UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑Q

 

For the quarterly period ended March 31, 2015

OR

For the transition period from             to             

Commission file number: 001-36687

 

XENON PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

 

200-3650 Gilmore Way

Burnaby, British Columbia V5G 4W8

Canada

(Address of principal executive offices)

(604) 484-3300

(Registrant’s telephone number, including area code)

 

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  x    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of registrant’s common shares outstanding as of May 11, 2015 was 14,228,536

 

 

 

 

 

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XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

 

 

 

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

XENON PHARMACEUTICALS INC.

Balance Sheets

(Unaudited)

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

 

 

 

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

 

 

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XENON PHARMACEUTICALS INC.

Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

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

 

 

 

 

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

 

 

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XENON PHARMACEUTICALS INC.

Statement of Shareholders’ Equity (Deficit)

(Unaudited)

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

 

 

 

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

 

 

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XENON PHARMACEUTICALS INC.

Statements of Cash Flows

(Unaudited)

(Expressed in thousands of U.S. dollars)

 

 

 

 

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

 

 

 

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XENON PHARMACEUTICALS INC.

Notes to Financial Statements

(Unaudited)

(Expressed in thousands of U.S. dollars except numbers of shares)

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.

On October 1, 2014, the Company effected a 1 for 4.86 reverse share split of its common and Series A, B and E redeemable convertible preferred shares. At the time of the consolidation, there were no outstanding Series C and D preferred shares and therefore such series were not included in the consolidation. Accordingly, (i) every 4.86 common shares were combined into one common share, (ii) every 4.86 redeemable Series A, B and E convertible preferred shares were combined into one redeemable convertible preferred share, (iii) the number of common shares into which each outstanding subscription right was exchangeable into common shares were proportionately decreased on a 1 for 4.86 basis, (iv) the number of common shares into which each outstanding option to purchase common shares was exercisable were proportionately decreased on a 1 for 4.86 basis, and (v) the exercise price for each such outstanding option to purchase common shares was proportionately increased on a 1 for 4.86 basis. All of the share numbers, share prices, and exercise prices prior to October 1, 2014 have been adjusted, on a retroactive basis, to reflect this 1 for 4.86 reverse share split.

On November 10, 2014, the Company completed an initial public offering (“IPO”) of 4,600,000 of its common shares at a price to the public of $9.00 per share. On November 10, 2014, the Company also completed a private placement, in which the Company issued 495,000 of its common shares to an affiliate of Genentech, Inc. (“Genentech”) at a price of $9.00 per share. Immediately prior to the closing of the IPO, all outstanding convertible preferred shares were converted into 7,725,924 common shares and 10,201 outstanding subscription rights were converted into 10,201 common shares. Following the IPO, there were no preferred shares or subscription rights outstanding.

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 month periods ended March 31, 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 change in functional currency described in note 3.

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.

 

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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 as foreign exchange gain (loss).

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 three months ended March 31, 2015 and no net income was attributable to common shareholders for the three months ended March 31, 2014, all stock options were anti-dilutive and were excluded from the diluted weighted average shares outstanding for both periods.

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).

 

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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.

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:

 

 

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The weighted-average fair value of options granted during the three months ended March 31, 2015 was $11.84 (three months ended March 31, 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 months ended March 31, 2015 and 2014:

 

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.

 

 

 

 

 

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

 

This section should be read in conjunction with our unaudited financial statements and related notes included in Part I, Item 1 of this report and our audited 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, 2014 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 12, 2015 and with the securities commissions in British Columbia, Alberta and Ontario on March 12, 2015.

 

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:

 

 

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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. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars.

 

Overview

 

We are a clinical-stage biopharmaceutical company discovering and developing a pipeline of differentiated therapeutics for orphan indications that we intend to commercialize on our own, and for larger market indications that we intend to partner with global pharmaceutical companies.  We have built a core enabling discovery platform for the discovery of validated drug targets by studying rare human diseases with extreme traits, including diseases caused by mutations in ion channels, known as channelopathies.  We have an integrated platform that includes in-house capabilities for human genetics, small molecule drug discovery, as well as preclinical and clinical development.

 

Our business was founded on our proprietary discovery platform, which we refer to as Extreme Genetics.  Extreme Genetics involves the study of families where individuals exhibit inherited severe traits, or phenotypes.  By identifying and characterizing single-gene defects responsible for these phenotypes, we gain insights into human disease biology to better select targets for therapeutic intervention.  Our Extreme Genetics discovery platform has yielded the first approved gene therapy product in the European Union, or the EU, and a broad development pipeline and multiple pharmaceutical partnerships.  We believe that our Extreme Genetics discovery platform enhances the likelihood of discovering a drug target that has a major effect in humans.  From these discoveries, we can gain an improved understanding of how a drug that modulates the target might act when given to a human.

 

Our pharmaceutical partners include Teva Pharmaceutical Industries, Ltd., or Teva (through its subsidiary, Ivax International GmbH), Genentech, Inc., or Genentech, and Merck & Co., Inc., or Merck (through its affiliate, Essex Chemie AG).  Our pharmaceutical collaborations have generated in aggregate over $155.0 million in non-equity funding to date with the potential to provide us with over $1.0 billion in future milestone payments, as well as royalties and co-promotion income on product sales.

 

To date, our Extreme Genetics discovery platform has yielded:

 

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We have funded our operations through the sale of equity securities, funding received from our licensees and collaborators and, to a lesser extent, government funding.   For the three months ended March 31, 2015, we recognized revenues, consisting primarily of funding from our collaborators of approximately $4.0 million.  This compared to $5.0 million for the three months ended March 31, 2014.

 

Though our revenue from our collaboration and license agreements has resulted in net income of $13.0 million for the year ended December 31, 2014 and $12.0 million for the year ended December 31, 2013, we do not expect to have sustained profitability for the foreseeable future. We had a net loss of $4.2 million for the three months ended March 31, 2015 and had an accumulated deficit of $108.0 million as of March 31, 2015, from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations.

 

We have not generated any royalty revenue or other revenue from product sales, and 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 substantially as we:

create additional infrastructure to support our operations as a public company 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. In addition, we have received nominal royalties from a diagnostic license. To date, we have not generated any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales other than from sales of Glybera under our license to uniQure for the foreseeable future, if ever.

 

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The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the three months ended March 31, 2015 and 2014 (in thousands):

 

 

Through March 31, 2015, we had recognized upfront fees and milestone payments totaling CAD$1.1 million, pursuant to our sublicense and research agreement with uniQure. We are eligible to receive certain additional milestone payments of less than CAD$1.0 million for Glybera and for each subsequent product, if any, developed pursuant to the agreement.

Pursuant to the terms of our collaborative development and license agreement with Teva, we received an upfront payment of $41.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $41.0 million upfront payment is being recognized as revenue ratably over the expected period of research performance of pre-commercial activities, which is the three-year period from December 2012 through December 2015.

Pursuant to the terms of our December 2011 collaborative development and license agreement with Genentech, we received an upfront payment of $10.0 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $10.0 million upfront payment was recognized as revenue ratably over the expected period of research performance, which was the three-year period from December 2011 through December 2014. In September 2013, we received a $5.0 million milestone payment for the selection of a compound for good laboratory practices, or GLP, toxicology studies. We recognized the milestone payment upon achievement in August 2013. In August 2014, we received an $8.0 million milestone payment for the approval of the GDC-0276 Clinical Trial Application by Health Canada. We recognized the milestone payment upon achievement in August 2014.

Pursuant to the terms of our March 2014 agreement with Genentech, we received an upfront payment of $1.5 million. We determined that the various deliverables under this agreement should be considered as a single unit of accounting. As such, the $1.5 million upfront payment is being recognized as revenue ratably over the expected period of research performance, which is the two-year period from March 2014 to March 2016.

As our other internal and partnered products are in various stages of clinical and preclinical development, we do not expect to generate any revenue from product sales other than from our share of revenue related to our agreement with uniQure for at least the next several years. We expect that revenue for the next several years will be derived from our agreement with uniQure and our eligibility to receive a share of the compensation received by uniQure relating to the technology or products licensed by us, and full-time equivalents, or FTEs, and 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.

The following table is a summary of our deferred revenue for our collaboration and licensing agreements as of March 31, 2015 and December 31, 2014 (in thousands):

 

 

We expect such deferred revenue remaining as of March 31, 2015 to be recognized as revenue in the applicable fiscal years ending December 31, 2015 and 2016 based on our accounting policy for revenue recognition for each collaboration agreement.

 

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Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2015 and 2014 (in thousands):

 

 

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research on our product candidates in collaboration with Teva and Genentech, as well as further research and development of our other proprietary product candidates.

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

Project-specific expenses reflect costs directly attributable to our clinical development candidates and our preclinical candidates once nominated and selected for further development. All remaining research and development expenses are reflected in early-stage discovery programs. 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 into clinical development, conduct our development activities under our agreements with Teva and Genentech, advance our internal drug discovery programs into preclinical 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, preclinical studies and clinical trial activities as well as third-party 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 preclinical 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 share-based compensation of our executive, finance, business development and administrative functions, travel expenses, allocated facility-related costs not otherwise included in research and development expenses, and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection. Following the IPO, we have been incurring additional general and administrative expenses as a public company, including costs of additional personnel, additional professional fees for audit, accounting and legal services, director fees, enhanced business and accounting systems, costs related to investor relations and increased premiums for directors’ and officers’ liability insurance.

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, and build our commercial infrastructure for the potential option for co-promotion of TV-45070 in the U.S., if and when regulatory approval is received.

 

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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.

Foreign Exchange Gain (Loss). On January 1, 2015, our functional currency changed from the Canadian dollar to the U.S. dollar based on our analysis of the changes in the primary economic environment in which we operate. We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations. For the three months ended March 31, 2015, net foreign exchange losses comprise 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). See Part I, Item 3 – “Foreign Currency Exchange Risk” below.

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 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 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.

During the three months ended March 31, 2015, we had the following changes in our critical accounting policies:

Our reporting currency is the U.S. dollar. Our functional currency 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 we operate. 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 as foreign exchange gain (loss).

There have been no other significant and material changes in our critical accounting policies during the three months ended March 31, 2015, 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 2014 Annual Report on Form 10-K filed with the SEC on March 12, 2015. We believe that the accounting policies discussed in the AnnualReport are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

 

 

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Results of Operations

Comparison of Three Months Ended March 31, 2015 and 2014

The following table summarizes the results of our operations for the three months ended March 31, 2015 and 2014 together with changes in those items (in thousands):

 

 

Revenue

We recognized revenue of $4.0 million for the three months ended March 31, 2015 compared to $5.0 million for the three months ended March 31, 2014, a decrease of $1.0 million. In the comparative period, $0.8 million was recognized relating to the upfront payment from the December 2011 collaborative development and license agreement with Genentech. No such amounts were recognized in the current quarter as the upfront payment was fully recognized by December 2014. This decrease was partially offset by recognition of $0.2 million of an upfront payment received from Genentech for the pain genetics collaboration entered into in March 2014. The remaining decrease was due to less FTE funding from both Genentech and Teva and the change in the foreign exchange rate between the U.S. and Canadian dollar.

Research and Development Expenses

The following table summarizes research and development expenses for the three months ended March 31, 2015 and 2014 together with changes in those items (in thousands):

 

 

Research and development expenses were $3.4 million for the three months ended March 31, 2015 as compared to $2.5 million for the three months ended March 31, 2014. The increase of $0.9 million was primarily attributable to a $1.5 million increase in preclinical and discovery program expenses primarily related to XEN801 entering IND-enabling studies as well as increased spending on our Nav1.6 sodium channel inhibitor program. This increase was partially offset by decreases in Teva and Genentech collaboration expenses.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the three months ended March 31, 2015 and 2014 together with changes in those items (in thousands):

 

 

 

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General and administrative expenses were $1.8 million for the three months ended March 31, 2015 compared to $1.4 million for the three months ended March 31, 2014. This increase was primarily due to additional expenses incurred as a public company, including costs of additional personnel, additional professional fees for audit, accounting and legal services, director fees, enhanced business and accounting systems, costs related to investor relations and increased premiums for directors’ and officers’ liability insurance.

Other Income (Expense)

The following table summarizes our other income (expense) for the three months ended March 31, 2015 and 2014 together with changes in those items (in thousands):

 

 

Other expense was $3.0 million for the three months ended March 31, 2015 as compared to other income of $0.3 million for the three months ended March 31, 2014, a change of $3.4 million, primarily attributable to $3.1 million of unrealized foreign exchange losses arising largely from the translation of $54.5 million of cash and cash equivalents and marketable securities denominated in Canadian dollars to U.S. dollars and an 8% decrease in the value of the Canadian dollar during the period.

Liquidity and Capital Resources

To date, we have financed our operations primarily through funding received from collaboration and license agreements, private placements of our common and preferred shares and our initial public offering, as well as through the receipt of government funding. As of March 31, 2015, we had cash and cash equivalents and marketable securities of $75.4 million. We received $38.5 million of proceeds, net of underwriting discounts and commissions but before offering expenses, from our initial public offering and $4.1 million of proceeds, net of underwriters’ fees but before offering expenses, from the concurrent private placement to an affiliate of Genentech. Our initial public offering and concurrent private placement each closed in November 2014.

We have incurred significant operating losses since inception. We had a $4.2 million net loss for the three months ended March 31, 2015 and an accumulated deficit of $108.0 million from inception through March 31, 2015. We expect to continue to incur significant expenses in excess of our revenue and expect to incur operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue our research and preclinical and clinical development of our product candidates; expand the scope of our current studies for our product candidates; initiate additional preclinical, clinical or other studies for our product candidates, including under our collaboration agreements; change or add additional manufacturers or suppliers; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; seek to identify and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other payments under our in-license agreements including, without limitation, our agreements with the University of British Columbia, or UBC, and the Memorial University of Newfoundland, or MUN; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; establish a sales, marketing and distribution infrastructure to commercialize any products for which we or one of our collaborators may obtain marketing approval, and maintain commercial rights; create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and experience any delays or encounter issues with any of the above.

Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination of collaboration agreements and equity or debt financings. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone payments under our agreements with them, we do not have any committed external sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common shareholders. If we raise additional funds through collaboration agreements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

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Our future capital requirements are difficult to forecast and will depend on many factors, including: