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FENNEC PHARMACEUTICALS INC. - Quarter Report: 2010 September (Form 10-Q)

Unassociated Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q

   
(Mark One)
x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____ to ____

Commission File Number: 001-32295
 

 
ADHEREX TECHNOLOGIES INC.
(Exact Name of Registrant as Specified in Its Charter)

Canada
(State or Other Jurisdiction of
Incorporation or Organization
20-0442384
(I.R.S. Employer
Identification No.)
   
501 Eastowne Drive, Suite 140
 
Chapel Hill, North Carolina
27514
(Address of Principal Executive Offices)
(Zip Code)

Registrant's Telephone Number, Including Area Code: (919) 636-4530
 

 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨
Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if smaller reporting company)
Smaller reporting company x

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 15, 2010, there were 368,293,451 shares of Adherex Technologies Inc. common stock outstanding.

 

 

TABLE OF CONTENTS

   
Page
PART I: FINANCIAL INFORMATION
   
Item 1. Financial Statements
  3
Condensed Consolidated Balance Sheets – September 30, 2010 and December 31, 2009
  3
Unaudited Interim Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2010 and 2009
  4
Unaudited Interim Condensed Consolidated Statements of Cash Flows - Three and Nine Months Ended September 30, 2010 and 2009
  5
Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity – For the Periods Ended September 3, 1996 to September30, 2010
  6
Notes to Unaudited Condensed Consolidated Financial Statements
  9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
  15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
  21
Item 4. Controls and Procedures
  21
PART II: OTHER INFORMATION
  22
Item 1. Legal Proceedings
  22
Item 1A. Risk Factors
  22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  23
Item3. Defaults Upon Senior Securities
  23
Item 4. (Removed and Reserved)
  23
Item 5. Other Information
  23
Item 6. Exhibits
  24
Signatures
  25
 
 
2

 

PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements

Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Condensed Consolidated Balance Sheets
(U.S. Dollars and shares in thousands, except per share amounts)

   
September 30,
2010
   
December 31,
2009
 
             
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 6,602     $ 685  
Accounts receivable
    1       69  
Prepaid expense
    -       75  
Other current assets
    -       4  
Total current assets
    6,603       833  
                 
Total assets
  $ 6,603     $ 833  
                 
Liabilities and Stockholders' Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 156     $ 318  
Accrued liabilities
    150       70  
Other current liabilities
    -       32  
Total current liabilities
    306       420  
                 
Other long-term liabilities
    -       7  
Derivative warrant liability
    4,692       -  
Total liabilities
    4,998       427  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock, no par value; unlimited shares authorized; 368,293 and 128,227 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
    64,929       64,929  
Additional paid-in capital
    37,664       35,225  
Deficit accumulated during development stage
    (102,231 )     (100,991 )
Accumulated other comprehensive income
    1,243       1,243  
Total stockholders’ equity
    1,605       406  
Total liabilities and stockholders’ equity
  $ 6,603     $ 833  

(The accompanying notes are an integral part of these interim consolidated financial statements)

 
3

 

Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Condensed Consolidated Statements of Operations
(U.S. Dollars and shares in thousands, except per share amounts)

   
Three Months Ended
   
Nine Months Ended
   
Cumulative
From
September 3,
1996 to
 
   
September
30,
2010
   
September
30,
2009
   
September 30,
2010
   
September 30,
2009
   
September
30,
2010
 
                               
Revenue
  $ -     $ -     $ -     $ -     $ -  
                                         
Operating expenses:
                                       
Research and development
    110       47       419       1,976       65,309  
Impairment of Capital Assets
    -       -       -       -       386  
(Gain) on deferred lease inducements
    -       (323 )     -       (323 )     (497 )
Acquired in-process research and development
    -       -       -       -       13,094  
Loss (gain) on impairment of asset held for sale
    -       57               386       (204 )
General and administrative
    807       293       3,369       1,276       28,078  
Total operating expenses
    917       74       3,788       3,315       106,166  
                                         
Loss from operations
    (917 )     (74 )     (3,788 )     (3,315 )     (106,166 )
                                         
Other income (expense):
                                       
Settlement of Cadherin litigation
    -       -       -       -       (1,283 )
Interest expense
    -       -       -       -       (19 )
Unrealized gain on derivative
    2,570       -       2,498       -       2,498  
Other income
    28       39       29       50       79  
Interest income
    13       -       21       46       2,818  
Total other income (expense), net
    2,611       39       2,548       96       4,093  
                                         
Net Income/(loss) and total comprehensive income/(loss)
  $ 1,694     $ (35 )   $ (1,240 )   $ (3,219 )   $ (102,073 )
                                         
Basic and diluted net income (loss) per common share
  $ 0.01     $ (0.01 )   $ (0.01 )   $ (0.02 )        
                                         
Weighted-average common shares used in computing basic and diluted net loss per common share
    368,293       128,227       261,597       128,227          
 
(The accompanying notes are an integral part of these interim condensed consolidated financial statements)

 
4

 

Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Condensed Consolidated Statements of Cash Flows
(U.S. Dollars and shares in thousands, except per share amounts)

   
Three Months Ended
   
Nine Months Ended
   
Cumulative
From
September 3,
 
   
September 30,
2010
   
September 30,
2009
   
September 30,
2010
   
September 30,
2009
   
1996 to
September 30,
2010
 
                               
Cash flows from (used in):
                             
Operating activities:
                             
Net income (loss)
  $ 1,694     $ (35 )   $ (1,240 )   $ (3,219 )   $ (102,073 )
Adjustments to reconcile net loss to net cash used in operating activities:
                                       
Depreciation and amortization
    -       -       -       -       1,404  
Non-cash Cadherin Biomedical Inc. litigation
    -       -       -       -       1,187  
Unrealized gain on warrant derivative
    (2,570 )     -       (2,498 )     -       (2,498 )
Amortization of deferred lease inducements
    -       (323 )     -       (347 )     (412 )
Unrealized foreign exchange loss
    -       -       -       -       9  
Loss on impairment of capital assets
    -       57       -       386       386  
Non-cash severance
    -       -       -       -       168  
Stock-based compensation - consultants
    -       -       -       10       722  
Stock-based compensation - employees
    386       9       2,439       532       9,966  
Acquired in-process research and development
    -       -       -       -       13,094  
Changes in operating assets and liabilities
    (60 )     (382 )     26       (1,867 )     (115 )
Net cash used in operating activities
    (550 )     (672 )     (1,273 )     (4,505 )     (78,162 )
                                         
Investing activities:
                                       
Purchase of capital assets
    -       -       -       -       (1,440 )
Disposal of capital assets
    -       -       -       -       115  
Proceeds from sale of assets
    -       -       -       24       24  
Release of restricted cash
    -       -       -       -       190  
Restricted cash
    -       -       -       -       (209 )
Purchase of short-term investments
    -       -       -       -       (22,148 )
Redemption of short-term investments
    -       -       -       -       22,791  
Investment in Cadherin Biomedical Inc.
    -       -       -       -       (166 )
Acquired intellectual property rights
    -       -       -       -       (640 )
Net cash provided by (used in) investing activities
    -       -       -       24       (1,483 )
                                         
Financing activities:
                                       
Conversion of long-term debt to equity
    -       -       -       -       68  
Long-term debt repayment
    -       -       -       -       (65 )
Capital lease repayments
    -       -       -       -       (8 )
Issuance of units, net of issue costs
    -       -       7,190       -       83,877  
Registration expense
    -       -       -       -       (465 )
Proceeds from convertible note
    -       -       -       -       3,017  
Other liability repayments
    -       -       -       -       (87 )
Financing expenses
    -       -       -       -       (544 )
Security deposits received
    -       -       -       -       35  
Proceeds from exercise of stock options
    -       -       -       -       51  
Net cash provided by financing activities
    -       -       7,190       -       85,879  
                                         
Effect of exchange rate on cash and cash equivalents
    -       -       -       -       368  
Increase (decrease) in cash and cash equivalents
    (550 )     (672 )     5,917       (4,481 )     6,602  
Cash and cash equivalents - Beginning of period
    7,152       1,540       685       5,349       -  
Cash and cash equivalents - End of period
  $ 6,602     $ 868     $ 6,602     $ 868     $ 6,602  

(The accompanying notes are an integral part of these interim condensed consolidated financial statements)

 
5

 

Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity
(U.S. dollars and shares in thousands, except per share information)

   
Common Stock
   
Non-redeemable
 Preferred Stock
   
Additional
Paid-in
   
Accumulated
Other
Comprehensive
   
Deficit 
Accumulated
During 
Development
   
Total 
Shareholders’
 
   
Number
   
Amount
   
of Subsidiary
   
Capital
   
Income
   
Stage
   
Equity
 
Balance at June 30, 1996
    -     $ -     $ -     $ -     $ -     $ -     $ -  
Issuance of common stock
    1,600       -       -       -       -       -       -  
Net loss
    -       -       -       -       -       (37 )     (37 )
Balance at June 30, 1997
    1,600       -       -       -       -       (37 )     (37 )
Net loss
    -       -       -       -       -       (398 )     (398 )
Balance at June 30, 1998
    1,600       -       -       -       -       (435 )     (435 )
Exchange of Adherex Inc. shares for Adherex Technologies Inc. shares
    (1,600 )     -       -       -       -       -       -  
Issuance of common stock
    4,311       1,615       -       -       -       -       1,615  
Cumulative translation adjustment
    -       -       -       -       20       -       20  
Net loss
    -       -       -       -       -       (958 )     (958 )
Balance at June 30, 1999
    4,311       1,615       -       -       20       (1,393 )     242  
Issuance of common stock
    283       793       -       -       -       -       793  
Issuance of equity rights
    -       -       -       171       -       -       171  
Issuance of special warrants
    -       -       -       255       -       -       255  
Settlement of advances:
                                                       
Issuance of common stock
    280       175       -       -       -       -       175  
Cancellation of common stock
    (120 )     -       -       -       -       -       -  
Cumulative translation adjustment
    -       -       -       -       16       -       16  
Net loss
    -       -       -       -       -       (1,605 )     (1,605 )
Balance at June 30, 2000
    4,754       2,583       -       426       36       (2,998 )     47  
Issuance of common stock:
                                                       
Initial Public Offering (“IPO”)
    1,333       5,727       -       -       -       (38 )     5,689  
Other
    88       341       -       -       -       -       341  
Issuance of special warrants
    -       -       -       1,722       -       -       1,722  
Conversion of special warrants
    547       1,977       -       (1,977 )     -       -       -  
Issuance of Series A special warrants
    -       -       -       4,335       -       -       4,335  
Conversion of Series A special warrants
    1,248       4,335       -       (4,335 )     -       -       -  
Conversion of equity rights
    62       171       -       (171 )     -       -       -  
Cumulative translation adjustment
    -       -       -       -       182       -       182  
Net loss
    -       -       -       -       -       (2,524 )     (2,524 )
Balance at June 30, 2001
    8,032       15,134       -       -       218       (5,560 )     9,792  
Cumulative translation adjustment
    -       -       -       -       11       -       11  
Net loss
    -       -       -       -               (3,732 )     (3,732 )
Balance at June 30, 2002
    8,032       15,134       -       -       229       (9,292 )     6,071  

(The accompanying notes are an integral part of these interim consolidated financial statements)
(continued on next page)

 
6

 

Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity (Continued)
(U.S. dollars and shares in thousands, except per share information)

   
Common Stock
   
Non-redeemable
 Preferred Stock
   
Additional
Paid-in
   
Accumulated
Other
Comprehensive
   
Deficit 
Accumulated 
During 
Development
   
Total
Shareholders’
 
   
Number
   
Amount
   
of Subsidiary
   
Capital
   
Income
   
Stage
   
Equity
 
Balance at June 30, 2002
    8,032       15,134       -       -       229       (9,292 )     6,071  
Common stock issued for Oxiquant acquisition
    8,032       11,077       -       543       -       -       11,620  
Exercise of stock options
    5       4       -       -       -       -       4  
Distribution to shareholders
    -       -       -       -       -       (158 )     (158 )
Stated capital reduction
    -       (9,489 )     -       9,489       -       -       -  
Stock options issued to consultants
    -       -       -       4       -       -       4  
Equity component of June convertible notes
    -       -       -       1,058       -       -       1,058  
Financing warrants
    -       -       -       53       -       -       53  
Cumulative translation adjustment
    -       -       -       -       (159 )     -       (159 )
Net loss
    -       -       -       -       -       (17,795 )     (17,795 )
Balance at June 30, 2003
    16,069       16,726       -       11,147       70       (27,245 )     698  
Stock options issued to consultants
    -       -       -       148       -       -       148  
Repricing of warrants related to financing
    -       -       -       18       -       -       18  
Equity component of December convertible notes
    -       -       -       1,983       -       -       1,983  
Financing warrants
    -       -       -       54       -       -       54  
Conversion of June convertible notes
    1,728       1,216       -       (93 )     -       -       1,123  
Conversion of December convertible notes
    1,085       569       -       (398 )     -       -       171  
Non-redeemable preferred stock
    -       -       1,045       -       -       -       1,045  
December private placement
    11,522       8,053       -       5,777       -       -       13,830  
May private placement
    4,669       6,356       -       2,118       -       -       8,474  
Exercise of stock options
    18       23       -       -       -       -       23  
Amalgamation of 2037357 Ontario Inc.
    800       660       (1,045 )     363       -       -       (22 )
Cumulative translation adjustment
    -       -       -       -       (219 )     -       (219 )
Net loss
    -       -       -       -       -       (6,872 )     (6,872 )
Balance at June 30, 2004
    35,891       33,603       -       21,117       (149 )     (34,117 )     20,454  
Stock options issued to consultants
    -       -       -       39       -       -       39  
Stock options issued to employees
    -       -       -       604       -       -       604  
Cost related to SEC registration
    -       (493 )     -       -       -       -       (493 )
Acquisition of Cadherin Biomedical Inc.
    644       1,252       -       -       -       -       1,252  
Cumulative translation adjustment
    -       -       -       -       1,392       -       1,392  
Net loss – six months ended December 31, 2004
    -       -       -       -       -       (6,594 )     (6,594 )
Balance at December 31, 2004
    36,535       34,362       -       21,760       1,243       (40,711 )     16,654  
 
 (The accompanying notes are part of these interim consolidated financial statements)
(continued on next page)
 
7

 
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Condensed Consolidated Statements of Stockholders' Equity (Continued)
(U.S. dollars and shares in thousands, except per share information)

   
Common Stock
   
Non-redeemable
 Preferred Stock
   
Additional
Paid-in
   
Accumulated
Other
Comprehensive
   
Deficit 
Accumulated 
During 
Development
   
Total
Shareholders’
 
   
Number
   
Amount
   
of Subsidiary
   
Capital
   
Income
   
Stage
   
Equity
 
Balance at December 31, 2004
    36,535       34,362       -       21,760       1,243       (40,711 )     16,654  
Financing costs
    -       (141 )     -       -       -       -       (141 )
Exercise of stock options
    15       25       -       -       -       -       25  
Stock options issued to consultants
    -       -       -       276       -       -       276  
July private placement
    6,079       7,060       -       1,074       -       -       8,134  
Net loss
    -       -       -       -       -       (13,871 )     (13,871 )
Balance at December 31, 2005
    42,629       41,306       -       23,110       1,243       (54,582 )     11,077  
Stock options issued to consultants
    -       -       -       100       -       -       100  
Stock options issued to employees
    -       -       -       491       -       -       491  
May private placement
    7,753       5,218       -       822       -       -       6,040  
Net loss
    -       -       -       -       -       (16,440 )     (16,440 )
Balance at December 31, 2006
    50,382       46,524       -       24,523       1,243       (71,022 )     1,268  
Stock options issued to consultants
    -       -       -       59       -       -       59  
Stock options issued to employees
    -       -       -       2,263       -       -       2,263  
February financing
    75,759       17,842       -       5,379       -       -       23,221  
Exercise of warrants
    2,086       563       -       131       -       -       694  
Net loss
    -       -       -       -       -       (13,357 )     (13,357 )
Balance at December 31, 2007
    128,227       64,929       -       32,355       1,243       (84,379 )     14,148  
Stock options issued to consultants
    -       -       -       88       -       -       88  
Stock options issued to employees
    -       -       -       2,417       -       -       2,417  
Net loss
    -       -       -       -       -       (13,600 )     (13,600 )
Balance at December 31, 2008
    128,227       64,929       -       34,860       1,243       (97,979 )     3,053  
Stock options issued to consultants
    -       -       -       10       -       -       10  
Stock options issued to employees
    -       -       -       355       -       -       355  
Net loss for quarter
    -       -       -       -       -       (3,012 )     (3,012 )
Balance at December 31, 2009
    128,227       64,929       -       35,225       1,243       (100,991 )     406  
Net loss for quarter
    -       -       -       -       -       (366 )     (366 )
Balance at March 31, 2010
    128,227       64,929       -       35,225       1,243       (101,357 )     40  
April financing
    240,066       -       -       -       -       -       -  
Stock options issued to employees and board
    -       -       -       2,054       -       -       2,054  
Net loss for quarter
    -       -       -       -       -       (2,569 )     (2,569 )
Balance at June 30, 2010
    368,293       64,929       -       37,278       1,243       (103,926 )     (476 )
Stock options issued to employees and board
    -       -       -       386       -       -       386  
Net income for quarter
    -       -       -       -       -       1,694       1,694  
Balance at September 30, 2010
    368,293     $ 64,929     $ -     $ 37,664     $ 1,243     $ (102,231 )   $ 1,605  

 
8

 
 
1.      Going Concern
 
Adherex Technologies Inc. (“Adherex”), together with its wholly owned subsidiaries Oxiquant, Inc. (“Oxiquant”) and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc. (“CBI”), a Canadian corporation, collectively referred to herein as the “Company” is a development stage biopharmaceutical company focused on cancer therapeutics.
 
These unaudited interim consolidated financial statements have been prepared using generally accepted accounting principles (“GAAP”) in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
During the three months ended September 30, 2010, the Company earned net income of $1.7 million and during the nine months ended September 30, 2010, the Company incurred a net loss of $1.2 million. At September 30, 2010, it had an accumulated deficit of $102.2 million and had experienced negative cash flows from operations since inception in the amount of $78.2 million. These circumstances lend substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the use of accounting principles applicable to a going concern may not be appropriate. The Company will need to obtain additional funding in the future in order to finance our business strategy, operations and growth through the issuance of equity, debt or collaboration. If we fail to arrange for sufficient capital on a timely basis, we may be required to curtail our business activities until we can obtain adequate financing.
 
These financial statements do not reflect the potentially material adjustments in the carrying values of assets and liabilities, the reported expenses, and the balance sheet classifications used, that would be necessary if the going concern assumption were not appropriate.
 
2.      Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the year ended December 31, 2009. Except as set out below, the Company's accounting policies are consistent with those presented in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009. These unaudited interim condensed consolidated financial statements have been prepared in U.S. dollars.

 
9

 

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in these interim condensed consolidated financial statements. Actual results could differ from these estimates. In the opinion of management, these unaudited interim consolidated financial statements include all normal and recurring adjustments, considered necessary for the fair presentation of the Company’s financial position at September 30, 2010, and to state fairly the results for the periods presented.

Cash and cash equivalents

Cash and 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 financial institutions in accordance with its investment policy designed to protect the principal investment. At September 30, 2010, the Company had $5.9 million in money market investments, which typically have minimal risk, and $0.7 million in cash. The financial markets have been volatile resulting in concerns regarding the recoverability of money market investments. The Company did not experience any loss or write down of its money market investments for the nine-month periods ended September 30, 2010 and 2009, respectively.

3.      Accounting Change
 
The Company reclassified the unrealized gain on derivative to other income (expense) in the interim condensed consolidated statements of operations; the amount was previously reported as an operating expense. This reclassification has no effect on previously reported net income/loss for the three and six month period ended June 30, 2010 or on basic and diluted net income/loss per common share for the previously reported three and six month period ended June 30, 2010.

4.      Recent Accounting Pronouncements
 
In January 2010, an update was made to the Fair Value Measurements and Disclosures topic of the FASB codification that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers into and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances, and settlements to be presented separately on a gross basis in the reconciliation of Level 3 fair value measurements. This update is effective for fiscal years beginning after December 15, 2009 except for Level 3 reconciliation disclosures which are effective for fiscal years beginning after December 15, 2010. The Company does not expect the adoption of the guidance to have an impact on the Company’s consolidated financial position and results of operations.

5.      Derivative Instruments
 
Effective January 1, 2009, the Company adopted ASC Topic 815-40, "Derivatives and Hedging" (ASC 815-40). One of the conclusions reached under ASC 815-40 was that an equity-linked financial instrument would not be considered indexed to the entity's own stock if the strike price is denominated in a currency other than the issuer's functional currency. The conclusion reached under ASC 815-40 clarified the accounting treatment for these and certain other financial instruments. ASC 815-40 specifies that a contract would not be treated as a derivative if it met the following conditions: (a) indexed to the Company's own stock; and (b) classified in shareholders' equity in the Company's statement of financial position. The Company's outstanding warrants denominated in Canadian dollars are not considered to be indexed to its own stock because the exercise price is denominated in Canadian dollars and the Company's functional currency is United States dollars. Therefore, these warrants have been treated as derivative financial instruments and recorded at their fair value as a liability. All other outstanding convertible instruments are considered to be indexed to the Company's stock, because their exercise price is denominated in the same currency as the Company's functional currency, and are included in shareholders' equity.

 
10

 

The Company's only derivative instruments are 240,066,664 warrants, the exercise price for which are denominated in a currency other than the Company's functional currency, as follows:

·
240,066,664 warrants exercisable at CAD$0.08 that expire on April 30, 2015
 
These warrants have been recorded at their fair value at issuance and will continue to be recorded at fair value at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as other income (expense). These warrants will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.
 
As of September 30, 2010, the fair value of these warrants was determined to be $4.7 million. The fair value as at June30, 2010 was $7.2 million. Accordingly the Company recorded an unrealized gain of $2.6 million and $2.5 million on the condensed consolidated statements of operations for both the three and nine months ended September 30, 2010, respectively, related to the change in the fair value of those warrants. There is no cash flow impact for these derivatives until the warrants are exercised. If these warrants are exercised, the Company will receive the proceeds from the exercise at the current exchange rate at the time of exercise.
 
6.      Stockholders' Equity

Warrants to purchase common stock

At September 30, 2010, the Company had the following warrants outstanding to purchase common stock priced in Canadian dollars with a weighted average exercise price of $0.08 and a weighted average remaining life of 4.8 years:

Warrants in thousands

Warrant Description
 
Warrants
Outstanding at
September 30,
2010
(in thousands)
   
Exercise Price
In CAD Dollars
 
Expiration Date
Investor warrants (1)
    240,066     $ 0.08  
April 30, 2015
 
(1) On April 30, 2010, the Company announced that it had completed a first closing of a non-brokered private placement (“Private Placement”) of 240,066,664 units, at a price of $0.03 per unit for net proceeds of $7.2 million. Each unit shall consist of one common share and one common share purchase warrant (a “Warrant”). Each Warrant will entitle the holder thereof to purchase one common share of the Company at a purchase price of CAD$0.08 per share for a period of five years from the issue date.

Stock option plan

The Compensation Committee of the Board of Directors administers the Company's stock option plan. The Compensation Committee designates eligible participants to be included under the plan and approves the number of options to be granted from time to time under the plan.

On June 24, 2010, at the Company’s annual meeting, shareholders approved an amendment to the Company’s Stock Option Plan (the “Plan Maximum Amendment”). The Plan Maximum Amendment relates to changing the maximum number of shares of common stock issuable under the Stock Option Plan from a fixed number of 20,000,000 to the number of shares that represent twenty five percent (25%) of the total number of all issued and outstanding shares of common stock from time to time. Under the current shares outstanding a maximum of 92,073,363 options 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. The stock option plan, as amended, allows the issuance of U.S. and Canadian dollar denominated grants.

Pursuant to employment agreements dated May 3, 2010 between the Company and each of Robert Andrade, Rosty Raykov and Thomas Spector (collectively Messrs. Andrade, Raykov and Spector) and conditioned upon the approval of the amended Stock Option Plan, the Board approved the grant to each, Messrs. Andrade, Raykov and Spector an option to purchase up to 5.0% of Adherex’s common stock estimated by the Company to be outstanding upon completion of the proposed rights offering announced by the Company on April 20, 2010.

Pursuant to Independent Director Agreements dated May 3, 2010 for each of Dr. Porter and Messrs. Breen and Bussandri and conditioned upon the approval of the amended Stock Option Plan, the Board approved the grant to each Dr. Porter and Messrs. Breen and Bussandri an option to purchase up to 1.33% of Adherex’s common stock estimated by the Company to be outstanding upon completion of the proposed rights offering announced by the Company on April 20, 2010.

 
11

 

During the three months ended September 30, 2010 and 2009, the Company recognized total stock-based compensation expense of $0.4 million and $0.01 million respectively. During the nine-months ended September 30, 2010 and 2009, the Company recognized total stock-based compensation expense of $2.4 million and $0.5 million, respectively. These amounts have been included in the general and administrative expenses for the respective periods.

Valuation assumptions

The value of options granted in the nine-month periods ended September 30, 2010 and September 30, 2009, were estimated using the Black-Scholes option-pricing model, using the following weighted average assumptions: expected dividend 0% and 0% respectively; risk-free interest rate of 2.06% and 3.00%, respectively, expected volatility of 99% and 85% respectively and a 7 year expected life.

Stock option activity

The following is a summary of option activity for the nine months ended September 30, 2010 for stock options denominated in Canadian dollars:

Options in thousands
 
Number of
Options
(thousands)
   
Weighted-
average
  Exercise  
Price
 
Outstanding at December 31, 2009
    2,623     CAD$
2.19
 
Granted
    67,692     CAD$
0.045
 
Exercised
    -     -  
Forfeited/cancelled/expired
    -     -  
Outstanding at September 30, 2010
    70,315     CAD$
.13
 

The following is a summary of option activity for the nine months ended September 30, 2010 for stock options denominated in U.S. dollars:
Options in thousands
 
Number of 
Options
(thousands)
   
Weighted-
  average  
Exercise
Price
 
Outstanding at December 31, 2009
    13,201     $ 0.55  
Granted
    -       -  
Exercised
    -       -  
Forfeited/cancelled/expired
    -       -  
Outstanding at September 30, 2010
    13,201     $ 0.55  
 
 
12

 

7.         Fair Value Measurements

The Company has adopted 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 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.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

   
Fair Value Measurement at September 30, 2010
       
   
Quoted Price
   
Significant
             
   
in Active Markets
   
Other
   
Significant
       
   
for Identical
   
Observable
   
Unobservable
       
   
Instruments
   
Inputs
   
Inputs
       
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Cash equivalents
  $ 5,936,000       -       -     $ 5,936,000  
                                 
Liabilities
                               
Derivative warrant liability
    -     $ 4,692,000       -     $ 4,692,000  

The Company's financial instruments include cash equivalents, accounts receivable, accounts payable and derivative warrant instruments. Due to the short-term maturity of accounts receivable and accounts payable, the carrying value of these instruments is a reasonable estimate of their fair value. Derivative warrant liability instrument is carried at fair value and calculated using Black-Scholes option pricing model using the following weighted average assumptions; expected dividend 0%; risk-free interest rate of 1.27%; expected volatility of 115% and a 4.6 year expected life.

8. Commitments

We had no material commitments for capital expenses as of September 30, 2010. The following table represents our contractual obligations and commitments at September 30, 2010 (in thousands of U.S. dollars):

   
Less than 1 year
   
1-3
years
   
3-5
years
   
More than 5
years
   
Total
 
Eastowne Lease (1)
    6       -       -       -       6  
OCT Clinical Service Agreement(2)
    171       342       -       -       513  
Drug purchase commitments (3)
 
60
   
25
      -       -    
85
 
Total
  $ 237     $ 367     $ -     $ -     $ 604  

(1)
In December 2009, we entered into a lease for new office facilities in Chapel Hill, North Carolina. Amounts shown assume the maximum amounts due under the lease.
(2)
Under the service agreement with OCT Group LLC entered in August 2010, we are required to make several payments over the course of our planned Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: regulatory approval of trial, enrollment of patients and the completion of therapy of patients.

 
13

 

(3)
Commitments to our third party manufacturing vendors that supply drug substance primarily for our clinical studies.

9.      Subsequent Events

On November 12, 2010, Adherex filed a registration statement with the Securities and Exchange Commission (the "SEC") in connection with a proposed rights offering to existing shareholders. As announced in April 2010, the Company intends to offer existing shareholders the opportunity to subscribe for up to 425,000,000 rights at CAD$0.03 per unit, with gross proceeds of up to CAD$12.75 million upon the issuance of all of the common stock underlying such rights (and additional gross proceeds of up to CAD$34.0 million upon the exercise of all of the warrants underlying such rights at an exercise price of CAD$0.08 per warrant). The Company intends to use the proceeds of the rights offering to further develop eniluracil (including to conduct and monitor the Phase II clinical trial of eniluracil in combination with 5-FU and leucovorin), and for other general corporate purposes. A registration statement relating to these securities has been filed with the SEC but has not yet been declared effective. Accordingly, the rights (and underlying common stock and warrants) may not be sold nor may offers be accepted prior to the time the registration statement becomes effective. The rights will be issued to all shareholders as of a record date which has yet to be determined. We will provide notice of the record date at such time as it is determined

 
14

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

The discussion below contains forward-looking statements regarding our financial condition and our results of operations that are based upon our unaudited interim condensed consolidated financial statements, that have been prepared in accordance with generally accounting principles, or GAAP, in the United States and have been prepared by and are the responsibility of management.  The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities.  We evaluate our estimates on an ongoing basis.  Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable.

We operate in a highly competitive environment that involves significant risks and uncertainties, many of which are beyond our control.  Our actual results, performance or achievements may be materially different from any results, performance or achievements expressed or implied by such forward-looking statements.  Words such as “may,” “will,” “expect,” “might”, “believe,” “anticipate,” “intend,” “could,” “estimate,” “project,” “plan,” and other similar words are one way to identify such forward-looking statements.  Forward-looking statements in this report include, but are not limited to, statements with respect to our anticipated sources and uses of cash and cash equivalents; our anticipated commencement dates, completion dates and results of clinical trials; our efforts to pursue collaborations with the government, industry groups or other companies; our anticipated progress and costs of our clinical and preclinical research and development programs; our corporate and development strategies; our expected results of operations; our anticipated levels of expenditures; our ability to protect our intellectual property; the anticipated applications and efficacy of our drug candidates; our ability to attract and retain key employees; and the nature and scope of potential markets for our drug candidates.  All statements, other than statements of historical fact, included in this report are forward-looking statements.  We include forward-looking statements because we believe it is important to communicate our expectations to our investors.  However, all forward-looking statements are based on management’s current expectations of future events and are subject to a number of risks and uncertainties, including our need to raise money in the very near term and others as discussed in this report.  Although we believe the expectations reflected in the forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained, and we caution you not to place undue reliance on such statements.

Overview
 
We are a biopharmaceutical company focused on cancer therapeutics.  We have the following products: (1) eniluracil, an oral dihydropyrimidine dehydrogenase, or DPD, inhibitor, which may improve the tolerability and effectiveness of 5-fluorouracil, or 5-FU, one of the most widely used oncology drugs in the world; (2) STS, a chemoprotectant being developed to reduce or prevent hearing loss that may result from treatment with platinum-based chemotherapy drugs; and (3)  ADH-1, a peptide molecule that selectively targets N-cadherin, a protein present on the blood vessels of solid tumors.

On July 7, 2009, we announced that we intended to primarily focus our remaining financial resources on the development of eniluracil.  We intend to primarily focus our resources on the development of a redesigned study combining oral eniluracil, 5-FU, and leucovorin targeting anti-cancer indications.  After a careful evaluation of the data from the prior GlaxoSmithKline studies and data from our own and other studies using eniluracil, we believe we can begin patient enrollment in a Phase II study with eniluracil, 5-FU and leucovorin within the next six months.

Additionally, throughout the remainder of 2009, we conducted a strategic review of ADH-1 and STS.  Our evaluation of ADH-1 resulted in the termination of our license agreement with McGill University and return of ADH-1 composition of matter patents and licenses to McGill University.  We continue to hold various ADH-1 method of use and small molecule patents.  We are also supporting an investigator-led Phase I study that will combine ADH-1 with gemcitabine.  With regards to STS, we continue patient enrollment of our Phase III studies for both the International Childhood Liver Tumour Strategy Group, known as SIOPEL, and the Children's Oncology Group.

On April 30, 2010, we completed a $7.2 million private placement, net of issue costs, which will allow for our planned clinical development of eniluracil as well as the support of our remaining programs.  We currently have four employees and the members of our Board of Directors have agreed to continue to serve for the benefit of the shareholders without further cash compensation.

 
15

 

We intend to arrange a Phase II study that treats patients with eniluracil, 5-FU and leucovorin.  Our prior eniluracil studies have shown that the dose of eniluracil was too low and consequently provided inadequate inactivation of DPD, the enzyme responsible for the rapid breakdown of 5-FU in the body.  We plan to increase the dose of eniluracil and also include leucovorin in our planned clinical trial.  Leucovorin enhances the anticancer activity of 5-FU and has been shown to be well tolerated in patients treated with eniluracil and 5FU.  We believe Leucovorin is uniquely appropriate to eniluracil regimens because eniluracil greatly reduces the variability of 5-FU dosing, and thereby makes leucovorin safer to use.  We have chosen metastatic breast cancer, or MBC, as the disease target for our planned Phase II trial.  The trial will compare eniluracil/5-FU/leucovorin to Xeloda®, which is indicated as monotherapy for MBC.  In addition, eniluracil/5-FU has been shown to be active against MBC.  Previous studies used eniluracil in a ten to one ratio to 5-FU.  Because such high ratios of eniluracil to 5-FU were found to decrease the antitumor activity in laboratory animals, our planned study will separate the dose of eniluracil and 5-FU to ensure that DPD is adequately inactivated and the levels of eniluracil are very low when 5-FU is administered.   We have contracted with OCT Group LLC in August 2010 to assist in the monitoring and organization of the study in the Russian Federation. We expect to commence these studies within the next six months.  

Patient enrollment is continuing in the Phase III trials of STS conducted by the International Childhood Liver Tumour Strategy Group, known as SIOPEL and the Children's Oncology Group.  Each of these trials is managed by SIOPEL and the Children’s Oncology Group, respectively, and each group is responsible for the costs of the trial.  We continue to hold STS patents and our responsibility in the testing is limited to providing the drug, drug distribution and pharmacovigilance, or safety monitoring, for the study.  The SIOPEL trial is expected to enroll approximately 100 pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL centers worldwide and the Children's Oncology Group study is expected to enroll up to 120 pediatric patients worldwide in five different disease indications. We have terminated our license agreement with McGill University related to ADH-1.  However, we continue to hold certain “method of use” patents for ADH-1.  We have given a supply of ADH-1 to researchers at the University of Nebraska so that they may explore the use of ADH-1 in combination with gemcitabine for patients with pancreatic cancer.  We have no further obligation to support this research, and the University of Nebraska has no obligation to do further work.

Our current prioritization initiative focuses primarily on our clinical activities with eniluracil, as well as logistical and product support of ongoing clinical programs.  In addition to our current development efforts with eniluracil, we continue to pursue collaborations with other pharmaceutical and biotechnology companies, governmental agencies, academic or other corporate collaborators with respect to these molecules.  Some of these preclinical molecules are currently being tested under agreements with third parties that may help to advance these products into future clinical development, either by us or under investigator-initiated studies.

Our common stock trades on the Pink Sheets in the United States.  Our common stock also trades on the Toronto Stock Exchange.  The Toronto Stock Exchange has continued listing standards, including minimum market capitalization and other requirements, that we might not meet in the future, particularly if the price of our common stock does not increase or we are unable to raise capital to continue our operations.  On April 22, 2010, the Toronto Stock Exchange issued an official delisting review of our common stock.  On August 17, 2010, we were notified of the results of the review and it was determined that we satisfied the listing requirements.

We have financed our operations since our inception on September 3, 1996 through the sale of equity and debt securities. We have not received and do not expect to have significant revenues from our product candidates until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue.  We experienced net losses of approximately $1.2 million for the nine months ended September 30, 2010 and $3.2 million for the nine months ended September30, 2009.  As of September 30, 2010, our deficit accumulated during development stage was approximately $102.2 million.

As a result of our limited financial resources we have postponed or terminated many of our previously planned or ongoing clinical development programs.  We continue to pursue various strategic alternatives, including collaborations with other pharmaceutical and biotechnology companies.  However, if a strategic transaction or other source of further financial resources cannot be secured in the future, we might cease our operations.  As a result, our filed Form 10-K for the year ended December 31, 2009 included a notation related to the uncertainty of our ability to continue as a going concern.  Our projections of our capital requirements are subject to substantial uncertainty.  More capital than we had anticipated may be thereafter required.  To finance our continuing operations we will need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provide us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources.  Given current economic conditions, we might not be able to raise the necessary capital or such funding may not be available on acceptable terms.  If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

 
16

 

Our operating expenses will depend on many factors, including the progress of our drug development efforts and the implementation of further cost reduction measures.  Our research and development expenses, which include expenses associated with our clinical trials, drug manufacturing to support clinical programs, salaries for research and development personnel, stock-based compensation, consulting fees, sponsored research costs, toxicology studies, license fees, milestone payments, and other fees and costs related to the development of product candidates, will depend on the availability of financial resources, the results of our clinical trials and any directives from regulatory agencies, which are difficult to predict.  Our general and administration expenses include expenses associated with the compensation of employees, stock-based compensation, professional fees, consulting fees, insurance and other administrative matters associated with our corporate office in Chapel Hill, North Carolina in support of our drug development programs.
 
Results of Operations
 
Our results of operations for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 were as follows:
 
In thousands of U.S. Dollars
 
Three Months
Ended
September 30,
2010
   
Three Months
Ended
September 30,
2009
   
Change
 
                   
Revenue
  $ -     $ -     $ -  
Operating expenses:
                       
Research and development
    110       47       63  
Gain on deferred lease inducements
    -       (323 )     323  
Loss on impairment of assets held for sale
    -       57       (57 )
General and administration
    807       293       514  
Total operating expenses (income)
    917       74       843  
                         
Loss from operations
    (917 )     (74 )     (843 )
                         
Unrealized gain on derivative
    2,570       -       2,570  
Other income
    28       39       (11 )
Interest income
    13       -       13  
Net Income/(loss) and total comprehensive loss
  $ 1,694     $ (35 )   $ 1,729  

Our total operating expenses increased by $0.8 million to a loss from operations of $0.9 million in the three months ended September 30, 2010, as compared to a loss of $0.07 million in the same period in 2009, primarily due to an increase in our overall clinical development study expenses and an increase in stock based compensation for the three months ended September 30, 2010 as compared to the same period in 2009.   We recorded $0.4 million in stock based compensation for the three months ended September 30, 2010 as compared to $0.009 million in the same period in 2009. The Company recorded an unrealized gain on derivative of $2.6 million in the three months ended September 30, 2010 as compared to nil in the same period in 2009.

Interest income was $0.01 million for the three months ended September 30, 2010 and was nil for the three months ended September 30, 2009.  The increase of $0.01 million was due to an increase in cash on hand due to our recently completed funding during the three months ended September 30, 2010.

Our results of operations for the nine months ended September30, 2010 versus nine months ended September 30, 2009 were as follows:

 
17

 
 
In thousands of U.S. Dollars
 
Nine Months
Ended
September 30,
2010
   
Nine Months
Ended
September 30,
2009
   
Change
 
                   
Revenue
  $ -     $ -     $ -  
Operating expenses:
                       
Research and development
    419       1,976       (1,557 )
(Gain) on deferred lease inducements
    -       (323 )     323  
Loss on impairment of assets held for sale
    -       386       386  
General and administration
    3,369       1,276       2,093  
Total operating expenses
    3,788       3,315       473  
                         
Loss from operations
    (3,788 )     (3,315 )     (473 )
                         
Gain on derivative
    2,498       -       2,498  
Other Income
    29       50       (21 )
Interest income
    21       46       (25 )
Net loss and total comprehensive loss
  $ (1,240 )   $ (3,219 )   $ 1,979  

Total operating expenses were $3.3 million for the nine months ended September 30, 2009 and $3.8 million for the nine months ended September 30, 2010.  The increase of $0.5 million, or 14%, was primarily due to the increase in stock based compensation which was partially offset by a  decrease in our overall clinical development studies and reductions in our employee headcount effective April 2009 .  The Company recorded, stock based compensation of $2.4 million for the nine months ended September 30, 2010 as compared to $0.5 million in the same period in 2009.

Quarterly Information
 
The following table presents selected consolidated financial data for each of the last eight quarters through September 30, 2010, as prepared under U.S. GAAP (U.S. dollars in thousands, except per share information):
 
Period
 
Net Income
(Loss) for the
Period
   
Basic and Diluted
Net Income (Loss)
per Common Share
 
September 30, 2008
  $ (3,244 )   $ (0.03 )
December 31, 2008
  $ (2,610 )   $ (0.02 )
March 31, 2009
  $ (2,246 )   $ (0.02 )
June 30, 2009
  $ (938 )   $ (0.01 )
September 30, 2009
  $ (35 )   $ (0.00 )
December 31, 2009
  $ 30     $ 0.00  
March 31, 2010
  $ (366 )   $ (0.00 )
June 30, 2010
  $ (2,569 )   $ (0.01 )
September 30, 2010
  $ 1,694     $ 0.01  

Liquidity and Capital Resources
 
 In thousands of U.S. dollars
 
September 30,
   
December 31,
 
  
 
2010
   
2009
 
Selected Asset and Liability Data:
           
Cash and cash equivalents
 
$
6,602
   
$
685
 
Other current assets
   
1
     
148
 
Current liabilities
   
306
     
420
 
Long term liabilities
   
4,692
     
7
 
Working capital[Current Assets – Current Liabilities]
   
6,297
     
413
 
                 
Selected Equity:
               
Common stock
 
$
64,929
   
$
64,929
 
Accumulated deficit
   
(102,231
)
   
(100,991
)
Stockholders’ equity
   
1,605
     
406
 
 
 
18

 

Cash and cash equivalents were $0.7 million at December 31, 2009 and $6.6 million at September 30, 2010.  The increase of $5.9 million, or 842%, was attributed to the closing of our funding transaction for net proceeds of $7.2 million.

Other current assets totaled $0.1 million at December 31, 2009 and $0.01 million at September 30, 2010.  The reduction of $0.1 million, or 99%, was attributed to a reduction in accounts receivable and prepaid expense, consisting of corporate and health insurance credits.

Current liabilities decreased $0.1 million, or 27%, from $0.4 million at December 31, 2009 to $0.3 million at September 30, 2010.  The reduction was due to the payment of outstanding accounts payable and accrued liabilities following the closing of our funding transaction.  Long term liabilities increased $4.7 million, from $0.007 million at December 31, 2009 to $4.7 million at September 30, 2010.  The increase was as a result of the accounting of the warrants issued in the private placement as a derivative liability.

At September 30, 2010, our working capital increased by approximately $5.9 million, from $0.4 million at December 31, 2009 to $6.3 million at September 30, 2010.  The increase was due to the financing completed in April 2010, which was offset by research and development activities and general corporate operations for the nine month period.

Since our inception on September 3, 1996, we have financed our operations through the sale of equity and debt securities and have raised gross proceeds totaling approximately $87.0 million through September 30, 2010.  We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $102.2 million at September 30, 2010.  We have not generated any revenues to date through the sale of products.  We do not expect to have significant revenues or income, other than interest income, until we are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other payments.
 
Net cash used in operating activities for the nine months ended September 30, 2010 was approximately $1.3 million, as compared to $4.5 million during the same period in 2009.  This decrease is due to a decrease in our overall clinical activities and lower headcount during the nine months ended September 30, 2010, as compared to the same period in 2009.
 
Outstanding Share Information

The outstanding share data for our company as of September 30, 2010 (in thousands):

   
September 30,
 2010
 
Common shares
    368,293  
Warrants
    240,066  
Stock options
    83,516  
Total
    691,875  

Financial Instruments

We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment.  At September 30, 2010, we had $6.6 million in cash and cash equivalents.  We have not experienced any loss or write down of our money market investments for each of the nine months ended September 30, 2010 and 2009.

Our investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment.  Investments may be made in U.S. or Canadian obligations and 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 also provides for investment limits on concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months.  This policy applies to all of our financial resources. The policy risks are primarily the opportunity cost of the conservative nature of the allowable investments.  As our main purpose is research and development, we have chosen to avoid investments of a trading or speculative nature.

 
19

 

Off-Balance Sheet Arrangements

Since our inception, we have not had any material off-balance sheet arrangements.  In addition, we do not engage in trading activities involving non-exchange trade contracts.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such activities.

Contractual Obligations and Commitments

We had no material commitments for capital expenses as of September 30, 2010. The following table represents our contractual obligations and commitments at September 30, 2010 (in thousands of U.S. dollars):

   
Less than 1 year
 
1-3
years
 
3-5
years
 
More than 5
years
 
Total
 
Eastowne Lease (1)
    6     -     -     -     6  
OCT Clinical Service Agreement(2)
    171     342     -     -     513  
Drug purchase commitments (3)
   
60
   
25
    -     -    
85
 
Total
  $ 237   $ 367   $ -   $ -   $ 604  

(1)
In December 2009, we entered into a lease for new office facilities in Chapel Hill, North Carolina.  Amounts shown assume the maximum amounts due under the lease.
(2)
Under the service agreement with OCT Group LLC entered in August 2010, we are required to make several payments over the course of our planned Phase II clinical trial in Russia.  The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: regulatory approval of trial, enrollment of patients and the completion of therapy of patients.
(3)
Commitments to our third party manufacturing vendors that supply drug substance primarily for our clinical studies.

 
20

 

Research and Development

Research and development expenses totaled $0.1 million for the three months ended September 30, 2010 and $0.05 million for the three months ended September 30, 2009. Our research and development efforts have been focused on the development of eniluracil, and support expenses for STS.

We have established relationships with contract research organizations, universities and other institutions, which we utilize to perform many of the day-to-day activities associated with our drug development.  Where possible, we have sought to include leading scientific investigators and advisors to enhance our internal capabilities.

Our product candidates are in various stages of development and still require significant, time-consuming and costly research and development, testing and regulatory clearances.  In developing our product candidates, we are subject to risks of failure that are inherent in the development of products based on innovative technologies.  For example, it is possible that any or all of these products will be ineffective or toxic, or will otherwise fail to receive the necessary regulatory clearances. There is a risk that our product candidates will be uneconomical to manufacture or market or will not achieve market acceptance. There is also a risk that third parties may hold proprietary rights that preclude us from marketing our product candidates or that others will market a superior or equivalent product.  As a result of these factors, we are unable to accurately estimate the nature, timing and future costs necessary to complete the development of these product candidates. In addition, we are unable to reasonably estimate the period when material net cash inflows could commence from the sale, licensing or commercialization of such product candidates, if ever.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period.  These estimates are based on assumptions and judgments that may be affected by commercial, economic and other factors.  Actual results could differ from these estimates.

Our accounting policies are consistent with those presented in our annual consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

As a small reporting company, we are not required to provide the information required by this item.

Item 4. Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized 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. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. 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. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have identified two material weaknesses in our internal control over financial reporting:

 
21

 

Our management has identified a control deficiency because we lack sufficient staff to segregate accounting duties.  We believe the control deficiency results primarily because we have one person performing all accounting and financial reporting duties.  As a result, we do not maintain adequate segregation of duties within our critical financial reporting applications, the related modules and financial reporting processes.  This control deficiency could result in a misstatement of balance sheet and income statement accounts in our interim or annual financial statements that would not be detected.  Accordingly, management has determined that this control deficiency constitutes a material weakness.

Our management has also identified another control deficiency that it believes constitutes a material weakness in our control over financial reporting.  We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with our complexity and our financial accounting and reporting requirements.  This control deficiency could result in a misstatement of the financial statements including disclosure that would not be prevented or detected on a timely basis.  We have not, therefore, timely prepared our consolidated financial statements and filed our periodic reports with the SEC. While we strive to ensure we have appropriate accounting personnel as well as an appropriate segregation of duties as much as practicable, we currently have insufficient financial resources to justify additional staff.   The Company continues to seek solutions to improve internal control over financial reporting. As a result, these significant internal control deficiencies are not expected to be remediated until we secure additional financial resources.  

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings
 
On occasion, we may be involved in legal matters arising in the ordinary course of business. While our management believes that such matters are currently insignificant, matters arising in the ordinary course of business for which we are or could become involved in litigation may have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors.

Additional Risks Related to our Business

We do not presently have the financial or human resources to complete Phase III trials for our lead product candidates.
 
We do not presently have the financial or human resources internally to complete Phase III trials for any of our lead product candidates.  We are currently designing and enrolling patients in a Phase II trial for eniluracil.  If these trials are successful, and if we decide to continue to develop eniluracil, we will need additional funding, or we will need to enlist a partner to conduct future trials.

We are currently developing STS in Phase III trials in collaboration with the International Childhood Liver Tumour Strategy Group, known as SIOPEL and the Children's Oncology Group.  It is possible SIOPEL and the Children's Oncology Group may not conduct or complete the clinical trials with STS as currently planned.  Such collaborators might not commit sufficient resources to the development of our product candidates, which may lead to significant delays.  We have already experienced significant delays in the activation of the Children's Oncology Group trial and subsequent accrual of patients into the Children's Oncology Group and SIOPEL clinical trials.  We may not be able to independently develop or conduct such trials ourselves.  

We continue to seek a licensing or funding partner for the further development of one or all of our product candidates.  If a partner for one or all of these technologies is not found, we may not be able to further advance these products.  If a partner is found, the financial terms that they propose may not be acceptable to us.

There is no assurance that we will successfully develop a commercially viable product. 
 
Since our formation in September 1996, we have engaged in research and development programs.  We have generated no revenue from product sales, we do not have any products currently available for sale, and none are expected to be commercially available for sale until we have completed additional clinical trials, if at all.  There can be no assurance that the research we fund and manage will lead to commercially viable products. Our intention is to commence a Phase II study for eniluracil and STS is currently in a Phase III study.  Our products must still undergo substantial additional regulatory review prior to commercialization.

 
22

 

We anticipate the need for additional capital in the future and if we cannot raise additional capital, we will not be able to fulfill our business plan.

We need to obtain additional funding in the future in order to finance our business strategy, operations and growth.  We may not be able to obtain additional financing in sufficient amounts or on acceptable terms when needed.  If we fail to arrange for sufficient capital on a timely basis, we may be required to curtail our business activities until we can obtain adequate financing.  Debt financing must be repaid regardless of whether or not we generate profits or cash flows from our business activities.  Equity financing may result in dilution to existing stockholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock or other securities.  If we cannot raise sufficient capital when necessary, we will likely have to curtail operations and you may lose part or all of your investment.
 
We may be unable to effectively deploy the proceeds from our April 30, 2010 financing for the development of eniluracil.
 
In April 2010, we announced the closing of a private placement for proceeds of $7.2 million.  This financing requires effective management and deployment of our current employees and consultants.  Any inability on our part to manage effectively the deployment of this capital could limit our ability to successfully develop eniluracil.

Additional Risks Related to our Common Stock

Our common stock is deemed to be a “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.

Our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers which sell our common stock to persons other than established customers and “accredited investors” who are generally individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000, together with their spouses. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and the ability of our stockholders to sell their shares of common stock.

Additionally, our common stock is subject to the SEC regulations for “penny stock.” Penny stock includes any equity security that is not listed on a national exchange and has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements be sent to holders of penny stock that disclose recent price information for the penny stock and information on the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On August 18, 2010, the Company issued 67.7 million stock options to certain employees and directors of the Company. The options were issued in a private placement exempt under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). The options were issued pursuant to employment agreements and Independent Director Agreements and were issued in Canadian dollar denominated grants at an exercise price of $0.045 per share and are exercisable for a period of 7 years from the grant date. The issuance of the options were subject to the approval of the Company's amended Stock Option Plan by the shareholders of the Company. The shareholders of the Company approved the Company's amended Stock Option Plan on June 24, 2010, at the Company's annual meeting.
 
Item 3. Default Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

 
23

 

Item 6.  Exhibits

Exhibit
No.
 
Description
1.1
 
Underwriting and Agency Agreement dated January 19, 2007 between Adherex Technologies Inc. and Versant Partners Inc. (included as Exhibit 1.1 to Form 8-K of Adherex, filed February 22, 2007 and incorporated herein by reference).
     
3.1
 
Articles of Amalgamation dated June 29, 2004 (included as Exhibit 1.7 to the Form 20-F Registration Statement, No. 001-32295, of Adherex, filed September 17, 2004 and incorporated herein by reference).
     
3.2
 
By-law No. 2 of the Company, as amended on November 2, 2004 (included as Exhibit 1.9 to the Form 20-F/A Registration Statement, No. 001-32295 of Adherex, filed November 5, 2004 and incorporated herein by reference).
     
4.1
 
Registration Rights Agreement, dated as of December 19, 2003, by and between Adherex Technologies Inc. and HBM BioVentures (Cayman) Ltd. (included as Exhibit 4.9 to the Form 20-F Registration Statement, No. 001-32295 of Adherex, filed September 17, 2004 and incorporated herein by reference).
     
4.2
 
Warrant Indenture dated February 21, 2007 between Adherex Technologies Inc. and Computershare Trust Company of Canada (included as Exhibit 4.45 to Form 8-K of Adherex, filed February 22, 2007 and incorporated herein by reference).
     
4.3
 
Form of common stock Warrant dated February 21, 2007 (included as Exhibit 4.43 to Form 8-K of Adherex, filed February 22, 2007, an incorporated herein by reference).
     
4.4
 
Form of Underwriter’s Warrant dated February 21, 2007 (included as Exhibit 4.44 to Form 8-K of Adherex, filed February 22, 2007 and incorporated herein by reference).
     
4.5
 
Form of Warrant (included as Exhibit 99.3 to the Form 8-K of Adherex, filed on May 4, 2010 and incorporated herein by reference).
     
     
10.1
 
Master Service Agreement with OCT Group LLC dated August 18, 2010 (filed herewith).
99.1
 
Press Release for Quarter Ended September 30, 2010 (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).
 
 
24

 

SIGNATURES
 
Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Adherex Technologies Inc.
     
Date: November 15, 2010
By:
/s/ Rostislav Raykov
   
Rostislav Raykov
   
Chief Executive Officer
   
(principal executive officer)
     
Date: November 15, 2010
By:
/s/ Robert Andrade
   
Robert Andrade
   
Chief Financial Officer
   
(principal financial and chief accounting officer)
 
 
25