xene-10q_20200331.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, 2020

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Shares, without par value

 

XENE

 

The Nasdaq Stock Market LLC

(The Nasdaq Global Market)

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

☐  

  

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 18, 2020, the registrant had 34,974,119 common shares, without par value, outstanding.

 

 


 

EXPLANATORY NOTE

Xenon Pharmaceuticals Inc. (the “Company,” “we” or “us”) is filing this Quarterly Report on Form 10-Q for the three months ended March 31, 2020 (this “Form 10-Q”) in reliance upon the relief set forth in the Order (the “Order”) issued by the Securities and Exchange Commission (the “Commission”) on March 25, 2020 (Release No. 34-88465) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Order provides conditional relief to public companies that are unable to timely comply with certain filing obligations as a result of the novel coronavirus (“COVID-19”) outbreak.

This Form 10-Q could not be filed within the time period specified under the Exchange Act, absent the relief available under the Order, due to the outbreak and spread of COVID-19. Specifically, employees in the Company’s financial reporting and legal departments have been working remotely and therefore been unable to maintain the same ordinary course interactions with the Company’s professional advisors. As a result, the preparation and completion of the Company’s financial statements for the three months ended March 31, 2020 to be included in this Form 10-Q was delayed.

Pursuant to the requirements of the Order, we filed a Form 8-K with the Commission on May 6, 2020 indicating our intention to rely upon the Order with respect to the filing of this Form 10-Q, which would have otherwise been required to have been filed by May 11, 2020. This Form 10-Q is being filed within the 45-day extension period provided by the Order.


 

-i-


XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

1

 

Item 1. Financial Statements

1

 

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

1

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019

2

 

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2020 and 2019

3

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

4

 

Notes to Consolidated Financial Statements

5

 

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

12

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

22

 

Item 4. Controls and Procedures

22

 

PART II. OTHER INFORMATION

23

 

Item 1. Legal Proceedings

23

 

Item 1A. Risk Factors

23

Item 5. Other Information

59

 

Item 6. Exhibits

60

 

SIGNATURES

61

 

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.

 

 

 

 

 

 

 

 

-ii-


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,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,508

 

 

$

24,755

 

Marketable securities

 

 

169,163

 

 

 

116,603

 

Accounts receivable

 

 

1,617

 

 

 

813

 

Prepaid expenses and other current assets

 

 

2,582

 

 

 

2,695

 

 

 

 

233,870

 

 

 

144,866

 

Operating lease right-of-use asset (note 7)

 

 

832

 

 

 

933

 

Property, plant and equipment, net

 

 

2,155

 

 

 

1,660

 

Deferred tax assets (note 12)

 

 

186

 

 

 

238

 

Total assets

 

$

237,043

 

 

$

147,697

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 8)

 

$

8,084

 

 

$

8,818

 

Deferred revenue (note 11)

 

 

24,608

 

 

 

29,743

 

Operating lease liability (note 7)

 

 

156

 

 

 

168

 

Term loan (note 9)

 

 

15,676

 

 

 

4,650

 

 

 

 

48,524

 

 

 

43,379

 

Deferred revenue, long-term (note 11)

 

 

 

 

 

709

 

Operating lease liability, long-term (note 7)

 

 

541

 

 

 

743

 

Term loan, long-term (note 9)

 

 

 

 

 

10,889

 

 

 

$

49,065

 

 

$

55,720

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

   outstanding: 1,016,000 (December 31, 2019 - 1,016,000) (note 10)

 

$

7,732

 

 

$

7,732

 

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

   outstanding: 34,956,272 (December 31, 2019 - 28,139,228) (note 10)

 

 

397,307

 

 

 

294,244

 

Additional paid-in capital

 

 

41,068

 

 

 

40,646

 

Accumulated deficit

 

 

(257,139

)

 

 

(249,655

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

187,978

 

 

$

91,977

 

Total liabilities and shareholders’ equity

 

$

237,043

 

 

$

147,697

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (note 13)

 

 

 

 

 

 

 

 

Subsequent event (notes 9 and 14)

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2020

 

 

2019

 

Revenue (note 11)

 

$

7,078

 

 

$

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

11,791

 

 

 

9,137

 

General and administrative

 

 

3,320

 

 

 

2,621

 

 

 

 

15,111

 

 

 

11,758

 

Loss from operations

 

 

(8,033

)

 

 

(11,758

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

1,116

 

 

 

682

 

Interest expense

 

 

(330

)

 

 

(358

)

Foreign exchange gain (loss)

 

 

(238

)

 

 

130

 

Loss before income taxes

 

 

(7,485

)

 

 

(11,304

)

Income tax (expense) recovery (note 12)

 

 

1

 

 

 

(37

)

Net loss and comprehensive loss

 

 

(7,484

)

 

 

(11,341

)

Net loss attributable to preferred shareholders

 

 

(222

)

 

 

(430

)

Net loss attributable to common shareholders

 

$

(7,262

)

 

$

(10,911

)

Net loss per common share (note 5):

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.22

)

 

$

(0.42

)

Weighted-average common shares outstanding (note 5):

 

 

 

 

 

 

 

 

Basic and diluted

 

 

33,189,733

 

 

 

25,753,836

 

 

 

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

 

 

 

-2-


XENON PHARMACEUTICALS INC.

Consolidated Statements 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, 2018

 

 

1,016,000

 

 

$

7,732

 

 

 

25,750,721

 

 

$

265,923

 

 

$

38,515

 

 

$

(207,885

)

 

$

(990

)

 

$

103,295

 

Cumulative effect of accounting

   change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(175

)

 

 

 

 

 

 

(175

)

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,341

)

 

 

 

 

 

 

(11,341

)

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

476

 

 

 

 

 

 

 

 

 

 

 

476

 

Issued pursuant to exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

21,233

 

 

 

117

 

 

 

(59

)

 

 

 

 

 

 

 

 

 

 

58

 

Balance as of

   March 31, 2019

 

 

1,016,000

 

 

$

7,732

 

 

 

25,771,954

 

 

$

266,040

 

 

$

38,932

 

 

$

(219,401

)

 

$

(990

)

 

$

92,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

   December 31, 2019

 

 

1,016,000

 

 

$

7,732

 

 

 

28,139,228

 

 

$

294,244

 

 

$

40,646

 

 

$

(249,655

)

 

$

(990

)

 

$

91,977

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,484

)

 

 

 

 

 

 

(7,484

)

Issuance of common shares,

  net of issuance costs (note 10a)

 

 

 

 

 

 

 

 

 

 

6,759,187

 

 

 

102,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,456

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,015

 

 

 

 

 

 

 

 

 

 

 

1,015

 

Issued pursuant to exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

57,857

 

 

 

607

 

 

 

(593

)

 

 

 

 

 

 

 

 

 

 

14

 

Balance as of

   March 31, 2020

 

 

1,016,000

 

 

$

7,732

 

 

 

34,956,272

 

 

$

397,307

 

 

$

41,068

 

 

$

(257,139

)

 

$

(990

)

 

$

187,978

 

(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,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,484

)

 

$

(11,341

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation

 

 

104

 

 

 

79

 

Amortization of discount on term loan

 

 

137

 

 

 

125

 

Deferred income tax expense

 

 

52

 

 

 

33

 

Stock-based compensation

 

 

1,015

 

 

 

491

 

Unrealized foreign exchange (gain) loss

 

 

522

 

 

 

(23

)

Unrealized gain on marketable securities

 

 

(281

)

 

 

(29

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(824

)

 

 

20

 

Prepaid expenses and other current assets

 

 

113

 

 

 

389

 

Accounts payable and accrued expenses

 

 

(577

)

 

 

1,560

 

Deferred revenue

 

 

(5,844

)

 

 

 

Net cash used in operating activities

 

 

(13,067

)

 

 

(8,696

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(647

)

 

 

(335

)

Purchases of marketable securities

 

 

(107,482

)

 

 

(34,325

)

Proceeds from marketable securities

 

 

55,204

 

 

 

27,657

 

Net cash used in investing activities

 

 

(52,925

)

 

 

(7,003

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Issuance of common shares, net of issuance costs (note 10a)

 

 

102,456

 

 

 

 

Issuance of common shares pursuant to exercise of stock options

 

 

14

 

 

 

58

 

Net cash provided by financing activities

 

 

102,470

 

 

 

58

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(725

)

 

 

67

 

Increase (decrease) in cash and cash equivalents

 

 

35,753

 

 

 

(15,574

)

Cash and cash equivalents, beginning of period

 

 

24,755

 

 

 

67,754

 

Cash and cash equivalents, end of period

 

$

60,508

 

 

$

52,180

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

206

 

 

$

230

 

Interest received

 

 

1,172

 

 

 

709

 

Cash paid for operating lease

 

 

159

 

 

 

158

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of stock options exercised on a cashless basis

 

 

583

 

 

 

7

 

 

 

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 predecessor to the Business Corporations Act (British Columbia) 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 neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy.

The Company has incurred significant operating losses since inception. As of March 31, 2020, the Company had an accumulated deficit of $257,139 and a $7,484 net loss for the three months ended March 31, 2020. 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, equity and debt financings. The continuation of 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 of March 31, 2020, 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. Certain information has been reclassified to conform with the financial statement presentation adopted for the current year.

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, 2019 and included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 9, 2020.

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, 2020 and 2019 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 2019 Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the policies described in notes 3 and 4 below.

 

-5-


 

3.

Use of estimates

The preparation of the unaudited interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas of estimates include, but are not limited to, revenue recognition including estimated timing of completion of performance obligations, the determination of stock-based compensation and the amounts recorded as accrued liabilities. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the recent novel coronavirus (“COVID-19”) and public and private sector policies and initiatives aimed at reducing its transmission.

There was no material impact to the Company’s consolidated financial statements as of and for the three months ended March 31, 2020; however, the full extent to which the COVID-19 pandemic may have a direct or indirect impact to our business, results of operations and financial condition, including revenue, expenses, research and clinical development plans and timelines, depends on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, as well as the economic impact on local, regional, national and global markets. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed quarterly. All revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

4.

Changes in significant accounting policies:

In November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer.   These amendments clarify that companies must measure and classify share-based payment awards to a customer following the guidance in Topic 718. A company will classify awards as liabilities or equity following the guidance in Topic 718, and measure them at their grant-date fair value. The awards will be recorded as a reduction to revenue or an expense based on the guidance in Topic 606. If a company intends to provide an award to a customer and the grant date has not occurred, the transaction price guidance in Topic 606 should be followed to estimate the fair value of the award. A company must adjust the fair value estimate each reporting date until a grant date is achieved and recognize changes in the grant-date fair value of an award as a result of changes in the expected outcome of a service or a performance condition as a reduction in the transaction price. If the terms of the award are modified after the grantee vests in the award and is no longer a customer, the award may be subject to other guidance. The Company has adopted this standard as of January 1, 2020 on a retrospective basis. The adoption of the standard had no impact on the Company’s consolidated balance sheets, consolidated statements of operations and comprehensive loss and consolidated statements of cash flows.

5.

Net income (loss) per common share:

For the three months ended March 31, 2020, basic net income (loss) per common share is calculated using the two-class method required for participating securities which includes 1,016,000 Series 1 Preferred Shares as a separate class (2019 – 1,016,000). The convertible 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, 2020 and 2019, 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.

 

-6-


 

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.

Leases:

The Company has one operating lease for research laboratories and office space in Burnaby, British Columbia for a 120-month term from April 1, 2012 to March 31, 2022.

The cost components of the operating lease were as follows for the three months ended March 31, 2020 and 2019:

 

 

Three Months Ended

 

 

March 31, 2020

 

 

March 31, 2019

 

Lease Cost

 

 

 

 

 

 

 

Operating lease expense

$

109

 

 

$

109

 

Variable lease expense(1)

 

136

 

 

 

135

 

Lease Term and Discount Rate

 

 

 

 

 

 

 

Remaining lease term (years)

2

 

 

3

 

Discount rate

 

3.75

%

 

 

3.75

%

 

 

(1)

Variable lease costs are payments that vary because of changes in facts or circumstances and include common area maintenance and property taxes related to the premises. Variable lease costs are excluded from the calculation of minimum lease payments.

Future minimum lease payments as of March 31, 2020 were as follows:

 

Year ending December 31:

 

2020

 

 

451

 

2021

 

 

567

 

2022

 

 

136

 

Total future minimum lease payments

 

$

1,154

 

Less: imputed interest

 

 

(38

)

Less: future lease incentives reasonably certain of use

 

 

(419

)

Present value of lease liabilities

 

$

697

 

 

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8.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consisted of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Trade payables

 

$

3,217

 

 

$

2,473

 

Employee compensation, benefits, and related accruals

 

 

976

 

 

 

2,892

 

Consulting and contracted research

 

 

3,639

 

 

 

3,104

 

Professional fees

 

 

237

 

 

 

154

 

Other

 

 

15

 

 

 

195

 

Total

 

$

8,084

 

 

$

8,818

 

9.

Term loan:

In August 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with Silicon Valley Bank (the “Bank”), pursuant to which the Bank agreed to extend a term loan to the Company with a principal amount of $15,500.

On May 20, 2020, the Company repaid the total outstanding term loan balance ahead of the maturity date. The repayment consisted of (i) the outstanding principal balance, (ii) a final payment fee of $1,008, which has been partially accrued up to the date of repayment, and (iii) a prepayment fee of $225. At the time of repayment, all liabilities and obligations under the Amended and Restated Loan Agreement terminated automatically. The repayment did not affect the Bank’s rights in connection with the warrant to the Bank to purchase 40,000 of our common shares at a price per common share of $9.79 which will remain outstanding until exercised or expired.

Interest expense was $330 for the three months ended March 31, 2020 (2019 - $358). Included within interest expense, are amortization of the debt discount and accretion of the final payment fee of $137 (2019 - $125).         

 The outstanding loan and unamortized debt discount balances as of March 31, 2020 and December 31, 2019 were as follows:

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Term loan

 

$

15,500

 

 

$

15,500

 

Accrued portion of final payment fee

 

 

493

 

 

 

411

 

Less: unamortized discount on loan

 

 

(317

)

 

 

(372

)

Less: current portion

 

 

(15,676

)

 

 

(4,650

)

Loan payable, long-term

 

$

 

 

$

10,889

 

10.Share capital:

 

(a)

Financing:

In November 2019, the Company entered into an at-the-market equity offering sales agreement with Jefferies LLC (“Jefferies”) and Stifel Nicolaus & Company, Incorporated (“Stifel”) to sell common shares of the Company having aggregate gross proceeds of up to $50,000, from time to time, through an “at-the-market” equity offering program under which Jefferies and Stifel would act as sales agents. As of December 31, 2019, the Company had sold 805,643 common shares under the sales agreement for proceeds of approximately $10,771, net of commissions paid, but excluding transaction expenses. In January 2020, the Company sold an additional 2,446,687 common shares for proceeds of approximately $37,979, net of commissions paid, but excluding transaction expenses.

In January 2020, the Company entered into an underwriting agreement with Jefferies, Stifel and Guggenheim Securities, LLC, relating to an underwritten public offering of 3,750,000 common shares sold by the Company at a public offering price of $16.00 per common share, and granted the underwriters an option for a period of 30 days to purchase up to an additional 562,500 common shares. The public offering was completed on January 27, 2020, and the Company received net proceeds of $56,700, net of underwriting discounts and commissions, but before offering expenses. The underwriters exercised their option in full in February 2020 and the Company received additional net proceeds of $8,460, net of underwriting discounts and commissions, but before offering expenses.

 

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(b)

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

In March 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.

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.

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.

During the year ended December 31, 2018, BVF converted 1,852,000 Series 1 Preferred Shares in exchange for an equal number of common shares of the Company.

BVF was a related party of the Company prior to the closing of the exchange agreement, and continues to be a related party as of March 31, 2020 and thereafter.

 

(c)

Stock-based compensation:

The following table presents stock option activity for the period:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Outstanding, beginning of period

 

 

3,534,236

 

 

 

2,671,906

 

Granted

 

 

1,118,350

 

 

 

21,900

 

Exercised(1)

 

 

(98,326

)

 

 

(22,402

)

Forfeited, cancelled or expired

 

 

(26,268

)

 

 

(3,955

)

Outstanding, end of period

 

 

4,527,992

 

 

 

2,667,449

 

Exercisable, end of period

 

 

1,992,705

 

 

 

1,769,984

 

 

 

(1)

During the three months ended March 31, 2020, 1,972 stock options were exercised for the same number of common shares for cash (2019 – 20,576). In the same period, the Company issued 55,885 common shares (2019 – 657) for the cashless exercise of 96,354 stock options (2019 – 1,826).

 

 

 

 

 

-9-


 

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,

 

 

 

2020

 

 

2019

 

Average risk-free interest rate

 

 

0.80

%

 

 

2.58

%

Expected volatility

 

 

68

%

 

 

76

%

Average expected term (in years)

 

 

6.73

 

 

 

6.27

 

Expected dividend yield

 

 

0

%

 

 

0

%

Weighted average fair value of stock options granted

 

$

7.41

 

 

$

5.34

 

11.

Revenue:

Revenue was as follows for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Neurocrine Biosciences:

 

 

 

 

 

 

 

 

    Recognition of the transaction price

 

$

5,844

 

 

$

 

    Research and development services

 

 

1,234

 

 

 

 

Total collaboration revenue

 

$

7,078

 

 

$

 

 

 

In December 2019, the Company entered into a License and Collaboration Agreement with Neurocrine Biosciences Inc. (“Neurocrine Biosciences”). Pursuant to this agreement, the Company granted an exclusive license to XEN901, now known as NBI-921352, and an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391 (collectively, the “DTCs”). The agreement also includes a two-year research collaboration to discover, identify and develop additional novel Nav1.6 and Nav1.2/1.6 inhibitors (“Research Compounds”), with an option to extend for an additional year. The Company and Neurocrine Biosciences will collaborate on the conduct of two collaboration programs: (a) a joint research collaboration to discover, identify and preclinically develop Research Compounds (the “Research Program”) and (b) a collaborative development program for XEN901 and two DTCs selected by the joint steering committee (the “Initial Development Program”). 

At execution of the agreement, Neurocrine Biosciences paid the Company an upfront cash payment of $30,000 and a $20,000 equity investment in the Company. The equity investment was measured at fair value of $16,667 on the date of issuance and the resulting premium $3,333, together with the upfront cash payment totaling $33,333, was the transaction price of the arrangement for allocation to the performance obligations.  The agreement includes the following performance obligations: (i) an exclusive license to XEN901 with associated technology and know-how transfer, (ii) an exclusive license to the DTCs with associated know-how transfer, (iii) a license to Research Compounds and research services under the Research Program, (iv) development services under the Initial Development Program for XEN901, and (v) development services under the Initial Development Program for the DTCs. The total transaction price of $33,333 was allocated to performance obligation (v) based on its estimated standalone selling price determined based on internal development plans and budget, with the balance allocated to performance obligations (i) and (ii) by the residual approach. The Company allocated the transaction price as follows: $28,807 to performance obligations (i) and (ii), which performance obligations are delivered concurrently and are being recognized as revenue over an approximate ten month period from the signing of the agreement, which is the expected period to complete the delivery of the licenses and transfer of the relevant technology and know-how, and $4,526 to performance obligation (v) which is being recognized as revenue over an approximate thirteen month period beginning March 2020 which is the expected period to complete the development services.

The arrangement consideration related to the services under performance obligations (iii) and (iv) to be performed on behalf of Neurocrine Biosciences were excluded from the initial transaction price allocation because the consideration and performance are contingent upon Neurocrine Biosciences requesting performance of the services and these services are priced at an estimated fair value. None of the at-risk substantive performance milestones, including development, regulatory and sales-based milestones, were included in the transaction price, as all milestone amounts are outside the control of the Company and contingent upon Neurocrine Biosciences’s efforts and success in future clinical trials. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

During the three months ended March 31, 2020, the Company recognized $7,078 of revenue which comprised of $5,761 associated with (i) the exclusive license to XEN901 and (ii) the exclusive license to the DTCs; $1,234 for the research and development services under (iii) the Research Program and (iv) the Initial Development Program for XEN901; and $83 for (v) development services under the Initial Development Program for the DTCs.  As of March 31, 2020, there is $1,234 of accounts receivable and $24,608 of deferred revenue related to the Neurocrine Collaboration Agreement, which is classified as current on the balance sheet based on the period the services are expected to be delivered.  

 

-10-


 

The Company has an option to co-fund 50% of the development costs of XEN901 or another product candidate in the U.S., exercisable upon achievement of certain milestones, in exchange for increased U.S. royalties. The Company has not exercised this option as of March 31, 2020.

Neurocrine Biosciences was a related party as of December 31, 2019 but was not considered a related party as of March 31, 2020.

12.

Income taxes:

Income tax (expense) recovery for the three months ended March 31, 2020 and 2019 arose from the operations of Xenon Pharmaceuticals USA Inc., the Company’s wholly-owned subsidiary in the United States. Deferred income tax assets recorded on the consolidated balance sheets as of March 31, 2020 and December 31, 2019 result from the temporary differences between the amounts of assets and liabilities recognized for financial statement and income tax purposes related to the operations of Xenon Pharmaceuticals USA Inc. The realization of deferred income tax assets is dependent upon the generation of sufficient taxable income during future periods in which the temporary differences are expected to reverse.

13.

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; $3,092 of services have been received to date and $3,908 remains committed as of March 31, 2020 .

 

(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 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. Future potential payments to 1st Order related to the XEN1101 program include $500 in clinical development milestones, up to $6,000 in regulatory milestones, and $1,500 in other milestones, which may be payable pre-commercially.  There are no royalty obligations to 1st Order. No amounts have been accrued to date based on the progress against these milestones.

 

(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. 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. No amounts have been accrued to date based on the progress against these milestones.

 

(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-


 

14.

Subsequent event:

Pursuant to an agreement entered in September 2019 with Flexion Therapeutics Inc. (“Flexion”) to which Flexion acquired global rights to develop and commercialize XEN402, also known as funapide, the Company is eligible for various CMC, development and regulatory milestone payments of up to $9,000 through initiation of a Phase 2 proof-of-concept clinical trial, of which $500 related to the initiation of the first GLP toxicology study and was recognized into revenue during the year ended December 31, 2019 as the achievement of this milestone was considered highly probable. In April 2020, Flexion initiated the first GLP toxicology study, triggering the payment of this milestone previously recognized into revenue.   

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, 2019 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 9, 2020 and with the securities commissions in British Columbia, Alberta and Ontario on March 9, 2020.


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;

 

the direct and indirect impact of COVID-19 on our business and operations, including supply chain, manufacturing, research and development costs, clinical trials and employees;

 

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, XEN496 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 identify 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;

 

-12-


 

 

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;

 

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 II, 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.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.

Overview

We are a clinical stage biopharmaceutical company committed to developing innovative therapeutics to improve the lives of patients with neurological disorders. We are advancing a novel product pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy.

 

-13-


 

Proprietary Programs

 

XEN1101 is a differentiated Kv7 potassium channel modulator being developed for the treatment of epilepsy and potentially other neurological disorders. Designed as a randomized, double-blind, placebo-controlled, multicenter study, a Phase 2b clinical trial (called the X-TOLE study) is ongoing to evaluate the clinical efficacy, safety and tolerability of XEN1101 administered as adjunctive treatment in approximately 300 adult patients with focal epilepsy. The primary endpoint is the median percent change in monthly focal seizure frequency from baseline compared to treatment period of active versus placebo. We continue to review blinded data from patients who have been treated to date in the X-TOLE trial in order to assess safety, tolerability, and discontinuations. To date, XEN1101 has been well-tolerated and the rate of discontinuations from the study are below what was modeled. In addition, more than 90% of subjects to date from the double-blind portion of the trial have rolled-over into the open-label extension phase. Therefore, based on analysis of the blinded safety data to date, we do not expect the need to conduct an interim analysis, which was an option that would have allowed for re-sizing of lower dose groups or for other changes to the study if tolerability was different than modeled. In the context of the COVID-19 pandemic, we are in close collaboration with each of the XEN1101 clinical sites in North America and Europe, taking specific direction from their respective clinical guidelines as they relate to new patient screening and randomization. Our primary efforts are focused on patients currently enrolled in the study, either in the double-blind portion or in the open-label extension portion of the study, while making other necessary amendments in the study, including minimizing any in-person patient visits and making provisions for adequate study drug supplies to patients wherever possible, to ensure that data integrity is maintained. We are expanding the X-TOLE clinical trial to include new sites in both existing and new jurisdictions to support enhanced patient screening as soon as the individual clinical trial sites deem it safe to do so. We anticipate topline data in the first half of 2021, dependent upon patient enrollment rates, which may be impacted by the COVID-19 pandemic. We also continue to explore the development of XEN1101 in other neurological indications.

 

XEN496, a Kv7 potassium channel modulator, is a proprietary pediatric formulation of the active ingredient ezogabine being developed for the treatment of epilepsy. The U.S. Food and Drug Administration, or FDA, has granted Orphan Drug Designation, or ODD, and Fast Track designation for the investigation of XEN496 for the treatment of seizures related to KCNQ2 developmental and epileptic encephalopathy, or KCNQ2-DEE. Published case reports where physicians have used ezogabine in infants and young children with KCNQ2-DEE suggest that ezogabine may be efficacious in this often hard-to-treat pediatric patient population. To support a planned Phase 3 clinical trial of XEN496 in patients with KCNQ2-DEE, we recently completed a pharmacokinetic, or PK, study testing our proprietary pediatric formulation (XEN496) in 24 healthy adult volunteers. Subjects were given a single 400 mg dose of XEN496 in either the fed or the fasted state. While the study was not designed to determine bioequivalence – given ezogabine is not available to use as a comparator – the PK profile observed for XEN496 supports our Phase 3 plans and appears to be comparable to historical PK data for immediate-release ezogabine tablets, with XEN496 showing similar absorption and elimination curves. We recently received additional feedback from FDA on our Phase 3 program for XEN496. The FDA has indicated that it is acceptable to study XEN496 in infants and children up to six years old, and that a single, small pivotal trial may be considered adequate in order to demonstrate XEN496’s efficacy in KCNQ2-DEE, provided the study shows evidence of a clinically meaningful benefit in patients with the intended indication. Based on the FDA’s feedback, we anticipate initiating a randomized, double-blind, placebo-controlled Phase 3 clinical trial to evaluate the clinical efficacy, safety and tolerability of XEN496 in approximately 40 pediatric patients with KCNQ2-DEE. The primary endpoint is expected to be the median percent change in seizure frequency from baseline compared to treatment period of active versus placebo. We expect to initiate the XEN496 Phase 3 clinical trial in 2020.

 

XEN007 (active ingredient flunarizine) is a CNS-acting calcium channel modulator that modulates Cav2.1 and T-type calcium channels. Other reported mechanisms include dopamine, histamine and serotonin inhibition. A physician-led, Phase 2 proof-of-concept study is examining the potential clinical efficacy, safety, and tolerability of XEN007 as an adjunctive treatment in pediatric patients diagnosed with treatment-resistant childhood absence epilepsy, or CAE. Results from this Phase 2 study are expected in 2020, dependent upon patient enrollment rates given the ongoing COVID-19 pandemic. Depending on the final results from the study, CAE may represent a potential orphan indication for future development of XEN007.

Partnered Programs

 

We have an ongoing collaboration with Neurocrine Biosciences, Inc., or Neurocrine Biosciences, to develop treatments for epilepsy. Neurocrine Biosciences has an exclusive license to XEN901, now known as NBI-921352, a clinical stage selective Nav1.6 sodium channel inhibitor with potential in SCN8A developmental and epileptic encephalopathy, or SCN8A-DEE, and other forms of epilepsy. Neurocrine Biosciences has indicated that it anticipates filing an IND application with the FDA in mid-2020 in order to start a Phase 2 clinical trial in SCN8A-DEE patients in the second half of 2020. We are eligible to receive up to $25.0 million upon the FDA acceptance of an IND for NBI-921352, with 55% of the amount in the form of an equity investment by Neurocrine Biosciences in our common shares at a 15% premium to our 30-day trailing volume weighted average price at that time.

 

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Flexion Therapeutics, Inc., or Flexion, acquired the global rights to develop and commercialize XEN402, a Nav1.7 inhibitor also known as funapide. Flexion’s pre-clinical product candidate, FX301, consists of XEN402 formulated for extended release from a thermosensitive hydrogel. The initial development of FX301 is intended to support administration as a peripheral nerve block for control of post-operative pain. In April 2020, Flexion presented new animal data in an ePoster presentation on the American Society of Regional Anesthesia and Acute Pain website that showed FX301 provided sustained, post-operative analgesic effect with no impairment in motor function compared to liposomal bupivacaine and placebo.  In addition, high local concentrations of funapide, the active ingredient in FX301, were measured at the site of administration for the duration of the study which is consistent with the creation of a depot providing controlled drug release. A GLP toxicology study with FX301 commenced in April 2020, triggering a $0.5 million milestone payment to us. Flexion anticipates initiating human clinical trials in 2021.

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, 2020, we recognized revenue of $7.1 million in connection with our agreement with Neurocrine Biosciences. We did not recognize any revenue for the three months ended March 31, 2019. We had a net loss of $7.5 million for the three months ended March 31, 2020 and an accumulated deficit of $257.1 million as of March 31, 2020, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

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.

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.

The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Neurocrine Biosciences:

 

 

 

 

 

 

 

 

    Recognition of the transaction price

 

$

5,844

 

 

$

 

    Research and development services

 

 

1,234

 

 

 

 

Total collaboration revenue

 

$

7,078

 

 

$

 

 

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For the three months ended March 31, 2020, we recognized revenue of $7.1 million in connection with our agreement with Neurocrine Biosciences.  Pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares. The equity investment was measured at fair value on the date of issuance and the resulting premium, together with the upfront cash payment, is the transaction price of the arrangement for allocation to the performance obligations. The allocation was based on the relative estimated standalone selling prices of each obligation under the agreement including: (i) an exclusive license to XEN901 with associated technology and know-how transfer, (ii) an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391, collectively referred to as the development track candidates, or the DTCs, with associated know-how transfer, and (iii) development services under the initial development program for the DTCs. In the three months ended March 31, 2020, we recognized $5.8 million of the transaction price allocated to performance obligations (i), (ii) and (iii). Performance obligations (i) and (ii) are being recognized over a ten month period from December 2019 to September 2020 which is the expected period to complete the delivery of the licenses and transfer of the relevant technology and know-how. Performance obligation (iii) is being recognized over a thirteen month period from March 2020 to March 2021 which is the expected period to complete the development services. Research and development services are recognized into revenue at fair market value as the services are rendered.

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 and research and development funding 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 milestone or royalty 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, 2020, we have recorded $24.6 million of deferred revenue from upfront payments received under our license and collaboration agreement with Neurocrine Biosciences.

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

11,791

 

 

$

9,137

 

General and administrative

 

 

3,320

 

 

 

2,621

 

Total operating expenses

 

$

15,111

 

 

$

11,758

 

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, and costs to support our partnered product candidates.

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, process development and 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.

Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. 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.

 

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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, process development and 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, 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 expenses 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.

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. We anticipate that our interest income will continue to fluctuate depending on our cash and investment balances and interest rates.

Interest Expense. Interest expense consists of accrual of the final payment fee, amortization of debt discounts, and interest charged on our borrowings with Silicon Valley Bank which accrue interest at a floating per annum rate of 0.5% above the prime rate.

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.

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 

 

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There have been no material changes in our critical accounting policies and significant judgements and estimates during the three months ended March 31, 2020, 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 2019 Annual Report on Form 10-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 9, 2020. 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.

Results of Operations

Comparison of Three Months Ended March 31, 2020 and 2019

The following table summarizes the results of our operations for the three months ended March 31, 2020 and 2019 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2020 vs. 2019

 

 

 

2020

 

 

2019

 

 

Increase/(Decrease)

 

Revenue

 

$

7,078

 

 

$

 

 

$

7,078

 

Research and development expenses

 

 

11,791

 

 

 

9,137

 

 

 

2,654

 

General and administrative expenses

 

 

3,320

 

 

 

2,621

 

 

 

699

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,116

 

 

 

682

 

 

 

434

 

Interest expense

 

 

(330

)

 

 

(358

)

 

 

28

 

Foreign exchange gain (loss)

 

 

(238

)

 

 

130

 

 

 

(368

)

Loss before income taxes

 

$

(7,485

)

 

$

(11,304

)

 

$

3,819

 

Revenue

Revenue increased by $7.1 million in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Revenue for the three months ended March 31, 2020 related to recognition of $5.8 million of deferred revenue as well as $1.2 million for research and development services under our license and collaboration agreement with Neurocrine Biosciences. No revenue was recognized in the comparative quarter.

Research and Development Expenses

The following table summarizes research and development expenses for the three months ended March 31, 2020 and 2019 together with changes in those items (in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

2020 vs. 2019

 

 

 

2020

 

 

2019