Fennec Pharmaceuticals 10Q 2022 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2022


	☐ 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

FENNEC PHARMACEUTICALS INC.

(Exact Name of Registrant as Specified in Its Charter)


British Columbia, Canada	20-0442384
(State or Other Jurisdiction of Incorporation or Organization	(I.R.S. Employer Identification No.)

PO Box 13628, 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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, no par value	FENC	Nasdaq Capital Market

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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	◻	Accelerated Filer	◻
Non-Accelerated Filer	⌧	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ⌧

As of August 11, 2022, there were 26,067,283 common shares outstanding.

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TABLE OF CONTENTS


	Page
PART I: FINANCIAL INFORMATION	3

Item 1. Condensed Consolidated Financial Statements	3

Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021	3

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021	4

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021	5

Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021	6

Notes to the Condensed Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3. Quantitative and Qualitative Disclosures about Market Risk	28

Item 4. Controls and Procedures	29

PART II: OTHER INFORMATION	29

Item 1. Legal Proceedings	29

Item 1A. Risk Factors	31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3. Defaults Upon Senior Securities	31

Item 4. Mine Safety Disclosures	31

Item 5. Other Information	31

Item 6. Exhibits	33

Signatures	34

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PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements.

Fennec Pharmaceuticals Inc.

Condensed Consolidated Balance Sheets

(U.S. Dollars and shares in thousands)


	June 30, 2022		December 31,
	(Unaudited)		2021

Assets
Current assets
Cash and cash equivalents	$	14,915	$	21,100
Prepaid expenses		490		1,034
Other current assets		149		253
Total current assets		15,554		22,387

Non-current assets
Deferred issuance cost, net of amortization		14		27
Total non-current assets		14		27
Total assets	$	15,568	$	22,414

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,743	$	777
Accrued liabilities		294		877
Current portion of long-term debt		1,000		—
Total current liabilities		3,037		1,654

Long-term liabilities
Term loan		4,000		5,000
Debt discount		(10)		(12)
Total long-term liabilities		3,990		4,988
Total liabilities		7,027		6,642

Commitments and Contingencies (Note 6)

Stockholders’ equity:
Common stock, 0 par value; unlimited shares authorized; 26,067 shares issued and outstanding (2021 ‑ 26,014)		140,922		140,801
Additional paid-in capital		54,630		53,214
Accumulated deficit		(188,254)		(179,486)
Accumulated other comprehensive income		1,243		1,243
Total stockholders’ equity		8,541		15,772
Total liabilities and stockholders’ equity	$	15,568	$	22,414

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Operations

(U.S. Dollars and shares in thousands, except per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021

Revenue	$	—	$	—	$	—	$	—

Operating expenses:
Research and development		1,131		800		2,568		3,216
General and administrative		3,878		3,120		5,987		5,627

Loss from operations		(5,009)		(3,920)		(8,555)		(8,843)

Other (expense)/income
Foreign currency transaction gain/(loss)		1		—		(2)		(8)
Amortization expense		(8)		—		(15)		—
Unrealized (loss)/gain on securities		(8)		(84)		(99)		98
Interest income		9		12		18		28
Interest expense		(57)		(9)		(115)		(9)
Total other (expense)/income		(63)		(81)		(213)		109

Net loss	$	(5,072)	$	(4,001)	$	(8,768)	$	(8,734)

Basic net loss per common share	$	(0.19)	$	(0.15)	$	(0.34)	$	(0.34)
Diluted net loss per common share	$	(0.19)	$	(0.15)	$	(0.34)	$	(0.34)
Weighted-average number of common shares outstanding basic		26,052		26,003		26,067		26,003
Weighted-average number of common shares outstanding diluted		26,052		26,003		26,067		26,003

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in thousands)

(Unaudited)


	Six Months Ended
	June 30,		June 30,
	2022		2021

Cash flows (used in) provided by:
Operating activities:
Net loss	$	(8,768)	$	(8,734)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt access fees		14		—
Amortization of debt discount		1		—
Unrealized loss/(gain) on securities		99		(98)
Stock-based compensation - consultants		69		9
Stock-based compensation - employees		1,407		1,913
Changes in operating assets and liabilities:
Prepaid expenses		544		388
Other assets		5		2
Accounts payable		966		(894)
Accrued liabilities		(583)		(605)
Net cash used in operating activities		(6,246)		(8,019)

Financing activities:
Long-term debt		—		5,000
Debt discount		—		(14)
Capitalized deferred issuance costs		—		(42)
Issuance of shares, options exercise		61		24
Net cash provided by financing activities		61		4,968

(Decrease)/increase in cash and cash equivalents		(6,185)		(3,051)
Cash and cash equivalents - Beginning of period		21,100		30,344
Cash and cash equivalents - End of period	$	14,915	$	27,293

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Fennec Pharmaceuticals Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three and Six Months Ended June 30, 2022, and 2021

(U.S. dollars and shares in thousands)

(Unaudited)


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity

Balance at December 31, 2021	26,014	$	140,801	$	53,214	$	(179,486)	$	1,243	$	15,772
Stock options issued to employees	0		0		399		0		0		399
Stock options issued to contractors	0		0		34		0		0		34
Stock option exercise	26		31		(16)		—		—		15
Net loss	—		—		—		(3,696)		—		(3,696)
Balance at March 31, 2022	26,040	$	140,832	$	53,631	$	(183,182)	$	1,243	$	12,524
Stock options issued to employees	—		—		1,008		—		—		1,008
Stock options issued to contractors	—		—		35		—		—		35
Stock option exercise	19		90		(44)		—		—		46
Restricted stock unit release	8		—		—		—		—		—
Net loss	—		—		—		(5,072)		—		(5,072)
Balance at June 30, 2022	26,067	$	140,922	$	54,630	$	(188,254)	$	1,243	$	8,541

								Accumulated
				Additional				Other		Total
	Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Capital		Deficit		Income		Equity
Balance at December 31, 2020	26,003	$	140,733	$	49,234	$	(162,140)	$	1,243	$	29,070
Stock options issued to employees	0		0		587		0		0		587
Stock options issued to contractors	0		0		9		0		0		9
Net loss	—		—		—		(4,733)		—		(4,733)
Balance at March 31, 2021	26,003	$	140,733	$	49,830	$	(166,873)	$	1,243	$	24,933
Stock options issued to employees	—		—		1,326		—		—		1,326
Stock option exercise	4		47		(24)		—		—		23
Net loss	—		—		—		(4,001)		—		(4,001)
Balance at June 30, 2021	26,007	$	140,780	$	51,132	$	(170,874)	$	1,243	$	22,281

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

1. Nature of Business and Going Concern

Fennec Pharmaceuticals Inc., a British Columbia corporation (“Fennec,” ”the “Company,” “we,” “us,” or “our”), is a biopharmaceutical company focused on the development of PEDMARK^TM (a unique formulation of sodium thiosulfate) for the prevention of platinum-induced ototoxicity in pediatric cancer patients. We have 4 wholly-owned subsidiaries: Oxiquant, Inc. and Fennec Pharmaceuticals, Inc., both Delaware corporations, Cadherin Biomedical Inc., a Canadian company, and Fennec Pharmaceuticals (EU) Limited (“Fennec Limited”), an Ireland company. With the exception of Fennec Pharmaceuticals, Inc., all subsidiaries are inactive.

These unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) that are applicable to a going concern, which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business.

During the three and six months ended June 30, 2022, the Company incurred a loss from operations of $5,009 and $8,555, respectively. At June 30, 2022, the Company had an accumulated deficit of $188,254 and had experienced negative cash flows from operating activities during the three and six months ended June 30, 2022 in the amount of $3,390 and $6,246, respectively.

On February 1, 2019, the Company’s wholly owned subsidiary Fennec Pharmaceuticals, Inc. entered into a Loan and Security Agreement (the “Bridge Bank Loan and Security Agreement”) with Bridge Bank, a division of Western Alliance Bank, an Arizona corporation (“Bridge Bank”), pursuant to which Bridge Bank agreed to loan $12,500 to Fennec Pharmaceuticals, Inc., to be made available upon New Drug Application (“NDA”) approval of PEDMARK^TM by the U.S. Food and Drug Administration (“FDA”) no later than September 30, 2020. The Bridge Bank Loan and Security Agreement was amended on June 26, 2020 to increase the total potential amount of the loan to $18,000 and to extend the outside date to receive NDA approval of PEDMARK^TM to December 31, 2020. In connection with this facility, the Company issued Bridge Bank a warrant to purchase up to 39 of the Company’s common shares at an exercise price of $6.80 per share, with an exercise period of ten years from the date of issuance subject to certain early termination conditions. Under Accounting Standards Codification (“ASC”) 470-50, Modifications and Extinguishments, the amendment to the facility was considered a modification. As such, the Company had been amortizing the loan fee and the value of the warrant over the remainder of the loan term. Following receipt of the FDA’s Complete Response Letter (“CRL”) in August 2020, which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARK^TM on the Company’s behalf, the Company decided to fully amortize the remaining portions of the loan fee and the value of the warrants. The warrant issued to Bridge Bank remains outstanding.

On June 24, 2021, the Company announced it had negotiated a second amendment to the Bridge Bank Loan and Security Agreement. This amendment provides Fennec with a $20,000 debt facility comprised of 3 term loans. Term Loan A consists of $5,000, which was funded upon closing. Term Loan B consists of $7,500 to be funded upon NDA approval of PEDMARK^TM (the “Approval Event”) in the U.S. Term Loan C consists of $7,500 to be funded upon the Company achieving consolidated trailing six-month revenues of $11 million on or before December 31, 2022. The interest-only period for the facility has the ability to be extended from 18 months to 24 months from the funding of Term Loan B, provided that Term Loan C is funded, and certain conditions are met.

On January 31, 2022, the Company announced a third amendment to the Bridge Bank Loan and Security Agreement. This amendment redefines certain definitions in the agreement. The term “Resubmission Event” is the resubmission by Fennec for final NDA approval from the FDA for PEDMARK on or before March 31, 2022. Fennec did achieve the Resubmission Event on March 24, 2022. The “Approval Event” is the receipt of the final NDA approval by Fennec from the U.S. Food and Drug Administration for PEDMARK^TM on or before September 30, 2022. The Company intends to use the proceeds from the loans to provide working capital for commercial readiness activities prior to NDA approval as well as commercialization activities for PEDMARK^TM, if approved by the FDA.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

The Company believes current funds, along with the funds from the Bridge Bank Loan and Security Agreement or from the securities purchase agreement dated August 1, 2022 with Petrichor Opportunities Fund I LP (the “Petrichor Agreement”) (see Subsequent Events), provide sufficient funding for the Company to carry out its planned activities, including, if PEDMARK^TMis approved by the FDA, the commencement of commercialization efforts, for at least the next twelve months as it continues its strategic development of PEDMARK^TM.

These financial statements do not reflect the potentially material adjustments in the carrying values of assets and liabilities, the reported expenses, and the balance sheet classifications used, that would be necessary if the going concern assumption were not appropriate or if there was a materially adverse event which affected the Company’s solvency.

2. Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company’s accounting policies are consistent with those presented in the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021. These unaudited interim condensed consolidated financial statements have been prepared in U.S. dollars. All amounts presented are in thousands except for per share amounts. The results of operations for the three and six monthsended June 30. 2022 are not necessarily indicative of results to be expected for the full fiscal year.

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 of the date of the interim condensed consolidated financial statements and the reported amounts of expense during the reporting period. Actual results could differ from those estimates.

In the opinion of management, these unaudited interim condensed consolidated financial statements include all adjustments, which are normal and recurring in nature, necessary for the fair presentation of the Company’s financial position at June 30, 2022 and to state fairly the results for the periods presented. The most significant estimates utilized during the three and six months ended June 30, 2022 include estimates necessary to value grants of various equity instruments to employees and contractors, as disclosed in Note 4.

New accounting pronouncements

The Company did not adopt any new accounting pronouncements during the quarter ended June 30, 2022.

Cash and cash equivalents

Cash equivalents consist of highly liquid investments with original maturities at the date of purchase of three months or less. The Company places its cash and cash equivalents in investments held by highly rated financial institutions in accordance with its investment policy designed to protect the principal investment. At June 30, 2022, the Company had $14,915 in cash, savings and money market accounts ($21,100 at December 31, 2021). At June 30, 2022, the Company held $278 in cash of which $37 (as presented in U.S. dollars) was in Canadian dollars ($34 at December 31, 2021 as presented in U.S. dollars). At June 30, 2022, the Company held $14,637 in money market investments. Money market

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

investments typically have minimal risks. While the Company has not experienced any loss or write-down of its money market investments, the amounts it holds in money market accounts are substantially above the $250 amount insured by the FDIC and may lose value.

Financial instruments

Financial instruments recognized on the balance sheets at June 30, 2022 and December 31, 2021 consist of cash and cash equivalents, shares of Processa Pharmaceuticals, Inc., accounts payable, accrued liabilities and current portion of long-term debt, the carrying values of which approximate fair value due to their relatively short time to maturity. The Company does not hold or issue financial instruments for trading.

The Company’s investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Investments, when made, are made in U.S. or Canadian bank securities, commercial paper of U.S. or Canadian industrial companies, utilities, financial institutions and consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper.

The policy risks are primarily the opportunity cost of the conservative nature of the allowable investments. As the main purpose of the Company is research and development, the Company has chosen to avoid investments of a trading or speculative nature.

Revenue

The Company’s nominal historical revenue has been generated through sales of its intellectual property (“IP”). For the periods presented, there is no revenue. For periods when the Company has generated its revenue through one segment and the revenue recognized under each of the Company’s arrangements during those periods is described below. The terms of these agreements may contain multiple promised goods or services or optional goods and services, including licenses to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by the Company on behalf of the collaboration partner related to the licensed product candidates.

Revenue recognition

Revenue is recognized when control of the promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or providing services. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

When determining whether the customer has obtained control of the goods or services, the Company considers the point at which the customer may benefit from the goods or services. For sale of IP, revenue is recognized upon grant or transfer of the IP, as the Company’s IP is considered functional in nature.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s contracts may contain multiple performance obligations if a promise to transfer goods or services is separately identifiable from other promises in a contract and, therefore, is considered distinct. For contracts with multiple performance obligations, the Company determines the standalone selling price of each performance obligation and allocates the total transaction price using the relative selling price basis. The Company recognizes performance obligations based on their nature.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

Significant payment terms

The Company’s revenue arrangements may include payments to the Company of one or more of the following: a non-refundable, upfront payment; milestone payments; and royalties on commercial sales of IP product candidates, if any. To date, the Company has received upfront payments and several milestone payments but has not received any license or option fees or earned royalty revenue as a result of product sales.

The Company estimates the amount of consideration to which it will be entitled in exchange for satisfying performance obligations. Based on the Company’s current contracts, variable consideration primarily exists in the following forms: development and regulatory milestones, royalties and sales-based milestones. The Company utilizes the “most likely amount” variable consideration method for estimating development and regulatory milestone consideration to include in the transaction price. The Company only includes an amount of variable consideration in the transaction price to the extent it is probable that a significant reversal in the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company refers to this as the variable consideration constraint.

Due to the uncertainty associated with the occurrence of any underlying events which would trigger development and regulatory milestone consideration under its revenue arrangements, with the exception of certain initial conditions precedent milestones, the Company has concluded the variable consideration associated with all development and regulatory milestones to be fully constrained as of June 30, 2022, and therefore has not included such consideration in the transaction price for any of its revenue arrangements. The Company will reassess this conclusion at each subsequent reporting period and will only include amounts associated with regulatory or development milestones in the transaction price when, or if, the variable consideration is determined to be released from the constraint.

The Company adjusts the transaction price for the effects of the time value of money if the timing of payments agreed to by the parties to the contract, explicitly or implicitly, provides the Company or its customer with a significant benefit of financing the transfer of goods or services. In relation to the royalties from the sale of Eniluracil to Elion (described under “Revenue arrangements” below), the Company concluded that its licensing and collaboration arrangements do not contain a significant financing component because the payment structure of its agreements arise from reasons other than providing a significant benefit of financing.

Contract assets

The Company did not have any contract assets as of June 30, 2022 or December 31, 2021.

Contract liabilities

The Company did not have any contract liabilities as of June 30, 2022 or December 31, 2021.

Revenue arrangements

Elion

In May 2016, the Company sold its rights in the drug Eniluracil to Elion Oncology, LLC (“Elion”). The agreement called for $40 in cash and 5% royalties to be paid to Fennec for any income derived from the sale of Eniluracil. The agreement was for the sale (not the license) of IP. In addition, the agreement did not call for any additional good or service beyond the transfer of IP and related assets (e.g. “all information and know-how”, documentation, etc.).

In August 2020, Elion entered into a license agreement with Processa Pharmaceuticals, Inc. (“Processa”). The license agreement called for equity and cash upon satisfying the Condition Precedent, along with development and regulatory milestone payments, sales milestone payments, and product royalties. The grant of the license was conditioned upon the

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

“Condition Precedent” which was defined as (i) Processa’s closing of a public offering by October 30, 2020 in which Processa raised at least $15,000 and (ii) Processa’s shares being listed on NASDAQ. Upon satisfying the Condition Precedent, which occurred in October 2020, Elion was entitled to receive $100 in cash and 825 in shares of Processa of which the Company is entitled to 5%. As a result, in January 2021, the Company received $5 in cash and 41 restricted shares of Processa common shares.

The agreement between Elion and Processa entitles Elion to the payments outlined in the table below. Fennec would be eligible to receive 5% of the following based on future milestone events:


Milestone Event	Milestone Payment
1st Year Anniversary of Effective Date		100 Restricted Shares
2nd Year Anniversary of Effective Date		100 Restricted Shares
1st Patient in Dose Confirmation Study		100 Restricted Shares
NDA Submission		300 Restricted Shares
1st FDA Approval in US	$	5,000
2nd FDA Approval in US	$	3,000
1st Regulatory Approval Outside US	$	2,000
2nd Regulatory Approval Outside US	$	2,000

Since the Condition Precedent was achieved, and only the passage of time must occur in order for the 1^st and 2^nd Year Anniversary payments to become due, the Company concluded the 1^st and 2^nd Year Anniversary milestone payments are also probable of coming to fruition and thus were included in the transaction price during the fourth quarter ended December 31, 2020 along with the aforementioned Condition Precedent payments.

The arrangement with Elion contains consideration that is variable based on the Processa’s achievement of the above referenced development and regulatory milestones. The next milestone payment the Company may be entitled to receive is 5 restricted shares for 1^st patient in Dose Confirmation Study and then another 15 restricted shares for the NDA submission. These are considered variable consideration that is fully constrained due to the uncertainty associated with the achievement of the development milestone. The considerations related to royalties (first and second FDA approval in U.S. and first and second regulatory approval outside U.S.) are also variable consideration that are fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Processa and the Company has a present right to payment.

The Company recognized $200 in revenue associated with the aforementioned cash and shares it became entitled to for the year ended December 31, 2020. Due to the one year lockup provision on the Processa shares, the Company deemed it reasonable to apply a liquidity discount of 20% to the valuation of the shares associated with the achievement of the Condition Precedent. Shares associated with the one- and two-year anniversary milestones had a 30% and 40% liquidity discount applied to their fair market valuations. Recognizing the passage of time, the Company adjusted its liquidity discount to the original shares of 0% and then 0% and 20% for the one- and two-year anniversary tranches.

Subsequent changes to the fair value of the underlying securities are recognized as unrealized gains or losses on marketable equity securities within the condensed consolidated statements of operations. During the quarter ended June 30, 2022, the Company reported $8 in unrealized loss on the fair value of the underlying Processa shares. Net loss over the life of the Processa shares was $25 at June 30, 2022.

3. Loss per Share

Earnings per common share is presented under two formats: basic earnings per common share and diluted earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, plus

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

the potentially dilutive impact of common stock equivalents (i.e. stock options and warrants). Dilutive common share equivalents consist of the incremental common shares issuable upon exercise of stock options and warrants. The following table sets forth the computation of basic and diluted net loss per share:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Numerator:
Net loss	$	(5,072)	$	(4,001)	$	(8,768)	$	(8,734)

Denominator:
Weighted-average common shares, basic		26,052		26,003		26,067		26,003
Dilutive effect of stock options		—		—		—		0
Dilutive effect of warrants		—		—		—		0
Incremental dilutive shares		—		—		—		0
Weighted-average common shares, diluted		26,052		26,003		26,067		26,003
Net loss per share, basic and diluted	$	(0.19)	$	(0.15)	$	(0.34)	$	(0.34)

The following outstanding options and warrants were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect:


	Three Months Ended June 30,		Six Months Ended June 30,
	2022	2021	2022	2021
Options to purchase common shares	4,337	3,653	4,337	3,653
Warrants to purchase common shares	39	39	39	39

4. Stockholders’ Equity

Authorized capital stock

The Company’s authorized capital stock consists of an unlimited number of common shares, 0 par value per share.

Warrants to Purchase Common Stock

During the three and six months ended June 30, 2022, there were 0 warrants issued or exercised. Outstanding warrants have a weighted average life of 6.60 years on June 30, 2022. The following tables detail the Company’s warrant activity for the three and six months ended June 30, 2022:


	Common Shares
	Issuable Upon Exercise
	of Outstanding	Weighted-Average
Investor Warrants	Warrants	Exercise Price $USD
Outstanding December 31, 2021	39	$	6.80
Issued	—		—
Outstanding June 30, 2022	39		6.80
Issued	—		—
Outstanding June 30, 2022	39	$	6.80

Equity Incentive Plan

The Compensation Committee of the Board of Directors administers the Company’s equity incentive plan (the “Plan”). The Compensation Committee designates eligible participants to be included under the Plan and approves the number of equity instruments to be granted from time to time under the Plan. Currently, the maximum number of equity instruments

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

issuable under the Plan, together with the Company’s prior stock option plan, is twenty-five percent (25%) of the total number of issued and outstanding common shares. Based upon the current shares outstanding, a maximum of 6,517 shares of common stock are authorized for issuance pursuant to stock options or other equity awards granted under the Plan. For all options issued under the Plan, the exercise price is the fair value of the underlying shares on the date of grant. All options vest within three years or less and are exercisable for a period of ten years from the date of grant. The Plan allows the issuance of Canadian and U.S. dollar grants. The table below outlines recognized contractor and employee expense from equity awards for the three and six month period ended June 30, 2022 and 2021.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Contractor options expense recognized	$	35	$	—	$	69	$	9
Employee options expense recognized		1,008		1,326		1,407		1,913
Total option expense recognized	$	1,043	$	1,326	$	1,476	$	1,922

Stock Option Activity

The following is a summary of option activity for the three and six months ended June 30, 2022, for stock options denominated in U.S. dollars. Since August of 2020, there have been 0 Canadian denominated options outstanding.


	Number of	Weighted-Average
US Denominated Options	Options (thousands)	Exercise Price $USD
Outstanding at December 31, 2021	4,259	$	5.13
Granted	200		5.64
Exercised	(26)		0.58
Forfeited	(382)		6.13
Outstanding at March 31, 2022	4,051		5.34
Granted	305		5.71
Exercised	(19)		2.38
Outstanding at June 30, 2022	4,337	$	5.14

During the three and six month periods ended June 30, 2022, there were 305 and 505 options granted, respectively. During the three and six month periods ended June 30, 2022, there were 26 and 45 exercises of options, respectively. This resulted in a cash inflow of $46 and $61, respectively. Of the 4,337 U.S. denominated options granted and outstanding at June 30, 2022, 3,050 are fully vested and exercisable.

The value of options issued was estimated using the Black-Scholes option pricing model using the assumptions in the table below. The expected volatility was determined using historical volatility of our stock based on the expected term of the award.


		Valuation Assumptions
Black-Scholes Model Assumptions		June 30, 2022
Expected dividend		0.00%
Risk free rate		2.99 - 3.65%
Expected volatility		69 - 73%
Expected life		5 - 6 years

Restricted Share Units Activity

The Plan allows for the issuance of restricted share units (“RSU’s”). The following is a summary of RSU activity for the three and six months ended June 30, 2022, for RSU’s denominated in U.S. dollars. During the quarter ended June 30,

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

2022, there were 8 RSU’s released from restriction. During the six months ended June 30, 2022, there were 88 RSU’s forfeited by departing employees. All RSU’s vest over one to three years.


		Number of Restricted
US Denominated RSUs		Share Units (thousands)
Outstanding at December 31, 2021		219
Awarded		—
Forfeited		(88)
Outstanding at March 31, 2022		131
Awarded		—
Released		(8)
Outstanding at June 30, 2022		123

The value of RSU’s issued was estimated using the share price on the date of the award multiplied by the number of shares granted.

5. Fair Value Measurements

The Company has adopted ASC 820 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.

Fair Value Measurement at June 30, 2022 and December 31, 2021

(in thousands)

Quoted Price in Active

Market for Identical

Significant Other

Significant

Instruments

Observable Inputs

Unobservable Inputs

Level 1

Level 2

Level 3

Total

2022

2021

2022

2021

2022

2021

2022

2021

Assets

Cash and cash equivalents

278

⁽¹⁾

14,637

21,018

—

14,915

21,100

Processa common shares

—

148

⁽²⁾

240

⁽²⁾

—

148

240

(1)	The Company held approximately $278 in cash as of June 30, 2022, of which approximately $37 was in Canadian funds (translated into U.S. dollars). As of December 31, 2021, the Company held approximately $82 in cash of which approximately $34 was in Canadian funds (translated into U.S. dollars).

(2)

The Company holds 46 unrestricted common shares of Processa (NASDAQ:PCSA). The Company expects to receive another 5 restricted common shares of Processa on October 20, 2022 which will become unrestricted one year after receipt. At October 30, 2020, Processa shares were trading at $4.11 per share. The Company originally applied a 20%, 30% and 40% liquidity discount to the shares and will mark to market at each balance sheet date. The Company will also adjust the liquidity discounts being applied to the share valuation to appropriately reflect the passage of time and the existence of any restrictions on the shares. Valuation of the shares at June 30, 2022 had a 0%, 0% and 20% liquidity discount applied to the 41, 5 and 5 share tranches, respectively.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

6. Commitments and Contingencies

Oregon Health & Science University Agreement

On February 20, 2013, Fennec entered into an exclusive license agreement with Oregon Health & Science University (“OHSU”) for exclusive worldwide license rights to intellectual property directed to thiol-based compounds, including PEDMARK^TM, and their use in oncology (the “OHSU Agreement”). OHSU will receive certain milestone payments, royalty on net sales for licensed products and a royalty on any consideration received from sublicensing of the licensed technology.

On May 18, 2015, Fennec negotiated an amendment (“Amendment 1”) to the OHSU Agreement, which expands Fennec’s exclusive license to include the use of N-acetylcysteine as a standalone therapy and/or in combination with sodium thiosulfate for the prevention of ototoxicity induced by chemotherapeutic agents to treat cancers. Further, Amendment 1 adjusts select milestone payments in the OHSU Agreement including but not limited to the royalty rate on net sales for licensed products, royalty rate from sublicensing of the licensed technology and the fee payable upon the regulatory approval of a licensed product.

The term of the OHSU Agreement as amended by Amendment 1 expires on the date of the last to expire claim(s) covered in the patents licensed to Fennec or 8 years, whichever is later. In the event a licensed product obtains regulatory approval and is covered by the Orphan Drug Designation, the parties will in good faith amend the term of the agreement. Sodium thiosulfate is currently protected by methods of use patents that the Company exclusively licensed from OHSU that expire in the United States in 2038. The OHSU Agreement is terminable by either Fennec or OHSU in the event of a material breach of the agreement by either party after 45 days prior written notice. Fennec also has the right to terminate the OHSU Agreement at any time upon 60 days prior written notice and payment of all fees due to OHSU under the OHSU Agreement.

Securities Class Action Suit

Chapman v. Fennec Pharmaceuticals Inc. et al.

On September 3, 2020, plaintiff Jim Chapman filed a putative federal securities class action lawsuit against the Company, our Chief Executive Officer, Rostislav Raykov, and Chief Financial Officer, Robert Andrade, in the United States District Court for the Middle District of North Carolina, captioned Chapman v. Fennec Pharmaceuticals Inc. et al., Case No. 1:20-cv-00812. The complaint alleged that prior to our August 10, 2020 receipt of a CRL from the FDA concerning our NDA for PEDMARK^TM, defendants made materially false or misleading statements and failed to disclose material facts about our third-party PEDMARK^TM product manufacturing facility and the impact the facility would have on regulatory approval for PEDMARK^TM. On December 3, 2020, the court appointed a lead plaintiff to represent the putative class. On February 1, 2021, the lead plaintiff filed an amended complaint. The amended complaint added members of our Board of Directors as defendants, asserts a putative class period from December 20, 2018 through August 10, 2020, makes allegations similar to those in the original complaint, claims the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and seeks an unspecified amount of compensatory damages and attorneys’ fees and costs.

On March 3, 2021, defendants filed a motion to dismiss the amended complaint. On April 2, 2021, plaintiff filed an opposition to the motion to dismiss. On April 16, 2021, defendants filed a reply in support of the motion to dismiss, and on December 16, 2021, the Magistrate Judge entered an order recommending that defendants’ motion to dismiss be granted in its entirety. On January 24, 2022, plaintiff filed objections to the Magistrate Judge’s recommendation, and defendants filed their response on February 3, 2022. On March 2, 2022, the U.S. District Court Judge adopted the Magistrate Judge’s order and recommendation and entered an order and judgment dismissing the amended complaint with prejudice.

On March 30, 2022, plaintiff filed a motion for post judgment relief, seeking leave to file a second amended complaint. In his proposed second amended complaint, plaintiff seeks to add allegations stemming from the receipt of a second CRL following our resubmission of our NDA for PEDMARK^TM, which we received on November 29, 2021, among other

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

things. Defendants filed an opposition to plaintiff’s motion for post judgment relief on April 20, 2022. On May 4, 2022, lead plaintiff submitted a reply in support of his motion.

We believe that this lawsuit is without merit and intend to defend it vigorously. We cannot predict the outcome of this lawsuit. Failure by us to obtain a favorable resolution of the lawsuit could have a material adverse effect on our business, results of operations, and financial condition. We have not recorded a liability as of June 30, 2022, because we believe a potential loss is not probable or reasonably estimable given the nature of the proceedings and our success so far by obtaining a dismissal with prejudice of the amended complaint.

Fisher v. Fennec Pharmaceuticals Inc. et al.

On February 9, 2022, plaintiff Jeffrey D. Fisher filed a putative federal securities class action lawsuit against the Company and our CEO and CFO in the United States District Court for the Middle District of North Carolina, captioned Fisher v. Fennec Pharmaceuticals Inc. et al., Case No. 1:22-cv-00115. The complaint asserts a putative class period from May 28, 2021 through November 28, 2021, and alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making materially false and misleading statements or omissions regarding the status of our third-party PEDMARK^TM product manufacturing facility, the facility’s compliance with cGMP, and the impact its status and compliance would have on regulatory approval for PEDMARK^TM in the period leading up to the Company’s November 29, 2021 receipt of a CRL for a subsequent NDA for PEDMARK^TM. The complaint seeks an unspecified amount of damages and attorneys’ fees and costs. On April 11, 2022, plaintiff Jeffrey D. Fisher filed a motion to be appointed lead plaintiff and represent the putative class and on May 9, 2022, the court appointed him as lead plaintiff.

On June 23, 2022, the lead plaintiff filed an amended complaint. The amended complaint asserts the same putative class period from May 28, 2021 through November 28, 2021, is brought against the same defendants, makes allegations similar to those in the original complaint. On August 7, 2022, defendants filed a motion to dismiss the amended complaint.

We believe that the lawsuit is without merit and intend to defend it vigorously. We cannot predict the outcome of this lawsuit. Failure by us to obtain a favorable resolution of the lawsuit could have a material adverse effect on our business, results of operations, and financial condition.

Hope Medical Enterprises, Inc.

On October 29, 2021, Hope Medical Enterprises, Inc. (“Hope”) filed two petitions for inter partes review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) of the USPTO. In its petitions, Hope seeks to invalidate our U.S. Patent No. 10,596,190 (“US ‘190”), which is exclusively in-licensed from OHSU and relates to a method of using our PEDMARK™ product, and our U.S. Patent No. 10,792,363 (“US ’363”), which relates to an anhydrous form of STS, which is the active pharmaceutical ingredient in our PEDMARK™ product. US ‘190 was issued on March 24, 2020. US ‘363 was issued on October 6, 2020.

On January 11, 2022, OHSU filed a Request for Supplemental Examination of US ‘190 requesting the consideration by the Central Re-examination Unit (“CRU”) of the USPTO of certain prior art references, including references cited by Hope in its Petition for IPR that are relevant to the granted claim of the patent. On January 28, 2022, the CRU found that the cited references constitute a substantial new question of patentability and ordered an ex parte reexamination of the single US ‘190 claim of pursuant to 35 U.S.C. § 257. On March 11, 2022, the CRU issued a substantive Office Action. We filed a preliminary response to Hope’s Request for IPR of the ‘190 Patent in February 2022, requesting that the ‘190 IPR be denied on the basis that the CRU is already reviewing the relevant issues in the Supplemental Examination Proceeding and is further advanced than PTAB in its consideration. On May 9, the PTAB granted Hope Medical’s Petition to Institute the IPR against the ‘190 patent and a stayed the Supplemental Examination pending the result of the ‘190 IPR. We expect a decision in the ‘190 IPR in May 2023, which can be appealed by the losing party. Further, in May 2022, the PTAB granted Hope Medical’s Petition to Institute the IPR against the ‘363 patent. We expect a decision in the ‘363 IPR in May 2023, which can be appealed by the losing party.

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

In February and April 2022, the USPTO issued Notices of Allowance to Fennec for two additional patents that cover the PEDMARK^TM pharmaceutical formulation. We expect these two additional U.S. patents to issue in the second half of 2022 and will be listed in the FDA’s Orange Book if our ending NDA for PEDMARK^TM is approved. These patents will expire in 2039, unless held invalid or unenforceable by a court or final jurisdiction.

We plan to vigorously defend our intellectual property rights related to PEDMARK™. However, we are unable to predict the outcome of Hope’s IPR petitions, or the Supplemental Examination, and an invalidation of one or both of the ‘190 and ‘363 patents may have a material adverse effect on our ability to protect our rights in PEDMARK™ beyond periods of marketing exclusivity for PEDMARK^TM possible in the United States under Orphan Drug Designation and in Europe under European Market Exclusivity for Pediatric Use (“PUMA”). We obtained U.S. Orphan Drug Designation for the use of PEDMARK^TM in the prevention of platinum-induced ototoxicity in pediatric patients in 2004. We plan to pursue PUMA upon approval of the MAA, which would allow for 10 years of market exclusivity upon PUMA approval.

Executive Severance

In the event of his termination with us other than for cause, we will be obligated to pay Mr. Raykov a one-time severance payment equal to twelve months of salary ($458 as of June 30, 2022). In the event of his termination with us other than for cause, we will be obligated to pay Mr. Andrade a one-time severance payment equal to six months of salary ($166 as of June 30, 2022).

Leases

We have an operating lease in Research Triangle Park, North Carolina utilizing small space within a commercial building. The operating lease has payments of $0.4 per month with no scheduled increases. This operating lease is terminable with 30 days’ notice and has no penalties or contingent payments due.

On January 23, 2020, the Company entered into an Office Service Agreement (the “Office Service Agreement”) with Regus to lease office space at in Hoboken, New Jersey. Per the terms of the Office Service Agreement, the monthly rent payments are $1. The Company was required to pay a security deposit of $2, which is the equivalent to two months of rent. The Office Service Agreement commenced on January 27, 2020, and terminates on July 31, 2020, thereafter the lease may continue on a month-to-month basis with either party being able to terminate the agreement by providing one months’ advance written notice of termination.

COVID-19

Our operations may be affected by the ongoing COVID-19 pandemic. The ultimate disruption that may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on our financial position, operations and cash flows. Possible effects may include, but are not limited to, disruption to our product launch which includes the ability of sales reps to communicate with oncologists, absenteeism in our labor workforce, unavailability of products and supplies used in operations, and a decline in value of our assets, including inventories, property and equipment, and marketable securities. COVID-19 has not had a material effect on our operations to date as we have historically had a workforce which works remotely, preparations for product launch have been under the assumption of a virtual launch, and product supplies have not been impacted.

7. Term Loans

On June 24, 2021, the Company announced it had negotiated a second amendment to the Bridge Bank Loan and Security Agreement with Bridge Bank. This amendment provides Fennec with a $20,000 debt facility comprised of 3 term loans. Term Loan A consists of $5,000, which was funded upon closing. Term Loan B consists of $7,500 to be funded upon NDA approval of PEDMARK^TM in the U.S. Term Loan C consists of $7,500 to be funded upon the occurrence the Company achieving consolidated trailing six-month revenues of $11,000 on or before December 31, 2022. The interest-only period for the facility has the ability to be extended from 18 months to 24 months from the funding of Term Loan B,

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

provided that Term Loan C is funded, and certain conditions are met. The Company intends to use the proceeds from the loans to provide working capital for commercial readiness activities prior to NDA approval as well as commercialization activities for PEDMARK^TM, if approved by the FDA.

On June 24, 2021, the Company drew $5,000 from Term Loan A. Term Loan A matures on July 1, 2025. Payments are for interest only through December 31, 2022. The Company shall make equal monthly payments of principal, together with applicable interest, following the interest only period until the maturity date. Interest shall accrue on the outstanding balance at a rate of 1% above prime as published by the Wall Street Journal on the first day of each month (5.75% at June 30, 2022). The Company is obligated to maintain a cash balance greater or equal to 3 times its monthly cash burn as calculated on the last date of the immediately preceding month. If Company fails to maintain the aforementioned cash balance, the bank can call the full amount of loan outstanding.

Collateral for Term Loan A, B and C shall not include any copyrights, patents, trademarks, servicemarks and applications therefor, now owned or hereafter acquired, or any claims for damages by way of any past, present, and future infringement of any of the foregoing (collectively, the “Intellectual Property”); provided, however, that the Collateral shall include all accounts and general intangibles that consist of rights to payment and proceeds from the sale, licensing or disposition of all or any part, or rights in the foregoing (the “Rights to Payment”). Notwithstanding the foregoing, if a judicial authority (including a U.S. Bankruptcy Court) holds that a security interest in the underlying Intellectual Property is necessary to have a security interest in the Rights to Payment, then the Collateral shall automatically, and effective as of the Effective Date, include the Intellectual Property to the extent necessary to permit perfection of Bridge Bank’s security interest in the Rights to Payment.

Aggregate annual payments due on Term Loan A as of June 30, 2022 are as follows (in thousands):


Years Ending December 31,		Amount
2022	$	—
2023		2,000
2024		2,000
2025		1,000
Total future payments		5,000
Less: unamortized debt discount		(10)
Total term loan, net of debt discount	$	4,990

In the event of default or change of control, all unpaid principal and all accrued and unpaid interest amounts (if any) become immediately due and payable including the prepayment fee. Events of default include, but are not limited to, a payment default, failure to achieve Approval Event before September 30, 2022, a material adverse change, and insolvency. The Bridge Bank facility is secured by all of the Company’s assets, including all capital stock held by the Company.

Debt issuance costs amounting to $55 securing access to Term Loans A, B and C were paid in cash to Bridge Bank on June 24, 2021. This amount was capitalized and is being amortized over the access period of the Term Loans. Upon drawing Term Loan A, the Company recorded a debt discount of $14, which was based on a pro-rata allocation of the issue costs to Loan A, reducing the capitalized amount by the same amount. The debt discount is being amortized over the life of Term Loan A.

8. Subsequent Events

On August 1, 2022, Fennec entered into a Securities Purchase Agreement (the “SPA”) with Petrichor (the “Investor”) in connection with the issuance of up to $45,000 of senior secured floating rate convertible notes (the “Notes”), issuable in multiple tranches. Upon certain closing conditions being satisfied, an initial tranche of $5,000 (the “First Closing Note”) will be issued and convertible at a price per share equal to the Initial Conversion Price equal to $8.11 per share, a 20%

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Fennec Pharmaceuticals Inc.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

(U.S. dollars and shares in thousands, except per share information)

premium of the 5-day volume weighted average price (the “VWAP”) of the Company’s common shares as traded on the Nasdaq Capital Market immediately prior announcement of the SPA.

A second tranche (the “Second Closing Notes”) of $20,000 is to be funded upon the approval of the United States Food and Drug Administration of the Company’s PEDMARK and satisfaction of other closing conditions. Subsequent to the funding of the Second Closing Note, and before December 31, 2023, the Company may draw up to $20,000 of additional financing under the SPA, in one or more tranches of $10,000 upon mutual agreement of the Company and the Investor (the “Subsequent Closing Notes”). Each of the Second and Subsequent Closing Notes will be convertible at a price per share equal to a 20% premium to the 5-day VWAP of the Company’s common shares as traded on the Nasdaq Capital Market immediately prior to the date on which the Company obtains FDA approval of PEDMARK (the “Second Closing Trigger”), provided, however, that the Second Closing Note and Subsequent Closing Notes Conversion Price shall be no more than one hundred and fifty percent (150%) of the Initial Conversion Price.

A commitment fee of 2.0% of the Notes is payable under the SPA. Half of such fee will be paid by the issuance on the first closing of warrants to purchase 55,498 Fennec common shares and half is payable in cash or warrants, at our election, on the second closing. The warrants will be exercisable at a price per share of $8.11 and will have a term of five years from the date of the grant.The initial $5 million tranche will be used to pay off the outstanding balance of the Bridge Bank Loan Security Agreement (Note 7).

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

CAUTIONARY STATEMENT

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Risk Factors.” We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 and the condensed consolidated financial statements and accompanying notes included elsewhere in this report.

Overview

Product Candidate - PEDMARK^TM

Our only product candidate in the clinical stage of development is:

PEDMARK^TM (a unique formulation of sodium thiosulfate (“STS”)). We have announced results of two Phase 3 clinical trials for the prevention of cisplatin induced hearing loss, or ototoxicity in children, including the pivotal Phase 3 study SIOPEL 6, “A Multicentre Open Label Randomised Phase 3 Trial of the Efficacy of Sodium Thiosulfate in Reducing Ototoxicity in Patients Receiving Cisplatin Chemotherapy for Standard Risk Hepatoblastoma,” and the proof of concept Phase 3 study in collaboration with the Children’s Oncology Group (“COG ACCL0431”) “A Randomized Phase 3 Study of Sodium Thiosulfate for the Prevention of Cisplatin-Induced Ototoxicity in Children”. COG ACCL0431 final results were published in the Lancet Oncology in 2016. SIOPEL 6 final results were published in the New England Journal of Medicine in June 2018.

We continue to focus our resources on the development of PEDMARK^TM.

PEDMARK^TM

We have licensed from Oregon Health & Science University (“OHSU”) intellectual property rights for the use of PEDMARK^TM as a chemoprotectant and are developing PEDMARK^TM as a protectant against the hearing loss often caused by platinum-based anti-cancer agents in children. Preclinical and clinical studies conducted by OHSU and others have indicated that PEDMARK^TM can effectively reduce the incidence of hearing loss caused by platinum-based anti-cancer agents.

Hearing loss among children receiving platinum-based chemotherapy is frequent, permanent and often severely disabling. The incidence of hearing loss in these children depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. In addition, adults undergoing chemotherapy for several common malignancies, including ovarian cancer, testicular cancer, and particularly head and neck cancer and brain cancer, often receive intensive platinum-based therapy and may experience severe, irreversible hearing loss, particularly in the high frequencies.

In the U.S. and Europe, it is estimated that, annually, over 10,000 children may receive platinum-based chemotherapy. The incidence of ototoxicity depends upon the dose and duration of chemotherapy. There is currently no established preventive agent for this hearing loss and only expensive, technically difficult and sub-optimal cochlear (inner ear) implants have been shown to provide some benefit. Infants and young children that suffer ototoxicity at critical stages

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of development lack speech language development and literacy, and older children and adolescents lack social-emotional development and educational achievement.

In March 2018, PEDMARK^TM received Breakthrough Therapy and Fast Track designations from the U.S. Food and Drug Administration (“FDA”). Further, PEDMARK^TM has received Orphan Drug Designation in the U.S. in this setting.

We initiated our rolling New Drug Application (“NDA”) for PEDMARK^TM for the prevention of ototoxicity induced by cisplatin chemotherapy patients 1 month to < 18 years of age with localized, non-metastatic, solid tumors with the FDA in December 2018. We announced that we had submitted full completion of the NDA in February 2020. The FDA set a Prescription Drug User Fee Act (“PDUFA”) target action date of August 10, 2020 for the completion of the FDA’s review. On August 10, 2020, we announced that we received a Complete Response Letter (“CRL”) from the FDA regarding our NDA for PEDMARK^TM, which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARK^TM on our behalf. Importantly, no clinical safety or efficacy issues were identified during the review and there was no requirement for further clinical data.

In May 2021, we announced the resubmission of our NDA for PEDMARK^TM and in June 2021 we further announced that the FDA accepted for filing the resubmission of our NDA and set a PDUFA target action date of November 27, 2021. On November 29, 2021, we announced that we received a CRL from the FDA regarding our NDA for PEDMARK^TM, which identified deficiencies in the third-party manufacturing facility that manufactures PEDMARK^TM on our behalf. In March 2022, we announced the resubmission of our NDA for PEDMARK^TM, and in April 2022, we further announced that the FDA accepted for filing the resubmission of our NDA and set a PDUFA target action date of September 23, 2022.

In August 2018, the Pediatric Committee (“PDCO”) of the European Medicines Agency (“EMA”) accepted our pediatric investigation plan (“PIP”) for sodium thiosulfate with the trade name Pedmarqsi for the condition of the prevention of platinum-induced hearing loss. An accepted PIP is a prerequisite for filing a Marketing Authorization Application (“MAA”) for any new medicinal product in Europe. The indication targeted by our PIP is for the prevention of platinum-induced ototoxic hearing loss for standard risk hepatoblastoma (“SR-HB”). Additional tumor types of the proposed indication will be subject to the Committee for Medicinal Products for Human Use (“CHMP”) assessment at the time of the MAA. No deferred clinical studies were required in the positive opinion given by PDCO. We were also advised that sodium thiosulfate (tradename to be determined) is eligible for submission of an application for a Pediatric Use Marketing Authorization (“PUMA”). A PUMA is a dedicated marketing authorization covering the indication and appropriate formulation for medicines developed exclusively for use in the pediatric population and provides data and market protection up to 10 years. Therefore, this decision allows us to proceed with the submission of a PUMA in the European Union (“EU”) with incentives of automatic access to the centralized procedure and up to 10 years of data and market protection. In February 2020, we announced that we had submitted a MAA for the prevention of ototoxicity induced by cisplatin chemotherapy patients 1 month to < 18 years of age with localized, non-metastatic, solid tumors. The EMA continues its review of our MAA.

Clinical Studies

PEDMARK^TM has been studied by cooperative groups in two Phase 3 clinical studies of survival and reduction of ototoxicity, COG ACCL0431 and SIOPEL 6. Both studies have been completed. The COG ACCL0431 protocol enrolled one of five childhood cancers typically treated with intensive cisplatin therapy for localized and disseminated disease, including newly diagnosed hepatoblastoma, germ cell tumor, osteosarcoma, neuroblastoma, and medulloblastoma. SIOPEL 6 enrolled only hepatoblastoma patients with localized tumors.

SIOPEL 6

In October 2007, we announced that our collaborative partner, the International Childhood Liver Tumour Strategy Group, known as SIOPEL, a multi-disciplinary group of specialists under the umbrella of the International Society of Pediatric Oncology, had launched a randomized Phase 3 clinical trial SIOPEL 6 to investigate whether STS reduces hearing loss in standard risk hepatoblastoma (liver) cancer patients receiving cisplatin as a monotherapy.

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The study was initiated in October 2007 initially in the United Kingdom and completed enrollment at the end of 2014. 52 sites from 11 countries enrolled 109 evaluable patients. Under the terms of our agreement, SIOPEL conducted and funded all clinical activities and we provided drug, drug distribution and pharmacovigilance, or safety monitoring, for the study. SIOPEL 6 was completed in December 2014 and the final results of SIOPEL 6 were published in The New England Journal of Medicine in June 2018.

The primary objectives of SIOPEL 6 were:

●

To assess the efficacy of STS to reduce the hearing impairment caused by cisplatin.

●

To carefully monitor any potential impact of STS on response to cisplatin and survival.

SIOPEL 6 - Results

Background / Objectives:

Bilateral high-frequency hearing loss is a serious permanent side-effect of cisplatin therapy, particularly debilitating when occurring in young children. STS has been shown to reduce cisplatin induced hearing loss. SIOPEL 6 was a Phase 3 randomized trial to assess the efficacy of STS in reducing ototoxicity in young children treated with cisplatin (Cis) for SR-HB.

Design / Methods:

Newly diagnosed patients with SR-HB, defined as tumor limited to PRETEXT I, II or III, no portal or hepatic vein involvement, no intra-abdominal extrahepatic disease, AFP >100ng/ml and no metastases, were randomized to Cis or Cis+STS for 4 preoperative and 2 postoperative courses. Cisplatin 80mg/m2 was administered over 6 hours, STS 20g/m2 was administered intravenously over 15 minutes exactly 6 hours after stopping cisplatin. Tumor response was assessed after 2 and 4 preoperative cycles with serum AFP and liver imaging. In case of progressive disease (PD), STS was to be stopped and doxorubicin 60mg/m2 combined with cisplatin. The primary endpoint was centrally reviewed absolute hearing threshold, at the age of ≥3.5 years by pure tone audiometry.

Results:

109 randomized patients (52 Cisplatin only ("Cis") and 57 Cis+STS) were evaluable. The combination of Cis+STS was generally well tolerated. With a patient follow-up time of 52 months, the three-year Event Free Survival ("EFS") for Cis was 78.8% and 82.1% for the Cis + STS. The three-year Overall Survival ("OS") is 92.3% for Cis and 98.2% for Cis + STS. Treatment failure defined as Progressive Disease ("PD") at 4 cycles was equivalent in both arms. Among the first 101 evaluable patients, hearing loss occurred in 29/46=63.0% under Cis and in 18/55=32.7% under Cis +STS, corresponding to a relative risk of 0.52(P=0.002).

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Conclusions:

This randomized Phase 3 trial in SR-HB of cisplatin versus cisplatin plus STS shows that the addition of STS significantly reduces the incidence of cisplatin-induced hearing loss without any evidence of tumor protection.

COG ACCL0431

In March 2008, we announced the activation of a Phase 3 trial with STS to prevent hearing loss in children receiving cisplatin-based chemotherapy in collaboration with the Children’s Oncology Group. The goal of this Phase 3 study was to evaluate in a multi-centered, randomized trial whether STS is an effective and safe means of preventing hearing loss in children receiving cisplatin-based chemotherapy for newly diagnosed germ cell, liver (hepatoblastoma), brain (medulloblastoma), nerve tissue (neuroblastoma) or bone (osteosarcoma) cancers. Eligible children, one to eighteen years of age, were to receive cisplatin according to their disease-specific regimen and, upon enrollment in this study, were randomized to receive STS or not. Efficacy of STS was determined through comparison of hearing sensitivity at follow-up relative to baseline measurements using standard audiometric techniques. The Children’s Oncology Group was responsible for funding the clinical activities for the study and we were responsible for providing the drug, drug distribution and pharmacovigilance, or safety monitoring, for the study. The trial completed enrollment of 131 pediatric patients in the first quarter of 2012. The final results of COG ACCL0431 were published in Lancet Oncology in December 2016.

COG ACCL0431 - Results

COG Study ACCL0431, “A Randomized Phase 3 Study of Sodium Thiosulfate for the Prevention of Cisplatin-Induced Ototoxicity in Children,” finished enrollment of 131 patients of which 125 were eligible patients. The patients had been previously diagnosed with childhood cancers.

The primary endpoint was to evaluate the efficacy of STS for prevention of hearing loss in children receiving cisplatin chemotherapy (hypothesis: 50% relative reduction in hearing loss).

Secondary endpoints included:

●

Compare change in mean hearing thresholds.

●

Compare incidence of other Grade 3/4 toxicities (renal and hematological).

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●

Monitor Event Free Survival (EFS) and Overall Survival (OS) in two groups.

125 eligible subjects were enrolled with germ cell tumor (32), osteosarcoma (29), neuroblastoma (26), medulloblastoma/pnet (26), hepatoblastoma (7), or other (5). Of these, 104 subjects (64 male and 29 <5 years old) were evaluable for the primary endpoint.

Subjects were randomized either to no treatment (control) or treatment with STS 16 grams/m2 IV over 15 minutes, 6 hours after each cisplatin dose. Hearing was measured using standard audiometry for age and data was reviewed centrally using American Speech-Language-Hearing Association criteria.

The proportion of subjects with hearing loss assessed at 4 weeks post the final cisplatin dose (primary endpoint):

●

The proportion of hearing loss for STS vs. Control was 28.6% (14/49) vs. 56.4% (31/55), respectively (p=0.004).

●

In a predefined subgroup of patients less than 5 years old with 29 eligible subjects: STS vs. Control was 21.4% (3/14) vs. 73.3% (11/15), respectively (p=0.005).

Conclusions:

●

STS protects against cisplatin-induced hearing loss in children across a heterogeneous range of tumor types, with even stronger efficacy in the protocol predefined subgroup of patients under five years old, and is not associated with serious adverse events attributed to its use.

●

Further potential clinical use will be informed by the final results of SIOPEL 6 study.

Capital Funding

We have not received and do not expect to have significant revenues from our product candidate until we are either able to sell our product candidate 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 $8.8 million for the six months ended June 30, 2022, and a net loss of $8.7 million for the six months ended June 30, 2021. As of June 30, 2022, our accumulated deficit was approximately $188.3 million ($179.5 million at December 31, 2021).

We believe that our cash and cash equivalents as of June 30, 2022, which totaled $14.9 million, plus the Bridge Bank Loan and Security Agreement or Petrichor Agreement, will be sufficient to meet our cash requirements through at least the next twelve months, including anticipated NDA approval and, if approved, the first commercial launch of PEDMARK^TMin the United States. Our projections of our capital requirements are subject to substantial uncertainty, and more capital than we currently anticipate may be required thereafter. To finance our continuing operations, we may 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. We may not be able to raise the necessary capital, or such funding may not be available on financially acceptable terms if at all. 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 efficiency of our operations and current resources. Our research and development expenses, which include expenses associated with our clinical trials, drug manufacturing to support clinical programs, consulting fees, sponsored research costs, toxicology studies, license fees, milestone payments, and other fees and costs related to the development of our product candidate, 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

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compensation of employees, stock-based compensation, professional fees, consulting fees, insurance and other administrative matters associated in support of our drug development programs.

Results of Operations

Three months ended June 30, 2022 versus three months ended June 30, 2021:


	Three Months Ended				Three Months Ended
In thousands of U.S. Dollars	June 30, 2022		%		June 30, 2021		%		Change
Revenue	$	—			$	—			$	—
Operating expenses:
Research and development		1,131	23	%		800	20	%		331
General and administration		3,878	77	%		3,120	80	%		758
Total operating expense		5,009	100	%		3,920	100	%		1,089
Loss from operations		(5,009)				(3,920)				(1,089)

Unrealized (loss)/gain on securities		(8)				(84)				76
Foreign currency transaction gain/(loss)		1				—				1
Amortization expense		(8)				—				(8)
Interest expense		(57)				(9)				(48)
Interest income		9				12				(3)
Net loss	$	(5,072)			$	(4,001)			$	(1,071)

Research and development expenses increased by $331 for the three months ended June 30, 2022, compared to the same period in 2021. The Company’s research and development activities during these three months increased as the Company’s efforts on a year over year basis were more focused on ongoing development and regulatory activities. The difference is mainly due to the timing of the NDA resubmission over the same period in 2021. General and administrative expenses increased by $758 over same period in 2021. Legal expenses increased $367 over same period in the prior year primarily as a result of the class action suits and patent defense. Sales and marketing activities increased by $620 over the same period in prior year as pre-commercialization activities increased. There was a decrease in non-cash equity compensation of $290 for the three months ended June 30, 2022 over the same period in 2021.

The Company holds shares of Processa (NASDAQ: PCSA) which are marked to market each balance sheet date and unrealized gains or losses are recognized at that time. The unrealized loss on those shares for the three months ended June 30, 2022 was $8. The Company has vendors that transact in Euros, Great British Pounds and Canadian Dollars. There was a foreign currency transaction gain of $1 for the three months ended June 30, 2022, compared to zero for the same period in 2021. Amortization expense is a non-cash expense and relates to amortization of the deferred issuance cost of the loan facilities with Bridge Bank. Amortization expense increased by $8 for the three months ended June 30, 2022 compared to the same period in 2021. Interest expense increased by $48 for the three months ended June 30 2022, over the same period in 2021. The increase relates to the interest being paid on the Bridge Bank loan facility. Interest income was $3 lower for the three months ended June 30, 2022, compared to the same period in 2021. This was driven mainly by lower average cash balances for the three months ended June 30, 2022 compared to the same period in 2021.

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Six months ended June 30, 2022 versus six months ended June 30, 2021:


	Six Months Ended				Six Months Ended
In thousands of U.S. Dollars	June 30, 2022		%		June 30, 2021		%		Change
Revenue	$	—			$	—			$	—
Operating expenses:
Research and development		2,568	30	%		3,216	36	%		(648)
General and administration		5,987	70	%		5,627	64	%		360
Total operating expenses		8,555	100	%		8,843	100	%		(288)
Loss from operations		(8,555)				(8,843)				288

Unrealized (loss)/gain on securities		(99)				98				(197)
Foreign currency transaction gain/(loss)		(2)				(8)				6
Amortization expense		(15)				—				(15)
Interest expense		(115)				(9)				(106)
Interest income		18				28				(10)
Net loss	$	(8,768)			$	(8,734)			$	(34)

Research and development expenses decreased by $648 for the six months ended June 30, 2022, compared to the same period in 2021. The main drivers of this decrease were a decline in manuafacturing activities ($384), and a decline in regulatory expense ($165). General and administrative expenses increased by $360 over same period in 2021 primarily related to legal expenses.

The Company holds shares of Processa (NASDAQ: PCSA) which are marked to market each balance sheet date and unrealized gains or losses are recognized at that time. The unrealized loss on those shares for the six months ended on June 30, 2022 was $99, which is in contrast to the $98 gain for the same period in 2021. Foreign currency transaction loss was $2 for the six months ended June 30, 2022 ($8 loss for same period in 2021). Amortization expense was $15 for the six months ended June 30, 2022 compared to $0 for the same period in 2021. In 2022, the Company is amortizing the capitalized costs associated with the renegotiated Bridge Bank loan facility. Interest expense increased $106 for the six months ended June 30, 2022 over same period in 2021. The expense relates to interest on the Bridge Bank loan facility. Interest income was $10 lower for the six months ended June 30, 2022, compared to the same period in 2021. This was driven mainly by lower average cash balances for the six months ended June 30, 2022 compared to the same period in 2021.

Liquidity and Capital Resources


	As of		As of
Selected Asset and Liability Data (thousands):	June 30, 2022		December 31, 2021
Cash and equivalents	$	14,915	$	21,100
Other current assets		639		1,287
Current liabilities		3,037		1,654
Working capital ⁽¹⁾		12,517		20,733
⁽¹⁾ [Current assets – current liabilities]

Selected Equity:
Common stock and additional paid in capital		195,552		194,015
Accumulated deficit		(188,254)		(179,486)
Shareholders’ equity		8,541		15,772

Cash and cash equivalents were $14,915 at June 30, 2022 and $21,100 at December 31, 2021. The decrease in cash and cash equivalents between June 30, 2022 and December 31, 2021 is the result of expenses related to the development and preparation of the NDA resubmission of PEDMARK^TM and general and administrative expenses, which was offset by minimal cash inflows of $61 from various option exercises. There was a decrease of $648 in other current assets between June 30, 2022 and December 31, 2021. This is a result of a $463 decrease in deferred charges related to the financing of

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our director and officer’s insurance policy, a $99 decrease in the value of Processa shares and a decrease in prepaid expenses of $544.

Current liabilities increased by $1,383 between June 30, 2022 and December 31, 2021. The increase was driven mainly by the re-classification of $1,000 from long to short-term debt. Payables and accrued expenses increased $361 due to timing of select manufacturing and expenses associated with the PEDMARK^TM pre-commercialization effort.

Working capital decreased between December 31, 2021 and June 30, 2022 by $8,216. The decrease relates to cash expenditures for operating activities for the six months ended June 30, 2022, the $1,000 reclassification of long-term debt to current liability, offset by the $61 cash inflow from option exercises. The Company expects increases in cash outflows related to pre-commercialization and commercialization activities in the coming quarters upon potential NDA approval.

The following table illustrates a summary of cash flow data for the three and six month periods ended June 30, 2022 and 2021:


Selected Cash Flow Data	Three Months Ended June 30,				Six Months Ended June 30,
(dollars and shares in thousands)	2022		2021		2022		2021
Net cash used in operating activities	$	(3,390)	$	(4,426)	$	(6,246)	$	(8,019)
Net cash provided by investing activities		—		—		—		—
Net cash provided by financing activities		46		4,968		61		4,968
Net cash flow	$	(3,344)	$	542	$	(6,185)	$	(3,051)

Net cash used in operating activities for the three and six months ended June 30, 2022 primarily reflected a net loss of $5,072 and $8,768, respectively. These three and six month losses were adjusted for the add back of non-cash items consisting of $1,043 and $1,476, respectively, in stock-based compensation expense, with unrealized loss on securities of $8 and $99 added back for the three and six months ended June 30, 2022, respectively. For the three and six months ended June 30, 2022, there was a net change in prepaid and other assets of $221 and $548, respectively; coupled with a net increase in current liabilities for the three and six month periods ended June 30, 2022 of $401 and $383, respectively. Three and six month cash flows from operating activities were negative $3,390 and $6,246, respectively, for the period ended June 30, 2022. Net cash provided by financing activities for the three and six months ended June 30, 2022 was $46 and $61, respectively. Financing activities consisted of proceeds from the exercises of various options. Net cash flows from the three and six month period ended June 30, 2022 were negative $3,344 and $6,185, respectively.

We continue to pursue various strategic alternatives including collaborations with other pharmaceutical and biotechnology companies. Our projections of further capital requirements are subject to substantial uncertainty. Our working capital requirements may fluctuate in future periods depending upon numerous factors, including: our ability to obtain additional financial resources; our ability to enter into collaborations that provide us with up-front payments, milestones or other payments; results of our research and development activities; progress or lack of progress in our preclinical studies or clinical trials; unfavorable toxicology in our clinical programs; our drug substance requirements to support clinical programs; change in the focus, direction, or costs of our research and development programs; headcount expense; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our patent claims; competitive and technological advances; the potential need to develop, acquire or license new technologies and products; our business development activities; new regulatory requirements implemented by regulatory authorities; the timing and outcome of any regulatory review process; and commercialization activities, if any.

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 June 30, 2022, we had approximately $278 in our cash accounts and $14,637 in savings and money market accounts. While we have never experienced any loss or write down of our money market investments since our inception, the amounts we hold in money market accounts are substantially above the $250 amount insured by the FDIC and may lose value.

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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.

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.

Research and Development

Our research and development efforts have been focused on the development of PEDMARK^TM since 2013.

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 issues are reviewed internally by our executive management and supporting scientific team.

Research and development expenses for the three and six months ended June 30, 2022 was $1,131 and $2,568, respectively. For the same periods in 2021, research and development expense was $800 and $3,216, respectively. We have decreased our research and development expenses related to PEDMARK^TMas our efforts have shifted to pre-commercialization activities after the NDA resubmission in March 2022.

Our product candidate still requires significant, time-consuming and costly research and development, testing and regulatory clearances. In developing our product candidate, 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 our product candidate will be ineffective or toxic, or will otherwise fail to receive the necessary regulatory clearances. There is a risk that our product candidate 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 candidate 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 this product candidate. 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 candidate, if ever.

Critical Accounting Policies and Use of Estimates

A summary of our critical accounting policies and use of estimates are presented in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (filed February 28, 2022). There have been no material changes to our critical accounting policies and use of estimates during the six months ended June 30, 2022.

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. 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

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issuer and maximum-weighted average time to maturity of twelve months. This policy applies to all of our financial resources.

At June 30, 2022, we had $14,637 in money market investments and savings accounts as compared to $21,018 at December 31, 2021; these investments typically have minimal risk. While we have never experienced any loss or write down of our money market investments since our inception, the amounts we hold in money market accounts are substantially above the $250 amount insured by the FDIC and may lose value.

Foreign Currency Exposure

We are subject to foreign currency risks as we purchase goods and services which are denominated in Euro, Great British Pounds and Canadian dollars. To date, we have not employed the use of derivative instruments; however, we do hold Canadian dollars which we use to pay vendors in Canada and other corporate obligations. At June 30, 2022, we held approximately $49 Canadian dollars ($37 as presented to U.S. dollars). At December 31, 2021, we held approximately $43 Canadian dollars ($34 as presented into U.S. dollars).

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 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 SEC rules and forms, and that such information is accumulated and communicated to our management, our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. 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. Based on this evaluation at the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and our Chief Financial Officer, have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings.

Chapman v. Fennec Pharmaceuticals Inc. et al.

On September 3, 2020, plaintiff Jim Chapman filed a putative federal securities class action lawsuit against the Company, our Chief Executive Officer, Rostislav Raykov, and Chief Financial Officer, Robert Andrade, in the United States District Court for the Middle District of North Carolina, captioned Chapman v. Fennec Pharmaceuticals Inc. et al., Case No. 1:20-cv-00812. The complaint alleged that prior to our August 10, 2020 receipt of a CRL from the FDA concerning our NDA for PEDMARK™, defendants made materially false or misleading statements and failed to disclose material facts about our third-party PEDMARK™ product manufacturing facility and the impact the facility would have on regulatory approval for PEDMARK™. On December 3, 2020, the court appointed a lead plaintiff to represent the putative class. On February 1, 2021, the lead plaintiff filed an amended complaint. The amended complaint added members of our Board of Directors as defendants, asserted a putative class period from December 20, 2018 through August 10, 2020, made allegations similar

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to those in the original complaint, claimed the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and sought an unspecified amount of compensatory damages and attorneys’ fees and costs.

On March 3, 2021, defendants filed a motion to dismiss the amended complaint. On April 2, 2021, lead plaintiff filed an opposition to the motion to dismiss. On April 16, 2021, defendants filed a reply in support of the motion to dismiss, and on December 16, 2021, the Magistrate Judge entered an order recommending that defendants’ motion to dismiss be granted in its entirety. On January 24, 2022, lead plaintiff filed objections to the Magistrate Judge’s recommendation, and defendants filed their response on February 3, 2022. On March 2, 2022, the U.S. District Court Judge adopted the Magistrate Judge’s order and recommendation and entered an order and judgment dismissing the amended complaint with prejudice.

On March 30, 2022, lead plaintiff filed a motion for post judgment relief, seeking leave to file a second amended complaint. In his proposed second amended complaint, lead plaintiff seeks to add allegations stemming from the receipt of a second CRL following our resubmission of our NDA for PEDMARK™, which we received on November 29, 2021, among other things. On April 20, 2022, defendants filed an opposition to lead plaintiff’s motion for post judgment relief. On May 4, 2022, lead plaintiff submitted a reply in support of his motion.

Fisher v. Fennec Pharmaceuticals Inc. et al.

On February 9, 2022, plaintiff Jeffrey D. Fisher filed a putative federal securities class action lawsuit against the Company and our CEO and CFO in the United States District Court for the Middle District of North Carolina, captioned Fisher v. Fennec Pharmaceuticals Inc. et al., Case No. 1:22-cv-00115. The complaint asserts a putative class period from May 28, 2021 through November 28, 2021, and alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making materially false and misleading statements or omissions regarding the status of our third-party PEDMARK™ product manufacturing facility, including the facility’s compliance with cGMP and remediation of deficiencies outlined in the August 10, 2020 CRL, and the impact its status and compliance would have on regulatory approval for PEDMARK™ in the period leading up to the Company’s November 29, 2021 receipt of a CRL for a subsequent NDA for PEDMARK™. The complaint seeks an unspecified amount of damages and attorneys’ fees and costs.

On April 11, 2022, plaintiff Jeffrey D. Fisher filed a motion to be appointed lead plaintiff and represent the putative class, and on May 9, 2022, the court appointed him as lead plaintiff.

Hope Medical Enterprises, Inc.

On October 29, 2021, Hope Medical Enterprises, Inc. (“Hope”) filed two petitions for inter partes review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”) of the USPTO. In its petitions, Hope seeks to invalidate our U.S. Patent No. 10,596,190 (“US ‘190”), which is exclusively in-licensed from Oregon Health & Science University (“OHSU”) and relates to a method of using our PEDMARK™ product, and our U.S. Patent No. 10,792,363 (“US ’363”),

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which relates to an anhydrous form of STS, which is the active pharmaceutical ingredient in our PEDMARK™ product. US ‘190 was issued on March 24, 2020. US ‘363 was issued on October 6, 2020.

On January 11, 2022, our licensor OHSU filed a Request for Supplemental Examination of US ‘190 requesting the consideration by the Central Re-examination Unit (“CRU”) of the USPTO of certain prior art references, including references cited by Hope in its Petition for IPR that are relevant to the granted claim of the patent. On January 28, 2022, the CRU found that the cited references constitute a substantial new question of patentability and ordered an ex parte reexamination of the single US ‘190 claim of pursuant to 35 U.S.C. § 257. On March 11, 2022, the CRU issued a substantive Office Action. We filed a preliminary response to Hope’s Request for IPR of the ‘190 Patent in February 2022, requesting that the ‘190 IPR be denied on the basis that the CRU is already reviewing the relevant issues in the Supplemental Examination Proceeding and is further advanced than PTAB in its consideration. On May 9, the PTAB granted Hope Medical’s Petition to Institute the IPR against the ‘190 patent and a stayed the Supplemental Examination pending the result of the ‘190 IPR. Further, in May 2022, the PTAB granted Hope Medical’s Petition to Institute the IPR against the ‘363 patent. We expect a decision in the ‘363 IPR in May 2023, which can be appealed by the losing party.

In February and April 2022, the USPTO issued Notices of Allowance to Fennec for two additional patents that cover the PEDMARK^TM pharmaceutical formulation. We expect these two additional U.S. patents to issue in the second half of 2022 and will be listed in the FDA’s Orange Book on approval of PEDMARK^TM. These patents will expire in 2039, unless held invalid or unenforceable by a court or final jurisdiction.

Item 1A. Risk Factors.

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 28, 2022 (the “Annual Report”), includes a detailed discussion of our risk factors under the heading “PART I, Item 1A – Risk Factors.” You should carefully consider the risk factors discussed in our Annual Report, as well as other information in this quarterly report. Any of these risks could cause our business, financial condition, results of operations and future growth prospects to suffer. We are not aware of any material changes from the risk factors previously disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

On August 12, 2022, we issued a press release announcing our financial results for the quarter ended June 30, 2022. A copy of the news release is attached to this report as Exhibit 99.1. The press release is being furnished and shall not be deemed to be filed for the purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or

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incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, unless such subsequent filing specifically references the press release.

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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 June 30, 2022 (filed herewith).

101.INS*		Inline XBRL Instance Document

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

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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.


	Fennec Pharmaceuticals Inc.

Date: August 12, 2022	By:	/s/ Rostislav Raykov
		Rostislav Raykov
		Chief Executive Officer
		(principal executive officer)

Date: August 12, 2022	By:	/s/ Robert Andrade
		Robert Andrade
		Chief Financial Officer
		(principal financial and chief accounting officer)

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Fennec Pharmaceuticals (FENC) 10-Q2022 Q2 Quarterly report

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