What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-03-12 compared with 2020-03-12 · 294 added, 299 removed, 736 unchanged (45% of the section changed)

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Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2020 to ensure that the information required to be disclosed by us in the reports we file under the Securities Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness.

Management Report on Internal Control over Financial Reporting

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act).

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Based on such assessment using those criteria, management concluded that, as of December 31, 2020, our internal control over financial reporting was effective.

Our independent registered public accounting firm, Ernst & Young LLP, has audited the financial statements included in this Annual Report and has issued a report on the effectiveness of our internal control over financial reporting.

The report of Ernst & Young LLP is included below.

Changes in Internal Control Over Financial Reporting

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Directors, Executive Officers and Corporate Governance

The information required by this Item is hereby incorporated by reference from (a) the information appearing under the captions “Election of Directors,” “Stock Ownership of Certain Beneficial Owners and Management,” “Corporate Governance” and “Executive and Director Compensation” in our definitive proxy statement which involves the election of directors and is to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2019 and (b) the information appearing under Item 1 in Part I of this report.

The information required by this Item is hereby incorporated by reference from (a) the information appearing under the captions “Election of Directors,” “Stock Ownership of Certain Beneficial Owners and Management,” “Corporate Governance” and “Executive and Director Compensation” in our definitive proxy statement which involves the election of directors and is to be filed with the SEC pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2020 and (b) the information appearing under Item 1 in Part I of this report.

Executive Compensation

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(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 23, 2012 and incorporated by reference herein).

4.7 Supplement No.

3 to the Transaction Agreements , dated December 16, 2020, with Invus, L.P.

and Invus C.V.

(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 16, 2020 and incorporated by reference herein).

4.8 — Subscription Agreement , dated December 11, 2020, with Artal International S.C.A., Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Biotechnology Value Trading Fund OS, L.P.

and MSI BVF SPV, L.L.C.

(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 11, 2020 and incorporated by reference herein).

4.9 — Indenture related to the 5.25% Convertible Senior Notes due 2021, dated as of November 26, 2014, with Wells Fargo Bank, N.A.

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4.10 — Form of 5.25% Convertible Senior Notes due 2021 (filed as Exhibit A to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 26, 2014 and incorporated by reference herein).

*4.11 — Description of Common Stock

10.1 — Offer Letter , dated July 1, 2014, with Lonnel Coats, as amended (filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference herein).

10.2 — Offer Letter , dated March 10, 2011, with Pablo Lapuerta, M.D.

(filed as Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2011 and incorporated by reference herein).

10.2 — Employment Agreement with Alan Main, Ph.D.

(filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2001 and incorporated by reference herein).

10.3 — Offer Letter , dated March 23, 2016, with Praveen Tyle, Ph.D.

(filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2016 and incorporated by reference herein).

10.4 — Offer Lette r , dated March 16, 2015, with Alexander A.

Santini, as amended (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference herein).

10.4 — Employment Agreement with Jeffrey L.

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333-96469) and incorporated by reference herein).

*10.5 — Release and Severance Agreement , dated September 30, 2020, with Pablo Lapuerta, M.D.

*10.6 — Release and Severance Agreement , dated September 30, 2020, with Alexander A.

10.7 — Form of Indemnification Agreement with Officers and Directors (filed as Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (Registration No.

333-96469) and incorporated by reference herein).

10.7 — Summary of Non-Employee Director Compensation (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 and incorporated by reference herein).

*10.8 — 2017 Equity Incentive Plan , as amended.

10.8 — Summary of Non-Employee Summary of Non-Employee Director Compensation (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 and incorporated by reference herein).

10.9 — 2017 Equity Incentive Plan, as amended (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 23, 2020 and incorporated by reference herein).

10.10 — 2017 Non-Employee Directors’ Equity Incentive Plan , as amended (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference herein).

10.11 — Form of Stock Option Agreement with Officers under the 2017 Equity Incentive Plan (filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2017 and incorporated by reference herein).

*10.11 — Form of Restricted Stock Unit Agreement with Officers .

10.12 — Form of Restricted Stock Unit Agreement with Officers under the 2017 Equity Incentive Plan (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2017 and incorporated by reference herein).

10.13 — Form of Notice of Stock Option Grant to Directors under the 2017 Non-Employee Directors’ Equity Incentive Plan (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 and incorporated by reference herein).

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§10.17 — Confidential Termination and Settlement Agreement and Mutual Releases , dated September 9, 2019, with Sanofi-Aventis Deutschland GmbH (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2019 and incorporated by reference herein).

†10.17 — License and Collaboration Agreement , dated October 21, 2014, with Ipsen Pharma SAS (filed as Exhibit 10.1 to the amendment to the Company’s Quarterly Report on Form 10-Q/A for the period ended September 30, 2014, as filed on December 23, 2014, and incorporated by reference herein).

†10.18 — First Amendment , dated March 17, 2015, to License and Collaboration Agreement, dated October 21, 2014, with Ipsen Pharma SAS (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015 and incorporated by reference herein).

*10.19 — Second Amendment , dated January 28, 2020, to License and Collaboration Agreement, dated October 21, 2014, with Ipsen Pharma SAS.

10.18 — Collaboration and License Agreement , dated December 17, 2003, with Bristol-Myers Squibb Company (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015 and incorporated by reference herein).

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(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A dated June 8, 2009 and incorporated by reference herein).

†10.25 — Commercial Supply Agreement , dated June 6, 2016, with Catalent CTS, LLC (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q/A for the period ended March 31, 2017 and incorporated by reference herein).

†10.26 — Amendment One to Commercial Supply Agreement , dated April 4, 2018, with Catalent CTS, LLC (filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference herein).

†10.27 — Amendment Two to Commercial Supply Agreement , dated April 27, 2018, with Catalent CTS, LLC (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the period ended December 31, 2018 and incorporated by reference herein).

10.28 — Term Loan and Security Agreement , dated August 30, 2018, between Lex-Gen Woodlands, L.P.

and Revere Credit Opportunities Fund III, LP (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 30, 2018 and incorporated by reference herein).

†10.29 — Loan Agreement , dated December 4, 2017, with BioPharma Credit PLC and BioPharma Credit Investments IV Sub LP (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 4, 2017 and incorporated by reference herein).

10.30 — Real Estate Purchase and Sale Agreement , dated January 20, 2020, between Lex-Gen Woodlands, L.P.

and FFC Equity Holdings, L.P.

(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 10, 2020 and incorporated by reference herein).

§10.23 — Asset Purchase and Sale Agreement , dated July 29, 2020, with TerSera Therapeutics LLC (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated September 8, 2020 and incorporated by reference herein).

10.24 — First Amendment to Asset Purchase and Sale Agreement , dated August 10, 2020, with TerSera Therapeutics LLC (filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K dated September 8, 2020 and incorporated by reference herein).

10.25 — Sublease Agreement , dated February 8, 2021, with Repsol Oil & Gas USA, LLC (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 8, 2021 and incorporated by reference herein).

21.1 — Subsidiaries (filed as Exhibit 21.1 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2010 and incorporated by reference herein).

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* Filed herewith.

† Confidential treatment has been requested for a portion of this exhibit.

† Confidential treatment has been requested for portions of this exhibit (indicated by “[**]”).

The confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.

§ Portions of the exhibit have been omitted.

§ Certain information (indicated by “[**]”) has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the Company if publicly disclosed.

Form 10-K Summary

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 12, 2021 expressed an unqualified opinion thereon.

Adoption of ASU No.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for revenues in 2018 due to the adoption of ASU No.

2014-09, Revenue from Contracts with Customers .

Basis for Opinion

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Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Sale of XERMELO product and related assets

Description of the Matter As described in Note 4 to the consolidated financial statements, in September 2020, the Company completed the sale of its XERMELO (telotristat ethyl) product and related assets (the “XERMELO sale”) to TerSera Therapeutics LLC.

The Company recognized a gain on sale of $132.6 million in loss from operations in the consolidated statements of comprehensive loss for the year ended December 31, 2020.

The XERMELO sale did not meet the criteria for reporting as discontinued operations as there was not a strategic shift that has (or will have) a major effect on the Company’s operations.

Auditing the XERMELO sale was especially challenging given the nature of the transaction and significant judgment required to determine whether discontinued operations presentation was appropriate, to estimate the variable consideration and to identify the specific assets and liabilities and related financial effects included within the scope of the divestiture given the degree of integration of the XERMELO product and related assets with the Company’s remaining operations.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process for the XERMELO sale.

For example, we tested controls over management’s review of the accounting treatment of the XERMELO sale and for calculating the gain on sale.

Our audit procedures included, among others, inspecting the transaction agreement, assessing the reasonableness of judgments, testing the accuracy of the gain on sale calculation and evaluating the adequacy of the Company’s disclosures related to the XERMELO sale.

For example, we evaluated the appropriateness of the Company’s application of the criteria for reporting of discontinued operations by inspecting management’s supporting documentation, reading of Board of Director meeting minutes and other entity information, and evaluating for contrary evidence based on our understanding of the business.

In addition, we tested the Company’s separation of XERMELO’s assets, liabilities and related financial information by inspecting the Company’s accounting records and agreeing it to the terms of the transaction agreement.

We also evaluated the appropriateness of the Company’s treatment of variable consideration included in the transaction agreement by inspecting management’s supporting documentation regarding the likelihood of occurrence of the underlying development, regulatory and commercial milestones and evaluating for contrary evidence based on our reading of Board of Director meeting minutes and other entity information, inquiries with management, and our understanding of the business.

Accrued research and development expenses

Description of the Matter As described in Note 2 to the consolidated financial statements, the Company records accruals for estimated costs of research and development activities that include contract services for clinical trials.

Clinical trial activities performed by third parties are accrued and expensed based upon estimates of the proportion of work completed over the life of the individual clinical trial in accordance with agreements established with contract research organizations (“CROs”), clinical trial sites and other third parties.

Estimates are determined by reviewing contracts, vendor agreements, purchase orders, change orders and trial budgets, as well as through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

Auditing management’s accounting for accrued third-party clinical trial research and development expenses is especially challenging because of the judgment applied by management to determine the progress or stage of completion of the activities under the Company’s research and development agreements and the cost and extent of work performed during the reporting period for services not yet billed by contracted third-party vendors.

The testing of the Company’s accrued clinical trial expense models also involves a significant level of effort to test the high volume of data from third parties, which is tracked in spreadsheets.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for accrued research and development expenses process, including controls over management’s review of clinical trial activity progress in comparison to budgets and invoices received from third parties.

Our audit procedures included, among others, testing the accuracy and completeness of the underlying inputs used in management’s analysis to determine costs incurred.

We compared expenses incurred to budgeted amounts per executed vendor contracts and to expenses incurred in prior periods and obtained an understanding of the reasons for changes.

We inspected the terms and conditions of vendor contracts, change orders and trial budgets, assessed direct fees, pass-through costs and clinical site costs, and clerically tested the cost models to track progress against trial budgets.

We evaluated estimated services incurred by third parties by understanding the terms and timeline of significant projects, evaluating management’s estimate of work performed and costs incurred by meeting with members of the Company’s clinical operations team, and obtaining external confirmation of key terms and conditions and other key inputs to the accrual calculation, such as costs incurred and key dates.

Further, we inspected invoices received from third parties after the balance sheet date and performed a lookback analysis to evaluate the completeness of accrued research and development expenses.

/s/ Ernst & Young LLP

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Short-term investments 26,012 235,547

Accounts receivable, net of allowances of $4 56,532 5,924

Accounts receivable, net 395 56,532

Inventory — 4,243

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Goodwill 44,543 44,543

Intangible assets 19,716 50,119

Intangible assets, net — 19,716

Other assets 1,231 1,655

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Accrued liabilities 29,691 42,151

Current portion of deferred revenue — 2,339

Current portion of long-term debt, net of deferred financing costs 11,646 11,012

Total current liabilities 46,806 65,341

Deferred revenue, net of current portion — 23,651

Long-term debt, net of deferred financing costs — 234,171

Deferred tax liabilities — 6,014

Other long-term liabilities 611 1,102

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Commitments and contingencies

Stockholders' Equity (Deficit):

Stockholders' Equity:

Preferred stock, $ 0.01 par value;

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Accumulated deficit ( 1,400,018 ) ( 1,341,444 )

Accumulated other comprehensive gain (loss) 84 ( 12 )

Accumulated other comprehensive income (loss) ( 6 ) 84

Treasury stock, at cost, 793 and 407 shares, respectively

Total stockholders' equity (deficit) 117,101 ( 26,405 )

Total liabilities and equity (deficit) $ 417,715 $ 284,136

( 4,843 ) ( 3,817 )

Total stockholders' equity 156,371 117,101

Total liabilities and equity $ 203,788 $ 417,715

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

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Research and development, including stock-based compensation of $ 6,376 , $ 7,096 and $ 6,010 respectively

Increase in fair value of Symphony Icon, Inc.

purchase liability

153,621 91,924 100,243

Selling, general and administrative, including stock-based compensation of $ 6,898 , $ 7,122 and $ 5,686 , respectively

47,230 56,835 63,754

Impairment loss on buildings 1,600 — —

Impairment loss on intangible asset — 28,638 —

Total operating expenses 204,380 180,628 166,488

Other operating income:

Gain on sale of XERMELO 132,585 — —

Income (loss) from operations ( 47,800 ) 141,445 ( 103,279 )

Gain on debt extinguishments, net 1,003 — —

Interest expense ( 14,544 ) ( 20,676 ) ( 20,777 )

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Stock-based compensation — — 11,696 — — — 11,696

Issuance of common stock to designees of Symphony Icon Holdings LLC

660 — 10,499 — — — 10,499

Issuance of common stock under Equity Incentive Plans

451 — 732 — — — 732

Issuance of treasury stock — — (3,143) — — 3,143 —

Repurchase of common stock — — — — — ( 972 ) ( 972 )

Net loss — — — ( 120,548 ) — — ( 120,548 )

Unrealized loss on investments

— — — — ( 27 ) — ( 27 )

Unrealized gain on investments — — — — 210 — 210

Balance at December 31, 2018 106,162 106 1,447,954 ( 1,471,577 ) ( 12 ) ( 2,876 ) ( 26,405 )

Cumulative effect of change in accounting principle

— — — 14,212 — — 14,212

Stock-based compensation — — 14,218 — — — 14,218

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Repurchase of common stock — — — — — ( 941 ) ( 941 )

Net loss — — — ( 120,548 ) — — ( 120,548 )

Net income — — — 130,133 — — 130,133

Unrealized gain on investments

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Stock-based compensation — — 13,274 — — — 13,274

Issuance of common stock under an Open Market Sale Agreement, net of issuance fees 3,709 4 6,959 — — — 6,963

Issuance of common stock upon private placement, net of issuance fees 20,313 20 62,987 — — — 63,007

Issuance of common stock in settlement of convertible notes, net of issuance fees 10,369 10 15,704 — — — 15,714

Issuance of common stock under Equity Incentive Plans

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Repurchase of common stock — — — — — ( 1,026 ) ( 1,026 )

Net income — — — 130,133 — — 130,133

Unrealized gain on investments

— — — — 96 — 96

Net loss — — — ( 58,574 ) — — ( 58,574 )

Unrealized loss on investments — — — — ( 90 ) — ( 90 )

Balance at December 31, 2020 142,289 $ 142 $ 1,561,096 $ ( 1,400,018 ) $ ( 6 ) $ ( 4,843 ) $ 156,371

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Depreciation and amortization 2,934 3,654 3,683

Impairment loss on intangible asset 28,638 — —

Increase in fair value of Symphony Icon, Inc.

purchase liability — — 2,101

Stock-based compensation 13,274 14,218 11,696

Loss on disposal of property and equipment — — 3

Amortization of debt issuance costs 1,013 1,465 1,336

Deferred tax benefit — ( 6,014 ) —

Gain on sale of XERMELO ( 132,585 ) — —

Impairment loss on building 1,600 — —

Impairment loss on intangible asset — 28,638 —

Gain on debt extinguishments, net ( 1,003 ) — —

Gain on disposal of property and equipment ( 707 ) — —

Changes in operating assets and liabilities:

(Increase) decrease in accounts receivable ( 50,608 ) ( 1,099 ) 166

(Increase) decrease in inventory 437 ( 2,732 ) ( 1,948 )

Decrease (increase) in accounts receivable 53,227 ( 50,608 ) ( 1,099 )

Decrease (increase) in inventory 345 437 ( 2,732 )

(Increase) decrease in prepaid expenses and other current assets ( 1,948 ) ( 2,652 ) 1,766

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Decrease in deferred revenue — ( 25,990 ) ( 22,940 )

Net cash provided by (used in) operating activities 113,807 ( 148,607 ) ( 185,394 )

Net cash (used in) provided by operating activities ( 142,969 ) 113,807 ( 148,607 )

Cash flows from investing activities:

Purchases of property and equipment ( 87 ) ( 70 ) ( 95 )

Proceeds from XERMELO sale 160,385 — —

Proceeds from disposal of property and equipment 11,013 — —

Purchases of investments ( 58,555 ) ( 322,385 ) ( 119,987 )

Maturities of investments 268,000 166,600 289,658

Net cash (used in) provided by investing activities ( 155,855 ) 169,576 50,522

Net cash provided by (used in) investing activities 380,756 ( 155,855 ) 169,576

Cash flows from financing activities:

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Repayment of debt borrowings ( 216,580 ) ( 1,285 ) ( 14,533 )

Net cash (used in) provided by financing activities ( 2,226 ) ( 2,244 ) 149,933

Net (decrease) increase in cash and cash equivalents ( 44,274 ) 18,725 15,061

Net cash used in financing activities ( 147,636 ) ( 2,226 ) ( 2,244 )

Net increase (decrease) in cash and cash equivalents 90,151 ( 44,274 ) 18,725

Cash and cash equivalents at beginning of year 36,112 80,386 61,661

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Supplemental disclosure of noncash investing and financing activities:

Common stock issued in satisfaction of Symphony Icon payment obligation $ — $ — $ 10,499

Liabilities assumed by TerSera from the XERMELO sale $ 3,437 $ — $ —

Common stock issued in satisfaction of convertible debt exchanges $ 15,714 $ — $ —

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

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Lexicon has financed its operations from inception primarily through sales of common and preferred stock, contract and milestone payments to it under strategic collaborations and other research and development collaborations, target validation, database subscription and technology license agreements, product sales, government grants and contracts and financing under debt and lease arrangements.

The Company’s future success is dependent upon many factors, including, but not limited to, its ability to successfully commercialize XERMELO in the United States and the amount of revenues generated from such commercialization efforts;

Ipsen Pharma SAS’s (“Ipsen”) ability to successfully commercialize XERMELO outside of the United States and Japan and Lexicon’s receipt of any milestone payments and royalties;

the success of its ongoing nonclinical and clinical development efforts and ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts;

its success in establishing new collaborations and licenses, including for the development and commercialization of sotagliflozin;

The Company’s future success is dependent upon many factors, including, but not limited to, the success of its ongoing nonclinical and clinical development efforts and its ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts;

TerSera’s ability to successfully develop and commercialize XERMELO for biliary tract cancer and the Company’s receipt of milestone payments and royalties from such efforts;

its success in establishing new collaborations and licenses;

the amount and timing of research, development and commercialization expenditures;

its resources devoted to developing and supporting its products;

general and industry-specific economic conditions which may affect research and development expenditures;

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Intercompany transactions and balances are eliminated in consolidation.

In 2018, accounts payable included $ 5.7 million related to its accrual for clinical studies.

The Company has reclassified this amount to accrued liabilities in the consolidated balance sheet for comparable presentation of accounts payable and accrued liabilities.

Use of Estimates:

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Accounts Receivable:

Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services.

The allowance for doubtful accounts takes into consideration such factors as historical write-offs, the economic climate and other factors that could affect collectibility.

Write-offs are evaluated on a case by case basis.

Inventories are determined at the lower of cost or market value with cost determined under the specific identification method and may consist of raw materials, work in process and finished goods.

Inventory consisted of the following as of December 31, 2019 and 2018 (in thousands):

As of December 31,

Raw materials $ 3,182 $ 3,564

Work-in-process 153 232

Finished goods 908 884

Total inventory $ 4,243 $ 4,680

Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services, net of an allowance for expected credit losses.

Inventory was comprised of supplies of XERMELO supporting the Company’s commercialization of the product in the United States.

Inventories were determined at the lower of cost or market value, with cost determined under the specific identification method.

As of December 31, 2019, inventory in the accompanying consolidated balance sheet consisted of raw materials, work in process and finished goods in the amounts of $ 3.2 million, $ 0.2 million and $ 0.9 million, respectively.

See Note 4, Asset Sale, for additional information relating to inventory.

Concentration of Credit Risk:

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The Company has not experienced any significant credit losses to date.

In 2019, customers in Germany and the United States represented 89 % and 10 % of revenue, respectively.

In 2020, customers in the United States represented 98 % of revenue.

In 2019, customers in Germany and the United States represented 89 % and 10 %, respectively.

In 2017, customers in Germany, France and the United States represented 65 %, 18 % and 17 % of revenue, respectively.

In 2018, customers in Germany and the United States represented 53 % and 40 % of revenue, respectively.

At December 31, 2020, management believes that the Company has no significant concentrations of credit risk.

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Substantially all of the Company’s revenues have been derived from drug discovery alliances, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, technology licenses, subscriptions to its databases, product sales, government grants and contracts and compound library sales.

In 2019, Sanofi-Aventis Deutschland GmbH (“Sanofi”) represented 89 % of revenues and no other individual customer represented more than 10% of revenues.

In 2018, Sanofi represented 53 % of revenues and two independent specialty pharmacies, Biologics, Inc.

and Diplomate Pharmacy, represented 25 % and 14 % of revenues, respectively.

In 2017, Sanofi and Ipsen represented 65 % and 18 % of revenues, respectively.

In 2020, two specialty pharmacies, Biologics, Inc.

and Diplomat Pharmacy, represented 65 % and 22 % of revenues, respectively.

In 2019, Sanofi represented 89 % of revenues and no individual XERMELO customer represented more than 10% of revenues.

In 2018, Sanofi represented 53 % of revenues and Biologics, Inc.

and Diplomat Pharmacy, represented 25 % and 14 % of revenues, respectively.

Intangible Assets:

Intangible assets, net consist of in-process research and development acquired in business combinations, which are reported at fair value, less accumulated amortization.

Intangible assets, net consist of in-process research and development acquired in business combinations, and are reported at fair value, less accumulated amortization.

Intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives.

During 2017, intangible assets relating to XERMELO of $ 24.7 million were reclassified from indefinite-lived to finite-lived assets following the approval of XERMELO by the FDA.

The Company has recorded $1.8 million in amortization expense related to this asset in each of the years ended December 31, 2019 and 2018, respectively, and $1.5 million for the year ended December 31, 2017.

Amortization expense is recorded as cost of sales in the accompanying consolidated statements of comprehensive income (loss).

Estimated future amortization expense for intangible assets as of December 31, 2019 is as follows:

For the Year Ending

(in thousands)

Thereafter 10,886

As of December 31, 2019, the net carrying value of the finite-lived intangible assets was $ 19.7 million.

During 2020, the remaining net carrying value of $ 18.5 million for the intangible assets relating to XERMELO was reduced to zero as a result of the sale of XERMELO and related assets to TerSera Therapeutics LLC and is included in Gain on sale of XERMELO in the accompanying consolidated statement of income (loss).

Property and Equipment:

3 unchanged sentences

Significant renewals and betterments are capitalized.

Accrued liabilities:

Accrued liabilities consisted of the following:

As of December 31,

(in thousands)

Accrued research and development services $ 21,962 $ 29,033

Accrued compensation and benefits 6,200 9,644

Short term lease liability 553 553

Other 976 2,921

Accrued liabilities $ 29,691 $ 42,151

Impairment of Long-Lived Assets:

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Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets.

If such assets are considereds to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

In 2020, we recognized an impairment loss of $ 1.6 million to reduce the carrying value of the assets comprising our campus in The Woodlands, Texas, which were sold in December 2020, to an estimated fair value, less estimated selling costs.

There were no impairments of long-lived assets, including finite-lived intangible assets, in 2019 or 2018.

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If the carrying value of the asset exceeds its fair value, then the intangible asset is written down to its fair value.

Lexicon determined that a triggering event occurred upon execution of the Termination Agreement with Sanofi (as defined in Note 13) and Lexicon's resulting decision to substantially reallocate resources from the development of certain programs, including LX1031 and LX1033 for irritable bowel syndrome, to the development of sotagliflozin.

In connection with such triggering event, Lexicon determined that its LX1031 and LX1033 programs for irritable bowel syndrome, collectively an intangible asset, were considered to be impaired and recorded an impairment charge of $ 28.6 million to IPR&D for the year ended December 31, 2019.

In 2019, Lexicon determined that a triggering event occurred upon execution of the Termination Agreement with Sanofi (as defined in Note 14) and Lexicon’s resulting decision to substantially reallocate resources from the development of certain programs, including LX1031 and LX1033 for irritable bowel syndrome, to the development of sotagliflozin.

The impairment reduced the remaining book value to zero.

There were no impairments of indefinite-lived intangible assets in 2018 or 2017.

There was no impairment of indefinite-lived intangible assets in 2018.

Goodwill Impairment:

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Product Revenues

Product revenues consist of commercial sales of XERMELO in the United States and sales of bulk tablets of XERMELO to Ipsen.

Product revenues are recognized when the customer obtains control of the Company’s product, which occurs upon delivery to the customer.

The Company recognizes product revenue net of applicable reserves for variable consideration, including allowances for customer credits, estimated rebates, chargebacks, discounts, returns, distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the United States, as discussed below.

These estimates are based on the most likely amount method for relevant factors such as current contractual and statutory requirements, industry data and forecasted customer buying and payment patterns.

Product shipping and handling costs are considered a fulfillment activity when control transfers to the Company’s customers and such costs are included in cost of sales.

Prior to the Company’s sale of XERELO and related assets to TerSera in September 2020, product revenues consisted of commercial sales of XERMELO in the United States and sales of bulk tablets of XERMELO to Ipsen.

Product revenues were recognized when the customer obtains control of the Company’s product, which occurs upon delivery to the customer.

The Company recognized product revenue net of applicable reserves for variable consideration, including allowances for customer credits, estimated rebates, chargebacks, discounts, returns, distribution service fees, and government rebates, such as Medicare Part D coverage gap reimbursements in the United States, as discussed below.

These estimates were based on the most likely amount method for relevant factors such as current contractual and statutory requirements, industry data and forecasted customer buying and payment patterns.

Product shipping and handling costs were considered a fulfillment activity when control transfers to the Company’s customers and such costs were included in cost of sales.

Customer Credits:

The Company’s customers are offered various forms of consideration, including allowances, service fees and prompt payment discounts.

The Company expects that its customers will earn prompt payment discounts.

As a result, the Company deducts the full amount of those discounts from total product sales when revenues are recognized.

Service fees are also deducted from product sales as they are earned.

The Company’s customers were offered various forms of consideration, including allowances, service fees and prompt payment discounts.

The Company expected that its customers would earn prompt payment discounts.

As a result, the Company deducted the full amount of those discounts from total product sales when revenues were recognized.

Service fees were also deducted from product sales as they were earned.

Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program.

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The allowance for rebates is based on statutory discount rates and expected utilization.

The Company’s estimates for expected utilization of rebates are based on third party market research data and data received from the specialty pharmacies.

Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known unpaid rebates from the prior quarter.

If actual future rebates vary from estimates, the Company may need to adjust prior period accruals, which would affect revenue in the period of adjustment.

The Company’s estimates for expected utilization of rebates were based on third party market research data and data received from the specialty pharmacies.

Rebates were generally invoiced and paid in arrears so that the accrual balance consisted of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known unpaid rebates from the prior quarter.

If actual future rebates varied from estimates, the Company adjusted prior period accruals, which affected revenue in the period of adjustment.

Chargebacks are discounts that occur when contracted customers purchase directly from a specialty pharmacy or distributor, who acts as a retailer.

Contracted customers, which currently consist primarily of Public Health Service Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price.

The specialty pharmacy or distributor, in turn, charges back to Lexicon the difference between the price paid by the specialty pharmacy or distributor and the discounted price paid to the specialty pharmacy or distributor by the customer.

The allowance for chargeback is based on known sales to contracted customers.

Contracted customers, which consisted primarily of Public Health Service Institutions, non-profit clinics, and federal government entities purchasing via the Federal Supply Schedule, generally purchase the product at a discounted price.

The specialty pharmacy or distributor, in turn, charged back to Lexicon the difference between the price paid by the specialty pharmacy or distributor and the discounted price paid to the specialty pharmacy or distributor by the customer.

The allowance for chargeback was based on known sales to contracted customers.

Medicare Part D Coverage Gap:

The Medicare Part D prescription drug benefit mandates manufacturers to fund a portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients.

The Company’s estimates for the expected Medicare Part D coverage gap are based on data received from the specialty pharmacies and projections based on historical data.

Funding of the coverage gap is generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters.

If actual future funding varies from estimates, the Company may need to adjust prior period accruals, which would affect revenues in the period of adjustment.

The Company’s estimates for the expected Medicare Part D coverage gap were based on data received from the specialty pharmacies and projections based on historical data.

Funding of the coverage gap was generally invoiced and paid in arrears so that the accrual balance consisted of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters.

If actual future funding varied from estimates, the Company adjusted prior period accruals, which affected revenues in the period of adjustment.

Co-payment assistance:

Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance.

The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

The Company accrued a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Collaborative Agreements

The Company adopted ASU NO.

2014-09, “Revenue from Contracts with Customers”, on January 1, 2018, using the modified retrospective method.

In its adoption, the Company recorded a $14.2 million cumulative-effect adjustment to its accumulated deficit related to a contract with the Texas Institute for Genomic Medicine.

Subsequent to adoption, the Company was notified that all performance obligations related to the contract have been fulfilled.

Revenues under collaborative agreements include both license revenue and contract research revenue.

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Cost of Sales:

Cost of sales consists of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO.

The Company began capitalizing inventory during 2017 once the FDA approved XERMELO as the related costs were expected to be recoverable through the commercialization of the product.

Costs incurred prior to approval of XERMELO have been recorded as research and development expense in the consolidated statements of comprehensive income (loss).

As a result, cost of sales for approximately the next twelve months will reflect a lower average per unit cost of materials.

Product shipping and handling costs are included in cost of sales.

Cost of sales also includes the amortization of the intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

Cost of sales consisted of third-party manufacturing costs, freight and indirect overhead costs associated with sales of XERMELO.

Product shipping and handling costs were included in cost of sales.

Cost of sales also included the amortization of the intangible asset for XERMELO using the straight-line method over the estimated useful life of 14 years.

Research and Development Expenses:

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For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study.

The Company's estimates of the clinical study costs and costs to transition activities from Sanofi for development of sotagliflozin for type 2 diabetes, heart failure and chronic kidney disease was based on estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the CRO that will conduct and manage the clinical studies on its behalf.

The Company’s estimates of the clinical study costs and costs to transition activities from Sanofi for the development of sotagliflozin for type 2 diabetes and heart failure, as well as the wind down of those activities, were based on estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the CRO that conducted and managed the clinical studies on its behalf.

The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits.

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Significant judgment is required in making these assessments to maintain or reverse valuation allowances and, to the extent future expectations change the Company would have to assess the recoverability of these deferred tax assets at that time.

The Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted on December 22, 2017.

The 2017 Tax Act significantly changes U.S.

corporate income tax laws, including a reduction of the U.S.

corporate income tax rate from 35 percent to 21 percent, reduction of certain tax credits, limitations on, or deductibility of interest expense and executive compensation, and limitations on the use of net operating loss carryforwards.

Net Income (Loss) per Common Share:

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Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2016-02, “Leases.” ASU 2016-02 requires companies that lease assets to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet.

The pronouncement also requires additional disclosures about the amount, timing and uncertainty of cash flows arising from leases.

This pronouncement was effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.

This ASU was required to be adopted using a modified retrospective approach.

Management adopted ASU 2016-02 on the effective date of January 1, 2019 and elected the practical expedient that allows entities to not apply the new guidance in the comparative periods they present in their financial statements in the year of adoption.

Consequently, prior year financial information has not been updated and the disclosures required under the new standard have not been provided for periods prior to January 1, 2019.

Upon adoption, the Company recognized $ 2.1 million for right-of-use assets and corresponding liabilities on the consolidated balance sheet,

primarily related to leases of office space.

The adoption of this ASU on January 1, 2019 did not have a material impact on Lexicon’s consolidated financial statements.

Pronouncements Not Yet Adopted.

In November 2018, the FASB issued ASU No.

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-18, Collaborative Arrangements (Topic 808):

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This amendment is effective for fiscal years, and interim periods within years presented, beginning after December 15, 2019, and should be applied retrospectively to the date of initial application of Topic 606.

The Company has applied the provisions of Topic 606 to account for its transactions for collaboration arrangements, including recognition, measurement, presentation and disclosure requirements, and does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

The Company has applied the provisions of Topic 606 to account for its transactions for collaboration arrangements, including recognition, measurement, presentation and disclosure requirements, and adoption of this ASU did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No.

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This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.

The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

Cash and Cash Equivalents and Investments

The adoption of this ASU did not have a material impact on the consolidated financial statements.

In September 2020, the Company completed the sale of its XERMELO (telotristat ethyl) product and related assets (the “XERMELO sale”) to TerSera Therapeutics LLC (“TerSera”) pursuant to an Asset Purchase and Sale Agreement entered into in July 2020.

The final consideration paid by TerSera was $ 160.0 million and the net gain recognized in connection with the XERMELO sale was $ 132.6 million.

The gain is reflected on the consolidated statement of comprehensive income (loss) for the year ended December 31, 2020.

The Company remains eligible to receive development, regulatory and sales milestone payments of up to an aggregate of $ 65.0 million for the development and commercialization of telotristat ethyl in patients with biliary tract cancer and mid-teens royalty payments on net sales of XERMELO in biliary tract cancer.

The Company has determined that these amounts are constrained until the achievement, if any, of specific events.

If or when the constraint is determined to be resolved, the Company will re-evaluate the overall gain in connection with the XERMELO sale and recognize an adjustment on a cumulative catch-up basis in the period that the determination is made.

Such adjustment would be included in Gain on sale of XERMELO in the consolidated statement of comprehensive income (loss).

The XERMELO sale did not meet the criteria for reporting discontinued operations as there was not a strategic shift that has (or will have) a major effect on the Company’s operations.

For the years ended December 31, 2020, 2019 and 2018, the pretax net loss on the condensed consolidated statement of comprehensive income (loss) for the Company’s XERMELO operations is $ 12.2 million, $ 15.4 million and $ 33.7 million, respectively.

As a result of the XERMELO sale, the Company implemented a reduction in force which reduced its workforce by approximately fifty percent.

The Company incurred and recognized severance charges of approximate $ 5.5 million.

Of this charge, $ 2.5 million was recorded in research and development expense and $ 3.0 million was recorded in selling, general and administrative expense in the accompanying consolidated statement of comprehensive income (loss) for the year ended December 31, 2020.

Cash, Cash Equivalents and Investments

The fair value of cash and cash equivalents and investments held at December 31, 2020 and 2019 are as follows:

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Securities maturing within one year:

treasury securities 235,463 94 ( 10 ) 235,547

Corporate debt securities 26,018 5 ( 11 ) 26,012

Total short-term investments $ 26,018 $ 5 $ ( 11 ) $ 26,012

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treasury securities 235,463 94 ( 10 ) 235,547

Corporate debt securities 5,695 — ( 3 ) 5,692

Total short-term investments $ 235,463 $ 94 $ ( 10 ) $ 235,547

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There were no transfers between Level 1 and Level 2 during the periods presented.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis.

These assets include goodwill associated with the acquisitions of Coelacanth Corporation in 2001 and Symphony Icon in 2010 and intangible assets associated with the acquisition of Symphony Icon in 2010.

For these assets, measurement at fair value in periods subsequent to their initial recognition is applicable if one or more is determined to be impaired.

Refer to Note 10, Debt Obligations, for fair value measurements of debt obligations.

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Computers and software 3 - 5

$ 3,826 $ 4,587

Furniture and fixtures 5 - 7

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Net property and equipment $ 295 $ 14,047

In December 2020, the Company’s subsidiary, Lex-Gen Woodlands, L.P., sold its facilities in The Woodlands, Texas for $ 11.9 million.

The land had a carrying value of $ 2.7 million and buildings and related assets sold had a net carrying value of $ 7.9 million.

Concurrent with the sale, the Company entered into a leaseback agreement with the purchaser with respect to a portion of such facilities for a period of up to six months.

The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States to provide emergency assistance to individuals and businesses affected by the COVID-19 pandemic.

The CARES Act includes temporary changes to both income and non-income based tax laws.

For the year ended December 31, 2020 the impact of the CARES Act was immaterial to the Company’s tax provision.

Future regulatory guidance under the CARES Act or additional legislation enacted by Congress in connection with the COVID-19 pandemic could impact our tax provision in future periods.

Lexicon recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized differently in the financial statements and tax returns.

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Stock-based compensation 5,651 5,340

Deferred revenue — 5,458

Interest — 3,625

Other 844 5,533

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Net deferred tax liabilities $ — $ —

Deferred tax assets associated with net operating losses (NOLs), deferred revenue and interest decreased in 2019 due to the Termination Agreement (as defined in Note 13) with Sanofi.

Refer to Note 13, Collaboration and License Agreements, for additional information.

The $ 4.1 million deferred tax liability relates to the tax impact of future amortization or possible impairments associated with intangible assets acquired with Symphony Icon, which are not deductible for tax purposes.

A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2020, 2019 and 2018 consists of the following:

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(in thousands)

Expected income tax expense (benefit) at 21 %, 21 % and 35 %, respectively

Expected income tax expense (benefit) at 21 %

$ ( 12,300 ) $ 26,065 $ ( 25,315 )

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Research and development credit — — ( 978 )

Orphan drug credit — — ( 189 )

Deferred true-up — — ( 5,316 )

Tax rate change — — 169,464

Symphony Icon fair value adjustment — — 735

Write off of credit carryover due to 382 study 31,053 — —

Change in valuation allowance ( 20,418 ) ( 35,276 ) 25,928

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Income tax benefit $ — $ ( 6,014 ) $ —

(1) Other is primarily comprised of expiring Research and Development credits for the year ended December 31, 2019.

(1) Other is primarily comprised of expiring Research and Development credits for the years ended December 31, 2019 and nondeductible expenses for the years ended December 31, 2020 and 2018.

Section 382 of the Internal Revenue Code of 1986, contains rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carryovers and certain built-in losses recognized in years after the “ownership change.” An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation.

If an ownership change occurs, Section 382 generally imposes an annual limitation on the use of pre-ownership change net operating loss carryovers to offset taxable income earned after the ownership change.

The Company completed a Section 382 study and determined that historical ownership changes occurred.

The Section 382 annual limitation related to historical ownership changes impacts our ability to utilize our tax attributes.

In 2020, the federal deferred tax assets and valuation allowance decreased due to the write-off of attributes that will expire still subject to limitation.

At December 31, 2020, Lexicon had both federal and state NOL carryforwards of approximately $ 918.1 million and $ 86.9 million, respectively.

In 2019, federal NOLs decreased by $ 62.2 million primarily due to utilization against taxable income.

The state NOL carryforwards decreased due to a legislative change from pre-apportionment to post-apportionment reporting in New Jersey.

In 2020, federal NOLs increased by $ 38.4 million primarily related to a current year NOL partially offset by $ 66.9 million decrease in historical NOLs which will expire still subject to Section 382 limitation.

The state NOL carryforwards increased due to a legislative change from pre-apportionment to post-apportionment reporting in New Jersey.

The federal and state NOL carryforwards will begin to expire in 2024.

The Company’s R&D tax credit carryforwards of approximately $ 46.3 million begin to expire in 2020.

The orphan drug credit relates to a credit that is calculated as a percentage of expenditures for development of XERMELO, which has received Orphan Drug designation from the FDA.

Utilization of the NOL, R&D credit and orphan drug credit carryforwards may be subject to a significant annual limitation due to ownership changes that have occurred previously or could occur in the future provided by Section 382 of the Internal Revenue Code.

Although NOLs were utilized in 2019, based on the federal tax law limits and the Company's cumulative loss position, Lexicon concluded it was appropriate to establish a full valuation allowance for its net deferred tax assets until an appropriate level of profitability is sustained.

During the year ended December 31, 2019, the valuation allowance decreased $ 35.3 million, primarily due to the Company’s utilization of NOLs and decreases to deferred revenue and interest deferred tax assets.

In 2020, the Company’s R&D tax credit carryforwards decreased by $ 17.0 million due to Section 382 limitations to approximately $ 29.3 million which will begin to expire in 2027.

Based on the federal tax law limits and the Company’s cumulative loss position, the Company concluded it was appropriate to establish a full valuation allowance for its net deferred tax assets until an appropriate level of profitability is sustained.

During the year ended December 31, 2020, the valuation allowance decreased $ 20.4 million, primarily due to decreases in deferred tax assets associated with attributes subject to IRC 382 limitation and capitalized research and development expenses partially offset by NOLs generated in the current year and the reversal of the deferred tax liability related to the acquisition of Symphony Icon.

Lexicon recorded an income tax benefit of $ 6.0 million in the year ended December 31, 2019 despite reporting pretax income for the year.

The result reflects the impact of the impairment of intangible assets associated with Symphony Icon and the benefit from the utilization of federal NOLs for which a tax benefit had not previously been recognized, partially offset by nondeductible expenses.

There were no income tax benefits in the year ended December 31, 2018.

Income tax benefits of $ 12.7 million were recorded for the year ended December 31, 2017.

Of the $ 12.7 million tax benefits, $ 8.7 million is the release of a valuation allowance as a result of the ability to estimate the reversal of the deferred tax liability related to the intangible associated with XERMELO and $ 4.0 million was recorded to remeasure the deferred tax liability associated with the remaining indefinite-lived intangible asset associated with Symphony Icon at the newly enacted U.S.

corporate income tax rate.

There were no income tax benefits in the years ended December 31, 2020 and 2018, respectively.

As of December 31, 2020 and 2019, the Company did not have any unrecognized tax benefits.

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federal authorities and 2012 to current remain open to examination by state authorities.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense.

As of December 31, 2020 and 2019, the Company had no accruals for interest or penalties related to income tax matters.

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The conversion feature did not meet the criteria for bifurcation as required by generally accepted accounting principles and the entire principal amount was recorded as long-term debt on the Company’s consolidated balance sheets.

The Convertible Notes are governed by an indenture (the “Indenture”), dated as of November 26, 2014, between the Company and Wells Fargo Bank, N.A., as trustee.

In 2020, the Company entered into separate, privately negotiated exchange agreements to exchange $ 75.8 million aggregate principal amount of the Convertible Notes for consideration valued at 85 % of the principal amount of the Convertible Notes.

In 2020, the Company issued 10,368,956 shares of the Company’s common stock and paid $ 50.0 million in cash, which included $ 1.3 million of accrued interest, to exchange such Convertible Notes.

The Company recorded the exchanges under the accounting requirements for debt extinguishment of convertible instruments.

As a result, a debt extinguishment gain of $ 9.6 million was recorded and is included in the accompanying consolidated statement of comprehensive income (loss) for the year ended December 31, 2020.

As of December 31, 2020, the carrying value of the remaining Convertible Notes was $ 11.6 million.

The remaining Convertible Notes are governed by an indenture (the “Indenture”), dated as of November 26, 2014, between the Company and Wells Fargo Bank, N.A., as trustee.

The Convertible Notes bear interest at a rate of 5.25 % per year, payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2015.

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The Company determined the expected life of the debt was equal to the seven -year term of the Convertible Notes.

As of December 31, 2019, the balance of unamortized debt issuance costs was $ 0.9 million, which offsets long-term debt on the consolidated balance sheets.

As of December 31, 2019, the carrying value of the Convertible Notes was $86.6 million.

The fair value of the Convertible Notes was $ 64.8 million as of December 31, 2019 and was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Convertible Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.

As of December 31, 2020, the balance of unamortized debt issuance costs was $ 0.1 million, which was adjusted upon execution of the exchange agreements and offsets long-term debt on the consolidated balance sheets.

The fair value of the remaining Convertible Notes was $ 9.2 million as of December 31, 2020 and was determined using Level 2 inputs based on the indicative pricing published by certain investment banks or trading levels of the Convertible Notes, which are not listed on any securities exchange or quoted on an inter-dealer automated quotation system.

Mortgage Loan.

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The Company recorded the refinancing as a debt extinguishment, with no recognition of gain or loss on the transaction.

The loan agreement provides for a $ 12.9 million mortgage on the Property and has a two -year term with a 10 -year amortization.

The mortgage loan bears interest at a rate per annum equal to the greater of (a) the 30-day LIBOR rate plus 5.5 % and (b) 7.5 % and provides for a balloon payment of $ 10.3 million due in August 2020.

Lexicon incurred $ 0.4 million of debt issuance costs in connection with the mortgage loan, which offsets the current portion of long-term debt on the consolidated balance sheets and will be amortized as interest expense over the two -year term of the loan agreement.

As of December 31, 2019, the balance of unamortized debt issuance costs was $ 0.1 million.

The consolidated balance sheet includes mortgage debt, the carrying value of the debt, of $ 11.0 million as of December 31, 2019.

The buildings and land that serve as collateral for the mortgage loan are included in property and equipment at $ 59.2 million and $ 2.7 million, respectively, before accumulated depreciation, as of December 31, 2019.

The fair value of Lexicon’s mortgage loan approximates its carrying value.

The fair value of Lexicon’s mortgage loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current incremental borrowing rate.

In January 2020, Lexicon’s wholly owned subsidiary entered into a real estate purchase and sale agreement under which Lexicon agreed to sell its facilities in The Woodlands, Texas.

Such sale is subject to normal and customary closing conditions, including a study period, which extends until April 9, 2020, during which the purchaser may conduct inspections, analyses and other studies of the property and may terminate the agreement in its discretion.

Such sale is also subject to the negotiation and execution by the parties of a leaseback agreement for a period of six months with respect to a portion of the property concurrently with closing.

The loan agreement provided for a $ 12.9 million mortgage on the Property and had a two -year term with a 10 -year amortization.

The mortgage loan bore interest at a rate per annum equal to the greater of (a) the 30-day LIBOR rate plus 5.5 % and (b) 7.5 % and provided for a balloon payment of $ 10.3 million, which was paid in full in August 2020.

As of December 31, 2019, the balance sheet included mortgage debt, the carrying value of the debt, of $ 11.0 million and was included in current portion of long-term debt.

BioPharma Term Loan.

In December 2017, Lexicon entered into a loan agreement with BioPharma Credit PLC and BioPharma Credit Investments IV Sub LP under which $ 150 million was funded in December 2017 (the “BioPharma Term Loan”).

The BioPharma Term Loan matures in December 2022, bears interest at 9 % per year, subject to additional interest if an event of default occurs and is continuing, and is payable quarterly.

The BioPharma Term Loan is subject to mandatory prepayment provisions that require prepayment upon a change of control or receipt of proceeds from certain non-ordinary course transfers of assets.

The Company may prepay the BioPharma Term Loan in whole at its option at any time.

Any prepayment of the BioPharma Term Loan is subject to customary make-whole premiums and prepayment premiums.

The Company’s obligations under the BioPharma Term Loan are secured by a first lien security interest in substantially all of the assets of the Company and certain of its subsidiaries, other than its facilities in The Woodlands, Texas.

The loan agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default applicable to the Company and certain of its subsidiaries, including among other things, covenants restricting dispositions, fundamental changes in our business, mergers or acquisitions, indebtedness, encumbrances, distributions, investments, transactions with affiliates and subordinated debt.

If an event of default occurs and is continuing, all amounts outstanding under the BioPharma Term Loan may be declared immediately due and payable.

The BioPharma Term Loan was scheduled to mature in December 2022, bore interest at 9 % per year, subject to additional interest if an event of default occurred and was continuing, and was payable quarterly.

The BioPharma Term Loan was subject to mandatory prepayment provisions that required prepayment upon a change of control or receipt of proceeds from certain non-ordinary course transfers of assets.

The Company repaid the BioPharma Term Loan in whole, together with required prepayment and make-whole premiums, upon closing of the XERMELO Sale in September 2020.

The Company recorded the repayment under the accounting requirements for debt extinguishment and as a result, a loss of $8.6 million was recognized and is included in the accompanying consolidated statement of comprehensive income (loss) for the year ended December 31, 2020.

The Company’s obligations under the BioPharma Term Loan were secured by a first lien security interest in substantially all of the assets of the Company and certain of its subsidiaries, other than its facilities in The Woodlands, Texas.

The loan agreement contained certain customary representations and warranties, affirmative and negative covenants and events of default applicable to the Company and certain of its subsidiaries, including among other things, covenants restricting dispositions, fundamental changes in our business, mergers or acquisitions, indebtedness, encumbrances, distributions, investments, transactions with affiliates and subordinated debt.

If an event of default occurred and was continuing, all amounts outstanding under the BioPharma Term Loan may have been declared immediately due and payable.

In connection with the BioPharma Term Loan, the Company incurred $ 4.1 million of debt issuance costs.

The debt issuance costs are amortized as interest expense over the expected life of the BioPharma Term Loan using the effective interest method.

The debt issuance costs were being amortized as interest expense over the expected life of the BioPharma Term Loan using the effective interest method.

The Company determined the expected life of the debt was equal to the five -year term of the BioPharma Term Loan.

As of December 31, 2019, the balance of unamortized debt issuance costs was $ 2.4 million, which offsets long-term debt on the consolidated balance sheets.

As of December 31, 2019, the carrying value of the BioPharma Term Loan was $147.6 million.

The fair value of the BioPharma Term Loan approximates its carrying value.

The fair value of the BioPharma Term Loan was determined using Level 2 inputs using discounted cash flow analysis, based on the Company’s estimated current incremental borrowing rate.

The following table includes the aggregate scheduled future principal payments of the Company’s long-term debt as of December 31, 2019:

For the Year Ending

(in thousands)

2020 $ 11,130

Total debt 248,630

Less deferred financing costs ( 3,447 )

Less current portion ( 11,012 )

Total long-term debt $ 234,171

The remaining balance of the debt issuance costs were written off and included as part of the debt extinguishment loss.

Commitments and Contingencies

Operating Lease Obligations :

A Lexicon subsidiary leases office space in Basking Ridge, New Jersey under a lease agreement, the term of which began in June 2015 and terminates in December 2022.

As disclosed in Note 3, Lexicon adopted ASU 2016-02, "Leases", on January 1, 2019.

A wholly-owned subsidiary of Lexicon leases office space in Basking Ridge, New Jersey under a lease agreement, the term of which began in June 2015 and terminates in December 2022.

As of December 31, 2020, the office space lease right-of-use (ROU) asset had a balance of $ 1.2 million, which is included in other assets in the consolidated balance sheet, and current and non-current liabilities relating to the ROU asset were $ 0.6 million and $ 0.6 million, respectively, which are included in accrued liabilities and other long-term liabilities in the consolidated balance sheet, respectively.

The discount rate used to record the office space lease was Lexicon’s estimated borrowing rate of 9 %.

Lexicon elected to apply the short-term lease exception to all leases one year or less.

Lexicon elected to apply the short-term lease exception to all leases with a term of one year or less.

The following table reconciles the undiscounted cash flows of the operating lease liability to the recorded lease liability at December 31, 2020:

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District Court for the Southern District of Texas, Houston Division.

A first amended complaint was filed on July 30, 2019 and Lexicon filed a motion to dismiss such first amended complaint on September 30, 2019.

The plaintiff filed an opposition to Lexicon's motion to dismiss on November 14, 2019 and Lexicon filed a reply in support of its motion to dismiss on December 13, 2019.

Our motion to dismiss was granted and the action was dismissed with prejudice by the District Court on August 14, 2020.

The lead plaintiffs filed a notice of appeal to the U.S.

Court of Appeals for the Fifth Circuit on September 11, 2020 and a brief in support of its appeal on December 17, 2020.

The Company filed a response brief on February 18, 2021 and the lead plaintiffs filed a reply brief on March 11, 2021.

The lawsuit purports to be a class action brought on behalf of purchasers of the Company’s securities during the period from March 11, 2016 through July 29, 2019.

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The complaint seeks, on behalf of the purported class, an unspecified amount of monetary damages, interest, fees and expenses of attorneys and experts, and other relief.

On October 16, 2020, Lexicon initiated arbitration proceedings against Sanofi-Aventis Deutschland GmbH, or Sanofi, seeking to recover damages for breach of contract relating to the Termination and Settlement Agreement and Mutual Releases with Sanofi, dated September 9, 2019.

In September 2020, Sanofi withheld approximately $ 23.2 million from the final $ 26 million payment due to the Company under the termination and settlement agreement, offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable by the Company under the terms of the termination and settlement agreement.

Lexicon disputes that at least a significant portion of such costs are properly reimbursable by the Company under the terms of the termination and settlement agreement and assert that, in any event, Sanofi was not permitted to withhold any of such costs under the terms of the termination and settlement agreement.

Lexicon is seeking payment of up to $ 23.2 million in such disputed costs, together with late interest and attorneys’ fees and costs.

Sanofi is seeking a declaratory judgment that Lexicon is liable for all disputed costs previously withheld and damages for any additional costs properly reimbursable under the terms of the termination and settlement agreement in excess of those previously withheld, together with late interest and attorneys’ fees.

In addition, Lexicon is from time to time party to claims and legal proceedings that arise in the normal course of its business and that it believes will not have, individually or in the aggregate, a material adverse effect on its results of operations, financial condition or liquidity.

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The total number of shares of common stock that may be issued pursuant to stock awards under the Equity Incentive Plan shall not exceed in the aggregate 30,000,000 shares at December 31, 2020.

In the first quarter of 2020, the Company amended the 2017 Equity Incentive Plan, subject to stockholder approval, to increase the aggregate number of shares that may be issued under the plan to 30,000,000 shares.

In the first quarter of 2020, the Company amended the 2017 Equity Incentive Plan to increase the aggregate number of shares that may be issued under the plan to 30,000,000 shares.

As of December 31, 2020, options to purchase 8,026,989 shares and 2,683,875 restricted stock units were outstanding, 1,909,515 shares had been issued upon the exercise of stock options, 3,160,935 shares had been issued pursuant to restricted stock units and 113,940 shares had been issued pursuant to stock bonus awards or restricted stock awards granted under the Equity Incentive Plan.

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The total number of shares of common stock that may be issued pursuant to stock awards under the Directors’ Plan shall not exceed in the aggregate 600,000 shares.

As of December 31, 2019, stock options to purchase 237,850 shares were outstanding, none had been issued upon the exercise of stock options, 27,728 restricted stock units were outstanding and 103,208 shares had been issued pursuant to restricted stock awards granted under the Directors’ Plan.

As of December 31, 2020, stock options to purchase 369,917 shares were outstanding, none had been issued upon the exercise of stock options, 85,104 restricted stock units were outstanding and 130,936 shares had been issued pursuant to restricted stock and restricted stock unit awards granted under the Directors’ Plan.

Stock Option Activity:

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The weighted average estimated grant date fair value of stock options granted during the years ended December 31, 2020, 2019 and 2018 were $ 2.35 , $ 3.18 and $ 5.63 , respectively.

The total intrinsic value of stock options exercised during the years ended December 31, 2018 and 2017 were $ 0.2 million and $ 2.0 million, respectively.

The total intrinsic value of stock options exercised during the year ended December 31, 2018 was $ 0.2 million.

The weighted average remaining contractual term of stock options outstanding and exercisable was 6.8 and 5.2 years, respectively, as of December 31, 2020.

At December 31, 2020, the aggregate intrinsic value of the outstanding stock options was $ 0.5 million.

At December 31, 2019, there was no intrinsic value of exercisable stock options.

At December 31, 2020, the intrinsic value of exercisable stock options was zero .

Stock Bonus and Restricted Stock Unit Activity:

During the year ended December 31, 2019, Lexicon granted its non-employee directors 27,728 restricted stock units and during the year ended December 31, 2018 and 2017, granted its non-employee directors 20,512 and 10,248 shares, respectively, of restricted stock awards.

During the year ended December 31, 2020 and 2019, Lexicon granted its non-employee directors 85,104 and 27,728 restricted stock units, respectively, and during the year ended December 31, 2018, granted its non-employee directors 20,512 shares of restricted stock awards.

The restricted stock in 2020, 2019 and 2018 had weighted average grant date fair values of $ 1.86 , $ 5.67 and $ 7.80 per share, respectively.

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During the years ended December 31, 2020, 2019 and 2018, Lexicon granted its employees restricted stock units in lieu of or in addition to annual stock option awards.

These restricted stock units vest in three to four annual installments.

These restricted stock units vest in three annual installments.

The total fair value of shares vested in 2020, 2019 and 2018 was $ 3.2 million, $ 2.9 million and $ 3.3 million, respectively.

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Lexicon has derived substantially all of its revenues from drug discovery and development alliances, target validation collaborations for the development and, in some cases, analysis of the physiological effects of genes altered in knockout mice, product sales, government grants and contracts, technology licenses, subscriptions to its databases and compound library sales.

In October 2014, Lexicon entered into a License and Collaboration Agreement, which was subsequently amended in March 2015 (collectively, the “Ipsen Agreement”), with Ipsen for the development and commercialization of XERMELO outside of the United States and Japan (the “Licensed Territory”).

The Ipsen Agreement was assigned to TerSera in September 2020 in connection with the XERMELO sale.

Under the Ipsen Agreement, Lexicon granted Ipsen an exclusive, royalty-bearing right and license under its patent rights and know-how to commercialize XERMELO in the Licensed Territory.

Ipsen is responsible for using diligent efforts to commercialize XERMELO in the Licensed Territory pursuant to a mutually approved commercialization plan.

Subject to certain exceptions, Lexicon was responsible for conducting clinical trials required to obtain regulatory approval for XERMELO

for carcinoid syndrome in the European Union, including those contemplated by a mutually approved initial development plan, and had the first right to conduct most other clinical trials of XERMELO.

Lexicon was responsible for the costs of all clinical trials contemplated by the initial development plan.

The costs of additional clinical trials were to be allocated between the parties based on the nature of such clinical trials.

Under the Ipsen Agreement, Ipsen paid Lexicon an aggregate of $ 47.2 million through September 30, 2020, consisting of $ 24.5 million in upfront payments, a $ 6.4 million milestone upon the acceptance of the filing submitted by Ipsen to the European Medicines Agency for XERMELO as an adjunct to somatostatin analog therapy for the long-term treatment of carcinoid syndrome, a $ 5.1 million milestone upon Ipsen’s receipt of approval from the European Commission for the marketing of XERMELO in all member states of the European Union, Norway and Iceland, a $ 3.8 million milestone upon Ipsen’s first commercial sale in Germany, a $ 3.8 million milestone upon Ipsen’s first commercial sale in the United Kingdom, a $ 1.3 million milestone upon Ipsen’s receipt of approval from Health Canada and a $ 2.3 million milestone upon Ipsen's first commercial sale in Canada.

In addition, Lexicon was eligible to receive from Ipsen (a) up to an aggregate of approximately $ 9.6 million upon the achievement of specified regulatory and commercial launch milestones and (b) up to an aggregate of € 72 million upon the achievement of specified sales milestones.

Milestone payments that were contingent upon achievement of a substantive milestone were deemed constrained.

Lexicon was also entitled to tiered, escalating royalties ranging from low twenties to mid-thirties percentages of net sales of XERMELO in the Licensed Territory, subject to a credit for amounts previously paid to Lexicon by Ipsen for the manufacture and supply of such units of XERMELO.

Lexicon and Ipsen had entered into a commercial supply agreement pursuant to which Lexicon supplied Ipsen’s commercial requirements of XERMELO, and Ipsen paid an agreed upon transfer price for such commercial supply.

The Company considered the following as its performance obligations with respect to the revenue recognition of the $ 24.5 million upfront payment:

• The exclusive license granted to Ipsen to develop and commercialize XERMELO in the Licensed

• The development services Lexicon is performing for XERMELO;

• The obligation to participate in committees which govern the development of XERMELO

until commercialization;

• The obligation to supply commercial supply of XERMELO, under a commercial supply agreement.

The Company determined that the license had stand-alone value because it is an exclusive license that grants Ipsen the right to develop and commercialize XERMELO or to sublicense its rights.

In addition, at the time of the agreement, it would have been possible for Ipsen or another third party to conduct clinical trials without assistance from Lexicon.

As a result, the Company considered the license and the development services under the Agreement to be separate performance obligations.

The Company recognized the portion of the transaction price allocated to the license immediately because Lexicon delivered the license and earned the revenue at the inception of the arrangement.

The Company recognized as revenue the amount allocated to the development services and the obligation to participate in committees over the period of time Lexicon performed services, which was completed in 2018.

The Company determined that the commercial supply agreement was a contingent deliverable at the onset.

There was inherent uncertainty in obtaining regulatory approval at the time and entry into the commercial supply agreement, thus making the applicability of the commercial supply agreement outside the control of Lexicon and Ipsen.

As a result, the Company determined the commercial supply agreement did not meet the definition of a performance obligation that needed to be accounted for at the inception of the arrangement.

The Company also determined that there was no significant and incremental discount related to the commercial supply agreement that should have been accounted for at the inception of the arrangement.

The Company determined that the initial transaction price was the $ 24.5 million upfront payments because they were the only payments that were fixed and determinable at the inception of the arrangement.

There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments, royalty payments or payments for finished drug product.

As such, the Company did not include those payments in the transaction price.

The Company allocated the transaction price based on the relative best estimate of selling price of each performance obligation.

The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate.

The significant inputs the Company used to determine the projected income of the license included:

estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate.

The Company estimated the selling price of the development services by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development.

The Company estimated the selling price of the obligation to participate in committees by using internal estimates of the number of internal hours and salary and benefits costs to perform these services.

As a result of the allocation, the Company recognized $ 21.2 million of the $ 24.5 million upfront payment for the license in 2014, and an additional $ 1.4 million in 2015 upon entering into the amendment.

The Company recognized the $ 1.7 million allocated to the development services deliverable over the estimated period of performance as development occurred, and recognized the $ 0.1 million allocated to the committee participation deliverable ratably over the period of performance.

Milestone payments that were contingent upon the achievement of a substantive milestone were deemed constrained.

If or when the constraint was determined to be resolved, the Company re-evaluated the overall transaction price and recognized an adjustment on a cumulative catch-up basis in the period that the adjustment was evaluated.

Revenue recognized under the Agreement was $ 0.3 million, $ 4.9 million and $ 4.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Revenue for each of the years ended December 31, 2020, 2019 and 2018 include $ 0.3 million of royalties from Ipsen.

Revenue for the years ended December 31, 2020, 2019 and 2018 include zero, $ 1.3 million and $ 1.6 million, respectively, from sales of bulk tablets of XERMELO to Ipsen.

In November 2015, Lexicon entered into a Collaboration and License Agreement, which was subsequently amended in July 2017 (collectively, the “Sanofi Agreement”), with Sanofi for the worldwide development and commercialization of Lexicon’s diabetes drug candidate sotagliflozin.

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Under the terms of the Termination Agreement, Lexicon regained all rights to sotagliflozin and assumed full responsibility for the worldwide development and commercialization of sotagliflozin in all indications.

Sanofi paid Lexicon $ 208 million in September 2019, $ 26 million in March 2020 (less amounts withheld by Sanofi offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable by Lexicon under the terms of the Termination Agreement) and is obligated to pay an additional $ 26 million within twelve months of the Settlement Date, and neither party will owe additional payments pursuant to the Sanofi Agreement.

Sanofi paid Lexicon $ 208 million in September 2019, $ 26 million in each of March and September 2020 (less amounts withheld by Sanofi offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable by Lexicon under the terms of the Termination Agreement), and neither party will owe additional payments pursuant to the Sanofi Agreement.

The parties have cooperated in the transition of responsibility for ongoing clinical studies and other activities, and each party is responsible for its own expenses associated with such transition, subject to certain exceptions.

The following is a summary description of the Sanofi Agreement without giving effect to the Termination Agreement.

See Note 11, Commitments and Contingencies, for additional information.

Beginning in March 2020, Lexicon closed out early the clinical studies related to the Phase 3 development program for sotagliflozin in type 2 diabetes, heart failure and chronic kidney disease.

Under the Sanofi Agreement, Lexicon had granted Sanofi an exclusive, worldwide (excluding Japan), royalty-bearing right and license under its patent rights and know-how to develop, manufacture and commercialize sotagliflozin.

2 unchanged sentences

Under the Sanofi Agreement, Sanofi paid Lexicon an upfront payment of $ 300 million.

In addition, Lexicon was eligible to receive from Sanofi (a) up to an aggregate of $ 110 million upon the achievement of four development milestones relating to the results of certain Phase 3 clinical trials of sotagliflozin in type 2 diabetes patients, (b) up to an aggregate of $ 220 million upon the achievement of four regulatory milestones relating to the first commercial sale following regulatory approval of sotagliflozin for type 1 and type 2 diabetes, respectively, in each of the United States and Europe, of which two milestones representing the substantial majority of such aggregate amount relate to type 2 diabetes and the remaining two milestones relate to type 1 diabetes, (c) $ 100 million upon the achievement of a milestone based on the results of either of two outcomes studies in type 2 diabetes patients, the completion of which would likely occur after initial regulatory approval of sotagliflozin in type 2 diabetes, and (d) up to an aggregate of $ 990 million upon the achievement of six commercial milestones that will be achieved upon reaching specified levels of sales.

In addition, Lexicon was eligible to receive from Sanofi (a) up to an aggregate of $ 110 million upon the achievement of four development milestones relating to the results of certain Phase 3 clinical trials of sotagliflozin in type 2 diabetes patients, (b) up to an aggregate of $ 220 million upon the achievement of four regulatory milestones relating to the first commercial sale following regulatory approval of sotagliflozin for type 1 and type 2 diabetes, respectively, in each of the United States and Europe, of which two milestones representing the substantial majority of such aggregate amount relate to type 2 diabetes and the remaining two milestones relate to type 1 diabetes, (c) $ 100 million upon the achievement of a milestone based on the results of either of two outcomes studies in type 2 diabetes patients, the completion of which would likely occur after initial regulatory approval of sotagliflozin in type 2 diabetes, and (d) up to an aggregate of $ 990 million upon the achievement of six commercial milestones that would be achieved upon reaching specified levels of sales.

The Company believed that each of the development and regulatory milestones under the Sanofi Agreement was substantive.

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Commercial milestones would have been accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria were met.

such range attributable to net sales for type 1 diabetes in the United States, and subject in each case to customary royalty reduction provisions.

Lexicon was also entitled to tiered, escalating royalties ranging from low double digit percentages to forty percent of net sales of sotagliflozin, based on indication and territory, with royalties for the higher band of such range attributable to net sales for type 1 diabetes in the United States, and subject in each case to customary royalty reduction provisions.

Lexicon continued to be responsible for all clinical development activities relating to type 1 diabetes and exercised an exclusive option to co-promote and have a significant role, in collaboration with Sanofi, in the commercialization of sotagliflozin for the treatment of type 1 diabetes in the United States.

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The royalty term for each licensed product in each country was the period commencing on the effective date of the Sanofi Agreement and ending on the latest of expiration of specified patent coverage, expiration of specified regulatory exclusivity and 10 years following the first commercial sale in the applicable country.

Either party could terminate the Sanofi Agreement in the event of an uncured material breach by the other party.

Prior to completion of the core development activities for type 2 diabetes specified in the development plan, Sanofi could terminate the Sanofi Agreement on a country-by-country and licensed product-by-licensed product basis, in the event of (a) notification of a material safety issue relating to the licensed product or the class of sodium-glucose cotransporters type 1 or type 2 inhibitors resulting in a recommendation or requirement that Lexicon or Sanofi cease development, (b) failure to achieve positive results with respect to certain clinical trial results, (c) the occurrence of specified fundamental adverse events or (d) the exploitation of the licensed product infringing third party intellectual property rights in specified major markets and Sanofi is unable to obtain a license to such third party intellectual property rights.

Either party had the right to terminate the Sanofi Agreement in the event of an uncured material breach by the other party.

Prior to completion of the core development activities for type 2 diabetes specified in the development plan, Sanofi had the right to terminate the Sanofi Agreement on a country-by-country and licensed product-by-licensed product basis, in the event of (a) notification of a material safety issue relating to the licensed product or the class of sodium-glucose cotransporters type 1 or type 2 inhibitors resulting in a recommendation or requirement that Lexicon or Sanofi cease development, (b) failure to achieve positive results with respect to certain clinical trial results, (c) the occurrence of specified fundamental adverse events or (d) the exploitation of the licensed product infringing third party intellectual property rights in specified major markets and Sanofi is unable to obtain a license to such third party intellectual property rights.

The Company considered the following as its performance obligations with respect to the revenue recognition of the $ 300 million upfront payment:

• The exclusive worldwide license granted to Sanofi to develop and commercialize sotagliflozin;

• The development services Lexicon is performing for sotagliflozin relating to type 1 diabetes;

• The funding Lexicon will provide for development relating to type 2 diabetes.

• The development services Lexicon was to perform for sotagliflozin relating to type 1 diabetes;

• The funding Lexicon was to provide for development relating to type 2 diabetes.

The Company determined that the license had stand-alone value because it was an exclusive license that gave Sanofi the right to develop and commercialize sotagliflozin or to sublicense its rights.

In addition, sotagliflozin is currently in development and it was possible that Sanofi or another third party could conduct clinical trials without assistance from Lexicon.

In addition, sotagliflozin was then in development and it was possible that Sanofi or another third party could conduct clinical trials without assistance from Lexicon.

As a result, the Company considered the license and the development services under the Sanofi Agreement to be separate performance obligations.

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The significant inputs the Company used to determine the projected income of the license included:

exercising the option to co-promote, estimated future

product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate.

exercising the option to co-promote, estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate.

The Company estimated the selling price of the development services for type 1 diabetes by using internal estimates of the cost to hire third parties to perform the services over the expected period to perform the development.

The Company estimated the obligation to provide funding for type 2 diabetes by using internal estimates of the expected cash flows and timing for $ 100 million in funding.

The Company estimated the

obligation to provide funding for type 2 diabetes by using internal estimates of the expected cash flows and timing for $ 100 million in funding.

As a result of the allocation of the Sanofi Agreement, the Company recognized $ 126.8 million of the $ 300 million upfront payment for the license in 2015.

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In addition, the Company recognized revenue of $ 260 million, representing the full cash consideration from the Termination Agreement.

The Company has no remaining performance obligations to Sanofi.

Revenue recognized under the collaboration agreements with Sanofi was $ 286 million, $ 33.2 million and $ 60.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Under the Ipsen Agreement, Lexicon granted Ipsen an exclusive, royalty-bearing right and license under its patent rights and know-how to commercialize XERMELO in the Licensed Territory.

Ipsen is responsible for using diligent efforts to commercialize XERMELO in the Licensed Territory pursuant to a mutually approved commercialization plan.

Subject to certain exceptions, Lexicon was responsible for conducting clinical trials required to obtain regulatory approval for XERMELO for carcinoid syndrome in the European Union, including those contemplated by a mutually approved initial development plan, and has the first right to conduct most other clinical trials of XERMELO.

Lexicon was responsible for the costs of all clinical trials contemplated by the initial development plan.

The costs of additional clinical trials will be allocated between the parties based on the nature of such clinical trials.

Under the Ipsen Agreement, Ipsen has paid Lexicon an aggregate of $ 47.2 million through December 31, 2019, consisting of $ 24.5 million in upfront payments, a $ 6.4 million milestone upon the acceptance of the filing submitted by Ipsen to the European Medicines Agency for XERMELO as an adjunct to somatostatin analog therapy for the long-term treatment of carcinoid syndrome, a $ 5.1 million milestone upon Ipsen’s receipt of approval from the European Commission for the marketing of XERMELO in all member states of the European Union, Norway and Iceland, a $ 3.8 million milestone upon Ipsen’s first commercial sale in Germany, a $ 3.8 million milestone upon Ipsen’s first commercial sale in the United Kingdom, a $ 1.3 million milestone upon Ipsen’s receipt of approval from Health Canada and a $2.3 million milestone upon Ipsen's first commercial sale in Canada.

In addition, Lexicon is eligible to receive from Ipsen (a) up to an aggregate of approximately $ 9.6 million upon the achievement of specified regulatory and commercial launch milestones and (b) up to an aggregate of € 72 million upon the achievement of specified sales milestones.

Milestone payments are deemed constrained.

Lexicon is also entitled to tiered, escalating royalties ranging from low twenties to mid-thirties percentages of net sales of XERMELO in the Licensed Territory, subject to a credit for amounts previously paid to Lexicon by Ipsen for the manufacture and supply of such units of XERMELO.

Lexicon and Ipsen have entered into a commercial supply agreement pursuant to which Lexicon supplies Ipsen’s commercial requirements of XERMELO, and Ipsen pays an agreed upon transfer price for such commercial supply.

The Company considered the following as its performance obligations with respect to the revenue recognition of the $ 24.5 million upfront payment:

• The exclusive license granted to Ipsen to develop and commercialize XERMELO in the Licensed

• The development services Lexicon is performing for XERMELO;

• The obligation to participate in committees which govern the development of XERMELO

until commercialization;

• The obligation to supply commercial supply of XERMELO, under a commercial supply agreement.

The Company determined that the license had stand-alone value because it is an exclusive license that grants Ipsen the right to develop and commercialize XERMELO or to sublicense its rights.

In addition, at the time of the agreement, it would have been possible for Ipsen or another third party to conduct clinical trials without assistance from Lexicon.

As a result, the Company considers the license and the development services under the Agreement to be separate performance obligations.

The Company recognized the portion of the transaction price allocated to the license immediately because Lexicon delivered the

license and earned the revenue at the inception of the arrangement.

The Company is recognizing as revenue the amount allocated to the development services and the obligation to participate in committees over the period of time Lexicon performs services, which was completed in 2018.

The Company determined that the commercial supply agreement is a contingent deliverable at the onset of the Agreement.

There was inherent uncertainty in obtaining regulatory approval at the time of the agreement, thus, making the applicability of the commercial supply agreement outside the control of Lexicon and Ipsen.

As a result, the Company has determined the commercial supply agreement does not meet the definition of a performance obligation that needs to be accounted for at the inception of the arrangement.

The Company has also determined that there is no significant and incremental discount related to the commercial supply agreement that should be accounted for at the inception of the arrangement.

There was considerable uncertainty at the date of the agreement as to whether Lexicon would earn milestone payments, royalty payments or payments for finished drug product.

As such, the Company did not include those payments in the transaction price.

The Company allocated the transaction price based on the relative best estimate of selling price of each performance obligation.

The Company estimated the selling price of the license deliverable by applying a probability-based income approach utilizing an appropriate discount rate.

The significant inputs the Company used to determine the projected income of the license included:

estimated future product sales, estimated cost of goods sold, estimated operating expenses, income taxes, and an appropriate discount rate.

The Company recognized the $ 1.7 million allocated to the development services deliverable over the estimated period of performance as development occurs, and recognized the $ 0.1 million allocated to the committee participation deliverable ratably over the estimated period of performance.

Milestone payments that are contingent upon the achievement of a substantive milestone are deemed constrained.

If or when the constraint is determined to be resolved, the Company will re-evaluate the overall transaction price and recognize an adjustment on a cumulative catch-up basis in the period that the adjustment was evaluated.

During 2019, the milestone earned when Ipsen made its first commercial sale in Canada was determined to be a distinct performance obligation relating to the development activities and accordingly, was recognized as revenue without further allocation to the remaining performance obligations.

Revenue recognized under the Agreement was $ 4.9 million, $ 4.6 million and $ 16.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Revenue for the years ended December 31, 2019, 2018 and 2017 include $0.3 million, $ 0.3 million and $ 0.1 million, respectively, of royalties from Ipsen.

Revenue for the years ended December 31, 2019, 2018 and 2017 include $1.3 million, $ 1.6 million and $ 0.8 million, respectively, from sales of bulk tablets of XERMELO to Ipsen.

Subsequent to the Termination Agreement, the Company has no remaining performance obligations to Sanofi.

Revenue recognized under the collaboration agreements with Sanofi was $ 286 million and $ 33.2 million for the years ended December 31, 2019 and 2018, respectively.

Earnings (Loss) Per Share

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For periods presented with a net loss, the shares associated with the Convertible Notes are not included in the computation of diluted earnings per share because they are antidilutive.

Selected Quarterly Financial Data (Unaudited)

The table below sets forth certain unaudited statements of comprehensive income (loss) data, and net income (loss) per common share data, for each quarter of 2019 and 2018:

(in thousands, except per share data)

Quarter Ended

March 31 June 30 September 30 December 31

Revenues (1) $ 9,216 $ 9,682 $ 294,448 $ 8,727

Income (loss) from operations $ ( 17,469 ) $ ( 18,545 ) $ 224,676 $ ( 47,217 )

Net income (loss) $ ( 21,797 ) $ ( 23,018 ) $ 226,086 $ ( 51,138 )

Net income (loss) per common share, basic $ ( 0.21 ) $ ( 0.22 ) $ 2.13 $ ( 0.48 )

Net income (loss) per common share, diluted $ ( 0.21 ) $ ( 0.22 ) $ 1.95 ( 0.48 )

Shares used in computing net income (loss) per common share, basic

106,054 106,272 106,272 106,272

Shares used in computing net income (loss) per common share, diluted 106,054 106,272 116,640 106,272

Revenues $ 25,374 $ 13,798 $ 6,966 $ 17,071

Loss from operations $ ( 37,713 ) $ ( 30,272 ) $ ( 22,927 ) $ ( 12,367 )

Net loss $ ( 41,821 ) $ ( 34,549 ) $ ( 27,396 ) $ ( 16,782 )

Net loss per common share, basic and diluted $ ( 0.40 ) $ ( 0.33 ) $ ( 0.26 ) $ ( 0.16 )

Shares used in computing net loss per common share, basic and diluted

105,668 105,848 105,881 105,920

(1) Revenues for the three months ended September 30, 2019 include $ 260 million from the Sanofi Termination Agreement, as defined in Note 13.

For periods presented with a net loss, the weighted average number of shares outstanding are the same for both basic and diluted net loss per common share.

For these periods, shares associated with convertible debt, stock options and restricted stock units are not included in the weighted average number of shares of common stock outstanding because they are antidilutive.

Other Capital Agreements

Common Stock :

In December 2020, Lexicon sold 20,312,500 shares of its common stock at a price of $ 3.200 per share in a registered direct offering pursuant to an existing shelf registration statement.

Sale of the shares resulted in net proceeds of $ 63.0 million, after deducting underwriting discounts and commissions of $ 1.8 million and offering expenses of $ 0.2 million.

The investors in the offering were Artal International S.C.A., an affiliate of of Invus, L.P., the Company’s largest stockholder, and BVF Partners L.P.

and certain affiliates of BVF Partners L.P.

All of the net proceeds of the registered direct offering are reflected as issuance of common stock in the accompanying financial statements.

In October 2020, Lexicon entered into an Open Market Sale Agreement SM (the “sales agreement”) with Jefferies LLC (“Jefferies”) relating to the shares of its common stock.

Lexicon may offer and sell common stock having an aggregate sales price of up to $ 50,000,000 from time to time through Jefferies acting as its sales agent.

In November 2020, Lexicon sold 3,709,233 shares of its common stock at a price of $ 1.992 per share pursuant to the sales agreement, resulting in net proceeds of $ 7.0 million.

The net proceeds from this sale are reflected as issuance of common stock in the accompanying financial statements.

In January 2021, Lexicon sold 2,000,000 shares of its common stock at a price of $ 8.463 per share pursuant to the sales agreement, resulting in net proceeds of $ 16.4 million.

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What changed 10-K

Item 9A. Controls and Procedures