What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-10-30 · 98 added, 250 removed, 279 unchanged (56% of the section changed)

3 unchanged sentences

(In thousands, except par value)

As of September 30, As of December 31,

As of March 31, As of December 31,

Assets (unaudited)

3 unchanged sentences

Accounts receivable, net 101 395

Inventory — 4,243

Prepaid expenses and other current assets 3,954 5,049

1 unchanged sentence

Property and equipment, net of accumulated depreciation and amortization of $ 5,851 and $ 5,815 , respectively

11,106 14,047

Goodwill 44,543 44,543

Intangible assets, net — 19,716

Other assets 3,005 1,231

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Total current liabilities 38,995 46,806

Long-term debt, net of deferred issuance costs 11,629 234,171

Other long-term liabilities 1,718 611

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Accumulated deficit ( 1,420,976 ) ( 1,400,018 )

Accumulated other comprehensive income 35 84

Accumulated other comprehensive income (loss) 5 ( 6 )

Treasury stock, at cost, 1,165 and 793 shares, respectively

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Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Three Months Ended March 31,

Net product revenue $ — $ 7,877

4 unchanged sentences

Cost of sales (including finite-lived intangible asset amortization)

633 577 1,929 2,457

Research and development, including stock-based compensation of $ 1,286 and $ 2,176 , respectively

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Selling, general and administrative, including stock-based compensation of $ 1,565 , and $ 2,256 , respectively

11,997 13,898 40,798 42,271

Impairment loss on buildings

Impairment loss on intangible asset — 28,638 — 28,638

Total operating expenses 20,866 70,437

Other operating income:

Gain on sale of XERMELO 132,818 — 132,818 —

Income (loss) from operations 86,675 224,676 ( 40,342 ) 188,662

Loss on debt extinguishments, net ( 255 ) — ( 255 ) —

Loss from operations ( 20,839 ) ( 62,438 )

Interest expense ( 167 ) ( 5,131 )

Interest and other income, net 48 958

Net income (loss) before taxes 82,603 220,072 ( 53,079 ) 175,257

Income tax benefit — 6,014 — 6,014

Net income (loss) $ 82,603 $ 226,086 $ ( 53,079 ) $ 181,271

Net income (loss) per common share, basic $ 0.77 $ 2.13 $ ( 0.50 ) $ 1.71

Net income (loss) per common share, diluted $ 0.71 $ 1.95 $ ( 0.50 ) $ 1.59

Shares used in computing net income (loss) per common share, basic 107,309 106,272 106,974 106,200

Shares used in computing net income (loss) per common share, diluted 117,552 116,640 106,974 116,742

Other comprehensive income (loss):

Unrealized gain (loss) on investments

( 277 ) ( 50 ) ( 49 ) 48

Comprehensive income (loss) $ 82,326 $ 226,036 $ ( 53,128 ) $ 181,319

Net loss $ ( 20,958 ) $ ( 66,611 )

Net loss per common share, basic and diluted $ ( 0.15 ) $ ( 0.63 )

Shares used in computing net loss per common share, basic and diluted 143,379 106,536

Other comprehensive loss:

Unrealized gain on investments 11 776

Comprehensive loss $ ( 20,947 ) $ ( 65,835 )

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

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

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Balance at March 31, 2020 107,711 $ 108 $ 1,466,604 $ ( 1,408,055 ) $ 860 $ ( 4,740 ) $ 54,777

Stock-based compensation — — 3,766 — — — 3,766

Net loss — — — ( 23,018 ) — — ( 23,018 )

Unrealized gain on investments — — — — 53 — 53

Balance at June 30, 2019 106,679 106 1,455,131 ( 1,516,392 ) 86 ( 3,817 ) ( 64,886 )

Stock-based compensation — — 3,562 — — — 3,562

Net income — — — 226,086 — — 226,086

Unrealized loss on investments — — — — ( 50 ) — ( 50 )

Balance at September 30, 2019 106,679 $ 106 $ 1,458,693 $ ( 1,290,306 ) $ 36 $ ( 3,817 ) $ 164,712

Lexicon Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

Common Stock Additional Accumulated Other

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Issuance of common stock under Equity Incentive Plans 1,263 1 547 — — — 548

Issuance of common stock under an Open Market Sale Agreement, net of issuance fees 2,000 2 16,397 — — — 16,399

Repurchase of common stock — — — — — ( 2,675 ) ( 2,675 )

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Balance at March 31, 2021 145,552 $ 145 $ 1,580,891 $ ( 1,420,976 ) $ 5 $ ( 7,518 ) $ 152,547

Stock-based compensation — — 4,258 — — — 4,258

Issuance of common stock under Equity Incentive Plans 187 — — — — — —

Repurchase of common stock — — — — — ( 103 ) ( 103 )

Net loss — — — ( 69,071 ) — — ( 69,071 )

Unrealized loss on investments — — — — ( 548 ) — ( 548 )

Balance at June 30, 2020 107,898 108 1,470,862 ( 1,477,126 ) 312 ( 4,843 ) ( 10,687 )

Stock-based compensation — — 1,904 — — — 1,904

Issuance of common stock, net of fees 9,333 9 14,087 — — — 14,096

Net income — — — 82,603 — — 82,603

Unrealized loss on investments — — — — ( 277 ) — ( 277 )

Balance at September 30, 2020 117,231 $ 117 $ 1,486,853 $ ( 1,394,523 ) $ 35 $ ( 4,843 ) $ 87,639

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

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(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income (loss) $ ( 53,079 ) $ 181,271

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Net loss $ ( 20,958 ) $ ( 66,611 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 37 906

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Amortization of debt issuance costs 14 362

Deferred tax benefit — ( 6,014 )

Gain on sale of XERMELO assets ( 132,818 ) —

Impairment loss on buildings 1,600 —

Impairment loss on intangible asset — 28,638

Loss on debt extinguishments, net 255 —

Changes in operating assets and liabilities:

(Increase) decrease in accounts receivable 52,201 ( 50,917 )

Decrease in accounts receivable 294 26,397

Decrease in inventory — 96

Increase in prepaid expenses and other current assets ( 6,008 ) ( 3,305 )

Decrease in other assets 314 330

(Increase) decrease in prepaid expenses and other current assets 1,095 ( 2,875 )

(Increase) decrease in other assets ( 74 ) 102

Increase (decrease) in accounts payable and other liabilities ( 8,418 ) 15,137

Decrease in deferred revenue — ( 25,929 )

Net cash (used in) provided by operating activities ( 108,730 ) 138,178

Net cash used in operating activities ( 25,159 ) ( 22,054 )

Cash flows from investing activities:

Purchases of property and equipment ( 38 ) —

Proceeds from XERMELO sale 160,385 —

Purchases of investments ( 21,686 ) ( 33,222 )

Maturities of investments 4,000 76,000

Net cash provided by (used in) investing activities 336,655 ( 46,457 )

Net cash (used in) provided by investing activities ( 17,724 ) 42,778

Cash flows from financing activities:

Proceeds from issuance of common stock, net of fees 16,947 —

Repurchase of common stock ( 2,675 ) ( 923 )

Repayment of debt borrowings — ( 321 )

Net cash used in financing activities ( 211,786 ) ( 1,904 )

Net increase in cash and cash equivalents 16,139 89,817

Net cash provided by (used in) financing activities 14,272 ( 1,244 )

Net increase (decrease) in cash and cash equivalents ( 28,611 ) 19,480

Cash and cash equivalents at beginning of period 126,263 36,112

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Cash paid for interest $ — $ 3,658

Supplemental disclosure of non-cash investing and financing activities:

Liabilities assumed by TerSera from the XERMELO sale 3,180 —

Common stock issued in satisfaction of convertible debt exchanges 14,096 —

Supplemental disclosure of non-cash activities:

Right-of-use asset $ 1,700 $ —

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

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In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the nine-month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020.

Operating results for the three-month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021.

The accompanying condensed consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries.

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Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.

As of September 30, 2020, short-term investments consisted of U.S.

As of March 31, 2021, short-term investments consisted of U.S.

treasury bills and corporate debt securities.

As of December 31, 2019, short-term investments consisted of U.S.

treasury bills.

As of December 31, 2020, short-term investments consisted of corporate debt securities.

The Company’s short-term investments are classified as available-for-sale securities and are carried at fair value, based on quoted market prices of the securities.

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The cost of securities sold is based on the specific identification method.

Accounts Receivable:

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 condensed 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 3, Asset Sale, for additional information relating to inventory.

Intangible Assets :

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

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 U.S.

Food and Drug Administration (the “FDA”).

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

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

During the three and nine months ended September 30, 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 Xermelo sale.

Accrued liabilities:

Accrued liabilities consisted of the following:

As of September 30, As of December 31,

As of March 31, As of December 31,

(in thousands)

4 unchanged sentences

Accrued liabilities $ 22,409 $ 29,691

Lexicon determines if a contract is or contains a lease at inception or upon modification of the contract.

A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration.

Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.

Lexicon does not apply this accounting to those leases with terms of twelve (12) months or less.

Operating lease right-of-use assets and associated lease liabilities are recorded in the balance sheet at the lease commencement date based on the present value of future minimum lease payments to be made over the expected lease term.

As the implicit rate is not determinable in its leases, Lexicon uses its incremental borrowing rate of 9 % at the commencement date in determining the present value of future payments.

Revenue Recognition:

Product Revenues

Product revenues consisted of commercial sales of XERMELO in the United States and sales of bulk tablets of XERMELO to Ipsen Pharma SAS (“Ipsen”).

Prior to the Company’s sale of XERMELO 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 Pharma SAS (“Ipsen”).

Product revenues were recognized when the customer obtained control of XERMELO, which occurred upon delivery to the customer.

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In agreements in which a license to the Company’s intellectual property is determined distinct from other performance obligations identified in the agreement, the Company recognizes revenue when the license is transferred to the licensee and the licensee is able to use and benefit from the license.

sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

For agreements that include sales-based royalties, including milestones based on a level of sales, the license is deemed to be the predominant item to which the royalties relate and the Company recognizes revenue at the later of (i) when the related sales occur or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

The Company may receive payments from its licensees based on billing schedules established in each contract.

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

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

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

For the three and nine months ended September 30, 2020, cost of sales in the accompanying condensed consolidated statement of income (loss) includes amortization expense of $ 0.3 million and $ 1.2 million, respectively, and for the three and nine months ended September 30, 2019, includes $ 0.4 million and $ 1.3 million, respectively.

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, including the costs to close out those studies, are based on actual costs incurred for activities completed subsequent to the transition date and estimates of the services to be received and efforts to be expended pursuant to contracts with multiple vendors and the contract research organization that has conducted and managed and is now closing out 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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Expected volatility is based on the historical volatility in the Company’s stock price.

The Company utilized the Black-Scholes valuation model for estimating the fair value of the stock option compensation granted, with the following weighted-average assumptions for stock options granted in the nine months ended September 30, 2020 and 2019:

Expected Volatility Risk-free Interest Rate Expected Term Dividend

September 30, 2020:

March 31, 2021:

Employees 105 % 0.4 % 4 — %

Officers and non-employee directors 90 % 1.0 % 7 — %

September 30, 2019:

March 31, 2020:

Employees 89 % 1.3 % 4 — %

Officers and non-employee directors 77 % 1.4 % 8 — %

The following is a summary of stock option activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, 2020:

The following is a summary of stock option activity under Lexicon’s stock-based compensation plans for the three months ended March 31, 2021:

Options Weighted Average Exercise Price

2 unchanged sentences

Granted 957 8.37

Exercised ( 109 ) 5.03

Expired ( 178 ) 12.55

Forfeited ( 31 ) 10.12

Outstanding at September 30, 2020 8,995 7.35

Exercisable at September 30, 2020 5,108 $ 9.63

(1) In connection with the reduction in force in September 2020, unvested stock options were forfeited or cancelled.

During the nine months ended September 30, 2020, Lexicon also granted its employees annual restricted stock units.

Outstanding employee restricted stock units vest in three to four annual installments.

The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the nine months ended September 30, 2020:

Outstanding at March 31, 2021 9,036 7.16

Exercisable at March 31, 2021 5,183 $ 8.63

During the three months ended March 31, 2021, Lexicon also granted its employees annual restricted stock units.

Outstanding employee restricted stock units vest in three annual installments.

The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the three months ended March 31, 2021:

Shares Weighted Average Grant Date

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Forfeited ( 33 ) 4.67

Outstanding at September 30, 2020 2,863 $ 4.35

(1) In connection with the reduction in force in September 2020, unvested restricted stock units were forfeited or cancelled.

Outstanding at March 31, 2021 2,213 $ 5.02

Net Loss per Common Share:

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Recent Accounting Pronouncements

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

2018-18, Collaborative Arrangements (Topic 808):

Clarifying the Interaction between Topic 808 and Topic 606.

This targeted amendment to Topic 808 clarifies that certain transactions resulting from a collaborative agreement should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer for a good or service that is a distinct unit-of-account.

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 requirement, and adoption of this ASU did not have a material impact on the condensed consolidated financial statements.

In January 2017, the FASB issued ASU No.

2017-04, Intangibles-Goodwill and Other, which is intended to simplify the subsequent measurement of goodwill.

The pronouncement allows an entity, during its annual or interim goodwill impairment evaluation, to compare the fair value of a reporting unit with its carrying amount.

An impairment charge is immediately recognized by which the carrying amount exceeds the fair value.

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

The adoption of this ASU did not have a material impact on the condensed 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 upfront consideration paid by TerSera, subject to a working capital adjustment as set forth in the Asset Purchase and Sale Agreement, was $ 160.4 million and the net gain recognized in connection with the XERMELO sale was $ 132.8 million.

The gain is reflected on the condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

The Company remains eligible to receive development, regulatory and sales milestone payments of up to an aggregate of $ 65 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.

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 three and nine months ended September 30, 2020, the pretax net loss on the condensed consolidated statement of comprehensive income (loss) for the Company’s XERMELO operations is $ 2.1 million and $ 12.1 million, respectively, and for the three and nine months ended September 30, 2019, the pretax net loss for the Company’s XERMELO operations is $ 4.1 million and $ 10.8 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 currently expects severance charges to approximate $ 5.7 million, of which $ 5.5 million was incurred through September 30, 2020.

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 condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

In December 2019, the FASB issued Accounting Standards Update (“ASU”) No.

2019-12, Income Taxes (Topic 740) Simplifying Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards.

The guidance amended certain disclosure requirements that had become redundant, outdated or superseded.

Additionally, this guidance amends accounting for the interim period effects of changes in tax laws or rates, and simplifies aspects of the accounting for franchise taxes.

The guidance is effective for annual periods beginning after December 15, 2020, including interim periods therein.

The adoption of ASU 2019-12 in the first quarter of 2021 did not have a material impact on the Company’s condensed consolidated financial statements.

Cash and Cash Equivalents and Investments

The fair value of cash and cash equivalents and investments held at September 30, 2020 and December 31, 2019 are as follows:

As of September 30, 2020

The fair value of cash and cash equivalents and investments held at March 31, 2021 and December 31, 2020 are as follows:

As of March 31, 2021

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value

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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

1 unchanged sentence

$ 152,281 $ 5 $ ( 11 ) $ 152,275

There were no realized losses during either of the nine months ended September 30, 2020 and 2019, respectively.

There were no realized losses during either of the three months ended March 31, 2021 and 2020, respectively.

The cost of securities sold is based on the specific identification method.

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The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated with investing in those securities.

The following table provides the fair value measurements of applicable Company assets that are measured at fair value on a recurring basis according to the fair value levels defined above as of September 30, 2020 and December 31, 2019.

Assets and Liabilities at Fair Value as of September 30, 2020

Assets and Liabilities at Fair Value as of March 31, 2021

Level 1 Level 2 Level 3 Total

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Total cash and cash equivalents and investments $ 126,263 $ 26,012 $ — $ 152,275

The Company did not have any Level 3 assets or liabilities as of September 30, 2020 or December 31, 2019.

The Company did not have any Level 3 assets or liabilities as of March 31, 2021 or December 31, 2020.

Transfers between levels are recognized at the actual date of the circumstance that caused the transfer.

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, Inc.

in 2010, and intangible assets associated with the acquisition of Symphony Icon, Inc.

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 5, Debt Obligations, for fair value measurements of debt obligations.

Refer to Note 9, Impairment Loss on Buildings, for fair value measurement of fixed assets.

Debt Obligations

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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 condensed consolidated balance sheets.

In September 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 principle amount of the Convertible Notes.

In September 2020, the Company issued 9,332,471 shares of the Company’s common stock and paid $ 44.0 million in cash, which included $ 1.1 million of accrued interest, to exchange $ 67.1 million aggregate principal amount of 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 $ 8.4 million was recorded and is included in the accompanying condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 2020.

As of September 30, 2020, the carrying value of the remaining Convertible Notes was $ 20.0 million.

In October 2020, the Company issued 1,036,484 shares of the Company’s common stock and paid $ 6.0 million in cash, which included $ 0.2 million of accrued interest, to exchange an additional $ 8.8 million aggregate principal amount of such Convertible Notes.

As of September 30, 2020, these notes are included in the current portion of long-term debt, net of deferred issuance costs in the accompanying condensed consolidated balance sheet.

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 principle amount of the Convertible Notes.

As of March 31, 2021, the carrying value of the remaining Convertible Notes was $ 11.7 million and are included in the current portion of long-term debt, net of deferred issuance costs in the accompanying condensed consolidated balance sheet.

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.

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If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

In connection with the issuance of the Convertible Notes, the Company incurred $ 3.4 million of debt issuance costs.

The debt issuance costs are amortized as interest expense over the expected life of the Convertible Notes using the effective interest method.

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

As of September 30, 2020, the balance of unamortized debt issuance costs was $ 0.13 million, which was adjusted in September 2020 upon execution of the exchange agreements and offsets long-term debt on the condensed consolidated balance sheets.

The fair value of the remaining Convertible Notes was $ 15.4 million as of September 30, 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.

In August 2018, a wholly owned subsidiary of Lexicon entered into a term loan and security agreement, refinancing the previously existing mortgage on its facilities in The Woodlands, Texas (the “Property”).

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.

At December 31, 2019, the condensed consolidated balance sheet includes mortgage debt, the carrying value of the debt, of $ 11.0 million and is included in current portion of long-term debt.

The fair value of the loan agreement approximated its carrying value.

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

BioPharma Term Loan.

In December 2017, Lexicon entered into a loan agreement with BioPharma under which $ 150.0 million was funded in December 2017 (the “BioPharma Term Loan”).

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 condensed consolidated statement of comprehensive income (loss) for the three and nine months ended September 30, 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 the 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 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.

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

At December 31, 2019, the fair value of the BioPharma Term Loan approximated 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 fair value of the remaining Convertible Notes was $ 12.6 million as of March 31, 2021 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.

Commitments and Contingencies

Operating Lease Obligations :

Lexicon’s operating leases include office space in The Woodlands, Texas and Basking Ridge, New Jersey that will expire in August 2025 and December 2022, respectively.

Under its lease agreements, Lexicon is obligated to pay property taxes, insurance, and maintenance costs.

As of March 31, 2021, the right-of-use assets for the office space leases had a balance of $ 2.9 million, which is included in other assets in the condensed consolidated balance sheet, and current and non-current liabilities relating to the assets were $ 1.0 million and $ 1.7 million, respectively, which are included in accrued liabilities and other long-term liabilities in the condensed consolidated balance sheet, respectively.

The following table reconciles the undiscounted cash flows of the operating lease liability to the recorded lease liability at March 31, 2021:

(in thousands)

Total undiscounted operating lease liability 3,248

amount of lease payments representing interest ( 505 )

Present value of future lease payments 2,743

short-term operating lease liability ( 1,026 )

Long-term operating lease liability $ 1,717

Legal Proceedings.

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

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

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.

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.

The complaint alleges that the defendants violated federal securities laws by making materially false and misleading statements and/or omissions concerning data from its Phase 3 clinical trials of sotagliflozin in type 1 diabetes patients and the prospects of FDA approval of sotagliflozin for the treatment of type 1 diabetes.

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

We 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 our securities during the period from March 11, 2016 through July 29, 2019.

The complaint alleges that the defendants violated federal securities laws by making materially false and misleading statements and/or omissions concerning data from our Phase 3 clinical trials of sotagliflozin in type 1 diabetes patients and the prospects of FDA approval of sotagliflozin for the treatment of type 1 diabetes.

The complaint purports to assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

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Sanofi Arbitration.

On October 16, 2020, the Company initiated arbitration proceedings against Sanofi-Aventis Deutschland GmbH (“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 (the “Termination Agreement”).

Agreement and Mutual Releases with Sanofi, dated September 9, 2019 (the “Termination Agreement”).

In September 2020, Sanofi withheld approximately $ 23.2 million from the final $ 26 million payment due to the Company under the Termination 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 Agreement.

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The Company 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 declaratory judgment that the Company is liable for all disputed costs previously withheld and damages for any additional costs properly reimburseable under the terms of the Termination 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 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 was 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 and a $ 6.4 million milestone payment 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 the 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 payments:

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

• The development services Lexicon was performing for XERMELO;

• The obligation to participate in committees which governed 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 was an exclusive license that gave 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 Ipsen 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 the services, which was completed in 2018.

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

There was inherent uncertainty in obtaining regulatory approval at the time of 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 in 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 in upfront payments 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 performance obligation over the period of performance as development occurred, and recognized the $ 0.1 million allocated to the committee participation performance obligation 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 would re-evaluate the overall transaction price and recognize an adjustment on a cumulative catch-up basis in the period that the adjustment was evaluated.

Revenue recognized under the Ipsen Agreement was $ 0.3 million and $ 3.5 million for the nine months ended September 30, 2020 and 2019, respectively.

Royalty revenue of $ 0.3 million was recognized for each of the nine months ended September 30, 2020 and 2019, respectively.

Prior to the XERMELO sale, Lexicon had earned certain milestone payments and royalties from Ipsen.

Revenue, including royalty revenue, recognized under the Ipsen Agreement was $ 0.1 million for the three months ended March 31, 2020.

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 of Lexicon’s diabetes drug candidate sotagliflozin.

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See Note 6, Commitments and Contingencies, for additional information.

In March 2020, Lexicon announced its plan to close out the clinical studies related to the Phase 3 development program for sotagliflozin in type 2 diabetes, heart failure and chronic kidney disease.

Revenue relating to the Termination Agreement was recognized in the third quarter of 2019.

Revenue recognized under the Sanofi Agreement was $ 286.0 million for the nine months ended September 30, 2019.

Impairment Loss on Buildings

In October 2020, Lex-Gen Woodlands, L.P.

entered into a real estate purchase and sale agreement under which the Company agreed to sell its facilities in The Woodlands, Texas for a purchase price of $ 11.9 million.

The sale agreement is subject to normal and customary closing conditions, including a study period, which extends until November 20, 2020, during which the purchaser may conduct inspections, analyses and other studies of the property and may terminate the agreement at its discretion.

The property did not meet the criteria for classification as held for sale at September 30, 2020.

Due to the negotiations to sell the property in 2020, the Company evaluated for impairment and recognized an impairment charge of $ 1.6 million in the second quarter of 2020 in order to reduce the carrying value of the property to its estimated fair value, less estimated selling costs.

Earnings (Loss) Per Share

The following is a summary of Lexicon’s earnings (loss) per share calculations and reconciliations of basic to diluted earnings (loss) per share.

(in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

Net income (loss) $ 82,603 $ 226,086 $ ( 53,079 ) $ 181,271

Add interest on Convertible Notes 1,258 1,277 — 3,790

Adjusted net income (loss) $ 83,861 $ 227,363 $ ( 53,079 ) $ 185,061

Shares used in computing net income (loss) per common share, basic 107,309 106,272 106,974 106,200

Add effect of potential dilutive securities:

Share based compensation awards 51 3 — 177

Convertible Notes 10,192 10,365 — 10,365

Shares used in computing net income (loss) per common share, diluted 117,552 116,640 106,974 116,742

Net income (loss) per share - basic $ 0.77 $ 2.13 $ ( 0.50 ) $ 1.71

Net income (loss) per share - diluted $ 0.71 $ 1.95 $ ( 0.50 ) $ 1.59

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.

The average number of shares associated with stock options and restricted stock units that were excluded from diluted earnings per share that would potentially dilute earnings per share in the future was 11,773 and 10,576 , respectively, for the three months ended September 30, 2020 and 2019, and 11,859 and 8,452 , respectively, for the nine months ended September 30, 2020 and 2019.

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.

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.

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

Other Capital Agreements

Common Stock :

In 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 $ 50.0 million from time to time through Jefferies acting as its sales agent.

In 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.

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.

The net proceeds are reflected as issuance of common stock in the accompanying condensed consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements