such person or group has the right to acquire within 60 days after March 27, 2023. For purposes of computing the percentage of outstanding common shares held by each person or group of persons named above, any shares that such person or group has the right to acquire within 60 days after March 27, 2023 are deemed outstanding but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person or group. As of March 27, 2023 there were 26,411,520 common shares issued and outstanding.
(2) Southpoint Capital Advisors, LP, 623 Fifth Avenue, Suite 2503, New York, New York 10022. John S. Clark, II holds voting and investment power over the shares owned by Southpoint Capital Advisors, LP.
(3) Essetifin SpA, Via Sudafrica 20, Rome, Italy 00144. Mario Artali holds voting and investment power over the shares owned by Essetifin SpA.
(4) Sonic Fund II, LP, 400 Hobron Lane, Suite 3709, Honolulu, HI 96815. Lawrence Kam holds voting and investment power over the shares held by Sonic Fund II, LP.
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(5) Avaro Capital Advisors, LLC, 110 Greene Street, Suite 800, New York, NY 10012. Scott Epstein holds voting and investment power over the shares owned by Avoro Capital Advisors, LLC.
Equity Compensation Plan Information
The following table provides certain information with respect to securities authorized for issuance under equity incentive plans as of December 31, 2022.
(share amounts are in thousands):
(c)
Number of securities remaining
(a)
(b)
available for future issuance under
Number of securities to be issued
Weighted-average exercise price of
equity compensation plans
upon exercise of outstanding
outstanding options, warrants and
(excluding securities reflected in
Plan Category
options warrants and rights
rights
Column (a))
Equity compensation plans approved by security holders
4,689
USD $5.51
2,062
Total
4,689
—
2,062
*
Our current stock option plan allows for the issuance of equity awards and grants denominated in both U.S. dollars and Canadian dollars. At December 31, 2022, there were 2.2 million common shares available for future grants under our current stock option plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
There were no reportable transactions with related parties during the year ended December 31, 2022 in which the amount involved exceeded the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years.
Indemnifications Related to Officers and the Board of Directors.
We have agreed to indemnify members of our Board of Directors (the “Board”) and certain of our officers if they are named or threatened to be named as a party to any proceeding by reason of the fact that they acted in such capacity. We maintain directors’ and officers’ (“D&O”) insurance coverage to protect against such losses. We have not historically incurred any losses related to these types of indemnifications. Presently, we are defending a suit against our Board and certain named officers. Management is unable to estimate a dollar value related to the suit, nor can it determine the probability of an outcome either in favour or against the Company. As a result, we have not recorded any liabilities related to such indemnifications as of December 31, 2022. In addition, as a result of D&O insurance policy coverage, we believe these indemnification agreements are not significant to our results of operations.
Director Independence
The Board of Directors is composed of a majority of independent directors. The Board applies the definition of independence found in the Nasdaq listing standards and in Canadian National Instruments 52-110 and 58-101 and National Policy 58-201. The Board has determined that Mr. Brughera, Haigh, Islam, Rallis and Ms. Cook are “independent.” Mr. Raykov, our Chief Executive Officer, is considered to have a material relationship with us by virtue of his executive officer position and is therefore not independent. We are of the view that the composition of our Board reflects a diversity of background and experience that are important for effective corporate governance. Other directorships held by Board members are described in this Annual Report under the heading “Directors and Executive Officers.”
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Item 14. Principal Accounting Fees and Services
The following presents the aggregate fees for professional services and other services rendered by our independent auditors, Haskell & White LLP (PCAOB ID# 200 ), in fiscal year 2022 and 2021:
Fiscal Year
Fiscal Year
2022
2021
Audit Fees (1)
$
86,250
$
73,100
Audit-Related Fees (2)
7,500
15,500
Tax Fees (3)
—
—
All Other Fees (4)
—
—
Total
$
93,750
$
88,600
(1) Audit Fees include fees for the standard audit work that needs to be performed each year in order to issue an opinion on the consolidated financial statements of the Company. It also includes fees for services that can only be provided by the Company’s auditor such as auditing of non-recurring transactions.
(2) Audit-Related Fees include fees assurance and related services that are reasonably related to the performance of the audit or review and are traditionally performed by the independent accountant.
(3) Tax Fees
(4) All Other Fees include fees for products and services other than Audit Fees, Audit Related Fees and Tax Fees.
The Audit Committee does not have formal pre-approval policies and procedures; however, prior to their engagement by us, the Audit Committee approved all of the services performed by Haskell & White LLP as required by SEC regulation.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are included as part of this Annual Report:
1. Financial Statements – See Index to Financial Statements on page F-1.
2. All schedules are omitted as the information required is inapplicable or the information is presented in the financial statements.
3. Exhibits:
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Exhibit
No.
Description
Location
3.1
Notice of Articles dated August 25, 2011
Exhibit 3.2I to the Form 8-K of the Company filed August 26, 2011
3.2
Articles dated August 25, 2011
Exhibit 3.2II to the Form 8-K of the Company filed August 26, 2011
3.3
Notice of Alteration Dated September 3, 2014
Exhibit 3.1 to the Form 8-K of the Company filed September 9, 2014
10.1
Fennec Amended and Restated Stock Option Plan*
Exhibit 10.1 to the Form 8-K of the Company filed September 29, 2017
10.2
Executive Employment Agreement dated May 3, 2010 by and between Fennec and Rostislav Raykov*
Exhibit 10.28 to the Form 10-Q of the Company filed May 14, 2010
10.3
Form of Independent Director Agreement, dated May 3, 2010
Exhibit 10.31 to the Form 10-Q of the Company filed May 14, 2010
10.4
Executive Employment Agreement dated November 12, 2015 by and between Fennec and Robert Andrade*
Exhibit 10.40 to the Form 10-Q of the Company filed November 12, 2015
10.5
Purchase Agreement, dated May 9, 2016, between Fennec Pharmaceuticals Inc. and Elion Oncology, LLC.
Exhibit 10.42 to the Form 10-Q of the Company filed May 12, 2016
10.6
Loan and Security Agreement dated as of February 1, 2019 by and between Fennec Pharmaceuticals, Inc. and Western Alliance Bank
Exhibit 10.1 to the Form 8-K of the Company filed February 4, 2019
10.7
First Amendment to Loan and Security Agreement dated as of June 25, 2020 by and between Fennec Pharmaceuticals, Inc. and Western Alliance Bank
Exhibit 10.1 to the Form 8-K of the Company filed June 26, 2020
10.8
Second Amendment to Loan and Security Agreement dated as of June 24, 2021 by and between Fennec Pharmaceuticals, Inc and Western Alliance Bank
Exhibit 10.1 to the form 8-K of the Company filed June 24, 2021
10.9
Third Amendment to Loan and Security Agreement dated as of January 27, 2022 by and between Fennec Pharmaceuticals, Inc and Western Alliance Bank
Exhibit 10.1 to the form 8-K of the Company filed January 31, 2022
10.10
At The Market Offering Agreement, dated October 30, 2020, between Fennec Pharmaceuticals Inc. and H.C. Wainwright & Co., LLC
Exhibit 1.1 to the Form 8-K of the Company filed October 30, 2020
10.11
Executive Employment Agreement of Shubh Goel
Exhibit 10.1 to the form 8-K of the Company filed September 9, 2019
10.12
First Closing of Financing Transaction, dated August 22, 2022, by and between Fennec Pharmaceuticals Inc. and Petrichor Opportunities Fund I LP
Exhibit 4.1 to the form 8-K of the Company filed August 22, 2022
10.13
Second Closing of Financing Transaction, dated September 23, 2022, by and between Fennec Pharmaceuticals Inc. and Petrichor Opportunities Fund I LP
Exhibit 4.1 to the form 8-K of the Company filed September 26, 2022
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Exhibit
No.
Description
Location
10.14
Share Registration Agreement, dated as of December 1, 2022, between Fennec Pharmaceuticals, Inc. and Petrichor Opportunities Fund I LP
Exhibit 4.5 to the Form S-3 of the Company filed December 1, 2022
16.1
Letter Regarding Change in Certifying Accountant
Exhibit 16.1 to the Form 8-K of the Company filed May 17, 2017
21
Subsidiaries
Exhibit 21 to the 10-K of the Company filed February 14, 2020
23.1
Consent of Haskell & White LLP, Independent Registered Public Accounting Firm
Filed herewith
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Exhibit
No.
Description
Location
31.1
Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1
Certification of Chief Executive Officer and Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
99.1
Press Release for Fiscal Year Ended December 31, 2022
Filed herewith
101.1
Interactive Data File
Filed herewith
104
Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Filed herewith
*
Indicates a management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Fennec Pharmaceuticals Inc.
By:
/s/ Rostislav Raykov
Rostislav Raykov
Chief Executive Officer and Director
Date: March 29, 2023
We, the undersigned directors and officers of Fennec Pharmaceuticals Inc., do hereby constitute and appoint Rostislav Raykov, as our true and lawful attorney-in-fact and agent with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which such attorney-in-fact and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Rostislav Raykov
Chief Executive Officer
March 29, 2023
Rostislav Raykov
(principal executive officer) and Director
/s/ Robert Andrade
Chief Financial Officer
March 29, 2023
Robert Andrade
(principal financial officer and principal
accounting officer)
/s/ Adrian J. Haigh
Director
March 29, 2023
Adrian J. Haigh
/s/ Dr. Khalid Islam
Director
March 29, 2023
Dr. Khalid Islam
/s/ Chris A. Rallis
Director
March 29, 2023
Chris A. Rallis
/s/ Marco Brughera
Director
March 29, 2023
Marco Brughera
/s/ Jodi Cook
Director
March 29, 2023
Jodi Cook
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FENNEC PHARMACEUTICALS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F- Error! Bookmark not defined.
Consolidated Balance Sheets
F-4
Consolidated Statements of Operations
F-5
Consolidated Statements of Shareholders’ (Deficit) Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to the Consolidated Financial Statements
F-8
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Fennec Pharmaceuticals Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Fennec Pharmaceuticals Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, shareholders’ (deficit) equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and Canadian generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
Estimated Product Discounts and Allowances
Critical Audit Matter Description
As discussed in Note 2 to the consolidated financial statements, the Company recognizes revenues at the net sales price, which includes estimates of variable consideration for which reserves are established primarily from rebates, chargebacks, discounts, returns and other allowances (the “allowances”). The estimation of these allowances is an important factor in the determination of net sales price and requires subjective management assumptions. Allowances totaled approximately $234,000 for the year ended December 31, 2022, and such amounts were recorded as reductions to trade receivables or accrued expenses as of December 31, 2022, depending on the nature of the contract and the related settlement.
How the Critical Audit Matter was Addressed in the Audit
Auditing the Company’s estimated allowances was complex and judgmental because the estimates involve subjective management assumptions about the product’s end users at the time of product distribution. Reductions to gross product revenue are sensitive to changes in management’s assumptions. Furthermore, PEDMARK® is the Company’s first commercial product, and as a result, management does not have Company-specific historical experience to make those estimates and relies on industry data and any known trends in making those estimates.
To test the allowances, our audit procedures included, among others:
◾ Through inquiry and observation, we obtained an understanding of the significant management assumptions supporting each potentially significant component of the allowances, including the nature of each allowance and the related percentage estimated by management.
◾ We assessed the methodologies used to determine the allowances and tested estimated percentages by corroborating the underlying data used to develop the estimate, which included the completeness and accuracy of such data. Our testing included comparing key assumptions used to calculate the allowances to external data, customer contracts, and payment data.
◾ We evaluated information subsequent to the balance sheet date to determine whether there was any new information that would require adjustment to the previously recorded allowances.
/s/ Haskell & White LLP
HASKELL & WHITE LLP
We have served as the Company’s auditor since 2017.
Irvine, California
March 29, 2023
F-3
Table of Contents
Fennec Pharmaceuticals Inc.
Consolidated Balance Sheets
(U.S. dollars and shares in thousands)
December 31,
December 31,
2022
2021
Assets
Current assets
Cash and cash equivalents
$
23,774
$
21,100
Accounts receivable, net
1,545
—
Prepaid expenses
770
1,034
Inventory
576
—
Other current assets
63
253
Total current assets
26,728
22,387
Non-current assets
Deferred issuance cost, net of amortization
211
27
Total non-current assets
211
27
Total assets
$
26,939
$
22,414
Liabilities and shareholders’ (deficit) equity
Current liabilities:
Accounts payable
$
2,390
$
777
Accrued liabilities
2,219
877
Total current liabilities
4,609
1,654
Long term liabilities
Term loan
25,000
5,000
PIK interest
260
—
Debt discount
( 361 )
( 12 )
Total long term liabilities
24,899
4,988
Total liabilities
29,508
6,642
Commitments and Contingencies (Note 7)
Shareholders’ (deficit) equity:
Common stock, no par value; unlimited shares authorized; 26,361 shares issued and outstanding ( 2021 ‑ 26,014 )
142,591
140,801
Additional paid-in capital
56,797
53,214
Accumulated deficit
( 203,200 )
( 179,486 )
Accumulated other comprehensive income
1,243
1,243
Total shareholders’ (deficit) equity
( 2,569 )
15,772
Total liabilities and shareholders’ (deficit) equity
$
26,939
$
22,414
(The accompanying notes are an integral part of these consolidated financial statements)
F-4
Table of Contents
Fennec Pharmaceuticals Inc.
Consolidated Statements of Operations
(U.S. dollars and shares in thousands, except per share information)
Year Ended
December 31,
December 31,
2022
2021
Revenue
PEDMARK product sales, net
$
1,535
$
—
Cost of products sold
( 86 )
—
Gross profit
1,449
—
Operating expenses:
Research and development
3,531
4,981
Selling and marketing
2,785
—
General and administrative
17,722
12,242
Total operating expenses
24,038
17,223
Loss from operations
( 22,589 )
( 17,223 )
Other (expense)/income
Unrealized foreign exchange loss
( 9 )
( 10 )
Amortization expense
( 149 )
( 16 )
Unrealized loss on securities
( 184 )
( 25 )
Interest income
195
54
Interest expense
( 978 )
( 126 )
Total other (expense)/income
( 1,125 )
( 123 )
Net loss
$
( 23,714 )
$
( 17,346 )
Basic net loss per common share
$
( 0.90 )
$
( 0.67 )
Diluted net loss per common share
$
( 0.90 )
$
( 0.67 )
Weighted-average number of common shares outstanding basic
26,275
26,006
Weighted-average number of common shares outstanding diluted
26,275
26,006
(The accompanying notes are an integral part of these consolidated financial statements)
F-5
Table of Contents
Fennec Pharmaceuticals Inc.
Consolidated Statements of Shareholders’ (Deficit) Equity
(U.S. dollars and shares in thousands)
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Accumulated
Comprehensive
Stockholders’
Number (Note 6)
Amount
Capital
Deficit
Income
(Deficit) Equity
Balance at December 31, 2020
26,003
$
140,733
$
49,234
$
( 162,140 )
$
1,243
$
29,070
Stock options issued to consultants
—
—
266
—
—
266
Stock options issued to employees
—
—
3,749
—
—
3,749
Exercise of stock options
11
68
( 35 )
—
—
33
Net loss
—
—
—
( 17,346 )
—
( 17,346 )
Balance at December 31, 2021
26,014
140,801
53,214
( 179,486 )
1,243
15,772
Stock options issued to consultants
—
—
133
—
—
133
Stock options issued to employees
—
—
4,087
—
—
4,087
Warrants issued in connection with term loan
—
—
441
—
—
441
Exercise of stock options
273
1,790
( 862 )
—
—
928
Restricted stock release
74
—
( 216 )
—
—
( 216 )
Net loss
—
—
—
( 23,714 )
—
( 23,714 )
Balance at December 31, 2022
26,361
$
142,591
$
56,797
$
( 203,200 )
$
1,243
$
( 2,569 )
(The accompanying notes are an integral part of these consolidated financial statements)
F-6
Table of Contents
Fennec Pharmaceuticals Inc.
Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
Year Ended
December 31,
December 31,
2022
2021
Cash flows (used in) provided by:
Operating activities:
Net loss
$
( 23,714 )
$
( 17,346 )
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt access fees
132
14
Amortization of debt discount
17
2
Unrealized loss on securities
184
25
Stock-based compensation - consultants
133
266
Stock-based compensation - employees
4,087
3,749
Changes in operating assets and liabilities:
Accounts receivable, net
( 1,545 )
—
Prepaid expenses
264
( 237 )
Inventory
( 576 )
—
Other assets
6
( 2 )
Accounts payable
1,612
( 794 )
Accrued liabilities
1,342
101
Net cash used in operating activities
( 18,058 )
( 14,222 )
Financing activities:
Issuance of shares, options exercise
928
33
Proceeds from long-term debt
24,935
5,000
Long term debt paid
( 5,000 )
—
Debt discount
238
( 14 )
Cash paid for taxes on restricted share release
( 194 )
—
Capitalized deferred issuance costs
( 175 )
( 41 )
Net cash provided by financing activities
20,732
4,978
Increase/(decrease) in cash and cash equivalents
2,674
( 9,244 )
Cash and cash equivalents - Beginning of year
21,100
30,344
Cash and cash equivalents - End of year
$
23,774
$
21,100
Non-cash investing and financing activities:
Financed insurance policy
$
550
$
466
Warrants issued in connection with term loan
$
441
$
—
(The accompanying notes are an integral part of these consolidated financial statements)
F-7
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
1. Nature of Business and Liquidity
Fennec Pharmaceuticals Inc. (“Fennec,” “the Company,” “we,” “us,” or “our”) was originally formed as a British Columbia corporation under the name Adherex Technologies Inc. and subsequently changed its name on September 3, 2014. Fennec, together with its wholly owned subsidiaries Oxiquant, Inc. (“Oxiquant”) and Fennec Pharmaceuticals, Inc., both Delaware corporations, and Cadherin Biomedical Inc. (“CBI”), a Canadian corporation and Fennec Pharmaceuticals (EU) Limited (“Fennec Limited”), collectively referred to herein as the “Company,” is a biopharmaceutical company with one FDA approved product developed to reduce the risk of ototoxicity associated with cisplatin in pediatric patients one month of age and older with localized, non-metastatic solid tumors. With the exception of Fennec Pharmaceuticals, Inc., all subsidiaries are inactive.
These 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 year ended December 31, 2022, the Company incurred a net loss from operations of $ 23,714 . At December 31, 2022, it had an accumulated deficit of $ 203,200 and had experienced negative cash flows from operating activities in the amount of $ 18,058 for the year ended December 31, 2022.
On August 1, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”) with Petrichor Opportunities Fund I LP (the “Investor”) in connection with the issuance of up to $ 45,000 of senior secured floating rate convertible notes (the “Notes”), issuable in multiple tranches (the “Note Financing”). On August 19, 2022, the Company closed on the initial tranche of $ 5,000 (the “First Closing Note”) which has an Initial Conversion Price equal to $ 8.11 per share, which was calculated based on a 20 % premium of the 5 -day volume weighted average price of the Company’s common shares as traded on the Nasdaq Capital Market (the “VWAP”) immediately prior to the announcement of the Securities Purchase Agreement (“SPA”) dated August 1, 2022. In connection with the first closing, the Company repaid in full its secured indebtedness with Bridge Bank in the amount of $ 5,000 .
On September 23, 2022, the Company closed on the second tranche of the Note Financing in the amount of $ 20,000 (the “Second Closing Note”), which has an Initial Conversion Price equal to $ 7.89 per share, which was calculated based on a 20 % premium of the 5 -day VWAP immediately prior to September 20, 2022, which was the date the Company obtained FDA approval of PEDMARK ® .
Subsequent to the funding of the Second Closing Note, and before December 31, 2023, the Company may draw up to $ 20,000 of additional financing under the SPA, in one or more tranches of $ 10,000 upon mutual agreement of the Company and the Investor (the “Subsequent Closing Notes”). The Subsequent Closing Notes will be convertible at a price per share equal to $ 7.89 per share, which price is calculated on the same basis as for the Second Closing Note.
A commitment fee of 2.0 % of the Notes was payable under the SPA. Half of such fee was paid by the issuance on the first closing of warrants to purchase 55,498 Fennec common shares (“First Closing Warrant”) and half was payable in cash or warrants of 55,498 Fennec common shares (“Second Closing Warrant”), at our election, on the second closing. The warrants are exercisable at a price per share of $ 8.11 and will have a term of five years from the date of the grant. The Company elected to have all the commitment fee of the Notes payable in warrants.
The Company believes current funds, which include funds from the First Closing Note and the Second Closing Note, provide sufficient funding for the Company to carry out its planned activities, including the continuation of commercialization efforts for at least the next twelve months of PEDMARK ® .
F-8
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
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 consolidated financial statements include the accounts of Fennec and of all its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include revenue recognition, allowance against trade receivables, measurement of stock-based compensation and estimates of the Company’s capital requirement over the next twelve months from the date of issuance of the consolidated financial statements. Actual results could differ from those estimates.
Segment and Geographic Information
Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment principally in the United States. As of December 31, 2022 and 2021, the Company has no net assets located outside of the United States.
Stock-Based Compensation
Under the Company’s stock-based compensation programs, the Company periodically grants stock options and restricted stock to employees, directors and consultants. The Company also issues shares under an employee stock purchase plan. The fair value of each award is recognized in the Company’s statements of operations over the requisite service period for such award.
The Company uses the Black-Scholes option pricing model to value stock option awards without market conditions, which requires the Company to make certain assumptions regarding the expected volatility of its common stock price, the expected term of the option grants, the risk-free interest rate and the dividend yield with respect to its common stock. The Company calculates volatility using its historical stock price data. Due to the lack of the Company’s own historical data, the Company elected to use the “simplified” method for “plain vanilla” options to estimate the expected term of the Company’s stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate used for each grant is based on the United States Treasury yield curve in effect at the time of grant for instruments with a similar expected life. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends and at present, has intention to pay cash dividends.
Inventory
Inventories are valued under a standard costing methodology on a first-in, first-out basis and are stated at the lower of cost or net realizable value. The Company capitalizes inventory costs related to products to be sold in the ordinary course of business. The Company makes a determination of capitalizing inventory costs for a product based on, among other factors, status of regulatory approval, information regarding safety, efficacy and expectations relating to commercial sales and recoverability of costs. Capitalized costs of inventories mainly include third party manufacturing, logistics and distribution
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
costs. The Company assesses recoverability of inventory each reporting period to determine any write down to net realizable value resulting from excess or obsolete inventories. The manufacturing costs for PEDMARK ® prior to regulatory approval were not capitalized as inventory but were expensed as research and development costs. The Company expensed pre-launch inventory as it could not reasonably anticipate FDA approval of PEDMARK ® .
Revenue Recognition
Under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company determines it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation(s). As part of the accounting for these arrangements, the Company must make significant judgments, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation.
Net Product Revenue
On September 20, 2022, the FDA approved PEDMARK ® in the United States to reduce the risk of ototoxicity associated with cisplatin in pediatric patients one month of age and older with localized, non-metastatic solid tumors. PEDMARK ® became commercially available on October 17, 2022. PEDMARK ® is the Company’s first commercial product. The Company sells its products principally through the following specialty distributors: Amerisource Specialty Distribution (“ASD”), McKesson Plasma and Biologics, McKesson Specialty and Cardinal Health Specialty (collectively the "Customers" and each a "Customer"). These Customers subsequently resell the Company’s products to health care providers and patients. In addition to distribution agreements with Customers, the Company enters into arrangements with health care providers and payors that provide for government-mandated and/or privately- negotiated rebates, chargebacks and discounts with respect to the purchase of the Company’s products. Revenues from product sales are recognized when the Customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the Customer.
Product Sales Discounts and Allowances
The Company records revenues from product sales at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established primarily from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between the Company and its Customers, health care providers, payors and other indirect customers relating to the sales of its products. These reserves are based on the amounts to be claimed on the related sales and are classified as a contra-asset or a current liability. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, forecasted Customer buying and payment patterns, and the Company’s historical experience that will develop over time as PEDMARK ® is the Company’s first commercial product. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of its contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenues and earnings in the period such variances become known.
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty distributor. Contracted customers, which currently consist of Public Health Service institutions and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to the Company the difference between the price initially paid by the specialty distributor
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Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
and the discounted price paid to the specialty distributor by its contracted customer. The allowance for chargebacks is based on actual chargebacks received and an estimate of sales by the specialty distributor to its contracted customers.
Discounts for Prompt Payment: The Customers receive a discount of 0.65 % for prompt payment. The Company expects its Customers will earn 100 % of their prompt payment discounts and, therefore, the Company deducts the full amount of these discounts from total product sales when revenues are recognized.
Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program and other government programs. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. The Company’s estimates for the expected utilization of rebates are based on Customer and payer data received from the specialty distributors and historical utilization rates that will develop over time as PEDMARK ® is the Company’s first commercial product. Rebates are generally invoiced by the payor and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to the Customers, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, the Company may need to adjust its accruals, which would affect net product revenues in the period of adjustment.
Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using Customer data provided by the third party that administers the copay program.
Other Customer Credits: The Company pays fees to its Customers for account management, data management and other administrative services. To the extent the services received are distinct from the sale of products to its Customers, the Company classifies these payments in selling, general and administrative expenses in its Consolidated Statements of Operations.
The following table summarizes net product revenues for PEDMARK ® in the United States earned in the years ended December 31, 2022 and 2021, respectively:
Year Ended
December 31,
December 31,
In thousands
2022
2021
Product revenues:
Gross product revenues
$
1,769
$
—
Discounts and allowances
( 234 )
—
Net product revenues
$
1,535
$
—
The following table summarizes the percentage of total product revenues for PEDMARK ® in the United States by any Customer who individually accounted for 10 % or more of total product revenues earned in the years ended December 31, 2022 and 2021, respectively:
Year Ended
December 31,
December 31,
In thousands
2022
2021
Cardinal Health Specialty
72
%
—
%
ASD
16
—
88
%
—
%
The activities and ending allowance balances for each significant category of discounts and allowances for PEDMARK ® (which constitute variable consideration) for the year ended December 31, 2022 were as follows:
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Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Chargebacks,
Rebates, Customer
Discounts for
Fees/Credits
Prompt Pay and
and Co-Pay
In thousands
Other Allowances
Assistance
Totals
Balance at December 31, 2021
$
—
$
—
$
—
Provision related to sales made in:
Current period
72
163
235
Prior periods
—
—
—
Payments and customer credits issued
( 1 )
—
( 1 )
Balance at December 31 2022
$
71
$
163
$
234
The allowances for chargebacks, fees due to Customers, rebates and discounts for prompt payment are recorded as a contra-asset to accounts receivable, while Medicaid rebates and return allowances are in accrued liabilities in the accompanying Consolidated Balance Sheets.
Trade Receivables
The Company records gross trade receivables at the time of product sale to its Customers. Amounts estimated for the associated chargebacks, cash discounts for prompt payment and any allowances for credit losses are booked as a reserve against accounts receivable and reduction of revenue. The Company considers its historical losses, if any, to estimate credit losses. The Customers are specialty distributors, and accordingly, the Company considers the risk of potential credit losses to be low.
Cost of Products Sold
Cost of products sold is related to the Company's product revenues for PEDMARK ® and consists primarily of product production costs associated with finished goods inventory and royalty ( 1 % of net sales), payments the Company is required to pay to Oregon Health & Science University (“OHSU”) on all net sales of PEDMARK ® . Cost of products sold also consists of shipping and other third-party logistics and distribution costs for the Company’s product. The Company considered regulatory approval of its product candidate to be uncertain and product manufactured prior to regulatory approval could not have been sold unless regulatory approval was obtained. As such, the manufacturing costs for PEDMARK ® incurred prior to regulatory approval were not capitalized as inventory but were expensed as research and development costs. After FDA approval in September 2022, the Company had various lots of PEDMARK ® in various stages of production in connection with the fourth quarter product launch. As of December 31, 2022, the Company capitalized approximately $ 0.6 million of costs as inventory on the Consolidated Balance Sheet. Of the items capitalized, $ 0.4 million was capitalized as work in process, $ 0.2 million was capitalized into finished goods, with $ 0.1 million of that being reclassified to cost of product sold.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities at the date of purchase of three months or less.
The Company places its cash and cash equivalents in investments held by highly rated financial institutions in accordance with its investment policy designed to protect the principal investment. At December 31, 2022, the Company had $ 23.8 million in cash and money market accounts (2021- $ 21.1 million). Money market investments typically have minimal risks. While the Company has not experienced any loss or write-down of its money market investments, the amounts it holds in money market accounts are substantially above the $ 250,000 amount insured by the FDIC and may lose value.
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Financial Instruments
Financial instruments recognized on the balance sheets at December 31, 2022 and December 31, 2021 consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and term loans, the carrying values of which approximate fair value due to their relatively short time to maturity or interest rates that approximate market interest rates. The Company does not hold or issue financial instruments for trading.
The Company’s investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Investments, when made, are made in U.S. or Canadian bank securities, commercial paper of U.S. or Canadian industrial companies, utilities, financial institutions and consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper.
The policy risks are primarily the opportunity cost of the conservative nature of the allowable investments. The Company has chosen to avoid investments of a trading or speculative nature to preserve cash.
Common Shares and Warrants
The Company has 0.2 million warrants with a weighted average strike price of $ 7.71 outstanding to purchase common shares that were denominated in United States dollars (“USD”) and have a weighted average life of 5.05 years.
Research and Development Costs and Investment Tax Credits
Research costs, including employee compensation, laboratory fees, lab supplies, and research and testing performed under contract by third parties, are expensed as incurred. Development costs, including drug substance costs, clinical study expenses and regulatory expenses are expensed as incurred.
Investment tax credits, which are earned as a result of qualifying research and development expenditures, are recognized when the expenditures are made and their realization is reasonably assured. They are applied to reduce related capital costs and research and development expenses in the year recognized.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents, and accounts receivable. The Company maintains deposits in highly-rated, federally-insured financial institutions in excess of federally insured limits. The Company’s investment strategy is focused on capital preservation. The Company invests in instruments that meet the high credit quality standards outlined in the Company’s investment policy. This policy also limits the amount of credit exposure to any one issue or type of instrument.
The Company’s trade receivables, includes amounts billed to Customers for product sales of PEDMARK ® . The Customers are a limited group of specialty distributors, and accordingly, the Company considers the risk of potential credit losses to be low.
Income Taxes
The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. The Company has deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. As of December 31, 2022, and 2021, we maintained a full valuation allowance against our deferred tax assets.
The provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Uncertainty in Income Taxes, address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, we may recognize the tax benefit from an uncertain tax position only if it is
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position.
Foreign Currency Translation
The U.S. dollar is the functional currency for the Company’s consolidated operations. All gains and losses from currency translations are included in results of operations.
Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the year. Diluted net loss per share is computed using the same method, except the weighted average number of common shares outstanding includes convertible debentures, stock options and warrants, if dilutive, as determined using the if-converted method and treasury methods. Accordingly, warrants to purchase 0.2 million of our common shares and options to purchase 4.5 million of our common shares at December 31, 2022, were not included in loss per share. Such options would have an antidilutive effect. In 2021, warrants to purchase 0.04 million of our common shares and options to purchase 4.3 million common shares were excluded from the computation of loss per share as their inclusion would have been antidilutive.
Recent Accounting Pronouncements
In May 2021, the FASB issued Accounting Standards Update ("ASU") 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU provides measurement guidance for a modification, or an exchange of a freestanding equity classified written call option that is not within the scope of another Topic. The Company adopted the ASU as of January 1, 2022 and its adoption did not have a significant impact on the Company's consolidated financial statements. The Company will apply the amendments prospectively to modifications or exchanges occurring on or after January 1, 2022.
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326) and subsequently related amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2022-02). This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. This ASU will be effective for the quarter ended March 31, 2023. The Company is evaluating the effect the adoption of this ASU will have on the consolidated financial statements.
In August 2020, the FASB issued Accounting Standards Update (“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). The new standard eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity's own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity's own equity. This ASU will be effective for the year ended December 31, 2024. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.
In June 2022, the FASB issued Accounting Standards Update ("ASU") 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security. This ASU will be effective for the year ended December 31, 2024. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
3. Loss per Share
Loss per common share is presented under two formats: basic loss per common share and diluted loss per common share. Basic loss per common share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period, plus the potentially dilutive impact of common shares equivalents (e.g. 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 (in thousands except per share data):
Year Ended December 31,
2022
2021
Numerator:
Net loss
$
( 23,714 )
$
( 17,346 )
Denominator:
Weighted-average common shares, basic
26,275
26,006
Dilutive effect of stock options
—
—
Dilutive effect of warrants
—
—
Incremental dilutive shares
—
—
Weighted-average common shares, diluted
26,275
26,006
Net loss per share, basic and diluted
$
( 0.90 )
$
( 0.67 )
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 (in thousands):
Year Ended December 31,
2022
2021
Options to purchase common shares
4,539
4,259
Warrants to purchase common shares
150
39
4. Stock Options
The Compensation Committee of the Board of Directors administers the Company’s stock option 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. On June 24, 2010, at the Company’s annual meeting, shareholders approved an amendment to the Company’s Stock Option Plan (the “Plan Maximum Amendment”). The Plan Maximum Amendment relates to changing the maximum number of common shares issuable under the stock option plan from a fixed number of 6.7 million to the number of shares that represents twenty-five percent ( 25 %) of the total number of all issued and outstanding common shares. Based upon the current shares outstanding, a maximum of 6.6 million of our common shares are authorized for issuance under the plan. The option exercise price for all options issued under the plan is based on 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 stock option plan, as amended, allows the issuance of Canadian and U.S. dollar grants. A summary of the stock option transactions, U.S. dollar grants, for the years ended December 31, 2022 and 2021 is below. There are no outstanding $CAD denominated options.
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Summary of $USD Option Activity
Number of
Options
Weighted
(in thousands)
Range
Average
Outstanding and exercisable at December 31, 2020
2,952
$
0.45 – 12.59
$
4.82
Granted
1,412
4.08 – 7.53
5.93
Exercised
( 11 )
1.05 – 5.10
3.15
Forfeited
( 94 )
7.40 – 8.09
7.79
Outstanding and exercisable at December 31, 2021
4,259
$
0.45 – 12.59
$
5.13
Granted
1,015
5.59 - 8.10
6.50
Exercised
( 273 )
0.45 - 8.38
3.29
Forfeited
( 462 )
5.59 - 8.10
6.79
Outstanding and exercisable at December 31, 2022
4,539
$
0.45 – 12.59
$
5.43
Summary of $USD Option Remaining Life
Number Outstanding and Exercisable at
Weighted Average Strike Price
Weighted Average
December 31, 2022
December 31, 2022
Remaining Life
(in thousands)
US Dollars
(years)
4,539
$ 5.43
6.67
Stock compensation expense for the fiscal years ended December 31, 2022 and 2021 was $ 4.2 million and $ 4.0 million, respectively. These amounts have been included in general and administrative expenses for the respective periods. The weighted average fair value per share of options granted and or vested during the fiscal years ended December 31, 2022 and 2021 was $ 5.43 and $ 5.93 , respectively. The intrinsic value (being the difference between the share price at December 31, 2022 and exercise price) of stock options exercisable at December 31, 2022 was $ 15.63 million. The intrinsic value of options exercised during the fiscal year ended December 31, 2022 was $ 1.81 million.
The fair value of all options vested during the fiscal year ended December 31, 2022 was $ 3.8 million. The fair values of options granted in fiscal years ended December 31, 2022 and 2021 were estimated on the date the options were granted based on the Black-Scholes option-pricing model, using the following weighted average assumptions for all options with a ten-year expiration:
Year Ended December 31, 2022
Year Ended December 31, 2021
Expected dividend
0
%
0
%
Risk-free interest rate
1.18 - 3.96
%
1.41 - 1.62
%
Expected volatility
71
%
122
%
Expected life
5 - 6 years
10 years
The Company uses the historical volatility and adjusts for available relevant market information pertaining to the Company’s share price.
Restricted Share Units Activity
The Plan allows for the issuance of restricted share units (“RSUs”). The following is a summary of RSU activity for the years ended December 31, 2022 and 2021. All granted RSUs are denominated in U.S. dollars. Prior to June 2021, there was no activity involving RSUs. Of the 219 RSUs awarded, 86 were forfeited in fiscal year 2022 and 98 were released from restriction. The Company recognized $ 0.3 million in RSU expense for the year ended December 31, 2022 and $ 0.1 million for the same period in 2021. Standard vesting of RSUs is over three years with 1/3 vesting on the first anniversary date of the grant and then 1/24 on the last day of each subsequent month. There were 26 RSUs awarded to employees with standard vesting released from restriction in 2022. The Compensation Committee may also award RSUs with alternative
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
vesting. There were 34 RSUs awarded to various contractors which were released from restriction in 2022 on the one year anniversary of the award. There were 38 RSUs awarded to our CFO which conditionally released from restriction upon FDA approval of PEDMARK ® in 2022. The Company recognized all of the expense associated with this release upon FDA approval of PEDMARK ® .
Number of Restricted
US Denominated RSU's
Share Units (thousands)
Outstanding at December 31, 2020
—
Granted
219
Outstanding at December 31, 2021
219
Granted
—
Forfeited
( 86 )
Released
( 98 )
Outstanding at December 31, 2022
35
5. Fair Value Measurements
The Company has adopted ASC 820 Fair Value Measurements and Disclosure Topic of the FASB. This Topic applies to certain assets and liabilities that are being measured and reported on a fair value basis. The Fair Value Measurements Topic defines fair value, establishes a framework for measuring fair value in accordance with US GAAP, and expands disclosure about fair value measurements. This Topic enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Topic requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company measures the fair value of its Processa common shares by taking into consideration valuations obtained from public financial markets. The Company uses Yahoo Finance to obtain share price data and Oanda for foreign currency pricing services to estimate fair value. These inputs include reported trades of and broker- dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities and other observable inputs.
As of December 31, 2022, the Company had financial assets valued based on Level 1 inputs consisting of cash and cash equivalents and had financial assets based on Level 2 inputs consisting of Processa common shares. During the year ended December 31, 2022, the Company did not have any transfers of financial assets between Levels 1 and 2.
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Assets/Liabilities Measured at Fair Value on a Recurring Basis
Fair Value Measurement at December 31, 2022 and December 31, 2021
(in thousands)
Quoted Price in Active
Market for Identical
Significant Other
Significant
Instruments
Observable Inputs
Unobservable Inputs
Level 1
Level 2
Level 3
Total
2022
2021
2022
2021
2022
2021
2022
2021
Assets
Cash and cash equivalents
$
307
(1)
82
(1)
23,467
21,018
—
—
23,774
21,100
Processa common shares
56
(2)
—
—
240
—
—
56
240
(1) The Company held approximately, $ 307 in cash as of December 31, 2022, of which approximately $ 33 was in Canadian funds (translated into U.S. dollars). As of December 31, 2021, the Company held approximately $ 8 2 , of which approximately $ 34 was in Canadian funds (translated into U.S. dollars).
(2) The Company received 41 restricted common shares of Processa (PSCA). The share restriction expired in three tranches: 50 % , 25 % and 25 % at the 6 , 9 and 12 month intervals, respectively from October 30, 2020. As of December 31, 2022, the restrictions have expired.
6. Stockholders’ Equity
Authorized Capital Stock
The Company’s authorized capital stock consists of an unlimited number of shares of no -par common shares.
Warrants to Purchase Common Shares
At December 31, 2022, the Company had 150 warrants outstanding to purchase common shares at a weighted average exercise price of $ 7.71 .
The following table summarized our warrant activity for the fiscal years ended December 31, 2022 and 2021.
Number of
Warrants
Weighted
(in thousands)
Range
Average
Outstanding and exercisable at December 31, 2020
$
39
$
6.80
$
6.80
Granted
—
—
—
Outstanding and exercisable at December 31, 2021
$
39
$
6.80
$
6.80
Granted
111
8.11
8.00
Outstanding and exercisable at December 31, 2022
$
150
$
7.71
$
7.71
7. Commitments and Contingencies
Oregon Health & Science University (“OHSU”) 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 PEDMARK ® and their use in oncology (the "OHSU Agreement"). OHSU will receive certain milestone payments, royalty on net sales for licensed products and a royalty on any consideration received from sublicensing of the licensed technology.
On May 18, 2015, Fennec negotiated an amendment ("Amendment 1") to the OHSU Agreement, which expands Fennec's exclusive license to include the use of N-acetylcysteine as a standalone therapy and/or in combination with PEDMARK ® 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
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
products, royalty rate from sublicensing of the licensed technology and the fee payable upon the regulatory approval of a licensed product. Certain milestone payments are due upon FDA approval and achievement of sufficient positive EBITDA over a specified period. PEDMARK ® received FDA approval in September 2022, however at this time, due to significant uncertainty surrounding timing and magnitude of certain milestones, the Company has only recorded a royalty liability associated with net revenue.
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. The Company now has a licensed product with regulatory approval that is covered by the Orphan Drug Designation, the parties amended the term of the agreement. Sodium thiosulfate is currently protected by methods of use patents that the Company exclusively licensed from OHSU that expired 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. The Company had accrued approximately $ 15 ( 1 % net sales) in royalty expense to OHSU at December 31, 2022.
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 $ 0.4 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 . The Company was required to pay a security deposit of $ 2 , which is the equivalent to two months of rent. The Office Service Agreement commenced on January 27, 2020, and terminates on July 31, 2020, thereafter the lease may continue on a month-to-month basis with either party being able to terminate the agreement by providing one months’ advance written notice of termination.
Securities Class Action Suit
Chapman v. Fennec Pharmaceuticals Inc. et al.
On September 3, 2020, plaintiff Jim Chapman filed a putative federal securities class action lawsuit against the Company, our Chief Executive Officer, Rostislav Raykov, and Chief Financial Officer, Robert Andrade, in the United States District Court for the Middle District of North Carolina, captioned Chapman v. Fennec Pharmaceuticals Inc. et al ., Case No. 1:20-cv-00812. The complaint alleged that prior to our August 10, 2020 receipt of a CRL from the FDA concerning our NDA for PEDMARK ® , defendants made materially false or misleading statements and failed to disclose material facts about our third-party PEDMARK ® product manufacturing facility and the impact the facility would have on regulatory approval for PEDMARK ® . On December 3, 2020, the court appointed a lead plaintiff to represent the putative class. On February 1, 2021, the lead plaintiff filed an amended complaint. The amended complaint added members of our Board of Directors as defendants, asserts a putative class period from December 20, 2018 through August 10, 2020, makes allegations similar to those in the original complaint, claims the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and seeks an unspecified amount of compensatory damages and attorneys’ fees and costs.
On March 3, 2021, defendants filed a motion to dismiss the amended complaint. On April 2, 2021, lead plaintiff filed an opposition to the motion to dismiss. On April 16, 2021, defendants filed a reply in support of the motion to dismiss, and on December 16, 2021, the Magistrate Judge entered an order recommending that defendants’ motion to dismiss be granted in its entirety. On January 24, 2022, lead plaintiff filed objections to the Magistrate Judge’s recommendation, and defendants filed their response on February 3, 2022. On March 2, 2022, the U.S. District Court Judge adopted the Magistrate Judge’s order and recommendation and entered an order and judgment dismissing the amended complaint with prejudice.
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
On March 30, 2022, lead plaintiff filed a motion for post judgment relief, seeking leave to file a second amended complaint. In his proposed second amended complaint, lead plaintiff seeks to add allegations stemming from the receipt of a second CRL following our resubmission of our NDA for PEDMARK ® , which we received on November 29, 2021, among other things. Defendants filed an opposition to plaintiff’s motion for post judgment relief on April 20, 2022. On May 4, 2022, lead plaintiff submitted a reply in support of his motion. On September 27, 2022, defendants filed a request for judicial notice regarding the FDA’s press release announcing that it has approved PEDMARK ® . On October 18, 2022, lead plaintiff filed his opposition to request for judicial notice. On October 21, 2022, defendants filed a reply in support of the request for judicial notice. On February 15, 2023, the Magistrate Judge recommended the motion for post judgment relief be denied. Lead plaintiff filed no timely objection to the recommendation, and on March 2, 2023, the U.S. District Court Judge issued an order adopting the Magistrate Judge’s recommendation, denying the motion for post judgment relief, and entering judgment for defendants.
We believe that this lawsuit is without merit and intend to defend it vigorously. We cannot predict the outcome of this lawsuit. Failure by us to obtain a favorable resolution of the lawsuit could have a material adverse effect on our business, results of operations, and financial condition. We have not recorded a liability as of December 31, 2022, because we believe a potential loss is not probable or reasonably estimable given the nature of the proceedings and our success so far by obtaining a dismissal with prejudice of the amended complaint.
Fisher v. Fennec Pharmaceuticals Inc. et al.
On February 9, 2022, plaintiff Jeffrey D. Fisher filed a putative federal securities class action lawsuit against the Company and our CEO and CFO in the United States District Court for the Middle District of North Carolina, captioned Fisher v. Fennec Pharmaceuticals Inc. et al. , Case No. 1:22-cv-00115. The complaint asserts a putative class period from May 28, 2021 through November 28, 2021, and alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making materially false and misleading statements or omissions regarding the status of our third-party PEDMARK ® product manufacturing facility, the facility’s compliance with cGMP, and the impact its status and compliance would have on regulatory approval for PEDMARK ® in the period leading up to the Company’s November 29, 2021 receipt of a CRL for a subsequent NDA for PEDMARK ® . The complaint seeks an unspecified amount of damages and attorneys’ fees and costs. On April 11, 2022, plaintiff Jeffrey D. Fisher filed a motion to be appointed lead plaintiff and represent the putative class and on May 9, 2022, the court appointed him as lead plaintiff.
On June 23, 2022, lead plaintiff filed an amended complaint. The amended complaint asserts the same putative class period from May 28, 2021 through November 28, 2021, is brought against the same defendants and makes allegations similar to those in the original complaint. On August 5, 2022, defendants filed a motion to dismiss the amended complaint. On August 26, 2022, lead plaintiff filed an opposition to the motion to dismiss. On September 9, 2022, defendants filed a reply in support of the motion to dismiss.
On September 27, 2022, defendants filed a request for judicial notice regarding the FDA’s press release announcing that it approved PEDMARK ® On September 30, 2022, lead plaintiff filed an opposition to the request for judicial notice. On October 6, 2022, defendants filed a reply in support of the request for judicial notice. On October 12, 2022, the U.S. District Court Judge issued a memorandum opinion and order dismissing the amended complaint in its entirety and with prejudice, and on October 14, 2022, entered judgment. Lead plaintiff had until November 14, 2022 to file a notice of appeal and did not file a notice of appeal.
We believe that the lawsuit is without merit and intend to defend it vigorously. We cannot predict the outcome of this lawsuit. Failure by us to obtain a favorable resolution of the lawsuit could have a material adverse effect on our business, results of operations, and financial condition. We have not recorded a liability as of December 31, 2022, because we believe a potential loss is not probable or reasonably estimable given the nature of the proceedings and our success so far by obtaining a dismissal with prejudice of the amended complaint.
Hope Medical Enterprises, Inc. Inter Partes Review (IPR) Challenges
On October 29, 2021, Hope Medical Enterprises, Inc. (“Hope”) filed two petitions for inter partes review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) of the USPTO. In its petitions, Hope seeks to invalidate our U.S. Patent
F-20
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
No. 10,596,190 (“US ‘190 Patent”), which is exclusively in-licensed from Oregon Health & Science University (“OHSU”) and relates to a method of using our PEDMARK ® product, and our U.S. Patent No. 10,792,363 (“US ’363 Patent”), which relates to an anhydrous form of STS and its method of manufacture, which is the active pharmaceutical ingredient in our PEDMARK ® product. The US ‘190 Patent was issued on March 24, 2020. The US ‘363 Patent was issued on October 6, 2020.
On January 11, 2022, OHSU filed a Request for Supplemental Examination of US ‘190 Patent (Control No. 96.000,390) requesting the consideration by the Central Re-examination Unit (“CRU”) of the USPTO of certain prior art references, including references cited by Hope in its Petition for IPR that are relevant to the granted claim of the patent. On January 28, 2022, the CRU issued a Supplemental Examination Certificate, identified a Substantial New Question (“SNQ”) on the patentability of the US ‘190 Patent claims, and ordered a Reexamination of US ‘190 Patent on March 9, 2022. On May 9, the PTAB granted Hope Medical’s Petition to Institute the IPR against the US ‘190 Patent and a stayed the US ‘190 Patent Reexamination pending the result of the US ‘190 Patent IPR. On August 12, 2022, OHSU filed a Motion to Amend the single claim of the US ‘190 Patent in the IPR to focus on the treatment of medulloblastoma. On December 5, 2022, OHSU filed a Revised Motion to Amend the single claim of the US ‘190 Patent. We expect a decision in the ‘190 Patent IPR in May 2023, which can be appealed by the losing party.
Further, in May 2022, the PTAB granted Hope Medical’s Petition to Institute the IPR against the ‘363 Patent. During the ‘363 Patent IPR, we disclaimed the ‘363 Patent claims directed to the anhydrous morphic form of STS, and filed a Motion to Amend the remaining method of manufacture claims. On December 14, 2022, we filed a Revised Motion to Amend the remaining claims in the ‘363 Patent. We expect a decision in the ‘363 IPR in May 2023, which can be appealed by the losing party.
We plan to vigorously defend our intellectual property rights related to PEDMARK ® . However, we are unable to predict the outcome of Hope’s IPR petitions, or the Reexamination. While we now have, or will shortly receive, additional U.S. patents that cover PEDMARK ® over the IPR challenged patents, an invalidation of our patents covering PEDMARK ® could have a material adverse effect on our ability to protect our rights in PEDMARK ® beyond periods of marketing exclusivity for PEDMARK ® possible in the United States under Orphan Drug Designation and in Europe under European Market Exclusivity for Pediatric Use (“PUMA”).
CIPLA ANDA Litigation
On December 1, 2022, we received a letter dated November 30, 2022, notifying us that CIPLA Ltd. and CIPLA USA (“CIPLA”) submitted to the FDA an ANDA (ANDA No. 218028) for a generic version of PEDMARK ® (sodium thiosulfate solution) that contains Paragraph IV Certifications on two of our patents covering PEDMARK ® : the OHSU licensed US ‘190 Patent, expiration date January 2038; and our US 11,291,728 Patent, expiration date July 2039. On January 6, 2023, we received a letter dated January 5, 2023, notifying us that CIPLA submitted to the FDA a Paragraph IV Certification on our newly issued US 11,510,984 Patent. These patents are listed in FDA’s list of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book, for PEDMARK ® . The certifications allege these patents are invalid or will not be infringed by the manufacture, use, or sale of CIPLA’s sodium thiosulfate solution.
Under the Food and Drug Cosmetic Act, as amended by the Drug Price Competition and Patent Term Restoration Act of 1984, as amended, after receipt of a valid Paragraph IV notice, the Company may bring a patent infringement suit in a federal district court against CIPLA within 45 days from the receipt of the Notice Letter and if such a suit is commenced within the 45 -day period, the Company is entitled to a 30 month stay on the FDA’s ability to give final approval to any proposed products that reference PEDMARK ® . In addition to the 30 -month stay, because we have received Orphan Drug Exclusivity, the FDA may not approve CIPLA’s ANDA for at least 7 years from PEDMARK ® ’s FDA approval date of September 20, 2022.
On January 10, 2023, we filed suit against the CIPLA entities in the United States District Court for the District of New Jersey (Case No. 3:23-cv-00123), for infringement of the ‘190 Patent and the ‘728 Patent. The suit is ongoing.
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
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 (currently $ 513 ). 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 six months of salary (currently $ 186 ).
Employee Benefit Plan
In May 2021, the Company established the Fennec Pharmaceuticals, Inc. 401(k) Plan (the “401(k) Plan”) for its employees, which is designed to be qualified under Section 401(k) of the Code. Eligible employees are permitted to contribute to the 401(k) Plan within statutory and 401(k) Plan limits. As of December 31, 2022 the Company does not offer matching contributions.
8. Term Loans
On August 1, 2022, the Company entered into the SPA with the Investor in connection with the issuance of up to $ 45,000 of Notes, issuable in multiple tranches. On August 19, 2022, the Company closed on the initial tranche of $ 5,000 , which has an Initial Conversion Price equal to $ 8.11 per share, which was calculated based on a 20 % premium of the 5 -day VWAP immediately prior to the announcement of the SPA. In connection with the first closing, the Company repaid in full its secured indebtedness with Bridge Bank in the amount of $ 5,000 . The Notes become due on the maturity date, which is August 19, 2027.
On September 23, 2022, the Company closed on the second tranche of the Note Financing in the amount of $ 20,000 , which has an Initial Conversion Price equal to $ 7.89 per share, which was calculated based on a 20 % premium of the 5 -day VWAP immediately prior to the Second Closing Trigger.
Subsequent to the funding of the Second Closing Note, and before December 31, 2023, the Company may draw up to $ 20,000 of additional financing under the SPA, in one or more tranches of $ 10,000 upon mutual agreement of the Company and the Investor (the “Subsequent Closing Notes”). The Subsequent Closing Notes will be convertible at a price per share equal to $ 7.89 per share, which price is calculated on the same basis as for the Second Closing Note.
A commitment fee of 2.0 % of the Notes is payable under the SPA. Half of such fee was paid by the issuance on the first closing of warrants to purchase 55,498 Fennec common shares and half was payable in cash or warrants of 55,498 Fennec common shares, at our election, on the second closing. The Company chose to issue warrants to satisfy the payable on both the first and second closing. The warrants are exercisable at a price per share of $ 8.11 and respectively, and both have a maturity date of August 19, 2027.
Cash interest on outstanding principal shall accrue at a rate of prime, plus 4.5 % per annum, from the date of funding (11% as of December 31, 2022). Cash interest is due on the first business day of each calendar quarter (“Interest Date”). Payment-in-kind (“PIK”) interest will commence on funding date and accrue at a rate of 3.5 % per annum. PIK interest will stop accruing on August 24, 2024. Any accrued PIK interest shall remain outstanding and be payable on each Interest Date and be added to the outstanding principal amount. The Company has accrued $ 0.26 in PIK interest and has classified the PIK interest in long-term liabilities.
The SPA notes are convertible into fully paid, non-assessable share of common shares at any point after their issuance dates and before the maturity date. Any amount of the SPA notes may be converted into common shares so long as it does not create partial shares. The conversion rate is determined by dividing the conversion amount by the conversion price. Provisions of the PSA create legal, valid and enforceable liens on, and security interests in, all of the Company’s and each of its subsidiaries assets.
Aggregate annual payments due on the SPA as of December 31, 2022, are as follows (in thousands):
Years Ending December 31,
Amount
2022
—
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
2023
—
2024
—
2025
—
2026
—
2027
25,000
Total future payments
25,000
Add: PIK interest
260
Less: unamortized debt discount
( 361 )
Total term loan, net of debt discount
$
24,899
In the event of default or change of control, all unpaid principal and all accrued and unpaid interest amounts (if any) become immediately due and payable. Events of default include, but are not limited to, a payment default, a material adverse change, and insolvency. The SPA facility is secured by all of the Company’s assets, including all capital stock held by the Company.
Debt issuance costs of $ 175 were paid in cash for legal fees and to the Investor in 2022 and warrants valued at $ 441 were granted the Investor to secure access to the SPA. These amounts were capitalized and are being amortized over the access period of the SPA. Upon drawing tranche 1 and tranche 2, the Company recorded a debt discount of $ 314 , which was based on a pro-rata allocation of the issue costs to secure the SPA, reducing the capitalized amount by the same amount. The debt discount is being amortized over the life of the SPA.
9. Income Taxes
The Company operates in both U.S. and Canadian tax jurisdictions. Its income is subject to varying rates of tax and losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. A reconciliation of the combined Canadian federal and provincial income tax rate with the Company’s effective tax rate is as follows (in thousands except for percentage rates):
Year Ended
Year Ended
December 31,
December 31,
2022
2021
Domestic loss
$
( 10,548 )
$
( 9,122 )
Foreign loss
( 13,117 )
( 8,173 )
Loss before income taxes
( 23,665 )
( 17,295 )
Expected statutory rate
26.50
%
26.50
%
Expected provision for (recovery of) income tax
( 6,271 )
( 4,583 )
Permanent differences
1,170
993
Change in valuation allowance
4,669
3,086
Effect of foreign exchange rate differences
—
Effect of change in future enacted tax rates
—
Tax credits and other adjustments
—
Effect of tax rate changes and other
432
504
Provision for income taxes
$
—
$
—
The Canadian statutory income tax rate of 26.5 percent is comprised of federal income tax at approximately 15.0 percent and provincial income tax at approximately 11.5 percent.
F-23
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
The primary temporary differences which gave rise to future income taxes (recovery) at December 31, 2022 and December 31, 2021:
December 31,
December 31,
2022
2021
Future tax assets:
SR&ED expenditures
$
2,086
$
2,086
Income tax loss carryforwards
34,948
30,007
Non-refundable investment tax credits
421
700
Share issue costs
62
77
Fixed and intangible assets
1,083
1,083
Debt discount
22
—
38,622
33,953
Less: valuation allowance
( 38,596 )
( 33,927 )
Net future tax assets
$
26
$
26
10. Subsequent Events
Management has evaluated subsequent events through the date of this filing and concluded there are no events of significance which require disclosure.
Tax Cuts and Jobs Act
On December 22, 2017, the then President of the United States signed into law an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 (commonly known as “the Tax Cuts and Jobs Act” (“TCJA”)), which introduced a comprehensive set of tax reforms. The Tax Cuts and Jobs Act significantly revises U.S. tax law by, among other provisions, lowering the Company’s corporate tax rate from 34 % to 21 % and eliminating or reducing certain income tax deductions.
In December 2017, in accordance with the SEC Staff Accounting Bulletin (“SAB”) 118–Income Tax Accounting Implications of the TCJA, the Company recorded tax effects on a provisional basis based on a reasonable estimate. The TCJA did not have a material impact on the Company's financial statements because its deferred temporary differences are fully offset by a valuation allowance and the Company does not have any offshore earnings from which to record the mandatory transition tax. During 2018, the Company completed its analysis under SAB 118 and no additional tax effects due to rate-remeasurement were required to be recorded.
There are no current income taxes owed, nor are any income taxes expected to be owed in the near term. At December 31, 2022, the Company has unclaimed Scientific Research and Experimental Development ("SR&ED") expenditures, income
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Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
tax loss carry-forwards and non-refundable investment tax credits. The unclaimed amounts and their expiry dates are as listed below:
Province/
Federal
State
SR&ED expenditures (no expiry)
$
7,872
$
—
Income tax loss carryforwards (expiry date):
2023
1,588
—
2024
4,849
—
2025
6,143
—
2026
13,868
—
2027
8,136
—
2028
10,509
4,164
2029
8,185
2,116
2030
2,608
700
2031
3,378
789
2032
3,491
651
2033
1,789
655
2034
1,812
617
2035
1,804
941
2036
2,208
1,013
2037
4,641
1,638
2038
5,267
-
2039
5,848
-
2040
5,792
-
2041
5,340
-
2042
6,192
-
No expiration
35,974
24,580
Investment tax credits (expiry date):
2023
169
2024
189
2025
82
2026
86
2027
47
F-25
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.