Xenon Pharmaceuticals Inc. 10-Q

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, 2020 2019 Assets Current assets: Cash and cash equivalents $ 44,199 $ 24,755 Marketable securities 158,555 116,603 Accounts receivable 1,786 813 Prepaid expenses and other current assets 2,470 2,695 207,010 144,866 Operating lease right-of-use asset (note 7) 1,029 933 Property, plant and equipment, net 2,347 1,660 Deferred tax assets (note 12) 290 238 Total assets $ 210,676 $ 147,697 Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued expenses (note 8) $ 7,769 $ 8,818 Deferred revenue (note 11) 12,692 29,743 Operating lease liability (note 7) 594 168 Term loan (note 9) — 4,650 21,055 43,379 Deferred revenue, long-term (note 11) — 709 Operating lease liability, long-term (note 7) 323 743 Term loan, long-term (note 9) — 10,889 $ 21,378 $ 55,720 Shareholders’ equity: Preferred shares, without par value; unlimited shares authorized; issued and outstanding: 1,016,000 (December 31, 2019 - 1,016,000 ) (note 10) $ 7,732 $ 7,732 Common shares, without par value; unlimited shares authorized; issued and outstanding: 34,994,790 (December 31, 2019 - 28,139,228 ) (note 10) 397,652 294,244 Additional paid-in capital 42,218 40,646 Accumulated deficit ( 257,314 ) ( 249,655 ) Accumulated other comprehensive loss ( 990 ) ( 990 ) $ 189,298 $ 91,977 Total liabilities and shareholders’ equity $ 210,676 $ 147,697 Commitments and contingencies (note 13) 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, 2020 2019 2020 2019 Revenue (note 11) $ 13,384 $ — $ 20,462 $ — Operating expenses: Research and development 10,720 8,205 22,511 17,342 General and administrative 3,310 2,307 6,630 4,928 14,030 10,512 29,141 22,270 Loss from operations ( 646 ) ( 10,512 ) ( 8,679 ) ( 22,270 ) Other income (expense): Interest income 912 706 2,028 1,388 Interest expense ( 154 ) ( 365 ) ( 484 ) ( 723 ) Foreign exchange gain 662 135 424 265 Loss on repayment of term loan (note 9) ( 988 ) — ( 988 ) — Loss before income taxes ( 214 ) ( 10,036 ) ( 7,699 ) ( 21,340 ) Income tax (expense) recovery (note 12) 39 29 40 ( 8 ) Net loss and comprehensive loss ( 175 ) ( 10,007 ) ( 7,659 ) ( 21,348 ) Net loss attributable to preferred shareholders ( 5 ) ( 380 ) ( 222 ) ( 810 ) Net loss attributable to common shareholders $ ( 170 ) $ ( 9,627 ) $ ( 7,437 ) $ ( 20,538 ) Net loss per common share (note 5): Basic and diluted $ ( 0.00 ) $ ( 0.37 ) $ ( 0.22 ) $ ( 0.80 ) Weighted-average common shares outstanding (note 5): Basic 34,979,282 25,773,879 34,084,508 25,763,858 Diluted 34,979,282 25,775,559 34,084,508 25,763,858 The accompanying notes are an integral part of these financial statements. -2- XENON PHARMACEUTICALS INC. Consolidated Statements 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, 2018 1,016,000 $ 7,732 25,750,721 $ 265,923 $ 38,515 $ ( 207,885 ) $ ( 990 ) $ 103,295 Cumulative effect of accounting change ( 175 ) ( 175 ) Net loss for the period ( 11,341 ) ( 11,341 ) Stock-based compensation expense 476 476 Issued pursuant to exercise of stock options 21,233 117 ( 59 ) 58 Balance as of March 31, 2019 1,016,000 $ 7,732 25,771,954 $ 266,040 $ 38,932 $ ( 219,401 ) $ ( 990 ) $ 92,313 Net loss for the period ( 10,007 ) ( 10,007 ) Stock-based compensation expense 470 470 Issued pursuant to exercise of stock options 3,102 22 ( 11 ) 11 Balance as of June 30, 2019 1,016,000 $ 7,732 25,775,056 $ 266,062 $ 39,391 $ ( 229,408 ) $ ( 990 ) $ 82,787 -3- XENON PHARMACEUTICALS INC. Consolidated Statements 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, 2019 1,016,000 $ 7,732 28,139,228 $ 294,244 $ 40,646 $ ( 249,655 ) $ ( 990 ) $ 91,977 Net loss for the period ( 7,484 ) ( 7,484 ) Issuance of common shares, net of issuance costs (note 10a) 6,759,187 102,456 102,456 Stock-based compensation expense 1,015 1,015 Issued pursuant to exercise of stock options 57,857 607 ( 593 ) 14 Balance as of March 31, 2020 1,016,000 $ 7,732 34,956,272 $ 397,307 $ 41,068 $ ( 257,139 ) $ ( 990 ) $ 187,978 Net loss for the period ( 175 ) ( 175 ) Stock-based compensation expense 1,472 1,472 Issued pursuant to exercise of stock options 38,518 345 ( 322 ) 23 Balance as of June 30, 2020 1,016,000 $ 7,732 34,994,790 $ 397,652 $ 42,218 $ ( 257,314 ) $ ( 990 ) $ 189,298 (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. -4- XENON PHARMACEUTICALS INC. Consolidated Statements of Cash Flows (Unaudited) (Expressed in thousands of U.S. dollars) Six Months Ended June 30, 2020 2019 Operating activities: Net loss $ ( 7,659 ) $ ( 21,348 ) Items not involving cash: Depreciation 271 179 Amortization of discount on term loan 216 255 Deferred income tax recovery ( 52 ) ( 11 ) Stock-based compensation 2,487 955 Unrealized foreign exchange (gain) loss 23 ( 225 ) Unrealized gain on marketable securities ( 532 ) ( 143 ) Loss on repayment of term loan (note 9) 988 — Changes in operating assets and liabilities: Accounts receivable ( 1,009 ) ( 15 ) Prepaid expenses and other current assets 225 522 Accounts payable and accrued expenses ( 1,054 ) 2,388 Deferred revenue ( 17,760 ) — Net cash used in operating activities ( 23,856 ) ( 17,443 ) Investing activities: Purchases of property, plant and equipment ( 1,016 ) ( 600 ) Purchases of marketable securities ( 146,773 ) ( 64,176 ) Proceeds from marketable securities 105,798 51,145 Net cash used in investing activities ( 41,991 ) ( 13,631 ) Financing activities: Repayment of term loan and repayment fees (note 9) ( 16,743 ) — Issuance of common shares, net of issuance costs (note 10a) 102,456 — Issuance of common shares pursuant to exercise of stock options 37 69 Net cash provided by financing activities 85,750 69 Effect of exchange rate changes on cash and cash equivalents ( 459 ) 326 Increase (decrease) in cash and cash equivalents 19,444 ( 30,679 ) Cash and cash equivalents, beginning of period 24,755 67,754 Cash and cash equivalents, end of period $ 44,199 $ 37,075 Supplemental disclosures: Interest paid $ 339 $ 468 Interest received 2,191 1,269 Cash paid for operating lease 311 314 Supplemental disclosures of non-cash transactions: Fair value of stock options exercised on a cashless basis 876 9 The accompanying notes are an integral part of these financial statements. -5- 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 predecessor to the Business Corporations Act (British Columbia) 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 neurology-focused therapies to address areas of high unmet medical need, with a focus on epilepsy. The Company has incurred significant operating losses since inception. As of June 30, 2020, the Company had an accumulated deficit of $ 257,314 and a $ 7,659 net loss for the six months ended June 30, 2020. 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, equity and debt financings. The continuation of 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 of June 30, 2020, 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. Certain information has been reclassified to conform with the financial statement presentation adopted for the current year. 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, 2019 and included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 9, 2020. 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, 2020 and 2019 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 2019 Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the policies described in notes 3 and 4 below. -6- 3. Use of estimates The preparation of the unaudited interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas of estimates include, but are not limited to, revenue recognition including estimated timing of completion of performance obligations, the determination of stock-based compensation and the amounts recorded as accrued liabilities. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the recent novel coronavirus (“COVID-19”) and public and private sector policies and initiatives aimed at reducing its transmission. There was no material impact to the Company’s consolidated financial statements as of and for the three and six month periods ended June 30, 2020; however, the full extent to which the COVID-19 pandemic may have a direct or indirect impact to our business, results of operations and financial condition, including revenue, expenses, research and clinical development plans and timelines, depends on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, as well as the economic impact on local, regional, national and global markets. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed quarterly. All revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. 4. Changes in significant accounting policies: In November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. These amendments clarify that companies must measure and classify share-based payment awards to a customer following the guidance in Topic 718. A company will classify awards as liabilities or equity following the guidance in Topic 718, and measure them at their grant-date fair value. The awards will be recorded as a reduction to revenue or an expense based on the guidance in Topic 606. If a company intends to provide an award to a customer and the grant date has not occurred, the transaction price guidance in Topic 606 should be followed to estimate the fair value of the award. A company must adjust the fair value estimate each reporting date until a grant date is achieved and recognize changes in the grant-date fair value of an award as a result of changes in the expected outcome of a service or a performance condition as a reduction in the transaction price. If the terms of the award are modified after the grantee vests in the award and is no longer a customer, the award may be subject to other guidance. The Company has adopted this standard as of January 1, 2020 on a retrospective basis. The adoption of the standard had no impact on the Company’s consolidated balance sheets, consolidated statements of operations and comprehensive loss and consolidated statements of cash flows. 5 . Net income (loss) per common share: For the three and six months ended June 30, 2020 and 2019, basic net income (loss) per common share are calculated using the two-class method required for participating securities which includes 1,016,000 Series 1 Preferred Shares as a separate class for the respective periods (three and six months ended June 30, 2019 – 1,016,000 ). The convertible 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 months ended June 30, 2020, 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 months ended June 30, 2019, 2,658,217 stock options and all warrants and convertible preferred shares were excluded from the calculation of diluted net loss per common share as their inclusion would be anti-dilutive. For the six months ended June 30, 2019, 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. The following table sets out the computation of basic and diluted net loss per common share: -7- Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Numerator: Allocation of loss attributed to shareholders Basic $ ( 170 ) $ ( 9,627 ) $ ( 7,437 ) $ ( 20,538 ) Adjustment for change in fair value of liability classified stock options — ( 5 ) — — $ ( 170 ) $ ( 9,632 ) $ ( 7,437 ) $ ( 20,538 ) Denominator: Weighted average number of shares: Basic 34,979,282 25,773,879 34,084,508 25,763,858 Adjustment for dilutive effect of stock options — 1,680 — — Diluted 34,979,282 25,775,559 34,084,508 25,763,858 Net loss attributable to shareholders per share - basic $ ( 0.00 ) $ ( 0.37 ) $ ( 0.22 ) $ ( 0.80 ) Net loss attributable to shareholders per share - diluted $ ( 0.00 ) $ ( 0.37 ) $ ( 0.22 ) $ ( 0.80 ) 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. -8- 7 . Leases: The Company has one operating lease for research laboratories and office space in Burnaby, British Columbia for a 120 -month term from April 1, 2012 to March 31, 2022 . The cost components of the operating lease were as follows for the three and six month periods ended June 30, 2020 and 2019: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Lease Cost Operating lease expense $ 151 $ 109 $ 260 $ 218 Variable lease expense (1) 132 134 267 268 Lease Term and Discount Rate Remaining lease term (years) 1.75 2.75 1.75 2.75 Discount rate 3.75 % 3.75 % 3.75 % 3.75 % (1) Variable lease costs are payments that vary because of changes in facts or circumstances and include common area maintenance and property taxes related to the premises. Variable lease costs are excluded from the calculation of minimum lease payments. Future minimum lease payments as of June 30, 2020 were as follows: Year ending December 31: 2020 312 2021 587 2022 46 Total future minimum lease payments $ 945 Less: imputed interest ( 28 ) Present value of lease liabilities $ 917 8 . Accounts payable and accrued expenses: Accounts payable and accrued expenses consisted of the following: June 30, December 31, 2020 2019 Trade payables $ 1,633 $ 2,473 Employee compensation, benefits, and related accruals 1,830 2,892 Consulting and contracted research 4,056 3,104 Professional fees 222 154 Other 28 195 Total $ 7,769 $ 8,818 9 . Term loan: In August 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with Silicon Valley Bank (the “Bank”), pursuant to which the Bank agreed to extend a term loan to the Company with a principal amount of $ 15,500 . In May 2020, the Company repaid the total outstanding term loan balance ahead of the maturity date. The repayment consisted of (i) the outstanding principal balance, (ii) a final payment fee of $ 1,008 , which was partially accrued up to the date of repayment, and (iii) a prepayment fee of $ 225 . At the time of repayment, all liabilities and obligations under the Amended and Restated Loan Agreement terminated automatically. The Company recorded a loss on repayment of the term loan of $ 988 , which represents the difference between the carrying value of the term loan on the repayment date and the amount paid to extinguish the term loan. The repayment did not affect the Bank’s rights in connection with the warrant to the Bank to purchase 40,000 of our common shares at a price per common share of $ 9.79 which will remain outstanding until exercised or expired in August 2028 . -9- 10 . Share capital: (a) Financing: In November 2019, the Company entered into an at-the-market equity offering sales agreement with Jefferies LLC (“Jefferies”) and Stifel, Nicolaus & Company, Incorporated (“Stifel”) to sell common shares of the Company having aggregate gross proceeds of up to $ 50,000 , from time to time, through an “at-the-market” equity offering program under which Jefferies and Stifel would act as sales agents. As of December 31, 2019, the Company had sold 805,643 common shares under the sales agreement for proceeds of approximately $ 10,771 , net of commissions paid, but excluding transaction expenses. In January 2020, the Company sold an additional 2,446,687 common shares for proceeds of approximately $ 37,979 , net of commissions paid, but excluding transaction expenses. In January 2020, the Company entered into an underwriting agreement with Jefferies, Stifel and Guggenheim Securities, LLC, relating to an underwritten public offering of 3,750,000 common shares sold by the Company 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 on January 27, 2020, and the Company received net proceeds of $ 56,700 , net of underwriting discounts and commissions, but before offering expenses. The underwriters exercised their option in full in February 2020 and the Company received additional net proceeds of $ 8,460 , net of underwriting discounts and commissions, but before offering expenses. (b) Exchange agreement with certain funds affiliated with BVF Partners L.P. (collectively, “BVF”): In March 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. 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. 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. During the year ended December 31, 2018, BVF converted 1,852,000 Series 1 Preferred Shares in exchange for an equal number of common shares of the Company. BVF was a related party of the Company prior to the closing of the exchange agreement, and continues to be a related party as of June 30, 2020 and thereafter. -10- (c) Stock-based compensation: In June 2020, the shareholders of the Company approved the Amended and Restated 2014 Equity Incentive Plan (the “Amended and Restated 2014 Plan”) amending certain provisions of the Company’s 2014 Equity Incentive Plan (the “2014 Plan”). The annual automatic share increase provision of the 2014 Plan was eliminated and the number of common shares available for issuance was increased by 4,000,000 over the existing share reserve under the 2014 Plan. The number of common shares that can be issued through restricted share awards, restricted share unit awards, or performance share awards was amended to be limited to 1,000,000 common shares, in the aggregate. Other amendments were made to terms of the 2014 Plan with respect to repricing, change of control and payment of dividends and other distributions. In connection with the shareholder approval of the Amended and Restated 2014 Plan, the Company’s non-shareholder-approved 2019 Inducement Equity Incentive Plan (the “2019 Inducement Plan”) was terminated. No further options will be granted under the 2019 Inducement Plan, and the 2019 Inducement Plan will continue to govern the options granted thereunder. The following table presents stock option activity for the period: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Outstanding, beginning of period 4,527,992 2,667,449 3,534,236 2,671,906 Granted 127,300 — 1,245,650 21,900 Exercised (1) ( 54,716 ) ( 3,461 ) ( 153,042 ) ( 25,863 ) Forfeited, cancelled or expired ( 5,144 ) ( 200 ) ( 31,412 ) ( 4,155 ) Outstanding, end of period 4,595,432 2,663,788 4,595,432 2,663,788 Exercisable, end of period 2,114,647 1,913,129 2,114,647 1,913,129 (1) During the six months ended June 30, 2020, 10,715 stock options were exercised for the same number of common shares for cash (six months ended June 30, 2019 – 23,472 ). In the same period, the Company issued 85,660 common shares (six months ended June 30, 2019 – 863 ) for the cashless exercise of 142,327 stock options (six months ended June 30, 2019 – 2,391 ). 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, 2020 2019 (1) 2020 2019 Average risk-free interest rate 0.48 % N/A 0.77 % 2.58 % Expected volatility 68 % N/A 68 % 76 % Average expected term (in years) 6.86 N/A 6.75 6.27 Expected dividend yield 0 % N/A 0 % 0 % Weighted average fair value of stock options granted $ 8.27 N/A $ 7.50 $ 5.34 (1) No stock options were granted during the three months ended June 30, 2019. 11 . Revenue: Revenue was as follows for the three and six month periods ended June 30, 2020 and 2019 : Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Neurocrine Biosciences: Recognition of the transaction price $ 11,916 $ — $ 17,760 $ — Research and development services 1,468 — 2,702 — Total collaboration revenue $ 13,384 $ — $ 20,462 $ — -11- In December 2019, the Company entered into a License and Collaboration Agreement with Neurocrine Biosciences Inc. (“Neurocrine Biosciences”) . Pursuant to this agreement, the Company granted an exclusive license to XEN901, now known as NBI-921352, and an exclusive license to pre-clinical compounds for development, XEN393, XPC’535 and XPC’391 (collectively, the “DTCs”). The agreement also includes a two-year research collaboration to discover, identify and develop additional novel Nav1.6 and Nav1.2/1.6 inhibitors (“Research Compounds”), with an option to extend for an additional year. The Company and Neurocrine Biosciences will collaborate on the conduct of two collaboration programs: (a) a joint research collaboration to discover, identify and preclinically develop Research Compounds (the “Research Program”) and (b) a collaborative development program for XEN901 and two DTCs selected by the joint steering committee (the “Initial Development Program”). At execution of the agreement, Neurocrine Biosciences paid the Company an upfront cash payment of $ 30,000 and a $ 20,000 equity investment in the Company. The equity investment was measured at fair value of $ 16,667 on the date of issuance and the resulting premium $ 3,333 , together with the upfront cash payment totaling $ 33,333 , was the transaction price of the arrangement for allocation to the performance obligations. The agreement includes the following performance obligations: (i) an exclusive license to XEN901 with associated technology and know-how transfer, (ii) an exclusive license to the DTCs with associated know-how transfer, (iii) a license to Research Compounds and research services under the Research Program, (iv) development services under the Initial Development Program for XEN901, and (v) development services under the Initial Development Program for the DTCs. The total transaction price of $ 33,333 was allocated to performance obligation (v) based on its estimated standalone selling price determined based on internal development plans and budget, with the balance allocated to performance obligations (i) and (ii) by the residual approach. The Company allocated the transaction price as follows: $ 28,807 to performance obligations (i) and (ii), which performance obligations are delivered concurrently and are being recognized as revenue over an approximate eleven month period from the signing of the agreement, which is the expected period to complete the delivery of the licenses and transfer of the relevant technology and know-how, and $ 4,526 to performance obligation (v) which is being recognized as revenue over an approximate thirteen month period beginning March 2020 which is the expected period to complete the development services. The arrangement consideration related to the services under performance obligations (iii) and (iv) to be performed on behalf of Neurocrine Biosciences were excluded from the initial transaction price allocation because the consideration and performance are contingent upon Neurocrine Biosciences requesting performance of the services and these services are priced at an estimated fair value. None of the at-risk substantive performance milestones, including development, regulatory and sales-based milestones, were included in the transaction price, as all milestone amounts are outside the control of the Company and contingent upon Neurocrine Biosciences’s efforts and success in future clinical trials. The Company will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur. During the three and six month periods ended June 30, 2020, the Company recognized $ 13,384 and $ 20,462 of revenue, respectively, which comprised of $ 11,523 and $ 17,285 , respectively, associated with (i) the exclusive license to XEN901 and (ii) the exclusive license to the DTCs; $ 1,468 and $ 2,702 , respectively, for the research and development services under (iii) the Research Program and (iv) the Initial Development Program for XEN901; and $ 393 and $ 475 , respectively, for (v) development services under the Initial Development Program for the DTCs. As of June 30, 2020, there is $ 1,467 of accounts receivable and $ 12,692 of deferred revenue related to the Neurocrine Collaboration Agreement, which is classified as current on the balance sheet based on the period the services are expected to be delivered. The Company has an option to co-fund 50 % of the development costs of XEN901 or another product candidate in the U.S., exercisable upon achievement of certain milestones, in exchange for increased U.S. royalties. The Company has not exercised this option as of June 30, 2020. Neurocrine Biosciences was a related party as of December 31, 2019 but was not considered a related party as of June 30, 2020. 12 . Income taxes: Income tax (expense) recovery for the three and six months ended June 30, 2020 and 2019 arose from the operations of Xenon Pharmaceuticals USA Inc., the Company’s wholly-owned subsidiary in the United States. Deferred income tax assets recorded on the consolidated balance sheets as of June 30, 2020 and December 31, 2019 resulted from the temporary differences between the amounts of assets and liabilities recognized for financial statement and income tax purposes related to the operations of Xenon Pharmaceuticals USA Inc. The realization of deferred income tax assets is dependent upon the generation of sufficient taxable income during future periods in which the temporary differences are expected to reverse. -12- 13 . 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 ; $ 3,159 of services have been received to date and $ 3,841 remains committed as of June 30, 2020. (b) License, manufacture and supply agreement: In March 2017, the Company entered into a license, manufacture and supply agreement with a pharmaceutical contract manufacturing organization for the access and use of certain regulatory documents as well as for the manufacture and supply of clinical and commercial drug product to support the development of XEN007. Under the terms of the agreement, the Company will be required to pay a low single-digit percentage royalty on net sales of any products developed and commercialized under the agreement. (c) Asset purchase agreement with 1st Order Pharmaceuticals, Inc. (“1st Order”): In April 2017, the Company acquired XEN1101 (previously known as 1OP2198) from 1st Order pursuant to an asset purchase agreement. In August 2020, the Company and 1st Order amended the asset purchase agreement to amend certain definitions in the agreement and to modify the payment schedule for certain milestones. Future potential payments to 1st Order related to the XEN1101 program include up to $ 1,200 in clinical development milestones, up to $ 6,000 in regulatory milestones, and $ 500 in other milestones. Upon execution of the amendment, a payment of $ 300 is payable; this amount has been accrued as of June 30, 2020. There are no royalty obligations to 1st Order. (d) License agreement In July 2017, the Company entered into a license agreement with a pharmaceutical company for the access and use of certain regulatory documents to support the development of XEN007. Future potential payments include $ 2,000 in clinical development milestones, up to $ 7,000 in regulatory milestones, plus a low-to-mid single-digit percentage royalty on net sales of any products developed and commercialized under the agreement . No amounts have been accrued to date based on the progress against these milestones. (e) Guarantees and indemnifications: The Company has entered into license and research agreements with third parties that include indemnification provisions that are customary in the industry. These indemnification provisions generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party claims or damages arising from these transactions. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds commercial and product liability insurance. This insurance limits the Company’s exposure and may enable it to recover a portion of any future amounts paid. Historically, the Company has not made any indemnification payments under such agreements and the Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.