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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 20, 2020
 
Flexion Therapeutics, Inc.
(Exact name of Registrant as Specified in Its Charter)
 
         
Delaware
 
001-36287
 
26-1388364
(State or Other Jurisdiction
of Incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
 
 
 
 
 
 
 
 
 
     
10 Mall Road, Suite 301,
Burlington, Massachusetts
 
01803
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
Registrant’s Telephone Number, Including Area Code: (781) 305-7777
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
 
 
 
 
 
 
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
 
 
 
 
 
 
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
 
 
 
 
 
 
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 
 
 
 
 
 
 
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, Par Value $0.001
 
FLXN
 
The Nasdaq Global Market
 
 
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
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.  
 
 

Item 8.01
Other Events.
 
 
 
In connection with the issuance of the report of its independent registered public accounting firm as part of its recently announced proposed public offering of common stock, Flexion Therapeutics, Inc. (the “Company”) is refiling as Exhibit 99.1 hereto its consolidated financial statements that were previously included in its Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”) and the related report of the Company’s independent registered public accounting firm. The financial statements filed as Exhibit 99.1 hereto are identical to those included in the Form 10-K other than (i) an update to Note 1 to the consolidated financial statements to disclose, (a) consistent with the disclosures appearing in the Company’s previously filed Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and due to circumstances arising after the filing of the Form 10-K on March 12, 2020, that there was substantial doubt about its ability to continue as a going concern, and (b) the Company entered into an amendment to its credit and security agreement with Silicon Valley Bank as agent, MidCap Financial Trust, Flexpoint MCLS Holdings, LLC, and the other lenders from time to time party thereto and (ii) to add Note 18 to the consolidated financial statements describing subsequent events that occurred after the Form 10-K was filed on March 12, 2020. The report of the Company’s independent registered public accounting firm included in Exhibit 99.1 hereto likewise includes a paragraph noting management’s conclusion regarding substantial doubt about the Company’s ability to continue as a going concern. Other than as described in the preceding sentences, Exhibit 99.1 does not revise, modify, update or otherwise affect the Form 10-K, including the consolidated financial statements.
This Form 8-K is being filed only for the purposes described above, and all other information in the Form 10-K remains unchanged. In order to preserve the nature and character of the disclosures set forth in the Form 10-K, the items included in Exhibit 99.1 of this Form 8-K have been updated solely for the matters described above. No attempt has been made in this Form 8-K to reflect events or occurrences after the date of the filing of the Form 10-K on March 12, 2020, and it should not be read to modify or update other disclosures as presented in the Form 10-K. As a result, this Form 8-K should be read in conjunction with the Form 10-K and the Company’s filings made with the SEC subsequent to the filing of the Form 10-K. References in the attached exhibits to the Form 10-K or parts thereof refer to the Form 10-K for the year ended December 31, 2019, filed on March 12, 2020.
Item 9.01
Financial Statements and Exhibits.
 
 
 
(d)
    Exhibits.
 
 
 
         
Exhibit
Number
 
 
Description
         
 
23.1
   
         
 
99.1
   
         
 
104
   
Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
             
 
 
Flexion Therapeutics, Inc.
 
 
 
 
 
 
 
Date: May 20, 2020
 
 
By:
 
/s/ Mark S. Levine
 
 
 
Mark S. Levine
 
 
 
General Counsel and Corporate Secretary
 
 
 
 
 
 
 
 
 
EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-219099) and Form S-8 (Nos. 333-193907, 333-202957, 333-210111, 333-216615, 333-221373, 333-223532, 333-229969, and 333-237132) of Flexion Therapeutics, Inc. of our report dated March 12, 2020, except with respect to our opinion on the consolidated financial statements insofar as it relates to the matters that raise substantial doubt about the Company’s ability to continue as a going concern discussed in Note 1, as to which the date is May 20, 2020, relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

May 20, 2020

EX-99.1
Exhibit 99.1
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
 
Page
 
Report of Independent Registered Public Accounting Firm
   
2
 
Consolidated Balance Sheets
   
4
 
Consolidated Statements of Operations and Comprehensive Loss
   
5
 
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
   
6
 
Consolidated Statements of Cash Flows
   
7
 
Notes to Consolidated Financial Statements
   
8
 
1

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Flexion Therapeutics, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Flexion Therapeutics, Inc. and its subsidiary (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, of changes in stockholders’ (deficit) equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework
(2013) issued by the COSO.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has begun to experience and expects to continue experiencing for the remainder of 2020, a material decline in revenue due to COVID-19 and there is substantial risk that the Company would fail to meet the minimum revenue covenant under the amendment to the amended and restated credit and security agreement that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting (not presented herein) appearing under Item 9A of the Company’s 2019 Annual Report on Form 10-K. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
2

accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 12, 2020, except with respect to our opinion on the consolidated financial statements insofar as it relates to the matters that raise substantial doubt about the Company’s ability to continue as a going concern discussed in Note 1, as to which the date is May 20, 2020.
We have served as the Company’s auditor since 2010.
3

Flexion Therapeutics, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
                 
 
December 31,
2019
 
 
December 31,
2018
 
Assets
 
 
 
 
 
 
Current assets
   
     
 
Cash and cash equivalents
  $
82,253
    $
87,229
 
Marketable securities
   
54,407
     
171,555
 
Accounts receivable, net
   
37,115
     
13,121
 
Inventories
   
16,529
     
7,637
 
Prepaid expenses and other current assets
   
5,371
     
5,500
 
                 
Total current assets
   
195,675
     
285,042
 
Property and equipment, net
   
13,662
     
10,710
 
Right-of-use
assets
   
8,223
     
  
 
                 
Total assets
  $
217,560
    $
295,752
 
                 
Liabilities and Stockholders’ (Deficit) Equity
 
 
 
 
 
 
Current liabilities
   
     
 
Accounts payable
  $
15,258
    $
12,340
 
Accrued expenses and other current liabilities
   
19,610
     
14,310
 
Operating lease liabilities
   
1,351
     
—  
 
Current portion of long-term debt
   
  
     
9,967
 
                 
Total current liabilities
   
36,219
     
36,617
 
Long-term operating lease liability, net
   
7,609
     
—  
 
Long-term debt, net
   
40,176
     
3,640
 
2024 convertible notes, net
   
153,413
     
144,879
 
Other long-term liabilities
   
251
     
537
 
                 
Total liabilities
   
237,668
     
185,673
 
                 
Commitments and contingencies
   
     
 
Preferred Stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2019 and December 31, 2018 and 0 shares issued and outstanding at December 31, 2019 and December 31, 2018
   
  
     
  
 
Stockholders’ (deficit) equity
   
     
 
Common stock, $0.001 par value; 100,000,000 shares authorized; 38,361,476 and 37,946,341 shares issued and outstanding, at December 31, 2019 and December 31, 2018, respectively
   
38
     
38
 
Additional
paid-in
capital
   
648,391
     
628,944
 
Accumulated other comprehensive loss
   
62
     
(77
)
Accumulated deficit
   
(668,599
)    
(518,826
)
                 
Total stockholders’ (deficit) equity
   
(20,108
)    
110,079
 
                 
Total liabilities and stockholders’ (deficit) equity
  $
217,560
    $
295,752
 
                 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
4

Flexion Therapeutics, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
 
Year Ended December 31,
 
 
2019
 
 
2018
 
 
2017
 
Revenues
 
 
 
 
 
 
 
 
 
Product revenue, net
  $
72,957
    $
22,524
    $
355
 
Operating expenses
 
 
 
 
 
 
 
 
 
Cost of sales
   
9,960
     
7,336
     
4
 
Research and development
   
69,559
     
53,079
     
51,231
 
Selling, general and administrative
   
129,709
     
121,311
     
78,801
 
                         
Total operating expenses
   
209,228
     
181,726
     
130,036
 
                         
Loss from operations
   
(136,271
)    
(159,202
)    
(129,681
)
                         
Other (expense) income
 
 
 
 
 
 
 
 
 
Interest income
   
3,212
     
4,567
     
3,718
 
Interest expense
   
(17,066
)    
(15,712
)    
(11,268
)
Other income (expense)
   
352
     
688
     
(250
)
                         
Total other (expense) income
   
(13,502
)    
(10,457
)    
(7,800
)
                         
Net loss
  $
(149,773
)   $
(169,659
)   $
(137,481
)
                         
Net loss per common share, basic and diluted
  $
(3.93
)   $
(4.49
)   $
(4.16
)
                         
Weighted average common shares outstanding, basic and diluted
   
38,086
     
37,751
     
33,027
 
                         
Other comprehensive income (loss)
   
     
     
 
Unrealized gains (losses) from
available-for-sale
securities, net of tax of $0
   
139
     
330
     
(336
)
                         
Total other comprehensive income (loss)
   
139
     
330
     
(336
)
                         
Comprehensive loss
  $
(149,634
)   $
(169,329
)   $
(137,817
)
                         
The accompanying notes are an integral part of these consolidated financial statements.
5

Flexion Therapeutics, Inc.
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
(In thousands)
 
Common Stock
   
Additional
Paid-in
Capital
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
Accumulated
Deficit
 
 
Total
Stockholders’
(Deficit)
Equity
 
 
Shares
 
 
Par Value
 
Balance at December 31, 2016
   
31,667
    $
32
    $
398,757
    $
(71
)   $
(211,686
)   $
187,032
 
                                                 
Issuance of common stock net of issuance costs
   
5,520
     
6
     
132,171
     
     
     
132,177
 
Issuance of common stock for equity awards
   
334
     
     
3,858
     
     
     
3,858
 
Employee stock purchase plan
   
90
     
     
1,016
     
     
     
1,016
 
Stock-based compensation expense
   
     
     
11,542
     
     
     
11,542
 
Portion of convertible debt proceeds allocated to equity component
   
     
     
62,466
     
     
     
62,466
 
Net loss
   
     
     
     
     
(137,481
)    
(137,481
)
Other comprehensive loss
   
     
     
     
(336
)    
     
(336
)
                                                 
Balance at December 31, 2017
   
37,611
    $
38
    $
609,810
    $
(407
)   $
(349,167
)   $
260,274
 
Issuance of common stock for equity awards, net of shares withheld for taxes
   
197
     
     
1,653
     
     
     
1,653
 
Employee stock purchase plan
   
138
     
     
2,022
     
     
     
2,022
 
Stock-based compensation expense
   
     
     
15,459
     
     
     
15,459
 
Net loss
   
     
     
     
     
(169,659
)    
(169,659
)
Other comprehensive income
   
     
     
     
330
     
     
330
 
                                                 
Balance at December 31, 2018
   
37,946
    $
38
    $
628,944
    $
(77
)   $
(518,826
)   $
110,079
 
Issuance of common stock for equity awards, net of shares withheld for taxes
   
230
     
     
1,726
     
     
     
1,726
 
Employee stock purchase plan
   
185
     
     
1,820
     
     
     
1,820
 
Stock-based compensation expense
   
     
     
15,901
     
     
     
15,901
 
Net loss
   
     
     
     
     
(149,773
)    
(149,773
)
Other comprehensive income
   
     
     
     
139
     
     
139
 
                                                 
Balance at December 31, 2019
   
38,361
    $
38
    $
648,391
    $
62
    $
(668,599
)   $
(20,108
)
                                                 
The accompanying notes are an integral part of these consolidated financial statements.
6

Flexion Therapeutics, Inc.
Consolidated Statements of Cash Flows
(In thousands)
 
Year Ended December 31,
 
 
2019
 
 
2018
 
 
2017
 
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
Net loss
  $
(149,773
)   $
(169,659
)   $
(137,481
)
Adjustments to reconcile net loss to cash used in operating activities:
   
     
     
 
Depreciation
   
1,059
     
1,714
     
2,008
 
Amortization of
right-of-use
assets
   
1,337
     
  
     
  
 
Stock-based compensation expense
   
15,901
     
15,459
     
11,542
 
Non-cash
interest expense
   
564
     
  
     
  
 
(Accretion) Amortization of (discount) premium on marketable securities
   
(1,337
)    
(1,320
)    
333
 
Loss from debt extinguishment
   
352
     
—  
     
—  
 
Amortization of debt discount and debt issuance costs
   
8,714
     
7,805
     
4,826
 
Premium paid on securities purchased
   
(34
)    
(214
)    
(857
)
Changes in operating assets and liabilities:
   
     
     
 
Accounts receivable
   
(23,994
)    
(12,711
)    
(410
)
Inventory
   
(7,674
)    
(5,244
)    
(1,799
)
Prepaid expenses and other current assets
   
126
     
(2,097
)    
387
 
Accounts payable
   
1,702
     
5,141
     
4,188
 
Accrued expenses and other current liabilities
   
5,326
     
707
     
9,432
 
Lease liabilities
   
(1,027
)    
  
     
  
 
                         
Net cash used in operating activities
   
(148,758
)    
(160,419
)    
(107,831
)
                         
Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
   
(3,894
)    
(852
)    
(2,146
)
Purchases of marketable securities
   
(115,466
)    
(222,482
)    
(356,754
)
Sale and redemption of marketable securities
   
234,124
     
348,918
     
240,228
 
                         
Net cash provided by (used in) investing activities
   
114,764
     
125,584
     
(118,672
)
                         
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Proceeds from the issuance of 2024 convertible notes
   
—  
     
—  
     
201,250
 
Proceeds from borrowings under term loan
   
40,000
     
—  
     
—  
 
Payment of debt issuance costs
   
(161
)    
—  
     
(6,470
)
Proceeds from the offering of common stock
   
—  
     
—  
     
132,666
 
Payments on notes payable
   
(14,367
)    
(10,000
)    
(8,333
)
Payments of public offering costs
   
—  
     
—  
     
(490
)
Proceeds from the exercise of stock options
   
1,726
     
1,653
     
3,858
 
Proceeds from employee stock purchase plan
   
1,820
     
2,022
     
1,016
 
                         
Net cash provided by (used in) financing activities
   
29,018
     
(6,325
)    
323,497
 
                         
Net (decrease) increase in cash, cash equivalents, and restricted cash
   
(4,976
)    
(41,160
)    
96,994
 
Cash, cash equivalents, and restricted cash at beginning of period
   
87,229
     
128,389
     
31,395
 
                         
Cash, cash equivalents, and restricted cash at end of period
  $
82,253
    $
87,229
    $
128,389
 
                         
Supplemental disclosures of cash flow information
 
 
 
 
 
 
 
 
 
Cash paid for interest
  $
8,049
    $
7,874
    $
5,080
 
Non-cash
investing and financing activities
 
 
 
 
 
 
 
 
 
Right-of-use
asset obtained in exchange for operating lease obligation
  $
9,560
    $
—  
    $
—  
 
Portion of debt proceeds allocated to equity component
  $
—  
    $
—  
    $
62,466
 
Purchases of property and equipment in accounts payable and accrued expenses
  $
2,202
    $
986
    $
9
 
The accompanying notes are an integral part of these consolidated financial statements.
7

Flexion Therapeutics, Inc.
Notes to Consolidated Financial Statements
1.
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: FX
201
, which is an investigational IA gene therapy product candidate in clinical development for the treatment of OA, and FX
301
, a preclinical product candidate, which is being developed as a locally administered peripheral nerve block for control of post-operative pain.
The accompanying 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 December 31, 2019, the Company had cash, cash equivalents, and marketable securities of approximately $136.7 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 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 10, 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. On May 18, 2020, the Company entered into an amendment to the amended and restated credit and security agreement (“the amendment”). Pursuant to the amendment, the Company borrowed $15.0 million under a new term loan advance and immediately used the proceeds to repay an equal amount under the revolving credit facility, and the maximum principal amount of the revolving credit facility was reduced from $20.0 million to $5.0 million. The new term loan is subject to substantially the same terms, including interest rate, amortization and maturity date, as the existing term loan under the credit facility. Under the credit facility, as amended, the Company remains subject to a minimum liquidity threshold, such that at any time the Company’s liquidity is below $80.0 million, the Company will become subject to a minimum revenue covenant. However, pursuant to the amendment, the Company’s minimum liquidity threshold now includes certain accounts receivable as deemed eligible under the credit and security agreement, in addition to cash, cash equivalents, and marketable securities. Prior to May 2021, the minimum revenue covenant, if it applies in the future, is unmodified and is based on the greater of (i) a conservative percentage of the year’s approved forecast and (ii) modest growth over the trailing twelve months of actual revenues. Beginning in May 2021, the minimum revenue covenant, if it applies, will be the greatest of (i) a conservative percentage of the year’s approved forecast, (ii) modest growth over the trailing twelve months of actual revenues and (iii) 100% of the minimum revenue covenant amount for the preceding month. Also pursuant to the amendment, the final payment due upon repayment or maturity of the term loans was changed from 4.75% of the term loan amount to 6.75% of the term loan amount.
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 December 31, 2019, 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 
minimum liquidity
is likely to decrease below
the
$80.0 
million
threshold in the amendment to the amended and restated credit and security agreement
 
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 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 December 31, 2019 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.
8

2.
Financing Transactions
On August 2, 2019, the Company entered into an amended and restated credit and security agreement (the “amended and restated credit and security agreement”) with Silicon Valley Bank as agent, MidCap Financial Trust, Flexpoint MCLS Holdings, LLC, and the other lenders from time to time party thereto (collectively, the “Lenders”), providing for a term loan of $40.0 million and a revolving credit facility of up to $20.0 million, both of which mature on January 1, 2024 (the “Maturity Date”). 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.
On October 16, 2017, the Company completed a
follow-on
public offering of its common stock, which resulted in the sale of 5,520,000 shares of the Company’s common stock at a price to the public of $25.50 per share including shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares. The Company received net proceeds from the
follow-on
financing of $132.2 million after deducting underwriting discounts, commissions, and offering costs paid by the Company
On May 2, 2017, the Company issued an aggregate of $201.3 million principal amount of the 2024 Convertible Notes. The 2024 Convertible Notes have a maturity date of May 1, 2024 are unsecured and accrue interest at a rate of 3.375% per annum, payable semi-annually on May 1 and November 1 of each year, beginning November 1, 2017. The Company received $194.8 million for the sale of the 2024 Convertible Notes, after deducting fees and expenses of $6.5 million.
The Company’s total issued common stock as of December 31, 2019 was 38,361,476 shares.
3.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements 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 financial information, including the accounts of the Company and its wholly owned subsidiary after elimination of all significant intercompany accounts and transactions.
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, revenues 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 consolidated financial statements include estimates related to revenue and 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.
Revenue Recognition
On October 6, 2017, U.S. Food and Drug Administration, (the 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
9

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 our customers do not exceed one year and therefore the Company has elected to apply the practical expedient and no amount of consideration has been allocated as a financing component. Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.
Transaction Price, including Variable Consideration
— Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee for service amounts that are detailed within contracts between the Company and its customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.
The amount of variable consideration which is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s original estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Service Fees and Allowances
—The Company compensates its customers and GPOs for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss through December 31, 2019, as well as a reduction to trade receivables, net on the consolidated balance sheets.
10

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 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 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 US 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 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 anticipates 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 the volume of product purchased. Rebates are based on actual purchase levels during the rebate purchase period. The Company estimates these rebates and records such estimate in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.
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 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 years ended December 31, 2019, 2018 and 2017:
(In thousands)
 
Service Fees,
Allowances and
Chargebacks
 
 
Government
Rebates and Other
Incentives
 
 
Product
Returns
 
 
Purchaser/Provider
Discounts and
Rebates
 
 
Total
 
Balance as of January 1, 2017
  $
—  
    $
—  
    $
—  
    $
—  
    $
—  
 
Provision related to sales in the current year
   
100
     
15
     
2
     
—  
     
117
 
Credit or payments made during the period
   
(40
)    
—  
     
—  
     
—  
     
(40
)
                                         
Balance as of December 31, 2017
   
60
     
15
     
2
     
—  
     
77
 
Provision related to sales in the current year
   
1,688
     
502
     
124
     
—  
     
2,314
 
Credit or payments made during the period
   
(1,147
)    
(26
)    
(1
)    
—  
     
(1,174
)
                                         
Balance as of December 31, 2018
   
601
     
491
     
125
     
—  
     
1,217
 
Provision related to sales in the current year
   
5,527
     
261
     
334
     
2,685
     
8,807
 
Credit or payments made during the period
   
(4,281
)    
(375
)    
(57
)    
(1,029
)    
(5,742
)
Adjustments related to prior period sales
   
—  
     
(129
)    
—  
     
—  
     
(129
)
                                         
Balance as of December 31, 2019
  $
1,847
    $
248
    $
402
    $
1,656
    $
4,153
 
                                         
Inventory
The Company values its inventories at the lower of cost or estimated net realizable value. The Company determines the cost of its inventories, which includes amounts related to materials and manufacturing overhead, on a
first-in,
first-out
basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and it writes down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified. Such impairment charges, should they occur, are recorded within cost of sales. The determination of whether inventory costs will be realizable requires estimates by management. If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required, which would be recorded as a cost of sales in the consolidated statements of operations and comprehensive loss.
The Company capitalizes inventory costs associated with the Company’s products after regulatory approval when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Inventory acquired prior to receipt of marketing approval of a product candidate is expensed as research and development expense as incurred. Inventory that can be used in either the production of clinical or commercial product is expensed as research and development expense when selected for use in a clinical manufacturing campaign. Inventory produced that will be used in promotional marketing campaigns is expensed to selling, general and administrative expense when it is selected for use in a marketing program.
Consolidation
The accompanying consolidated financial statements include the Company and its wholly-owned subsidiary, Flexion Therapeutics Securities Corporation. The Company has eliminated all intercompany transactions for the years ended December 31, 2019, 2018 and 2017. In addition, Flexion Therapeutics, Inc. is registered to do business in the United Kingdom through its branch office located in Swindon, United Kingdom.
Accounts Receivable
Accounts receivable are recorded net of customer allowances for distribution fees and chargebacks, and doubtful accounts. Allowances for distribution fees and chargebacks are based on contractual terms. The Company estimates the allowance for doubtful accounts based on existing contractual payment terms, actual payment patterns of its customers and individual customer circumstances. At December 31, 2019 and 2018, respectively, the Company determined that an allowance for doubtful accounts was not required. No accounts were written off during the years ended December 31, 2019 and 2018, respectively.
12

Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The Company currently invests available cash in money market funds of a major financial institution, corporate bonds, government obligations and commercial paper.
Marketable Securities
Marketable securities consist of investments with original maturities greater than ninety days and less than one year from the balance sheet date. Long-term investments consist of investments with maturities of greater than one year. The Company classifies all of its investments, which consist solely of debt securities, as
available-for-sale.
Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are recorded as a component of other comprehensive income (loss). Realized gains and losses are determined on a specific identification basis and are included in other income (loss). Amortization and accretion of discounts and premiums is recorded in other income.
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 betterments 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 designated 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.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.
13

Debt Issuance Costs, net
As of December 31, 2019 and 2018, the carrying value of debt issuance costs was $2.9 million and $3.5 million, respectively, and was presented as a direct deduction from the carrying amounts of long-term debt. In addition, $0.6 million, $0.6 million, and $0.4 million, respectively, of debt issuance costs were amortized and recognized as other expense in the statement of operations for the years ended December 31, 2019, 2018 and 2017.
Research and Development
Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, depreciation, clinical trial and related clinical manufacturing costs, contract services and other related costs. Research and development costs are expensed to operations as the related obligation is incurred.
As part of the process of preparing its financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with applicable internal and vendor personnel to identify services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice it monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known to it at that time. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:
  CROs in connection with clinical studies;
  investigative sites in connection with clinical studies;
  vendors related to product manufacturing, development and distribution of clinical supplies; and
  vendors in connection with preclinical development activities.
The Company records expenses related to clinical studies and manufacturing development activities based on its estimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing vendors that conduct and manage these activities on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows.
The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known to it. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, the Company modifies its estimates of accrued expenses accordingly on a prospective basis. If the Company does not identify costs that it has begun to incur, or if it underestimates or overestimates the level of services performed or the costs of these services, the Company’s actual expenses could differ from its estimates. To date, the Company has not adjusted its estimates at any particular balance sheet date in any material amount.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are recorded as general and administrative expenses as incurred, as recoverability of such expenditures is uncertain.
Accounting for Stock-Based Compensation
The Company measures all stock options and other stock based-awards granted to employees at the fair value at the date of grant using the Black-Scholes option-pricing model. The fair value of the awards is recognized as expense over the requisite service period, which is generally the vesting period of the respective award. The straight-line method of expense recognition is applied to all awards with service-only conditions. The Company accounts for forfeitures as they occur and does not estimate future forfeitures. As such, previously recognized compensation expense for an award is reversed in the period that the award is forfeited. For stock awards that have a performance condition, the Company recognizes compensation expense based on its assessment of the probability that the performance condition will be achieved, using an accelerated attribution model, over the explicit or implicit service period.
14

As a result of our adoption of “ASU
2018-07”,
stock-based awards granted to
non-employees
are accounted for the same way as awards granted to employees, and such awards will not be
re-measured
at fair value each reporting period. We adopted this standard prospectively and there was no impact on previously issued financial statements.
The Company classifies stock-based compensation expense in the consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified, or in the case of a
non-employee,
in the same manner as the award recipient’s service costs are classified.
Concentration of Credit Risk and Significant Suppliers
Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of commercial paper and corporate bonds. The Company generally invests its cash in money market funds, government and corporate bonds, and commercial paper at one financial institution. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
The Company is completely dependent on third-party manufacturers and product suppliers for research and commercial activities. In particular, the Company relies on a limited number of manufacturers and relies on them to purchase from third-party suppliers the materials necessary to produce its product candidates for its clinical trials and for commercial supply. These programs would be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients.
Three individual customers accounted for 44%, 25% and 15% for a total 84% of product revenues for the year ended 2019, and two individual customers accounted for 49% and 32% for a total of 81% for the year ended December 31, 2018. Four individual customers accounted for 42%, 11%, 20%, and 20% for a total of 93% of accounts receivable from product sales for the year ended December 31, 2019, and two individual customers accounted for 52% and 30% for a total of 82% for the year ended December 31, 2018. No other customers accounted for more than 10% of product revenue or accounts receivable for the years ended December 31, 2019 and 2018, respectively.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive income (loss) in all periods presented was unrealized gains (losses) on
available-for-sale
securities.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred taxes are determined based on the differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted rates in effect for the year in which these temporary differences are expected to be recovered or settled. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
15

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a
two-step
process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed
more-likely-than-not
to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
Fair Value Measurements
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
• Level 1   —
 
Quoted market prices in active markets for identical assets or liabilities. Level 1 consists primarily of financial instruments whose value is based on quoted market prices, such as exchange-traded instruments and listed equities.
     
• Level 2   —
 
Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
     
• Level 3   —
 
Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The Company’s financial instruments consist of cash equivalents, marketable securities, accounts payable and accrued expenses, its term loan and 2024 Convertible Notes (Note 10). The estimated fair value of the Company’s financial instruments, with the exception of the 2024 Convertible Notes, approximates their carrying values.
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 $215.7 million at December 31, 2019.
Net Loss Per Share
The Company follows the
two-class
method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The
two-class
method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The
two-class
method requires income available to common stockholders for the period to be allocated between common and participating securities based on their respective rights to receive dividends as if all income for the period had been distributed.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities, including the assumed conversion of our 2024 Convertible Notes, outstanding stock options and unvested restricted common stock, except where the result would be anti-dilutive. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of the conversion of the 2024 Convertible Notes, the exercise of outstanding stock options and the vesting unvested restricted common stock. In the diluted net loss per share calculation, net loss would also be adjusted for the
16

elimination of interest expense on the 2024 Convertible Notes, if the impact was not anti-dilutive. For periods in which the Company has reported net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Potential common shares will always be anti-dilutive for periods in which the Company has reported a net loss. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders for the years ended December 31, 2019, 2018 and 2017.
Segment Data
The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. The Company is a biopharmaceutical company focused on the development and commercialization of novel, local therapies. All revenues for the years ended December 31, 2019, 2018 and 2017 were generated in the United States.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU
2016-02,
 Leases
 (“ASU
2016-02”),
to increase transparency and comparability among organizations by recognizing lease assets and liabilities, including operating leases, on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASU
2016-02
on January 1, 2019 using the “Comparatives under 840” approach, which was approved by the FASB in July 2018 as part of ASU
2018-11.
Under this method, the consolidated financial statements as of the year ended December 31, 2019 are presented applying the new requirements under ASC 842, while the consolidated financial statements as of the year ended December 31, 2018 are presented under ASC 840.
As part of its adoption of ASU
2016-02,
the Company elected the package of practical expedients which allows it to not reassess (1) whether existing contracts contain leases, (2) the lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition. Consequently, on adoption, the Company recognized lease liabilities of $7.0 million and corresponding
right-of-use
(“ROU”) assets of $6.6 mill
ion based on the present value of the remaining minimum rental payments under current leasing standards for existing operating lease
s. These lease liabilities and ROU assets relate to operating leases only, as the Company concluded that it does not have any finance leases. The difference between the lease liability and the ROU assets upon adoption relates to the deferred rent balance that had been recorded prior to adoption. The Company determined that no cumulative adjustment to retained earnings was required.
In June 2018, the FASB issued ASU No.
2018-07,
 Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
 (“ASU
2018-07”).
The new standard expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Equity-based payments to nonemployees were previously covered under ASC
505-50
and required companies to measure the awards based on the fair value of the consideration received or the fair value of the equity instruments issued and remeasure the fair value of such awards at each reporting date. The Company adopted ASU
2018-07
prospectively and there was no impact on previously issued financial statements.
Accounting Standards Recently Issued
In June 2016, the FASB issued ASU No.
2016-13,
 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
 (“ASU
2016-13”).
The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU
2016-13
is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of ASU
 2016-13
on the Company’s consolidated financial statements.
17

In July 2018, the FASB issued ASU No.
 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU
2018-13”).
The new standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, as part of the FASB’s disclosure framework project. ASU
2018-13
is effective for fiscal years, and the interim periods within those years, beginning after December 15, 2019, and early adoption is permitted. Additionally, the new standard permits an entity to early adopt any removed or modified disclosures upon issuance of the ASU and delay adoption of the additional disclosures until their effective date. ASU
2018-13
removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The Company early adopted this portion of the standard as of the quarter ended September 30, 2018. The Company does not expect the adoption of the remainder of ASU
2018-13
to have any impact on its consolidated financial statements, as the changes to the disclosures are primarily relevant for companies with Level 3 assets and liabilities, which the Company does not have.
4.
Fair Value of Financial Assets and Liabilities
The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2019 and 2018 and indicate the level of the fair value hierarchy utilized to determine such fair value:
 
Fair Value Measurements as of December 31, 2019
 
(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
 
                                 
       
 
Fair Value Measurements as of December 31, 2018
 
(In thousands)
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
  $
—  
    $
57,739
    $
—  
    $
57,739
 
Marketable securities
   
—  
     
171,555
     
—  
     
171,555
 
                                 
  $
—  
    $
229,294
    $
—  
    $
229,294
 
                                 
As of December 31, 2019 and 2018, the Company’s cash equivalents that are invested in money market funds and overnight repurchase contracts are valued based on Level 2 inputs. 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.
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”). 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. The amount outstanding on the 2019 term loan is reported at its carrying value in the accompanying balance sheet as of December 31, 2019. 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 December 31, 2019.
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,
18

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 $215.7 million at December 31, 2019.
5.
Marketable Securities
As of December 31, 2019 and 2018, the fair value of
available-for-sale
marketable securities by type of security was as follows:
 
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
     
—  
     
18,244
 
                                 
  $
54,345
    $
62
    $
—  
    $
54,407
 
                                 
       
 
December 31, 2018
 
(In thousands)
 
Amortized Cost
 
 
Gross Unrealized
Gains
 
 
Gross Unrealized
Losses
 
 
Fair Value
 
Commercial paper
  $
36,723
    $
—  
    $
—  
    $
36,723
 
U.S. government obligations
   
39,910
     
—  
     
(12
)    
39,898
 
Corporate bonds
   
94,999
     
20
     
(85
)    
94,934
 
                                 
  $
171,632
    $
20
    $
(97
)   $
171,555
 
                                 
As of December 31, 2019 and 2018, marketable securities consisted of approximately $54.4 million and $171.6 million, respectively, of investments that mature within 12 months. There were no investments with maturities greater than 12 months as of December 31, 2019 and December 31, 2018
6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of December 31, 2019 and 2018:
 
December 31,
 
(in thousands)
 
2019
 
 
2018
 
Prepaid expenses
  $
5,072
    $
4,717
 
Deposits
   
61
     
66
 
Interest receivable on marketable securities
   
238