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ADHXF > SEC Filings for ADHXF > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations


The discussion below contains forward-looking statements regarding our financial condition and our results of operations that are based upon our annual consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles within the United States, or U.S. GAAP, and applicable U.S. Securities and Exchange Commission, or SEC, regulations for financial information. The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable.


In December 2008 we received notice from the American Stock Exchange that we were not in compliance with Section 1003(a)(ii) of its Company Guide, because our stockholders' equity was below $6 million and we incurred losses from continued operation and net losses in the five most recent fiscal years. On January 29, 2009, we voluntarily filed to delist our common stock from the American Stock Exchange and effective January 29, 2009 our common stock was no longer traded on the American Stock Exchange. As a result, any trading of our common stock in the U.S. must now be conducted in the over-the-counter markets. Our common stock continues to trade on the Toronto Stock Exchange. The Toronto Stock Exchange also has continued listing standards, including minimum market capitalization and other requirements, that we might not meet in the future, particularly if the price of our common stock does not increase or we are unable to raise capital to continue our operations. On September 18, 2012, the Toronto Stock Exchange issued an official delisting review of our common stock. On January 7, 2013, the Toronto Stock Exchange announced that it had completed its review of the common shares of the Company and had determined that the Company meets TSX's continued listing requirements.

On August 25, 2011,Adherex filed Articles of Amendment under the Canada Business Corporations Act to implement a one-for-eighteen 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 effective 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. In April of 2011, we commenced a Phase II trial comparing the anti-tumor activity and safety of Eniluracil plus 5-FU and leucovorin regimen (treatment Arm 1) versus Xeloda® (capecitabine) (treatment Arm 2) for Metastatic Breast Cancer. Patients who have disease progression in Arm 2 may crossover to take Eniluracil plus 5-FU and leucovorin (Treatment Arm X).We expect the proceeds we received from the April 2010 Private Placement and the Rights Offering completed in March 2011 will be sufficient to fund the Phase II trial. We expect results from those trials to be indicative of the future viability of Eniluracil and will allow us to assess whether further development and testing of Eniluracil is warranted. The Phase II trial completed enrollment at the end of 2012. The Company enrolled 153 patients and anticipates that final safety and efficacy data will be available during the second or third quarter of 2013. We do not presently have the financial or human resources to complete Phase III trials for Eniluracil. If our Phase II trial for Eniluracil is 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.

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 completed during the first half of 2012 with the final results expected during the second or third quarter of 2013. The SIOPEL trial has enrolled 69 patients as of March 16, 2013.

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 candidate molecules. Some of these preclinical candidates 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.

We have not received and do not expect to have significant revenues from our product candidates until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue. We experienced net losses of approximately$5.2 million for the twelve months ended December 31, 2012 and generated net income of $4.7 million for the twelve months ended December 31, 2011 (as a result of a non-cash gain on derivatives of $8.1 million). As of December 31, 2012, our deficit accumulated during development stage was approximately $110.5 million.

As a result of our limited financial resources we have postponed or terminated many of our previously planned or ongoing clinical development programs including our cadherin technology platform. We continue to pursue various strategic alternatives, including collaborations with other pharmaceutical and biotechnology companies. As a result, there is 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 anticipated may be requiredthereafter. 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 financially acceptable terms if at all. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

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

Results of Operations

Fiscal 2012 versus Fiscal 2011

                                    Fiscal                Fiscal                   Increase
    In thousands of U.S. Dollars     2012         %         2011         %        (Decrease)

    Revenue                        $      -               $      -               $          -
    Operating expenses:
    Research and development          2,075        57 %      1,494        43 %            581
    General and administration        1,545        43 %      1,944        57 %           (399 )
    Total operating expense           3,620       100 %      3,438       100 %            182

    Other (Loss) Income              (1,563 )                8,071                     (9,634 )
    Interest income                      20                     52                        (32 )

    Net (loss) income              $ (5,163 )             $  4,685               $     (9,848 )

· Research and development expenses were higher in fiscal 2012, as compared to fiscal 2011 primarily due to higher average patient participation in the Phase 2 study with Eniluracil and related costs. In fiscal 2012, 83 patients were enrolled in the Phase 2 study with Eniluracil compared with 70 patients enrolled in fiscal 2011. In fiscal 2012, 112 patients participated in the Phase 2 study with Eniluracil compared with 70 patients participating in fiscal 2011.
· General and administrative expenses decreased primarily as a result of the approximately $0.3 million in costs related to the 2011 rights offering which did not recur in 2012.
· Other income decreased $9.6million as a result of change in the fair value of derivatives.
· Interest income decreased in fiscal 2012, as compared to 2011 due to a lower average cash balance for the comparable periods.

Quarterly Information

The following table presents selected consolidated financial data for each of the last eight quarters through December 31, 2012, as prepared under U.S. GAAP (dollars in thousands, except per share information). Share information has been restated to reflect the share consolidation in 2012:

                     Net (Loss)/Income for         Basic and Diluted
                              the                Net (Loss)/Income per
      Period                 Period                  Common Share
March 31, 2011       $                4,669     $                  0.23
June 30, 2011        $                 (348 )   $                 (0.01 )
September 30, 2011   $               (3,144 )   $                 (0.17 )
December 31, 2011    $                3,508     $                  0.14
March 31, 2012       $                2,715     $                  0.11
June 30, 2012        $                 (602 )   $                 (0.02 )
September 30, 2012   $                 (764 )   $                 (0.03 )
December 31, 2012    $               (6,511 )   $                 (0.26 )

                                                               December      December
                                                                    31,        31,
Dollars in thousands                                               2012        2011
Selected Asset and Liability Data:
Cash and cash equivalents                                    $    2,303     $    5,297
Other current assets                                                 62             54
Capital assets                                                        -              -
Current liabilities excluding derivative warrant liability          682            394
Derivative warrant liability                                      6,640          5,077
Long term liabilities                                                 -              -
Working capital[Current Assets - Current Liabilities
excluding derivative liability]                                   1,683          4,957

Selected Equity:
Common stock                                                 $   65,952     $   65,952
Accumulated deficit                                            (110,543 )     (105,380 )
Shareholders' (deficit)                                          (4,957 )         (120 )

Liquidity and Capital Resources

· The decrease in cash and cash equivalents between December 31, 2011 and December 31, 2012 is due to clinical trial expenses related to our Phase II study of Eniluracil and our general and administrative expenses.

· The increase in other current assets between December 31, 2011 and December 31, 2012 is a result of an increase in prepaid insurance expenses.

· Our liabilities increased $1.9 million between December 31, 2011 and December 31, 2012. The increase was primarily a result of the valuation of the derivative liability at the two valuation dates as well as an increase in accrued liabilities from costs related to the Phase 2 study of Eniluracil.

· Current liabilities excluding derivative warrant liability increased between December 31, 2011 and December 31, 2012. The increase was due to a December 31, 2012 accrual for research and development expenses which reflects a timing difference in invoicing as compared to December 31, 2011.

· At December 31, 2012, our working capital decreased by approximately $3.3 million from December 31, 2011 due to operating expenses for the year.

                                                12 Months       12 Months
                                                  Ended           Ended
                                                December        December
                                                   31,             31,
Dollars and shares in thousands                   2012            2011
Selected Cash Flow Data:
Net cash used in operating activities          $    (2,994 )   $    (3,226 )
Net cash provided from financing activities              -           2,566
 Net cash provided from investing activities             -               -
Number of shares of common stock outstanding        25,158          25,158

The net cash flow used in operating activities for the year ended December 31, 2012 was approximately $3.0 million as compared to $3.2 million during the same period in 2011. This decrease is due to adecrease in our overall administrative activities during the fiscal year ended December 31, 2012, as compared to the same period in 2011. Our administrative activities decreased from fiscal year 2012 to fiscal year 2011 due to $0.3 million in costs incurred related to the 2011 rights offering during fiscal 2011. During fiscal 2012 our average monthly cash burn was $0.25 million, as compared to $0.26 million for fiscal 2011.

On July 7, 2009, we announced that we intended to primarily focus our remaining financial resources on the development of Eniluracil. In 2009, we terminated our Eniluracil study using our topical formulation and decided to focus our resources on the development of a redesigned study combining Eniluracil and 5-fluorouracil, or 5-FU, targeting anti-cancer indications. We continue to pursue various strategic alternatives including collaborations with other pharmaceutical and biotechnology companies. Our projections of further capital requirements are subject to substantial uncertainty. Our working capital requirements may fluctuate in future periods depending upon numerous factors, including: our ability to obtain additional financial resources; our ability to enter into collaborations that provide us with up-front payments, milestones or other payments; results of our research and development activities; progress or lack of progress in our preclinical studies or clinical trials; unfavorable toxicology in our clinical programs, our drug substance requirements to support clinical programs; change in the focus, direction, or costs of our research and development programs; headcount expense; the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing our patent claims; competitive and technological advances; the potential need to develop, acquire or license new technologies and products; our business development activities; new regulatory requirements implemented by regulatory authorities; the timing and outcome of any regulatory review process; and commercialization activities, if any.

We had cash and cash equivalents of approximately $2.3 million as of December 31, 2012. On April 30, 2010, we announced that we had completed a first closing of a non-brokered private placement of 240,066,664 Units, at a price of CAD$0.03 per Unit for gross proceeds of CAD$7.2 million. On March 29, 2011 we completed a Rights Offering to our shareholders for an aggregate of 84,559,178 Units, representing total proceeds of approximately $2.5 million. These financings allowed for the development of our Phase II trial of Eniluracil and the Phase III trials of STS.

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 December 31, 2012, we had approximately $0.1 million in our cash accounts and $2.2 million in our money market accounts. We have not experienced any loss or write down of our money market investments for the year ended December 31, 2012 or for any other year since the inception of the company.

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.

We classify investments with original maturities at the date of purchase greater than three months which mature at or less than twelve months as current. We carry investments at their fair value with unrealized gains and losses included in other comprehensive income (loss); however we have not held any instruments that were classified as short term investments during the periods presented in this Annual Report.

Off-Balance Sheet Arrangements

Since our inception, we have not had any material off-balance sheet arrangements.

Contractual Obligations and Commitments

Since our inception, inflation has not had a material impact on our operations. We had no material commitments for capital expenses or contractual obligations beyond 3 years as of December 31, 2012. The following table represents our contractual obligations and commitments at December 31, 2012 (in thousands of U.S. dollars):

                                                   Less than           1-3
                                                     1 year           years            Total
OCT Clinical Service Agreement (1)                         402                -             402
Oregon Health & Science University (2),
excluding potential royalty payments                         -                -               -
Life Sci Advisors, LLC (3)                                  55                -              55

Total $ 457 $ - $ 457

(1) Under the service agreement with OCT Group LLC entered in August 2010, the Company is required to make several payments over the course of our Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including regulatory approval of trial, enrollment of patients and the completion of therapy of patients. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. Further, 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.
(2) Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002, included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. The license agreement with OHSU dated September 26, 2002 was terminated on February 20, 2013. Royalty payments, which are contingent on sales, are not included.

(3) Under the service agreement with LifeSci Advisors, LLC, the Company is required to make several payments over the course of a six month agreement. Life SciAdvisors, LLC services include, but are not limited to, an investor meeting program and creating a key message platform.

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 at 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.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. The following description of critical accounting policies, judgments and estimates should be read in conjunction with our December 31, 2012 consolidated financial statements.

Stock-based Compensation

The calculation of the fair values of our stock-based compensation plans requires estimates that require management's judgments. Under ASC 718, the fair value of each stock option is estimated on the grant date using the Black-Scholes option-pricing model. The valuation models require assumptions and estimates to determine expected volatility, expected life, expected dividends and expected risk-free interest rates. The expected volatility was determined using historical volatility of our stock based on the contractual life of the award. The risk-free interest rate assumption was based on the yield on zero-coupon U.S. Treasury strips at the award grant date. We also used historical data to estimate forfeiture experience. In valuing options granted in the year ended December 31, 2012 and fiscal year ended December 31, 2011 we used the following weighted average assumptions:

                          Year Ended      Year Ended
                           December        December
                           31, 2012        31, 2011
Expected dividend                   0 %             0 %
Risk-free interest rate     1.09-1.26 %      1.85-2.5 %
Expected volatility           118-133 %       121-132 %
Expected life                 7 years         7 years

Common stock and warrants

Common stock is recorded as the net proceeds received on issuance after deducting all share issuance costs and the value of investor warrants. Warrants are recorded at fair value and are deducted from the proceeds of common stock and recorded on the consolidated statements of stockholders' equity as additional paid-in capital.

Derivative Instruments

Effective January 1, 2009, the Company adopted ASC Topic 815-40, "Derivatives and Hedging" (ASC 815-40). One of the conclusions reached under ASC 815-40 was that an equity-linked financial instrument would not be considered indexed to the entity's own stock if the strike price is denominated in a currency other than the issuer's functional currency. The conclusion reached under ASC 815-40 clarified the accounting treatment for these and certain other financial instruments. ASC 815-40 specifies that a contract would not be treated as a derivative if it met the following conditions: (a) indexed to the Company's own stock; and (b) classified in shareholders' equity in the Company's statement of financial position. The Company's outstanding warrants denominated in Canadian dollars are not considered to be indexed to its own stock because the exercise price is denominated in Canadian dollars and the Company's functional currency is United States dollars. Therefore, these warrants have been treated as derivative financial instruments and recorded at their fair value as a liability. All other outstanding convertible instruments are considered to be indexed to the Company's stock, because their exercise price is denominated in the same currency as the Company's functional currency, and are included in stockholders' 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 December 31, 2012, the fair value of the warrants expiring April 30, 2015 . . .

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