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, 2022 2021 Assets Current assets: Cash and cash equivalents $ 369,987 $ 175,688 Marketable securities 418,251 376,086 Accounts receivable 2,524 2,765 Prepaid expenses and other current assets 4,041 4,481 794,803 559,020 Operating lease right-of-use asset, net (note 5) 7,730 8,056 Property, plant and equipment, net 4,536 4,466 Deferred tax assets 311 465 Total assets $ 807,380 $ 572,007 Liabilities and shareholders’ equity Current liabilities: Accounts payable and accrued expenses (note 6) $ 13,736 $ 13,717 Operating lease liability (note 5) — 605 13,736 14,322 Operating lease liability, long-term (note 5) 7,851 7,652 $ 21,587 $ 21,974 Shareholders’ equity: Preferred shares, without par value; unlimited shares authorized; issued and outstanding: nil (December 31, 2021 - 1,016,000 ) (note 7) $ — $ 7,732 Common shares, without par value; unlimited shares authorized; issued and outstanding: 62,242,883 (December 31, 2021 - 51,634,752 ) (note 7) 1,061,690 783,170 Additional paid-in capital 133,295 117,495 Accumulated deficit ( 408,202 ) ( 357,374 ) Accumulated other comprehensive loss ( 990 ) ( 990 ) $ 785,793 $ 550,033 Total liabilities and shareholders’ equity $ 807,380 $ 572,007 Commitments and contingencies (note 9) 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, 2022 2021 2022 2021 Revenue (note 8) $ 536 $ 2,218 $ 9,302 $ 6,576 Operating expenses: Research and development 22,146 18,377 41,506 34,685 General and administrative 8,705 6,339 15,480 10,448 30,851 24,716 56,986 45,133 Loss from operations ( 30,315 ) ( 22,498 ) ( 47,684 ) ( 38,557 ) Other income (expense): Interest income 816 72 1,184 219 Unrealized fair value loss on marketable securities ( 1,288 ) ( 17 ) ( 4,650 ) ( 92 ) Foreign exchange gain (loss) ( 411 ) 117 ( 112 ) 272 Loss before income taxes ( 31,198 ) ( 22,326 ) ( 51,262 ) ( 38,158 ) Income tax recovery 40 217 434 285 Net loss and comprehensive loss ( 31,158 ) ( 22,109 ) ( 50,828 ) ( 37,873 ) Net loss attributable to preferred shareholders — ( 521 ) ( 385 ) ( 951 ) Net loss attributable to common shareholders $ ( 31,158 ) $ ( 21,588 ) $ ( 50,443 ) $ ( 36,922 ) Net loss per common share (note 3): Basic and diluted $ ( 0.55 ) $ ( 0.51 ) $ ( 0.91 ) $ ( 0.94 ) Weighted-average common shares outstanding (note 3): Basic and diluted 56,192,922 42,090,207 55,522,857 39,457,413 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, 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 7a and note 7c) — — 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. -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, 2021 1,016,000 $ 7,732 51,634,752 $ 783,170 $ 117,495 $ ( 357,374 ) $ ( 990 ) $ 550,033 Net loss for the period — — — — — ( 19,670 ) — ( 19,670 ) Issuance of common shares, net of issuance costs (note 7a) — — 258,986 7,876 — — — 7,876 Conversion of preferred shares to common shares (note 7b) ( 1,016,000 ) ( 7,732 ) 1,016,000 7,732 — — — — Stock-based compensation expense — — — — 3,614 — — 3,614 Issued pursuant to exercise of stock options — — 149,311 1,529 ( 1,529 ) — — — Balance as of March 31, 2022 — $ — 53,059,049 $ 800,307 $ 119,580 $ ( 377,044 ) $ ( 990 ) $ 541,853 Net loss for the period — — — — — ( 31,158 ) — ( 31,158 ) Issuance of common shares and pre-funded warrants, net of issuance costs (note 7a and note 7c) — — 9,098,362 260,503 9,387 — — 269,890 Stock-based compensation expense — — — — 5,208 — — 5,208 Issued pursuant to exercise of stock options — — 85,472 880 ( 880 ) — — — Balance as of June 30, 2022 — $ — 62,242,883 $ 1,061,690 $ 133,295 $ ( 408,202 ) $ ( 990 ) $ 785,793 (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, 2022 2021 Operating activities: Net loss $ ( 50,828 ) $ ( 37,873 ) Items not involving cash: Depreciation 751 427 Deferred income tax expense (recovery) 154 ( 21 ) Stock-based compensation 8,822 4,669 Unrealized foreign exchange loss 492 11 Unrealized fair value loss on marketable securities 4,650 92 Changes in operating assets and liabilities: Accounts receivable 235 ( 608 ) Prepaid expenses and other current assets 439 ( 349 ) Accounts payable and accrued expenses ( 11 ) 484 Deferred revenue — ( 617 ) Net cash used in operating activities ( 35,296 ) ( 33,785 ) Investing activities: Purchases of property, plant and equipment ( 756 ) ( 1,313 ) Purchases of marketable securities ( 141,638 ) ( 122,279 ) Proceeds from marketable securities 94,823 76,680 Net cash used in investing activities ( 47,571 ) ( 46,912 ) Financing activities: Issuance of common shares and pre-funded warrants, net of issuance costs (note 7a and note 7c) 277,766 118,615 Issuance of common shares pursuant to exercise of stock options — 217 Net cash provided by financing activities 277,766 118,832 Effect of exchange rate changes on cash and cash equivalents ( 600 ) ( 214 ) Increase in cash and cash equivalents 194,299 37,921 Cash and cash equivalents, beginning of period 175,688 45,009 Cash and cash equivalents, end of period $ 369,987 $ 82,930 Supplemental disclosures: Interest received $ 3,509 $ 1,537 Cash paid for operating lease 410 412 Supplemental disclosures of non-cash transactions: Fair value of stock options exercised on a cashless basis 2,409 1,324 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, 2022, the Company had an accumulated deficit of $ 408,202 and a $ 50,828 net loss for the six months ended June 30, 2022. 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 the sale of equity securities, funding received from collaboration and license agreements, 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, 2022, 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 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, 2021 included in the Company’s 2021 Annual Report on Form 10-K filed with the SEC and with the securities commissions in British Columbia, Alberta and Ontario on March 1, 2022. 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, 2022 and 2021 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 2021 Annual Report on Form 10-K for the year ended December 31, 2021. 3 . 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 the Series 1 Preferred Shares as a separate class for the six months ended June 30, 2022, and for the three and six months ended June 30, 2021. 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. In March 2022, the outstanding 1,016,000 Series 1 Preferred Shares were converted and exchanged for an equal number of common shares of the Company (note 7b). The weighted average number of common shares used in the basic and diluted net income (loss) per common share calculations includes the weighted-average pre-funded warrants outstanding during the period as they are exercisable at any time for nominal cash consideration . -8- 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, 2022, all stock options and warrants were anti-dilutive and were excluded from the diluted weighted average common shares outstanding for the period. Convertible preferred shares were anti-dilutive and excluded from the diluted weighted average common shares outstanding for the six months ended June 30, 2022. For the three and six months ended June 30, 2021, 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. 4 . Fair value of financial instruments: The Company measures certain financial instruments and other items 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. 5 . 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. In November 2021, the Company entered into an agreement to extend the lease for an additional 10-year term to June 30, 2032 . -9- The cost components of the operating lease were as follows for the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Lease Cost Operating lease expense $ 238 $ 140 $ 476 $ 279 Variable lease expense (1) 191 190 383 374 Lease Term and Discount Rate Remaining lease term (years) 10.00 6.00 10.00 6.00 Discount rate 3.42 % 2.45 % 3.42 % 2.45 % (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, 2022 were as follows: Year ending December 31: 2022 $ 458 2023 915 2024 956 2025 1,010 2026 1,064 2027 and thereafter 6,671 Total future minimum lease payments $ 11,074 Less: imputed interest ( 1,781 ) Less: future lease incentives reasonably certain of use (1) ( 1,442 ) Present value of lease liabilities $ 7,851 (1) The future lease incentives are expected to be utilized within the next twelve months. 6. Accounts payable and accrued expenses: Accounts payable and accrued expenses consisted of the following: June 30, December 31, 2022 2021 Trade payables $ 3,178 $ 3,824 Employee compensation, benefits, and related accruals 3,321 5,940 Consulting and contracted research 6,047 3,550 Professional fees 950 285 Other 240 118 Total $ 13,736 $ 13,717 7 . Share capital: (a) Financing: In August 2020, the Company entered into an “at-the-market” equity offering sales agreement, amended as of March 2022, with Jefferies LLC (“Jefferies”) and Stifel, Nicolaus & Company, Incorporated (“Stifel”) pursuant to which the Company may sell common shares from time to time. In January 2021, the Company sold an aggregate of 733,000 common shares for proceeds of $ 10,693 , net of commissions and transaction expenses pursuant to a prospectus supplement filed in August 2020 (“August 2020 ATM"). The Company may sell common shares having gross proceeds of up to $ 250,000 , from time to time, pursuant to a new prospectus supplement filed in March 2022 (“March 2022 ATM"), replacing the August 2020 ATM. As of June 30, 2022, no common shares have been sold under the March 2022 ATM. -10- 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 at $ 18.4999 per pre-funded warrant (note 7c), with each pre-funded warrant having an exercise price of $ 0.0001 . The public offering was completed in March 2021, and the Company received proceeds of $ 107,922 , net of underwriting discounts, commissions and offering expenses. In January 2022, in connection with the License and Collaboration Agreement entered in December 2019 and amended in January 2021 (the "Neurocrine Collaboration Agreement"), the Company executed a Share Purchase Agreement ("SPA") pursuant to which the Company issued 258,986 common shares for an aggregate purchase price of $ 8,250 , or $ 31.855 per common share, which represents a premium of $ 374 when compared to the fair value of common shares on the date of issuance. The SPA contains certain other customary terms and conditions, including mutual representations, warranties and covenants. For additional information regarding the Neurocrine Collaboration Agreement, refer to note 8a. In June 2022, the Company entered into an underwriting agreement with Jefferies, J.P. Morgan Securities LLC, Stifel and SVB Securities LLC, relating to an underwritten public offering of 9,098,362 common shares, including 1,229,508 shares sold upon the full exercise of the underwriters’ over-allotment option, at a public offering price of $ 30.50 per common share and pre-funded warrants to purchase 327,868 common shares at $ 30.4999 per pre-funded warrant (note 7c), with each pre-funded warrant having an exercise price of $ 0.0001 . The public offering was completed in June 2022, and the Company received proceeds of $ 269,890 , 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 Series 1 Preferred Shares were convertible into common shares on a one-for-one basis, subject to certain restrictions. The Series 1 Preferred Shares ranked 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 were entitled to vote together with the common shares on an as-converted basis and as a single class, subject to certain restrictions. The Series 1 Preferred Shares were 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 had 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. In March 2022, the remaining outstanding 1,016,000 Series 1 Preferred Shares were exchanged for an equal number of common shares. (c) Pre-funded warrants: The following table summarizes the pre-funded warrants outstanding at June 30, 2022: Date of Issuance Pre-Funded Warrants to Purchase Common Shares Price per Pre-Funded Warrant Exercise Price March 2021 1,081,081 $ 18.4999 $ 0.0001 October 2021 1,694,915 $ 29.4999 $ 0.0001 June 2022 327,868 $ 30.4999 $ 0.0001 Total 3,103,864 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. -11- Since the p re- f unded w arrants meet the condition for equity classification, net proceeds from issuances of the p re- f unded w arrants are recorded in additional paid-in capital. Upon exercise of the p re -f unded w arrants, 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 3 0 , 202 2 , no p re- f unded w arrants have been exercised. Pre- f unded w arrants to purchase 3,103,864 ( June 3 0 , 2021 – 1,081,081 ) common shares are not included in the number of issued and outstanding common shares as of June 3 0 , 202 2 . (d) Stock-based compensation: The following table presents stock option activity for the period: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Outstanding, beginning of period 7,075,073 5,742,608 5,638,232 4,758,997 Granted 318,000 382,500 1,977,845 1,494,450 Exercised (1) ( 130,031 ) ( 222,331 ) ( 349,138 ) ( 344,734 ) Forfeited, cancelled or expired ( 28,582 ) ( 131,726 ) ( 32,479 ) ( 137,662 ) Outstanding, end of period 7,234,460 5,771,051 7,234,460 5,771,051 Exercisable, end of period 3,464,081 2,842,948 3,464,081 2,842,948 (1) During the six months ended June 30, 2022, no stock options were exercised for cash (six months ended June 30, 2021 – 58,179 ) . In the same period, the Company issued 234,783 (six months ended June 30, 2021 – 179,129 ) common shares for the cashless exercise of 349,138 (six months ended June 30, 2021 – 286,555 ) stock options. 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, 2022 2021 2022 2021 Average risk-free interest rate 3.17 % 1.27 % 2.14 % 1.18 % Expected volatility 70 % 69 % 70 % 68 % Average expected term (in years) 5.87 7.09 6.21 6.67 Expected dividend yield 0 % 0 % 0 % 0 % Weighted average fair value of stock options granted $ 19.60 $ 12.14 $ 19.29 $ 12.67 8 . Revenue: Revenue was as follows for the three and six months ended June 30, 2022 and 2021 : Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Neurocrine Biosciences: Recognition of the transaction price $ — $ 617 $ 372 $ 617 Research and development services 536 1,601 1,806 2,959 Milestone payments — — 7,124 — Pacira BioSciences: Milestone payments — — — 3,000 Total collaboration revenue $ 536 $ 2,218 $ 9,302 $ 6,576 (a) Neurocrine Biosciences license and collaboration agreement : In December 2019, the Company entered into the Neurocrine Collaboration Agreement with 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”) which ended in June 2022. 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 NBI-921352 and two DTCs selected by the joint steering committee (the “Initial Development Program”). -12- 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 of $ 3,333 , together with the upfront cash payment totaling $ 33,333 , was the transaction price of the arrangement for allocation to the performance obligati ons. The agreement includes the following performance obligations: (i) an exclusive license to NBI-921352 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 NBI-921352 , 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 approa ch. The Company allocated the transaction price as follows: $ 28,807 to performance obligations (i) and (ii), completed as of December 2020 , and $ 5,025 , which includes $ 499 of variable consideration, to performance obligation (v ), which was complete d as of March 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 at the inception of the agreement, as all milestone amounts are outside the control of the Company and contingent upon Neurocrine Biosciences’s efforts and success in future clinical trials. In January 2022, based on the receipt of the U.S. Food and Drug Administration’s (“FDA”) full IND acceptance for NBI-921352, the Company received an aggregate milestone payment of $ 15,000 in the form of $ 6,750 in cash and a $ 8,250 equity investment in the Company (note 7a) . The equity investment was measured at fair value of $ 7,876 on the date of issuance and the resulting premium of $ 374 , with the cash payment of $ 6,750 , was recognized as revenue in the period as the Company did no t have any remaining performance obligations in relation to this milestone on the date it was achieved. During the three and six months ended June 30, 2022, the Company recognized $ 536 and $ 1,806 of revenue, respectively, for the research and development services under (iii) the Research Program and (iv) the Initial Development Program for NBI-921352, compared to $ 1,601 and $ 2,959 for the three and six months ended June 30, 2021, respectively. In addition, the Company recognized nil and $ 372 for the three and six months ended June 30, 2022, respectively, for (v) development services under the Initial Development Program for the DTCs, compared to $ 617 for the three and six months ended June 30, 2021. The Company is eligible to receive pre-commercial and commercial milestone payments with respect to the licensed products totaling up to an additional $ 1,667,500 , comprised of up to $ 1,067,500 in additional development and regulatory milestone payments related to NBI-921352 and other licensed Nav1.6 or Nav1.2/1.6 inhibitor products, and up to $ 600,000 in additional sales-based milestone payments for multiple products. In addition, the Company is eligible to receive royalties on net sales in and outside the U.S., ranging from (a) for NBI-921352, a low double-digit percentage to a mid-teen percentage and a high-single digit percentage to low double-digit percentage, respectively; (b) for DTCs, a high-single digit percentage to a low double-digit percentage and a mid-single digit percentage to a high-single digit percentage, respectively; and (c) for Research Compounds, a mid-single digit percentage to a high-single digit percentage and a tiered mid-single digit percentage, respectively. Royalty rates are subject to customary reductions. These additional amounts will be recognized as determinable. The Company has an option to co-fund 50 % of the development costs of NBI-921352 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, 2022. (b) Asset Purchase Agreement with Flexion Therapeutics, Inc., which was subsequently acquired by Pacira BioSciences, Inc. In September 2019, the Company entered into an agreement with Flexion Therapeutics Inc. (“Flexion”), which was acquired by Pacira BioSciences, Inc. (“Pacira BioSciences”) in November 2021, 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 PCRX301, owned or controlled by the Company. -13- During the six months ended June 30, 2021, the FDA cleared the first investigational new drug application for PCRX301 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. 9 . 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 $ 4,840 of services have been received and $ 2,160 remains committed as of June 30, 2022. 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, 2022 with respect to the unsatisfied portion under the priority access agreement. (b) 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 $ 900 in clinical development milestones, up to $ 6,000 in regulatory milestones, and $ 500 in other milestones. To date, the Company has paid $ 600 based on progress against these milestones. There are no royalty obligations to 1st Order. (c) 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. -14-