FENCF 10-Q Quarterly Report March 31, 2011

FENNEC PHARMACEUTICALS INC.

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10-Q 1 v222254_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____ to ____

Commission File Number: 001-32295

ADHEREX TECHNOLOGIES INC.

(Exact Name of Registrant as Specified in Its Charter)

Canada (State or Other Jurisdiction of Incorporation or Organization	20-0442384 (I.R.S. Employer Identification No.)

PO Box 136285, 68 TW Alexander Drive Research Triangle Park, North Carolina (Address of Principal Executive Offices)	27709 (Zip Code)

Registrant's Telephone Number, Including Area Code: (919) 636-4530

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 x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No 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.

Large Accelerated Filer	¨		Accelerated Filer	¨
Non-Accelerated Filer	¨	(Do not check if smaller reporting company)	Smaller reporting company	x

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES ¨ NO x

As of May 13, 2011, there were 452,852,631 shares of Adherex Technologies Inc. common stock outstanding.

TABLE OF CONTENTS

	Page

PART I: FINANCIAL INFORMATION	3

Item 1. Financial Statements (unaudited)	3

Consolidated Balance Sheets – March 31, 2011 and December 31, 2010	3

Unaudited Interim -Consolidated Statements of Operations - Three Months Ended March 31, 2011 and 2010	4

Unaudited Interim Consolidated Statements of Cash Flows - Three Months Ended March 31, 2011 and 2010	5

Unaudited Interim Consolidated Statements of Stockholders' Equity – For the Period Ended September 3, 1996 to March 31, 2011	6

Notes to Unaudited Consolidated Financial Statements	9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3. Quantitative and Qualitative Disclosures about Market Risk	20

Item 4. Controls and Procedures	20

PART II: OTHER INFORMATION	22

Item 1. Legal Proceedings	22

Item 1A. Risk Factors	22

Item 2. Unregistered Sales of Equity Securities	23

Item 3. Defaults Upon Senior Securities	23

Item 4. Removed and Reserved	23

Item 5. Other Information	23

Item 6. Exhibits	24

Signatures	25

PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Balance Sheets

(U.S. Dollars and shares in thousands, except per share amounts)

	March 31, 2011			December 31, 2010

Assets

Current assets:
Cash and cash equivalents	$	5,023		$	5,947
Subscription receivable (see Note 5)		2,548			-
Prepaid expense		29			38
Other current Assets		37			8
Total assets	$	7,637		$	5,993

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable	$	442		$	272
Accrued liabilities		114			195
Derivative warrant liability		7,366			10,450

Total liabilities		7,922			10,917

Commitments (see Note 8)

Stockholders' equity:
Common stock, no par value; unlimited shares authorized; 452,852 Shares issued and outstanding (2010-368,293)		65,952			64,929
Additional paid-in capital		37,916			37,717
Deficit accumulated during development stage		(105,396	)		(108,813	)
Accumulated other comprehensive income		1,243			1,243
Total stockholders’ equity		(285	)		(4,924	)
Total liabilities and stockholders’ equity	$	7,637		$	5,993

(The accompanying notes are an integral part of these interim consolidated financial statements)

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Operations

(U.S. Dollars and shares in thousands, except per share amounts)

	Three Months Ended						Cumulative From September 3, 1996 to
	March 31, 2011			March 31, 2010			March 31, 2011

Revenue	$	-		$	-		$	-

Operating expenses:
Research and development		315			163			65,913
Gain on Deferred lease inducements		-			-			(497	)
Impairment of Capital Assets		-			-			386
Acquired in-process research and development		-			-			13,094
General and administrative		706			203			29,311

Loss from operations		(1,021	)		(366	)		(108,207	)

Other income (expense):

Settlement of Cadherin Biomedical Inc. litigation		-			-			(1,283	)
Interest expense		-			-			(19	)
Unrealized/realized gain on derivatives		5,680			-			2,429
Other Income		-			-			254
Interest income and other		10			-			2,839
Total other income, net		5,690			-			4,220

Net income (loss) and comprehensive income (loss)	$	4,669		$	(366	)	$	(103,987	)

Basic and diluted net income (loss) per common share	$	0.01		$	(0.00	)
Weighted-average number of common shares outstanding, basic		370,173			128,227
Weighted-average number of common shares outstanding, diluted		450,033			128.227

(The accompanying notes are an integral part of these consolidated financial statements)

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim Consolidated Statements of Cash Flows

(U.S. Dollars and shares in thousands, except per share amounts)

	Three Months Ended						Cumulative From September 3, 1996 to
	March 31, 2011			March 31, 2010			March 31, 2011

Cash flows from (used in):
Operating activities:
Net income (loss)	$	4,669		$	(366	)	$	(103,987	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		-			-			1,404
Non-cash Cadherin Biomedical Inc. litigation expense		-			-			1,187
Unrealized/realized gain on derivative warrants		(5,680	)		-			(2,429	)
Unrealized foreign exchange loss		10			-			55
Amortization of deferred lease inducements		-			-			(412	)
Loss on impairment of capital assets		-			-			386
Non-cash severance expense		-			-			168
Stock options issued to consultants		-			-			775
Stock options issued to employees		-			-			9,964
Acquired in-process research and development		-			-			13,094
Changes in operating assets and liabilities		(47	)		29			(70	)
Net cash used in operating activities		(1,048	)		(337	)		(79,865	)

Investing activities:
Purchase of capital assets		-			-			(1,440	)
Disposal of capital assets		-			-			115
Release of restricted cash		-			-			190
Restricted cash		-			-			(209	)
Proceeds from sale of assets		-			-			24
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 used in investing activities		-			-			(1,483	)

Financing activities:
Conversion of long-term debt to equity		-			-			68
Long-term debt repayments		-			-			(65	)
Capital lease repayments		-			-			(8	)
Issuance of common stock, net of issue costs		-			-			83,877
Registration expense		-			-			(465	)
Financing expenses		-			-			(544	)
Proceeds from convertible note		-			-			3,017
Other liability repayments		-			-			(87	)
Security deposits		-			-			35
Proceeds from exercise of stock options		-			-			51
Net cash provided in financing activities		-			-			85,879

Effect of exchange rate changes on cash and cash equivalents		124			-			492
Net change in cash and cash equivalents		(924	)		(337	)		-
Cash and cash equivalents - Beginning of period		5,947			685			-
Cash and cash equivalents - End of period	$	5,023		$	348		$	5,023

(The accompanying notes are an integral part of these interim consolidated financial statements)

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim 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 interim consolidated financial statements)

(continued on next page)

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim 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 part of these interim consolidated financial statements)

(continued on next page)

Adherex Technologies Inc.

(a development stage company)

Unaudited Interim 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 for quarter		-		-			-		-		-		(3,012	)		(3,012	)
Balance at December 31, 2009		128,227		64,929			-		35,225		1,243		(100,991	)		407
Stock options issued to consultants		-		-			-		53		-		-			53
Stock options issued to employees		-		-			-		2,439		-		-			2,439
April financing		240,066		-			-		-		-		-			-
Net loss		-		-			-		-		-		(7,823	)		(7,823	)
Balance at December 31, 2010		368,293		64,929			-		37,717		1,243		(108,813	)		(4,924	)
Rights offering, net of issuance of $300		84,559		1,023			-		199		-		(1,252	)		(30	)
Net income for quarter		-		-			-		-		-		4,669			4,669
Balance at March 31, 2011		452,852	$	65,952		$	-	$	37,916	$	1,243	$	(105,396	)	$	(285	)

(The accompanying notes are an integral part of these interim consolidated financial statements)

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)

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 focused on cancer therapeutics.

These unaudited interim 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 Adherex 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 financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company is a development stage company and during the three months ended March 31, 2011, generated a net income of $4,669 substantially as a result of an unrealized gain on a derivative. Cash used in operations in the quarter ended March 31, 2011 was $1,048. At March 31, 2011, the Company had an accumulated deficit of $105,396 and had experienced negative cash flows from operations since inception in the amount of $79,865. These circumstances lend significant 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 will need to obtain additional funding in the future in order to finance our business strategy, operations and growth through the issuance of equity, debt or collaboration. If we fail to arrange for sufficient capital on a timely basis, we may be required to curtail our business activities until we can obtain adequate financing.

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

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes filed with the Securities and Exchange Commission (“SEC”) in the Company's Annual Report on Form 10-K for the year ended December 31, 2010. The Company's accounting policies are consistent with those presented in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. These unaudited interim consolidated financial statements have been prepared in U.S. dollars.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in these interim consolidated financial statements. Actual results could differ from these estimates. In the opinion of management, these unaudited interim consolidated financial statements include all normal and recurring adjustments, considered necessary for the fair presentation of the Company’s financial position at March 31, 2011, and to state fairly the results for the periods presented.

Cash and cash equivalents

Cash and 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 March 31, 2011, the Company had $4,699 in money market investments, which typically have minimal risk, and $324 in cash of which $292 was in Canadian dollars. The financial markets have been volatile resulting in concerns regarding the recoverability of money market investments. The Company did not experience any loss or write down of its money market investments for the three-month period ended March 31, 2011 and 2010, respectively.

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)

3.	Recent Accounting Pronouncements

The Company reviewed recent accounting pronouncements and does not expect the adoption of any guidance to have an impact on the Company's consolidated financial position and results of operations.

4.	Derivative Instruments

Effective January 1, 2009, the Company adopted ASC Topic 815-40, "Derivatives and Hedging" (ASC 815-40). One of the conclusions reached under ASC 815-40 was 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 conclusion reached under ASC 815-40 clarified the accounting treatment for these and certain other financial instruments. ASC 815-40 specifies that a contract would not be treated as a derivative if it met the following conditions: (a) indexed to the Company's own stock; and (b) classified in shareholders' equity in the Company's statement of financial position. The Company's outstanding warrants denominated in Canadian dollars are not considered to be indexed to its own stock because the exercise price is denominated in Canadian dollars and the Company's functional currency is United States dollars. Therefore, these warrants have been treated as derivative financial instruments and recorded at their fair value as a liability. All other outstanding convertible instruments are considered to be indexed to the Company's stock, because their exercise price is denominated in the same currency as the Company's functional currency, and are included in shareholders' equity.

The Company's only derivative instruments are 324,625 warrants, the exercise price for which are denominated in a currency other than the Company's functional currency, as follows:

240,066 warrants exercisable at CAD$0.08 that expire on April 30, 2015; and

84,559 warrants exercisable at CAD$0.08 that expire on March 29, 2016.

These warrants have been recorded at their fair value at issuance and will continue to be recorded at fair value at each subsequent balance sheet date. Any change in value between reporting periods will be recorded as other income (expense). These warrants will continue to be reported as a liability until such time as they are exercised or expire. The fair value of these warrants is estimated using the Black-Scholes option-pricing model.

As of March 31, 2011, the fair value of the warrants expiring April 30, 2015 was determined to be $5,383. The fair value as at December 31, 2010 was $10,450. Accordingly the Company recorded an unrealized gain of $5,067 on the interim consolidated statements of operations for the three months ended March 31, 2011, related to the change in the fair value of those warrants. As of March 31, 2011, the fair value of the warrants expiring March 29, 2016 was determined to be $1,983. Total net proceeds committed for the rights offering issue on March 29, 2011 was $2,566. Accordingly the Company recorded an increase in Common stock of $583. There is no cash flow impact for these derivatives until the warrants are exercised. If these warrants are exercised, the Company will receive the proceeds from the exercise at the current exchange rate at the time of exercise.

In February 2011, the Company filed a final short form prospectus for a rights offering open to all shareholders on a dilution-free, equal participation basis. In accordance with the terms of the rights offering, each shareholder of record on March 2, 2011 received one right for each common share held. Every right held entitled the holder thereof to purchase for Cdn $0.03 or USD $0.0303 at the shareholder’s option a unit consisting of one common share along with one warrant to purchase a common share of the Company at Cdn$0.08. The rights traded on the TSX and on the Pink Sheets and expired on March 29, 2011.

Under the terms of the rights offering, the monetary amount to be received by the Company upon the exercise of rights was not fixed. Each holder of rights could elect either the $0.03 CDN or USD$0.0303 subscription price. Furthermore, the Cdn$0.03 subscription price is not denominated in the Company’s U.S. dollar functional currency. Therefore, the pro rata distribution of rights to the Company’s shareholders was accounted for as a derivative financial liability measured at fair value.

On March 2, 2011, rights began trading. On this date, the Company recognized a derivative financial liability of $1.25 million associated with the Company’s legal obligation to carry out the rights offering. The deficit was adjusted by a corresponding amount. The derivative financial liability was remeasured at fair value with changes being recognized in earnings until its expiry. During the quarter ended March 31, 2011, the Company recognized a realized derivative gain of $0.613 million. The rights expired on March 29, 2011.

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)

Upon the closing of the rights offering, the Company issued a total of 84,559 units for total net proceeds of $2,566. Accordingly the Company recorded an increase in Common stock of $440. Expenses and fees relating to the rights offering totaled approximately $300.

5.	Stockholders' Equity

Warrants to purchase common stock

At March 31, 2011, the Company had the following warrants outstanding to purchase common stock priced in Canadian dollars with a weighted average exercise price of $0.08 and a weighted average remaining life of 4.2 years:

Warrant Description	Number Outstanding at March 31 2010		Exercise Price In CAD Dollars		Expiration Date
Investor warrants (1)		240,066	$	0.08	April 30, 2015
Investor warrants (2)		84,559	$	0.08	March 29, 2016
		324,625

(1) On April 30, 2010, the Company announced that it had completed a first closing of a non-brokered private placement (“Private Placement”) of 240,066 units, at a price of $0.03 per unit for net proceeds of CAD$7,200. Each unit consists of one common share and one common share purchase warrant (a “Warrant”). Each Warrant entitles the holder thereof to purchase one common share of the Company at a purchase price of CAD$0.08 per share for a period of five years from the issue date.

(2) On March 29, 2011, the Company announced that it had completed a non-brokered rights offering of 84,559 units, at a price of $0.03 per unit for total net proceeds of $2,566 . Each unit consists of one common share and one common share purchase warrant (a “Warrant”). Each Warrant entitles the holder thereof to purchase one common share of the Company at a purchase price of CAD$0.08 per share for a period of five years from the issue date.

Stock option plan

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. On June 24, 2010, at the Company’s annual meeting, shareholders approved an amendment to the Company’s Stock Option Plan (the “Plan Maximum Amendment”). The Plan Maximum Amendment relates to changing the maximum number of shares of common stock issuable under the Stock Option Plan from a fixed number of 20,000 to the number of shares that represent twenty five percent (25%) of the total number of all issued and outstanding shares of common stock from time to time. Based upon the current shares outstanding, a maximum of 113,213 options 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. During the three-month periods ended March 31, 2011 and 2010, the Company recognized total stock-based compensation expense of $0 and $0, respectively.

Valuation assumptions

There were no options granted in the three month period ended March 31, 2011 and the three-month period ended March 31, 2010.

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)

Stock option activity

There was no stock option activity for the three-month period ended March 31, 2011 for stock options denominated in Canadian and U.S dollars:

7.	Fair Value Measurements

The Company has adopted Fair Value Measurements and Disclosure Topic of the FASB. This Topic applies to certain assets and liabilities that are being measured and reported on a fair value basis. The Fair Value Measurements Topic defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosure about fair value measurements. This Topic enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The Topic requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

Fair Value Measurement at March 31, 2011

Quoted Price

Significant

in Active Markets

Other

Significant

for Identical

Observable

Unobservable

Instruments

Inputs

Level 1

Level 2

Level 3

Total

Assets

Money market investment

4,669

Liabilities

Derivative warrant liability

7,366

The Company's financial instruments include subscription receivable, accounts payable and accrued liabilities and derivative warrant instruments. Due to the short-term maturity of subscription receivable, accounts payable and accrued liabilities, the carrying value of these instruments is a reasonable estimate of their fair value. Derivative warrant liability instrument is carried at fair value and calculated using Black-Scholes option pricing model using the following weighted average assumptions; expected dividend 0%; risk-free interest rate of 2.24%; expected volatility of 132.3% and 125.49% and a 4.1 or 5 year expected life, respectively.

Adherex Technologies Inc.

(a development stage company)

Notes to Unaudited Interim Consolidated Financial Statements (Continued)

(U.S. dollars and shares in thousands, except per share information)

8. Commitments

The Company had no material commitments for capital expenses as of March 31, 2011. The following table represents our contractual obligations and commitments at March 31, 2011 (in thousands of U.S. dollars):

			1-3
	Less than 1 year		years		Total
Property Lease (1)		2		-		2
OCT Clinical Service Agreement(2)		114		435		549
Database Integration Service Agreement (3)		130		146		276
Drug purchase commitments (4)		60		25		85
Total	$	306	$	606	$	912

(1)	Our office lease in Chapel Hill, NC expired January 15, 2011. In February 2011, we entered into a lease for a new office facility in Research Triangle Park, North Carolina. Amounts shown assume the maximum amounts due under the leases.

(2)

Under the service agreement with OCT Group LLC entered in August 2010, we are required to make several payments over the course of our Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: regulatory approval of trial, enrollment of patients and the completion of therapy of patients. The Company amended the agreement in April 2011 for the addition of additional sites for OCT to service during the Phase II clinical trial.

(3)

Under the service agreement with Database Integrations entered in December 2010, we are required to make several payments over the course of our Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: EDC live, time and completion of enrollment.

(4)	Commitments to our third party manufacturing vendors that supply drug substance primarily for our clinical studies.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT

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

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

Overview

Adherex Technologies, Inc. is a biopharmaceutical company focused on cancer therapeutics. We incorporated under the Canada Business Corporations Act and we have three wholly-owned subsidiaries: Oxiquant, Inc. and Adherex, Inc., both Delaware corporations, and Cadherin Biomedical Inc., a Canadian company.

On July 7, 2009, we announced that we intended to focus our remaining financial resources on the development of oral eniluracil. We will focus our resources on the development of a redesigned study combining oral eniluracil, 5-fluorouracil, or 5-FU, and leucovorin targeting anti-cancer indications. Additionally, throughout the remainder of 2009, we conducted a strategic review of ADH-1 and STS. Our evaluation of ADH-1 resulted in the termination of our license agreement with McGill University. We continue to hold various ADH-1 and small molecule patents that are property of Adherex. We are also supporting an investigator led Phase I study that will combine ADH-1 with gemcitabine. With regards to STS, we continue patient enrollment of our Phase III studies for both the International Childhood Liver Tumour Strategy Group, known as SIOPEL, and the Children's Oncology Group, or COG.

On April 30, 2010, we completed a CAD$7.2 million private placement, net of issue costs, the proceeds of which we intend to use to fund our planned clinical development of eniluracil and our remaining programs.

On March 29, 2011 we completed a rights offering to our shareholders (the "Rights Offering". Pursuant to the terms of the Rights Offering, we distributed rights to subscribe for up to 425,000 units (including an over subscription) at a price of CAD$0.03 per unit (for gross proceeds of up to CAD$12,750), to our shareholders on the basis of one right per each share of common stock held by such shareholder on March 2, 2011, the record date for the Rights Offering. On March 29, 2011, the expiration date for the Rights Offering, we had received subscriptions for an aggregate of 84,559 units, representing total net proceeds of approximately $2.5 million.

Our current prioritization initiative focuses primarily on our clinical activities with eniluracil, as well as logistical and product support of ongoing clinical programs. Eniluracil was previously under development by GlaxoSmithKline.

GlaxoSmithKline advanced eniluracil into a comprehensive Phase III clinical development program that did not produce positive results and GlaxoSmithKline terminated further development. We developed a hypothesis as to why the GlaxoSmithKline Phase III trials were not successful and licensed the compound from GlaxoSmithKline in July 2005. We believe that eniluracil might enhance and expand the therapeutic spectrum of activity of 5-FU, reduce the occurrence of a disabling side effect known as hand foot syndrome and allow 5-FU to be given orally. We expect the net proceeds we received from the April 2010 private placement and the Rights Offering completed in March 2011 will be sufficient to fund a Phase II trial involving approximately 140 patients. We expect results from those trials to be indicative of the future viability of eniluracil and will allow us to assess whether further development and testing of enliuracil is warranted. During the third quarter of 2010, Adherex submitted the protocol to the U.S. Food and Drug Administration and to the Ministry of Healthcare and Social Development in Russia. The Phase II trial is currently open for recruitment in Russia and enrolled its first patient on April 27, 2011.

Patient enrollment is continuing in the Phase III trials of STS conducted by the International Childhood Liver Tumour Strategy Group, known as SIOPEL and the Children's Oncology Group. Each of these trials is managed by SIOPEL and the Children’s Oncology Group, respectively, and each group is responsible for the costs of the trial. We continue to hold STS patents and our responsibility in the testing is limited to providing the drug, drug distribution and pharmacovigilance, or safety monitoring, for the study. The SIOPEL trial is expected to enroll approximately 100 pediatric patients with liver (hepatoblastoma) cancer at participating SIOPEL centers worldwide and the Children's Oncology Group study is expected to enroll up to 120 pediatric patients worldwide in five different disease indications. We have terminated our license agreement with McGill University related to ADH-1. However, we continue to hold certain “method of use” patents for ADH-1. We have given a supply of ADH-1 to researchers at the University of Nebraska so that they may explore the use of ADH-1 in combination with gemcitabine for patients with pancreatic cancer. We have no further obligation to support this research, and the University of Nebraska has no obligation to do further work.

Our current prioritization initiative focuses primarily on our clinical activities with eniluracil, as well as logistical and product support of ongoing clinical programs. In addition to our current development efforts with eniluracil, we continue to pursue collaborations with other pharmaceutical and biotechnology companies, governmental agencies, academic or other corporate collaborators with respect to these molecules. Some of these preclinical molecules are currently being tested under agreements with third parties that may help to advance these products into future clinical development, either by us or under investigator-initiated studies.

Our common stock trades on the Pink Sheets in the United States. Our common stock also trades on the Toronto Stock Exchange. The Toronto Stock Exchange has continuing listing standards, including minimum market capitalization and other requirements, that we might not meet in the future, particularly if the price of our common stock does not increase or we are unable to raise capital to continue our operations. On April 22, 2010, the Toronto Stock Exchange issued an official delisting review of our common stock. On August 17, 2010, we were notified of the results of the review and it was determined that we satisfied the listing requirements.

We have financed our operations since our inception on September 3, 1996 through the sale of equity and debt securities. We have not received and do not expect to have significant revenues from our product candidates until we are either able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other revenue. We generated net income of approximately $4.7 million for the three months ended March 31, 2011. The net income for the period ended March 31, 2011 was primarily as a result of a $5.7 million gain on derivative income, of which $1.3 million was realized, offset by operating expenses. As of March 31, 2011, our deficit accumulated during development stage was approximately $105.4 million.

As a result of our limited financial resources we have postponed or terminated many of our previously planned or ongoing clinical development programs. We continue to pursue various strategic alternatives, including collaborations with other pharmaceutical and biotechnology companies. As a result, our filed Form 10-K for the year ended December 31, 2010 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 may be thereafter required. To finance our continuing operations we will need to raise substantial additional funds through either the sale of additional equity, the issuance of debt, the establishment of collaborations that provide us with funding, the out-license or sale of certain aspects of our intellectual property portfolio or from other sources. Given current economic conditions, we might not be able to raise the necessary capital or such funding may not be available on acceptable terms. If we cannot obtain adequate funding in the future, we might be required to further delay, scale back or eliminate certain research and development studies, consider business combinations or even shut down some, or all, of our operations.

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

Results of Operations

Three months ended March 31, 2011 versus three months ended March 31, 2010:

In thousands of U.S. Dollars	Three Months Ended March 31, 2011			%			Three Months Ended March 31, 2010			%			Change

Revenue	$	-					$	-					$	-
Operating expenses:
Research and development		315			31	%		163			45	%		152
General and administration		706			69	%		203			55	%		503
Total operating expenses		1,021			100	%		366			100	%		655

Loss from operations		(1,021	)					(366	)					(655	)

Unrealized/realized gain on derivative warrants		5,680						-						5,680
Interest income		10						-						10
Net income/(loss) and total comprehensive income/ (loss)	$	4,669					$	(366	)				$	5,035

There was a significant increase in operating expenses for the three months ended March 31, 2011 as compared to the same period in 2010 as a result of an increase in trial-related expenses incurred in preparation for the Phase 2 clinical trial of eniluracil. In addition there were increased professional fees associated with the rights offering.

The gain of $5,680 on the derivative warrants is comprised of an unrealized gain $5,067 relating to the warrants expiring in 2015, and realized gain of $613 for the rights offering which expired on March 29, 2011.

Quarterly Information

The following table presents selected consolidated financial data for each of the last eight quarters through March 31, 2011, as prepared under U.S. GAAP (U.S. dollars in thousands, except per share information):

Period	Net Loss for the Period			Basic and Diluted Net Loss per Common Share
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
March 31, 2010	$	(366	)	$	(0.00	)
June 30, 2010	$	(2,569	)	$	(0.01	)
September 30, 2010	$	1,694		$	0.01
December 31, 2010	$	(6,582	)	$	(0.03	)
March 31, 2011	$	4,669		$	0.01

Liquidity and Capital Resources

	March 31,			December 31,
In thousands of U.S. dollars	2011			2010
Selected Asset and Liability Data:
Cash and cash equivalents	$	5,023		$	5,947
Subscription receivable		2,548			-
Other current assets		66			46
Current liabilities		556			467
Derivative warrant liability		7,365			10,450
Long term liabilities
Working capital [Current Assets - Current Liabilities excluding the derivative warrant liabilities]		7,081			5,526

Selected Stockholders’ Equity Data:
Common stock	$	65,952		$	64,929
Deficit accumulated during the development stage		(105,396	)		(108,813	)
Total stockholders’ equity		(285	)		(4,924	)

Cash and cash equivalents were $5.9 million at December 31, 2010 and $5.0 million at March 31, 2011. The decrease of $0.9 million, is attributed to the ramp up in clinical trial expenses related to our Phase II study as well as expenses associated with the Rights Offering.

The Company recorded $2.5 million in subscription receivable relating to the Company's completed rights offering in March 2011. This was collected after the quarter end.

Since our inception on September 3, 1996, we have financed our operations through the sale of equity and debt securities and have raised gross proceeds totaling approximately $88.9 million through March 31, 2011. We have incurred net losses and negative cash flow from operations each year, and we had an accumulated deficit of approximately $105.4 million at March 31, 2011. We have not generated any revenues to date through the sale of products. We do not expect to have significant revenues or income, other than interest income, until we are able to sell our product candidates after obtaining applicable regulatory approvals or we establish collaborations that provide us with up-front payments, licensing fees, milestone payments, royalties or other payments.

Net cash used in operating activities for the three months ended March 31, 2011 was approximately $1.0 million, as compared to $0.3 million during the same period in 2010. This increase is due to an increase in our overall clinical activities during the three months ended March 31, 2011, as compared to the same period in 2010 as well as costs associated with the rights offering.

Outstanding Share Information

The outstanding share data for our company as of March 31, 2011 (in thousands):

	March 31, 2011
Common shares		452,852
Warrants		324,625
Stock options		83,180
Total		860,657

Financial Instruments

We invest excess cash and cash equivalents in high credit quality investments held by financial institutions in accordance with our investment policy designed to protect the principal investment. At March 31, 2011, we had approximately $5.0 million in cash accounts. We have not experienced any loss or write down of our money market investments for the three months ended March 31, 2011 and 2010, respectively.

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

We had no material commitments for capital expenses as of March 31, 2011. The following table represents our contractual obligations and commitments at March 31, 2011 (in thousands of U.S. dollars):

	Less than 1 year		1-3 years		Total
Property Lease (1)		2		-		2
OCT Clinical Service Agreement(2)		114		435		549
Database Integration Service Agreement (3)		130		146		276
Drug purchase commitments (4)		60		25		85
Total	$	306	$	606	$	912

(1)	Our office lease in Chapel Hill, NC expired January 15, 2011. In February 2011, we entered into a lease for a new office facility in Research Triangle Park, North Carolina. Amounts shown assume the maximum amounts due under the leases.

(2)

Under the service agreement with OCT Group LLC entered in August 2010, we are required to make several payments over the course of our planned Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: regulatory approval of trial, enrollment of patients and the completion of therapy of patients.

(3)

Under the service agreement with Database Integrations entered in December 2010, we are required to make several payments over the course of our planned Phase II clinical trial in Russia. The payments will be made upon the fulfillment of several milestones during the planned clinical trial including: EDC live, time and completion of enrollment.

(4)	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 currently include eniluracil, STS, ADH-1 and various cadherin-based preclinical programs.

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

Research and development expenses totaled $315 and $163 for the three months ended March 31, 2011 and 2010, 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

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

Our accounting policies are consistent with those presented in our annual consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Money Market Investments

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.

At March 31, 2011, we had $4,699 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 three months ended March 31, 2011 and 2010.

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 March 31, 2011 we held approximately $292 in Canadian dollars.

Item 4. Controls and Procedures

(a)	Evaluation of Disclosure Controls and Procedures .

In connection with the preparation of this report, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of March 31, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, the Company’s management concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were not effective as a result of having identified two material weaknesses in our internal control over financial reporting, as described in further detail below.

Our management has identified a control deficiency because we lack sufficient staff to segregate accounting duties. We believe the control deficiency results primarily because we have one full time employee performing all accounting and financial reporting duties. As a result, we do not maintain adequate segregation of duties within our critical financial reporting applications, the related modules and financial reporting processes. This control deficiency could result in a misstatement of balance sheet and income statement accounts in our interim or annual financial statements that would not be detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

Our management has also identified another control deficiency that it believes constitutes a material weakness in our control over financial reporting. We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with our complexity and our financial accounting and reporting requirements. This control deficiency could result in a misstatement of the financial statements including disclosure that would not be prevented or detected on a timely basis. We have not, therefore, timely prepared all of our consolidated financial statements and filed all of our periodic reports with the SEC. While we strive to ensure we have appropriate accounting personnel as well as an appropriate segregation of duties as much as practicable, we currently have insufficient financial resources to justify additional staff. The Company continues to seek solutions to improve internal control over financial reporting. As a result, these significant internal control deficiencies are not expected to be remediated until we secure additional financial resources.

After the Company filed its Current Report on Form 8-K under Item 4.02 on November 2, 2010, the Company took remedial actions for our internal control weaknesses by contracting additional personnel with experience in the application of U.S. GAAP financial accounting and reporting requirements in order to assist management in its financial accounting and reporting functions. We believe that this has helped remedy, but has not eliminated, the control deficiency described above regarding lack of sufficient staff to segregate accounting duties. To finance our continuing operations, we will need to raise additional funds beyond those from our April 2010 private placement and the Rights Offering and, as disclosed in the notes to the interim financial statements for the period ended March 31, 2011, there remains substantial uncertainty of our ability to continue as a going concern and the failure to obtain such funds might require us 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. Once we are able to secure such additional financing, we anticipate hiring additional personnel with appropriate technical accounting knowledge, experience, and training in the application of U.S. GAAP to supplement our current accounting staff.

(b)	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 fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors.

Additional Risks Related to our Business

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 designing and enrolling patients in a Phase II trial for eniluracil. If these trials are successful, and if we decide to continue to develop eniluracil, we will need additional funding, or we will need to enlist a partner to conduct future trials.

We are currently developing STS in Phase III trials in collaboration with the International Childhood Liver Tumour Strategy Group, known as SIOPEL and the Children's Oncology Group. It is possible SIOPEL and the Children's Oncology Group 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 Children's Oncology Group trial and subsequent accrual of patients into the Children's Oncology Group 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.

There is no assurance that we will successfully develop a commercially viable product.

Since our formation in September 1996, we have engaged in research and development programs. We have generated no revenue from product sales, we do not have any products currently available for sale, and none are expected to be commercially available for sale until we have completed additional clinical trials, if at all. There can be no assurance that the research we fund and manage will lead to commercially viable products. Our intention is to commence a Phase II study for eniluracil and STS is currently in a Phase III study. Our products must still undergo substantial additional regulatory review prior to commercialization.

We anticipate the need for additional capital in the future and if we cannot raise additional capital, we will not be able to fulfill our business plan.

We need to obtain additional funding in the future in order to finance our business strategy, operations and growth. We may not be able to obtain additional financing in sufficient amounts or on acceptable terms when needed. If we fail to arrange for sufficient capital on a timely basis, we may be required to curtail our business activities until we can obtain adequate financing. Debt financing must be repaid regardless of whether or not we generate profits or cash flows from our business activities. Equity financing may result in dilution to existing stockholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock or other securities. If we cannot raise sufficient capital when necessary, we will likely have to curtail operations and you may lose part or all of your investment.

We may be unable to effectively deploy the proceeds from our recent financings for the development of eniluracil.

In April 2010, we announced the closing of a private placement for proceeds of CAD $7.2 million and in March 2011, we announced the closing of a rights offering for total net proceeds of approximately$2.5 million. Any inability on our part to manage effectively the deployment of this capital could limit our ability to successfully develop eniluracil.

Additional Risks Related to our Common Stock

Our common stock is deemed to be a “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.

Our common stock is subject to Rule 15g-1 through 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers which sell our common stock to persons other than established customers and “accredited investors” who are generally individuals with a net worth in excess of $1,000,000 (excluding the value of their primary residence) or annual incomes exceeding $200,000, or $300,000, together with their spouses. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and the ability of our stockholders to sell their shares of common stock.

Additionally, our common stock is subject to the SEC regulations for “penny stock.” Penny stock includes any equity security that is not listed on a national exchange and has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements be sent to holders of penny stock that disclose recent price information for the penny stock and information on the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3. Default Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit
No.		Description

3.1		Articles of Amalgamation dated June 29, 2004 (included as Exhibit 1.7 to the Form 20-F Registration Statement, No. 001-32295, of Adherex, filed September 17, 2004 and incorporated herein by reference).

3.2		By-law No. 2 of the Company, as amended on November 2, 2004 (included as Exhibit 1.9 to the Form 20-F/A Registration Statement, No. 001-32295 of Adherex, filed November 5, 2004 and incorporated herein by reference).

4.1		Form of Subscription Rights Certificate (March 2011 Rights Offering) (Exhibit 4.5 to Form S-1/A Registration Statement (No. 333-170570) of Adherex, filed February 9, 2011).

4.2		Form of Warrant (March 2011 Rights Offering)( Exhibit 4.6 to Form S-1/A Registration Statement (No. 333-170570) of Adherex, filed February 9, 2011).

10.1		Amended Master Service Agreement with OCT Group LLC dated April 2, 2011 (filed herewith).

99.1		Press Release for Quarter Ended March 31, 2011 (filed herewith).

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).

SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Adherex Technologies Inc.

Date: May 13, 2011	By:	/s/ Rostislav Raykov
		Rostislav Raykov
		Chief Executive Officer
		(principal executive officer)

Date: May 13, 2011	By:	/s/ Robert Andrade

		Robert Andrade
		Chief Financial Officer
		(principal financial and chief accounting officer)

TABLE OF CONTENTS

Part I: Financial Information Item 1. Financial Statements (unaudited) 3 Item 1. Financial Statements (unaudited)Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations 14 Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures 20 Item 4. Controls and Procedures Part Ii: Other Information 22 Part Ii: Other Information Item 1. Legal Proceedings 22 Item 1. Legal Proceedings Item 1A. Risk Factors 22 Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities 23 Item 2. Unregistered Sales Of Equity Securities Item 3. Defaults Upon Senior Securities 23 Item 3. Defaults Upon Senior Securities Item 4. Removed and Reserved 23 Item 4. Removed and Reserved Item 5. Other Information 23 Item 5. Other Information Item 6. Exhibits 24 Item 6. Exhibits Part 1: Financial Information Item 1. Financial Statements Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Default Upon Senior Securities

FENCF 10-Q Quarter ended March 31, 2011