LEXICON PHARMACEUTICALS, INC. 10-Q

Item 1. Financial Statements Lexicon Pharmaceuticals, Inc. Condensed Consolidated Balance Sheets (In thousands, except par value) As of June 30, As of December 31, 2021 2020 Assets (unaudited) Current assets: Cash and cash equivalents $ 89,887 $ 126,263 Short-term investments 28,614 26,012 Accounts receivable 159 395 Prepaid expenses and other current assets 4,598 5,049 Total current assets 123,258 157,719 Property and equipment, net of accumulated depreciation and amortization of $ 4,746 and $ 5,815 , respectively 1,201 295 Goodwill 44,543 44,543 Other assets 2,670 1,231 Total assets $ 171,672 $ 203,788 Liabilities and Equity Current liabilities: Accounts payable $ 8,545 $ 5,469 Accrued liabilities 12,595 29,691 Current portion of long-term debt, net of deferred issuance costs 11,675 11,646 Total current liabilities 32,815 46,806 Other long-term liabilities 1,624 611 Total liabilities 34,439 47,417 Commitments and contingencies Stockholders’ Equity: Preferred stock, $ 0.01 par value; 5,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.001 par value; 225,000 shares authorized; 145,640 and 142,289 shares issued, respectively 146 142 Additional paid-in capital 1,583,653 1,561,096 Accumulated deficit ( 1,439,043 ) ( 1,400,018 ) Accumulated other comprehensive loss ( 5 ) ( 6 ) Treasury stock, at cost, 1,165 and 793 shares, respectively ( 7,518 ) ( 4,843 ) Total stockholders’ equity 137,233 156,371 Total liabilities and equity $ 171,672 $ 203,788 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Lexicon Pharmaceuticals, Inc. Condensed Consolidated Statements of Comprehensive Loss (In thousands, except per share amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenues: Net product revenue $ — $ 8,985 $ — $ 16,862 Collaborative agreements — 25 — 33 Royalties and other revenue 234 153 261 267 Total revenues 234 9,163 261 17,162 Operating expenses: Cost of sales (including finite-lived intangible asset amortization) — 728 — 1,296 Research and development, including stock-based compensation of $ 1,184 , $ 1,949 , $ 2,470 and $ 4,125 , respectively 10,257 57,301 22,866 112,482 Selling, general and administrative, including stock-based compensation of $ 1,602 , $ 2,309 , $ 3,167 and $ 4,565 , respectively 7,936 14,113 16,193 28,801 Impairment loss on buildings — 1,600 — 1,600 Total operating expenses 18,193 73,742 39,059 144,179 Loss from operations ( 17,959 ) ( 64,579 ) ( 38,798 ) ( 127,017 ) Interest expense ( 169 ) ( 5,125 ) ( 336 ) ( 10,256 ) Interest and other income, net 61 633 109 1,591 Net loss $ ( 18,067 ) $ ( 69,071 ) $ ( 39,025 ) $ ( 135,682 ) Net loss per common share, basic and diluted $ ( 0.13 ) $ ( 0.65 ) $ ( 0.27 ) $ ( 1.27 ) Shares used in computing net loss per common share, basic and diluted 144,451 107,073 143,917 106,804 Other comprehensive loss: Unrealized gain (loss) on investments ( 10 ) ( 548 ) 1 228 Comprehensive loss $ ( 18,077 ) $ ( 69,619 ) $ ( 39,024 ) $ ( 135,454 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Lexicon Pharmaceuticals, Inc. Condensed Consolidated Statements of Stockholders’ Equity (In thousands) (Unaudited) Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Gain (Loss) Treasury Stock Shares Par Value Total Balance at December 31, 2019 106,679 $ 106 $ 1,462,172 $ ( 1,341,444 ) $ 84 $ ( 3,817 ) $ 117,101 Stock-based compensation — — 4,432 — — — 4,432 Issuance of common stock under Equity Incentive Plans 1,032 2 — — — — 2 Repurchase of common stock — — — — — ( 923 ) ( 923 ) Net loss — — — ( 66,611 ) — — ( 66,611 ) Unrealized gain on investments — — — — 776 — 776 Balance at March 31, 2020 107,711 108 1,466,604 ( 1,408,055 ) 860 ( 4,740 ) 54,777 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 ) Balance at December 31, 2020 142,289 $ 142 $ 1,561,096 $ ( 1,400,018 ) $ ( 6 ) $ ( 4,843 ) $ 156,371 Stock-based compensation — — 2,851 — — — 2,851 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 ) Net loss — — — ( 20,958 ) — — ( 20,958 ) Unrealized gain on investments — — — — 11 — 11 Balance at March 31, 2021 145,552 $ 145 $ 1,580,891 $ ( 1,420,976 ) $ 5 $ ( 7,518 ) $ 152,547 Stock-based compensation — — 2,786 — — — 2,786 Issuance of common stock under Equity Incentive Plans 88 1 7 — — — 8 Issuance fees related to Open Market Sale Agreement — — ( 31 ) — — — ( 31 ) Net loss — — — ( 18,067 ) — — ( 18,067 ) Unrealized loss on investments — — — — ( 10 ) — ( 10 ) Balance at June 30, 2021 145,640 146 1,583,653 ( 1,439,043 ) ( 5 ) ( 7,518 ) 137,233 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Lexicon Pharmaceuticals, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended June 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 39,025 ) $ ( 135,682 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 79 1,806 Stock-based compensation 5,637 8,690 Amortization of debt issuance costs 29 726 Impairment loss on buildings — 1,600 Changes in operating assets and liabilities: Decrease in accounts receivable 236 25,656 Decrease in inventory — 254 Decrease (increase) in prepaid expenses and other current assets 451 ( 4,141 ) Decrease in other assets 261 207 (Decrease) increase in accounts payable and other liabilities ( 14,707 ) 32,532 Net cash used in operating activities ( 47,039 ) ( 68,352 ) Cash flows from investing activities: Purchases of property and equipment ( 985 ) — Purchases of investments ( 24,373 ) ( 37,148 ) Maturities of investments 21,772 158,000 Net cash (used in) provided by investing activities ( 3,586 ) 120,852 Cash flows from financing activities: Proceeds from issuance of common stock, net of fees 16,924 — Repurchase of common stock ( 2,675 ) ( 1,026 ) Repayment of debt borrowings — ( 643 ) Net cash provided by (used in) financing activities 14,249 ( 1,669 ) Net (decrease) increase in cash and cash equivalents ( 36,376 ) 50,831 Cash and cash equivalents at beginning of period 126,263 36,112 Cash and cash equivalents at end of period $ 89,887 $ 86,943 Supplemental disclosure of cash flow information: Cash paid for interest $ 307 $ 9,569 Supplemental disclosure of non-cash activities: Right-of-use asset $ 1,704 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Lexicon Pharmaceuticals, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies Basis of Presentation: The accompanying unaudited condensed consolidated financial statements of Lexicon Pharmaceuticals, Inc. (“Lexicon” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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 six-month period ended June 30, 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. Intercompany transactions and balances are eliminated in consolidation. For further information, refer to the financial statements and footnotes thereto included in Lexicon’s annual report on Form 10-K for the year ended December 31, 2020, as filed with the SEC. Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments: Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of June 30, 2021, short-term investments consisted of U.S. treasury bills and corporate debt securities. 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. The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security. Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity. Net realized gains and losses, interest and dividends are included in interest income. The cost of securities sold is based on the specific identification method. Accrued liabilities: Accrued liabilities consisted of the following: As of June 30, As of December 31, 2021 2020 (in thousands) Accrued research and development services $ 6,869 $ 21,962 Accrued compensation and benefits 3,544 6,200 Short term lease liability 1,027 553 Other 1,155 976 Total accrued liabilities $ 12,595 $ 29,691 Leases: 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. 7 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 Prior to the Company’s sale of XERMELO and related assets to TerSera Therapeutics LLC (“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. 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 U.S. 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. The Company’s net product revenues reflected the Company’s best estimates of the amounts of consideration to which it was entitled based on the terms of the respective underlying contracts. Product shipping and handling costs were considered a fulfillment activity when control transferred to the Company’s customers and such costs were included in cost of sales. Collaborative Agreements Revenues under collaborative agreements include both license revenue and contract research revenue. The Company performs the following five steps in determining the amount of revenue to recognize as it fulfills its performance obligations under each of its agreements: (i) identify the contract(s) with a customer; (ii) identify the performance obligation in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. The Company applies this five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract, determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company develops assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. At contract inception, the Company evaluates whether development milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal will not occur, the associated development milestone value is included in the transaction price. Development milestones that are not within the control of the Company or the licensee, including those requiring regulatory approval, are not considered probable of being achieved until those milestones are achieved. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue when (or as) the performance obligation is satisfied. At the end of each reporting period, the Company re-evaluates the probability of achievement of the development milestones and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues in the period of adjustment. 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. 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). 8 The Company may receive payments from its licensees based on billing schedules established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under the relevant agreement. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. Cost of Sales: 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: Research and development expenses consist of costs incurred for company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred. Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. 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 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. The Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives. Stock-Based Compensation: The Company recognizes compensation expense in its condensed consolidated statements of comprehensive loss for share-based payments, including stock options and restricted stock units granted to employees, based on their fair values on the date of the grant, with the compensation expense recognized over the period in which an employee is required to provide service in exchange for the stock award. Stock-based compensation expense for awards without performance conditions is recognized on a straight-line basis. Stock-based compensation expense for awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. The fair value of stock options is estimated at the date of grant using the Black-Scholes method. The Black-Scholes option-pricing model requires the input of subjective assumptions. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of determining the fair value of stock options, the Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in a change in the assumptions used for expected option lives. Historical data is used to estimate the expected option life for each group. Expected volatility is based on the historical volatility in the Company’s stock price. 9 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 six months ended June 30, 2021 and 2020: Expected Volatility Risk-free Interest Rate Expected Term Dividend Rate June 30, 2021: Employees 101 % 0.6 % 4 — % Officers and non-employee directors 90 % 1.1 % 7 — % June 30, 2020: Employees 90 % 1.3 % 4 — % Officers and non-employee directors 78 % 1.4 % 8 — % The following is a summary of stock option activity under Lexicon’s stock-based compensation plans for the six months ended June 30, 2021: Options Weighted Average Exercise Price (in thousands) Outstanding at December 31, 2020 8,397 $ 7.12 Granted 1,109 7.87 Exercised ( 111 ) 5.01 Expired ( 191 ) 12.50 Forfeited ( 56 ) 8.52 Outstanding at June 30, 2021 9,148 7.12 Exercisable at June 30, 2021 5,527 $ 8.36 During the six months ended June 30, 2021, Lexicon also granted its employees and non-employee directors annual restricted stock units. Outstanding employee restricted stock units vest in three annual installments. Outstanding non-employee director restricted stock units vest fully on the first anniversary of the grant. The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the six months ended June 30, 2021: Shares Weighted Average Grant Date Fair Value (in thousands) Outstanding at December 31, 2020 2,769 $ 4.35 Granted 663 8.22 Vested ( 1,239 ) 5.04 Forfeited ( 134 ) 5.16 Outstanding at June 30, 2021 2,059 $ 5.13 Net Loss per Common Share: Net loss per common share is computed using the weighted average number of shares of common stock outstanding. Shares associated with convertible debt, stock options and restricted stock units are not included because they are antidilutive. 10 2. Recent Accounting Pronouncements 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. 3. Cash and Cash Equivalents and Investments The fair value of cash and cash equivalents and investments held at June 30, 2021 and December 31, 2020 are as follows: As of June 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Cash and cash equivalents $ 89,887 $ — $ — $ 89,887 Securities maturing within one year: U.S. treasury securities 15,182 1 — 15,183 Corporate debt securities 13,437 5 ( 11 ) 13,431 Total short-term investments $ 28,619 $ 6 $ ( 11 ) $ 28,614 Total cash and cash equivalents and investments $ 118,506 $ 6 $ ( 11 ) $ 118,501 As of December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Cash and cash equivalents $ 126,263 $ — $ — $ 126,263 Securities maturing within one year: Corporate debt securities 26,018 5 ( 11 ) 26,012 Total short-term investments $ 26,018 $ 5 $ ( 11 ) $ 26,012 Total cash and cash equivalents and investments $ 152,281 $ 5 $ ( 11 ) $ 152,275 There were no realized losses during either of the six months ended June 30, 2021 and 2020, respectively. The cost of securities sold is based on the specific identification method. 4. Fair Value Measurements The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. The following levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities: • Level 1 - quoted prices in active markets for identical investments, which include U.S. treasury securities • Level 2 - other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.), which includes corporate debt securities • Level 3 - significant unobservable inputs 11 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 June 30, 2021 and December 31, 2020. Assets and Liabilities at Fair Value as of June 30, 2021 Level 1 Level 2 Level 3 Total (in thousands) Assets Cash and cash equivalents $ 89,887 $ — $ — $ 89,887 Short-term investments 15,183 13,431 — 28,614 Total cash and cash equivalents and investments $ 105,070 $ 13,431 $ — $ 118,501 Assets and Liabilities at Fair Value as of December 31, 2020 Level 1 Level 2 Level 3 Total (in thousands) Assets Cash and cash equivalents $ 126,263 $ — $ — $ 126,263 Short-term investments — 26,012 — 26,012 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 June 30, 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. Refer to Note 6, Debt Obligations, for fair value measurements of debt obligations. 5. Property and Equipment Property and equipment was comprised of the following: Estimated Useful Lives As of In Years June 30, 2021 December 31, 2020 (in thousands) Computers and software 3 - 5 $ 3,176 $ 3,826 Furniture and fixtures 5 - 7 1,719 1,867 Leasehold improvements 3 - 7 1,052 417 Total property and equipment 5,947 6,110 Less: Accumulated depreciation and amortization ( 4,746 ) ( 5,815 ) Net property and equipment $ 1,201 $ 295 During the three months ended June 30, 2021, the Company retired $ 1.1 million of computers and software and furniture and fixtures, which had been fully depreciated, and purchased $ 1.0 million of assets comprised of leasehold improvements, computers and software and furniture. The leasehold improvements are being amortized over the lease term. In 2020, the Company recorded an impairment loss of $ 1.6 million to reduce the carrying value of the assets comprising its campus in The Woodlands, Texas, which were sold in December 2020, to its estimated fair value, less estimated selling costs. Concurrent with the sale, the Company entered into a leaseback agreement with the purchaser with respect to a portion of the facilities for a period of up to six months and in June 2021, the Company relocated its corporate offices to another facility. 12 6. Debt Obligations Convertible Debt. In November 2014, Lexicon completed an offering of $ 87.5 million in aggregate principal amount of its 5.25 % Convertible Senior Notes due 2021 (the “Convertible Notes”). 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 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. As of June 30, 2021, the carrying value of the remaining Convertible Notes was $ 11.7 million and is 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. 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. The Convertible Notes mature on December 1, 2021. The Company may not redeem the Convertible Notes prior to the maturity date, and no sinking fund is provided for the Convertible Notes. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, the Company will deliver for each $1,000 principal amount of converted Convertible Notes a number of shares of its common stock equal to the conversion rate, as described in the Indenture. The conversion rate is initially 118.4553 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of $ 8.442 per share of common stock). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances. 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. The fair value of the remaining Convertible Notes was $ 12.1 million as of June 30, 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. 7. Commitments and Contingencies Operating Lease Obligations : Lexicon’s operating leases include office space in The Woodlands, Texas and Basking Ridge, New Jersey and 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 June 30, 2021, the right-of-use assets for the office space leases had a balance of $ 2.7 million, which is included in other assets in the condensed consolidated balance sheet. Current and non-current liabilities relating to the leases were $ 1.0 million and $ 1.6 million, respectively, which are included in accrued liabilities and other long-term liabilities in the condensed consolidated balance sheet, respectively. 13 The following table reconciles the undiscounted cash flows of the operating lease liability to the recorded lease liability at June 30, 2021: (in thousands) 2021 $ 486 2022 1,163 2023 531 2024 544 2025 370 Thereafter — Total undiscounted operating lease liability 3,094 Less: amount of lease payments representing interest ( 444 ) Present value of future lease payments 2,650 Less: short-term operating lease liability ( 1,027 ) Long-term operating lease liability $ 1,623 Legal Proceedings. On January 28, 2019, a purported securities class action complaint captioned Daniel Manopla v. Lexicon Pharmaceuticals, Inc., Lonnel Coats, Jeffrey L. Wade and Pablo Lapuerta, M.D. was filed against the Company and certain of its officers in the U.S. 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. 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. Oral arguments were held on June 9, 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. The complaint alleges that the defendants violated federal securities laws by making materially false and misleading statements and/or omissions concerning data from the Company’s 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. 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. 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”). 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. The Company disputes that at least a significant portion of such costs are properly reimbursable by the Company under the terms of the Termination Agreement and asserts that, in any event, Sanofi was not permitted to withhold any of such costs under the terms of the Termination Agreement. 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. 14 8. Collaboration and License Agreements 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. Ipsen. 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. 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 $ 0.2 million for the six months ended June 30, 2020. Sanofi. 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 drug candidate sotagliflozin. In December 2016, Sanofi terminated its rights under the Sanofi Agreement with respect to Japan. Effective as of September 9, 2019 (the “Settlement Date”), Lexicon entered into the Termination Agreement with Sanofi, pursuant to which the Sanofi Agreement was terminated and certain associated disputes between Lexicon and Sanofi were settled. 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 and $ 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 owes any 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. See Note 7, 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. Subsequent to the Termination Agreement, Lexicon has no remaining performance obligations to Sanofi. 9. 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. 15