PINX:ADHXF Adherex Technologies Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2012

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 20-0442384
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
   
PO Box 136285, 68 TW Alexander Drive 27709
Research Triangle Park, North Carolina  (Zip Code)
 (Address of Principal Executive Offices)  
   

 

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 ¨ Noþ

 

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

 

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

 

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

 

As of May 10, 2012, 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
Consolidated Balance Sheets –March 31, 2012 and December 31, 2011 3
Unaudited Interim -Consolidated Statements of Operations - Three Months Ended March 31, 2012 and 2011 4
Unaudited Interim  Consolidated Statements of Cash Flows - Three Months Ended March 31, 2012 and 2011 5
Unaudited Interim  Consolidated Statements of Stockholders' Equity– For the Period Ended September 3,1996 to March 31, 2012 6
Notes to Unaudited Interim Consolidated Financial Statements 10
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3.  Quantitative and Qualitative Disclosures about Market Risk 19
Item 4.  Controls and Procedures 20
PART II: OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 1A.  Risk Factors 21
Item 2. Unregistered Sales of Equity Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Mine Safety Disclosure 22
Item 5. Other Information 22
Item 6.  Exhibits 23
Signatures 24

 

 
 

 

PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Balance Sheets

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

 

   March 31,     
   2012   December 31, 
   (unaudited)   2011 
         
Assets          
           
Current assets:          
Cash and cash equivalents  $4,719   $5,297 
Prepaid expense   24    35 
Other current assets   14    19 
Total assets   4,757    5,351 
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable  $374   $342 
Accrued liabilities   38    52 
Derivative liability   1,750    5,077 
           
Total liabilities   2,162    5,471 
           
Commitments (see Note 6)          
           
Stockholders' equity:          
Common stock, no par value; unlimited shares authorized; 25,158 shares issued and outstanding (2011-25,158)   65,952    65,952 
Additional paid-in capital   38,065    38,065 
Deficit accumulated during development stage   (102,665)   (105,380)
Accumulated other comprehensive income   1,243    1,243 
Total stockholders’ equity   2,595    (120)
Total liabilities and stockholders’ equity   4,757    5,351 

 

(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   Cumulative 
From
September 3, 
1996 to
 
   March 31,
2012
   March 31,
2011
   March 31, 
2012
 
             
Revenue  $-   $-   $- 
                
Operating expenses:               
Research and development   296    315    67,389 
Gain on deferred lease inducements   -    -    (497)
Impairment of capital assets   -    -    386 
Acquired in-process research and development   -    -    13,094 
General and administrative   320    706    30,869 
                
Loss from operations   (616)   (1,021)   (111,241)
                
Other income (expense):               
Settlement of Cadherin Biomedical Inc. litigation   -    -    (1,283)
Interest expense   -    -    (19)
Unrealized/realized gain on derivatives   3,327    5,680    8,147 
Other income / (expense)   (4)   -    260 
Interest income and other   8    10    2,880 
Total other income, net   3,331    5,690    9,985 
                
Net income / (loss) and comprehensive income / (loss)  $2,715   $4,669   $(101,256)
                
Earnings per share of common stock, basic  $0.11   $0.23      
Earnings per share of common stock, diluted  $0.11   $0.19      
Weighted-average number of common shares outstanding, basic   25,158    20,565      
Weighted-average number of common shares outstanding,  diluted   25,158    25,001      

 

(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, except per share amounts)

 

       Cumulative 
       From 
       September 3, 
   Three Months Ended   1996 to 
   March 31,
2012
   March 31,
2011
   March 31,
2012
 
             
Cash flows from (used in):               
Operating activities:               
Net income (loss)  $2,715   $4,669   $(101,256)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization   -    -    1,404 
Non-cash Cadherin Biomedical Inc. litigation expense   -    -    1,187 
(Gain)/loss on derivative warrant   (3,327)   (5,680)   (8,146)
Unrealized foreign exchange loss        10    36 
Amortization of deferred lease inducements   -    -    (412)
Loss on impairment of capital assets   -    -    386 
Non-cash severance expense   -    -    168 
Stock options issued to consultants   -    -    896 
Stock options issued to employees   -    -    10,095 
Acquired in-process research and development   -    -    13,094 
Changes in non-cash working capital   34    (47)   (73)
Net cash used in operating activities   (578)   (1,048)   (82,621)
                
Investing activities:               
Purchase of capital assets   -    -    (1,440)
Disposal of capital assets   -    -    115 
Release of restricted cash   -    -    190 
Restricted cash   -    -    (209)
Proceeds from sale of assets   -    -    24 
Purchase of short-term investments   -    -    (22,148)
Redemption of short-term investments   -    -    22,791 
Investment in Cadherin Biomedical Inc.   -    -    (166)
Acquired intellectual property rights   -    -    (640)
Net cash used in investing activities   -    -    (1,483)
                
Financing activities:               
Conversion of long-term debt to equity   -    -    68 
Long-term debt repayments   -    -    (65)
Capital lease repayments   -    -    (8)
Issuance of common stock, net of issue costs   -    -    86,443 
Registration expense   -    -    (465)
Financing expenses   -    -    (544)
Proceeds from convertible note   -    -    3,017 
Other liability repayments   -    -    (87)
Security deposits   -    -    35 
Proceeds from exercise of stock options   -    -    51 
Net cash from used in financing activities   -    -    88,445 
                
Effect of exchange rate changes on cash and cash equivalents   -    124    378 
Net change in cash and cash equivalents   (578)   (924)   4,719 
Cash and cash equivalents - Beginning of period   5,297    5,947    - 
Cash and cash equivalents - End of period  $4,719   $5,023   $4,719 

 

(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

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

 

   Common Stock   Non-redeemable
Preferred Stock
   Additional
 Paid-in
   Accumulated
Other
Comprehensive
   Deficit 
Accumulated
During 
Development
   Total 
Stockholders’ 
Equity
 
  

Number(Note 4)

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

 

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

(continued on next page)

 

6
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Continued)

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

 

   Common Stock   Non-redeemable
Preferred Stock
   Additional 
Paid-in
   Accumulated
Other
Comprehensive
   Deficit 
Accumulated 
During 
Development
   Total
Stockholders’
Equity
 
  

Number (Note 4)

  Amount   of 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)

(continued on next page)

 

7
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Continued)

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

 

   Common Stock   Non-redeemable
Preferred Stock
   Additional Paid-in   Accumulated
Other
Comprehensive
   Deficit 
Accumulated 
During 
Development
   Total
Stockholders’ Equity
 
  

Number(Note 4)

   Amount   of 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 loss   -    -    -    -    -    (13,357)   (13,357)
Balance at December 31, 2007   7,124    64,929    -    32,355    1,243    (84,379)   14,148 
Stock options issued to consultants   -    -    -    88    -    -    88 
Stock options issued to employees   -    -    -    2,417    -    -    2,417 
Net loss   -    -    -    -    -    (13,600)   (13,600)
Balance at December 31, 2008   7,124    64,929    -    34,860    1,243    (97,979)   3,053 
Stock options issued to consultants   -    -    -    10    -    -    10 
Stock options issued to employees   -    -    -    355    -    -    355 
Net loss   -    -    -    -    -    (3,012)   (3,012)
Balance at December 31, 2009   7,124    64,929    -    35,225    1,243    (100,991)   406 
Stock options issued to consultants   -    -    -    53    -    -    53 
Stock options issued to employees   -    -    -    2,439    -    -    2,439 
April financing   13,337    -    -    -    -    -    - 
Net loss   -    -    -    -    -    (7,824)    (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)

(continued on next page)

 

8
 

 

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Stockholders' Equity (Continued)

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

 

   Common Stock   Non-redeemable
Preferred Stock
of
   Additional Paid-in   Accumulated
Other
Comprehensive
   Deficit 
Accumulated 
During 
Development
   Total Stockholders’
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)
Net income for the quarter   -    -    -    -    -    2,715    2,715 
Balance at March 31, 2012   25,158    65,952         38,065    1,243    (102,665)   2,595 

 

(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 (“U.S.”) of America that are applicable to a going concern entity which contemplates that Adherex will continue operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company is a development stage company and during the three months ended March 31, 2012, generated net income of $2,715 substantially as a result of an unrealized gain on a derivative of $3,327. Cash used in operations in the quarter ended March 31, 2012 was $578. At March 31, 2012, the Company had an accumulated deficit of $102,665 and had experienced negative cash flows from operations since inception in the amount of $82,621. These circumstances raise substantial doubt as to the ability of the Company to meet its obligations as they come due and, accordingly, the use of accounting principles applicable to a going concern may not be appropriate.The Company will need to obtain additional funding in the future in order to finance our business strategy, operations and growth through the issuance of equity, debt or collaboration. If we fail to arrange for sufficient capital on a timely basis, we may be required to curtail our business activities until we can obtain adequate financing.

 

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

 

2.Significant Accounting Policies

 

Basis of presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.The Company's accounting policies are consistent with those presented in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. These unaudited interim consolidated financial statements have been prepared in U.S. dollars.

 

On August 25, 2011, the Company affected a 18-for-1 reverse split of its share capital. Accordingly, the share, per share, and share option data appearing in the unaudited interim consolidated financial statements and notes have been adjusted for all periods to reflect the impact of the reverse split.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in these unaudited interim consolidated financial statements. Actual results could differ from these estimates. In the opinion of management, these unaudited interim consolidated financial statements include all normal and recurring adjustments, considered necessary for the fair presentation of the Company’s financial position at March 31, 2012, 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)

 

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 March 31, 2012, the Company had $4,604 in money market investments included as cash equivalents, which typically have minimal credit risk, and $115 in cash of which $90 (as translated to US dollars) was in Canadian dollars. The Company did not experience any loss or write down of its money market investments for the three-month periods ended March 31, 2012 and 2011, 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 shareholders' equity in the Company's statement of financial position. The Company's outstanding warrants denominated in Canadian dollars are not considered to be indexed to its own stock because the exercise price is denominated in Canadian dollars and the Company's functional currency is United States dollars. Therefore, these warrants have been treated as derivative financial instruments and recorded at their fair value as a liability. All other outstanding convertible instruments are considered to be indexed to the Company's stock, because their exercise price is denominated in the same currency as the Company's functional currency, and are included in stockholders' equity (deficiency.)

 

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

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

 

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

 

As of March 31, 2012, the fair value of the warrants expiring April 30, 2015 and March 29, 2016 was determined to be $1,204 and $518, respectively (December 31, 2011 – warrants expiring April 30, 2015, fair value of $3,672 and $1,340 respectively), and the gain on these warrants for the three months ended March 31, 2012 was $2,468 and $821, respectively (For the three months ending March 31, 2011 - warrants expiring April 30, 2015 and March 29, 2016, gain of $5,067). 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 March 31, 2012   Three months ended March 31, 2011 
Warrants expiring April 30, 2015   2,468    5,067 
Warrants expiring March 29, 2016   821    - 
Rights offering derivative   -    613 
Options to contractors   38    - 
Gain on Derivative Instruments   3,327    5,680 

 

In February 2011, the Company filed a final short form prospectus for a rights offering. In accordance with the terms of the rights offering, each shareholder of record on March 2, 2011 received one right for each common share held. Every right held entitled the holder thereof to purchase for CAD $0.03, or USD $0.0303 at the shareholder’s option, a unit consisting of one common share along with one warrant to purchase a common share of the Company at CAD $0.08. The rights began trading on March 2, 2011 on the TSX and on the Pink Sheets and expired on March 29, 2011.

 

11
 

 

On March 2, 2011, the Company recognized a derivative financial liability of $1,250 million associated with the Company’s obligation to carry out the rights offering. The deficit was adjusted by a corresponding amount. The derivative financial liability was adjusted to fair value at each quarter end with changes being recognized in earnings until the expiry of the warrants. During the three months ended March 31, 2011, the Company recognized a realized derivative gain of $613. The rights expired on March 29, 2011.

 

Under the terms of the rights offering, the monetary amount to be received by the Company upon the exercise of rights was not fixed. Each holder of rights could elect either the CAD $0.03 CAD or USD$0.0303 subscription price. Furthermore, the CAD $0.03 subscription price was not denominated in the Company’s U.S. dollar functional currency. Therefore, the pro rata distribution of rights to the Company’s shareholders was accounted for as a derivative financial liability measured at fair value.

 

Upon the closing of the rights offering in March 2011, the Company issued a total of 84,559 units for total proceeds of $2,566. Accordingly the Company recorded an increase in Common stock of $1,023 (4,697 shares). Expenses and fees relating to the rights offering totaled approximately $300 and were expensed since it was uncertain as to whether any shares would be issued.

 

During the three months ended March 31, 2012, 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, no such exception exists for contractors.

 

4.Stockholders' Equity

 

On August 10, 2011, the Board of Directors approved a 18-for-1 reverse stock split, or “Share Consolidation”, which became effective on August 25, 2011. The 18-for-1 reverse stock split affected all of the Company’s common shares, stock options and warrants outstanding at the effective date. Consequently, the Company has retroactively adjusted its financial statements for all periods presented to show the shares, stock options and warrants as if they had always been presented on this basis. The number of units and unit prices have not been adjusted to reflect the Share Consolidation, and the number of warrants outstanding have not been adjusted to reflect the Share Consolidation (in accordance with the terms of the warrants, the number of shares of common stock issuable thereunder were adjusted as a result of the Share Consolidation but not the number of warrants outstanding).

 

Warrants to purchase common stock

 

At March 31, 2012, the Company had the following warrants outstanding to purchase common stock priced in Canadian dollars with a weighted average exercise price of $0.08 and a weighted average remaining life of 3.3 years:

 

Warrant Description  Common Shares Issuable Upon Exercise of
Outstanding Warrants at March 31, 2012
   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.

 

(2) On March 29, 2011, the Company announced that it had completed a non-brokered rights offering of 84,559 units, at a price of CAD $0.03 per unit for total net proceeds of $2,566. Each unit consisted of one common share and one common share purchase warrant (a “Warrant”). As a result of the Share Consolidation, 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
 

 

Stock option plan

The Compensation Committee of the Board of Directors administers the Company’s stock option plan. The Compensation Committee designates eligible participants to be included under the plan and approves the number of options to be granted from time to time under the plan. On June 24, 2010, at the Company’s annual meeting, shareholders approved an amendment to the Company’s Stock Option Plan (the “Plan Maximum Amendment”). The Plan Maximum Amendment relates to changing the maximum number of shares of common stock issuable under the Stock Option Plan from a fixed number of 20,000 to the number of shares that represent twenty-five percent (25%) of the total number of all issued and outstanding shares of common stock from time to time. Based upon the current shares outstanding, a maximum of 6,289 options are authorized for issuance under the plan. The option exercise price for all options issued under the plan is based on the fair value of the underlying shares on the date of grant. All options vest within three years or less and are exercisable for a period of seven years from the date of grant. The stock option plan, as amended, allows the issuance of Canadian and U.S. dollar grants. During the three months ended March 31, 2012 and 2011, the Company recognized total stock-based compensation expense of $0 and $0, respectively.

 

There were no options granted in the three month period ended March 31, 2012 and the three-month period ended March 31, 2011.

 

Stock option activity

 

There was no stock option activity for the three-month period ended March 31, 2012 and the three-month period ended March 31, 2011 for stock options denominated in Canadian or U.S dollars:

 

5.Fair Value Measurements

 

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

 

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

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

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

 

Assets/Liabilities Measured at Fair Value on a Recurring Basis

 

   Fair Value Measurement at March 31, 2012     
   Quoted Price            
   in Active   Significant        
     Markets   Other    Significant      
   for Identical   Observable   Unobservable     
   Instruments   Inputs   Inputs     
   Level 1   Level 2   Level 3   Total 
Assets                    
Cash equivalents  $-   $4,604   $-   $4,604 
                     
Liabilities                    
Derivative liabilities   -    1,750    -    1,750 
TOTAL  $-   $6,354   $-   $6,354 

 

The Company's financial instruments include cash equivalents and derivatives. Only cash equivalents and derivatives are carried at their fair value. The derivative liabilities include warrants denominated in a currency other than the Company’s functional currency and options issued to contractors in a currency other than the functional currency of the Company. The warrants are carried at fair value and calculated using the Black-Scholes option pricing model using the following assumptions: expected dividend 0%; risk-free interest rate of 1.3%-1.5%; expected volatility of 138% - 139%; and a 3.1 or 4.0 year remaining life. The options also use the Black-Scholes model with the following assumptions: expected dividend 0%; risk-free interest rate of 1.73%-1.89% expected volatility of 124%-128%; and a 5.6-6.2 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.

 

13
 

 

 

6. Commitments

 

The Company had no material commitments for capital expenses as of March 31, 2012.The following table represents our contractual obligations and commitments at March 31, 2012 (in thousands of U.S. dollars):

 

   Less than
1 year
   1-3
years
   Total 
             
OCT Clinical Service Agreement (1)  $360   $36   $396 
Database Integration Service Agreement (2)   109    -    109 
Drug purchase commitments (3)   9    -    9 
Total  $478   $36   $514 

 

(1) Under the service agreement with OCT Group LLC entered in August 2010, we are required to make several payments over the course of our Phase II clinical trial in Russia.  The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: regulatory approval of trial, enrollment of patients and the completion of therapy of patients.  The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial.
  (2) Under the service agreement with Database Integrations entered in December 2010, we are required to make several payments over the course of our Phase II clinical trial in Russia.  The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: EDC live, time and completion of enrollment.
  (3) Commitments to our third party manufacturing vendors that supply drug substance primarily for our clinical studies.

 

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.

 

14
 

 

Overview

 

Adherex Technologies, Inc. is a biopharmaceutical company focused on cancer therapeutics. We incorporated under the Canada Business Corporations Act and we have three wholly-owned subsidiaries: Oxiquant, Inc. and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc., a Canadian company.

 

On August 25, 2011, Adherex filed Articles of Amendment under the Canada Business Corporations Act to implement a eighteen-for-one reverse split of our common stock (defined herein as the “Share Consolidation”).  As a result of the Share Consolidation, every eighteen shares of common stock outstanding on August 25, 2011 were combined into one share of common stock. Our common stock began trading on the Toronto Stock Exchange and the OTC market (on the OTCQB tier) on a post-Share Consolidation basis on August 30, 2011.The share consolidation reduced the number of shares of the Company's outstanding common stock from approximately 452.8 million, to approximately 25.2 million as of August 25, 2011, the effective date of the Share Consolidation. Consequently, the Company has retroactively adjusted its financial statements for all periods presented to show the shares, stock options and warrants as if they had always been presented on this basis.

 

Our current prioritization initiative focuses primarily on our clinical activities with eniluracil, as well as logistical and product support of ongoing clinical programs.  Eniluracil was previously under development by GlaxoSmithKline. GlaxoSmithKline advanced eniluracil into a comprehensive Phase III clinical development program that did not produce positive results and GlaxoSmithKline terminated further development. We developed a hypothesis as to why the GlaxoSmithKline Phase III trials were not successful and licensed the compound from GlaxoSmithKline in July 2005. We believe that eniluracil might enhance and expand the therapeutic spectrum of activity of 5-FU, reduce the occurrence of a disabling side effect known as hand foot syndrome and allow 5-FU to be given orally. We expect the proceeds we received from the April 2010 Private Placement and the Rights Offering completed in March 2011 will be sufficient to fund a Phase II trial involving approximately 140 patients. We expect results from those trials to be indicative of the future viability of eniluracil and will allow us to assess whether further development and testing of eniluracil is warranted. The Phase II trial is currently open for recruitment in Russia and the United States and enrolled its first patient on April 27, 2011. The Company has enrolled 114 patients as of May 10, 2012 and anticipates that it will achieve full enrollment during the Company's third calendar quarter of 2012.

 

Patient enrollment is continuing in the Phase III trials of STS conducted by the International Childhood LiverTumour Strategy Group, known as SIOPEL and the Children's Oncology Group.  Each of these trials is managed by SIOPEL and the Children’s Oncology Group, respectively, and each group is responsible for the costs of the trial. We continue to hold STS patents and our responsibility in the testing is limited to providing the drug, drug distribution and pharmacovigilance, or safety monitoring, for the study.  The SIOPEL trial is expected to enroll approximately 100 pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL centers worldwide and the Children's Oncology Group study is expected to enroll up to 135 pediatric patients worldwide in five different disease indications.  The Company's Children Oncology Group study has enrolled 131 patients as of May 10, 2012. The SIOPEL trial has enrolled 53 patients as of May 10, 2012.

 

 In addition to our current development efforts with eniluracil, we continue to pursue collaborations with other pharmaceutical and biotechnology companies, governmental agencies, academic or other corporate collaborators with respect to these molecules. Some of these preclinical molecules are currently being tested under agreements with third parties that may help to advance these products into future clinical development, either by us or under investigator-initiated studies.

 

Our common stock trades on the 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 April 22, 2010, the Toronto Stock Exchange issued an official delisting review of our common stock. On August 17, 2010, we were notified of the results of the review and it was determined that we satisfied the listing requirements.

 

We have financed our operations since our inception on September 3, 1996 through the sale of equity and debt securities. We have not received and do not expect to have significant revenues from our product candidates until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue. We generated net income of approximately $2.7 million for the three months ended March 31, 2012 (as a result of a non-cash gain on derivatives of $3.3 million). As of March 31, 2012, our deficit accumulated during development stage was approximately $102.7 million.

 

15
 

 

As a result of our limited financial resources we have postponed or terminated many of our previously planned or ongoing clinical development programs.  We continue to pursue various strategic alternatives, including collaborations with other pharmaceutical and biotechnology companies. As a result, our filed Form 10-K for the year ended December 31, 2011 included a notation related to the uncertainty of our ability to continue as a going concern.  Our projections of our capital requirements are subject to substantial uncertainty.  More capital than we had anticipated may be thereafter required.  To finance our continuing operations we will need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provide us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources.  Given current economic conditions, we might not be able to raise the necessary capital or such funding may not be available on acceptable terms.  If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

 

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.

 

Results of Operations

Three months ended March 31, 2012 versus three months ended March 31, 2011:

 

In thousands of U.S. Dollars  Three Months
Ended
March 31, 2012
   %   Three Months
Ended
March 31, 2011
   %   Change 
                     
Revenue  $-        $-        $- 
Operating expenses:                         
Research and development   296    49%   315    31%   (19)
General and administrative   320    51%   706    69%   (386)
Total operating expenses   616    100%   1,021    100%   (405)
                          
Loss from operations   (616)        (1,021)        405 
                          
Unrealized/realized gain on derivative   3,327         5,680         (2,353)
Interest and other income   4         10         (6)
Net incomeloss and total comprehensive income/ (loss)  $2,715        $4,669        $1,954 

 

Operating expenses for the three months ended March 31, 2012 were $0.6 million or $0.4 million less than the comparable period in 2011. Research and development expenses for the three months ended March 31, 2012 were unchanged from the comparable period in 2011. General and administrative expenses decreased to $0.3 million for the three months ended March 31, 2012 as compared to $0.7 million in the period ended March 31, 2011 primarily as a result of the expenses associated with the March 2011 Rights Offering.

 

The Company recorded an unrealized gain on derivatives of $3.3 million in the three months ended March 31, 2012 compared to an unrealized gain of $5.7 million in the three months ended March 31, 2011. 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.

 

16
 

 

Quarterly Information

 

The following table presents selected consolidated financial data for each of the last eight quarters through March 31, 2012, 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
 
         
June 30, 2010  $(2,569)  $(0.13)
September 30, 2010   1,694    0.08 
December 31, 2010   (8,895)   (0.32)
March 31, 2011   4,669    0.23 
June 30, 2011   (348)   (0.01)
September 30, 2011   (3,144)   (0.17)
December 31, 2011   3,508    0.14 
March 31, 2012   2,715   0.11 

 

Liquidity and Capital Resources

 

   March 31,   December 31, 
In thousands of U.S. dollars  2012   2011 
Selected Asset and Liability Data:          
Cash and cash equivalents  $4,719   $5,297 
Other current assets   38    54 
Derivative  liabilities   1,750    5,077 
Other current liabilities   412    394 
Long term liabilities          
Working capital [Current Assets - Current Liabilities excluding the derivative liabilities]   4,345    4,957 
           
Selected Stockholders’ Equity Data:          
Common stock  $65,952   $65,952 
Deficit accumulated during the development stage   (102,665)   (105,380)
Total stockholders’ equity (deficiency)   2,595    (120)

 

Cash and cash equivalents were $5.3 million at December 31, 2011 and $4.7 million at March 31, 2012. The decrease of $0.6 million, is attributed to the clinical trial expenses related to our Phase II study as well as ongoing general and administrative expenses.

 

Since our inception on September 3, 1996, we have financed our operations through the sale of equity and debt securities and have raised gross proceeds totaling approximately $88.4 million through March 31, 2012. We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $102.7 million at March 31, 2012. We have not generated any revenues to date through the sale of products. We do not expect to have significant revenues or income, other than interest income, until we are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments,royalties or other payments.

 

Net cash used in operating activities for the three months ended March 31, 2012 was approximately $0.6 million, as compared to $1.0 million during the same period in 2011. This decrease is due to our expenses associated with the March 2011 Rights Offering during the three months ended March 31, 2011, as compared to the current period.

 

17
 

 

Outstanding Share Information

 

The outstanding share data for our company as of March 31, 2012 (in thousands):

 

   March 31,
2012
 
Common shares   25,158 
Warrants   18,035 
Stock options   5,134 
Total   48,327 

 

Financial Instruments

 

We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. At March 31, 2012, we had approximately $4.7 million in cash accounts and money market investments. We have not experienced any loss or write down of our money market investments for the three months ended March 31, 2012 and 2011, 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.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Contractual Obligations and Commitments

 

We had no material commitments for capital expenses as of March 31, 2012. The following table represents our contractual obligations and commitments at March 31, 2012 (in thousands of U.S. dollars):

 

   Less than
1 year
   1-3
years
   Total 
             
OCT Clinical Service Agreement (1)  $360   $36   $396 
Database Integration Service Agreement (2)   109    -    109 
Drug purchase commitments (3)   9    -    9 
Total  $478   $36   $514 

 

(1) Under the service agreement with OCT Group LLC entered in August 2010, we are required to make several payments over the course of our Phase II clinical trial in Russia.  The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: regulatory approval of trial, enrollment of patients and the completion of therapy of patients.  The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial.
(2) Under the service agreement with Database Integrations entered in December 2010, we are required to make several payments over the course of our Phase II clinical trial in Russia.  The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: EDC live, time and completion of enrollment.

 

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

 

Research and Development

 

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

 

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

 

Research and development expenses totaled $0.3 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively.

 

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

 

Critical Accounting Policies and Estimates

 

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

 

Our accounting policies are consistent with those presented in our annual consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Money Market Investments

 

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

 

At March 31, 2012, we had $4.6 million in money market investments which typically have minimal market risk. The financial markets have been volatile resulting in concerns regarding the recoverability of money market investments. We have not experienced any loss or write down of our money market investments for the three months ended March 31, 2012 and 2011.

 

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.

 

19
 

 

Foreign Currency Exposure

 

We are subject to foreign currency risks as we conduct certain clinical development activities in Canada, the United Kingdom, Europe, Russia and the Pacific Rim. To date, we have not employed the use of derivative instruments to hedge our exposure to changes in currency exchange rates; however, we do hold Canadian dollars which we use to pay certain research and other corporate obligations conducted in Canada. At March 31, 2012 we held approximately $0.1 million in 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 March 31, 2012. 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 two material weaknesses in our internal control over financial reporting, as described in further detail below.

 

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

 

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

 

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 internal control weaknesses by contracting 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. In addition, the Company has engaged additional accounting resources during the first quarter of 2012 to assist with the Company's U.S. GAAP financial accounting and reporting requirements. We believe that this added experience and knowledge should, over time, remediate the material internal control weakness of having 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. Further we believe 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 in the notes to the interim consolidated financial statements for the period ended March 31, 2012, raises substantial doubt over 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.

 

20
 

 

(b) Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2012 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

 

We do not presently have the financial or human resources to complete Phase III trials for our lead product candidates.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

21
 

 

We may be unable to effectively deploy the proceeds from our recent financings for the development of eniluracil.

 

In April 2010, we announced the closing of a private placement for proceeds of CAD $7.2 million and in March 2011, we announced the closing of a Rights Offering for proceeds of approximately$2.5 million.  Any inability on our part to manage effectively the deployment of this capital could limit our ability to successfully develop eniluracil.

 

Additional Risks Related to our Common Stock

 

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

 

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

 

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

 

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

 

None

 

Item 3. Default Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosure

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

22
 

 

Item 6. Exhibits

 

Exhibit No. Description

 

31.1Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

31.2Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

32.1Certification 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).

 

99.1Press Release for Quarter Ended March 31, 2012 (filed herewith).

 

101.1Interactive Data File*

 

*To be filed by amendment pursuant to Rule 405(a)(2)(ii) of Regulation S-T.

 

23
 

 

SIGNATURES

 

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

 

  Adherex Technologies Inc.
   
Date: May 10, 2012  By: /s/ Rostislav Raykov
    Rostislav Raykov
    Chief Executive Officer
    (principal executive officer)
   

Date: May 10, 2012

 

By:  

/s/ Robert Andrade

    Robert Andrade
    Chief Financial Officer
    (principal financial and chief accounting officer)

 

24

PINX:ADHXF Quarterly Report 10-Q Filling

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