Flexion Therapeutics, Inc.
Flexion Therapeutics Inc (Form: 10-Q, Received: 11/06/2017 16:41:10)

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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, 2017

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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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

 

  (Do not check if a smaller reporting company)

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 October 31, 2017 the registrant had 37,540,829 shares of Common Stock ($0.001 par value) outstanding.

1


 

 

 

FLEXION THERAPEUTICS, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

3

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 (Unaudited)

4

 

Condensed Consolidated Statements of Stockholder’s Equity (Deficit) (Unaudited)

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

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

17

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

24

 

Item 4. Controls and Procedures

25

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

26

 

Item 1A. Risk Factors

26

 

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

50

 

Item 3. Defaults Upon Senior Securities

50

 

Item 4. Mine Safety Disclosures

50

 

Item 5. Other Information

50

 

Item 6. Exhibits

51

 

Signatures

52

 

 

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,

2017

 

 

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

159,179

 

 

$

30,915

 

Marketable securities

 

 

175,921

 

 

 

174,688

 

Prepaid expenses and other current assets

 

 

3,609

 

 

 

3,790

 

Total current assets

 

$

338,709

 

 

$

209,393

 

Property and equipment, net

 

 

11,481

 

 

 

11,664

 

Long-term investments

 

 

 

 

 

4,725

 

Restricted cash

 

 

600

 

 

 

480

 

Total assets

 

$

350,790

 

 

$

226,262

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,960

 

 

$

2,161

 

Accrued expenses and other current liabilities

 

 

12,276

 

 

 

6,245

 

Current portion of long-term debt

 

 

9,967

 

 

 

9,134

 

Total current liabilities

 

$

26,203

 

 

$

17,540

 

Long-term debt, net

 

 

15,260

 

 

 

21,399

 

2024 convertible notes, net

 

 

135,275

 

 

 

-

 

Other long-term liabilities

 

 

399

 

 

 

291

 

Total liabilities

 

$

177,137

 

 

$

39,230

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2017

   and December 31, 2016 and 0 shares issued and outstanding at September 30, 2017

   and December 31, 2016

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 31,983,903 and

31,667,469 shares issued and outstanding, at September 30, 2017 and

December 31, 2016, respectively

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

472,322

 

 

 

398,757

 

Accumulated other comprehensive loss

 

 

(62

)

 

 

(71

)

Accumulated deficit

 

 

(298,639

)

 

 

(211,686

)

Total stockholders’ equity

 

 

173,653

 

 

 

187,032

 

Total liabilities and stockholders’ equity

 

$

350,790

 

 

$

226,262

 

 

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,

 

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

12,846

 

 

 

9,047

 

 

 

35,371

 

 

 

29,933

 

 

General and administrative

 

 

18,375

 

 

 

8,388

 

 

 

46,533

 

 

 

18,295

 

 

Total operating expenses

 

 

31,221

 

 

 

17,435

 

 

 

81,904

 

 

 

48,228

 

 

Loss from operations

 

 

(31,221

)

 

 

(17,435

)

 

 

(81,904

)

 

 

(48,228

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,095

 

 

 

421

 

 

 

2,450

 

 

 

1,052

 

 

Interest expense

 

 

(3,843

)

 

 

(561

)

 

 

(7,363

)

 

 

(1,039

)

 

Other expense

 

 

(219

)

 

 

(207

)

 

 

(136

)

 

 

(567

)

 

Total other income (expense)

 

 

(2,967

)

 

 

(347

)

 

 

(5,049

)

 

 

(554

)

 

Net loss

 

$

(34,188

)

 

$

(17,782

)

 

$

(86,953

)

 

$

(48,782

)

 

Net loss per share basic and diluted

 

$

(1.07

)

 

$

(0.65

)

 

$

(2.73

)

 

$

(2.04

)

 

Weighted average common shares outstanding, basic and diluted

 

 

31,931

 

 

 

27,524

 

 

 

31,821

 

 

 

23,938

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) from available-for-sale securities, net of tax of $0

 

 

18

 

 

 

38

 

 

 

9

 

 

 

(70

)

 

Total other comprehensive income (loss)

 

 

18

 

 

 

38

 

 

 

9

 

 

 

(70

)

 

Comprehensive loss

 

$

(34,170

)

 

$

(17,744

)

 

$

(86,944

)

 

$

(48,852

)

 

 

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

 

4


Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Changes in Stockholder’s Equity (Deficit)

(Unaudited in thousands)

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Additional Paid-in-Capital

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Accumulated Deficit

 

 

Total Stockholder's Equity (Deficit)

 

Balance at December 31, 2014

 

 

 

21,440

 

 

$

21

 

 

$

238,402

 

 

$

(5

)

 

$

(93,477

)

 

$

144,941

 

Exercise of stock options

 

 

 

109

 

 

 

1

 

 

 

592

 

 

 

 

 

 

 

 

 

 

$

593

 

Employee Stock Purchase Plan

 

 

 

21

 

 

 

 

 

 

276

 

 

 

 

 

 

 

 

 

 

 

276

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

4,583

 

 

 

 

 

 

 

 

 

 

 

4,583

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,315

)

 

 

(46,315

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(92

)

 

 

 

 

 

 

(92

)

Balance at December 31, 2015

 

 

 

21,570

 

 

$

22

 

 

$

243,853

 

 

$

(97

)

 

$

(139,792

)

 

$

103,986

 

Issuance of Common Stock net of issuance costs

 

 

 

10,040

 

 

 

10

 

 

 

147,491

 

 

 

 

 

 

 

 

 

 

 

147,501

 

Exercise of stock options

 

 

 

30

 

 

 

-

 

 

 

167

 

 

 

 

 

 

 

 

 

 

 

167

 

Employee Stock Purchase Plan

 

 

 

27

 

 

 

 

 

 

476

 

 

 

 

 

 

 

 

 

 

 

476

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

6,770

 

 

 

 

 

 

 

 

 

 

 

6,770

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,894

)

 

 

(71,894

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

 

26

 

Balance at December 31, 2016

 

 

 

31,667

 

 

$

32

 

 

$

398,757

 

 

$

(71

)

 

$

(211,686

)

 

$

187,032

 

Exercise of stock options

 

 

 

261

 

 

 

 

 

 

3,076

 

 

 

 

 

 

 

 

 

 

$

3,076

 

Employee Stock Purchase Plan

 

 

 

56

 

 

 

 

 

 

453

 

 

 

 

 

 

 

 

 

 

 

453

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

7,570

 

 

 

 

 

 

 

 

 

 

 

7,570

 

Convertible debt

 

 

 

 

 

 

 

 

 

 

 

62,466

 

 

 

 

 

 

 

 

 

 

 

62,466

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86,953

)

 

 

(86,953

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

9

 

Balance at September 30, 2017

 

 

 

31,984

 

 

$

32

 

 

$

472,322

 

 

$

(62

)

 

$

(298,639

)

 

$

173,653

 

 

 

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,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(86,953

)

 

$

(48,782

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

1,456

 

 

 

700

 

Stock-based compensation expense

 

 

7,570

 

 

 

4,963

 

Amortization of premium (discount) on marketable securities

 

 

355

 

 

 

544

 

Loss on disposal of fixed assets

 

 

 

 

 

2,278

 

Amortization of convertible debt discount and debt issuance costs

 

 

2,985

 

 

 

26

 

Premium paid on securities purchased

 

 

(676

)

 

 

(273

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

95

 

Prepaid expenses, other current and long-term assets

 

 

181

 

 

 

(697

)

Accounts payable

 

 

2,020

 

 

 

(1,029

)

Accrued expenses and other current and long-term liabilities

 

 

7,124

 

 

 

690

 

Net cash used in operating activities

 

 

(65,938

)

 

 

(41,485

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,882

)

 

 

(8,165

)

Change in restricted cash

 

 

(120

)

 

 

 

Purchases of marketable securities

 

 

(199,756

)

 

 

(80,134

)

Sale and redemption of marketable securities

 

 

203,578

 

 

 

40,897

 

Net cash provided by investing activities

 

 

1,820

 

 

 

(47,402

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from the issuance of 2024 convertible notes

 

 

201,250

 

 

 

 

Payment of debt issuance costs

 

 

(6,470

)

 

 

(42

)

Proceeds from issuance of notes payable

 

 

 

 

 

15,000

 

Proceeds from the offering of common stock

 

 

 

 

 

77,644

 

Payments on notes payable

 

 

(5,833

)

 

 

 

Payments of public offering costs

 

 

(95

)

 

 

(256

)

Proceeds from the exercise of stock options

 

 

3,077

 

 

 

166

 

Proceeds from Employee Stock Purchase Plan

 

 

453

 

 

 

240

 

Net cash provided by financing activities

 

 

192,382

 

 

 

92,752

 

Net increase in cash and cash equivalents

 

 

128,264

 

 

 

3,865

 

Cash and cash equivalents at beginning of period

 

 

30,915

 

 

 

62,944

 

Cash and cash equivalents at end of period

 

$

159,179

 

 

$

66,809

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,334

 

 

$

823

 

Supplemental disclosures of non-cash financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

$

14

 

 

$

 

 

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 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. On October 6, 2017, the U.S. Food and Drug Administration, or FDA, approved Zilretta TM , as the first and only extended-release, intra-articular, or IA (meaning in the joint), injection indicated for the management of OA related knee pain. Zilretta is a non-opioid therapy that employs Flexion’s proprietary microsphere technology to provide pain relief for over 12 weeks.  Zilretta is not intended for repeat administration, as the efficacy and safety of repeat administration of Zilretta have not been evaluated.

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 will require 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, adequate personnel infrastructure and extensive compliance reporting capabilities. 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, 2017, and for the three and nine months ended September 30, 2017 and 2016, 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 10, 2017.

The information presented in the condensed consolidated financial statements and related notes as of September 30, 2017, and for the three and nine months ended September 30, 2017 and 2016, is unaudited.  The December 31, 2016 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, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017, 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, 2017, the Company had cash, cash equivalents, marketable securities, and long-term investments of approximately $335,100,000. Management believes that current cash, cash equivalents and marketable securities on hand at September 30, 2017, together with the net proceeds of its October 2017 common stock offering of approximately $132,400,000 described in note 12, 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 sales revenue from Zilretta and 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 successfully commercialize Zilretta. 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 perform 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 commercialize Zilretta.

In May 2014, the FASB issued guidance which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective

7


Date. This latest standard defers the effective date of revenue standard ASU 2014-09 by one year and permits early adoption on a limited basis. Since the Company has not generated revenue as of September 30, 2017, this guidance will only impact future periods, if any, when revenue is earned.  This update will replace existing revenue recognition guidance under GAAP when it becomes effective for th e Company beginning January 1, 2018, with early adoption permitted in the first quarter of 2017. The updated standard will permit the use of either the retrospective or cumulative effect transition method. The Company adopted this guidance as of January 1, 2017 and will apply this guidance to any future revenue arrangements.

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 became effective for the Company’s 2017 fiscal year. Given the Company has a full valuation against its deferred tax assets and liabilities, the impact of adopting this guidance was not material to 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 became effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within such annual period.  The Company adopted this guidance beginning on January 1, 2017 and no longer records stock compensation expense net of forfeitures.  The Company adopted this guidance using a modified retrospective approach to reflect forfeitures as they occurred in the total stock based compensation expense recorded in the Company’s financial statements. The impact of this adoption was not material to 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.

In November, 2016, the FASB issued ASU 2016-18, Statement of cash flows (Topic 230): Restricted Cash, to provide specific guidance on the cash flow classification and presentation of changes in restricted cash and restricted cash equivalents. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this accounting standard on its condensed consolidated 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, 2017 and the year ended December 31, 2016.

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.

8


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.

 

 

 

3. 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, 2017 and December 31, 2016 and indicate the level of the fair value hierarchy utilized to determine such fair value:

 

 

 

Fair Value Measurements as of September 30, 2017 Using:

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

146,175

 

 

$

 

 

$

146,175

 

Marketable securities

 

 

 

 

 

175,921

 

 

 

 

 

 

175,921

 

 

 

$

 

 

$

322,096

 

 

$

 

 

$

322,096

 

 

 

 

Fair Value Measurements as of December 31, 2016 Using:

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

9,830

 

 

$

 

 

$

9,830

 

Marketable securities

 

 

 

 

 

179,414

 

 

 

 

 

 

179,414

 

 

 

$

 

 

$

189,244

 

 

$

 

 

$

189,244

 

 

As of September 30, 2017 and December 31, 2016 the Company’s cash equivalents that are invested in money market funds and overnight repurchase contracts are valued using Level 2 inputs and primarily rely on quoted prices in active markets for similar securities. 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, 2017 and year ended December 31, 2016, 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

9


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, 2017 and December 31, 2016. The result of the calculation yielded a fair value that approximates its carrying value.

 

On May 2, 2017 the Company issued 3.375% convertible senior notes due 2024 (the “2024 Convertible Notes”) with embedded conversion features.  The Company estimated the fair value of the 2024 Convertible Notes using a discounted cash flow approach to derive the value of a debt instrument using the expected cash flows and the estimated yield related to the convertible notes. The significant assumptions used in estimating the expected cash flows were: the estimated market yield based on an implied yield and credit quality analysis of a term loan with similar attributes, and the average implied volatility of the Company’s traded and quoted options available as of May 2, 2017. The Company recorded approximately $136.7 million as the fair value of the liability on May 2, 2017, with a corresponding amount recorded as a discount on the initial issuance of the 2024 Convertible Notes of approximately $64.5 million. The debt discount was recorded to equity and is being amortized to the debt liability over the life of the 2024 Convertible Notes using the effective interest method.

 

The fair value of the 2024 Convertible Notes, which differs from their carrying value, is influenced by interest rates, stock price and stock price volatility and is determined by prices for the 2024 Convertible Notes observed in market trading.  The market for trading of the 2024 Convertible Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs.  The estimated fair value of the 2024 Convertible Notes, face value of $201.3 million, was $225.4 million at September 30, 2017.  

 

4. Marketable Securities

As of September 30, 2017 and December 31, 2016 the fair value of available-for-sale marketable securities by type of security was as follows:

 

 

 

September 30, 2017

 

(In thousands)

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

U.S. government obligations

 

$

20,417

 

 

$

 

 

$

(3

)

 

$

20,414

 

Commercial paper

 

 

17,901

 

 

 

 

 

 

 

 

 

17,901

 

Corporate bonds

 

 

137,667

 

 

 

4

 

 

 

(65

)

 

 

137,606

 

 

 

$

175,985

 

 

$

4

 

 

$

(68

)

 

$

175,921

 

 

 

 

December 31, 2016

 

(In thousands)

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Commercial paper

 

$

7,769

 

 

$

 

 

$

 

 

$

7,769

 

U.S. government obligations

 

 

75,524

 

 

 

5

 

 

 

(12

)

 

 

75,517

 

Corporate bonds

 

 

96,193

 

 

 

1

 

 

 

(66

)

 

 

96,128

 

 

 

$

179,486

 

 

$

6

 

 

$

(78

)

 

$

179,414

 

 

As of September 30, 2017 and December 31, 2016, marketable securities consisted of approximately $175,921,000 and $174,688,000, respectively, of investments that mature within twelve months and as of December 31, 2016 approximately $4,725,000 of investments that mature within fifteen months.  As of September 30, 2017 there were no marketable securities with maturities beyond twelve months.

 

 

10


5. Property and Equipme nt, Net

Property and equipment, net, as of September 30, 2017 and December 31, 2016 consisted of the following:

 

(In thousands)

 

September 30,

2017

 

 

December 31,

2016

 

Manufacturing equipment

 

$

11,520

 

 

$

10,099

 

Computer and office equipment

 

 

858

 

 

 

573

 

Software

 

 

434

 

 

 

434

 

Construction—in progress

 

 

586

 

 

 

1,254

 

Furniture and fixtures

 

 

454

 

 

 

402

 

Leasehold improvements

 

 

461

 

 

 

278

 

 

 

 

14,313

 

 

 

13,040

 

Less: Accumulated depreciation

 

 

(2,832

)

 

 

(1,376

)

Total property and equipment, net

 

$

11,481

 

 

$

11,664

 

 

Depreciation expense for the nine months ended September 30, 2017 and 2016 was approximately $1,456,000 and $700,000, respectively.  No property and equipment was disposed of during the nine months ended September 30, 2017.  Approximately $2,265,000 in manufacturing equipment located at the Evonik facility was disposed of, resulting in a loss of $2,180,000 which was recorded in research and development expenses for the nine months ended September 30, 2016. Construction in progress primarily consists of amounts related to equipment purchased for the Company’s portfolio expansion efforts.

 

6.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets and other assets consisted of the following as of September 30, 2017 and December 31, 2016:

(In thousands)

 

September 30,

2017

 

 

December 31,

2016

 

Prepaid expenses

 

$

2,907

 

 

$

1,086

 

Deposits

 

 

61

 

 

 

2,099

 

Interest receivable on marketable securities

 

 

641

 

 

 

605

 

Total prepaid expenses and other current assets

 

$

3,609

 

 

$

3,790

 

 

 

 

 

 

 

 

 

On December 1, 2016, Flexion paid a refundable NDA fee in the amount of $2,038,100 to the FDA. The Company evaluated each of the published criteria to qualify for a waiver and concluded all criteria were met and thus, obtaining a refund of the fee was probable. As of December 31, 2016 the NDA fee was classified as a deposit in other current assets.  On May 16, 2017, Flexion received the full refund of this NDA fee.  

 

 

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

(In thousands)

 

September 30,

2017

 

 

December 31,

2016

 

Research and development

 

$

1,284

 

 

$

1,606

 

Payroll and other employee-related expenses

 

 

4,946

 

 

 

3,393

 

Professional services fees

 

 

2,444

 

 

 

926

 

Other

 

 

646

 

 

 

159

 

Interest expense

 

 

2,956

 

 

 

161

 

Total accrued expenses and other current liabilities

 

$

12,276

 

 

$

6,245

 

 

 

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

11


publicly-traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simp lified” 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, 2017 and 2016 are as follows:

 

 

 

Nine months ended

September 30,

 

 

 

2017

 

 

2016

 

Risk-free interest rates

 

1.97-2.29%

 

 

1.05-1.90%

 

Expected dividend yield

 

 

0.00

%

 

 

0.00

%

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Expected volatility

 

69.9-72.8%

 

 

79.8-91.1%

 

 

The following table summarizes stock option activity for the nine months ended September 30, 2017:

 

(In thousands, except per share amounts)

 

Shares   Issuable

Under   Options

 

 

Weighted   Average

Exercise   Price

 

Outstanding as of December 31, 2016

 

 

3,268

 

 

$

14.84

 

Granted

 

 

982

 

 

 

22.11

 

Exercised

 

 

(261

)

 

 

11.47

 

Cancelled

 

 

(251

)

 

 

18.48

 

Outstanding as of September 30, 2017

 

 

3,738

 

 

$

17.63

 

Options vested and expected to vest at September 30, 2017

 

 

3,738

 

 

$

17.63

 

Options exercisable at September 30, 2017

 

 

1,450

 

 

$

14.34

 

 

Approximately 122,800 outstanding restricted stock units (“RSUs”) are included in stock options outstanding at September 30, 2017.  The RSUs are performance based awards which would begin vesting if and when the Company receives approval from the FDA of an NDA for Zilretta (the “Milestone”), which was achieved on October 6, 2017.     

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 261,000 options, with an aggregate intrinsic value of approximately $2,511,800 were exercised during the nine months ended September 30, 2017.

At September 30, 2017 and 2016, there were options for the purchase of approximately 3,738,000 and 2,478,000 shares of the Company’s common stock outstanding, respectively, with a weighted average remaining contractual term of 8.0 years and with a weighted average exercise price of $17.63 and $15.11 per share, respectively.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2017 and 2016 was $14.19 and $11.90, respectively.

Stock-based Compensation

The Company recorded stock-based compensation expense related to stock options for the three and nine months ended September 30, 2017 and 2016 as follows:

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Research and development

 

$

1,057

 

 

$

543

 

 

$

2,859

 

 

$

1,656

 

 

General and administrative

 

 

1,772

 

 

 

1,160

 

 

 

4,711

 

 

 

3,307