Flexion Therapeutics, Inc.
Flexion Therapeutics Inc (Form: 10-Q, Received: 11/07/2016 17:25:02)

 

 

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, 2016

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes       No  

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

As of October 31, 2016, the registrant had 27,527,419 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, 2016 and December 31, 2015 (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2016 and 2015 (Unaudited)

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)

5

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

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

15

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

22

 

Item 4. Controls and Procedures

22

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

24

 

Item 1A. Risk Factors

24

 

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

27

 

Item 3. Defaults Upon Senior Securities

27

 

Item 4. Mine Safety Disclosures

27

 

Item 5. Other Information

27

 

Item 6. Exhibits

28

 

 

2


 

PART I. FINANCI AL INFORMATION

Item 1. Financial Statements

Flexion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share amounts)

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,809

 

 

$

62,944

 

Marketable securities

 

 

92,693

 

 

 

48,303

 

Accounts receivable

 

 

 

 

 

95

 

Prepaid expenses and other current assets

 

 

1,584

 

 

 

761

 

Total current assets

 

 

161,086

 

 

 

112,103

 

Property and equipment, net

 

 

11,223

 

 

 

7,442

 

Long-term investments

 

 

2,003

 

 

 

7,357

 

Other assets

 

 

30

 

 

 

157

 

Restricted cash

 

 

80

 

 

 

80

 

Total assets

 

$

174,422

 

 

$

127,139

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,029

 

 

$

3,692

 

Accrued expenses and other current liabilities

 

 

3,724

 

 

 

4,367

 

Current portion of long-term debt

 

 

6,634

 

 

 

 

Total current liabilities

 

 

12,387

 

 

 

8,059

 

Long-term debt

 

 

23,664

 

 

 

15,002

 

Other long-term liabilities

 

 

339

 

 

 

91

 

Total liabilities

 

 

36,390

 

 

 

23,152

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2016

   and December 31, 2015 and 0 shares issued and outstanding at September 30, 2016

   and December 31, 2015

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 27,527,419 and

   21,570,395 shares issued and outstanding, at September 30, 2016 and

   December 31, 2015, respectively

 

 

28

 

 

 

22

 

Additional paid-in capital

 

 

326,605

 

 

 

243,854

 

Accumulated other comprehensive income

 

 

(27

)

 

 

(97

)

Accumulated deficit

 

 

(188,574

)

 

 

(139,792

)

Total stockholders’ equity

 

 

138,032

 

 

 

103,987

 

Total liabilities and stockholders’ equity

 

$

174,422

 

 

$

127,139

 

 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,047

 

 

 

7,829

 

 

 

29,933

 

 

 

23,724

 

General and administrative

 

 

8,388

 

 

 

3,197

 

 

 

18,295

 

 

 

8,860

 

Total operating expenses

 

 

17,435

 

 

 

11,026

 

 

 

48,228

 

 

 

32,584

 

Loss from operations

 

 

(17,435

)

 

 

(11,026

)

 

 

(48,228

)

 

 

(32,584

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

421

 

 

 

274

 

 

 

1,052

 

 

 

882

 

Interest expense

 

 

(561

)

 

 

(202

)

 

 

(1,039

)

 

 

(406

)

Other income (expense), net

 

 

(207

)

 

 

(182

)

 

 

(567

)

 

 

(639

)

Total other income (expense)

 

 

(347

)

 

 

(110

)

 

 

(554

)

 

 

(163

)

Net loss

 

$

(17,782

)

 

$

(11,136

)

 

$

(48,782

)

 

$

(32,747

)

Net loss per share basic and diluted

 

$

(0.65

)

 

$

(0.52

)

 

$

(2.04

)

 

$

(1.52

)

Weighted average common shares outstanding, basic and diluted

 

 

27,524

 

 

 

21,507

 

 

 

23,938

 

 

 

21,478

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains from available-for-sale securities, net of tax

   of $0

 

 

38

 

 

 

9

 

 

 

(70

)

 

 

8

 

Total other comprehensive (loss) income

 

 

38

 

 

 

9

 

 

 

(70

)

 

 

8

 

Comprehensive loss

 

$

(17,744

)

 

$

(11,127

)

 

$

(48,852

)

 

$

(32,739

)

 

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

 

 

4


 

Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(48,782

)

 

$

(32,747

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

700

 

 

 

130

 

Stock-based compensation expense

 

 

4,963

 

 

 

3,099

 

Amortization of premium (discount) on marketable securities

 

 

544

 

 

 

637

 

Other non-cash charges

 

 

26

 

 

 

31

 

Loss on disposal of fixed assets

 

 

2,278

 

 

 

 

Premium paid on securities purchased

 

 

(273

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

95

 

 

 

(46

)

Prepaid expenses, other current and long-term assets

 

 

(697

)

 

 

(243

)

Accounts payable

 

 

(1,029

)

 

 

389

 

Accrued expenses and other current and long-term liabilities

 

 

690

 

 

 

786

 

Net cash used in operating activities

 

 

(41,485

)

 

 

(27,964

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,165

)

 

 

(2,415

)

Change in restricted cash

 

 

 

 

 

24

 

Purchases of marketable securities

 

 

(80,151

)

 

 

(106,465

)

Sale and redemption of marketable securities

 

 

40,897

 

 

 

95,704

 

Discount received on securities purchased

 

 

17

 

 

 

 

Net cash used in investing activities

 

 

(47,402

)

 

 

(13,152

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of debt issuance costs

 

 

(42

)

 

 

(108

)

Payments on debt

 

 

 

 

 

(3,500

)

Proceeds from the offering of common stock, net of underwriter's commission and fees

 

 

77,644

 

 

 

 

Proceeds from the issuance of notes payable

 

 

15,000

 

 

 

15,004

 

Payments of public offering costs

 

 

(256

)

 

 

(225

)

Proceeds from the exercise of stock options

 

 

166

 

 

 

216

 

Proceeds from Employee Stock Purchase Plan

 

 

240

 

 

 

138

 

Net cash provided by financing activities

 

 

92,752

 

 

 

11,525

 

Net increase (decrease) in cash and cash equivalents

 

 

3,865

 

 

 

(29,591

)

Cash and cash equivalents at beginning of period

 

 

62,944

 

 

 

103,098

 

Cash and cash equivalents at end of period

 

$

66,809

 

 

$

73,507

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

823

 

 

$

370

 

Supplemental disclosures of non-cash financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

$

 

 

$

811

 

 

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

 

 

5


 

Flexion Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. Overview and Nature of the Business

Flexion Therapeutics, Inc. (“Flexion,” the “Company,” “we,” “our,” or “us”) was incorporated under the laws of the state of Delaware on November 5, 2007. Flexion is a specialty pharmaceutical company focused on the development and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis (“OA”), a type of degenerative arthritis. The Company’s lead product candidate, Zilretta™ (also known as FX006), is a late-stage, injectable, extended-release, intra-articular, or IA, meaning “in the joint,” investigational steroid that is being developed as a treatment for patients with moderate to severe knee OA 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. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance reporting capabilities. The Company’s product candidates are all in the development stage. There can be no assurance that development efforts, including clinical trials, will be successful. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

 

 

2. Financing Activities

On June 13, 2016, the Company completed a follow-on public offering of its common stock (the “2016 Offering”), which resulted in the sale of 5,500,000 shares of the Company’s common stock at a price to the public of $14.00 per share.  On June 21, 2016, the Company completed the sale of an additional 400,000 shares of its common stock at the public offering price pursuant to the underwriters’ exercise of their option to purchase additional shares.  The Company received aggregate gross proceeds from the 2016 Offering of $77.6 million after deducting underwriting commissions and fees paid by the Company.

The Company’s total issued common stock as of September 30, 2016 was 27,527,419.

 

 

3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2016, and for the three and nine months ended September 30, 2016 and September 30, 2015, 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 11, 2016.

The information presented in the condensed consolidated financial statements and related notes as of September 30, 2016, and for the three and nine months ended September 30, 2016 and September 30, 2015, is unaudited.  The December 31, 2015 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, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016, 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, 2016 and December 31, 2015, the Company had cash, cash equivalents, marketable securities, and long-term investments of $161,505,000 and $118,604,000, respectively.  Management believes that current cash, cash equivalents and marketable securities on

6


 

hand at September 30, 2016 should be sufficient to fund operations for at least the next twelve months. The future viability of the Company is dependent on its ability to raise additional capital to finance its operations, to fund increased research and development costs in order to seek approval for commercialization of its product candidates, and to successful ly commercialize Zilretta, if approved. The Company’s failure to raise capital as and when needed would have a negative impact on its financial condition and its ability to pursue its business strategies as this capital is necessary for the Company to perf orm the research and development activities required to develop and seek approval for commercialization of the Company’s product candidates, to establish a commercial infrastructure in order to generate future revenue streams, and to successfully commercia lize Zilretta, if approved.

 

In August 2014, the FASB issued ASU No. 2014-15,  Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern  (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures, if required. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016, and applies to annual and interim periods thereafter. The Company does not believe that the adoption of ASU 2014-15 will have a significant impact on the Company’s financial statement disclosures.

In April 2015, the FASB released Accounting Standards Update (“ASU”) 2015-05, Customers Accounting for Fees Paid in a Cloud Computing Arrangement (“CCA”).  Previously, there was no specific U.S. GAAP guidance on accounting for such fees from the customer’s perspective. Under the new standard, customers apply the same criteria as vendors to determine whether a CCA contains a software license or is solely a service contract. For public companies, the new standard is effective for annual periods, including interim periods, beginning after December 15, 2015 with early adoption allowed The Company adopted this guidance as of January 1, 2016 and applied it to new internally used software acquired during the quarterly period ended June 30, 2016.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016, with early adoption allowed. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the Company’s financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), to increase transparency and comparability among organizations by recognizing lease assets and liabilities, including for operating leases, on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance may have on the Company’s financial statements.

In March 2016, the FASB released ASU 2016-09, which amends ASC Topic 718, Compensation-Stock Compensation, to require changes to several areas of employee share-based payment accounting in an effort to simplify share-based reporting.  The update revises requirements in the following areas:  minimum statutory withholding, accounting for income taxes, forfeitures, and intrinsic value accounting for private entities.   For public companies, the new rules will become effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within such annual period.  The Company is currently evaluating the impact that the adoption of this guidance may have on the Company’s financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of cash flows (Topic 230), to increase the consistency of presentation in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  ASU 2016-15 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2017.  The Company is currently evaluating the potential impact that the adoption of this guidance may have on the Company’s financial statements.

 

Consolidation

The accompanying condensed consolidated financial statements include the Company and its wholly-owned subsidiary, Flexion Securities Corporation, Inc. The Company has eliminated all intercompany transactions for the three and nine months ended September 30, 2016 and the year ended December 31, 2015, the year Flexion Securities Corporation, Inc. was established.

U.S. Government Grant

The Company previously performed research and development for the U.S. Department of Defense under a cost reimbursable grant for a Phase 2 clinical trial investigating Zilretta in active military and medically retired veterans with post-traumatic knee OA.  Due to the challenges of enrolling military personnel with post-traumatic knee OA, the Company discontinued the trial and terminated the grant. The related costs incurred under the grant prior to the termination have been included in research and development expense in the statement of operations. The Company was reimbursed and has offset research and development expenses in the statement of

7


 

operations when invoices for allow able costs were prepared and submitted to the U.S. Department of Defense. Payments under cost reimbursable grants with agencies of the U.S. government are provisional payments subject to adjustment upon audit by the U.S. government.

Accounts Receivable

Accounts receivable represents allowable costs under the Company’s now terminated U.S. Government agency grant for which the Company has not yet received reimbursement. The Company invoiced the government on a quarterly basis for reimbursable costs under the grant. Reimbursable costs that have not been invoiced on the last day of the quarter are recorded as unbilled accounts receivable. As of September 30, 2016 there were no unbilled accounts receivable, and as of December 31, 2015, there were unbilled accounts receivable of $95,000.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets and liabilities, expenses and related disclosures. The Company bases estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. The most significant estimates in these condensed consolidated financial statements include useful lives with respect to long-lived assets, such as property and equipment and leasehold improvements, accounting for stock-based compensation, and accrued expenses, including clinical research costs. The Company’s actual results may differ from these estimates under different assumptions or conditions. The Company evaluates its estimates on an ongoing basis. Changes in estimates are reflected in reported results in the period in which they become known by the Company’s management.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization expense is recognized using the straight-line method over the following estimated useful lives:

 

 

 

Estimated

Useful Life

(Years)

Computers, office equipment, and minor computer software

 

3

Computer software

 

7

Manufacturing equipment

 

7-10

Furniture and fixtures

 

5

 

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Costs of major additions and improvements are capitalized and depreciated on a straight-line basis over their useful lives. Repairs and maintenance costs are expensed as incurred. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income. Property and equipment includes construction-in-progress that is not yet in service.

Foreign Currencies

The Company maintains a bank account denominated in British Pounds.  All foreign currency payables and cash balances are measured at the applicable exchange rate at the end of the reporting period.  All associated gains and losses from foreign currency transactions are reflected in the consolidated statements of operations.

 

 

8


 

4 . Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 and indicate the level of the fair value hierarchy utilized to determine such fair value:

 

 

 

Fair Value Measurements as of September 30, 2016 Using:

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

44,540

 

 

$

 

 

$

44,540

 

Marketable securities

 

 

 

 

 

94,696

 

 

 

 

 

 

94,696

 

 

 

$

 

 

$

139,236

 

 

$

 

 

$

139,236

 

 

 

 

Fair Value Measurements as of December 31, 2015 Using:

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

61,534

 

 

$

 

 

$

61,534

 

Marketable securities

 

 

 

 

 

55,660

 

 

 

 

 

 

55,660

 

 

 

$

 

 

$

117,194

 

 

$

 

 

$

117,194

 

 

As of September 30, 2016 and December 31, 2015, the Company’s cash equivalents that are invested in money market funds are valued based on Level 2 inputs. The Company measures the fair value of marketable securities, which consist of U.S. government obligations, commercial paper, and corporate bonds, using Level 2 inputs and primarily relies on quoted prices in active markets for similar marketable securities. During the nine months ended September 30, 2016 and year ended December 31, 2015, there were no transfers between Level 1, Level 2, and Level 3.

The carrying values of accounts receivable, prepaid expenses, other current assets, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these balances.

The Company has a term loan outstanding under its 2015 credit facility with MidCap Financial Funding XIII Trust and Silicon Valley Bank (the “2015 term loan”).  The amount outstanding on its 2015 term loan is reported at its carrying value in the accompanying balance sheet. The Company determined the fair value of the 2015 term loan using an income approach that utilizes a discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for credit risk. The 2015 term loan was valued using Level 2 inputs as of September 30, 2016 and December 31, 2015. The result of the calculation yielded a fair value that approximates its carrying value.

 

 

5. Marketable Securities

As of September 30, 2016 and December 31, 2015 the fair value of available-for-sale marketable securities by type of security was as follows:

 

 

 

September 30, 2016

 

(In thousands)

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

U.S. Government obligations

 

$

17,017

 

 

$

7

 

 

$

(1

)

 

$

17,023

 

Commercial Paper

 

 

2,996

 

 

 

 

 

 

 

 

 

2,996

 

Corporate bonds

 

 

74,710

 

 

 

2

 

 

 

(35

)

 

 

74,677

 

 

 

$

94,723

 

 

$

9

 

 

$

(36

)

 

$

94,696

 

 

 

 

December 31, 2015

 

(In thousands)

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Corporate Bonds

 

$

55,757

 

 

$

4

 

 

$

(101

)

 

$

55,660

 

 

 

$

55,757

 

 

$

4

 

 

$

(101

)

 

$

55,660

 

 

As of September 30, 2016 and December 31, 2015, marketable securities consisted of $92,693,000 and $48,303,000, respectively, of investments that mature within twelve months and $2,003,000 and $7,357,000, respectively, of investments that mature within fifteen months.

 

 

9


 

6. Property and Equipment, Net

Property and equipment as of September 30, 2016 and December 31, 2015 consisted of the following:

 

(In thousands)

 

September 30,

2016

 

 

December 31,

2015

 

Manufacturing equipment

 

$

10,099

 

 

$

2,534

 

Computers, office equipment, and minor computer software

 

 

539

 

 

 

393

 

Software

 

 

436

 

 

 

342

 

Construction—in progress

 

 

429

 

 

 

4,134

 

Furniture and fixtures

 

 

402

 

 

 

290

 

Leasehold improvements

 

 

278

 

 

 

239

 

 

 

 

12,183

 

 

 

7,932

 

Less: Accumulated depreciation

 

 

(960

)

 

 

(490

)

Total property and equipment, net

 

$

11,223

 

 

$

7,442

 

 

Depreciation expense for the nine months ended September 30, 2016 and 2015 was $700,000 and $130,000, respectively. During the nine months ended September 30, 2016, $2,630,000 of property and equipment was disposed of, resulting in a loss of $2,278,000.  Of the $2,630,000 disposed of during the nine months ended September 30, 2016, $2,265,000 was related to manufacturing equipment that will no longer be used due to the Company’s decision to not utilize Evonik Corporation (“Evonik”) for supplies of clinical or commercial Zilretta finished drug product, resulting in a loss of $2,180,000. Construction-in progress is primarily comprised of amounts related to the purchase of a dedicated manufacturing suite for use by the Company’s contract manufacturer of Zilretta finished drug product, Patheon UK Limited (“Patheon”).

 

No property and equipment was disposed of during the nine months ended September 30, 2015.  

 

 

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

(In thousands)

 

September 30,

2016

 

 

December 31,

2015

 

Payroll and other employee-related expenses

 

$

2,018

 

 

$

1,648

 

Professional services fees

 

 

819

 

 

 

434

 

Other

 

 

258

 

 

 

74

 

Clinical research

 

 

204

 

 

 

552

 

Interest expense

 

 

156

 

 

 

81

 

Contract manufacturing services

 

 

149

 

 

 

1,444

 

Regulatory services

 

 

88

 

 

 

64

 

Consultant fees and expenses

 

 

32

 

 

 

70

 

Total accrued expenses and other current liabilities

 

$

3,724

 

 

$

4,367

 

 

 

10


 

8 . Stock-Based Compensation

Stock Option Valuation

The fair value of each of the Company’s stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model. The Company currently estimates its expected stock volatility based on the historical volatility of its publicly-traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own publicly-traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The relevant data used to determine the value of the stock option grants for the nine months ended September 30, 2016 and 2015 are as follows:

 

 

 

Nine months ended

September 30,

 

 

 

2016

 

 

2015

 

Risk-free interest rates

 

1.05-1.90

%

 

1.49-1.92

%

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Expected volatility

 

79.8-91.1

%

 

76.4-81.4

%

 

The following table summarizes stock option activity for the nine months ended September 30, 2016:

 

(In thousands, except per share amounts)

 

Shares   Issuable

Under   Options

 

 

Weighted   Average

Exercise   Price

 

Outstanding as of December 31, 2015

 

 

1,657

 

 

$

14.28

 

Granted

 

 

948

 

 

 

16.67

 

Exercised

 

 

(30

)

 

 

5.52

 

Cancelled

 

 

(97

)

 

 

19.16

 

Outstanding as of September 30, 2016

 

 

2,478

 

 

$

15.11

 

Options vested and expected to vest at September 30,

   2016

 

 

2,141

 

 

$

14.72

 

Options exercisable at September 30, 2016

 

 

1,078

 

 

$

11.95

 

 

In addition to the approximately 948,000 common stock options granted, approximately 205,000 restricted common stock units (“RSUs”) were also granted, of which approximately 10,000 RSUs were cancelled, during the nine months ended September 30, 2016.  The RSUs are performance based awards which will begin vesting upon the achievement of a corporate performance based milestone. No outstanding performance awards were vested as of September 30, 2016.

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. A total of approximately 30,000 options, with an aggregate intrinsic value of $236,000, were exercised during the nine months ended September 30, 2016.

At September 30, 2016 and 2015, there were options for the purchase of approximately 2,478,000 and 1,578,000 shares of the Company’s common stock outstanding, respectively, with a weighted average remaining contractual term of 8.0 and 8.1 years, respectively, and with a weighted average exercise price of $15.11 and $10.32 per share, respectively.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2016 and 2015 was $11.90 and $15.67, respectively.

11


 

Stock-based Compensation

The Company recorded stock-based compensation expense related to stock options for the three and nine months ended September 30, 2016 and 2015 as follows:

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development

 

$

543

 

 

$

332

 

 

$

1,656

 

 

$

941

 

General and administrative

 

 

1,160

 

 

 

789

 

 

 

3,307

 

 

 

2,158

 

 

 

$

1,703

 

 

$

1,121

 

 

$

4,963

 

 

$

3,099

 

 

As of September 30, 2016 unrecognized stock-based compensation expense for stock options outstanding was $11,227,000, which was expected to be recognized over a weighted average period of 2.7 years. As of September 30, 2015, unrecognized stock-based compensation expense for stock options outstanding was $11,500,000, which was expected to be recognized over a weighted average period of 2.7 years.

Restricted Stock Units

On January 4, 2016, the Company granted RSUs with performance and time-based vesting conditions to certain executives.  These RSUs vest, and the underlying shares of common stock become deliverable, in the event the Company receives approval from the U.S. Food and Drug Administration (“FDA”) of a new drug application (“NDA”) for Zilretta (the Milestone ).  Depending on when and if the Milestone is achieved, the maximum aggregate number of shares of the Company’s common stock available to be earned under these awards is 194,400 with an approximate value of $3,538,000 as of the grant date.  The amount of earned shares decreases the closer that the Milestone date is to the termination date of the award.  If the Milestone is not achieved prior to July 1, 2018, the termination date of these awards, these awards will not vest, will be forfeited in their entirety and no shares of common stock will be delivered.  Since it is not possible for the Company to determine the probability of the performance condition being achieved, no compensation costs will be recorded until the Milestone is achieved.  If the Milestone is achieved prior to the termination date, compensation costs will be recognized over the remaining requisite service period of these awards, beginning on the Milestone achievement date.

 

 

9. Net Loss per Share

Basic and diluted net loss per share was calculated as follows for the three and nine months ended September 30, 2016 and 2015:

 

 

 

For the three months ended

September 30,

 

 

For the nine months ended

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(17,782

)

 

$

(11,136

)

 

$

(48,782

)

 

$

(32,747

)

Net loss:

 

$

(17,782

)

 

$

(11,136

)

 

$

(48,782

)

 

$

(32,747

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and

   diluted

 

 

27,524

 

 

 

21,507

 

 

 

23,938

 

 

 

21,478

 

Net loss per share, basic and diluted

 

$

(0.65

)

 

$

(0.52

)

 

$

(2.04

)

 

$

(1.52

)

 

Stock options and RSUs covering  2,549,000 and 1,716,000 weighted average shares of common stock were excluded from the computation of diluted net loss per share for the three months ended September 30, 2016 and 2015, respectively, and 2,452,000 and 1,658,000 weighted average shares of common stock were excluded from the computation of diluted net loss per share attributable to common shareholders for the nine months ended September 30, 2016 and 2015, respectively. These equity awards were excluded from the computations because the awards had an anti-dilutive impact due to the net loss incurred for those periods.

 

 

10. Long-term Debt

On August 4, 2015, the Company entered into a credit and security agreement with MidCap Financial Trust, as agent, and MidCap Financial Funding XIII Trust and Silicon Valley Bank, as lenders, (the “Lenders”), to borrow up to $30,000,000 in term loans. The Company concurrently borrowed an initial term loan of $15,000,000 under the facility. The Company granted the Lenders

12


 

a security interest in substantially all of its personal property, rights and assets, other than intellectual property, to secure the payment of all amounts owed under the credit facility. The Compa ny agreed not to encumber any of its intellectual property without the Lenders’ prior written consent. The Company also agreed to maintain a balance in cash or cash equivalents at Silicon Valley Bank equal to the principal balance of the loan plus 5% for s o long as the Company maintains any cash or cash equivalents in non-secured bank accounts.

On July 22, 2016, the Company borrowed the remaining $15,000,000 under the credit and security agreement, in the form of a second term loan after receiving positive Phase 3 Zilretta clinical trial data meeting the trial’s primary endpoint and which is sufficient to file an NDA for Zilretta.  The second term loan is subject to the same credit terms as the initial term loan under the facility.

The credit and security agreement also contains certain representations, warranties, and covenants of the Company as well as a material adverse event clause. As of September 30, 2016, the Company was compliant with all covenants.

Borrowings under the credit facility accrue interest monthly at a fixed interest rate of 6.25% per annum. Following an interest-only period of 19 months, principal will be due in 36 equal monthly installments commencing March 1, 2017 and ending February 1, 2020 (the “maturity date”). Upon the maturity date, the Company will be obligated to pay a final payment equal to 9% of the total principal amounts borrowed under the facility. The final payment amount is being accreted to the carrying value of the debt using the effective interest rate method. As of September 30, 2016, the carrying value of the term loan was $30,298,000, of which $6,634,000 was due within 12 months and $23,664,000 was due in greater than 12 months.

In connection with the credit and security agreement, the Company incurred debt issuance costs totaling approximately $150,000. These costs are being amortized over the estimated term of the debt using the straight-line method which approximates the effective interest method.  The Company elected the early adoption of ASU 2015-03, Interest – Imputation of Interest , and accordingly deducted the debt issuance costs from the carrying amount of the debt as of September 30, 2016 and December 31, 2015.

As of September 30, 2016, annual principal and interest payments due under the 2015 term loan are as follows: 

 

Year

 

Aggregate

Minimum

Payments

(in thousands)

 

2016 (remaining three months)

 

$

474

 

2017

 

 

10,036

 

2018

 

 

11,082

 

2019

 

 

10,448

 

2020

 

 

4,380

 

Total

 

$

36,420

 

Less interest

 

 

(3,422

)

Less final payment

 

 

(2,700

)

Total

 

$

30,298

 

 

 

11. Income Taxes

 

Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”) contains rules that limit the ability of a company that undergoes an ownership change within the meaning of Section 382 to utilize its net operating losses (“NOLs”) and existing tax credits as of the date of such ownership change.  Under the rules, such an ownership change is generally any change in ownership of more than 50% of a company’s stock within a rolling three-year period.  The rules generally operate by focusing on changes in ownership among stockholders considered by the rules to own, directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new issuances of stock by the company.  During the quarter ended September 30, 2016, the Company completed a Section 382 study through June 30, 2016.  The results of this study showed that one historical ownership change within the meaning of Section 382 had occurred on June 8, 2016 in connection with the Company’s 2016 Offering.  Although a Section 382 change in ownership has occurred, it is not currently anticipated that a portion of the Company’s NOLs will expire unutilized as a result of this Section 382 limitation.  Any subsequent ownership changes as defined by Section 382 may potentially limit the amount of our NOL carryforwards that could be utilized annually to offset any future taxable income.  The Company has generated losses since inception and therefore has recorded no income tax benefits for those losses due to its uncertainty of realizing a benefit from those losses.

 

13


 

12. Foreign Currency

 

The Company maintains a bank account denominated in British Pounds.  All foreign currency payables and cash balances are measured at the applicable exchange rate at the end of the reporting period.  All associated gains and losses from foreign currency transactions are reflected in the consolidated statements of operations.  Foreign currency losses for the three and nine months ended September 30, 2016 was $0.6 million, compared to zero for the three and nine months ended September 30, 2015.

 

 

14


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto for the fiscal year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed by us with the Securities and Exchange Commission, or SEC, on March 11, 2016.

Forward-Looking Statements

This discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward looking statements, which represent our intent, belief, or current expectations, involve risks and uncertainties. We use words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” “should” and similar expressions to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many factors, including without limitation those set forth under “Risk Factors” in our Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We are a specialty pharmaceutical company focused on the 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.  We own the exclusive worldwide rights to our lead product candidate, Zilretta, a late-stage, extended-release, intra-articular investigational steroid that we are developing for the treatment of OA knee pain.

We were incorporated in Delaware in November 2007, and to date we have devoted substantially all of our resources to developing our product candidates, including conducting clinical trials with our product candidates, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. From our inception through September 30, 2016, we have funded our operations primarily through the sale of our common stock and convertible preferred stock and, to a lesser extent, debt financing. From our inception through September 30, 2016, we have raised $337.0 million from such transactions, including from our initial and follow-on public offerings. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or third-party funding, and licensing or collaboration arrangements.

Product Candidates and Recent Developments

Zilretta (FX006)—Late Stage Candidate for Intra-articular Therapy for Patients with Moderate to Severe OA Pain

Our lead product candidate, Zilretta, is a late-stage, injectable, extended-release, intra-articular, or IA, meaning “in the joint,” investigational steroid that we are developing as a treatment for patients with moderate to severe OA knee pain. We specifically designed Zilretta to combine a commonly administered steroid, triamcinolone acetonide, or TCA, with poly lactic-co-glycolic acid, referred to as PLGA, with the goal of providing sustained therapeutic concentrations in the joint and persistent analgesic effect. Zilretta is intended to address the limitations of current IA therapies by providing long-lasting, local analgesia while avoiding systemic side effects, which are effects that occur throughout the body as a result of drug that is released from the site of injection into circulating blood. To date, we have completed six clinical trials in which a total of over 600 patients with OA of the knee were treated with Zilretta. The overall frequency of treatment-related adverse events in these trials has been similar to those observed with placebo and no serious adverse events have been assessed as related to Zilretta in those trials. Both the magnitude and duration of pain relief provided by Zilretta in clinical trials have been shown to be clinically meaningful with the magnitude of pain relief amongst the largest reported to date in OA clinical trials.

15


 

Based on the strength of our p ivotal and other clinical trials, we believe that Zilretta has the potential to address a significant unmet medical need for OA pain management by providing safe, more effective and sustained pain relief. We believe the following attributes uniquely distin guish Zilretta:

 

An injectable, IA, non-opioid, extended-release investigational treatment for patients with moderate to severe OA pain that has demonstrated the following in clinical trials to date:

 

statistically significant, durable and clinically meaningful improvements in validated OA specific measures,

 

statistically significant, durable and clinically meaningful pain relief compared to placebo,

 

persistent therapeutic concentrations of drug in the joint and durable efficacy, and

 

limited systemic exposures and the potential for fewer serious side effects compared to oral treatment options for OA pain.

 

Amongst the largest analgesic effects reported in OA clinical trials.

 

Strong proprietary position through a combination of patents, trade secrets and proprietary know-how, as well as eligibility for marketing exclusivity.

 

Well-defined Section 505(b)(2) of the Federal Food Drug and Cosmetic Act, regulatory pathway seeking approval for a novel formulation of the same dose and administration route of the already approved immediate-release steroid used by orthopedists and rheumatologists.

 

Familiarity of orthopedists and rheumatologists with IA injections utilizing the same steroid at the same dose.

 

Fast Track designation from the FDA.

In April 2016, we initiated a double-blind, randomized, parallel group, single dose Phase 2 clinical trial of Zilretta in patients with OA of the knee who also have Type 2 (adult) diabetes. Approximately 20% of patients with knee OA have diabetes and clinical trial data demonstrate that these patients, when treated with IA injections of immediate-release TCA (as well as other corticosteroids) can experience elevations in blood glucose levels in the days post injection. These increases in blood glucose coincide with peak plasma concentrations of the injected steroid and are thought to reflect the anti-insulin effects of such drugs. Approximately 33 patients were enrolled in this double-blind randomized, parallel group single dose study, and blood glucose levels were  monitored for a total of three weeks (one week prior to injection and two weeks post injection) using a continuous glucose monitoring device.  In November 2016, we announced top-line results from this trial that demonstrated a markedly lower post-injection rise in blood glucose levels in patients receiving Zilretta compared to patients receiving immediate-release TCA. The difference was statistically significant (p<0.05, 2-sided) and clinically relevant.

Based upon the results of our pivotal clinical trials and the written responses from the FDA to questions we submitted in advance of a pre-NDA meeting with the FDA regarding Zilretta, we anticipate submitting our Zilretta NDA for single-dose administration to the FDA in December 2016.

Financial Overview

Revenue

We have not generated any revenue since our inception. We do not have any products approved for sale, and we do not expect to generate any revenue from the sale of products in the near future. In the future, if our research and development efforts result in clinical success and regulatory approval, we may generate revenue from the sales of our product candidates, including Zilretta, or we may generate revenue from licensing rights to our product candidates to third parties. If we fail to obtain regulatory approval for Zilretta or other product candidates, our ability to generate future revenue, and our results of operations and financial position will be adversely affected.

Operating Expenses

The majority of our operating expenses to date have been related to the development activities of Zilretta.

16


 

Research and Development Expenses

Since our inception, we have focused our resources on our development activities, including: preclinical studies, clinical trials, and chemistry, manufacturing, and controls (“CMC”). Our development expenses consist primarily of:

 

expenses incurred under agreements with consultants, contract research organizations, or CROs, and investigative sites that conduct our preclinical studies and clinical trials;

 

costs of acquiring, developing and manufacturing clinical trial materials, as well as scale-up for potential commercial supply;

 

personnel costs, including salaries, benefits, stock-based compensation and travel expenses for employees engaged in scientific research and development functions;

 

costs related to compliance with regulatory requirements;

 

expenses related to the in-license of certain technologies from pharmaceutical companies; and

 

allocated expenses for rent and maintenance of facilities, insurance and other general overhead.

We expense research and development costs as incurred. Our direct research and development expenses consist primarily of external-based costs, such as fees paid to investigators, consultants, investigative sites, CROs and companies that manufacture our clinical trial materials and anticipated future commercial supplies, and are tracked on a program-by-program basis. We do not allocate personnel costs, facilities or other indirect expenses to specific research and development programs. These indirect expenses are included within the amounts designated as “Personnel and other costs” in the table below.

The following table summarizes our research and development expenses for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Direct research and development expenses by program:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zilretta

 

$

5,023

 

 

$

5,455

 

 

$

18,453

 

 

$

15,718

 

FX007

 

 

12

 

 

 

103

 

 

 

264

 

 

 

383

 

Portfolio expansion

 

 

52

 

 

 

 

 

 

222

 

 

 

 

Other

 

 

62

 

 

 

79

 

 

 

203

 

 

 

242

 

Total direct research and development expenses

 

 

5,149

 

 

 

5,637

 

 

 

19,142

 

 

 

16,343

 

Personnel and other costs

 

 

3,898

 

 

 

2,192

 

 

 

10,791

 

 

 

7,381

 

Total research and development expenses

 

$

9,047

 

 

$

7,829

 

 

$

29,933

 

 

$

23,724

 

 

Related costs incurred under our prior grant from the U.S. Department of Defense for the Phase 2 clinical trial that investigated Zilretta in active military and medically retired veterans with post-traumatic knee OA were included in research and development expenses. Reimbursements were recorded as an offset to research and development expenses when invoices for allowable costs were prepared and submitted to the U.S. Department of Defense. Due to the challenges of enrolling military personnel with post-traumatic knee OA, we discontinued this Phase 2 trial and terminated the grant.  Payments under cost reimbursable grants with agencies of the U.S. government were provisional payments subject to adjustment upon audit by the U.S. government. To date we have been reimbursed for approximately $757,000 under the grant.

Our research and development expenses are expected to increase in the foreseeable future. Specifically, our costs associated with Zilretta will increase as we conduct additional clinical trials, make initial investments for commercial product supply, and further the manufacturing process in anticipation of validation and commercialization, including the costs for the build-out of the portion of the dedicated manufacturing facility with our contract manufacturer, Patheon. Evonik, our supplier of PLGA for Zilretta, had previously manufactured finished drug product for our Zilretta clinical trial materials; however, in early 2016 we decided to use Patheon as our sole supplier of Zilretta finished drug product for clinical trials and commercial supply.  We impaired approximately $2,265,000 in manufacturing equipment located at the Evonik facility, resulting in a loss of $2,180,000 which was recorded in research and development expenses for the nine months ended September 30, 2016.

We cannot determine with certainty the duration of and completion costs associated with future clinical trials of Zilretta or the regulatory approval process. The duration, costs and timing associated with the development and commercialization of Zilretta will depend on a variety of factors, including uncertainties associated with the results of our clinical trials and our ability to obtain regulatory approval. As a result of these uncertainties, we are currently unable to estimate with any precision our future research and

17


 

development expenses, when or if we will achieve regulatory approval, generate revenue from sales or achieve a positive cash flow position.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, including salaries, related benefits, travel expenses and stock-based compensation of our executive, finance, business development, commercial, information technology, legal and human resources functions. Other general and administrative expenses include an allocation of facility-related costs, patent filing expenses, and professional fees for legal, consulting, auditing and tax services.

We anticipate that our general and administrative expenses will increase in the future as we continue to build our corporate and commercial infrastructure to support the continued development and potential launch of Zilretta or any other product candidates. Additionally, we anticipate increased expenses related to the audit, legal and compliance, regulatory, investor relations and tax-related services associated with maintaining compliance with the SEC and Nasdaq requirements and healthcare laws and compliance requirements, director and officer insurance premiums and other costs associated with operating as a publicly-traded company.

Other Income (Expense)

Interest income.  Interest income consists of interest earned on our cash and cash equivalents balances and our marketable securities. The primary objective of our investment policy is capital preservation.

Interest expense.  We have borrowed $30.0 million under our 2015 term, and we incur interest related to this borrowing at a fixed rate of 6.25% per annum. We expect to incur future interest expense related to this borrowing until February 1, 2020.

Foreign currency gain (loss). We maintain a bank account denominated in British Pounds.  All foreign currency payables and cash balances are measured at the applicable exchange rate at the end of the reporting period.  All associated gains and losses from foreign currency transactions are reflected in the consolidated statements of operations, within general and administrative expenses.

Other expense.  Other expense consists of the net amortization of premiums and discounts related to our marketable securities, and our realized gains (losses) on redemptions of our marketable securities. We will continue to incur expenses related to net amortization of premiums on marketable securities for as long as we hold these investments.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements, and the reported revenue and expenses during the reported periods. We evaluate these estimates and judgments, including those described below, on an ongoing basis. We base our estimates on historical experience, known trends and events, contractual milestones and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the nine months ended September 30, 2016.

18


 

RESULTS OF OPERATIONS

Comparison of the three and nine months ended September 30, 2016 and 2015

The following tables summarize our results of operations for the three and nine months ended September 30, 2016 (certain items may not sum correctly due to rounding):

 

 

 

Three Months Ended September 30,

 

(In thousands)

 

2016

 

 

2015

 

 

Change

 

 

%   Increase/

(Decrease)

 

Revenue

 

$

 

 

$

 

 

$

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,047

 

 

 

7,829

 

 

 

1,218

 

 

 

15.6

%

General and administrative

 

 

8,388

 

 

 

3,197

 

 

 

5,191

 

 

 

162.4

%

Total operating expenses

 

 

17,435

 

 

 

11,026

 

 

 

6,409

 

 

 

58.1

%

Loss from operations

 

 

(17,435

)

 

 

(11,026

)

 

 

(6,409

)

 

 

58.1

%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

421

 

 

 

274

 

 

 

147

 

 

 

53.6

%

Interest expense

 

 

(561

)