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iXBRL+

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2020  

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                 TO                

Commission file number: 001-36287

 

Flexion Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-1388364

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

10 Mall Road, Suite 301

Burlington, Massachusetts

 

01803

(Address of Principal Executive Offices)

 

(Zip Code)

(781) 305-7777

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

FLXN

NASDAQ

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of August 1, 2020, the registrant had 49,298,390 shares of Common Stock ($0.001 par value) outstanding.

 

 

 

 

FLEXION THERAPEUTICS, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

3

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 (Unaudited)

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

5

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

 

Item 4. Controls and Procedures

37

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

38

 

Item 1A. Risk Factors

38

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

70

 

Item 3. Defaults Upon Senior Securities

70

 

Item 4. Mine Safety Disclosures

70

 

Item 5. Other Information

70

 

Item 6. Exhibits

71

 

Signatures

72

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Flexion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share amounts)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

183,099

 

 

$

82,253

 

Marketable securities

 

 

17,509

 

 

 

54,407

 

Accounts receivable, net

 

 

21,524

 

 

 

37,115

 

Inventories

 

 

19,392

 

 

 

16,529

 

Prepaid expenses and other current assets

 

 

5,043

 

 

 

5,371

 

Total current assets

 

$

246,567

 

 

$

195,675

 

Property and equipment, net

 

 

17,795

 

 

 

13,662

 

Right-of-use assets

 

 

7,414

 

 

 

8,223

 

Total assets

 

$

271,776

 

 

$

217,560

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,886

 

 

$

15,258

 

Accrued expenses and other current liabilities

 

 

15,410

 

 

 

19,610

 

Deferred revenue

 

 

5,000

 

 

 

 

Operating lease liabilities

 

 

1,422

 

 

 

1,351

 

Current portion of long-term debt

 

 

7,639

 

 

 

 

Total current liabilities

 

$

37,357

 

 

$

36,219

 

Long-term operating lease liability, net

 

 

6,790

 

 

 

7,609

 

Long-term debt, net

 

 

52,829

 

 

 

40,176

 

2024 convertible notes, net

 

 

157,990

 

 

 

153,413

 

Other long-term liabilities

 

 

295

 

 

 

251

 

Total liabilities

 

$

255,261

 

 

$

237,668

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2020

   and December 31, 2019 and 0 shares issued and outstanding at June 30, 2020

   and December 31, 2019

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 49,270,392 and

   38,361,476 shares issued and outstanding, at June 30, 2020 and

   December 31, 2019, respectively

 

 

49

 

 

 

38

 

Additional paid-in capital

 

 

754,483

 

 

 

648,391

 

Accumulated other comprehensive income

 

 

3

 

 

 

62

 

Accumulated deficit

 

 

(738,020

)

 

 

(668,599

)

Total stockholders' equity (deficit)

 

 

16,515

 

 

 

(20,108

)

Total liabilities and stockholders' equity

 

$

271,776

 

 

$

217,560

 

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

 

 

3


Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

15,451

 

 

$

16,953

 

 

$

35,578

 

 

$

27,517

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

5,481

 

 

 

1,398

 

 

 

7,757

 

 

 

3,160

 

Research and development

 

 

12,507

 

 

 

16,125

 

 

 

33,641

 

 

 

31,550

 

Selling, general and administrative

 

 

24,730

 

 

 

33,103

 

 

 

54,029

 

 

 

65,325

 

Total operating expenses

 

 

42,718

 

 

 

50,626

 

 

 

95,427

 

 

 

100,035

 

Loss from operations

 

 

(27,267

)

 

 

(33,673

)

 

 

(59,849

)

 

 

(72,518

)

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

95

 

 

 

831

 

 

 

522

 

 

 

1,842

 

Interest expense

 

 

(5,002

)

 

 

(3,949

)

 

 

(9,723

)

 

 

(7,885

)

Other (expense) income

 

 

(197

)

 

 

304

 

 

 

(123

)

 

 

536

 

Total other (expense) income

 

 

(5,104

)

 

 

(2,814

)

 

 

(9,324

)

 

 

(5,507

)

Loss before income taxes

 

 

(32,371

)

 

 

(36,487

)

 

 

(69,173

)

 

 

(78,025

)

Income tax expense

 

 

248

 

 

 

 

 

 

248

 

 

 

 

Net loss

 

$

(32,619

)

 

$

(36,487

)

 

 

(69,421

)

 

 

(78,025

)

Net loss per common share, basic and diluted

 

$

(0.76

)

 

$

(0.96

)

 

$

(1.71

)

 

$

(2.05

)

Weighted average common shares outstanding, basic and diluted

 

 

42,776

 

 

 

38,010

 

 

 

40,664

 

 

 

38,001

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains from available-for-sale securities, net

   of tax of $0

 

 

(3

)

 

 

125

 

 

 

(59

)

 

 

307

 

Total other comprehensive (loss) income

 

 

(3

)

 

 

125

 

 

 

(59

)

 

 

307

 

Comprehensive loss

 

$

(32,622

)

 

$

(36,362

)

 

$

(69,480

)

 

$

(77,718

)

 

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

4


Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited in thousands)

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

Stockholders'

 

 

 

 

Shares

 

 

Par Value

 

 

Paid-in-

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Equity

(Deficit)

 

Balance at December 31, 2019

 

 

 

38,361

 

 

$

38

 

 

$

648,391

 

 

$

62

 

 

$

(668,599

)

 

$

(20,108

)

Issuance of common stock for equity

   awards, net of shares withheld for taxes

 

 

 

201

 

 

 

1

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

9

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

4,651

 

 

 

 

 

 

 

 

 

 

 

4,651

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,802

)

 

 

(36,802

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56

)

 

 

 

 

 

 

(56

)

Balance at March 31, 2020

 

 

 

38,562

 

 

$

39

 

 

$

653,050

 

 

$

6

 

 

$

(705,401

)

 

$

(52,306

)

Issuance of common stock net of issuance costs

 

 

 

10,615

 

 

 

10

 

 

 

96,754

 

 

 

 

 

 

 

 

 

 

 

96,764

 

Issuance of common stock for equity

   awards, net of shares withheld for taxes

 

 

 

11

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

1

 

Employee stock purchase plan

 

 

 

82

 

 

 

 

 

 

 

891

 

 

 

 

 

 

 

 

 

 

 

891

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,787

 

 

 

 

 

 

 

 

 

 

 

3,787

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,619

)

 

 

(32,619

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

(3

)

Balance at June 30, 2020

 

 

 

49,270

 

 

$

49

 

 

$

754,483

 

 

$

3

 

 

$

(738,020

)

 

$

16,515

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

 

Shares

 

 

Par Value

 

 

Paid-in-

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balance at December 31, 2018

 

 

 

37,946

 

 

$

38

 

 

$

628,944

 

 

$

(77

)

 

$

(518,826

)

 

$

110,079

 

Issuance of common stock for equity

   awards

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,853

 

 

 

 

 

 

 

 

 

 

 

3,853

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,538

)

 

 

(41,538

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

 

182

 

Balance at March 31, 2019

 

 

 

37,993

 

 

$

38

 

 

$

632,797

 

 

$

105

 

 

$

(560,364

)

 

$

72,576

 

Issuance of common stock for equity

   awards

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock purchase plan

 

 

 

106

 

 

 

 

 

 

 

1,040

 

 

 

 

 

 

 

 

 

 

 

1,040

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

4,217

 

 

 

 

 

 

 

 

 

 

 

4,217

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,487

)

 

 

(36,487

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125

 

 

 

 

 

 

 

125

 

Balance at June 30, 2019

 

 

 

38,107

 

 

$

38

 

 

$

638,054

 

 

$

230

 

 

$

(596,851

)

 

$

41,471

 

 

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

5


Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(69,421

)

 

$

(78,025

)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

751

 

 

 

435

 

Amortization of right-of-use assets

 

 

809

 

 

 

553

 

Stock-based compensation expense

 

 

8,438

 

 

 

8,070

 

Non cash interest expense

 

 

292

 

 

 

 

Accretion of discount on marketable securities

 

 

(52

)

 

 

(836

)

Loss on disposal of fixed assets

 

 

262

 

 

 

 

Amortization of debt discount and debt issuance costs

 

 

4,577

 

 

 

4,184

 

Premium paid on securities purchased

 

 

(17

)

 

 

(26

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

15,591

 

 

 

(9,468

)

Inventory

 

 

(2,502

)

 

 

(4,512

)

Prepaid expenses and other current assets

 

 

328

 

 

 

1,287

 

Accounts payable

 

 

(7,540

)

 

 

(271

)

Accrued expenses and other current liabilities

 

 

(4,375

)

 

 

787

 

Deferred revenue

 

 

5,000

 

 

 

 

Lease liabilities

 

 

(748

)

 

 

(541

)

Net cash used in operating activities

 

 

(48,607

)

 

 

(78,363

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,538

)

 

 

(1,068

)

Purchases of marketable securities

 

 

(12,490

)

 

 

(96,198

)

Sale and redemption of marketable securities

 

 

49,398

 

 

 

138,061

 

Net cash provided by investing activities

 

 

31,370

 

 

 

40,795

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from borrowings under term loan

 

 

15,000

 

 

 

 

Proceeds from revolving line of credit

 

 

20,000

 

 

 

 

Repayments of revolving line of credit

 

 

(15,000

)

 

 

 

Proceeds from the offering of common stock

 

 

97,289

 

 

 

 

Payments of public offering costs

 

 

(107

)

 

 

 

Payments on notes payable

 

 

 

 

 

(5,000

)

Proceeds from the exercise of stock options

 

 

10

 

 

 

 

Proceeds from employee stock purchase plan

 

 

891

 

 

 

1,040

 

Net cash provided by (used in) financing activities

 

 

118,083

 

 

 

(3,960

)

Net increase (decrease) in cash and cash equivalents

 

 

100,846

 

 

 

(41,528

)

Cash and cash equivalents at beginning of period

 

 

82,253

 

 

 

87,229

 

Cash and cash equivalents at end of period

 

$

183,099

 

 

$

45,701

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Right-of-use asset obtained in exchange for operating lease obligation

 

 

 

 

 

7,046

 

Purchases of property and equipment in accounts payable and accrued expenses

 

 

2,126

 

 

 

 

Public offering costs included in accounts payable or accrued

 

 

418

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

5,048

 

 

 

3,699

 

 

 

 

 

 

 

 

 

 

 

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

 

6


Flexion Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Overview and Nature of the Business

Flexion Therapeutics, Inc. (“Flexion” or the “Company”) was incorporated under the laws of the state of Delaware on November 5, 2007. Flexion is a biopharmaceutical company focused on the discovery, development and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, or OA, a type of degenerative arthritis. The Company has an approved product, ZILRETTA®, which it markets in the United States.  ZILRETTA is the first and only extended-release, intra-articular, or IA (meaning in the joint), injection indicated for the management of OA knee pain. ZILRETTA is a non-opioid therapy that employs Flexion’s proprietary microsphere technology to provide pain relief. The pivotal Phase 3 trial, on which the approval of ZILRETTA was based, showed that ZILRETTA met the primary endpoint of pain reduction at Week 12, with statistically significant pain relief extending through Week 16. The Company also has two pipeline programs focused on the local treatment of musculoskeletal conditions: FX201, which is an investigational IA gene therapy product candidate in clinical development for the treatment of OA, and FX301, a preclinical product candidate, which is being developed as a locally administered peripheral nerve block for control of post-operative pain.

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations. As of June 30, 2020, the Company had cash, cash equivalents, and marketable securities of approximately $200.6 million.

The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry, including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and the ability to secure additional capital to fund operations. Successfully commercializing ZILRETTA requires significant sales and marketing efforts and the Company’s pipeline programs will require significant additional research and development efforts, including extensive preclinical and clinical testing. These activities will in turn require significant amounts of capital, qualified personnel and adequate infrastructure. There can be no assurance when, if ever, the Company will realize significant revenue from the sales of ZILRETTA or if the development efforts supporting the Company’s pipeline, including future clinical trials, will be successful.

The Company’s operations have been and continue to be affected by the ongoing global pandemic of a novel strain of coronavirus (“COVID-19”) and the resulting volatility and uncertainty it has caused. In March 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has caused significant volatility and uncertainty, which could result in a prolonged economic downturn that has disrupted and is expected to continue to disrupt the Company’s business. While there have been no material asset impairments recorded to date, any prolonged material future disruptions to the work of the Company’s employees, suppliers, contract manufacturers, or vendors, or to the operations of physicians that administer ZILRETTA could negatively impact the Company’s operations, availability of supplies, carrying value of assets, or the Company’s operating results or cash flows.

In the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020, the Company disclosed that there was substantial doubt about its ability to continue as a going concern as a result of conditions that existed as of March 31, 2020. Specifically, those conditions included an expected material decline in revenue due to COVID-19 as compared to its prior expectations, and as a result, it was deemed probable that the Company would fail to meet the revenue covenant within the Company’s amended and restated credit and security agreement described in Note 9. In the three months following March 31, 2020, the Company took certain actions designed to alleviate the substantial doubt, including reducing certain operating expenses through hiring and travel freezes, suspension and/or termination of active clinical trials, reduction of certain marketing expenses, and elimination of non-essential operating expenses, modifying the amended and restated credit and security agreement, and completing an equity offering of 10,615,385 shares of the Company’s common stock which resulted in $96.8 million of net proceeds to the Company. The amendment to the amended and restated credit and security agreement resulted in a change in the minimum liquidity threshold that determines whether or not the revenue covenant is applicable. Pursuant to the amendment, the Company’s minimum liquidity threshold now includes certain accounts receivable as deemed eligible under the amended and restated credit and security agreement, in addition to cash, cash equivalents, and marketable securities. Additionally, prior to May 2021, the minimum revenue covenant, if it applies in the future, is unmodified and is based on the greater of (i) a conservative percentage of the year’s approved forecast and (ii) modest growth over the trailing twelve months of actual revenues. Beginning in May 2021, the minimum revenue covenant, if it applies, will be the greatest of (i) a conservative percentage of the year’s approved forecast, (ii) modest growth over the trailing twelve months of actual revenues and (iii) 100% of the minimum revenue covenant amount for the preceding month. As of June 30, 2020, the Company was in compliance with all covenants under the amended and restated credit and security agreement.  

7


Additionally, while purchases of ZILRETTA by physicians, clinics, and certain medical centers or hospitals (i.e., healthcare providers who administer ZILRETTA to patients) dropped precipitously in the latter part of March into early April due to the adverse impact of COVID-19 on the operations of these healthcare providers, as the second quarter progressed, there was an increase in demand for ZILRETTA such that total ZILRETTA purchases by healthcare providers for the second quarter were consistent with the first quarter of this year. The Company currently expects to be able to maintain the $80.0 million liquidity threshold for at least 12 months following the issuance of these financial statements. Taking these factors together, the revenue covenant under the amended and restated credit and security agreement is not expected to be applicable through 12 months from the issuance of the financial statements. Management believes that current cash, cash equivalents, and marketable securities on hand at June 30, 2020 will be sufficient to fund operations for at least the next 12 months from the issuance date of these financial statements.

The future viability of the Company is dependent on its ability to fund its operations through sales of ZILRETTA, and/or raise additional capital, such as through debt or equity offerings, as needed. If the Company is unable to grow sales of ZILRETTA in future periods, it is possible that the Company may not maintain compliance with the revenue covenant in the period after 12 months from issuance of these financial statements and would need to seek additional financing. The Company may not be able to obtain financing on acceptable terms, or at all. In particular, as a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any additional debt or equity financing more difficult, more costly and more dilutive. If the Company is unable to obtain funding on a timely basis, the Company may need to curtail its operations, including the commercialization of ZILRETTA and research and development activities, which could adversely affect its prospects.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements as of June 30, 2020, and for the three and six months ended June 30, 2020 and 2019, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and Generally Accepted Accounting Principles (“GAAP”) for consolidated financial information including the accounts of the Company and its wholly-owned subsidiary after elimination of all significant intercompany accounts and transactions. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020.

The information presented in the condensed consolidated financial statements and related notes as of June 30, 2020 and December 31, 2019, and for the three and six months ended June 30, 2020 and 2019, is unaudited.  The December 31, 2019 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

Interim results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, or any future period.

Recent Accounting Pronouncements

Accounting Standards Recently Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. The Company adopted this standard as of January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.

In July 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, as part of the FASB’s disclosure framework project. ASU 2018-13 is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. Additionally, the new standard permits an entity to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. ASU 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The Company early adopted this portion

8


of the standard as the quarter ended September 30, 2018. The Company adopted the remainder of the standard as of January 1, 2020. The adoption of the remainder of ASU 2018-13 did not have a material impact on the Company’s condensed consolidated financial statements.

 

Consolidation

The accompanying condensed consolidated financial statements include the Company and its wholly-owned subsidiary, Flexion Therapeutics Securities Corporation. The Company has eliminated all intercompany transactions for the three and six months ended June 30, 2020 and the year ended December 31, 2019.

Revenue Recognition

On October 6, 2017, the U.S. Food and Drug Administration, (FDA), approved ZILRETTA. The Company entered into a limited number of arrangements with specialty distributors and a specialty pharmacy in the U.S. to distribute ZILRETTA. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606 - Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.

To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to arrangements that meet the definition of a contract with a customer under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Revenue, Net— The Company primarily sells ZILRETTA to specialty distributors and a specialty pharmacy, who then subsequently resell ZILRETTA to physicians, clinics and certain medical centers or hospitals. The Company also contracts directly with healthcare providers and intermediaries such as Group Purchasing Organizations (“GPOs”). In addition, the Company enters into arrangements with government payers that provide for government mandated rebates and chargebacks with respect to the purchase of ZILRETTA.  

The Company recognizes revenue on product sales when the customer obtains control of the Company's product, which occurs at a point in time (upon delivery to the customer). The Company has determined that the delivery of ZILRETTA to its customers constitutes a single performance obligation.  There are no other promises to deliver goods or services beyond what is specified in each accepted customer order.  The Company has assessed the existence of a significant financing component in the agreements with its customers.  The trade payment terms with customers do not exceed one year and therefore the Company has elected to apply the practical expedient and no amount of consideration has been allocated as a financing component.  Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.

Transaction Price, including Variable Consideration— Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee for service amounts that are detailed within contracts between the Company and its customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

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The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s original estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Service Fees and Allowances— The Company compensates its customers and GPOs for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss through June 30, 2020, as well as a reduction to trade receivables, net on the condensed consolidated balance sheets.

Product Returns— Consistent with industry practice, the Company generally offers customers a limited right of return for product that has been purchased from the Company based on the product’s expiration date.  The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses and other current liabilities, net, on the condensed consolidated balance sheets. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has received an immaterial amount of returns to date and believes that future returns of ZILRETTA will be minimal.

Chargebacks— Chargebacks for fees and discounts to qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified VA hospitals and 340b entities at prices lower than the list prices charged to customers who directly purchase the product from the Company. The 340b Drug Discount Program is a U.S. federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible health care organizations and covered entities at significantly reduced prices.  Customers charge the Company for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and trade receivables, net. Chargeback amounts are generally determined at the time of resale to the qualified government healthcare provider by customers, and the Company generally issues credits for such amounts within a few weeks of the customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period-end that the Company expects will be sold to qualified healthcare providers, and chargebacks that customers have claimed, but for which the Company has not yet issued a credit.

Government Rebates— The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company estimates its exposure to utilization from the Medicare Part D coverage gap discount program to be immaterial.  For Medicaid programs, the Company estimates the portion of sales attributed to Medicaid patients and records a liability for the rebates to be paid to the respective state Medicaid programs.  The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Purchaser/Provider Discounts and Rebates — Beginning in the third quarter of 2019, the Company began offering rebates to eligible purchasers and healthcare providers that are variable based on volume of product purchased. Rebates are based on actual purchase levels during the rebate purchase period. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

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Other Incentives— Other incentives which the Company offers include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.

To date, the Company’s only source of product revenue has been from the U.S. sales of ZILRETTA, which it began shipping to customers in October 2017.

The following table summarizes activity in each of the product revenue allowance and reserve categories for the three and six months ended June 30, 2020 and 2019:

 

(In thousands)

 

Service Fees,

Allowances and

Chargebacks

 

 

Government

Rebates and

Other

Incentives

 

 

Product Returns

 

 

Purchaser/Provider Discounts and Rebates

 

 

Total

 

Balance as of December 31, 2019

 

$

1,847

 

 

$

248

 

 

$

402

 

 

$

1,656

 

 

$

4,153

 

Provision related to sales in the current quarter

 

 

1,590

 

 

 

254

 

 

 

114

 

 

 

526

 

 

 

2,484

 

Credits and payments made

 

 

(1,852

)

 

 

(199

)

 

 

(10

)

 

 

(1,656

)

 

 

(3,717

)

Adjustments related to prior period sales

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Balance as of March 31, 2020

 

 

1,585

 

 

 

398

 

 

 

506

 

 

 

526

 

 

 

3,015

 

Provision related to sales in the current quarter

 

 

1,417

 

 

 

133

 

 

 

98

 

 

 

892

 

 

 

2,540

 

Credits and payments made

 

 

(1,172

)

 

 

(262

)

 

 

(1

)

 

 

(528

)

 

 

(1,963

)

Adjustments related to prior period sales

 

 

 

 

 

90

 

 

 

 

 

 

2

 

 

 

92

 

Balance as of June 30, 2020

 

$

1,830

 

 

$

359

 

 

$

603

 

 

$

892

 

 

$

3,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

601

 

 

$

491

 

 

$

125

 

 

$

 

 

$

1,217

 

Provision related to sales in the current quarter

 

 

741

 

 

 

24

 

 

 

57

 

 

 

 

 

 

822

 

Credits and payments made

 

 

(332

)

 

 

(36

)

 

 

(33

)

 

 

 

 

 

(401

)

Balance as of March 31, 2019

 

 

1,010

 

 

 

479

 

 

 

149

 

 

 

 

 

 

1,638

 

Provision related to sales in the current quarter

 

 

1,196

 

 

 

121

 

 

 

92

 

 

 

 

 

 

1,409

 

Credits and payments made

 

 

(1,157

)

 

 

(65

)

 

 

(6

)

 

 

 

 

 

(1,228

)

Balance as of June 30, 2019

 

$

1,049

 

 

$

535