Significant Accounting Policies

6 Months Ended

Jun. 30, 2022

Significant Accounting Policies

Significant Accounting Policies

2.    Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and are the responsibility of the Company’s management. These unaudited interim condensed consolidated financial statements do not include all of the information and notes required by U.S. GAAP for annual financial statements. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated 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, 2021. The Company’s accounting policies are consistent with those presented in the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021. These unaudited interim condensed consolidated financial statements have been prepared in U.S. dollars. All amounts presented are in thousands except for per share amounts. The results of operations for the three and six monthsended June 30. 2022 are not necessarily indicative of results to be expected for the full fiscal year.

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 of the date of the interim condensed consolidated financial statements and the reported amounts of expense during the reporting period. Actual results could differ from those estimates.

In the opinion of management, these unaudited interim condensed consolidated financial statements include all adjustments, which are normal and recurring in nature, necessary for the fair presentation of the Company’s financial position at June 30, 2022 and to state fairly the results for the periods presented. The most significant estimates utilized during the three and six months ended June 30, 2022 include estimates necessary to value grants of various equity instruments to employees and contractors, as disclosed in Note 4.

New accounting pronouncements

The Company did not adopt any new accounting pronouncements during the quarter ended June 30, 2022.

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 highly rated financial institutions in accordance with its investment policy designed to protect the principal investment. At June 30, 2022, the Company had $14,915 in cash, savings and money market accounts ($21,100 at December 31, 2021). At June 30, 2022, the Company held $278 in cash of which $37 (as presented in U.S. dollars) was in Canadian dollars ($34 at December 31, 2021 as presented in U.S. dollars). At June 30, 2022, the Company held $14,637 in money market investments. Money market

investments typically have minimal risks. While the Company has not experienced any loss or write-down of its money market investments, the amounts it holds in money market accounts are substantially above the $250 amount insured by the FDIC and may lose value.

Financial instruments

Financial instruments recognized on the balance sheets at June 30, 2022 and December 31, 2021 consist of cash and cash equivalents, shares of Processa Pharmaceuticals, Inc., accounts payable, accrued liabilities and current portion of long-term debt, the carrying values of which approximate fair value due to their relatively short time to maturity. The Company does not hold or issue financial instruments for trading.

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, when made, 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 trading or speculative nature.

Revenue

The Company’s nominal historical revenue has been generated through sales of its intellectual property (“IP”). For the periods presented, there is no revenue. For periods when the Company has generated its revenue through one segment and the revenue recognized under each of the Company’s arrangements during those periods is described below. The terms of these agreements may contain multiple promised goods or services or optional goods and services, including licenses to product candidates, referred to as exclusive licenses, as well as research and development activities to be performed by the Company on behalf of the collaboration partner related to the licensed product candidates.

Revenue recognition

Revenue is recognized when control of the promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or providing services. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

When determining whether the customer has obtained control of the goods or services, the Company considers the point at which the customer may benefit from the goods or services. For sale of IP, revenue is recognized upon grant or transfer of the IP, as the Company’s IP is considered functional in nature.

Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s contracts may contain multiple performance obligations if a promise to transfer goods or services is separately identifiable from other promises in a contract and, therefore, is considered distinct. For contracts with multiple performance obligations, the Company determines the standalone selling price of each performance obligation and allocates the total transaction price using the relative selling price basis. The Company recognizes performance obligations based on their nature.

Significant payment terms

The Company’s revenue arrangements may include payments to the Company of one or more of the following: a non-refundable, upfront payment; milestone payments; and royalties on commercial sales of IP product candidates, if any. To date, the Company has received upfront payments and several milestone payments but has not received any license or option fees or earned royalty revenue as a result of product sales.

The Company estimates the amount of consideration to which it will be entitled in exchange for satisfying performance obligations. Based on the Company’s current contracts, variable consideration primarily exists in the following forms: development and regulatory milestones, royalties and sales-based milestones. The Company utilizes the “most likely amount” variable consideration method for estimating development and regulatory milestone consideration to include in the transaction price. The Company only includes an amount of variable consideration in the transaction price to the extent it is probable that a significant reversal in the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company refers to this as the variable consideration constraint.

Due to the uncertainty associated with the occurrence of any underlying events which would trigger development and regulatory milestone consideration under its revenue arrangements, with the exception of certain initial conditions precedent milestones, the Company has concluded the variable consideration associated with all development and regulatory milestones to be fully constrained as of June 30, 2022, and therefore has not included such consideration in the transaction price for any of its revenue arrangements. The Company will reassess this conclusion at each subsequent reporting period and will only include amounts associated with regulatory or development milestones in the transaction price when, or if, the variable consideration is determined to be released from the constraint.

The Company adjusts the transaction price for the effects of the time value of money if the timing of payments agreed to by the parties to the contract, explicitly or implicitly, provides the Company or its customer with a significant benefit of financing the transfer of goods or services. In relation to the royalties from the sale of Eniluracil to Elion (described under “Revenue arrangements” below), the Company concluded that its licensing and collaboration arrangements do not contain a significant financing component because the payment structure of its agreements arise from reasons other than providing a significant benefit of financing.

Contract assets

The Company did not have any contract assets as of June 30, 2022 or December 31, 2021.

Contract liabilities

The Company did not have any contract liabilities as of June 30, 2022 or December 31, 2021.

Revenue arrangements

Elion

In May 2016, the Company sold its rights in the drug Eniluracil to Elion Oncology, LLC (“Elion”). The agreement called for $40 in cash and 5% royalties to be paid to Fennec for any income derived from the sale of Eniluracil. The agreement was for the sale (not the license) of IP. In addition, the agreement did not call for any additional good or service beyond the transfer of IP and related assets (e.g. “all information and know-how”, documentation, etc.).

In August 2020, Elion entered into a license agreement with Processa Pharmaceuticals, Inc. (“Processa”). The license agreement called for equity and cash upon satisfying the Condition Precedent, along with development and regulatory milestone payments, sales milestone payments, and product royalties. The grant of the license was conditioned upon the

“Condition Precedent” which was defined as (i) Processa’s closing of a public offering by October 30, 2020 in which Processa raised at least $15,000 and (ii) Processa’s shares being listed on NASDAQ. Upon satisfying the Condition Precedent, which occurred in October 2020, Elion was entitled to receive $100 in cash and 825 in shares of Processa of which the Company is entitled to 5%. As a result, in January 2021, the Company received $5 in cash and 41 restricted shares of Processa common shares.

The agreement between Elion and Processa entitles Elion to the payments outlined in the table below. Fennec would be eligible to receive 5% of the following based on future milestone events:

Milestone Event	Milestone Payment
1st Year Anniversary of Effective Date		100 Restricted Shares
2nd Year Anniversary of Effective Date		100 Restricted Shares
1st Patient in Dose Confirmation Study		100 Restricted Shares
NDA Submission		300 Restricted Shares
1st FDA Approval in US	$	5,000
2nd FDA Approval in US	$	3,000
1st Regulatory Approval Outside US	$	2,000
2nd Regulatory Approval Outside US	$	2,000

Since the Condition Precedent was achieved, and only the passage of time must occur in order for the 1^st and 2^nd Year Anniversary payments to become due, the Company concluded the 1^st and 2^nd Year Anniversary milestone payments are also probable of coming to fruition and thus were included in the transaction price during the fourth quarter ended December 31, 2020 along with the aforementioned Condition Precedent payments.

The arrangement with Elion contains consideration that is variable based on the Processa’s achievement of the above referenced development and regulatory milestones. The next milestone payment the Company may be entitled to receive is 5 restricted shares for 1^st patient in Dose Confirmation Study and then another 15 restricted shares for the NDA submission. These are considered variable consideration that is fully constrained due to the uncertainty associated with the achievement of the development milestone. The considerations related to royalties (first and second FDA approval in U.S. and first and second regulatory approval outside U.S.) are also variable consideration that are fully constrained in accordance with the royalty recognition constraint. The variable consideration related to royalties will be recognized in the period the products are sold by Processa and the Company has a present right to payment.

The Company recognized $200 in revenue associated with the aforementioned cash and shares it became entitled to for the year ended December 31, 2020. Due to the one year lockup provision on the Processa shares, the Company deemed it reasonable to apply a liquidity discount of 20% to the valuation of the shares associated with the achievement of the Condition Precedent. Shares associated with the one- and two-year anniversary milestones had a 30% and 40% liquidity discount applied to their fair market valuations. Recognizing the passage of time, the Company adjusted its liquidity discount to the original shares of 0% and then 0% and 20% for the one- and two-year anniversary tranches.

Subsequent changes to the fair value of the underlying securities are recognized as unrealized gains or losses on marketable equity securities within the condensed consolidated statements of operations. During the quarter ended June 30, 2022, the Company reported $8 in unrealized loss on the fair value of the underlying Processa shares. Net loss over the life of the  Processa shares was $25 at June 30, 2022.