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EX-32.1 - EXHIBIT 32.1 - FENNEC PHARMACEUTICALS INC.v360179_ex32-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2013

OR

 

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

For the transition period from____ to ____

 

Commission File Number: 001-32295

 

ADHEREX TECHNOLOGIES INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Canada

(State or Other Jurisdiction of

Incorporation or Organization

 

20-0442384

(I.R.S. Employer

Identification No.)

   

PO Box 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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No ¨

 

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

 

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

 

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

 

As of November 10, 2013, there were 25,157,618 shares of Adherex Technologies Inc. common stock outstanding.

 

 
 

 

TABLE OF CONTENTS

 

  Page
   
PART I: FINANCIAL INFORMATION  
   
Item 1.  Financial Statements (Unaudited) 3
   
Unaudited Interim Consolidated Balance Sheets –September 30, 2013 and December 31, 2012 3
   
Unaudited Interim Consolidated Statements of Operations –For the Three Months and Nine Months Ended September 30, 2013 and 2012 4
   
Unaudited Interim  Consolidated Statements of Cash Flows –For the Three Months and Nine Months Ended September 30, 2013 and 2012 5
   
Unaudited Interim  Consolidated Statements of Stockholders' Equity (Deficiency)-For the Period Ended September 3,1996 to September 30, 2013 6
   
Notes to the Unaudited Interim Consolidated Financial Statements 10
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk 22
   
Item 4.  Controls and Procedures 22
   
PART II: OTHER INFORMATION 23
   
Item 1. Legal Proceedings 23
   
Item 1A.  Risk Factors 23
   
Item 2. Unregistered Sales of Equity Securities 25
   
Item 3. Defaults Upon Senior Securities 25
   
Item 4. Mine Safety Disclosure 25
   
Item 5. Other Information 25
   
Item 6.  Exhibits 26
   
Signatures 27

 

2
 

  

PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Balance Sheets

(U.S. Dollars and shares in thousands)

 

   September 30,
2013
   December 31,
2012
 
         
Assets          
           
Current assets:          
Cash and cash equivalents  $538   $2,303 
Prepaid expenses   101    56 
Other current assets   1    6 
Total assets  $640   $2,365 
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable  $315   $259 
Accrued liabilities   65    423 
Derivative liability (Note 3)   4,387    6,640 
           
Total liabilities   4,767    7,322 
           
Commitments (see Note 6)          
           
Stockholders' equity:          
Common stock, no par value; unlimited shares authorized;
25,158 shares issued and outstanding (2012-25,158)
   65,952    65,952 
Additional paid-in capital   38,488    38,391 
Deficit accumulated during development stage   (109,810)   (110,543)
Accumulated other comprehensive income   1,243    1,243 
Total stockholders’ equity (deficiency)   (4,127)   (4,957)
Total liabilities and stockholders’ equity  $640   $2,365 

 

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

 

3
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Operations

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

 

   Three Months Ended   Nine Months Ended   Cumulative
From
September 3,
1996 to
 
   September 30,
2013
   September 30,
2012
   September 30,
2013
   September 30,
2012
   September 30,
2013
 
                     
Revenue  $-   $-   $-   $-   $- 
                          
Operating expenses:                         
Research and development   (224)   357    507    1,514    69,675 
Impairment of capital assets   -    -    -    -    386 
Gain on deferred lease inducements   -    -    -    -    (497)
Acquired in-process research and development   -    -    -    -    13,094 
General and administrative   275    273    1,008    983    33,102 
Total operating expenses   51    630    1,515    2,497    115,760 
                          
Loss from operations   (51)   (630)   (1,515)   (2,497)   (115,760)
                          
Other (expense) income :                         
Settlement of Cadherin litigation   -    -    -    -    (1,283)
Interest expense   -    -    -    -    (19)
Unrealized (loss) gain on derivatives   (1,708)   (139)   2,254    3,832    5,511 
Other income   (7)   -    (8)   -    251 
Interest income and other   -    5    3    13    2,900 
Total other income (expense), net   (1,715)   (134)   2,249    3,845    7,360 
                          
Net (loss) income  $(1,766)  $(764)  $734   $1,348   $(108,400)
                          
Basic and diluted net (loss) income per common share  $(0.07)  $(0.03)  $0.03   $0.05      
Weighted-average number of common shares outstanding, basic   25,158    25,158    25,158    25,158      
                          
Weighted-average number of common shares outstanding, diluted   25,158    25,158    25,648    25,158      

 

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

 

4
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Cash Flows

(U.S. Dollars and shares in thousands)

 

   Three Months Ended   Nine Months Ended   Cumulative
From
September 3,
 
   September
30, 2013
   September
30, 2012
   September
30, 2013
   September
30, 2012
   1996 to
September 30, 2013
 
Cash flows (used in):                         
Operating activities:                         
                          
Net (loss) income  $(1,766)  $(764)  $734   $1,348   $(108,400)
Adjustments to reconcile net loss to net cash used in operating activities:                         
Depreciation and amortization   -    -    -    -    1,404 
Non-cash settlement of Cadherin litigation   -    -    -    -    1,187 
Unrealized loss (gain) on derivative   1,708    139    (2,254)   (3,832)   (5,511)
Amortization of deferred lease inducements   -    -    -    -    (412)
Unrealized foreign exchange (income) loss   -    -    -    -    36 
Loss on impairment of capital assets   -    -    -    -    386 
Non-cash severance   -    -    -    -    168 
Stock-based compensation - consultants   27    3    -    38    1,075 
Stock-based compensation - employees   41    -    97    17    10,339 
Acquired in-process research and development   -    -    -    -    13,094 
Changes in operating assets and liabilities   (479)   (104)   (342)   (8)   (167)
Net cash used in operating activities   (469)   (726)   (1,765)   (2,437)   (86,801)
Investing activities:                         
Purchase of capital assets   -    -    -    -    (1,440)
Disposal of capital assets   -    -    -    -    115 
Proceeds from sale of assets   -    -    -    -    24 
Release of restricted cash   -    -    -    -    190 
Restricted cash   -    -    -    -    (209)
Purchase of short-term investments   -    -    -    -    (22,148)
Redemption of short-term investments   -    -    -    -    22,791 
Investment in Cadherin Biomedical Inc.   -    -    -    -    (166)
Acquired intellectual property rights   -    -    -    -    (640)
Net cash used in investing activities   -    -    -    -    (1,483)
Financing activities:                         
Conversion of long-term debt to equity   -    -    -    -    68 
Long-term debt repayment   -    -    -    -    (65)
Capital lease repayments   -    -    -    -    (8)
Issuance of units, net of issue costs   -    -    -    -    86,443 
Registration expense   -    -    -    -    (465)
Proceeds from convertible note   -    -    -    -    3,017 
Other liability repayments   -    -    -    -    (87)
Financing expenses   -    -    -    -    (544)
Security deposits received   -    -    -    -    35 
Proceeds from exercise of stock options   -    -    -    -    51 
Net cash provided by financing activities   -    -    -    -    88,445 
                          
Effect of exchange rate on cash and cash equivalents   -    -    -    -    377 
(Decrease) Increase  in cash and cash equivalents   (469)   (726)   (1,765)   (2,437)   538 
Cash and cash equivalents - Beginning of period   1,007    3,586    2,303    5,297    - 
                          
Cash and cash equivalents - End of period  $538   $2,860   $538   $2,860   $538 

 

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

 

5
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency)

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

 

                       Deficit     
           Non-redeemable       Accumulated   Accumulated   Total 
           Preferred Stock   Additional   Other   During   Stockholders' 
   Common Stock   of   Paid-in   Comprehensive   Development   Equity 
   Number (Note 4)   Amount   Subsidiary   Capital   Income   Stage   (Deficiency) 
Balance at September 3, 1996   -   $-   $-   $-   $-   $-   $- 
Issuance of common stock   89    -    -    -    -    -    - 
Net loss   -    -    -    -    -    (37)   (37)
Balance at June 30, 1997, 2005   89    -    -    -    -    (37)   (37)
Net loss   -    -    -    -    -    (398)   (398)
Balance at June 30, 1998   89    -    -    -    -    (435)   (435)
Exchange of Adherex Inc. shares for Adherex Technologies Inc. shares   (89)   -    -    -    -    -    - 
Issuance of common stock   239    1,615    -    -    -    -    1,615 
Cumulative translation adjustment   -    -    -    -    20    -    20 
Net loss   -    -    -    -    -    (958)   (958)
Balance at June 30, 1999   239    1,615    -    -    20    (1,393)   242 
Issuance of common stock   16    793    -    -    -    -    793 
Issuance of equity rights   -    -    -    171    -    -    171 
Issuance of special warrants   -    -    -    255    -    -    255 
Settlement advances:                                   
Issuance of common stock   16    175    -    -    -    -    175 
Cancellation of common stock   (7)   -    -    -    -    -    - 
Cumulative translation adjustment   -    -    -    -    16    -    16 
Net loss   -    -    -    -    -    (1,605)   (1,605)
Balance at June 30, 2000   264    2,583    -    426    36    (2,998)   47 
Issuance of common stock:                                   
Initial Public Offering ("IPO")   74    5,727    -    -    -    (38)   5,689 
Other   5    341    -    -    -    -    341 
Issuance of special warrants   -    -    -    1,722    -    -    1,722 
Conversion of special warrants   30    1,977    -    (1,977)   -    -    - 
Issuance of Series A special warrants   -    -    -    4,335    -    -    4,335 
Conversion of Series A special warrants   69    4,335    -    (4,335)   -    -    - 
Conversion of equity rights   4    171    -    (171)   -    -    - 
Cumulative translation adjustment   -    -    -    -    182    -    182 
Net loss   -    -    -    -    -    (2,524)   (2,524)
Balance at June 30, 2001   446    15,134    -    -    218    (5,560)   9,792 
Cumulative translation adjustment   -    -    -    -    11    -    11 
Net loss   -    -    -    -    -    (3,732)   (3,732)
Balance at June 30, 2002   446    15,134    -    -    229    (9,292)   6,071 

 

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

 

6
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency) (Continued)

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

 

                       Deficit     
           Non-redeemable       Accumulated   Accumulated   Total 
           Preferred Stock   Additional   Other   During   Stockholders' 
   Common Stock   of   Paid-in   Comprehensive   Development   Equity 
   Number (Note 4)   Amount   Subsidiary   Capital   Income   Stage   (Deficiency) 
Balance at June 30, 2002   446    15,134    -    -    229    (9,292)   6,071 
Common stock issued for Oxiquant acquisition   446    11,077    -    543    -    -    11,620 
Exercise of stock options   1    4    -    -    -    -    4 
Distribution to shareholders   -    -    -    -    -    (158)   (158)
Stated capital reduction   -    (9,489)   -    9,489    -    -    - 
Stock options issued to consultants   -    -    -    4    -    -    4 
Equity component of June convertible  notes   -    -    -    1,058    -    -    1,058 
Financing warrants   -    -    -    53    -    -    53 
Cumulative translation adjustment   -    -    -    -    (159)   -    (159)
Net loss   -    -    -    -    -    (17,795)   (17,795)
Balance at June 30, 2003   893    16,726    -    11,147    70    (27,245)   698 
Stock options issued to consultants   -    -    -    148    -    -    148 
Repricing of warrants related to financing   -    -    -    18    -    -    18 
Equity component of December convertible notes   -    -    -    1,983    -    -    1,983 
Financing warrants   -    -    -    54    -    -    54 
Conversion of June convertible notes   96    1,216    -    (93)   -    -    1,123 
Conversion of December convertible notes   60    569    -    (398)   -    -    171 
Non-redeemable preferred stock   -    -    1,045    -    -    -    1,045 
December private placement   640    8,053    -    5,777    -    -    13,830 
May private placement   259    6,356    -    2,118    -    -    8,474 
Exercise of stock options   1    23    -    -    -    -    23 
Amalgamation of 2037357 Ontario Inc.   44    660    (1,045)   363    -    -    (22)
Cumulative translation adjustment   -    -    -    -    (219)   -    (219)
Net loss   -    -    -    -    -    (6,872)   (6,872)
Balance at June 30, 2004   1,993    33,603    -    21,117    (149)   (34,117)   20,454 
Stock options issued to consultants   -    -    -    39    -    -    39 
Stock options issued to employees   -    -    -    604    -    -    604 
Cost related to SEC registration   -    (493)   -    -    -    -    (493)
Acquisition of Cadherin Biomedical Inc.   37    1,252    -    -    -    -    1,252 
Cumulative translation adjustment   -    -    -    -    1,392    -    1,392 
Net loss - six months ended December 31, 2004   -    -    -    -    -    (6,594)   (6,594)
Balance at December 31, 2004   2,030    34,362    -    21,760    1,243    (40,711)   16,654 

 

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

 

7
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency) (Continued)

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

 

                       Deficit     
           Non-redeemable       Accumulated   Accumulated   Total 
           Preferred Stock   Additional   Other   During   Stockholders' 
   Common Stock   of   Paid-in   Comprehensive   Development   Equity 
   Number (Note 4)   Amount   Subsidiary   Capital   Income   Stage   (Deficiency) 
Balance at December 31, 2004   2,030    34,362    -    21,760    1,243    (40,711)   16,654 
Financing costs   -    (141)   -    -    -    -    (141)
Exercise of stock options   1    25    -    -    -    -    25 
Stock options issued to consultants   -    -    -    276    -    -    276 
July private placement   337    7,060    -    1,074    -    -    8,134 
Net loss   -    -    -    -    -    (13,871)   (13,871)
Balance at December 31, 2005   2,368    41,306    -    23,110    1,243    (54,582)   11,077 
Stock options issued to consultants   -    -    -    100    -    -    100 
Stock options issued to employees   -    -    -    491    -    -    491 
May private placement   431    5,218    -    822    -    -    6,040 
Net loss   -    -    -    -    -    (16,440)   (16,440)
Balance at December 31, 2006   2,799    46,524    -    24,523    1,243    (71,022)   1,268 
Stock options issued to consultants   -    -    -    59    -    -    59 
Stock options issued to employees   -    -    -    2,263    -    -    2,263 
February financing   4,209    17,842    -    5,379    -    -    23,221 
Exercise of warrants   116    563    -    131    -    -    694 
Net income   -    -    -    -    -    (13,357)   (13,357)
Balance at December 31, 2007   7,124    64,929    -    32,355    1,243    (84,379)   14,148 
Stock options issued to consultants   -    -    -    88    -    -    88 
Stock options issued to employees   -    -    -    2,417    -    -    2,417 
Net income   -    -    -    -    -    (13,600)   (13,600)
Balance at December 31, 2008   7,124    64,929    -    34,860    1,243    (97,979)   3,053 
Stock options issued to consultants   -    -    -    10    -    -    10 
Stock options issued to employees   -    -    -    355    -    -    355 
Net income   -    -    -    -    -    (3,012)   (3,012)
Balance at December 31, 2009   7,124    64,929    -    35,225    1,243    (100,991)   406 
Stock options issued to consultants   -    -    -    53    -    -    53 
Stock options issued to employees   -    -    -    2,439    -    -    2,439 
April financing   13,337    -    -    -    -    -    - 
Net income   -    -    -    -    -    (7,824)   (7,824)
Balance at December 31, 2010   20,461    64,929    -    37,717    1,243    (108,815)   (4,926)

 

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

 

8
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Deficiency) (Continued)

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

 

                       Deficit     
           Non-redeemable       Accumulated   Accumulated   Total 
           Preferred Stock   Additional   Other   During   Stockholders' 
   Common Stock   of   Paid-in   Comprehensive   Development   Equity 
   Number (Note 4)   Amount   Subsidiary   Capital   Income   Stage   (Deficiency) 
Balance at December 31, 2010   20,461    64,929    -    37,717    1,243    (108,815)   (4,926)
Stock options issued to consultants   -    -    -    20    -    -    20 
Stock options issued to employees   -    -    -    129    -    -    129 
Rights offering   4,697    1,023    -    199    -    (1,250)   (28)
Net income   -    -    -    -    -    4,685    4,685 
Balance at December 31, 2011   25,158    65,952    -    38,065    1,243    (105,380)   (120)
Stock options issued to consultants   -    -    -    152    -    -    152 
Stock options issued to employees   -    -    -    174    -    -    174 
Net income   -    -    -    -    -    (5,163)   (5,163)
Balance at December 31, 2012   25,158    65,952    -    38,391    1,243    (110,543)   (4,957)
Net income   -    -    -    -    -    (4,108)   (4,108)
Balance at March 31, 2013   25,158    65,952    -    38,391    1,243    (114,651)   (9,065)
Stock options issued to employees   -    -    -    29    -    -    29 
Net income   -    -    -    -    -    6,607    6,607 
Balance at June 30, 2013   25,158    65,952    -    38,420    1,243    (108,044)   (2,429)
Stock options issued to consultants   -    -    -    27    -    -    27 
Stock options issued to employees   -    -    -    41    -    -    41 
Net income   -    -    -    -    -    (1,766)   (1,766)
Balance at September 30, 2013   25,158   $65,952   $-   $38,488   $1,243   $(109,810)  $(4,127)

 

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

 

9
 

 

Adherex Technologies Inc.

(a development stage company)

Notes to the Unaudited Interim Consolidated Financial Statements

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

 

1.Going Concern

 

Adherex Technologies Inc. (“Adherex”), a Canadian Corporation, together with its wholly owned subsidiaries Oxiquant, Inc. (“Oxiquant”) and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc. (“CBI”), a Canadian corporation, collectively referred to herein as the “Company”, is a development stage biopharmaceutical company focused on cancer therapeutics.

 

These unaudited interim consolidated financial statements have been prepared using generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) that are applicable to a going concern which contemplates that Adherex 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. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company is a development stage company and during the nine months ended September 30, 2013, generated net income of $734 which includes an unrealized non-cash gain of $2,254 on derivative liabilities. Cash used in operations in the nine months ended September 30, 2013 was $1,765. At September 30, 2013, the Company had an accumulated deficit of $109,810 and had experienced negative cash flows from operations since inception in the amount of $86,801. These circumstances cast substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the use of accounting principles applicable to a going concern may not be appropriate. The Company will need to obtain additional funding in the future in order to finance its business strategy beyond the current trials through the issuance of equity, debt or collaboration. If the Company fails to arrange for sufficient capital on a timely basis, it may be required to curtail its business activities until it can obtain adequate financing.

 

These financial statements do not reflect the potentially material adjustments in the carrying values of assets and liabilities, the reported expenses, and the balance sheet classifications used, that would be necessary if the going concern assumption were not appropriate.

 

2.Significant Accounting Policies

 

Basis of presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These unaudited interim consolidated financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.The Company's accounting policies are consistent with those presented in the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2012. These unaudited interim consolidated financial statements have been prepared in U.S. dollars.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates include certain accruals, valuation of derivative warrant liability and the value of stock based compensation. Actual results could differ from those estimates.

 

In the opinion of management, these unaudited interim consolidated financial statements include all normal and recurring adjustments, considered necessary for the fair presentation of the Company’s financial position at September 30, 2013, and to state fairly the results for the periods presented. The most significant estimates included in these financial statements are the derivative instruments described in Note 3. There were significant changes in their valuation during the quarter.

 

10
 

 

Adherex Technologies Inc.

(a development stage company)

Notes to the Unaudited Interim Consolidated Financial Statements

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

 

New Accounting Pronouncements Adopted

 

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"), which requires companies to provide information about the amounts reclassified out of AOCI by component. In addition, companies are required to report significant amounts reclassified out of AOCI by the respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, companies are required to cross-reference to other disclosures that provide additional detail on those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 and has not impacted the Company's consolidated financial condition, results of operations or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," an amendment to FASB Accounting Standards Codification, or "ASC" Topic 740, Income Taxes, or "FASB ASC Topic 740." This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application are permitted. This accounting guidance is not expected to have a material impact on our consolidated financial statements or financial statement disclosures.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of highly liquid investments with original maturities at the date of purchase of three months or less. The Company places its cash and cash equivalents in investments held by financial institutions in accordance with its investment policy designed to protect the principal investment. At September 30, 2013, the Company had $261 in money market investments, which typically have minimal risk and $277 in cash of which $135 was in Canadian dollars. The financial markets have been volatile resulting in concerns regarding the recoverability of money market investments. The Company did not experience any loss or write down of its money market investments for the nine-month periods ended September 30, 2013 and 2012, respectively.

 

3.Derivative Instruments

  

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

The Company's derivative instruments include warrants to purchase 18,035 shares, the exercise prices for which are denominated in a currency other than the Company's functional currency, as follows:

·Warrants to purchase 13,337 shares exercisable at CAD$1.44 per whole share that expire on April 30, 2015; and
·Warrants to purchase 4,698 shares exercisable at CAD$1.44 per whole share that expire on March 29, 2016.

 

11
 

 

Adherex Technologies Inc.

(a development stage company)

Notes to the Unaudited Interim Consolidated Financial Statements

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

 

These warrants were recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain (loss). These warrants will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.

 

As of September 30, 2013, the fair value of the warrants expiring April 30, 2015 and March 29, 2016 was determined to be $3,017 and $1,292, respectively (December 31, 2012 – warrants expiring April 30, 2015 and March 29, 2016, fair value of $4,698 and $1,847, respectively), and the loss on these warrants for the three months ended September 30, 2013 was $1,288 and $394, respectively (for the three months ended September 30, 2012 - warrants expiring April 30, 2015 and March 29, 2016, loss of $129 and $6, respectively). The unrealized gain on the warrants expiring April 30, 2015 and March 29, 2016 for the nine months ended September 30, 2013 was $1,681 and $555, respectively (for the nine months ended September 30, 2012 - warrants expiring April 30, 2015 and March 29, 2016, gain of $2,852 and $940, respectively.). There is no cash flow impact for these derivatives until the warrants are exercised. If these warrants are exercised, the Company will receive the proceeds from the exercise at the current exchange rate at the time of exercise.

 

Gain (Loss) on Derivative Instruments  Three months ended September 30,
2013
   Three months ended September 30,
2012
 
Warrants expiring April 30, 2015   (1,288)   (129)
Warrants expiring March 29, 2016   (394)   (6)
Options to contractors   (26)   (4)
Gain (loss) on Derivative Instruments   (1,708)   (139)

 

Gain on Derivative Instruments  Nine months ended September 30,
2013
   Nine months ended September 30,
2012
 
Warrants expiring April 30, 2015   1,681    2,852 
Warrants expiring March 29, 2016   555    940 
Options to contractors   18    40 
Gain on Derivative Instruments   2,254    3, 832 

 

During the nine months ended September 30, 2013, the Company issued no options to contractors with a Canadian dollar denominated strike price. However, during 2010 and 2011, the Company issued 194 options to contractors with a Canadian dollar denominated strike price. Consequently, the Company now has derivatives relating to these options since the strike price is denominated in a currency other than the functional currency of the Company. While there is an exception to this rule for employees in ASU 2010-13, which amended ASC 718, no such exception exists for contractors. For the three and nine months ended September 30, 2013, the gain (loss) on these derivatives related to contractor options was $(26) and $18, respectively, compared to the three and nine months ended September 30, 2012 in which the gain (loss) on these derivatives related to contractor options was $(4) and $40.

 

4.Stockholders' Equity

 

Warrants to purchase common stock

 

At September 30, 2013, the Company had the following warrants outstanding to purchase common stock priced in Canadian dollars with a weighted average exercise price of CAD$1.44 and a weighted average remaining life of 1.8 years:

 

Warrant Description  Common Shares Issuable Upon Exercise of
Outstanding Warrants at September 30, 2013
   Exercise Price
In CAD Dollars
   Expiration Date
Investor warrants (1)   13,337   $1.44   April 30, 2015
Investor warrants (2)   4,698   $1.44   March 29, 2016
    18,035         

 

(1) On April 30, 2010, the Company announced that it had completed a first closing of a non-brokered private placement (“Private Placement”) of 240,066 units, at a price of CAD$0.03 per unit for net proceeds of CAD$7,200. Each unit consisted of one common share and one common share purchase warrant (a “Warrant”). As a result of the Share Consolidation, each eighteen (18) Warrants now entitle the holder thereof to purchase one common share of the Company at a purchase price of CAD$1.44 per whole share for a period of five years from the issue date.

 

12
 

 

Adherex Technologies Inc.

(a development stage company)

Notes to the Unaudited Interim Consolidated Financial Statements

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

 

(2) On March 29, 2011, the Company announced that it had completed a non-brokered rights offering of 84,559 units, at a price of CAD$0.03 per unit for total net proceeds of $2,547. Each unit consisted of one common share and one common share purchase warrant (a “Warrant”). As a result of the Share Consolidation, each eighteen (18) Warrants now entitle the holder thereof to purchase one common share of the Company at a purchase price of CAD$1.44 per whole share for a period of five years from the issue date.

 

Stock option plan

 

The Compensation Committee of the Board of Directors administers the Company’s stock option plan.  The Compensation Committee designates eligible participants to be included under the plan and approves the number of options to be granted from time to time under the plan. On June 24, 2010, at the Company’s annual meeting, shareholders approved an amendment to the Company’s Stock Option Plan (the “Plan Maximum Amendment”). The Plan Maximum Amendment relates to changing the maximum number of shares of common stock issuable under the stock option plan from a fixed number of 20,000 to the number of shares that represent twenty five percent (25%) of the total number of all issued and outstanding shares of common stock from time to time. Based upon the current shares outstanding, a maximum of 6,290 options are authorized for issuance under the plan. The option exercise price for all options issued under the plan is based on the fair value of the underlying shares on the date of grant. All options vest within three years or less and are exercisable for a period of seven years from the date of grant. The stock option plan, as amended, allows the issuance of Canadian and U.S. dollar grants. During the three and nine-month periods ended September 30, 2013, the Company recognized total stock-based compensation expense of $68 and $97, respectively. During the three and nine-month periods ended September 30, 2012, the Company recognized total stock-based compensation expense of $3 and $55, respectively.

 

Valuation assumptions

 

The value of options granted in the three months ended September 30, 2013 and September 30, 2012, respectively, were estimated using the Black-Scholes option-pricing model, using the following assumptions: expected dividend 0% and 0%, respectively; risk-free interest rate of 2.13-2.27% and 1.26%, respectively; expected volatility of 163% and 118% respectively; and a 7 year expected life. For the nine months ended September 30, 2013 and September 30, 2012 respectively, the value of options granted were estimated using the Black-Scholes option pricing model using the following assumptions: expected dividend 0% and 0%, respectively; risk-free interest rate of 1.2-2.27% and 1.13-1.26%, respectively; expected volatility of 159-163% and 118-133% respectively; and a 7 year expected life.

 

Stock option activity

 

The following is a summary of option activity for the nine months ended September 30, 2013 for stock options denominated in Canadian dollars:

 

   Number of
Options(thousands)
   Weighted-average
Exercise Price
 
Outstanding at December 31, 2012   4,171   CAD$0.78 
Granted   -    - 
Exercised   -    - 
Expired   -    - 
Outstanding at September 30, 2013   4,171   CAD$

0.78

 

 

Canadian dollar denominated options issued to contractors vest immediately and are treated as derivative liabilities. They are recorded at fair value estimated using the Black-Scholes model with the gain or loss reported as unrealized gain (loss).

 

The following is a summary of option activity for the nine months ended September 30, 2013 for stock options denominated in U.S. dollars:

 

   Number of
Options(thousands)
   Weighted-average
Exercise Price
 
Outstanding at December 31, 2012   1,327   $2.58 
Granted   316    0.24 
Exercised   -    - 
Expired   -    - 
Outstanding at September 30, 2013   1,643   $1.80 

 

13
 

 

Adherex Technologies Inc.

(a development stage company)

Notes to the Unaudited Interim Consolidated Financial Statements

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

 

5.Fair Value Measurements

 

The Company has adopted the Fair Value Measurements and Disclosure Topic of the FASB. This Topic applies to certain assets and liabilities that are being measured and reported on a fair value basis. The Fair Value Measurements Topic defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. This Topic enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Topic requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

Assets/Liabilities Measured at Fair Value on a Recurring Basis

 

   Fair Value Measurement at September 30, 2013     
   Quoted Price in
Active Markets
   Significant
Other
   Significant     
   for Identical
Instruments
   Observable
Inputs
   Unobservable
Inputs
     
   Level 1   Level 2   Level 3   Total 
Assets                
Cash equivalents  $277   $261   $-   $538 
Liabilities                    
Derivative liabilities   -    4,387    -    4,387 
TOTAL  $277   $4,648   $-   $4,925 

 

The Company's financial instruments include cash and cash equivalents and derivatives. Only cash and cash equivalents and derivatives are carried at their fair value. The derivative liabilities include warrants denominated in a currency other than the Company’s functional currency and options issued to contractors in a currency other than the functional currency of the Company. The warrants are carried at fair value and calculated using the Black-Scholes option pricing model using the following assumptions: expected dividend 0%; risk-free interest rate of 1.19%-1.24%; expected volatility of 144-157%; and a 1.58 or 2.5 year remaining life. The options also use the Black-Scholes model with the following assumptions: expected dividend 0%; risk-free interest rate of 1.66%-1.78%; expected volatility of 144%-148%; and a 4.14-4.63 year remaining life. The risk-free rate was based on Bank of Canada Bond issues of similar term. Expected volatility was estimated by using historical volatility of weekly close share prices for a period equal to the remaining life of the instrument.

 

6. Commitments and contingencies

 

The Company had no material commitments for capital expenses as of September 30, 2013. Under the service agreement with OCT Group LLC entered in August 2010, the Company was required to make several payments over the course of our Phase II clinical trial in Russia. The payments were made upon the fulfillment of several milestones during the clinical trial including regulatory approval of trial, enrollment of patients and the completion of therapy of patients. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. The Company amended the agreement in June 2012 for the transition to a paper-based database to be developed by OCT. In addition, the Company amended the agreement on October 29, 2012 for the addition of up to 20 patients to be enrolled. The service agreement with OCT expired on June 30, 2013. The remaining amounts due under the contract were settled August 1, 2013 for $260 less than the expense that had been recorded for the period ended June 30, 2013. This resulted in a credit to research and development expense.

 

14
 

 

Adherex Technologies Inc.

(a development stage company)

Notes to the Unaudited Interim Consolidated Financial Statements

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

 

Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002,

included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. The license agreement with OHSU dated September 26, 2002 was terminated on February 20, 2013. Royalty payments are contingent on sales.

 

In the event of his termination with us other than for cause, the Company will pay CEO, Rostislav Raykov, $140 in severance.

 

7. Subsequent Events

 

On November 15, 2013, the Company announced that it entered-into subscription agreements with certain investors for a non-brokered private placement (the “Private Placement”) to raise up to $1,600,000 through the sale of up to 4,000,000 units (the “Units”) at $0.40 per Unit.  Each unit will consist of one common share and one common share purchase warrant (each a “Warrant”).  Each Warrant will entitle the holder to purchase one additional common share for five years from the issue date at a price of $0.50 per Warrant.  The Company expects to close the Private Placement on or about November 21, 2013, subject to the satisfaction of customary regulatory approvals, including approval by the Toronto Stock Exchange.

 

15
 

 

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

 

CAUTIONARY STATEMENT

 

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

 

We operate in a highly competitive environment that involves significant risks and uncertainties, some of which are beyond our control. Our actual results, performance or achievements may be materially different from any results, performance or achievements expressed or implied by such forward-looking statements. Words such as “may,” “will,” “expect,” “might”, “believe,” “anticipate,” “intend,” “could,” “estimate,” “project,” “plan,” and other similar words are one way to identify such forward-looking statements. Forward-looking statements in this report include, but are not limited to, statements with respect to (1) our anticipated sources and uses of cash and cash equivalents; (2) our anticipated commencement dates, completion dates and results of clinical trials; (3) our efforts to pursue collaborations with the government, industry groups or other companies; (4) our anticipated progress and costs of our clinical and preclinical research and development programs; (5) our corporate and development strategies; (6) our expected results of operations; (7) our anticipated levels of expenditures; (8) our ability to protect our intellectual property; (9) the anticipated applications and efficacy of our drug candidates; (10) our ability to attract and retain key employees; and (11) the nature and scope of potential markets for our drug candidates. All statements, other than statements of historical fact, included in this report that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. We include forward-looking statements because we believe it is important to communicate our expectations to our investors. However, all forward-looking statements are based on management’s current expectations of future events and are subject to a number of risks and uncertainties, including our need to raise money in the very near term and others as discussed in this report. Although we believe the expectations reflected in the forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained, and we caution you not to place undue reliance on such statements.

 

Overview

 

Adherex Technologies Inc. is a biopharmaceutical company focused on cancer therapeutics. We incorporated under the Canada Business Corporations Act (“CBCA”). At the Company's June 2011 Annual Meeting, shareholders of Adherex approved the continuation of Adherex Technologies’ federal incorporation under the CBCA to incorporation under the Business Corporations Act (British Columbia).We have three wholly-owned subsidiaries: Oxiquant, Inc. and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc., a Canadian company. Adherex's prioritization initiative focuses primarily on STS and to a lesser degree Eniluracil.

 

16
 

 

STS is currently FDA-approved as an antidote for cyanide poisoning. Adherex has licensed from Oregon Health & Science University intellectual property rights for the use of STS as a chemoprotectant, and are developing STS as a protectant against the hearing loss often caused by platinum-based anti-cancer agents in children. Preclinical and clinical studies conducted by Oregon Health & Science University and others have indicated that STS can effectively reduce the incidence of hearing loss caused by platinum-based anti-cancer agents. Adherex has received Orphan Drug Designation in the United States for the use of STS in the prevention of platinum induced ototoxicity in pediatric patients.

 

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. 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.

 

We are currently conducting two Phase III trials of STS with our co-operative group partners:  the Children's Oncology Group (COG), and the International Childhood Liver Tumour Strategy Group (SIOPEL). Each of these trials is managed by COG and SIOPEL, respectively, and each group is responsible for the costs of their study. In addition to our STS patents licensed from OHSU, we continue to hold exclusive regulatory data rights from the results of these trials. Our primary responsibility for the trials is limited to providing STS, its drug distribution and pharmacovigilance, or safety monitoring.

 

The COG study completed enrollment of 135 children in the first quarter of 2012. Preliminary study data is not available to Adherex for public disclosure.  The final results from this study are expected to be submitted for presentation at the American Society of Clinical Oncology meeting in June of 2014.

 

The SIOPEL study is expected to enroll approximately 102 pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL centers worldwide.  As of November 1, 2013 the trial has enrolled 80 patients. Interim results from this study are expected to be submitted for presentation at the American Society of Clinical Oncology meeting in June of 2014.

 

Pending the outcome of our analysis of the study results from COG and SIOPEL, Adherex plans to meet with the FDA to agree on acceptable data package for a New Drug Application for STS.

 

Eniluracil was previously under development by GlaxoSmithKline. GlaxoSmithKline advanced eniluracil into a comprehensive Phase III clinical development program that did not produce positive results and GlaxoSmithKline terminated further development. We developed a hypothesis as to why the GlaxoSmithKline Phase III trials were not successful and licensed the compound from GlaxoSmithKline in July 2005. We believe that eniluracil might enhance and expand the therapeutic spectrum of activity of 5-FU, reduce the occurrence of a disabling side effect known as hand foot syndrome and allow 5-FU to be given orally. Adherex completed the enrollment of a Phase II trial comparing eniluracil/5-FU/leucovorin vs. capecitabine in metastatic breast cancer patients at the end of 2012 after having enrolled 153 patients. After the completion of enrollment and with preliminary results of the trial, Adherex had an End-of-Phase 2 meeting with the FDA on May 22, 2013 to discuss the potential further development of eniluracil. During the meeting, Adherex reviewed the opportunity that eniluracil offers to Metastatic Breast Cancer (MBC) patients who had rapid disease progression on capecitabine.  Adherex proposed a small pivotal single arm clinical study addressing the special ability of eniluracil/5-FU/leucovorin to meet the medical needs of these patients. However, the FDA strongly recommended that Adherex consider other larger clinical trial design alternatives for the future development of eniluracil in MBC. Currently, Adherex does not have the financial resources to pursue such a larger clinical trial. Accordingly, Adherex management believes that any further development of eniluracil would require a licensing or funding partnership, which may include the Company evaluating viable indications for eniluracil other than MBC.  Data from the Phase II trial was submitted for publication in a scientific journal. 

 

Our common stock trades on the OTCQB in the United States. Our common stock also trades on the Toronto Stock Exchange. The Toronto Stock Exchange has continuing listing standards, including minimum market capitalization and other requirements, that we might not meet in the future, particularly if the price of our common stock does not increase or we are unable to raise capital to continue our operations. On September 18, 2012, the Toronto Stock Exchange issued an official delisting review of our common stock. On January 7, 2013, the Toronto Stock Exchange completed its review of the Company and determined that the Company met TSX's continued listing requirements.

 

17
 

 

We have financed our operations since our inception on September 3, 1996 through the sale of equity and debt securities. We have not received and do not expect to have significant revenues from our product candidates until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue. We generated net income of approximately $734 for the nine months ended September 30, 2013. The net income for the period ended September 30, 2013 was primarily as a result of a $2,254 unrealized non-cash gain on derivative liabilities, offset by operating expenses relating principally to the eniluracil Phase II clinical trial. As of September 30, 2013, our deficit accumulated during development stage was approximately $109,810.

 

Our filed Form 10-K for the year ended December 31, 2012 included a notation related to the substantial doubt of our ability to continue as a going concern. As a result of our limited financial resources, we have postponed or terminated many of our previously planned or ongoing clinical development programs. We currently plan to continue operations of the company at least until the results of the Children’s Oncology Group Phase III STS trial and interim data from SIOPEL 6 Phase III STS trial become publicly available, which is expected to occur in the second quarter of 2014. We believe that the results of the two Phase III STS studies will impact our ability to secure future funding, or enter into a transaction with a strategic partner. Our projections of our capital requirements are subject to substantial uncertainty. More capital than we had anticipated may be thereafter required. To finance our continuing operations we will need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provides us with funding, or the out-license or sale of certain aspects of our intellectual property portfolio or from other sources. We might not be able to raise the necessary capital or such funding may not be available on acceptable terms. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

 

Our operating expenses will depend on many factors, including the progress of our drug development efforts and the implementation of further cost reduction measures. Our research and development expenses, which include expenses associated with our clinical trials, drug manufacturing to support clinical programs, salaries for research and development personnel, stock-based compensation, consulting fees, sponsored research costs, toxicology studies, license fees, milestone payments, and other fees and costs related to the development of product candidates, will depend on the availability of financial resources, the results of our clinical trials and any directives from regulatory agencies, which are difficult to predict. Our general and administrative expenses include expenses associated with the compensation of employees, stock-based compensation, professional fees, consulting fees, insurance, and other administrative matters associated with our corporate office in Research Triangle Park, North Carolina in support of our drug development programs.

 

On November 15, 2013, the Company announced that it entered-into subscription agreements with certain investors for a non-brokered private placement (the “2013 Private Placement”) to raise up to $1.6 million through the sale of up to 4.0 million units (the “Units”) at $0.40 per Unit.  Each unit will consist of one common share and one common share purchase warrant (each a “Warrant”).  Each Warrant will entitle the holder to purchase one additional common share for five years from the issue date at a price of $0.50 per Warrant.  The Company expects to close the Private Placement on or about November 21, 2013, subject to the satisfaction of customary regulatory approvals, including approval by the Toronto Stock Exchange. It is anticipated that the net proceeds from the 2013 Private Placement will be used by the Company for general working capital purposes, including the development of STS.

 

Results of Operations

 

Three months ended September 30, 2013 versus three months ended September 30, 2012:

 

In thousands of U.S. Dollars  Three Months
Ended September 30,
2013
   Three Months
Ended September 30,
2012
   Change 
             
Revenue  $-   $-   $- 
Operating expenses:               
Research and development   (224)   357    (581)
General and administration   275    273    2 
Total operating expenses   51    630    (579)
                
Loss from operations   (51)   (630)   579 
                
Unrealized gain/(loss) on derivatives   (1,708)   (139)   (1,569)
Interest and other (loss) / income   (7)   5    (12)
Net  gain/(loss) and total comprehensive gain/(loss)  $(1,766)  $(764)  $(1,002)

 

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There was a significant decrease in research and development expenses for the three months ended September 30, 2013 as compared to the same period in 2012 due to the winding down of the Phase II eniluracil trial. Research and development costs are impacted by the clinical support costs associated with the amount of patients enrolled and participating in the trial during the financial period.

 

The Company recorded an unrealized loss on derivatives of $1,708 in the three months ended September 30, 2013 compared to an unrealized loss of $139 in the three months ended September 30, 2012. These derivatives have been recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain/(loss). These warrants will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.

Our results of operations for the nine months ended September 30, 2013 versus nine months ended September 30, 2012 were as follows:

 

In thousands of U.S. Dollars  Nine Months
Ended September 30,
2013
   Nine Months
Ended September 30,
2012
   Change 
             
Revenue  $-   $-   $- 
Operating expenses:               
Research and development   507    1,514    (1,007)
General and administration   1,008    983    25 
Total operating expenses   1,515    2,497    (982)
Unrealized/realized gain/(loss) on derivatives   2,254    3,832    (1,578)
Interest and other income (loss)   (5)   13    (18)
Net income  $734   $1,348   $(614)

 

Total operating expenses were approximately $1,515 for the nine months ended September 30, 2013 and approximately $2,497 for the nine months ended September 30, 2012. The decrease of $982 was primarily due to decreased costs associated with the Company’s Phase II eniluracil trial offset by a slight increase in general and administrative expenses. Research and development expenses decreased approximately $1,007 in the period ended September 30, 2013 compared to the similar period as a result of the study concluding enrollment in December 2012.

 

Quarterly Information

 

The following table presents selected consolidated financial data for each of the last eight quarters through September 30, 2013, as prepared under U.S. GAAP (U.S. dollars in thousands, except per share information):

 

Period  Net Income (Loss) for
the Period
   Basic and Diluted
Net Income(Loss) per
Common Share
 
         
December 31, 2011   3,508    0.14 
March 31, 2012   2,715    0.11 
June 30, 2012   (602)   (0.02)
September 30, 2012   (764)   (0.03)
December 31, 2012   (6,511)   (0.26)
March 31, 2013   (4,108)   (0.16)
June 30, 2013   6,607    0.26 
September 30, 2013   (1,766)   (0.07)

 

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Liquidity and Capital Resources

 

In thousands of U.S. dollars  September 30, 2013   December 31, 2012 
Selected Asset and Liability Data:          
Cash and cash equivalents  $538   $2,303 
Other current assets   102    62 
Derivative  liabilities   4,387    6,640 
Other current liabilities   380    682 
Long term liabilities          
Working capital [Current Assets - Current Liabilities excluding the derivative liabilities]   260    1,683 
Selected Stockholders’ Equity Data:          
Common stock  $65,952   $65,952 
Deficit accumulated during the development stage   (109,810)   (110,543)
Total stockholders’ equity (deficiency)   (4,127)   (4,957)

 

Cash and cash equivalents were $2,303 at December 31, 2012 and $538 at September 30, 2013. The decrease of approximately $1,765 is attributable to the Company's operating expenses.

 

Since our inception on September 3, 1996, we have financed our operations through the sale of equity and debt securities and have raised gross proceeds totaling approximately $89.5 million through September 30, 2013.We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $109,810 at September 30, 2013. We have not generated any revenues to date through the sale of products. We do not expect to have significant revenues or income, other than interest income, until we are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other payments.

 

Net cash used in operating activities for the nine months ended September 30, 2013 was $1,765, as compared to $2,437 during the same period in 2012. This decrease is due to decreased research and development expenses incurred from the Phase II eniluracil trial. There was no net cash provided by financing activities for the nine months ended September 30, 2013 similar to the comparable period in 2012.

 

Outstanding Share Information

 

The outstanding share data for our company as of September 30, 2013 (in thousands):

 

   September 30, 2013 
Common shares   25,158 
Warrants   18,035 
Stock options   5,814 
Total   49,007 

 

Financial Instruments

 

We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. At September 30, 2013, we had approximately $0.54 million in cash accounts. We have not experienced any loss or write down of our money market investments for the nine months ended September 30, 2013 and 2012, respectively.

 

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.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Contractual Obligations and Commitments

 

The Company had no material commitments as of September 30, 2013. Under the service agreement with OCT Group LLC entered in August 2010, the Company was required to make several payments over the course of our Phase II clinical trial in Russia. The payments were made upon the fulfillment of several milestones during the clinical trial including regulatory approval of trial, enrollment of patients and the completion of therapy of patients. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. The Company amended the agreement in June 2012 for the transition to a paper-based

database to be developed by OCT. In addition, the Company amended the agreement on October 29, 2012 for the addition of up to 20 patients to be enrolled. The service agreement with OCT expired on June 30, 2013.

 

On August 1, 2013, Adherex settled a balance of $0.5 million in accounts payable with OCT for $0.23 million. No further money is owed to OCT.

 

Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002, included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. On February 20, 2013, Adherex terminated the license agreement with OHSU and entered into a new license agreement. Obligations under the new license agreement relate to royalty and sales milestones. Adherex no longer owes $0.5 million to OHSU upon the completion of Phase III clinical trials.

 

In the event of his termination with us other than for cause, the Company will pay its CEO, Rostislav Raykov, $140 in severance.

 

Research and Development

 

Our research and development efforts have been focused on the development of cancer therapeutics and currently include eniluracil and STS.

 

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

 

Research and development expenses for the three months ended September 30, 2013 and 2012 were $(224) and $357 respectively and for the nine months then ended totaled $507 and $1,514, respectively. The decrease in research and development expenses relates to the conclusion of enrollment of the Phase II eniluracil trial in December 2012. As a result of the wind down of the trial, research and development expenses including patient monitoring, database support and drug shipment costs to Russia significantly decreased. The company also settled an outstanding $0.5 million debt with OCT during Q3 for $0.23 million. The result is a credit balance in research and development expenses.

 

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

 

21
 

 

 

Critical Accounting Policies and Estimates

 

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

 

Our accounting policies are consistent with those presented in our annual consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Money Market Investments

 

We maintain an investment portfolio consisting of U.S. or Canadian obligations and bank securities and money market investments in compliance with our investment policy. We do not hold any mortgaged-backed investments in our investment portfolio. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper. The policy also provides for investment limits on concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months. This policy applies to all of our financial resources.

 

At September 30, 2013, we had approximately $261 in money market investments which typically have minimal market risk. We have not experienced any loss or write down of our money market investments for the three and nine months ended September 30, 2013 and 2012.

 

Our investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Our risk associated with fluctuating interest rates on our investments is minimal and not significant to the results of operations. We currently do not use interest rate derivative instruments to manage exposure to interest rate changes. As the main purpose is research and development, we have chosen to avoid investments of a trade or speculative nature.

 

Foreign Currency Exposure

 

We are subject to foreign currency risks as we conduct certain clinical development activities in Canada, the United Kingdom, Europe, Russia and the Pacific Rim. To date, we have not employed the use of derivative instruments to hedge our exposure to changes in currency exchange rates; however, we do hold Canadian dollars which we use to pay certain research and other corporate obligations conducted in Canada. At September 30, 2013, we held approximately $135 Canadian dollars.

 

Item 4. Controls and Procedures

 

(a)Evaluation of Disclosure Controls and Procedures.

 

In connection with the preparation of this report, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of September 30, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective as a result of having identified one material weakness in our internal control over financial reporting, as described in further detail below.

 

22
 

 

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

 

After the Company filed its Current Report on Form 8-K under Item 4.02 on November 2, 2010, the Company took remedial actions for our previously reported internal control weakness of not maintaining sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with our complexity and our financial accounting and reporting requirements. In 2012, the Company has contracted additional personnel with experience in the application of U.S. GAAP financial accounting and reporting requirements in order to assist management in its financial accounting and reporting functions. As a result, the Company believes that this added experience and knowledge has remediated the previously disclosed material internal control weakness described above.

 

Further, the Company believes that this has helped remedy, but has not eliminated, the control deficiency described above regarding lack of sufficient staff to segregate accounting duties. To finance our continuing operations, we will need to raise additional funds beyond those from our April 2010 private placement and the Rights Offering and, as disclosed elsewhere in this report, there remains substantial uncertainty of our ability to continue as a going concern and the failure to obtain such funds might require us to further delay, scale back or eliminate certain research and development studies, consider business combinations, or even shut down some, or all, of our operations. Once we are able to secure such additional financing, we anticipate hiring additional personnel with appropriate technical accounting knowledge, experience, and training in the application of U.S. GAAP to supplement our current accounting staff.

 

(b)Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2013 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

 

None.

 

Item 1A. Risk Factors.

 

Additional Risks Related to our Business

 

There is no assurance that we will successfully develop a commercially viable product. 

 

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

 

23
 

 

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

 

We need to obtain additional funding in the future in order to finance our business strategy, operations and growth. We may not be able to obtain additional financing in sufficient amounts or on acceptable terms when needed. If we fail to arrange for sufficient capital on a timely basis, we may be required to curtail our business activities until we can obtain adequate financing. Debt financing must be repaid regardless of whether or not we generate profits or cash flows from our business activities. Equity financing may result in dilution to existing stockholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock or other securities. If we cannot raise sufficient capital when necessary, we will likely have to curtail operations and you may lose part or all of your investment.

 

We may be unable to effectively deploy the proceeds from our 2013 Private Placement for the development of STS.

 

On November 15, 2013, we announced the closing of a private placement for proceeds of up to $1.6 million, which is expected to close on or about November 21, 2013, subject to customary regulatory approvals.  Any inability on our part to manage effectively the deployment of this capital could limit our ability to successfully develop STS.

 

Additional Risks Related to our Common Stock

 

We may be unable to maintain the listing of our common stock on the TSX and that would make it more difficult for stockholders to dispose of their common stock.

 

Our common stock is currently listed on the TSX. The TSX has rules for continued listing, including minimum market capitalization and other requirements, that we might not meet in the future, particularly if the price of our common stock does not increase or we are unable to raise additional capital to continue operations. In January 2009, our common stock was delisted from the AMEX as we did not meet the continued listing requirements of that exchange. On September 8, 2012, the Toronto Stock Exchange issued an official delisting review of our common stock. The remedial delisting review was initiated because the value of the shares of our common stock that are held by “public shareholders” had been below the CAD $2.0 million threshold required under the TSX continuing listing standards for a period of 30 consecutive trading days. On January 7, 2013, the Toronto Stock Exchange completed its review of the Company and determined that the Company met TSX's continued listing requirements.

 

Delisting from the TSX would make it more difficult for stockholders to dispose of their common stock and more difficult to obtain accurate quotations on our common stock. This could have an adverse effect on the price of our common stock. There can be no assurances that a market maker will make a market in our common stock on the OTCQB or any other stock quotation system after delisting. Furthermore, securities quoted on the Pink Sheets generally have significantly less liquidity than securities traded on a national securities exchange, not only in the number of shares that can be bought and sold, but also through delays in the timing of transactions and lower market prices than might otherwise be obtained. As a result, stockholders might find it difficult to resell shares at prices quoted in the market or at all. Furthermore, because of the limited market and generally low volume of trading in our common stock, our common stock is more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and announcements made by us, our competitors or parties with whom we have business relationships. Our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future, may also be materially and adversely affected by the fact that our securities are not traded on a national securities exchange.

 

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

 

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

 

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

 

24
 

 

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

 

On April 3, 2013, May 14, 2013, August 13, 2013 and August 23, 2013, the Company issued 25,000, 10,204, 31,250 and 250,000 stock options, respectively, to certain consultants and officers of the Company. The options were issued in a private placement exempt under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"). The options were issued in USD dollar denominated grants at an exercise price of $0.80, $0.98, $0.32 and $0.24 per share, respectively, and are exercisable for a period of 7 years from the grant date.

 

Item 3. Default Upon Senior Securities

 

None.

 

Item 4.Mine Safety Disclosure

 

None. Not applicable.

 

Item 5. Other Information

 

None.

 

25
 

 

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).
     
101.1   Interactive Data File

 

 

26
 

 

SIGNATURES

 

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Adherex Technologies Inc.
     
Date: November 15, 2013   By:  

/s/ Rostislav Raykov

        Rostislav Raykov
        Chief Executive Officer
        (principal executive officer)
     
Date: November 15, 2013   By:  

/s/ Krysia Lynes

        Krysia Lynes
        Chief Financial Officer
        (principal financial and chief accounting officer)

 

27