Attached files

file filename
EX-32.2 - EX-32.2 - Xenon Pharmaceuticals Inc.xene-ex322_6.htm
EX-32.1 - EX-32.1 - Xenon Pharmaceuticals Inc.xene-ex321_9.htm
EX-31.2 - EX-31.2 - Xenon Pharmaceuticals Inc.xene-ex312_8.htm
EX-31.1 - EX-31.1 - Xenon Pharmaceuticals Inc.xene-ex311_7.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10‑Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

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: 001-36687

 

XENON PHARMACEUTICALS INC.

(Exact name of Registrant as Specified in its Charter)

 

 

Canada

98-0661854

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

200-3650 Gilmore Way

Burnaby, British Columbia, Canada

V5G 4W8

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (604) 484-3300

 

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      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  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 4, 2018, the registrant had 14,172,188 common shares, without par value, outstanding.

 

 

 

 


 

XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

1

 

Item 1. Financial Statements

1

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

1

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2018 and 2017

2

 

Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2018

3

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

4

 

Notes to Consolidated Financial Statements

5

 

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

11

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

20

 

Item 4. Controls and Procedures

21

 

PART II. OTHER INFORMATION

22

 

Item 1. Legal Proceedings

22

 

Item 1A. Risk Factors

22

 

Item 6. Exhibits

54

 

SIGNATURES

55

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. and its subsidiary. “Xenon” and the Xenon logo are the property of Xenon Pharmaceuticals Inc. and are registered in the United States and used or registered in various other jurisdictions. This report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

-i-


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

XENON PHARMACEUTICALS INC.

Consolidated Balance Sheets

(Unaudited)

(Expressed in thousands of U.S. dollars except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,200

 

 

$

20,486

 

Marketable securities

 

 

17,878

 

 

 

23,181

 

Accounts receivable

 

 

432

 

 

 

438

 

Prepaid expenses and other current assets

 

 

1,151

 

 

 

716

 

 

 

 

36,661

 

 

 

44,821

 

Prepaid expenses, long term

 

 

 

 

 

230

 

Property, plant and equipment, net

 

 

1,101

 

 

 

1,070

 

Total assets

 

$

37,762

 

 

$

46,121

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 7)

 

 

2,388

 

 

 

3,383

 

Loan payable, current portion (note 8)

 

 

1,400

 

 

 

700

 

 

 

 

3,788

 

 

 

4,083

 

Loan payable, long-term (note 8)

 

 

5,476

 

 

 

6,104

 

 

 

$

9,264

 

 

$

10,187

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred shares, without par value; unlimited shares authorized; issued and

   outstanding: 2,868,000 (December 31, 2017 - nil) (note 9a)

 

 

21,825

 

 

 

 

Common shares, without par value; unlimited shares authorized; issued and

   outstanding: 14,171,301 (December 31, 2017 - 17,998,420) (notes 9a and b)

 

 

147,887

 

 

 

173,841

 

Additional paid-in capital

 

 

36,919

 

 

 

36,471

 

Accumulated deficit

 

 

(177,143

)

 

 

(173,388

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

28,498

 

 

$

35,934

 

Total liabilities and shareholders’ equity

 

$

37,762

 

 

$

46,121

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

-1-


 

XENON PHARMACEUTICALS INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(Expressed in thousands of U.S. dollars except share and per share amounts)

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

Collaboration revenue

 

$

 

 

$

16

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

5,580

 

 

 

5,903

 

General and administrative

 

 

2,238

 

 

 

2,100

 

 

 

 

7,818

 

 

 

8,003

 

Loss from operations

 

 

(7,818

)

 

 

(7,987

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

108

 

 

 

149

 

Interest expense

 

 

(159

)

 

 

 

Foreign exchange gain (loss)

 

 

(284

)

 

 

321

 

Gain on termination of collaboration agreement (note 9b)

 

 

4,398

 

 

 

 

Net loss and comprehensive loss

 

 

(3,755

)

 

 

(7,517

)

Net loss attributable to preferred shareholders

 

 

(33

)

 

 

 

Net loss attributable to common shareholders

 

$

(3,722

)

 

$

(7,517

)

Net loss per common share (note 5):

 

 

 

 

 

 

 

 

Basic

 

$

(0.21

)

 

$

(0.42

)

Diluted

 

$

(0.21

)

 

$

(0.43

)

Weighted-average common shares outstanding (note 5):

 

 

 

 

 

 

 

 

Basic

 

 

17,804,421

 

 

 

17,946,209

 

Diluted

 

 

17,804,421

 

 

 

17,974,469

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

-2-


 

XENON PHARMACEUTICALS INC.

Consolidated Statement of Shareholders’ Equity

(Unaudited)

(Expressed in thousands of U.S. dollars except share amounts)

 

 

Convertible

preferred shares

 

 

Common shares

 

 

Additional

paid-in

capital

 

 

Accumulated deficit

 

 

Accumulated other

comprehensive

loss (1)

 

 

Total shareholders'

equity

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

   December 31, 2016

 

 

 

 

$

 

 

 

17,930,590

 

 

$

173,246

 

 

$

34,326

 

 

$

(142,681

)

 

$

(990

)

 

$

63,901

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,704

)

 

 

 

 

 

 

(30,704

)

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,460

 

 

 

 

 

 

 

 

 

 

 

2,460

 

Issued pursuant to exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

67,830

 

 

 

595

 

 

 

(415

)

 

 

(3

)

 

 

 

 

 

 

177

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

100

 

Balance as of

   December 31, 2017

 

 

 

 

$

 

 

 

17,998,420

 

 

$

173,841

 

 

$

36,471

 

 

$

(173,388

)

 

$

(990

)

 

$

35,934

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,755

)

 

 

 

 

 

 

(3,755

)

Issued (cancelled) pursuant

   to exchange agreement (note 9a)

 

 

2,868,000

 

 

 

21,825

 

 

 

(2,868,000

)

 

 

(21,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled pursuant to termination of

   collaboration agreement (note 9b)

 

 

 

 

 

 

 

 

 

 

(1,000,000

)

 

 

(4,470

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,470

)

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

670

 

 

 

 

 

 

 

 

 

 

 

670

 

Issued pursuant to exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

40,881

 

 

 

341

 

 

 

(222

)

 

 

 

 

 

 

 

 

 

 

119

 

Balance as of

   March 31, 2018

 

 

2,868,000

 

 

$

21,825

 

 

 

14,171,301

 

 

$

147,887

 

 

$

36,919

 

 

$

(177,143

)

 

$

(990

)

 

$

28,498

 

(1)

Our accumulated other comprehensive loss is entirely related to historical cumulative translation adjustments from the application of U.S. dollar reporting when the functional currency of the Company was the Canadian dollar.

The accompanying notes are an integral part of these financial statements.

 

 

-3-


 

 

 

XENON PHARMACEUTICALS INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in thousands of U.S. dollars)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,755

)

 

$

(7,517

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation

 

 

150

 

 

 

165

 

Amortization of discount on term loan

 

 

72

 

 

 

 

Stock-based compensation

 

 

663

 

 

 

478

 

Unrealized foreign exchange (gain) loss

 

 

267

 

 

 

(326

)

Gain on termination of collaboration agreement (note 9b)

 

 

(4,398

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3

 

 

 

11

 

Prepaid expenses, and other current assets

 

 

(435

)

 

 

404

 

Prepaid expenses, long term

 

 

230

 

 

 

139

 

Accounts payable and accrued expenses

 

 

(1,016

)

 

 

186

 

Net cash used in operating activities

 

 

(8,219

)

 

 

(6,460

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(181

)

 

 

(137

)

Purchase of marketable securities

 

 

(8,148

)

 

 

 

Proceeds from marketable securities

 

 

13,306

 

 

 

9,384

 

Net cash provided by investing activities

 

 

4,977

 

 

 

9,247

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Issuance of common shares pursuant to exercise of stock options

 

 

119

 

 

 

174

 

Net cash provided by financing activities

 

 

119

 

 

 

174

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(163

)

 

 

104

 

Increase (decrease) in cash and cash equivalents

 

 

(3,286

)

 

 

3,065

 

Cash and cash equivalents, beginning of period

 

 

20,486

 

 

 

17,095

 

Cash and cash equivalents, end of period

 

$

17,200

 

 

$

20,160

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

71

 

 

$

 

Interest received

 

 

141

 

 

 

55

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of stock options exercised on a cashless basis

 

 

176

 

 

 

19

 

Issuance of preferred shares in exchange for common shares (note 9a)

 

 

21,825

 

 

 

 

Termination of Teva agreement through cancellation of common shares (note 9b)

 

 

4,470

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

-4-

 

 


 

XENON PHARMACEUTICALS INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Expressed in thousands of U.S. dollars except share and per share amounts)

1.

Nature of the business:

Xenon Pharmaceuticals Inc. (the “Company”), incorporated in 1996 under the British Columbia Business Corporations Act and continued federally in 2000 under the Canada Business Corporation Act, is a clinical stage biopharmaceutical company focused on developing innovative therapeutics to improve the lives of patients with neurological disorders. Building upon its extensive knowledge of human genetics and diseases caused by mutations in ion channels, known as channelopathies, the Company is advancing a novel product pipeline of central nervous system therapies to address areas of high unmet medical need, such as epilepsy and pain.

The Company has incurred significant operating losses since inception. As of March 31, 2018, the Company had an accumulated deficit of $177,143 and a $3,755 net loss for the three months ended March 31, 2018. Management expects to continue to incur significant expenses in excess of revenue and to incur operating losses for the foreseeable future. To date, the Company has financed its operations primarily through funding received from collaboration and license agreements, private placements of common and preferred shares, public offerings of common shares, debt financing, and government funding.

Until such time as the Company can generate substantial product revenue, if ever, management expects to finance the Company’s cash needs through a combination of collaboration agreements and equity or debt financings. The continuation of the research and development activities and the future commercialization of its products are dependent on the Company’s ability to successfully raise additional funds when needed. It is not possible to predict either the outcome of future research and development programs or the Company’s ability to continue to fund these programs in the future.

2.

Basis of presentation:

These consolidated financial statements are presented in U.S. dollars.

The Company has one wholly-owned subsidiary as at March 31, 2018, Xenon Pharmaceuticals USA Inc., which was incorporated in Delaware on December 2, 2016.

These unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated on consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, these consolidated financial statements do not include all of the information and footnotes required for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2017 and included in the Company’s 2017 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 7, 2018.

These unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The results of operations for the three months ended March 31, 2018 and 2017 are not necessarily indicative of results that can be expected for a full year. These unaudited interim consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 31, 2017, with the exception of the policy described in note 3 below.

3.

Changes in significant accounting policies:

The new revenue standard (Accounting Standards Codification “ASC" 606) became effective for the Company on January 1, 2018, and was adopted using the modified retrospective method under which previously presented financial statements are not restated and the cumulative effect of adopting the new revenue standard on contracts in process is recognized by an adjustment to retained earnings at the effective date. The adoption of the new revenue standard did not change the Company’s recognized revenue under its one ongoing significant collaborative research and license agreement with Genentech, a member of the Roche Group, described in note 11b to the audited consolidated financial statements of the Company included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 31, 2017 and no cumulative effect adjustment was required.

 

-5-


 

The new guidance in ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under a five-step model: (1) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied.

The Company generates revenue primarily through collaboration agreements. Such agreements may require the Company to deliver various rights and/or services, including intellectual property rights or licenses and research and development services. Under such collaboration agreements, the Company is generally eligible to receive non-refundable upfront payments, funding for research and development services, milestone payments, and royalties.

In contracts where the Company has more than one performance obligation to provide its customer with goods or services, each performance obligation is evaluated to determine whether it is distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated stand-alone selling price of each deliverable reflects the Company’s best estimate of what the selling price would be if the deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if selling price on a stand-alone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to the customer for the related goods or services. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

4.

Future changes in accounting policies:

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842): Recognition and Measurement of Financial Assets and Financial Liabilities. The update requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The new guidance retains a distinction between finance leases and operating leases, with cash payments from operating leases classified within operating activities in the statement of cash flows. These amendments will be effective for public entities for fiscal years and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s consolidated financial statements.

5.

Net income (loss) per common and preferred share:

Basic net income (loss) per common share is calculated using the two-class method required for participating securities which includes the convertible preferred shares as a separate class. The preferred shares entitle the holders to participate in dividends and in earnings and losses of the Company on an equivalent basis as common shares. Accordingly, undistributed earnings (losses) are allocated to common shares and participating preferred shares based on the weighted-average shares of each class outstanding during the period.

The treasury stock method is used to compute the dilutive effect of the Company’s stock options and warrants. Under this method, the incremental number of common shares used in computing diluted net income (loss) per common share is the difference between the number of common shares assumed issued and purchased using assumed proceeds.

The if-converted method is used to compute the dilutive effect of the Company’s convertible preferred shares. Under the if-converted method, dividends on the preferred shares, if applicable, are added back to earnings attributable to common shareholders, and the preferred shares and paid-in kind dividends are assumed to have been converted at the share price applicable at the end of the period. The if-converted method is applied only if the effect is dilutive.

For the three months ended March 31, 2018, all stock options, warrants and convertible preferred shares were anti-dilutive and were excluded from the diluted weighted average common shares outstanding for the period. For the three months ended March 31, 2017, 1,943,508 stock options were excluded from the calculation of diluted net loss per common share as their inclusion would be anti-dilutive.

 

-6-


 

The following table sets out the computation of basic and diluted net loss per common and preferred share:

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

Common Shares

 

 

Preferred Shares

 

 

Common Shares

 

 

Preferred Shares

 

Allocation of loss attributed to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(3,722

)

 

$

(33

)

 

$

(7,517

)

 

$

 

Adjustment for change in fair value of liability classified stock options

 

 

 

 

 

 

 

 

(133

)

 

 

 

Diluted

 

$

(3,722

)

 

$

(33

)

 

$

(7,650

)

 

$

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,804,421

 

 

 

159,333

 

 

 

17,946,209

 

 

 

 

Adjustment for dilutive effect of stock options

 

 

 

 

 

 

 

 

28,260

 

 

 

 

Diluted

 

 

17,804,421

 

 

 

159,333

 

 

 

17,974,469

 

 

 

 

Net loss attributable to shareholders per share - basic

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.42

)

 

$

 

Net loss attributable to shareholders per share - diluted

 

$

(0.21

)

 

$

(0.21

)

 

$

(0.43

)

 

$

 

6.

Fair value of financial instruments:

Certain financial instruments and other items are measured at fair value.

To determine the fair value, the Company uses the fair value hierarchy for inputs used to measure fair value of financial assets and liabilities. This hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels: Level 1 (highest priority), Level 2, and Level 3 (lowest priority).

 

Level 1 - Unadjusted quoted prices in active markets for identical instruments.

 

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

Level 3 - Inputs are unobservable and reflect the Company’s assumptions as to what market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The Company’s Level 1 assets include cash and cash equivalents and marketable securities with quoted prices in active markets. The carrying amount of accounts receivables, accounts payable and accrued expenses approximates fair value due to the nature and short-term of those instruments. The Company’s term loan bears interest at a rate that approximates prevailing market rates for instruments with similar characteristics and, accordingly, the carrying value of the loan approximates fair value.

7.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Trade payables

 

$

473

 

 

$

1,253

 

Employee compensation, benefits, and related accruals

 

 

573

 

 

 

1,017

 

Consulting and contracted research

 

 

1,026

 

 

 

817

 

Professional fees

 

 

253

 

 

 

252

 

Other

 

 

63

 

 

 

44

 

Total

 

$

2,388

 

 

$

3,383

 

 

-7-


 

8.

Term Loan:

At March 31, 2018, the Company determined the effective interest rate on the initial tranche of its loan with Silicon Valley Bank (the “Bank”) to be 9.48% (December 31, 2017 - 9.25%). Amortization of the debt discount was $72 for the three months ended March 31, 2018. Interest payments are made monthly.

Interest expense was $159 for the three months ended March 31, 2018.

The outstanding loan and unamortized debt discount balances are as follows:

 

 

March 31,

 

 

 

2018

 

Term loan

 

$

7,000

 

Less: unamortized discount on loan

 

 

(177

)

Less: current portion

 

 

(1,400

)

Accrued portion of final payment fee

 

 

53

 

Loan payable, long-term

 

$

5,476

 

Scheduled principal payments on outstanding debt, excluding the final payment fee of $455, as of March 31, 2018, are as follows:

2018

 

 

 

$

700

 

2019

 

 

 

 

2,800

 

2020

 

 

 

 

2,800

 

2021

 

 

 

 

700

 

Total

 

 

 

$

7,000

 

The loan agreement contains affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, engage in any new line of business, pay dividends or make distributions, or repurchase stock, in each case subject to certain exceptions. The Company is in compliance with these covenants at March 31, 2018.

At March 31, 2018, the Company has a warrant outstanding to the Bank to purchase 50,411 of the Company’s common shares at a price per share of $2.43.

9.

Share Capital:

 

(a)

Exchange agreement with certain funds affiliated with BVF Partners L.P. (collectively, “BVF”):

On March 23, 2018, the Company and BVF entered into an exchange agreement pursuant to which the Company issued to BVF 2,868,000 Series 1 Preferred Shares in exchange for 2,868,000 common shares which were subsequently cancelled by the Company on the closing date of March 27, 2018.

The Company filed articles of amendment creating an unlimited number of Series 1 Preferred Shares. The Series 1 Preferred Shares are convertible into common shares on a one-for-one basis subject to the holder, together with its affiliates, beneficially owning no more than 9.99% of the total number of common shares issued and outstanding immediately after giving effect to such conversion (the “Beneficial Ownership Limitation”). The holder may reset the Beneficial Ownership Limitation to a higher or lower number, not to exceed 19.99% of the total number of common shares issued and outstanding immediately after giving effect to such conversion, upon providing written notice to the Company which will be effective 61 days after delivery of such notice. Each Series 1 Preferred Share is also convertible into one common share at any time at the Company’s option without payment of additional consideration, provided that prior to any such conversion, the holder, together with its affiliates, beneficially owns less than 5.00% of the total number of common shares issued and outstanding and such conversion will not result in the holder, together with its affiliates, beneficially holding more than  5.00% of the total number of common shares issued and outstanding immediately after giving effect to such conversion. In the event of a change of control, holders of Series 1 Preferred Shares shall be issued one common share for each outstanding Series 1 Preferred Share held immediately prior to the change of control (without regard to the Beneficial Ownership Limitation), and following such conversion, will be entitled to receive the same kind and amount of securities, cash or property that a holder of common shares is entitled to receive in connection with such change of control.

 

-8-


 

The Series 1 Preferred Shares rank equally to the common shares in the event of liquidation, dissolution or winding up or other distribution of the assets of the Company among its shareholders and the holders of the Series 1 Preferred Shares are entitled to vote together with the common shares on an as-converted basis and as a single class, subject in the case of each holder of the Series 1 Preferred Shares to the Beneficial Ownership Limitation. Any Series 1 Preferred Shares that are ineligible to be converted into common shares due to the Beneficial Ownership Limitation, measured as of a given record date that applies for a shareholder meeting or ability to act by written consent, shall be deemed to be non-voting securities of the Company. Holders of Series 1 Preferred Shares are entitled to receive dividends (without regard to the Beneficial Ownership Limitation) on the same basis as the holders of common shares. The Company may not redeem the Series 1 Preferred Shares.

The Company recorded the issuance of Series 1 Preferred Shares and corresponding cancellation of common shares at $7.61 per share, the estimated weighted average cost at which BVF acquired the common shares. The Series 1 Preferred Shares are recorded wholly as equity under ASC 480, with no bifurcation of conversion feature from the host contract, given that the Series 1 Preferred Shares cannot be cash settled and have no redemption features.

 

(b)

Termination of collaboration agreement with Teva Pharmaceuticals International GmbH and Teva Canada Limited (together, “Teva”):

On March 7, 2018, the Company and Teva, entered into a termination agreement terminating by mutual agreement the collaborative development and license agreement dated December 7, 2012, as amended, which subsequently closed on March 27, 2018. In connection with the termination, Teva returned and the Company cancelled 1,000,000 common shares that were owned by Teva. Pursuant to the terms of the termination agreement, Teva also agreed to return, license or assign to the Company certain intellectual property, including certain patent rights and will transfer regulatory filings related to TV-45070 to the Company. The termination agreement requires the Company to pay a low single-digit percentage royalty to Teva based on net sales of approved products, if any, resulting from any continued development and commercialization of TV-45070 by the Company during the period that assigned or licensed patents cover such products. To date, no such sales have occurred.

The Company recorded a gain on the termination of the collaboration agreement of $4,398, net of direct costs incurred in connection with the termination and cancellation of 1,000,000 common shares, based on the estimated fair value represented by the market price of the common shares prior to the closing of the transaction.

 

(c)

Stock-based compensation:

The following table presents stock option activity for the period:

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Outstanding, beginning of period

 

 

2,339,905

 

 

 

1,910,823

 

Granted

 

 

563,700

 

 

 

416,750

 

Exercised(1)

 

 

(84,668

)

 

 

(67,921

)

Forfeited, cancelled or expired

 

 

(22,996

)

 

 

(1,415

)

Outstanding, end of period

 

 

2,795,941

 

 

 

2,258,237

 

Exercisable, end of period

 

 

1,505,459

 

 

 

1,293,367

 

 

 

(1)

During the three months ended March 31, 2018, 13,374 stock options were exercised for the same number of common shares for cash (three months ended March 31, 2017 – 62,397). In the same period, the Company issued 27,507 common shares (three months ended March 31, 2017 – 3,693) for the cashless exercise of 71,294 stock options (three months ended March 31, 2017 – 5,524).

The fair value of each stock option granted is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Average risk-free interest rate

 

 

2.77

%

 

 

2.44

%

Expected volatility

 

 

75

%

 

 

81

%

Average expected term (in years)

 

 

7.36

 

 

 

7.47

 

Expected dividend yield

 

 

0

%

 

 

0

%

Weighted average fair value of stock options granted

 

$

3.41

 

 

$

6.34

 

 

-9-


 

10.

Commitments and contingencies:

 

(a)

Priority access agreement with Medpace Inc. (“Medpace”):

In August 2015, the Company entered into a priority access agreement with Medpace for the provision of certain clinical development services. Under the terms of the agreement, the Company has committed to using Medpace non-exclusively for clinical development services over the five year term of the agreement. In consideration for priority access to Medpace resources and preferred service rates, the Company has committed to $7,000 of services over the term of the agreement, $3,000 of which was paid in the year ended December 31, 2015.

 

(b)

License, manufacture and supply agreement:

In March 2017, the Company entered into a license, manufacture and supply agreement with a pharmaceutical contract manufacturing organization for the access and use of certain regulatory documents as well as for the manufacture and supply of clinical and commercial drug product to support the development of XEN007. Under the terms of the agreement, the Company paid an upfront fee of $500 CAD and will be required to pay a low single-digit percentage royalty on net sales of any products developed and commercialized under the agreement.

 

(c)

Asset purchase agreement with 1st Order Pharmaceuticals, Inc. (“1st Order”):

In April 2017, the Company acquired XEN1101 (previously known as 1OP2198) from 1st Order pursuant to an asset purchase agreement. 1st Order previously acquired 1OP2198 from an affiliate of Valeant Pharmaceuticals International, Inc. (“Valeant”), and the Company has assumed certain financial responsibilities under that agreement. Under the terms of the agreement, the Company paid an upfront fee of $350 and milestone payments in 2017 totaling $700, which were expensed as research and development. Future potential payments to both 1st Order and Valeant include $1,000 in clinical development milestones, up to $13,000 in regulatory milestones, and up to approximately $33,600 in sales-based and other milestones, which includes a $1,500 milestone that may be payable pre-commercially, plus a mid-to-high single-digit percentage royalty on commercial sales.

 

(d)

License agreement

In July 2017, the Company entered into a license agreement with a pharmaceutical company for the access and use of certain regulatory documents to support the development of XEN007. Under the terms of the agreement, the Company paid an upfront fee of $1,000, which was expensed as research and development. Future potential payments include $2,000 in clinical development milestones, up to $7,000 in regulatory milestones, plus a low-to-mid single-digit percentage royalty on net sales of any products developed and commercialized under the agreement.

 

(e)

Guarantees and indemnifications:

The Company has entered into license and research agreements with third parties that include indemnification provisions that are customary in the industry. These indemnification provisions generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party claims or damages arising from these transactions.

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds commercial and product liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such agreements and the Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

11.

Related Parties:

 

(a)

Exchange agreement with BVF:

On March 23, 2018, the Company and BVF entered into an exchange agreement pursuant to which the Company issued 2,868,000 Series 1 Preferred Shares in exchange for 2,868,000 common shares which were subsequently cancelled by the Company. Prior to the closing of the transactions contemplated in the exchange agreement on March 27, 2018, BVF held a number of common shares representing approximately 19.9% of the Company’s then outstanding common shares. For additional information regarding the Series 1 Preferred Shares, refer to note 9a.

 

(b)

Termination of collaboration agreement with Teva:

On March 7, 2018, the Company and Teva, entered into a termination agreement terminating by mutual agreement the collaborative development and license agreement dated December 7, 2012, as amended, which subsequently closed on March 27, 2018. In connection with the closing, the Company cancelled 1,000,000 common shares that were owned by Teva. Prior to the share cancellation, Teva owned more than 5% of the Company’s outstanding common shares. For additional information regarding the termination agreement and the share cancellation, refer to note 9b.


 

-10-


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This section should be read in conjunction with our unaudited interim consolidated financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 7, 2018 and with the securities commissions in British Columbia, Alberta and Ontario on March 7, 2018.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. The words or phrases “would be,” “will allow,” “intends to,” “may,” “believe,” “plan,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:

 

our ability to identify additional products or product candidates either from our internal research efforts or though acquiring or in-licensing other product candidates or technologies;

 

the initiation, timing, cost, progress and success of our research and development programs, pre-clinical studies, and clinical trials;

 

our ability to advance product candidates into, and successfully complete, clinical trials;

 

our ability to recruit sufficient numbers of patients for our current and future clinical trials for orphan or more common indications;

 

our ability to achieve profitability;

 

our ability to obtain funding for our operations, including research funding;

 

our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments;

 

the timing and magnitude of potential milestone payments under our product acquisition and in-licensing agreements;

 

the implementation of our business model and strategic plans;

 

our ability to develop and commercialize product candidates for orphan and niche indications independently;

 

our ability to advance XEN007 and potentially other future product candidates directly into Phase 2 or later stage clinical trials;

 

our commercialization, marketing and manufacturing capabilities and strategy;

 

our ability to discover genes and drug targets;

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

our expectations regarding federal, state and foreign regulatory requirements;

 

the therapeutic benefits, effectiveness and safety of our product candidates;

 

the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates;

 

the rate and degree of market acceptance and clinical utility of any future products;

 

the timing of, and our and our collaborators’ ability to obtain and maintain, regulatory approvals for our product candidates;

 

our ability to maintain and establish collaborations;

 

our expectations regarding market risk, including interest rate changes and foreign currency fluctuations;

 

-11-


 

 

our belief in the sufficiency of our cash, cash equivalents and marketable securities to meet our needs for at least the next 12 months;

 

our ability to engage and retain the employees required to grow our business;

 

our future financial performance and projected expenditures;

 

developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and

 

estimates of our expenses, future revenue, capital requirements and our needs for additional financing.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part I, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. and its subsidiary. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.

Overview

We are a clinical stage biopharmaceutical company focused on developing innovative therapeutics to improve the lives of patients with neurological disorders. Building upon our extensive knowledge of human genetics and diseases caused by mutations in ion channels, known as channelopathies, we are advancing a novel product pipeline of central nervous system, or CNS, therapies to address areas of high unmet medical need, such as epilepsy and pain.

To date, our pharmaceutical collaborations have generated in aggregate over $160.0 million in non-equity funding with the potential to provide us with future milestone payments, as well as royalties on product sales. Our current pharmaceutical partners include Genentech, a member of the Roche Group, and Merck & Co., Inc., or Merck (through its affiliate, Essex Chemie AG).

Our clinical development pipeline includes:

 

XEN1101 is a Kv7 potassium channel opener being developed for the treatment of epilepsy including: treatment-resistant adult and pediatric focal seizures; rare, pediatric forms of epilepsy, such as EIEE7, an early infantile epileptic encephalopathy associated with mutations in the KCNQ2 gene that cause loss-of-function in the Kv7.2 potassium channel; and potentially other neurological disorders. In October 2017, following acceptance of our clinical trial application, or CTA, for XEN1101 by the Medicines & Healthcare products Regulatory Agency, or MHRA, in the United Kingdom, we initiated a randomized, double-blind, placebo-controlled Phase 1 clinical trial to evaluate the safety, tolerability and pharmacokinetics of both single ascending doses, or SAD, and multiple ascending doses, or MAD, of XEN1101 in healthy subjects. The XEN1101 Phase 1 clinical trial includes a pharmacodynamic biomarker read-out from a transcranial magnetic stimulation, or TMS, study, designed to assess XEN1101’s ability and potency to modulate cortical excitability, thereby demonstrating activity in the target CNS tissue. We have completed a Phase 1a pilot TMS study in 8 healthy subjects and have now begun a double-blind, placebo-controlled, randomized cross-over Phase 1b TMS study in approximately 15 healthy subjects. We expect to present interim Phase 1 results at the 14th EILAT Conference on New Antiepileptic Drugs and Devices to be held in Madrid, Spain on May 15, 2018. The release of the complete Phase 1 results, including the Phase 1b TMS data, is anticipated in the second half of 2018. We anticipate initiating a Phase 2 clinical trial evaluating XEN1101 as a treatment for adult focal seizures by year end. We also intend to explore a parallel plan to advance XEN1101 into rare, pediatric forms of epilepsy as soon as feasible thereafter;

 

XEN901 is a potent, highly selective Nav1.6 sodium channel inhibitor being developed for the treatment of epilepsy including treatment resistant adult and pediatric focal seizures, as well as rare, pediatric forms of epilepsy, such as EIEE13, an early infantile epileptic encephalopathy due to gain-of-function mutations in the SCN8A gene that encodes the Nav1.6 sodium channel. In February 2018, following acceptance of our CTA for XEN901 by the MHRA in the United Kingdom, we initiated a randomized, double-blind, placebo-controlled Phase 1 clinical trial to evaluate XEN901’s safety, tolerability and pharmacokinetics in both SAD and MAD cohorts of approximately 64 healthy subjects in total. We expect to present an update on XEN901, including pre-clinical data, at the 14th EILAT Conference on New Antiepileptic Drugs and Devices to be held in Madrid, Spain on May 15, 2018. Upon completion of the Phase 1 clinical trial, a read-out of results is anticipated in the second half of 2018, followed by a Phase 2 trial evaluating XEN901’s efficacy as a treatment for adult focal seizures. We also intend to pursue a parallel plan to advance XEN901 into rare, pediatric forms of epilepsy as soon as feasible thereafter;

 

-12-


 

 

We have identified an additional clinical stage, ion channel program, XEN007 (active ingredient flunarizine), to expand our existing neurology-focused product pipeline. XEN007 is a CNS-acting calcium channel blocker that directly modulates Cav2.1, which is a critical calcium channel implicated in the pathophysiology of hemiplegic migraine, or HM, a rare and debilitating neurological disorder afflicting approximately 60,000 people in the U.S. Flunarizine has been used outside of the U.S. in the prevention of chronic migraine and has been reported to have clinical benefit in HM case studies. Xenon’s clinical development plans include a proposed strategy to develop XEN007 as the first treatment specifically approved for HM anywhere in the world. We have received Orphan Drug Designation from the U.S. Food and Drug Administration, or FDA, for XEN007 for the treatment of HM. In addition, we have entered into key agreements in order to access regulatory files and manufacturing support to potentially enable the accelerated clinical development of XEN007 directly into a Phase 2 clinical trial. We are currently examining various development strategies for XEN007 with key opinion leaders and leading clinicians, as well as exploring options for potential partnerships for this program; and

 

We have an ongoing collaboration with Genentech focused on developing novel inhibitors of Nav1.7 for the treatment of pain. Genentech has completed a Phase 1 clinical trial for GDC-0310, which is an oral, selective Nav1.7 small-molecule inhibitor developed for the potential treatment of pain. Guidance around the future clinical development of GDC-0310 will be updated once ongoing pre-clinical studies are completed and the final results are analyzed by Genentech.

We have funded our operations through the sale of equity securities, funding received from our licensees and collaborators, debt financing and, to a lesser extent, government funding. For the three months ended March 31, 2018, we recognized no revenue. This compares to $0.02 million for the three months ended March 31, 2017, consisting primarily of funding from our collaborators.

We had a net loss of $3.8 million for the three months ended March 31, 2018 and an accumulated deficit of $177.1 million as of March 31, 2018, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations and we do not expect to have sustained profitability for the foreseeable future.

To date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent, government funding. We have not generated any significant royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. We expect that our revenue in the near term will be substantially dependent on our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and the commercialization of current and future products, we cannot predict when or whether we will receive further milestone payments under our current or future collaboration agreements or whether we will be able to report either revenue or net income in future years.

We expect to continue to incur significant expenses and operating losses for at least the next 12 to 24 months. We anticipate that our expenses will increase as we:

 

continue our research and pre-clinical and clinical development of our product candidates either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies;

 

seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials;

 

make milestone and other payments under our in-license or other agreements;

 

maintain, protect and expand our intellectual property portfolio;

 

attract, hire and retain skilled personnel; and

 

create additional infrastructure to support our operations and otherwise.

 

Recent Developments

On March 27, 2018, we closed a transaction with certain funds affiliated with BVF Partners L.P., collectively referred to as BVF, to allow for a one-for-one exchange of our common shares for Series 1 Preferred Shares. BVF, an existing shareholder, held a number of our common shares, representing approximately 19.9% of our outstanding common shares prior to closing. Pursuant to the exchange agreement, BVF exchanged an aggregate of 2,868,000 common shares for 2,868,000 Series 1 Preferred Shares. For additional information, please refer to our Current Report on Form 8-K, filed with the U.S. Securities and Exchange Commission, or SEC, and with the securities commissions in British Columbia, Alberta and Ontario, or the Canadian Securities Commissions, on March 28, 2018.

 

-13-


 

Subsequently, also on March 27, 2018, we closed a transaction with Teva Pharmaceuticals International GmbH, along with Teva Canada Limited, collectively referred to as Teva, to terminate by mutual agreement the collaborative development and license agreement dated December 7, 2012, as amended. In connection with the closing of such transaction, we cancelled 1,000,000 of our common shares that were owned by Teva. Teva also agreed to return, license or assign to us certain intellectual property, including certain patent rights and will transfer regulatory filings related to TV-45070 to us. The termination agreement requires us to pay a low single-digit percentage royalty to Teva based on net sales of approved products, if any, resulting from any continued development and commercialization of TV-45070 by us during the period that assigned or licensed patents cover such products. For additional information, please refer to our Current Reports on Form 8-K, filed with the SEC and the Canadian Securities Commissions on March 7, 2018 and March 28, 2018.

Financial Operations Overview

Revenue

To date, our revenue has been primarily derived from collaboration and licensing agreements as well as, to a lesser extent, government funding. We have not generated any significant royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever.

For the three months ended March 31, 2018 and 2017, we did not recognize significant revenue from our collaboration agreements.

As our other internal and partnered products are in various stages of clinical and pre-clinical development, we do not expect to generate any revenue from product sales for at least the next several years. We expect that any revenue for the next several years will be derived from milestone payments under our current collaboration agreements and any additional collaboration agreements that we may enter into in the future. We cannot provide any assurance as to the extent or timing of future milestone payments or royalty payments or that we will receive any future payments at all.

We expect that any revenue we generate will fluctuate quarter to quarter as a function of the timing and amount of milestones and other payments from our existing collaborations and any future collaborations.

As of March 31, 2018, we have recognized all deferred revenue from upfront payments received under our existing collaboration and licensing agreements.

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2018 and 2017 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Research and development

 

$

5,580

 

 

$

5,903

 

General and administrative

 

 

2,238

 

 

 

2,100

 

Total operating expenses

 

$

7,818

 

 

$

8,003

 

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research and development of our proprietary product candidates, including any acquired or in-licensed product candidates or technology, as well as to support research and development on our product candidates under current and former collaboration agreements.

Research and development expenses consist of costs incurred in performing research and development activities, including salary, related benefits and stock-based compensation for employees engaged in scientific research and development, third-party contract costs relating to research, formulation, manufacturing, pre-clinical studies and clinical trial activities, third-party acquisition, license and collaboration fees, laboratory consumables and allocated facility-related and information technology costs.

 

-14-


 

Project-specific expenses reflect costs directly attributable to our clinical development candidates and our pre-clinical candidates once nominated and selected for further development, including pre-clinical and discovery costs supporting a development candidate. All remaining research and development expenses are reflected in pre-clinical, discovery and other program expenses. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis.

We expense all research and development costs as incurred. We expect that our research and development expenses will increase in the future as we advance our proprietary product candidates through clinical development, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. The increase in expense will likely include added personnel and third-party contracts related to research, formulation, manufacturing, pre-clinical studies and clinical trial activities as well as third-party acquisition, license and collaboration fees and laboratory consumables.

Clinical development timelines, likelihood of regulatory approval and commercialization and associated costs are uncertain and difficult to estimate and can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific research and pre-clinical and clinical results of each product candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest category of operating expense for at least the next 12 to 24 months.

General and Administrative Expenses

General and administrative expenses consist primarily of salary, related benefits and stock-based compensation of our executive, finance, legal, business development and administrative functions, travel expenses, allocated facility-related and information technology costs not otherwise included in research and development expenses, director compensation, director’s and officer’s insurance premiums, investor relations costs and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection. General and administrative expenses also include fair value adjustments of certain liability classified stock option awards.

We expect that general and administrative expenses will increase in the future as we expand our operating activities to support increased research and development activities.

Other Income (Expense)

Interest Income. Interest income consists of income earned on our cash and investment balances. Our interest income has not been significant due to the levels of cash and investment balances and low interest earned on such balances. We anticipate that our interest income will continue to fluctuate depending on timing of payments from collaborative partners, our cash and investment balances, and interest rates.

Interest Expense. In December 2017, we entered into a Loan and Security Agreement, or Loan Agreement, with Silicon Valley Bank, or the Bank, whereby we borrowed an initial tranche of $7.0 million which accrues interest at a floating per annum rate of 0.5% above the prime rate, payable monthly commencing in January 2018. We expect to pay interest through the maturity of the initial tranche on March 31, 2021.

Foreign Exchange Gain (Loss). Net foreign exchange gains and losses consist of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations. See “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Exchange Risk” below for additional information.

Gain on Termination of Collaboration Agreement. In March 2018, we entered into a termination agreement terminating by mutual agreement the collaborative development and license agreement dated December 7, 2012, as amended, with Teva. We recorded a one-time gain on the termination of the collaboration agreement, net of direct costs incurred in connection with the termination and cancellation of 1,000,000 of our common shares.

 

-15-


 

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and significant judgments and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and significant estimates include those related to:

 

revenue recognition;

 

research and development costs; and

 

stock-based compensation.

During the three months ended March 31, 2018, we had the following change in our critical accounting policies:

Revenue Recognition: Revenue recognition is a critical accounting estimate due to the magnitude and nature of the revenues we receive. We adopted the new revenue standard (Accounting Standards Codification, or ASC, 606), effective January 1, 2018, using the modified retrospective method under which previously presented financial statements are not restated and the cumulative effect of adopting the new revenue standard on contracts in process is recognized by an adjustment to retained earnings at the effective date. The adoption of the new revenue standard did not change our recognized revenue under our one ongoing significant collaborative research and license agreement with Genentech, a member of the Roche Group, described in note 11b to our audited consolidated financial statements included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2017 and no cumulative effect adjustment was required.

Our primary sources of revenue have been derived from non-refundable upfront payments, funding for research and development services, milestone payments, and royalties under various collaboration agreements.

In contracts where we have more than one performance obligation to provide our customer with goods or services, each performance obligation is evaluated to determine whether it is distinct. The consideration under the contract is then allocated between the distinct performance obligations based on their respective relative stand-alone selling prices. The estimated stand-alone selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold on a stand-alone basis and is determined by reference to market rates for the good or service when sold to others or by using an adjusted market assessment approach if selling price on a stand-alone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred to our customer for the related goods or services. Consideration associated with at-risk substantive performance milestones, including sales-based milestones, is recognized as revenue when we determine it is probable that a significant reversal of the cumulative revenue recognized will not occur. Sales-based royalties received in connection with licenses of intellectual property are subject to a specific exception in the revenue standards, whereby the consideration is not included in the transaction price and recognized in revenue until the customer’s subsequent sales or usages occur.

There have been no other significant or material changes in our critical accounting policies and significant judgements and estimates during the three months ended March 31, 2018, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and Significant Judgments and Estimates” included in our 2017 Annual Report on Form 10-K filed with the SEC and with the Canadian Securities Commissions on March 7, 2018. We believe that the accounting policies discussed in the Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

-16-


 

Results of Operations

Comparison of three months ended March 31, 2018 and 2017

The following table summarizes the results of our operations for the three months ended March 31, 2018 and 2017 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2018 vs. 2017

 

 

 

2018

 

 

2017

 

 

Increase/(Decrease)

 

Collaboration revenue

 

$

 

 

$

16

 

 

$

(16

)

Research and development expenses

 

 

5,580

 

 

 

5,903

 

 

 

(323

)

General and administrative expenses

 

 

2,238

 

 

 

2,100

 

 

 

138

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

108

 

 

 

149

 

 

 

(41

)

Interest expense

 

 

(159

)

 

 

 

 

 

(159

)

Foreign exchange gain (loss)

 

 

(284

)

 

 

321

 

 

 

(605

)

Gain on termination of collaboration agreement

 

 

4,398

 

 

 

 

 

 

4,398

 

Net loss

 

$

(3,755

)

 

$

(7,517

)

 

$

3,762

 

Revenue

We did not recognize any revenue for the three months ended March 31, 2018 compared to $0.02 million for the three months ended March 31, 2017. The decrease as compared to the same period in 2017 was due to the expiration of full-time equivalent funding from Teva at the end of 2017 as we shifted resources from supporting our collaborations to our proprietary programs.

Research and Development Expenses

The following table summarizes research and development expenses for the three months ended March 31, 2018 and 2017 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2018 vs. 2017

 

 

 

2018

 

 

2017

 

 

Increase/(Decrease)

 

Collaboration expenses

 

$

 

 

$

70

 

 

$

(70

)

XEN801 expenses

 

 

 

 

 

1,449

 

 

 

(1,449

)

XEN901 and Nav1.6 pre-clinical and discovery expenses

 

 

2,837

 

 

 

2,514

 

 

 

323

 

XEN1101 expenses

 

 

1,762

 

 

 

 

 

 

1,762

 

Pre-clinical, discovery and other program expenses

 

 

981

 

 

 

1,870

 

 

 

(889

)

Total research and development expenses

 

$

5,580

 

 

$

5,903

 

 

$

(323

)

 

Research and development expenses were $5.6 million for the three months ended March 31, 2018 compared to $5.9 million for the three months ended March 31, 2017. The decrease of $0.3 million was primarily attributable to decreased spending on XEN801, a product candidate which is no longer being developed, and a decrease in pre-clinical, discovery and other internal program expenses. This decrease was partially offset by increased spending on our XEN1101 product candidate which was acquired in April 2017, our XEN901 product candidate and pre-clinical and discovery expenses supporting our Nav1.6 program.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the three months ended March 31, 2018 and 2017 together with changes in those items (in thousands):