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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 March 31, 2020  

or

 

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

FOR THE TRANSITION PERIOD FROM                 TO                

Commission file number: 001-36287

 

Flexion Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

26-1388364

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

10 Mall Road, Suite 301

Burlington, Massachusetts

 

01803

(Address of Principal Executive Offices)

 

(Zip Code)

(781) 305-7777

(Registrant’s Telephone Number, Including Area Code)

 

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

FLXN

NASDAQ

 

 

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

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


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

As of May 1, 2020, the registrant had 38,562,754 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 March 31, 2020 and December 31, 2019 (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019 (Unaudited)

4

 

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

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (Unaudited)

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

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

25

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

34

 

Item 4. Controls and Procedures

35

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

36

 

Item 1A. Risk Factors

36

 

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

67

 

Item 3. Defaults Upon Senior Securities

67

 

Item 4. Mine Safety Disclosures

67

 

Item 5. Other Information

67

 

Item 6. Exhibits

68

 

Signatures

69

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Flexion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share amounts)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,019

 

 

$

82,253

 

Marketable securities

 

 

13,212

 

 

 

54,407

 

Accounts receivable, net

 

 

30,362

 

 

 

37,115

 

Inventories

 

 

19,991

 

 

 

16,529

 

Prepaid expenses and other current assets

 

 

5,812

 

 

 

5,371

 

Total current assets

 

$

181,396

 

 

$

195,675

 

Property and equipment, net

 

 

15,364

 

 

 

13,662

 

Right-of-use assets

 

 

7,822

 

 

 

8,223

 

Total assets

 

$

204,582

 

 

$

217,560

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,458

 

 

$

15,258

 

Accrued expenses and other current liabilities

 

 

20,635

 

 

 

19,610

 

Operating lease liabilities

 

 

1,381

 

 

 

1,351

 

Current portion of long-term debt

 

 

2,222

 

 

 

 

Total current liabilities

 

$

35,696

 

 

$

36,219

 

Long-term operating lease liability, net

 

 

7,162

 

 

 

7,609

 

Long-term debt, net

 

 

58,060

 

 

 

40,176

 

2024 convertible notes, net

 

 

155,675

 

 

 

153,413

 

Other long-term liabilities

 

 

295

 

 

 

251

 

Total liabilities

 

$

256,888

 

 

$

237,668

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2020

   and December 31, 2019 and 0 shares issued and outstanding at March 31, 2020

   and December 31, 2019

 

 

 

 

 

 

Stockholders' deficit

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 38,562,422 and

   38,361,476 shares issued and outstanding, at March 31, 2020 and

   December 31, 2019, respectively

 

 

39

 

 

 

38

 

Additional paid-in capital

 

 

653,050

 

 

 

648,391

 

Accumulated other comprehensive income

 

 

6

 

 

 

62

 

Accumulated deficit

 

 

(705,401

)

 

 

(668,599

)

Total stockholders' deficit

 

 

(52,306

)

 

 

(20,108

)

Total liabilities and stockholders' deficit

 

$

204,582

 

 

$

217,560

 

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

 

 

3


Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

2020

 

 

2019

 

 

Revenues

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

20,127

 

 

$

10,564

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

2,276

 

 

 

1,762

 

 

Research and development

 

 

21,134

 

 

 

15,424

 

 

Selling, general and administrative

 

 

29,299

 

 

 

32,222

 

 

Total operating expenses

 

 

52,709

 

 

 

49,408

 

 

Loss from operations

 

 

(32,582

)

 

 

(38,844

)

 

Other (expense) income

 

 

 

 

 

 

 

 

 

Interest income

 

 

427

 

 

 

1,011

 

 

Interest expense

 

 

(4,721

)

 

 

(3,936

)

 

Other income

 

 

74

 

 

 

231

 

 

Total other (expense) income

 

 

(4,220

)

 

 

(2,694

)

 

Net loss

 

$

(36,802

)

 

$

(41,538

)

 

Net loss per common share, basic and diluted

 

$

(0.95

)

 

$

(1.09

)

 

Weighted average common shares outstanding, basic and diluted

 

 

38,553

 

 

 

37,992

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

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

   of tax of $0

 

 

(56

)

 

 

182

 

 

Total other comprehensive (loss) income

 

 

(56

)

 

 

182

 

 

Comprehensive loss

 

$

(36,858

)

 

$

(41,356

)

 

 

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

4


Flexion Therapeutics, Inc.

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

(Unaudited in thousands)

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

 

Shares

 

 

Par Value

 

 

Paid-in-

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Stockholders'

(Deficit)

 

Balance at December 31, 2019

 

 

 

38,361

 

 

$

38

 

 

$

648,391

 

 

$

62

 

 

$

(668,599

)

 

$

(20,108

)

Issuance of common stock for equity

   awards, net of shares withheld for taxes

 

 

 

201

 

 

 

1

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

9

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

4,651

 

 

 

 

 

 

 

 

 

 

 

4,651

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,802

)

 

 

(36,802

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56

)

 

 

 

 

 

 

(56

)

Balance at March 31, 2020

 

 

 

38,562

 

 

$

39

 

 

$

653,050

 

 

$

6

 

 

$

(705,401

)

 

$

(52,306

)

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

 

Shares

 

 

Par Value

 

 

Paid-in-

Capital

 

 

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Stockholders'

Equity

 

Balance at December 31, 2018

 

 

 

37,946

 

 

$

38

 

 

$

628,944

 

 

$

(77

)

 

$

(518,826

)

 

$

110,079

 

Issuance of common stock for equity

   awards

 

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,853

 

 

 

 

 

 

 

 

 

 

 

3,853

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,538

)

 

 

(41,538

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

 

182

 

Balance at March 31, 2019

 

 

 

37,993

 

 

$

38

 

 

$

632,797

 

 

$

105

 

 

$

(560,364

)

 

$

72,576

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(36,802

)

 

$

(41,538

)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

198

 

 

 

219

 

Amortization of right-of-use assets

 

 

401

 

 

 

263

 

Stock-based compensation expense

 

 

4,651

 

 

 

3,853

 

Non cash interest expense

 

 

106

 

 

 

 

Accretion of discount on marketable securities

 

 

(59

)

 

 

(431

)

Loss on disposal of fixed assets

 

 

262

 

 

 

 

Amortization of debt discount and debt issuance costs

 

 

2,262

 

 

 

2,069

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,753

 

 

 

(2,009

)

Inventory

 

 

(3,101

)

 

 

(2,326

)

Prepaid expenses and other current assets

 

 

(441

)

 

 

844

 

Accounts payable

 

 

(3,035

)

 

 

(348

)

Accrued expenses and other current liabilities

 

 

1,025

 

 

 

1,665

 

Lease liabilities

 

 

(417

)

 

 

(242

)

Net cash used in operating activities

 

 

(28,197

)

 

 

(37,981

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,244

)

 

 

(1,068

)

Purchases of marketable securities

 

 

 

 

 

(76,308

)

Sale and redemption of marketable securities

 

 

41,198

 

 

 

118,563

 

Net cash provided by investing activities

 

 

37,954

 

 

 

41,187

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving line of credit

 

 

20,000

 

 

 

 

Payments on notes payable

 

 

 

 

 

(2,500

)

Proceeds from the exercise of stock options

 

 

9

 

 

 

 

Net cash provided by (used in) financing activities

 

 

20,009

 

 

 

(2,500

)

Net increase in cash and cash equivalents

 

 

29,766

 

 

 

706

 

Cash and cash equivalents at beginning of period

 

 

82,253

 

 

 

87,229

 

Cash and cash equivalents at end of period

 

$

112,019

 

 

$

87,935

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

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

 

 

 

 

 

6,595

 

Purchases of property and equipment in accounts payable and accrued expenses

 

 

1,436

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

703

 

 

 

170

 

 

 

 

 

 

 

 

 

 

 

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

 

6


Flexion Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Overview and Nature of the Business

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

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations. As of March 31, 2020, the Company had cash, cash equivalents, and marketable securities of approximately $125.2 million.

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

The Company’s operations have been and continue to be affected by the ongoing global pandemic of a novel strain of coronavirus (“COVID-19”) and the resulting volatility and uncertainty it has caused. In March 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has caused significant volatility and uncertainty, which could result in a prolonged economic downturn that has disrupted and is expected to continue to disrupt the Company’s business. As a result of these negative impacts, specifically the adverse impact on the operations of healthcare providers that administer ZILRETTA to patients, the Company has begun to experience and expects to continue experiencing for the remainder of 2020, and possibly longer, a material decline in revenue as compared to its prior expectations in the absence of COVID-19. The Company has also suspended or terminated active clinical trials.  While there have been no material asset impairments recorded to date, any prolonged material future disruptions to the work of the Company’s employees, suppliers, contract manufacturers, or vendors could negatively impact the Company’s operations, availability of supplies, carrying value of assets, or the Company’s operating results or cash flows.

The future viability of the Company is dependent on its ability to fund its operations through sales of ZILRETTA, and/or raise additional capital, such as through debt or equity offerings, as needed. This funding is necessary for the Company to support the commercialization of ZILRETTA and to perform the research and development activities required to develop the Company’s other product candidates in order to generate future revenue streams. The Company may not be able to obtain financing on acceptable terms, or at all. In particular, as a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have recently experienced extreme volatility and disruptions, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. If the equity and credit markets continue to deteriorate, it may make any additional debt or equity financing more difficult, more costly and more dilutive. If the Company is unable to obtain funding on a timely basis, the Company may need to curtail its operations, including the commercialization of ZILRETTA and research and development activities, which could adversely affect its prospects.

In accordance with the amended and restated credit and security agreement described in Note 9, if the Company’s liquidity decreases below $80.0 million, the Company will need to comply with a minimum revenue covenant and all amounts received from customer collections will be applied to immediately reduce the Company’s revolving credit facility. The minimum revenue covenant is set annually and is based on the greater of a conservative percentage of the year’s approved forecast and modest growth over the trailing twelve months of actual revenues. The amended and restated credit and security agreement also has a material adverse event clause. If the minimum revenue covenant becomes applicable and the Company fails to comply with it, or a material adverse change

7


as defined in the agreement occurs, the amounts due under the amended and restated credit and security agreement could be declared immediately due and payable, resulting in the Company immediately needing additional funds. As of March 31, 2020, the Company was compliant with all covenants.

Given the expected decrease in revenue due to COVID-19, the Company expects that absent raising additional capital through financing or other transactions its cash balance is likely to decrease below $80.0 million within the next twelve months, and the Company believes there is substantial risk that it would fail to meet the minimum revenue covenant at that time or shortly thereafter if the negative impacts of COVID-19 continue. If the Company is or expects to be subject to and unable to meet the minimum revenue covenant, the Company would plan to request a waiver from the lenders, although there can be no assurances that such a request would be granted or would not be conditioned on additional terms or concessions. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued.

Management's plans that are intended to mitigate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern include reducing certain operating expenses through hiring and travel freezes, suspension and/or termination of active clinical trials, reduction of certain marketing expenses, and elimination of non-essential operating expenses, requesting a waiver of the minimum revenue covenant from the lenders, and remaining opportunistic with respect to raising additional capital through financing or other transactions.

Management believes that current cash, cash equivalents, and marketable securities on hand at March 31, 2020 and taking into account its plans to reduce operating expenses and ability to raise additional capital through an equity or other financing, should be sufficient to fund operations for at least the next twelve months from the issuance date of these financial statements. However, because certain elements of the Company’s operating plan are outside of the Company’s control, including the Company’s plan to obtain a waiver from the lender with respect to the minimum revenue covenant associated with the amended and restated credit and security agreement, as well as the Company’s ability to raise capital through an equity or other financing, neither of which have occurred as of the issuance of these financial statements, those elements cannot be considered probable according to accounting standards. As a result, in accordance with the requirements of ASC 205-40, management has concluded that it is required to disclose that substantial doubt exists about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements as of March 31, 2020, and for the three months ended March 31, 2020 and 2019, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and Generally Accepted Accounting Principles (“GAAP”) for consolidated financial information including the accounts of the Company and its wholly-owned subsidiary after elimination of all significant intercompany accounts and transactions. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the Company’s financial position and results of its operations, as of and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020.

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

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

Recent Accounting Pronouncements

Accounting Standards Recently Adopted

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

8


In July 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, as part of the FASB’s disclosure framework project. ASU 2018-13 is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. Additionally, the new standard permits an entity to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. ASU 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The Company early adopted this portion of the standard as the quarter ended September 30, 2018. The Company adopted the remainder of the standard as of January 1, 2020. The adoption of the remainder of ASU 2018-13 did not have a material impact on the Company’s condensed consolidated financial statements.

 

Consolidation

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

Revenue Recognition

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

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

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

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

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

9


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

Service Fees and Allowances— The Company compensates its customers and GPOs for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss through March 31, 2020, as well as a reduction to trade receivables, net on the condensed consolidated balance sheets.

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

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

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

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

10


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

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

The following table summarizes activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2020 and 2019:

 

(In thousands)

 

Service Fees,

Allowances and

Chargebacks

 

 

Government

Rebates and

Other

Incentives

 

 

Product Returns

 

 

Purchaser/Provider Discounts and Rebates

 

 

Total

 

Balance as of December 31, 2019

 

$

1,847

 

 

$

248

 

 

$

402

 

 

$

1,656

 

 

$

4,153

 

Provision related to sales in the current quarter

 

 

1,590

 

 

 

254

 

 

 

114

 

 

 

526

 

 

 

2,484

 

Credits and payments made

 

 

(1,852

)

 

 

(199

)

 

 

(10

)

 

 

(1,656

)

 

 

(3,717

)

Adjustments related to prior period sales

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Balance as of March 31, 2020

 

 

1,585

 

 

 

398

 

 

 

506

 

 

 

526

 

 

 

3,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

$

601

 

 

$

491

 

 

$

125

 

 

$

 

 

$

1,217

 

Provision related to sales in the current quarter

 

 

741

 

 

 

24

 

 

 

57

 

 

 

 

 

 

822

 

Credits and payments made

 

 

(332

)

 

 

(36

)

 

 

(33

)

 

 

 

 

 

(401

)

Adjustments related to prior period sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2019

 

 

1,010

 

 

 

479

 

 

 

149

 

 

 

 

 

 

1,638

 

 

 

License Agreement – On March 30, 2020, the Company entered into an exclusive license agreement with Hong Kong Tainuo Pharma Ltd. (“HK Tainuo”) and Jiangsu Tainuo Pharmaceutical Co. Ltd. (“Jiangsu Tainuo”), a subsidiary of China Shijiazhuang Pharmaceutical Co, Ltd. for the development and commercialization of ZILRETTA in Greater China (consisting of mainland China, Hong Kong and Macau, and Taiwan). Under the terms of the agreement, HK Tainuo is obligated to pay the Company an upfront payment of $10.0 million. The Company is also eligible to receive up to $32.5 million in aggregate development, regulatory and commercial sales milestone payments. All payments received from HK Tainuo are subject to the applicable Hong Kong withholding taxes. HK Tainuo will be responsible for the clinical development, product registration and commercialization of ZILRETTA in Greater China and Jiangsu Tainuo will serve as the guarantor of HK Tainuo’s obligations and responsibilities under the agreement. The Company is solely responsible for the manufacture and supply of ZILRETTA to HK Tainuo for all clinical and commercial activities. The terms related to product manufacturing and supply, including pricing and minimum purchase requirements agreed to in the license agreement, will be covered by a separate supply agreement. All amounts owed to the Company are nonrefundable and non-creditable once paid. Unless terminated earlier in accordance with its terms, the license agreement continues in effect in perpetuity or as long as HK Tainuo or Jiangsu Tainuo continue to sell ZILRETTA in Greater China. Either party may terminate the agreement prior to expiration in the event of a material breach if not cured within 60 days from the date of notice of such breach (30 days in the case of payment obligations), or either party files for bankruptcy. The Company also has the right to terminate the agreement if HK Tainuo, Jiangsu Tainuo or any affiliate of each, commences any action or proceeding that challenges the validity, enforceability or scope of any Company patent in Greater China. Upon any such termination, the license granted to HK Tainuo will terminate and all know-how and patents will revert back to the Company. The revenue related to the upfront payment of $10.0 million will be recognized as the Company’s supply obligation is fulfilled over the term of the supply agreement. Therefore, no revenue was recognized associated with this contract as of March 31, 2020.

 

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, revenue and 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 estimates related to revenue recognition and

11


accrued expenses related to preclinical and clinical development 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.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, reserves and allowances, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international customers and markets. The Company has made estimates of the impact of COVID-19 within its financial statements and there may be changes to those estimates in future periods.

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.

Leases

The Company determines if an arrangement is a lease at contract inception. Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease liabilities with a term greater than one year and their corresponding right-of-use assets are recognized on the balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The Company made an accounting policy election to expense leases with a term of one year or less on a straight-line basis over the lease term. To date, the Company has not identified any material short-term leases, either individually or in the aggregate.

As the Company’s leases do not provide an implicit rate, the Company utilized the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company estimated the incremental borrowing rate based on a yield curve analysis of companies with a similar credit rating to its own, which was calculated using a number of financial ratios and qualitative considerations of the Company’s business. The yields on the Company’s currently outstanding debt (the 2024 Convertible Notes and term loan) were also used as inputs to the analysis to calculate a spread, adjusted for factors that reflect the profile of secured borrowing over the expected term of the lease.

The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, utilities, performance of manufacturing services, purchase of inventory, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected to use this practical expedient for its real estate leases and account for each

12


lease component and related non-lease component as one single component. In contrast, the Company has elected not to apply the practical expedient for its lease of manufacturing space at Patheon and has instead allocated consideration between the lease and non-lease components of the contract. The Company calculated the fair value of the lease component using publicly available information to identify comparable rentals in the same geographic area. The remainder of the consideration was allocated to the non-lease components.

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 March 31, 2020 and December 31, 2019 and indicate the level of the fair value hierarchy utilized to determine such fair value:

 

 

 

Fair Value Measurements as of March 31, 2020 Using:

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

96,439

 

 

$

 

 

$

 

 

$

96,439

 

Marketable securities

 

 

 

 

 

13,212

 

 

 

 

 

 

13,212

 

 

 

$

96,439

 

 

$

13,212

 

 

$

 

 

$

109,651

 

 

 

 

Fair Value Measurements as of December 31, 2019 Using:

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

69,733

 

 

$

 

 

$

69,733

 

Marketable securities

 

 

 

 

 

54,407

 

 

 

 

 

 

54,407

 

 

 

$

 

 

$

124,140

 

 

$

 

 

$

124,140

 

 

As of March 31, 2020, the Company’s cash equivalents that are invested in money market funds and overnight repurchase contracts are valued using Level 1 inputs based on quoted prices for identical securities in active markets. The Company measures the fair value of marketable securities using Level 2 inputs and primarily relies on quoted prices in active markets for similar marketable securities. Amortization and accretion of discounts and premiums are recorded in other income. As of December 31, 2019, the Company’s cash equivalents and marketable securities were classified within Level 2 of the fair value hierarchy.

The Company had a term loan outstanding under its 2015 credit facility with MidCap Financial Funding XIII Trust and Silicon Valley Bank (the “2015 term loan”).  On August 2, 2019, the Company entered into an amended and restated credit and security agreement with Silicon Valley Bank as agent, MidCap Financial Trust, and Flexpoint MCLS Holdings, LLC (collectively, the “Lenders”), providing for a term loan of $40.0 million (the “2019 term loan”) and a revolving credit facility of up to $20.0 million. The Company concurrently borrowed the $40.0 million term loan and used $7.7 million of the proceeds to repay the remaining amount owed on the 2015 term loan. In February 2020, the Company drew down the full $20.0 million available under the revolving credit facility. The amount outstanding on the 2019 term loan is reported at its carrying value in the accompanying balance sheet as of March 31, 2020. The Company determined the fair value of the 2019 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 2019 term loan was valued using Level 2 inputs as of March 31, 2020. The result of the calculation yielded a fair value that approximates its carrying value. The Company also concluded that the carrying value of the revolving credit facility approximates fair value because of the short-term maturity of this debt instrument.

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 $150.2 million at March 31, 2020.  

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4. Marketable Securities

As of March 31, 2020 and December 31, 2019 the fair value of available-for-sale marketable securities by type of security was as follows:

 

 

 

March 31, 2020

 

(In thousands)

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Corporate bonds

 

$

13,206

 

 

$

7

 

 

$

(1

)

 

$

13,212

 

 

 

$

13,206

 

 

$

7

 

 

$

(1

)

 

$

13,212

 

 

 

 

December 31, 2019

 

(In thousands)

 

Amortized Cost

 

 

Gross Unrealized

Gains

 

 

Gross Unrealized

Losses

 

 

Fair Value

 

Commercial paper

 

$

6,189

 

 

$

 

 

$

 

 

$

6,189

 

U.S. government obligations

 

 

29,950

 

 

 

24

 

 

 

 

 

 

29,974

 

Corporate bonds

 

 

18,206

 

 

 

38