0001564590-18-020018.txt : 20180807 0001564590-18-020018.hdr.sgml : 20180807 20180807170221 ACCESSION NUMBER: 0001564590-18-020018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 54 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180807 DATE AS OF CHANGE: 20180807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Xenon Pharmaceuticals Inc. CENTRAL INDEX KEY: 0001582313 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 980661854 STATE OF INCORPORATION: A1 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36687 FILM NUMBER: 18998910 BUSINESS ADDRESS: STREET 1: 200 - 3650 GILMORE WAY CITY: BURNABY STATE: A1 ZIP: V5G 48W BUSINESS PHONE: (604) 484-3300 MAIL ADDRESS: STREET 1: 200 - 3650 GILMORE WAY CITY: BURNABY STATE: A1 ZIP: V5G 48W 10-Q 1 xene-10q_20180630.htm 10-Q xene-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10‑Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

OR

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

For the transition period from                            to                         

Commission File Number: 001-36687

 

XENON PHARMACEUTICALS INC.

(Exact name of Registrant as Specified in its Charter)

 

 

Canada

98-0661854

(State or other jurisdiction of

incorporation or organization)

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

200-3650 Gilmore Way

Burnaby, British Columbia, Canada

V5G 4W8

(Address of principal executive offices)

(Zip Code)

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of August 3, 2018, the registrant had 19,261,889 common shares, without par value, outstanding.

 

 

 

 


 

XENON PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

Page

 

PART I. FINANCIAL INFORMATION

1

 

Item 1. Financial Statements

1

 

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

1

 

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

2

 

Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2018

3

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

4

 

Notes to Consolidated Financial Statements

5

 

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

13

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

 

Item 4. Controls and Procedures

25

 

PART II. OTHER INFORMATION

25

 

Item 1. Legal Proceedings

25

 

Item 1A. Risk Factors

25

 

Item 6. Exhibits

58

 

SIGNATURES

59

 

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

 

-i-


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

XENON PHARMACEUTICALS INC.

Consolidated Balance Sheets

(Unaudited)

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,435

 

 

$

20,486

 

Marketable securities

 

 

15,835

 

 

 

23,181

 

Accounts receivable

 

 

171

 

 

 

438

 

Prepaid expenses and other current assets

 

 

909

 

 

 

716

 

 

 

 

64,350

 

 

 

44,821

 

Prepaid expenses, long term

 

 

 

 

 

230

 

Property, plant and equipment, net

 

 

1,086

 

 

 

1,070

 

Total assets

 

$

65,436

 

 

$

46,121

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses (note 7)

 

 

3,094

 

 

 

3,383

 

Loan payable, current portion (note 8)

 

 

 

 

 

700

 

 

 

 

3,094

 

 

 

4,083

 

Loan payable, long-term (note 8)

 

 

11,721

 

 

 

6,104

 

 

 

$

14,815

 

 

$

10,187

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

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

 

 

21,825

 

 

 

 

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

   outstanding: 17,640,951 (December 31, 2017 - 17,998,420) (note 9)

 

 

177,012

 

 

 

173,841

 

Additional paid-in capital

 

 

37,718

 

 

 

36,471

 

Accumulated deficit

 

 

(184,944

)

 

 

(173,388

)

Accumulated other comprehensive loss

 

 

(990

)

 

 

(990

)

 

 

$

50,621

 

 

$

35,934

 

Total liabilities and shareholders’ equity

 

$

65,436

 

 

$

46,121

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

Subsequent events (note 12)

 

 

 

 

 

 

 

 

 

 

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

 

 

-1-


 

XENON PHARMACEUTICALS INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

 

$

 

 

$

15

 

 

$

 

 

$

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

5,408

 

 

 

6,109

 

 

 

10,988

 

 

 

12,012

 

General and administrative

 

 

2,178

 

 

 

1,799

 

 

 

4,416

 

 

 

3,899

 

 

 

 

7,586

 

 

 

7,908

 

 

 

15,404

 

 

 

15,911

 

Loss from operations

 

 

(7,586

)

 

 

(7,893

)

 

 

(15,404

)

 

 

(15,880

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

125

 

 

 

109

 

 

 

233

 

 

 

258

 

Interest expense

 

 

(200

)

 

 

 

 

 

(359

)

 

 

 

Foreign exchange gain (loss)

 

 

(140

)

 

 

404

 

 

 

(424

)

 

 

725

 

Gain on termination of collaboration agreement (note 9c)

 

 

 

 

 

 

 

 

4,398

 

 

 

 

Net loss and comprehensive loss

 

 

(7,801

)

 

 

(7,380

)

 

 

(11,556

)

 

 

(14,897

)

Net loss attributable to preferred shareholders

 

 

(1,303

)

 

 

 

 

 

(996

)

 

 

 

Net loss attributable to common shareholders

 

$

(6,498

)

 

$

(7,380

)

 

$

(10,560

)

 

$

(14,897

)

Net loss per common share (note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.45

)

 

$

(0.41

)

 

$

(0.66

)

 

$

(0.83

)

Diluted

 

$

(0.45

)

 

$

(0.41

)

 

$

(0.66

)

 

$

(0.84

)

Weighted-average common shares outstanding (note 5):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,306,491

 

 

 

17,997,194

 

 

 

16,055,456

 

 

 

17,971,702

 

Diluted

 

 

14,306,491

 

 

 

18,015,748

 

 

 

16,055,456

 

 

 

17,995,109

 

 

 

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

 

 

-2-


 

XENON PHARMACEUTICALS INC.

Consolidated Statement of Shareholders’ Equity

(Unaudited)

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

 

 

Convertible

preferred shares

 

 

Common shares

 

 

Additional

paid-in

capital

 

 

Accumulated deficit

 

 

Accumulated other

comprehensive

loss (1)

 

 

Total shareholders'

equity

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

   December 31, 2016

 

 

 

 

$

 

 

 

17,930,590

 

 

$

173,246

 

 

$

34,326

 

 

$

(142,681

)

 

$

(990

)

 

$

63,901

 

Net loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,704

)

 

 

 

 

 

 

(30,704

)

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,460

 

 

 

 

 

 

 

 

 

 

 

2,460

 

Issued pursuant to exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

67,830

 

 

 

595

 

 

 

(415

)

 

 

(3

)

 

 

 

 

 

 

177

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

100

 

Balance as of

   December 31, 2017

 

 

 

 

$

 

 

 

17,998,420

 

 

$

173,841

 

 

$

36,471

 

 

$

(173,388

)

 

$

(990

)

 

$

35,934

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,556

)

 

 

 

 

 

 

(11,556

)

Issuance of common shares,

   net of issuance costs (note 9a)

 

 

 

 

 

 

 

 

 

 

3,440,000

 

 

$

28,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,957

 

Issued (cancelled) pursuant

   to exchange agreement (note 9b)

 

 

2,868,000

 

 

 

21,825

 

 

 

(2,868,000

)

 

 

(21,825

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled pursuant to termination of

   collaboration agreement (note 9c)

 

 

 

 

 

 

 

 

 

 

(1,000,000

)

 

 

(4,470

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,470

)

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,327

 

 

 

 

 

 

 

 

 

 

 

1,327

 

Issued pursuant to exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

70,531

 

 

 

509

 

 

 

(327

)

 

 

 

 

 

 

 

 

 

 

182

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

247

 

 

 

 

 

 

 

 

 

 

 

247

 

Balance as of

   June 30, 2018

 

 

2,868,000

 

 

$

21,825

 

 

 

17,640,951

 

 

$

177,012

 

 

$

37,718

 

 

$

(184,944

)

 

$

(990

)

 

$

50,621

 

(1)

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

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

 

 

-3-


 

 

 

XENON PHARMACEUTICALS INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in thousands of U.S. dollars)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,556

)

 

$

(14,897

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation

 

 

302

 

 

 

334

 

Amortization of discount on term loan

 

 

164

 

 

 

 

Stock-based compensation

 

 

1,363

 

 

 

1,076

 

Unrealized foreign exchange (gain) loss

 

 

406

 

 

 

(819

)

Gain on termination of collaboration agreement (note 9c)

 

 

(4,398

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

263

 

 

 

5

 

Prepaid expenses, and other current assets

 

 

(193

)

 

 

590

 

Prepaid expenses, long term

 

 

230

 

 

 

123

 

Accounts payable and accrued expenses

 

 

(338

)

 

 

326

 

Net cash used in operating activities

 

 

(13,757

)

 

 

(13,262

)

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(318

)

 

 

(238

)

Purchase of marketable securities

 

 

(17,911

)

 

 

(22,281

)

Proceeds from marketable securities

 

 

25,146

 

 

 

41,099

 

Net cash provided by investing activities

 

 

6,917

 

 

 

18,580

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of second tranche under term loan, net of issuance costs

   (note 8)

 

 

4,989

 

 

 

 

Issuance of common shares, net of issuance costs (note 9a)

 

 

28,957

 

 

 

 

Issuance of common shares pursuant to exercise of stock options

 

 

182

 

 

 

177

 

Net cash provided by financing activities

 

 

34,128

 

 

 

177

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(339

)

 

 

500

 

Increase in cash and cash equivalents

 

 

26,949

 

 

 

5,995

 

Cash and cash equivalents, beginning of period

 

 

20,486

 

 

 

17,095

 

Cash and cash equivalents, end of period

 

$

47,435

 

 

$

23,090

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest paid

 

$

164

 

 

$

 

Interest received

 

 

289

 

 

 

457

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

 

 

Fair value of stock options exercised on a cashless basis

 

 

212

 

 

 

25

 

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

 

 

21,825

 

 

 

 

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

 

 

4,470

 

 

 

 

 

 

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

 

 

-4-

 

 


 

XENON PHARMACEUTICALS INC.

Notes to Consolidated Financial Statements

(Unaudited)

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

1.

Nature of the business:

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

The Company has incurred significant operating losses since inception. As of June 30, 2018, the Company had an accumulated deficit of $184,944 and a $11,556 net loss for the six months ended June 30, 2018. Management expects to continue to incur significant expenses in excess of revenue and to incur operating losses for the foreseeable future. To date, the Company has financed its operations primarily through funding received from collaboration and license agreements, private placements of common and preferred shares, public offerings of common shares, debt financing, and government funding.

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

2.

Basis of presentation:

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

The Company has one wholly-owned subsidiary as at June 30, 2018, Xenon Pharmaceuticals USA Inc., which was incorporated in Delaware on December 2, 2016.

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

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

These unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and six month periods ended June 30, 2018 and 2017 are not necessarily indicative of results that can be expected for a full year. These unaudited interim consolidated financial statements follow the same significant accounting policies as those described in the notes to the audited consolidated financial statements of the Company included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 31, 2017, with the exception of the policy described in note 3 below.

3.

Changes in significant accounting policies:

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

 

-5-


 

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

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

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

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

4.

Future changes in accounting policies:

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

5.

Net income (loss) per common and preferred share:

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

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

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

For the three and six month periods ended June 30, 2018, all stock options, warrants and convertible preferred shares were anti-dilutive and were excluded from the diluted weighted average common shares outstanding for the period. For the three and six months ended June 30, 2017, 2,228,637 and 2,086,072 stock options, respectively, were excluded from the calculation of diluted net loss per common share as their inclusion would be anti-dilutive. No warrants or convertible preferred shares were outstanding during the three and six months ended June 30, 2017.

 

-6-


 

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

Common Shares

 

 

Preferred Shares

 

 

Common Shares

 

 

Preferred Shares

 

 

Common Shares

 

 

Preferred Shares

 

 

Common Shares

 

 

Preferred Shares

 

Allocation of loss attributed to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(6,498

)

 

$

(1,303

)

 

$

(7,380

)

 

$

 

 

$

(10,560

)

 

$

(996

)

 

$

(14,897

)

 

$

 

Adjustment for change in fair value of liability classified stock options

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

 

 

 

 

 

 

(162

)

 

 

 

Diluted

 

$

(6,498

)

 

$

(1,303

)

 

$

(7,410

)

 

$

 

 

$

(10,560

)

 

$

(996

)

 

$

(15,059

)

 

$

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,306,491

 

 

 

2,868,000

 

 

 

17,997,194

 

 

 

 

 

 

16,055,456

 

 

 

1,513,667

 

 

 

17,971,702

 

 

 

 

Adjustment for dilutive effect of stock options

 

 

 

 

 

 

 

 

18,554

 

 

 

 

 

 

 

 

 

 

 

 

23,407

 

 

 

 

Diluted

 

 

14,306,491

 

 

 

2,868,000

 

 

 

18,015,748

 

 

 

 

 

 

16,055,456

 

 

 

1,513,667

 

 

 

17,995,109

 

 

 

 

Net loss attributable to shareholders per share - basic

 

$

(0.45

)

 

$

(0.45

)

 

$

(0.41

)

 

$

 

 

$

(0.66

)

 

$

(0.66

)

 

$

(0.83

)

 

$

 

Net loss attributable to shareholders per share - diluted

 

$

(0.45

)

 

$

(0.45

)

 

$

(0.41

)

 

$

 

 

$

(0.66

)

 

$

(0.66

)

 

$

(0.84

)

 

$

 

6.

Fair value of financial instruments:

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

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

 

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

 

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

 

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

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

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

 

-7-


 

7.

Accounts payable and accrued expenses:

Accounts payable and accrued expenses consisted of the following:

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Trade payables

 

$

853

 

 

$

1,253

 

Employee compensation, benefits, and related accruals

 

 

861

 

 

 

1,017

 

Consulting and contracted research

 

 

1,078

 

 

 

817

 

Professional fees

 

 

242

 

 

 

252

 

Other

 

 

60

 

 

 

44

 

Total

 

$

3,094

 

 

$

3,383

 

8.

Term loan:

On June 12, 2018, the Company entered into a First Loan Modification Amendment (the “Modification”) to its Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”), (together, the “Modified Loan Agreement”), pursuant to which the Bank accelerated the availability of the second tranche of $5,000 which was funded on the date of the Modification.

The initial tranche of $7,000, which was funded in December 2017, and the second tranche are interest-only until September 30, 2018 or, subject to the achievement of certain clinical milestones (the “Interest-Only Milestone”), March 31, 2019. Following the expiration of the interest-only period, the first tranche will be payable in 30 equal monthly installments or, if the Interest-Only Milestone is achieved, 24 equal monthly installments of principal plus interest, maturing on March 31, 2021. The second tranche will be payable in 24 equal monthly installments or, if the Interest-Only Milestone is achieved, 18 equal monthly installments of principal plus interest, maturing on September 30, 2020. The interest and payment terms of the third and final tranche, if borrowed, remain unchanged from the Loan Agreement. The Modification did not amend the Loan Agreement’s interest provisions.

At June 30, 2018, the Company determined the effective interest rate on the Modified Loan Agreement with the Bank to be 10.24% (December 31, 2017 – 9.25%). Amortization of the debt discount was $92 and $164 for the three and six months ended June 30, 2018, respectively. Interest payments are made monthly.

Interest expense was $200 and $359 for the three and six months ended June 30, 2018, respectively.

On August 3, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with the Bank, pursuant to which the Bank agreed to extend a term loan to the Company with a principal amount of $15,500 (the “Term Loan”). For additional information regarding the Amended and Restated Loan Agreement, refer to subsequent event note 12b. The Term Loan will be used in part to repay amounts borrowed under the Modified Loan Agreement and will extend the interest-only period from September 30, 2018 to March 31, 2020. The classification of the loan payable on the consolidated balance sheet and outstanding balances in the tables below as of June 30, 2018 reflect the repayment terms under the Amended and Restated Loan Agreement.

The outstanding loan and unamortized debt discount balances as of June 30, 2018 in accordance with the repayment terms under Amended and Restated Loan Agreement are as follows:

 

 

June 30,

 

 

 

2018

 

Term loan

 

$

12,000

 

Less: unamortized discount on loan

 

 

(389

)

Less: current portion

 

 

 

Accrued portion of final payment fee

 

 

110

 

Loan payable, long-term

 

$

11,721

 

 

-8-


 

Scheduled principal payments on outstanding debt, excluding the final payment fee of $780, as of June 30, 2018 in accordance with the repayment terms under Amended and Restated Loan Agreement, are as follows:

2018

 

 

 

$

 

2019

 

 

 

 

 

2020

 

 

 

 

3,600

 

2021

 

 

 

 

4,800

 

2022

 

 

 

 

3,600

 

Total

 

 

 

$

12,000

 

The Modified Loan Agreement contains affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s ability to incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into certain transactions with affiliates, engage in any new line of business, pay dividends or make distributions, or repurchase stock, in each case subject to certain exceptions. The Company is in compliance with these covenants at June 30, 2018.

In connection with the Modification, the number of common shares exercisable pursuant to the warrant issued to the Bank in December 2017 under the Loan Agreement increased by 36,008 common shares. The relative fair value of the additional common shares exercisable pursuant to the warrant was $247 and is classified in equity. With this increase, at June 30, 2018, the Company has a warrant outstanding to the Bank to purchase a total of 86,419 of the Company’s common shares at a price per common share of $2.43. The warrant is immediately exercisable, has a 10-year term, and contains a cashless exercise provision.

9.

Share capital:

 

(a)

Financing:

On May 8, 2018, the Company entered into an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated (“Stifel”) to sell common shares of the Company having aggregate gross proceeds of up to $30,000, from time to time, through an “at-the-market” equity offering program under which Stifel will act as sales agent. During the three months ended June 30, 2018, the Company sold 3,440,000 common shares under the sales agreement for proceeds of approximately $29,200, net of commissions paid, but excluding estimated transaction expenses.

 

(b)

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

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

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

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

 

-9-


 

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

 

(c)

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

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

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

 

(d)

Stock-based compensation:

The following table presents stock option activity for the period:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Outstanding, beginning of period

 

 

2,795,941

 

 

 

2,258,237

 

 

 

2,339,905

 

 

 

1,910,823

 

Granted

 

 

122,750

 

 

 

29,750

 

 

 

686,450

 

 

 

446,500

 

Exercised(1)

 

 

(34,051

)

 

 

(3,085

)

 

 

(118,719

)

 

 

(71,006

)

Forfeited, cancelled or expired

 

 

(52,655

)

 

 

(8,005

)

 

 

(75,651

)

 

 

(9,420

)

Outstanding, end of period

 

 

2,831,985

 

 

 

2,276,897

 

 

 

2,831,985

 

 

 

2,276,897

 

Exercisable, end of period

 

 

1,560,573

 

 

 

1,374,535

 

 

 

1,560,573

 

 

 

1,374,535

 

 

 

(1)

During the six months ended June 30, 2018, 36,007 stock options were exercised for the same number of common shares for cash (six months ended June 30, 2017 – 63,425). In the same period, the Company issued 34,524 common shares (six months ended June 30, 2017 – 4,405) for the cashless exercise of 82,712 stock options (six months ended June 30, 2017 – 7,581).

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Average risk-free interest rate

 

 

2.88

%

 

 

2.05

%

 

 

2.79

%

 

 

2.41

%

Expected volatility

 

 

75

%

 

 

81

%

 

 

75

%

 

 

81

%

Average expected term (in years)

 

 

7.65

 

 

 

7.68

 

 

 

7.41

 

 

 

7.49

 

Expected dividend yield

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

Weighted average fair value of stock options granted

 

$

4.54

 

 

$

2.92

 

 

$

3.61

 

 

$

6.11

 

 

10.

Commitments and contingencies:

 

(a)

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

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

 

-10-