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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, 2021

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 Global Market

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

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

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

As of November 1, 2021, the registrant had 50,321,366 shares of Common Stock ($0.001 par value) outstanding.

 

 

 


 

 

FLEXION THERAPEUTICS, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

3

 

Condensed Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020 (Unaudited)

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020 (Unaudited)

4

 

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

5

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021, and 2020 (Unaudited)

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

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

24

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

35

 

Item 4. Controls and Procedures

36

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

37

 

Item 1A. Risk Factors

37

 

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

43

 

Item 3. Defaults Upon Senior Securities

43

 

Item 4. Mine Safety Disclosures

43

 

Item 5. Other Information

43

 

Item 6. Exhibits

44

 

Signatures

45

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Flexion Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited in thousands, except share and per share amounts)

 

 

September 30,
2021

 

December 31,
2020

 

Assets

 

 

 

 

Current assets

 

 

 

 

Cash and cash equivalents

$

136,824

 

$

107,704

 

Marketable securities

 

5,229

 

 

67,576

 

Accounts receivable, net

 

29,375

 

 

30,025

 

Inventories

 

14,669

 

 

15,394

 

Prepaid expenses and other current assets

 

6,659

 

 

5,112

 

Total current assets

 

192,756

 

 

225,811

 

Property and equipment, net

 

19,480

 

 

19,538

 

Right-of-use assets

 

5,695

 

 

6,577

 

Total assets

$

217,931

 

$

251,926

 

Liabilities and Stockholders’ Deficit

 

 

 

 

Current liabilities

 

 

 

 

Accounts payable

$

7,492

 

$

6,928

 

Accrued expenses and other current liabilities

 

24,875

 

 

20,008

 

Deferred revenue

 

10,000

 

 

10,000

 

Operating lease liabilities

 

1,619

 

 

1,526

 

Current portion of long-term debt

 

 

 

16,806

 

Total current liabilities

 

43,986

 

 

55,268

 

Long-term operating lease liability, net

 

5,328

 

 

6,123

 

Long-term debt, net

 

80,087

 

 

44,114

 

2024 convertible notes, net

 

170,418

 

 

162,786

 

Other long-term liabilities

 

489

 

 

295

 

Total liabilities

 

300,308

 

 

268,586

 

Commitments and contingencies

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2021
   and December 31, 2020 and
0 shares issued and outstanding at September 30, 2021
   and December 31, 2020

 

 

 

 

Stockholders' deficit

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 50,299,458 and
   
49,403,034 shares issued and outstanding, at September 30, 2021 and
   December 31, 2020, respectively

 

50

 

 

49

 

Additional paid-in capital

 

780,954

 

 

765,607

 

Accumulated other comprehensive loss

 

 

 

(11

)

Accumulated deficit

 

(863,381

)

 

(782,305

)

Total stockholders' deficit

 

(82,377

)

 

(16,660

)

Total liabilities and stockholders' deficit

$

217,931

 

$

251,926

 

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

3


 

Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited in thousands, except per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2021

 

2020

 

2021

 

2020

 

Revenues

 

 

 

 

 

 

 

 

 

Product revenue, net

 

$

21,326

 

$

23,664

 

$

74,090

 

$

59,242

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

3,727

 

 

5,130

 

 

14,791

 

 

12,887

 

Research and development

 

 

14,771

 

 

10,092

 

 

41,487

 

 

43,733

 

Selling, general and administrative

 

 

26,986

 

 

27,312

 

 

81,993

 

 

81,341

 

Total operating expenses

 

 

45,484

 

 

42,534

 

 

138,271

 

 

137,961

 

Loss from operations

 

 

(24,158

)

 

(18,870

)

 

(64,181

)

 

(78,719

)

Other (expense) income

 

 

 

 

 

 

 

 

 

Interest income

 

 

54

 

 

62

 

 

531

 

 

584

 

Interest expense

 

 

(5,787

)

 

(5,125

)

 

(16,156

)

 

(14,848

)

Other expense

 

 

(421

)

 

(457

)

 

(1,270

)

 

(581

)

Total other (expense) income

 

 

(6,154

)

 

(5,520

)

 

(16,895

)

 

(14,845

)

Loss before income taxes

 

 

(30,312

)

 

(24,390

)

 

(81,076

)

 

(93,564

)

Income tax expense

 

 

 

 

248

 

 

 

 

495

 

Net loss

 

$

(30,312

)

$

(24,638

)

 

(81,076

)

 

(94,059

)

Net loss per common share, basic and diluted

 

$

(0.60

)

$

(0.50

)

$

(1.62

)

$

(2.16

)

Weighted average common shares outstanding, basic and diluted

 

 

50,265

 

 

49,298

 

 

50,027

 

 

43,563

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

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

 

 

2

 

 

(9

)

 

11

 

 

(68

)

Total other comprehensive income (loss)

 

 

2

 

 

(9

)

 

11

 

 

(68

)

Comprehensive loss

 

$

(30,310

)

$

(24,647

)

$

(81,065

)

$

(94,127

)

 

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

(Unaudited in thousands)

 

 

Common Stock

 

Additional

 

Accumulated
Other

 

 

 

Total

 

 

Shares

 

Par Value

 

Paid-in-
Capital

 

Comprehensive
(Loss) Income

 

Accumulated
Deficit

 

Stockholders'
Deficit

 

Balance at December 31, 2020

 

49,403

 

$

49

 

$

765,607

 

$

(11

)

$

(782,305

)

$

(16,660

)

Issuance of common stock, net of issuance costs

 

134

 

 

 

 

1,700

 

 

 

 

 

 

1,700

 

Issuance of common stock for equity
   awards, net of shares withheld for taxes

 

405

 

 

1

 

 

7

 

 

 

 

 

 

8

 

Stock-based compensation expense

 

 

 

 

 

4,640

 

 

 

 

 

 

4,640

 

Net loss

 

 

 

 

 

 

 

 

 

(28,556

)

 

(28,556

)

Other comprehensive income

 

 

 

 

 

 

 

1

 

 

 

 

1

 

Balance at March 31, 2021

 

49,942

 

$

50

 

$

771,954

 

$

(10

)

$

(810,861

)

$

(38,867

)

Issuance of common stock for equity
   awards, net of shares withheld for taxes

 

46

 

 

 

 

 

 

 

 

 

 

 

Employee stock purchase plan

 

118

 

 

 

 

921

 

 

 

 

 

 

921

 

Stock-based compensation expense

 

 

 

 

 

3,975

 

 

 

 

 

 

3,975

 

Net loss

 

 

 

 

 

 

 

 

 

(22,208

)

 

(22,208

)

Other comprehensive income

 

 

 

 

 

 

 

8

 

 

 

 

8

 

Balance at June 30, 2021

 

50,106

 

$

50

 

$

776,850

 

$

(2

)

$

(833,069

)

$

(56,171

)

Issuance of common stock for equity
   awards, net of shares withheld for taxes

 

193

 

 

 

 

(92

)

 

 

 

 

 

(92

)

Stock-based compensation expense

 

 

 

 

 

4,196

 

 

 

 

 

 

4,196

 

Net loss

 

 

 

 

 

 

 

 

 

(30,312

)

 

(30,312

)

Other comprehensive income

 

 

 

 

 

 

 

2

 

 

 

 

2

 

Balance at September 30, 2021

 

50,299

 

$

50

 

$

780,954

 

$

 

$

(863,381

)

$

(82,377

)

 

5


 

 

Common Stock

 

Additional

 

Accumulated
Other

 

 

 

Total

 

 

Shares

 

Par Value

 

Paid-in-
Capital

 

Comprehensive
Income (Loss)

 

Accumulated
Deficit

 

Stockholders'
(Deficit) Equity

 

Balance at December 31, 2019

 

38,361

 

$

38

 

$

648,391

 

$

62

 

$

(668,599

)

$

(20,108

)

Issuance of common stock for equity
   awards, net of shares withheld for taxes

 

201

 

 

1

 

 

8

 

 

 

 

 

 

9

 

Stock-based compensation expense

 

 

 

 

 

4,651

 

 

 

 

 

 

4,651

 

Net loss

 

 

 

 

 

 

 

 

 

(36,802

)

 

(36,802

)

Other comprehensive loss

 

 

 

 

 

 

 

(56

)

 

 

 

(56

)

Balance at March 31, 2020

 

38,562

 

$

39

 

$

653,050

 

$

6

 

$

(705,401

)

$

(52,306

)

Issuance of common stock, net of issuance costs

 

10,615

 

$

10

 

$

96,754

 

 

 

 

 

 

96,764

 

Issuance of common stock for equity
   awards, net of shares withheld for taxes

 

11

 

 

 

 

1

 

 

 

 

 

 

1

 

Employee stock purchase plan

 

82

 

 

 

 

891

 

 

 

 

 

 

891

 

Stock-based compensation expense

 

 

 

 

 

3,787

 

 

 

 

 

 

3,787

 

Net loss

 

 

 

 

 

 

 

 

 

(32,619

)

 

(32,619

)

Other comprehensive loss

 

 

 

 

 

 

 

(3

)

 

 

 

(3

)

Balance at June 30, 2020

 

49,270

 

$

49

 

$

754,483

 

$

3

 

$

(738,020

)

$

16,515

 

Issuance of common stock for equity
   awards, net of shares withheld for taxes

 

36

 

 

 

 

78

 

 

 

 

 

 

78

 

Stock-based compensation expense

 

 

 

 

 

4,959

 

 

 

 

 

 

4,959

 

Net loss

 

 

 

 

 

 

 

 

 

(24,638

)

 

(24,638

)

Other comprehensive loss

 

 

 

 

 

 

 

(9

)

 

 

 

(9

)

Balance at September 30, 2020

 

49,306

 

$

49

 

$

759,520

 

$

(6

)

$

(762,658

)

$

(3,095

)

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

 

6


 

Flexion Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited in thousands)

 

 

Nine Months Ended

 

 

September 30,

 

 

2021

 

2020

 

Cash flows from operating activities

 

 

 

 

Net loss

$

(81,076

)

$

(94,059

)

Adjustments to reconcile net loss to cash used in operating activities

 

 

 

 

Depreciation

 

1,573

 

 

1,295

 

Amortization of right-of-use assets

 

1,315

 

 

1,224

 

Stock-based compensation expense

 

12,811

 

 

13,397

 

Provision for inventory

 

1,773

 

 

 

Non cash interest expense

 

540

 

 

518

 

Amortization (accretion) of premium (discount) on marketable securities

 

441

 

 

(18

)

Loss on disposal of fixed assets

 

 

 

262

 

Loss on debt extinguishment

 

502

 

 

 

Amortization of debt discount and debt issuance costs

 

7,842

 

 

6,947

 

Premium paid on securities purchased

 

(54

)

 

(534

)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

650

 

 

9,216

 

Inventory

 

(1,048

)

 

(1,063

)

Prepaid expenses and other current assets

 

(1,547

)

 

(496

)

Accounts payable

 

980

 

 

(6,693

)

Accrued expenses and other current liabilities

 

4,992

 

 

216

 

Deferred revenue

 

 

 

10,000

 

Lease liabilities

 

(1,135

)

 

(1,031

)

Net cash used in operating activities

 

(51,441

)

 

(60,819

)

Cash flows from investing activities

 

 

 

 

Purchases of property and equipment

 

(1,737

)

 

(8,860

)

Proceeds from sale of fixed assets

 

 

 

13

 

Purchases of marketable securities

 

(5,175

)

 

(56,216

)

Sale and redemption of marketable securities

 

67,146

 

 

54,398

 

Net cash provided by (used in) investing activities

 

60,234

 

 

(10,665

)

Cash flows from financing activities

 

 

 

 

Proceeds from borrowings under term loan

 

55,000

 

 

15,000

 

Payments on notes payable

 

(56,875

)

 

 

Proceeds from revolving line of credit

 

20,000

 

 

20,000

 

Repayments of revolving line of credit

 

 

 

(15,000

)

Proceeds from the offering of common stock

 

 

 

97,289

 

Proceeds from issuance of common stock (net of issuance costs)

 

1,700

 

 

 

Payments of public offering costs

 

(125

)

 

(400

)

Payment of debt issuance costs

 

(210

)

 

 

Proceeds from the exercise of stock options (net of shares withheld for taxes)

 

(84

)

 

88

 

Proceeds from employee stock purchase plan

 

921

 

 

891

 

Net cash provided by financing activities

 

20,327

 

 

117,868

 

Net increase in cash and cash equivalents

 

29,120

 

 

46,384

 

Cash and cash equivalents at beginning of period

 

107,704

 

 

82,253

 

Cash and cash equivalents at end of period

$

136,824

 

$

128,637

 

Non-cash operating, investing and financing activities

 

 

 

 

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

 

433

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

15

 

 

870

 

Public offering costs in accounts payable and accrued expenses

 

 

 

125

 

Supplemental disclosures of cash flow information

 

 

 

 

Cash paid for interest

 

6,483

 

 

6,042

 

 

 

 

 

 

 

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, the most common form of 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, an investigational IA gene therapy product candidate in clinical development for the treatment of OA, and FX301, a locally administered peripheral nerve block product candidate in clinical development for the control of post-operative pain.

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

Proposed Acquisition by Pacira BioSciences, Inc.

On October 11, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pacira BioSciences, Inc., a Delaware corporation (“Pacira”), and Oyster Acquisition Company Inc., a Delaware corporation and wholly owned subsidiary of Pacira (“Purchaser”). Pursuant to the Merger Agreement, on October 22, 2021, Purchaser commenced a tender offer (the “Offer”) to purchase each issued and outstanding share of the Company’s common stock (the “Shares”) at an offer price of (i) $8.50 per Share in cash, net of applicable withholding taxes and without interest, plus (ii) one non-transferable contractual contingent value right per Share, which will represent the right to receive one or more contingent payments up to $8.00 in the aggregate, in cash, net of applicable withholding taxes and without interest, upon the achievement of specified milestones on or prior to December 31, 2030.

Promptly following the completion of the Offer, upon the terms and subject to the conditions of the Merger Agreement, Purchaser will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Pacira. The Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the Delaware General Corporation Law, which permits completion of the Merger without a vote of the holders of common stock upon the acquisition by Purchaser of a majority of the aggregate voting power of common stock. As a result of the Merger, the Company will cease to be a publicly traded company.

The Merger Agreement contains customary representations and warranties. The Merger is expected to close before the end of the calendar year 2021, subject to the satisfaction or waiver of customary closing conditions, including, among others, that the number of Shares tendered in the Offer represent at least one Share more than 50% of the total number of Shares at the time of the expiration of the Offer. The Merger Agreement provides Pacira and the Company with certain termination rights and, under certain circumstances, may require the Company to pay Pacira a termination fee of $18.0 million.

For additional information related to the Merger Agreement, refer to the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company with the Securities and Exchange Commission on October 22, 2021, together with the exhibits and annexes thereto and as amended or supplemented from time to time.

The Company recorded acquisition-related costs of approximately $0.7 million for each of the three and nine months ended September 30, 2021, primarily for outside legal and external financial advisory fees associated with the pending acquisition by Pacira. These costs were recorded in general and administrative expense in the Company’s condensed consolidated statements of operations and comprehensive loss in the respective reporting periods. Additional acquisition-related costs are expected to be incurred through the closing of the Merger.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the realization of assets and satisfaction of liabilities and commitments in the

7


 

normal course of business. The Company has incurred recurring losses and negative cash flows from operations. As of September 30, 2021, the Company had cash, cash equivalents, and marketable securities of approximately $142.1 million.

The Company’s operations have been and continue to be affected by the ongoing global pandemic of a novel strain of coronavirus (“COVID-19”). In March 2020, the World Health Organization declared COVID-19 a pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has caused significant volatility and uncertainty, which could result in a prolonged economic downturn that has disrupted and is expected to continue to disrupt the Company’s business. While there have been no material asset impairments recorded to date, any prolonged material future disruptions to the work of the Company’s employees, suppliers, contract manufacturers, or vendors, or to the operations of physicians that administer ZILRETTA could negatively impact the Company’s operations, availability of supplies, carrying value of assets, 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 raising additional capital, such as through debt or equity offerings, as needed. The Company may not be able to obtain financing on acceptable terms, or at all. In particular, as a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility and disruptions, including declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any additional debt or equity financing more difficult, more costly, and more dilutive. If the Company is unable to obtain funding on a timely basis, the Company may need to curtail its operations, including the commercialization of ZILRETTA, and/or reduce the scope of, or delay certain research and development activities, including the FX201 or FX301 programs, 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 $100.0 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 applied to the trailing six-months of net revenue and is determined based on the Company’s approved forecast, as determined by the Lenders. 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 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 September 30, 2021, the Company was in compliance with all financial covenants under the amended and restated credit and security agreement.

If the Company is unable to grow sales of ZILRETTA in future periods, it is possible that the Company may not maintain compliance with the revenue covenant, in the event it applies, in future periods, which would require the Company to repay its outstanding borrowings under the term loan and revolving credit facility. Given the recent decrease in revenue as compared to the Company’s expectations, the Company expects that absent raising additional capital through financing or other transactions its cash balance is likely to decrease below $100.0 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 demand for ZILRETTA does not increase in line with its expectations. 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 would be intended to mitigate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern include reducing operating expenses through hiring and travel freezes, delaying, reducing, or ceasing all research and development activities outside of the ongoing clinical trials, reduction of certain external 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. However, as the Company is expecting to close the planned merger with Pacira prior to the end of 2021, none of the above actions have been taken or have been approved to be taken and therefore cannot be considered in management’s going concern evaluation as a mitigating action.

The Company has concluded that without taking into consideration the planned Merger with Pacira, management’s plans do not alleviate the substantial doubt about the Company’s ability to continue as a going concern. As the planned Merger with Pacira has not occurred as of the issuance of these financial statements, it also cannot be considered within management’s plans to alleviate the conditions raised around substantial doubt. 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 September 30, 2021, and for the three and nine months ended September 30, 2021 and 2020, 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

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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 that 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, 2021.

The information presented in the condensed consolidated financial statements and related notes as of September 30, 2021, and December 31, 2020, and for the three and nine months ended September 30, 2021 and 2020, is unaudited. The December 31, 2020, condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

Interim results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021, or any future period.

Recent Accounting Pronouncements

Accounting Standards Recently Issued

In August 2020, the FASB issued ASU No. 2020-06, (“ASU 2020-06”). The new standard simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. The new guidance reduced the number of accounting models for convertible debt and convertible preferred stock instruments and made certain disclosure amendments intended to improve the information provided to users. The guidance also amended the derivative guidance for the “own stock” scope exception, which exempts qualifying instruments from being accounted for as derivatives if certain criteria are met. Finally, the standard changed the way certain convertible instruments are treated when calculating earnings per share. The standard is effective for the Company for fiscal years, and the interim periods within those years, beginning after December 15, 2021, and early adoption is permitted. The Company is currently evaluating the impact of ASU 2020-06 on the Company’s condensed consolidated financial statements.

Consolidation

The accompanying condensed consolidated financial statements include the Company and its wholly owned subsidiary, Flexion Therapeutics Securities Corporation. The Company has eliminated all intercompany transactions for the three and nine months ended September 30, 2021, and the year ended December 31, 2020.

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 that 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

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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 that are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

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

Service Fees and Allowances

The Company compensates its customers and GPOs for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss through September 30, 2021, 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. Historically, the Company has received an immaterial amount of returns. In the third quarter of 2021, there was a significant increase in actual and expected product returns from specialty distributors of product that was never sold through to healthcare providers. This is due to the fact that the majority of product sold during the third quarter had between 3-4 months of expiry remaining. The vast majority of the returns related to product that was sold to the specialty distributors during the third quarter of 2021 and resulted in a $2.0 million reduction of revenue in the third quarter of 2021. In addition, the Company increased its estimate of future returns relating to short-dated product, which resulted in an additional $1.4 million reduction in revenue in the third quarter of 2021.

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 that 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

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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 that remains in the distribution channel inventories at the end of each reporting period.

Purchaser/Provider Discounts and Rebates

The Company offers 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. In the third quarter of 2021, the Company implemented an off-invoice discount (“OID”) program whereby providers receive the discounted price immediately upon purchase, rather than having to wait until the end of the quarter for a rebate payment. Specialty distributors and other customers charge the Company for the difference between what they pay for the product (list price) and the net selling price after taking into account the OID. Chargeback amounts are generally determined at the time of resale to the eligible 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 commercial chargebacks consist of credits that the Company expects to issue for units sold to qualified healthcare providers but for which no chargeback has been submitted, and chargebacks that customers have claimed, but for which the Company has not yet issued a credit. 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 that is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets.

Other Incentives

Other incentives that 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 that 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.

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The following table summarizes activity in each of the product revenue allowance and reserve categories for the nine months ended September 30, 2021 and 2020:

(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, 2020

$

1,733

 

$

530

 

$

628

 

$

1,832

 

$

4,723

 

Provision related to sales in the current quarter

 

2,188