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ADHXF > SEC Filings for ADHXF > Form 10-Q on 13-May-2013All Recent SEC Filings

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Quarterly Report

Item 2. 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 unaudited interim consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP in the United States ("U.S.") and have been prepared by and are the responsibility of the Company's management. The preparation of these unaudited interim consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable.

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


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

Our current prioritization initiative focuses primarily on our clinical activities with Eniluracil, as well as logistical and product support of STS. Eniluracil was previously under development by GlaxoSmithKline. GlaxoSmithKline advanced Eniluracil into a comprehensive Phase III clinical development program that did not produce positive results and GlaxoSmithKline terminated further development. We developed a hypothesis as to why the GlaxoSmithKline Phase III trials were not successful and licensed the compound from GlaxoSmithKline in July 2005. We believe that Eniluracil might enhance and expand the therapeutic spectrum of activity of 5-FU, reduce the occurrence of a disabling side effect known as hand foot syndrome and allow 5-FU to be given orally. We expect the proceeds we received from the April 2010 Private Placement and the Rights Offering completed in March 2011 will be sufficient to fund the Phase II trial involving approximately 140 evaluable patients. We expect results from those trials to be indicative of the future viability of Eniluracil and will allow us to assess whether further development and testing of Eniluracil is warranted. The Phase II trial completed enrollment in Russia and the United States at the end of December 2012 after having enrolled 153 patients. Adherex anticipates final efficacy and safety data to be available during the second or third quarter of 2013.

We are currently conducting Phase III trials of STS conducted by the International Childhood LiverTumour Strategy Group, known as SIOPEL and the Children's Oncology Group. Each of these trials is managed by SIOPEL and the Children's Oncology Group, respectively, and each group is responsible for the costs of the trial. We continue to hold STS patents and our responsibility in the testing is limited to providing the drug, drug distribution and pharmacovigilance, or safety monitoring, for the study. The SIOPEL trial is expected to enroll approximately 100 pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL centers worldwide and the Children's Oncology Group study was designed to enroll up to 135 pediatric patients worldwide in five different disease indications. The Company's Children Oncology Group study completed enrollment in the first half of 2012. Final efficacy and safety data from the Children Oncology Group study is expected during the second or third quarter of 2013. The SIOPEL trial has enrolled 72 patients as of May 10, 2013.

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

We have financed our operations since our inception on September 3, 1996 through the sale of equity and debt securities. We have not received and do not expect to have significant revenues from our product candidates until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue. We generated a net loss of approximately $4.1 million for the three months ended March 31, 2013. The net loss for the period ended March 31, 2013 included a $3.6 million unrealized non-cash loss on derivative liabilities and operating expenses relating principally to the Eniluracil Phase II clinical trial. As of March 31, 2013, our deficit accumulated during development stage was approximately $114.6 million.

As a result of our limited financial resources, we have postponed or terminated many of our previously planned or ongoing clinical development programs. We continue to pursue various strategic alternatives, including collaborations with other pharmaceutical and biotechnology companies. As a result, our filed Form 10-K for the year ended December 31, 2012 included a notation related to the substantial doubt of our ability to continue as a going concern. Our projections of our capital requirements are subject to substantial uncertainty. More capital than we had anticipated may be thereafter required. To finance our continuing operations we will need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provide us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources. Given current economic conditions, we might not be able to raise the necessary capital or such funding may not be available on acceptable terms. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

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

Results of Operations

Three months ended March 31, 2013 versus three months ended March 31, 2012:

                                    Three Months                       Three Months
                                        Ended                             Ended
In thousands of U.S. Dollars       March 31, 2013          %          March 31, 2012          %          Change

Revenue                            $             -                   $              -                   $       -
Operating expenses:
Research and development                       178            33 %                296            49 %         118
General and administrative                     359            67 %                320            51 %         (39 )
Total operating expenses                       537           100 %                616           100 %         (79 )

Loss from operations                          (537 )                             (616 )                        79

Unrealized gain (loss) on
derivative                                  (3,573 )                            3,327                      (6,900 )
Interest and other income                        2                                  4                          (2 )
Net income /(loss) and total
comprehensive income/(loss)        $        (4,108 )                 $          2,715                   $  (6,823 )

Operating expenses for the three months ended March 31, 2013 were $0.5 million or $0.08 million less than the comparable period in 2012. Research and development expenses for the three months ended March 31, 2013 were $0.2 million or $0.1 million less than the comparable period in 2012.Research and development costs are impacted by the clinical support costs associated with the amount of patients enrolled and participating in the trial during the financial period. For the three months ended March 31, 2013, the Company had approximately 25 patients still participating in the Phase II Eniluracil study in comparison to approximately 75 patients participating in the three months ended March 31, 2012. General and administrative expenses increased to $0.4 million for the three months ended March 31, 2013 as compared to $0.3 million in the period ended March 31, 2012 primarily as a result of increased expenses associated with insurance and investor relations.

The Company recorded an unrealized loss on derivatives of $3.6 million in the three months ended March 31, 2013 compared to an unrealized gain of $3.3 million in the three months ended March 31, 2012. These derivatives have been recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain/(loss). These warrants and contractor options will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.

Quarterly Information

The following table presents selected consolidated financial data for each of
the last eight quarters through March 31, 2013, as prepared under U.S. GAAP
(U.S. dollars in thousands, except per share information):

                                                   Basic and Diluted
                     Net (Loss)/Income for       Net (Loss)/Income per
      Period               the 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 )
March 31, 2013       $               (4,108 )                     (0.16 )

                                                                 March 31, 2013      December31, 2012
Dollars in thousands
Selected Asset and Liability Data:
Cash and cash equivalents                                      $          1,896     $            2,303
Other current assets                                                         42                     62
Capital assets                                                                -                      -
Current liabilities excluding derivative warrant liability                  790                    682
Derivative warrant liability                                             10,213                  6,640
Long term liabilities                                                         -                      -
Working capital [Current Assets - Current Liabilities
excluding derivative liability]                                           1,148                  1,683

Selected Equity:
Common stock                                                   $         65,952     $           65,952
Accumulated deficit                                                    (114,651 )             (110,543 )
Stockholders' (deficit)                                                  (9,065 )               (4,957 )

Liquidity and Capital Resources

Cash and cash equivalents were $2.3 million at December 31, 2012 and $1.9 million at March 31, 2013. The decrease of $0.4million, is attributed to the clinical trial expenses related to our Phase II study as well as ongoing general and administrative expenses.

Since our inception on September 3, 1996, we have financed our operations through the sale of equity and debt securities and have raised gross proceeds totaling approximately $88.4 million through March 31, 2013.We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $114.6 million at March 31, 2013. We have not generated any revenues to date through the sale of products. We do not expect to have significant revenues or income, other than interest income, until we are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other payments.

Net cash used in operating activities for the three months ended March 31, 2013was approximately $0.4million, as compared to $0.6 million during the same period in 2012. This decrease is due to our Eniluracil expenses winding down during the three months ended March 31, 2013, as compared to the same period in the prior year.

Outstanding Share Information

The outstanding share data for our company as of March 31, 2013 (in thousands):

                 March 31,
Common shares        25,158
Warrants             18,035
Stock options         5,498
Total                48,684

Financial Instruments

We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. At March 31, 2013, we had approximately $1.9million in cash accounts and money market investments. We have not experienced any loss or write down of our money market investments for the three months ended March 31, 2013 and 2012, respectively.

Our investment policy is to manage investments to achieve, in the order of importance, the financial objectives of preservation of principal, liquidity and return on investment. Investments may be made in U.S. or Canadian obligations and bank securities, commercial paper of U.S. or Canadian industrial companies, utilities, financial institutions and consumer loan companies, and securities of foreign banks provided the obligations are guaranteed or carry ratings appropriate to the policy. Securities must have a minimum Dun & Bradstreet rating of A for bonds or R1 low for commercial paper. The policy also provides for investment limits on concentrations of securities by issuer and maximum-weighted average time to maturity of twelve months. This policy applies to all of our financial resources.

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

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

We had no material commitments for capital expenses as of March 31, 2013. The
following table represents our contractual obligations and commitments at March
31, 2013 (in thousands of U.S. dollars):

                                                      Less than          1-3
                                                       1 year           years          Total

OCT Clinical Service Agreement (1)                   $       354     $         -     $      354
Life Sci Advisors (2)                                         25               -             25
Oregon Health & Science University, excluding
potential royalty payments (3)                                 -               -              -
Total                                                $       379     $         -     $      379

(1) Under the service agreement with OCT Group LLC entered in August 2010, the Company is required to make several payments over the course of our Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including regulatory approval of trial, enrollment of patients and the completion of therapy of patients. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. The Company amended the agreement in June 2012 for the transition to a paper-based database to be developed by OCT. In addition, the Company amended the agreement on October 29, 2012 for the addition of up to 20 patients to be enrolled. Further, the Company amended the agreement on April 5, 2013 for an additional 6 months of service by OCT for the remaining patients still participating in the clinical trial.

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

(3) Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002, included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. The license agreement with OHSU dated September 26, 2002 was terminated on February 20, 2013. Royalty payments, which are contingent on sales, are not included.

Research and Development

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

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

Research and development expenses totaled $0.2 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.

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

Critical Accounting Policies and Estimates

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

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

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