LEXICON PHARMACEUTICALS, INC. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2023 to ensure that the information required to be disclosed by us in the reports we file under the Securities Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework) . 44 Based on such assessment using those criteria, management concluded that, as of December 31, 2023, our internal control over financial reporting was effective. Changes in Internal Control Over Financial Reporting Subsequent to our evaluation described above, there were no significant changes in internal controls or other factors during the fiscal quarter ended December 31, 2023 that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 9B. Other Information Insider Trading Arrangements During the three months ended December 31, 2023, none of our directors or executive officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 45 PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is hereby incorporated by reference from (a) the information appearing under the captions “Election of Directors,” “Stock Ownership of Certain Beneficial Owners and Management,” “Corporate Governance” and “Executive and Director Compensation” in our definitive proxy statement which involves the election of directors and is to be filed with the SEC pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2023 and (b) the information appearing under Item 1 in Part I of this report. Item 11. Executive Compensation The information required by this Item is hereby incorporated by reference from the information appearing under the captions “Corporate Governance” and “Executive and Director Compensation” in our definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of our fiscal year on December 31, 2023. Notwithstanding the foregoing, in accordance with the instructions to Item 407(e)(5) of Regulation S-K, the information contained in our proxy statement under the sub-heading “Compensation Committee Report” shall not be deemed to be filed as part of or incorporated by reference into this annual report on Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is hereby incorporated by reference from the information appearing under the captions “Stock Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” 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, 2023. Item 13. Certain Relationships and Related Transactions, and Director Independence 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, 2023. Item 14. 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, 2023. 46 PART IV Item 15. Exhibit and Financial Statement Schedules (a) Documents filed as a part of this report: 1. Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) F-1 Consolidated Balance Sheets F-3 Consolidated Statements of Comprehensive Loss F-4 Consolidated Statements of Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedules 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. Exhibits Exhibit No. Description 1.1 — Open Market Sale Agreement℠ , dated December 29, 2023, with Jefferies LLC (filed as Exhibit 1.1 to the Company's Current Report on Form 8-K dated December 29, 2023 and incorporated by reference herein). 3.1 — Fifth Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Current Report on Form 8‑K dated May 20, 2022 and incorporated by reference herein). 3.2 — Certificate of Designations , dated March 12, 2024 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8‑K dated March 12, 2024 and incorporated by reference herein). 3.3 — 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). 4.1 — Securities Purchase Agreement , dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 17, 2007 and incorporated by reference herein). 4.2 — Amendment , dated October 7, 2009, to Securities Purchase Agreement, dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 7, 2009 and incorporated by reference herein). 4.3 — Registration Rights Agreement , dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated June 17, 2007 and incorporated by reference herein). 4.4 — Stockholders’ Agreement , dated June 17, 2007, with Invus, L.P. (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated June 17, 2007 and incorporated by reference herein). 4.5 — Supplement to Transaction Agreements , dated March 15, 2010, with Invus, L.P. and Invus C.V. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 15, 2010 and incorporated by reference herein). 4.6 — Supplement No. 2 to Transaction Agreements , dated February 23, 2012, with Invus, L.P. and Invus C.V. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 23, 2012 and incorporated by reference herein). 4.7 — Supplement No. 3 to the Transaction Agreements , dated December 16, 2020, with Invus, L.P. and Invus C.V. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 16, 2020 and incorporated by reference herein). 4.8 — Description of Common Stock (filed as Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2021 and incorporated by reference herein). 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 , 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). 47 10.3 — Offer Letter , dated July 27, 2021, with Craig B. Granowitz, M.D., Ph.D. (filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2021 and incorporated by reference herein). 10.4 — Employment Agreement , dated July 12, 2001, with Alan J. 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). 10.5 — 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). *10.6 — Summary of Non-Employee Director Compensation 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 27, 2023 and incorporated by reference herein). 10.8 — 2017 Non-Employee Directors’ Equity Incentive Plan, as amended (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated April 27, 2023 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). *10.10 — 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). 10.13 — 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). 10.14 — First Amendment , dated May 30, 2006, to Collaboration and License Agreement, dated December 17, 2003, with Bristol-Myers Squibb Company (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2015 and incorporated by reference herein). †10.15 — Second Amendment, dated November 2, 2016, to Collaboration and License Agreement, dated December 17, 2003, with Bristol-Myers Squibb Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 2, 2016 and incorporated by reference herein). 10.16 — 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). †10.17 — Loan and Security Agreement , dated March 17, 2022, with Oxford Finance, LLC and the lenders listed therein (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022 and incorporated by reference herein). †10.18 — First Amendment to Loan and Security Agreement , dated August 29, 2022, with Oxford Finance, LLC and the lenders listed therein (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 29, 2022 and incorporated by reference herein). †10.19 — Second Amendment to Loan and Security Agreement , dated May 1, 2023, with Oxford Finance, LLC and the lenders listed therein (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated May 1, 2023 and incorporated by reference herein). †10.20 — Third Amendment to Loan and Security Agreement , dated June 23, 2023, with Oxford Finance, LLC and the lenders listed therein (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 23, 2023 and incorporated by reference herein). †10.21 — Fourth Amendment to Loan and Security Agreement , dated December 29, 2023, with Oxford Finance, LLC and the lenders listed therein (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated December 29, 2023 and incorporated by reference herein). †10.22 — F ifth Amendment to Loan and Security Agreement , dated March 6, 2024, with Oxford Finance, LLC and the lenders listed therein (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated March 6, 2024 and incorporated by reference herein). 10.23 — Purchase Agreement , dated May 31, 2023, with Artal International S.C.A., Artal Group S.A., Artal International Management S.A., Invus Advisors, L.L.C., Invus Public Equities, L.P., Invus, L.P., Mr. Amaury Wittouck, Stichting Administratiekantoor Westend and Westend S.A. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 31, 2023 and incorporated by reference herein). 48 10.24 — Preferred Stock Purchase Agreement , dated March 11, 2024, with the purchasers party thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 6, 2024 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, 2021 and incorporated by reference herein). *23.1 — Consent of Independent Registered Public Accounting Firm . *24.1 — Power of Attorney (contained in signature page). *31.1 — Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 . *31.2 — Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 — Certification of Principal Executive and Principal Financial Officers Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . *97.1 — Incentive-Based Compensation Clawback Policy *101.INS — XBRL Instance Document. *101.SCH — XBRL Taxonomy Extension Schema Document. *101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document. *101.DEF — XBRL Taxonomy Extension Definition Linkbase Document. *101.LAB — XBRL Taxonomy Extension Label Linkbase Document. *101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document. ______________ * Filed herewith. † Confidential treatment has been requested for portions of this exhibit (indicated by “[**]”). The confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Item 16. Form 10-K Summary Not applicable. 49 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Lexicon Pharmaceuticals, Inc. Date: March 25, 2024 By: /s/ LONNEL COATS Lonnel Coats Chief Executive Officer Date: March 25, 2024 By: /s/ JEFFREY L. WADE Jeffrey L. Wade President and Chief Financial Officer Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lonnel Coats and Jeffrey L. Wade, or either of them, each with the power of substitution, his or her attorney-in-fact, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, here ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ LONNEL COATS Chief Executive Officer and Director (Principal Executive Officer) March 25, 2024 Lonnel Coats /s/ JEFFREY L. WADE President and Chief Financial Officer (Principal Financial Officer) March 25, 2024 Jeffrey L. Wade /s/ KRISTEN L. ALEXANDER Vice President, Finance and Accounting (Principal Accounting Officer) March 25, 2024 Kristen L. Alexander /s/ RAYMOND DEBBANE Chairman of the Board of Directors March 25, 2024 Raymond Debbane /s/ PHILIPPE J. AMOUYAL Director March 25, 2024 Philippe J. Amouyal /s/ SAMUEL L. BARKER Director March 25, 2024 Samuel L. Barker, Ph.D. /s/ ROBERT J. LEFKOWITZ Director March 25, 2024 Robert J. Lefkowitz, M.D. /s/ CHRISTOPHER J. SOBECKI Director March 25, 2024 Christopher J. Sobecki /s/ DIANE E. SULLIVAN Director March 25, 2024 Diane E. Sullivan /s/ JUDITH L. SWAIN Director March 25, 2024 Judith L. Swain, M.D. 50 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Lexicon Pharmaceuticals, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Lexicon Pharmaceuticals, Inc. (the Company) as of December 31, 2023 and 2022 , the related consolidated statements of comprehensive loss , stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023 , 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, 2023 and 2022 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 , in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit 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. F-1 Accrued research and development expenses Description of the Matter As described in Note 2 and Note 5 to the consolidated financial statements, the Company records accruals for estimated costs of research and development activities that include contract services for clinical trials. Clinical trial expenses are accrued based upon milestones and the number of patients enrolled over the duration of the study. The accrual for these third-party clinical trial research and development expenses includes estimates of services completed. 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 estimate of services completed related to the activities under the Company’s research and development agreements. How We Addressed the Matter in Our Audit Our audit procedures included, among others, testing the accuracy and completeness of the underlying inputs used in management’s analysis to determine costs incurred. We compared expenses incurred to budgeted amounts per executed vendor contracts and to expenses incurred in prior periods and obtained an understanding of the reasons for changes. We inspected the terms and conditions of vendor contracts, change orders and trial budgets, 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 inputs to the clinical trial expense calculation, such as total approved trial budgets and amounts invoiced, and number and timing of patients enrolled in clinical studies. 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 We have served as the Company’s auditor since 2002. Houston, Texas March 25, 2024 F-2 Lexicon Pharmaceuticals, Inc. Consolidated Balance Sheets (In thousands, except par value and share amounts) As of December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 22,465 $ 46,345 Short-term investments 147,561 92,012 Accounts receivable, net 1,010 28 Inventory 381 — Prepaid expenses and other current assets 5,130 2,481 Total current assets 176,547 140,866 Property and equipment, net of accumulated depreciation and amortization of $ 4,538 and $ 3,984 , respectively 1,987 2,071 Goodwill 44,543 44,543 Operating lease right-of-use-assets 5,524 6,407 Other assets 828 412 Total assets $ 229,429 $ 194,299 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 14,389 $ 10,395 Accrued liabilities 17,157 12,777 Total current liabilities 31,546 23,172 Long-term debt, net 99,508 48,579 Long-term operating lease liabilities 5,265 5,424 Total liabilities 136,319 77,175 Commitments and contingencies (Note 10) Stockholders' Equity: Preferred stock, $ 0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.001 par value; 300,000,000 shares authorized; 245,792,668 and 189,213,948 shares issued, respectively 245 189 Additional paid-in capital 1,862,558 1,709,144 Accumulated deficit ( 1,766,839 ) ( 1,589,720 ) Accumulated other comprehensive income (loss) 31 ( 428 ) Treasury stock, at cost, 867,973 and 488,205 shares, respectively ( 2,885 ) ( 2,061 ) Total stockholders' equity 93,110 117,124 Total liabilities and stockholders’ equity $ 229,429 $ 194,299 The accompanying notes are an integral part of these consolidated financial statements. F-3 Lexicon Pharmaceuticals, Inc. Consolidated Statements of Comprehensive Loss (In thousands, except per share amounts) Year Ended December 31, 2023 2022 2021 Revenues: Net product revenue $ 1,110 $ — $ — Royalties and other revenue 94 139 298 Total revenues 1,204 139 298 Operating expenses: Cost of sales 85 — — Research and development, including stock-based compensation of $ 5,139 , $ 4,253 and $ 4,284 respectively 58,887 52,816 55,046 Selling, general and administrative, including stock-based compensation of $ 9,201 , $ 7,267 and $ 6,293 , respectively 113,982 48,083 32,342 Total operating expenses 172,954 100,899 87,388 Loss from operations ( 171,750 ) ( 100,760 ) ( 87,090 ) Interest and other expense ( 13,101 ) ( 2,780 ) ( 802 ) Interest income and other, net 7,732 1,596 134 Net loss $ ( 177,119 ) $ ( 101,944 ) $ ( 87,758 ) Net loss per common share, basic and diluted $ ( 0.80 ) $ ( 0.62 ) $ ( 0.60 ) Shares used in computing net loss per common share, basic and diluted 221,130 165,733 145,652 Other comprehensive loss: Unrealized gain (loss) on investments 459 ( 418 ) ( 4 ) Comprehensive loss $ ( 176,660 ) $ ( 102,362 ) $ ( 87,762 ) The accompanying notes are an integral part of these consolidated financial statements. F-4 Lexicon Pharmaceuticals, Inc. Consolidated Statements of Stockholders’ Equity (In thousands) Accumulated Additional Other Common Stock Paid-In Accumulated Comprehensive Treasury Shares Par Value Capital Deficit Gain (Loss) Stock Total 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 Stock-based compensation — — 11,520 — — — 11,520 Issuance of common stock under Equity Incentive Plans 32 — — — — — — Issuance of common stock, net of issuance fees 39,100 39 94,166 — — — 94,205 Issuance of equity-classified warrants — — 1,030 — — — 1,030 Issuance of treasury stock — — ( 6,321 ) — — 6,321 — Repurchase of common stock — — — — — ( 864 ) ( 864 ) Net loss — — — ( 101,944 ) — — ( 101,944 ) Unrealized loss on investments — — — — ( 418 ) — ( 418 ) Balance at December 31, 2022 189,214 $ 189 $ 1,709,144 $ ( 1,589,720 ) $ ( 428 ) $ ( 2,061 ) $ 117,124 Issuance of equity-classified warrants — — 307 — — — 307 Stock-based compensation — — 14,340 — — — 14,340 Issuance of common stock, net of fees 55,288 55 138,768 — — — 138,823 Issuance of common stock under Equity Incentive Plans 1,291 1 ( 1 ) — — — — Repurchase of common stock — — — — — ( 824 ) ( 824 ) Net loss — — — ( 177,119 ) — — ( 177,119 ) Unrealized gain on investments — — — — 459 — 459 Balance at December 31, 2023 245,793 $ 245 $ 1,862,558 $ ( 1,766,839 ) $ 31 $ ( 2,885 ) $ 93,110 The accompanying notes are an integral part of these consolidated financial statements. F-5 Lexicon Pharmaceuticals, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 177,119 ) $ ( 101,944 ) $ ( 87,758 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 554 427 292 Stock-based compensation 14,340 11,520 10,577 Amortization of debt-related costs 1,774 741 54 Loss on disposal of property and equipment — 3 49 Other non-cash adjustments ( 4,105 ) — — Changes in operating assets and liabilities: (Increase) decrease in accounts receivable ( 982 ) ( 14 ) 381 Increase in inventories ( 381 ) — — (Increase) decrease in prepaid expenses and other current assets ( 2,899 ) ( 316 ) 2,885 Decrease in other long-term assets 467 656 661 Increase (decrease) in accounts payable and other liabilities 6,454 76 ( 14,158 ) Net cash used in operating activities ( 161,897 ) ( 88,851 ) ( 87,017 ) Cash flows from investing activities: Purchases of property and equipment ( 470 ) ( 1,326 ) ( 1,221 ) Purchases of investments ( 223,343 ) ( 133,949 ) ( 34,261 ) Maturities of investments 173,870 64,197 37,592 Net cash (used in) provided by investing activities ( 49,943 ) ( 71,078 ) 2,110 Cash flows from financing activities: Proceeds from issuance of common stock, net of fees 138,823 94,205 37,084 Repurchase of common stock ( 824 ) ( 864 ) ( 2,675 ) Proceeds (repayment) of debt borrowings, net of fees 49,961 48,868 ( 11,700 ) Net cash provided by financing activities 187,960 142,209 22,709 Net decrease in cash and cash equivalents ( 23,880 ) ( 17,720 ) ( 62,198 ) Cash and cash equivalents at beginning of year 46,345 64,065 126,263 Cash and cash equivalents at end of year $ 22,465 $ 46,345 $ 64,065 Supplemental disclosure of cash flow information: Cash paid for interest $ 10,057 $ 2,289 $ 799 Supplemental disclosure of noncash investing and financing activities: Right-of-use assets obtained in exchange for operating lease liability $ — $ 5,206 $ 1,704 Issuance of equity-classified warrants $ 307 $ 1,030 $ — Issuance of treasury stock $ — $ 6,321 $ — Accrual of deferred financing costs $ 250 $ — $ — The accompanying notes are an integral part of these consolidated financial statements. F-6 Lexicon Pharmaceuticals, Inc. Notes to Consolidated Financial Statements 1. Organization and Operations Lexicon Pharmaceuticals, Inc. (“Lexicon” or the “Company”) is a Delaware corporation incorporated on July 7, 1995. Lexicon was organized to discover the functions and pharmaceutical utility of genes and use those gene function discoveries in the discovery and development of pharmaceutical products for the treatment of human disease. Lexicon has financed its operations from inception primarily through sales of common and preferred stock, contract and milestone payments to it under strategic collaborations and other research and development collaborations, target validation, database subscription and technology license agreements, product sales, government grants and contracts and financing under debt and lease arrangements. The Company’s future success is dependent upon many factors, including, but not limited to, the success of its commercialization efforts for INPEFA for heart failure; the success of its commercial launch of sotagliflozin for patients with type 1 diabetes and CKD, if approved; its ongoing research and development efforts and its ability to obtain necessary regulatory approvals of the drug candidates which are the subject of such efforts; its success in establishing new collaborations and licenses and its receipt of milestones, royalties and other payments under such arrangements; the amount and timing of research, development and commercialization expenditures; the resources devoted to developing and supporting its products; 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. As a result of the aforementioned factors and the related uncertainties, there can be no assurance of the Company’s future success. 2. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements include the accounts of Lexicon and its wholly-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation. Lexicon has made certain reclassification adjustments to conform prior-period amounts to the current presentation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Use of Estimates. The preparation of financial statements in conformity with U. S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments. Lexicon considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 2023 and 2022, short-term investments consist primarily of U.S. treasury bills as well as certain corporate and other debt securities. The Company’s short-term investments are available for use in current operations regardless of the stated maturity date of the security. These short-term investments are classified as available-for-sale securities as the Company has not historically or does not intend to sell any of its available-for-sale securities prior to their maturity dates. Short-term investments are carried at fair value, based on quoted market prices of the securities. The costs of securities sold is based on the specific identification method. Any net realized gains and losses, interest and dividends, and amortization of premium or accretion of discount are included in interest and other income. Unrealized gains and losses on such securities are reported as a separate component of stockholders’ equity. The Company reviews its portfolio of available-for-sale debt securities in an unrealized loss position. For those investments whose fair value is less than amortized cost, to the extent the Company decided to sell these investments prior to their maturity dates or was required to sell such investments, the Company would evaluate the expected cash flows to be received as compared to amortized cost and to determine if an expected credit loss has occurred. Accounts Receivable. Lexicon records trade accounts receivable in the normal course of business related to the sale of products or services, net of an allowance for expected credit losses. Concentration of Credit Risk. Lexicon’s cash equivalents, investments and accounts receivable represent potential concentrations of credit risk. The Company attempts to minimize potential concentrations of risk in cash equivalents and investments by placing investments in high-quality financial instruments. The Company has not experienced any realized losses on its cash equivalents or short-term investments. The Company’s accounts receivable are unsecured and are primarily F-7 concentrated in large pharmaceutical and biotechnology companies located in the United States. The Company has not experienced any significant credit losses to date. Segment Information and Significant Customers. 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, as well as from commercial sales of its approved drug products. In support of the commercial launch of INPEFA in 2023, the Company entered into distribution agreements with wholesalers and limited retail pharmacies. The Company’s net product sales are generated from sales to these customers. In 2023, 11 United States-based customers accounted for all of the Company’s net product revenue. Three large wholesalers, each of which account for greater than 10% of total revenues and in the aggregate account for greater than 85 % of total revenues. In 2022 and 2021, the Company’s revenues were solely derived from royalties and other revenues from one and two customers, respectively. Property and Equipment. Property and equipment that is held and used is carried at cost and depreciated using the straight-line method over the estimated useful life of the assets, which ranges from three to 40 years. Maintenance, repairs and minor replacements are charged to expense as incurred. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. Significant renewals and betterments are capitalized. Impairment of Long-Lived Assets. Long-lived assets and right-of-use assets for leases are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount that the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There were no impairments of long-lived assets, in 2023, 2022, or 2021. Goodwill. Goodwill is not amortized, but is tested at least annually for impairment at the reporting unit level which the Company has determined is the single operating segment disclosed in its current financial statements. An impairment exists when the carrying amount of goodwill exceeds its implied fair value. Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired. Leases. Lexicon determines if a contract is or contains a lease at inception or upon modification of the contract. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Lexicon does not apply this accounting to those leases with terms of twelve (12) months or less. Operating lease right-of-use assets and associated lease liabilities are recorded in the balance sheet at the lease commencement date based on the present value of future lease payments to be made over the expected lease term. As the implicit rate is not determinable in its leases, Lexicon uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. Inventory: Inventory is comprised of INPEFA, the Company’s approved product that it is commercializing in the United States. Inventories are determined at the lower of cost or market value, with cost determined under the specific identification method. Revenue Recognition. 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: (a) identify the contract(s) with a customer; (b) identify the performance obligation in the contract; (c) determine the transaction price; (d) allocate the transaction price to the performance obligation in the contract, and (e) recognize revenue when (or as) the Company satisfies the performance obligation. The Company applies this five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract 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. The Company develops assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. F-8 Product Revenues Product revenues consist of U.S. sales of INPEFA, which Lexicon began shipping to its customers in the U.S. in June 2023. These customers primarily include wholesalers and limited retail pharmacies. The Company is continuing to contract with certain managed care programs or pharmacy benefit managers (“PBMs”) and has legislatively mandated contracts with the federal and state governments under which rebates are provided based on product utilization. Product revenues are recognized when control is transferred to the customer upon delivery. The Company recognizes product revenue net of applicable estimates of reserves for variable consideration using the expected value method. These estimates consider relevant factors such as current contractual and statutory requirements, industry data and forecasted customer buying and payment patterns. Net product revenue includes variable consideration only to the extent that it is probable that a significant reversal in revenue recognized will not occur in a future period. As necessary, these estimates will be adjusted in the period that such variances to actuals become known. Listed below is a further discussion of these reserves and sales return allowances: Customer Credits. The Company’s customers were offered various forms of consideration, including allowances, service fees and prompt payment discounts. The Company records allowances, deducts the full amount of prompt payment discounts, and deducts service fees from total product sales when revenues are earned and recognized. Rebates. Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program reflecting amounts owed after final dispensing of the product to participants. The Company’s estimates for rebates is based on statutory discount rates, third party market research data and data from sales to its customers. As rebates are generally invoiced and paid in arrears, the Company accrues an estimate of rebates based on the current quarter’s activity, plus any known unpaid prior quarter rebates. Chargebacks. Chargebacks are discounts that occur when contracted healthcare providers purchase directly from a wholesaler. Generally, the contracted healthcare providers purchase INPEFA at a discounted price. The wholesaler, in turn, charges back to Lexicon the difference between the price paid by the wholesaler and the discounted price that the wholesaler’s customer pays for that product. Medicare Part D Coverage Gap. The Medicare Part D prescription drug benefit mandates manufacturers to fund a portion of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. The Company’s estimates for the expected Medicare Part D coverage gap are based on sales data received from a third party and projections based on historical data. As funding of the coverage gap is generally invoiced and paid in arrears, the Company accrues an estimate based on the current quarter’s activity, plus any known unpaid prior quarter estimates. Co-payment assistance. Patients with commercial insurance who meet certain eligibility requirements are eligible to receive co-payment assistance. The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators. Sales returns. The Company records allowances for product returns, if appropriate, as a reduction of revenue at the time product sales are recorded based on an assessment of market exclusivity of the product, the patient population, the customers’ return rights and the Company’s historical experience with returns. Because approval is recent and there is a limited number of patients, most customers and retailers carry a limited inventory. Collaborative Agreements Revenues under collaborative agreements include both license revenue and contract research revenue. At contract inception, the Company evaluates whether development milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal will not occur, the associated development milestone value is included in the transaction price. Development milestones that are not within the control of the Company or the licensee, including those requiring regulatory approval, are not considered probable of being achieved until those approvals are received. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue when (or as) the performance obligation is satisfied. At the end of each reporting period, the Company re-evaluates the probability of achievement of the development milestones and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues in the period of adjustment. F-9 For agreements in which a license to the Company’s intellectual property is determined distinct from other performance obligations identified in the agreement, the Company recognizes revenue when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For agreements that include sales-based royalties, including milestones based on a level of sales, the license is deemed to be the predominant item to which the royalties relate and the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). The Company may receive payments from its licensees based on billing schedules established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations under these agreements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. Cost of Sales. Cost of sales consists of third-party manufacturing costs, product shipping and handling costs and freight associated with sales of INPEFA. The Company began capitalizing inventory manufactured subsequent to regulatory approval of INPEFA in June 2023, as the related costs were expected to be recovered through the commercialization of the product. Costs related to manufacturing inventory prior to the approval of INPEFA have been recorded as research and development expense in the consolidated statements of comprehensive loss. Research and Development Expenses. Research and development expenses consist of costs incurred for company-sponsored as well as collaborative research and development activities. These costs include direct and research-related overhead expenses and are expensed as incurred. Technology license fees for technologies that are utilized in research and development and have no alternative future use are expensed when incurred. Substantial portions of the Company’s preclinical and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the completion of milestones. The Company monitors patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to the Company by the vendors and clinical site visits. The Company’s estimates depend on the timeliness and accuracy of the data provided by the vendors regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives. Stock-Based Compensation. Compensation expense related to stock options and restricted stock units (“RSUs”) is determined based on the fair value of the award on the date of the grant and is recognized on a straight-line basis over the vesting period in which an employee is required to provide service. Forfeitures of share-based payment awards are recognized in the period in which they occur. Compensation expense is recorded in research and development expense and selling, general, and administrative expense as noted on the Company’s consolidated statements of comprehensive loss. Income Taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized differently in the financial statements and tax returns. The Company uses the liability method in accounting for income taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of liabilities and assets using enacted tax rates and laws in effect in the years in which the differences are expected to reverse. Deferred tax assets are evaluated for realization based on a more-likely-than-not criteria in determining if a valuation allowance should be provided. In evaluating our valuation allowances, we consider cumulative book losses, the reversal of existing temporary differences, tax planning strategies and estimates of future taxable income, the latter two of which involve the exercise of significant judgment. Net Loss per Common Share. Net loss per common share is computed using the weighted average number of shares of common stock outstanding. Shares associated with warrants, stock options and restricted stock units that could potentially dilute earnings per share in the future are not included in the computation of diluted earnings per share because they are antidilutive. Recent Accounting Pronouncements Issued But Not Yet Adopted. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures , which is effective retrospectively for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures , which is effective prospectively for annual periods beginning after December 15, 2024. Early adoption is permitted for both standards. We do not expect these accounting pronouncements to have a material impact on our financial statements. F-10 3. Cash, Cash Equivalents and Investments The fair value of cash and cash equivalents and investments held at December 31, 2023 and 2022 are as follows: As of December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Cash and cash equivalents $ 22,465 $ — $ — $ 22,465 Securities maturing within one year: U.S. treasury securities 141,577 31 ( 12 ) 141,596 Corporate debt securities 5,954 11 — 5,965 Total short-term investments $ 147,531 $ 42 $ ( 12 ) $ 147,561 Total cash and cash equivalents and investments $ 169,996 $ 42 $ ( 12 ) $ 170,026 As of December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) Cash and cash equivalents $ 46,345 $ — $ — $ 46,345 Securities maturing within one year: U.S. treasury securities 74,022 — ( 342 ) 73,680 Corporate debt securities 18,418 — ( 86 ) 18,332 Total short-term investments $ 92,440 $ — $ ( 428 ) $ 92,012 Total cash and cash equivalents and investments $ 138,785 $ — $ ( 428 ) $ 138,357 For the years ended December 31, 2023 and 2022, our investments in an unrealized loss position had an estimated fair value of $ 58.5 million and $ 89.0 million, respectively. There were no realized gains or losses for the years ended December 31, 2023, 2022, and 2021. 4. Fair Value Measurements The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. The following levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities: • Level 1 – quoted prices in active markets for identical assets, which include U.S. treasury securities • Level 2 – other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.), which include corporate debt securities • Level 3 – significant unobservable inputs The inputs or methodology used for valuing securities are not necessarily an indication of the credit risk associated with investing in those securities. The following tables provide the fair value measurements of applicable Company assets that are measured at fair value on a recurring basis according to the fair value levels defined above as of December 31, 2023 and 2022. There were no transfers between Level 1 and Level 2 during the periods presented. F-11 F-12 Assets at Fair Value As of December 31, 2023 Level 1 Level 2 Level 3 Total (in thousands) Cash and cash equivalents $ 22,465 $ — $ — $ 22,465 Short-term investments 141,596 5,965 — 147,561 Total cash and cash equivalents and investments $ 164,061 $ 5,965 $ — $ 170,026 Assets at Fair Value As of December 31, 2022 Level 1 Level 2 Level 3 Total (in thousands) Cash and cash equivalents $ 46,345 $ — $ — $ 46,345 Short-term investments 73,680 18,332 — 92,012 Total cash and cash equivalents and investments $ 120,025 $ 18,332 $ — $ 138,357 The carrying amount of cash and cash equivalents, prepaid expenses and other assets, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The fair value of the Oxford Term Loans (see Note 9) is determined under Level 2 in the fair value hierarchy and approximates carrying value as the loans bear interest at a rate that approximates prevailing market rates for instruments with similar characteristics. 5. Supplemental Financial Information The following tables show the Company’s additional balance sheet information as of December 31, 2023 and 2022: As of December 31, 2023 2022 (in thousands) Inventories: Raw materials $ — $ — Work-in-progress 100 — Finished goods 281 — Inventory $ 381 $ — As of December 31, 2023 2022 (in thousands) Accrued Liabilities: Accrued research and development services $ 3,705 $ 3,252 Accrued compensation and benefits 9,591 7,830 Short term lease liability 1,291 1,291 Other 2,570 404 Accrued liabilities $ 17,157 $ 12,777 F-13 6. Property and Equipment Property and equipment at December 31, 2023 and 2022 are as follows: Estimated Useful Lives As of December 31, In Years 2023 2022 (in thousands) Computers and software 3 - 5 $ 2,408 $ 2,209 Furniture and fixtures 5 - 7 1,939 1,794 Leasehold improvements 3 - 7 2,178 2,052 Total property and equipment 6,525 6,055 Less: Accumulated depreciation and amortization ( 4,538 ) ( 3,984 ) Net property and equipment $ 1,987 $ 2,071 7. Income Taxes Effective Tax Rate Reconciliation. A reconciliation of the statutory tax rate to the effective tax rate for the years ended December 31, 2023, 2022 and 2021 consists of the following: Year Ended December 31, 2023 2022 2021 (in thousands) Expected income tax expense (benefit) at 21% $ ( 37,196 ) $ ( 21,408 ) $ ( 18,429 ) State income taxes, net of federal benefit ( 3,895 ) — — Equity compensation 1,530 1,627 851 Research and development credit ( 712 ) — — State income taxes, tax rate change ( 4,723 ) — — Change in valuation allowance 44,410 19,543 17,210 Other (1) 586 238 368 Income tax benefit $ — $ — $ — (1) Other is primarily comprised of expiring NOLs and nondeductible expenses for the year ended December 31, 2023 and nondeductible expenses for the years ended December 31, 2022 and 2021. F-14 Deferred Tax Assets and Liabilities. Lexicon recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized differently in the financial statements and tax returns. The components of Lexicon’s deferred tax assets (liabilities) at December 31, 2023 and 2022 are as follows: As of December 31, 2023 2022 (in thousands) Deferred tax assets: Net operating loss carryforwards $ 288,264 $ 251,331 Research and development tax credits 30,002 29,290 Orphan drug credits 24,524 24,524 Capitalized research and development 37,357 33,813 Stock-based compensation 6,965 5,445 Interest 1,359 398 Other 3,308 2,255 Total deferred tax assets 391,779 347,056 Deferred tax liabilities: Other ( 1,608 ) ( 1,295 ) Total deferred tax liabilities ( 1,608 ) ( 1,295 ) Less: valuation allowance ( 390,171 ) ( 345,761 ) Net deferred tax liabilities $ — $ — Net Operating Losses/Valuation Allowance. At December 31, 2023, Lexicon had both federal and state NOL carryforwards of approximately $ 1.3 billion and $ 169.6 million, respectively. The Company had $ 606.5 million of U.S. federal NOL carryforwards as of December 31, 2023, which can be carried forward indefinitely. The remaining federal and state NOL carryforwards will begin to expire in 2024. The Company maintains a valuation allowance on net operating losses and other deferred tax assets. Accordingly, the Company has not reported any tax benefit relating to the remaining net operating loss carryforwards and income tax credit carryforwards that are available for utilization in future periods. 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 2023, the Company reassessed the valuation allowance and considered negative evidence, including the cumulative losses over the three years ended December 31, 2023 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, 2023 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. deferred tax assets in future periods. 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. 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. 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, 2023, the valuation allowance increased $ 44.4 million, primarily due to NOLs generated, increases in deferred tax assets associated with capitalized research and development expense and deferred tax assets for state jurisdictions. Other. As of December 31, 2023 and 2022, the Company did no t have any unrecognized tax benefits and had no accruals for interest or penalties related to income tax matters. Any interest and penalties related to uncertain tax positions will be reflected as a component of income tax expense. The Company is subject to U.S. federal and state income taxes. The tax years 2020 through 2022 remain open to examination by the Internal Revenue Service of the United Sates and the tax years 2019 through 2022 remain open to examination by various state tax authorities. F-15 8. Goodwill Lexicon recorded goodwill from previous acquisitions prior to 2011 of $ 44.5 million, representing the excess of purchase price over the fair value of the underlying net identifiable assets including the effects of deferred taxes. Goodwill is not subject to amortization, but is tested at least annually on its assessment date for impairment at the reporting unit level, which is the Company’s single operating segment. There was no impairment of goodwill in 2023, 2022 or 2021. 9. Debt Obligations Oxford Term Loans. In March 2022, Lexicon and one of its subsidiaries entered into a loan and security agreement with Oxford Finance LLC (“Oxford”) that provides up to $ 150 million in borrowing capacity (the “Oxford Term Loans”). The loan and security agreement was subsequently amended in August 2022, May 2023, June 2023 and December 2023. The Company incurred debt issuance costs of $ 0.3 million in connection with the December 2023 amendment which extended the fourth tranche period and modified the existing financial covenant relating to net sales of INPEFA and the minimum cash and investments balance requirement. In March 2024, the Company entered into a fifth amendment further modifying the existing financial covenant relating to net sales of INPEFA. The Oxford Term Loans are available in five tranches, each maturing in March 2027. The first $ 25 million tranche was funded in March 2022, the second $ 25 million tranche was funded in December 2022 and the third $ 50 million tranche was funded in June 2023. The fourth $ 25 million tranche will be available for draw at Lexicon’s option upon the achievement of specified INPEFA net sales and until April 15, 2025. An unused fee will be due in the event Lexicon does not draw the full amount available under the fourth tranche. The fifth $ 25 million tranche is available for draw at Lexicon’s option, subject to Oxford’s consent, at any time prior to the expiration of the interest-only payment period as described below. A final payment exit fee equal to 6 % of the amount funded under the Oxford Term Loans is due upon prepayment or maturity. The final payment exit fee of $ 6 million as of December 31, 2023, in the aggregate for the three borrowed tranches, is recorded as a debt discount on the consolidated balance sheet. Concurrent with the funding of the first three tranches, Lexicon granted Oxford warrants to purchase 420,673 shares of Lexicon’s common stock at an exercise price of $ 2.08 per share, 224,128 shares of Lexicon’s common stock at an exercise price of $ 1.95 per share and 183,824 shares of Lexicon’s common stock at an exercise price of $ 2.38 per share, respectively. Subject to and upon funding of the fourth tranche, Lexicon will grant Oxford a warrant to purchase shares of its common stock having a value equal to 1.75 % of such tranche, as determined by reference to a 10 -day average closing price of the shares, and having an exercise price equal to such average closing price. All warrants are exercisable for five years from their respective grant dates and feature a net cashless exercise provision. The Company allocated the proceeds from each term loan tranche to the corresponding warrant using the relative fair value method and used the Black-Scholes model to calculate the fair value of the warrants. As of December 31, 2023, the carrying value of the Oxford Term Loans on the consolidated balance sheet was $ 99.5 million, reflecting an unamortized discount of $ 6.5 million to the face value of long-term debt for the final payment exit fee, the warrant fair value, and debt issuance costs, which are being amortized into interest and other expense throughout the life of the term loan using the effective interest rate method. Monthly interest-only payments are due during an initial 36 -month period from the original March 2022 borrowing date. The interest-only period will be followed by an amortization period extending through the maturity date. Payments of $ 34.8 million, $ 52.2 million, and $ 19.0 million, including debt principal and final exit fee payments, will be due during the fiscal years ended December 31, 2025, December 31, 2026 and December 31, 2027, respectively, with respect to all borrowed loan tranches as of December 31, 2023. Prior to the June 2023 amendment to the loan and security agreement, the Oxford Term Loans bore interest at a floating rate equal to the 30-day U.S. Dollar LIBOR plus 7.90 %, but not less than 8.01 %, subject to additional interest if an event of default occurs and is continuing. Following such amendment, the floating interest rate is based on the sum of (a) the 1-month CME Term Secured Overnight Financing Rate (SOFR), (b) 0.10 %, and (c) 7.90 % for the first and second tranches and 7 % for the third and fourth tranches. As of December 31, 2023, the weighted average interest rate of the Oxford Term Loans was 12.9 %. During the year ended December 31, 2023, the Company recognized interest expense of $ 11.6 million, including $ 1.5 million in amortization of discount and related debt issuance costs. If an event of default occurs and is continuing, Oxford may declare all amounts outstanding under the loan and security agreement to be immediately due and payable. Additionally, Lexicon may prepay the Oxford Term Loans in whole at its option at any time. Any prepayment of the Oxford Term Loans is subject to prepayment fees for up to three years after the funding of each tranche of the loans. F-16 Lexicon’s obligations under the Oxford Term Loans are secured by a first lien security interest in all of the assets of the Company and its subsidiaries. The loan and security agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default applicable to Lexicon and its subsidiaries. In addition to the financial covenants, additional covenants include those restricting dispositions, fundamental changes to its business, mergers or acquisitions, indebtedness, encumbrances, distributions, investments, transactions with affiliates and subordinated debt. The loan and security agreement includes a financial covenant which requires Lexicon to maintain a minimum cash and investments balance of $ 10 million until the achievement of specified INPEFA net sales. Upon funding of the fourth tranche, the minimum cash and investments balance will increase to $ 25 million. The loan and security agreement includes a separate financial covenant relating to net sales of INPEFA as noted above. The Company was in compliance with its debt covenants as of December 31, 2023, and has classified its debt as long-term based on its intent and ability to refinance with completed equity financing (see Note 13) if the Company is unable to meet these financial covenants within one year . 10. Commitments and Contingencies Operating Lease Obligations. Lexicon’s operating leases include leases of office space in The Woodlands, Texas and Bridgewater, New Jersey that will expire in August 2025 and January 2034, respectively. The Texas lease provides for escalating yearly base rent payments which started at $ 506,000 and increase to $ 557,000 in the final year of the lease. The New Jersey lease provides for escalating yearly base rent payments which started at $ 820,000 and increase to $ 986,000 in the final year of the lease. Under its lease agreements, Lexicon is obligated to pay property taxes, insurance, and maintenance costs. As of December 31, 2023 and 2022, the right-of-use assets for the office space leases had a balance of $ 5.5 million and $ 6.4 million, respectively, which are included in operating lease right-of-use-assets in the consolidated balance sheet. Current and long-term liabilities as of December 31, 2023, relating to the leases were $ 1.3 million and $ 5.3 million, respectively, which are included in accrued liabilities and long-term operating lease liabilities in the consolidated balance sheet, respectively. Current and long-term liabilities as of December 31, 2022, relating to the leases were $ 1.3 million and $ 5.4 million, respectively, which are included in accrued liabilities and long-term operating lease liabilities in the consolidated balance sheet, respectively. During the years ended December 31, 2023 and 2022, the Company incurred lease expense of $ 1.6 million and $ 1.8 million, respectively. During the years ended December 31, 2023 and 2022, the Company made cash payments for lease liabilities of $ 0.8 million and $ 1.1 million, respectively. As of December 31, 2023 and 2022, the weighted-average remaining lease terms were 9 years and 9.5 years, respectively, with weighted-average discount rates of 9.6 % for each year. F-17 The following table reconciles the undiscounted cash flows of the operating lease liability to the recorded lease liability at December 31, 2023: (in thousands) 2024 $ 1,378 2025 1,220 2026 865 2027 881 2028 898 Thereafter 4,746 Total undiscounted operating lease liability $ 9,988 Less: amount of lease payments representing interest ( 3,432 ) Present value of future lease payments 6,556 Less: short-term operating lease liability ( 1,291 ) Long-term operating lease liability $ 5,265 Employment Arrangements. Lexicon has entered into employment arrangements with certain of its corporate officers. Under the arrangements, each officer receives a base salary, subject to adjustment, with an annual discretionary bonus based upon specific objectives to be determined by the compensation committee. The employment arrangements are at-will and some contain non-competition agreements. Some of the arrangements also provide for certain severance payments for either six or 12 months and, in some cases, payment of a specified portion of the officer’s bonus target for such year, in the event of a specified termination of the officer’s employment. Legal Proceedings. 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. 11. Equity Incentive Awards The Company has stockholder-approved equity incentive plans further described below that permit the grant of stock options, restricted stock unit awards, and other stock-based awards to employees, directors, and consultants of the Company. 2017 Equity Incentive Plan. The Company’s 2017 Equity Incentive Plan permits the grant of incentive stock options to employees and nonstatutory stock options to employees, directors and consultants of the Company. The plan also permits the grant of stock bonus awards, restricted stock awards, restricted stock unit awards, stock appreciation rights and performance stock awards. Incentive and nonstatutory stock options have an exercise price of 100 % or more of the fair market value of the Company’s common stock on the date of grant. Most stock options granted under the 2017 Equity Incentive Plan become vested and exercisable over a period of four years . Stock options granted under the Equity Incentive Plan have a term of 10 years from the date of grant. Vesting of restricted stock units issued under this plan generally vest in three annual installments. 2017 Non-Employee Directors’ Equity Incentive Plan (the “Directors’ Plan”). Under the Company’s Directors’ Plan, non-employee directors may be granted awards under the plan with an aggregate grant date fair value of no more than $ 500,000 during any calendar year, taken together with any cash fees paid to such non-employee director in compensation for service on Lexicon’s board of directors during such calendar year. Stock options granted under the Directors’ Plan have an exercise price equal to the fair market value of the Company’s common stock on the date of grant and a term of 10 years from the date of grant. Vesting of restricted stock units granted under this plan occurs on the first anniversary of the grant date. The total number of shares of common stock that may be issued pursuant to stock awards under the Equity Incentive Plan and the Directors’ Plan shall not exceed in the aggregate 55,000,000 and 2,000,000 shares at December 31, 2023, respectively. Under the combined plans, as of December 31, 2023, an aggregate of 23,719,712 shares of common stock were reserved for issuance upon exercise of outstanding stock options and vesting of outstanding restricted stock units and 24,047,212 additional shares were available for future grants. The Company has a policy of using either authorized and unissued shares or treasury shares, including shares acquired by purchase in the open market or in private transactions, to satisfy equity award exercises. As of December 31, 2023, options to purchase 18,705,022 shares and 5,014,690 restricted stock F-18 units were outstanding, 2,285,702 shares had been issued upon the exercise of stock options, 6,730,226 shares had been issued pursuant to restricted stock units and 217,148 shares had been issued pursuant to stock bonus awards or restricted stock awards granted under the aggregate of both plans. For the years ended December 2023, 2022, and 2021 stock-based compensation costs was $ 14.3 million, $ 11.5 million, and $ 10.6 million, respectively. As of December 31, 2023, future stock-based compensation cost for all outstanding unvested stock options and restricted stock units was $ 26.8 million, which is expected to be recognized over a weighted-average period of 1.2 years. Stock Options. The following is a summary of stock option activity under Lexicon’s equity incentive plans for the year ended December 31, 2023: As of December 31, 2023 (in thousands, except exercise price data) Options Weighted Average Exercise Price Outstanding at beginning of year 12,349 $ 5.10 Granted 8,091 2.29 Exercised — — Expired ( 152 ) 14.68 Forfeited ( 1,583 ) 3.66 Outstanding at end of year 18,705 3.93 Exercisable at end of year 8,280 $ 5.58 The weighted average estimated grant date fair value of stock options granted during the years ended December 31, 2023, 2022 and 2021 were $ 1.78 , $ 2.30 and $ 4.85 , respectively. The weighted average remaining contractual term of stock options outstanding and exercisable was 7.5 and 5.6 years, respectively, as of December 31, 2023. At December 31, 2023, the aggregate intrinsic value of the outstanding stock options was $ 0.4 million. At December 31, 2023, the intrinsic value of exercisable stock options was $ 0 . The fair value of stock options is estimated at the date of grant using the Black-Scholes method requiring the input of subjective assumptions. For purposes of determining the fair value of stock options, the Company segregates its options into two homogeneous groups, based on exercise and post-vesting employment termination behaviors, resulting in different assumptions used for expected option lives. Historical data is used to estimate the expected option life for each group. Expected volatility is based on the historical volatility in the Company’s stock price. The following weighted-average assumptions were used for stock options granted in the years ended December 31, 2023, 2022 and 2021, respectively: Expected Volatility Risk-free Interest Rate Expected Term Dividend Rate December 31, 2023: Employees 110 % 3.9 % 4 0 % Officers and non-employee directors 98 % 4.0 % 6 0 % December 31, 2022: Employees 109 % 2.8 % 4 0 % Officers and non-employee directors 91 % 1.9 % 7 0 % December 31, 2021: Employees 104 % 0.7 % 4 0 % Officers and non-employee directors 90 % 1 % 6 0 % Restricted Stock Units. During the years ended December 31, 2023, 2022 and 2021, Lexicon granted its employees restricted stock units in lieu of or in addition to annual stock option awards. The total fair value of shares vested in 2023, 2022 and 2021 was $ 2.9 million, $ 2.9 million and $ 8.7 million, respectively. F-19 During the years ended December 31, 2023, 2022 and 2021, Lexicon granted its non-employee directors 64,256 , 74,416 and 32,192 restricted stock units, respectively. The restricted stock granted in 2023, 2022 and 2021 had weighted average grant date fair values of $ 2.36 , $ 1.77 and $ 5.04 per share, respectively. The following is a summary of restricted stock units activity under Lexicon’s stock-based compensation plans for the year ended December 31, 2023: Shares Weighted Average Grant Date Fair Value (in thousands) Outstanding at December 31, 2022 2,748 $ 3.78 Granted 4,199 2.43 Vested ( 1,291 ) 3.80 Forfeited ( 641 ) 2.72 Outstanding at December 31, 2023 5,015 $ 2.78 During the year ended December 31, 2022, the Company issued $ 6.3 million of Treasury shares in lieu of issuing additional authorized common shares in order to satisfy the annual vesting of restricted stock units for its employees and officers. 12. Benefit Plan Lexicon maintains a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all full-time employees. Participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company matches employee contributions according to a specified formula. The matching contributions totaled $ 1.2 million, $ 0.7 million and $ 0.4 million in the years ended December 31, 2023, 2022 and 2021, respectively. Company contributions are vested based on the employee’s years of service, with full vesting after four years of service. 13. Other Capital Agreements Common Stock. In June 2023, Lexicon sold an aggregate of 55,288,460 shares of its common stock at a price of $ 2.60 per share in a public offering and concurrent private placement to an affiliate of Invus, L.P., resulting in net proceeds of approximately $ 139 million, after deducting underwriting discounts and commissions and offering expenses. In August 2022, Lexicon sold an aggregate of 39,100,000 shares of its common stock at a price of $ 2.50 per share in a public offering and concurrent private placement to two affiliates of Invus, L.P., resulting in net proceeds of $ 94.2 million, after deducting underwriting discounts and commissions and offering expenses. In January 2021, Lexicon sold 2,000,000 shares of its common stock at a price of $ 8.463 per share under a previous Open Market Sale Agreement ™ with Jefferies LLC, 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 under 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. Convertible Preferred Stock. On March 11, 2024, Lexicon entered into an agreement with certain accredited investors pursuant to which the Company agreed to sell 2,304,147 shares of its Series A Convertible Preferred Stock, par value $ 0.01 per share, in a private placement at a price of $ 108.50 per share. The Company received net proceeds of approximately $ 242 million, after deducting placement agent fees and offering expenses from the private placement offering. Each share of preferred stock is convertible into 50 shares of common stock. An affiliate of Invus, L.P. elected to participate on the same terms as each other purchaser on a pro rata basis and also agreed to vote at the Company’s 2024 annual meeting of stockholders in favor of the approval of an amendment to the Company’s certificate of incorporation increasing the total authorized common shares thereunder from 300,000,000 to 450,000,000 shares (the “New Charter”). F-20 Following the approval of the New Charter by the Company’s shareholders, the adoption of the New Charter by the Company’s board of directors, and the filing and acceptance of the New Charter by the Secretary of State of Delaware, each share of preferred stock will automatically convert into 50 shares (subject to adjustments) of common stock.