Xeris Biopharma Holdings, Inc. (XERS) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth in Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K. This discussion and analysis compares 2023 results to 2022. For discussion and analysis that compares 2022 results to 2021, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7. of this Annual Report on Form 10-K for the year ended December 31, 2022.

Overview

As used herein, the "Company", "Xeris", "we" or "our" refers to Xeris Biopharma Holdings, Inc. ("Xeris Biopharma"). Throughout this document, unless otherwise noted, references to Gvoke include Gvoke PFS, Gvoke HypoPen, Gvoke Kit and Ogluo.

We are focused on building an innovative, self-sustaining, growth-oriented biopharmaceutical company committed to improving patients’ lives by developing and commercializing clinically meaningful products across a range of therapies. We are uniquely positioned to achieve this through our three commercial products and our proprietary formulation science (XeriSol and XeriJect), which generates partnerships and enhances our product candidates.

Patents

We currently own 170 patents issued globally, including composition of matter patents covering our ready-to-use glucagon formulation that expire in 2036. Included in the total patents, we have 60 granted patents globally related to our platform technologies and 8 patents granted in the United States and listed in the United States FDA Orange Book covering proprietary formulations of levoketoconazole (the active pharmaceutical ingredient in Recorlev) and the uses of such formulations in treating certain endocrine-related diseases and syndromes. The latter includes United States Patent Nos. 11,020,393, 11,278,547 and 11,903,940, which were granted on June 1, 2021, March 22, 2022, and February 22, 2024, respectively, and which provide patent protection through 2040 for the use of Recorlev in the treatment of certain patients with persistent or recurrent Cushing’s syndrome.

Financing

We have funded our operations to date primarily with proceeds from the sale of our preferred and common stock and debt financing.

For the years ended December 31, 2023 and 2022, we reported net losses of $62.3 million and $94.7 million, respectively. We have not been profitable since inception, and, as of December 31, 2023, our accumulated deficit was $617.0 million. In the near term, we expect to continue to incur significant expenses, operating losses and net losses as we:

We may continue to seek public equity and debt financing to meet our capital requirements. There can be no assurance that such funding may be available to us on acceptable terms, or at all, or that we will be able to commercialize our product candidates, if approved. In addition, we may not be profitable even if we commercialize any of our product candidates.

Components of our Results of Operations

The following discussion sets forth certain components of the statement of operations of Xeris for years ended December 31, 2023 and 2022 as well as factors that impact those items.

Product revenue, net

Product revenue, net, represents gross product sales less estimated allowances for patient copay assistance programs, prompt payment discounts, payor rebates, chargebacks, service fees, and product returns, all of which are recorded at the time of sale to the pharmaceutical wholesaler or other customer. We apply significant judgment and estimates in determining some of these allowances. If actual results differ from our estimates, we make adjustments to these allowances in the period in which the actual

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results or updates to estimates become known. See "Critical Accounting Policies and Use of Estimates and Assumptions" for further information regarding the significant judgments and estimates involved in the determination of product revenue, net.

Royalty, contract and other revenue

Royalty and contract revenue is recognized as earned in accordance with contract terms when it can be reasonably estimated and collectability is reasonably assured.

Cost of goods sold

Cost of goods sold primarily includes product costs, which include all costs directly related to the purchase of raw materials, charges from our contract manufacturing organizations, and manufacturing overhead costs, as well as shipping and distribution charges. Cost of goods sold also includes losses from excess, slow-moving or obsolete inventory and inventory purchase commitments, if any. Manufacturing costs for Gvoke and Recorlev incurred prior to approval and initial commercialization were expensed as research and development expenses.

Research and development expenses

Research and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates. We recognize research and development expenses as incurred. Research and development expenses that are paid in advance of performance are capitalized until services are provided or goods are delivered. Research and development expenses include:

Research and development activities are central to our business model. We expect to continue to incur significant research and development expenses as we advance our pipeline candidates and in particular plan and conduct clinical trials, prepare regulatory filings for our product candidates, and utilize internal resources to support these efforts. Our research and development costs have declined as compared to previous levels as a result of directing significant funding to our commercial activities.

Our research and development expenses may vary significantly over time due to uncertainties relating to the timing and results of our clinical trials, feedback received from interactions with the FDA and the timing of regulatory approvals.

Selling, general and administrative expenses

Selling, general and administrative expenses consist primarily of compensation and related personnel costs, marketing and selling expenses, professional fees and facility costs not otherwise included in research and development expenses.

Amortization of intangible assets

Amortization of intangible assets relates to the amortization of our products: Keveyis and Recorlev. These two intangible assets are being amortized over a five-year and fourteen-year period, respectively, using the straight-line method.

Other income (expense)

Other income (expense) consists primarily of interest expense related to our convertible debt, Hayfin Loan Agreement, Oxford Loan Agreement, interest income earned on deposits and investments, gains and losses on extinguishment of debt and lease remeasurement, and the change in fair value of our warrants and CVRs.

Income tax

We have incurred operating losses since inception and therefore do not have any taxable income. As of December 31, 2023, we had federal net operating loss carryforwards of $494.3 million and various state net operating loss carryforwards of $352.2 million, $6.9 million in federal income tax credits will begin to expire in 2038, and the $3.7 million of state economic development and research and development credits will begin to expire in 2024.

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Results of Operations

The following table summarizes our results of operations for the years ended December 31, 2023 and 2022 (in thousands):

nm: not meaningful

Product revenue, net

Gvoke net revenue increased by $14.5 million or 27.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022. Gvoke prescriptions grew approximately 48.9% in 2023 compared to prior year. The growth in product demand was partially offset by a decrease in net pricing.

Keveyis net revenue increased by $7.5 million or 15.1% for the year ended December 31, 2023 compared to the year ended December 31, 2022. These increase was driven by higher patient demand coupled with an increase in net pricing.

Recorlev net revenue increased by $22.1 million or 297.7% for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven primarily by increases in the number of patients on therapy.

Royalty, contract and other revenue

Royalty and contract revenue in 2023 was primarily generated from various collaboration agreements, including one with Horizon Therapeutics plc (subsequently acquired by Amgen Inc.) for which $6.0 million was recognized in connection with the target produce profile milestone achieved.

Cost of goods sold

Cost of goods sold increased by $6.0 million or 26.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was mainly attributable to higher product sales, partially offset by the product mix and a one-time contract credit in the first quarter of 2023.

Research and development expenses

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Research and development expenses increased by $1.4 million or 6.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven by the expenses related to the Phase 2 study for XP-8121.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $8.4 million or 6.1% for the year ended December 31, 2023 compared to the year ended December 31, 2022, due to higher personnel costs and rent expenses related to the new lease which commenced in April 2023.

Amortization of intangible assets

For the years ended December 31, 2023 and December 31, 2022, amortization of intangible assets were both $10.8 million.

Other income (expense)

For the year ended December 31, 2023, interest expense increased $12.5 million or 88.7% compared to the year ended December 31, 2022. The increase was primarily due to a higher principal amount and increased interest rates related to third party debt arrangements.

Other expense in the years ended December 31, 2023 and December 31, 2022 included losses of $2.8 million and $1.2 million, respectively, on extinguishment of debt related to the third party debt arrangements.

For the year ended December 31, 2023, change in fair value of contingent value rights was a gain of $5.2 million compared to a loss of $3.2 million for the year ended December 31, 2022. The gain in 2023 were primarily due to changes in revenue assumptions based on recent trends adjusted for management’s estimates of future sales.

Liquidity and Capital Resources

Our primary uses of cash are to fund costs related to the manufacturing, marketing and selling of products, the research and development of our product candidates, general and administrative expenses and working capital requirements. Historically, we have funded our operations primarily through private placements of convertible preferred stock, public equity offerings of common stock, and issuance of debt.

On January 2, 2022, we entered into a securities purchase agreement in connection with the private placement of our common stock with Armistice for aggregate gross proceeds of approximately $30.0 million and completed the transaction on January 3, 2022. In January 2022, we filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on February 7, 2022, and which covers the offering, issuance and sale by us of up to an aggregate of $250.0 million of our common stock, preferred stock, debt securities, warrants and/or units.

In March 2022, we, Xeris Pharma and certain subsidiary guarantors, entered into a Credit Agreement and Guaranty (the "Hayfin Loan Agreement") with the lenders from time to time parties thereto (the "Lenders") and Hayfin Services LLP, as administrative agent for the Lenders, pursuant to which we and our subsidiaries party thereto granted a first priority security interest on substantially all of our assets, including intellectual property, subject to certain exceptions. The Hayfin Loan Agreement provided for the Lenders to extend $100.0 million in term loans to us on the closing date and up to an additional $50.0 million in delayed draw term loan(s) during the one year period immediately following the closing date (collectively, the "Loans"). On December 28, 2022, we borrowed the full amount of such $50.0 million delayed draw term loan under the Hayfin Loan Agreement. In conjunction with the execution of the Hayfin Loan Agreement, the Oxford Loan Agreement balance of $43.5 million was repaid in full and fees of $2.1 million in connection with the loan repayment were paid. In addition to utilizing the proceeds to repay the obligations under the Oxford Loan Agreement in full, the proceeds were otherwise used for general corporate purposes. After repayment, the Loans may not be re-borrowed.

In September 2023, we completed the exchange of $32.0 million in aggregate principal amount of the 2025 Convertible Notes for $33.6 million in aggregate principal amount of the 2028 Convertible Notes. As of December 31, 2023, the outstanding balance of the 2025 Convertible Notes was $15.2 million and the outstanding balance of the 2028 Convertible Notes was $33.6 million.

Capital Resources and Funding Requirements

We have incurred operating losses since inception, and we have an accumulated deficit of $617.0 million at December 31, 2023. Based on our current operating plans and existing working capital at December 31, 2023, we believe that our cash resources are sufficient to sustain operations and capital expenditure requirements for at least the next 12 months. We expect to incur substantial additional expenditures in the near term to support the marketing and selling of Gvoke, Recorlev and Keveyis as well as our ongoing research and development activities. We expect to continue to incur net losses for at least the next 12 months. Our ability to fund marketing and selling of Gvoke, Recorlev and Keveyis, as well as our product development and clinical operations, including

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completion of future clinical trials, will depend on the amount and timing of cash received from product revenue and potential future financings. Our future capital requirements will depend on many factors, including, but not limited to:

As we continue the marketing and selling of Gvoke, Recorlev and Keveyis, we may not generate a sufficient amount of product revenue to fund our cash requirements. Accordingly, we may need to obtain additional financing in the future which may include public or private debt and/or equity financings. As detailed in "Note 1 – Liquidity and capital resources" of Item 8 in this Form 10-K, there can be no assurance that such funding may be available to us on acceptable terms, or at all, or that we will be able to successfully market and sell Gvoke, Recorlev and Keveyis.

Cash Flows

Operating activities

Net cash used in operating activities was $47.0 million for the year ended December 31, 2023, compared to $102.9 million for the year ended December 31, 2022. The decrease in net cash used in operating activities was primarily driven by reduced working capital usage, partially offset by changes to the fair value of contingent value rights. For a discussion regarding product revenue, net and increases in spending, refer to "Results of Operations" included in this "Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations" of Part II.

Investing activities

Net cash used in investing activities was $6.0 million for the year ended December 31, 2023, compared to net cash provided by investing activities of $34.5 million for the year ended December 31, 2022. Cash used in investing activities in 2023 was primarily due to the purchase of short-term investments. In 2022, we used the majority of investments that matured to fund operations instead of re-investing.

Financing activities

Net cash used in financing activities was $1.6 million for the year ended December 31, 2023, compared to net cash provided by financing activities of $127.5 million for the year ended December 31, 2022. The cash provided by financing activities in 2022 was primarily due to the net proceeds of $30.0 million from the January 2022 private placement of our common stock with an affiliate of Armistice, proceeds net of debt issuance costs of $141.3 million from the Hayfin Loan Agreement, partially offset by the payoff of the outstanding principal under the Oxford Loan Agreement of $43.5 million in March 2022.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES AND ASSUMPTIONS

Our management’s discussion and analysis of our financial condition and results of operations on our financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including, among others, those related to revenue recognition and contingent considerations. We base our estimates on historical experience and on various other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our significant accounting policies are more fully described in "Note 2 - Summary of Significant Accounting Policies" of Item 8 in this Form 10-K.

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Revenue recognition

We apply the guidance in ASC 606, Revenue Recognition, to all contracts with customers within the scope of the standard.

We sell product primarily to wholesalers or a specialty pharmacy that subsequently resell to retail pharmacies or patients. We enter into arrangements with payors, group purchasing organizations, and healthcare providers that provide for government-mandated or privately-negotiated rebates, chargebacks and discounts related to our products. We currently sell Gvoke, Recorlev and Keveyis in the United States only and Ogulo (the brand name in the European Union and United Kingdom for the Company's ready-to-use liquid glucagon product) in the United Kingdom.

Revenue is recognized when our customer (e.g., a wholesaler or specialty pharmacy) obtains control of promised goods or services, which is when our obligations under the terms of the contract with the customer are satisfied, based on the consideration we expect to receive in exchange for those goods or services.

Revenues are recorded at the net product sales price, which includes estimated allowances for patient copay assistance programs, prompt payment discounts, payor rebates, chargebacks, service fees, and product returns, all of which are recorded at the time of sale to the pharmaceutical wholesaler or other customer. The Company applies significant judgments and estimates in determining some of these allowances. If actual results differ from its estimates, adjustments are made to these allowances in the period in which the actual results or updates to estimates become known.

Patient Copay Assistance Program

We offer savings programs to commercially insured patients under which the cost of a prescription to a patient is discounted. We reimburse pharmacies for this discount through a third-party vendor. We record an accrual to reduce gross sales for the estimated copay on units sold to wholesalers and other customers. The estimate is based on estimated percentages of products that will be prescribed to qualified patients, expected patient utilization of the discount program, average assistance paid based on reporting from the third-party vendor as well as industry data and estimated levels of inventory in the distribution channel. Accrued copay fees are recorded as a reduction of product revenue and included in accrued trade discounts and rebates on the consolidated balance sheets.

Commercial Rebates

We contract with certain private payor organizations, primarily insurance companies and pharmacy benefit managers, to provide rebates with respect to utilization of the products and contracted formulary status. We accrue estimated rebates based on actual average rebate amounts and estimated percent of product that will be prescribed to qualified patients and record the rebate as a reduction of product revenue. Accrued commercial rebates are included in accrued trade discounts and rebates on the consolidated balance sheets.

Government Rebates

We participate in certain federal and state government rebate programs such as the Medicaid Drug Rebate Program, TRICARE Retail Refunds Program, and Medicare Part D Program. We accrue estimated rebates and discounts based on actual average rebate amounts and estimated percent of product that will be prescribed to qualified patients and record the rebates as a reduction of product revenue. Accrued government rebates are included in accrued trade discounts and rebates on the consolidated balance sheets.

Chargebacks

We arrange with certain commercial and government entities allowing them to buy products directly from wholesalers at specific prices. These entities purchase products through wholesalers at the discounted price and the wholesalers charge the difference between their list price and the discounted price back to us. We accrue estimated chargebacks based on estimated percentages of products sold to these entities, contract prices, and estimated levels of inventory in the distribution channel and records the chargebacks as a reduction of product revenue. Accrued chargebacks are recorded as an allowance against trade receivables on the consolidated balance sheets.

Product Returns

For some products, our customers generally have the right to return product during the period beginning six months prior to the product expiration date and up to one year after the product expiration date. We use actual return data to estimate the provision for returns. In a reporting period, we may decide to constrain revenue for product returns based on information from various sources, including channel inventory levels, inventory dating, prescription data, the expiration dates of product currently being shipped, price changes of competitive products and introductions of generic products. While we believe that our returns reserve is sufficient to avoid a significant reversal of revenue in future periods, if it were to increase or decrease the rate by 1%, it would have a $1.5 million impact on revenue in the year ended December 31, 2023. We record estimated product returns in accrued returns reserve on the consolidated balance sheets and as a reduction of product revenue.

Contingent considerations

The fair value of the CVRs was calculated by using a discounted cash flow method for the Keveyis patent milestone and an option pricing method for the Recorlev and Keveyis sales milestones. In the case of Keveyis milestones, we applied a scenario-based method

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and weighted them based on the possible achievement of the milestone. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurement. The key assumptions used include the discount rate and sales growth. A 1% change of the discount rate will change the CVR value by approximately $0.02 million or 0.1%. A 10% change of estimated net revenue will change the CVR value by approximately $1.7 million or 8%. The estimated value of the CVR consideration is based upon available information and certain assumptions which our management believes are reasonable under the circumstances. The ultimate payout under the CVRs may differ materially from the assumptions used in determining the fair value of the CVR consideration. This value is then remeasured for future expected payout as well as the increase in fair value due to the time value of money. These gains or losses, if any, are recognized in the consolidated statements of operations and comprehensive loss.

NEW ACCOUNTING STANDARDS

Refer to "Note 2 - Basis of presentation and summary of significant accounting policies and estimates," in Item 8 of this Form 10-K for a description of recent accounting pronouncements applicable to our financial statements.

JOBS ACT ACCOUNTING ELECTION

We were an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). However, we became an accelerated filer and thus ceased to be an emerging growth company on December 31, 2023. As a result, we were required to adopt new or revised accounting standards as required by public companies, including those standards which we had previously deferred pursuant to the JOBS Act. Additionally, we are no longer able to take advantage of the reduced regulatory and reporting requirements of emerging growth companies.