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, 2021 2020 Assets Current assets: Cash and cash equivalents $ 82,930 $ 45,009 Marketable securities 177,593 131,988 Accounts receivable 2,919 1,822 Prepaid expenses and other current assets 3,313 2,964 266,755 181,783 Operating lease right-of-use asset, net (note 6) 3,086 3,326 Property, plant and equipment, net 4,326 3,554 Deferred tax assets (note 11) 544 523 Total assets $ 274,711 $ 189,186 Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued expenses (note 7) $ 11,198 $ 10,874 Deferred revenue (note 10) 3,025 3,642 Operating lease liability (note 6) 759 265 14,982 14,781 Operating lease liability, long-term (note 6) 2,746 3,050 $ 17,728 $ 17,831 Shareholders’ equity: Preferred shares, without par value; unlimited shares authorized; issued and outstanding: 1,016,000 (December 31, 2020 - 1,016,000 ) (note 9) $ 7,732 $ 7,732 Common shares, without par value; unlimited shares authorized; issued and outstanding: 41,117,568 (December 31, 2020 - 35,012,125 ) (note 9) 499,351 397,748 Additional paid-in capital 67,255 45,357 Accumulated deficit ( 316,365 ) ( 278,492 ) Accumulated other comprehensive loss ( 990 ) ( 990 ) $ 256,983 $ 171,355 Total liabilities and shareholders’ equity $ 274,711 $ 189,186 Commitments and contingencies (note 12) Subsequent event (note 13) The accompanying notes are an integral part of these financial statements. -3- 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, 2021 2020 2021 2020 Revenue (note 10) $ 2,218 $ 13,384 $ 6,576 $ 20,462 Operating expenses: Research and development 18,377 10,720 34,685 22,511 General and administrative 6,339 3,310 10,448 6,630 24,716 14,030 45,133 29,141 Loss from operations ( 22,498 ) ( 646 ) ( 38,557 ) ( 8,679 ) Other income (expense): Interest income 55 912 127 2,028 Interest expense — ( 154 ) — ( 484 ) Foreign exchange gain 117 662 272 424 Loss on repayment of term loan (note 8) — ( 988 ) — ( 988 ) Loss before income taxes ( 22,326 ) ( 214 ) ( 38,158 ) ( 7,699 ) Income tax recovery (note 11) 217 39 285 40 Net loss and comprehensive loss ( 22,109 ) ( 175 ) ( 37,873 ) ( 7,659 ) Net loss attributable to preferred shareholders ( 521 ) ( 5 ) ( 951 ) ( 222 ) Net loss attributable to common shareholders $ ( 21,588 ) $ ( 170 ) $ ( 36,922 ) $ ( 7,437 ) Net loss per common share (note 4): Basic and diluted $ ( 0.51 ) $ ( 0.00 ) $ ( 0.94 ) $ ( 0.22 ) Weighted-average common shares outstanding (note 4): Basic and diluted 43,106,207 34,979,282 40,473,413 34,084,508 The accompanying notes are an integral part of these financial statements. -4- 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 9a) 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 ) The 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 -5- 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, 2020 1,016,000 $ 7,732 35,012,125 $ 397,748 $ 45,357 $ ( 278,492 ) $ ( 990 ) $ 171,355 Net loss for the period ( 15,764 ) ( 15,764 ) Issuance of common shares and pre-funded warrants, net of issuance costs (note 9a and note 9c) 5,868,135 99,846 18,769 118,615 Stock-based compensation expense 1,965 1,965 Issued pursuant to exercise of stock options 82,455 740 ( 634 ) 106 Balance as of March 31, 2021 1,016,000 $ 7,732 40,962,715 $ 498,334 $ 65,457 $ ( 294,256 ) $ ( 990 ) $ 276,277 Net loss for the period ( 22,109 ) ( 22,109 ) Stock-based compensation expense 2,704 2,704 Issued pursuant to exercise of stock options 154,853 1,017 ( 906 ) 111 Balance as of June 30, 2021 1,016,000 $ 7,732 41,117,568 $ 499,351 $ 67,255 $ ( 316,365 ) $ ( 990 ) $ 256,983 (1) The 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. -6- XENON PHARMACEUTICALS INC. Consolidated Statements of Cash Flows (Unaudited) (Expressed in thousands of U.S. dollars) Six Months Ended June 30, 2021 2020 Operating activities: Net loss $ ( 37,873 ) $ ( 7,659 ) Items not involving cash: Depreciation 427 271 Amortization of discount on term loan — 216 Deferred income tax recovery ( 21 ) ( 52 ) Stock-based compensation 4,669 2,487 Unrealized foreign exchange loss 11 23 Unrealized loss (gain) on marketable securities 92 ( 532 ) Loss on repayment of term loan (note 8) — 988 Changes in operating assets and liabilities: Accounts receivable ( 608 ) ( 1,009 ) Prepaid expenses and other current assets ( 349 ) 225 Accounts payable and accrued expenses 484 ( 1,054 ) Deferred revenue ( 617 ) ( 17,760 ) Net cash used in operating activities ( 33,785 ) ( 23,856 ) Investing activities: Purchases of property, plant and equipment ( 1,313 ) ( 1,016 ) Purchases of marketable securities ( 122,279 ) ( 146,773 ) Proceeds from marketable securities 76,680 105,798 Net cash used in investing activities ( 46,912 ) ( 41,991 ) Financing activities: Repayment of term loan and repayment fees (note 8) — ( 16,743 ) Proceeds from issuance of common shares and pre-funded warrants, net of issuance costs (note 9a) 118,615 102,456 Issuance of common shares pursuant to exercise of stock options 217 37 Net cash provided by financing activities 118,832 85,750 Effect of exchange rate changes on cash and cash equivalents ( 214 ) ( 459 ) Increase in cash and cash equivalents 37,921 19,444 Cash and cash equivalents, beginning of period 45,009 24,755 Cash and cash equivalents, end of period $ 82,930 $ 44,199 Supplemental disclosures: Interest paid $ — $ 339 Interest received 1,537 2,191 Cash paid for operating lease 412 311 Supplemental disclosures of non-cash transactions: Fair value of stock options exercised on a cashless basis 1,324 876 Increase in operating lease liability and accounts receivable related to lease incentives claimed in the period 493 — The accompanying notes are an integral part of these financial statements. -7- 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 Corporations Act, is a clinical stage biopharmaceutical company focused on developing innovative therapeutics to improve the lives of patients with neurological disorders, with a focus on epilepsy. The Company has incurred significant operating losses since inception. As of June 30, 2021, the Company had an accumulated deficit of $ 316,365 and a $ 37,873 net loss for the six months ended June 30, 2021. 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 and pre-funded warrants and debt financings. 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, 2021 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, 2020 and included in the Company’s 2020 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2021. 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 months ended June 30, 2021 and 2020 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 2020 Annual Report on Form 10-K for the year ended December 31, 2020, with the exception of the policy described in note 3 below. 3 . Changes in significant accounting policies: In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. These amendments simplify accounting for income taxes, change the accounting for certain income tax transactions and make certain improvements to the codification. The Company has adopted this standard as of January 1, 2021 on a prospective 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. -8- 4 . Net income (loss) per common share: Basic net income (loss) per common share is 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 three and six months ended June 30, 2021 (2020 – 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 weighted average number of common shares used in the basic and diluted net income (loss) per common share calculations for the three and six months ended June 30, 2021 include the pre-funded warrants issued in connection with the Company’s March 2021 underwritten public offering (note 9c) as the pre-funded warrants are exercisable at any time for nominal cash consideration. 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, 2021 and 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. 5 . 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. 6 . Leases: The Company has one operating lease for research laboratories and office space in Burnaby, British Columbia. In October 2020, the Company entered into a lease amendment for a 21–month committed term from October 1, 2020 to June 30, 2022 and a renewal option for a portion of the facility for a 5 -year term that was reasonably certain of exercise was included in the determination of the right-of-use asset and lease liability. -9- The cost components of the operating lease were as follows for the three and six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Lease Cost Operating lease expense $ 140 $ 151 $ 279 $ 260 Variable lease expense (1) 190 132 374 267 Lease Term and Discount Rate Remaining lease term (years) 6.00 1.75 6.00 1.75 Discount rate 2.45 % 3.75 % 2.45 % 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, 2021 were as follows: Year ending December 31: 2021 $ 416 2022 713 2023 584 2024 584 2025 and thereafter 1,460 Total future minimum lease payments $ 3,757 Less: imputed interest ( 252 ) Present value of lease liabilities $ 3,505 7 . Accounts payable and accrued expenses: Accounts payable and accrued expenses consisted of the following: June 30, December 31, 2021 2020 Trade payables $ 3,278 $ 3,041 Employee compensation, benefits, and related accruals 2,459 2,859 Consulting and contracted research 5,025 4,738 Professional fees 362 167 Other 74 69 Total $ 11,198 $ 10,874 8 . 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 . The Term Loan accrued interest at a floating per annum rate of 0.5 % above the prime rate. The Term Loan was interest-only until March 31, 2020 , followed by 30 equal monthly installments of principal plus interest, originally maturing on September 1, 2022 . In addition, the Company was required to pay a final payment fee of 6.5 % of the Term Loan on the date on which the term loan was prepaid, paid or became due and payable in full. 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. -10- 9 . 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 $ 10,729 , net of commissions paid and transaction expenses. In January 2020, the Company sold an additional 2,446,687 common shares for proceeds of approximately $ 37,796 , net of commissions and 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 in January 2020, and the Company received proceeds of $ 56,265 , net of underwriting discounts, commissions and offering expenses. The underwriters exercised their option in full in February 2020 and the Company received additional proceeds of $ 8,395 , net of underwriting discounts, commissions and offering expenses. In August 2020, the Company entered into an at-the-market equity offering sales agreement with Jefferies and Stifel to sell common shares of the Company having aggregate gross proceeds of up to $ 100,000 , from time to time, through an “at-the-market” equity offering program under which Jefferies and Stifel would act as sales agents. As of June 30, 2021, 733,000 common shares have been sold under the sales agreement for proceeds of approximately $ 10,693 , net of commissions and transaction expenses. In March 2021, the Company entered into an underwriting agreement with Jefferies and Stifel, relating to an underwritten public offering of 5,135,135 common shares, including 810,810 common shares sold upon the full exercise of the underwriters’ over-allotment option, at a public offering price of $ 18.50 per common share and pre-funded warrants to purchase 1,081,081 common shares (the “Pre-Funded Warrants”) at $ 18.4999 per Pre-Funded Warrant (note 9c). The public offering was completed in March 2021, and the Company received proceeds of $ 107,922 , net of underwriting discounts, commissions and 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. -11- 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, 2021. (c) Pre-Funded Warrants: In connection with an underwritten public offering completed in March 2021, the Company issued 1,081,081 Pre-Funded Warrants at a price of $ 18.4999 per Pre-Funded Warrant which grants the holder the right to purchase up to 1,081,081 common shares at an exercise price of $ 0.0001 per share. The Pre-Funded Warrants are exercisable at the holder’s discretion from the date of issuance until the date the Pre-Funded Warrant is exercised in full. The Company may not affect the exercise of any Pre-Funded Warrant, and a holder will not be entitled to exercise any portion of any Pre-Funded Warrant that, upon giving effect to such exercise, would cause: (i) the aggregate number of common shares beneficially owned by such holder, together with its affiliates, to exceed 4.99% of the total number of common shares outstanding immediately after giving effect to the exercise; or (ii) the combined voting power of the Company’s securities beneficially owned by such holder, together with its affiliates, to exceed 4.99% of the combined voting power of all of the Company’s securities immediately outstanding after giving effect to the exercise, which percentage may be changed at the holder’s election to a higher or lower percentage not in excess of 19.99% upon at least 61 days’ notice to the Company. Since the Pre-Funded Warrants meet the condition for equity classification, proceeds from issuance of the Pre-Funded Warrants of $ 18,769 , net of underwriting discounts, commissions and offering expenses, are recorded in additional paid-in capital. Upon exercise of the Pre-Funded Warrants, the historical costs recorded in additional paid-in capital along with the exercise price collected from holder will be recorded in common shares. As of June 30, 2021, no Pre-Funded Warrants have been exercised. Pre-funded warrants to purchase 1,081,081 common shares are not included in the number of issued and outstanding common shares as of June 30, 2021. (d) Stock-based compensation: The following table presents stock option activity for the period: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Outstanding, beginning of period 5,742,608 4,527,992 4,758,997 3,534,236 Granted 382,500 127,300 1,494,450 1,245,650 Exercised (1) ( 222,331 ) ( 54,716 ) ( 344,734 ) ( 153,042 ) Forfeited, cancelled or expired ( 131,726 ) ( 5,144 ) ( 137,662 ) ( 31,412 ) Outstanding, end of period 5,771,051 4,595,432 5,771,051 4,595,432 Exercisable, end of period 2,842,948 2,114,647 2,842,948 2,114,647 (1) During the six months ended June 30, 2021, 58,179 (six months ended June 30, 2020 – 10,715 ) stock options were exercised for the same number of common shares in exchange for cash. In the same period, the Company issued 179,129 (six months ended June 30, 2020 – 85,660 ) common shares for the cashless exercise of 286,555 (six months ended June 30, 2020 – 142,327 ) stock options. -12- 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, 2021 2020 2021 2020 Average risk-free interest rate 1.27 % 0.48 % 1.18 % 0.77 % Expected volatility 69 % 68 % 68 % 68 % Average expected term (in years) 7.09 6.86 6.67 6.75 Expected dividend yield 0 % 0 % 0 % 0 % Weighted average fair value of stock options granted $ 12.14 $ 8.27 $ 12.67 $ 7.50 10 . Revenue: Revenue was as follows for the three and six months ended June 30, 2021 and 2020 : 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 (a) Neurocrine Biosciences license and collaboration agreement : 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 are collaborating 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), completed as of December 2020 , and $ 5,118 , which includes $ 592 of variable consideration, to performance obligation (v), which is expected to be completed by Q1 2022. 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. -13- During the three and six month periods ended June 30, 2021, the Company recognized $ 2,218 and $ 3,576 of revenue, respectively (three and six months ended June 30, 2020 – $ 13,384 and $ 20,462 respectively), which comprised of $ 1,601 and $ 2,959 , respectively (three and six months ended June 30, 2020 – $ 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 $ 617 and $ 617 , respectively (three and six months ended June 30, 2020 – $ 393 and $ 475 respectively), for (v) development services under the Initial Development Program for the DTCs. During the three and six months ended June 30, 2020, the Company also recognized revenue of $ 11,523 and $ 17,285 , respectively, associated with (i) the exclusive license to XEN901 and (ii) the exclusive license to the DTCs. As of June 30, 2021, there is $ 1,624 of accounts receivable and $ 3,025 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, 2021. (b) Flexion definitive agreement: In September 2019, the Company entered into an agreement with Flexion Therapeutics Inc. (“Flexion”) pursuant to which Flexion acquired all rights with respect to XEN402, and a related compound (collectively “XEN402”), including certain regulatory documentation, intellectual property rights, reports, data and all quantities of XEN402, now known as FX301, owned or controlled by the Company. During the six months ended June 30, 2021, the U.S. Food and Drug Administration cleared the first investigational new drug application for FX301 and Flexion initiated a Phase 1b clinical trial, resulting in milestone payments of $ 1,000 and $ 2,000 paid to the Company, respectively. Pursuant to terms of the agreement, the Company will also be eligible for a development milestone payment of $ 5,000 upon initiation of a Phase 2 proof-of-concept clinical trial. Following successful proof-of-concept, the Company may be entitled to future clinical development and global regulatory approval milestone payments of up to $ 40,750 , commercial milestone payments of up to $ 75,000 , as well as future royalties ranging from mid-single to low-double digit percentages. These additional amounts will be recognized as determinable. 11 . Income taxes: Income tax recovery for the three and six months ended June 30, 2021 and 2020 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, 2021 and December 31, 2020 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 . 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 which the Company has committed to using Medpace non-exclusively for clinical development services over the five-year term of the agreement which ended in August 2020. The Company has committed to $ 7,000 of services over the term of the agreement of which $ 3,595 of services have been received and $ 3,405 remains committed as of June 30, 2021. As the Company did not meet the commitment to retain Medpace for $7,000 of services prior to August 2020, the Company is required to provide Medpace the exclusive right to perform all subsequent outsourced clinical development work until such $7,000 commitment has been satisfied, subject to the availability of appropriate Medpace resources and reasonable service rates. If the Company decides not to retain Medpace for the provision of clinical development services, the Company may satisfy its obligations under the priority access agreement by paying Medpace an amount equal to half of the unsatisfied portion. The Company intends to continue to utilize Medpace for clinical development work where suitable in order to fulfill the remaining commitment; therefore, no liability has been recognized as of June 30, 2021 with respect to the unsatisfied portion under the priority access agreement. -14- (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. To date, the Company has paid $ 300 based on progress against these milestones. 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. 13. Subsequent event: On August 6, 2021, the Company and Genentech and its affiliate, F. Hoffman-La Roche Ltd., entered into a termination agreement terminating by mutual agreement the collaborative research and license agreement dated December 22, 2011, as amended. Pursuant to the terms of the termination agreement, Genentech has returned, licensed or assigned to the Company certain intellectual property, including certain patent rights and materials related to Nav1.7 and products incorporating such compounds for all uses. Notwithstanding such termination, the Company remains subject to a low single-digit percentage, tiered royalty on the net sales of the Company’s Nav1.6 compounds, including XEN901, now known as NBI-921352, for a period of ten years from first commercial sale on a country-by-country basis. In accordance with the license and collaboration agreement with Neurocrine Biosciences, the Company remains solely responsible for all payments to Genentech with respect to certain Nav1.6 compounds, including NBI-921352, licensed to Neurocrine Biosciences. In addition, the Company and Genentech agreed to waive the Company's entitlement to receive future potential milestone payments of up to $ 1,500 under a separate agreement with Genentech for pain genetics dated March 19, 2014, which expired in March 2018, following the receipt of Genentech’s confirmation that Genentech has stopped all activities under that program. Other than as described above, the Company has no further financial obligations to make potential payments to Genentech with respect to the termination agreement and no financial entitlement to receive future potential payments from Genentech with respect to either agreement. -15-