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ADHXF > SEC Filings for ADHXF > Form 10-Q on 9-Aug-2013All Recent SEC Filings




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 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. Adherex's prioritization initiative focuses primarily on STS and Eniluracil.

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

We are currently conducting Phase III trials of STS conducted by the International Childhood Liver Tumour 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. The SIOPEL trial has enrolled 78 patients as of August 10, 2013. Final efficacy and safety data from the Children Oncology Group study is expected during the third quarter of 2013. If convincing efficacy and safety results are received from the Children's Oncology Group trial, Adherex plans to meet with the FDA to discuss a New Drug Application for STS.

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

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

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 $2,499 for the six months ended June 30, 2013. The net income for the period ended June 30, 2013 was primarily as a result of a $3,962 unrealized non-cash gain on derivative liabilities, offset by operating expenses relating principally to the eniluracil Phase II clinical trial. As of June 30, 2013, our deficit accumulated during development stage was approximately $108,045.

Our filed Form 10-K for the year ended December 31, 2012 included a notation related to the substantial doubt of our ability to continue as a going concern. As a result of our limited financial resources, we have postponed or terminated many of our previously planned or ongoing clinical development programs. We currently plan to continue operations the company until the results of the Children's Oncology Group Phase III STS trial is finalized, which is expected to occur in the third quarter of 2013. We are pursuing various strategic alternatives, including collaborations with other pharmaceutical and biotechnology companies. We believe that the results of the Phase III STS will impact the Company's ability to secure a transaction with a strategic partner. Our projections of our capital requirements are subject to substantial uncertainty. More capital than we had anticipated may be thereafter required. To finance our continuing operations we will need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provides us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources. We might not be able to raise the necessary capital or such funding may not be available on acceptable terms. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

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

Results of Operations

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

                                                     Three Months              Three Months
In thousands of U.S. Dollars                      Ended June 30, 2013       Ended June 30, 2012        Change

Revenue                                          $                   -     $                   -     $        -
Operating expenses:
Research and development                                           554                       860           (306 )
General and administration                                         373                       390            (17 )
Total operating expenses                                           927                     1,250           (323 )

Loss from operations                                               927                     1,250            323

Unrealized gain/(loss) on derivatives                            7,535                       645          6,890
Interest and other (loss) / income                                  (1 )                       3             (4 )
Net  gain/(loss) and total comprehensive
gain/(loss)                                      $               6,607     $                (602 )   $    7,209

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

The Company recorded an unrealized gain on derivatives of $7,535 in the three months ended June 30, 2013 compared to an unrealized gain of $645 in the three months ended June 30, 2012. These derivatives have been recorded at their fair value as a liability at issuance and will continue to be re-measured at fair value as a liability at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as unrealized gain/(loss). These warrants will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.

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

                                                      Six Months                Six Months
In thousands of U.S. Dollars                      Ended June 30, 2013       Ended June 30, 2012        Change

Revenue                                          $                   -     $                   -     $         -
Operating expenses:
Research and development                                           732                     1,157            (425 )
General and administration                                         732                       710              22
Total operating expenses                                         1,464                     1,867            (403 )
Unrealized/realized gain/(loss) on derivatives                   3,962                     3,971              (9 )
Interest and other income (loss)                                     1                         8              (7 )
Net income                                       $               2,499     $               2,112     $       387

Total operating expenses were approximately $1,464 for the six months ended June 30, 2013 and approximately $1,867 for the six months ended June 30, 2012. The decrease of $403 was primarily due to decreased costs associated with the Company's Phase II eniluracil trial offset by a slight increase in general and administrative expenses. Research and development expenses decreased approximately $425 in the period ended June 30, 2013 compared to the similar period as a result of the study concluding enrollment in December 2012.

Quarterly Information

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

                                                  Basic and Diluted
                     Net Income (Loss) for       Net Income(Loss) per
      Period               the Period                Common Share
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 )
June 30, 2013                         6,607                       0.26

Liquidity and Capital Resources

In thousands of U.S. dollars                              June 30, 2013       December 31, 2012
Selected Asset and Liability Data:
Cash and cash equivalents                                $         1,007     $             2,303
Other current assets                                                  23                      62
Derivative liabilities                                             2,678                   6,640
Other current liabilities                                            781                     682
Long term liabilities
Working capital [Current Assets - Current Liabilities
excluding the derivative liabilities]                                249                   1,683
Selected Stockholders' Equity Data:
Common stock                                             $        65,952     $            65,952
Deficit accumulated during the development stage                (108,045 )              (110,543 )
Total stockholders' equity (deficiency)                            2,429                  (4,957 )

Cash and cash equivalents were $2,303 at December 31, 2012 and $1,007 at June 30, 2013. The decrease of approximately $1,296 is attributable to the Company's operating expenses.

Since our inception on September 3, 1996, we have financed our operations through the sale of equity and debt securities and have raised gross proceeds totaling approximately $89.5 million through June 30, 2013.We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $108,045 at June 30, 2013. We have not generated any revenues to date through the sale of products. We do not expect to have significant revenues or income, other than interest income, until we are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other payments.

Net cash used in operating activities for the six months ended June 30, 2013 was $1,296, as compared to $1,711 during the same period in 2012. This decrease is due to decreased research and development expenses incurred from the Phase II eniluracil trial. There was no net cash provided by financing activities for the six months ended June 30, 2013 similar to the comparable period in 2012.

Outstanding Share Information

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

                 June 30, 2013
Common shares            25,158
Warrants                 18,035
Stock options             5,533
Total                    48,726

Financial Instruments

We invest excesscash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. At June 30, 2013, we had approximately $0.9 million in cash accounts. We have not experienced any loss or write down of our money market investments for the six months ended June 30, 2013 and 2012, respectively.

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

The Company had no material commitments as of June 30, 2013. Under the service agreement with OCT Group LLC entered in August 2010, the Company was required to make several payments over the course of our Phase II clinical trial in Russia. The payments were made upon the fulfillment of several milestones during the clinical trial including regulatory approval of trial, enrollment of patients and the completion of therapy of patients. The Company amended the agreement in April 2011 and August 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial. The Company amended the agreement in June 2012 for the transition to a paper-based database to be developed by OCT. In addition, the Company amended the agreement on October 29, 2012 for the addition of up to 20 patients to be enrolled. The service agreement with OCT expired on June 30, 2013.

Under the license agreement with Oregon Health & Science University (OHSU) for STS dated February 20, 2013, upon the first commercial sale of STS we may become responsible for a payment to OHSU of up to $0.1 million. Prior to this new license agreement with OHSU, the previous license agreement with OHSU dated September 26, 2002, included that the Company may have become responsible for a payment to OHSU of up to $0.5 million upon the successful completion of the Phase III clinical trial with COG or SIOPEL. The license agreement with OHSU dated September 26, 2002 was terminated on February 20, 2013. Royalty payments are contingent on sales.

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

Research and Development

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

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

Research and development expenses for the three months ended June 30, 2013 and 2012 were $554 and $860 respectively and for the six months then ended totaled $732 and $1,157, respectively. The decrease in research and development expenses relates to the conclusion of enrollment of the Phase II eniluracil trial in December 2012. As a result of the wind down of the trial, research and development expenses including patient monitoring, database support and drug shipment costs to Russia significantly decreased.

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

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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