FENNEC PHARMACEUTICALS INC. (FENC) FY 2023 MD&A

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 sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A - Risk Factors” 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 unmet medical need.  On October 17, 2022, we announced commercial availability of PEDMARK®  in the U. S. In addition, in January 2023, PEDMARK® was included in the National Comprehensive Cancer Network (“NCCN”) clinical practice guidelines for Adolescent and Young Adult (“AYA”) Oncology with a category 2A recommendation.

In June 2023, we received European Commission Marketing Authorization for PEDMARQSI® (known as PEDMARK® in the U.S.) Further, the decision included the receipt of a PUMA in the EU with up to 8 years of data exclusivity plus 2 years of market protection. In March 2024, the Company announced an exclusive licensing agreement with Norgine, which will commercialize PEDMARQSI® in in Europe, Australia and New Zealand in 2024.

In the U.S., 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

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ototoxicity and our programs supporting patient access to PEDMARK®. We have obtained applicable regulatory approval to sell PEDMARK® in the U.S. and authorization from the European Commission Marketing Authorization for PEDMARQSI® in the EU. Commercialization of PEDMARQSI® in Europe, Australia and New Zealand will be undertaken by Norgine. The Company recognizes there may still be a need to establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties, or other revenue to further commercialize our product around the world.

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 HEAR® also provides access to care coordinators that can answer insurance questions about coverage for PEDMARK® and provide tips and resources for managing treatment.

We received Orphan Drug Exclusivity for PEDMARK® in January 2023, which provides seven years of market exclusivity from the date of its FDA approval on September 20, 2022 until September 20, 2029. We currently have three patents listed for PEDMARK® in the FDA’s Orange Book. In September 2022, the USPTO issued the 728 patent, in December 2022, the USPTO issued the 984 patent and in April 2023, the USPTO issued the 793 patent, each that cover PEDMARK® pharmaceutical formulation. The 728 patent, the 984 patent and the 793 patent will expire in 2039. We are also pursuing additional patent applications in both the U.S. and abroad for PEDMARK®.

PEDMARK® Product Overview

PEDMARK® is the first and only therapy approved by the FDA indicated to reduce the risk of ototoxicity associated with cisplatin treatment in pediatric patients with localized, non-metastatic, solid tumors. Further, PEDMARQSI®, known as PEDMARK®  in the U.S. was granted marketing authorization by the European Commission in June 2023.  PEDMARK®  is a unique formulation of sodium thiosulfate in single-dose, ready-to-use vials for intravenous use in pediatric patients. PEDMARK® is also the only therapeutic agent with proven efficacy and safety data with an established dosing paradigm, across two open-label, randomized Phase 3 clinical studies, the Clinical Oncology Group (“COG”) Protocol ACCL0431 and SIOPEL 6.

In the U.S. and Europe, it is estimated that more than 10,000 children annually may receive platinum-based chemotherapy. The incidence of ototoxicity depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids. 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.

PEDMARK® has been studied by co-operative groups in two Phase 3 clinical studies of survival and reduction of ototoxicity, COG ACCL0431 and SIOPEL 6. Both studies have been completed. The COG ACCL0431 protocol enrolled pediatric patients with cancers typically treated with intensive cisplatin therapy for localized and disseminated disease, including newly diagnosed hepatoblastoma, germ cell tumor, osteosarcoma, neuroblastoma, medulloblastoma, and other solid tumors. SIOPEL 6 enrolled only hepatoblastoma patients with localized tumors.

Cisplatin Induced Ototoxicity

Cisplatin and other platinum compounds are essential chemotherapeutic agents for the treatment of many pediatric malignancies. Unfortunately, platinum-based therapies can cause ototoxicity, or hearing loss, which is permanent, irreversible, and particularly harmful to the survivors of pediatric cancer.

The incidence of ototoxicity depends upon the dose and duration of chemotherapy, and many of these children require lifelong hearing aids or cochlear implants, which can be helpful for some, but do not reverse the hearing loss and can be costly over time. Infants and young children that are affected by ototoxicity at critical stages of development lack speech and language development and literacy, and older children and adolescents often lack social-emotional development and educational achievement.

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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 $16.05 million for the fiscal year ended December 31, 2023, and a net loss of $23.71 million for the fiscal year ended December 31, 2022. As of December 31, 2023, our accumulated deficit was approximately $219.2 million ($203.2 million at December 31, 2022).

We believe that our cash and cash equivalents as of December 31, 2023, which totaled $13.3 million, cash from product sales, plus the remaining Petrichor Financing of $15 million in convertible notes, which are subject to mutual agreement between us and Petrichor (see Note 1 and Note 8 to consolidated financial statements contained elsewhere in this Annual Report), along with the approximately $43 million we received in the Norgine licensing deal will be sufficient to meet our cash requirements through at least the next twelve months. We anticipate the Norgine licensing deal will alleviate the need to find alternative sources of financing and help us to fund operations while we expand our markets to areas outside of U.S., Europe, Australia and New Zealand. We continue to look to establish collaborations that will provide us with funding, for the out-license or sale of certain aspects of our intellectual property portfolio or from other sources.

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 commercialization 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®.

Results of Operations

Fiscal 2023 versus Fiscal 2022

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Quarterly Information

The following table presents selected consolidated financial data for each of the last eight quarters through December 31, 2023, as prepared under generally accepted accounting principles within the United States, or U.S. GAAP (dollars in thousands, except per share information).

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Quarter ended December 31, 2023 versus 2022

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Revenues reported for the three months ended December 31, 2023, were $9.7 million, which is an increase of $8.2 million over the same period in 2022. Gross profit from sales of PEDMARK® increased by $7.6 million for the three months ended December 31, 2023, over the same period in 2022. We reported a loss from operations of $1.8 million for the three months ended December 31, 2023, compared to a loss from operations of $6.1 million for the same period in 2022. Research and development expenses decreased by $0.09 for the three months ended December 31, 2023, over the same period in 2022. The Company recorded selling and marketing expenses of $3.9 million in the quarter ended December 31, 2023, as compared to $2.8 million in the same period in 2022. General and administrative expenses increased by $2.3 million in the three months ended December 31, 2023, as compared to the same period in 2022. There was an increase of $1.8 million related to commercial spending and consulting, $0.3 million related to increased payroll and benefits and $0.1 million in legal fees. These increases were offset by a decrease in non-cash equity expenses of $318. There was an unrealized loss of $0.004 million on the Processa shares for the quarter ended December 31, 2023. Interest income increased $0.04 million for the quarter ended December 31, 2023, compared to the same period a year prior. Amortization and interest expenses were up $0.17 million for the quarter ended December 31, 2023 over the same period in 2022. The vast majority of this is interest and is driven by larger debt load and higher interest rates.

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Liquidity and Capital Resources

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The net cash flow used in operating activities for the year ended December 31, 2023 was approximately $17.1 million as compared to $18.1 million in 2022. There was a decrease in net loss of $7.7 million in fiscal 2023 compared to fiscal 2022. In 2023, non-cash items added back to net loss increased by $1.1 million over 2022 and net changes in balance sheet accounts subtracted $6.8 million in 2023. Net financing activities in 2023 provided approximately $14.1 million less than in 2022. This was mainly from the funding of the Petrichor Note, net of fees, and approximately $0.8 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 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 $13.3 million as of December 31, 2023. We currently anticipate that our available capital resources, including our existing cash and cash equivalents, accounts receivable balances and the remaining $15 million available under the SPA and subject to 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. In March of 2024, we announced a licensing deal with Norgine. The deal with Norgine provided the Company with approximately $43 million cash with approximately another $229 million in the future from milestone payments and royalties.

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, 2023, we had approximately $1.4 million in our cash accounts and $11.9 million in savings and money market accounts. While we have never

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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, other than the OHSU Agreement and lease agreements described in notes to our consolidated financial statements contained elsewhere in this Annual Report, and the severance amounts as disclosed in the Annual Report.

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, 2023 consolidated financial statements.

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.

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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, 2023 and 2022, we used the following weighted average assumptions:

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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, 2023 and December 31, 2022 is as follows (in thousands):

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Newly Adopted and Recent Accounting Pronouncements

In August 2020, the 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 adopted this ASU in Q1 of 2023.

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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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In June 2022, the 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

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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 adopted this ASU in 2023.

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In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. This guidance will be effective for the annual periods beginning the year ended December 31, 2025. The Company is currently evaluating the effect the adoption of this ASU will have on the consolidated financial statements.

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