What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2022-03-10 compared with 2021-03-12 · 145 added, 273 removed, 757 unchanged (36% of the section changed)

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Based on such assessment using those criteria, management concluded that, as of December 31, 2021, 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.

Our independent registered public accounting firm, Ernst & Young LLP , Houston, Texas , PCAOB ID:

42 , 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.

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(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated March 12, 2021 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated March 10, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

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Other Information

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Directors, Executive Officers and Corporate Governance

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The information required by this Item is hereby incorporated by reference from the information appearing under the captions “Corporate Governance” and “Transactions with Related Persons” in our definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2021.

Principal Accounting Fees and Services

Principal Accountant Fees and Services

The information required by this Item as to the fees we pay our principal accountant is hereby incorporated by reference from the information appearing under the caption “Ratification and Approval of Independent Auditors” in our definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2021.

Exhibits and Financial Statement Schedules

Exhibit and Financial Statement Schedules

(a) Documents filed as a part of this report:

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

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All other financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.

3.1 — Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 26, 2012 and incorporated by reference herein).

3.2 — Certificate of Amendment to Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 20, 2015 and incorporated by reference herein).

3.1 — Second Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated April 29, 2021 and incorporated by reference herein).

3.2 — Second Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on Form 8‑K dated April 26, 2012 and incorporated by reference herein).

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(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.

(filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated November 26, 2014 and incorporated by reference herein).

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).

*4.8 — 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 — 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 — Employment Agreement with Jeffrey L.

(filed as Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (Registration No.

10.2 — Employment Agreement , dated January 1, 1999, with Jeffrey L.

Wade (filed as Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (Registration No.

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.

*10.3 — Offer Letter , dated July 27, 2021, with Craig B.

Granowitz, M.D., Ph.D.

10.4 — Employment Agreement , dated July 12, 2001, with Alan J.

(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).

10.5 — Form of Indemnification Agreement with Officers and Directors (filed as Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (Registration No.

333-96469) and incorporated by reference herein).

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).

10.6 — 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).

10.7 — 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).

10.8 — 2017 Non-Employee Directors’ Equity Incentive Plan, as amended , (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 2021 and incorporated by reference herein).

10.9 — 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).

10.12 — 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).

*10.10 — Form of Restricted Stock Unit Agreement with Officers under the 2017 Equity Incentive Plan

10.11 — 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).

10.12 — Form of Notice of Restricted Stock Unit Grant to Directors under the 2017 Non-Employee Directors’ Equity Incentive Plan (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 and incorporated by reference herein).

†10.15 — Collaboration and License Agreement, dated November 5, 2015, with Sanofi (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K/A for the period ended December 31, 2015 and incorporated by reference herein).

†10.16 — Amendment No.

1 , dated July 1, 2017, to Collaboration and License Agreement, dated November 5, 2015, with Sanofi (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017 and incorporated by reference herein).

§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).

10.13 — 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).

§10.23 — 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).

10.18 — 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).

*21.1 — Subsidiaries

*23.1 — Consent of Independent Registered Public Accounting Firm .

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

§ 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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/s/ LONNEL COATS

President and Chief Executive Officer

Chief Executive Officer

March 10, 2022 By:

/s/ JEFFREY L.

Executive Vice President, Corporate and Administrative Affairs and Chief Financial Officer

President and Chief Financial Officer

Power of Attorney

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Signature Title Date

/s/ LONNEL COATS President, Chief Executive Officer and Director

/s/ LONNEL COATS Chief Executive Officer and Director

(Principal Executive Officer) March 10, 2022

/s/ JEFFREY L.

WADE Executive Vice President, Corporate and Administrative Affairs and Chief Financial Officer (Principal Financial Officer) March 12, 2021

TESSMER Vice President, Finance and Accounting

WADE President and Chief Financial Officer (Principal Financial Officer) March 10, 2022

/s/ KRISTEN L.

ALEXANDER Vice President, Finance and Accounting

(Principal Accounting Officer) March 10, 2022

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We have audited the accompanying consolidated balance sheets of Lexicon Pharmaceuticals, Inc.

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with US generally accepted accounting principles.

(the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

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, 2021, 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 10, 2022 expressed an unqualified opinion thereon.

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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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

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

The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accrued research and development expenses

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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.

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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.

We inspected the terms and conditions of vendor contracts, change orders and trial budgets, and clerically tested the cost models to track progress against trial budgets.

Further, we inspected invoices received from third parties during the year as well as 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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Accounts receivable, net 14 395

Inventory — 4,243

Prepaid expenses and other current assets 2,164 5,049

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Goodwill 44,543 44,543

Intangible assets, net — 19,716

Other assets 2,269 1,231

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Accrued liabilities 12,972 29,691

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

Current portion of long-term debt, net of deferred issuance costs — 11,646

Total current liabilities 22,124 46,806

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

Other long-term liabilities 1,190 611

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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 )

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 )

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

Issuance of common stock under Equity Incentive Plans

517 — — — — — —

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

Net income — — — 130,133 — — 130,133

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

Stock-based compensation — — 10,577 — — — 10,577

Issuance of common stock under an Open Market Sale Agreement, net of issuance fees 6,177 6 35,485 — — — 35,491

Issuance of common stock under Equity Incentive Plans 1,616 2 1,591 — — — 1,593

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

Net loss — — — ( 87,758 ) — — ( 87,758 )

Unrealized loss on investments — — — — ( 4 ) — ( 4 )

Balance at December 31, 2021 150,082 $ 150 $ 1,608,749 $ ( 1,487,776 ) $ ( 10 ) $ ( 7,518 ) $ 113,595

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

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

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

(Gain) loss on disposal of property and equipment 49 ( 707 ) —

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivable 381 53,227 ( 50,608 )

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

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

Decrease in inventory — 345 437

Decrease (increase) in prepaid expenses and other current assets 2,885 ( 1,948 ) ( 2,652 )

Decrease in other assets 661 424 429

Increase (decrease) in accounts payable and other liabilities ( 20,969 ) 20,097 ( 19,913 )

(Decrease) increase in accounts payable and other liabilities ( 14,158 ) ( 20,969 ) 20,097

Decrease in deferred revenue — — ( 25,990 )

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Repurchase of common stock ( 2,675 ) ( 1,026 ) ( 941 )

Proceeds from debt borrowings, net of fees — — 12,529

Repayment of debt borrowings ( 11,700 ) ( 216,580 ) ( 1,285 )

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

Net cash provided by (used in) financing activities 22,709 ( 147,636 ) ( 2,226 )

Net (decrease) increase in cash and cash equivalents ( 62,198 ) 90,151 ( 44,274 )

Cash and cash equivalents at beginning of year 126,263 36,112 80,386

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Supplemental disclosure of noncash investing and financing activities:

Right-of-use asset $ 1,704 $ — $ 1,799

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

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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;

its success in establishing new collaborations and licenses and its receipt of milestones, royalties and other payments under such arrangements;

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;

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

and its ability to obtain and enforce patents and other proprietary rights in its discoveries, comply with federal and state regulations, and maintain sufficient capital to fund its activities.

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

As of December 31, 2020 and December 31, 2019, short-term investments consist of U.S.

As of December 31, 2021, short-term investments consist of U.S.

treasury bills and corporate debt securities.

As of December 31, 2020, short-term investments consist 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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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 2021, customers in Switzerland and the United States represented 76 % and 24 % 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 2018, customers in Germany and the United States represented 53 % and 40 % of revenue, respectively.

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

At December 31, 2021, management believes that the Company has no significant concentrations of credit risk.

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Lexicon operates in one business segment, which primarily focuses on the discovery, development and commercialization of pharmaceutical products for the treatment of human disease.

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.

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 2021, AC Bioscience Ltd.

represented 76 % of revenues and Taconic Farms, Inc.

represented 24 % of revenues, respectively.

In 2020, two specialty pharmacies, Biologics, Inc.

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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, 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.

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:

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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 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.

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.

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.

In 2020, the Company 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 2021 or 2019.

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When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of its intangible assets.

If management believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the intangible assets is less than its carrying amount, the Company calculates the asset’s fair value.

If management believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the intangible assets is less than the Company’s carrying amount, the Company calculates the asset’s fair value.

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

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.

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

The impairment reduced the remaining book value to zero.

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

There was no impairment of indefinite lived intangible assets in 2020 or 2021.

Goodwill Impairment:

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Product Revenues

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.

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.

Product revenues were recognized when the customer obtained control of the Company’s product, which occured 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.

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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 were based on third party market research data and data received from the specialty pharmacies.

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

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.

1 unchanged sentence

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

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.

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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 were based on data received from the specialty pharmacies and projections based on historical data.

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

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Co-payment assistance:

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

Patients with commercial insurance who met certain eligibility requirements were eligible to receive co-payment assistance.

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.

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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:

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 collaborative agreements:

(i) identify the contract(s) with a customer;

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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 and determines those that are performance obligations, and assesses whether each promised good or service is distinct.

At contract inception, the Company assesses the goods or services promised within each contract and 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.

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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 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’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 contract research organization 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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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.

As of December 31, 2020, stock-based compensation cost for all outstanding unvested options and restricted stock units was $ 15.7 million, which is expected to be recognized over a weighted-average period of 1.1 years.

As of December 31, 2021, stock-based compensation cost for all outstanding unvested stock options and restricted stock units was $ 15.9 million, which is expected to be recognized over a weighted-average period of 1.2 years.

The fair value of stock options is estimated at the date of grant using the Black-Scholes method.

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Expected volatility is based on the historical volatility in the Company’s stock price.

The following weighted-average assumptions were used for options granted in the years ended December 31, 2020, 2019 and 2018, respectively:

The following weighted-average assumptions were used for stock options granted in the years ended December 31, 2021, 2020 and 2019, respectively:

Expected Volatility Risk-free Interest Rate Expected Term Dividend

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On a periodic basis, the valuation allowance is reassessed on deferred income tax assets, weighing positive and negative evidence to assess the recoverability of the deferred tax assets.

In 2020, the Company reassessed the valuation allowance and considered negative evidence, including the cumulative losses over the three years ended December 31, 2020, and positive evidence, including the income during the year ended December 31, 2020 and projections of future income.

After assessing both the negative evidence and the positive evidence, the Company concluded that it should continue to maintain the valuation allowance on net operating losses and other deferred tax assets as of December 31, 2020 given the significance of the weight of the negative evidence.

In 2021, the Company reassessed the valuation allowance and considered negative evidence, including the cumulative losses over the three years ended December 31, 2021 and positive evidence including the projections of future income.

After assessing both the negative and the positive evidence, the Company concluded that it should continue to maintain the valuation allowance on net operating losses and other deferred tax assets as of December 31, 2021 given the significance of the weight of the negative evidence.

Based on recent financial performance and future projections, the Company could record a reversal of all, or a portion of the valuation allowance associated with U.S.

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However, any such change is subject to actual performance and other considerations that may present positive or negative evidence at the time of the assessment.

The total deferred tax asset balance subject to the valuation allowance was approximately $ 309.0 million at December 31, 2020.

The total gross deferred tax asset balance subject to the valuation allowance assessment was approximately $ 326.6 million at December 31, 2021.

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.

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Recent Accounting Pronouncements

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

In December 2019, the Financial Accounting Standards Board (“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.

In November 2018, the FASB issued ASU No.

2018-18, Collaborative Arrangements (Topic 808):

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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 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 adoption of this ASU during the first quarter of 2020 did not have a material impact on the consolidated financial statements.

In September 2020, the Company completed the sale of its XERMELO product and related assets (the “XERMELO sale”) to 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 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 XERMELO 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.

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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.

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

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

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Securities maturing within one year:

treasury securities 7,562 — ( 1 ) 7,561

Corporate debt securities 15,125 — ( 8 ) 15,117

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

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

Property and Equipment

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Furniture and fixtures 5 - 7

Laboratory equipment 3 - 7

Leasehold improvements 3 - 7

Buildings 15 - 40

Land — — 2,664

Total property and equipment 6,029 6,110

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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.

In connection with the sale, the Company recorded an impairment loss of $ 1.6 million to reduce the carrying value of the assets to its estimated fair value, less estimated selling costs.

During the year ended December 31, 2021, the Company retired $ 1.3 million of computers and software and furniture and fixtures, which had been fully depreciated.

During the year ended December 31, 2021, the Company purchased $ 1.2 million of assets comprised of leasehold improvements, computers and software and furniture.

The leasehold improvements are being amortized over the lease term.

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.

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Stock-based compensation 5,163 5,651

Interest 148 —

Other 1,308 844

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Deferred tax liabilities:

Deferred tax liability related to acquisition of Symphony Icon — ( 4,140 )

Other ( 412 ) —

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Equity compensation 851 1,777 1,688

Research and development credit — — ( 978 )

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

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

(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.

(1) Other is primarily comprised of expiring Research and Development credits for the year ended December 31, 2019 and nondeductible expenses for the years ended December 31, 2021 and 2020.

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.

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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 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.

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.

At December 31, 2021, Lexicon had both federal and state NOL carryforwards of approximately $ 1.1 billion and $ 86.9 million, respectively.

In 2021, federal NOLs increased by $ 132.7 million related to a current year NOL.

The Company had $ 342.0 million of U.S.

federal NOL carryforwards as of December 31, 2021, which can be carried forward indefinitely.

The remaining federal and state NOL carryforwards will begin to expire in 2022.

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 years ended December 31, 2020 and 2018, respectively.

During the year ended December 31, 2021, the valuation allowance increased $ 17.2 million, primarily due to NOLs generated partially offset by decreases in deferred tax assets associated with capitalized research and development expenses.

As of December 31, 2021 and 2020, the Company did not have any unrecognized tax benefits.

Any interest and penalties related to uncertain tax positions will be reflected as a component of income tax expense.

The Company is primarily subject to U.S.

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Convertible Notes.

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”).

In November 2014, Lexicon completed an offering of $ 87.5 million in aggregate principal amount of 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 consolidated balance sheets.

The Convertible Notes were governed by an indenture between the Company and Wells Fargo Bank, N.A., as trustee.

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

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.

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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.

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.

In December 2021, the remaining balance of $ 11.6 million was repaid in cash.

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 debt issuance costs were 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 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.

There are no debt issuance costs as of December 31, 2021.

Mortgage Loan.

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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.

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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.

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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.

There are no debt issuance costs as of December 31, 2021.

Commitments and Contingencies

Operating Lease Obligations :

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 with a term of one year or less.

Lexicon’s operating leases include leases of 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 December 31, 2021, the right-of-use assets for the office space leases had a balance of $ 2.3 million, which is included in other assets in the consolidated balance sheet.

Current and non-current liabilities relating to the leases were $ 1.1 million and $ 1.2 million, respectively, which are included in accrued liabilities and other long-term liabilities in the consolidated balance sheet, respectively.

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

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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.

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.

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.

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.

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.

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.

Equity Incentive Awards

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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, 2021.

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.

As of December 31, 2021, options to purchase

7,958,179 shares and 1,822,043 restricted stock units were outstanding, 2,285,702 shares had been issued upon the exercise of stock options, 4,314,948 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.

2017 Non-Employee Directors’ Equity Incentive Plan:

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At December 31, 2021, the aggregate intrinsic value of the outstanding stock options was $ 1.8 million.

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

At December 31, 2021, the intrinsic value of exercisable stock options was $ 0.7 million.

Stock Bonus and Restricted Stock Unit Activity:

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.

Vesting of restricted stock units occurs on the first anniversary of the grant date and vesting of restricted stock awards is immediate.

During the years ended December 31, 2021, 2020 and 2019, Lexicon granted its employees restricted stock units in lieu of or in addition to annual stock option awards.

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The total fair value of shares vested in 2021, 2020 and 2019 was $ 8.7 million, $ 3.2 million and $ 2.9 million, respectively.

During the years ended December 31, 2021, 2020 and 2019, Lexicon granted its non-employee directors 32,192 , 85,104 and 27,728 restricted stock units, respectively.

The restricted stock granted in 2021, 2020 and 2019 had weighted average grant date fair values of $ 5.04 , $ 1.86 , and $ 5.67 per share, respectively.

Vesting of restricted stock units occurs on the first anniversary of the grant date.

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

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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.

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, 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.

Under the Ipsen Agreement, Ipsen paid Lexicon an aggregate of $ 47.2 million through September 30, 2020.

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

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

Revenue for the year ended December 31, 2019 included $ 1.3 million 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 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.

Sanofi paid Lexicon $ 208 million in September 2019, $ 12.1 million in March 2020 and $ 2.7 million in September 2020.

An arbitration panel issued a judgment in Sanofi’s favor in November 2021 with respect to a dispute regarding amounts withheld by Sanofi from its March and September 2020 payments offsetting certain third party costs and internal costs incurred by Sanofi and asserted by Sanofi to be payable under the terms of the Termination Agreement.

Such judgment obligates Lexicon to reimburse Sanofi for its attorneys’ fees and costs relating to the arbitration proceedings, which could require a payment up to $ 2.1 million.

Neither party will owe any additional payments pursuant to the Sanofi Agreement or Termination 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 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.

Subject to specified exceptions, neither party could (a) perform clinical development activities relating to any other compound which inhibits sodium-glucose cotransporters type 1 or type 2 or (b) commercialize any such compounds in the United States, countries of the European Union and certain other specified countries, in each case during the royalty terms applicable in such countries.

Among the specified exceptions was a right Lexicon retained to pursue the development of its development candidate LX2761, with respect to which Lexicon granted Sanofi certain rights of first negotiation specified in the Sanofi Agreement.

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 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.

Due to the uncertainty surrounding the achievement of the future development and regulatory milestones, these payments were deemed constrained and were not recognized as revenue.

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.

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.

Under the terms of its co-promotion option, Lexicon would have funded forty percent of the commercialization costs relating to such co-promotion activities.

Sanofi was responsible for all clinical development and commercialization of sotagliflozin for the treatment of type 2 diabetes worldwide and would have been solely responsible for the commercialization of sotagliflozin for the treatment of type 1 diabetes outside the United States.

Lexicon shared in the funding of a portion of the planned type 2 diabetes development costs over the first three years of the collaboration, up to an aggregate of $ 100 million, which was satisfied in 2018.

Sanofi would have booked sales worldwide in all indications.

The parties were responsible for using commercially reasonable efforts to perform their development and commercialization obligations pursuant to mutually approved development and commercialization plans.

The parties’ activities under the Sanofi Agreement were governed by a joint steering committee and certain other governance committees which reflected equal or other appropriate representation from both parties.

If the applicable governance committee was not able to make a decision by consensus and the parties were not able to resolve the issue through escalation to specified senior executive officers of the parties, then Sanofi would have final decision-making authority, subject to limitations specified in the Sanofi Agreement.

The Sanofi Agreement would have expired upon the expiration of all applicable royalty terms for all licensed products in all countries.

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 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 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 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.

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 was recognizing as revenue the amount allocated to the development services for type 1 diabetes over the period of time Lexicon performed services, which was expected to be through 2027, and recognized as revenue the obligation to provide funding for development services for type 2 diabetes over the period of time Lexicon provided the funding, which was completed in 2018.

The Company determined that the initial transaction price was the $ 300 million upfront payment because it was the only payment that was 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 or royalty payments.

As such, the Company did not include those payments in the allocable consideration.

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:

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.

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.

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

Under the Sanofi Agreement, Sanofi paid Lexicon an upfront payment of $ 300 million in December 2015.

The Company recognized $ 126.8 million of the $ 300 million upfront payment for the license in 2015.

The Company was recognizing the $ 113.8 million allocated to the development services performance obligation and the $ 59.4 million allocated to the funding performance obligation over the estimated period of performance as the development and funding occurred.

The Termination Agreement was accounted for as a modification under ASC 606.

Upon execution of the Termination Agreement in September 2019, the Company recognized the remaining $ 23.5 million allocated to Lexicon’s performance obligations as revenue and reduced its remaining deferred revenue balance accordingly.

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

Upon execution of the Termination Agreement in September 2019, the Company recognized the remaining $ 23.5 million allocated to its performance obligations as revenue and reduced its remaining deferred revenue balance accordingly.

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

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.

Revenue recognized under the collaboration agreements with Sanofi was $ 286 million for the year ended December 31, 2019.

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:

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

Year Ended December 31,

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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 10,221,278 , 11,113,054 and 8,206,390 , respectively, for the years ended December 31, 2021, 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.

Prior to the extinguishment of the Convertible Notes, 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.

Other Capital Agreements

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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.

In August and September 2021, Lexicon sold an aggregate of 4,176,953 shares of its common stock at a price of $ 4.732 per share pursuant to the sales agreement, resulting in net proceeds of $ 19.1 million.

The net proceeds from each of these sales are reflected as issuances of common stock in the accompanying 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-K

Item 9A. Controls and Procedures