# FENNEC PHARMACEUTICALS INC. (FENC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FENNEC PHARMACEUTICALS INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1211583/000155837023004948/fencf-20221231x10k.htm
Accession: 0001558370-23-004948
Filing date: 2023-03-29
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FENC/
All MD&A years: /company/FENC/mda/
Previous year: /company/FENC/mda/fy2021/ (FY 2021)
Next year: /company/FENC/mda/fy2023/ (FY 2023)

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

Caution Concerning Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing at the end of this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” section of this Annual Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We are a commercial-stage biopharmaceutical company focused on our only product candidate PEDMARK®. On September 20, 2022 we received approval from the FDA for PEDMARK® (sodium thiosulfate injection) to reduce the risk of ototoxicity associated with cisplatin in pediatric patients one month of age and older with localized, non-metastatic solid tumors. This approval makes PEDMARK®  the first and only treatment approved by the FDA in this area of significant unmet medical need.  On October 17, 2022 we announced commercial availability of PEDMARK®  in the United States.

We sell our product through an experienced field force including Regional Pediatric Oncology Specialists and medical science liaisons who are helping to educate the medical communities and patients about cisplatin induced ototoxicity and our programs supporting patient access to PEDMARK®.

Further, we have established Fennec HEARS™, a comprehensive single source program designed to connect PEDMARK® patients to both patient financial and product access support. The program offers assistance and resources, regardless of insurance type, that can address co-pays or lack of coverage when certain eligibility requirements are met. Fennec HEARS also provides access to care coordinators that can answer insurance questions about coverage for PEDMARK® and provide tips and resources for managing treatment.  

We currently have three patents listed for PEDMARK®  in the FDA’s Orange Book which are the “190”, “728” and “984” patents. The “190” patent is exclusively in-licensed from Oregon Health & Science University (“OHSU”) and relates to a method of using our PEDMARK® product. The “190” expires in 2038 and the “728” and “984” patents expire in 2039, respectively, unless held invalid or unenforceable by a court or final jurisdiction. Further, in January  2023, the USPTO issued Notices of Allowance to us for one additional patent applications that cover the PEDMARK® pharmaceutical formulation. We expect this additional U.S. patent to issue in Q1 of 2023 or Q2 of 2023. This patent will expire in 2039, unless held invalid or unenforceable by a court of final jurisdiction.  We are also pursuing additional patent applications in both the U.S. and internationally for PEDMARK®.

Hearing loss among children receiving platinum-based chemotherapy is frequent, permanent and often severely disabling. The incidence of hearing loss in these children depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. In addition, adults undergoing chemotherapy for several common malignancies, including ovarian cancer, testicular cancer, and particularly head and neck cancer and brain cancer, often receive intensive platinum-based therapy and may experience severe, irreversible hearing loss, particularly in the high frequencies.

In the U.S. and Europe, it is estimated that, annually, over 10,000 children may receive platinum-based chemotherapy.  The incidence of ototoxicity depends upon the dose and duration of chemotherapy. Other than PEDMARK®, there is currently no established preventive agent for this hearing loss and only expensive, technically difficult and sub-optimal cochlear (inner ear) implants have been shown to provide some benefit. Infants and young children that suffer ototoxicity at critical stages of development lack speech language development and literacy, and older children and adolescents lack social-emotional development and educational achievement.

In August 2018, the Pediatric Committee (“PDCO”) of the European Medicines Agency (“EMA”) accepted our pediatric investigation plan (“PIP”) for sodium thiosulfate with the trade name Pedmarqsi for the condition of the prevention of platinum-induced hearing loss. An accepted PIP is a prerequisite for filing a Marketing Authorization Application (“MAA”) for any new medicinal product in Europe. The indication targeted by our PIP is for the prevention of platinum-

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induced ototoxic hearing loss for standard risk hepatoblastoma (“SR-HB”). Additional tumor types of the proposed indication will be subject to the Committee for Medicinal Products for Human Use (“CHMP”) assessment at the time of the MAA. No deferred clinical studies were required in the positive opinion given by PDCO. We were also advised that sodium thiosulfate (tradename to be determined) is eligible for submission of an application for a PUMA. A PUMA is a dedicated marketing authorization covering the indication and appropriate formulation for medicines developed exclusively for use in the pediatric population and provides market protection up to 10 years. Therefore, this decision allows us to proceed with the submission of a PUMA in the European Union (“EU”) with incentives of automatic access to the centralized procedure and up to 10 years of market protection. In February 2020, we announced that we had submitted a MAA for the prevention of ototoxicity induced by cisplatin chemotherapy patients 1 month to 18 years of age with localized, non-metastatic, solid tumors. The EMA continues its review of our MAA.

Now that we have obtained applicable regulatory approval to sell PEDMARK® in the United States, we recognize there may still be a need to establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue.

We generated a net loss of approximately $23.7 million for the fiscal year ended December 31, 2022, and a net loss of $17.4 million for the fiscal year ended December 31, 2021. As of December 31, 2022, our accumulated deficit was approximately $203.2 million ($179.5 million at December 31, 2021).

We believe that our cash and cash equivalents as of December 31, 2022, which totaled $23.8 million, cash from product sales, plus the remaining Petrichor Financing of $20 million in convertible notes subject to mutual agreement between the Company and Petrichor (see Note 1 and Note 7 to consolidated financial statements contained elsewhere in this report), will be sufficient to meet our cash requirements through at least the next twelve months. Our projections of our capital requirements are subject to substantial uncertainty, and more capital than we currently anticipate may be required thereafter. To finance our continuing operations, we may 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. We may 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 commercialization efforts and efficiency of our operations and current resources. Our research and development expenses, which include expenses associated with our clinical trials, drug manufacturing to support clinical programs, consulting fees, sponsored research costs, toxicology studies, license fees, milestone payments, and other fees and costs related to the comercialization of our product, 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 primarily of our commercialization of PEDMARK®.

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Results of Operations

Fiscal 2022 versus Fiscal 2021

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Fiscal Year Ended","\u200b","","\u200b","Fiscal Year Ended","\u200b","","\u200b","Increase"],["In thousands of U.S. Dollars","","December 31, 2022","","%","","December 31, 2021","","%","","(Decrease)"],["PEDMARK product sales, net","\u200b","$","1,535","","","\u200b","$","\u2014","","","\u200b","$","1,535"],["Cost of product sales","\u200b","\u200b","(86)","\u200b","\u200b","\u200b","\u200b","\u2014","\u200b","\u200b","\u200b","\u200b","(86)"],["Gross profit","\u200b","\u200b","1,449","\u200b","\u200b","\u200b","\u200b","\u2014","\u200b","\u200b","\u200b","\u200b","1,449"],["Operating expenses:","\u200b","","","","","\u200b","","","","","\u200b"],["Research and development","\u200b","","3,531","","15","%","","4,981","","29","%","","(1,450)"],["Selling and marketing","\u200b","\u200b","2,785","\u200b","12","%","\u200b","\u2014","\u200b","-","%","\u200b","2,785"],["General and administrative","\u200b","","17,722","","74","%","","12,242","","71","%","","5,480"],["Total operating expense","\u200b","","24,038","","100","%","","17,223","","100","%","","6,815"],["Loss from operations","\u200b","","22,589","","","\u200b","","17,223","","","\u200b","","5,280"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Unrealized loss on securities","\u200b","\u200b","(184)","\u200b","\u200b","\u200b","\u200b","(25)","\u200b","\u200b","\u200b","\u200b","(159)"],["Amortization expense","\u200b","","(149)","","","\u200b","","(16)","","","\u200b","","(133)"],["Interest expense","\u200b","\u200b","(978)","\u200b","\u200b","\u200b","\u200b","(126)","\u200b","\u200b","\u200b","\u200b","(852)"],["Unrealized foreign exchange loss","\u200b","","(9)","","","\u200b","","(10)","","","\u200b","","1"],["Interest income","\u200b","","195","","","\u200b","","54","","","\u200b","","141"],["Net loss","\u200b","$","(23,714)","","","\u200b","$","(17,346)","","","\u200b","$","(5,430)"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Commercial launch of PEDMARK\u00ae commenced in October 2022. The Company recorded net product sales of $1.54 million in fiscal 2022. The Company recorded discounts and allowances against sales in the amount of $0.2 million and cost of products sold of $0.1 million. The Company had gross profit of $1.4 million for fiscal year ended 2022. In fiscal 2021, the Company had no revenues."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Research and development expense decreased by $1.5 million in fiscal 2022 as compared to fiscal 2021. The Company reduced research and development costs when it received FDA approval of PEDMARK\u00ae. The majority of traditional research and development expenses associated with PEDMARK\u00ae are now recorded as general and administrative expenses or capitalized into inventory and eventually recorded to costs of product sales."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The Company began incurring selling and marketing expenses when it expanded its payroll to include an internal salesforce. Selling and marketing expenses include distribution costs, logistics, shipping and insurance, advertising, wages commissions and out-of-pocket expenses. The Company recorded $2.8 million in selling and marketing expenses in fiscal 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","There was a $5.5 million increase in general and administrative expenses in fiscal 2022 compared to fiscal 2021. Payroll and benefits related expenses rose by $4.0 million in fiscal 2022 compared to fiscal 2021. There was an increase in legal costs of $1.4 million in fiscal 2022 over fiscal 2021. This net increase is comprised of an increase in $0.2 million in class action suit defense, a decrease in general legal expense of $0.2 million and an increase of $1.4 million in intellectual property litigation. Pre-commercialization activities rose by $0.4 million in fiscal 2022 over fiscal 2021. Non-cash expenses associated with equity remuneration increased by $0.2 million."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The value of our Processa shares declined by $0.2 million for the year ended December 31, 2022. For fiscal year ended December 31, 2021, there was a gain of $0.03 million. We acquired the Processa shares on October 30, 2020. The Processa shares are marked to market at each balance sheet date with the resulting change in value being booked as an unrealized gain or loss."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Amortization expense was up $0.1 million in fiscal 2022, as we wrote off the entire capitalized amount associated with the Bridge Bank Loan and Security Agreement origination costs but replaced it with the Petrichor Opportunities Fund I LP Senior Secured Securities Notes. The increase in amortization relates to the relative size of the deferred asset created by the capitalization of the loan origination and access fees."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Other losses increased by $0.6 million, driven mainly by interest on long-term debt."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest income increased in fiscal 2022 as compared to fiscal 2021 by $0.1 million, due to higher average balances and sharply increased rates on money market accounts for the comparable periods."]]
[[/GREPCENT_TABLE]]

Quarterly Information

The following table presents selected consolidated financial data for each of the last eight quarters through December 31, 2022, as prepared under generally accepted accounting principles within the United States, or U.S. GAAP (dollars in thousands, except per share information).

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Net (Loss)/Income for the","\u200b","Basic Net (Loss)/Income per","\u200b","Diluted Net (Loss)/Income per"],["Period","","Period","","Common Share","","Common Share"],["March 31, 2021","","$","(4,733)","","$","(0.18)","","$","(0.18)"],["June 30, 2021","","\u200b","(4,001)","","\u200b","(0.15)","","\u200b","(0.15)"],["September 30, 2021","","\u200b","(4,185)","","\u200b","(0.16)","","\u200b","(0.16)"],["December 31, 2021","\u200b","\u200b","(4,427)","\u200b","\u200b","(0.18)","\u200b","\u200b","(0.18)"],["March 31, 2022","","\u200b","(3,696)","","\u200b","(0.14)","","\u200b","(0.14)"],["June 30, 2022","","\u200b","(5,075)","","\u200b","(0.19)","","\u200b","(0.19)"],["September 30, 2022","","\u200b","(8,089)","","\u200b","(0.31)","","\u200b","(0.31)"],["December 31, 2022","\u200b","\u200b","(6,857)","\u200b","\u200b","(0.26)","\u200b","\u200b","(0.26)"]]
[[/GREPCENT_TABLE]]

​

Quarter ended December 31, 2022 versus 2021

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Quarter Ended","\u200b","\u200b","\u200b","Quarter Ended","\u200b","","\u200b","Increase"],["In thousands of U.S. Dollars","","December 31, 2022","","%","","December 31, 2021","","%","","(Decrease)"],["PEDMARK product sales, net","\u200b","$","1,535","","","\u200b","$","\u2014","","","\u200b","$","1,535"],["Cost of product sales","\u200b","\u200b","(86)","\u200b","\u200b","\u200b","\u200b","\u2014","\u200b","\u200b","\u200b","\u200b","(86)"],["Gross profit","\u200b","\u200b","1,449","\u200b","\u200b","\u200b","\u200b","\u2014","\u200b","\u200b","\u200b","\u200b","1,449"],["Operating expenses:","\u200b","","","","","\u200b","","","","","\u200b"],["Research and development","\u200b","","117","","2","%","","523","","36","%","","(406)"],["Selling and marketing","\u200b","\u200b","2,785","\u200b","37","%","\u200b","\u2014","\u200b","\u2014","%","\u200b","2,785"],["General and administration","\u200b","","4,682","","62","%","","3,684","","64","%","","998"],["Total operating expense","\u200b","","7,584","","100","%","","4,207","","100","%","","3,377"],["Loss from operations","\u200b","","6,135","","","\u200b","","4,207","","","\u200b","","1,928"],["Unrealized (loss)/gain on securities","\u200b","","(58)","","","\u200b","","(162)","","","\u200b","","104"],["Interest income","\u200b","","153","","","\u200b","","13","","","\u200b","","140"],["Amortization expense","\u200b","","(70)","","","\u200b","","(8)","","","\u200b","","(62)"],["Interest expense","\u200b","\u200b","(744)","\u200b","\u200b","\u200b","\u200b","(62)","\u200b","\u200b","\u200b","\u200b","(682)"],["Other (loss), net","\u200b","","(3)","","","\u200b","","(1)","","","\u200b","","(2)"],["Net loss","\u200b","$","(6,857)","","","\u200b","$","(4,427)","","","\u200b","$","(2,430)"]]
[[/GREPCENT_TABLE]]

​

Revenues reported in the three months ended December 31, 2022, represent product sales of PEDMARK®. We announced product launch of PEDMARK® on October 17, 2022. We reported a loss from operations of $6.1 million for the three months ended December 31, 2022, compared to a loss from operations of $4.2 million for the same period in 2021. Research and development expenses totaled $0.1 million for the three months ended December 31, 2022, down by $0.4 million over the same period in 2021. The Company recorded selling and marketing expenses of $2.8 million in the quarter ended December 31, 2022. General and administrative expenses increased by $1.0 million in the three months ended December 31, 2022, as compared to the same period in 2021. There was an increase of $795 related to product launch activities, $334 related to professional fees, $89 in payroll and benefits and an $87 increase in miscellaneous items. These increases were offset by a decrease in  non-cash equity expenses of $318.  There was an unrealized loss of $0.06 million on the Processa shares for quarter ended December 31, 2022. The Processa shares will be marked to market at each balance sheet date. Interest income was up $0.14 million for the quarter ended December 31, 2022 compared to the same period a year prior. This was driven by higher daily balances and higher interest rates. Amortization and interest expenses were up

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$0.74 million for the quarter ended December 31, 2022 over the same period in 2021. The vast majority of this is interest and is driven by larger debt load and higher interest rates.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","As at","\u200b","As at"],["Selected Asset and Liability Data (thousands):","","December 31, 2022","","December 31, 2021"],["Cash and equivalents","\u200b","$","23,774","\u200b","$","21,100"],["Other current assets","\u200b","","2,954","\u200b","","1,287"],["Current liabilities","\u200b","","(4,608)","\u200b","","(1,654)"],["Working capital (1)","\u200b","","22,120","\u200b","","20,733"],["(1) [Current assets \u2013 current liabilities]","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Selected Equity:","\u200b","","\u200b","\u200b","","\u200b"],["Common stock and additional paid in capital","\u200b","\u200b","199,388","\u200b","\u200b","194,015"],["Accumulated deficit","\u200b","","(203,200)","\u200b","","(179,486)"],["Shareholders\u2019 (deficit) equity","\u200b","","(2,569)","\u200b","","15,772"]]
[[/GREPCENT_TABLE]]

​

Liquidity and Capital Resources

[[GREPCENT_TABLE]]
[["","\u25cf","There was a $2.7 million increase in cash and cash equivalents between December 31, 2022 and December 31, 2021. The net increase was the result of cash operating expenses, offset by the net $20.0 million received from the Petrichor note and $0.9 million received from the exercise of 273 options. During the period ended December 31, 2022, cash for operations was used mainly on the pre-commercialization activities of PEDMARK\u00ae prior to FDA approval and then commercialization activities post NDA approval."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The increase in other current assets of $1.7 million between December 31, 2021 and December 31, 2022 primarily relates to an increase of $2.1 million in inventory and accounts receivable offset by $0.4 million decrease in the value of Processa shares and prepaid assets."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Current liabilities at December 31, 2022 increased $3.0 million compared to December 31, 2021. Accounts payable was up $1.6 million over prior year highlighting our post commercialization activity. Accrued expenses were up $1.4 million over prior year primarily due to a $1.3 million increase in anticipated bonus payments and employee paid time off."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Working capital increased by $1.4 million between December 31, 2022 and December 31, 2021. The increase was a result of cash used in operations offset by net inflow of cash of $20.0 million received from the Petrichor Note, and $0.9 million received from stock option exercises and interest income."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Selected Cash Flow Data","\u200b","Year Ended","","Year Ended"],["(dollars and shares in thousands)","\u200b","December 31, 2022","\u200b","December 31, 2021"],["Net cash used in operating activities","\u200b","$","(18,058)","\u200b","$","(14,222)"],["Net cash provided by investing activities","\u200b","","\u2014","\u200b","","\u2014"],["Net cash provided by financing activities","\u200b","","20,732","\u200b","","4,978"],["Net cash flow","\u200b","$","2,674","\u200b","$","(9,244)"]]
[[/GREPCENT_TABLE]]

​

The net cash flow used in operating activities for the year ended December 31, 2022 was approximately $18.1 million as compared to $14.2 million in 2021. There was an increase in net loss of $6.4 million in fiscal 2022 compared to fiscal 2021. In 2022 non-cash items added back to net loss increased by $0.5 million over 2021 and net changes in balance sheet accounts added back another $0.2 million over 2021. Net financing activities in 2022 provided approximately $20.7 million from funding of the Petrichor Note, net of fees, and approximately $0.9 million arising from various option exercises.

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

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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 $23.8 million as of December 31, 2022. We currently anticipate that our available capital resources, including our existing cash and cash equivalents, accounts receivable balances and the remaining $20 million available under the SPA by mutual agreement between the Company and Petrichor, will be sufficient to meet our expected working capital and capital expenditure requirements as our business is currently conducted for at least the next 12 months.

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, 2022, we had approximately $0.3 million in our cash accounts and $23.5 million in savings and money market accounts. While we have never experienced any loss or write down of our money market investments since our inception, the amounts we hold in money market accounts are substantially above the $250,000 amount insured by the FDIC and may lose value.

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. Until the company is cash flow positive from operations, 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

None.

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.

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, 2022 consolidated financial statements.

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Revenue Recognition

Under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, the Company recognizes revenue when its customers obtain control of promised goods or services, in an amount that reflects the consideration which the Company determines it expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligation(s). As part of the accounting for these arrangements, the Company must make significant judgments, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each performance obligation.

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 fiscal years ended December 31, 2022 and 2021, we used the following weighted average assumptions:

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Year Ended","","Year Ended"],["\u200b","\u200b","December 31,","\u200b","December 31,"],["\u200b","","2022","","2021","\u200b"],["Expected dividend","","\u2014","%","\u2014","%"],["Risk-free interest rate","","1.18 - 3.96","%","1.41 \u2013 1.62","%"],["Expected volatility","","150 - 181","%","122","%"],["Expected life","","5 - 6 years","","10 years","\u200b"]]
[[/GREPCENT_TABLE]]

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Common shares and warrants

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

Outstanding Share Information

Our outstanding comparative share data at December 31, 2022 and December 31, 2021 is as follows (in thousands):

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","December 31,","","December 31,","","\u200b"],["Outstanding Share Type","\u200b","2022","\u200b","2021","","Change"],["Common shares","\u200b","26,361","\u200b","26,014","","347"],["Warrants","","150","","39","\u200b","111"],["Stock options","","4,539","","4,259","\u200b","280"],["Total","","31,050","","30,312","\u200b","738"]]
[[/GREPCENT_TABLE]]

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Newly Adopted and Recent Accounting Pronouncements

In May 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU provides measurement guidance for a modification or an exchange of a freestanding equity classified written call option that is not within the scope of another Topic.  The Company adopted the ASU as of January 1, 2022 and its adoption did

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not have a significant impact on the Company's consolidated financial statements.  The Company will apply the amendments prospectively to modifications or exchanges occurring on or after January 1, 2022.

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In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326) and subsequently related amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2022-02).  This guidance replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost based on expected credit losses. The estimate of expected credit losses requires the incorporation of historical information, current conditions, and reasonable and supportable forecasts. This ASU will be effective for the year ended December 31, 2023. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.

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In August 2020, the  Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The new standard eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity's own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity's own equity. This ASU will be effective for the year ended December 31, 2024. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.

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In June 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which (1) clarifies the guidance in Topic 820 on the fair value measurement of an equity security that is subject to contractual restrictions that prohibit the sale of an equity security and (2) requires specific disclosures related to such an equity security.  This ASU will be effective for the year ended December 31, 2024. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.

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