Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of December 31, 2023. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized and reported within the time
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periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, the Company’s management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints that require the Company’s management to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2023, the Company's disclosure controls and procedures were not effective because of a material weakness in the Company's internal control over financial reporting related to fees and allowances paid to distributors for distinct services.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's management evaluated the effectiveness of its internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the Company’s management has concluded that, as of December 31, 2023, our internal controls over financial reporting were not effective because of the existence of a material weakness in internal control over financial reporting related to fees and allowances paid to distributors for distinct services.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness is defined as a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
With respect to the fees and allowances paid to distributors for distinct services, the execution of the controls over the application of accounting literature did not operate effectively with respect to:
● Measurement and classification of fees paid to customers for distinct services under ASC 606 Revenue from Contracts with Customers .
● Measurement of services received and expensed in a reporting period, measurement of services that pertain to future periods, and the periods of attribution for those future services.
Remediation Process
The Company is evaluating the material weaknesses and developing a plan of remediation to strengthen the effectiveness of the design and operation of its internal control environment. The remediation plan will include the following actions:
● Enhance the formality of its review procedures with respect to accounting for new contracts with customers.
● Strengthen the review process to improve the operation of accounting and review controls with respect to complex and non-recurring ransactions, as well as those transactions that require significant estimates and judgments.
● Engaging additional service providers or hiring additional full-time employees may be necessary and advisable to address these weaknesses.
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The actions that the Company is taking are subject to ongoing senior management review as well as Audit Committee oversight. The Company is committed to maintaining a strong internal control environment and believes that these remediation efforts will represent significant improvements in its controls. The Company has started to implement these steps; however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weakness described above will continue to exist.
Changes in Internal Control over Financial Reporting
There were no changes to the Company’s internal control over financial reporting during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, the Company’s 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
Insider Adoption or Termination of Trading Arrangements
During the fiscal quarter ended December 31, 2023, Rostislav Raykov , informed us of the adoption of a 10b5-1 trading arrangement for 133,000 shares to be sold with a termination date of December 13, 2024 . No additional directors or officers informed us of the adoption , modification or termination of a “ Rule 10b5-1 trading arrangement ” or “ non-Rule 10b5-1 trading arrangement ,” as those terms are defined in Regulation S-K, Item 408.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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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.
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.
July 2009
47
Robert Andrade, Texas, USA
Chief Financial Officer
CFO of Fennec Pharmaceuticals
N/A
48
Adrian J. Haigh, Dublin, Ireland
Chief Operating Officer
Senior Vice President and General Manager of EMEA Region at PTC Therapeutics; previously Chief Operating Officer at Gentium GmbH; previously Regional VP Commercial Operations at Biogen Idec
N/A
64
Chris A. Rallis, North Carolina,
USA
Director (1)(2)(3)
Executive-in-residence at Pappas Capital; previously CEO of ImmunoBiosciences
August 2011
70
Marco Brughera, Milano, Italy
Director (1(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
68
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
68
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
56
(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 Company as it has developed within the drug development industry and, as such, is able to provide the Company with unique insight and guidance.
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Robert Andrade
Mr. Andrade has served as Chief Financial Officer of Fennec since November 2015. Mr. Andrade was previously Chief Financial Officer and a 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.
Adrian J. Haigh
Mr. Haigh has served as Chief Operating Officer of Fennec since August 2023. Mr. Haigh served as a director of Fennec from April 2014 through July of 2023. Mr. Haigh retired from PTC Therapeutics on December 31, 2022, where his last role at PTC was Senior Vice President and Head of International. He joined PTC in 2014 as Head of EMEA and built its 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 he 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 since April 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 of Directors.
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;
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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.
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
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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 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.
Insider Trading Policy
The Company has adopted an insider trading policy which governing the purchase, sale and/or other dispositions of its securities by directors, officers and employees (or the company itself) that are reasonably designed to promote compliance with insider trading laws, rules and regulations and any applicable listing standards. The policy has been filed as Exhibit 10.16 to this Annual Report.
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, 2023 and December 31, 2022.
Restricted Share
Option Awards
Name and Principal Position
Year
Salary ($)
Bonus ($)
Unit Awards ($) (2)
($) (1)
Total ($)
Rostislav Raykov, CEO
2023
607,061
278,006
728,000
927,873
2,540,940
2022
503,436
110,725
—
—
614,161
Robert Andrade, CFO
2023
439,764
161,113
312,000
397,660
1,310,537
2022
364,698
64,221
—
—
428,919
Adrian Haigh, COO
2023
183,940
167,753
—
1,003,009
1,354,702
2022
—
—
—
—
—
Shubh Goel, CCO
2023
—
—
—
—
—
2022
8,637
—
—
—
8,637
(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 Mr. Haigh of 175,000, 75,000 and 200,000 options, respectively. Such option grants were received on March 31, 2023 for Mr. Raykov and Mr. Andrade and August 7, 2023 for Mr. Haigh. March grants have an exercise price of $8.32, while the August grant was at an exercise price of $8.03. On March 31, 2023, Mr. Raykov and Mr. Andrade were also awarded 87,500 and 37,500 Restricted Share Units each, respectively. All option grants expire 10 years after the grant date. All equity awards 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
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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 equity 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, 2023, Mr. Raykov’s salary is $585,276 per year.
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 Fennec, Mr. Andrade’s remaining unvested equity 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, 2023, Mr. Andrade’s salary is $423,982 per year.
Adrian Haigh
Mr. Haigh has been employed by us since August of 2023. Mr. Haigh was a director of the Company from April 2014 through July of 2023. Mr. Haigh is employed by us as our Chief Operating Officer and: (a) received an initial annual salary in the amount of €400,000 (Approximately $441,000 translated on December 31, 2023), and (b) may receive annual bonuses at the sole discretion of the Board. If Mr. Haigh’s employment terminates due to a change of control of Fennec, Mr. Haigh’s remaining unvested options shall immediately vest and be fully exercisable. If Mr. Haigh is dismissed from employment by us for any reason other than “for cause,” we are obligated to pay Mr. Haigh severance compensation equal to three month’s salary. Effective December 31, 2023, Mr. Haigh’s salary is €400,000 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, Mr. Haigh 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, Mr. Haigh 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
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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, 2023. Ms. Goel’s resignation was voluntary and there is no severance owed.
Name
Severance
Estimated Bonus
Value of benefits
Rostislav Raykov, CEO
$
607,061
$
278,006
$
885,067
Robert Andrade, CFO
$
219,882
$
161,113
$
380,995
Adrian Haigh, COO 1
$
110,364
$
167,753
$
278,117
(1) Mr. Haigh’s severance figures translated to U.S. dollars as of December 31, 2023.
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
$
1,645,204
$
1,645,204
Robert Andrade, CFO
1.25 X
$
696,463
$
696,463
Adrian Haigh, COO
0.5X
$
87,923
$
87,923
(1) Change of control payments are calculated based on the two-year annualized average salary plus cash bonus as calculated as of December 31, 2023. Mr. Haigh’s figures translated to U.S. dollars as of December 31, 2023.
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, 2024, 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 $400 million, with 50% of such incentive pool being payable to the CEO, 30% to the CFO and the balance to other key personnel as determined by the CEO in consultation with the Compensation Committee.
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Equity Grants, Exercises and Holdings
The following table sets forth information concerning the number and value of unexercised options held by each Named Executive Officer as of December 31, 2023. All executive awards, with the exception of those expiring 03/31/2033, 06/02/2031 and 08/07/2033, are exercisable immediately. Grants expiring 12/20/2031 fully vested upon FDA approval of PEDMARK ® . Our current stock option plan provides for equity awards and grants denominated in US and CAD dollars.
Number of Options
Name
Granted
Exercisable
Option Exercise Price
Expiration Date
Rostislav Raykov
175,000
—
USD$
8.32
03/31/2033
300,000
275,491
USD$
4.08
12/20/2031
250,000
215,280
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
100,000
USD$
8.38
02/06/2028
100,000
100,000
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
—
USD$
8.32
03/31/2033
75,000
50,491
USD$
4.08
12/20/2031
100,000
85,617
USD$
7.53
06/02/2031
125,000
23,671
USD$
6.93
05/15/2030
80,000
24,961
USD$
4.83
04/04/2029
50,000
39,116
USD$
8.38
02/06/2028
50,000
50,000
USD$
5.10
06/27/2027
75,000
15,816
USD$
2.45
07/05/2026
Adrian Haigh
200,000
—
USD$
8.03
08/07/2033
20,000
20,000
USD$
8.78
06/12/2033
20,000
20,000
USD$
5.59
06/14/2032
20,000
20,000
USD$
7.52
06/29/2031
20,000
20,000
USD$
6.17
08/13/2030
20,000
20,000
USD$
4.26
06/18/2029
20,000
20,000
USD$
10.93
06/08/2028
20,000
20,000
USD$
5.10
06/27/2027
10,246
10,246
USD$
2.44
06/09/2026
10,000
10,000
USD$
2.69
12/31/2024
133,333
133,333
USD$
2.31
04/25/2024
Compensation of Directors
Director Compensation Table
The following table summarizes the compensation earned by our non-executive directors for the year ended December 31, 2023.
Name
Fees paid in Cash
Stock Awards
Option Awards (1)(2)
Total
Dr. Islam
96,250
—
128,979
225,229
Mr. Brughera
63,125
—
103,183
166,308
Mr. Haigh
42,500
—
103,183
145,683
Dr. Cook
50,625
—
103,183
153,808
Mr. Rallis
70,000
—
103,183
173,183
Total
$
322,500
$
—
$
541,711
$
864,211
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(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 12, 2023
20,000
8.78
Mr. Brughera
June 12, 2023
20,000
8.78
Mr. Haigh
June 12, 2023
20,000
8.78
Dr. Islam
June 12, 2023
25,000
8.78
Dr. Cook
June 12, 2023
20,000
8.78
Total
105,000
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 current directors 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 25, 2024 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
—
293,579
—
293,579
1.07
%
Dr. Khalid Islam
213,825
175,000
—
388,825
1.43
%
Robert Andrade
105,746
556,391
—
662,137
2.39
%
Marco Brughera
—
175,545
—
175,545
0.64
%
Jodi Cook
—
100,000
—
100,000
0.37
%
Chris A. Rallis
51,896
178,450
—
230,346
0.84
%
Rostislav Raykov
287,471
1,386,114
—
1,673,585
588.00
%
All Officers and Directors as a Group
658,938
2,865,079
—
3,524,017
12.04
%
Southpoint Capital Advisors, LP. (2)
4,077,214
—
—
4,077,214
15.05
%
Essetifin SpA (3)
3,225,694
—
—
3,225,694
11.90
%
Sonic Fund II, LP. (4)
2,407,357
—
—
2,407,357
8.88
%
Solas Capital Management, LLC (5)
1,378,513
—
—
1,378,513
5.09
%
(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 25, 2023. For purposes of computing
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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 25, 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 25, 2024 there were 27,099,908 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. Roberto Capriata 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.
(5) Solas Capital Management, LLC, 1063 Post Road, 2 nd Floor Darien, CT 06820. Frederick Tucker Golden hold voting and investment power over the shares held by Solas Capital Management, 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, 2023.
(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
4,948
USD $6.31
1,741
Total
4,948
—
1,741
*
Our current stock option plan allows for the issuance of equity awards and grants denominated in both U.S. dollars and Canadian dollars. As of December 31, 2023, there were 1.7 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, 2023 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, 2023. 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
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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.”
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 2023 and 2022:
Fiscal Year
Fiscal Year
2023
2022
Audit Fees (1)
$
132,750
$
86,250
Audit-Related Fees (2)
14,000
7,500
Tax Fees (3)
—
—
All Other Fees (4)
—
—
Total
$
146,750
$
93,750
(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:
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
4.1
Fennec Pharmaceuticlas, Inc. Description of the Registrant’s Securities
Filed herewith
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, `
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Exhibit
No.
Description
Location
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
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
10.15
First Amendment to Securities Purchase Agreement and Third Closing of Financing Transaction, dated as of December 4, 2023, between Fennec Pharmaceuticals, Inc. and Petrichor Opportunities Fund I LP
Exhibit 4.6 to the form 8-K of the Company filed December 6, 2023.
10.16
Fennec Pharmaceuticals, Inc. Insider Trading Policy, dated July 11, 2009.
Filed herewith
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
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
97
Fennec Pharmaceuticals, Inc. Incentive Compensation Recovery Policy
Filed herewith
99.1
Press Release for Fiscal Year Ended December 31, 2022
Filed herewith
101.1
Interactive Data File
Filed herewith
95
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Exhibit
No.
Description
Location
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, 2024
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, 2024
Rostislav Raykov
(principal executive officer) and Director
/s/ Robert Andrade
Chief Financial Officer
March 29, 2024
Robert Andrade
(principal financial officer and principal
accounting officer)
/s/ Adrian J. Haigh
Chief Operating Officer
March 29, 2024
Adrian J. Haigh
(principal operations office)
/s/ Dr. Khalid Islam
Director
March 29, 2024
Dr. Khalid Islam
/s/ Chris A. Rallis
Director
March 29, 2024
Chris A. Rallis
/s/ Marco Brughera
Director
March 29, 2024
Marco Brughera
/s/ Jodi Cook
Director
March 29, 2024
Jodi Cook
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FENNEC PHARMACEUTICALS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-4
Consolidated Statements of Operations
F-5
Consolidated Statements of Shareholders’ Deficit
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, 2023 and 2022, and the related consolidated statements of operations, shareholders’ deficit, 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, 2023 and 2022, 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. 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.
Estimated Product Allowances and Discounts
Critical Audit Matter Description
As described in Note 2 to the consolidated financial statements, the Company recognizes revenues based on the net sales price, which includes estimates of variable consideration for which reserves are established primarily from rebates, chargebacks, discounts, returns, and other allowances. In addition, certain distributors provide distinct and estimable services to the Company in exchange for product discounts. The estimated fair value of distinct and estimable services
F-2
Table of Contents
performed by the distributor and the attribution of those amounts to the period of benefit are important factors in the determination of net sales price and requires subjective management assumptions. Allowances totaled $2.5 million for the year ended December 31, 2023, and distinct and estimable distributor services totaled $6.3 million for the year ended December 31, 2023, of which $2.0 million is presented as a prepaid expense as of December 31, 2023.
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. Auditing estimates of the amount and timing of distinct distributor services provided to the Company was complex and judgmental because the estimates involve significant measurement uncertainty about the fair value of services received by the Company and when such services were rendered to the Company. 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 has limited Company-specific historical experience to make estimates. A high degree of auditor judgment, subjectivity and effort was required in performing procedures and evaluating evidence related to management’s assumptions in these areas.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:
◾ Through interviews, inquiries, and observations, we obtained an understanding of the significant management assumptions behind the potentially significant components of the allowances, including the nature of each allowance and the amounts estimated by management. Through interviews, inquiries, and observations, we obtained an understanding of the significant management assumptions supporting the fair value estimates of distinct distributor services and the timing of performance.
◾ We assessed the methodologies used to determine the allowances and the fair value of distinct distributor services and tested estimated percentages by corroborating the underlying data used to develop the estimate, which included evaluating the completeness and accuracy of such data. Our testing of allowances included comparing key assumptions to customer contracts, payment data, and other third-party sources, as applicable. Our testing of the fair value of distinct distributor services included evaluating management’s estimate of costs to perform necessary services and assessing the reasonableness of estimated timeframes associated with the performance of those services.
◾ We evaluated information subsequent to the balance sheet date to determine whether there was any new information that would require adjustment to the previously estimated amounts.
/s/ Haskell & White LLP
HASKELL & WHITE LLP
We have served as the Company’s auditor since 2017.
Irvine, California
March 29, 2024
F-3
Table of Contents
Fennec Pharmaceuticals Inc.
Consolidated Balance Sheets
(U.S. dollars and shares in thousands)
December 31,
December 31,
2023
2022
Assets
Current assets
Cash and cash equivalents
$
13,269
$
23,774
Accounts receivable, net
8,814
1,545
Prepaid expenses
2,575
770
Inventory
2,156
576
Other current assets
44
63
Total current assets
26,858
26,728
Non-current assets
Deferred issuance cost
816
809
Deferred issuance cost (amortization)
( 810 )
( 598 )
Total non-current assets
6
211
Total assets
$
26,864
$
26,939
Liabilities and shareholders’ deficit
Current liabilities:
Accounts payable
$
3,778
$
2,390
Accrued liabilities
3,754
2,219
Operating lease liability - current
21
—
Total current liabilities
7,553
4,609
Non-current liabilities
Term loan
30,000
25,000
PIK interest
1,219
260
Debt discount
( 288 )
( 361 )
Operating lease liability - net of current portion
2
—
Total non-current liabilities
30,933
24,899
Total liabilities
38,486
29,508
Commitments and contingencies (Note 7)
Shareholders’ deficit:
Common shares, no par value; unlimited shares authorized; 27,027 shares issued and outstanding ( 2022 ‑ 26,361 )
144,307
142,591
Additional paid-in capital
62,073
56,797
Accumulated deficit
( 219,245 )
( 203,200 )
Accumulated other comprehensive income
1,243
1,243
Total shareholders’ deficit
( 11,622 )
( 2,569 )
Total liabilities and shareholders’ deficit
$
26,864
$
26,939
(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,
2023
2022
Revenue
PEDMARK (R) product sales, net
$
21,252
$
1,535
Cost of products sold
( 1,259 )
( 86 )
Gross profit
19,993
1,449
Operating expenses:
Research and development
56
3,531
Selling and marketing
12,123
2,785
General and administrative
20,585
17,722
Total operating expenses
32,764
24,038
Loss from operations
( 12,771 )
( 22,589 )
Other (expense)/income
Unrealized foreign exchange gain/(loss)
5
( 9 )
Amortization expense
( 287 )
( 149 )
Unrealized loss on securities
( 39 )
( 184 )
Interest income
441
195
Interest expense
( 3,394 )
( 978 )
Total other (expense)/income
( 3,274 )
( 1,125 )
Net loss
$
( 16,045 )
$
( 23,714 )
Basic net loss per common share
$
( 0.60 )
$
( 0.90 )
Diluted net loss per common share
$
( 0.60 )
$
( 0.90 )
Weighted-average number of common shares outstanding basic
26,574
26,275
Weighted-average number of common shares outstanding diluted
26,574
26,275
(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
(U.S. dollars and shares in thousands)
Accumulated
Additional
Other
Total
Common Stock
Paid-in
Accumulated
Comprehensive
Shareholders’
Number (Note 6)
Amount
Capital
Deficit
Income
Deficit
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
Issuance of securities
—
—
( 862 )
—
—
( 862 )
Exercise of stock options
273
1,790
( 216 )
—
—
1,574
Restricted stock release
74
—
—
—
—
—
Net loss
—
—
—
( 23,714 )
—
( 23,714 )
Balance at December 31, 2022
26,361
142,591
56,797
( 203,200 )
1,243
( 2,569 )
Stock options and restricted share units issued to employees
—
—
5,354
—
—
5,354
Exercise of stock options
588
1,716
—
—
—
1,716
Restricted stock release
78
—
( 78 )
—
—
( 78 )
Net loss
—
—
—
( 16,045 )
—
( 16,045 )
Balance at December 31, 2023
27,027
$
144,307
$
62,073
$
( 219,245 )
$
1,243
$
( 11,622 )
(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,
2023
2022
Cash flows (used in) provided by:
Operating activities:
Net loss
$
( 16,045 )
$
( 23,714 )
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt access fees
221
132
Amortization of debt discount
66
17
Unrealized loss on securities
39
184
Stock-based compensation - consultants
—
133
Stock-based compensation - employees
5,354
4,087
Changes in operating assets and liabilities:
Accounts receivable, net
( 7,269 )
( 1,545 )
Prepaid expenses
104
264
Inventory
( 1,580 )
( 576 )
Other assets
3
6
Accounts payable
1,388
1,612
Accrued liabilities
576
1,342
Net cash used in operating activities
( 17,143 )
( 18,058 )
Financing activities:
Issuance of shares, options exercise
1,716
928
Proceeds from long-term debt
4,997
24,935
Long term debt paid
—
( 5,000 )
Debt discount
3
238
Cash paid for taxes on restricted share release
( 78 )
( 194 )
Capitalized deferred issuance costs
—
( 175 )
Net cash provided by financing activities
6,638
20,732
(Decrease)/increase in cash and cash equivalents
( 10,505 )
2,674
Cash and cash equivalents - Beginning of year
23,774
21,100
Cash and cash equivalents - End of year
$
13,269
$
23,774
Non-cash investing and financing activities:
Financed insurance policy
$
403
$
550
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., and Fennec Pharmaceuticals (EU) Limited, 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, 2023, the Company incurred a net loss from operations of $ 16,045 . At December 31, 2023, it had an accumulated deficit of $ 219,245 and had experienced negative cash flows from operating activities in the amount of $17,143 for the year ended December 31, 2023.
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 ® .
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 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.
On December 4, 2023, the Company closed a third tranche under the SPA in the amount of $ 5,000,000 (the “Third 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 ® .
Also on December 4, 2023, the Company entered into a First Amendment to the Securities Purchase Agreement (the “SPA Amendment”) with the Investor, which, among other things, extends the period that the Company may draw the remaining $ 15,000,000 under the SPA from December 31, 2023, to December 31, 2024. Subsequent draws are subject to mutual agreement of the Company and the Investor and will be represented by Notes that will also be convertible at a price equal
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)
to $ 7.89 per share.
The Company believes current funds, which include funds from the First, Second and Third Closing Notes, 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 ® . In addition to the aforementioned, the Company announced in March of 2024 that is had secured an exclusive licensing agreement with Norgine to commercialize PEDMARQSI in Europe, Australia and New Zealand. The deal provided the Company with approximately $ 43 million up front, with the potential of approximately another $ 230 million in future royalties and milestone payments.
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, amount and timing of marketing and other services performed by certain distributors, allowance against trade receivables, measurement of stock-based compensation 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, 2023, the Company had an operating lease in Ireland. This is the only asset located outside of the United States.
Stock-Based Compensation
Under the Company’s stock-based compensation programs, the Company periodically grants stock options and restricted stock 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 no intention to pay cash dividends.
F-9
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Inventory
Inventories are valued under a standard costing methodology on a first-in, first-out basis and are stated at the lower of cost or net realizable value. The Company capitalizes inventory costs related to products to be sold in the ordinary course of business. The Company makes a determination of capitalizing inventory costs for a product based on, among other factors, 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 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 through select specialty distributors in the U.S. and through distributors purchasing PEDMARK product globally. 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 U.S. based 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.
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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)
The Company also utilizes select distributors to introduce its product into global markets. These distributors take on the function of shipping, storage, marketing and other services related to the sale of our product. We record distribution and other fees paid to these distributors as a reduction of revenue, unless the payment is for a distinct good or service from the customer and we can reasonably estimate the fair value of the goods or services received. If both conditions are met, we record the consideration paid to the distributor as an operating expense. These costs are typically known at the time of sale, resulting in minimal adjustments subsequent to the period of sale.
Chargebacks: Chargebacks are discounts that occur when contracted customers purchase directly from a specialty distributor. Contracted customers, which currently consist of Public Health Service institutions and Federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price. The specialty distributor, in turn, charges back to the Company the difference between the price initially paid by the specialty distributor and the discounted price paid to the specialty distributor by its contracted customer. The allowance for chargebacks is based on actual chargebacks received and an estimate of sales by the specialty distributor to its contracted customers.
Discounts for Prompt Payment: 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 and marketing expenses in its Consolidated Statements of Operations.
Distribution and Other Fees: We pay distribution and other fees to certain customers in connection with the sales of our products. We record distribution and other fees paid to our customers as a reduction of revenue, unless the payment is for a distinct good or service from the customer and we can reasonably estimate the fair value of the goods or services received. If both conditions are met, we record the consideration paid to the customer as an operating expense. These costs are typically known at the time of sale, resulting in minimal adjustments subsequent to the period of sale.
The following table summarizes net product revenues for PEDMARK ® in the years ended December 31, 2023, and 2022, respectively:
Year Ended
December 31,
December 31,
2023
2022
Product revenues:
Gross product revenues
$
23,782
$
1,769
Discounts and allowances
( 2,530 )
( 234 )
Net product revenues
$
21,252
$
1,535
F-11
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
For the years ended December 31, 2023 and 2022, the Company had 4 distributors and 3 distributors that represented more than 10% of net sales, respectively.
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, 2023, and 2022 were as follows:
Chargebacks,
Rebates, Customer
Discounts for
Fees/Credits
Prompt Pay and
and Co-Pay
In thousands
Other Allowances
Assistance
Totals
Balance at December 31, 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
Provision related to sales made in:
Current period
1,164
600
1,764
Prior periods
—
—
—
Payments and customer credits issued
( 870 )
( 333 )
( 1,203 )
Balance at December 31, 2023
$
365
$
430
$
795
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, both specialty and other select global distributors. Amounts estimated for the associated chargebacks, cash discounts for prompt payment and any allowances for credit losses are booked as a reserve against accounts receivable and reduction of revenue. The Company determines its allowance methodology by pooling receivable balances at the Customer level. The Company considers various factors, including loss history, individual credit risk associated with each Customer, and the current and future condition of the general economy. These credit risk factors are monitored on a quarterly basis and updated as necessary. To the extent that any individual debtor is identified whose credit quality has deteriorated, the Company establishes allowances based on the individual risk characteristics of such a Customer. Customers categorized as specialty distributors, and accordingly, the Company considers the risk of potential credit losses to be low. Sales to other select global distributors have the potential for losses. The Company evaluates the risk of credit losses on sales on an individual basis using the above mentioned criteria. The Company had a balance in allowance for credit losses of $ 0.3 million as of December 31, 2023.
Cost of Products Sold
Cost of products sold is related to the Company's product revenues for PEDMARK ® and consists primarily of product production costs associated with finished goods inventory and 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, 2023, the Company capitalized approximately $ 2.2 million of costs as inventory on the Consolidated Balance Sheet. Of the items
F-12
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
capitalized, $ 1.4 million was capitalized as work in process and raw materials, $ 0.8 million was capitalized into finished goods.
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. As of December 31, 2023, the Company had $ 13.3 million in cash and money market accounts (2022- $ 23.8 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.
Financial Instruments
Financial instruments recognized on the balance sheets at December 31, 2023 and 2022, 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 have a weighted average life of 4.05 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.
F-13
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
The Company’s trade receivables includes amounts billed to Customers, both specialty and select global distributors, for product sales of PEDMARK ® . Both specialty and select global distributors are a limited group of 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, 2023, and 2022, 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 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, restricted share units, 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, restricted share units of 0.2 million to obtain our common shares, and options to purchase 4.8 million of our common shares at December 31, 2023, were not included in loss per share. Such options would have an antidilutive effect. In 2022, warrants to purchase 0.2 million of our common shares, restricted share units to obtain 0.04 million of our common shares and options to purchase 4.5 million common shares were excluded from the computation of loss per share as their inclusion would have been antidilutive.
Recent Accounting Pronouncements
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 adopted this ASU in Q1 of 2023.
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 adopted this ASU in 2023.
In June 2016, the Financial Accounting Standards Board ("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
F-14
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
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 year ended December 31, 2023. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.
In December 2023 , the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-09 , “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. This guidance will be effective for the annual periods beginning the year ended December 31, 2025. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.
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,
2023
2022
Numerator:
Net loss
$
( 16,045 )
$
( 23,714 )
Denominator:
Weighted-average common shares, basic
26,574
26,275
Dilutive effect of stock options
—
—
Dilutive effect of warrants
—
—
Dilutive effect of restricted share units
—
—
Incremental dilutive shares
—
—
Weighted-average common shares, diluted
26,574
26,275
Net loss per share, basic and diluted
$
( 0.60 )
$
( 0.90 )
The following outstanding options, restricted share units, 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,
2023
2022
Options to purchase common shares
4,798
4,539
Restricted share units to obtain common shares
218
35
Warrants to purchase common shares
150
150
4. Stock Options
The Compensation Committee of the Board of Directors administers the Company’s 2020 Equity Incentive Plan (The “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 6.8 million of our
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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)
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, 2023 and 2022 is below. There are no outstanding $CAD denominated options.
Summary of $USD Option Activity
Number of
Options
Weighted
(in thousands)
Range
Average
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
Granted
1,245
7.35 - 9.05
8.25
Exercised
( 586 )
0.72 - 7.99
3.18
Forfeited
( 400 )
4.08 - 8.32
7.45
Outstanding and exercisable at December 31, 2023
4,798
$
4.08 - 10.96
$
6.27
Summary of $USD Option Remaining Life
Number Outstanding and Exercisable at
Weighted Average Strike Price
Weighted Average
December 31, 2023
December 31, 2023
Remaining Life
(in thousands)
US Dollars
(years)
4,798
$ 6.27
5.58
Stock compensation expense for the fiscal years ended December 31, 2023, and 2022 was $ 5.4 million and $ 4.2 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, 2023, and 2022 was $ 4.73 and $ 5.43 , respectively. The intrinsic value (being the difference between the share price at December 31, 2023 and exercise price) of stock options exercisable at December 31, 2023 was $ 23.8 million. The intrinsic value of options exercised during the fiscal year ended December 31, 2023, was $ 2.97 million.
The fair value of all options vested during the fiscal year ended December 31, 2023, was $ 6.4 million. The fair values of options granted in fiscal years ended December 31, 2023 and 2022 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, 2023
Year Ended December 31, 2022
Expected dividend
-
%
-
%
Risk-free interest rate
3.58 - 5.31
%
1.18 - 3.96
%
Expected volatility
59 - 167
%
150 - 181
%
Expected life
1.50 - 6 years
5 - 6 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, 2023, and 2022. Prior to June 2021, there was no activity involving RSUs. During the year ended December 31, 2023, 365 RSUs were awarded, 96 were forfeited and 86 were released from restriction. The Company
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Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
recognized $ 1.3 million in RSU expense for the year ended December 31, 2023, and $ 0.3 million for the same period in 2022. 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. The Compensation Committee may also award RSUs with alternative vesting.
Number of Restricted
US Denominated RSU's
Share Units (thousands)
Outstanding at December 31, 2021
219
Awarded
—
Forfeited
( 86 )
Released
( 98 )
Outstanding at December 31, 2022
35
Awarded
365
Forfeited
( 96 )
Released
( 86 )
Outstanding at December 31, 2023
218
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, 2023, 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, 2023, 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, 2023 and December 31, 2022
(in thousands)
Quoted Price in Active
Market for Identical
Significant Other
Significant
Instruments
Observable Inputs
Unobservable Inputs
Level 1
Level 2
Level 3
Total
2023
2022
2023
2022
2023
2022
2023
2022
Assets
Cash and cash equivalents
$
1,340
(1)
307
(1)
11,929
23,467
—
—
13,269
23,774
Processa common shares
17
(2)
56
—
—
—
—
17
56
(1) The Company held approximately, $ 1,340 in cash as of December 31, 2023, of which approximately $ 473 was in Canadian funds and $97 in Euro (both translated into U.S. dollars). As of December 31, 2022, the Company held approximately $ 307 , of which approximately $ 33 was in Canadian funds (translated into U.S. dollars).
(2) The Company has 41 unrestricted common shares of Processa (PSCA).
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, 2023, 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, 2023 and 2022.
Number of
Warrants
Weighted
(in thousands)
Range
Average
Outstanding and exercisable at December 31, 2021
$
39
$
6.80
$
6.80
Granted
111
8.11
8
Outstanding and exercisable at December 31, 2022
$
150
$
7.71
$
7.71
Granted
—
—
—
Outstanding and exercisable at December 31, 2023
$
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 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
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Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
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 $ 106 ( 1 % net sales) in royalty expense to OHSU at December 31, 2023.
Securities Class Action Suit
Hope Medical Enterprises, Inc. Inter Partes Review (IPR) Challenges
On October 29, 2021, Hope Medical Enterprises, Inc. (“Hope”) filed a Petition for inter partes review (IPR2022-00123) with the Patent Trial and Appeal Board (“PTAB”) of the USPTO to invalidate U.S. Patent No. 10,596,190 (the “‘190 Patent”), which is exclusively in-licensed from Oregon Health & Science University (“OHSU”) and relates to a method of using PEDMARK ® . The ‘190 Patent was issued on March 24, 2020. On April 18, 2023, the PTAB invalidated the only claim of the‘190 Patent. The final written decision became effective June 20, 2023. The ‘190 Patent was previously listed in the United States Approved Drug Products with Therapeutic Equivalence Evaluations (also known as the “Orange Book”). In light of PTAB’s final written decision on the invalidity of the ‘190 Patent, we requested that the FDA remove the ’190 Patent from the Orange Book. Two United States patent applications claiming priority through the ‘190 Patent remain pending at the United States Patent and Trademark Office (“USPTO”).
On October 29, 2021, Hope Medical Enterprises, Inc. (“Hope”) filed a Petition for inter partes review (IPR2022-00125) to invalidate our wholly owned U.S. Patent No. 10,792,363 (the “’363 Patent”), which relates to an anhydrous form of STS and its method of manufacture, which is the active pharmaceutical ingredient in the PEDMARK ® product. The ‘363 Patent was issued October 6, 2020. During the ‘363 IPR, we disclaimed the patent claims directed to the anhydrous morphic form of STS and continued with claims directed to its method of manufacture. Because the remaining claims in the ‘363 patent are directed to a method of manufacture, the ‘363 patent is not eligible for listing in the Orange Book. In September 2023, the PTAB issued a Final Written Decision in favor of Fennec and upholding the amended claim.
The USPTO has now granted three additional U.S. patents that cover the PEDMARK ® formulation, each of which have been listed in the U.S. FDA’s “Orange Book” (U.S. Patent No. 11,291,728 (issued April 5, 2022), U.S. Patent No. 11,510,984 (issued November 29, 2022), and U.S. Patent No. 11,617,793 (issued April 4, 2023)), and seven additional United States patent applications from this family are pending at the USPTO. We plan to vigorously defend our intellectual property rights to PEDMARK ® if challenged. 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 ® in the United States under Orphan Drug Designation.
CIPLA 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 ‘190 Patent, expiration date January 2038; and our US 11,291,728 Patent (the “’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 (the “’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.
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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)
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. 2:23-cv-00123), for infringement of the ‘190 Patent, the ‘728 Patent, and the ‘984 Patent. On April 20, 2023, we filed an Amended Complaint to assert infringement of the ‘728 patent and the ‘984 Patent. On April 4, 2023, we were granted US 11,617,793 Patent (the “’793 Patent”) covering the formulation of the PEDMARK ® product, which was listed in the Orange Book on or around April 17, 2023, and has an expiration date of July 2039. On May 11, 2023, we received written notice of CIPLA’s Paragraph IV Certification as to the ’793 Patent, which was dated May 10, 2023, along with an enclosed statement of alleged factual and legal bases for stating that the ’793 Patent is invalid, unenforceable, and/or will not be infringed by CIPLA’s ANDA Product. On July 27, 2023, we filed a Second Amended Complaint to assert the ‘793 Patent. The suit is ongoing.
PEDMARQSI ® (EU Brand name for PEDMARK ® ) received European Commission approval in June 2023 and was granted 10 years of market exclusivity in Europe under Pediatric Use (“PUMA”).
Executive Severance
In the event of Mr. Raykov's termination with the Company other than for cause, the Company will be obligated to pay him a one -time severance payment equal to twelve months of salary (currently $ 585 ). In the event of Mr. Andrade’s termination with the Company other than for cause, the Company will be obligated to pay him a one -time severance payment equal to six months of salary (currently $ 212 ). In the event of Mr. Haigh’s termination with the Company other than for cause, the Company will be obligated to pay him a one -time severance payment equal to three months of salary (currently approximately $ 110 as translated into U.S. dollars at December 31, 2023).
Leases
The Company has an operating lease in Research Triangle Park, North Carolina utilizing a 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 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 terminated on July 31, 2020, thereafter the lease has been continuing on a month-to-month basis with either party being able to terminate the agreement by providing one months’ advance written notice of termination.
On August 1, 2023, the Company entered into a second Office Service Agreement (the “Second Office Service Agreement”) with Regus to lease office space in Dublin, Ireland. Per the terms of the Second Office Service Agreement, the monthly rent payments are $ 2 . The Company was required to pay a security deposit of $ 5 , which is the equivalent of two months rent. The Second Office Service Agreement commenced on August 1, 2023 and terminates on January 31, 2025, thereafter the lease may continue on a month-to-month basis with either party being able to terminate the agreement by providing one month’s advance written notice of termination.
The Second Office Service Agreement does not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring the operating lease liability. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease within a particular currency environment. The Company uses an incremental borrowing rate consisting of the current prime rate plus 150 basis points for operating leases that
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Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
commenced after August 2023. The depreciable lives of operating leases and leasehold improvements are limited by the expected lease term.
December 31, 2023
Remaining lease terms (in months)
13
Discount rate
10
%
Maturities of lease liabilities as of December 31, 2023 were as follows (in thousands):
Year Ending December 31,
2024
$
23
2025
2
25
Less imputed interest
2
Total lease liabilities
$
23
Current operating lease liabilities
$
21
Non-current operating lease liabilities
2
Total lease liabilities
$
23
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, 2023 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 (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 ® .
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 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.
On December 4, 2023, the Company closed a third tranche under the SPA in the amount of $ 5,000,000 (the “Third 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
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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)
FDA approval of PEDMARK ® .
Also on December 4, 2023, the Company entered into a First Amendment to the Securities Purchase Agreement (the “SPA Amendment”) with the Investor, which, among other things, extends the period that the Company may draw the remaining $ 15,000,000 under the SPA from December 31, 2023, to December 31, 2024. Subsequent draws are subject to mutual agreement of the Company and the Investor and will be represented by Notes that will also be convertible at a price equal to $ 7.89 per share.
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, 2023). 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 $ 1,219 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, 2023, are as follows (in thousands):
Years Ending December 31,
Amount
2024
$
—
2025
—
2026
—
2027
30,000
Total future payments
30,000
Add: PIK interest
1,219
Less: unamortized debt discount
( 288 )
Total term loan, net of debt discount
$
30,931
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 through 3, 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.
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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)
9. Income Taxes
The Company operates in U.S., Canadian and Ireland 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,
2023
2022
Domestic loss
$
( 12,301 )
$
( 10,548 )
Foreign loss
( 3,744 )
( 13,117 )
Loss before income taxes
( 16,045 )
( 23,665 )
Expected statutory rate
26.50
%
26.50
%
Expected provision for (recovery of) income tax
( 4,252 )
( 6,271 )
Permanent differences
1,553
1,170
Change in valuation allowance
2,038
4,669
Effect of tax rate changes and other
661
432
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.
The primary temporary differences which gave rise to future income taxes (recovery) at December 31, 2023 and December 31, 2022:
December 31,
December 31,
2023
2022
Future tax assets:
SR&ED expenditures
$
2,086
$
2,086
Income tax loss carryforwards
37,143
30,007
Non-refundable investment tax credits
297
700
Share issue costs
73
77
Fixed and intangible assets
1,083
1,083
Debt discount
62
—
40,744
33,953
Less: valuation allowance
( 40,718 )
( 33,927 )
Net future tax assets
$
26
$
26
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
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Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
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, but the Norgine deal will cause the Company to be closer to using its historical tax losses. Once those losses are used up, the Company will owe income taxes. As of December 31, 2023, the Company has unclaimed Scientific Research and Experimental Development ("SR&ED") expenditures, income 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):
2024
4,849
—
2025
6,143
—
2026
13,868
—
2027
8,136
—
2028
10,509
—
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
1,803
941
2036
2,208
1,013
2037
4,641
1,638
2038
7,427
-
2039
9,587
-
2040
15,009
-
2041
13,556
-
2042
18,798
-
2043
—
No expiration
37,204
24,837
Investment tax credits (expiry date):
2024
189
2025
82
2026
86
2027
47
10. Revision to Prior Period Financial Statements
In preparing the annual report on Form 10-K for the year ended December 31, 2023, the Company determined that it overstated sales and marketing expenses associated with select distributors, which does not accurately match the expense to the proper period that related sales and marketing expenses were received. The Company determined that, based on the timeline of services provided by these distinct distributors, it would be more accurate to defer a portion of the sales and marketing expenses to future periods and amortize the remaining expense over the expected service period. The Company also determined that a portion of such expenses would be more accurately characterized as distribution fees and has presented such amounts as a reduction of revenues. These revisions resulted in adjustments to net product sales, sales and marketing expenses and current assets as previous reported in the Company’s September 30, 2023 condensed consolidated financial statements. Net product sales were adjusted down in the amount of $ 0.2 million, sales and marketing expenses were decreased by $ 1.2 million and current assets increased by $ 1.0 million as of September 30, 2023. The effect on our September 30, 2023 financial results are presented below.
F-24
Table of Contents
Fennec Pharmaceuticals Inc.
Notes to the Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
The effect of the revisions to the unaudited condensed consolidated financial statements is as follows (amount in thousands):
Condensed Consolidated Balance Sheet (Unaudited)
As of September 30, 2023
As
Previously
Reported
Adjustments
As Revised
Prepaid expenses
$
247
$
950
$
1,197
Total current assets
18,946
950
19,896
Total assets
$
19,028
$
950
$
19,978
Accumulated deficit
$
( 216,563 )
$
( 950 )
$
( 215,613 )
Total shareholders' deficit
( 10,531 )
( 950 )
( 9,581 )
Total liabilities and shareholder's deficit
$
( 19,028 )
$
( 950 )
$
( 19,978 )
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended
Nine Months Ended
September 30, 2023
September 30, 2023
As
As
Previously
As
Previously
As
Reported
Adjustments
Revised
Reported
Adjustments
Revised
PEDMARK® product sales, net
$
6,515
$
( 219 )
$
6,296
$
11,517
$
( 219 )
$
11,298
Sales and marketing expense
3,384
( 1,169 )
2,215
8,255
( 1,169 )
7,086
Net loss
( 1,867 )
950
( 917 )
( 13,363 )
950
( 12,413 )
Net loss attributable to common shareholders
$
( 1,867 )
$
950
$
( 917 )
$
( 13,363 )
$
950
$
( 12,413 )
Basic net loss per common share
$
( 0.07 )
$
0.04
$
( 0.03 )
$
( 0.50 )
$
0.03
$
( 0.47 )
Diluted net loss per common share
$
( 0.07 )
$
0.04
$
( 0.03 )
$
( 0.50 )
$
0.03
$
( 0.47 )
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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)
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
For the Three Months Ended
For the Nine Months Ended
September 30, 2023
September 30, 2023
Total
Total
Accumulated
Stockholders’
Accumulated
Stockholders’
Deficit
Equity
Deficit
Equity
As Previously Reported
Net loss
$
( 1,867 )
$
( 1,867 )
$
( 13,363 )
$
( 13,363 )
Balance at September 30, 2023
$
( 216,563 )
$
( 10,531 )
$
( 216,563 )
$
( 10,531 )
Adjustments
$
950
$
950
$
950
$
950
As Revised
Net loss
$
( 917 )
$
( 917 )
$
( 12,413 )
$
( 12,413 )
Balance at September 30, 2023
$
( 215,613 )
$
( 9,581 )
$
( 215,613 )
$
( 9,581 )
Condensed Consolidated Statement of Cash Flows (Unaudited)
For the Nine Months Ended
September 30, 2023
As
Previously
Reported
Adjustments
As Revised
Cash Flows from Operating Activities:
Net loss
$
( 13,363 )
$
950
$
( 12,413 )
Reconciliation of net loss to net cash used in operating activities:
Prepaid expenses
523
( 950 )
( 427 )
Subtotal of non-cash charges
1,080
( 950 )
130
Net cash used in operating activities
$
( 12,283 )
$
-
$
( 12,283 )
11. Subsequent Events
On March 17, 2024, the Company announced it had entered into an exclusive licensing agreement with Norgine to commercialize PEDMARQSI ® in Europe, Australia, and New Zealand. The Company received approximately $ 43 million up front with the potential of up to approximately $ 230 million related to royalty and milestone payments.
F-26