Xenon Pharmaceuticals Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section should be read in conjunction with our unaudited interim consolidated financial statements and related notes included in Part I, Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 1, 2021 and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2021. Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. The words or phrases “would be,” “will allow,” “intends to,” “may,” “believe,” “plan,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to : • our ability to identify additional products or product candidates either from our internal research efforts or though acquiring or in-licensing other product candidates or technologies; • the initiation, timing, cost, progress and success of our research and development programs, pre-clinical studies, and clinical trials; • our ability to advance product candidates into, and successfully complete, clinical trials; • our ability to recruit sufficient numbers of patients for our current and future clinical trials for orphan or more common indications; • the direct and indirect impact of COVID-19 on our business and operations, including supply chain, manufacturing, research and development costs, clinical trial conduct, clinical trial data and employees; • our ability to achieve profitability; • our ability to obtain funding for our operations; • our ability to receive milestones, royalties and sublicensing fees under our collaborations, and the timing of such payments; • the timing and magnitude of potential milestone payments under our product acquisition and in-licensing agreements; • the implementation of our business model and strategic plans; • our ability to develop and commercialize product candidates for orphan and niche indications or more common indications independently; • our ability to advance XEN007 and potentially other future product candidates directly into Phase 2 or later stage clinical trials; • our pre-commercial, commercialization, marketing, and manufacturing capabilities and strategy; • our ability to identify drug targets; • our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; • our expectations regarding federal, state and foreign regulatory requirements; • the therapeutic benefits, effectiveness and safety of our product candidates; • the accuracy of our estimates of the size and characteristics of the markets that may be addressed by our products and product candidates and our ability to obtain suitable pricing and receive reimbursements from health agencies; • the rate and degree of market acceptance and clinical utility of any future products; • the timing of, and our and our collaborators’ ability to obtain and maintain, regulatory approvals for our product candidates; • our ability to maintain and establish collaborations; -16- • our expectations regarding market risk, including interest rate changes and foreign currency fluctuations; • our belief in the sufficiency of our cash, cash equivalents and marketable securities to meet our needs for at least the next 12 months; • our ability to engage and retain the employees required to grow our business; • our future financial performance and projected expenditures; • developments relating to our competitors and our industry, including the success of competing therapies that are or become available; and • estimates of our expenses, future revenue, capital requirements and our needs for additional financing. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law. In this report, “we,” “our,” “us,” “Xenon,” and “the Company” refer to Xenon Pharmaceuticals Inc. and its subsidiary. Unless otherwise noted, all dollar amounts in this report are expressed in United States dollars. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements. Overview We are a clinical stage biopharmaceutical company committed to developing innovative therapeutics to improve the lives of patients with neurological disorders. We are advancing a novel product pipeline of neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy . Proprietary Programs • XEN1101 is a differentiated Kv7 potassium channel modulator being developed for the treatment of epilepsy and potentially other neurological disorders. Designed as a randomized, double-blind, placebo-controlled, multicenter study, our “X-TOLE” study is an ongoing Phase 2b clinical trial to evaluate the clinical efficacy, safety, and tolerability of XEN1101 administered as adjunctive treatment in approximately 300 adult patients with focal epilepsy. The primary endpoint is the percent change in monthly focal seizure frequency from baseline compared to treatment period of active versus placebo. Based on the completion in late June of the randomization of 326 patients, we anticipate topline results from the Phase 2b X-TOLE clinical trial in late September to mid-October 2021. On July 12, 2021, we hosted a KOL webinar focused on XEN1101 and the adult focal epilepsy landscape. As part of a strategy to continue to expand the intellectual property protecting XEN1101, we recently obtained allowance of a U.S. patent application with claims directed to four distinct crystalline forms of XEN1101, pharmaceutical compositions comprising the same, and methods of preparing and using the same. Any patent issuing from this allowed application is expected to expire in Q4 2040. • We also continue to evaluate opportunities to develop XEN1101 in neurological indications outside of epilepsy that could be well suited to its unique mechanism of action. We are collaborating with the Icahn School of Medicine at Mount Sinai to facilitate an investigator-sponsored Phase 2 proof-of-concept, randomized, parallel-arm, placebo-controlled clinical trial of XEN1101 for the treatment of major depressive disorder, or MDD, and anhedonia, which is expected to be initiated in the coming months. In parallel, we are planning a company-sponsored clinical study in MDD supported by promising pre-clinical data with XEN1101 and clinical data generated from both an open-label study and a randomized, placebo-controlled clinical trial that explored the targeting of KCNQ channels as a treatment for MDD using ezogabine. -17- • XEN496, a Kv7 potassium channel modulator, is a proprietary pediatric formulation of the active ingredient ezogabine being developed for the treatment of KCNQ2 developmental and epileptic encephalopathy , or KCNQ2-DEE. We received Fast Track designation and Orphan Drug Designation , or ODD, for XEN496 for the treatment of seizures associated with KCNQ2-DEE from the U.S. Food and Drug Administration , or FDA, as well as orphan medicinal product designation from the European Commission. A Phase 3 randomized, double-blind, placebo-controlled, parallel group, multicenter clinical trial, called the “EPIK” study, is underway to evaluate the efficacy, safety, and tolerability of XEN496 administered as adjunctive treatment in approximately 40 pediatric patients aged one month to less than 6 years with KCNQ2-DEE . • XEN007 (active ingredient flunarizine) is a CNS-acting Cav2.1 and T-type calcium channel modulator that is being studied in treatment-resistant absence seizures and potentially other neurological disorders. Recently, the FDA granted ODD and rare pediatric disease, or RPD, designation for the treatment of childhood absence epilepsy, or CAE, with XEN007. The FDA grants the RPD designation for serious or life-threatening diseases that primarily affect children 18 years old or younger and affect fewer than 200,000 people nationwide. An investigator-led Phase 2 proof-of-concept study is ongoing to examine the potential clinical efficacy, safety, and tolerability of XEN007 as an adjunctive treatment in pediatric patients diagnosed with treatment-resistant absence seizures, including CAE and juvenile absence epilepsy, or JAE. A presentation of promising interim data collected from a small number of patients was presented at the virtual annual meeting of the American Epilepsy Society in December 2020. The lead investigator has expanded the study to include an additional site, which is currently screening patients, and is also evaluating the addition of other sites. Additional results from a larger data set are anticipated by the end of this year, which will inform our decision regarding the future development of XEN007. Partnered Programs • We have an ongoing collaboration with Neurocrine Biosciences, Inc., or Neurocrine Biosciences, to develop treatments for epilepsy. Neurocrine Biosciences has an exclusive license to XEN901, now known as NBI-921352, a clinical stage selective Nav1.6 sodium channel inhibitor with potential in SCN8A developmental and epileptic encephalopathy, or SCN8A-DEE, and other forms of epilepsy. The FDA has provided feedback on an Investigational New Drug, or IND, application submitted by Neurocrine Biosciences in support of a Phase 2 clinical trial in SCN8A-DEE patients. Based on this feedback, Neurocrine Biosciences anticipates initiating a Phase 2 clinical trial in adolescent patients (aged 12 years and older) with SCN8A-DEE in the third quarter of 2021, and the trial protocol will be amended to include younger pediatric patients (aged 2-11 years) with SCN8A-DEE as soon as the FDA has reviewed and approved additional non-clinical information. In parallel, Neurocrine Biosciences is advancing clinical plans to develop NBI-921352 for the treatment of adult focal epilepsy and expects to initiate a Phase 2 clinical trial in 2021. Upon IND or equivalent regulatory acceptance for NBI-921352 in adult focal epilepsy, we are eligible to receive a $10.0 million milestone payment; upon FDA acceptance of a protocol amendment for NBI-921352 in pediatric patients (aged 2-11 years) with SCN8A-DEE, we are eligible to receive a $25.0 million milestone payment, or a $15.0 million milestone payment if the IND acceptance for adult focal epilepsy occurs first. Both milestone payments are in the form of 45% cash and a 55% equity investment in our common shares at a 15% premium to our 30-day trailing volume weighted average price at that time. • Flexion Therapeutics, Inc., or Flexion, acquired the global rights to develop and commercialize XEN402, a Nav1.7 inhibitor also known as funapide. Flexion’s FX301 consists of XEN402 formulated for extended release from a thermosensitive hydrogel. The initial development of FX301 is intended to support administration as a peripheral nerve block for control of post-operative pain. On March 31, 2021, Flexion announced the treatment of the first patient in a Phase 1b proof-of-concept trial evaluating the safety and tolerability of FX301 administered as a single-dose, popliteal fossa block (a commonly used nerve block in foot and ankle-related surgeries) in patients undergoing bunionectomy. Flexion anticipates data from the Phase 1b trial of FX301 in late 2021. Pursuant to the terms of the agreement, we are eligible to receive certain clinical, regulatory, and commercial milestone payments, as well as future sales royalties. We have funded our operations primarily through the sale of equity securities, funding received from our licensees and collaborators, and debt financing. For the six months ended June 30, 2021 and 2020, we recognized revenue of $6.6 million and $20.5 million, respectively, in connection with our agreements with Neurocrine Biosciences and Flexion. We had a net loss of $37.9 million for the six months ended June 30, 2021 and an accumulated deficit of $316.4 million as of June 30, 2021, from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We do not generate any royalty revenue from product sales, and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever . We expect that our revenue in the near term will be substantially dependent on our collaboration agreements. Given the uncertain nature of clinical development of our current and future product candidates and the commercialization of current and future products, we cannot predict when or whether we will receive further milestone payments under our current or future collaboration agreements or whether we will be able to report either revenue or net income in future years. -18- We expect to continue to incur significant expenses and operating losses for the foreseeable future . We anticipate that our expenses will increase as we: • continue our research and pre-clinical and clinical development of our product candidates either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies; • seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials; • make milestone and other payments under our in-license or other agreements; • maintain, protect and expand our intellectual property portfolio; • attract, hire and retain skilled personnel; and • create additional infrastructure to support our operations. Financial Operations Overview Revenue To date, our revenue has been primarily derived from collaboration and licensing agreements. We do not generate any royalty revenue from product sales , and do not otherwise anticipate generating revenue from product sales for the foreseeable future, if ever. The following table is a summary of revenue recognized from our current collaboration and licensing agreements for the three and six months ended June 30, 2021 and 2020 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Neurocrine Biosciences: Recognition of the transaction price $ 617 $ 11,916 $ 617 $ 17,760 Research and development services 1,601 1,468 2,959 2,702 Flexion: Milestone payments — — 3,000 — Total collaboration revenue $ 2,218 $ 13,384 $ 6,576 $ 20,462 Pursuant to the terms of our license and collaboration agreement with Neurocrine Biosciences, we received an upfront cash payment of $30.0 million and a $20.0 million equity investment in our common shares. The equity investment was measured at fair value on the date of issuance and the resulting premium, together with the upfront cash payment and variable consideration which is probable that a significant reversal of the cumulative revenue recognized will not occur, is the transaction price of the arrangement for allocation to the performance obligations. The allocation was based on the relative estimated standalone selling prices of each obligation under the agreement including: (i) an exclusive license to NBI-921352 with associated technology and know-how transfer, (ii) an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391, collectively referred to as the development track candidates, or the DTCs, with associated know-how transfer, and (iii) development services under the initial development program for the DTCs. In the three and six months ended June 30, 2021, we recognized $0.6 million and $0.6 million, respectively, of the transaction price allocated to performance obligations (i), (ii) and (iii), compared to $11.9 million and $17.8 million, respectively, for the three and six months ended June 30, 2020. Performance obligations (i) and (ii) were completed as of December 31, 2020 . Performance obligation (iii) is expected to be completed by Q1 2022. Research and development services are recognized into revenue at fair market value as the services are rendered. In the six months ended June 30, 2021, we recognized revenue of $3.0 million in connection with our agreement with Flexion for the global rights to develop and commercialize FX301 which included a $1.0 million milestone for the clearance of an IND by the FDA and a $2.0 million milestone for the initiation of a Phase 1b clinical trial. No revenue was recognized for the three and six months ended June 30, 2020 in connection with our agreement with Flexion. As our other internal and partnered products are in various stages of clinical and pre-clinical development, we do not expect to generate any revenue from product sales for at least the next several years. We expect that any revenue for the next several years will be derived from milestone payments and research and development funding under our current collaboration agreements and any additional collaboration agreements that we may enter into in the future. We cannot provide any assurance as to the extent or timing of future milestone payments or royalty payments or that we will receive any future 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. -19- As of June 30, 2021 , there is $ 3.0 million remaining in deferred revenue from the upfront payments received under our license and collaboration agreement with Neurocrine Biosciences . Operating Expenses The following table summarizes our operating expenses for the three and six months ended June 30, 2021 and 2020 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 18,377 $ 10,720 $ 34,685 $ 22,511 General and administrative 6,339 3,310 10,448 6,630 Total operating expenses $ 24,716 $ 14,030 $ 45,133 $ 29,141 Research and Development Expenses Research and development expenses represent costs incurred to conduct research and development of our proprietary product candidates, including any acquired or in-licensed product candidates or technology, and costs to support our partnered product candidates . Research and development expenses consist of costs incurred in performing research and development activities, including salary, related benefits and stock-based compensation for employees engaged in scientific research and development, third-party contract costs relating to research, formulation, process development and manufacturing, pre-clinical studies and clinical trial activities, third-party acquisition, license and collaboration fees, laboratory consumables and allocated facility-related and information technology costs. Project-specific expenses reflect costs directly attributable to our clinical development candidates for which we have incurred significant expenses. All remaining research and development expenses are reflected in pre-clinical, discovery and other internal program expenses. At any given time, we have several active early-stage research and drug discovery programs. Our personnel and infrastructure are typically deployed over multiple projects and are not directly linked to any individual internal early-stage research or drug discovery program. Therefore, we do not maintain financial information for our internal early-stage research and internal drug discovery programs on a project-specific basis. We expense all research and development costs as incurred. We expect that our research and development expenses will increase in the future as we advance our proprietary product candidates through clinical development, advance our internal drug discovery programs into pre-clinical development and continue our early-stage research. The increase in expense will likely include added personnel and third-party contracts related to research, formulation, process development and manufacturing, pre-clinical studies and clinical trial activities as well as third-party acquisition, license and collaboration fees and laboratory consumables. Clinical development timelines, likelihood of regulatory approval, and commercialization and associated costs are uncertain, difficult to estimate, and can vary significantly. We anticipate determining which research and development projects to pursue as well as the level of funding available for each project based on the scientific research and pre-clinical and clinical results of each product candidate and related regulatory action. We expect our research and development expenses to continue to represent our largest category of operating expenses for at least the next 12 to 24 months. General and Administrative Expenses General and administrative expenses consist primarily of salary, related benefits and stock-based compensation of our executive, finance, legal, business development, commercial and administrative functions, travel expenses, allocated facility-related and information technology costs not otherwise included in research and development expenses, director compensation, director’s and officer’s insurance premiums, investor relations costs and professional fees for auditing, tax and legal services, including legal expenses for intellectual property protection. We expect that general and administrative expenses will increase in the future as we expand our operating activities to support increased research and development activities and the potential commercialization of our product candidates. Other Income (Expense) Interest Income. Interest income consists of income earned on our cash and investment balances. We anticipate that our interest income will continue to fluctuate depending on our cash and investment balances and interest rates. -20- Interest Expense. Interest expense consists of accrual of the final payment fee, amortization of debt discounts, and interest charged on our borrowings with Silicon Valley Bank. In May 2020, we repaid the total outstanding term loan balance ahead of the maturity date. Foreign Exchange Gain (Loss). Net foreign exchange gains and losses consisted of gains and losses from the impact of foreign exchange fluctuations on our monetary assets and liabilities that are denominated in currencies other than the U.S. dollar (principally the Canadian dollar). We will continue to incur substantial expenses in Canadian dollars and will remain subject to risks associated with foreign currency fluctuations. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the U.S., or U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the revenue and expenses incurred during the reported periods. We base estimates on our historical experience, known trends and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and significant judgments and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and significant estimates include those related to: • revenue recognition; • research and development costs; and • stock-based compensation There have been no material changes in our critical accounting policies and significant judgments and estimates during the six months ended June 30, 2021, 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 2020 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or SEC, and with the securities commissions in British Columbia, Alberta and Ontario, or the Canadian Securities Commissions, on March 1, 2021. We believe that the accounting policies discussed in the Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Results of Operations Comparison of Three and Six Months Ended June 30, 2021 and 2020 The following table summarizes the results of our operations for the three and six months ended June 30, 2021 and 2020 together with changes in those items (in thousands): Three Months Ended June 30, Change 2021 vs. 2020 Six Months Ended June 30, Change 2021 vs. 2020 2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease) Revenue $ 2,218 $ 13,384 $ (11,166 ) $ 6,576 $ 20,462 $ (13,886 ) Research and development expenses 18,377 10,720 7,657 34,685 22,511 12,174 General and administrative expenses 6,339 3,310 3,029 10,448 6,630 3,818 Other: Interest income 55 912 (857 ) 127 2,028 (1,901 ) Interest expense — (154 ) 154 — (484 ) 484 Foreign exchange gain 117 662 (545 ) 272 424 (152 ) Loss on repayment of term loan — (988 ) 988 — (988 ) 988 Loss before income taxes $ (22,326 ) $ (214 ) $ (22,112 ) $ (38,158 ) $ (7,699 ) $ (30,459 ) -21- Revenue Revenue decreased by $11.2 million and $13.9 million in the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020, respectively. Revenue for the three and six months ended June 30, 2021 related to recognition of $0.6 million and $0.6 million, respectively, of deferred revenue as well as $1.6 million and $3.0 million, respectively, for research and development services under our license and collaboration agreement with Neurocrine Biosciences, as compared to recognition of $11.9 million and $17.8 million, respectively, of deferred revenue and $1.5 million and $2.7 million, respectively, for research and development services in the comparative period. Revenue for the six months ended June 30, 2021 also included $3.0 million in milestone revenue recognized in connection with our agreement with Flexion, whereas no revenue was recognized in connection with this agreement for the six months ended June 30, 2020. Research and Development Expenses The following table summarizes research and development expenses for the three and six months ended June 30, 2021 and 2020 together with changes in those items (in thousands): Three Months Ended June 30, Change 2021 vs. 2020 Six Months Ended June 30, Change 2021 vs. 2020 2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease) XEN1101 $ 8,533 $ 5,304 $ 3,229 $ 15,002 $ 10,545 $ 4,457 XEN496 4,237 1,889 2,348 9,914 4,556 5,358 NBI-921352 377 549 (172 ) 733 1,263 (530 ) Pre-clinical, discovery and other programs 5,230 2,978 2,252 9,036 6,147 2,889 Total research and development $ 18,377 $ 10,720 $ 7,657 $ 34,685 $ 22,511 $ 12,174 Research and development expenses increased by $7.7 million and $12.2 million in the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020, respectively. The increases were primarily attributable to increased spending on our clinical development product candidates XEN1101 and XEN496, and, to a lesser extent, increased spending on our pre-clinical, discovery and other internal programs. This was partially offset by decreased spending on NBI-921352 as we performed less clinical development activities on behalf of Neurocrine Biosciences in the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020; c ertain costs related to NBI-921352 development activities have been incurred by us and Neurocrine Biosciences reimburses us for development services we incur at fair market value. General and Administrative Expenses The following table summarizes general and administrative expenses for the three and six months ended June 30, 2021 and 2020 together with changes in those items (in thousands): Three Months Ended June 30, Change 2021 vs. 2020 Six Months Ended June 30, Change 2021 vs. 2020 2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease) General and administrative $ 6,339 $ 3,310 $ 3,029 $ 10,448 $ 6,630 $ 3,818 General and administrative expenses increased by $3.0 million and $3.8 million in the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020, respectively. The increases were primarily attributable to increased stock-based compensation expense due to an increase in the number of options granted at a higher fair value, increased legal fees for intellectual property protection, and higher salaries and benefits due to increased headcount to support our expanding research and development activities . Other Income The following table summarizes our other income for the three and six months ended June 30, 2021 and 2020 together with changes in those items (in thousands): Three Months Ended June 30, Change 2021 vs. 2020 Six Months Ended June 30, Change 2021 vs. 2020 2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease) Other income $ 172 $ 432 $ (260 ) $ 399 $ 980 $ (581 ) -22- Other income decreased by $0.3 million and $0.6 million in the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020, respectively. For the three months ended June 30, 2021, the decrease was primarily attributable to lower interest income due to a decrease in market yields on investments and lower foreign exchange gains due to a decrease in cash and cash equivalents and marketable securities denominated in Canadian dollars. This was partially offset by a one-time loss on the repayment of our term loan with Silicon Valley Bank of $1.0 million in the same period in 2020. For the six months ended June 30, 2021, the decrease was primarily attributable to lower interest income due to a decrease in market yields on investments, partially offset by decrease in interest expense and a one-time loss on the repayment of our term loan with Silicon Valley Bank of $1.0 million and in the same period in 2020. 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, public offerings of our common shares and pre-funded warrants, and debt financing. As of June 30, 2021, we had cash and cash equivalents and marketable securities of $260.5 million. We have incurred significant operating losses since inception. We had a $37.9 million net loss for the six months ended June 30, 2021 and an accumulated deficit of $316.4 million from inception through June 30, 2021. 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 pre-clinical and clinical development of our product candidates; expand the scope of our current studies for our product candidates; initiate additional pre-clinical, clinical or other studies for our product candidates, including under our collaboration agreements; change or add manufacturers or suppliers and manufacture drug supply and drug products for clinical trials and commercialization; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; seek to identify, evaluate and validate additional product candidates; acquire or in-license other product candidates and technologies; make milestone or other payments under our product acquisition and in-license agreements, including, without limitation, payments to the Memorial University of Newfoundland, 1st Order Pharmaceuticals, Inc., and other third parties; 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 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. For example, in March 2021 we entered into an underwriting agreement with Jefferies LLC, or Jefferies, and Stifel, Nicolaus & Company, Incorporated, or Stifel, relating to an underwritten public offering of 5,153,135 common shares, including 810,810 shares sold upon the full exercise of the underwriters’ option to purchase additional shares, and pre-funded warrants to purchase 1,081,081 common shares. The common shares were offered at a public offering price of $18.50 per common share and the pre-funded warrants were offered at a price of $18.4999 per pre-funded warrant, for proceeds of $107.9 million, net of underwriting discounts, commissions and offering expenses. In August 2020, we entered into an at-the-market equity offering sales agreement with Jefferies and Stifel, to sell our common shares having aggregate sales proceeds of up to $100.0 million, from time to time, through an “at-the-market” equity offering program under which Jefferies and Stifel are acting as sales agents. As of June 30, 2021, we had sold an aggregate of 733,000 common shares for proceeds of $10.7 million, net of commissions paid and transaction expenses. In addition, in January 2020, we entered into an underwriting agreement with Jefferies, Stifel, and Guggenheim Securities, LLC, relating to an underwritten public offering of 3,750,000 common shares at a public offering price of $16.00 per common share, and granted the underwriters an option for a period of 30 days to purchase up to an additional 562,500 common shares. The public offering was completed in January 2020 and the underwriters’ option was exercised in full in February 2020. We issued an aggregate of 4,312,500 common shares and raised total proceeds of $64.7 million, net of underwriting discounts, commissions and offering expenses. Further, in November 2019, we entered into an at-the-market equity offering sales agreement with Jefferies and Stifel, to sell our common shares having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at-the-market” equity offering program under which Jefferies and Stifel acted as sales agent. As of January 2020, we had sold an aggregate of 3,252,330 common shares for proceeds of $48.5 million, net of commissions paid and transaction expenses. -23- Except for any obligations of our collaborators to make milestone payments a nd research and development funding 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 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. Our future capital requirements are difficult to forecast and will depend on many factors, including: • the number and characteristics of the future product candidates we pursue either from our internal research efforts or through acquiring or in-licensing other product candidates or technologies; • the scope, progress, results and costs of independently researching and developing any of our future product candidates, including conducting pre-clinical research and clinical trials; • whether our existing collaborations continue to generate substantial milestone payments and, ultimately, royalties on future approved products for us; • the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates we develop independently; • the timing and magnitude of potential milestone payments and royalties under our product acquisition and in-license agreements; • the cost of commercializing any future products we develop independently that are approved for sale; • the cost of manufacturing our future product candidates and products, if any; • our ability to maintain existing collaborations and to establish new collaborations, licensing or other arrangements and the financial terms of such arrangements; • the costs of preparing, filing, prosecuting, maintaining, defending and enforcing patents, including litigation costs and the outcome of such litigation; and • the timing, receipt and amount of sales of, or royalties on our future products, if any. Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash and cash equivalents and marketable securities as of the date of this report will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials remains uncertain. Cash Flows The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020 (in thousands): Six Months Ended June 30, 2021 2020 Net cash used in operating activities $ (33,785 ) $ (23,856 ) Net cash used in investing activities (46,912 ) (41,991 ) Net cash provided by financing activities 118,832 85,750 Operating Activities For the six months ended June 30, 2021, net cash used in operating activities totaled $33.8 million, compared to $23.9 million for the same period in 2020. The increase in cash used in operating activities was primarily related to higher expenditures for the clinical development of our proprietary product candidates and lower interest income for the six months ended June 30, 2021 as compared to the same period in 2020, partially offset by $3.0 million in milestone revenue recognized in connection with our agreement with Flexion and changes in operating assets and liabilities primarily attributable to the timing of payments for accrued clinical trial costs and accrued expenses in the normal course of business. -24- Investing Activities For the six months ended June 30, 2021, net cash used in investing activities totaled $46.9 million, compared to $42.0 million for the same period in 2020. The change in cash used in investing activities was driven primarily by an increase in purchases of marketable securities, net of redemptions. Financing Activities For the six months ended June 30, 2021, net cash provided by financing activities totaled $118.8 million, compared to $85.8 million for the same period in 2020. The increase in cash provided by financing activities was primarily related to net proceeds of $118.6 million from the issuance of common shares and pre-funded warrants during the six months ended June 30, 2021 as compared to $102.5 million from the issuance of common shares, partially offset by repayment of the term loan, for the same period in 2020. Contractual Obligations and Commitments Our future significant contractual obligations as of December 31, 2020 were reported in our Annual Report on Form 10-K, filed with the SEC and the Canadian Securities Commissions on March 1, 2021. As of June 30, 2021, there have been no material changes from the contractual commitments previously disclosed in the Annual Report on Form 10-K. Inflation We do not believe that inflation has had a material effect on our business, financial condition or results of operations in the last two fiscal years. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purposes entities and other structured finance entities. Outstanding Share Data As of August 9, 2021, we had 41,124,184 common shares issued and outstanding, outstanding pre-funded warrants to purchase an additional 1,081,081 common shares, outstanding stock options to purchase an additional 5,757,599 common shares and an outstanding warrant to purchase an additional 40,000 common shares. In addition, we had 1,016,000 Series 1 Preferred Shares issued and outstanding. 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, or 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 us which will be effective 61 days after delivery of such notice. 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. The Series 1 Preferred Shares may be “restricted securities” as such term is defined under applicable Canadian securities laws, as 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. For additional information regarding our Series 1 Preferred Shares, see note 10b to our consolidated financial statements included in Part I, Item 1 of this report.