Xenon(XENE) - 2020 Q1 - Quarterly Report

EXPLANATORY NOTE Xenon Pharmaceuticals Inc. filed this Quarterly Report on Form 10-Q in reliance on an SEC Order, as the COVID-19 outbreak delayed the preparation and completion of financial statements due to remote work and limited interactions with advisors - Filing of Form 10-Q was delayed due to the COVID-19 outbreak, impacting financial reporting and legal departments' ability to interact with professional advisors[7] - The Form 10-Q was filed within the 45-day extension period provided by the SEC Order issued on March 25, 2020[8] PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and related notes, detailing the company's financial position and performance Item 1. Financial Statements This section provides the company's unaudited consolidated financial statements and comprehensive notes, highlighting key financial changes and capital activities Consolidated Balance Sheets This section presents the company's financial position, showing significant increases in cash, marketable securities, and shareholders' equity, alongside a rise in common shares outstanding Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Metric | March 31, 2020 | December 31, 2019 | Change (Absolute) | | :-------------------------------- | :------------- | :---------------- | :---------------- | | Cash and cash equivalents | $60,508 | $24,755 | +$35,753 | | Marketable securities | $169,163 | $116,603 | +$52,560 | | Total assets | $237,043 | $147,697 | +$89,346 | | Total liabilities | $49,065 | $55,720 | -$6,655 | | Total shareholders' equity | $187,978 | $91,977 | +$96,001 | - Common shares outstanding increased to 34,956,272 as of March 31, 2020, from 28,139,228 as of December 31, 2019[13] Consolidated Statements of Operations and Comprehensive Loss This section details the company's financial performance, showing increased revenue from collaboration, higher operating expenses, and a reduced net loss for the period Consolidated Statements of Operations and Comprehensive Loss Highlights (Three Months Ended March 31, in thousands of U.S. dollars) | Metric | 2020 | 2019 | Change (Absolute) | | :----------------------------------- | :----- | :----- | :---------------- | | Revenue | $7,078 | $0 | +$7,078 | | Research and development expenses | $11,791 | $9,137 | +$2,654 | | General and administrative expenses | $3,320 | $2,621 | +$699 | | Loss from operations | $(8,033) | $(11,758) | +$3,725 | | Net loss and comprehensive loss | $(7,484) | $(11,341) | +$3,857 | | Net loss per common share (Basic and diluted) | $(0.22) | $(0.42) | +$0.20 | - Revenue for the three months ended March 31, 2020, was primarily derived from the Neurocrine Biosciences collaboration agreement[14][51] Consolidated Statements of Shareholders' Equity This section outlines changes in shareholders' equity, primarily driven by substantial increases from common share issuances and stock-based compensation expenses - Total shareholders' equity increased from $91,977 thousand as of December 31, 2019, to $187,978 thousand as of March 31, 2020[16] - Issuance of common shares, net of issuance costs, contributed $102,456 thousand to shareholders' equity during the three months ended March 31, 2020[16] - Stock-based compensation expense was $1,015 thousand for the three months ended March 31, 2020, compared to $476 thousand for the same period in 2019[16] Consolidated Statements of Cash Flows This section details cash flow activities, showing increased cash usage in operations and investing, offset by a substantial increase in cash from financing activities Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, in thousands of U.S. dollars) | Activity | 2020 | 2019 | Change (Absolute) | | :-------------------------------- | :--------- | :--------- | :---------------- | | Net cash used in operating activities | $(13,067) | $(8,696) | $(4,371) | | Net cash used in investing activities | $(52,925) | $(7,003) | $(45,922) | | Net cash provided by financing activities | $102,470 | $58 | +$102,412 | | Cash and cash equivalents, end of period | $60,508 | $52,180 | +$8,328 | - Net cash provided by financing activities significantly increased to $102,470 thousand in Q1 2020, primarily due to the issuance of common shares[18] - Purchases of marketable securities increased substantially to $107,482 thousand in Q1 2020 from $34,325 thousand in Q1 2019[18] Notes to Consolidated Financial Statements This section provides detailed explanatory notes to the consolidated financial statements, covering business nature, accounting policies, estimates, and specific financial instrument details 1. Nature of the business Xenon Pharmaceuticals Inc. is a clinical-stage biopharmaceutical company focused on developing innovative therapeutics for neurological disorders, particularly epilepsy, leveraging its expertise in human genetics and ion channels. The company has incurred significant operating losses since inception and expects this trend to continue, financing its operations primarily through collaboration agreements, equity, and debt financings - Xenon Pharmaceuticals Inc. is a clinical-stage biopharmaceutical company focused on developing therapies for neurological disorders, with a primary focus on epilepsy[20] - The company had an accumulated deficit of $257,139 thousand and a net loss of $7,484 thousand for the three months ended March 31, 2020, and expects to continue incurring operating losses[21] - Operations are financed primarily through collaboration and license agreements, private and public equity offerings, debt financing, and government funding[21][22] 2. Basis of presentation The consolidated financial statements are presented in U.S. dollars and include the accounts of Xenon Pharmaceuticals Inc. and its wholly-owned U.S. subsidiary. They are prepared in accordance with U.S. GAAP and SEC rules for interim financial information, reflecting normal recurring adjustments - Consolidated financial statements are presented in U.S. dollars and include Xenon Pharmaceuticals Inc. and its wholly-owned subsidiary, Xenon Pharmaceuticals USA Inc[23][24] - Statements are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) and SEC rules for interim financial information[25] 3. Use of estimates The preparation of interim financial statements requires management to make estimates and assumptions, particularly concerning revenue recognition, stock-based compensation, and accrued liabilities. While the COVID-19 pandemic had no material impact as of March 31, 2020, its future effects on the business, operations, and financial condition remain highly uncertain - Significant areas of estimates include revenue recognition, stock-based compensation, and accrued liabilities[28] - No material impact from the COVID-19 pandemic on consolidated financial statements as of March 31, 2020; however, the full extent of future impacts is highly uncertain[29] 4. Changes in significant accounting policies The company adopted ASU 2019-08, related to share-based consideration payable to a customer, retrospectively as of January 1, 2020. This adoption had no impact on the company's consolidated financial statements - Adopted 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,' retrospectively as of January 1, 2020[30] - The adoption of this standard had no impact on the company's consolidated balance sheets, statements of operations and comprehensive loss, or statements of cash flows[30] 5. Net income (loss) per common share Net income (loss) per common share is calculated using the two-class method for participating securities, which includes Series 1 Preferred Shares. For the three months ended March 31, 2020 and 2019, all stock options, warrants, and convertible preferred shares were anti-dilutive and thus excluded from diluted weighted-average common shares outstanding - Basic net income (loss) per common share is calculated using the two-class method for participating securities, including Series 1 Preferred Shares[31] - For the three months ended March 31, 2020 and 2019, all stock options, warrants, and convertible preferred shares were anti-dilutive and excluded from diluted weighted-average common shares outstanding[34] 6. Fair value of financial instruments The company measures financial instruments at fair value using a three-level hierarchy. Level 1 assets include cash, cash equivalents, and marketable securities with quoted prices in active markets. Other instruments like accounts receivable, accounts payable, accrued expenses, and the term loan approximate fair value due to their short-term nature or prevailing market rates - The company uses a fair value hierarchy (Level 1, Level 2, and Level 3) to classify inputs used to measure the fair value of financial assets and liabilities[35] - Level 1 assets include cash and cash equivalents and marketable securities with quoted prices in active markets[37] - The carrying amounts of accounts receivables, accounts payable, accrued expenses, and the term loan approximate fair value[37] 7. Leases The company has one operating lease for research laboratories and office space in Burnaby, British Columbia, with a remaining term of 2 years as of March 31, 2020. Total future minimum lease payments amount to $1,154 thousand - The company has one operating lease for research laboratories and office space in Burnaby, British Columbia[38] - The remaining lease term is 2 years as of March 31, 2020, with a discount rate of 3.75%[38] Future Minimum Lease Payments as of March 31, 2020 (in thousands of U.S. dollars) | Year ending December 31: | Amount | | :----------------------- | :----- | | 2020 | $451 | | 2021 | $567 | | 2022 | $136 | | Total future minimum lease payments | $1,154 | 8. Accounts payable and accrued expenses Accounts payable and accrued expenses decreased to $8,084 thousand as of March 31, 2020, from $8,818 thousand at December 31, 2019, primarily due to a reduction in employee compensation, benefits, and related accruals Accounts Payable and Accrued Expenses (in thousands of U.S. dollars) | Category | March 31, 2020 | December 31, 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 | - The decrease in total accounts payable and accrued expenses was primarily driven by a reduction in employee compensation, benefits, and related accruals[39] 9. Term loan The company had a term loan of $15,500 thousand with Silicon Valley Bank. This loan was fully repaid on May 20, 2020, ahead of its maturity date, including a final payment fee of $1,008 thousand and a prepayment fee of $225 thousand. Interest expense for Q1 2020 was $330 thousand - The company had a term loan with a principal amount of $15,500 thousand from Silicon Valley Bank[40] - The total outstanding term loan balance was repaid on May 20, 2020, ahead of maturity, including a final payment fee of $1,008 thousand and a prepayment fee of $225 thousand[41] - Interest expense for the three months ended March 31, 2020, was $330 thousand, including amortization of debt discount and accretion of the final payment fee[42] 10. Share capital This section details the company's share capital activities, including significant equity financings in late 2019 and early 2020 that raised over $100 million in net proceeds. It also covers the exchange agreement with BVF for Series 1 Preferred Shares and stock option activity, which saw a substantial increase in options granted and a higher weighted-average fair value in Q1 2020 (a) Financing This subsection details recent equity financings, including an at-the-market offering and a public offering, which collectively raised significant net proceeds - In January 2020, the company sold an additional 2,446,687 common shares under an at-the-market offering for net proceeds of approximately $37,979 thousand[43] - Completed an underwritten public offering of 3,750,000 common shares in January 2020, receiving net proceeds of $56,700 thousand[44] - Underwriters exercised their option in full in February 2020 for an additional 562,500 common shares, yielding $8,460 thousand in net proceeds[44] (b) Exchange agreement with certain funds affiliated with BVF Partners L.P. (collectively, "BVF") This subsection describes the exchange agreement with BVF, involving the issuance of Series 1 Preferred Shares convertible into common shares with beneficial ownership limitations - In March 2018, the company issued 2,868,000 Series 1 Preferred Shares to BVF in exchange for common shares, convertible one-for-one into common shares subject to a 9.99% beneficial ownership limitation[45][46] - Series 1 Preferred Shares rank equally to common shares in liquidation and are entitled to vote on an as-converted basis[47] - BVF converted 1,852,000 Series 1 Preferred Shares into common shares during the year ended December 31, 2018[49] (c) Stock-based compensation This subsection details stock option activity, including grants, exercises, and forfeitures, along with the weighted-average assumptions used for valuation Stock Option Activity (Three Months Ended March 31) | Metric | 2020 | 2019 | | :-------------------------- | :--------- | :--------- | | Outstanding, beginning of period | 3,534,236 | 2,671,906 | | Granted | 1,118,350 | 21,900 | | Exercised | (98,326) | (22,402) | | Forfeited, cancelled or expired | (26,268) | (3,955) | | Outstanding, end of period | 4,527,992 | 2,667,449 | Weighted-Average Assumptions for Stock Options Granted (Three Months Ended March 31) | Assumption | 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 For the three months ended March 31, 2020, the company recognized $7,078 thousand in collaboration revenue, primarily from its agreement with Neurocrine Biosciences. This revenue stemmed from an upfront cash payment and an equity investment, allocated across exclusive licenses for XEN901 and DTCs, and development services. As of March 31, 2020, $24,608 thousand of deferred revenue remained Revenue (Three Months Ended March 31, in thousands of U.S. dollars) | Source | 2020 | 2019 | | :-------------------------------- | :----- | :----- | | Neurocrine Biosciences: Recognition of the transaction price | $5,844 | $0 | | Neurocrine Biosciences: Research and development services | $1,234 | $0 | | Total collaboration revenue | $7,078 | $0 | - The Neurocrine Biosciences agreement included an upfront cash payment of $30,000 thousand and a $20,000 thousand equity investment[52] - As of March 31, 2020, there was $24,608 thousand of deferred revenue related to the Neurocrine Collaboration Agreement[54] 12. Income taxes Income tax expense or recovery for the periods presented is attributable to the operations of Xenon Pharmaceuticals USA Inc. Deferred income tax assets are recognized based on temporary differences, with their realization contingent upon the generation of sufficient future taxable income - Income tax (expense) recovery arose from the operations of Xenon Pharmaceuticals USA Inc., the company's wholly-owned U.S. subsidiary[56] - Deferred income tax assets are recorded based on temporary differences, and their realization depends on generating sufficient taxable income in future periods[56] 13. Commitments and contingencies The company has various commitments, including a priority access agreement with Medpace for $3,908 thousand in clinical development services remaining. Other agreements involve potential milestone payments and royalties for XEN007 and XEN1101 programs. The company also has customary indemnification provisions in its agreements, covered by commercial and product liability insurance - Committed to $3,908 thousand of clinical development services under a priority access agreement with Medpace Inc. as of March 31, 2020[57] - Potential future payments for the XEN1101 program include $500 thousand in clinical development milestones, up to $6,000 thousand in regulatory milestones, and $1,500 thousand in other pre-commercial milestones[57] - License agreements for XEN007 include potential payments of $2,000 thousand in clinical development milestones, up to $7,000 thousand in regulatory milestones, and low-to-mid single-digit percentage royalties on net sales[57] - Indemnification provisions in license and research agreements are customary, with potential future indemnification being unlimited but covered by commercial and product liability insurance[57][58] 14. Subsequent event In April 2020, Flexion Therapeutics Inc. initiated the first GLP toxicology study for FX301 (XEN402), triggering a $500 thousand milestone payment to Xenon. This milestone payment had been previously recognized into revenue during the year ended December 31, 2019 - Flexion Therapeutics Inc. initiated the first GLP toxicology study for FX301 (XEN402) in April 2020[59] - This initiation triggered a $500 thousand milestone payment to Xenon, which was recognized into revenue during the year ended December 31, 2019[59] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and operational results, covering program overviews, financial performance, liquidity, and the impact of COVID-19 Forward-Looking Statements This section contains forward-looking statements regarding future expectations and operational projections, which are subject to various risks and uncertainties - This section contains forward-looking statements regarding future expectations, projections of operational results, and financial condition[61] - These statements are subject to certain risks and uncertainties that could cause actual results to differ materially, as discussed in Part II, Item 1A — 'Risk Factors'[63] Overview This overview introduces Xenon Pharmaceuticals as a clinical-stage biopharmaceutical company focused on neurology, detailing its proprietary and partnered programs, recent revenue, and financial losses - Xenon Pharmaceuticals is a clinical-stage biopharmaceutical company focused on developing neurology-focused therapies, with a primary emphasis on epilepsy[65] - Proprietary programs include XEN1101 (Phase 2b for focal epilepsy), XEN496 (Phase 3 for KCNQ2-DEE), and XEN007 (Phase 2 for childhood absence epilepsy)[67] - Partnered programs include NBI-921352 (Neurocrine Biosciences, for SCN8A-DEE) and FX301 (Flexion, for post-operative pain)[67][68] - Recognized $7.1 million in revenue for the three months ended March 31, 2020, primarily from the Neurocrine Biosciences agreement[68] - Reported a net loss of $7.5 million for Q1 2020 and an accumulated deficit of $257.1 million as of March 31, 2020[68] Proprietary Programs This section details the company's proprietary clinical programs, including XEN1101 for focal epilepsy, XEN496 for KCNQ2-DEE, and XEN007 for childhood absence epilepsy, noting their development stages and potential COVID-19 impacts - XEN1101 (Kv7 potassium channel modulator) is in an ongoing Phase 2b clinical trial (X-TOLE study) for focal epilepsy, showing good tolerability and low discontinuation rates[67] - Topline data for the XEN1101 X-TOLE study is anticipated in the first half of 2021, with patient enrollment rates potentially impacted by the COVID-19 pandemic[67] - XEN496 (pediatric formulation of ezogabine) has Orphan Drug Designation and Fast Track designation for KCNQ2-DEE, with a Phase 3 clinical trial expected to initiate in 2020 based on FDA feedback[67] - XEN007 (CNS-acting calcium channel modulator) is in a physician-led Phase 2 proof-of-concept study for treatment-resistant childhood absence epilepsy, with results expected in 2020, dependent on patient enrollment rates due to COVID-19[67] Partnered Programs This section details partnered programs, including NBI-921352 with Neurocrine Biosciences for SCN8A-DEE, and FX301 with Flexion Therapeutics for post-operative pain, outlining their development progress and milestone payments - Neurocrine Biosciences has an exclusive license to NBI-921352 (formerly XEN901), a selective Nav1.6 sodium channel inhibitor for SCN8A-DEE and other epilepsies[67] - Neurocrine Biosciences anticipates filing an IND application in mid-2020 and starting a Phase 2 clinical trial in SCN8A-DEE patients in the second half of 2020[67] - The company is eligible to receive up to $25.0 million upon FDA acceptance of an IND for NBI-921352[67] - Flexion Therapeutics, Inc. acquired global rights to XEN402 (now FX301), a Nav1.7 inhibitor for post-operative pain; a GLP toxicology study commenced in April 2020, triggering a $0.5 million milestone payment[68] Financial Operations Overview The company's revenue is primarily derived from collaboration and licensing agreements, with no significant product sales revenue expected in the near term. Operating expenses are projected to increase over the next 12-24 months due to advancing product candidates, seeking regulatory approvals, expanding intellectual property, and building infrastructure. Critical accounting policies remain consistent, focusing on revenue recognition, R&D costs, and stock-based compensation Revenue Revenue is primarily from collaboration and licensing agreements, with $7.1 million recognized in Q1 2020 from the Neurocrine Biosciences agreement, and $24.6 million in deferred revenue remaining - Revenue is primarily derived from collaboration and licensing agreements, with no significant royalty revenue from product sales anticipated for the foreseeable future[69][70] Collaboration Revenue (Three Months Ended March 31, in thousands of U.S. dollars) | Source | 2020 | 2019 | | :-------------------------------- | :----- | :----- | | Neurocrine Biosciences: Recognition of the transaction price | $5,844 | $0 | | Neurocrine Biosciences: Research and development services | $1,234 | $0 | | Total collaboration revenue | $7,078 | $0 | - The $7.1 million revenue in Q1 2020 was from the Neurocrine Biosciences agreement, which included an upfront cash payment of $30.0 million and a $20.0 million equity investment[72] - As of March 31, 2020, $24.6 million of deferred revenue was recorded from upfront payments under the Neurocrine Biosciences agreement[74] Operating Expenses Total operating expenses increased by $3.353 million in Q1 2020, driven by higher research and development and general and administrative costs, with further increases expected Operating Expenses (Three Months Ended March 31, in thousands of U.S. dollars) | Category | 2020 | 2019 | | :-------------------------- | :------- | :------- | | Research and development | $11,791 | $9,137 | | General and administrative | $3,320 | $2,621 | | Total operating expenses | $15,111 | $11,758 | - Total operating expenses increased by $3.353 million (28.5%) from Q1 2019 to Q1 2020[75] - Expects research and development expenses to increase in the future as proprietary product candidates advance through clinical development and internal drug discovery programs progress[79] Research and Development Expenses Research and development expenses increased by $2.7 million in Q1 2020, primarily due to increased spending on XEN496 and XEN1101, partially offset by reduced XEN901 costs Research and Development Expenses by Program (Three Months Ended March 31, in thousands of U.S. dollars) | Program | 2020 | 2019 | Change (Absolute) | | :-------------------------------- | :------- | :------- | :---------------- | | XEN1101 expenses | $5,241 | $3,643 | +$1,598 | | XEN496 expenses | $2,667 | $650 | +$2,017 | | XEN901 expenses (now known as NBI-921352) | $714 | $2,742 | -$2,028 | | Pre-clinical, discovery and other program expenses | $3,169 | $2,102 | +$1,067 | | Total research and development expenses | $11,791 | $9,137 | +$2,654 | - Research and development expenses increased by $2.7 million (29.0%) in Q1 2020 compared to Q1 2019[90] - The increase was primarily due to increased spending on XEN496 and XEN1101, partially offset by decreased spending on XEN901 as Neurocrine Biosciences now bears most development costs[90] General and Administrative Expenses General and administrative expenses increased by $0.7 million in Q1 2020, mainly due to higher stock-based compensation, salaries, benefits, and insurance premiums General and Administrative Expenses (Three Months Ended March 31, in thousands of U.S. dollars) | Category | 2020 | 2019 | Change (Absolute) | | :-------------------------------- | :------- | :------- | :---------------- | | General and administrative expenses | $3,320 | $2,621 | +$699 | - General and administrative expenses increased by $0.7 million in Q1 2020, primarily due to higher stock-based compensation, salaries and benefits, and insurance premiums, partially offset by lower legal fees[91] Other Income (Expense) Other income increased by $0.1 million in Q1 2020, driven by higher interest income, despite a foreign exchange loss due to Canadian dollar depreciation Other Income (Expense) (Three Months Ended March 31, in thousands of U.S. dollars) | Category | 2020 | 2019 | Change (Absolute) | | :-------------------- | :------- | :------- | :---------------- | | Interest income | $1,116 | $682 | +$434 | | Interest expense | $(330) | $(358) | +$28 | | Foreign exchange gain (loss) | $(238) | $130 | $(368) | | Total Other Income | $548 | $454 | +$94 | - Interest income increased by $0.4 million due to higher average cash and investment balances[92] - A foreign exchange loss of $0.2 million was recorded in Q1 2020, compared to a $0.1 million gain in Q1 2019, largely due to an 8% decrease in the value of the Canadian dollar[92] Critical Accounting Policies and Significant Judgments and Estimates This section identifies critical accounting policies and significant estimates, including revenue recognition and R&D costs, noting no material changes during the period - Critical accounting policies and significant estimates include revenue recognition, research and development costs, and stock-based compensation[86] - No material changes in critical accounting policies or significant judgments and estimates occurred during the three months ended March 31, 2020[87] Results of Operations This section summarizes the results of operations, highlighting a $7.1 million increase in revenue and a $3.8 million reduction in loss before income taxes for Q1 2020 Summary of Operations (Three Months Ended March 31, in thousands of U.S. dollars) | Metric | 2020 | 2019 | Change (Absolute) | | :-------------------------------- | :------- | :------- | :---------------- | | Revenue | $7,078 | $0 | +$7,078 | | Research and development expenses | $11,791 | $9,137 | +$2,654 | | General and administrative expenses | $3,320 | $2,621 | +$699 | | 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 increased by $7.1 million in Q1 2020, primarily due to the Neurocrine Biosciences collaboration agreement[89] - Loss before income taxes decreased by $3.8 million, from $(11,304) thousand in Q1 2019 to $(7,485) thousand in Q1 2020[88] Liquidity and Capital Resources This section details the company's liquidity and capital resources, highlighting $229.7 million in cash and marketable securities, recent equity financings, and the repayment of its term loan, which are expected to fund operations for at least 12 months - As of March 31, 2020, the company had $229.7 million in cash, cash equivalents, and marketable securities[93] - The company had an accumulated deficit of $257.1 million as of March 31, 2020, and expects to continue incurring significant operating losses[93] - Existing cash and cash equivalents and marketable securities are expected to fund operating expenses and capital expenditure requirements for at least the next 12 months[97] - Raised $64.9 million in net proceeds from an underwritten public offering in January/February 2020 and $48.8 million from an at-the-market offering as of January 14, 2020[95] - Received an upfront cash payment of $30.0 million and a $20.0 million equity investment from Neurocrine Biosciences in December 2019[95] - The $15.5 million term loan with Silicon Valley Bank was repaid in May 2020, ahead of its maturity date[95] Cash Flows For the three months ended March 31, 2020, net cash used in operating activities increased to $13.1 million, and net cash used in investing activities increased to $52.9 million, primarily due to higher marketable securities purchases. Net cash provided by financing activities significantly increased to $102.5 million, driven by common share issuances Summary of Cash Flows (Three Months Ended March 31, in thousands of U.S. dollars) | Activity | 2020 | 2019 | | :-------------------------------- | :--------- | :--------- | | Net cash used in operating activities | $(13,067) | $(8,696) | | Net cash used in investing activities | $(52,925) | $(7,003) | | Net cash provided by financing activities | $102,470 | $58 | - The increase in cash used in operating activities was primarily related to higher research and development and general and administrative expenses and changes in working capital[99] - The increase in cash used in investing activities was driven by a significant increase in purchases of marketable securities, net of redemptions[100] - Net cash provided by financing activities increased substantially due to net proceeds from the issuance of common shares[101] Contractual Obligations and Commitments There have been no material changes to the company's contractual commitments since December 31, 2019, except for the full repayment of the $15.5 million term loan with Silicon Valley Bank on May 20, 2020, which included a final payment fee of $1.0 million and a prepayment fee of $0.2 million - No material changes to contractual commitments from those disclosed in the 2019 Annual Report on Form 10-K, as of March 31, 2020[102] - The $15.5 million term loan with Silicon Valley Bank was fully repaid on May 20, 2020, including a $1.0 million final payment fee and a $0.2 million prepayment fee[102] Inflation The company does not believe that inflation has had a material effect on its business, financial condition, or results of operations over the past two fiscal years - Inflation has not had a material effect on the company's business, financial condition, or results of operations in the last two fiscal years[103] Off-Balance Sheet Arrangements The company does not engage in any off-balance sheet financing activities and has no interest in variable interest entities - The company does not engage in any off-balance sheet financing activities[104] - The company does not have any interest in variable interest entities[104] Outstanding Share Data As of May 18, 2020, the company had 34,974,119 common shares issued and outstanding. Additionally, there were 4,492,149 outstanding stock options, a warrant for 40,000 common shares, and 1,016,000 Series 1 Preferred Shares, which are convertible into common shares on a one-for-one basis, subject to a 9.99% beneficial ownership limitation - As of May 18, 2020, the company had 34,974,119 common shares issued and outstanding[105] - Outstanding stock options to purchase an additional 4,492,149 common shares and an outstanding warrant to purchase 40,000 common shares[105] - 1,016,000 Series 1 Preferred Shares were issued and outstanding, convertible into common shares on a one-for-one basis, subject to a 9.99% beneficial ownership limitation[105] 2019 Inducement Equity Incentive Plan The 2019 Inducement Equity Incentive Plan, adopted in September 2019, reserved 400,000 common shares for equity awards to new employees or non-employee directors as an inducement. This plan, approved without shareholder approval per Nasdaq rules, will automatically terminate if the amended 2014 Equity Incentive Plan is approved by shareholders on June 1, 2020 - The 2019 Inducement Equity Incentive Plan was adopted in September 2019, reserving 400,000 common shares for issuance[106] - Awards under the plan are granted to individuals not previously serving as employees or non-employee directors, as an inducement to employment[108] - The plan will automatically terminate if the amendment and restatement of the 2014 Equity Incentive Plan is approved by shareholders on June 1, 2020[109] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Xenon Pharmaceuticals Inc. is exempt from providing quantitative and qualitative disclosures about market risk, as per Item 305(e) of Regulation S-K - As a smaller reporting company, Xenon Pharmaceuticals Inc. is not required to provide quantitative and qualitative disclosures about market risk[110] Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, evaluated the company's disclosure controls and procedures as of March 31, 2020, and concluded they were effective. There were no material changes in internal control over financial reporting during the period. The effectiveness of internal controls is subject to inherent limitations, providing reasonable, not absolute, assurances - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of March 31, 2020[111] - There were no material changes in internal control over financial reporting during the period ended March 31, 2020[112] - The effectiveness of any system of internal control over financial reporting is subject to inherent limitations and can only provide reasonable, not absolute, assurances[113] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, other disclosures, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is not currently involved in any legal proceedings that management believes would have a material adverse effect on its business, financial condition, operating results, or cash flows. Litigation, if it occurs, could still negatively impact the company due to defense costs and diversion of management resources - The company is not currently a party to any legal proceedings that are expected to have a material adverse effect on its business, financial condition, operating results, or cash flows[114] Item 1A. Risk Factors This section details various risks that could materially affect the company's business, financial condition, and operating results, encompassing financial, operational, developmental, commercial, and market-related factors Risks Related to Our Financial Condition and Capital Requirements This section highlights financial risks, including ongoing losses, the need for additional capital, potential shareholder dilution, impacts of market conditions, currency fluctuations, and restrictive debt covenants - The company has incurred significant losses ($7.5 million net loss in Q1 2020, $257.1 million accumulated deficit) and anticipates continued losses, requiring substantial additional funding[116] - Failure to obtain necessary capital when needed may force delays, limitations, or termination of product development efforts or other operations[123] - Raising additional capital may cause dilution to existing shareholders, restrict operations, or require relinquishing rights to technologies or product candidates[130] - Unstable market and economic conditions, including the COVID-19 pandemic, may adversely affect the business and financial condition, making financing more difficult[131] - The company is subject to risks associated with currency fluctuations, particularly the Canadian dollar, which could impact results of operations[132] - Debt financing arrangements can contain operating and financial covenants that may restrict business and financing activities[133] Risks Related to Our Business This section addresses business risks such as potential product development failures, intense industry competition, lack of commercialization experience, unproven drug discovery, COVID-19 impacts, and adverse tax consequences for U.S. shareholders - The company or its collaborators may fail to successfully develop product candidates, which are in varying stages of development and require substantial clinical testing and regulatory approval[135] - The biotechnology and pharmaceutical industries are intensely competitive, with many companies having significantly greater financial resources and expertise[136][138] - The company has no experience in Phase 3 and later-stage clinical development or commercialization, making it difficult to assess its ability to independently develop and commercialize products[143] - The company's approach to drug discovery is unproven, and there is no guarantee it will result in commercially valuable products[147][149] - The COVID-19 pandemic and other public health crises may materially and adversely affect the company's business, including supply chain disruptions, delays in clinical trials (e.g., XEN1101 enrollment), and impacts on employee productivity[161][162][163] - U.S. holders of common shares may suffer adverse tax consequences if the company is characterized as a passive foreign investment company (PFIC)[166] Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates This section details risks in product development, including lengthy and unpredictable regulatory approvals, uncertain clinical trial outcomes, potential manufacturing changes, and the impact of losing orphan drug designation or limited market opportunities - The regulatory approval processes are lengthy, expensive, and inherently unpredictable, with no guarantee of obtaining approval for product candidates[176] - Clinical drug development involves uncertain timelines and outcomes, with trials potentially halted or delayed due to safety risks, inability to enroll sufficient patients (especially for ultra-orphan indications), or regulatory non-compliance[179][180][189] - Results of pre-clinical studies or earlier clinical trials may not be predictive of later-stage clinical trials, and regulatory authorities may disagree with trial design or data interpretation[197][198] - Changes in methods of product candidate manufacturing or formulation may result in additional costs or delays[199] - Failure to obtain or maintain orphan drug designation or other regulatory exclusivity for product candidates would harm the company's competitive position[193][194] - Obtaining approval for product candidates in one jurisdiction does not ensure approval in other jurisdictions, limiting market opportunities[200] Risks Related to Commercialization This section outlines commercialization risks, including the lack of internal sales capabilities, ongoing regulatory burdens, potentially small market opportunities for rare diseases, unfavorable pricing, and the impact of healthcare reform measures - The company lacks its own sales, marketing, and distribution capabilities, and establishing them or relying on third parties carries significant risks and costs[205][206][207] - Even if regulatory approval is received, ongoing regulatory obligations and continued review may result in significant additional expenses and potential sanctions[208][209] - Market opportunities for product candidates targeting rare and ultra-rare diseases may be smaller than anticipated, requiring successful patient identification and significant market share for profitability[213] - Unfavorable pricing regulations and challenging third-party coverage and reimbursement practices could harm the business and limit product adoption and sales revenue[214][216][217] - Recently enacted and future legislation, including healthcare reform measures and drug price controls, may increase commercialization costs and affect product prices[218][220][221] Risks Related to Our Dependence on Third Parties This section details risks associated with dependence on third parties, including collaborators for development and commercialization, contract manufacturers for supply, and contract research organizations for clinical trials - The successful development and commercialization of partnered products and product candidates are highly dependent on the research, development, and marketing efforts of collaborators (e.g., Neurocrine Biosciences, Flexion, Genentech, Merck)[226] - Non-performance, shifting priorities, or termination of collaboration agreements by third parties could significantly delay or terminate programs, requiring the company to assume responsibilities or seek new collaborators[227][228] - The company relies on third-party manufacturers (CMOs) to produce clinical product candidate supplies, entailing risks related to regulatory compliance, quality control, and timely delivery[236][237] - Reliance on third parties (CROs, academic institutions) to monitor, support, and conduct pre-clinical and clinical trials poses risks of delays, non-compliance with regulatory requirements (cGLP, cGCP, cGMP), and potential data rejection[238][239][240][242] Risks Related to Intellectual Property This section covers intellectual property risks, including the uncertainty of patent protection, potential invalidation of patents, infringement claims, challenges in maintaining trade secret confidentiality, and impacts from changes in patent laws - The company's commercial success depends on obtaining and maintaining adequate patent and other intellectual property protection, which is uncertain and may not provide competitive advantages[246][248] - Patents covering product candidates could be found invalid or unenforceable if challenged, leading to loss of protection and competitive harm[253][254] - Claims that product candidates infringe third-party patent or intellectual property rights could result in costly litigation, require substantial time and money to resolve, or necessitate obtaining licenses on unfavorable terms[262][264][267][268] - Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information[271] - Recent court decisions and changes in patent laws could increase uncertainties and costs surrounding patent prosecution and enforcement[272] - Failure to obtain patent term extension under the Hatch-Waxman Act could shorten the exclusive marketing period for product candidates[273][274] Risks Related to Our Industry This section addresses industry-specific risks, including product liability lawsuits, compliance with anti-kickback and privacy laws, environmental regulations, and vulnerability to natural disasters - The company faces an inherent risk of product liability lawsuits from clinical testing and commercialization, which could result in substantial liabilities, decreased demand, and reputational harm[277][278] - Current and future operations are subject to federal and state anti-kickback, fraud and abuse, false claims, transparency, and health information privacy and security laws, with non-compliance potentially leading to significant penalties[281][282][283] - Failure to comply with environmental, health, and safety laws and regulations could result in fines or penalties[284] - The company is vulnerable to natural disasters (e.g., earthquakes) and other disruptions, which could adversely affect operations and data[285] Risks Related to the Securities Markets and Ownership of Our Common Shares This section covers risks related to common share ownership, including stock price volatility, potential future dilution, anti-takeover provisions, implications of 'smaller reporting company' status, and the absence of anticipated cash dividends - The market price of the company's common shares may be volatile, influenced by factors such as clinical trial results, regulatory announcements, and general market conditions, potentially leading to substantial losses for investors[286][287] - Future sales and issuances of common shares, preferred shares, or other convertible securities could cause substantial dilution to existing shareholders and a decline in the market price of common shares[288][302][303] - Provisions in corporate charter documents and Canadian law could make an acquisition of the company more difficult and may prevent attempts by shareholders to replace management[290][291][293] - As a 'smaller reporting company,' the company may comply with reduced reporting and disclosure requirements, which could make its common shares less attractive to investors[295][297] - The company's loss of 'emerging growth company' status may increase costs and demands on management, particularly regarding compliance with Section 404 of Sarbanes-Oxley[298][299] - The company does not anticipate paying any cash dividends on its common shares in the foreseeable future, meaning capital appreciation would be the sole source of gain for investors[308] Item 5. Other Information On May 20, 2020, Xenon Pharmaceuticals Inc. terminated its amended and restated loan and security agreement with Silicon Valley Bank by prepaying approximately $15.7 million, which included the outstanding principal balance and associated fees - The company terminated its amended and restated loan and security agreement with Silicon Valley Bank on May 20, 2020[309] - Approximately $15.7 million was prepaid to cover outstanding borrowed amounts and fees related to the termination[309] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, as well as various XBRL (eXtensible Business Reporting Language) documents for financial data - Exhibits include certifications of the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1, 32.2)[312] - XBRL Instance Document and Taxonomy Extension Documents (Schema, Calculation, Definition, Label, Presentation) are included[312] - Certifications attached as Exhibits 32.1 and 32.2 are not deemed filed with the Securities and Exchange Commission[312] SIGNATURES The Quarterly Report on Form 10-Q was duly signed on May 21, 2020, by Simon Pimstone, Chief Executive Officer, and Ian Mortimer, President and Chief Financial Officer, on behalf of Xenon Pharmaceuticals Inc - The report was signed by Simon Pimstone, Chief Executive Officer, and Ian Mortimer, President and Chief Financial Officer[316] - The signing date for the report was May 21, 2020[316]