FENNEC PHARMACEUTICALS INC.
For the period ended Dec 31, 2024. Filed Mar 26, 2025.
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FY2024 · Filed Mar 26, 2025
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Fennec Pharmaceuticals Inc. (the “Company”) as of December 31, 2024 and 2023, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Norgine License and Supply Agreement
As described in Note 1 to the consolidated financial statements, the Company entered into a 10-year licensing and supply agreement with Norgine Pharma UK Limited (“Norgine”) to commercialize PEDMARQSI in contractually defined territories. The Company received $43 million in upfront consideration in connection with this agreement, and the agreement provides for up to $227 million in additional commercial and regulatory milestone payments and tiered royalties on net sales of PEDMARQSI in the licensed territories. During the year ended December 31, 2024, the Company recognized related licensing revenue of $18.0 million and product sales revenue of $813,000, and as of December 31, 2024, the Company has a contract liability of $24.8 million.
Accounting for this transaction involved significant estimates and judgments to evaluate the contract’s distinct performance obligations, determine the transaction price, estimate related standalone selling prices of distinct performance obligations, and allocate the transaction price to the distinct performance obligations based on standalone selling price. A high degree of auditor judgment, subjectivity and effort was required in performing procedures and evaluating evidence related to management’s assumptions in these areas. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:
| ◾ | We obtained and read the customer contract to obtain an understanding of the contractual responsibilities of the parties and the terms and conditions of the relationship; we evaluated management’s accounting policies and practices with respect to revenue recognition for compliance with accounting principles generally accepted in the United States of America. |
| ◾ | We tested the Company’s application of the revenue recognition model under Accounting Standards Codification (“ASC”) Topic 606, including its identification of distinct performance obligations (delivery of a functional intellectual property license and a material supply right); we tested management’s determination of the transaction price by evaluating the accounting guidance and contract terms; we assessed the reasonableness of management’s estimates of standalone selling price by testing significant judgments made in the areas of forecasted 10-year sales performance, future market product pricing and sales volumes in the covered territories, market royalty rates, upfront payments and milestone payments in comparable transactions, and discount rates; we evaluated the timing and pattern of revenue recognition for license fees, milestone payments, and supply arrangements; and we considered the impact of potential future sales-based royalty and milestone payments on the Company’s application of ASC Topic 606. |
| ◾ | We reviewed management’s estimates of variable consideration, including the probability of achieving milestone payments and the constraint applied to revenue recognition. |
| ◾ | We assessed the adequacy of the Company’s financial statement disclosures regarding this agreement and related revenue recognition policies. |
Estimated Product Allowances and Discounts
As described in Note 2 to the consolidated financial statements, the Company recognizes revenues based on the net sales price, which includes estimates of variable consideration for which reserves are established primarily from rebates, chargebacks, discounts, returns, and other allowances. Further, certain distributors provide distinct and estimable services to the Company in exchange for product allowances. The estimated fair value of distinct and estimable services performed by the distributor and the attribution of those amounts to the period of benefit are important factors in the determination of net sales price and requires subjective management assumptions. Allowances provided to distributors in excess of the estimated fair value of services received by the Company are presented as sales discounts. Allowances provided to such distributors during the year ended December 31, 2024 for distinct and estimable distributor services totaled $8.0 million, of which $1.7 million is presented as prepaid expenses as of December 31, 2024.
Auditing estimates of the amount and timing of distinct distributor services provided to the Company was challenging and judgmental because the estimates involve significant measurement uncertainty about the fair value of services received by the Company and the periods that such services were rendered to the Company. A high degree of auditor judgment, subjectivity and effort was required in performing procedures and evaluating evidence related to management’s assumptions in these areas. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:
| ◾ | We obtained and read related customer contracts to obtain an understanding of the contractual responsibilities of the parties; we evaluated management’s accounting policies and practices with respect to distinct distributor provided services for compliance with accounting principles generally accepted in the United States of America; and we obtained an understanding of management’s monitoring and oversight of such services. |
| ◾ | Through interviews, inquiries, observations, and examination of Company-prepared analyses, we obtained an understanding of the significant management assumptions behind the potentially significant components of the distributor allowances, including the nature of each allowance and the amounts estimated by management. Through interviews, inquiries, and observations, we obtained an understanding of the significant management assumptions supporting the fair value estimates of distinct distributor services and the timing of performance of services. |
| ◾ | We assessed the methodologies used to determine the allowances and the fair value of distinct distributor services and tested estimated percentages by corroborating the underlying data used to develop the estimate, which included evaluating the completeness and accuracy of such data. Our testing of allowances included comparing key assumptions to customer contracts, payment data, and other third-party sources, as applicable. Our testing of the fair value of distinct distributor services included evaluating management’s estimate of costs to perform necessary services and assessing the reasonableness of estimated timeframes associated with the performance of those services. |
| ◾ | We evaluated information subsequent to the balance sheet date to determine whether there was any new information that would require adjustment to the previously estimated amounts. |
Estimated Allowances for Expected Credit Losses
As described in Note 2 to the consolidated financial statements, the Company recognizes an allowance for expected credit losses related to trade receivables from customers. The determination of the allowance involves significant management judgment, including assessments of historical collection experience, customer creditworthiness, aging of receivables, macroeconomic conditions, country-specific risks in international markets, and management’s expectations of future events. The estimation uncertainty regarding the allowance is exacerbated by the fact that the Company’s first commercial sale to a domestic customer occurred in October 2022, and its first commercial sale to a global distributor occurred in March 2023.
The allowance is particularly sensitive to evolving payment behaviors of global distributors and changes in economic conditions that may impact the collectability of receivables of these global distributors. Given the complexity and subjectivity involved in estimating potential uncollectible accounts, especially in emerging markets with heightened credit risk, we identified the evaluation of management’s estimate of an allowance for expected credit loss as a critical audit matter. The Company recorded a $2.5 million credit loss (bad debt) expense during the year ended December 31, 2024, and as of December 31, 2024, the allowance for credit losses totaled $3.8 million.
Auditing the Company’s estimated allowances was challenging and required significant judgment due to the reliance on subjective management assumptions about the creditworthiness of global distributors. While domestic specialty distributor customers pose a lower credit risk due to their size, established relationships, and payment history, estimating expected credit losses for international customers involves greater estimation uncertainty. These customers have limited credit history with the Company and may lack formal credit ratings, increasing dependence on management’s judgment in assessing creditworthiness and potential payment default risk. As a result, auditing these estimates required a high degree of judgment, subjectivity, and effort in evaluating management’s assumptions and supporting evidence. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others:
| ◾ | We evaluated management’s accounting policies and practices for estimating expected credit losses with respect to domestic and international customers for compliance with accounting principles generally accepted in the United States of America. |
| ◾ | Through interviews, inquiries, and observations, we obtained an understanding of the significant management assumptions used in developing the allowance, including evaluating the reasonableness of key assumptions used in estimating expected credit losses and the recoverability of receivables. |
| ◾ | We assessed the historical accuracy of management’s estimates by comparing prior year allowances to actual write-offs. |
| ◾ | We evaluated potentially uncollectible accounts on a customer-specific basis, considering each customer’s history and unique circumstances. We also inspected available objective support, such as customer communications and cash receipts, to assess whether the evidence (or lack thereof) corroborated or contradicted management’s assertions. |
| ◾ | We evaluated information subsequent to the balance sheet date to determine whether there was any new information that would require adjustment to the previously estimated amounts. |
/s/ Haskell & White LLP
HASKELL & WHITE LLP
We have served as the Company’s auditor since 2017.
Irvine, California
March 26, 2025
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