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 discovering and developing a pipeline of differentiated therapeutics for orphan indications that it intends to commercialize on its own, and for larger market indications that it intends to partner with global pharmaceutical companies.

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

The accompanying unaudited interim 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 financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2014 and included in the Company’s 2014 Annual Report on Form 10-K filed with the SEC on March 12, 2015.

These unaudited interim 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 and six month periods ended June 30, 2015 and 2014 are not necessarily indicative of results that can be expected for a full year. These unaudited interim financial statements follow the same significant accounting policies as those described in the notes to the audited financial statements of the Company included in the Company’s 2014 Annual Report on Form 10-K for the year ended December 31, 2014, with the exception of the policies described in note 3(a).

Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for the current interim period.

The Company’s reporting currency is the U.S. dollar. The functional currency of the Company changed to U.S. dollars from Canadian dollars on January 1, 2015 based on management’s analysis of the changes in the primary economic environment in which the Company operates. The change in functional currency is accounted for prospectively from January 1, 2015 and prior year financial statements have not been restated for the change in functional currency. Past translation gains and losses from the application of the U.S. dollar as the reporting currency while the Canadian dollar was the functional currency are included as part of the cumulative foreign currency translation adjustment, which is reported as a component of shareholders’ equity under accumulated other comprehensive loss.

For periods commencing January 1, 2015, monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates in effect at the balance sheet date. Opening balances related to non-monetary assets and liabilities are based on prior period translated amounts, and nonmonetary assets and nonmonetary liabilities incurred after January 1, 2015 are translated at the approximate exchange rate prevailing at the date of the transaction. Revenue and expense transactions are translated at the approximate exchange rate in effect at the time of the transaction. Foreign exchange gains and losses are included in the statement of operations and comprehensive income (loss) as foreign exchange gain (loss).

The Company granted stock options with exercise prices denominated in Canadian dollars under its Amended and Restated Stock Option Plan to members of its board of directors and certain consultants prior to the Company’s initial public offering (“IPO”) in November 2014. Following the change in functional currency on January 1, 2015, described in note 3(a), the options denominated in Canadian dollars that were granted to members of the Company’s board of directors and certain consultants were subject to liability accounting with fair value calculated using the Black-Scholes option-pricing model. The liability classified stock options are measured at fair value at each reporting period with changes in fair value recognized in the statement of operations and comprehensive income (loss) as general and administrative stock based compensation expense.

In May 2014, the FASB issued amendments to clarify the principles of recognizing revenue and to develop a common revenue standard that would remove inconsistencies in revenue requirements, leading to improved comparability of revenue recognition practices across entities and industries. The amendments stipulate that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosure will also be required about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. In April 2015, the FASB voted to propose a deferral of the effective date of the new revenue standard by one year. The new guidance would be effective for public entities for fiscal years beginning after December 15, 2017 instead of the originally contemplated effective date of December 15, 2016. Entities are permitted to adopt in accordance with the original effective date if they choose. The Company is currently evaluating the new guidance to determine the impact it will have on the Company’s financial position, results of operations and cash flows.

In August 2014, the FASB issued amendments requiring management to assess an entity’s ability to continue as a going concern. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. These amendments will be effective for public entities for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of these amendments in fiscal 2017 is not expected to have a material impact on the Company’s financial statements.

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share is computed by adjusting net income (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities.

Prior to the Company’s IPO, net income (loss) per share was calculated under the two-class method as the Company had outstanding shares that met the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. All of the outstanding redeemable convertible preferred shares converted to common shares upon the consummation of the Company’s IPO.

As the Company reported a net loss attributable to common shareholders for the six months ended June 30, 2015 and no net income was attributable to common shareholders for the three and six months ended June 30, 2014, all stock options were anti-dilutive and were excluded from the diluted weighted average shares outstanding for those periods. For the three months ended June 30, 2015, common shares of 389,283 were excluded from the calculation of income per common share because their inclusion would be anti-dilutive.

The following is a reconciliation of the numerators and denominators of basic and diluted net income (loss) per common share:

U.S. GAAP establishes a fair value hierarchy for inputs to be 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).

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. As quoted prices for the liability classified stock options are not readily available, the Company has used a Black-Scholes pricing model to estimate fair value using Level 3 inputs as defined above.

The weighted average Black-Scholes option-pricing assumptions for liability classified stock options outstanding at June 30, 2015 are as follows:

Accounts payable and accrued expenses consisted of the following:

The following table presents stock option activity for the period:

The fair value of each option issued to employees and non-employees is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

The weighted-average fair value of options granted during the six months ended June 30, 2015 was $11.96 (six months ended June 30, 2014 - $6.57) per option.

The Company has entered into a number of collaboration agreements with multiple deliverables under which it may have received non-refundable upfront payments. The Company generally recognizes revenue from upfront payments ratably over the term of its estimated period of performance of research under its collaboration agreements in the event that such arrangements represent a single unit of accounting. The collaborations may also include contractual milestone payments, which relate to the achievement of prespecified research, development, regulatory and commercialization events. The milestone events coincide with the progression of product candidates from research and development, to regulatory approval and through to commercialization. The process of successfully discovering a new product candidate, having it selected by the collaborator for development and having it approved and ultimately sold for a profit is highly uncertain. As such, the milestone payments that the Company may earn from its collaborators involve a significant degree of risk to achieve.

The following table is a summary of the revenue recognized from the Company’s collaborations for the three and six months ended June 30, 2015 and 2014: