FENNEC PHARMACEUTICALS INC. - Quarter Report: 2013 March (Form 10-Q)
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 March 31, 2013
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.) |
|
PO Box 136285, 68 TW Alexander Drive Research Triangle Park, North Carolina (Address of Principal Executive Offices) |
27709 (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ 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 May 13, 2013, there were 25,157,861 shares of Adherex Technologies Inc. common stock outstanding.
TABLE OF CONTENTS
| Page | |
| PART I: FINANCIAL INFORMATION | |
| Item 1. Financial Statements (unaudited) | 4 |
| Unaudited Interim Consolidated Balance Sheets –March 31, 2013 and December 31, 2012 | 4 |
| Unaudited Interim Consolidated Statements of Operations - Three Months Ended March 31, 2013 and 2012 | 5 |
| Unaudited Interim Consolidated Statements of Cash Flows - Three Months Ended March 31, 2013 and 2012 | 6 |
| Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency)– For the Period Ended September 3,1996 to March 31, 2013 | 7 |
| Notes to the Unaudited Interim Consolidated Financial Statements | 11 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 21 |
| Item 4. Controls and Procedures | 22 |
| PART II: OTHER INFORMATION | 23 |
| Item 1. Legal Proceedings | 23 |
| Item 1A. Risk Factors | 23 |
| Item 2. Unregistered Sales of Equity Securities | 24 |
| Item 3. Defaults Upon Senior Securities | 24 |
| Item 4. Mine Safety Disclosure | 25 |
| Item 5. Other Information | 25 |
| Item 6. Exhibits | 26 |
| Signatures | 27 |
| 3 |
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Balance Sheets
(U.S. Dollars and shares in thousands, except per share amounts)
| March 31, 2013 (Unaudited) | December 31, 2012 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,896 | $ | 2,303 | ||||
| Prepaid expense | 39 | 56 | ||||||
| Other current assets | 3 | 6 | ||||||
| Total assets | $ | 1,938 | $ | 2,365 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 698 | $ | 259 | ||||
| Accrued liabilities | 92 | 423 | ||||||
| Derivative liabilities | 10,213 | 6,640 | ||||||
| Total current liabilities | 11,003 | 7,322 | ||||||
| Total liabilities | 11,003 | 7,322 | ||||||
| Commitments (Note 6) | ||||||||
| Stockholders’ (deficit) equity | ||||||||
| Common stock, no par value; unlimited shares authorized; (2013 - 25,158, 2012 - 25,158 shares issued and outstanding) | 65,952 | 65,952 | ||||||
| Additional paid-in capital | 38,391 | 38,391 | ||||||
| Deficit accumulated during development stage | (114,651 | ) | (110,543 | ) | ||||
| Accumulated other comprehensive income | 1,243 | 1,243 | ||||||
| Total stockholders’ (deficit) equity | (9,065 | ) | (4,957 | ) | ||||
| Total liabilities and stockholders’ equity | $ | 1,938 | $ | 2,365 | ||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
| 4 |
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Statements of Operations
(U.S. Dollars and shares in thousands, except per share amounts)
| Three Months Ended | Cumulative From September 3, 1996 to | |||||||||||
| March 31, 2013 | March 31, 2012 | March 31, 2013 | ||||||||||
| Revenue | $ | - | $ | - | $ | - | ||||||
| Operating expenses: | ||||||||||||
| Research and development | 178 | 296 | 69,346 | |||||||||
| Gain on deferred lease inducements | - | - | 386 | |||||||||
| Impairment of capital assets | - | - | (497 | ) | ||||||||
| Acquired in-process research and development | - | - | 13,094 | |||||||||
| General and administrative | 359 | 320 | 32,453 | |||||||||
| Loss from operations | (537 | ) | (616 | ) | (114,782 | ) | ||||||
| Other income (expense): | ||||||||||||
| Settlement of Cadherin Biomedical Inc. litigation | - | - | (1,283 | ) | ||||||||
| Interest expense | - | - | (19 | ) | ||||||||
| Unrealized/realized gain/(loss) on derivatives | (3,573 | ) | 3,327 | (316 | ) | |||||||
| Other income / (expense) | - | (4 | ) | 259 | ||||||||
| Interest income and other | 2 | 8 | 2,899 | |||||||||
| Total other income, net | (3,571 | ) | 3,331 | 1,540 | ||||||||
| Net (loss) / income and comprehensive (loss) / income | $ | (4,108 | ) | $ | 2,715 | $ | (113,242 | ) | ||||
| Basic and diluted net (loss) income per common share | $ | (0.16 | ) | $ | 0.11 | |||||||
| Weighted-average number of common shares outstanding, basic | 25,158 | 25,158 | ||||||||||
| Weighted-average number of common shares outstanding, diluted | 25,158 | 25,158 | ||||||||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
| 5 |
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Statements of Cash Flows
(U.S. Dollars and shares in thousands, except per share amounts)
| Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Cumulative From September 3, 1996 to March 31,2013 | ||||||||||
| Cash flows from (used in): | ||||||||||||
| Operating activities: | ||||||||||||
| Net (loss)/income | $ | (4,108 | ) | $ | 2,715 | $ | (113,242 | ) | ||||
| Adjustments for non-cash items: | ||||||||||||
| Loss/(gain) on derivative warrants | 3,573 | (3,327 | ) | 316 | ||||||||
| Depreciation and amortization | - | - | 1,404 | |||||||||
| Non-cash Cadherin Biomedical Inc. litigation expense | - | - | 1,187 | |||||||||
| Unrealized foreign exchange (gain)/loss | - | - | 36 | |||||||||
| Loss on impairment of capital assets | - | - | 386 | |||||||||
| Amortization of and gain on lease inducements | - | - | (412 | ) | ||||||||
| Non-cash severance expense | - | - | 168 | |||||||||
| Stock options issued to consultants | - | - | 1,048 | |||||||||
| Stock options issued to employees | - | - | 10,269 | |||||||||
| Acquired in-process research and development | - | - | 13,094 | |||||||||
| Changes in non-cash working capital | 128 | 34 | 302 | |||||||||
| Net cash used in operating activities | (407 | ) | (578 | ) | (85,444 | ) | ||||||
| Investing activities: | ||||||||||||
| Purchase of capital assets | - | - | (1,440 | ) | ||||||||
| Disposal of capital assets | - | - | 115 | |||||||||
| Proceeds from sale of assets | - | - | 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 used in investing activities | - | - | (1,483 | ) | ||||||||
| Financing activities: | ||||||||||||
| Conversion of long-term debt to equity | - | - | 68 | |||||||||
| Long-term debt repayments | - | - | (65 | ) | ||||||||
| Capital lease repayments | - | - | (8 | ) | ||||||||
| Issuance of common stock | - | - | 86,443 | |||||||||
| Registration expense | - | - | (465 | ) | ||||||||
| Financing expenses | - | - | (544 | ) | ||||||||
| Proceeds from convertible note | - | - | 3,017 | |||||||||
| Other liability repayments | - | - | (87 | ) | ||||||||
| Security deposits received | - | - | 35 | |||||||||
| Proceeds from exercise of stock options | - | - | 51 | |||||||||
| Net cash provided from financing activities | - | - | 88,445 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | - | - | 378 | |||||||||
| Net change in cash and cash equivalents | (407 | ) | (578 | ) | 1,896 | |||||||
| Cash and cash equivalents - Beginning of period | 2,303 | 5,297 | - | |||||||||
| Cash and cash equivalents - End of period | $ | 1,896 | $ | 4,719 | 1,896 | |||||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
| 6 |
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency)
(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
Stockholders’ | |||||||||||||||||||||||
| Number | Amount | of Subsidiary | Capital | Income | Stage | (Deficit)/Equity | ||||||||||||||||||||||
| Balance as at Sept. 3 1996 | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
| Issuance of common stock | 89 | - | - | - | - | - | - | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (37 | ) | (37 | ) | |||||||||||||||||||
| Balance at June 30, 1997 | 89 | - | - | - | - | (37 | ) | (37 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (398 | ) | (398 | ) | |||||||||||||||||||
| Balance at June 30, 1998 | 89 | - | - | - | - | (435 | ) | (435 | ) | |||||||||||||||||||
| Exchange of Adherex Inc. shares for Adherex Technologies Inc. shares | (89 | ) | - | - | - | - | - | - | ||||||||||||||||||||
| Issuance of common stock | 239 | 1,615 | - | - | - | - | 1,615 | |||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | 20 | - | 20 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (958 | ) | (958 | ) | |||||||||||||||||||
| Balance at June 30, 1999 | 239 | 1,615 | - | - | 20 | (1,393 | ) | 242 | ||||||||||||||||||||
| Issuance of common stock | 16 | 793 | - | - | - | - | 793 | |||||||||||||||||||||
| Issuance of equity rights | - | - | - | 171 | - | - | 171 | |||||||||||||||||||||
| Issuance of special warrants | - | - | - | 255 | - | - | 255 | |||||||||||||||||||||
| Settlement of advances: | ||||||||||||||||||||||||||||
| Issuance of common stock | 16 | 175 | - | - | - | - | 175 | |||||||||||||||||||||
| Cancellation of common stock | (7 | ) | - | - | - | - | - | - | ||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | 16 | - | 16 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,605 | ) | (1,605 | ) | |||||||||||||||||||
| Balance at June 30, 2000 | 264 | 2,583 | - | 426 | 36 | (2,998 | ) | 47 | ||||||||||||||||||||
| Issuance of common stock: | ||||||||||||||||||||||||||||
| Initial Public Offering (“IPO”) | 74 | 5,727 | - | - | - | (38 | ) | 5,689 | ||||||||||||||||||||
| Other | 5 | 341 | - | - | - | - | 341 | |||||||||||||||||||||
| Issuance of special warrants | - | - | - | 1,722 | - | - | 1,722 | |||||||||||||||||||||
| Conversion of special warrants | 30 | 1,977 | - | (1,977 | ) | - | - | - | ||||||||||||||||||||
| Issuance of Series A special warrants | - | - | - | 4,335 | - | - | 4,335 | |||||||||||||||||||||
| Conversion of Series A special warrants | 69 | 4,335 | - | (4,335 | ) | - | - | - | ||||||||||||||||||||
| Conversion of equity rights | 4 | 171 | - | (171 | ) | - | - | - | ||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | 182 | - | 182 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,524 | ) | (2,524 | ) | |||||||||||||||||||
| Balance at June 30, 2001 | 446 | 15,134 | - | - | 218 | (5,560 | ) | 9,792 | ||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | 11 | - | 11 | |||||||||||||||||||||
| Net loss | - | - | - | - | (3,732 | ) | (3,732 | ) | ||||||||||||||||||||
| Balance at June 30, 2002 | 446 | 15,134 | - | - | 229 | (9,292 | ) | 6,071 | ||||||||||||||||||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
(continued on next page)
| 7 |
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency) (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
Stockholders’ | |||||||||||||||||||||||
| Number | Amount | of Subsidiary | Capital | Income | Stage | (Deficit)/Equity | ||||||||||||||||||||||
| Balance at June 30, 2002 | 446 | 15,134 | - | - | 229 | (9,292 | ) | 6,071 | ||||||||||||||||||||
| Common stock issued for Oxiquant acquisition | 446 | 11,077 | - | 543 | - | - | 11,620 | |||||||||||||||||||||
| Exercise of stock options | 1 | 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 | 893 | 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 | 96 | 1,216 | - | (93 | ) | - | - | 1,123 | ||||||||||||||||||||
| Conversion of December convertible notes | 60 | 569 | - | (398 | ) | - | - | 171 | ||||||||||||||||||||
| Non-redeemable preferred stock | - | - | 1,045 | - | - | - | 1,045 | |||||||||||||||||||||
| December private placement | 640 | 8,053 | - | 5,777 | - | - | 13,830 | |||||||||||||||||||||
| May private placement | 259 | 6,356 | - | 2,118 | - | - | 8,474 | |||||||||||||||||||||
| Exercise of stock options | 1 | 23 | - | - | - | - | 23 | |||||||||||||||||||||
| Amalgamation of 2037357 Ontario Inc. | 44 | 660 | (1,045 | ) | 363 | - | - | (22 | ) | |||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | (219 | ) | - | (219 | ) | |||||||||||||||||||
| Net loss | - | - | - | - | - | (6,872 | ) | (6,872 | ) | |||||||||||||||||||
| Balance at June 30, 2004 | 1,993 | 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. | 37 | 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 | 2,030 | 34,362 | - | 21,760 | 1,243 | (40,711 | ) | 16,654 | ||||||||||||||||||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
(continued on next page)
| 8 |
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency) (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
Stockholders’ | |||||||||||||||||||||||
| Number | Amount | of Subsidiary | Capital | Income | Stage | (Deficit)/ Equity | ||||||||||||||||||||||
| Balance at December 31, 2004 | 2,030 | 34,362 | - | 21,760 | 1,243 | (40,711 | ) | 16,654 | ||||||||||||||||||||
| Financing costs | - | (141 | ) | - | - | - | - | (141 | ) | |||||||||||||||||||
| Exercise of stock options | 1 | 25 | - | - | - | - | 25 | |||||||||||||||||||||
| Stock options issued to consultants | - | - | - | 276 | - | - | 276 | |||||||||||||||||||||
| July private placement | 337 | 7,060 | - | 1,074 | - | - | 8,134 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (13,871 | ) | (13,871 | ) | |||||||||||||||||||
| Balance at December 31, 2005 | 2,368 | 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 | 431 | 5,218 | - | 822 | - | - | 6,040 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (16,440 | ) | (16,440 | ) | |||||||||||||||||||
| Balance at December 31, 2006 | 2,799 | 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 | 4,209 | 17,842 | - | 5,379 | - | - | 23,221 | |||||||||||||||||||||
| Exercise of warrants | 116 | 563 | - | 131 | - | - | 694 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (13,357 | ) | (13,357 | ) | |||||||||||||||||||
| Balance at December 31, 2007 | 7,124 | 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 | 7,124 | $ | 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 | - | - | - | - | - | (3,012 | ) | (3,012 | ) | |||||||||||||||||||
| Balance at December 31, 2009 | 7,124 | $ | 64,929 | $ | - | $ | 35,225 | $ | 1,243 | $ | (100,991 | ) | $ | 406 | ||||||||||||||
| Stock options issued to consultants | - | - | - | 53 | - | - | 53 | |||||||||||||||||||||
| Stock options issued to employees | - | - | - | 2,439 | - | - | 2,439 | |||||||||||||||||||||
| April Financing | 13,337 | - | - | - | - | - | - | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (7,823 | ) | (7,823 | ) | |||||||||||||||||||
| Balance at December 31, 2010 | 20,461 | $ | 64,929 | $ | - | $ | 37,717 | $ | 1,243 | $ | (108,815 | ) | $ | (4,924 | ) | |||||||||||||
| Stock options issued to consultants | - | - | - | 20 | - | - | 20 | |||||||||||||||||||||
| Stock options issued to employees | - | - | - | 129 | - | - | 129 | |||||||||||||||||||||
| Rights Offering | 4,697 | 1,023 | - | 199 | - | (1,250 | ) | (28 | ) | |||||||||||||||||||
| Net income | - | - | - | - | - | 4,685 | 4,685 | |||||||||||||||||||||
| Balance at December 31, 2011 | 25,158 | $ | 65,952 | $ | - | $ | 38,065 | $ | 1,243 | $ | (105,380 | ) | $ | (120 | ) | |||||||||||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
(continued on next page)
| 9 |
Adherex Technologies Inc.
(a development stage company)
Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency) (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
Stockholders’ | |||||||||||||||||||||||
| Number | Amount | of Subsidiary | Capital | Income | Stage | (Deficit)/ Equity | ||||||||||||||||||||||
| Stock options issued to consultants | - | - | - | 152 | - | - | 152 | |||||||||||||||||||||
| Stock options issued to employees | - | - | - | 174 | - | - | 174 | |||||||||||||||||||||
| Net income | - | - | - | - | - | (5,163 | ) | (5,163 | ) | |||||||||||||||||||
| Balance at December 31, 2012 | 25,158 | $ | 65,952 | $ | - | $ | 38,391 | $ | 1,243 | $ | (110,543 | ) | $ | (4,957 | ) | |||||||||||||
| Net income | - | - | - | - | - | (4,108 | ) | (4,108 | ) | |||||||||||||||||||
| Balance at March 31, 2013 | 25,158 | $ | 65,952 | $ | - | $ | 38,391 | $ | 1,243 | $ | (114,651 | ) | $ | (9,065 | ) | |||||||||||||
(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)
| 10 |
Adherex Technologies Inc.
(a development stage company)
Notes to the Unaudited Interim Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
| 1. | Going Concern |
Adherex Technologies Inc. (“Adherex”), a British Columbia corporation 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 with a portfolio of product candidates under development for use in the treatment of cancer. With the exception of Adherex Inc., all subsidiaries are inactive.
These unaudited interim consolidated financial statements have been prepared using generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) of America that are applicable to a going concern entity which contemplates that Adherex will continue operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The unaudited interim consolidated 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.
The Company is a development stage company and during the three months ended March 31, 2013, incurred a loss from operations of$537. Cash used in operations in the quarter ended March 31, 2013 was $407. At March 31, 2013, the Company had an accumulated deficit of $114,651 and had experienced negative cash flows from operations since inception in the amount of $85,444.
These circumstances raise 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 unaudited interim consolidated 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 consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. The Company's accounting policies are consistent with those presented in the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. These unaudited interim consolidated financial statements have been prepared in U.S. dollars.
Use of estimates
The preparation of financial statements in conformity with U.S. 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 at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include certain accruals, valuation of derivative warrant liability and the value of stock based compensation. Actual results could differ from those 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 March 31, 2013, and to state fairly the results for the periods presented. The most significant estimates included in these financial statements are the derivative instruments described in Note 3. There were significant changes in their valuation during the quarter.
| 11 |
Adherex Technologies Inc.
(a development stage company)
Notes to the Unaudited Interim Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
Newly Accounting Pronouncements Adopted
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"), which requires companies to provide information about the amounts reclassified out of AOCI by component. In addition, companies are required to report significant amounts reclassified out of AOCI by the respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, companies are required to cross-reference to other disclosures that provide additional detail on those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 and has not impacted the Company's consolidated financial condition, results of operations or cash flows.
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 financial institutions in accordance with its investment policy designed to protect the principal investment. At March 31, 2013, the Company had $1,865in money market investments included as cash equivalents, which typically have minimal credit risk, and $31 in cash of which $22(as translated to US dollars) was in Canadian dollars. The Company did not experience any loss or write down of its money market investments for the three-month periods ended March 31, 2013 and 2012, respectively.
| 3. | Derivative Instruments |
Effective January 1, 2009, the Company adopted Accounting Standards Codification (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 stockhoders' 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 stockholders' equity(deficiency).
The Company's derivative instruments include warrants to purchase 18,035 shares, the exercise prices for which are denominated in a currency other than the Company's functional currency, as follows:
| · | Warrants to purchase 13,337 shares at CAD$1.44 per whole share that expire on April 30, 2015; and |
| · | Warrants to purchase 4,698 shares exercisable at CAD$1.44 per whole share that expire on March 29, 2016. |
These warrants have been recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain/(loss). 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.
| 12 |
Adherex Technologies Inc.
(a development stage company)
Notes to the Unaudited Interim Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
| Gain/(Loss) on Derivative Instruments | Three months ended March 31, 2013 | Three months ended March 31, 2012 | ||||||
| Warrant expiring April 15, 2015 | (2,317 | ) | 2,468 | |||||
| Warrant expiring March 29, 2016 | (1,198 | ) | 821 | |||||
| Options to contractors | (58 | ) | 38 | |||||
| TOTAL | (3,573 | ) | 3,327 | |||||
As of March 31, 2013, the fair value of the warrants expiring April 30, 2015 and March 29, 2016 was determined to be $7,015 and $3,045, respectively (December 31, 2012 – warrants expiring April 30, 2015, fair value of $4,698 and $1,847 respectively), and the loss on these warrants for the three months ended March 31, 2013 was $2,317 and $1,198, respectively (For the three months ending March 31, 2012 - warrants expiring April 30, 2015 and March 29, 2016, gain of $2,468 and $821). 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.
During the fiscal year ended December 31, 2011, the Company issued 108 options to contractors with a Canadian dollar denominated strike price. Consequently, the Company now has derivatives relating to these options since the strike price is denominated in a currency other than the US dollar functional currency of the Company. While there is an exception to this rule for employees in ASU 2010-13, no such exception exists for contractors. These options will be marked to market until the earlier of their expiry or exercise. The fair value of these options at March 31, 2013 was $153(December 31, 2012 - $95) and the loss for the three months ended March 31, 2013 was $58 (March 31, 2012 – gain of $38).
| 4. | Stockholders' Equity |
Warrants to purchase common stock
At March 31, 2013, the Company had the following warrants outstanding to purchase common stock priced in Canadian dollars with a weighted average exercise price of $1.44 and a weighted average remaining life of 2.32 years:
| Warrant Description | Common Shares Issuable Upon Exercise of Outstanding Warrants at March 31, 2013 | Exercise Price In CAD Dollars | Expiration Date | |||||||
| Investor warrants (1) | 13,337 | $ | 1.44 | April 30, 2015 | ||||||
| Investor warrants (2) | 4,698 | $ | 1.44 | March 29, 2016 | ||||||
| 18,035 | ||||||||||
(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 units, at a price of CAD $0.03 per unit for net proceeds of CAD$7,200. Each unit consisted of one common share and one common share purchase warrant (a “Warrant”). As a result of the Share Consolidation in 2011, each eighteen (18) Warrants now entitle the holder thereof to purchase one common share of the Company at a purchase price of CAD$1.44 per whole share for a period of five years from the issue date.
(2) On March 29, 2011, the Company announced that it had completed a non-brokered rights offering of 84,559 units, at a price of CAD $0.03 per unit for total net proceeds of $2,566. Each unit consisted of one common share and one common share purchase warrant (a “Warrant”). As a result of the Share Consolidation in 2011, each eighteen (18) Warrants now entitle the holder thereof to purchase one common share of the Company at a purchase price of CAD$1.44 per whole share for a period of five years from the issue date.
| 13 |
Adherex Technologies Inc.
(a development stage company)
Notes to the Unaudited Interim Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
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 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. Based upon the current shares outstanding, a maximum of 6,289 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. All options vest within three years or less and are exercisable for a period of seven years from the date of grant. The stock option plan, as amended, allows the issuance of Canadian and U.S. dollar grants. During the three months ended March 31, 2013 and 2012, the Company recognized total stock-based compensation expense of $0 and $0, respectively.
There were no options granted in the three month period ended March 31, 2013and the three-month period ended March 31, 2012.
Stock option activity
There was no stock option activity for the three-month period ended March 31, 2013and the three-month period ended March 31, 2012 for stock options denominated in Canadian or U.S dollars. On April 3, 2013, the Company issued 25,000 options to certain board members of the Company in accordance with their agreements. The options were USD denominated grants at an exercise price of $0.80 for a period of 7 years from the grant date.
| 5. | Fair Value Measurements |
The Company has adopted the 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 U.S. 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 March 31, 2013
| Quoted Price in Active | ||||||||||||||||
| Markets for Identical | Significant Other | Significant | ||||||||||||||
| Instruments | Observable Inputs | Unobservable | ||||||||||||||
| Inputs | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets | ||||||||||||||||
| Cash equivalents | $ | - | $ | 1,865 | $ | - | $ | 1,865 | ||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | - | 10,213 | - | 10,213 | ||||||||||||
The Company's financial instruments include cash equivalents and derivatives. Only cash equivalents and derivatives are carried at their fair value. The derivative liabilities include warrants denominated in a currency other than the Company’s functional currency and options issued to contractors in a currency other than the functional currency of the Company. The warrants are carried at fair value and calculated using the Black-Scholes option pricing model using the following assumptions: expected dividend 0%; risk-free interest rate of 0.99%-1.09%; expected volatility of 139% - 147%; and a 2.1 or 3.0 year remaining life. The options also use the Black-Scholes model with the following assumptions: expected dividend 0%; risk-free interest rate of 1.24%-1.29% expected volatility of 142%-148%; and a 4.6-5.1 year remaining life. The risk free rate was based on Bank of Canada Bond issues of similar term. Expected volatility was estimated by using historical volatility of weekly close share prices for a period equal to the remaining life of the instrument.
| 14 |
Adherex Technologies Inc.
(a development stage company)
Notes to the Unaudited Interim Consolidated Financial Statements
(U.S. dollars and shares in thousands, except per share information)
6. Commitments
The Company had no material commitments for capital expenses as of March 31, 2013.The following table represents our contractual obligations and commitments at March 31, 2013 (in thousands of U.S. dollars):
| Less than 1 year | 1-3 years | Total | ||||||||||
| OCT Clinical Service Agreement (1) | $ | 354 | $ | - | $ | 354 | ||||||
| Life Sci Advisors(2) | 25 | - | 25 | |||||||||
| Oregon Health & Science University, excluding potential royalty payments (3) | - | - | ||||||||||
| Total | $ | 379 | $ | - | $ | 379 | ||||||
| (1) | Under the service agreement with OCT Group LLC entered in August 2010, the Company is required to make several payments over the course of our 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. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. The Company amended the agreement in June 2012 for the transition to a paper-based database to be developed by OCT. In addition, the Company amended the agreement on October 29, 2012 for the addition of up to 20 patients to be enrolled. Further, the Company amended the agreement on April 5, 2013 for an additional 6 months of service by OCT for the remaining patients still participating in the clinical trial. |
| (2) | Under the service agreement with LifeSci Advisors, LLC, the Company is required to make several payments over the course of the agreement. Life SciAdvisors, LLC services include, but are not limited to, an investor meeting program and creating a key message platform. |
| (3) | Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002, included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. The license agreement with OHSU dated September 26, 2002 was terminated on February 20, 2013. Royalty payments, which are contingent on sales, are not included. |
| 15 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
The discussion below contains forward-looking statements regarding our financial condition and our results of operations that are based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP in the United States (“U.S.”) and have been prepared by and are the responsibility of the Company’s management. The preparation of these unaudited interim consolidated 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, some 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 (1) our anticipated sources and uses of cash and cash equivalents; (2) our anticipated commencement dates, completion dates and results of clinical trials; (3) our efforts to pursue collaborations with the government, industry groups or other companies; (4) our anticipated progress and costs of our clinical and preclinical research and development programs; (5) our corporate and development strategies; (6) our expected results of operations; (7) our anticipated levels of expenditures; (8) our ability to protect our intellectual property; (9) the anticipated applications and efficacy of our drug candidates; (10) our ability to attract and retain key employees; and (11) the nature and scope of potential markets for our drug candidates. All statements, other than statements of historical fact, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future 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
Adherex Technologies Inc. is a biopharmaceutical company focused on cancer therapeutics. We incorporated under the Canada Business Corporations Act (“CBCA”). At the Company's June 2011 Annual Meeting, shareholders of Adherex approved the continuation of Adherex Technologies’ federal incorporation under the CBCA to incorporation under the Business Corporations Act (British Columbia).We have three wholly-owned subsidiaries: Oxiquant, Inc. and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc., a Canadian company.
Our current prioritization initiative focuses primarily on our clinical activities with Eniluracil, as well as logistical and product support of STS. Eniluracil was previously under development by GlaxoSmithKline. GlaxoSmithKline advanced Eniluracil into a comprehensive Phase III clinical development program that did not produce positive results and GlaxoSmithKline terminated further development. We developed a hypothesis as to why the GlaxoSmithKline Phase III trials were not successful and licensed the compound from GlaxoSmithKline in July 2005. We believe that Eniluracil might enhance and expand the therapeutic spectrum of activity of 5-FU, reduce the occurrence of a disabling side effect known as hand foot syndrome and allow 5-FU to be given orally. We expect the proceeds we received from the April 2010 Private Placement and the Rights Offering completed in March 2011 will be sufficient to fund the Phase II trial involving approximately 140 evaluable patients. We expect results from those trials to be indicative of the future viability of Eniluracil and will allow us to assess whether further development and testing of Eniluracil is warranted. The Phase II trial completed enrollment in Russia and the United States at the end of December 2012 after having enrolled 153 patients. Adherex anticipates final efficacy and safety data to be available during the second or third quarter of 2013.
We are currently conducting Phase III trials of STS conducted by the International Childhood LiverTumour 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 was designed to enroll up to 135 pediatric patients worldwide in five different disease indications. The Company's Children Oncology Group study completed enrollment in the first half of 2012. Final efficacy and safety data from the Children Oncology Group study is expected during the second or third quarter of 2013. The SIOPEL trial has enrolled 72 patients as of May 10, 2013.
| 16 |
Our common stock trades on the OTCQB in the United States. Our common stock also trades on the Toronto Stock Exchange. The Toronto Stock Exchange has continuing 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 September 18, 2012, the Toronto Stock Exchange issued an official delisting review of our common stock. On January 7, 2013, the Toronto Stock Exchange completed its review of the Company and determined that the Company met TSX's continued 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 generated a net loss of approximately $4.1 million for the three months ended March 31, 2013. The net loss for the period ended March 31, 2013 included a $3.6 million unrealized non-cash loss on derivative liabilities and operating expenses relating principally to the Eniluracil Phase II clinical trial. As of March 31, 2013, our deficit accumulated during development stage was approximately $114.6 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. As a result, our filed Form 10-K for the year ended December 31, 2012 included a notation related to the substantial doubt 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.
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 administrative 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 Research Triangle Park, North Carolina in support of our drug development programs.
| 17 |
Results of Operations
Three months ended March 31, 2013 versus three months ended March 31, 2012:
| In thousands of U.S. Dollars | Three Months Ended March 31, 2013 | % | Three Months Ended March 31, 2012 | % | Change | |||||||||||||||
| Revenue | $ | - | $ | - | $ | - | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Research and development | 178 | 33 | % | 296 | 49 | % | 118 | |||||||||||||
| General and administrative | 359 | 67 | % | 320 | 51 | % | (39 | ) | ||||||||||||
| Total operating expenses | 537 | 100 | % | 616 | 100 | % | (79 | ) | ||||||||||||
| Loss from operations | (537 | ) | (616 | ) | 79 | |||||||||||||||
| Unrealized gain (loss) on derivative | (3,573 | ) | 3,327 | (6,900 | ) | |||||||||||||||
| Interest and other income | 2 | 4 | (2 | ) | ||||||||||||||||
| Net income /(loss) and total comprehensive income/(loss) | $ | (4,108 | ) | $ | 2,715 | $ | (6,823 | ) | ||||||||||||
Operating expenses for the three months ended March 31, 2013 were $0.5 million or $0.08 million less than the comparable period in 2012. Research and development expenses for the three months ended March 31, 2013 were $0.2 million or $0.1 million less than the comparable period in 2012.Research and development costs are impacted by the clinical support costs associated with the amount of patients enrolled and participating in the trial during the financial period. For the three months ended March 31, 2013, the Company had approximately 25 patients still participating in the Phase II Eniluracil study in comparison to approximately 75 patients participating in the three months ended March 31, 2012. General and administrative expenses increased to $0.4 million for the three months ended March 31, 2013 as compared to $0.3 million in the period ended March 31, 2012 primarily as a result of increased expenses associated with insurance and investor relations.
The Company recorded an unrealized loss on derivatives of $3.6 million in the three months ended March 31, 2013 compared to an unrealized gain of $3.3 million in the three months ended March 31, 2012. These derivatives have been recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain/(loss). These warrants and contractor options 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.
Quarterly Information
The following table presents selected consolidated financial data for each of the last eight quarters through March 31, 2013, as prepared under U.S. GAAP (U.S. dollars in thousands, except per share information):
| Period | Net (Loss)/Income for the Period | Basic and Diluted Net (Loss)/Income per Common Share | ||||||
| March 31, 2011 | $ | 4,669 | $ | 0.23 | ||||
| June 30, 2011 | $ | (348 | ) | $ | (0.01 | ) | ||
| September 30, 2011 | $ | (3,144 | ) | $ | (0.17 | ) | ||
| December 31, 2011 | $ | 3,508 | $ | 0.14 | ||||
| March 31, 2012 | $ | 2,715 | $ | 0.11 | ||||
| June 30, 2012 | $ | (602 | ) | $ | (0.02 | ) | ||
| September 30, 2012 | $ | (764 | ) | $ | (0.03 | ) | ||
| December 31, 2012 | $ | (6,511 | ) | $ | (0.26 | ) | ||
| March 31, 2013 | $ | (4,108 | ) | (0.16 | ) | |||
| 18 |
| March 31, 2013 | December31, 2012 | |||||||
| Dollars in thousands | ||||||||
| Selected Asset and Liability Data: | ||||||||
| Cash and cash equivalents | $ | 1,896 | $ | 2,303 | ||||
| Other current assets | 42 | 62 | ||||||
| Capital assets | — | — | ||||||
| Current liabilities excluding derivative warrant liability | 790 | 682 | ||||||
| Derivative warrant liability | 10,213 | 6,640 | ||||||
| Long term liabilities | - | - | ||||||
| Working capital [Current Assets – Current Liabilities excluding derivative liability] | 1,148 | 1,683 | ||||||
| Selected Equity: | ||||||||
| Common stock | $ | 65,952 | $ | 65,952 | ||||
| Accumulated deficit | (114,651 | ) | (110,543 | ) | ||||
| Stockholders’ (deficit) | (9,065 | ) | (4,957 | ) | ||||
Liquidity and Capital Resources
Cash and cash equivalents were $2.3 million at December 31, 2012 and $1.9 million at March 31, 2013. The decrease of $0.4million, is attributed to the clinical trial expenses related to our Phase II study as well as ongoing general and administrative expenses.
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 $88.4 million through March 31, 2013.We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $114.6 million at March 31, 2013. 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 three months ended March 31, 2013was approximately $0.4million, as compared to $0.6 million during the same period in 2012. This decrease is due to our Eniluracil expenses winding down during the three months ended March 31, 2013, as compared to the same period in the prior year.
Outstanding Share Information
The outstanding share data for our company as of March 31, 2013 (in thousands):
| March 31, 2013 | ||||
| Common shares | 25,158 | |||
| Warrants | 18,035 | |||
| Stock options | 5,498 | |||
| Total | 48,684 | |||
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 March 31, 2013, we had approximately $1.9million in cash accounts and money market investments. We have not experienced any loss or write down of our money market investments for the three months ended March 31, 2013 and 2012, respectively.
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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.
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 traded 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 March 31, 2013. The following table represents our contractual obligations and commitments at March 31, 2013 (in thousands of U.S. dollars):
| Less than 1 year | 1-3 years | Total | ||||||||||
| OCT Clinical Service Agreement (1) | $ | 354 | $ | - | $ | 354 | ||||||
| Life Sci Advisors (2) | 25 | - | 25 | |||||||||
| Oregon Health & Science University, excluding potential royalty payments (3) | - | - | - | |||||||||
| Total | $ | 379 | $ | - | $ | 379 | ||||||
| (1) | Under the service agreement with OCT Group LLC entered in August 2010, the Company is required to make several payments over the course of our 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. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. The Company amended the agreement in June 2012 for the transition to a paper-based database to be developed by OCT. In addition, the Company amended the agreement on October 29, 2012 for the addition of up to 20 patients to be enrolled. Further, the Company amended the agreement on April 5, 2013 for an additional 6 months of service by OCT for the remaining patients still participating in the clinical trial. |
| (2) | Under the service agreement with LifeSci Advisors, LLC, the Company is required to make several payments over the course of the agreement. Life SciAdvisors, LLC services include, but are not limited to, an investor meeting program and creating a key message platform. |
| (3) | Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002, included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. The license agreement with OHSU dated September 26, 2002 was terminated on February 20, 2013. Royalty payments, which are contingent on sales, are not included. |
Research and Development
Our research and development efforts have been focused on the development of cancer therapeutics and currently include Eniluracil and 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.
Research and development expenses totaled $0.2 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.
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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. Further, even if regulatory clearances are received, we will be required to monitor our product for adverse effects and should these develop, previously received regulatory clearance may be suspended or revoked. 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 and bring them to market. 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, 2012.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Money Market Investments
We maintain an investment portfolio consisting of U.S. or Canadian obligations and bank securities and money market investments in compliance with our investment policy. We do not hold any mortgaged-backed investments in our investment portfolio. 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.
At March 31, 2013, we had $1.9 million in money market investments which typically have minimal market risk. The financial markets have been volatile resulting in concerns regarding the recoverability of money market investments. We have not experienced any loss or write down of our money market investments for the three months ended March 31, 2013 and 2012.
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. Our risk associated with fluctuating interest rates on our investments is minimal and not significant to the results of operations. We currently do not use interest rate derivative instruments to manage exposure to interest rate changes. As the main purpose is research and development, we have chosen to avoid investments of a trade or speculative nature.
Foreign Currency Exposure
We are subject to foreign currency risks as we conduct certain clinical development activities in Canada, the United Kingdom, Europe, Russia and the Pacific Rim. To date, we have not employed the use of derivative instruments to hedge our exposure to changes in currency exchange rates; however, we do hold Canadian dollars which we use to pay certain research and other corporate obligations conducted in Canada. At March 31, 2013 we held approximately $0.02 million in Canadian dollars.
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Item 4.Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. |
In connection with the preparation of this report, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of March 31, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted 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 management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective as a result of having identified one material weakness in our internal control over financial reporting, as described in further detail below.
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 full time employee 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 consolidated financial statements that would not be detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
After the Company filed its Current Report on Form 8-K under Item 4.02 on November 2, 2010, the Company took remedial actions for our previously reported internal control weakness of not maintaining 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. In 2012, the Company has contracted additional personnel with experience in the application of U.S. GAAP financial accounting and reporting requirements in order to assist management in its financial accounting and reporting functions. As a result, the Company believes that this added experience and knowledge has remediated the previously disclosed material internal control weakness described above.
Further, the Company believes that this has helped remedy, but has not eliminated, the control deficiency described above regarding lack of sufficient staff to segregate accounting duties. To finance our continuing operations, we will need to raise additional funds beyond those from our April 2010 private placement and the Rights Offering and, as disclosed elsewhere in this report, there remains substantial uncertainty of our ability to continue as a going concern and the failure to obtain such funds might require us 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. Once we are able to secure such additional financing, we anticipate hiring additional personnel with appropriate technical accounting knowledge, experience, and training in the application of U.S. GAAP to supplement our current accounting staff.
| (b) | Changes in Internal Control over Financial Reporting |
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2013that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None.
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. 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.
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 stockholders may lose part or all of their investment.
We may be unable to effectively deploy the proceeds from our financings for the development of Eniluracil.
In April 2010, we announced the closing of a private placement for proceeds of CAD $7.2 million and in March 2011, we announced the closing of a Rights Offering for proceeds of approximately$2.5 million. Any inability on our part to manage effectively the deployment of this capital could limit our ability to successfully develop Eniluracil.
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Additional Risks Related to our Common Stock
We may be unable to maintain the listing of our common stock on the TSX and that would make it more difficult for stockholders to dispose of their common stock.
Our common stock is currently listed on the TSX. The TSX has rules for continued listing, 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 additional capital to continue operations. In January 2009, our common stock was delisted from the AMEX as we did not meet the continued listing requirements of that exchange. On September 8, 2012, the Toronto Stock Exchange issued an official delisting review of our common stock. The remedial delisting review was initiated because the value of the shares of our common stock that are held by “public shareholders” had been below the CAD$2.0 million threshold required under the TSX continuing listing standards for a period of 30 consecutive trading days. On January 7, 2013, the Toronto Stock Exchange completed its review of the Company and determined that the Company met TSX's continued listing requirements.
Delisting from the TSX would make it more difficult for stockholders to dispose of their common stock and more difficult to obtain accurate quotations on our common stock. This could have an adverse effect on the price of our common stock. There can be no assurances that a market maker will make a market in our common stock on the OTCQB or any other stock quotation system after delisting. Furthermore, securities quoted on the Pink Sheets generally have significantly less liquidity than securities traded on a national securities exchange, not only in the number of shares that can be bought and sold, but also through delays in the timing of transactions and lower market prices than might otherwise be obtained. As a result, stockholders might find it difficult to resell shares at prices quoted in the market or at all. Furthermore, because of the limited market and generally low volume of trading in our common stock, our common stock is more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and announcements made by us, our competitors or parties with whom we have business relationships. Our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future, may also be materially and adversely affected by the fact that our securities are not traded on a national securities exchange.
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 (excluding the value of their primary residence) 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 April 3, 2013, the Company issued 25,000 stock options to certain board members in accordance with their agreements. 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 in USD dollar denominated grants at an exercise price of $0.80 per share and are exercisable for a period of 7 years from the grant date.
Item 3. Default Upon Senior Securities
None.
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Item 4. Mine Safety Disclosure
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
|
Exhibit No. |
Description | |
| 31.1 | Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
| 31.2 | Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
| 99.1 | Press Release for Quarter Ended March 31, 2013 (filed herewith). | |
| 101.1 | Interactive Data File* |
*To be filed by amendment pursuant to Rule 405(a)(2)(ii) of Regulation S-T.
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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: May 13, 2013 | By: |
/s/ Rostislav Raykov |
| Rostislav Raykov | ||
| Chief Executive Officer | ||
| (principal executive officer) | ||
| Date: May 13, 2013 | By: |
/s/ Robert Andrade |
| Robert Andrade | ||
| Chief Financial Officer | ||
| (principal financial and chief accounting officer) | ||
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