FENNEC PHARMACEUTICALS INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
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(
Mark
One)
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2009 | |
| OR | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 001-32295 |
| For the transition period from____ to ____ | |
| ADHEREX TECHNOLOGIES INC. |
| (Exact Name of Registrant as Specified in Its Charter) |
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Canada
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20-0442384
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(State
or Other Jurisdiction of
Incorporation
or Organization
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(I.R.S.
Employer
Identification
No.)
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501
Eastowne Drive, Suite 140
Chapel
Hill, North Carolina
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27514 | |
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(Zip
Code)
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(919)
636-4530
(
Registrant's telephone number,
including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES
¨
NO
þ
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES
¨
NO
þ
Indicate by check mark whether the
Registrant: (1) has filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES
þ
NO
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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LargLarge
accelerated filer
¨
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Accelerated
filer
¨
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Non-accelerated
filer
¨
(Do
not check if a smaller reporting company)
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Smaller
reporting company
þ
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Indicated
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES
¨
NO
þ
The
aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing sales price of the Common
Shares as reported by NYSE Alternext US LLC, formerly the American Stock
Exchange on June 30, 2008, (the last business day of the Registrant’s most
recently completed second fiscal quarter) was $18,425,553 based upon a total of
83,752,514 shares held as of June 30, 2008 by persons believed to be
non-affiliates of the Registrant. (For purposes of this calculation, all of the
Registrant’s officers, directors and 10% owners known to the Company are deemed
to be affiliates of the Registrant.)
As of March 16, 2010, there were
128,226,787 shares of common stock outstanding.
ADHEREX
TECHNOLOGIES INC.
2009
FORM 10-K ANNUAL REPORT
TABLE
OF CONTENTS
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Page
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Item
1.
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Business
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1 | |||
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Item
1A.
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Risk
Factors
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7 | |||
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Item
1B.
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Unresolved
Staff Comments
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15 | |||
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Item
2.
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Properties
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15 | |||
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Item
3.
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Legal
Proceedings
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15 | |||
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Item
4.
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Reserved
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15 | |||
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Item
5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and
Issuers Purchases of Equity Securities
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16 | |||
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Item
6.
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Selected
Financial Data
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21 | |||
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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21 | |||
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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28 | |||
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Item
8.
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Financial
Statements and Supplementary Data
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29 | |||
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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29 | |||
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Item
9A.
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Controls
and Procedures
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29 | |||
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Item
9B.
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Other
Information
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30 | |||
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PART
III
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Item
10.
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Directors,
Executives Officers and Corporate Governance
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31 | |||
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Item
11.
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Executive
Compensation
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32 | |||
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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32 | |||
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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32 | |||
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Item
14.
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Principal
Accounting Fees and Services
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32 | |||
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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33 | |||
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SIGNATURES
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36 | ||||
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements that involve
significant risks and uncertainties. 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,” “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 Annual 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; and (10) our ability to
attract and retain key employees. All statements, other
than statements of historical fact, included in this Annual 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 that 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
specifically our need to raise money in the very near term and others, as
discussed below in Item 1.A., “Risk Factors.” 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.
Our periodic and current reports are
available, free of charge, after the material is electronically filed with, or
furnished to, the SEC and EDGAR at
http://www.sec.gov/edgar
and the Canadian securities reglators
on SEDAR, at
www.sedar.com
. The information provided
on our website is not part of this report and is therefore not incorporated
herein by reference.
Overview
On July
7, 2009, we announced that we intended to focus our remaining financial
resources on the development of oral eniluracil. We have terminated
our eniluracil study using our topical formulation and will focus our resources
on the development of a redesigned study combining oral eniluracil and
5-fluorouracil, or 5-FU, targeting anti-cancer
indications. After a careful evaluation of the data from the
prior GlaxoSmithKline, or GSK, studies, data from our studies and other studies
using eniluracil, we believe we can design and implement a Phase II study with
eniluracil within the next three to nine months assuming we have adequate
financial resources to conduct such a study. Additinally, throughout
the remainder of 2009, we conducted an evaluation of ADH-1 and
STS. The evaluation of ADH-1 resulted in the return of all ADH-1
patents and licenses to McGill University. With regards to STS, we
continue our Phase III studies with STS for both the International Childhood
Liver Tumour Strategy Group, known as SIOPEL, and the Children's Oncology Group,
or COG. Our evaluation of STS continues to pursue strategic
alternatives, including collaborations with other pharmaceutical and
biotechnology companies.
Our
planned clinical development of eniluracil is dependent on obtaining additional
financial resources in the very near term. If we do not receive
additional financial resources in the near term, we might cease operations
sooner than June 30, 2010. We currently have three employees and members of the
Board of Directors have agreed to continue to serve for the benefit of the
shareholders without further compensation. Our projections
of our capital requirements into the second quarter of 2010 and beyond
are subject to substantial uncertainty. Additional capital may be
required earlier than June 30, 2010 or more capital than we had anticipated
thereafter may be required. To finance our operations beyond the
second quarter of 2010, or earlier if necessary, 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,
we might be required to further delay, scale back or eliminate certain research
and development studies, consider business combinations or shut down some, or
all, of our operations.
We are a
biopharmaceutical company focused on cancer therapeutics. We
are in the business of solving problems for patients with cancer. We have
two primary products in the clinical stage of development,
including: (1) Eniluracil, an oral dihydropyrimidine
dehydrogenase, or DPD, inhibitor, which may improve the tolerability and
effectiveness of 5-fluorouracil (5-FU), one of the most widely used oncology
drugs in the world; and (2) STS is a chemoprotectant being developed
to reduce or prevent hearing loss that may result from treatment
with platinum-based chemotherapy drugs.
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We
are evaluating a study design for a Phase II study in which we will dose
patients with eniluracil, 5-FU and leucovorin. Our prior
eniluracil studies have shown that the dose of eniluracil was too low and
consequently provided inadequate inactivation of DPD. We plan
to increase the dose of eniluracil and also include leucovorin in our
planned clinical trial. Leucovorin potentiates the anticancer
activity of 5-FU and has been shown to be well tolerated in patients
treated with both eniluracil and 5FU. Leucovorin is uniquely
appropriate to eniluracil regimens because it greatly reduces the
variability of 5-FU dosing. We are evaluating cancer disease
targets for our planned Phase II trial and are currently considering
colorectal and breast cancer, where Xeloda is indicated. The combination
of eniluracil and 5-FU has been shown to be active and well tolerated
against these diseases. However, the previous studies used
eniluracil in a ten to one ratio to 5-FU. Because such high
ratios of eniluracil to 5-FU were found to decrease the antitumor activity
in laboratory animals, our planned study will use a strategy that
adequately inactivates DPD and does not have high levels of eniluracil
present when 5-FU is administered. We expect to design
and commence these studies within the next three to nine months assuming
we have adequate financial resources to conduct such a
study. We will also solicit the assistance of certain key
opinion leaders for the design of these
studies.
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1
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·
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We
continue to enroll patients in our Phase III trials of STS with the
International Childhood Liver Tumour Strategy Group, known as SIOPEL and
the Children's Oncology Group, or COG. The SIOPEL trial is
expected to enroll approximately 100 pediatric patients with liver
(hepatoblastoma) cancer at participating SIOPEL centers worldwide and the
COG study is expected to enroll up to 120 pediatric patients worldwide in
five different disease indications.
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Our
current prioritization initiative focuses primarily on our clinical activities
with eniluracil, and preclinical support will be limited only to those
activities necessary to support the ongoing clinical programs.
On
January 20, 2009, we filed a notification to remove our common stock from the
AMEX and effective January 30, 2009, our common stock no longer traded on the
AMEX. Our common stock continues to trade on the Toronto Stock
Exchange, or TSX, and on the over the counter market, or pink sheets, in the
U.S.
Adherex
Technologies Inc. was incorporated under the
Canada Business Corporations
Act
and has three wholly-owned subsidiaries: Oxiquant, Inc. and Adherex,
Inc., both Delaware corporations, and Cadherin Biomedical Inc., a Canadian
company.
Eniluracil
Eniluracil
was previously under development by GlaxoSmithKline, or GSK. GSK
advanced eniluracil into a comprehensive Phase III clinical development program
that did not produce positive results and GSK terminated further
development. We developed a hypothesis as to why the GSK Phase III
trials were not successful and licensed the compound from GSK in July
2005. We successfully completed a clinical proof of concept study
using a modified dose and schedule of eniluracil and 5-FU. 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.
Eniluracil
is an irreversible inhibitor of DPD, the enzyme primarily responsible for the
rapid breakdown of 5-FU in the body. Eniluracil is being developed by Adherex to
improve the therapeutic value of 5-FU by making it effective in cancers and
reducing the debilitating side effects.
While
5-FU is a current mainstay of contemporary oncology treatment, it has some
therapeutic drawbacks and limitations:
5-FU:
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is
given by vein (intravenously) and often by prolonged, multi-day
infusions;
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produces
highly variable blood levels in patients. Low levels can reduce its
effectiveness and high levels can increase its side
effects;and
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is broken down
(catabolized) to form α-fluoro-β-alanine (F-BAL). This
compound appears to cause neurotoxicity and “hand-foot
sy
ndrome” which are debilitating and dose-limiting side
effects of 5-FU therapy. Importantly, F-BAL also
decreases the antitumor activity of 5-FU in lab
animals.
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Eniluracil:
Mechanism of Action
By
inactivating DPD, eniluracil prevents the breakdown of 5-FU to
F-BAL. Eniluracil also greatly prolongs exposure of the tumor
cells to 5-FU.
When
eniluracil is properly used in combination with 5-FU, it resolves many of
the therapeutic drawbacks and limitations of 5-FU noted above.
For
instance, eniluracil:
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enables
5-FU to be dosed orally;
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converts
highly variable blood levels of 5-FU to highly consistent and predictable
levels;
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extends
the elimination half-life of 5-FU from about 10 minutes to about 5 hours;
and
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prevents
the formation of F-BAL, which is the apparent causative agent for
hand-foot syndrome and for 5-FU-induced neurotoxicity. F-Bal
also decreases the antitumor efficacy of 5-FU in lab
animals.
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Thus,
eniluracil has the potential to make 5-FU more effective and better
tolerated.
Eniluracil:
Clinical Development
Eniluracil
plus 5-FU was previously being developed by GlaxoSmithKline (GSK). Although the
therapy was successful in Phase I and Phase II clinical trials, it tended to
produce less antitumor activity than the control therapy in two Phase III
trials. Development was subsequently stopped.
Adherex
believes that the dose and schedule used in the previous GSK Phase III trials
may not have been optimal. Preclinical studies have shown that when
eniluracil is present in high ratios to 5-FU, it decreases the antitumor
activity. In the GSK Phase III trials, the ratio of eniluracil to 5-FU was 10 to
1.
2
Adherex’s
Chief Scientific Officer, Dr. Spector, is the principal inventor of
eniluracil/5-FU treatment and has 20 years experience with
eniluracil. Dr. Spector has created a revised protocol designed to
avoid the problems of the earlier GSK Phase III trials as well as those
encountered in Adherex's more recent trials. Adherex is considering disease
targets and trial designs.
Eniluracil:
Market Opportunity
Xeloda®,
a currently available oral 5-FU prodrug, has worldwide sales of over US$1
billion each year. Eniluracil + 5-FU/leucovorin could not only could compete
with Xeloda® in its currently approved indications (with either a reduced
toxicity profile, enhanced efficacy, or both) but also may open up new
indications where 5-FU (and Xeloda®) is not currently used, expanding the reach
of a drug that is already one of the world’s most widely used.
STS
STS is
currently marketed for use in humans as part of a treatment for cyanide
poisoning. We have licensed from Oregon Health & Science
University (“OHSU”) 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 both children and
adults. Preclinical and clinical studies conducted by OHSU 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.
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. 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. 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.
Investigators
at OHSU have conducted Phase I and Phase II studies which have shown STS reduces
the hearing loss associated with platinum-based chemotherapy. In one
study at OHSU, the need for hearing aids to correct high frequency hearing loss
was reduced from about 50% to less than 5%.
In
October 2007, we announced that our collaborative partner, the International
Childhood Liver Tumour Strategy Group (known as SIOPEL), a multi-disciplinary
group of specialists under the umbrella of the International Society of
Pediatric Oncology, had launched a randomized Phase III clinical trial to
investigate whether STS reduces hearing loss in children receiving cisplatin, a
platinum-based chemotherapy often used in children. The study
initially opened in the United Kingdom and will include SIOPEL centers in up to
33 additional further countries. The clinical trial is expected to
enroll approximately 100 children with liver (hepatoblastoma) cancer.
Patients will receive cisplatin alone or cisplatin plus STS. The study,
which is being coordinated through the Children’s Cancer and Leukemia Group in
the United Kingdom, is intended to compare the level of hearing loss associated
with cisplatin alone versus the combination of cisplatin plus STS, as well as
the safety, tolerability and anti-tumor activity in both arms of the
study. Under the terms of our agreement, SIOPEL will conduct and fund
the clinical activity and we will provide drug, drug distribution and
pharmacovigilance, or safety monitoring, for the study.
In March
2008, we announced the activation of a Phase III trial with STS to prevent
hearing loss in children receiving cisplatin-based chemotherapy in collaboration
with the Children’s Oncology Group, or COG. The goal of this Phase
III study is to evaluate in a multi-centered, randomized trial whether STS is an
effective and safe means of preventing hearing loss in children receiving
cisplatin-based chemotherapy for newly diagnosed germ cell, liver
(hepatoblastoma), brain (medulloblastoma), nerve tissue (neuroblastoma) or bone
(osteosarcoma) cancers. Eligible children who are to receive
cisplatin according to their disease-specific regimen (will be one to eighteen
years of age) and, upon enrollment in this study, will be randomized to receive
STS or not. Efficacy of STS will be determined through comparison of
hearing sensitivity at follow-up relative to baseline measurements using
standard audiometric techniques. The trial is expected to enroll up
to 120 patients in up to 230 COG centers in the United States, Canada, Australia
and Europe. COG will fund the clinical activities for the study and
we will be responsible for providing the drug, drug distribution and
pharmacovigilance, or safety monitoring, for the study.
Intellectual Property
Our
general policy is to seek patent protection in the United States, major European
countries, Japan, Canada and other jurisdictions as appropriate for our
compounds and methods. Our cadherin-based patent portfolio currently
includes patents with respect to our unique composition of matter, broad claims
with respect to modulating cell adhesion, specific claims for the use of these
compounds in various diseases and pharmaceutical formulations of these
compounds.
Currently,
we own or have licensed more than 10 issued U.S. patents. Eniluracil
is currently protected under issued composition of matter and method
patents that we exclusively licensed from GSK that expire in 2014 and 2015 (in
combination with 5-fluorouracil). STS is currently protected by method of
use patents that we exclusively licensed from OHSU that expire in Europe in 2021
and are currently pending in the United States. None of the above expiry
dates take into consideration additional pending patent applications for
eniluracil that, if issued, could provide additional patent protection, nor
possible patent term extensions or periods of data exclusivity that may be
available upon marketing approval in the various countries worldwide. In
addition, periods of marketing exclusivity for STS may also be possible in the
United States under orphan drug status. We obtained U.S. Orphan Drug
Designation for the use of STS in the prevention of platinum-induced ototoxicity
in pediatric patients in 2004.
3
Our
success is significantly dependent on our ability to obtain and maintain patent
protection for our product candidates, both in the United States and
abroad. The patent position of biotechnology and pharmaceutical
companies, in general, is highly uncertain and involves complex legal and
factual questions, which often results in apparent inconsistencies regarding the
breadth of claims allowed and general uncertainty as to their legal
interpretation and enforceability. Further, some of our principal
candidates, including STS, are based on previously known compounds, and
candidates or products that we develop in the future may include or be based on
the same or other compounds owned or produced by other parties, some or all of
which may not be subject to effective patent protection. In addition,
regimens that we may develop for the administration of pharmaceuticals, such as
specifications for the frequency, timing and amount of dosages, may not be
patentable. Accordingly, our patent applications may not result in
patents being issued and issued patents may not afford effective
protection. In addition, products or processes that we develop may
turn out to be covered by third party patents, in which case we may require a
license under such patents if we intend to continue the development of those
products or processes.
Corporate
Relationships
License
Agreement with Oregon Health & Science University
In
November 2002, we acquired an exclusive license agreement with OHSU through our
acquisition of Oxiquant Inc., which had entered into the license agreement with
OHSU in September 2002. Pursuant to the license agreement, OHSU
granted us an exclusive worldwide license to intellectual property directed to
thiol-based compounds including STS and their use in oncology. In
consideration, OHSU was issued 250,250 shares of common stock of Oxiquant that
were subsequently converted upon the acquisition of Oxiquant into 382,514 shares
of Adherex common stock, and warrants to purchase shares of Adherex common stock
that subsequently expired in 2007. In addition, we are required to
make the following milestone payments: (i) $50,000 upon completion of Phase I
clinical trials, (ii) $200,000 upon completion of Phase II clinical trials,
(iii) $500,000 upon completion of Phase III clinical trials, and (iv) $250,000
upon the first commercial sale for any licensed product. We are also
required to pay OHSU a 2.5% royalty on net sales of any licensed products and a
15% royalty on any consideration received from sublicensing of the licensed
technology.
The term
of the license agreement expires on the date of the last to expire claim(s)
covered in the patents licensed to us, unless earlier terminated as provided in
the agreement. The agreement is terminable by OHSU in the event of a
material breach of the agreement by us or our sublicensees after 60 days prior
written notice from OHSU. We have the right to terminate the
agreement at any time upon 60 days prior written notice and payment of all fees
due to OHSU under the agreement.
Development
and License Agreement with GlaxoSmithKline
In July
2005, we licensed eniluracil from GSK. Under the original terms of
the agreement, we received an exclusive license for eniluracil for all
indications, and GSK retained options to buy back the compound at various points
in time during its development in return for milestone payments and sales
royalties to Adherex. GSK made a concurrent equity investment of $3.0
million to assist in its further development.
In March
2007, we purchased all of GSK’s remaining options to buy back eniluracil under
the agreement for a $1.0 million fee. We are now in full control of
the development of eniluracil and are required to pay GSK development and sales
milestone payments and sales royalties. Specifically, if we file a
New Drug Application, or NDA, with the Food and Drug Administration, or FDA, we
will be obligated to pay GSK development milestones of $5.0
million. Depending upon the commercial success of eniluracil, we may
also be required to pay GSK up to an additional $70.0 million in development and
sales milestones, plus double-digit royalties based on our annual net sales. If
we pursue other indications, we may be required to pay up to an additional $15.0
million to GSK for each indication approved by the FDA.
Collaboration
Agreement with McGill University
In
February 2001, we entered into a general collaboration agreement with McGill
University. Pursuant to the terms of the agreement, McGill granted us
a 27-year exclusive worldwide license to develop, use and market certain cell
adhesion technology and compounds. In particular, McGill granted us
an exclusive worldwide license to U.S. Patent 6,031,072 covering specific
compounds including ADH-1 (composition of matter), U.S. Patent 6,551,994
covering alpha-catenin and beta-catenin inhibiting compounds, related
international filings under the Patent Cooperation Treaty, or PCT, continuations
and certain other patents and patent applications.
In
consideration, we issued 508,416 shares of our common stock to
McGill. We also agreed to pay to McGill future royalties of 2% of any
gross revenues from the use of the technology and compounds. In
addition, we agreed to fund research at McGill over a period of 10 years
totaling CAD$3.3 million. Annual funding commenced in 2001, the first
year of the agreement, for a total of CAD$200,000, and increases annually by 10%
through 2010, when the required annual funding reaches CAD$500,000.
The
general collaboration agreement with McGill University terminated on November
19, 2009. Adherex returned all licenses to McGill University granted
in the agreement.
Competition
Competition
in the biotechnology and pharmaceutical industries is intense. We
expect that if any of our product candidates achieve regulatory approval for
sale, they will compete on the basis of drug efficacy, safety, patient
convenience, reliability, ease of manufacture, price, marketing, distribution
and patent protection, among other variables. Our competitors may
develop technologies or drugs that are more effective, safer or more affordable
than any we may develop.
4
There are
a number of different approaches to the development of therapeutics for the
treatment of cancer that are currently being used and studied. These
approaches include: (i) surgery to excise the cancerous tissue; (ii) radiation
therapy, which attacks cancerous cells but does not easily distinguish between
healthy and diseased cells; (iii) chemotherapy, which works by preventing a
cancerous cell from dividing or by killing cells that quickly divide; (iv)
immunotherapy, which stimulates the body’s immune system to respond to the
disease; and (v) hormone therapy, which may slow the growth of cancer cells or
even kill them.
We are
aware of a number of companies engaged in the research, development and testing
of new cancer therapies or means of increasing the effectiveness of existing
therapies, including, among many others, Abbott Laboratories, Amgen, Antisoma,
AstraZeneca, Bayer, Bristol-Myers Squibb, EntreMed, Genentech, Merck & Co.,
NeoPharm, Novartis, Johnson & Johnson, OSI Pharmaceuticals, Onyx, OXiGENE,
Peregrine Pharmaceuticals, Pfizer, Roche, Taiho and
Sanofi-Aventis. Some of these companies have products that have
already received, or are in the process of receiving, regulatory approval or are
in later stages of clinical development than our products. Many of
them have much greater financial resources than we do. Many of these
companies have marketed drugs or are developing targeted cancer therapeutics
which, depending upon the mechanism of action of such agents, could be viewed as
competitors.
There are
several potential therapies that may be competitive to eniluracil, including
capecitabine (Xeloda®) which is an oral pro-drug of 5-FU marketed by Roche that
is converted to 5-FU following absorption from the gastrointestinal
tract. Capecitabine is approved by the FDA and many other regulatory
agencies worldwide for use in breast and colorectal cancer, but eniluracil/5-FU
has a potential competitive advantage in having minimal hand foot syndrome
compared to the up to 60% incidence with Xeloda®. Hand foot syndrome
is a major complication of the use of Xeloda® and there is currently no adequate
treatment, with most physicians resorting to reducing the starting dosage of
Xeloda®.
5-FU is
normally rapidly metabolized and broken down by the enzyme
DPD. Eniluracil is an irreversible inhibitor of DPD and its use with
5-FU leads to prolonged and elevated levels of 5-FU. Uracil is a
competitive inhibitor of DPD. Although not FDA approved as a
therapeutic agent, uracil has been used with 5-FU and tegafur, a reversible DPD
inhibitor (5-chloro-2, 4-dihydrozypyidine, or CDHP) for the treatment of certain
cancers. UFT is an orally active combination of uracil and tegafur
that is available in some international markets through Merck KGaA.
S-1,
which is marketed by Taiho in Japan for gastric cancer, colorectal cancer, head
and neck cancer, non-small cell lung cancer, and inoperable or recurrent breast
cancer, is an orally active combination of tegafur and oxonic acid, an inhibitor
of phosphoribosyl pyrophosphate transferase, an enzyme that reduces the
incorporation of 5-FU into RNA. Both S-1 and UFT have been shown to
have very low levels of hand foot syndrome, but because they are reversible
inhibitors of DPD, these products would not be expected to be as successful at
targeting new product indications where DPD levels are intrinsically high, such
as hepatocellular cancer, compared to an irreversible DPD inhibitor like
eniluracil. Other reversible DPD inhibitors in development include a
Roche molecule, Ro 09-4889, which has completed a Phase I clinical
study. To our knowledge, no other irreversible DPD inhibitors are
currently in development.
We are
not aware of any commercially available agents that reduce the incidence of
hearing loss associated with the use of platinum-based anti-cancer agents, for
which purpose we are developing STS. There are several potential
competitive agents with activity in preclinical or limited clinical
settings. These include: D-methionine, an amino acid that has been
shown to protect against hearing loss in experimental settings but was
demonstrated to be inferior to STS in comparative studies; SPI-3005, an oral
agent primarily being developed by Sound Pharmaceuticals for noise and
age-related hearing loss but in early Phase I trials for chemotherapy related
hearing loss, which mimics glutathione peroxidase and induces the intracellular
induction of glutathione; AHLi-11, an siRNA compound not yet in clinical trials
being developed by Quark Pharmaceuticals aimed at silencing p53 following high
dose cisplatin therapy; N-acetylcysteine and amifostine, which have shown
effectiveness (but less than STS) in experimental systems; and Vitamin E,
salicylate and tiopronin, which have all demonstrated moderate activity in rat
models to protect against cisplatin-induced ototoxicity, but no clinical trials
have been performed. Cochlear implants, which are small electronic
devices that are surgically placed in the inner ear to assist with certain types
of deafness, are utilized to offer some relief but are often
suboptimal.
Many
chemotherapeutic agents are currently available and numerous others are being
developed. Any chemotherapeutic products that we develop may not be
able to compete effectively with existing or future chemotherapeutic
agents. Our competitors might obtain regulatory approval for their
drug candidates sooner than we do, or their drugs may prove to be more effective
than ours. However, cancer as a disease is not currently controlled
by any one anti-cancer agent, and there is typically a need for several agents
at any one time and over time.
Many of
our existing or potential competitors have substantially greater financial,
technical and human resources than we do and may be better equipped to develop,
manufacture and market products. In addition, many of these
competitors have extensive experience with preclinical testing and human
clinical trials and in obtaining regulatory approvals. In addition,
many of the smaller companies that compete with us have formed collaborative
relationships with large, established companies to support the research,
development, clinical trials and commercialization of any products that they may
develop
.
We
may rely on third parties to commercialize the products we develop, and our
success will depend in large part on the efforts and competitive merit of these
collaborative partners. Academic institutions, government agencies
and other public and private research organizations may also conduct research,
seek patent protection and establish collaborative arrangements for research,
clinical development and marketing of products similar to those we seek to
develop. These companies and institutions compete with us in
recruiting and retaining qualified scientific and management personnel as well
as in acquiring technologies complementary to our projects. The
existence of competitive products, including products or treatments of which we
are not aware, or products or treatments that may be developed in the future,
may adversely affect the marketability of any products that we may
develop.
5
Government
Regulation
The
production and manufacture of our product candidates and our research and
development activities are subject to significant regulation for safety,
efficacy and quality by various governmental authorities around the
world.
In
Canada, these activities are subject to regulation by Health Canada’s
Therapeutic Products Directorate, or TPD, and the rules and regulations
promulgated under the Food and Drug Act. In the United States, drugs
and biological products are subject to regulation by the FDA. The FDA
requires licensing of manufacturing and contract research facilities, carefully
controlled research and testing of products and governmental review and approval
of results prior to marketing therapeutic products. Additionally, the
FDA requires adherence to “Good Laboratory Practices” as well as “Good Clinical
Practices” during clinical testing and “Good Manufacturing Practices” and
adherence to labeling and supply controls. The systems of new drug
approvals in Canada and the United States are substantially similar, and are
generally considered to be among the most rigorous in the world.
Generally,
the steps required for drug approval in Canada and the United States,
specifically in cancer related therapies, include:
Preclinical Studies
:
Preclinical studies, also known as non-clinical studies, primarily involve
evaluations of pharmacology, toxic effects, pharmacokinetics and metabolism of a
drug in animals to provide evidence of the relative safety and bioavailability
of the drug prior to its administration to humans in clinical
studies. A typical program of preclinical studies takes 18 to 24
months to complete. The results of the preclinical studies as well as
information related to the chemistry and comprehensive descriptions of proposed
human clinical studies are then submitted as part of the Investigational New
Drug, or IND, application to the FDA, a Clinical Trial Application to the TPD,
or similar submission to other foreign regulatory bodies. This is
necessary in Canada, the United States and most other countries prior to
undertaking clinical studies. Additional preclinical studies are
conducted during clinical development to further characterize the toxic effects
of a drug prior to submitting a marketing application.
Phase I Clinical Trials
: Most
Phase I clinical trials take approximately one year to complete and are usually
conducted on a small number of healthy human subjects to evaluate the drug’s
safety, tolerability and pharmacokinetics. In some cases, such as
cancer indications, Phase I clinical trials are conducted in patients rather
than healthy volunteers.
Phase II Clinical Trials
:
Phase II clinical trials typically take one to two years to complete and are
generally carried out on a relatively small number of patients (generally
between 15 and 50 patients) in a specific setting of targeted disease or medical
condition, in order to provide an estimate of the drug’s effectiveness in that
specific setting. This phase also provides additional safety data and
serves to identify possible common short-term side effects and risks in a
somewhat larger group of patients. Phase II testing frequently
relates to a specific disease, such as breast or lung cancer. Some
contemporary methods of developing drugs, particularly molecularly targeted
therapies, do not require broad testing in specific diseases, and instead permit
testing in subsets of patients expressing the particular marker. In
some cases, such as cancer indications, the company sponsoring the new drug may
submit a marketing application to seek accelerated approval of the drug based on
evidence of the drug’s effect on a “surrogate endpoint” from Phase II clinical
trials. A surrogate endpoint is a laboratory finding or physical sign
that may not be a direct measurement of how a patient feels, functions or
survives, but is still considered likely to predict therapeutic benefit for the
patient. If accelerated approval is received, the company sponsoring
the new drug must continue testing to demonstrate that the drug indeed provides
therapeutic benefit to the patient.
Phase III Clinical Trials
:
Phase III clinical trials typically take two to four years to complete and
involve tests on a much larger population of patients suffering from the
targeted condition or disease. These studies involve conducting
controlled testing and/or uncontrolled testing in an expanded patient population
(several hundred to several thousand patients) at separate test sites
(multi-center trials) to establish clinical safety and
effectiveness. These trials also generate information from which the
overall benefit-risk relationship relating to the drug can be determined and
provide a basis for drug labeling. Phase III trials are generally the
most time consuming and expensive part of a clinical trial
program. In some instances, governmental authorities (such as the
FDA) will allow a single Phase III clinical trial to serve as a pivotal efficacy
trial to support a Marketing Application.
Marketing Application
: Upon
completion of Phase III clinical trials, the pharmaceutical company sponsoring
the new drug assembles all the chemistry, preclinical and clinical data and
submits it to the TPD or the FDA as part of a New Drug Submission in Canada or a
New Drug Application, or NDA, in the United States. The marketing
application is then reviewed by the regulatory body for approval to market the
product. The review process generally takes twelve to eighteen
months.
Any
clinical trials that we conduct may not be successfully completed, either in a
satisfactory time period or at all. The typical time periods
described above may vary substantially and may be materially
longer. In addition, the FDA and its counterparts in other countries
have considerable discretion to discontinue trials if they become aware of any
significant safety issues or convincing evidence that a therapy is not effective
for the indication being tested. The FDA and its counterparts in
other countries may not (i) allow clinical trials to proceed at any time after
receiving an IND, (ii) allow further clinical development phases after
authorizing a previous phase, or (iii) approve marketing of a drug after the
completion of clinical trials.
While
European, U.S. and Canadian regulatory systems require that medical products be
safe, effective, and manufactured according to high quality standards, the drug
approval process in Europe differs from that in the United States and Canada and
may require us to perform additional preclinical or clinical testing regardless
of whether FDA or TPD approval has been obtained. The amount of time
required to obtain necessary approvals may be longer or shorter than that
required for FDA or TPD approval. European Union Regulations and
Directives generally classify health care products either as medicinal products,
medical devices or in vitro diagnostics. For medicinal products,
marketing approval may be sought using either the centralized procedure of the
European Agency for the Evaluation of Medicinal Products, or EMEA, or the
decentralized, mutual recognition process. The centralized procedure,
which is mandatory for some biotechnology derived products, results in an
approval recommendation from the EMEA to all member states, while the European
Union mutual recognition process involves country by country
approval.
6
An
investment in our common stock involves a significant risk of
loss. You should carefully read this entire report and should give
particular attention to the following risk factors. You should
recognize that other significant risks may arise in the future, which we cannot
reasonably foresee at this time. Also, the risks that we now foresee
might affect us to a greater or different degree than currently
expected. There are a number of important factors that could cause
our actual results to differ materially from those expressed or implied by any
of our forward-looking statements in this report. These factors
include, without limitation, the risk factors listed below and other factors
presented throughout this report and any other documents filed by us with the
Securities and Exchange Commission, or the SEC, and the Canadian securities
regulators on SEDAR which can be accessed at www.sedar.com.
Risks
Related to Our Business
We
will need to raise substantial additional funds in the very near future to
continue our operations.
We
believe that our current cash and cash equivalents will only be sufficient to
satisfy our anticipated capital requirements into the second quarter of
2010. The audit opinion contained in our Annual Report filed on Form
10-K for the fiscal year ended December 31, 2009 included a notation related to
the uncertainty of our ability to continue as a going concern. The
current conditions in worldwide financial markets make fund-raising for small
biotechnology companies like us very difficult. Although, we continue
to pursue various strategic alternatives, including collaborations with other
pharmaceutical and biotechnology companies, if a strategic transaction or other
source of further financial resources cannot be secured in the very near term,
we might cease operations sooner than June 30, 2010. Our projections
of our capital requirements into the second quarter of 2010 and beyond
are subject to substantial uncertainty. Our current and
future working capital requirements may change depending upon numerous
factors, including: our ability to obtain additional financial resources; our
ability to enter into collaborations that provide us with funding, 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; changes in the focus, direction, or
costs of our research and development programs; employee related 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 our commercialization activities, if any. Any such change could
mean more capital than we had anticipated thereafter may be
required. To finance our operations beyond the second quarter of
2010, or earlier if necessary, 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 market conditions, there is a serious risk
that we might not be able to raise the necessary capital or such funding may not
be available on favorable terms or at all. If we cannot obtain
adequate funding in the very near term, we might be required to delay, scale
back or eliminate certain research and development studies, consider business
combinations or shut down some, or all of our operations.
We
have a history of significant losses and have had no revenues to date through
the sale of our products. If we do not generate significant revenues,
we will not achieve profitability.
To date,
we have been engaged primarily in research and development
activities. We have had no revenues through the sale of our products,
and we do not expect to have significant revenues until we are able to either
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 have
incurred significant operating losses every year since our inception on
September 3, 1996. We experienced net losses
of approximately $3.0 million
for the twelve months ended December 31, 2009, $13.6 million for the year ended
December 31, 2008, $13.4 million for the fiscal year ended December 31, 2007,
and $16.4 million for the fiscal year ended December 31, 2006. At
December 31, 2009, we had an accumulated deficit of approximately $101.0
million. We anticipate incurring substantial additional losses due to
the need to spend substantial
amounts on our current clinical trials,
anticipated research and development activities, and general and administrative
expenses, among other factors. We have not commercially introduced
any product and our product candidates are in varying stages of development and
testing. Our ability to attain profitability will depend upon our
ability to fund and develop products that are safe, effective and commercially
viable, to obtain regulatory approval for the manufacture and sale of our
product candidates and to license or otherwise market our product candidates
successfully. Any revenues generated from such products, assuming
they are successfully developed, marketed and sold, may not be realized for a
number of years. We may never achieve or sustain profitability on an
ongoing basis.
We
have experienced significant management turnover and might not be able to
recruit and retain the experienced personnel we need to compete in the drug
discovery and development industry.
Our
future success depends on the personal efforts and abilities of the principal
members of our senior management and scientific staff to provide strategic
direction, develop business, manage our operations, and maintain a cohesive and
stable work environment. Our Chief Executive Officer and General
Counsel both left the Company in July 2009, as did a number of our
directors. Also, our Chief Financial Officer left the Company in
September 2009. We retained three new executives at that time, so their
integration into our company has been and will continue to be critical to our
success. Our executives and key personnel might not stay with the
Company in light of our cash position and recent turnover in personnel, and the
recent and any further departures could have a material adverse effect on our
business.
7
If
we do not maintain current or enter into new collaborations with other
companies, we might not successfully develop our product candidates or generate
sufficient revenues to expand our business.
We
currently rely on scientific and research and development collaboration
arrangements with academic institutions and other third party collaborators,
including our agreement for eniluracil with GSK and an exclusive worldwide
license from OHSU for STS.
The
agreements with OHSU are terminable by either party in the event of an uncured
breach by the other party. We may also terminate our agreement with
OHSU at any time upon prior written notice of specified durations to the
licensor. Termination of any of our collaborative arrangements could
materially adversely affect our business. For example, if we are
unable to make the appropriate payments under these agreements, the licensor
might terminate the agreement which might have a material adverse
impact. In addition, our collaborators might not perform as agreed in
the future.
Since we
conduct a significant portion of our research and development through
collaborations, our success may depend significantly on the performance of such
collaborators, as well as any future collaborators. Collaborators
might not commit sufficient resources to the research and development or
commercialization of our product candidates. Economic or
technological advantages of products being developed by others, or other factors
could lead our collaborators to pursue other product candidates or technologies
in preference to those being developed in collaboration with us. The
commercial potential of, development stage of and projected resources required
to develop our drug candidates will affect our ability to maintain current
collaborations or establish new collaborators. There is a risk of
dispute with respect to ownership of technology developed under any
collaboration. Our management of any collaboration will require
significant time and effort as well as an effective allocation of
resources. We may not be able to simultaneously manage a large number
of collaborations.
Our
product candidates are still in development. Due to the long,
expensive and unpredictable drug development process, we might not ever
successfully develop and commercialize any of our product
candidates.
In order
to achieve profitable operations, we, alone or in collaboration with others,
must successfully fund, develop, manufacture, introduce and market our product
candidates. The time necessary to achieve market success for any
individual product is long and uncertain. Our product candidates and
research programs are in various stages of clinical development and require
significant, time-consuming and costly research, testing and regulatory
clearances. In developing our product candidates, we are subject to
risks of failure that are inherent in the development of therapeutic products
based on innovative technologies. For example, our product candidates
might be ineffective, as eniluracil was shown to be in earlier clinical trials
conducted by GSK, or may be overly toxic, or otherwise might fail to receive the
necessary regulatory clearances. The results of preclinical and
initial clinical trials are not necessarily predictive of future
results. Our product candidates might not be economical to
manufacture or market or might not achieve market acceptance. In
addition, third parties might hold proprietary rights that preclude us from
marketing our product candidates or others might market equivalent or superior
products.
We
must conduct human clinical trials to assess our product
candidates. If these trials are delayed or are unsuccessful, our
development costs will significantly increase and our business prospects may
suffer.
Before
obtaining regulatory approvals for the commercial sale of our product
candidates, we must demonstrate, through preclinical studies with animals and
clinical trials with humans, that our product candidates are safe and effective
for use in each target indication. To date, we have performed only
limited clinical trials, and we have only done so with some of our product
candidates. Much of our testing has been conducted on animals or on
human cells in the laboratory, and the benefits of treatment seen in animals may
not ultimately be obtained in human clinical trials. As a result, we
will need to perform significant additional research and development and
extensive preclinical and clinical testing prior to any application for
commercial use. We may suffer significant setbacks in clinical
trials, and the trials may demonstrate our product candidates to be unsafe or
ineffective. We may also encounter problems in our clinical trials
that will cause us to delay, suspend or terminate those clinical trials, which
would increase our development costs and harm our financial results and
commercial prospects. Identifying and qualifying patients to
participate in clinical trials of our potential products is critically important
to our success. The timing of our clinical trials depends on the
speed at which we can recruit patients to participate in testing our product
candidates. We have experienced delays in some of our clinical
trials, including a significant delay in the initial activation and patient
enrollment in our STS Phase III studies, and we may experience significant
delays in the future. If patients are unwilling to participate in our
trials because of competitive clinical trials for similar patient populations,
perceived risk or any other reason, the timeline for recruiting patients,
conducting trials and obtaining regulatory approval of potential products will
be delayed. Other factors that may result in significant delays
include obtaining regulatory or ethics review board approvals for proposed
trials, reaching agreement on acceptable terms with prospective clinical trial
sites, and obtaining sufficient quantities of drug for use in the clinical
trials. Such delays could result in the termination of the clinical
trials altogether.
Regulatory
approval of our product candidates is time-consuming, expensive and uncertain,
and could result in unexpectedly high expenses and delay our ability to sell our
products.
Development,
manufacture and marketing of our products are subject to extensive regulation by
governmental authorities in the United States and other
countries. This regulation could require us to incur significant
unexpected expenses or delay or limit our ability to sell our product
candidates, including eniluracil and STS, our product candidates that are
farthest along in development and the regulatory process.
Our
clinical studies might be delayed or halted, or additional studies might be
required, for various reasons, including:
8
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lack
of funding;
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the
drug is not effective;
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patients
experience severe side effects during
treatment;
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appropriate
patients do not enroll in the studies at the rate
expected;
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drug
supplies are not sufficient to treat the patients in the studies;
or
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we
decide to modify the drug during
testing.
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If
regulatory approval of any product is granted, it will be limited to those
indications for which the product has been shown to be safe and effective, as
demonstrated to the FDA’s satisfaction through clinical
studies. Furthermore, approval might entail ongoing requirements for
post-marketing studies. Even if regulatory approval is obtained,
labeling and promotional activities are subject to continual scrutiny by the FDA
and state regulatory agencies and, in some circumstances, the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of
approved products for unapproved, or off-label, uses. These
regulations and the FDA’s interpretation of them might impair our ability to
effectively market our products.
We and
our third-party manufacturers are also required to comply with the applicable
FDA current Good Manufacturing Practices, or GMP, regulations, which include
requirements relating to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation. Further,
manufacturing facilities must be approved by the FDA before they can be used to
manufacture our products, and they are subject to additional FDA inspection. If
we fail to comply with any of the FDA’s continuing regulations, we could be
subject to reputational harm and sanctions, including:
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delays,
warning letters and fines;
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product
recalls or seizures and injunctions on
sales;
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refusal
of the FDA to review pending
applications;
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total
or partial suspension of
production;
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withdrawals
of previously approved marketing applications;
and
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civil
penalties and criminal
prosecutions.
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In
addition, identification of side effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional testing or changes in labeling
of the product.
We
do not presently have the financial or human resources to complete Phase III
trials for our lead product candidates.
We do not
presently have the financial or human resources internally to complete Phase III
trials for any of our lead product candidates. We are currently
developing STS in Phase III trials in collaboration with SIOPEL and
COG. SIOPEL and COG may not conduct or complete the clinical trials
with STS as currently planned. Such collaborators might not commit
sufficient resources to the development of our product candidates, which may
lead to significant delays. We have already experienced significant
delays in the activation of the COG trial and subsequent accrual of patients
into the COG and SIOPEL clinical trials. We may not be able to
independently develop or conduct such trials ourselves. We continue
to seek a licensing or funding partner for the further development of one or all
of our product candidates. If a partner for one or all of these
technologies is not found, we may not be able to further advance these
products. If a partner is found, the financial terms that they
propose may not be acceptable to us.
We
may expand our business through new acquisitions that could disrupt our
business, harm our financial condition and dilute current stockholders’
ownership interests in our company.
We may
expand our products and capabilities, and therefore may seek mergers,
acquisitions or other business arrangements to do so. Mergers and
acquisitions involve numerous risks, including:
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substantial
cash expenditures;
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potentially
dilutive issuance of equity
securities;
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incurrence
of debt and contingent liabilities, some of which may be difficult or
impossible to identify at the time of
acquisition;
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difficulties
in assimilating the operations of the merged or acquired
companies;
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diverting
our management’s attention away from other business
concerns;
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the
additional expense of the
transaction;
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the
generation of shareholder lawsuits;
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risks
of entering markets in which we have limited or no direct experience;
and
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the
potential loss of our key employees or key employees of the acquired
companies.
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9
We cannot
assure you that any merger or acquisition will result in short-term or long-term
benefits to us. We may incorrectly judge the value or worth of an
acquired company or business. In addition, our future success would
depend in part on our ability to assimilate the companies and their personnel
effectively. We might not be able to make the combination of our
business with that of acquired businesses or companies work or be
successful. Furthermore, the development or expansion of our business
or any acquired business or companies may require a substantial capital
investment by us. We may not have the necessary funds or they might
not be available to us on acceptable terms or at all. We may also
seek to raise the necessary funds by selling shares of our stock, which could
dilute current stockholder’s ownership interest in our company.
If
our licenses to proprietary technology owned by others are terminated or expire,
we may suffer increased development costs and delays, and we may not be able to
successfully develop our product candidates.
The
development of our drug candidates and the manufacture and sale of any products
that we develop will involve the use of processes, products and information,
some of the rights to which are owned by others. Our product
candidates are licensed under agreements with GSK and OHSU. Although
we have obtained licenses or rights with regard to the use of certain processes,
products and information, the licenses or rights could be terminated or expire
during critical periods and we may not be able to obtain, on favorable terms or
at all, licenses or other rights that may be required. Some of these
licenses provide for limited periods of exclusivity that may be extended only
with the consent of the licensor, which may not be granted.
If
we are unable to adequately protect or maintain our patents and licenses related
to our product candidates, or we infringe upon the intellectual property rights
of others, we may not be able to successfully develop and commercialize our
product candidates.
The value
of our technology will depend in part upon our ability, and those of our
collaborators, to obtain patent protection or licenses to patents, maintain
trade secret protection and operate without infringing on the rights of third
parties. Although we have successfully pursued patent applications in
the past, it is possible that:
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some
or all of our pending patent applications, or those we have licensed, may
not be allowed;
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proprietary
products or processes that we develop in the future may not be
patentable;
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any
issued patents that we own or license may not provide us with any
competitive advantages or may be successfully challenged by third parties;
or
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the
patents of others may have an adverse effect on our ability to do
business.
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It is not
possible for us to be certain that we are the original and first creator of
inventions encompassed by our pending patent applications or that we were the
first to file patent applications for any such inventions. Further,
any of our patents, once issued, may be declared by a court to be invalid or
unenforceable.
Eniluracil
is currently protected under issued composition of matter and method
patents that we exclusively licensed from GSK that expire in 2014 and 2015 (in
combination with 5-FU). STS is currently protected by method of use
patents that we exclusively licensed from OHSU that expire in Europe in 2021 and
are currently pending in the United States. None of the above expiry dates
take into consideration additional pending patent applications for eniluracil
that, if issued, could provide additional patent protection nor possible patent
term extensions or periods of data exclusivity that may be available upon
marketing approval in the various countries worldwide. In addition,
periods of marketing exclusivity for STS may also be possible in the United
States under orphan drug status. We obtained Orphan Drug Designation in
the United States for the use of STS in the prevention of platinum-induced
ototoxicity in pediatric patients in 2004, if approved, will have seven years of
exclusivity in the United States from the approval date.
We may be
required to obtain licenses under patents or other proprietary rights of third
parties but the extent to which we may wish or need to do so is
unknown. Any such licenses may not be available on terms acceptable
to us or at all. If such licenses are obtained, it is likely they
would be royalty bearing, which would reduce any future income. If
licenses cannot be obtained on an economical basis, we could suffer delays in
market introduction of planned products or their introduction could be
prevented, in some cases after the expenditure of substantial
funds. If we do not obtain such licenses, we would have to design
around patents of third parties, potentially causing increased costs and delays
in product development and introduction or precluding us from developing,
manufacturing or selling our planned products, or our ability to develop,
manufacture or sell products requiring such licenses could be
foreclosed.
Litigation
may also be necessary to enforce or defend patents issued or licensed to us or
our collaborators or to determine the scope and validity of a third party’s
proprietary rights. We could incur substantial costs if litigation is
required to defend ourselves in patent suits brought by third parties, if we
participate in patent suits brought against or initiated by our collaborators,
or if we initiate such suits. We might not prevail in any such
action. An adverse outcome in litigation or an interference to
determine priority or other proceeding in a court or patent office could subject
us to significant liabilities, require disputed rights to be licensed from other
parties or require us or our collaborators to cease using certain technology or
products. Any of these events would likely have a material adverse
effect on our business, financial condition and results of
operations.
Much of
our technological know-how that is not patentable may constitute trade
secrets. Our confidentiality agreements might not provide for
meaningful protection of our trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure of
information. In addition, others may independently develop or obtain
similar technology and may be able to market competing products and obtain
regulatory approval through a showing of equivalency to our product that has
obtained regulatory approvals, without being required to undertake the same
lengthy and expensive clinical studies that we would have already
completed.
10
The
vulnerability to off-label use or sale of our product candidates that are
covered only by “method of use” patents may cause downward pricing pressure on
these product candidates if they are ever commercialized and may make it more
difficult for us to enter into collaboration or partnering arrangements for the
development of these product candidates.
Some of
our product candidates, including STS, are currently only covered by “method of
use” patents, which cover the use of certain compounds to treat specific
conditions, and not by “composition of matter” patents, which would cover the
chemical composition of the compound. Method of use patents provides
less protection than composition of matter patents because of the possibility of
off-label competition if other companies develop or market the compound for
other uses. If another company markets a drug that we expect to
market under the protection of a method of use patent, physicians may prescribe
the other company’s drug for use in the indication for which we obtain approval
and have a patent, even if the other company’s drug is not approved for such an
indication. Off-label use and sales could limit our sales and exert
pricing pressure on any products we develop covered only by method of use
patents. Also, it may be more difficult to find a collaborator to
license or support the development of our product candidates that are only
covered by method of use patents.
If
our third party manufacturers breach or terminate their agreements with us, or
if we are unable to secure arrangements with third party manufacturers on
acceptable terms as needed in the future, we may suffer significant delays and
additional costs.
We have
no experience manufacturing products and do not currently have the resources to
manufacture any products that we may develop. We currently have
agreements with contract manufacturers for clinical supplies of STS, eniluracil
and 5-FU, including drug substance providers and drug product suppliers, but
they might not perform as agreed in the future or may terminate our agreement
with them before the end of the required term. Significant additional
time and expense would be required to effect a transition to a new contract
manufacturer.
We plan
to continue to rely on contract manufacturers for the foreseeable future to
produce quantities of products and substances necessary for research and
development, preclinical trials, human clinical trials and product
commercialization, and to perform their obligations in a timely manner and in
accordance with applicable government regulations. If we develop any
products with commercial potential, we will need to develop the facilities to
independently manufacture such products or secure arrangements with third
parties to manufacture them. We may not be able to independently
develop manufacturing capabilities or obtain favorable terms for the manufacture
of our products. While we intend to contract for the commercial
manufacture of our product candidates, we may not be able to identify and
qualify contractors or obtain favorable contracting terms. We or our
contract manufacturers may also fail to meet required manufacturing standards,
which could result in delays or failures in product delivery, increased costs,
injury or death to patients, product recalls or withdrawals and other problems
that could significantly hurt our business. We intend to maintain a
second source for back-up commercial manufacturing, wherever
feasible. However, if a replacement to our future internal or
contract manufacturers were required, the ability to establish second-sourcing
or find a replacement manufacturer may be difficult due to the lead times
generally required to manufacture drugs and the need for FDA compliance
inspections and approvals of any replacement manufacturer, all of which factors
could result in production delays and additional commercialization
costs. Such lead times would vary based on the situation, but might
be twelve months or longer.
We
lack the resources necessary to effectively market our product candidates, and
we may need to rely on third parties over whom we have little or no control and
who may not perform as expected.
We do not
have the necessary resources to market our product candidates. If we
develop any products with commercial potential, we will either have to develop a
marketing capability, including a sales force, which is difficult and expensive
to implement successfully, or attempt to enter into a collaboration, merger,
joint venture, license or other arrangement with third parties to provide a
substantial portion of the financial and other resources needed to market such
products. We may not be able to do so on acceptable terms, if at
all. If we rely extensively on third parties to market our products,
the commercial success of such products may be largely outside of our
control.
We
conduct our business internationally and are subject to laws and regulations of
several countries which may affect our ability to access regulatory agencies and
may affect the enforceability and value of our licenses.
We have
conducted clinical trials in the United States, Canada, Europe and the Pacific
Rim and intend to, or may, conduct future clinical trials in these and other
jurisdictions. There can be no assurance that any sovereign
government will not establish laws or regulations that will be deleterious to
our interests. There is no assurance that we, as a Canadian
corporation, will continue to have access to the regulatory agencies in any
jurisdiction where we might want to conduct clinical trials or obtain regulatory
approval, and we might not be able to enforce our license or patent rights in
foreign jurisdictions. Foreign exchange controls may have a material
adverse effect on our business and financial condition, since such controls may
limit our ability to flow funds into or out of a particular country to meet
obligations under licenses, clinical trial agreements or other
collaborations.
Our
cash invested in money market fund might be subject to loss.
There has been significant
deterioration and instability in the financial markets. Even though
we believe we take a conservative approach to investing our funds, the
volatility of the current financial markets exposes us to increased investment
risk, including the risks that the value and liquidity of our money market
investments could deteriorate significantly and the issuers of the investments
we hold could be subject to credit rating downgrades. This might
result in significant losses in our money market investments that could
adversely impact our financial condition, which could be an immediate problem
given our extremely limited financial resources. While we have not experienced
any loss or write down of our money market investments in the past, we cannot
guarantee that such losses will not occur in future periods.
11
We
terminated a former executive and did not obtain a release and might be required
to pay severance to this former executive in the
future.
We terminated an executive and did not
pay any severance or obtain a release. While we believe we terminated the
executive in accordance with the terms of the executive’s employment contract,
and do not anticipate having to pay any material severance to the executive, if
a lawsuit is brought, a court may disagree with our interpretation of the terms
of the executive’s employment contract and we could be required to pay severance
in the future
Risks
Related to Our Industry
If
we are unable to obtain applicable U.S. and/or foreign regulatory approvals, we
will be unable to develop and commercialize our drug candidates.
The
preclinical studies and clinical trials of our product candidates, as well as
the manufacturing, labeling, sale and distribution, export or import, marketing,
advertising and promotion of our product candidates are subject to various
regulatory frameworks in the United States, Canada and other
countries. Any products that we develop must receive all relevant
regulatory approvals and clearances before any marketing, sale or
distribution. The regulatory process, which includes extensive
preclinical studies and clinical testing to establish product safety and
efficacy, can take many years and cost substantial amounts of
money. As a result of the length of time, many challenges and costs
associated with the drug development process, the historical rate of failures
for drug candidates is extremely high. For example, prior development
of our compound eniluracil by GSK was not successful. Varying
interpretations of the data obtained from studies and tests could delay, limit
or prevent regulatory approval or clearance. Changes in regulatory
policy could also cause delays or affect regulatory approval. Any
regulatory delays may increase our development costs and negatively impact our
competitiveness and prospects. It is possible that we may not be able
to obtain regulatory approval of any of our drug candidates or approvals may
take longer and cost more to obtain than expected.
Regulatory
approvals, if granted, may entail limitations on the uses for which any products
we develop may be marketed, limiting the potential sales for any such
products. The granting of product approvals can be withdrawn at any
time, and manufacturers of approved products are subject to regular reviews,
including for compliance with GMP. Failure to comply with any
applicable regulatory requirement, which may change from time to time, can
result in warning letters, fines, sanctions, penalties, recalling or seizing
products, suspension of production, or even criminal prosecution.
Future
sales of our product candidates may suffer if they fail to achieve market
acceptance.
Even if
our product candidates are successfully developed and achieve appropriate
regulatory approval, they may not enjoy commercial acceptance or
success. Product candidates may compete with a number of new and
traditional drugs and therapies developed by major pharmaceutical and
biotechnology companies. Market acceptance is dependent on product
candidates demonstrating clinical efficacy and safety, as well as demonstrating
advantages over alternative treatment methods. In addition, market
acceptance is influenced by government reimbursement policies and the ability of
third parties to pay for such products. Physicians, patients, the
medical community or patients may not accept or utilize any products we may
develop.
We
face a strong competitive environment. Other companies may develop or
commercialize more effective or cheaper products, which may reduce or eliminate
the demand for our product candidates.
The
biotechnology and pharmaceutical industry, and in particular the field of cancer
therapeutics where we are focused, is very competitive. Many
companies and research organizations are engaged in the research, development
and testing of new cancer therapies or means of increasing the effectiveness of
existing therapies, including, among many others, Abbott Laboratories, Amgen,
Antisoma, Adventrix, AstraZeneca, Bayer, Bristol-Myers Squibb, EntreMed,
Genentech, Johnson & Johnson, Merck & Co., NeoPharm, Novartis, Onyx, OSI
Pharmaceuticals, OXiGENE, Peregrine Pharmaceuticals, Pfizer, Roche,
Sanofi-Aventis, and Taiho. Many of these companies have marketed
drugs or are developing targeted cancer therapeutics which, depending upon the
mechanism of action of such agents could thus be competitors.
Many of
our existing or potential competitors have substantially greater financial,
technical and human resources than we do and may be better equipped to develop,
manufacture and market products. In addition, many of these
competitors have extensive experience with preclinical testing and human
clinical trials and in obtaining regulatory approvals. Also, some of
the smaller companies that compete with us have formed collaborative
relationships with large, established companies to support the research,
development, clinical trials and commercialization of any products that they may
develop.
Academic
institutions, government agencies and other public and private research
organizations may also conduct research, seek patent protection and establish
collaborative arrangements for research, clinical development and marketing of
products similar to those we seek to develop. These companies and
institutions compete with us in recruiting and retaining qualified scientific
and management personnel as well as in acquiring technologies complementary to
our projects.
We are
likely to face competition in the areas of product efficacy and safety, ease of
use and adaptability, as well as pricing, product acceptance, regulatory
approvals and intellectual property. Competitors could develop more
effective, safer and more affordable products than we do, and they may obtain
patent protection or product commercialization before we do or even render our
product candidates obsolete. The existence of competitive products,
including products or treatments of which we are not aware, or products or
treatments that may be developed in the future, may adversely affect the
marketability of any products that we develop.
12
We
may face product liability claims that could require us to defend costly
lawsuits or incur substantial liabilities that could adversely impact our
financial condition, receipt of regulatory approvals for our product candidates
and our results of operation.
The use
of our product candidates in clinical trials and for commercial applications, if
any, may expose us to liability claims in the event that such product candidates
cause injury or death or result in other adverse effects. These
claims could be made by health care institutions, contract laboratories, and
subjects participating in our clinical studies, patients or others using our
product candidates. In addition to liability claims, certain serious
adverse events could require interruption, delay and/or discontinuation of a
clinical trial and potentially prevent further development of the product
candidate. We carry clinical trial insurance but the coverage may not
be sufficient to protect us from legal expenses and liabilities we might
incur. Litigation is very expensive, even if we are
successful. In addition, our existing coverage may not be adequate if
we further develop products, and future coverage may not be available in
sufficient amounts or at reasonable cost. In addition, we might
reduce the amount of this coverage due to our limited financial
resources. Adverse liability claims may also harm our ability to
obtain or maintain regulatory approvals.
We
use hazardous material and chemicals in our research and development, and our
failure to comply with laws related to hazardous materials could materially harm
us.
Our
research and development processes involve the controlled use of hazardous
materials, such as flammable organic solvents, corrosive acids and corrosive
bases. Accordingly, we are subject to federal, state, local and
foreign laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. The risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable
for any damages that result and any such liability could exceed our resources
and may not be covered by our general liability insurance. We
currently do not carry insurance specifically for hazardous materials
claims. We may be required to incur significant costs to comply with
environmental laws and regulations, which may change from time to
time.
Efforts
to reduce product pricing and health care reimbursement and changes to
government policies could negatively affect the commercialization of our product
candidates.
If any of
our product candidates achieve regulatory approval, we may be materially
adversely affected by the continuing efforts of governmental and third-party
payors to contain or reduce health care costs. For example, if we
succeed in bringing one or more products to market, such products may not be
considered cost-effective and the availability of consumer reimbursement may not
exist or be sufficient to allow the sale of such products on a competitive
basis. The constraints on pricing and availability of competitive
products may further limit our pricing and reimbursement policies as well as
adversely impact market acceptance and commercialization for the
products.
In some
foreign markets, the pricing or profitability of healthcare products is subject
to government control. In recent years, federal, state, provincial
and local officials and legislators have proposed or are proposing a variety of
price-based reforms to the healthcare systems in the United States, Canada and
elsewhere. Some proposals include measures that would limit or
eliminate payments from third-party payors to the consumer for certain medical
procedures and treatments or allow government control of pharmaceutical
pricing. The adoption of any such proposals or reforms could
adversely affect the commercial viability of our product
candidates.
Any
significant changes in the healthcare system in the United States, Canada or
abroad would likely have a substantial impact on the manner in which we conduct
business and could have a material adverse effect on our ability to raise
capital and the viability of product commercialization.
New
accounting or regulatory pronouncements may impact our future financial position
and results of operations.
There may
be new accounting or regulatory pronouncements or rulings, which could have an
impact on our future financial position and results of
operations. Changing laws, regulations and standards relating to
corporate governance and public disclosures can create uncertainty and such
uncertainty may lead to increased expenses and exposure to
liabilities.
Risks
Related to Owning Our Common Shares
Our
common shares have been delisted from NYSE Alternext US LLC (formerly the
American Stock Exchange), which may make it more difficult for stockholders to
dispose of their shares.
In
December 2008, we received notice from the NYSE Alternext US, LLC (formerly the
American Stock Exchange), or AMEX, that we were not in compliance with Section
1003(a)(ii) of its Company Guide, because our stockholders’ equity was below $6
million and we had incurred losses from continued operations and net losses in
the five most recent fiscal years. On January 20, 2009, we
voluntarily filed to delist our common stock from the AMEX and effective January
30, 2009, our common stock no longer traded on the AMEX. As a result,
any trading of our common stock in the U.S. will need to be conducted in the
over-the-counter market, or on the pink sheets. In addition, our
common stock is also subject to the SEC’s penny stock rules, which impose
additional requirements on broker-dealers who effect trades. As a
result, stockholders might have difficulty selling our common stock,
particularly in the U.S.
We
may be unable to maintain the listing of our common stock on the TSX and that
would make it more difficult for stockholders to dispose of their common
stock.
Our
common stock is currently listed on the TSX. The TSX has rules for
continued listing, 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 additional capital
to continue operations. In January 2009, our common stock was
delisted from the AMEX as the Company did not meet the continued listing
requirements of that exchange.
13
Delisting
from the TSX would make it more difficult for stockholders to dispose of their
common stock and more difficult to obtain accurate quotations on our common
stock. This could have an adverse effect on the price of our common
stock. There can be no assurances that a market maker will make a
market in our common stock on the pink sheets or any other stock quotation
system after delisting. Furthermore, securities quoted on the pink
sheets generally have significantly less liquidity than securities traded on a
national securities exchange, not only in the number of shares that can be
bought and sold, but also through delays in the timing of transactions and lower
market prices than might otherwise be obtained. As a result,
stockholders might find it difficult to resell shares at prices quoted in the
market or at all. Furthermore, because of the limited market and
generally low volume of trading in our common stock, our common stock is more
likely to be affected by broad market fluctuations, general market conditions,
fluctuations in our operating results, changes in the market’s perception of our
business, and announcements made by us, our competitors or parties with whom we
have business relationships. Our ability to issue additional
securities for financing or other purposes, or to otherwise arrange for any
financing we may need in the future, may also be materially and adversely
affected by the fact that our securities are not traded on a national securities
exchange.
The
market price of our common shares is highly volatile and could cause the value
of your investment to significantly decline.
Historically,
the market price of our common shares has been highly volatile and the market
for our common shares has from time to time experienced significant price and
volume fluctuations, some of which are unrelated to our operating
performance. From January 4, 2005 to December 31, 2009, the trading
price of our stock fluctuated from a high closing price of CAD$2.09 per share to
a low closing price of CAD$0.02 per share on the TSX. From November
12, 2004 until our delisting on January 30, 2009, the trading price of our stock
fluctuated from a high closing price of $1.71 per share to a low closing price
of $0.01 per share on the AMEX. Historically, our common shares have
had a low trading volume, and may continue to have a low trading volume in the
future. This low volume may contribute to the volatility of the
market price of our common shares. It is likely that the market price
of our common shares will continue to fluctuate significantly in the
future.
The
market price of our stock may be significantly affected by many factors,
including without limitation:
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our
immediate need to raise additional capital and the terms of any
transaction we are able to enter
into;
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the
economic crisis or other external factors generally or stock market trends
in the pharmaceutical or biotechnology industries
specifically;
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announcements
of licensing agreements, joint ventures, collaborations or other strategic
alliances that involve our products or those of our
competitors;
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innovations
related to our or our competitors’
products;
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actual
or potential clinical trial results related to our or our competitors’
products;
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·
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our
financial results or those of our
competitors;
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reports
of securities analysts regarding us or our
competitors;
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developments
or disputes concerning our licensed or owned patents or those of our
competitors;
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developments
with respect to the efficacy or safety or our products or those of our
competitors; and
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health
care reforms and reimbursement policy changes nationally and
internationally.
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Our
existing principal stockholders hold a substantial number of our common shares
and may be able to exercise influence in matters requiring approval of
stockholders.
At December 31, 2009, our current
stockholders separately representing more than 5% ownership in our Company,
collectively represented beneficial ownership of approximately 60% of our common
shares. In particular, Southpoint Capital Advisors LP owns or
exercises control over 41.5 million common shares, representing approximately
32% of the issued and outstanding common shares. In addition, Mr. Robert Butts,
Co-Founder and Portfolio Manager of Southpoint Capital Advisors LP, serves as
our Chairman of our Board of Directors. Southpoint
Capital, our other 5% stockholders, and other insiders, acting alone or
together, might be able to influence the outcomes of matters that require the
approval of our stockholders, including but not limited to certain equity
transactions (such as a financing), an acquisition or merger with another
company, a sale of substantially all of our assets, the election and removal of
directors, or amendments to our incorporating documents. These
stockholders might make decisions that are adverse to your
interests. The concentration of ownership could have the effect of
delaying, preventing or deterring a change of control of our company, which
could adversely affect the market price of our common shares or deprive our
other stockholders of an opportunity to receive a premium for their common
shares as part of a sale of our company.
We
will need to raise substantial additional funds in the very near future to
continue our operations, any equity offering will result in significant dilution
to the ownership interests of shareholders and may result in dilution of the
value of such interests and any debt offering will increase financial
risk.
In order
to satisfy our anticipated capital requirements beyond the second quarter of
2010, and possibly earlier, we will need to raise substantial additional funds
through either the sale of additional equity, the issue of securities
convertible into 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. The most likely sources of financing that may be available
to the Company in the near term are the sale of common shares and/or securities
convertible into common shares and the issuance of debt.
14
The
Company cannot predict the size of future issues of common shares or the issue
of securities convertible into common shares or the effect that any such future
issues and sales of common shares will have on the market price of our common
shares. However, given the current market price of the Company’s common shares,
any transaction involving the issue of common shares, or securities convertible
into common shares, will result in immediate and substantial dilution to present
and prospective holders of common shares. Alternatively, the Company may rely on
debt financing and assume debt obligations that require it to make substantial
interest and capital payments and to pledge some or all of its assets as
collateral to secure such debt obligations.
There
are a large number of our common shares underlying outstanding warrants and
options, and reserved for issuance under our stock option plan, that may be sold
in the market, which could depress the market price of our stock and result in
substantial dilution to the holders of our common shares.
Sale or
issuance of a substantial number of our common shares in the future could cause
the market price of our common stock to decline. It may also impair
our ability to obtain additional financing. At December 31, 2009, we
had outstanding warrants to purchase approximately 41.1 million of our common
shares and had a weighted average exercise price of $0.44. In
addition, at December 31, 2009, there were approximately 15.8 million common
shares issuable upon the exercise of stock options granted by us of which
approximately 2.6 million were denominated in Canadian dollars and had a
weighted average exercise price of CAD$2.19 per common share and approximately
13.2 million were denominated in U.S. dollars and had a weighted average
exercise price of $0.55 per common share. We may also issue further
warrants as part of any future financings as well as the additional 4.8 million
options to acquire our common shares currently remaining available for issuance
under our stock option plan.
We
have not paid any dividends since incorporation and do not anticipate declaring
any dividends in the foreseeable future. As a result, you will not be
able to recoup your investment through the payment of dividends on your common
shares and the lack of a dividend payable on our common shares might depress the
value of your investment.
We will
use all available funds to finance the development of our product candidates and
operation of our business. Our directors will determine if and when
dividends should be declared and paid in the future based on our financial
position at the relevant time, but since we have no present plans to pay
dividends, you should not expect receipt of dividends either for your cash needs
or to enhance the value of your common shares.
None.
We lease
two facilities, one of which we sublease to another tenant. The
facility we occupy has approximately 1,100 square feet of office space in Chapel
Hill, North Carolina and the current monthly lease payments are approximately
$2,000 and the lease expires in January 2012. The subleased space
consists of approximately 7,636 square feet of laboratory and office space and
the current monthly payments are approximately $10,500 and the lease expires in
September 2010. We have subleased this space to a third party for
approximately $7,000 per month through September 2010.
None.
None.
15
The
following table sets forth information concerning our executive officers as of
March 26, 2009:
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Name
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Age
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Position
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Rostislav
Raykov
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34
|
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Chief
Executive Officer and Board Member
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Robert
Andrade
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34
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Chief
Financial Officer and Board Member
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Dr.
Thomas Spector
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65
|
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Chief Scientific
Officer
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Rostislav
Raykov.
Mr.
Raykov, was appointed as the new Chief Executive Officer and member of the Board
in July 2009. Mr. Raykov is also a General Partner at DCML, a private
investment partnership. Prior to joining DCML, Mr. Raykov was a General
Partner of Alchem Investment Partners (2006-2007), an event driven hedge
fund. Prior to founding Alchem, Mr. Raykov was a portfolio manager and
securities analyst for John A. Levin & Co. Event Driven Fund (2002-2005).
Prior to joining John A. Levin & Co., Mr. Raykov was a securities analyst
for the Merger Fund at Tiedemann Investment Group (1999-2002) and an investment
banking analyst at Bear Stearns (1998-1999). Mr. Raykov earned a B.S. in
Business Administration from the University of North Carolina at Chapel
Hill.
Robert
Andrade.
Mr.
Robert Andrade, was appointed as Chief Financial Officer and member of the Board
in September 2009. Mr. Andrade is a General Partner at DCML, a private
investment partnership. Prior to joining DCML, Mr. Andrade was a portfolio
manager and securities analyst for Millennium Partners L.P. (2006-2007). Prior
to joining Millennium Partners L.P., Mr. Andrade was a securities analyst for
the Event Driven Fund at Caxton Associates LLC (2003-2005). Prior to
Caxton Associates LLC, Mr. Andrade was a private equity associate at Trimaran
Capital Partners (2000-2003) and an investment banking analyst at Bear Stearns
(1997-1999). Mr. Andrade earned a M.A. and B.A. in Economics from the University
of Southern California.
Dr. Thomas
Spector, PhD.
Dr. Spector was
appointed Chief Scientific Officer at Adherex in July 2009. He is
President of Spector Consulting Services. Dr. Spector is the principal
inventor of the eniluracil / 5-fluorouracil treatment. In 2004, he discovered
why the dosing regimen in Glaxo’s Phase III clinical trial was not
optimal. Dr. Spector has authored and co-authored over 100 scientific
articles, including 25 manuscripts on eniluracil / 5-fluorouracil. He has
over 35 years experience in drug discovery and development and was the Assoc.
Division Director of Experimental Therapy at Burroughs Wellcome and The
International Vice President of Cancer Research at GlaxoWellcome (now
GSK). Dr. Spector received a Ph.D. in Pharmacology from Yale
University.
Our
common stock traded on currently trades on the Pink Sheets under the trading
symbol “ADHXF” and previously under the trading symbol “ADH” from November 12,
2004 until January 29, 2009, and has traded on the TSX, under the trading symbol
“AHX” since June 5, 2001. In December 2008, we received notice from
the AMEX that we were not in compliance with certain continued listing standards
as set forth in Part 10 of the NYSE Alternext US, LLC Company
Guide. On January 20, 2009, we voluntarily filed to delist our common
stock from the AMEX and on January 30, 2009, we no longer traded on the
AMEX. The following table sets forth the quarterly high and low
market closing prices, and average daily trading volume on the AMEX and the TSX,
for the two most recent full financial years:
|
Pink
Sheets-Over-the-Counter
(in
U.S. dollars)
|
Toronto
Stock Exchange
(in
Canadian dollars)
|
|||||||||||||||||||||||
|
Fiscal
2009:
|
High
$
|
Low
$
|
Volume
|
High
$
|
Low
$
|
Volume
|
||||||||||||||||||
|
Quarter
ended 12/31/09
|
$ | 0.07 | $ | 0.04 | 41,135 | $ | 0.07 | $ | 0.04 | 24,676 | ||||||||||||||
|
Quarter
ended 09/30/09
|
0.08 | 0.03 | 162,329 | 0.09 | 0.03 | 50,638 | ||||||||||||||||||
|
Quarter
ended 06/30/09
|
0.04 | 0.02 | 106,323 | 0.06 | 0.03 | 97,452 | ||||||||||||||||||
|
Quarter
ended 03/31/09
|
0.04 | 0.01 | 73,131 | $ | 0.07 | $ | 0.02 | 30,298 | ||||||||||||||||
|
Fiscal
2008:
|
||||||||||||||||||||||||
|
Quarter
ended 12/31/08
|
$ | 0.09 | $ | 0.02 | 309,656 | $ | 0.11 | $ | 0.02 | 91,302 | ||||||||||||||
|
Quarter
ended 09/30/08
|
0.23 | 0.09 | 110,686 | 0.20 | 0.10 | 26,653 | ||||||||||||||||||
|
Quarter
ended 06/30/08
|
0.37 | 0.21 | 109,689 | 0.35 | 0.21 | 30,382 | ||||||||||||||||||
|
Quarter
ended 03/31/08
|
0.40 | 0.30 | 61,708 | 0.39 | 0.26 | 24,969 | ||||||||||||||||||
As of
March 5, 2010, the last reported sale on the TSX was CAD$0.04 per share and the
last reported sale on the over the counter markets in the U.S. was $0.04 per
share.
16
Record
Holders
As of
March 5, 2010, there were approximately 91 shareholders of record of our common
stock, one of which was Cede & Co., a nominee for Depository Trust Company,
or DTC, and one of which was The Canadian Depository for Securities Limited, or
CDS. All of our common shares held by brokerage firms, banks and
other financial institutions in the U.S. or Canada as nominees for beneficial
owners are considered to be held of record by Cede & Co. in respect of
brokerage firms, banks and other financial institutions located in
Canada. Cede & Co. and CDS are each considered to be one
shareholder of record.
Relative
Stock Performance
The
following line graph compares the percentage change, from December 31, 2005 to
December 31, 2009, in cumulative total shareholder return for $100 (CAD$ for TSX
and US$ for AMEX) invested in our common stock with cumulative total return of
the AMEX Composite, the AMEX Biotechnology Index and the S&P/TSX Composite
Total Return Index.
Dividend
Policy
We have
never declared or paid cash dividends on our common stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of business and do not anticipate paying any cash dividends in the
foreseeable future.
Material United States Federal and
Canadian Income Tax Consequences
This
section summarizes the material U.S. federal and Canadian federal income tax
consequences of the ownership and disposition of the common
stock. Nothing contained herein shall be construed as tax advice; you
must rely only on the advice of your own tax advisor. We make no
assurances as to the applicability of any tax laws with respect to any
individual investment. In this section, we have calculated whether we
meet certain thresholds related to our status under various U.S. tax
rules. Any such calculations are dependent on many facts, not all of
which may be known to us and any of which might change, which could change the
results of any calculation.
This
summary relating to the common stock applies to the beneficial owners who are
individuals, corporations, trusts and estates that:
|
·
|
at
all relevant times are: (i) U.S. persons for purposes of the U.S.
Internal Revenue Code of 1986, as amended through the date hereof, or the
Code, (ii) nonresidents of Canada for purposes of the Income Tax Act
(Canada), or the Income Tax Act, and (iii) residents of the United
States for purposes of, and entitled to all the benefits under, the
Canada-United States Income and Capital Tax Convention (1980), as amended
through the date hereof, or the Tax
Treaty;
|
|
·
|
hold
common stock as a capital asset for purposes of the Code and capital
property for the purposes of the Income Tax
Act;
|
|
·
|
deal
at arm’s length with, and are not affiliated with, the Company for
purposes of the Income Tax Act; and
|
|
·
|
do
not and will not use or hold the common stock in carrying on a business in
Canada.
|
17
Persons
who satisfy the above conditions are referred to as U.S.
Shareholders.
The tax
consequences of an investment in common stock by persons who are not U.S.
Shareholders may differ materially from the tax consequences discussed in this
section. The Income Tax Act contains rules relating to securities
held by some financial institutions. This Annual Report does not
discuss these rules, and holders that are financial institutions should consult
their own tax advisors. This discussion is based upon the following,
all as currently in effect:
|
·
|
the
Income Tax Act and regulations under the Income Tax
Act;
|
|
·
|
the
Code and Treasury regulations under the
Code;
|
|
·
|
the
Tax Treaty;
|
|
·
|
the
administrative policies and practices published by the Canada Revenue
Agency, formerly Revenue Canada;
|
|
·
|
all
specific proposals to amend the Income Tax Act and the regulations under
the Income Tax Act that have been publicly announced by or on behalf of
the Minister of Finance (Canada) prior to the date of this
report;
|
|
·
|
the
administrative policies and rulings published by the U.S. Internal Revenue
Service, or the IRS; and
|
|
·
|
judicial
decisions.
|
All of
the foregoing are subject to change either prospectively or
retroactively. This summary does not take into account estate or gift
tax laws, the tax laws of the various provinces or territories of Canada or the
tax laws of the various state and local jurisdictions of the United States or
foreign jurisdictions.
This
discussion summarizes the material U.S. federal and Canadian federal income tax
considerations of the ownership and disposition of common stock. This
discussion does not address all possible tax consequences relating to an
investment in common stock. No account has been taken of your
particular circumstances, and this summary does not address consequences
peculiar to you if you are subject to special provisions of U.S. or Canadian
income tax law (including, without limitation, dealers in securities or foreign
currency, tax-exempt entities, banks, insurance companies or other financial
institutions, persons that hold common stock as part of a “straddle,” “hedge” or
“conversion transaction,” persons acquiring shares upon exercise of stock
options or in other compensatory transactions, and U.S. Shareholders that have a
“functional currency” other than the U.S. dollar or that own common stock
through a partnership or other pass-through entity). Therefore, you
should consult your own tax advisor regarding the tax consequences of purchasing
and owning common stock.
Material
U.S. Federal Income Tax Considerations
Subject
to the discussion below regarding Passive Foreign Investment Company Rules and
Controlled Foreign Corporation Rules, this section summarizes U.S. federal
income tax consequences of ownership and disposition of the common
stock.
U.S.
Shareholders are generally required to include in income dividend distributions,
if any, paid by a corporation to the extent of a corporation’s current or
accumulated earnings and profits attributable to the distribution as computed
based on U.S. income tax principles. The amount of any cash
distribution paid in Canadian dollars will be equal to the U.S. dollar value of
the Canadian dollars on the date of distribution based on the exchange rate on
such date, regardless of whether the payment is in fact converted to U.S.
dollars, and without reduction for Canadian withholding tax. For a
discussion of Canadian withholding taxes applicable to dividends paid by the
Company, see “Material Canadian Federal Income Tax Considerations.” You will
generally be entitled to a foreign tax credit or deduction for U.S. federal
income tax purposes in an amount equal to the Canadian tax
withheld. To the extent distributions paid by the Company on the
common stock exceed the Company’s current or accumulated earnings and profits,
they will be treated first as a return of capital up to your adjusted tax basis
in the shares and then as capital gain from the sale or exchange of the
shares.
Under
current law the maximum rate of U.S. federal income tax on dividends paid to
noncorporate U.S. holders is reduced to 15% for tax years from 2003 through
2010. In order to qualify for the reduced tax rates on dividends, a
noncorporate shareholder must satisfy certain holding period requirements and
must not be under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property. In some circumstances, this holding period may be
increased. Additionally, the reduced tax rates do not apply to
dividends that a noncorporate shareholder elects to treat as investment income
for purposes of Section 163(d)(4) of the Code.
Dividends
received from a “qualified foreign corporation” are eligible for the reduced
dividends tax rates for noncorporate shareholders. In general, a
Canadian corporation entitled to all the benefits of the Tax Treaty will be
treated as a qualified foreign corporation. In addition, a foreign
corporation will be treated as a qualified foreign corporation with respect to
any dividend paid by that corporation if the stock with respect to which the
dividend is paid is readily tradable on an established securities market in the
United States. Regardless of the above rules, however, a foreign
corporation will not be treated as a qualified foreign corporation if, for the
taxable year of the corporation in which the dividend was paid, or the preceding
taxable year, the corporation is classified for U.S. tax purposes as a passive
foreign investment company, or PFIC. Accordingly, any dividends paid
by us in a year that we are a PFIC or in the next taxable year would not qualify
for the reduced tax rates on dividends paid to noncorporate U.S.
holders. As discussed below under “Passive Foreign Investment Company
Rules,” we have determined that we are a PFIC for U.S. federal income tax
purposes and likely will continue to be a PFIC at least until we develop a
source of significant operating revenues.
18
Dividends
paid by the Company generally will constitute foreign source dividend income and
“passive income” for purposes of the foreign tax credit, which could affect the
amount of foreign tax credits available to you. The Code applies
various limitations on the amount of foreign tax credits that may be available
to a U.S. taxpayer.
Because
of the complexity of those limitations, you should consult your own tax advisor
with respect to the availability of foreign tax credits.
Dividends
paid by the Company on the common stock generally will not be eligible for the
“dividends received” deduction available to corporate shareholders, because the
Company is a foreign corporation. Note, however, that if a corporate shareholder
owns at least 10 percent of our stock and we are not a PFIC (see “Passive
Foreign Investment Company Rules” below) for a particular year, a dividends
received deduction may be available under Section 245 of the Code for any
dividends paid by the Company to that shareholder attributable to our
U.S.-source earnings.
If you
sell the common stock, you generally will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and your
adjusted tax basis in the shares. Any such gain or loss will be
long-term or short-term capital gain or loss, depending on whether the shares
have been held by you for more than one year, and will generally be U.S.-source
gain or loss.
Dividends
paid by the Company on the common stock generally will be subject to U.S.
information reporting, and a backup withholding tax may apply unless you furnish
the paying agent or middleman with a duly completed and signed Form
W-9. You will be allowed a refund or a credit equal to any amount
withheld under the U.S. backup withholding tax rules against your U.S. federal
income tax liability, provided you furnish the required information to the
IRS.
Passive
Foreign Investment Company Rules
The
passive foreign investment company, or PFIC, provisions of the Code can have
significant tax effects on U.S. Shareholders. We will be classified
as a PFIC for any taxable year if, after the application of certain “look
through” rules, either:
|
·
|
75%
or more of our gross income is “passive income,” which includes interest,
dividends and certain rents and royalties;
or
|
|
·
|
the
average quarterly percentage, by fair market value, of our assets that
produce or are held for the production of “passive income” is 50% or more
of the fair market value of all of our
assets.
|
Based
upon our review of our financial data for the current and prior fiscal years, we
have determined that we are currently a PFIC and likely will continue to be a
PFIC at least until we develop a source of significant operating
revenues.
Our
classification as a PFIC for any period during a U.S. Shareholder’s holding
period for our shares, absent the holder’s validly making one of the elections
described below, would generally require the U.S. Shareholder to treat all
“excess distributions” received during such holding period with respect to those
shares as if those amounts were ordinary income earned ratably over such holding
period. Excess distributions for this purpose would include all gain
realized on the disposition of the shares as well as certain distributions made
by us. Amounts treated under this analysis as earned in the year of
the disposition or in any year before the first year in which we are a PFIC
would be included in the holder’s ordinary income for the year of the
disposition. Additionally, amounts treated as earned in a year of
distribution would be included in the holder’s ordinary income for the year of
the distribution. All remaining amounts would be subject to tax at
the highest ordinary income tax rate that would have been applicable in the year
in which such amounts were treated as earned, and interest would be charged on
the tax payable with respect to such amounts. In addition, if we are
classified as a PFIC, shares acquired from a decedent dying in a calendar year
other than 2010 generally would not receive a “stepped-up” basis but would,
instead, have a tax basis equal to the lower of the decedent’s basis or the fair
market value of those shares on the date of the decedent’s death. In
the case of decedents dying in 2010, if we are a PFIC, current law provides that
shares acquired from the decedent would have a tax basis equal to the decedent’s
basis, except that if a QEF election (as described below) were in effect for the
decedent, the shares could be included within the decedent’s property that is
subject to a limited basis increase under Section 1022 of the Code.
The
special PFIC tax rules described above will not apply to a U.S. Shareholder if
the holder makes a qualified electing fund, or QEF, election under Section 1295
of the Code to have us treated as a QEF for the first taxable year of the
holder’s holding period in which we are a PFIC and we provide certain
information to the U.S. Shareholder. A U.S. Shareholder that makes a
QEF election with respect to us will be currently taxable on its pro rata share
of our ordinary earnings and net capital gain during any years we are a PFIC (at
ordinary income and capital gains rates, respectively), regardless of whether or
not distributions were received. An electing U.S. Shareholder’s basis
in the shares would be increased by the amounts included in
income. Subsequent distributions by us of previously included
earnings and profits generally would not be treated as a taxable dividend, and
would result in a corresponding reduction in basis in the shares. A
U.S. Shareholder making such a timely election will not be taxed on our
undistributed earnings and profits for any year that we are not a
PFIC. Upon request by a U.S. shareholder, we will provide the
information necessary for such holder to make the QEF election.
19
Alternatively,
subject to specific limitations, U.S. Shareholders who actually or
constructively own marketable shares in a PFIC may make an election under
Section 1296 of the Code to mark those shares to market annually, rather than
being subject to the above-described rules. Amounts included in or
deducted from income under this mark-to-market election and actual gains and
losses realized upon disposition, subject to specific limitations, will be
treated as ordinary gains or losses. For this purpose, we believe
that our shares will be treated as “marketable stock” within the meaning of
Section 1296(e)(1) of the Code.
As
discussed above, dividends from a PFIC do not qualify for the reduced tax rates
on dividends paid to noncorporate U.S. Shareholders currently in effect under
the Code through 2010.
If we
should ever qualify as a controlled foreign corporation (see “Controlled Foreign
Corporation Rules” below), the Company would not be treated as a PFIC with
respect to a U.S. Shareholder during any period in which (i) the holder
holds at least 10% of our shares and (ii) we are a controlled foreign
corporation.
You
should consult your tax advisor with respect to how the PFIC rules affect your
tax situation.
Controlled
Foreign Corporation Rules
If more
than 50% of the voting power or total value of all classes of our shares are
owned, directly or indirectly, by U.S. shareholders, each of which owns at least
10% of the total combined voting power of all classes of our shares, we could be
treated as a controlled foreign corporation, or CFC, under Section 957 of the
Code. This classification would require such 10%-or-greater
shareholders to include in income their pro rata shares of our “subpart F
income,” as defined in Section 951 of the Code. In addition, under
Section 1248 of the Code, gain from the sale or exchange of shares by a U.S.
Shareholder who is or was a 10%-or-greater shareholder while we were a CFC at
any time during the five-year period ending with the sale or exchange could be
taxable in whole or in part as dividend income. Such amount taxable
as a dividend is generally the amount of our earnings and profits during the
period we were a CFC that are attributable to the shares sold or exchanged, but
for this purpose our earnings and profits will be reduced by certain amounts,
including (i) earnings previously taxed to the shareholder as subpart F
income, and (ii) income from a U.S. trade or business for which we were
fully subject to U.S. corporate income taxation.
We
believe that we are not a CFC. However, we cannot assure you that we
will not become a CFC in the future.
Material
Canadian Federal Income Tax Considerations
This
section summarizes the material anticipated Canadian federal income tax
considerations relevant to the ownership and disposition of the common
stock.
Under the
Income Tax Act, assuming you are a U.S. Shareholder, and provided the common
stock is listed on a designated stock exchange, which includes the TSX, you will
generally not be subject to Canadian tax on a capital gain realized on an actual
or deemed disposition of the common stock unless you alone or together with
persons with whom you did not deal at arm’s length owned or had rights to
acquire 25% or more of our issued shares of any class at any time during the
sixty (60) month period before the actual or deemed disposition. The
Canadian government announced changes to the Income Tax Act on March 4, 2010,
which, if enacted as proposed, will provide that U.S. Shareholders will not
generally be subject to Canadian tax on a capital gain realized on an actual or
deemed disposition of the common stock unless, in addition to the conditions set
out above, more than 50% of the fair market value of the common stock is derived
directly or indirectly from (i) real or immovable property situated in Canada;
(ii) Canadian resource properties; (iii) timber resource properties; and (iv)
options in respect of (i), (ii) or (iii) during the sixty (60) month period that
precedes the disposition. Based upon our review of our financial data
for the current and prior fiscal years, we have determined that the common stock
does not currently derive, and has not derived during the past sixty (60)
months, more than 50% of its fair market value from the property listed above,
and this characterization of the common stock will likely continue.
Dividends
paid, credited or deemed to have been paid or credited on the common stock to
U.S. Shareholders will be subject to a Canadian withholding tax under the Income
Tax Act at a rate of 25% of the gross amount of the dividends. Under
the Tax Treaty, the rate of withholding tax on dividends generally applicable to
U.S. Shareholders who beneficially own the dividends is reduced to
15%. In the case of U.S. Shareholders that are corporations that
beneficially own at least 10% of the Company’s voting shares, the rate of
withholding tax on dividends generally is reduced to 5%. So-called
"fiscally transparent" entities, such as United States limited liability
companies, or LLCs, are not entitled to rely on the terms of the Tax Treaty, and
therefore do not benefit from these reduced rates. Under the terms of
a protocol to the Tax Treaty signed in September 2007 and ratified December 15,
2008, however, reduced rates under the Tax Treaty apply to members of fiscally
transparent entities, such as LLCs and partnerships, who would be entitled to
rely on the Tax Treaty if they held the common stock directly. Members of such
entities are regarded as holding their proportionate share of the common stock
held by the entity for the purposes of the Tax Treaty. The reduced withholding
rates will apply to members of fiscally transparent entities for dividends paid
on or after February 1, 2009.
Canada
does not currently impose any federal estate taxes or succession
duties. However, if you die, there is a deemed disposition of the
common stock held at that time for proceeds of disposition generally equal to
the fair market value of the common stock immediately before your
death. Capital gains realized on the deemed disposition, if any, will
have the income tax consequences described above.
20
The
selected statement of operations data and balance sheet data with respect to the
years ended December 31, 2009, 2008, 2007, 2006 and 2005 are derived from our
consolidated financial statements as prepared in all material respects with
generally accepted accounting principles in the United States and prepared in
U.S. dollars. The selected financial data set forth below should be
read in conjunction with our “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in Item 7 below and our
consolidated financial statements and the notes thereto appended to this Annual
Report filed on Form 10-K. These historical results are not
necessarily indicative of our future results.
|
Statement
of Operations Data:
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
|||||||||||||||
|
In
thousands, except per share data
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
2,113 | 10,366 | 10,912 | 14,003 | 11,678 | |||||||||||||||
|
Impairment
of Capital Assets
|
386 | |||||||||||||||||||
|
Gain
on Deferred Lease Inducements
|
(497 | ) | ||||||||||||||||||
|
General
and administration
|
1,214 | 3,520 | 3,278 | 2,883 | 2,543 | |||||||||||||||
|
Loss
from operations
|
(3,216 | ) | (13,886 | ) | (14,190 | ) | (16,886 | ) | (14,221 | ) | ||||||||||
|
Other
Income
|
(157 | ) | - | - | - | - | ||||||||||||||
|
Interest
expense
|
- | - | - | (3 | ) | (11 | ) | |||||||||||||
|
Interest
income
|
47 | 286 | 833 | 449 | 361 | |||||||||||||||
|
Loss
before income taxes
|
(3,012 | ) | (13,600 | ) | (13,357 | ) | (16,440 | ) | (13,871 | ) | ||||||||||
|
Recovery
of income taxes
|
- | - | - | - | - | |||||||||||||||
|
Net
loss
|
$ | (3,012 | ) | $ | (13,600 | ) | $ | (13,357 | ) | $ | (16,440 | ) | $ | (13,871 | ) | |||||
|
Net
loss per share of common stock, basic and diluted
|
$ | (0.02 | ) | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.34 | ) | $ | (0.35 | ) | |||||
|
Weighted
average number of shares of common stock outstanding, basic and
diluted
|
128,227 | 128,227 | 116,571 | 47,663 | 39,276 | |||||||||||||||
|
Balance
Sheet Data:
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
December
31,
|
|||||||||||||||
|
In thousands, except per share
data
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$ | 685 | $ | 5,401 | $ | 16,217 | $ | 5,718 | $ | 13,144 | ||||||||||
|
Working
capital
|
412 | 3,209 | 14,159 | 1,200 | 10,735 | |||||||||||||||
|
Total
assets
|
833 | 6,060 | 17,209 | 6,628 | 14,291 | |||||||||||||||
|
Common
stock
|
64,929 | 64,929 | 64,929 | 46,524 | 41,306 | |||||||||||||||
|
Additional
paid-in capital
|
35,225 | 34,860 | 32,355 | 24,523 | 23,110 | |||||||||||||||
|
Accumulated
deficit
|
(100,991 | ) | (97,979 | ) | (84,379 | ) | (71,022 | ) | (54,582 | ) | ||||||||||
|
Stockholders’
equity
|
$ | 406 | $ | 3,053 | $ | 14,148 | $ | 1,268 | $ | 11,077 | ||||||||||
|
Number
of shares of common stock outstanding
|
128,227 | 128,227 | 128,227 | 50,382 | 42,629 | |||||||||||||||
CAUTIONARY
STATEMENT
The
discussion below contains forward-looking statements regarding our financial
condition and our results of operations that are based upon our annual
consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles within the United States,
or U.S. GAAP, and applicable U.S. Securities and Exchange Commission,
or SEC, regulations for financial information. The preparation of
these financial statements also conform in all material respects with generally
accepted accounting principles in Canada, or Canadian GAAP, except as described
in Note 10 in our annual consolidated financial statements contained in this
Annual Report on Form 10-K for the year ended December 31, 2009. The
preparation of these financial statements requires our management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
income and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an ongoing
basis. Our estimates are based on historical experience and on
various other assumptions that we believe to be reasonable.
21
Overview
On July
7, 2009, we announced that we intended to focus our remaining financial
resources on the development of oral eniluracil. We have terminated
our eniluracil study using our topical formulation and will focus our resources
on the development of a redesigned study combining oral eniluracil and
5-fluorouracil, or 5-FU, targeting anti-cancer indications. After a
careful evaluation of the data from the prior GlaxoSmithKline, or GSK, studies,
data from our studies and other studies using eniluracil, we believe we can
design and implement a Phase II study with eniluracil within the next three to
six months assuming we have adequate financial resources to conduct such a
study, which is not assured.
In addition, on July 7, 2009, we also
entered into a separation agreement with Dr. William P. Peters, our then Chief
Executive Officer. As part of the termination agreement we paid Dr.
Peters one month severance. In addition, on July 7, 2009, Dr. Donald
W. Kufe, Mr. Michael G. Martin, Dr, Fred H. Mermelstein, Dr. Robin J. Norris,
Dr. Peter Morand and Dr. William P. Peters resigned as directors of the
Company. In addition, on July 10, 2009, we terminated the employment
of Mr. D. Scott Murray, and do not expect to pay any material severance amount
to Mr. Murray.
On July
7, 2009, the Board of Directors appointed Mr. Robert Butts to serve as Chairman
of the Board, Mr. Rosty Raykov to serve as a director and Chief Executive
Officer of the Company, Mr. Robert Andrade to serve as a director and Vice
President of the Company, and Dr. Thomas Spector to serve as Chief Scientific
Officer of the Company. Dr. Spector is the principal inventor of
eniluracil and its combination with 5-FU. Dr. Spector will be
responsible for the clinical development of eniluracil.
Mr. Butts
is a Co-Founder and Portfolio Manager of Southpoint Capital Advisory LP, which
owns 41.5 million common shares of the Company, representing approximately 32%
of the issued and outstanding common shares.
On August
19, 2009, Dr. Robin Norris, the Company’s Chief Operating Officer, amended and
restated his employment agreement through and including December 31,
2009. Dr. Norris’s employment was terminated on December 31,
2009.
On
September 4, 2009, Jim Klein, the Company’s Chief Financial Officer, resigned
from the Company. The Company appointed Robert Andrade as its new
Chief Financial Officer subsequent to Mr. Klein’s resignation.
On
September 23, 2009, the Company’s Board of Directors approved the appointment of
Deloitte & Touche LLP as the Company’s new auditor replacing
PricewaterhouseCoopers LLP (“PwC”). The resignation of PwC on
September 23, 2009 was not related to any disagreements with Company management
over the Company’s audited financial statements. There have been no
reportable events (as defined in National Instrument 51-102 (Section
4.11)) and in Item 304(a)(1)(v) of Regulation S-K between
the Company and PwC. During the Company’s fiscal years ended December
31,2007 and 2008 and through September 23, 2009, the Company did not consult
with PwC regarding any matters described in Items 304(a)(1)(iv) or 304(a)(1)(v)
of Regulation S-K.
As a
result of our limited financial resources and the decline in the availability of
further capital, we plan to focus our activities on the development of
eniluracil. Accordingly, we have postponed or terminated many of our
previously planned or ongoing clinical development programs as outlined
below. We believe that our current cash and cash equivalents will be
sufficient to satisfy our anticipated capital requirements only into the second
quarter of 2010. The members of the Board of Directors have also
agreed to continue to serve without further compensation. We continue
to pursue various strategic alternatives, including collaborations with other
pharmaceutical and biotechnology companies. However, if a strategic
transaction or other source of further financial resources cannot be secured in
the very near term, we might cease operations sooner. As a result,
the audit opinion contained in our Annual Report filed on Form 10-K included a
notation related to the uncertainty of our ability to continue as a going
concern. Our projections of our capital requirements are
subject to substantial uncertainty. More capital than we had
anticipated thereafter may be required. To finance our operations
beyond the second quarter of 2010, or earlier if necessary, 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 very near term, 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.
The
trading of our common stock in the U.S. must now be conducted in the
over-the-counter markets, on the pink sheets. Our common stock
continues to trade on the TSX. The TSX also has continued listing
standards, including minimum market capitalization and other requirements, that
we might not meet in the future, particularly if the price of our common stock
does not increase or we are unable to raise capital to continue our
operations.
We have
not received and do not expect to have significant revenues from our product
candidates until we are either able to sell our product candidates after
obtaining applicable regulatory approvals or we establish collaborations that
provide us with up-front payments, licensing fees, milestone payments, royalties
or other revenue. We experienced net losses
of approximately $3.0 million
for the twelve months ended December 31, 2009, $13.6 million for the
year ended December 31, 2008, $13.4 million for the fiscal year ended December
31, 2007, and $16.4 million for the fiscal year ended December 31,
2006.
As of December 31, 2009, our deficit accumulated during
development stage was approximately $101.0 million.
Our
operating expenses will depend on many factors, including the progress of our
drug development efforts and the implementation of further cost reduction
measures. Our research and development expenses, which include
expenses associated with our clinical trials, drug manufacturing to support
clinical programs, salaries for research and development personnel, stock-based
compensation, consulting fees, sponsored research costs, toxicology studies,
license fees, milestone payments, and other fees and costs related to the
development of product candidates, will depend on the availability of financial
resources, the results of our clinical trials and any directives from regulatory
agencies, which are difficult to predict. Our general and
administration expenses include expenses associated with the compensation of
employees, stock-based compensation, professional fees, consulting fees,
insurance and other administrative matters associated with our facilities in the
Research Triangle Park, North Carolina in support of our drug development
programs.
In
September 2009, the Company terminated the Maplewood lease relating to the
Company’s primary office facility in Research Triangle Park for approximately
$175,000.
22
Results of
Operations
Fiscal
2009 versus Fiscal 2008
|
In thousands of U.S.
Dollars
|
Fiscal
2009
|
%
|
Fiscal
2008
|
%
|
Increase
(Decrease)
|
|||||||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | ||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
2,113 | 66 | % | 10,366 | 75 | % | (8,253 | ) | ||||||||||||
|
Impairment
of Capital Assets
|
386 | 12 | % | - | 386 | |||||||||||||||
|
Gain
on Deferred lease inducements
|
(497 | ) | -15 | % | - | (497 | ) | |||||||||||||
|
General
and administration
|
1,214 | 38 | % | 3,520 | 25 | % | (2,306 | ) | ||||||||||||
|
Total
operating expense
|
(3,216 | ) | 100 | % | (13,886 | ) | 100 | % | 10,670 | |||||||||||
|
Other
Income
|
157 | 157 | ||||||||||||||||||
|
Interest
income
|
47 | 286 | (239 | ) | ||||||||||||||||
|
Net
loss
|
$ | (3,012 | ) | $ | (13,600 | ) | $ | 10,588 | ||||||||||||
|
·
|
Research
and development expenses were lower in fiscal 2009, as compared to fiscal
2008 primarily due to a decrease and closing of clinical studies being
conducted throughout 2009, as compared to 2008. During fiscal
2008, we completed our ADH-1 trial in combination with docetaxel,
carboplatin, and capecitabine and completed patient enrollment in our
Phase IIb systemic ADH-1 trial with regionally-infused melphalan for the
treatment of melanoma.
|
|
·
|
General
and administrative expenses decreased as a result of a reduction in our
employee headcount effective April 2009. General and
administrative expense includes non-cash stock-based compensation expense
of $0.5 million in fiscal 2009 and $1.3 million in fiscal
2008.
|
|
·
|
Interest
income decreased in fiscal 2009, as compared to 2008 due to less cash on
hand as a result of funding our operations during fiscal
2009.
|
Fiscal
2008 versus Fiscal 2007
|
In thousands of U.S.
Dollars
|
Fiscal
2008
|
%
|
Fiscal
2007
|
%
|
Increase
(Decrease)
|
|||||||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | ||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
10,366 | 75 | % | 10,912 | 77 | % | (546 | ) | ||||||||||||
|
General
and administration
|
3,520 | 25 | % | 3,278 | 23 | % | 242 | |||||||||||||
|
Total
operating expense
|
(13,866 | ) | 100 | % | (14,190 | ) | 100 | % | (304 | ) | ||||||||||
|
Interest
expense
|
- | - | ||||||||||||||||||
|
Interest
income
|
286 | 833 | (547 | ) | ||||||||||||||||
|
Total
other income
|
286 | 833 | (547 | ) | ||||||||||||||||
|
Net
loss
|
$ | (13,600 | ) | $ | (13,357 | ) | $ | (243 | ) | |||||||||||
|
·
|
Research and development expenses
were lower in fiscal 2008, as compared to fiscal 2007 primarily due to
less clinical studies being conducted throughout 2008, as compared to
2007. As part of our prioritization initiative initiated in the third
quarter of 2008 to reduce operating expense, we closed patient enrollment
in our Phase I/II clinical trial studying oral eniluracil in liver cancer
in Asia and suspended patient enrollment in our Phase I study to determine
the maximum tolerated dose of oral 5-FU in combination with oral
eniluracil. During fiscal 2008, we completed our ADH-1 trial in
combination with docetaxel, carboplatin, and capecitabine and completed
patient enrollment in our Phase IIb systemic ADH-1 trial with
regionally-infused melphalan for the treatment of melanoma.
|
|
·
|
General
and administrative expenses increased primarily due to foreign currency
losses on our Canadian denominated investments totaling $0.2 million. It
was determined the losses were other than temporary and were therefore not
included in other comprehensive income. General and administrative expense
includes non-cash stock-based compensation expense of $1.3 million in
fiscal 2008 and $1.2 million in fiscal
2007.
|
|
·
|
Interest
income decreased in fiscal 2008 as compared to 2007 due to less cash on
hand as a result of funding our operations during fiscal
2008.
|
23
Quarterly
Information
The
following table presents selected consolidated financial data for each of the
last eight quarters through December 31, 2009, as prepared under U.S. GAAP
(dollars in thousands, except per share information):
|
Period
|
Net
Loss for the Period
|
Basic
and Diluted
Net
Loss per Common Share
|
||||||
|
December
31, 2007
|
$ | (3,008 | ) | $ | (0.02 | ) | ||
|
March
31, 2008
|
$ | (4,304 | ) | $ | (0.03 | ) | ||
|
June
30, 2008
|
$ | (3,442 | ) | $ | (0.03 | ) | ||
|
September
30, 2008
|
$ | (3,244 | ) | $ | (0.03 | ) | ||
|
December
31, 2008
|
$ | (2,610 | ) | $ | (0.02 | ) | ||
|
March
31, 2009
|
$ | (2,246 | ) | $ | (0.02 | ) | ||
|
June
30, 2009
|
$ | (761 | ) | $ | (0.01 | ) | ||
|
September
30, 2009
|
$ | (35 | ) | $ | (0.00 | ) | ||
|
December
31, 2009
|
$ | 30 | $ | 0.00 | ||||
Liquidity
and Capital Resources
|
December
31,
|
December
31,
|
December
31,
|
||||||||||
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
|||||||||
|
Selected
Asset and Liability Data:
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 685 | $ | 5,401 | $ | 16,217 | ||||||
|
Working
capital[Current Assets – Current Liabilities]
|
412 | 3,209 | 14,159 | |||||||||
|
Selected
Equity:
|
||||||||||||
|
Common
stock
|
$ | 64,929 | $ | 64,929 | $ | 64,929 | ||||||
|
Accumulated
deficit
|
(100,991 | ) | (97,979 | ) | (84,379 | ) | ||||||
|
Shareholders’
equity
|
406 | 3,053 | 14,148 | |||||||||
|
Selected
Cash Flow Data:
|
||||||||||||
|
Net
cash used in operating activities
|
$ | (4,688 | ) | $ | (10,808 | ) | $ | (13,303 | ) | |||
|
Net
cash provided from financing activities
|
- | 7 | 23,875 | |||||||||
|
Number
of shares of common stock outstanding
|
128,227 | 128,227 | 128,227 | |||||||||
We have
financed our operations since inception on September 3, 1996 through the sale of
equity and debt securities and have raised gross proceeds totaling approximately
$86.0 million through December 31, 2009. We have incurred net losses
and negative cash flow from operations each year, and we had an accumulated
deficit of approximately $101.0 million as of December 31, 2009. 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 licensing fees, royalties, milestone payments or up-front
payments.
The net
cash flow used in operating activities for fiscal year 2009 was approximately
$4.7 million, as compared to $10.8 million in fiscal 2008. During
fiscal 2009 our average monthly cash burn was $0.4 million, as compared to $0.9
million for fiscal 2008. The decrease in the current year is due to a
decrease our overall clinical activities and headcount during fiscal
2009. At December 31, 2009, our working capital, defined as current
assets less current liabilities decreased by approximately $2.7 million
primarily due to funding research and development activities and general
corporate operations.
In
December 2008 we received notice from the AMEX that we were not in compliance
with Section 1003(a)(ii) of its Company Guide, because our stockholders’ equity
was below $6 million and we incurred losses from continued operation and net
losses in the five most recent fiscal years. On January 29, 2009, we
voluntarily filed to delist our common stock from the AMEX and effective January
29, 2009 our common stock was no longer traded on the AMEX. As a
result, any trading of our common stock in the U.S. must now be conducted in the
over-the-counter markets, on the pink sheets. Our common stock
continues to trade on the TSX. The TSX also has continued listing
standards, including minimum market capitalization and other requirements, that
we might not meet in the future, particularly if the price of our common stock
does not increase or we are unable to raise capital to continue our
operations.
24
We believe that our current cash and cash equivalents of $0.7 million
will be sufficient to satisfy our anticipated capital requirements into the
second quarter of 2010. In July 2009, we terminated the employment of
our Chief Executive Officer for one month severance and we terminated another
executive officer thereby reducing our operating expense. In August
2009, we amended the employment contract of our Chief Operating Officer at a
reduced salary and in September 2009, our Chief Financial Officer
resigned. We also terminated our topical eniluracil program thereby
reducing our operating expense. We continue to pursue various
strategic alternatives, including, collaborations with other pharmaceutical and
biotechnology companies and we believe that our current cash and cash
equivalents will be sufficient to satisfy our currently anticipated capital
requirements into the second quarter of 2010. However, if a strategic
transaction or other source of further financial resources cannot be secured in
the very near term, we might cease operations sooner than June 30,
2010. 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.
In
February 2007, we completed the sale of equity securities for gross proceeds of
$25.0 million. We issued 75.8 million units at a price of $0.33 per
unit providing net proceeds of $23.2 million after deducting broker fees and
other offering expenses. Each unit sold consisted of one common share
and one-half of a common share purchase warrant. This financing
included an aggregate of 75.8 million shares of common stock, 37.9 million
investor warrants and 6.6 million broker warrants to acquire additional shares
of our common stock. Each whole investor warrant entitles the holder
to acquire one additional share of our common stock at an exercise price of
$0.40 per share for a period of three years. Each whole broker
warrant entitles the holder to acquire one unit (the same as the units sold to
investors) at an exercise price of $0.33 per unit for a period of two
years. During fiscal 2007, we issued 2.1 million shares of common
stock pursuant to the exercise of warrants resulting in additional proceeds of
approximately $0.7 million.
To
finance our operations beyond the second quarter of 2010, or possibly earlier,
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. The recent
turmoil in the worldwide financial markets has led to an overall tightening in
the credit markets and a significant decline in the availability of capital,
especially for small biotechnology companies which are generally viewed as
higher risk investments. Given the current economic conditions, there
is serious risk that we might not be able to raise the necessary capital or such
funding may not be available on acceptable terms. We can therefore
make no assurance that we will be able to raise the necessary capital to
continue our operations.
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, 2009, we had $0.7
million in cash accounts. We have not experienced any loss or write
down of our money market investments for the years ended December 31, 2009 and
2008.
Our
investment policy is to manage investments to achieve, in the order of
importance, the financial objectives of preservation of principal, liquidity and
return on investment. Investments may be made in U.S. or Canadian
obligations and bank securities, commercial paper of U.S. or Canadian industrial
companies, utilities, financial institutions and consumer loan companies, and
securities of foreign banks provided the obligations are guaranteed or carry
ratings appropriate to the policy. Securities must have a minimum Dun
& Bradstreet rating of A for bonds or R1 low for commercial
paper. The policy also provides for investment limits on
concentrations of securities by issuer and maximum-weighted average time to
maturity of twelve months. This policy applies to all of our
financial resources.
The
policy risks are primarily the opportunity cost of the conservative nature of
the allowable investments. As our main purpose is research and
development, we have chosen to avoid investments of a trading or speculative
nature.
We
classify investments with original maturities at the date of purchase greater
than three months which mature at or less than twelve months as
current. We carry investments at their fair value with unrealized
gains and losses included in other comprehensive income (loss); however we have
not held any instruments that were classified as short term investments during
the periods presented in this Annual Report.
Off-Balance
Sheet Arrangements
Since our
inception, we have not had any material off-balance sheet
arrangements.
Contractual
Obligations and Commitments
Since our
inception, inflation has not had a material effect on our
operations. We had no material commitments for capital expenses as of
December 31, 2009.
The
following table represents our contractual obligations and commitments at
December 31, 2009 (in thousands of U.S. dollars):
25
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
Total
|
||||||||||||||||
|
Englert
Lease (1)
|
$ | 76 | $ | - | $ | - | $ | - | $ | 76 | ||||||||||
|
Eastowne
Lease (2)
|
24 | - | - | - | 24 | |||||||||||||||
|
Drug
purchase commitments (3)
|
25 | 25 | - | - | 50 | |||||||||||||||
|
Total
|
$ | 125 | $ | 25 | $ | - | $ | - | $ | 150 | ||||||||||
|
(1)
|
In
April 2004, we entered into a lease for facilities in Durham, North
Carolina. Amounts shown assume the maximum amounts due under
the lease. In July 2008, we entered into an agreement with
another company to sublease this facility until September 2010; however,
in the event of their default, we would become responsible for the
obligation. We are contractually obligated under the lease
until September 2010.
|
|
(2)
|
In
December 2009, we entered into a lease for new office facilities in Chapel
Hill, North Carolina. Amounts shown assume the maximum amounts
due under the lease.
|
|
(3)
|
Commitments
to our third party manufacturing vendors that supply drug substance
primarily for our clinical studies.
|
Research
and Development
Our
research and development efforts have been focused on the development of cancer
therapeutics and our cadherin technology platform 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 issues are
reviewed internally by our executive management and supporting scientific
staff. Major development issues are presented to the members of our
Scientific and Clinical Advisory Board for discussion and review.
Research
and development expenses totaled $2.1 million and $10.4 million for the fiscal
years ended December 31, 2009 and 2008, 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. 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
Effective
January 1, 2007, we changed our primary basis of accounting to U.S.
GAAP. We made the change to U.S. GAAP to comply with U.S. securities
law as a result of our loss of foreign private issuer status with the Securities
and Exchange Commission.
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as at the date
of the financial statements and the reported amounts of revenue and expense
during the reporting period. These estimates are based on assumptions
and judgments that may be affected by commercial, economic and other
factors. Actual results could differ from these
estimates.
An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates reasonably could
have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the financial
statements. The following description of critical accounting
policies, judgments and estimates should be read in conjunction with our
December 31, 2008 consolidated financial statements.
Stock-based
Compensation
The
calculation of the fair values of our stock-based compensation plans requires
estimates that require management‘s judgments. Under ASC 718,
the fair value of each stock option is estimated on the grant date using the
Black-Scholes option-pricing model. The valuation models require assumptions and
estimates to determine expected volatility, expected life, expected dividends
and expected risk-free interest rates. The expected volatility was determined
using historical volatility of our stock based on the contractual life of the
award. The risk-free interest rate assumption was based on the yield on
zero-coupon U.S. Treasury strips at the award grant date. We also used
historical data to estimate forfeiture experience.
26
Common
stock and warrants
Common
stock is recorded as the net proceeds received on issuance after deducting all
share issuance costs and the value of investor warrants. Warrants are
recorded at fair value and are deducted from the proceeds of common stock and
recorded on the consolidated statements of stockholders’ equity as additional
paid-in capital.
During
fiscal 2008, we had warrants to purchase common stock that were denominated in
both U.S. and Canadian dollars, which results in our having warrants outstanding
that are denominated outside its U.S. dollar functional currency.
In June 2008, the FASB issued
authoritative guidance relating to determining whether an instrument (or
embedded feature) is indexed to an entity’s own stock, which was effective
January 1, 2009. It provides guidance in assessing whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity's own stock
for purposes of determining whether the equity-linked instrument qualifies as a
derivative instrument. We adopted this authoritative guidance on January 1,
2009. As a result, any outstanding warrants denominated in
Canadian dollars were not considered to be indexed to our stock and was
therefore to be treated as derivative financial instruments and recorded at
their fair value as a liability. Since the warrants to purchase
common stock that are denominated in Canadian dollars expired on December 19,
2008, EITF 07-5 did not have an effect on our financial statements.
Outstanding
Share Information
Our
outstanding share data at December 31, 2009 follows (in thousands):
|
December
31, 2009
|
||||
|
Common
shares
|
128,227 | |||
|
Warrants
|
41,119 | |||
|
Stock
options
|
15,823 | |||
|
Total
|
185,169 | |||
Canadian
Accounting Principles
We
present our consolidated financial results in accordance with U.S.
GAAP. Significant differences exist between U.S. and Canadian GAAP
and are presented in Note 10 in the consolidated financial
statements.
New
Accounting Pronouncements Adopted
In May 2009, the FASB issued
authoritative guidance relating to subsequent events, which is effective June
15, 2009. It provides guidance for disclosing events that occur after the
balance sheet date, but prior to the issuance of the financial statements. We
adopted this authoritative guidance on June 30, 2009. The adoption of this
authoritative guidance did not have any impact upon our financial position or
operating results.
In December 2007, the Emerging Issue
Task Force, or EITF, issued EITF No. 07-01, “Accounting for Collaborative
Arrangement Related to the Development and Commercialization of Intellectual
Property”, or EITF 07-01, codified as ASC 808-10. EITF 07-01 defines
the accounting for collaborations between participants. EITF 07-01
requires certain transactions between collaborators to be recorded in the
statement of operations on either a gross or net basis within expense when
certain characteristics exist in the collaborative agreement. EITF
07-01 did not have a material impact on our financial statements.
In
December 2007, the FASB issued ASC No. 805, Business Combination” (“ASC 805”),
which, requires an acquiring company to measure all assets acquired and
liabilities assumed, including contingent considerations and all contractual
contingencies, at the fair value at the acquisition date. ASC 805
establishes principles and requirements for how the acquirer: i) recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree;
ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The
adoption of ASC 805 did not have a material impact on our financial
statements.
In November 2007, the Emerging Issues
Task Force (“EITF”) of the FASB issued EITF No. 07-5, Issue Summary No.1
“Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entity's Own Stock” (“EITF 07-5”), codified as ASC 815-40. In June
2008, one of the conclusions reached under EITF 07-05 was a consensus that an
equity-linked financial instrument would not be considered indexed to the
entity's own stock if the strike price is denominated in a currency other than
the issuer's functional currency. The issues brought to the EITF for
discussion related to how an entity should determine whether certain instruments
or embedded features are indexed to its own stock. This discussion
included equity-linked financial instruments where the exercise price is
denominated in a currency other than the issuer's functional currency; such as
the Company’s outstanding warrants to purchase common stock that are denominated
in Canadian dollars. This conclusion reached under EITF 07-05
clarified the accounting treatment for these and certain other financial
instruments as it related to FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”), codified as ASC
815-10.
27
SFAS 133
specifies that a contract that would otherwise meet the definition of a
derivative under SFAS 133, issued or held by the reporting entity that is both
(a) indexed to its own stock and (b) classified in stockholders' equity in its
statement of financial position should not be considered a derivative financial
instrument for purposes of applying SFAS 133. As a result, the
Company’s outstanding warrants denominated in Canadian dollars were not
considered to be indexed to its own stock and should therefore be treated as
derivative financial instruments and recorded at their fair value as a
liability. EITF 07-05 is effective for financial statements for
fiscal years beginning after December 15, 2008 and earlier adoption is not
permitted. Since the warrants to purchase common stock that are
denominated in Canadian dollars expired on December 19, 2008, EITF 07-5 did not
have a material impact on the Company’s financial statements unless the Company
issues further equity instruments denominated outside its functional
currency.
In April 2009, an update was made to
the Financial Instruments topic of the FASB codification Fair Value
Measurements
and Disclosures that requires disclosures about the fair value of financial
instruments in interim financial statements as well as in annual financial
statements. The new guidance also amends the existing requirements on the fair
value disclosures in all interim financial statements. This guidance is
effective for interim periods ending after June 15, 2009, but early adoption was
permitted for interim periods ending after March 15, 2009. The adoption of this
standard did not have a material impact on our consolidated financial position
and results of operations.
In April
2009, an update was made to the Fair Value Measurements and Disclosures topic of
the FASB codification that provides additional guidance in determining fair
value when there is no active market or where price inputs being used represent
distressed sales. This guidance is effective for interim periods ending after
June 15, 2009, but early adoption was permitted for interim periods ending after
March 15, 2009. The adoption of this standard did not have an impact on our
consolidated financial position and results of operations.
In April 2009, an update was made to
the Debt and Equity topic of the FASB codification that provides guidance in
determining whether impairments of debt securities are other than temporary, and
modifies the presentation and disclosures surrounding such instruments. This
guidance is effective for interim periods ending after June 15, 2009, but early
adoption was permitted for interim periods ending after March 15, 2009. The
adoption of this standard did not have an impact on our consolidated financial
position and results of operations.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of
FASB Statement No. 162” (“SFAS 168”), which establishes the FASB Accounting
Standards Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied in the preparation of
financial statements in conformity with U.S. GAAP. SFAS 168
explicitly recognizes rules and interpretative release of the SEC under federal
securities laws as authoritative U.S. GAAP. SFAS 168 if effective for
interim and annual periods ending after September 15,
2009. Accordingly, we were required to adopt SFAS 168 on October 1,
2009. As the issuance of SFAS 168 and the Codification does not
change U.S. GAAP, the adoption of this standard did not have any impact on our
financial statements.
Recent
Accounting Pronouncements
In June
2009, the FASB issued changes to the consolidation guidance applicable to a
variable interest entity (VIE). FASB ASC Topic 810, "Consolidation," amends the
guidance governing the determination of whether an enterprise is the primary
beneficiary of a VIE, and is, therefore, required to consolidate an entity, by
requiring a qualitative analysis rather than a quantitative analysis. The
qualitative analysis will include, among other things, consideration of who has
the power to direct the activities of the entity that most significantly impact
the entity's economic performance and who has the obligation to absorb losses or
the right to receive benefits of the VIE that could potentially be significant
to the VIE. This standard also requires continuous reassessments of whether an
enterprise is the primary beneficiary of a VIE. FASB ASC 810 also requires
enhanced disclosures about an enterprise's involvement with a VIE. Topic 810 is
effective as of the beginning of interim and annual reporting periods that begin
after November 15, 2009. This will not have an impact on the Company’s financial
position, results of operations or cash flows.
In
January 2010, an update was made to the Fair Value Measurements and Disclosures
topic of the FASB codification that requires new disclosures for fair value
measurements and provides clarification for existing disclosure requirements.
More specifically, this update will require (a) an entity to disclose separately
the amounts of significant transfers into and out of Level 1 and 2 fair value
measurements and to describe the reasons for the transfers; and (b) information
about purchases, sales, issuances, and settlements to be presented separately on
a gross basis in the reconciliation of Level 3 fair value measurements. This
update is effective for fiscal years beginning after December 15, 2009 except
for Level 3 reconciliation disclosures which are effective for fiscal years
beginning after December 15, 2010. We do not expect the adoption of the guidance
to have an impact on our consolidated financial position and results of
operations.
ITEM7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Money
Market Investments
We are
subject to increased risk associated with our cash and cash equivalents due to
the recent bank and financial institution failures in the U.S. We
maintain an investment portfolio consisting of U.S. or Canadian obligations and
bank securities and money market investments in compliance with our investment
policy. We do not hold any mortgaged-backed investments in our
investment portfolio. 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.
28
At
December 31, 2009, we had $Nil in money market investments which typically have
minimal risk. The financial markets have been volatile resulting in
concerns regarding the recoverability of money market investments. We
have not experienced any loss or write down of our money market investments for
the years ended December 31, 2009 and 2008.
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. Our risk associated with fluctuating
interest rates on our investments is minimal and not significant to the results
of operations. We currently do not use interest rate derivative
instruments to manage exposure to interest rate changes. As the main
purpose is research and development, we have chosen to avoid investments of a
trade or speculative nature.
Foreign
Currency Exposure
We are
subject to foreign currency risks as we conduct certain clinical development
activities in Canada, the United Kingdom, Europe and the Pacific
Rim. To date, we have not employed the use of derivative instruments;
however, we do hold Canadian dollars which we use to pay certain clinical
development activities conducted in Canada and research, and other corporate
obligations. At December 31, 2009 we held approximately $0.2 million
in Canadian dollars.
Current
Equity Markets
The
volatility and disruption of the capital and credit markets and adverse changes
in the global economy may continue to adversely impact our business. Due to the
significant uncertainty in the capital and credit markets, our access to capital
may not be available on favorable terms, or at all. Furthermore, should the
adverse global economic conditions persist or worsen; we could experience
further decrease in our shareholders’ equity, and have difficulty sustaining our
operations. Our results of operations, financial condition,
cash flows and capital position could be materially adversely affected by
continued disruptions in the capital and credit markets.
The
financial statements required to be filed pursuant to this Item 8 are appended
to this Annual Report on Form 10-K. A list of the financial
statements file herewith is found at “Index to Financial Statements” on Page
F-1.
On
September 23, 2009, PricewaterhouseCoopers LLP (“PwC”) resigned as the Company’s
independent registered public accounting firm. The reports of
PwC on the consolidated financial statements of the Company for the fiscal years
ended December 31, 2008, 2007 and 2006 did not contain an adverse opinion or a
diclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accouting principles. During the
Company’s fiscal years ended December 31, 2007 and 2008, and through September
23, 2009, the Company did not have any disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of PwC, would have
caused it to make reference to the subject matter of the disagreements in
connection with its reports on the consolidated financial statements for such
years. During the Company’s fiscal years ended December 31,
2007 and 2008 and through September 23, 2009, no “reportable events” as defined
in Item 304(a)(1)(v) of Regulation S-K have occurred. PwC has
indicated to the Company that it concurs with the foregoing statements contained
in the second, third and fourth paragraphs above as they relate to PwC and has
furnished a letter to the Securities and Exchange Commission to this
effect.
The
Company engaged Deloitte & Touche LLP,as its new independent registered
public accounting firm as of September 23, 2009. The Company’s Audit
Committee participated in and approved this decision. During the
Company’s fiscal years ended December 31, 2007 and 2008 and through September
23, 2009, the Company did not consult with PwC regarding any matters described
in Items 304(a)(1)(v) or 304(a)(1)(v) of Regulation S-K.
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed
only to provide reasonable assurance that information to be disclosed in our
Exchange Act Reports is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. As of the end of
the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the Company’s disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(e). Based upon this evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are effective to provide the
reasonable assurance discussed above.
Management’s Report on Internal
Control over Financial Reporting
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
29
Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or
the Exchange Act) as of December 31, 2009. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
these disclosure controls and procedures are effective and designed to ensure
that the information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the requisite time periods.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
12a-15(f). Our internal control over financial reporting is designed
to provide reasonable assurance to our management and board of directors
regarding the preparation and fair presentation of published financial
statements. A control sytem, no matter how well designed and
operated, can only provide reasonable, not absolute, assurance that the
objectives of the control system are met and must reflect the fact that there
are resource constraints that require management to consider the benefits of
internal controls relative to their costs. Because of these inherent
limitations, management does not expect that our internal controls over
financial reporting can prevent all error and all fraud.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with
the evaluation of our internal control over financial reporting that occurred
during the last fiscal quarter covered by this Annual Report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
None.
30
Information
required by this Item concerning our directors is incorporated by reference from
the section captioned “Election of Directors” contained in our proxy statement
related to the 2010 Annual General Meeting of Stockholders scheduled to be held
which we intend to file with the SEC within 120 days of the end of our fiscal
year pursuant to General Instruction G(3) of Form 10-K.
Audit
Committee
On behalf
of the Board, the Audit Committee of the Board retains, oversees and evaluates
Adherex’s independent auditors, reviews the financial reports and other
financial information provided by Adherex, including audited financial
statements, and discusses the adequacy of disclosure with management and the
auditors. The Audit Committee also reviews the performance of the
independent auditors in the annual audit and in assignments unrelated to the
audit, assesses the independence of the auditors, and reviews their
fees. The Audit Committee is also responsible for reviewing Adherex’s
internal controls over financial reporting and disclosure.
The Audit
Committee operates under a written charter adopted by the Board and attached
hereto as Exhibit 99.1 – Other Exhibits.
The
directors have appointed an Audit Committee consisting of three directors;
Claudio F. Bussandri, William Breen and Arthur Porter, all of whom are
independent and financially literate within the meaning of National Instrument
52-110 – Audit Committees. Mr. Bussandri holds an MBA from McGill
University and has over 30 years of experience in various executive positions,
including being the immediate past CEO of McKesson Canada and previously the
President of Lantic Sugar Limited. Mr. Breen has over 30 years
of experience in various executive positions, including being the past Chairman,
President and Chief Executive Officer of Simware Inc., Senior Vice President,
Operations at Cognos Inc. and Vice President, Operations at Computel Systems
Ltd. Dr. Porter has over 20 years of experience in various executive positions
at medical organizations, including Chief Executive Officer of the McGill
University Health Centre and the Detroit Medical Center. Each of
these directors has held various director and/or executive officer positions
with private and public companies and/or community organizations and hase had
responsibility for the supervision of the preparation of financial materials and
disclosure documents for public and private corporations.
Though
the Audit Committee does not have formal pre-approval policies and procedures in
place, it has pre-approved all of the services performed by Deloitte &
Touche LLP and PwC, as discussed below, as required by SEC
regulation.
Audit
Fees
The
following table presents the aggregate fees for professional services and other
services rendered by our independent auditors, Deloitte & Touche LLP and PwC
in fiscal year 2009 and PwC in fiscal year 2008 (in United
dollars):
|
Fiscal
Year
2009
|
Fiscal
Year
2008
|
|||||||
|
Audit
Fees (1)
|
$ | 63,000 | $ | 182,943 | ||||
|
Audit-Related
Fees (2)
|
- | -- | ||||||
|
Tax
Fees (3)
|
11,250 | 56,702 | ||||||
|
All
Other Fees (4)
|
- | 3,707 | ||||||
|
Total
|
$ | 74,250 | $ | 243,352 | ||||
|
(1)
|
Audit Fees
include fees
for the standard audit work that needs to be performed each year in order
to issue an opinion on the consolidated financial statements of the
Corporation and to issue reports on the local statutory and regulatory
financial statements. It also includes fees for services that
can only be provided by the Corporation’s auditor such as auditing of
non-recurring transactions and application of new accounting policies,
audits of significant and newly implemented system controls, pre-issuance
reviews of quarterly financial results, consents and comfort letters and
any other audit services required for U.S. Securities and Exchange
Commission or other regulatory
filings.
|
|
(2)
|
Audit-Related Fees
include fees for those other assurance services provided by auditors but
not restricted to those that can only be provided by the auditor signing
the audit report.
|
|
(3)
|
Tax Fees
include fees
for periodic tax consultations and compliance services in various local,
regional and national tax
jurisdictions.
|
|
(4)
|
31
The
information required by this Item is incorporated by reference from the sections
captioned “Executive Compensation” and “Compensation of Directors” contained in
our proxy statement related to the 2010 Annual General Meeting of Stockholders
scheduled to be held which we intend to file with the SEC within 120 days of the
end of our fiscal year pursuant to General Instruction G(3) of Form
10-K.
The
information required by this Item will be set forth in our definitive proxy
statement with respect to our 2009 annual meeting of shareholders to be filed no
later than 120 days after December 31, 2009 and is incorporated herein by this
reference.
Equity
Compensation Plan Information
The
following table provides certain information with respect to securities
authorized for issuance under equity incentive plans as of December 31,
2009:
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of outstanding options warrants
and rights (*)
|
(b)
Weighted-average
exercise price of outstanding options, warrants and
rights
|
(c)
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in Column
(a))
|
|||||||||
|
Equity compensation plans
|
13,200,852 |
$ 0.55
|
4,876,326 | |||||||||
| approved by security holders | 2,622,206 |
CAD
$ 2.19
|
||||||||||
|
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
|
Total
|
15,823,674 | - | 4,876,326 | |||||||||
* The
Company’s current stock option plans allows for the issuance of stock options
denominated in both United States, or U.S., dollars and Canadian, or CAD,
dollars. This table presents the number and weighted-average exercise
price of outstanding options by the currency associated with the original
grants. The numbers presented include 700,000 options with an
exercise price of CAD $2.25 that were specifically approved by the Company’s
shareholders on December 16, 2003 and granted to the Company’s Chief Executive
Officer outside of the Company’s stock option plan. At December 31,
2009 we had 13,200,852 stock options denominated in U.S. dollars with a
weighted-average exercise price of $0.55 and 2,622,206 stock options denominated
in CAD dollars with a weighted-average exercise price of CAD$2.19. At
December 31, 2009, we had 4,876,326 stock options available for future
issuance.
The
information required by this Item will be set forth in our definitive proxy
statement with respect to our 2010 annual meeting of shareholders to be filed no
later than 120 days after December 31, 2009 and is incorporated herein by this
reference.
The
information required by this Item will be set forth in our definitive proxy
statement with respect to our 2010 annual meeting of shareholders to be filed no
later than 120 days after December 31, 2009 and is incorporated herein by this
reference.
32
(a) The
following documents are included as part of this Annual Report filed on Form
10-K:
1. Financial
Statements – See Index to Financial Statements on page F-1.
2. All schedules are
omitted as the information required is inapplicable or the information is
presented in the financial statements.
3.
Exhibits:
33
|
Exhibit
No.
|
Description
|
Location
|
|
1.1
|
Underwriting
and Agency Agreement dated January 19, 2007 between Adherex Technologies
Inc. and Versant Partners Inc.
|
Exhibit
1.1 to Form 8-K of Adherex, filed February 22, 2007
|
|
3.1
|
Articles
of Amalgamation dated June 29, 2004
|
Exhibit
1.7 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
3.2
|
By-laws
of the Company, as amended on November 2, 2004
|
Exhibit
1.9 to the Form 20-F/A Registration Statement (No. 001-32295) of Adherex,
filed November 5, 2004
|
|
4.1
|
Registration
Rights Agreement, dated as of December 19, 2003, by and between Adherex
Technologies Inc. and HBM BioVentures (Cayman) Ltd.
|
Exhibit
4.9 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
4.2
|
Warrant
Indenture dated February 21, 2007 between Adherex Technologies Inc. and
Computershare Trust Company of Canada
|
Exhibit
4.45 to Form 8-K of Adherex, filed February 22, 2007
|
|
4.3
|
Form
of Common Stock Warrant dated February 21, 2007
|
Exhibit
4.43 to Form 8-K of Adherex, filed February 22, 2007
|
|
4.4
|
Form
of Underwriter’s Warrant dated February 21, 2007
|
Exhibit
4.44 to Form 8-K of Adherex, filed February 22, 2007
|
|
10.1
|
General
Collaboration Agreement, dated as of February 26, 2001, by and between
Adherex Technologies Inc. and McGill University
|
Exhibit
4.2 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
10.2
|
Exclusive
License Agreement, dated as of September 26, 2002, by and between Oregon
Health & Science University and Oxiquant, Inc.
|
Exhibit
4.5 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
10.3
|
Lease
Agreement, dated as of March 8, 2004, by and between Realmark-Commercial,
LLC and Adherex, Inc.
|
Exhibit
4.8 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
*10.4
|
Executive
Employment Agreement, dated as of December 12, 2001, by and between
Adherex Technologies Inc. and Robin J. Norris
|
Exhibit
4.10 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
34
|
*10.5
|
Executive
Employment Agreement, dated as of February 19, 2003, by and between
Adherex Technologies Inc. and William P. Peters
|
Exhibit
4.12 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
*10.6
|
Executive
Employment Agreement, dated April 21, 2004, by and between Adherex, Inc.
and James A. Klein, Jr.
|
Exhibit
4.13 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
10.7
|
Second
Amendment to Lease Agreement dated September 14, 2004 between Realmark
Commercial LLC and Adherex, Inc.
|
Exhibit
4.29 to the Form 20-F/A Registration Statement (No. 001-32295) of Adherex,
filed November 5, 2004
|
|
10.8
|
Development
and License Agreement dated July 14, 2005 between Adherex Technologies
Inc. and Glaxo Group Limited**
|
Exhibit
4.30 to Form 6-K of Adherex, filed July 22, 2005
|
|
10.9
|
Sublease
Agreement, dated as of August 31, 2005, by and between Biostratum, Inc.
and Adherex, Inc. (Englert)
|
Exhibit
4.32 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2005
|
|
10.10
|
Sublease
Agreement, dated as of August 31, 2005, by and between Biostratum, Inc.
and Adherex, Inc. (Creekstone)
|
Exhibit
4.33 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2005
|
|
10.11
|
Amendment
No. 1 to Development and License
Agreement
dated December 20, 2005 between Glaxo Group Limited and Adherex
Technologies Inc.**
|
Exhibit
4.36 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2005
|
|
10.12
|
Partial
Assignment of Lease and Lease Amendment
Number
Two dated August 31, 2005
|
Exhibit
4.38 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2005
|
|
10.13
|
Highwoods
Realty Limited Partnership Office Master Lease (Creekstone)
|
Exhibit
4.39 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2005
|
|
10.14
|
Consent
to Sublease dated August 31, 2005 among
Highwoods
Realty Limited Partnership, BioStratum, Inc. and Adherex,
Inc.
|
Exhibit
4.40 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2005
|
|
10.15
|
Amendment
No. 2 to Development and License Agreement dated June 23, 2006 between
Glaxo Group Limited and Adherex Technologies Inc.**
|
Exhibit
4.41 to Form 6-K of Adherex, filed August 9, 2006
|
|
10.16
|
Sub-SubLease
Agreement dated December 22, 2006 between Biostratum, Inc and NephroGenex,
Inc
|
Exhibit
4.46 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2006
|
35
|
*10.17
|
Executive
Employment Agreement, dated as of February 28, 2007, by and between
Adherex, Inc. and D. Scott Murray
|
Exhibit
4.47 to the Form 20-F Annual Report (No. 001-32295) of Adherex filed for
fiscal year ended December 31, 2006
|
|
10.18
|
Amendment
No. 3 to Development and License Agreement dated January 17, 2007 between
Adherex Technologies Inc. and Glaxo Group Limited
|
Exhibit
4.42 to Form 6-K of Adherex, filed January 19, 2007
|
|
10.19
|
Amendment
No. 4 to Development and License Agreement dated May 23,
2007 between Adherex Technologies Inc. and Glaxo Group
Limited
|
Exhibit
10.1 to Form 8-K of Adherex, filed June 19, 2007
|
|
10.20
|
Amended
and Restated Stock Option Plan
|
Exhibit
10.19 to Form 10-K of Adherex, filed March 28, 2008
|
|
10.21
|
License
Agreement entered into on May 13, 2008 between Adherex Technologies Inc.
and Stichting Antoni van Leeuwenhoek Ziekenhuis
|
Exhibit
10.21 to Form 10-Q of Adherex, filed August 13, 2008
|
|
10.22
|
Success-Based
Incentive Program
|
Exhibit
10.22 to Form 8-K of Adherex, filed December 11, 2008
|
|
10.23
|
Seperation
and Mutual Release Agreement – Dr. William Peters
|
Exhibit
10.23 to Form 8-K of Adherex, filed July 7, 2009
|
|
10.24
|
Lease
Termination and Release
|
Exhibit
10.24 to Form 10-Q of Adherex, filed November 16, 2009
|
|
10.25
|
Amended
and Restated Employment Agreement – Dr. Robin J. Norris
|
Exhibit
10.25 to Form 10-Q of Adherex, filed November 16, 2009
|
|
16
|
Press
Release regarding change in certifying accountants
|
Filed
herewith
|
|
21
|
Subsidiaries
|
Exhibit
8 to the Form 20-F Registration Statement (No. 001-32295) of Adherex,
filed September 17, 2004
|
|
31.1
|
Certification
of Chief Executive Officer of the Company in accordance with Section 302
of the Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
|
31.2
|
Certification
of Chief Financial Officer of the Company in accordance with Section 302
of the Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer of the Company in
accordance with Section 906 of the Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
|
99.1
|
Other
Exhibits - Audit Committee Charter
|
Filed
herewith
|
|
*
|
Indicates
a management contract or compensatory
plan.
|
|
**
|
The
Company has received confidential treatment with respect to certain
portions of this exhibit. Those portions have been omitted from this
exhibit and are filed separately with the U.S. Securities and Exchange
Commission.
|
36
SIGNATURES
Pursuant to
the requirements of Section 13 of 15(d) the Securities Exchange Act of 1934, the
registrant has duly causes this report to be signed on its behalf by the
undersigned, thereunto authorized.
| Adherex Technologies Inc. | |||
|
Date
March 30, 2010
|
By:
|
/s/ Rostislav Raykov | |
| Rostislav Raykov | |||
| Chief Executive Officer and Director | |||
Pursuant to
the requirement of the Securities and Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signatures
|
Title
|
Date
|
|
/s/ Rostislav
Raykov
|
Chief
Executive Officer
|
March
30, 2010
|
|
Rostislav
Raykov
|
(principal
executive officer) and Director
|
|
|
/s/ Robert
Andrade
|
Chief
Financial Officer, Director
|
March
30, 2010
|
|
Robert
Andrade
|
(principal
financial officer and principal accounting officer)
|
|
|
/s/ WILLIAM
G. BREEN
|
Director
|
March
30, 2010
|
|
William
G. Breen
|
||
|
/s/ CLAUDIO
F. BUSSANDRI
|
Director
|
March
30, 2010
|
|
Claudio
F. Bussandri
|
||
|
/s/ ROBERT
W. BUTTS
|
Director
|
March
30, 2010
|
|
Robert
W. Butts
|
||
|
/s/ ARTHUR
T. PORTER
|
Director
|
March
30, 2010
|
|
Arthur
T. Porter
|
||
37
ADHEREX
TECHNOLOGIES INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
||||
|
Independent
Auditors’ Report
|
F-2 | |||
|
Balance
Sheets
|
F-3 | |||
|
Statement
of Operations
|
F-4 | |||
|
Statement
of Cash Flows
|
F-5 | |||
|
Statement
of Stockholders’ Equity
|
F-6 | |||
|
Notes
to Financial Statements
|
F-9 | |||
Report
of Independent Registered Chartered Accountants
To the
Shareholders of Adherex Technologies Inc.
We have
audited the accompanying consolidated balance sheet of Adherex Technologies Inc.
and its subsidiaries (a development stage company) (the “Company”) as of
December 31, 2009 and the related consolidated statement of operations, cash
flows, and stockholders’ equity for the year ended December 31, 2009 and
cumulatively for the period from September 3, 1996 (date of inception) to
December 31, 2009. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. The
Company's consolidated financial statements as of and for the years ended
December 31, 2008 and 2007, and for the period from September 3, 1996 (date of
inception) to December 31, 2008 were audited by other auditors whose report,
dated March 30, 2009, expressed an unqualified opinion on those statements. The
financial statements for the period from September 3, 1996 (date of inception)
to December 31, 2008 reflected total revenues of $Nil and a net loss
$97,821,000, and are included in the related total revenues and net loss
respectively for the period from September 3, 1996 to December 31, 2009. Our
opinion, insofar as it relates to the amounts included for the period from
September 3, 1996 to December 31, 2008, is based solely on the report of such
other auditors.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and Canadian generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Adherex Technologies Inc. and its
subsidiaries as of December 31, 2009 and the results of its operations and its
cash flows for the year then ended, and cumulatively for the period from
September 3, 1996 to December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit that raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DeloitteTouche LLP
Independent
Registered Chartered Accountants
Licensed
Public Accountants
Ottawa,
Canada
March 30,
2010
F-1
Independent
Auditors’ Report
To
the Shareholders of Adherex Technologies Inc.
We have
audited the accompanying consolidated balance sheets of Adherex Technologies
Inc. (a development stage company) as of December 31, 2008 and the related
consolidated statements of operations, cash flows and stockholders’ equity for
the years ended December 31, 2008 and December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits of the Company’s financial statements as of December 31,
2008 and for each of the two years in the period ended December 31, 2008 in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2008 in accordance with accounting
principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers
LLP
Chartered
Accountants, Licensed Public Accountants
Ottawa,
Canada
March 30,
2009
F-2
Adherex
Technologies Inc.
(a
development stage company)
(U.S.
Dollars and shares in thousands, except per share amounts)
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 685 | $ | 5,349 | ||||
|
Cash
pledged as collateral
|
- | 52 | ||||||
|
Accounts
receivable
|
69 | 6 | ||||||
|
Investment
tax credits recoverable
|
- | 133 | ||||||
|
Prepaid
expense
|
75 | 71 | ||||||
|
Other
current assets
|
4 | 28 | ||||||
|
Total
current assets
|
833 | 5,639 | ||||||
|
Capital
assets
|
- | 136 | ||||||
|
Leasehold
improvements
|
- | 285 | ||||||
|
Total
assets
|
$ | 833 | $ | 6,060 | ||||
|
Liabilities
and stockholders’ equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 318 | $ | 547 | ||||
|
Accrued
liabilities
|
70 | 1,883 | ||||||
|
Other
current liabilities
|
32 | - | ||||||
|
Total
current liabilities
|
420 | 2,430 | ||||||
|
Deferred
lease inducements
|
- | 570 | ||||||
|
Other
long-term liabilities
|
7 | 7 | ||||||
|
Total
liabilities
|
427 | 3,007 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Common
stock, no par value; unlimited shares authorized; 128,227 shares issued
and outstanding
|
64,929 | 64,929 | ||||||
|
Additional
paid-in capital
|
35,225 | 34,860 | ||||||
|
Deficit
accumulated during development stage
|
(100,991 | ) | (97,979 | ) | ||||
|
Accumulated
other comprehensive income
|
1,243 | 1,243 | ||||||
|
Total
stockholders’ equity
|
406 | 3,053 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 833 | $ | 6,060 | ||||
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-3
Adherex
Technologies Inc.
(a
development stage company)
(U.S.
dollars and shares in thousands, except per share information)
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
Cumulative
From
September
3, 1996 to
December
31, 2009
|
|||||||||||||
|
Revenue
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Research
and development
|
2,113 | 10,366 | 10,912 | 64,890 | ||||||||||||
|
Impairment
of Capital Assets
|
386 | 386 | ||||||||||||||
|
Gain
on Deferred lease inducements
|
(497 | ) | (497 | ) | ||||||||||||
|
Acquired
in-process research and development
|
- | - | - | 13,094 | ||||||||||||
|
General
and administration
|
1,214 | 3,520 | 3,278 | 24,709 | ||||||||||||
|
Loss
from operations
|
(3,216 | ) | (13,886 | ) | (14,190 | ) | (102,583 | ) | ||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Settlement
of Cadherin Biomedical Inc. litigation
|
- | - | - | (1,283 | ) | |||||||||||
|
Interest
expense
|
- | - | - | (19 | ) | |||||||||||
|
Other
income
|
157 | - | - | 255 | ||||||||||||
|
Interest
income
|
47 | 286 | 833 | 2,797 | ||||||||||||
|
Total
other income
|
204 | 286 | 833 | 1,750 | ||||||||||||
|
Net
loss and total comprehensive loss
|
$ | (3,012 | ) | $ | (13,600 | ) | $ | (13,357 | ) | $ | (100,833 | ) | ||||
|
Net
loss per share of common stock, basic and diluted
|
$ | (0.02 | ) | $ | (0.11 | ) | $ | (0.11 | ) | |||||||
|
Weighted-average
number of shares of common stock outstanding, basic and
diluted
|
128,227 | 128,227 | 116,571 | |||||||||||||
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-4
Adherex
Technologies Inc.
(a
development stage company)
(U.S.
Dollars and shares in thousands, except per share amounts)
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
Cumulative
From
September
3,
1996
to
December
31, 2009
|
|||||||||||||
|
Cash
flows from (used in):
|
||||||||||||||||
|
Operating
activities:
|
||||||||||||||||
|
Net
loss
|
$ | (3,012 | ) | $ | (13,600 | ) | $ | (13,357 | ) | $ | (100,833 | ) | ||||
|
Adjustments
for non-cash items:
|
||||||||||||||||
|
Depreciation
and amortization
|
- | 164 | 81 | 1,404 | ||||||||||||
|
Non-cash
Cadherin Biomedical Inc. litigation expense
|
- | - | - | 1,187 | ||||||||||||
|
Unrealized
foreign exchange loss
|
- | - | - | 9 | ||||||||||||
|
Loss
on impairment of capital assets
|
386 | - | - | 386 | ||||||||||||
|
Amortization
of and gain on lease inducements
|
(538 | ) | (11 | ) | 111 | (412 | ) | |||||||||
|
Non-cash
severance expense
|
- | - | - | 168 | ||||||||||||
|
Stock
options issued to consultants
|
10 | 88 | 59 | 722 | ||||||||||||
|
Stock
options issued to employees
|
355 | 2,417 | 2,263 | 7,703 | ||||||||||||
|
Acquired
in-process research and development
|
- | - | - | 13,094 | ||||||||||||
|
Changes
in operating assets and liabilities
|
(1,889 | ) | 134 | (2,460 | ) | (140 | ) | |||||||||
|
Net
cash used in operating activities
|
(4,688 | ) | (10,808 | ) | (13,303 | ) | (76,889 | ) | ||||||||
|
Investing
activities:
|
||||||||||||||||
|
Purchase
of capital assets
|
- | (15 | ) | (73 | ) | (1,440 | ) | |||||||||
|
Disposal
of capital assets
|
- | - | - | 115 | ||||||||||||
|
Proceeds
from sale of assets
|
24 | 24 | ||||||||||||||
|
Release
of restricted cash
|
- | - | - | 190 | ||||||||||||
|
Restricted
cash
|
- | - | (2 | ) | (209 | ) | ||||||||||
|
Purchase
of short-term investments
|
- | - | - | (22,148 | ) | |||||||||||
|
Redemption
of short-term investments
|
- | - | - | 22,791 | ||||||||||||
|
Investment
in Cadherin Biomedical Inc.
|
- | - | - | (166 | ) | |||||||||||
|
Acquired
intellectual property rights
|
- | - | - | (640 | ) | |||||||||||
|
Net
cash provided from (used in) investing activities
|
24 | (15 | ) | (75 | ) | (1,507 | ) | |||||||||
|
Financing
activities:
|
||||||||||||||||
|
Conversion
of long-term debt to equity
|
- | - | - | 68 | ||||||||||||
|
Long-term
debt repayments
|
- | - | - | (65 | ) | |||||||||||
|
Capital
lease repayments
|
- | - | - | (8 | ) | |||||||||||
|
Issuance
of common stock
|
- | - | 23,915 | 76,687 | ||||||||||||
|
Registration
expense
|
- | - | - | (465 | ) | |||||||||||
|
Financing
expenses
|
- | - | - | (544 | ) | |||||||||||
|
Proceeds
from convertible note
|
- | - | - | 3,017 | ||||||||||||
|
Other
liability repayments
|
- | - | (40 | ) | (87 | ) | ||||||||||
|
Security
deposits received
|
- | 7 | - | 35 | ||||||||||||
|
Proceeds
from exercise of stock options
|
- | - | - | 51 | ||||||||||||
|
Net
cash provided from financing activities
|
- | 7 | 23,875 | 78,713 | ||||||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
- | 3 | - | 368 | ||||||||||||
|
Net
change in cash and cash equivalents
|
(4,664 | ) | (10,813 | ) | 10,497 | 685 | ||||||||||
|
Cash
and cash equivalents - Beginning of period
|
5,349 | 16,162 | 5,665 | - | ||||||||||||
|
Cash
and cash equivalents - End of period
|
$ | 685 | $ | 5,349 | $ | 16,162 | 685 | |||||||||
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-5
Adherex
Technologies Inc.
(a
development stage company)
Consolidated
Statements of Stockholders' Equity
(U.S.
dollars and shares in thousands, except per share information)
|
Common
Stock
|
Non-redeemable
Preferred
Stock
|
Additional
Paid-in
|
Accumulated
Other
Comprehensive
|
Deficit
Accumulated
During
Development
|
Total
Shareholders’
|
|||||||||||||||||||||||
|
Number
|
Amount
|
of
Subsidiary
|
Capital
|
Income
|
Stage
|
Equity
|
||||||||||||||||||||||
|
Balance
at June 30, 1996
|
- | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||
|
Issuance
of common stock
|
1,600 | - | - | - | - | - | - | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (37 | ) | (37 | ) | |||||||||||||||||||
|
Balance
at June 30, 1997
|
1,600 | - | - | - | - | (37 | ) | (37 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (398 | ) | (398 | ) | |||||||||||||||||||
|
Balance
at June 30, 1998
|
1,600 | - | - | - | - | (435 | ) | (435 | ) | |||||||||||||||||||
|
Exchange
of Adherex Inc. shares for Adherex Technologies Inc.
shares
|
(1,600 | ) | - | - | - | - | - | - | ||||||||||||||||||||
|
Issuance
of common stock
|
4,311 | 1,615 | - | - | - | - | 1,615 | |||||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | 20 | - | 20 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (958 | ) | (958 | ) | |||||||||||||||||||
|
Balance
at June 30, 1999
|
4,311 | 1,615 | - | - | 20 | (1,393 | ) | 242 | ||||||||||||||||||||
|
Issuance
of common stock
|
283 | 793 | - | - | - | - | 793 | |||||||||||||||||||||
|
Issuance
of equity rights
|
- | - | - | 171 | - | - | 171 | |||||||||||||||||||||
|
Issuance
of special warrants
|
- | - | - | 255 | - | - | 255 | |||||||||||||||||||||
|
Settlement
of advances:
|
||||||||||||||||||||||||||||
|
Issuance
of common stock
|
280 | 175 | - | - | - | - | 175 | |||||||||||||||||||||
|
Cancellation
of common stock
|
(120 | ) | - | - | - | - | - | - | ||||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | 16 | - | 16 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (1,605 | ) | (1,605 | ) | |||||||||||||||||||
|
Balance
at June 30, 2000
|
4,754 | 2,583 | - | 426 | 36 | (2,998 | ) | 47 | ||||||||||||||||||||
|
Issuance
of common stock:
|
||||||||||||||||||||||||||||
|
Initial
Public Offering (“IPO”)
|
1,333 | 5,727 | - | - | - | (38 | ) | 5,689 | ||||||||||||||||||||
|
Other
|
88 | 341 | - | - | - | - | 341 | |||||||||||||||||||||
|
Issuance
of special warrants
|
- | - | - | 1,722 | - | - | 1,722 | |||||||||||||||||||||
|
Conversion
of special warrants
|
547 | 1,977 | - | (1,977 | ) | - | - | - | ||||||||||||||||||||
|
Issuance
of Series A special warrants
|
- | - | - | 4,335 | - | - | 4,335 | |||||||||||||||||||||
|
Conversion
of Series A special warrants
|
1,248 | 4,335 | - | (4,335 | ) | - | - | - | ||||||||||||||||||||
|
Conversion
of equity rights
|
62 | 171 | - | (171 | ) | - | - | - | ||||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | 182 | - | 182 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (2,524 | ) | (2,524 | ) | |||||||||||||||||||
|
Balance
at June 30, 2001
|
8,032 | 15,134 | - | - | 218 | (5,560 | ) | 9,792 | ||||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | 11 | - | 11 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (3,732 | ) | (3,732 | ) | ||||||||||||||||||||
|
Balance
at June 30, 2002
|
8,032 | 15,134 | - | - | 229 | (9,292 | ) | 6,071 | ||||||||||||||||||||
(The
accompanying notes are an integral part of these consolidated financial
statements)
(continued
on next page)
F-6
Adherex
Technologies Inc.
(a
development stage company)
Consolidated
Statements of Stockholders' Equity (continued)
(U.S.
dollars and shares in thousands, except per share information)
|
Common
Stock
|
Non-redeemable
Preferred
Stock
|
Additional
Paid-in
|
Accumulated
Other
Comprehensive
|
Deficit
Accumulated
During
Development
|
Total
Shareholders’
|
|||||||||||||||||||||||
|
Number
|
Amount
|
of
Subsidiary
|
Capital
|
Income
|
Stage
|
Equity
|
||||||||||||||||||||||
|
Balance
at June 30, 2002
|
8,032 | 15,134 | - | - | 229 | (9,292 | ) | 6,071 | ||||||||||||||||||||
|
Common
stock issued for Oxiquant acquisition
|
8,032 | 11,077 | - | 543 | - | - | 11,620 | |||||||||||||||||||||
|
Exercise
of stock options
|
5 | 4 | - | - | - | - | 4 | |||||||||||||||||||||
|
Distribution
to shareholders
|
- | - | - | - | - | (158 | ) | (158 | ) | |||||||||||||||||||
|
Stated
capital reduction
|
- | (9,489 | ) | - | 9,489 | - | - | - | ||||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 4 | - | - | 4 | |||||||||||||||||||||
|
Equity
component of June convertible notes
|
- | - | - | 1,058 | - | - | 1,058 | |||||||||||||||||||||
|
Financing
warrants
|
- | - | - | 53 | - | - | 53 | |||||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | (159 | ) | - | (159 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (17,795 | ) | (17,795 | ) | |||||||||||||||||||
|
Balance
at June 30, 2003
|
16,069 | 16,726 | - | 11,147 | 70 | (27,245 | ) | 698 | ||||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 148 | - | - | 148 | |||||||||||||||||||||
|
Repricing
of warrants related to financing
|
- | - | - | 18 | - | - | 18 | |||||||||||||||||||||
|
Equity
component of December convertible notes
|
- | - | - | 1,983 | - | - | 1,983 | |||||||||||||||||||||
|
Financing
warrants
|
- | - | - | 54 | - | - | 54 | |||||||||||||||||||||
|
Conversion
of June convertible notes
|
1,728 | 1,216 | - | (93 | ) | - | - | 1,123 | ||||||||||||||||||||
|
Conversion
of December convertible notes
|
1,085 | 569 | - | (398 | ) | - | - | 171 | ||||||||||||||||||||
|
Non-redeemable
preferred stock
|
- | - | 1,045 | - | - | - | 1,045 | |||||||||||||||||||||
|
December
private placement
|
11,522 | 8,053 | - | 5,777 | - | - | 13,830 | |||||||||||||||||||||
|
May
private placement
|
4,669 | 6,356 | - | 2,118 | - | - | 8,474 | |||||||||||||||||||||
|
Exercise
of stock options
|
18 | 23 | - | - | - | - | 23 | |||||||||||||||||||||
|
Amalgamation
of 2037357 Ontario Inc.
|
800 | 660 | (1,045 | ) | 363 | - | - | (22 | ) | |||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | (219 | ) | - | (219 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (6,872 | ) | (6,872 | ) | |||||||||||||||||||
|
Balance
at June 30, 2004
|
35,891 | 33,603 | - | 21,117 | (149 | ) | (34,117 | ) | 20,454 | |||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 39 | - | - | 39 | |||||||||||||||||||||
|
Stock
options issued to employees
|
- | - | - | 604 | - | - | 604 | |||||||||||||||||||||
|
Cost
related to SEC registration
|
- | (493 | ) | - | - | - | - | (493 | ) | |||||||||||||||||||
|
Acquisition
of Cadherin Biomedical Inc.
|
644 | 1,252 | - | - | - | - | 1,252 | |||||||||||||||||||||
|
Cumulative
translation adjustment
|
- | - | - | - | 1,392 | - | 1,392 | |||||||||||||||||||||
|
Net
loss – six months ended December 31, 2004
|
- | - | - | - | - | (6,594 | ) | (6,594 | ) | |||||||||||||||||||
|
Balance
at December 31, 2004
|
36,535 | 34,362 | - | 21,760 | 1,243 | (40,711 | ) | 16,654 | ||||||||||||||||||||
(The
accompanying notes are an integral part of these consolidated financial
statements)
(continued
on next page)
F-7
Adherex
Technologies Inc.
(a
development stage company)
Consolidated
Statements of Stockholders' Equity (continued)
(U.S.
dollars and shares in thousands, except per share information)
|
Common
Stock
|
Non-redeemable
Preferred
Stock
|
Additional
Paid-in
|
Accumulated
Other
Comprehensive
|
Deficit
Accumulated
During
Development
|
Total
Shareholders’
|
|||||||||||||||||||||||
|
Number
|
Amount
|
of
Subsidiary
|
Capital
|
Income
|
Stage
|
Equity
|
||||||||||||||||||||||
|
Balance
at December 31, 2004
|
36,535 | 34,362 | - | 21,760 | 1,243 | (40,711 | ) | 16,654 | ||||||||||||||||||||
|
Financing
costs
|
- | (141 | ) | - | - | - | - | (141 | ) | |||||||||||||||||||
|
Exercise
of stock options
|
15 | 25 | - | - | - | - | 25 | |||||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 276 | - | - | 276 | |||||||||||||||||||||
|
July
private placement
|
6,079 | 7,060 | - | 1,074 | - | - | 8,134 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (13,871 | ) | (13,871 | ) | |||||||||||||||||||
|
Balance
at December 31, 2005
|
42,629 | 41,306 | - | 23,110 | 1,243 | (54,582 | ) | 11,077 | ||||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 100 | - | - | 100 | |||||||||||||||||||||
|
Stock
options issued to employees
|
- | - | - | 491 | - | - | 491 | |||||||||||||||||||||
|
May
private placement
|
7,753 | 5,218 | - | 822 | - | - | 6,040 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (16,440 | ) | (16,440 | ) | |||||||||||||||||||
|
Balance
at December 31, 2006
|
50,382 | 46,524 | - | 24,523 | 1,243 | (71,022 | ) | 1,268 | ||||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 59 | - | - | 59 | |||||||||||||||||||||
|
Stock
options issued to employees
|
- | - | - | 2,263 | - | - | 2,263 | |||||||||||||||||||||
|
February
financing
|
75,759 | 17,842 | - | 5,379 | - | - | 23,221 | |||||||||||||||||||||
|
Exercise
of warrants
|
2,086 | 563 | - | 131 | - | - | 694 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (13,357 | ) | (13,357 | ) | |||||||||||||||||||
|
Balance
at December 31, 2007
|
128,227 | 64,929 | - | 32,355 | 1,243 | (84,379 | ) | 14,148 | ||||||||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 88 | - | - | 88 | |||||||||||||||||||||
|
Stock
options issued to employees
|
- | - | - | 2,417 | - | - | 2,417 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (13,600 | ) | (13,600 | ) | |||||||||||||||||||
|
Balance
at December 31, 2008
|
128,227 | $ | 64,929 | $ | - | $ | 34,860 | $ | 1,243 | $ | (97,979 | ) | $ | 3,053 | ||||||||||||||
|
Stock
options issued to consultants
|
- | - | - | 10 | - | - | 10 | |||||||||||||||||||||
|
Stock
options issued to employees
|
- | - | - | 355 | - | - | 355 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (3,012 | ) | (3,012 | ) | |||||||||||||||||||
|
Balance
at December 31, 2009
|
128,227 | $ | 64,929 | $ | - | $ | 35,225 | $ | 1,243 | $ | (100,991 | ) | $ | 407 | ||||||||||||||
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-8
1.
Going Concern
Adherex
Technologies Inc. (“Adherex”), a Canadian Corporation together with its wholly
owned subsidiaries Oxiquant, Inc. (“Oxiquant”) and Adherex, Inc., both Delaware
corporations, and Cadherin Biomedical Inc. (“CBI”), a Canadian corporation,
collectively referred to herein as the “Company,” is a development stage
biopharmaceutical company with a portfolio of product candidates under
development for use in the treatment of cancer. With the exception of
Adherex Technologies Inc., all subsidiaries are inactive.
These
consolidated financial statements have been prepared using generally accepted
accounting principles (“GAAP”) in the United States (“U.S.”) of America that are
applicable to a going concern which contemplates that the Company will continue
in operation for the foreseeable future and will be able to realize its assets
and discharge its liabilities in the normal course of
business.
The
Company is a development stage company and during the year ended December 31,
2009, incurred a net loss of $3,012. At December 31, 2009, it had an
accumulated deficit of $100,991, and had experienced negative cash flows from
operations since inception in the amount of $77,048. Also, at
December 31, 2009, the Company has cash and cash equivalents of $685,000, which
based on management’s current plans, will only be able to fund operations into
the second quarter of 2010. The Company continues to pursue various
strategic alternatives, including, collaborations with other pharmaceutical and
biotechnology companies; however, if a strategic transaction is not completed or
the Company does not otherwise obtain additional financial resources in the very
near term, it might cease operations sooner than first quarter of
2010. The Company has also not been successful in obtaining
additional financing since February 2007. These circumstances lend
substantial doubt as to the ability of the Company to meet its obligations as
they come due and, accordingly, the use of accounting principles applicable to a
going concern may not be appropriate.
The
Company’s ability to continue as a going concern is dependent on the raising of
additional financial resources in the very near term. The Company does not
anticipate any revenues in the foreseeable future. If the Company is
unable to obtain adequate financial resources, it could be forced to cease
operations. The Company’s management is considering all financial
alternatives and seeking to raise additional funds for operations from current
stockholders, other potential investors, corporate partners, or other sources.
This disclosure is not an offer to sell, nor a solicitation of an offer to
buy the Company’s securities. While the Company is striving to
achieve these plans, there is no assurance that such funding will be obtainable
on favorable terms or at all.
These financial statements do not reflect the potentially material
adjustments in the carrying values of assets and liabilities, the reported
expenses, and the balance sheet classifications used, that would be necessary if
the going concern assumption were not appropriate.
2.
Significant Accounting Policies
Basis
of presentation
Effective
January 1, 2007, the Company changed its primary basis of accounting to United
States (“U.S.”) generally accepted accounting principles (“U.S.
GAAP”). It made this change to comply with U.S. securities law as a
result of the loss of the Company’s foreign private issuer status with the
Securities and Exchange Commission (“SEC”). The consolidated
financial statements have been prepared in U.S. dollars. The
consolidated financial statements include the accounts of Adherex and of all its
wholly-owned subsidiaries and all material inter-company transactions and
balances have been eliminated upon consolidation.
These
consolidated financial statements also conform in all material respects with
generally accepted accounting principles in Canada ("Canadian GAAP") except as
described in Note 10 in the consolidated financial statements.
Use
of estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that impact the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as at
the date of the financial statements and the reported amounts of revenue and
expense during the reporting period. Significant estimates include
certain accruals and the value of stock based compensation. Actual
results could differ from those estimates.
F-9
Cash and Cash Equivalents
Cash
equivalents consist of highly liquid investments with original maturities at the
date of purchase of three months or less.
The
Company places its cash and cash equivalents in investments held by financial
institutions in accordance with its investment policy designed to protect the
principal investment. At December 31, 2009, the Company had $685 in
cash accounts. Money market investments typically have minimal risk;
however, in recent months the financial markets have been volatile resulting in
concerns regarding money market investments. The Company did not
experience any loss or write down of its money market investments for the years
ended December 31, 2009 and 2008.
Capital
assets
Capital
assets are initially recorded at cost and are then amortized using the declining
balance method at the following annual rates:
|
Furniture,
fixtures and office equipment
|
20%
|
|
Computer
equipment
|
30%
|
|
Computer
software
|
100%
|
|
Laboratory
equipment
|
20%
|
Leasehold
improvements are amortized on a straight-line basis over the lease
term.
Financial
instruments
Financial
instruments recognized on the balance sheets at December 31, 2009 and December
31, 2008 consist of cash and cash equivalents, cash pledged as collateral,
accounts receivable, accounts payable and other current liabilities, the
carrying value of which approximates fair value due to their relatively short
time to maturity. The Company does not hold or issue financial
instruments for trading purposes and does not hold any derivative financial
instruments.
The
Company’s 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 are made in U.S. or Canadian 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 risks are primarily the opportunity cost of the conservative nature of
the allowable investments. As the main purpose of the Company is
research and development, the Company has chosen to avoid investments of a trade
or speculative nature.
Deferred
leasehold inducements
Leasehold
inducements consist of periods of reduced rent and other capital inducements
provided by the lessor. The leasehold inducements relating to the
reduced rent periods are deferred and allocated over the term of the
lease. The Company has received lease inducements in the form of
leasehold improvements and rent-free periods.
Impairment
of long-lived assets
The
Company tests the recoverability of long-lived assets whenever events or changes
in circumstances indicate that its carrying amount may not be
recoverable. The Company records an impairment loss in the period
when it is determined that the carrying amount of the asset may not be
recoverable. The impairment loss is calculated as the amount by which
the carrying amount of the assets exceeds the discounted cash flows from the
asset.
Convertible
notes
The
Company splits convertible notes into their debt and detachable warrant
components based on the relative fair value of each component.
F-10
Common
stock and warrants
At
December 31, 2007, the Company had warrants outstanding to purchase common stock
that were denominated in both U.S. and Canadian dollars, which resulted in the
Company having warrants outstanding that were denominated outside the Company’s
U.S. dollar functional currency.
In
November 2007, the Emerging Issues Task Force (“EITF”) of the FASB issued EITF
No. 07-5, Issue Summary No.1 “Determining Whether an Instrument (or an Embedded
Feature) is Indexed to an Entity's Own Stock” (“EITF 07-5”), codified as ASC
815-40. In June 2008, one of the conclusions reached under EITF 07-05
was a consensus that an equity-linked financial instrument would not be
considered indexed to the entity's own stock if the strike price is denominated
in a currency other than the issuer's functional currency. The issues
brought to the EITF for discussion related to how an entity should determine
whether certain instruments or embedded features are indexed to its own
stock. This discussion included equity-linked financial instruments
where the exercise price is denominated in a currency other than the issuer's
functional currency; such as the Company’s outstanding warrants to purchase
common stock that were denominated in Canadian dollars. This
conclusion reached under EITF 07-05 clarified the accounting treatment for these
and certain other financial instruments as it related to FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”),
codified as ASC 815-10. SFAS 133 specifies that a contract that would
otherwise meet the definition of a derivative under SFAS 133, issued or held by
the reporting entity that is both (a) indexed to its own stock and (b)
classified in stockholders' equity in its statement of financial position should
not be considered a derivative financial instrument for purposes of applying
SFAS 133. As a result, the Company’s outstanding warrants denominated
in Canadian dollars were not considered to be indexed to its own stock and
should therefore be treated as derivative financial instruments and recorded at
their fair value as a liability. EITF 07-05 is effective for
financial statements for fiscal years beginning after December 15, 2008 and
earlier adoption is not permitted. Since the warrants to
purchase common stock that are denominated in Canadian dollars expired on
December 19, 2008, EITF 07-5 did not have a material impact on the Company’s
financial statements as the Company did not issue further equity instruments
denominated outside its functional currency.
Revenue
recognition
The
Company recognizes revenue from multiple element arrangements under development
and license agreement, which include license payments, milestones and
royalties. Revenue arrangements with multiple deliverables are
accounted for in accordance with EITF No. 00-21, codified as ASC 605-25,
“Revenue Arrangements with Multiple Deliverables” and Staff Accounting Bulletin
No. 101 “Revenue Recognition in Financial Statements” and are divided into
separate units of accounting if certain criteria are met. The
consideration the Company receives is allocated among the separate units of
accounting based on their respective fair values, and the applicable revenue
recognition criteria are considered separately for each of the separate
units.
Non-refundable
up-front payments received in conjunction with the development and license
agreement, including license fees and milestones, are deferred and recognized on
a straight-line basis over the relevant periods.
The
Company records royalty revenue in accordance with the contract terms once it
can be reliably measured and the collection is reasonably assured.
Research
and development costs and investment tax credits
Research
costs, including employee compensation, laboratory fees, lab supplies, and
research and testing performed under contract by third parties, are expensed as
incurred. Development costs, including drug substance costs, clinical
study expenses and regulatory expenses are expensed as incurred.
Investment
tax credits, which are earned as a result of qualifying research and development
expenditures, are recognized when the expenditures are made and their
realization is reasonably assured. They are applied to reduce related
capital costs and research and development expenses in the year
recognized.
Income
taxes
The
Company accounts for income taxes under the asset and liability method that
requires the recognition of deferred tax assets or liabilities for the expected
future tax consequences of temporary differences between the financial statement
carrying amounts and tax basis of assets and liabilities. The Company
provides a valuation allowance to reduce its deferred tax assets when it is more
likely than not that such assets will not be realized.
F-11
The
Company accounts for uncertainty in income taxes by following the Financial
Accounting Standards Board issued Interpretation No. 48 (‘‘FIN 48’’), codified
as ASC 740-10-25, ‘‘Accounting for Uncertainty in Income Taxes – an
Interpretation of SFAS No. 109.’’ FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with Statement of Financial Accounting Standards No. 109,
‘‘Accounting for Income Taxes.’, codified as ASC 740-10. FIN 48
provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing tax returns to
determine whether the tax positions have met a “more-likely-than-not” threshold
of being sustained by the applicable tax authority. Tax benefits
related to tax positions not deemed to meet the “more-likely-than-not” threshold
are not permitted to be recognized in the financial statements. Upon
adoption of FIN 48, the Company has elected an accounting policy that
continues to classify accrued interest and penalties related to liabilities for
income taxes in income tax expense.
Foreign
currency translation
The U.S.
dollar is the functional currency for substantially all of the Company’s
consolidated operations. For those entities, all gains and losses from currency
translations are included in results of operations. For CBI which is using a
functional currency other than the U.S. dollar, the cumulative translation
effects are included in “accumulated other comprehensive income” in the
consolidated balance sheets.
Stock-Based
compensation plan
Effective
January 1, 2006, the Company adopted the fair value recognition requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-based Payment" ("SFAS No. 123(R)"), codified as ASC 718-10, using the
modified prospective transition method and therefore has not restated results
for prior periods. The Company recognizes these compensation costs
net of an estimated forfeiture rate on a straight-line basis over the requisite
service period of the award, which is generally three years.
Loss
per share
Basic net
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the year. Diluted net
loss per share is computed using the same method, except the weighted average
number shares of common stock outstanding include, convertible debentures, stock
options and warrants, if dilutive.
New
accounting pronouncements
In May
2009, the FASB issued authoritative guidance relating to subsequent events,
which is effective June 15, 2009. It provides guidance for disclosing events
that occur after the balance sheet date, but prior to the issuance of the
financial statements. We adopted this authoritative guidance on June 30, 2009.
The adoption of this authoritative guidance did not have any impact upon the
Company’s financial position or operating results.
In
December 2007, the Emerging Issue Task Force, or EITF, issued EITF No. 07-01,
“Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property”, or EITF 07-01, codified as ASC
808-10. EITF 07-01 defines the accounting for collaborations between
participants. EITF 07-01 requires certain transactions between
collaborators to be recorded in the statement of operations on either a gross or
net basis within expense when certain characteristics exist in the collaborative
agreement. EITF 07-01 did not have a material impact on the Company’s
financial statements.
In
December 2007, the FASB issued ASC No. 805, Business Combinations” (“ASC 805”),
which, requires an acquiring company to measure all assets acquired and
liabilities assumed, including contingent considerations and all contractual
contingencies, at the fair value at the acquisition date. ASC 805
establishes principles and requirements for how the acquirer: i) recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree;
ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The
adoption of ASC 805 did not have a material impact on the Company’s financial
statements.
F-12
In April
2008, the FASB issued pronouncements under ASC 350-30, General Intangibles Other
Than Goodwill (formerly FSP No. 142-3, Determination of the Useful Life of
Intangible Assets). ASC 350-30 amends the factors considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under ASC 350 (formerly SFAS No. 142, Goodwill and
Other Intangible Assets). ASC 350-30 requires a consistent approach between the
useful life of a recognized intangible asset under ASC 350 and the period of
expected cash flows used to measure the fair value of an asset under ASC 805-10.
ASC 350-30 also requires enhanced disclosures when an intangible asset’s
expected future cash flows are affected by an entity’s intent and/or ability to
renew or extend the arrangement. ASC 350-30 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and is
applied prospectively. The Company has adopted ASC 350-30 and applied its
various provisions as required as of January 1, 2009. The adoption of ASC 350-30
did not have a material impact on the Company’s financial position, results of
operations, or cash flows.
In April
2009, an update was made to the Financial Instruments topic of the FASB
codification Fair Value
Measurements
and Disclosures that requires disclosures about the fair value of financial
instruments in interim financial statements as well as in annual financial
statements. The new guidance also amends the existing requirements on the fair
value disclosures in all interim financial statements. This guidance is
effective for interim periods ending after June 15, 2009, but early adoption was
permitted for interim periods ending after March 15, 2009. The adoption of this
standard did not have a material impact on the Company’s consolidated financial
position and results of operations.
In April
2009, an update was made to the Fair Value Measurements and Disclosures topic of
the FASB codification that provides additional guidance in determining fair
value when there is no active market or where price inputs being used represent
distressed sales. This guidance is effective for interim periods ending after
June 15, 2009, but early adoption was permitted for interim periods ending after
March 15, 2009. The adoption of this standard did not have an impact on the
Company’s consolidated financial position and results of
operations.
In April
2009, an update was made to the Debt and Equity topic of the FASB codification
that provides guidance in determining whether impairments of debt securities are
other than temporary, and modifies the presentation and disclosures surrounding
such instruments. This guidance is effective for interim periods ending after
June 15, 2009, but early adoption was permitted for interim periods ending after
March 15, 2009. The adoption of this standard did not have an impact on the
Company’s consolidated financial position and results of
operations.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”), which establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with U.S. GAAP. SFAS 168 explicitly recognizes rules and interpretative release of the SEC under federal securities laws as authoritative U.S. GAAP. SFAS 168 if effective for interim and annual periods ending after September 15, 2009. Accordingly, we are required to adopt SFAS 168 on October 1, 2009. As the issuance of SFAS 168 and the Codification does not change U.S. GAAP, the adoption of this standard is not expected to have any impact on the Company’s financial statements.
Recent
accounting pronouncements
In June
2009, the FASB issued changes to the consolidation guidance applicable to a
variable interest entity (VIE). FASB ASC Topic 810, "Consolidation," amends the
guidance governing the determination of whether an enterprise is the primary
beneficiary of a VIE, and is, therefore, required to consolidate an entity, by
requiring a qualitative analysis rather than a quantitative analysis. The
qualitative analysis will include, among other things, consideration of who has
the power to direct the activities of the entity that most significantly impact
the entity's economic performance and who has the obligation to absorb losses or
the right to receive benefits of the VIE that could potentially be significant
to the VIE. This standard also requires continuous reassessments of whether an
enterprise is the primary beneficiary of a VIE. FASB ASC 810 also requires
enhanced disclosures about an enterprise's involvement with a VIE. Topic 810 is
effective as of the beginning of interim and annual reporting periods that begin
after November 15, 2009. This will not have an impact on the Company’s financial
position, results of operations or cash flows.
In
January 2010, an update was made to the Fair Value Measurements and Disclosures
topic of the FASB codification that requires new disclosures for fair value
measurements and provides clarification for existing disclosure requirements.
More specifically, this update will require (a) an entity to disclose separately
the amounts of significant transfers into and out of Level 1 and 2 fair value
measurements and to describe the reasons for the transfers; and (b) information
about purchases, sales, issuances, and settlements to be presented separately on
a gross basis in the reconciliation of Level 3 fair value measurements. This
update is effective for fiscal years beginning after December 15, 2009 except
for Level 3 reconciliation disclosures which are effective for fiscal years
beginning after December 15, 2010. The Company does not expect the adoption of
the guidance to have an impact on the Company’s consolidated financial position
and results of operations.
F-13
3. Capital Assets
The
components of capital assets are presented below:
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Cost
|
Accumulated
Amortization
|
|||||||||||||
|
Furniture,
fixtures and office equipment
|
$ | - | $ | - | $ | 92 | $ | 78 | ||||||||
|
Computer
equipment
|
- | - | 149 | 115 | ||||||||||||
|
Computer
software
|
- | - | 162 | 162 | ||||||||||||
|
Laboratory
equipment
|
- | - | 623 | 537 | ||||||||||||
|
Leasehold
improvements
|
- | - | 4 | 2 | ||||||||||||
| - | $ | - | 1,030 | $ | 894 | |||||||||||
|
Accumulated
amortization
|
- | (894 | ) | |||||||||||||
|
Net
book value
|
$ | - | $ | 136 | ||||||||||||
Amortization
expense for capital assets was $0 and $164 for the years ended December 31, 2009
and 2008, respectively.
At
December 31, 2009, the Company determined the carrying values of its capital
assets to be nil. In connection with the 75% reduction in the
Company’s employee headcount and limited financial resources, the Company had
decided to list idle laboratory equipment for sale as they are no longer
required by the business. During the second quarter ended June 30,
2009, the Company received $24 from the sale of a portion of these
assets. Management determined the carrying values to be nil after not
recording any other sale of these assets during 2009. Accordingly, the Company
recorded a $101 loss on impairment of assets for the year ended December 31,
2009.
4.
Leasehold Improvements
On August
31, 2005, the Company entered into agreements to lease a new office and
laboratory facility (“Maplewood Facility”) and sublease the Company’s existing
facility (“Englert Facility”) on similar terms as in the original
lease. As an incentive to enter into the Maplewood Facility lease,
the Company received free rent and capital inducements. The Company
only paid half rent for the Maplewood Facility over the first 24 months of the
84-month lease term and received additional inducements in the form of
furniture, equipment and leasehold improvements. In September 2009,
the Company terminated the Maplewood lease relating to the Company’s primary
office facility in Research Triangle Park for approximately
$175,000.
Management
has performed an impairment analysis
ASC Topic 360, ―Property,
Plant and Equipment
‖ (previously SFAS No. 144) and has determined that
the leasehold improvements, consisting primarily of equipment and leasehold
improvements, were impaired at December 31, 2009. At December 31,
2009, the Company determined the fair value of these leasehold improvements to
be nil. Accordingly, the Company recorded a $285 loss on impairment
in Consolidated Statement of Operations for the year ended December 31,
2009.
The
Company had recorded rent expense by charging the total rental payments plus the
value of the capital inducements received against earnings on a straight-line
basis over the 84-month term of the lease, which expires on August 31,
2012.
5.
Shareholders’ Equity
Authorized
capital stock
The
Company’s authorized capital stock consists of an unlimited number of shares of
no par common stock.
Equity
financings
On June
5, 2001, the Company completed an IPO issuing 1,333 shares of common stock at a
price of CAD$7.50 per share. Net proceeds of this offering credited
to common stock amounted to $5,727 after deducting the underwriting fee of $501
and expenses of $354. As additional compensation in connection with
the offering, the Company granted the underwriters non-assignable support
options representing ten percent of the offered shares. Each
support option entitled the holder to purchase one share of common stock on or
before June 5, 2003 at CAD$7.50. The Company also granted the
underwriters an option (“Over-allotment Option”) to purchase up to 200 shares of
common stock at the offering price for a period ending 30 days from the close of
the offering. On July 5, 2001, the Over-allotment Option expired
unexercised.
F-14
On
December 19, 2003, the Company completed a private placement of equity
securities totaling $16,095, comprised of (i) $15,050 for 11,522 units, at a
price of CAD$1.75 per unit, comprised of an aggregate of 11,522 shares of common
stock and warrants to acquire 5,761 shares of common stock of Adherex with an
exercise price of CAD$2.15 per share which expired unexercised on December 19,
2008, and (ii) $1,045 for 800 Series 1 Preferred Shares and warrants to
purchase 400 Series 1 Preferred Shares of 2037357 Ontario Inc. The
$5,777 estimated fair value of the warrants has been allocated to additional
paid-in capital and the balance of $8,053 has been credited to common
stock. The non-redeemable Series 1 Preferred Shares of 2037357
Ontario Inc. (“Preferred Shares”) were exchangeable into 800 shares of common
stock of Adherex. Upon such an exchange, all of the then outstanding
warrants to purchase the Preferred Shares would be exchanged for an equal number
of warrants to purchase Adherex common stock, which would have an exercise price
of CAD$2.15 per share and expire on December 19, 2008. The $1,045 was
to be spent on specific research and development projects in Ontario, Canada as
designated by Adherex. Adherex could compel the exchange of the
Preferred Shares into common stock and warrants for common stock of Adherex at
any time after January 3, 2005. The Company also issued broker
warrants to purchase 1,226 shares of common stock exercisable at a price of
CAD$2.15 per share.
2037357
Ontario Inc. has been accounted for in accordance with the substance of the
transaction. The $1,045 has been recorded as non-redeemable Preferred
Shares and the amounts expended were recorded as expenses in the relevant
periods. On June 14, 2004, the preferred shares and warrants were
exchanged for 800 shares of Adherex common stock and warrants to purchase 400
shares of Adherex common stock, all of which expired on December 19,
2008. In June 2004, 2037357 Ontario Inc. became a wholly owned
subsidiary of the Company and was amalgamated with Adherex Technologies
Inc. The investment has been split between the estimated fair value
of the warrants of $363, which has been included in additional paid-in capital,
and the remainder of $660, which has been recorded in common stock.
On May
20, 2004, the Company completed equity financings with total gross proceeds of
$9,029 less $555 of issuance costs. The Company issued 4,669 units at
a purchase price of CAD$2.65 per unit with each unit consisting of one share of
common stock and one-half of a common stock purchase warrant. Each
whole warrant entitled the holder to acquire one additional share of common
stock at an exercise price of CAD$3.50, all of which expired unexercised on May
19, 2007. The $2,118 value of the warrants has been allocated to
additional paid-in capital and the balance of $6,356 has been credited to common
stock.
On July
20, 2005, the Company completed a private placement of equity securities for
gross proceeds of $8,510 for 6,079 units at a price of $1.40 per unit, providing
net proceeds of $8,134 after deducting broker fees and other expenses of
$376. Each unit consisted of one common share and 0.30 of a common
share purchase warrant. The private placement comprised an aggregate
of 6,079 shares of common stock, along with 1,824 investor warrants and 57
broker warrants to acquire additional shares of Adherex common
stock. Each whole investor warrant entitled the holder to acquire one
additional share of common stock of Adherex at an exercise price of $1.75 per
share for a period of three years and each whole broker warrant entitled the
holder to acquire one share of Adherex common stock at an exercise price of
$1.75 for a period of two years, all of which expired unexercised on July 20,
2007 and 2008, respectively. The warrants, with a value of $1,074
based on the Black-Scholes option pricing model, have been allocated to
additional paid-in capital and the remaining balance of $7,060 has been credited
to common stock.
On May 8,
2006, the Company completed a private placement of equity securities for gross
proceeds of $6,512 for 7,753 units at a price of $0.84 per unit providing net
proceeds of $6,040 after deducting broker fees and certain other
expenses. Each unit consisted of one common share and 0.30 of a
common share purchase warrant. The private placement comprised an
aggregate of 7,753 shares of common stock, along with 2,326 investor warrants
and 465 broker warrants to acquire additional shares of Adherex common
stock. Each whole investor warrant entitled the holder to acquire one
additional share of Adherex common stock at an exercise price of $0.97 per share
for a period of four years. Each whole broker warrant entitles the
holder to acquire one share of Adherex common stock at an exercise price of
$0.97 per share for a period of two years, all of which expired unexercised on
May 7, 2008. The warrants, with a value of $822 based on the
Black-Scholes option pricing model, have been allocated to additional paid-in
capital and the remaining balance of $5,218 has been credited to common
stock.
On
February 21, 2007, the Company completed the sale of equity securities providing
gross proceeds of $25,000 for 75,759 units at a price of $0.33 per unit
providing net proceeds of $23,221 after deducting broker fees and other
expenses. Each unit consisted of one common share and one-half of a
common share purchase warrant.
F-15
The
offering comprised an aggregate of 75,759 shares of common stock, 37,879
investor warrants and 6,618 broker warrants to acquire additional shares of
Adherex common stock. Each whole investor warrant entitled the holder
to acquire one additional share of Adherex common stock at an exercise price of
$0.40 per share for a period of three years. Each whole broker
warrant entitles the holder to acquire one additional unit at an exercise price
of $0.33 per unit for a period of two years, the unexercised portion of which
expired on February 21, 2009. The warrants, with a value of $5,379
based on the Black-Scholes option pricing model, have been allocated to
additional paid-in-capital and the remaining balance of $17,842 has been
included in common stock.
During
the second quarter of fiscal 2007, the Company received gross proceeds of $694
related to the exercise of warrants and issued 2,086 shares of common stock and
1,000 additional investor warrants, which entitle the holder to acquire one
additional share of Adherex common stock at an exercise price of $0.40 per share
and which expire on February 21, 2010. The warrants exercised during
the period included 86 investor warrants with an exercise price of $0.40 per
share and 2,000 broker warrants with an exercise price of $0.33 per
unit. The warrants, with a value of $131 based on the Black-Scholes
option pricing model, have been allocated to additional paid-in capital and the
remaining balance of $563 has been included in common stock.
Special
warrants
From May
2000 through November 2000, the Company issued special warrants. Each
special warrant was sold for CAD$25.00 and entitled the holder thereof to
acquire, for no additional consideration, four shares of common stock of the
Company. The special warrants also included a price protection
adjustment determined by dividing CAD$32.50 by the initial public offering
(“IPO”) price of CAD$7.50.
During
the year ended June 30, 2000, 16 of 126 special warrants were issued, with the
balance of 110 issued in the year ended June 30, 2001. Upon
completion of the IPO, on June 5, 2001, these special warrants were converted to
547 shares of common stock, which included 42 shares of common stock issued
under the price protection adjustment.
Special
A warrants
During
October 2000, the Company issued Series A special warrants. Each
Series A special warrant was sold at CAD$6.25 and entitled the holder to
acquire, for no additional consideration, one share of common stock of the
Company. The Series A special warrants also included a price
protection adjustment determined by dividing CAD$8.125 by the IPO
price.
Upon
completion of the IPO on June 5, 2001, these Series A special warrants were
converted to 1,248 shares of common stock, which included 96 shares of common
stock issued under the price protection adjustment.
In
addition, each Series A special warrant included a share purchase warrant
entitling the holder to purchase an additional share of common stock at the IPO
price, which was also subject to the price protection adjustment, so that 1,248
additional common stock could have been sold at the IPO price. These
share purchase warrants expired unexercised on September 3, 2001.
Equity
rights
On
September 28, 1999, University Medical Discoveries Inc. (“UMDI”) invested $171
for equity of the Company. The form of this equity was to be the same
as the first class of securities to raise greater than $683 subsequent to the
date of the investment. The date of conversion was dependent on
certain milestones being met under a specific research project. On
August 24, 2000, the Company and UMDI agreed to convert UMDI’s $171 investment
into 62 shares of common stock of the Company.
Triathlon
settlement
During
fiscal 2000, other advances totaling $175 were settled by the issuance to
Triathlon Limited of 280 shares of common stock of the Company. The
number of shares issued was determined with reference to the fair value at the
time the advances were made.
Shire
BioChem Inc. agreement
On August
17, 2000, the Company entered into a subscription agreement and a license
agreement with Shire BioChem Inc. (“BioChem”). Under the
subscription agreement, BioChem purchased 88 shares of common stock of the
Company for $341. Pursuant to a price protection clause in the
agreement, an additional eight shares of common stock were issued on completion
of the Company’s IPO on June 5, 2001.
F-16
Acquisitions
On
November 20, 2002, the Company issued 8,032 shares of commons stock to acquire
all of the issued and outstanding securities of Oxiquant, a holding company
which held certain intellectual property rights, including rights to sodium
thiosulfate.
In
connection with the acquisition of the intellectual property of Oxiquant in
November 2002, the Company issued 461 warrants with an exercise price of
CAD$3.585 that expired unexercised on May 20, 2007 and 170 introduction warrants
with an exercise price of CAD$2.05 that expired unexercised on November 20,
2007.
As a
prerequisite of the Oxiquant transaction, Adherex licensed all of its
Cadherin-related intellectual property for non-cancer applications and
transferred $158 in cash to Cadherin Biomedical Inc. or CBI, a wholly-owned
subsidiary of Adherex at the time, in return for Class A Preferred Shares of
CBI. These CBI Class A Preferred Shares were then distributed to all
of the Adherex shareholders of record by way of special dividend, effecting a
“spin out” of CBI and the non-cancer assets from Adherex.
In order
to effect such a distribution under Section 42 of the Canada Business
Corporations Act (“CBCA”), the Company was legally required to reduce its stated
capital so that the aggregate amount of its liabilities and stated capital did
not exceed the realizable value of Adherex’s assets. Management
determined that the stated capital needed to be reduced by $9,489, in order to
comply with the requirements of Section 42 of the CBCA. The Company decreased
common stock and increased additional paid-in capital by $9,489.
In
February 2004, the Company and CBI became involved in litigation. On
December 3, 2004, the Company and CBI settled the litigation and the Company
agreed to acquire all of the issued and outstanding shares of CBI and reacquire
the non-cancer rights to the cadherin-based intellectual property. As
part of the agreement, the Company issued 644 common shares valued at $1,252,
net of transaction costs.
Convertible
note warrants
On June
23, 2003, the Company issued senior secured convertible notes with a face value
totaling $2,219. These notes were convertible into common stock and
warrants to acquire common stock of the Company upon completion of an equity
fund raising round. Investors also received warrants to purchase an
aggregate of 345 shares of common stock of the Company with an exercise price of
CAD$2.75 per share that expired unexercised on June 23, 2007. The
notes bore interest at an annual rate of eight percent compounded
semi-annually, and matured one year from issue but were renewable for one
additional year at the option of the Company. In connection with this
issuance, the Company issued broker warrants to purchase 101 shares of common
stock exercisable at a price of CAD$2.35 per share which expired unexercised on
June 23, 2005. As an inducement to consent to the issuance of the
December 2003 convertible notes, the exercise price of these warrants was
changed from CAD$2.75 per share to CAD$2.05 per share on December 3,
2003.
On
December 3, 2003, the Company issued additional senior secured convertible notes
with a face value totaling CAD$1,458. These notes were convertible
into common stock and warrants to acquire common stock of the Company upon
completion of an equity fund raising round. Also, investors received
warrants for 271 shares of common stock exercisable at a price of CAD$2.15 per
share which expired unexercised on December 3, 2007. The notes bore
interest at an annual rate of eight percent compounded semi-annually, and
matured one year from issue but were renewable for one additional year at the
option of the Company. The Company also issued broker warrants to
purchase 94 shares of common stock exercisable at a price of CAD$2.15 per share
which expired unexercised on December 3, 2005.
On
December 19, 2003, the Company completed an equity financing resulting in the
conversion of the June and the December notes into 2,813 shares of common stock
with a carrying value of $1,785 credited to common stock. In
addition, the Company issued 1,407 warrants to purchase common stock with an
exercise price of CAD$2.15 per share which expired unexercised on December 19,
2008.
F-17
Warrants
to Purchase Common Stock
At
December 31, 2009, the Company had the following warrants to purchase common
stock outstanding priced in U.S. dollars with a weighted average exercise price
of $0.43 and a weighted average remaining life of 0.16 years:
|
Warrant
Description
|
Number
Outstanding
at
December
31,
2009
|
Exercise
Price
In
U.S. Dollars
|
Expiration
Date
|
||||||
|
Investor
warrants
|
38,793 | $ | 0.40 |
February
20, 2010
|
|||||
|
Investor
warrants
|
2,326 | $ | 0.97 |
May
7, 2010
|
|||||
| 41,119 | |||||||||
The
38,793 warrants with an exercise price of $0.40 expired on February 20,
2010.
Stock
options
The
Compensation Committee of the Board of Directors administers the Company’s stock
option plan. The Compensation Committee designates eligible
participants to be included under the plan and approves the number of options to
be granted from time to time under the plan. A maximum of 20,000
options, not including the 700 options issued to the Chief Executive Officer and
specifically approved by the shareholders, are authorized for issuance under the
plan. The option exercise price for all options issued under the plan
is based on the fair value of the underlying shares on the date of
grant. All options vest within three years or less and are
exercisable for a period of seven years from the date of grant. The
stock option plan, as amended, allows the issuance of Canadian and U.S. dollar
grants. A summary of the stock option transactions, for both the
Canadian and U.S. dollar grants, through the year ended December 31, 2009 is
below.
The
following options granted under the stock option plan are exercisable in
Canadian dollars:
|
Exercise
Price in Canadian Dollars
|
||||||||||||
|
Number
of Options
|
Range
|
Weighted-
average
|
||||||||||
|
Outstanding
at December 31, 2007
|
2,939 | $ | 1.65 - 3.25 | $ | 2.18 | |||||||
|
Granted
|
- | - | - | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Cancelled
|
(166 | ) | 1.65 - 3.25 | 1.99 | ||||||||
|
Outstanding
at December 31, 2008
|
2,773 | 1.65 - 3.25 | 2.19 | |||||||||
|
Granted
|
- | - | - | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Cancelled
|
(150 | ) | 1.65 - 3.25 | 1.99 | ||||||||
|
Outstanding
at December 31, 2009
|
2,623 | $ | 1.65 - 3.25 | $ | 2.19 | |||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||
|
Range
of
Exercise
Price in Canadian Dollars
|
Number
Outstanding at December 31, 2009
|
Weighted-
average
Exercise
Price in Canadian Dollars
|
Weighted-average
Remaining
Contractual
Life
(years)
|
Number
Outstanding at
December
31, 2009
|
Weighted-average
Exercise
Price
|
Weighted-
average
Remaining Contractual Life (years)
|
||||||||||||||||||||
| $ | 1.63 - $1.75 | 848 | $ | 1.66 | 0.19 | 848 | $ | 1.66 | 0.19 | |||||||||||||||||
| $ | 1.76 - $2.00 | 191 | 1.98 | 1.92 | 191 | 1.98 | 1.92 | |||||||||||||||||||
| $ | 2.01 - $2.25 | 956 | 2.25 | 1.01 | 956 | 2.25 | 1.01 | |||||||||||||||||||
| $ | 2.26 - $3.00 | 526 | 2.80 | 1.36 | 526 | 2.80 | 1.36 | |||||||||||||||||||
| $ | 3.01 - $3.25 | 101 | 3.25 | 1.16 | 101 | 3.25 | 1.16 | |||||||||||||||||||
| 2,623 | $ | 2.19 | 1.15 | 2,623 | $ | 2.19 | 1.15 | |||||||||||||||||||
F-18
The
following options granted under the stock option plan are exercisable in U.S.
dollars:
|
Exercise
Price in U.S. Dollars
|
||||||||||||
|
Number
of Options
|
Range
|
Weighted-
average
|
||||||||||
|
Outstanding
at December 31, 2007
|
12,724 | $ | 0.28 - 1.35 | $ | 0.58 | |||||||
|
Granted
|
3,318 | 0.10 - 0.38 | 0.37 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Cancelled
|
(409 | ) | 0.28 - 1.20 | 0.50 | ||||||||
|
Outstanding
at December 31, 2008
|
15,633 | 0.10 - 1.35 | 0.54 | |||||||||
|
Granted
|
200 | 0.06 | 0.06 | |||||||||
|
Exercised
|
- | - | - | |||||||||
|
Cancelled
|
(2,632 | ) | 0.28 - 1.20 | 0.50 | ||||||||
|
Outstanding
at December 31, 2009
|
13,201 | $ | 0.10 - 1.35 | $ | 0.55 | |||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||
|
Range
of
Exercise
Price in U.S. Dollars
|
Number
Outstanding at
December
31,
2009
|
Weighted-
average
Exercise
Price
|
Weighted-average
Remaining
Contractual
Life
(years)
|
Number
Outstanding at
December
31,
2009
|
Weighted-
average
Exercise
Price
|
Weighted-average
Remaining
Contractual
Life
(years)
|
||||||||||||||||||||
| $ | 0.05 - $0.30 | 2,705 | $ | 0.26 | 4.02 | 2,683 | $ | 0.26 | 4.00 | |||||||||||||||||
| $ | 0.31 - $0.50 | 2,873 | 0.38 | 3.22 | 2,862 | 0.38 | 3.21 | |||||||||||||||||||
| $ | 0.51 - $0.75 | 6,368 | 0.63 | 3.21 | 6,235 | 0.63 | 3.18 | |||||||||||||||||||
| $ | 0.76 - $1.35 | 1,255 | 1.17 | 2.41 | 1,235 | 1.16 | 2.41 | |||||||||||||||||||
| 13,201 | $ | 0.55 | 3.35 | 13,014 | $ | 0.55 | 3.32 | |||||||||||||||||||
Stock
compensation expense for the fiscal years ended December 31, 2009, 2008 and 2007
was $365, $2,505 and $2,322, respectively. The weighted average fair
value per share of options granted during the fiscal years ended December 31,
2009, 2008 and 2007 was $0.06, $0.29 and $0.43, respectively. There
was no intrinsic value in stock options outstanding at December 31,
2009.
The fair
values of options granted in fiscal years ended December 31, 2008, 2007 and 2006
were estimated on the date the options were granted based on the Black-Scholes
option-pricing model, using the following weighted average
assumptions:
|
Year
Ended
December 31,
2009
|
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
||||||||||
|
Expected
dividend
|
0 | % | 0 | % | 0 | % | ||||||
|
Risk-free
interest rate
|
3.00 | % | 3.16 | % | 4.58 | % | ||||||
|
Expected
volatility
|
85.6 | % | 85.6 | % | 77.7 | % | ||||||
|
Expected
life
|
7
years
|
7
years
|
7
years
|
|||||||||
The
Company uses the historical volatility and adjusts for available relevant market
information pertaining to the Company’s share price.
F-19
6.
Research and Development
Investment
tax credits earned as a result of qualifying research and development
expenditures and government grants have been applied to reduce research and
development expenses as follows:
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Cumulative
From
September 3, 1996 to
December
31,
|
|||||||||||||
|
2009
|
2007
|
2006
|
2009
|
|||||||||||||
|
Research
and development
|
$ | 2,113 | $ | 10,366 | $ | 10,912 | $ | 66,182 | ||||||||
|
Investment
tax credits
|
- | - | - | (1,632 | ) | |||||||||||
|
National
Research Council grants
|
- | - | - | (197 | ) | |||||||||||
| $ | 2,113 | $ | 10,366 | $ | 10,912 | $ | 64,353 | |||||||||
7.
Capital and Operating Lease Commitments
The
Company has entered into operating lease agreements for the office and
laboratory facilities located in the United States. As of December
31, 2009, the minimum cash payments per the lease agreements are as
follows:
|
Year Ending
|
Amount
|
|||
|
December
31, 2010
|
$ | 100 | ||
|
December
31, 2011
|
- | |||
|
December
31, 2012
|
- | |||
|
December
31, 2013 and thereafter
|
- | |||
|
Total
minimum rent payments
|
$ | 100 | ||
The table
above includes a lease agreement for the Englert Facility which has been
subleased to a third party until September 30, 2010. Under the terms
of the operating lease for the facilities, the Company financed $80 of leasehold
improvements through the building’s owner. The amount is being
financed over the term of the lease which expires in September 2010 and bears an
annual interest rate of six percent. This obligation was assumed by
the sublessee when the Company subleased the facility to a third party; however,
should the sublessee default, the Company would become liable and assume all
obligations included in the Englert Facility lease agreement. The Company has
recorded $7 as a long term liability on the balance sheet related to the
security deposit recoverable by sublessee from the Company.
Rental
payments on operating leases are summarized in the table below:
|
Year
Ending
|
Rent
Amount
|
Interest
|
||||||
|
December
31, 2009
|
$ | 477 | $ | - | ||||
|
December
21, 2008
|
464 | - | ||||||
|
December
31, 2007
|
327 | - | ||||||
8.
Commitments and Contingencies
Oregon
Health & Science University agreement
The
Company has an exclusive license agreement with Oregon Health & Science
University (“OHSU”) for exclusive worldwide license rights to intellectual
property directed to thiol-based compounds, including STS and their use in
oncology. OHSU will receive certain milestone payments, a
2.5 percent royalty on net sales for licensed products and a
15 percent royalty on any consideration received from sublicensing of the
licensed technology. Milestone payment fees payable to OHSU include:
$50 upon completion of Phase I clinical trials; $200 upon completion of Phase II
clinical trials; $500 upon completion of Phase III clinical trials; and $250
upon first commercial sale for any licensed product. To date, no
milestone payments have been accrued or paid.
F-20
GlaxoSmithKline
On July
14, 2005, the Company entered into a development and license agreement with
GlaxoSmithKline (“GSK”). The agreement included the in-license by
Adherex of GSK’s oncology product, eniluracil, and an option for GSK to license
ADH-1. As part of the transaction, GSK invested $3,000 in the
Company's common stock. On October 11, 2006, the GSK option to
license ADH-1 expired unexercised. Under the terms of the agreement
relating to eniluracil, Adherex received an exclusive license to develop
eniluracil for all indications and GSK retained options to buy-back and assume
development of the compound at various points in time. On March 1,
2007, the GSK agreement was amended and the Company purchased all of GSK’s
remaining buy-back options for a fee of $1,000. The Company is now
required to pay GSK development and sales milestones and double-digit
royalties. Specifically, if the Company files a New Drug Application
(“NDA”) with the Food and Drug Administration (“FDA”), the Company may be
required to pay development milestones of $5,000 to GSK. Depending
upon whether the NDA is approved by the FDA and whether eniluracil becomes a
commercial success, the Company may be required to pay up to an additional
$70,000 in development and sales milestones for the initially approved
indication, plus 14-16% royalties based on annual net sales. If the
Company pursues other indications, it may be required to pay up to an additional
$15,000 to GSK per FDA-approved indication.
McGill
Agreement
On
February 26, 2001, the Company entered into a general collaboration agreement
with McGill that grants the Company a 27-year exclusive, worldwide license to
develop, use and market certain cell adhesion technology and
compounds. The license agreement provides for the Company to pay
future royalties of two percent of gross revenues from the use of the
technology and compounds. The agreement also provided for the Company
to make payments as follows:
|
·
|
CAD$100
if the Company has not filed an investigational new drug (“IND”)
application, or similar application with Canadian, US, European or a
recognized agency, relating to the licensed product prior to September 23,
2002. On August 1, 2002, McGill acknowledged that work
completed on the clinical development of ADH-1 was sufficient to meet the
requirements of the September 23, 2002 milestone and thus no payment was
required.
|
|
·
|
CAD$100
if the Company has not commenced Phase II clinical trials in a recognized
jurisdiction on any licensed product prior to September 23,
2004. On September 20, 2004, McGill acknowledged that the
Company had met obligations with respect to the September 23, 2004
milestone and thus no payment was
required.
|
|
·
|
CAD$200
if the Company has not commenced Phase III clinical trials in a recognized
jurisdiction on any licensed product prior to September 23, 2006, which
was paid in fiscal year 2007.
|
In
addition, the Company is required to fund mutually agreed upon research at
McGill over a period of ten years totaling CAD$3,300. Annual funding
commenced in 2001 with a total payment of CAD$200 and increases annually by
10 percent through to the tenth year of the agreement when annual funding
reaches CAD$500. The additional research commitment can be deferred
in any year if it exceeds five percent of the Company’s cash and cash
equivalents and at December 31, 2009, there have been no deferrals with respect
to this provision. The Company receives certain intellectual property
rights resulting from this research.
The
agreement with McGill was terminated on November 19, 2009.
9.
Income Taxes
The
Company operates in several tax jurisdictions. Its income is subject
to varying rates of tax and losses incurred in one jurisdiction cannot be used
to offset income taxes payable in another. A reconciliation of the
combined Canadian federal and provincial income tax rate with the Company’s
effective tax rate is as follows:
F-21
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
Year
Ended
December
31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Domestic
loss
|
(1,804 | ) | $ | (9,432 | ) | $ | (9,104 | ) | ||||
|
Foreign
loss
|
(1,208 | ) | (4,168 | ) | (4,253 | ) | ||||||
|
Loss
before income taxes
|
(3,012 | ) | (13,600 | ) | (13,357 | ) | ||||||
|
Expected
statutory rate (recovery)
|
30.9 | % | 30.90 | % | 32.02 | % | ||||||
|
Expected
provision for (recovery of) income tax
|
(931 | ) | (4,203 | ) | (4,277 | ) | ||||||
|
Permanent
differences
|
113 | 779 | 746 | |||||||||
|
Change
in valuation allowance
|
(3,290 | ) | 3,171 | 3,813 | ||||||||
|
Non-refundable
investment tax credits
|
(573 | ) | (22 | ) | (22 | ) | ||||||
|
Share
issue costs and effect of change of carryforwards
|
- | (90 | ) | (352 | ) | |||||||
|
Effect
of foreign exchange rate differences
|
(876 | ) | (143 | ) | (637 | ) | ||||||
|
Expiry
of loss
|
1,111 | - | - | |||||||||
|
Effect
of change in future enacted tax rates
|
- | 886 | 916 | |||||||||
|
Effect
of tax rate changes and other
|
4,446 | (378 | ) | (187 | ) | |||||||
|
Provision
for income taxes
|
$ | - | $ | - | $ | - | ||||||
The
Canadian statutory come tax rate of 30.9 percent is comprised of federal
income tax at approximately 19 percent and provincial income tax at
approximately 11.8 percent.
The
primary temporary differences which gave rise to future income taxes (recovery)
at December 31, 2009, December 31, 2008 and December 31, 2007 are as
follows:
|
December
31,
2009
|
December
31,
2008
|
December
31,
2007
|
||||||||||
|
Future
tax assets:
|
||||||||||||
|
SR&ED
expenditures
|
2,117 | $ | 2,062 | $ | 1,931 | |||||||
|
Income
tax loss carryforwards
|
17,651 | 21,307 | 19,243 | |||||||||
|
Non-refundable
investment tax credits
|
1,633 | 1,116 | 1,090 | |||||||||
|
Share
issue costs
|
187 | 298 | 425 | |||||||||
|
Accrued
expenses
|
27 | 137 | 153 | |||||||||
|
Fixed
and intangible assets
|
832 | 818 | 1,058 | |||||||||
|
Harmonization
credit
|
287 | - | - | |||||||||
| 22,448 | 25,738 | 23,900 | ||||||||||
|
Less:
valuation allowance
|
(22,448 | ) | (25,738 | ) | (23,900 | ) | ||||||
|
Net
future tax assets
|
$ | - | $ | - | $ | - | ||||||
There are
no current income taxes owed, nor are any income taxes expected to be owed in
the near term.
At
December 31, 2009 the Company has unclaimed Scientific Research and Experimental
Development ("SR&ED") expenditures, income tax loss carry forwards and
non-refundable investment tax credits. The unclaimed amounts and
their expiry dates are as listed below:
F-22
|
Federal
|
Province/
State
|
|||||||
|
SR&ED
expenditures (no expiry)
|
$ | 7,872 | $ | 1,580 | ||||
|
Income
tax loss carryforwards (expiry date):
|
||||||||
|
2014
|
5,786 | 6,537 | ||||||
|
2015
|
10,928 | 11,680 | ||||||
|
2021
|
26 | - | ||||||
|
2022
|
233 | - | ||||||
|
2023
|
133 | - | ||||||
|
2024
|
1,536 | 1,455 | ||||||
|
2025
|
4,795 | 4,768 | ||||||
|
2026
|
19,982 | 19,970 | ||||||
|
2027
|
8,136 | 8,128 | ||||||
|
2028
|
10,509 | 10,492 | ||||||
|
2029
|
3,553 | 3,552 | ||||||
|
Investment
tax credits (expiry date):
|
||||||||
|
2018
|
9 | - | ||||||
|
2019
|
7 | - | ||||||
|
2020
|
91 | - | ||||||
|
2021
|
52 | - | ||||||
|
2022
|
521 | - | ||||||
|
2023
|
379 | - | ||||||
|
2024
|
169 | - | ||||||
|
2025
|
189 | - | ||||||
|
2026
|
82 | - | ||||||
|
2027
|
86 | - | ||||||
|
2028
|
47 | - | ||||||
|
2029
|
- | - | ||||||
10.
Canadian Accounting Principles
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States in U.S.
dollars. These principles differ, as they affect the Company, at
December 31, 2009 and December 31, 2008 and for the fiscal years ended December
31, 2009, December 31, 2008, and December 31, 2007 in the following material
respects from Canadian generally accepted accounting
principles. There are no differences in reported cash flow for the
periods presented.
F-23
|
Consolidated Balance Sheets - Canadian
GAAP:
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
$ | 833 | $ | 5,639 | ||||
|
Leasehold
improvements
|
- | 285 | ||||||
|
Capital
assets
|
- | 136 | ||||||
|
Total
assets
|
$ | 833 | $ | 6,060 | ||||
| a | ) | b | ) | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
$ | 420 | $ | 2,430 | ||||
|
Other
long-term liabilities
|
7 | 7 | ||||||
|
Deferred
lease inducement
|
- | 570 | ||||||
|
Total
liabilities
|
427 | 3,007 | ||||||
|
Stockholders’
equity
|
||||||||
|
Common
stock
|
64,929 | 64,891 | ||||||
|
Contributed
surplus
|
35,225 | 37,088 | ||||||
|
Accumulated
other comprehensive income
|
1,243 | 5,850 | ||||||
|
Deficit
accumulated during development stage
|
(100,991 | ) | (104,776 | ) | ||||
|
Total
stockholders’ equity
|
406 | 3,053 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 833 | $ | 6,060 | ||||
Consolidated Statements of
Operations – Canadian GAAP:
|
Year
Ended
December
31, 2009
|
Year
Ended
December
31, 2008
|
Year
Ended
December
31, 2007
|
||||||||||
|
Net
loss in accordance with U.S. GAAP
|
$ | (3,012 | ) | $ | (13,600 | ) | $ | (13,357 | ) | |||
|
Adjustments
to reconcile to Canadian GAAP:
|
||||||||||||
|
Acquired
intellectual property rights amortization (2)
|
- | (1,664 | ) | (1,808 | ) | |||||||
|
Loss
on impairment of intellectual property (2)
|
- | (7,220 | ) | - | ||||||||
|
Future
income taxes (2)
|
- | 2,474 | 1,165 | |||||||||
|
License
fee paid (2)
|
- | - | 1,000 | |||||||||
|
License
fee amortization (2)
|
- | (144 | ) | (120 | ) | |||||||
|
Net
loss and total comprehensive loss
|
$ | (3,012 | ) | $ | (20,154 | ) | $ | (13,120 | ) | |||
|
Net
loss per share of common stock, basic and diluted
|
$ | (0.02 | ) | $ | (0.16 | ) | $ | (0.11 | ) | |||
|
Weighted-average
number of shares of common stock outstanding, basic and
diluted
|
128,227 | 128,227 | 116,571 | |||||||||
F-24
Notes to the Consolidated
Financial Statements - Canadian GAAP:
1. Summary of significant
accounting policies
Current
accounting pronouncements
In
January 2009, the Emerging Issues Committee of the CICA issued Abstract No. 173,
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
(“EIC-173”). EIC-173 requires an entity to take into account its own
credit risk and that of the relevant counterparties when determining the fair
value of financial assets and financial liabilities, including derivative
instruments. This EIC, which was effective for the Company on January
1, 2009 had no impact on the financial position or results of
operations.
In
February 2008, the CICA issued Handbook Section 3064, “Goodwill and intangible
assets”, replacing Handbook Sections 3062, “Goodwill and Other Intangible
Assets” and 3450, “Research and Development Costs”. It established
standards for the recognition, measurement, presentation and disclosure of
goodwill and intangibles by profit-oriented enterprises. The new
section was applicable to the Company’s financial statements beginning January
1, 2009 and did not have an impact upon adoption.
In June
2009, the CICA amended Handbook Section 3862, Financial Instruments –
Disclosures, to enhance disclosure requirements about the liquidity risk of
financial instruments, to include new disclosure requirements about the fair
value measurements of financial instruments, and to include implementation
guidance about fair value measurement disclosures to assist in applying the
Handbook Section. Handbook Section 3862 now requires that all
financial instruments measured at fair value be categorized into one of three
hierarchy levels, described below, for disclosure purposes. Each
level is based on the transparency of the inputs used to measure the fair values
of assets and liabilities:
| - | Level 1 – inputs are based on unadjusted quoted prices in active markets for identical assets and liabilities; |
| - | Level 2 – inputs other than quoted prices in Level 1 that are observable for the asset or liability, either directly or indirectly; and |
| - | Level 3 – inputs for the asset or liability that are not based on observable market data. |
Determination
of fair value and the resulting hierarchy requires the use of observable market
data whenever available. The classification of a financial instrument in the
hierarchy is based upon the lowest level of input that is significant to the
measurement of fair value. The amendments to Handbook Section 3862
had no impact on the Company’s financial statements.
2. Acquired
intellectual property rights
Under
U.S. GAAP, the cost of acquired technology is charged to expense as in-process
research and development ("IPRD") when acquired if the feasibility of such
technology has not been established and no future alternative use
exists. Canadian GAAP requires the capitalization and amortization of
the costs of acquired technology. This difference decreases the net
loss from operations under Canadian GAAP in the year the IPRD is acquired and
increases the net loss under Canadian GAAP in subsequent periods as a result of
amortization expense.
Under
Canadian GAAP, a future tax liability is also recorded upon acquisition of the
technology to reflect the tax effect of the difference between the carrying
amount of the technology in the financial statements and the tax basis of these
assets, which is nil. As the intellectual property is amortized, the
future tax liability is also reduced to reflect the change in this temporary
difference between the tax and accounting values of the assets. Under
U.S. GAAP, because the technology is expensed immediately as IPRD, there is no
difference between the tax basis and the financial statement carrying value of
the assets and therefore no future tax liability exists.
On
November 20, 2002 Adherex acquired certain intellectual property through the
acquisition of Oxiquant, a holding company with no active
business. The intellectual property was valued at CAD$31,162
reflecting net liabilities assumed of CAD$401 and provision for future income
tax liability of CAD$11,390, resulting in a total consideration of
CAD$19,371. The assets consisted primarily of three product
candidates including; mesna, N-Acetylcysteine (“NAC”) and Sodium Thiosulfate
(“STS”). The acquired intellectual property was deemed to have a ten
year useful life, amortized on a straight-line basis.
F-25
At
December 31, 2005, the Company determined the carrying value of the
intellectual property relating to mesna, which had a book value of $3,539, and a
related future income tax asset of $1,294, was fully impaired and written off
based on the Company’s lack of any further developmental plans. This decision
was based on the addition of eniluracil to the Company’s product portfolio,
along with the financial resources additionally devoted to the development of
ADH-1. The loss on impairment is calculated as the amount by which the carrying
amount of the asset exceeded its discounted cash flows.
At
December 31, 2006, the Company determined the carrying value of the
intellectual property relating to NAC, which had a book value of $2,021, and a
related future income tax benefit of $739, was fully impaired and written off
because the Company had no plans for further development of NAC. The loss on
impairment is calculated as the amount by which the carrying amount of the asset
exceeded its undiscounted cash flows.
On March
1, 2007, the Company purchased all of GSK’s remaining options to buy back
eniluracil under the Company’s development and license agreement for a cash fee
of $1,000. Under U.S. GAAP, the cost of the license fee paid to GSK
was charged to expense as the feasibility of such technology had not been
established and no future alternative use existed. Canadian GAAP
requires the capitalization and amortization of the costs of such license
fees. The license fee was being amortized over the estimated life of
seven years on a straight-line basis.
During
the year ended December 31, 2007, the Company reduced the future tax liability
by $660 which was the amortization expense for the intellectual
property. In addition, at December 31, 2007, the Company reduced the
future tax liability by $505 to adjust for lower tax rates projected over the
remaining estimated life of the intellectual property.
At
December 31, 2008, given the disruption and uncertainty in the global
economy, the significant decrease in the Company’s stock price, lack of
financial resources, and the continued projection of negative cash flows, all of
which made the Company’s ability to attract future capital difficult, it was
determined that the appropriate triggers had been reached for an impairment test
of all intangible assets. The Company performed asset recoverability tests,
using undiscounted cash flows based on internal projections for revenues and
expenses. The Company determined the carrying value of the intellectual property
relating to both STS and eniluracil, which had a combined book value of $7,220,
and a related future income tax liability of $1,970, exceeded the fair value of
nil, and the entire carrying value was written off. While the Company
impaired the intellectual property in the financial statements, there has been
no material change in the underlying science associated with these compounds and
therefore the Company will continue the current ongoing studies relating to STS
and topical eniluracil.
F-26
TABLE OF CONTENTS
Part IItem 1. Business 1Item 1A. Risk Factors 7Item 1B. Unresolved Staff Comments 15Item 2. Properties 15Item 3. Legal Proceedings 15Item 4. Reserved 15Part IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuers Purchases Of Equity Securities 16Item 6. Selected Financial Data 21Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations 21Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28Item 8. Financial Statements and Supplementary Data 29Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29Item 9A. Controls and Procedures 29Item 9B. Other Information 30Part IIIItem 10. Directors, Executives Officers and Corporate Governance 31Item 11. Executive Compensation 32Item 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters 32Item 13. Certain Relationships and Related Transactions, and Director Independence 32Item 14. Principal Accounting Fees and Services 32Part IVItem 15. Exhibits and Financial Statement Schedules 33Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuers Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholders MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules