Quarterly Report (10-q)

Date : 11/07/2019 @ 9:06PM
Source : Edgar (US Regulatory)
Stock : Flexion Therapeutics Inc (FLXN)
Quote : 19.685  0.155 (0.79%) @ 3:59PM

Quarterly Report (10-q)

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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 SEPTEMBER 30, 2019

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 November 1, 2019, the registrant had 38,174,760 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 September 30, 2019 and December 31, 2018 (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (Unaudited)

4

 

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

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (Unaudited)

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

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

24

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

32

 

Item 4. Controls and Procedures

33

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

34

 

Item 1A. Risk Factors

34

 

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

61

 

Item 3. Defaults Upon Senior Securities

61

 

Item 4. Mine Safety Disclosures

61

 

Item 5. Other Information

61

 

Item 6. Exhibits

62

 

Signatures

63

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Flexion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share amounts)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

87,769

 

 

$

87,229

 

Marketable securities

 

 

87,991

 

 

 

171,555

 

Accounts receivable, net

 

 

29,316

 

 

 

13,121

 

Inventories

 

 

14,773

 

 

 

7,637

 

Prepaid expenses and other current assets

 

 

5,235

 

 

 

5,500

 

Total current assets

 

$

225,084

 

 

$

285,042

 

Property and equipment, net

 

 

10,651

 

 

 

10,710

 

Right-of-use assets

 

 

8,618

 

 

 

 

Total assets

 

$

244,353

 

 

$

295,752

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,088

 

 

$

12,340

 

Accrued expenses and other current liabilities

 

 

24,419

 

 

 

14,310

 

Operating lease liabilities

 

 

1,283

 

 

 

 

Current portion of long-term debt

 

 

 

 

 

9,967

 

Total current liabilities

 

$

37,790

 

 

$

36,617

 

Long-term operating lease liability, net

 

 

7,865

 

 

 

 

Long-term debt, net

 

 

40,070

 

 

 

3,640

 

2024 convertible notes, net

 

 

151,204

 

 

 

144,879

 

Other long-term liabilities

 

 

251

 

 

 

537

 

Total liabilities

 

$

237,180

 

 

$

185,673

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2019

   and December 31, 2018 and 0 shares issued and outstanding at September 30, 2019

   and December 31, 2018

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 38,152,405 and

   37,946,341 shares issued and outstanding, at September 30, 2019 and

   December 31, 2018, respectively

 

 

38

 

 

 

38

 

Additional paid-in capital

 

 

642,087

 

 

 

628,944

 

Accumulated other comprehensive income (loss)

 

 

131

 

 

 

(77

)

Accumulated deficit

 

 

(635,083

)

 

 

(518,826

)

Total stockholders' equity

 

 

7,173

 

 

 

110,079

 

Total liabilities and stockholders' equity

 

$

244,353

 

 

$

295,752

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

21,786

 

 

$

6,990

 

 

$

49,303

 

 

$

12,981

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

2,872

 

 

 

1,619

 

 

 

6,032

 

 

 

5,264

 

Research and development

 

 

20,938

 

 

 

13,578

 

 

 

52,488

 

 

 

38,223

 

Selling, general and administrative

 

 

32,136

 

 

 

32,804

 

 

 

97,461

 

 

 

90,739

 

Total operating expenses

 

 

55,946

 

 

 

48,001

 

 

 

155,981

 

 

 

134,226

 

Loss from operations

 

 

(34,160

)

 

 

(41,011

)

 

 

(106,678

)

 

 

(121,245

)

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

721

 

 

 

1,157

 

 

 

2,563

 

 

 

3,572

 

Interest expense

 

 

(4,652

)

 

 

(3,930

)

 

 

(12,537

)

 

 

(11,775

)

Other (expense) income

 

 

(141

)

 

 

144

 

 

 

395

 

 

 

364

 

Total other (expense) income

 

 

(4,072

)

 

 

(2,629

)

 

 

(9,579

)

 

 

(7,839

)

Net loss

 

$

(38,232

)

 

$

(43,640

)

 

$

(116,257

)

 

$

(129,084

)

Net loss per common share, basic and diluted

 

$

(1.00

)

 

$

(1.15

)

 

$

(3.06

)

 

$

(3.42

)

Weighted average common shares outstanding, basic and diluted

 

 

38,125

 

 

 

37,818

 

 

 

38,043

 

 

 

37,712

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   of tax of $0

 

 

(99

)

 

 

153

 

 

 

208

 

 

 

250

 

Total other comprehensive (loss) income

 

 

(99

)

 

 

153

 

 

 

208

 

 

 

250

 

Comprehensive loss

 

$

(38,331

)

 

$

(43,487

)

 

$

(116,049

)

 

$

(128,834

)

 

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

 

 

 

 

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

 

Issuance of common stock for equity

   awards

 

 

 

45

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

8

 

Employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

4,025

 

 

 

 

 

 

 

 

 

 

 

4,025

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,232

)

 

 

(38,232

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(99

)

 

 

 

 

 

 

(99

)

Balance at September 30, 2019

 

 

 

38,152

 

 

$

38

 

 

$

642,087

 

 

$

131

 

 

$

(635,083

)

 

$

7,173

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

 

Shares

 

 

Par Value

 

 

Paid-in-

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balance at December 31, 2017

 

 

 

37,611

 

 

$

38

 

 

$

609,810

 

 

$

(407

)

 

$

(349,167

)

 

$

260,274

 

Issuance of common stock for equity

   awards

 

 

 

22

 

 

 

 

 

 

414

 

 

 

 

 

 

 

 

 

 

 

414

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,657

 

 

 

 

 

 

 

 

 

 

 

3,657

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,569

)

 

 

(41,569

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(169

)

 

 

 

 

 

 

(169

)

Balance at March 31, 2018

 

 

 

37,633

 

 

$

38

 

 

$

613,881

 

 

$

(576

)

 

$

(390,736

)

 

$

222,607

 

Issuance of common stock for equity

   awards

 

 

 

122

 

 

 

 

 

 

1,396

 

 

 

 

 

 

 

 

 

 

 

1,396

 

Employee stock purchase plan

 

 

 

53

 

 

 

 

 

 

 

1,129

 

 

 

 

 

 

 

 

 

 

 

1,129

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,984

 

 

 

 

 

 

 

 

 

 

 

3,984

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43,875

)

 

 

(43,875

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

266

 

 

 

 

 

 

 

266

 

Balance at June 30, 2018

 

 

 

37,808

 

 

$

38

 

 

$

620,390

 

 

$

(310

)

 

$

(434,611

)

 

$

185,507

 

Issuance of common stock for equity

   awards

 

 

 

17

 

 

 

 

 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

86

 

Employee stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,999

 

 

 

 

 

 

 

 

 

 

 

3,999

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43,640

)

 

 

(43,640

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

153

 

 

 

 

 

 

 

153

 

Balance at September 30, 2018

 

 

 

37,825

 

 

$

38

 

 

$

624,475

 

 

$

(157

)

 

$

(478,251

)

 

$

146,105

 

 

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(116,257

)

 

$

(129,084

)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

733

 

 

 

1,494

 

Amortization of right-of-use assets

 

 

942

 

 

 

 

Stock-based compensation expense

 

 

12,095

 

 

 

11,640

 

Non cash interest expense

 

 

459

 

 

 

 

Accretion of discount on marketable securities

 

 

(1,155

)

 

 

(803

)

Loss from debt extinguishment

 

 

352

 

 

 

 

Amortization of debt discount and debt issuance costs

 

 

6,505

 

 

 

5,786

 

Premium paid on securities purchased

 

 

(27

)

 

 

(215

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(16,195

)

 

 

(8,388

)

Inventory

 

 

(6,151

)

 

 

(3,044

)

Prepaid expenses, other current and long-term assets

 

 

265

 

 

 

(1,273

)

Accounts payable

 

 

(576

)

 

 

2,300

 

Accrued expenses and other current liabilities

 

 

10,033

 

 

 

3,826

 

Lease liabilities and other long-term liabilities

 

 

(839

)

 

 

 

Net cash used in operating activities

 

 

(109,816

)

 

 

(117,761

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,118

)

 

 

(688

)

Purchases of marketable securities

 

 

(106,105

)

 

 

(157,116

)

Sale and redemption of marketable securities

 

 

191,059

 

 

 

269,417

 

Net cash provided by investing activities

 

 

83,836

 

 

 

111,613

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from borrowings under term loan

 

 

40,000

 

 

 

 

Payment of debt issuance costs

 

 

(161

)

 

 

 

Payments on notes payable

 

 

(14,367

)

 

 

(7,500

)

Proceeds from the exercise of stock options

 

 

8

 

 

 

1,896

 

Proceeds from employee stock purchase plan

 

 

1,040

 

 

 

1,129

 

Net cash provided by (used in) financing activities

 

 

26,520

 

 

 

(4,475

)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

540

 

 

 

(10,623

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

87,229

 

 

 

128,389

 

Cash, cash equivalents, and restricted cash at end of period

 

$

87,769

 

 

$

117,766

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

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

 

$

9,560

 

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

 

1,410

 

 

 

143

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

3,991

 

 

 

4,268

 

 

 

 

 

 

 

 

 

 

 

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 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 may 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.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2019, and for the three and nine months ended September 30, 2019 and 2018, 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 February 28, 2019.

The information presented in the condensed consolidated financial statements and related notes as of September 30, 2019, and for the three and nine months ended September 30, 2019 and 2018, is unaudited.  The December 31, 2018 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019, or any future period.

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 September 30, 2019, the Company had cash, cash equivalents, and marketable securities of approximately $175.8 million. Management believes that current cash, cash equivalents, and marketable securities on hand at September 30, 2019 should be sufficient to fund operations for at least the next twelve 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. This funding is necessary for the Company to support the commercialization of ZILRETTA and to perform the research and development activities required to develop the Company’s other product candidates in order to generate future revenue streams. The Company may not be able to obtain financing on acceptable terms, or at all. 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.

7


Recent Accounting Pronouncements

Accounting Standards Recently Adopted

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases (“ASU 2016-02”), to increase transparency and comparability among organizations by recognizing lease assets and liabilities, including operating leases, on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASU 2016-02 on January 1, 2019 using the “Comparatives under 840” approach, which was approved by the FASB in July 2018 as part of ASU 2018-11. Under this method, the condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 are presented applying the new requirements under ASC 842, while the condensed consolidated financial statements as of December 31, 2018 and for the three and nine months ended September 30, 2018 are presented under ASC 840. The required disclosures are presented under ASC 842 for the current year and ASC 840 for the prior year.

As part of its adoption of ASU 2016-02, the Company elected the package of practical expedients which allows it to not reassess (1) whether existing contracts contain leases, (2) the lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition. Consequently, on adoption, the Company recognized lease liabilities of $7.0 million and corresponding right-of-use, or ROU, assets of $6.6 million based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. These lease liabilities and ROU assets relate to operating leases only, as the Company concluded that it does not have any finance leases. The difference between the lease liability and the ROU assets upon adoption relates to the deferred rent balance that had been recorded prior to adoption. The Company determined that no cumulative adjustment to retained earnings was required.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Equity-based payments to nonemployees were previously covered under ASC 505-50 and required companies to measure the awards based on the fair value of the consideration received or the fair value of the equity instruments issued and remeasure the fair value of such awards at each reporting date. The Company adopted ASU 2018-07 on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial position or results of operations.

Accounting Standards Recently Issued

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 is still evaluating the impact of ASU 2016-13 on the Company’s consolidated financial statements; however, it does not expect the impact to be material.

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 of the standard as of the quarter ended September 30, 2018. The Company does not expect the adoption of the remainder of ASU 2018-13 to have any impact on its consolidated financial statements, as the changes to the disclosures are primarily relevant for companies with Level 3 assets and liabilities, which the Company does not have.

 

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 nine months ended September 30, 2019 and 2018 and the year ended December 31, 2018.

Revenue Recognition

On October 6, 2017, the U.S. Food and Drug Administration, or 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.

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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. For a complete discussion of accounting for product revenue, see Product Revenue, Net (below).

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.

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 September 30, 2019, 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.

The Company’s limited right of return allows for eligible returns of ZILRETTA in the following circumstances:

 

Shipment errors that were the result of an error by the Company;

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Quantity delivered that is greater or less than the quantity ordered;

 

Product distributed by the Company that is damaged in transit prior to receipt by the customer;

 

Expired product, previously purchased directly from the Company, that is returned during the period beginning three months prior to the product’s expiration date and ending three months after the product’s expiration date;

 

Product subject to a recall; and

 

Product that the Company, at its sole discretion, has specified to be returned.

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 nine months ended September 30, 2019 and 2018:

 

(In thousands)

 

Service Fees,

Allowances and

Chargebacks

 

 

Government

Rebates and

Other

Incentives

 

 

Product Returns

 

 

Provider Rebates

 

 

Total

 

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