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

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

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

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

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

As of ~~October 31, 2017~~November 1, 2021, the registrant had ~~37,540,829~~50,321,366 shares of Common Stock ($0.001 par value) outstanding.

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

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

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

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.~~2007. Flexion is a ~~specialty pharmaceutical~~biopharmaceutical company focused on the discovery, development, and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, ~~(“OA”)~~or OA, the most common form of arthritis. The Company has an approved product, ZILRETTA®, ~~a type of degenerative arthritis.~~ ~~On October 6, 2017,~~which it markets in the ~~U.S. Food and Drug Administration, or FDA, approved Zilretta~~^TM~~, as~~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 ~~related~~ knee pain. ~~Zilretta~~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 ~~over 12 weeks. Zilretta is not intended~~the treatment of OA, and FX301, a locally administered peripheral nerve block product candidate in clinical development for ~~repeat administration, as~~ the ~~efficacy and safety~~control of ~~repeat administration of Zilretta have not been evaluated.~~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 will require~~ZILRETTA requires significant sales and marketing efforts and the Company’s pipeline programs ~~may~~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 ~~personnel infrastructure and extensive compliance reporting capabilities.~~infrastructure. There can be no assurance as to when, if ever, the Company will ~~realize significant revenue from the~~generate sales of ~~Zilretta~~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

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, ~~2017,~~2021, and for the three and nine months ended September 30, ~~2017~~2021 and ~~2016,~~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

the accounts of the Company and its ~~wholly-owned~~wholly owned subsidiary after elimination of all significant intercompany accounts and transactions. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments ~~which~~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, ~~2017.~~2021.

The information presented in the condensed consolidated financial statements and related notes as of September 30, ~~2017,~~2021, and December 31, 2020, and for the three and nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, is unaudited. The December 31, ~~2016~~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, ~~2017~~2021, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017,~~2021, or any future period.

Recent Accounting Pronouncements

The accompanying condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations. As of September 30, 2017, the Company had cash, cash equivalents, marketable securities, and long-term investments of approximately $335,100,000. Management believes that current cash, cash equivalents and marketable securities on hand at September 30, 2017, together with the net proceeds of its October 2017 common stock offering of approximately $132,400,000 described in note 12, should be sufficient to fund operations for at least the next twelve months from the issuance date of these financial statements. The future viability of the Company is dependent on sales revenue from Zilretta and its ability to raise additional capital to finance its operations, to fund increased research and development costs in order to seek approval for commercialization of its product candidates, and to successfully commercialize Zilretta. The Company’s failure to raise capital as and when needed would have a negative impact on its financial condition and its ability to pursue its business strategies as this capital is necessary for the Company to perform the research and development activities required to develop and seek approval for commercialization of the Company’s product candidates, to establish a commercial infrastructure in order to generate future revenue streams, and to successfully commercialize Zilretta.Accounting Standards Recently Issued

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

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

~~In November 2015,~~2020, the FASB issued ASU ~~2015-17,~~ ~~Income Taxes~~ ~~(Topic 740), to simplify the presentation of deferred income taxes. Under the~~No. 2020-06, (“ASU 2020-06”). The new standard ~~both deferred tax~~simplifies the accounting for certain financial instruments with characteristics of liabilities and ~~assets~~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 ~~required to be classified as noncurrent in a classified balance sheet. ASU 2015-17 became~~met. Finally, the standard changed the way certain convertible instruments are treated when calculating earnings per share. The standard is effective for the ~~Company’s 2017 fiscal year. Given the~~ Company ~~has a full valuation against its deferred tax assets and liabilities, the impact of adopting this guidance was not material to the Company’s financial statements.~~

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

In March 2016, the FASB released ASU 2016-09, which amends ASC Topic 718, Compensation-Stock Compensation, to require changes to several areas of employee share-based payment accounting in an effort to simplify share-based reporting. The update revises requirements in the following areas: minimum statutory withholding, accounting for income taxes, forfeitures, and intrinsic value accounting for private entities. ~~For public companies, the new rules became effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within such annual period.~~ The Company adopted this guidance beginning on January 1, 2017 and no longer records stock compensation expense net of forfeitures. The Company adopted this guidance using a modified retrospective approach to reflect forfeitures as they occurred in the total stock based compensation expense recorded in the Company’s financial statements. The impact of this adoption was not material to the Company’s financial statements.

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

~~In November, 2016, the FASB issued ASU 2016-18,~~ ~~Statement of cash flows~~ ~~(Topic 230): Restricted Cash, to provide specific guidance on the cash flow classification~~2021, and presentation of changes in restricted cash and restricted cash equivalents. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2017. Earlyearly adoption is ~~permitted, including adoption in an interim period.~~ permitted. The Company is currently evaluating the impact of ~~this accounting standard~~ASU 2020-06 on ~~its~~the Company’s condensed consolidated financial statements.

Consolidation

~~Consolidation~~

The accompanying condensed consolidated financial statements include the Company and its ~~wholly-owned~~wholly owned subsidiary, Flexion Therapeutics Securities ~~Corporation, Inc.~~Corporation. The Company has eliminated all intercompany transactions for the three and nine months ended September 30, ~~2017~~2021, and the year ended December 31, ~~2016.~~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

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

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.

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			383			151			2,703			5,425
Credits and payments made		(1,969	)		(266	)		(9	)		(1,832	)		(4,076	)
Adjustments related to prior period sales		—			—			(111	)		—			(111	)
Balance as of March 31, 2021		1,952			647			659			2,703			5,961
Provision related to sales in the current quarter		2,682			424			179			3,100			6,385
Credits and payments made		(2,527	)		(311	)		(86	)		(2,711	)		(5,635	)
Adjustments related to prior period sales		(10	)		—			—			—			(10	)
Balance as of June 30, 2021	$	2,097		$	760		$	752		$	3,092		$	6,701
Provision related to sales in the current quarter		2,538			290			3,130			3,245			9,203
Credits and payments made		(2,859	)		(401	)		(1,331	)		(5,182	)		(9,773	)
Adjustments related to prior period sales		—			—			291			—			291
Balance as of September 30, 2021	$	1,776		$	649		$	2,842		$	1,155		$	6,422

Balance as of December 31, 2019	$	1,847		$	248		$	402		$	1,656		$	4,153
Provision related to sales in the current quarter		1,590			254			114			526			2,484
Credits and payments made		(1,852	)		(199	)		(10	)		(1,656	)		(3,717	)
Adjustments related to prior period sales		—			95			—			—			95
Balance as of March 31, 2020		1,585			398			506			526			3,015
Provision related to sales in the current quarter		1,417			133			98			892			2,540
Credits and payments made		(1,172	)		(262	)		(1	)		(528	)		(1,963	)
Adjustments related to prior period sales		—			90			—			2			92
Balance as of June 30, 2020	$	1,830		$	359		$	603		$	892		$	3,684
Provision related to sales in the current quarter		2,270			265			136			1,314			3,985
Credits and payments made		(2,585	)		(198	)		(21	)		(894	)		(3,698	)
Adjustments related to prior period sales		—			40			—			2			42
Balance as of September 30, 2020	$	1,515		$	466		$	718		$	1,314		$	4,013

License Agreement – On March 30, 2020, the Companyentered into an exclusive license agreement with Hong Kong Tainuo Pharma Ltd. (“HK Tainuo”) and Jiangsu Tainuo Pharmaceutical Co. Ltd. (“Jiangsu Tainuo”), a subsidiary of China Shijiazhuang Pharmaceutical Co, Ltd., for the development and commercialization (other than manufacturing) of ZILRETTA in Greater China (consisting of mainland China, Hong Kong and Macau, and Taiwan). Under the terms of the agreement, HK Tainuo paid the Company an upfront payment of $10.0 million, of which $5.0 million was received as of June 30, 2020, and the remaining $5.0 million was received as of September 30, 2020. The Company is also eligible to receive up to $32.5 million in aggregate development, regulatory, and commercial sales milestone payments. All payments received from HK Tainuo are subject to applicable Hong Kong withholding taxes. HK Tainuo is responsible for the clinical development, product registration, and commercialization of ZILRETTA in Greater China, and Jiangsu Tainuo serves as the guarantor of HK Tainuo’s obligations and responsibilities under the agreement. The Company is solely responsible for the manufacture and supply of ZILRETTA to HK Tainuo for all clinical and commercial activities. The terms related to product manufacturing and supply, including pricing and minimum purchase requirements agreed to in the license agreement, will be covered by a separate supply agreement, which has not yet been finalized. All amounts owed to the Company are nonrefundable and non-creditable once paid. Unless terminated earlier in accordance with its terms, the license agreement continues in effect in perpetuity or as long as HK Tainuo or Jiangsu Tainuo continue to sell ZILRETTA in Greater China. Either party may terminate the agreement prior to expiration in the event of a material breach if not cured within 60 days from the date of notice of such breach (30 days in the case of payment obligations), or either party files for bankruptcy. The Company also has the right to terminate the agreement if HK Tainuo, Jiangsu Tainuo, or any affiliate of each commences any action or proceeding that challenges the validity, enforceability, or scope of any Company patent in Greater China. Upon any such termination, the license granted to HK Tainuo will terminate and all know-how and patents will revert back to the Company. The Company concluded that the license and supply obligations were not distinct performance obligations, and therefore the transaction price will be recognized as revenue as the

Company’s supply obligation is fulfilled over the term of the supply agreement, which has not yet commenced. NaN revenue was recognized associated with this contract as of September 30, 2021. The proceeds associated with the upfront payment have been recorded in short-term deferred revenue on the Company’s condensed consolidated balance sheet as of September 30, 2021, as there is uncertainty around the timing of when the revenue will be recognized. The Company will re-evaluate the classification of deferred revenue when the supply agreement is finalized.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that may affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures. The Company bases estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. The most significant estimates in these condensed consolidated financial statements include ~~useful lives with respect~~estimates related to ~~long-lived assets, such as property and equipment and leasehold improvements, accounting for stock-based compensation,~~revenue recognition and accrued expenses ~~including~~related to preclinical and clinical ~~research~~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.

8The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations, and financial condition, including sales, expenses, reserves and allowances, clinical trials, research and development expenses, and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national, and international customers and markets. The Company has made estimates of the impact of COVID-19 within its financial statements, and there may be changes to those estimates in future periods.

Property and Equipment

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


		Estimated Useful Life (Years)
Computers, office equipment, and minor computer software		3
Computer software		7
Manufacturing equipment		~~7-10~~7-10
Furniture and fixtures		5

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

Foreign Currencies

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

Leases

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

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

The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, utilities, performance of manufacturing services, purchase of inventory, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected to use this practical expedient for its real estate leases and account for each lease component and related non-lease component as one single component. In contrast, the Company has elected not to apply the practical expedient for its lease of manufacturing space at Patheon and has instead allocated consideration between the lease and non-lease components of the contract. The Company calculated the fair value of the lease component using publicly available information to identify comparable rentals in the same geographic area. The remainder of the consideration was allocated to the non-lease components.

3. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, ~~2017~~2021 and December 31, ~~2016~~2020, and indicate the level of the fair value hierarchy utilized to determine such fair value:


	Fair Value Measurements as of September 30, 2021 Using:
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	108,686	$	0	$	0	$	108,686
Marketable securities		0		5,229		0		5,229
	$	108,686	$	5,229	$	0	$	113,915


	Fair Value Measurements as of September 30, 2017 Using:								Fair Value Measurements as of December 31, 2020 Using:
(In thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	—	$	146,175	$	—	$	146,175	$	79,148	$	6,832	$	0	$	85,980
Marketable securities		—		175,921		—		175,921		0		67,576		0		67,576
	$	—	$	322,096	$	—	$	322,096	$	79,148	$	74,408	$	0	$	153,556

Fair Value Measurements as of December 31, 2016 Using:

(In thousands)

Level 1

Level 2

Level 3

Total

Assets:

Cash equivalents

$
—

$
9,830

$
—

$
9,830

Marketable securities

—

179,414

—

179,414

$
—

$
189,244

$
—

$
189,244

As of September 30, ~~2017~~2021 and December 31, ~~2016~~2020, the Company’s cash equivalents that are invested in money market funds ~~and overnight repurchase contracts~~are valued using Level 1 inputs based on quoted prices for identical securities in active markets. The Company’s marketable securities are valued using Level 2 inputs and primarily rely on quoted prices in active markets for similar securities. The Company measures the fair value of marketable securities, which consist of U.S. government obligations, commercial paper, and corporate bonds, using Level 2 inputs and primarily relies on quoted prices in active markets for similar marketable securities. ~~During the nine months ended September 30, 2017~~Amortization and ~~year ended December 31, 2016, there were no transfers between Level 1, Level 2,~~accretion of discounts and ~~Level 3.~~premiums are recorded in other income.

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

The Company has a term loan outstanding under its ~~2015~~2021 credit facility with Silicon Valley Bank as agent, MidCap Financial Trust, and MidCap Funding XIII Trust ~~and Silicon Valley Bank~~ (the ~~“2015~~“2021 term loan”)., as well as a revolving credit facility. The amount outstanding on ~~its 2015~~the 2021 term loan is reported at its carrying value in the accompanying balance ~~sheet.~~sheet as of September 30, 2021. The Company determined the fair value of the ~~2015~~2021 term loan using an income approach that utilizes a

discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for credit risk. The ~~2015~~2021 term loan was valued using Level 2 inputs as of September 30, ~~2017 and December 31, 2016.~~2021. The result of the calculation yielded a fair value that approximates its carrying value. The Company also concluded that the carrying value of the revolving credit facility approximates fair value because of the short-term maturity of this debt instrument.

On May 2, 2017, the Company issued ~~3.375%~~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~~$136.7 million as the fair value of the liability on May 2, 2017, with a corresponding amount recorded as a discount on the initial issuance of the 2024 Convertible Notes of approximately ~~$64.5~~$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~~$201.3 million, was ~~$225.4~~$179.8 million at September 30, ~~2017.~~ 2021.

4. Marketable Securities

As of September 30, ~~2017~~2021 and December 31, ~~2016~~2020, the fair value of available-for-sale marketable securities by type of security was as follows:


	September 30, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	2,000	$	—	$	—	$	2,000
Corporate bonds		3,229		—		—		3,229
	$	5,229	$	—	$	—	$	5,229


	September 30, 2017									December 31, 2020
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper										$	6,890	$	—	$	—		$	6,890
U.S. government obligations	$	20,417	$	—	$	(3	)	$	20,414		9,997		1		—			9,998
Commercial paper		17,901		—		—			17,901
Corporate bonds		137,667		4		(65	)		137,606		50,700		2		(14	)		50,688
	$	175,985	$	4	$	(68	)	$	175,921	$	67,587	$	3	$	(14	)	$	67,576

December 31, 2016

(In thousands)

Amortized Cost

Gross Unrealized
Gains

Gross Unrealized
Losses

Fair Value

Commercial paper

$
7,769

$
—

$
—

$
7,769

U.S. government obligations

75,524

5

(12
)

75,517

Corporate bonds

96,193

1

(66
)

96,128

$
179,486

$
6

$
(78
)

$
179,414

As of September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, marketable securities consisted of ~~approximately $175,921,000~~$5.2 million and ~~$174,688,000,~~$67.6 million, respectively, of investments that mature within ~~twelve~~12 months. There were 0 investments with maturities greater than 12 months ~~and~~ as ~~of December 31, 2016 approximately $4,725,000 of investments that mature within fifteen months. As~~ of September 30, ~~2017 there were no~~2021, and December 31, 2020. The Company assesses its available-for-sale marketable securities for impairment on a quarterly basis in accordance with ~~maturities beyond twelve months.~~ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. There were 0 material impairments of the Company’s available-for-sale marketable securities measured and carried at fair value during the three and nine months ended September 30, 2021.

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of September 30, 2021, and December 31, 2020:


(In thousands)	September 30, 2021		December 31, 2020
Prepaid expenses	$	6,065	$	4,346
Deposits		175		112
Interest receivable on marketable securities		18		246
Other		401		408
Total prepaid expenses and other current assets	$	6,659	$	5,112

6. Inventory

Inventory consisted of the following as of September 30, 2021, and December 31, 2020:


(In thousands)	September 30, 2021		December 31, 2020
Raw materials	$	2,831	$	4,287
Work in process		6,305		4,666
Finished goods		5,533		6,441
Total inventories	$	14,669	$	15,394

Finished goods manufactured by the Company have a shelf life of approximately 24 months from the date of manufacture.

The Company reduces its inventory to net realizable value for potentially excess, dated, or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand and any firm purchase orders, as well as product shelf life. During the nine months ended September 30, 2021, the Company expensed $5.2 million to cost of sales for unabsorbed manufacturing and overhead costs related to the operation of the United Kingdom facility at Patheon UK Limited. In addition, cost of sales for the three and nine months ended September 30, 2021, included charges of $1.2 million and $1.8 million, respectively, resulting from the write-down of short-dated ZILRETTA inventory that will not be sold prior to expiry.

1015

7. Property and Equipment, Net

Property and equipment, net, as of September 30, ~~2017~~2021, and December 31, ~~2016~~2020, consisted of the following:


(In thousands)	September 30, 2017			December 31, 2016			September 30, 2021			December 31, 2020
Computer and office equipment							$	1,215		$	1,203
Manufacturing equipment	$	11,520		$	10,099			12,656			12,297
Computer and office equipment		858			573
Furniture and fixtures								609			609
Software		434			434			555			495
Construction—in progress		586			1,254
Furniture and fixtures		454			402
Leasehold improvements		461			278			1,177			1,157
Construction in progress								14,988			13,924
		14,313			13,040			31,200			29,685
Less: Accumulated depreciation		(2,832	)		(1,376	)		(11,720	)		(10,147	)
Total property and equipment, net	$	11,481		$	11,664		$	19,480		$	19,538

Depreciation ~~expense~~ for the three and nine months ended September 30, ~~2017 and 2016~~2021, was approximately ~~$1,456,000~~$0.5 million and ~~$700,000, respectively. No~~$1.6 million, respectively, compared to $0.5 and $1.3 million, respectively, for the same periods in the prior year. NaN property and equipment was disposed of during the nine months ended September 30, ~~2017. Approximately $2,265,000 in manufacturing equipment located at the Evonik facility was~~2021. The Company disposed of ~~resulting in a loss~~1 piece of ~~$2,180,000 which was recorded in research and development expenses for~~equipment during the nine months ended September 30, ~~2016. Construction in progress primarily consists~~2020, and recorded a loss on the disposal of ~~amounts related to equipment purchased for the Company’s portfolio expansion efforts.~~

6.	~~Prepaid Expenses and Other Current Assets~~

~~Prepaid expenses and other current assets and other assets consisted of the following as~~$0.3 million. As of September 30, ~~2017 and December 31, 2016:~~

(In thousands)

September 30,
2017

December 31,
2016

Prepaid expenses

$
2,907

$
1,086

Deposits

61

2,099

Interest receivable on marketable securities

641

605

Total prepaid expenses and other current assets

$
3,609

$
3,790

~~On December 1, 2016, Flexion paid a refundable NDA fee~~2021, construction in ~~the amount~~progress consisted primarily of ~~$2,038,100~~equipment purchases related to the ~~FDA. The Company evaluated each~~expansion of the published criteria to qualify for a waiver and concluded all criteria were met and thus, obtaining a refund of the fee was probable. As of December 31, 2016 the NDA fee was classified as a deposit in other current assets. On May 16, 2017, Flexion received the full refund of this NDA fee. Company’s manufacturing capabilities at its contract manufacturer, Patheon U.K. Limited.

7. 8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the ~~following:~~

(In thousands)

September 30,
2017

December 31,
2016

Research and development

$
1,284

$
1,606

Payroll and other employee-related expenses

4,946

3,393

Professional services fees

2,444

926

Other

646

159

Interest expense

2,956

161

Total accrued expenses and other current liabilities

$
12,276

$
6,245

8. ~~Stock-Based Compensation~~

~~Stock Option Valuation~~

The fair value of each of the Company’s stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model. The Company currently estimates its expected stock volatility based on the historical volatility of its publicly-traded peer companies and expects to continue to do so until such timefollowing as ~~it has adequate historical data regarding the volatility of its own~~

publicly-traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. The relevant data used to determine the value of the stock option grants for the nine months ended September 30, 2017 and 2016 are as follows:

Nine months ended
September 30,

2017

2016

Risk-free interest rates

1.97-2.29%

1.05-1.90%

Expected dividend yield

0.00
%

0.00
%
Expected term (in years)

6.0

6.0

Expected volatility

69.9-72.8%

79.8-91.1%

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

(In thousands, except per share amounts)

Shares Issuable
Under Options

Weighted Average
Exercise Price

Outstanding as of December 31, 2016

3,268

$
14.84

Granted

982

22.11

Exercised

(261
)

11.47

Cancelled

(251
)

18.48

Outstanding as of September 30, 2017

3,738

$
17.63

Options vested and expected to vest at September 30, 2017

3,738

$
17.63

Options exercisable at September 30, 2017

1,450

$
14.34

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

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. A total of approximately 261,000 options, with an aggregate intrinsic value of approximately $2,511,800 were exercised during the nine months ended September 30, 2017.

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

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

~~Stock-based Compensation~~

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

Three months ended
September 30,

Nine months ended
September 30,

(In thousands)

2017

2016

2017

2016

Research and development

$
1,057

$
543

$
2,859

$
1,656

General and administrative

1,772

1,160

4,711

3,307

$
2,829

$
1,703

$
7,570

$
4,963

As of September 30, ~~2017, unrecognized stock-based compensation expense for stock options outstanding was approximately $26,223,061 which is expected to be recognized over a weighted average period of 2.9 years.~~2021, and December 31, 2020:


(In thousands)	September 30, 2021		December 31, 2020
Research and development	$	2,972	$	1,856
Payroll and other employee-related expenses		10,189		10,674
Professional services fees		2,961		2,094
Accrued interest		2,943		1,464
Product revenue reserves		4,646		2,990
Other		1,164		930
Total accrued expenses and other current liabilities	$	24,875	$	20,008

9. Debt

~~Restricted Stock Units~~Amended and Restated Credit and Security Agreement

On January 4, 2016, the Company granted RSUs with performance and time-based vesting conditions to certain executives. These RSUs vest, and the underlying shares of common stock become deliverable, beginning when Milestone is achieved. As a result of the Milestone being achieved on October 6, 2017, the number of shares of the Company’s common stock earned under these awards is 122,800 with an approximate value of $2,234,960 as of the grant date and will vest over a period of three years. Compensation costs will be recognized over the remaining requisite service period of these awards, beginning on the Milestone achievement date.

~~9. Net Loss per Share~~

~~Basic and diluted net loss per share was calculated as follows for the three and nine months ended September 30, 2017 and 2016:~~

For the three months ended
September 30,

For the nine months ended
September 30,

(In thousands)

2017

2016

2017

2016

Numerator:

Net loss

$
(34,188
)

$
(17,782
)

$
(86,953
)

$
(48,782
)

Net loss:

$
(34,188
)

$
(17,782
)

$
(86,953
)

$
(48,782
)

Denominator:

Weighted average common shares outstanding, basic and
diluted

31,931

27,524

31,821

23,938

Net loss per share, basic and diluted

$
(1.07
)

$
(0.65
)

$
(2.73
)

$
(2.04
)

~~The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated as including them would have an anti-dilutive effect:~~

For the three months ended
September,

For the nine months ended
September,

2017

2016

2017

2016

Shares issuable upon conversion of the 2024 convertible notes

7,514,937

-

4,171,895

-

Stock Options

3,680,096

2,359,370

3,514,511

2,265,023

Restricted stock units

126,219

189,300

168,196

187,220

Total

11,321,252

2,548,670

7,854,602

2,452,243

~~10. Debt~~

Term Loan

On August 4, 2015, the Company entered into a credit and security agreement with MidCap Financial Trust, as agent, and MidCap Financial Funding XIII Trust and Silicon Valley Bank, as lenders, ~~(the “Lenders”),~~ to borrow up to ~~$30,000,000~~$30.0 million in term ~~loans.~~loans (the “2015 term loan”). On August 2, 2019, the Company terminated the credit and security agreement and concurrently entered into an amended and restated credit and security agreement (the “Existing Credit Agreement”) with Silicon Valley Bank as agent, MidCap Financial Trust, Flexpoint MCLS Holdings, LLC, and the other lenders from time to time party thereto, 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 Company concurrently borrowed ~~an initial~~the $40.0 million term loan and used $7.7 million of ~~$15,000,000~~the proceeds to repay the remaining amount owed on the 2015 term loan.

On May 18, 2020, 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 prior term loan under the credit facility.

On July 30, 2021, the Company entered into a second amendment (the “2021 Amended Credit Agreement”) to the Existing Credit Agreement with Silicon Valley Bank, as agent and lender, MidCap Financial Trust, MidCap Funding XIII Trust, and the other lenders from time to time party thereto (collectively, the “Lenders”), providing for a term loan facility of up to $75.0 million, with $55.0 million available at closing and an additional $20.0 million (the “second tranche”) available upon positive Phase 1 clinical trial data in either of the Company’s two pipeline programs, FX201 and FX301, sufficient to initiate a Phase 2 clinical study, and a revolving credit facility of up to $25.0 million, both of which mature on February 1, 2024, which may be extended to July 1, 2026, upon satisfaction of certain specified conditions set forth in the 2021 Amended Credit Agreement (the “Maturity Date”). The Company concurrently borrowed the $55.0 million term loan (the “2021 term loan”), simultaneously used $48.1 million of the proceeds to repay the outstanding term loan under the Existing Credit Agreement, and drew down $20.0 million from the revolving

credit facility, bringing the total revolver balance to $25.0 million. In connection with the repayment of the Existing Credit Agreement, the Company recorded a debt extinguishment loss of $0.5 million primarily related to the write-off of the unamortized portion of the final payment, which was recorded as a component of interest expense on the statement of operations for the three and nine months ended September 30, 2021.

The Company granted the Lenders a security interest in substantially all of its personal property, rights, and assets, other than intellectual property, to secure the payment of all amounts owed under the ~~credit facility.~~2021 Amended Credit Agreement. The Company also agreed not to encumber any of its intellectual property without the Lenders’ prior written consent.

The Company also agreed to maintain a balance in cash or cash equivalents at Silicon Valley Bank equal to the principal balance of the loan plus 5% for so long as the Company maintains any cash or cash equivalents in non-secured bank accounts.

On July 22, 2016, the Company borrowed the remaining $15,000,000 under the credit and security agreement, in the form of a second term loan. The second term loan is subject to the same credit terms as the initial term loan under the facility.

~~The credit and security agreement also~~2021 Amended Credit Agreement contains certain representations, warranties, and covenants, including a minimum revenue covenant that will be in effect at any time the Company’s liquidity (defined as cash, cash equivalents and marketable securities held with Silicon Valley Bank and certain accounts receivable as deemed eligible under the 2021 Amended Credit Agreement) is below $100.0 million (if the second tranche is undrawn) or $120.0 million (if the second tranche is drawn). Additionally, if the Company’s liquidity is below $100.0 million, all amounts received from customer collections will be applied immediately to reduce the revolving credit facility. The minimum revenue covenant, if it applies in the future, is applied to the trailing six-months of net revenue and is determined based on the ~~Company~~Company’s approved forecast, as ~~well 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. As of September 30, ~~2017,~~2021, the Company was compliant with all financial covenants.

~~Borrowings~~Term loan borrowings under the 2021 credit facility accrue interest monthly at a ~~fixed~~floating interest rate equal to the greater of ~~6.25%~~(i) prime rate plus 2.75% or (ii) 6.0% per ~~annum.~~annum. Following an interest-only period of 1924 months (if the second tranche is undrawn), or 36 months (if the second tranche is drawn), principal ~~will be~~is due in 36 equal monthly installments ~~commencing March 1, 2017 and ending February 1, 2020 (the “maturity date”).~~ through Maturity Date. Upon the ~~maturity date,~~Maturity Date, the Company will be obligated to pay a final payment equal to 9%4.75% of the total principal amounts borrowed under the facility. The final payment amount is being accreted to the carrying value of the debt using the ~~straight line~~straight-line method, which approximates the effective interest method. As of September 30, ~~2017,~~2021, the carrying value of the 2021 term loan was approximately ~~$25,227,000,~~$55.1 million, all of which ~~$9,967,000 was due within 12 months and $15,260,000 was due~~is presented as long-term debt in ~~greater than 12 months.~~

the Company’s condensed consolidated balance sheet as of September 30, 2021. In connection with the ~~credit and security agreement,~~planned merger with Pacira, the Company ~~incurred debt issuance costs totaling approximately $150,000. These costs are being amortized over~~evaluated the ~~estimated term~~terms of the ~~debt using~~2021 Amended Credit Agreement and determined the ~~straight-line method which approximates the effective interest method.~~ agreement will require acceleration of payments upon a change of control.

The Company ~~deducted~~may prepay the ~~debt issuance costs from~~term loan at any time by paying the ~~carrying amount~~outstanding principal balance, a final payment equal to 4.75% of the ~~debt as~~term loan amount, all accrued interest, and a prepayment fee of ~~September 30, 2017~~3% of the outstanding term loan amount if repaid in the first year, 2% of the outstanding term loan amount if repaid in the second year, and ~~December 31, 2016.~~1% of the outstanding term loan amount if repaid in the third year of the loan; 0 prepayment fee is required thereafter.

As of September 30, ~~2017,~~2021, annual principal and interest payments due under the ~~2015~~ term loan ~~are~~were as follows:


Year	Aggregate Minimum Payments (in thousands)
2021		568
2022		3,346
2023		10,907
2024		20,710
2025		19,587
Thereafter		13,523
Total	$	68,641
Less interest		(11,029	)
Less unamortized portion of final payment		(2,525	)
Total	$	55,087

Revolving Credit Facility

Year

Aggregate
Minimum
Payments
(in thousands)

2017

$
2,869

2018

11,082

2019

10,448

2020

4,383

Total

$
28,782

Less interest

(855
)
Less final payment

(2,700
)
Total

$
25,227

Borrowings under the 2021 Amended Credit Agreement revolving credit facility accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 1.75% or (ii) 5.00%. In addition to paying interest on any amounts borrowed under the revolving credit facility, the Company may owe an unused revolving line facility fee equal to 0.25% per annum of the average unused portion of the revolving line, multiplied by the difference between the total amount available to be borrowed (the “Revolving Commitment Amount”) and the greater of the average outstanding revolver balance and 25% of the Revolving Commitment Amount.

The Company may retire the revolving credit facility early, at any time, by paying the outstanding principal balance, all accrued interest, and a termination fee equal to 2% of the Revolving Commitment Amount if repaid in the first year, and 1% of the Revolving Commitment Amount if repaid in the second year; with 0 termination fee thereafter.

2024 Convertible Notes

On May 2, 2017, the Company issued an aggregate of ~~$201.3~~$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%~~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~~$194.8 million for the sale of the 2024 Convertible Notes, after deducting fees and expenses of ~~$6.5~~$6.5 million.

The 2024 Convertible Notes are senior unsecured obligations and bear interest at a rate of 3.375% per year, payable semi-annually in arrears on May and November 1st of each year. The 2024 Convertible Notes will mature on May 1, 2024, unless earlier repurchased or converted. Upon conversion of the 2024 Convertible Notes, at the election of each holder of a 2024 Convertible Note (the ~~Holder)~~“Holder”), the note will be convertible into cash, shares of the Company’s common stock, or a combination thereof, at the Company’s election (subject to certain limitations in the 2015 term loan), at a conversion rate of approximately 37.3413 shares of common stock per ~~$1,000~~$1,000 principal amount of the 2024 Convertible Notes, which corresponds to an initial conversion price of approximately ~~$26.78~~$26.78 per share of the Company’s common stock.

The ~~Conversion Rate~~conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, fundamental change events and certain corporate events that occur prior to the maturity date of the notes. In addition, if the Company delivers a notice of redemption, the Company will increase, in certain circumstances, the conversion rate for a Holder who elects to convert its notes in connection with such a corporate event or notice of redemption, as the case may be. At any time prior to the close of business on the business day immediately preceding February 1, 2024, Holders may convert all, or any portion, of the 2024 Convertible Notes at their option only under the following circumstances:

~~(1)~~

during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

(1)

(2)

during the 5-business-day period after any 10-consecutive-trading-day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

(3)

if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; and

(4)

upon the occurrence of specified corporate events.

~~(2)~~

during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

~~(3)~~

~~if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; and~~

~~(4)~~

~~upon the occurrence of specified corporate events.~~

On or after February 1, 2024, until the close of business on the business day immediately preceding the maturity date, ~~holders~~Holders may convert their notes at any time, regardless of the foregoing circumstances. The Company may redeem, for cash, all or any portion of the 2024 Convertible Notes, at its option, on or after May 6, 2020, if the last reported sale price of the Company’s common stock has been at least ~~130%~~130% of the conversion price for at least 20 trading days during any 30 consecutive day trading period, at a redemption price equal to ~~100%~~100% of the principal amount of the 2024 Convertible Notes to be redeemed, plus accrued and unpaid ~~interest.~~interest, subject to the Holders’ right to convert as described above.

The 2024 Convertible Notes are considered convertible debt with a cash conversion feature. Per ASC 470-20, Debt with Conversion and Other Options,, the Company has separated the convertible debt into liability and equity components based on the fair value of a similar debt instrument excluding the embedded conversion option. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2024 Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2024 Convertible Notes and the fair value of the liability of the 2024 Convertible Notes on their respective dates of issuance. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense using the effective interest method over seven ~~years.~~years. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The liability component of ~~$136.7~~$136.7 million was recorded as long-term debt at May 2, 2017, with the remaining equity component of ~~$64.5~~$64.5 million recorded as additional paid-in capital.

In connection with the issuance of the 2024 Convertible Notes, the Company incurred approximately ~~$6.5~~$6.5 million of debt issuance costs, which primarily consisted of underwriting, legal, and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total d~~ebt~~debt issuance costs, ~~$4.4~~$4.4 million ~~were~~was allocated to the liability component and are recorded as a reduction of the 2024 Convertible Notes in our consolidated balance sheets. The remaining ~~$2.1~~$2.1 million was allocated to the equity component and is recorded as a reduction to additional paid-in capital.

Debt discount and issuance costs of ~~$68.9~~$68.9 million are being amortized to interest expense over the life of the 2024 Convertible Notes using the effective interest rate method. As of September 30, ~~2017,~~2021, the stated interest rate was ~~3.375%~~3.375%, and the effective interest rate was ~~9.71%~~9.71%. Interest expense related to the 2024 Convertible Notes for the three and nine months ended September 30, ~~2017~~2021, was ~~$3,488,296,~~$4.1 million and $12.2 million, including ~~$1,658,620~~$2.4 million and $7.2 million, related to amortization of the debt discount.

The table below summarizes the carrying value of the 2024 Convertible Notes as of September 30, ~~2017:~~2021:


	(in thousands)
Gross proceeds	$	201,250
Portion of proceeds allocated to equity component (additional paid-in capital)		(64,541	)
Debt issuance costs		(6,470	)
Portion of issuance costs allocated to equity component (additional paid-in capital)		2,075
Amortization of debt discount and debt issuance costs		38,104
Carrying value 2024 Convertible Notes	$	170,418

10. Stock-Based Compensation

Stock Option Valuation

(in thousands)

Gross proceeds

$
201,250

Portion allocated to equity (additional paid-in capital)

(64,541
)
Debt issuance costs

(6,470
)
Portion allocated to equity (additional paid-in capital)

2,075

Amortization of debt discount and debt issuance costs

2,961

Carrying value 2024 Convertible Notes

$
135,275

~~11.~~ ~~Foreign Currency~~

The ~~Company maintains a bank account denominated~~fair value of each of the Company’s stock option grants is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on historical volatility of the Company’s common stock. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in ~~British Pounds. All foreign currency payables and cash balances are measured~~effect at the ~~applicable exchange rate at the end~~time of grant of the ~~reporting period. All associated gains~~award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and ~~losses from foreign currency transactions are reflected~~does not expect to pay any cash dividends in the ~~consolidated statements~~foreseeable future. The relevant data used to determine the value of ~~operations. Foreign currency losses~~the stock option grants for the three and nine months ended September 30, ~~2017~~2021 and 2020, were ~~$0.1 million~~as follows:


	Three months ended		Nine months ended
	September 30,		September 30,
	2021	2020	2021	2020
Risk-free interest rates	0.96 - 1.12%	0.47%	0.96 - 1.28%	0.47 - 1.79%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Expected term (in years)	6.0	6.0	6.0	6.0
Expected volatility	71.8 - 71.9%	72.5%	71.8 - 72.4%	65.4 - 72.5%

The following table summarizes stock option activity for the nine months ended September 30, 2021:


(In thousands, except per share amounts)	Shares Issuable Under Options			Weighted Average Exercise Price Per Share
Outstanding as of December 31, 2020		4,592		$	17.77
Granted		587			8.30
Exercised		(43	)		3.40
Cancelled		(837	)		18.81
Outstanding as of September 30, 2021		4,299		$	16.42
Options vested and expected to vest at September 30, 2021		4,299		$	16.42
Options exercisable at September 30, 2021		3,302		$	17.91

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the options and ~~$0.5 million,~~the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock. Options to purchase a total of 42,682 shares of the Company’s common stock, with an aggregate intrinsic value of approximately $386,138, were exercised during the nine months ended September 30, 2021.

At September 30, 2021 and 2020, there were options for the purchase of 4,299,337 and 4,753,623 shares of the Company’s common stock outstanding, respectively, ~~compared~~with a weighted average remaining contractual term of 6.0 years and 6.5 years, respectively, and with a weighted average exercise price of $16.42 and $17.74 per share, respectively.

The weighted average grant date fair value of options granted during the nine months ended September 30, 2021 and 2020, was $5.28 and $8.86 per share, respectively.

Restricted Stock Units

During the nine months ended September 30, 2021, the Company awarded 1,169,320 restricted stock units (“RSUs”) to ~~$0.6 million~~employees at a weighted average grant date fair value of $10.79 per share. The majority of the RSUs vest in 4 substantially equal installments on each of the first four anniversaries of the vesting commencement date, subject to the employee’s continued employment with, or services to, the Company on each vesting date. Compensation expense is recognized on a straight-line basis.

Included in the 2021 RSU awards was a grant of 106,100 RSUs to the Company’s chief executive officer. These RSUs have two performance conditions relating to achieving a certain revenue threshold for the year ending December 31, 2021, as well as progressing at least one of the Company’s current pipeline assets. The number of shares ultimately eligible for vesting under the RSU award will depend upon the degree to which the performance conditions are achieved. The maximum number of shares that are eligible for vesting under the award is 159,150, which would be earned based on 150% achievement of the performance conditions. The portion of the RSUs eligible for vesting will vest in four substantially equal installments starting in 2022 upon confirmation of such performance metrics being achieved and thereafter on January 1 of the subsequent three years so that all of such shares will have vested on January 1, 2025, subject to the employee’s continued employment with, or services to, the Company on each vesting date. As of September 30, 2021, the Company concluded that it was not probable that either performance condition would be met. Therefore, 0 expense has been recognized on these awards during the three and nine months ended September 30, 2021.

The following table summarizes the RSU activity for the nine months ended September 30, 2021:


(In thousands, except per share amounts)	Number of Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested balance as of December 31, 2020		2,193		$	14.15
Granted		1,169			10.79
Vested/Released		(626	)		14.57
Cancelled		(490	)		13.42
Nonvested Balance as of September 30, 2021		2,246		$	12.45

Stock-based Compensation

The Company recorded stock-based compensation expense related to stock options and RSUs and shares purchased under the Employee Stock Purchase Plan for the three and nine months ended September 30, ~~2016.~~2021 and 2020, as follows:


	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Research and development	$	1,166	$	1,403	$	3,469	$	4,692
Selling, general and administrative		3,030		3,556		9,342		8,705
Total	$	4,196	$	4,959	$	12,811	$	13,397

As of September 30, 2021, unrecognized stock-based compensation expense for stock options outstanding was approximately $6.7 million, which is expected to be recognized over a weighted average period of 2.5 years. As of September 30, 2021, unrecognized stock-based compensation expense for RSUs outstanding was $21.9 million, which is expected to be recognized over a weighted average period of 2.3 years.

11. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows for the three and nine months ended September 30, 2021 and 2020:


	For the three months ended September 30,						For the nine months ended September 30,
(In thousands, except per share amounts)	2021			2020			2021			2020
Numerator:
Net loss	$	(30,312	)	$	(24,638	)	$	(81,076	)	$	(94,059	)
Net loss:	$	(30,312	)	$	(24,638	)	$	(81,076	)	$	(94,059	)
Denominator:
Weighted average common shares outstanding, basic and diluted		50,265			49,298			50,027			43,563
Net loss per share, basic and diluted	$	(0.60	)	$	(0.50	)	$	(1.62	)	$	(2.16	)

1520

~~12.~~ ~~Subsequent Event~~

~~Financing~~

~~On October 16, 2017, the Company completed a follow-on public offering of its~~The following common stock ~~which resulted in~~equivalents were excluded from the ~~sale~~calculation of ~~5,520,000 shares of the Company’s common stock at a price to the public of $25.50~~diluted net loss per share for the periods indicated as including shares sold pursuant to the exercise in full of the underwriters’ option to purchase 720,000 additional shares. The Company received net proceeds from the follow-on financing of $132.4 million after deducting underwriting discounts, commissions, and offering costs paid by the Company.them would have an anti-dilutive effect:


	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Shares issuable upon conversion of the 2024 Convertible Notes		7,515		7,515		7,515		7,515
Stock options		4,676		4,986		4,579		4,946
Restricted stock units		2,301		2,058		2,350		1,485
Total		14,492		14,559		14,444		13,946

~~13.~~

12. Commitments and Contingencies

Operating Leases

Burlington Lease

In May 2013, the Company entered into a lease for office space in Burlington, Massachusetts (the “Lease”)~~. The~~, for an initial term of ~~the Lease was for~~ 42 ~~months with minimum monthly lease payments beginning at $17,588 per month and escalating over the term of the Lease.~~months. In ~~July 2015,~~June 2019, the Company amended the Lease to add ~~approximately 4,700~~additional square feet of ~~additional~~ office space with the option to lease an additional 5,400 square feet in the same building in Burlington, Massachusetts (the “Amendment”). In addition, at the time, The Company leased approximately 6,700 square feet of temporary space for use prior to delivery of the additional space. The Amendment also extendedand extend the term of the Lease through ~~October 31, 2019. In addition, at the same time, The Company leased approximately 6,700 square feet of temporary space for use prior to delivery~~April 30, 2025 (the “Amended Lease”). As a result of the ~~additional space under~~Amended Lease, the ~~Amendment. On September 30, 2015,~~total rentable floor area is 41,873 square feet. Starting in August 2019, the Company exercised its option for the additional 5,400 square feet of office space under the Amendment. On September 21, 2016, the Company entered into another amendment to extend the Lease for the 6,700 square feet of temporary space until October 31, 2017.

~~On April 7, 2017, the Company further amended the Lease to extend~~Company’s minimum monthly lease payment is approximately $108,000, which increases over the term ~~to October 31, 2023 on~~of the then-existing office space, including the temporary space, consisting of approximately 28,600 square feet of office space in Burlington, Massachusetts. From November 2016 through October 2017, the Company’s lease payment for this space was approximately $80,000 per month. Also, as part of this amendment to the Lease, the Company leased an additional 1,471 square feet of office space beginning in 2018. The lease payment for the 1,471 square feet of office space is approximately $4,100 per month.

On October 6, 2017, the Company exercised its option for an additional 6,450 square feet of space, with the term expected to commence on or about April 1, 2018. After April 2018, the Company will have approximately 36,500 square feet of office space in Burlington, Massachusetts under a lease term expiring on October 31, 2023.Amended Lease. In addition to the base rent for the office space, ~~which increases over the term of the amended Lease,~~ the Company is responsible for its share of operating expenses and real estate taxes.

The lease cost for the Amended Lease (including the expense relating to the original Lease) for the three and nine months ended September 30, 2021, amounted to $0.5 million and $1.4 million for each of the three and nine months ended September 30, 2021 and 2020, respectively, and was included in operating expenses. As of September 30, 2021, the remaining lease term on the Amended Lease was 3.6 years, which includes the 18-month extension resulting from the amendment signed in June 2019.

Woburn Lease

In February 2017, the Company entered into a five-year lease for laboratory space located in Woburn, Massachusetts, with a monthly lease payment of approximately ~~$15,000,~~$15,000, which increases over the term of the lease, plus a share of operating expenses. The ~~total cash obligations~~lease cost for the Woburn lease amounted to $58,000 and $150,000 for the three and nine months ended September 30, 2021 respectively, as compared to $46,000 and $139,000, respectively, for the same periods in the prior year, and was included in operating expenses.

In June 2021, the Company amended the Woburn lease to extend the term of the lease ~~are~~through February 29, 2024. Starting in March 2022, the Company’s minimum monthly lease payment will be approximately ~~$0.9 million.~~

~~Future minimum~~$20,400, which increases over the term of the amended lease. The Company accounted for the amended lease as a modification that is not a separate contract from the original lease, as the amended lease does not contain any additional rights, and recorded an incremental right-of-use asset and lease liability of $0.4 million, which represents the present value of the lease payments over the remaining lease term of 2.7 years, discounted at 8.4%. As of September 30, 2021, the remaining lease term on the Woburn lease, as amended, was 2.4 years.

Manufacturing and Supply Agreement with Patheon UK Limited

In July 2015, the Company and Patheon UK Limited (“Patheon”) entered into a Manufacturing and Supply Agreement (the “Manufacturing Agreement”) and a Technical Transfer and Service Agreement (the “Technical Transfer Agreement”) for the manufacture of ZILRETTA.

Patheon agreed in the Technical Transfer Agreement to undertake certain transfer activities and construction services needed to prepare Patheon’s United Kingdom facility for the commercial manufacture of ZILRETTA in dedicated manufacturing suites. The Company provided Patheon with certain equipment and materials necessary to manufacture ZILRETTA and pays Patheon a monthly fee for such activities and reimburses Patheon for certain material, equipment, and miscellaneous expenses and additional services.

The initial term of the Manufacturing Agreement is 10 years from approval by the FDA of the Patheon manufacturing suites for ZILRETTA, or until October 6, 2027. The Company pays a monthly base fee to Patheon for the operation of the manufacturing suites and a per product fee for each vial based upon a forecast of commercial demand. The Company also reimburses Patheon for purchases of materials and equipment made on its behalf, certain nominal expenses, and additional services. The Manufacturing Agreement will remain in full effect unless and until it expires or is terminated. Upon termination of the Manufacturing Agreement (other than termination by Flexion in the event that Patheon does not meet the construction and manufacturing milestones or for a breach by Patheon), Flexion will be obligated to pay for the costs incurred by Patheon associated with the removal of Flexion’s manufacturing equipment and for Patheon’s termination costs up to a capped amount.

The Manufacturing Agreement with Patheon contains an operating lease for the use of dedicated manufacturing suites. With the adoption of ASU 2016-02, the Company recorded a right-of-use asset and corresponding lease liability for the operating lease.

In June 2019, the Company and Patheon amended the Manufacturing Agreement and the Technical Transfer Agreement. The amendment primarily modifies the compensation structure, which is comprised of base fees and per product fees the Company pays to Patheon and does not result in any additional rights of use. The Company accounted for the amendment as a lease modification that is not a separate contract from the original lease. As part of the modification, the Company reassessed whether the contract is or contains a lease and determined that there is an operating lease component for the use of dedicated manufacturing suites. The remainder of the consideration is allocated to the service component. The Company also reassessed the lease liability by calculating the present value of the remaining lease payments as of the modification date, discounted at 6.1%. The modification resulted in an increase to each of the lease liability and right of use asset of $0.5 million.

In April 2020, the Company entered into a side letter amending the Manufacturing Agreement with Patheon pursuant to which the parties agreed that the Company would continue to pay the monthly base fee for maintaining the manufacturing suites, but minimum purchase obligations would be cancelled for 2020 as the Company temporarily suspended manufacturing activities for ZILRETTA due to COVID-19. The amendment did not change the amount of fixed consideration owed to Patheon over the life of the contract, nor did it grant the Company any additional rights of use. As such, there was no change in the accounting for the embedded lease as a result of this amendment. The Company restarted manufacturing activities at Patheon in the fourth quarter of 2020.

As of September 30, 2021, the remaining lease term on the Patheon lease was 6.1 years. The lease cost for the three and nine months ended September 30, 2021, amounted to $61,000 and $185,000, respectively, compared to $58,000 and $171,000, respectively, for the same periods in the prior year, and is included in inventory as part of manufacturing overhead.

The components of lease expense and related cash flows were as follows:


(In thousands)	For the three months ended September 30,				For the nine months ended September 30,
Operating lease cost	2021		2020		2021		2020
Operating lease cost included in operating expenses	$	525	$	513	$	1,552	$	1,540
Operating lease cost included in inventory		61		58		185		171
Total operating lease cost		586		571		1,737		1,711

Operating cash flows from operating leases		855		699		2,450		2,256

Maturities of lease liability due under these lease agreements as of September 30, 2021, were as follows:


Year	Operating Lease Obligations (In thousands)
2021		515
2022		2,087
2023		2,142
2024		1,975
2025		809
Thereafter		422
Present value of imputed interest		(2,115	)
Total	$	5,835

Other Commitments and Contingencies

Evonik Supply Agreement

In November 2016, the Company entered into a Supply Agreement with Evonik Corporation (“Evonik”) for the purchase of PLGA, which is used in the manufacturing of clinical and commercial supply of ZILRETTA. Pursuant to the Supply Agreement, Flexion is obligated to submit rolling monthly forecasts to Evonik for PLGA supply, a portion of which will constitute binding orders. In addition, Flexion agreed to certain minimum purchase requirements, which do not apply (i) during periods in which Evonik is in material breach of the Supply Agreement or is unable to perform its obligations due to a force majeure event, (ii) with respect to orders that Evonik is unable to supply in excess of binding orders, (iii) for orders Evonik is unable to timely deliver or does not deliver conforming product and provides a credit for such order, or (iv) during an uncured material quality failure by Evonik. Flexion agreed to purchase PLGA batches at a specified price per gram in U.S. dollars, subject to adjustment from time to time, including due to changes in price indices and in the event the initial term of the Supply Agreement was extended. The initial term of the agreement was five years, commencing in July 2016. In May 2021, the Company entered into an amendment to the Supply Agreement that became effective on June 30, 2021. The total term of the Supply Agreement, as amended, is eight years. Upon termination of the Supply Agreement (other than termination due to the bankruptcy of either Evonik or Flexion), Flexion is obligated to pay the costs associated with the binding supply forecast provided to Evonik.

FX201-Related Agreements

In December 2017, the Company entered into a definitive agreement with GeneQuine Biotherapeutics GmbH (“GeneQuine”) to acquire the global rights to FX201. As part of the asset purchase transaction, the Company made an upfront payment to GeneQuine of $2.0 million. The upfront fee was attributed to the intellectual property acquired and recognized as research and development expense in December 2017 as the FX201 rights had not been commercially approved and had no alternative future use. In 2018, the Company paid GeneQuine $750,000 for initiating a GLP toxicology study of FX201. In addition, the Company paid GeneQuine $750,000 in November 2019 following the FDA acceptance of the Investigational New Drug (“IND”) application for FX201. The next milestone of $2.5 million was achieved in March 2020, when the first patient was treated in the Phase 1 clinical trial. The Company may also be required to make additional milestone payments during the development of FX201, including up to $4.5 million for the initiation of a Phase 2 proof of concept (“PoC”) clinical trial and, following successful PoC, up to an additional $51.5 million in development and global regulatory approval milestone payments. The transaction was accounted for as an asset acquisition, as it did not qualify as a business combination. Milestone payments earned prior to regulatory approval of FX201 are recognized as research and development expense in the period when the milestone events become probable of being achieved. Future milestones earned upon regulatory approval would be recognized as an intangible asset and amortized to expense over its estimated life. As of September 30, 2021, 0 other milestones under the arrangement were probable of being achieved. As part of the transaction, the Company became the direct licensee of certain underlying Baylor College of Medicine (“Baylor”) patents and other proprietary rights related to FX201 for human applications. The Baylor license agreement grants the Company an exclusive, royalty-bearing, world-wide right and license (with a right to sublicense) for human applications under its patent and other proprietary rights directly related to FX201, with a similar non-exclusive license to certain Baylor intellectual property rights that are not specific to FX201. The license agreement with Baylor includes a low single-digit royalty on net sales of FX201 and requires the Company to use reasonable efforts to develop FX201 according to timelines set out in the license agreement. In December 2017, the Company also entered into a Master Production Services Agreement with SAFC Carlsbad, Inc., a part of MilliporeSigma, for the manufacturing of preclinical and initial clinical supplies of FX201. In addition, in February 2020 the Company entered into a manufacturing agreement with another vendor for clinical trial supply of FX201 through Phase 3 clinical trials.

FX301-Related Agreements

In September 2019, the Company entered into a definitive agreement with Xenon Pharmaceuticals, Inc. (“Xenon”) that provides the Company with the global rights to develop and commercialize XEN402, Xenon’s NaV1.7 inhibitor known as funapide, formulated for extended release with a novel, Flexion proprietary thermosensitive hydrogel under the Company’s ~~lease obligations~~preclinical program known as FX301. The transaction was accounted for as an asset acquisition, as it did not qualify as a business combination. As part of the asset purchase transaction, the Company made an upfront payment to Xenon of $3.0 million. The upfront fee was attributed to the intellectual property acquired and was recognized as research and development expense in September 2019 as the FX301 product candidate had not been commercially approved and had no alternative future use. The next milestone of $0.5 million was achieved following the commencement of the GLP toxicology study. This milestone was recognized as research and development expense in the first quarter of 2020. The Company also paid $1.0 million when the IND was cleared by FDA in February 2021 and $2.0 million upon the initiation of the Phase 1b clinical trial in March 2021. These milestones were recognized as research and development expenses in the first quarter of 2021. The Company may also be required to make additional milestone payments during the development of FX301, including up to $5.0 million through initiation of a Phase 2 PoC clinical trial and, following successful PoC, up to $40.8 million in development and global regulatory approval milestone payments and up to an additional $75.0 million in sales-related milestone payments. Future milestone payments earned prior to regulatory approval of FX301 would be recognized as research and development expense in the period when the milestone events become probable of being achieved. Future milestones earned subsequent to regulatory approval would be recognized as an intangible asset and amortized to expense over the estimated life of FX301. As of September 30, 2021, 0 other milestones under the arrangement were probable of being achieved. As part of the transaction, the Company became the direct licensee of certain underlying Xenon patents and other proprietary rights related to XEN402 for human applications. The Xenon agreement grants the Company an exclusive, royalty-bearing, world-wide right and license (with a right to sublicense) for human applications under its patents directly related to XEN402, with a similar royalty-free license to other Xenon proprietary rights directly related to XEN402. The agreement with Xenon includes a tiered royalty ranging from mid-single digits to low double digits that is based on aggregate annual net sales of FX301 and requires the Company to use reasonable efforts to develop FX301 according to timelines set out in the agreement.

Legal Proceedings

Between October 22, 2021, and November 10, 2021, eleven complaints were filed in federal court by purported stockholders of Flexion regarding the Merger. The first complaint was filed on October 22, 2021, in the United States District Court for the Southern District of New York and is captioned Elaine Wang v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-08693. The second complaint was filed on October 28, 2021, in the United States District Court for the Southern District of New York and is captioned Marc Waterman v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-08804 (S.D.N.Y filed October 28, 2021). The third complaint was filed on October 28, 2021, in the United States District Court for the Southern District of New York and is captioned Melinda Turkington v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-08817. The fourth complaint was filed on November 1, 2021, in the United States District Court for the Southern District of New York and is captioned Barbara Hart v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-08919. The fifth complaint was filed on November 1, 2021, in the United States District Court for the Southern

District of New York and is captioned Lee Beary v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-08925. The sixth complaint was filed on November 2, 2021, in the United States District Court for the Southern District of New York and is captioned Katherine Finger v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-09032. The seventh complaint was filed on November 2, 2021, in the United States District Court for the Eastern District of New York and is captioned David Gruver v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-06106. The eighth complaint was filed on November 3, 2021, in the United States District Court for the Southern District of New York and is captioned Theodore Meshover v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-09043. The ninth complaint was filed on November 4, 2021, in the United States District Court for the District of Delaware and is captioned Sam Carlisle v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-01572-UNA. The tenth complaint was filed on November 4, 2021, in the United States District Court for the Eastern District of Pennsylvania and is captioned Alex Ciccotelli v. Flexion Therapeutics, Inc., et al., Case No. 2:21-cv-04885. The eleventh complaint was filed on November 10, 2021, in the United States District Court for the District of Delaware and is captioned James Murray v. Flexion Therapeutics, Inc., et al., Case No. 1:21-cv-01590-UNA(collectively, the “Complaints”). The Complaints name as defendants Flexion and each member of Flexion’s board of directors (the “Flexion Defendants”). The Waterman complaint additionally names as defendants Pacira and Purchaser (the “Pacira Defendants”). The plaintiffs generally contend that the Solicitation/Recommendation Statement on Schedule 14D-9, filed on October 22, 2021, has omitted or misrepresented material information regarding the Merger. The Hart complaint additionally alleges that Flexion engaged in an insufficient sales process and that members of Flexion’s board of directors and Flexion’s management had conflicts of interest with Flexion’s stockholders. The Complaints allege violations of Section 14(d) and/or Section 14(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) against all Flexion Defendants and assert violations of Section 20(a) of the Exchange Act against the members of Flexion’s board of directors. The Waterman complaint additionally alleges violations of Section 14(d), Section 14(e), and Section 20(a) of the Exchange Act against the Pacira Defendants. The Complaints collectively seek, among other relief, (i) injunctive relief preventing the consummation of the transactions contemplated by the Merger Agreement; (ii) rescission and/or rescissory damages in the event the transactions contemplated by the Merger Agreement are consummated; (iii) other damages purportedly incurred on account of defendants’ alleged misstatements or omissions; (iv) disclosure of certain information requested by the plaintiffs; (v) declaratory relief stating defendants violated the Exchange Act; and (vi) an award of plaintiffs’ expenses and attorneys’ fees. The Flexion Defendants have been served with the Wang complaint and the Hart complaint, but have not been served with any of the other Complaints.On November 12, 2021, the Company filed a Schedule 14D-9/A containing certain supplemental disclosures in order to moot the claims alleged in the Complaints. The Flexion Defendants’ deadline to respond to the Wang complaint is December 27, 2021, and the Flexion Defendants’ deadline to respond to the Hart complaint is January 3, 2022.

Each of the Flexion Defendants and the Pacira Defendants intend to vigorously defend these actions. The Company believes that the Complaints are without merit and has not recorded an expense related to the outcome of these litigations because it is not yet possible to determine if a potential loss is probable nor reasonably estimable.

At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as ~~follows:~~incurred the costs related to its legal proceedings.

Year

Aggregate
Minimum
Payments

2017

$
293,440

2018

1,341,672

2019

1,491,101

2020

1,533,276

2021

1,575,620

2022

1,446,770

2023

1,202,874

Total

$
8,884,753

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

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto for the fiscal year ended December 31, ~~2016~~2020, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed by us with the Securities and Exchange Commission, or SEC, on March 10, ~~2017.~~2021.

Forward-Looking Statements

This discussion and analysis contains “forward-looking statements” ~~that is~~—as defined in Section 21E of the Exchange Act—which are statements related to future, not past, events ~~– as defined in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act that~~and reflect our current expectations regarding future development activities, results of operations, financial condition, cash ~~flows,~~flow, performance, and business prospects and opportunities, as well as assumptions made by and information currently available to our management. ~~Forward looking~~Forward-looking statements include any statement that does not directly relate to a current historical fact. ~~The Company has~~We have tried to identify forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “predict,” “potential,” “believe,” ~~“should”~~“should,” and similar expressions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance, or achievement. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. The forward-looking statements in this Quarterly Report on Form 10-Q, other than the statements regarding the proposed acquisition by Pacira BioSciences, Inc. (“Pacira”), do not assume the consummation of the proposed acquisition unless specifically stated otherwise.

~~Overview~~Forward-looking statements include, without limitation, statements regarding the anticipated consummation and timing of the acquisition of Flexion by Pacira and payments that may be made upon the satisfaction of specified milestones, which are each based

on Pacira’s and Flexion’s current expectations and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks related to Pacira’s ability to complete the transaction on the proposed terms and schedule or at all; whether the tender offer conditions will be satisfied; whether sufficient stockholders of Flexion tender their shares in the transaction; the outcome of legal proceedings instituted against Flexion and/or others relating to the transaction; the failure (or delay) to receive the required regulatory approvals relating to the transaction; the possibility that competing offers will be made; risks related to future opportunities and plans for Flexion and its products, including uncertainty of the expected financial performance of Flexion and its products, including whether the milestones will ever be achieved; and the occurrence of any event, change, or other circumstance that could give rise to the termination of the acquisition agreement, as well as other risks related to Pacira’s and Flexion’s businesses detailed from time-to-time under the caption “Risk Factors” and elsewhere in Pacira’s and Flexion’s respective SEC filings and reports, including their respective Annual Reports on Form 10-K for the year ended December 31, 2020, and subsequent quarterly and current reports filed with the SEC.

Overview

We are a ~~specialty pharmaceutical~~biopharmaceutical company focused on the discovery, development, and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, ~~a type~~the most common form of ~~degenerative~~ arthritis, referred to as OA.

On October 6, 2017, the ~~U.S~~U.S. Food and Drug Administration ~~or FDA,~~(“FDA”), approved ~~Zilretta, as~~our product, ZILRETTA, for marketing 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 related knee pain. ~~Zilretta~~ZILRETTA is a non-opioid therapy that employs our 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.

We also have two pipeline programs focused on the local treatment of musculoskeletal conditions: FX201, which is an investigational IA gene therapy product candidate in clinical development for ~~over 12 weeks. Zilretta is not intended~~the treatment of OA, and FX301, an investigational NaV1.7 inhibitor product candidate in clinical development as a locally administered peripheral analgesic nerve block for ~~repeat administration, as the efficacy and safety~~control of ~~repeat administration of Zilretta have not been evaluated.~~post-operative pain.

We were incorporated in Delaware in November 2007, and, to date, we have devoted substantially all of our resources to developing our product candidates, including conducting clinical trials with our product candidates, preparing for and undertaking the commercialization of ~~Zilretta,~~ZILRETTA, providing general and administrative support for these operations, and protecting our intellectual property. ~~As of September 30, 2017 we have not yet generated any revenue from product sales.~~ From our inception through September 30, ~~2017,~~2021, we have funded our operations primarily through the sale of our common stock, convertible preferred stock, and convertible debt, ~~and~~as well as debt financing. From our inception through September 30, 2017, we had raised approximately $624 million from such transactions, including from our initial and follow-on public offerings and the issuance of convertible notes. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or third-party funding, and licensing or collaboration arrangements.

Proposed Acquisition by Pacira BioSciences, Inc.

~~Zilretta~~^TM~~(triamcinolone~~On October 11, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 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 our 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 Flexion (the “Merger”), with Flexion 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 our common stock upon the acquisition by Purchaser of a majority of the aggregate voting power of our common stock. As a result of the Merger, we 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 Flexion with certain termination rights and, under certain circumstances, may require us 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 filed with the SEC on October 22, 2021, together with the exhibits and annexes thereto and as amended or supplemented from time to time. Please also see “Item 1A. Risk Factors—Risks Related to Our Pending Acquisition by Pacira.

Q3 2021 Commercial Performance

ZILRETTA net sales in the third quarter were $21.3 million. We believe that our commercial performance reflects the adverse impacts of several key factors.

First, in August, we introduced a ZILRETTA price increase coupled with an “off-invoice discount” (OID) program intended to mitigate the impacts of the increase. As part of this program, providers have the ability to earn higher discounts in exchange for purchasing more units in each order. In conjunction with those changes, we revised the discount tiers such that the discounts offered at the lowest purchasing tiers were less than they were prior to the implementation of the OID program. Our goal was to incentivize higher purchasing volumes by healthcare practices; however, some accounts were reluctant to increase order sizes in amounts sufficient to obtain the more favorable cost recovery available in the higher discount tiers. We believe that this program had the unanticipated effect of causing accounts to purchase less product than we had forecast.

Second, COVID-19 and the emergence of the Delta variant resulted in reduced patient flows and restricted our Musculoskeletal Business Managers’ (MBMs) ability to access key office personnel. These restrictions were particularly acute in August and September as COVID cases spiked in a number of key regions.

Third, net sales in the quarter were reduced due to several unanticipated manufacturing batch failures in late 2020 and in the first half of 2021 that contributed to short-dated ZILRETTA inventory in the distribution channel, resulting in smaller order sizes by physician practices and product returns from specialty distributors. The product returns were a consequence of the drop in demand during the quarter. If demand had been in line with our forecast, significantly more inventory would have been consumed, and we anticipate that we would have avoided having short-dated product in the channel. We adjusted our manufacturing process to address the batch failures, and subsequent batches have fully met our product specifications and have been entered into the supply chain. These new batches have greater than 12 months of expiry remaining, which is consistent with the product dating that we were selling prior to the pause in manufacturing due to COVID-19.

Pipeline Updates

ZILRETTA/FX006 (triamcinolone acetonide extended-release injectable suspension) - IA treatment for OA

~~Zilretta combines a commonly administered steroid, triamcinolone acetonide, or TA, with poly lactic-co-glycolic acid, referred to as PLGA, with~~ZILRETTA is the ~~goal~~first and only extended-release IA therapy for patients confronting OA-related knee pain. In September 2021, we announced the inclusion of ~~delivering a 32 mg dose to provide extended therapeutic concentrations~~ZILRETTA in the ~~joint~~American Academy of Orthopaedic Surgeons (AAOS) updated evidence-based clinical practice guidelines for the management of OA of the knee. The AAOS guidelines reflect a moderate recommendation for the use of intra-articular (IA) corticosteroids for patients with symptomatic OA of the knee. The recommendation follows a review of data from 25 studies assessing IA corticosteroids. Included in its rationale is a differential analysis of extended-release intra-articular steroid, of which ZILRETTA is the only available product, versus immediate-release IA corticosteroids, where AAOS analyses demonstrated that it can, “be used over immediate-release corticosteroids to improve patient outcomes.”

In addition to knee OA, we believe that ZILRETTA’s extended-release profile may also provide effective treatment for OA pain in other large joints, including the shoulder and ~~persistent analgesic effect. Zilretta was designed to address~~in August results from the ~~limitations~~Phase 2 pharmacokinetic (“PK”) trial assessing the safety and general tolerability of current IA therapies by providing extended, local analgesia. Both the magnitude and duration of pain relief provided by Zilretta in clinical trials have been shown to be clinically meaningful with the magnitude of pain relief amongst the largest seen to dateZILRETTA in OA ~~clinical trials.~~

~~The overall frequency~~ of ~~treatment-related adverse events~~the shoulder were published in ~~these trials was~~Drugs in R&D. PK and safety profiles of ZILRETTA were similar to those ~~observed with placebo and no drug-related serious adverse events were reported.~~ Based on the strength of our pivotal and other clinical trials, we believe that Zilretta has the potential to address a significant unmet medical need for OA pain management by providing safe, effective and extended pain relief. We believe Zilretta is uniquely distinguished by the following attributes:

~~significant pain relief at week 12 versus placebo (p-value of <0.0001, 2 sided) as measured by the weekly mean of the Average Daily Pain, or ADP;~~

~~durable and significant pain relief beginning at week 1 and continuing through week 12 with approximately 60%~~reported in Phase 3 studies of patients ~~reporting no pain or mild pain~~with knee OA. Plasma PK findings from this study were also consistent with the extended release of triamcinolone acetonide (“TA”) within the synovial fluid following an IA injection of ZILRETTA in the knee. Plasma PK data indicate the total and maximal exposure to TA was approximately two-thirds lower in patients treated with ZILRETTA compared to triamcinolone acetonide in crystalline suspension. With respect to our plans to initiate a registration study in shoulder OA by end of year, based on recent interactions with FDA, we are currently reassessing the proposed study design and determining the best path forward given FDA’s feedback.

At the American College of Rheumatology (ACR) annual meeting in November we presented data from our open-label Phase 3b trial assessing the effect of a single administration of ZILRETTA on synovitis in 129 patients with knee OA. In patients with knee OA and baseline synovitis (n=102), ZILRETTA significantly reduced synovial tissue volume at ~~week 12;~~

~~numeric~~Week 6 (primary endpoint). These patients also reported improvements in ~~validated OA specific measures compared to placebo~~WOMAC-A (pain), B (stiffness), and ~~immediate-release TA injection;~~

~~an acceptable safety profile with side effect similar to placebo;~~

•

~~statistically significant (p<0.05, 2-sided) reduction in the rise of blood glucose compared to that observed following immediate-release TA injection in Type 2 diabetic patients who also have knee OA;~~

•~~persistent concentrations of drug in the joint; and~~

~~reduced rescue medicine consumption compared with placebo~~C (function) and ~~immediate-release TA injection.~~

~~Additionally, we have fully enrolled more than 200 patients in an ongoing study to gather safety~~KOOS-QoL scores through Week 24. ZILRETTA was well tolerated and exploratory efficacy data related to repeat administration. We expect full data to be available in the third quarter of 2018 to inform both clinical and regulatory perspectives, and these data will form the basis for an interaction with the FDA~~. Furthermore, we plan to initiate clinical trials of Zilretta in hip and shoulder OA and bilateral knee OA by the end of 2017.~~there were no new or unexpected adverse events.

~~Pipeline Program~~

~~FX101~~FX201 (humantakinogene hadenovec) – ~~Intra-articular~~Locally Administered Gene Therapy for the Treatment of OA ~~Pain~~

~~FX101 (fluticasone extended-release)~~FX201 is our novel, clinical stage, investigational IA gene therapy product candidate, which is designed to induce the production of interleukin-1 receptor antagonist (“IL-1Ra”), an anti-inflammatory protein. Preclinical data suggest that, following injection of FX201, its genetic material is incorporated into local cells and IL-1Ra is expressed in response to inflammation in the joint tissues. Inflammation is a ~~pre-clinical drug candidate~~known cause of pain, and chronic inflammation is thought to play a major role in the progression of OA. By persistently suppressing inflammation, we believe that ~~aims~~FX201 has the potential to ~~provide extended~~both reduce pain ~~relief~~and possibly modify disease progression. We acquired the rights to FX201 via a definitive agreement with GeneQuine Biotherapeutics GmbH, or GeneQuine, and have an exclusive license to the underlying intellectual property rights for human use of FX201 from Baylor College of Medicine in Houston, Texas. In May 2019, the U.S. Patent and Trademark Office issued patent number 10,301,647, which covers the composition of matter and method of use of FX201 in the treatment of OA with a term through January 2033.

In March 2020, we initiated a Phase 1 single ascending dose (“SAD”) study to evaluate the safety and tolerability of FX201 in patients with painful OA of the knee. The multicenter, open-label study is evaluating three doses (low, mid and high dose) of FX201 in cohorts of five to eight patients. In addition, in the first quarter of 2021, we expanded the trial to include up to 20 additional patients in both the low and mid dose treatment groups.

In June 2021, the SAD phase of the study was fully enrolled, and, as of November 1, 2021, 65 patients had been treated across all cohorts including the expansion groups. The most commonly observed treatment-related adverse events (“AEs”) observed in the trial have been pain, swelling, and effusion, and, in the second quarter, we made the strategic decision to investigate pretreatment with an intra-articularly administered immediate-release steroid prior to FX201 administration as a means to mitigate potential AEs. We expect to treat up to 38 patients with a pretreatment regimen. In October 2021, we presented initial data from the mid-dose cohort of the open-label FX201 Phase 1 single ascending dose phase of the trial in patients with knee OA via a poster at the 2021 European Society of Gene & Cell Therapy (ESGCT) annual meeting. Preliminary results indicate that seven of eight patients treated with the mid dose of FX201 experienced a reduction of pain and functional improvement from baseline out to Week 24. The mid dose of FX201 was generally well-tolerated in all eight patients with moderate-to-severe knee OA. ~~FX101 leverages our~~

FX301 (funapide in a proprietary ~~microsphere technology,~~thermosensitive hydrogel) – Locally Administered NaV1.7 Inhibitor for the Treatment of Post-Operative Pain

In September 2019, we entered into a definitive agreement with Xenon Pharmaceuticals that provides us with the global rights to develop and ~~based on our pre-clinical,~~ ~~in vivo~~ ~~pharmacokinetic studies,~~commercialize XEN402, a NaV1.7 inhibitor, for control of post-operative pain. Our investigational product candidate, known as FX301, consists of funapide formulated for extended release from a Flexion proprietary thermosensitive hydrogel for administration as a peripheral nerve block for control of post-operative pain. Within minutes following injection, the thermosensitive formulation has been shown to transition from a liquid to a gel, an effect that we believe itcan provide local delivery of funapide near target nerves for up to a week. Unlike typical local anesthetics, the selective pharmacology of funapide has the potential to provide ~~patients with~~effective pain relief while preserving motor function. As such, we believe FX301 could enable ambulation, rapid discharge, and early rehabilitation following musculoskeletal surgery.

In a validated post-operative pain model in pigs, a single injection of FX301 provided both greater analgesic effect from 12 through 72 hours and a longer duration of effect through 72 hours compared to liposomal bupivacaine or placebo. In addition, treatment with FX301 did not significantly affect total walking distance in animals at 2 and 24 hours post-injection, whereas animals treated with liposomal bupivacaine experienced a significant reduction in total walking distance compared with baseline at 2 and 24 hours post-injection.

These data formed the basis of our IND application for upFX301, which the FDA cleared in February 2021. In March 2021, we announced the treatment of the first patient in a Phase 1b proof-of-concept trial evaluating the safety and tolerability of FX301 administered as a single-dose, popliteal fossa block (a commonly used nerve block in foot and ankle-related surgeries) in patients undergoing bunionectomy. The Phase 1b randomized, double-blind, placebo-controlled study is being conducted in two parts, the SAD portion investigated FX301 at low and high doses of funapide administered at two volumes in four cohorts of patients undergoing bunionectomy. A total of 48 patients (12 patients per cohort), were randomized to ~~six months. We intend~~receive either FX301 or placebo. A Safety Monitoring Committee reviewed data from each dose cohort before the study escalated into higher doses. In July 2021, we fully enrolled the SAD portion of the trial, and following an assessment of safety, systemic exposure and efficacy data by an internal review committee, we made the decision to ~~conduct Good Laboratory Practice (GLP) toxicology studies,~~expand the study. In the expansion cohort, an additional 36 patients will be randomized (1:1) to receive either FX301 at the selected dose (130 mg/low volume) or placebo to further assess the safety, tolerability, systemic exposure, and ~~pending successful results,~~efficacy of FX301 as a single-injection analgesic nerve block adjacent to the sciatic nerve of the popliteal fossa. Based on the current pace of enrollment in the expansion cohort, we ~~will file an Investigational New Drug to advance FX101 into clinical trials.~~ anticipate having data available in the first quarter of 2022.

Financial Overview

Revenue

AsProduct Revenue

Net product sales consist of ~~September 30,~~sales of ZILRETTA, which was approved by the FDA on October 6, 2017, ~~we have~~and launched in the United States in October 2017. We had not generated any revenue ~~since our inception. We expect~~prior to ~~initiate a full commercial~~the launch of ~~Zilretta in late November 2017~~ZILRETTA.

License Revenue

On March 30, 2020, weentered into an exclusive license agreement with HK Tainuo and ~~begin to generate initial revenue late in the fourth quarter~~Jiangsu Tainuo, a subsidiary of ~~2017. Additionally, we may generate revenue from licensing rights to our product or product candidates to third parties.~~

~~Operating Expenses~~

~~The majority of our operating expenses to date have been related to~~China Shijiazhuang Pharmaceutical Co, Ltd., for the development and commercialization of ZILRETTA in Greater China (consisting of mainland China, Hong Kong and Macau, and Taiwan). Under the terms of the agreement, HK Tainuo paid us an upfront payment of $10.0 million, of which $5.0 million was received as of June 30, 2020, and the remaining $5.0 million was received as of September 30, 2020. We are also eligible to receive up to $32.5 million in aggregate development, regulatory, and commercial ~~launch preparation activities~~sales milestone payments. All payments received from HK Tainuo are subject to applicable Hong Kong withholding taxes. HK Tainuo is responsible for the clinical development, product registration, and commercialization of ~~Zilretta.~~ZILRETTA in Greater China, and Jiangsu Tainuo serves as the guarantor of HK Tainuo’s obligations and responsibilities under the agreement. We are solely responsible for the

manufacture and supply of ZILRETTA to HK Tainuo for all clinical and commercial activities. The terms related to product manufacturing and supply, including pricing and minimum purchase requirements agreed to in the license agreement, will be covered by a separate supply agreement. All amounts owed to us are nonrefundable and non-creditable once paid. We concluded that the license and supply obligations were not distinct performance obligations, and therefore the transaction price will be recognized as revenue as our supply obligation is fulfilled over the term of the supply agreement, which has not yet commenced. No revenue was recognized associated with this contract as of September 30, 2021.

Cost of Sales

Cost of sales consists of third-party manufacturing costs, freight, and indirect overhead costs associated with sales of ZILRETTA. Cost of sales also includes period costs related to certain inventory manufacturing services, inventory adjustment charges, and unabsorbed manufacturing and overhead costs, as well as any write-offs of inventory that fails to meet specifications or is otherwise no longer suitable for commercial manufacture.

Research and Development Expenses

~~Since our inception, we have focused our resources on our~~Our research and development activities ~~including:~~include: preclinical studies, clinical trials, and chemistry, manufacturing, and controls, or ~~CMC.~~CMC, activities. Our research and development expenses consist primarily of:



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



costs of acquiring, developing, and manufacturing clinical trial materials;



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



costs related to compliance with certain regulatory requirements;



~~manufacturing costs in preparation for potential commercialization of Zilretta;~~

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



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

We expense research and development ~~costs~~expenses as incurred. Our direct research and development expenses consist primarily of external-based costs, such as fees paid to investigators, consultants, investigative sites, CROs, and companies that manufacture our clinical trial materials and potential future commercial supplies and are tracked on a program-by-program basis. We do not allocate personnel costs, facilities, or other indirect expenses to specific research and development programs. These indirect expenses are included within the amounts designated as “Personnel and other costs” in the ~~table~~Results of Operations section below. Inventory acquired prior to receipt of the marketing approval of ~~Zilretta was~~a product candidate is recorded as research and development expense as incurred. ~~We will begin to capitalize the costs associated with the production of Zilretta as a result of the FDA approval on October 6, 2017.~~

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

(In thousands)

2017

2016

2017

2016

Direct research and development expenses by program:

Zilretta

$
5,479

$
5,023

$
14,951

$
18,453

FX007

—

12

1

264

Portfolio expansion

1,115

52

2,088

222

Other

427

62

906

203

Total direct research and development expenses

7,021

5,149

17,946

19,142

Personnel and other costs

5,825

3,898

17,425

10,791

Total research and development expenses

$
12,846

$
9,047

$
35,371

$
29,933

We previously performed research and development for the U.S. Department of Defense under a cost reimbursable grant for a Phase 2 clinical trial investigating Zilretta in active military and medically retired veterans with post-traumatic knee OA Reimbursements were recorded as an offset to research and development expenses when invoices for allowable costs were prepared and submitted to the U.S. Department of Defense. Due to the challenges of enrolling military personnel with post-traumatic knee OA, we discontinued this Phase 2 trial and terminated the grant as of July 31, 2016. Payments under cost reimbursable grants with agencies of the U.S. government were provisional payments subject to adjustment upon audit by the U.S. government. We were reimbursed for approximately $757,000 under the grant.

Our research and development expenses are expected to increase infor the foreseeable future. While the duration of COVID-19 and its impact on our ability to conduct clinical development are highly uncertain, we expect that a return to normal operations will likely result in an increase in future research and development expenses. Specifically, our costs ~~associated with Zilretta~~ will increase as we conduct additional clinical trials for ZILRETTA, including our planned registration trial in shoulder OA, and conduct further ~~the manufacturing process in support of commercialization. Evonik Corporation, or Evonik, our supplier of PLGA for Zilretta, had previously manufactured finished drug product~~development activities for our ~~Zilretta clinical trial materials; however, in early 2016 we decided to use Patheon UK Limited (part of Thermo Fisher Scientific), or Patheon, as~~pipeline programs, including our ~~sole supplier of Zilretta finished drug product for~~on-going clinical trials of FX201 and commercial supply. We impaired approximately $2,265,000 in manufacturing equipment located at the Evonik facility, resulting in a loss of $2,180,000 which was recorded in research and development expenses for the nine months ended September 30, 2016.FX301.

We cannot determine with certainty the duration of and completion costs associated with ongoing and future clinical trials or the associated regulatory approval process, ~~associated with~~ post-marketing development of ~~Zilretta~~ZILRETTA, or development of any product candidates in our pipeline. The duration, costs, and timing associated with the further development of ~~Zilretta~~ZILRETTA or the development of other product candidates will depend on a variety of factors, including uncertainties associated with the results of our clinical ~~trials.~~trials, as well as the status and timing of the Merger. As a result of these uncertainties, we are currently unable to estimate with any precision our future research and development expenses for expanded indications for ~~Zilretta~~ZILRETTA or ~~any~~the product candidates in our ~~pipeline, or when we may generate sufficient revenue to achieve a positive cash flow position.~~pipeline.

Selling, General and Administrative Expenses

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

We anticipate that ~~our~~selling, general, and administrative expenses will increase inas compared to the ~~future as we continue to build~~prior year, including external marketing expenses and the operation of our corporate and commercial infrastructure to support the continued development and launch of Zilretta or any other product candidates. In particular, since Zilretta was approved by the FDA on October 6, 2017, we expect to incur material and ongoing increases in general and administrative expenses related to our hiring of a field sales force to market Zilretta in the United States. Additionally, we anticipate increased expenses related to the audit, legal and compliance, regulatory, investor relations and tax-related services associated with maintaining compliance with the Securities and Exchange Commission and Nasdaq requirements and healthcare laws and compliance requirements, director and officer insurance premiums and other costs associated with operating as a publicly-traded company.force.

Other Income (Expense)

Interest ~~income.~~income

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

Interest ~~expense.~~ ~~We issued approximately $201.3 million in convertible notes, or the~~expense

Interest expense consists of contractual interest on our 2024 Convertible Notes, which ~~pay semi-annual coupon payments~~accrue interest at a rate of 3.375%~~. We expect to pay coupon payments through the maturity of the 2024 Convertible Notes on May 1, 2024. We have also borrowed $30.0 million under~~ per annum, payable semi-annually, our ~~2015~~ term loan facility, which, accrues interest at a floating interest rate equal to the greater of the prime rate as reported in the Wall Street Journal plus 2.75% or 6.0% per annum, and ~~we incur~~our revolving credit facility, which accrues interest at a floating interest rate equal to the greater of the prime rate as reported in the Wall Street Journal plus 1.75% or 5.0% per annum. Also included in interest expense is the amortization of the final payment on the 2021 term loan, the loss on debt extinguishment related to ~~this borrowing at a fixed rate of 6.25% per annum. We expect~~the 2019 term loan, and the debt discount related to ~~incur future~~the convertible notes, which is being amortized to interest expense ~~related to this borrowing until February 1, 2020.~~

~~Foreign currency gain (loss).~~ ~~We maintain a bank account denominated in British Pounds. All foreign currency payables and cash balances are measured at~~using the ~~applicable exchange rate at~~effective interest method over the ~~end~~expected life of the ~~reporting period. All associated gains and losses from foreign currency transactions are reflected in the consolidated statements of operations, within other~~debt.

Other income ~~and expense.~~(expense)

Other ~~expense.~~ ~~Other expense~~income (expense) consists of the ~~net~~ amortization of premiums ~~and~~or accretion of discounts related to our marketable securities, ~~and our~~ realized gains (losses) on redemptions of our marketable ~~securities. We will continue to incur expenses~~securities, gains (losses) from foreign currency transactions, and the amortization of debt issuance costs on the 2024 Convertible Notes, which are being amortized over the term of the loan.

Provision for income taxes

The provision for income taxes consists of foreign withholding taxes related to ~~net amortization of premiums on marketable securities for as long as we hold these investments.~~our license agreement with HK Tainuo.

Critical Accounting Policies and Significant Judgments and Estimates

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

We believe that the estimates, assumptions, and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2020, have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. There were no material changes to our critical accounting policies and estimates during the nine months ended September 30, ~~2017.~~2021.

2029

RESULTS OF OPERATIONS

Comparison of the ~~three~~Three and ~~nine months ended~~Nine Months Ended September 30, ~~2017~~2021 and ~~2016~~2020

The following tables summarize our results of operations for the three and nine months ended September 30, ~~2017:~~2021:


	Three Months Ended September 30,
(In thousands)	2021			2020			Change			% Increase/ (Decrease)
Revenues:
Product revenue, net	$	21,326		$	23,664		$	(2,338	)		(9.9	)%
Operating expenses:
Cost of sales		3,727			5,130			(1,403	)		(27.3	)%
Research and development		14,771			10,092			4,679			46.4	%
Selling, general and administrative		26,986			27,312			(326	)		(1.2	)%
Total operating expenses		45,484			42,534			2,950			6.9	%
Loss from operations		(24,158	)		(18,870	)		(5,288	)		28.0	%
Other (expense) income:
Interest income		54			62			(8	)		(12.9	)%
Interest expense		(5,787	)		(5,125	)		(662	)		12.9	%
Other expense		(421	)		(457	)		36			(7.9	)%
Total other (expense) income		(6,154	)		(5,520	)		(634	)		11.5	%
Loss before income taxes		(30,312	)		(24,390	)		(5,922	)		24.3	%
Income tax expense		—			248			(248	)	NM
Net loss	$	(30,312	)	$	(24,638	)		(5,674	)		23.0	%


	Nine Months Ended September 30,
(In thousands)	2021			2020			Change			% Increase/ (Decrease)
Revenues:
Product revenue, net	$	74,090		$	59,242		$	14,848			25.1	%
Operating expenses:
Cost of sales		14,791			12,887			1,904			14.8	%
Research and development		41,487			43,733			(2,246	)		(5.1	)%
Selling, general and administrative		81,993			81,341			652			0.8	%
Total operating expenses		138,271			137,961			310			0.2	%
Loss from operations		(64,181	)		(78,719	)		14,538			(18.5	)%
Other (expense) income:
Interest income		531			584			(53	)		(9.1	)%
Interest expense		(16,156	)		(14,848	)		(1,308	)		8.8	%
Other expense		(1,270	)		(581	)		(689	)		118.6	%
Total other (expense) income		(16,895	)		(14,845	)		(2,050	)		13.8	%
Loss before income taxes		(81,076	)		(93,564	)		12,488			(13.3	)%
Income tax expense		—			495			(495	)	NM
Net loss	$	(81,076	)	$	(94,059	)		12,983			(13.8	)%

Product Revenue

Three Months Ended September 30,

(In thousands)

2017

2016

Change

% Increase/
(Decrease)

Revenue

$
—

$
—

$
—

—

Operating expenses:

Research and development

12,846

9,047

3,799

42.0
%
General and administrative

18,375

8,388

9,987

119.1
%
Total operating expenses

31,221

17,435

13,786

79.1
%
Loss from operations

(31,221
)

(17,435
)

(13,786
)

79.1
%
Other income (expense):

Interest income

1,095

421

674

160.1
%
Interest expense

(3,843
)

(561
)

(3,282
)

585.0
%
Other expense

(219
)

(207
)

(12
)

5.8
%
Total other income (expense)

(2,967
)

(347
)

(2,620
)

755.0
%
Net loss

$
(34,188
)

$
(17,782
)

$
(16,406
)

92.3
%

Nine Months Ended September 30,

(In thousands)

2017

2016

Change

% Increase/
(Decrease)

Revenue

$
—

$
—

$
—

—

Operating expenses:

Research and development

35,371

29,933

5,438

18.2
%
General and administrative

46,533

18,295

28,238

154.3
%
Total operating expenses

81,904

48,228

33,676

69.8
%
Loss from operations

(81,904
)

(48,228
)

(33,676
)

69.8
%
Other income (expense):

Interest income

2,450

1,052

1,398

132.9
%
Interest expense

(7,363
)

(1,039
)

(6,324
)

608.7
%
Other expense

(136
)

(567
)

431

(76.0
)%
Total other income (expense)

(5,049
)

(554
)

(4,495
)

811.4
%
Net loss

$
(86,953
)

$
(48,782
)

$
(38,171
)

78.2
%

~~Research~~The following table presents the adjustments deducted from gross product revenue to arrive at net product revenue for sales of ZILRETTA during the three and ~~Development Expenses~~

Three Months Ended September 30,
(In thousands)

2017

2016

Change

% Increase/(Decrease)

Direct research and development expenses by program:

Zilretta

$
5,479

$
5,023

$
456

9.1
%

FX007

—

12

(12
)

(100.0
)%

Portfolio expansion

1,115

52

1,063

2044.2
%

Other

427

62

365

588.7
%

Total direct research and development expenses

7,021

5,149

1,872

36.4
%

Personnel and other costs

5,825

3,898

1,927

49.4
%

Total research and development expenses

$
12,846

$
9,047

$
3,799

42.0
%

Nine Months Ended September 30,
(In thousands)

2017

2016

Change

% Increase/(Decrease)

Direct research and development expenses by program:

Zilretta

$
14,951

$
18,453

$
(3,502
)

(19.0
)%

FX007

1

264

(263
)

(99.6
)%

Portfolio expansion

2,088

222

1,866

840.5
%

Other

906

203

703

346.3
%

Total direct research and development expenses

17,946

19,142

(1,196
)

(6.2
)%

Personnel and other costs

17,425

10,791

6,634

61.5
%

Total research and development expenses

$
35,371

$
29,933

$
5,438

18.2
%

~~Research~~nine months ended September 30, 2021 and ~~development expenses were $12.8~~2020:


	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except for % of sales)	2021			% of Sales	2020			% of Sales	2021			% of Sales	2020			% of Sales
Product revenue, gross	$	30,825		100.0%	$	27,704		100.0%	$	95,283		100.0%	$	68,498		100.0%
Adjustments to product revenue, gross
Provider discounts and rebates		(3,245	)	(10.5)%		(1,329	)	(4.8)%		(9,048	)	(9.5)%		(2,757	)	(4.0)%
Estimate of product returns		(3,421	)	(11.1)%		(136	)	(0.5)%		(3,640	)	(3.8)%		(345	)	(0.5)%
All other		(2,833	)	(9.2)%		(2,575	)	(9.3)%		(8,505	)	(8.9)%		(6,154	)	(9.0)%
Product revenue, net	$	21,326		69.2%	$	23,664		85.4%	$	74,090		77.8%	$	59,242		86.5%

Net product revenue for the three months ended September 30, 2021 and 2020, was $21.3 million and ~~$9.0~~$23.7 million, respectively. The number of ZILRETTA units sold period-over-period increased, which resulted in an increase in net revenue of $1.6 million, offset by

a decrease of $3.9 million, which was attributable to a decrease in the net price per unit. The decrease in net price was due to an increase in returns of short-dated product, which resulted in a reduction of revenue of $3.4 million for the three months ended September 30, ~~2017~~2021. The decrease in net price was also attributed to the increase in rebates and ~~2016,~~discounts offered to healthcare providers, partially offset by an increase in our gross sales price in the third quarter of 2021.

Net product revenue for the nine months ended September 30, 2021 and 2020, was $74.1 million and $59.2 million, respectively. The period-over-period increase was due to an increase in ~~research and development expenses~~the number of ~~$3.8~~ZILRETTA units sold, which resulted in an increase in net revenue of $20.3 million, offset by a decrease of $5.5 million, which was attributable to a decrease in the net price per unit primarily due to ~~a $1.4 million~~provider rebate offerings and other discounts and the aforementioned charge relating to product returns, partially offset by an increase in ~~preclinical expenses~~our gross sales price in the third quarter of 2021. Net revenue for the nine months ended September 30, 2020, included the adverse impact of COVID-19 on the operations of healthcare providers, which resulted in a material decline in net revenue as compared to our prior expectations.

For further discussion regarding our revenue recognition policy, see Note 2, “Summary of Significant Accounting Policies,” in the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q.

Cost of Sales

Cost of sales was $3.7 million and $5.1 million for the three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, cost of sales was comprised of $1.8 million related to ~~our portfolio expansion~~the actual cost of units sold and $0.7 million of period costs and other ~~program costs,~~adjustments. In addition, cost of sales for the three months ended September 30, 2021 included a ~~$0.5~~charge of $1.2 million ~~increase in development expenses for Zileretta, including CMC~~related to the write-down of short-dated inventory that will not be sold prior to expiry. For the three months ended September 30, 2020, cost of sales was comprised of $2.0 million related to the actual cost of units sold and ~~clinical trial costs,~~$3.1 million of unabsorbed overhead associated with the voluntary, temporary suspension of manufacturing activities at Patheon due to COVID-19 impacts on sales of ZILRETTA.

Cost of sales was $14.8 and ~~an increase of $1.9 million in personnel and other employee-related costs for additional headcount and stock compensation expense.~~

~~Research and development expenses were $35.3 million and $29.9~~$12.9 million for the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. ~~The increase in research~~For the nine months ended September 30, 2021, costs of sales consisted of $7.1 million related to the actual cost of units sold, $5.2 million of unabsorbed manufacturing and overhead costs related to the operation of the facility at Patheon, $1.8 million related to the write-down of short-dated inventory that will not be sold prior to expiry, and $0.7 million of period costs and other adjustments For the nine months ended September 30, 2020, cost of sales consisted of $5.6 million related to the actual cost of units sold, $6.5 million of unabsorbed manufacturing overhead, and $0.8 million of period costs and adjustments.

Research and Development Expenses


	Three Months Ended September 30,
(In thousands)	2021		2020		Change		% Increase/ (Decrease)
Direct research and development expenses by program:
ZILRETTA	$	1,675	$	1,043	$	632		60.6	%
FX201		3,358		831		2,527		304.1	%
FX301		1,839		1,160		679		58.5	%
Portfolio expansion		226		72		154		213.9	%
Other		630		386		244		63.2	%
Total direct research and development expenses		7,728		3,492		4,236		121.3	%
Personnel and other costs		7,043		6,600		443		6.7	%
Total research and development expenses	$	14,771	$	10,092	$	4,679		46.4	%


	Nine Months Ended September 30,
(In thousands)	2021		2020		Change			% Increase/ (Decrease)
Direct research and development expenses by program:
ZILRETTA	$	4,319	$	8,188	$	(3,869	)		(47.3	)%
FX201		6,715		5,789	$	926			16.0	%
FX301		7,878		4,362	$	3,516			80.6	%
Portfolio expansion		691		279		412			147.7	%
Other		1,593		1,284		309			24.1	%
Total direct research and development expenses		21,196		19,902		1,294			6.5	%
Personnel and other costs		20,291		23,831		(3,540	)		(14.9	)%
Total research and development expenses	$	41,487	$	43,733	$	(2,246	)		(5.1	)%

Research and development expenses of $5.4 million was primarily due to an increase of $2.6 million in preclinical expenses related to our portfolio expansion and other program costs, and a $6.6 million increase in personnel and other employee-related costs for additional headcount and stock compensation expense, partially offset by a decrease of $3.5 million in development expenses for Zilretta, including CMC and clinical trial costs.

~~General and Administrative Expenses~~

~~General and administrative expenses~~ were ~~$18.4~~$14.8 million and ~~$8.4~~$10.1 million for the three months ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. ~~The~~For the three months ended September 30, 2021, development expenses for ZILRETTA increased by $0.6 million due to an increase in ~~general~~ZILRETTA life cycle management activities. Program expenses related to FX201 and ~~administrative expenses of $10.0~~FX301 increased by $2.5 million ~~was primarily~~

and $0.7 million, respectively, due to ~~additional~~an increase in clinical trial activity, and portfolio expansion-related expenses increased by $0.4 million. Personnel and other costs ~~associated with building a commercial infrastructure~~also increased by $0.4 million due to ~~effectively support the commercialization of Zilretta, including increases~~an increase in ~~public relations and promotional expenses, market research expenses, and~~ salary and ~~related~~other employee-related costs ~~associated with additional headcount cost related to the creation of commercial marketing~~ and ~~sales capabilities, and stock~~stock-based compensation expense.

~~General~~Research and ~~administrative~~development expenses were ~~$46.5~~$41.5 million and ~~$18.3~~$43.7 million for the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. The ~~increase~~decrease in ~~general~~research and ~~administrative expenses~~development expense of ~~$28.2~~$2.2 million was primarily due to ~~additional costs associated with building~~ a ~~commercial infrastructure~~decrease of $3.9 million in development expense for ZILRETTA due to ~~effectively support the commercialization~~a reduction in ZILRETTA life cycle management activities, and a decrease of ~~Zilretta, including increases~~$3.5 million in ~~public relations and promotional expenses, market research expenses, and~~ salary and other employee-related costs and stock-based compensation expense related to lower headcount. Decreases were partially offset by an increase of $0.9 million related to FX201 due to increased clinical trial activity in 2021, offset by the $2.5 million milestone payment related to dosing the first human patient in the Phase 1 clinical trial that occurred in the first quarter of 2020 and an increase of $3.5 million related to FX301, which is attributed to the achievement of certain development milestones, including the clearing of the IND by FDA and the initiation of the Phase 1b clinical trial, both of which occurred in the first quarter of 2021, and a $0.7 million increase in costs ~~associated with additional~~related to our portfolio expansion.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $27.0 million and $27.3 million for the three months ended September 30, 2021 and 2020, respectively. Selling expenses were $17.8 million and $19.3 million for the three months ended September 30, 2021 and 2020, respectively. The year-over-year decrease in selling expenses of $1.5 million was primarily due to lower headcount, ~~cost~~partially offset by the resumption of industry conferences and physician speaker programs and increase in business travel. General and administrative expenses were $9.2 million and $8.0 million for the three months ended September 30, 2021 and 2020, respectively, which represents an increase of $1.2 million. The increase was largely attributable to acquisition costs related to the ~~creation~~merger agreement with Pacira.

Selling, general and administrative expenses were $82.0 million and $81.3 million for the nine months ended September 30, 2021 and 2020, respectively. Selling expenses were $55.7 million and $56.5 million for the nine months ended September 30, 2021 and 2020, respectively. The year-over-year decrease in selling expenses of ~~commercial marketing~~$0.8 million was primarily due to lower headcount and ~~sales capabilities,~~a reduction in operating expenses, partially offset by the partial resumption of industry conferences and ~~stock compensation expense.~~physician speaker programs and increases in business travel. General and administrative expenses were $26.3 million and $24.8 million for the nine months ended September 30, 2021 and 2020, respectively, which represents an increase of $1.5 million. The year-over-year increase was largely attributable to acquisition costs related to the merger agreement with Pacira.

Other Income (Expense)

Interest income was ~~$1.1~~$0.1 million for each of the three months ended September 30, 2021 and 2020, respectively. Interest income was $0.5 million and $0.6 million for the nine months ended September 30, 2021 and 2020.The decrease in interest income was primarily due to a decrease in the average investment balance as well as a decrease in interest rates over the period

Interest expense was $5.8 million and $5.1 million for the three months ended September 30, 2021 and 2020, respectively. Interest expense was $16.2 million and $14.8 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in interest expense was attributed to the loss on debt extinguishment of $0.5 million recorded in connection with the 2021 Amended Credit Agreement, which resulted in the partial repayment of the final payment owed on the prior term loan agreement, as well as an increase in the amortization of the debt discount on the 2024 Convertible Notes.

We recorded other expense of $0.4 million for the three months ended September 30, ~~2017 and 2016, respectively. Interest income~~2021, compared to $0.5 million for the three months ended September 30, 2020. Other expense was ~~$2.5~~$1.3 million and ~~$1.1~~$0.6 million for the nine months ended September 30, ~~2017~~2021 and ~~2016,~~2020, respectively. The increase in ~~interest income~~other expense was primarily due to changes in the price of debt securities, resulting in increased amortization of premiums, as well as an increase in ~~average investment balance~~foreign currency losses due to exchange rate fluctuations.

Liquidity and ~~yield during 2017.~~Capital Resources

~~Interest expense was $3.8 million and $0.6 million for~~For the ~~three~~nine months ended September 30, ~~2017 and 2016, and $7.4~~2021, we generated $74.1 million in net product revenue. We have incurred significant net losses in each year since our inception, including net losses of $113.7 million, $149.8 million, and ~~$1.0~~$169.7 million, for fiscal years 2020, 2019, and 2018, respectively, and $81.1 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in interest expense for the three and nine months ended September 30, 2017 was primarily due to interest incurred on the 2024 Convertible Notes and the $30 million borrowed under our 2015 term loan.

~~Liquidity and Capital Resources~~

2021. As of September 30, ~~2017, we had not generated any revenue and have incurred losses since our inception in 2007. As of September 30, 2017,~~2021, we had an accumulated deficit of ~~$298.6~~$863.4 million. We anticipate that we will continue to incur losses ~~for~~over the ~~foreseeable future.~~ next few years.

Since our inception through September 30, 2021, we have funded our operations primarily through the sale of our common stock and convertible preferred stock and convertible debt, and through venture debt financing, including amounts from our initial and follow-on public offerings, as well as our term loan and revolving credit facility and our 2024 Convertible Notes issuance. This funding is necessary to support the commercialization of ZILRETTA and to perform the research and development activities required to develop our other product candidates in order to generate potential future revenue streams. We 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 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 deteriorate, it may make any additional debt or equity financing more difficult, more costly, and more dilutive.

We expect that our research and development ~~and general and administrative~~ expenses will ~~continue to~~ increase in 2021 and beyond and, as a result, we ~~will~~may need additional capital to fund our operations, which we may seek to obtain through one or more equity offerings, debt and convertible debt financings, government or other third-party funding, and licensing or collaboration arrangements.

~~Since~~If the recent decrease in revenue as compared to our ~~inception~~expectations continues, we anticipate that absent raising additional capital through ~~September 30, 2017,~~financing or other transactions, our cash balance is likely to decrease below $100.0 million within the next twelve months. If this occurs, under the terms of the 2021 Amended Credit Agreement, we ~~have funded~~would become subject to a minimum revenue covenant and we believe there is substantial risk that we would fail to meet the minimum revenue covenant at that time or shortly thereafter. If we become subject to the minimum revenue covenant and fail to comply with it, the lenders could elect to declare all amounts outstanding to be immediately due and payable. While we would expect to request a waiver from the lenders, there can be no assurances that such a request would be granted or would not be conditioned on additional terms or concessions, or that we would be able to raise additional capital to avoid application of the minimum revenue covenant. These conditions raise substantial doubt about our ~~operations primarily through~~ability to continue as a going concern for a period of one year after the sale of our common stock and convertible preferred stock, convertible debt, and venture debt financing. From our inception through September 30, 2017, we had raised approximately $624 million from such transactions, including amounts from our initial and follow-on public offerings during 2014 and 2016 as well as our 2024 Convertible Notes issuance in 2017. date that the financial statements are issued.

As of September 30, ~~2017,~~2021, we had cash and cash equivalents of $159.2 million and marketable securities of $175.9 million, which does not include the net proceeds of our October 2017 common stock offering of approximately $132.4 million. Based on our current operating plan we anticipate that our existing cash, cash equivalents, and marketable securities ~~will~~of $142.1 million. Management believes that current cash, cash equivalents, and marketable securities on hand at September 30, 2021, and taking into account our plans to reduce operating expenses, request a waiver of the minimum revenue covenant from the lenders, and remain opportunistic with respect to raising additional capital through financing or other transactions, should be sufficient to fund ~~our~~ operations for at least the next twelve months from the issuance date of these financial statements. However, as we are 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.

We have concluded that without taking into consideration the planned merger with Pacira, Management’s plans do not alleviate the substantial doubt about our ability to continue as a going concern. As the planned merger transaction 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 our ability to continue as a going concern for one year from the date the financial statements included in this ~~report.~~ report are issued.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with ~~a view to~~an objective of capital preservation.

On July 30, 2021, we entered into a second amendment (the “2021 Amended Credit Agreement”) to our Amended and Restated Credit and Security Agreement (the “Existing Credit Agreement”) with Silicon Valley Bank, as agent and lender, MidCap Financial Trust, MidCap Funding XIII Trust, and the other lenders from time to time party thereto (collectively, the “Lenders”), providing for a term loan facility of up to $75.0 million, with $55.0 million available at closing and an additional $20.0 million (the “second tranche”) available upon positive Phase 1 clinical trial data in either of our two pipeline programs, FX201 and FX301, sufficient to initiate a Phase 2 clinical study, and a revolving credit facility of up to $25.0 million, both of which mature on February 1, 2024, which may be extended to July 1, 2026, upon satisfaction of certain specified conditions set forth in the 2021 Amended Credit Agreement (the “Maturity Date”). We concurrently borrowed the $55.0 million term loan (the “2021 term loan”), simultaneously used $48.1 million of the proceeds to repay the outstanding term loan under the Existing Credit Agreement, and drew down $20.0 million from the revolving credit facility, bringing the total revolver balance to $25.0 million.

The 2021 Amended Credit Agreement contains certain representations, warranties, and covenants, including a minimum revenue covenant that will be in effect at any time our liquidity (defined as cash, cash equivalents and marketable securities held with Silicon Valley Bank and certain accounts receivable as deemed eligible under the 2021 Amended Credit Agreement) is below $100.0 million (if the second tranche is undrawn) or $120.0 million (if the second tranche is drawn). Additionally, if our liquidity is below $100.0 million, all amounts received from customer collections will be applied immediately to reduce the revolving credit facility. The minimum revenue covenant, if it applies in the future, is applied to the trailing six-months of net revenue and is determined based on our approved forecast, as determined by the Lenders. If the revenue covenant becomes applicable and we fail to comply with it, the amounts due under the 2021 Amended Credit Agreement could be declared immediately due and payable.

Term loan borrowings under the 2021 Amended Credit Agreement accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 2.75% or (ii) 6.00% per annum. Under the term loan credit facility, following an interest-only period ending on August 1, 2023 (if the second tranche is undrawn) or August 1, 2024 (if the second tranche is drawn), principal is due in equal monthly installments through the Maturity Date. We may prepay the term loan at any time by paying the outstanding principal balance, a final payment equal to 4.75% of the term loan amount, all accrued interest, and a prepayment fee of 3% of the outstanding term loan amount if repaid in the first year, 2% of the outstanding term loan amount if repaid in the second year, and 1% of the outstanding term loan amount if repaid in the third year of the loan; no prepayment fee is required thereafter.

Revolving borrowings under the 2021 Amended Credit Agreement accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 1.75% or (ii) 5.00% per annum. The revolving credit facility is co-terminus with the term loan credit facility. If the interest payment on the revolving credit facility is less than the amount of interest that would have been payable had we borrowed 25% of the total commitments under the revolving credit facility, or the Revolving Commitment Amount, then we will be required to pay the difference. We are also required to pay a facility fee in respect of the revolving credit facility equal to 0.5% of the

Revolving Commitment Amount payable at closing and 0.5% of the Revolving Commitment Amount payable on the first anniversary of closing. We may retire the revolving credit facility early, at any time, by paying the outstanding principal balance, all accrued interest, and a termination fee equal to 2% of the Revolving Commitment Amount if repaid in the first year, and 1% of the Revolving Commitment Amount if repaid in the second year; with no termination fee thereafter. To the extent any portion of the Revolving Commitment Amount is undrawn, we will be required to pay an “unused line fee” equal to 0.25% per annum of the average unused portion of the Revolving Commitment Amount, calculated on a calendar year basis as an amount equal to the difference between (i) the Revolving Commitment Amount and (ii) the greater of (A) 25.0% of the Revolving Commitment Amount, and (B) the average for the period of the daily closing balance of the Revolving Commitment Amount outstanding.

On November 4, 2020, we entered into a Distribution Agreement with Goldman Sachs & Co. LLC and Credit Suisse Securities (USA) LLC (collectively, the “Managers”) relating to the issuance and sale from time to time of up to $100,000,000 of shares of our common stock. Under the terms of the Distribution Agreement, we will pay the Managers a commission of up to 3% of the gross sales price of any shares sold. As of September 30, 2021, 134,048 shares had been sold under the Distribution Agreement, for total net proceeds of $1.7 million.

We are subject to a variety of specified liquidity and capitalization restrictions under the Merger Agreement. Unless we obtain Pacira’s prior written consent (which consent may not be unreasonably withheld, conditioned or delayed) and except (i) as required or expressly contemplated by the Merger Agreement, (ii) as required by applicable law or (iii) as set forth in the confidential disclosure schedule we delivered to Pacira, we may not, among other things and subject to certain exceptions and aggregate limitations, incur additional indebtedness, issue additional shares of our common stock outside of our equity incentive plans, repurchase our common stock, pay dividends, acquire assets, securities or property, dispose of businesses or assets, enter into material contracts or make certain additional capital expenditures.

The following table shows a summary of our cash flows for ~~each of~~ the nine months ended September 30, ~~2017~~2021 and ~~2016:~~2020:


	Nine Months Ended September 30,
(In thousands)	2021			2020
Cash flows used in operating activities	$	(51,441	)	$	(60,819	)
Cash flows provided by (used in) investing activities		60,234			(10,665	)
Cash flows provided by financing activities		20,327			117,868
Net increase in cash and cash equivalents	$	29,120		$	46,384

Nine Months Ended September 30,

(In thousands)

2017

2016

Cash flows used in operating activities

$
(65,938
)

$
(41,485
)
Cash flows provided by investing activities

1,820

(47,402
)
Cash flows provided by financing activities

192,382

92,752

Net increase in cash and cash equivalents

$
128,264

$
3,865

Net Cash Used in Operating Activities

Operating activities used ~~$65.9~~$51.4 million of cash in the nine months ended September 30, ~~2017.~~2021. Cash used in operating activities resulted primarily from our net loss for the period of $81.1 million, partially offset by changes in our operating assets and liabilities of $2.9 million and non-cash charges of $26.7 million. Changes in our operating assets and liabilities consisted primarily of a $0.7 million decrease in accounts receivable and an increase of $6.0 million in accounts payable and accrued expense, partially offset by a $1.5 million increase in prepaid expenses and other current assets, a $1.0 million increase in inventory, and a $1.1 million decrease in lease liabilities primarily due to principal lease payments. Our non-cash charges consisted primarily of $12.8 million of stock-based compensation expense, $7.8 million related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes, $1.3 million related to the amortization of right-of-use assets, $1.6 million of depreciation, $0.5 million of non-cash interest expense related to amortization of the final payment due on the 2021 term loan, $0.4 million of amortization of premiums paid for the purchase of marketable securities, $0.5 million related to the loss of debt extinguishment, and $1.8 million related to the provision for inventory for the write-down of short-dated ZILRETTA inventory that is not expected to be sold prior to expiry.

Operating activities used $60.8 million of cash in the nine months ended September 30, 2020. The cash flow used in operating activities resulted primarily from our net loss ~~of $87.0 million~~ for the period of $94.1 million, partially offset by changes in our operating assets and liabilities of ~~$9.3~~$10.1 million and non-cash charges of ~~$11.7~~$23.1 million. Our non-cash charges consisted primarily of $7.6 million of stock-based compensation expense and $1.8 million of depreciation and amortization offset by $0.7 million of premium paid on marketable securities. Net cash provided by changesChanges in our operating assets and liabilities consisted primarily of a ~~$0.2~~$9.2 million decrease in ~~our prepaid expenses~~accounts receivable, and ~~other current assets due primarily~~a $10.0 million increase in deferred revenue related to the ~~receipt of the refund of the NDA fee and an increase of $9.1 million in accounts payable and accrued expenses.~~

Operating activities used $41.5 million of cash in the nine months ended September 30, 2016. The cash flow used in operating activities resulted primarily from our net loss of $48.8 million for the period and cash used for changes in our operating assets and liabilities of $0.9 million,license agreement with HK Tainuo, partially offset by ~~non-cash charges of $8.2 million. Our non-cash charges consisted primarily of $5.0~~a $1.1 million ~~of stock-based compensation expense and $2.3 million of loss related to the disposal of our fixed assets, and $1.2 million of depreciation and amortization. Net cash used for changes~~increase in ~~our operating assets and liabilities consisted primarily of~~inventory, a ~~$0.7~~$0.5 million increase in prepaid expenses and other current assets, ~~due primarily to insurance costs and~~ a decrease of ~~$0.3~~$6.5 million in accounts payable and accrued ~~expenses.~~expenses and a $1.0 million decrease in lease liabilities and other long-term liabilities primarily due to principal lease payments. Our non-cash charges consisted primarily of $13.4 million of stock-based compensation expense, $6.9 million related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes, $1.2 million related to the amortization of right-of-use assets, $1.3 million of depreciation, $0.5 million of non-cash interest expense related to amortization of the final payment due on the 2019 term loan and $0.3 million related to the loss on disposal of fixed assets, partially offset by $0.5 million of premiums paid for the purchase of marketable securities.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was ~~$1.8~~$60.2 million in the nine months ended September 30, ~~2017.~~2021. Net cash provided by investing activities consisted primarily of cash received for the redemption and sale of marketable securities of ~~$203.6~~$67.1 million, partially offset by cash used to purchase marketable securities of ~~$199.8 million. In addition, $1.8~~$5.2 million and capital expenditures of ~~cash was used~~$1.7 million, primarily relating to the purchase of equipment associated with the expansion of our manufacturing ~~equipment.~~facilities at Patheon.

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Net cash used in investing activities was ~~$47.4~~$10.7 million in the nine months ended September 30, ~~2016.~~2020. Net cash used in investing activities consisted primarily of ~~cash used for the purchase~~purchases of marketable securities of ~~$80.2~~$56.2 million and capital expenditures of $8.9 million, primarily relating to the purchase of equipment associated with the expansion of our manufacturing facilities at Patheon. These expenses were partially offset by cash received for the redemption and sale of marketable securities of ~~$40.9~~$54.4 million. ~~In addition, $8.2 million of cash was used to purchase manufacturing equipment.~~

Net Cash Provided by Financing Activities

Net cash provided by financing activities was ~~$192.4~~$20.3 million for the nine months ended September 30, ~~2017.~~ 2021, which consisted of $55.0 million and $20.0 million of additional term loan and revolving credit facility borrowings, respectively, under the 2021 Amended Credit Agreement, $0.9 million related to employee stock purchases through our employee stock purchase plan, and $1.7 million related to the net proceeds received from the sale of common stock under our Distribution Agreement. Increases were partially offset by a decrease of $56.9 million of principal payments and partial repayment of the final payment under the 2019 term loan, $0.2 million related the payment of debt issuance costs related to the 2021 Amended Credit Agreement, and $0.1 million of public offering costs paid during the period.

Net cash provided by financing activities inwas $117.9 million for the nine months ended September 30, ~~2017 consisted primarily~~2020, of which $97.2 million related to the net ~~cash~~proceeds received from the ~~issuance~~offering of our common stock, partially offset by public offering costs paid during the ~~2024 Convertible Notes~~period of ~~$194.8~~$0.4 million, ~~and $3.5~~$0.1 million received from the exercise of stock options and $0.9 million relating to employee stock purchases through our employee stock purchase ~~plan. These cash inflows were partially offset by $5.8~~plan, as well as $20.0 million ~~related to~~borrowed under the ~~payment of principal on our 2015 term loan.~~

Net cash provided by financing activities provided in the nine months ended September 30, 2016 was $92.8 million and consisted of $77.6 million in gross proceeds from a follow-on public offering, $15.0 million from borrowing the remaining amount under ourrevolving credit facility associated with ~~MidCap Financial Funding XIII Trust and Silicon Valley, and $0.4 million related to the exercises of stock options and employee stock purchases through~~ our ~~employee stock purchase plan.~~2019 term loan.

Contractual Obligations

~~In February 2017, we entered into~~For a ~~five year lease for laboratory space located~~discussion of our contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ~~Woburn, Massachusetts with a total cash obligation of approximately $0.9 million.~~

~~On April 7, 2017, we entered into an amendment~~our 2020 Annual Report on Form 10-K. There have not been any material changes to such contractual obligations or potential milestone payments since December 31, 2020, other than as described in Notes 9, 12, and 13 to our ~~existing lease for approximately 1,471 additional square feet of rented space located~~unaudited consolidated financial statements included elsewhere in Burlington, Massachusetts and an extension of our current lease term through October 2023. The amendment also gave us the option to lease approximately 6,450 of additional square feet beginning in 2018, which we exercised on October 6, 2017. this report.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary exposures to market risk are interest income sensitivity and equity price risk. Interest income is affected by changes in the general level of U.S. interest rates. Due to the short-term duration of a majority of our investment portfolio and the low risk profile of our investments, an immediate 10.0% change in interest rates would not have a material effect on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on our investment portfolio.

Investments

We do not believe that our cash, cash equivalents, and marketable securities have significant risk of default or illiquidity. While ~~we believe~~ our cash and ~~cash equivalents and marketable securities~~investments are invested with the goal of capital preservation, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits.

Term Loans

We have borrowed $55.0 million in term loans under our 2021 Amended Credit Agreement. Term loan borrowings under the 2021 Amended Credit Agreement accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 2.75% or (ii) 6.0% per annum.

Revolving Credit Facility

We have borrowed $25.0 million under the revolving credit facility. Under the 2021 Amended Credit Agreement, borrowings under the revolving credit facility accrue interest monthly at a floating interest rate equal to the greater of (i) the Prime Rate plus 1.75% or (ii) or 5.0% per annum. In addition to paying interest on any amounts borrowed under the revolving credit facility, we may in the future owe an unused revolving line facility fee equal to 0.25% per annum of the average unused portion of the revolving line, multiplied by the difference between the total amount available to be borrowed (the “Revolving Commitment Amount”) and the greater of the average outstanding revolver balance and 25% of the Revolving Commitment Amount.

Convertible Notes

On May 2, 2017, we issued $201.3 million aggregate principal amount of 2024 Convertible Notes. The 2024 Convertible Notes are senior unsecured obligations and bear interest at a rate of 3.375% per year, payable semi-annually in arrears on May and

November 1st of each year. The 2024 Convertible Notes will mature on May 1, 2024, unless repurchased or converted earlier. The 2024 Convertible Notes will be convertible into cash, shares of our common stock, or a combination thereof, at our election (subject to certain limitations in the 2015 term loan), at a conversion rate of approximately 37.3413 shares of common stock per $1,000 principal amount of the 2024 Convertible Notes, which corresponds to a conversion price of approximately $26.78 per share of our common stock and represents a conversion premium of approximately 35% based on the last reported sale price of our common stock of $19.72 on May 2, 2017, the date the 2024 Convertible Notes offering was priced. As of May 2, 2017, the fair value of the 2024 Convertible Notes was $136.7 million. Our 2024 Convertible Notes include conversion and settlement provisions that are based on the price of our common stock at conversion or at maturity of the 2024 Convertible Notes. The amount of cash we may be required to pay is determined by the price of our common stock. The fair ~~values~~value of our 2024 Convertible Notes are dependent on the price and

volatility of our common stock and will generally increase or decrease as the market price of our common stock changes. AsThe estimated fair value of the 2024 Convertible Notes, face value of $201.3 million, was $179.8 million at September 30, ~~2017, the debt liability had a fair value that approximated fair value at issuance.~~2021.

Foreign Currency Exchange

Most of our transactions are conducted in the U.S. dollar. We do have certain agreements with vendors located outside the United States, which have transactions conducted primarily in British Pounds and Euros. As of September 30, ~~2017~~2021, we had ~~no payables to vendors~~$2.5 million in liabilities denominated in ~~currencies other than the U.S. dollar, therefore a~~British Pounds. A hypothetical 10% change in foreign exchange rates would ~~have no effect on~~result in a $0.2 million change in the value of our liabilities. No other payables to vendors were denominated in currencies other than in U.S. dollars. As of September 30, ~~2017,~~2021, we had ~~approximately $4.3~~$2.6 million inof cash denominated in British Pounds. A hypothetical 10% change in foreign exchange rates would result in ~~either~~ a $0.3 million ~~increase,~~change in the ~~event the U.S. dollar strengthens relative to the British Pound, or a $0.4 million decrease, in the event the U.S. dollar weakens relative to the British Pound,~~amount of cash denominated in British Pounds.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We are responsible for maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer) of our disclosure controls and procedures as required by Rule 13a-15 under the Exchange Act, our principal executive officer and principal financial officer ~~has~~have concluded that our disclosure controls and procedures were effective to achieve their stated purpose as of September 30, ~~2017,~~2021, the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, ~~2017~~2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2536

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

WeBetween October 22, 2021, and November 10, 2021, eleven Complaints were filed in federal court by purported stockholders of the Company regarding the Merger. The Complaints name the Flexion Defendants (defined above as the Company and each member of our board of directors) as defendants. The Waterman complaint additionally names as defendants the Pacira Defendants. The plaintiffs generally contend that the Solicitation/Recommendation Statement on Schedule 14D-9 that we filed on October 22, 2021, omitted or misrepresented material information regarding the Merger. The Hart complaint additionally alleges that we engaged in an insufficient sales process and that members of our board of directors and our management had conflicts of interest with stockholders of the Company. The Complaints allege violations of Section 14(d) and/or Section 14(e) of the Exchange Act against all Flexion Defendants, and assert violations of Section 20(a) of the Exchange Act against the members of our board of directors. The Waterman complaint additionally alleges violations of Section 14(d), Section 14(e), and Section 20(a) of the Exchange Act against the Pacira Defendants. The Complaints collectively seek, among other relief, (i) injunctive relief preventing the consummation of the transactions contemplated by the Merger Agreement; (ii) rescission and/or rescissory damages in the event the transactions contemplated by the Merger Agreement are consummated; (iii) other damages purportedly incurred on account of defendants’ alleged misstatements or omissions; (iv) disclosure of certain information requested by the plaintiffs; (v) declaratory relief stating defendants violated the Exchange Act; and (vi) an award of plaintiffs’ expenses and attorneys’ fees. The Flexion Defendants have been served with the Wang complaint and the Hart complaint but have not ~~currently~~been served with any of the other Complaints. On November 12, 2021, we filed a ~~party~~Schedule 14D-9/A containing certain supplemental disclosures in order to ~~any material legal proceedings.~~moot the claims alleged in the Complaints. The Flexion Defendants’ deadline to respond to the Wang complaint is December 27, 2021, and the Flexion Defendants’ deadline to respond to the Hart complaint is January 3, 2022. Each of the Flexion Defendants and the Pacira Defendants intend to vigorously defend these actions.

ITEM 1A. RISK FACTORS

~~You should consider carefully the risks described below, together with the other information contained~~As disclosed in ~~this Quarterly Report and~~“Item 1A. Risk Factors” in our other public filings in evaluating our business. The risk factors set forth below with an asterisk (*) next to the title contain changes to the description of the risk factors associated with our business previously disclosed in Exhibit 99.1 to our CurrentAnnual Report on Form ~~8-K~~10‑K for the year ended December 31, 2020, which was filed on ~~October~~March 10, ~~2017. Additional~~2021, there are a number of risks and uncertainties that ~~we are unaware of~~ may ~~also become important factors that affect us. If any of the following risks actually occurs,~~have a material effect on our business, financial condition, results of operations, and future growth prospects. There are also additional risks and uncertainties that we are unaware of that may become important factors that affect us, including as a result of the potential acquisition by Pacira. The following risk factors are either new or have changed materially from those set forth in our Annual Report on Form 10‑K for the year ended December 31, 2020. You should carefully review the risks described below and in our Annual Report on Form 10‑K and in other reports we file with the Securities and Exchange Commission in evaluating our business.

Risks Related to Our Pending Acquisition by Pacira BioSciences, Inc.

The announcement and pendency of our agreement to be acquired by Pacira may have an adverse effect on our business, operating results, and our stock price and may result in the loss of employees, customers, suppliers, and other business partners.

On October 11, 2021, we entered into the Merger Agreement with Pacira and Purchaser, providing for the merger of Purchaser with and into Flexion, with Flexion surviving the Merger as a wholly owned subsidiary of Pacira. We are subject to risks in connection with the announcement and pendency of the Merger, including, but not limited to, the following:

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market reaction to the announcement of the Merger;

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changes in our business, operations, financial position, and prospects;

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market assessments of the likelihood that the Merger will be consummated;

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the amount of consideration offered per Share will not be increased to account for positive changes in our business, assets, liabilities, prospects, ~~would likely be materially and adversely affected. In these circumstances,~~outlook, financial condition, or results of operations during the pendency of the Merger, including any successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common ~~stock would likely decline.~~

~~Risks Related~~stock;

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potential adverse effects on our relationships with our existing and prospective customers, suppliers, and other business partners due to ~~Our Financial Condition~~uncertainties about the Merger, including such customers, suppliers, and ~~Need for Additional Capital~~

~~(*) We~~other business partners choosing to (i) delay, defer, or cease purchasing products or services from, or providing products or services to, us or the combined company; (ii) delay or defer other decisions concerning us or the combined company; or (iii) otherwise seek to change the terms on which they do business with us or the combined company;

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we have incurred, ~~significant losses since our inception~~ and ~~anticipate that we~~ will continue to incur, significant ~~losses~~costs, expenses, and fees for professional services and other transaction costs in connection with the ~~foreseeable future.~~Merger, and many of these fees and costs are payable by us regardless of whether the Merger is consummated;

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potential adverse effects on our ability to attract, recruit, retain, and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the Merger, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment following the Merger; 

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the pendency and outcome of legal proceedings that have ~~a limited operating history. To date, we have focused primarily on developing~~been and may be instituted against us or our ~~lead product, Zilretta. Any additional product candidates we develop will require substantial development~~board of directors, executive officers, and others relating to the transactions contemplated by the Merger Agreement, which could be time-consuming and expensive and delay or prevent the consummation of the Merger; and

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the possibility of disruption to our business, including increased costs and diversion of management time and resources ~~before~~that could otherwise have been devoted to other opportunities that may have been beneficial to us.

While the Merger is pending, we ~~would~~are subject to contractual restrictions that could harm our business, operating results, and our stock price.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the Merger, generally requiring us to conduct our businesses in the ordinary course, consistent with past practice, and restricting us from taking certain specified actions absent Pacira’s prior written consent, including, without limitation, restrictions on our ability to enter into contracts, acquire or dispose of assets, raise equity capital, incur indebtedness, or incur certain capital expenditures. We may find that these and other obligations in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments, and future business opportunities that may arise, even if our management and board of directors think they may be advisable. These restrictions could adversely impact our business, operating results, and our stock price and our perceived acquisition value, regardless of whether the Merger is completed.

The failure to complete the Merger may adversely affect our business and our stock price.

Consummation of the Merger is subject to certain closing conditions, and a number of the conditions are not within our control and may prevent, delay, or otherwise materially adversely affect the completion of the transaction. We cannot predict with certainty whether and when any of the required closing conditions will be satisfied or if another uncertainty may arise and cannot assure you that we will be able to ~~apply for~~successfully consummate the proposed merger as currently contemplated under the Merger Agreement or ~~receive regulatory approvals~~at all. Such conditions include, among other things, (i) valid tender (without withdrawal) of Shares that represent at least one Share more than 50% of the then issued and ~~begin generating revenue~~outstanding Shares; (ii) subject to certain materiality qualifications, the continued accuracy of our representations and warranties, and our continued compliance with covenants and obligations (to be performed at or prior to the closing of the Merger); (iii) the absence of any continuing Material Adverse Effect (as defined in the Merger Agreement) on our business, assets, financial condition, or results of operations occurring after the date of the Merger Agreement; (iv) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (v) the absence of any legal restraints prohibiting the Merger and of certain legal proceedings brought by a governmental entity relating to the Merger.  There can be no assurance that these conditions to the consummation of the Merger will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe or at all.  If the Merger is not completed, we may be subject to negative publicity or be negatively perceived by the investment or business communities and our stock price could fall to the extent that our current stock price reflects an assumption that the Merger will be completed. Furthermore, if the Merger is not completed, we may suffer other consequences that could adversely affect our business and results of our operations, including, but not limited to, the filing of associated litigation, difficulties in raising additional capital or obtaining other financing, damage to relationships with vendors or customers, and loss of key personnel.

The Merger Agreement limits our ability to pursue alternative transactions, which could deter a third party from ~~product sales. We have incurred significant net losses~~proposing an alternative transaction.

The Merger Agreement contains provisions that, subject to certain exceptions, limit our ability to (i) directly or indirectly, solicit, initiate, or knowingly facilitate or encourage (including by way of furnishing non-public information) any inquiry regarding, or the making of any proposal or offer that could reasonably be expected to lead to, an acquisition proposal; (ii) engage in, ~~each year since our inception, including net losses of $71.9 million, $46.3 million, and $27.3 million for fiscal years 2016, 2015, and 2014, respectively, and $87.0 million~~continue, or otherwise participate in any discussions or negotiations regarding, or furnish to any other person any information in connection with or for the ~~nine months ended September 30, 2017.~~ purpose of knowingly encouraging or facilitating, an acquisition proposal; (iii) adopt, approve, or enter into any letter of intent, acquisition agreement, agreement in principle, or similar agreement with respect to an acquisition proposal or any proposal or offer that could reasonably be expected to lead to an acquisition proposal; or (iv) waive or release any person from, or fail to use reasonable best efforts to enforce, any standstill obligations relating to an acquisition proposal or any proposal or offer that could reasonably be expected to lead to an acquisition proposal. It is possible that these or other provisions in the Merger Agreement, including a termination fee of $18.0 million payable to Pacira under certain circumstances, might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of our outstanding common stock from considering or proposing an acquisition or might result in a potential competing acquirer proposing an overall lower per-share consideration amount than it might otherwise have proposed to offer.

If the Merger occurs, our stockholders will not be able to participate in any financial upside to our business after the Merger other than through the CVRs; if the required milestones under the CVRs are not achieved, stockholders will not realize any value from the CVRs.

Upon consummation of the Merger, each issued and outstanding share will be converted into the right to receive (i) $8.50 per Share in cash, net of applicable withholding taxes and without interest, plus (ii) one non-transferable contractual contingent value right (“CVR”) 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 pursuant to the terms of the Contingent Value Right Agreement in the form attached as Exhibit C to the Merger Agreement (the “CVR Agreement”). Following the consummation of the Merger, whether any of the milestones are achieved will be subject to Pacira’s commercially reasonable efforts and activities, over which our stockholders will have no control, and there is no guarantee that any of the milestones will be achieved. If none of the milestones specified in the CVR Agreement are achieved on or before December 31, 2030, no payment will be made under the CVRs, and the CVRs will expire valueless.

The tax treatment of the CVRs is unclear.

The U.S. federal income tax treatment of the CVRs is unclear. There is no legal authority directly addressing the U.S. federal income tax treatment of the receipt of, and payments (if any) under, the CVRs, and there can be no assurance that the Internal Revenue Service would not assert, or that a court would not sustain, a position that could result in adverse U.S. federal income tax consequences to holders of the CVRs.

Additional lawsuits may be filed against us and the members of our board of directors arising out of the proposed Merger, which may delay or prevent the proposed Merger.

Additional putative stockholder complaints, including stockholder class action complaints, and other complaints may be filed against us, our board of directors, Pacira, Pacira’s board of directors, and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Pacira, or Pacira’s board of directors could delay or prevent the consummation of the Merger, divert the attention of our management and employees from our day-to-day business, and otherwise adversely affect us financially.

We will incur substantial transaction fees and costs in connection with the Merger.

As of September 30, ~~2017, we had an accumulated deficit of $298.6 million. We expect to incur net losses over the next few years as we invest in the commercialization of Zilretta and advance our development programs.~~

~~We have devoted most of our financial resources to product development, including our non-clinical development activities and clinical trials. To date,~~2021, we have ~~financed our operations exclusively through~~incurred $0.7 million of expenses and fees for professional services and other transaction costs in connection with the ~~sale of equity securities~~Merger and debt. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenue. Even though the U.S. Food and Drug Administration, or FDA, has granted marketing approval for Zilretta, as of September 30, 2017, we had not generated any revenues from sales of Zilretta and cannot guarantee that our commercialization efforts will ever result in substantial product revenues.

~~We also~~ expect to continue to incur ~~substantial and increased~~additional significant costs. A material portion of these expenses asare payable by us whether or not the Merger is completed. While we ~~invest in the commercial launch of Zilretta, scale up commercial manufacturing of Zilretta and continue our development activities with respect to Zilretta and FX101. We also expect~~have assumed that a continued increase in our expenses associated with our operations as a publicly-traded company. As a result of the foregoing, we expect to continue to incur significant and increasing losses and negative cash flows for the foreseeable future.

~~(*) As of September 30, 2017, we had not generated any revenue and may never be profitable.~~

Our ability to generate revenue and achieve profitability depends primarily on our ability to successfully commercialize Zilretta, as well as our ability to obtain regulatory approval for and commercialize other product candidates. We may never succeed in these activities and may never generate revenues that are significant enough to achieve profitability. Our ability to generate future revenue from product sales depends heavily on our success in launching and commercializing Zilretta and any other product candidates for which we receive regulatory approval.

~~Because of the numerous risks and uncertainties associated with new pharmaceutical product launches and development efforts, we are unable to predict the timing or~~certain amount of ~~increased~~transaction expenses ~~when, or if, we will begin to generate meaningful revenue from product sales, or when, or if, we~~ will be able to achieve or maintain profitability. In addition, our expenses could increase beyond expectations if we determine that additional sales and marketing personnel or other resources are necessary to successfully commercialize Zilretta or if we face any product liability claims that may be brought against us following the commercial launch of Zilretta.

If we are unable to generate significant revenues from product sales, particularly from sales of Zilretta, or to maintain an acceptable cost structure related to our operations, we may not become profitable and may need to obtain additional funding to continue operations.

~~(*) If we fail to obtain additional financing, we may be forced to delay, reduce or eliminate our product development programs and/or commercialization activities.~~

Developing and commercializing pharmaceutical products, including conducting preclinical studies and clinical trials, and building and maintaining sales and marketing capabilities, is expensive. We expect our expenses to substantially increase in connection with our ongoing activities, particularly as we build our sales and marketing organization, commercialize Zilretta and advance our clinical programs.

As of September 30, 2017, we had cash, cash equivalents and marketable securities of $335.1 million and working capital of $312.5 million. Based upon our current operating plan, we believe that our existing cash, cash equivalents and marketable securities, together with the net proceeds of approximately $132.4 million from our October 2017 common stock offering, will enable us to fund our operating expenses and capital requirements for at least the next twelve months from the issuance date of these financial statements. Regardless of our expectations as to how long our cash, cash equivalents and marketable securities will fund our operations, changing circumstancesincurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may ~~cause us to consume capital more rapidly than we currently anticipate.~~

~~Attempting to secure additional financing may divert our management from our day-to-day activities, which may~~exceed the costs historically borne by us. These costs could adversely affect our ~~ability to develop~~business, financial condition, operating results, and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:

~~significantly delay, scale back or discontinue commercialization of Zilretta or the further development of Zilretta or our product candidates;~~

~~seek corporate partners for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available;~~

~~seek corporate partners to assist in the commercialization of Zilretta on terms that are less favorable than might otherwise be available;~~

~~relinquish or license on unfavorable terms, our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves; or~~

~~significantly curtail, or cease, operations.~~

~~We may sell additional equity or debt securities to fund our operations, which may result in dilution to our stockholders and impose restrictions on our business.~~cash flows.

In order to raise additional funds to support our operations, we may sell additional equity or debt securities, which could adversely impact our existing stockholders as well as our business. The sale of additional equity or convertible debt securities would result in the issuance of additional shares of our capital stock and dilution to all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business.

Our existing indebtedness contains restrictions that limit our flexibility in operating our business. WeIn addition, we may be required to make a prepayment or repay our outstanding indebtedness earlier than we ~~expect,~~expect.

On August 2, 2019, we entered into an Amended and Restated Credit and Security Agreement with Silicon Valley Bank, MidCap Financial Trust, and Flexpoint MCLS Holdings, LLC, or the Credit Agreement, which ~~could have~~provides for a ~~materially adverse effect~~term loan of $40.0 million and a revolving credit facility up to $20.0 million. We concurrently drew down the $40.0 million term loan and used $7.7 million of the proceeds to repay the remaining amount owed on our ~~business, or may otherwise be unable~~prior credit facility. In February 2020, we drew down $20.0 million from the revolving credit facility. On May 18, 2020, we entered into an amendment to the Credit Agreement pursuant to which we borrowed $15.0 million under a new term loan advance and immediately used the proceeds to repay ~~our indebtedness as it becomes due.~~

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. On ~~August 4, 2015,~~July 30, 2021, we entered into a ~~credit and security agreement with MidCap Financial SBIC, LP,~~second amendment, or ~~MidCap, as administrative agent, MidCap Funding XIII Trust and Silicon Valley Bank, as agent lenders,~~the 2021 Amended Credit Agreement, to ~~borrow~~the Credit Agreement, which provides for a term loan of up to ~~$30.0~~$75.0 million, with $55.0 million available at closing and ~~contemporaneously~~an additional $20.0 million, or the second tranche, available upon positive Phase 1 clinical trial data in either of our two pipeline programs, FX201 and FX301, sufficient to initiate a Phase 2 clinical study, and a revolving credit facility of up to $25.0 million. We concurrently borrowed the $55.0 million term loan, simultaneously used $48.1 million of the proceeds to repay the previously outstanding term loan under the Credit Agreement, and drew down ~~$15.0~~$20.0 million ~~under~~from the revolving credit ~~facility.~~facility, bringing the total revolver balance to $25.0 million. The ~~credit agreement~~2021 Amended Credit Agreement contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

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incur or assume certain debt;

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merge or consolidate or acquire all or substantially all of the capital stock or property of another entity;

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enter into any transaction or series of related transactions that would be deemed to result in a change in control of us under the terms of the agreement;

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change the nature of our business;

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change our organizational structure or type;

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amend, modify, or waive any of our organizational documents;

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~~license, transfer or dispose of certain assets;~~

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license, transfer, or dispose of certain assets;

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grant certain types of liens on our assets;

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make certain investments;

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pay cash dividends;

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enter into material transactions with affiliates; and

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amend or waive provisions of material agreements in certain manners.

Under the 2021 Amended Credit Agreement we are subject to a minimum liquidity threshold, such that at any time our liquidity (defined as cash, cash equivalents, and marketable securities held with Silicon Valley Bank and certain accounts receivable as deemed eligible under the 2021 Amended Credit Agreement) is below $100.0 million (if the second tranche is undrawn) or $120.0 million (if the second tranche is drawn), we will become subject to a minimum revenue covenant. The minimum revenue covenant, if it applies in the future, is applied to the trailing six months of net revenue and is determined based on our approved forecast, as determined by the Lenders.

If the revenue covenant becomes applicable to us and we fail to meet it, the commitments under the 2021 Amended Credit Agreement could be terminated and any outstanding borrowings, together with accrued interest, under the 2021 Amended Credit Agreement could be declared immediately due and payable. Additionally, if our liquidity is below $120.0 million, all amounts received from customer collections will be applied immediately to reduce the revolving credit facility. The restrictive covenants ofin the ~~credit agreement~~2021 Amended Credit Agreement could ~~cause~~prevent us ~~to be unable to pursue~~from pursuing business opportunities that we or our stockholders may consider beneficial.

A breach of any of these covenants could result in an event of default under the ~~credit agreement.~~2021 Amended Credit Agreement. An event of default will also occur if, among other things, a material adverse change in our business, operations, or condition occurs, which could potentially include a material impairment of the prospect of our repayment of any portion of the amounts we owe under the ~~credit agreement occurs.~~2021 Amended Credit Agreement. In the case of a continuing event of default under the ~~credit agreement,~~2021 Amended Credit Agreement, the lenders could elect to declare all amounts outstanding to be immediately due and payable, proceed against the collateral in which we granted the lenders a security interest under the ~~credit agreement,~~2021 Amended Credit Agreement, or otherwise exercise the rights of a secured creditor. Amounts outstanding under the ~~credit agreement~~2021 Amended Credit Agreement are secured by all of our existing and future assets, excluding intellectual property, which is subject to a negative pledge arrangement.

In April 2017, we also issued $201.3 million principal amount of our 3.375% Convertible Senior Notes due 2024, or the 2024 Convertible Notes. The 2024 Convertible Notes will mature on May 1, 2024, unless earlier redeemed, repurchased, or converted in accordance with the terms of the indenture governing the notes. If the 2024 Convertible Notes are not redeemed or repurchased on or before their maturity date of May 1, 2024, we will be required to convert all or a portion of the amounts due under the 2024 Convertible Notes into common stock, which would cause our stockholders to experience additional dilution and could cause our stock price to fall. If specified bankruptcy, insolvency, or reorganization-related events of default occur, or if certain other events of default occur, including a default under the 2021 Amended Credit Agreement resulting in an obligation to repay the indebtedness, and the trustee or certain holders of the 2024 Convertible Notes elect, the principal of, and accrued and unpaid interest on, all of the then-outstanding 2024 Convertible Notes will automatically become due and payable. In addition, if we undergo certain fundamental change transactions specified in the indenture governing the 2024 Convertible Notes, including, but not limited to the consummation of the Merger, the holders of the notes may require us to repurchase their notes at a price equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest.

We may not have enough available cash or be able to raise additional funds on satisfactory terms, if at all, through equity or debt financings to repay or refinance our indebtedness at the time any such repayment or repurchase is required. In such an event, we may be required to delay, limit, reduce, or terminate our product development or commercialization efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our business, financial condition, and results of operations could be materially adversely affected as a result.

~~Risks Related~~We may not have enough available cash or be able to ~~Commercialization Activities~~

~~(*)~~raise additional funds on satisfactory terms, if at all, through equity or debt financings to repay or refinance our indebtedness at the time any such repayment or repurchase is required. In such an event, we may be required to delay, limit, reduce, or terminate our product development or commercialization efforts or grant others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our prospects are highly dependent on the successful commercialization of Zilretta, which received approval in October 2017 from the FDA as an injectable, extended-release, intra-articular, or IA, treatment for patients with osteoarthritis, or OA, of the knee. To the extent Zilretta is not commercially successful, our business, financial condition, and results of operations ~~may~~could be materially adversely affected as a result.

General Business Risks

COVID-19 will likely continue to have an adverse impact on our clinical trials and further development of our pipeline.

COVID-19’s impact on the healthcare industry is significant and has impacted our on-going clinical trials and may disrupt further development of our pipeline. For example, in April 2020, we temporarily suspended the active Phase 1 clinical trial evaluating the safety and tolerability of FX201. The decision was made in consideration of guidance from the FDA to ensure the safety of trial participants and minimize risk to trial integrity from disruptions caused by COVID-19. In addition, we decided to terminate the Phase 2 trial evaluating the efficacy of ZILRETTA in patients with shoulder OA and adhesive capsulitis, given the small number of patients enrolled in the trial, the uncertainty as to when we would be able to restart the study, and the ~~price~~costs required to maintain it in an inactive status. While we subsequently restarted our Phase 1 clinical trial of ~~our common stock may decline.~~

~~Zilretta is our only drug that has been approved for sale and it has only been approved for the treatment of~~FX201 in late May 2020, intend to initiate a trial investigating ZILRETTA in patients with shoulder OA following our reassessment of the ~~knee~~proposed study design, and have started clinical development of FX301, we cannot guarantee that COVID-19’s impact or restrictions implemented by government agencies or healthcare facilities in ~~the United States. We are focusing a significant portion of our activities and resources on Zilretta,~~response to COVID-19 will not force us to delay, suspend, or terminate these trials, and we ~~believe our prospects are highly dependent on,~~cannot predict how access to, utilization of, and ~~a significant portion~~efficacy of COVID-19 vaccines may influence such impacts and restrictions. These impacts of COVID-19 will increase the ~~value~~costs of ~~our company relates to,~~completing clinical development and delay our ability to ~~successfully commercialize Zilretta in the United States.~~

Successful commercialization of Zilretta is subject to many risks. We have never, as an organization, launched or commercialized a product, and there is no guarantee that we will be able to do so successfully with Zilrettaobtain marketing approval for its approved indication. There are numerous examples of unsuccessful product launches and failures to meet high expectations of market potential, including by pharmaceutical companies with more experience and resources than us.

~~Market acceptance of Zilretta and any other product for which we receive approval, will depend on a number of factors, including:~~

~~the efficacy and safety as demonstrated in clinical trials;~~

~~the timing of market introduction of the product as well as competitive products;~~

~~the clinical indications for which the product is approved;~~

~~acceptance by physicians, the medical community and patients of the product as a safe and effective treatment;~~

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~~the ability to distinguish safety and efficacy from existing, less expensive generic alternative therapies;~~

~~the convenience of prescribing, administrating and initiating patients on the product;~~

~~the potential and perceived advantages of the product over alternative treatments;~~

~~the potential and perceived value of the product over alternative treatments;~~

~~the cost of treatment in relation to alternative treatments, including any similar generic treatments;~~

~~the availability of coverage and adequate reimbursement and pricing by third-party payors and government authorities;~~

~~the prevalence and severity of adverse side effects; and~~

~~the effectiveness of sales and marketing efforts.~~

~~With respect to Zilretta, while we have established~~ our commercial team and have hired our sales force, we will need to train and further develop the team in order to be prepared to successfully coordinate the launch and commercialization of Zilretta. Even if we are successful in building out our commercial team, there are many factors that could cause the launch and commercialization of Zilretta to be unsuccessful, including a number of factors that are outside our control. The commercial success of Zilretta depends on the extent to which patients and physicians accept and adopt Zilretta as a treatment for OA of the knee, and we do not know whether our or others’ revenue estimates in this regard will be accurate. For example, if the patient population suffering from OA of the knee is smaller than we estimate or if physicians are unwilling to prescribe or patients are unwilling to use Zilretta, the commercial potential of Zilretta will be limited. In addition, if Zilretta is not convenient for physicians to use, then it may not achieve widespread adoption, regardless of its comparative efficacy and safety. For example, Zilretta must be administered only by a health care professional in an office, clinic or hospital setting. In addition, Zilretta requires a multi-step preparation process, which may discourage some physicians from using Zilretta. Moreover, Zilretta’s label indicates that it is not intended for repeat administration; this may negatively impact our commercialization efforts. We also do not know how physicians, patients and payors will respond to the pricing of Zilretta. In particular, our insight into pricing sensitivity may be delayed because as part of our initial launch strategy we intend to provide some free product as samples during a trial period, and do not know whether physicians that initially use Zilretta will continue to do so after using the free product samples.

Physicians may not prescribe Zilretta and patients may be unwilling to use Zilretta if coverage is not provided or reimbursement is inadequate to cover a significant portion of the cost. Additionally, any negative development for Zilretta in clinical development in additional indications, may adversely impact the commercial results and potential of Zilretta. Thus, significant uncertainty remains regarding the commercial potential of Zilretta.

If the launch or commercialization of Zilretta is unsuccessful or perceived as disappointing, our stock price could decline significantly and the long-term success of the product and our company could be harmed.

If we are unable to differentiate Zilretta from existing generic therapies for the treatment of OA, or if the FDA or other applicable regulatory authorities approve generic products that compete with Zilretta, our ability to successfully commercialize Zilretta would be adversely affected.

Immediate-release TA and other injectable immediate-release steroids, which are the current IA standard of care for OA pain, are available in generic form and are therefore relatively inexpensive compared to the pricing for Zilretta. These generic steroids also have well-established market positions and familiarity with physicians, healthcare payors and patients. Although we believe Zilretta has shown clinically meaningful differentiation as compared to immediate-release TA in our clinical trials, it is possible that as we receive data from additional clinical trials or in a post-marketing setting from physician and patient experiences with the commercial product, the data or commercial experiences will not continue to support such differentiation. It is also possible that the FDA, physicians and healthcare payors will not agree with our interpretation of our existing and future clinical trial data for Zilretta. If we are unable to demonstrate significant differentiation for Zilretta from immediate-release TA and other injectable immediate-release steroids, our opportunity for Zilretta to achieve premium pricing and be commercialized successfully would be adversely affected. For example, although Zilretta, compared to immediate-release TA, achieved statistical significance through 12 weeks in validated, OA specific pain, stiffness, function and quality of life secondary measures in our Phase 3 trial and showed numeric improvements at weeks 2 through 12 on the daily pain rating scale, it did not achieve statistical significance in the daily pain rating scale during the course of the trial. As a result, it is possible that healthcare payors will not agree with our assessment that Zilretta is sufficiently differentiated from immediate-release TA to support premium pricing. In addition, while Zilretta demonstrated numeric improvement over immediate-release TA in the Phase 3 trial in pre-specified OA measures of pain, stiffness, function and quality of life, as measured by the Western Ontario and McMaster Universities Osteoarthritis Index (WOMAC) and Knee injury and Osteoarthritis Outcome Score (KOOS), these OA specific data are not included in the Zilretta label, which may limit our ability to effectively promote Zilretta to physicians and healthcare payors as a superior alternative to immediate-release TA.

In addition to existing generic steroids, such as immediate-release TA, the FDA or other applicable regulatory authorities may approve generic products that could compete with our product candidates. Once an NDA, including a Section 505(b)(2) application, is approved, the product covered thereby becomes a “listed drug” which can, in turn, be cited by potential competitors in support of approval of an abbreviated new drug application, or ANDA. The FDCA, FDA regulations and other applicable regulations and policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for generic substitutes. These manufacturers might only be required to conduct a relatively inexpensive study to show that their product has the same active ingredient(s), dosage form, strength, route of administration, conditions of use, or labeling as our product candidate and that the generic product is bioequivalent to ours, meaning it is absorbed in the body at the same rate and to the same extent as Zilretta. These generic equivalents, which must meet the same quality standards as branded pharmaceuticals, would be significantly less costly than ours to bring to market and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of the sales of any branded product is typically lost to the generic product. Accordingly, competition from generic equivalents to ourpipeline product candidates ~~would materially adversely impact our ability to successfully commercialize our product candidates, including Zilretta.~~and ZILRETTA for additional indications.

~~We face significant competition from other biopharmaceutical companies, and our operating results will suffer if we fail to compete effectively.~~

The biopharmaceutical industries are intensely competitive and subject to rapid and significant technological change. In addition, the competition in the pain and OA market is intense. We have competitors both in the United States and internationally, including major multinational pharmaceutical and biotechnology companies. For example, the injectable OA treatment market today includes many injectable immediate-release steroids, including TA, the active ingredient in Zilretta, as well as hyaluronic acid, or HA, injections. In addition, we expect that injectable therapies such as Zilretta will continue to be used primarily after oral medications no longer provide adequate pain relief. To the extent that new or improved oral pain medications are introduced that demonstrate better long-term efficacy and safety, patients and physicians may further delay the introduction of injectable therapies such as Zilretta in the OA treatment continuum. Zilretta could also face competition from other formulations or devices that deliver pain medication on an extended basis, such as transdermal delivery systems or implantable devices.

Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staffs and experienced commercial and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. As a result, these companies may obtain regulatory approval more rapidly than we are able and may be more effective in selling and marketing their products as well. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors may succeed in developing, acquiring or licensing on an exclusive basis drug products or drug delivery technologies that are more effective or less costly than Zilretta or any other product candidate that we are currently developing or that we may develop.

~~We believe that our ability to successfully compete will depend on, among other things:~~

~~the efficacy and safety of our product candidates, including as relative to marketed products and product candidates in development by third parties;~~

~~the ability to distinguish safety and efficacy from existing, less expensive generic alternative therapies;~~

~~the time it takes for our product candidates to complete clinical development and receive marketing approval;~~

~~the ability to maintain a good relationship with regulatory authorities;~~

~~the ability to commercialize and market any of our product candidates that receive regulatory approval;~~

~~the price of our products, including in comparison to branded or generic competitors;~~

~~whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;~~

~~the ability to protect intellectual property rights related to our product candidates;~~

~~the ability to manufacture on a cost-effective basis and sell commercial quantities of any of our product candidates that receive regulatory approval; and~~

~~acceptance of any of our product candidates that receive regulatory approval by physicians and other healthcare providers.~~

If our competitors market products that are more effective, safer or less expensive than Zilretta or our other future products, if any, or that reach the market sooner than any future products, if any, we may not achieve commercial success. In addition, the

biopharmaceutical industry is characterized by rapid technological change. Because we have limited research and development capabilities, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less competitive or not economical.

(*) If we are unable to maintain sales and marketing capabilities or enter into agreements with third parties to market, distribute and sell our product candidates, we may be unable to generate any revenue.

Our strategy is to establish a targeted sales and marketing organization to successfully execute the commercial launch of Zilretta in the United States. While we have established our commercial team and have hired our sales force, we do not have any experience commercializing pharmaceutical products as an organization. In order to successfully market Zilretta, we must continue to build our sales, marketing, managerial, compliance and related capabilities or make arrangements with third parties to perform these services. These efforts will continue to be expensive and time-consuming, and we will be competing with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize Zilretta and may not become profitable.

Additionally, our strategy in the United States includes distributing Zilretta solely through a limited network of third-party specialty distributors and one specialty pharmacy. While we have entered into agreements with a specialty pharmacy and specialty distributors to distribute Zilretta in the United States, they may not perform as agreed or they may terminate their agreements with us. Also, we may need to enter into agreements with additional specialty distributors or specialty pharmacies, and there is no guarantee that we will be able to do so on commercially reasonable terms or at all. If we are unable to maintain and, if needed, expand, our network of specialty distributors and specialty pharmacies, we would be exposed to substantial distribution risk.

To date, we have not entered into any strategic partnerships for any of our product candidates. We face significant competition in seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and finalize. We may not be able to negotiate strategic partnerships for territories outside of the United States on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any strategic partnerships outside of the United States because of the numerous risks and uncertainties associated with establishing strategic partnerships. To the extent that we enter into collaboration arrangements, our future collaboration partners may not dedicate sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our product candidates in territories outside of the United States, or if our potential future collaboration partners do not successfully commercialize our product candidates in these territories, our ability to generate revenue from product sales will be adversely affected.

We and any collaboration partners that we may engage will be competing with many companies that currently have extensive and well-funded marketing and sales operations. If we, alone or with commercialization partners, are unable to compete successfully against these established companies, the commercial success of any approved products will be limited. In addition, if we are unable to effectively develop and maintain our commercial team, including our U.S. sales force, or maintain and, if needed, expand, our network of specialty distributors and specialty pharmacies, our ability to effectively commercialize Zilretta and generate product revenues would be limited.

We plan to rely on a single specialty pharmacy for distribution of Zilretta in the United States, and the loss of that specialty pharmacy or its failure to distribute Zilretta effectively would adversely affect sales of Zilretta.

We plan to rely on a single specialty pharmacy for distribution of Zilretta in the United States. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions, which often require a high level of patient education and ongoing management. The use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:

~~not provide us accurate or timely information regarding their inventories, the number of patients who are using our products or complaints about our products;~~

~~reduce or discontinue their efforts to sell or support or otherwise not effectively sell or support our products;~~

~~not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;~~

~~be unable to satisfy financial obligations to us or others; or~~

~~cease operations.~~

In the event that our single specialty pharmacy does not fulfill its contractual obligations to us, or refuses or fails to adequately serve patients, or the agreement is terminated without adequate notice, shipments of Zilretta, and associated revenues, would be adversely affected. In addition, we expect that it would take a significant amount of time if we were required to change our specialty pharmacy.

If we are unable to effectively train, equip, and ~~equip~~deploy our sales force, our ability to successfully commercialize ~~Zilretta~~ZILRETTA will be harmed.

~~Zilretta will be a newly-marketed drug and, therefore, none of the members of our sales force will have ever promoted Zilretta prior to its launch. As a result, we will be~~We are required to expend significant time and resources to train our sales force to be credible, persuasive, and compliant with applicable laws in marketing ~~Zilretta~~ZILRETTA for ~~the treatment of patients with OA of the knee.~~its approved indication. In addition, we must train our sales force to ensure that an appropriate and compliant message about ~~Zilretta~~ZILRETTA is being delivered. Due to the COVID-19 pandemic, our MBMs have been using a mix of in-person and virtual interactions with physicians to convey key information about ZILRETTA and aid physicians and their staff in prescribing and obtaining reimbursement for ZILRETTA. While we have attempted to maintain the effectiveness of our sales and marketing efforts, it may not be as effective as in the pre-COVID environment, as access to some providers remains limited. If we are unable to maintain an effectively ~~train our~~trained sales force, ~~and~~ equip them with compliant and effective materials, including medical and sales literature to help them appropriately inform and educate customers regarding the potential benefits and safety of ~~Zilretta~~ZILRETTA and its proper administration, and deploy them in an efficient and productive manner, our efforts to successfully commercialize ~~Zilretta~~ZILRETTA could be ~~put in jeopardy,~~jeopardized, which would negatively impact our ability to generate product revenues.

(*) If we are unable to achieve and maintain adequate levels of third-party payor coverage and reimbursement for Zilretta, or, if approved, any other product candidates, on reasonable pricing terms, their commercial success may be severely hindered.

Successful sales of any approved product candidates depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors is critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available. The resulting reimbursement payment rates for Zilretta, and if approved, our other product candidates, might not be adequate or may require co-payments that patients find unacceptably high.

Payors may require documented proof that patients meet certain eligibility criteria in order to be reimbursed for Zilretta, for example requiring that a patient first try and fail treatment with an injection of generic corticosteroid. Payors may even require that pre-approval, or prior-authorization, be obtained from the payor for reimbursement of Zilretta. Patients are unlikely to use Zilretta, and if approved, any other products, unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. For example, Zilretta will be sold to physicians on a “buy and bill” basis. Buy and bill products must be purchased by healthcare providers before they can be administered to patients. Healthcare providers subsequently must seek reimbursement for the product from the applicable third party payor, such as Medicare or a health insurance company. Healthcare providers may be reluctant to administer Zilretta because they would have to fund the purchase of the product and then seek reimbursement, which may be different from their purchase price, or because they do not want the additional administrative burden required to obtain reimbursement for the product.

Further, the status of a J-Code for Zilretta could also affect reimbursement. J-Codes are permanent reimbursement codes maintained by the Centers for Medicare and Medicaid Services, or CMS that are a component of the Healthcare Common Procedure Coding System and are typically used to report injectable drugs that ordinarily cannot be self-administered. We do not currently have a specific J-Code for Zilretta. Until we can obtain a specific J-Code for Zilretta, we will need to use a non-specific miscellaneous J-Code for Zilretta, which is a temporary code to facilitate reimbursement for physician-administered Zilretta. Since miscellaneous J-Codes may be used for a wide variety of products, health plans may have more difficulty determining the actual product used and billed for the patient. As a result, these claims must often be submitted with additional information and manually processed, which can create delays in claims processing times as well as increasing the likelihood for claim errors.

In addition, the market for Zilretta and any of our other product candidates may depend significantly on access to third-party payors’ medical policies, drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies, and we will be required to offer discounted rates to certain government and other payors to ensure coverage of our drugs. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and

~~clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.~~

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Third party coverage and reimbursement for Zilretta or, if approved, any of our other product candidates, may not be available or adequate in either the United States or international markets, or may be more limited than the indications for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. If coverage and reimbursement are not available or only available at limited levels, we may not be able to successfully commercialize any product candidate for which we obtain marketing approval, including Zilretta, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

~~(*) Guidelines and recommendations published by various organizations can reduce the use of Zilretta and any other products we may commercialize.~~

Government agencies promulgate regulations and guidelines directly applicable to us and to our products and product candidates. In addition, professional societies, such as the American Academy of Orthopedic Surgeons, practice management groups, private health and science foundations and organizations involved in various diseases from time to time may also publish guidelines or recommendations to the healthcare and patient communities. Recommendations of government agencies or these other groups or organizations may relate to such matters as usage, dosage, route of administration and use of concomitant therapies. Recommendations or guidelines that do not recognize Zilretta or our other product candidates, suggest the reduced use of Zilretta or our other product candidates, or suggest the use of competitive or alternative products as the standard of care to be followed by patients and healthcare providers could result in decreased use of Zilretta or any future products.

(*) Following commercial launch, Zilretta will be available to a much larger number of patients and in broader populations, and we do not know whether the results of Zilretta’s use in such larger number of patients and broader populations will be consistent with the results from our clinical studies.

While the FDA granted approval of Zilretta based on the data included in the NDA, including data from our completed pivotal Phase 3 clinical trial, we do not know whether the results when a large number of patients and broader populations are exposed to Zilretta, including results related to safety and efficacy, will be consistent with the results from earlier clinical studies of Zilretta that served as the basis for the approval of Zilretta. New data relating to Zilretta, including from adverse event reports, our on-going repeat-dose safety study, or our planned clinical trials of Zilretta in hip and shoulder OA and bilateral knee OA, may result in changes to the product label and may adversely affect sales, or result in withdrawal of Zilretta from the market. The FDA and regulatory authorities in other jurisdictions may also consider any new data in connection with further marketing approval applications. If Zilretta or any additional approved products cause serious or unexpected side effects after receiving market approval, a number of potentially significant negative consequences could result, including:

~~regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of a modified Risk Evaluation and Mitigation Strategy;~~

~~regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;~~

~~we may be required to change the way the product is promoted or administered or conduct additional clinical studies;~~

~~we could be sued and held liable for harm caused to patients; or~~

~~our reputation may suffer.~~

~~Any of these events could prevent us from maintaining market acceptance of the affected product and could substantially increase the costs of commercializing Zilretta or any additional products.~~

Recently enacted and future legislation, including health care reform measures, may increase the difficulty and cost for us to commercialize ~~Zilretta~~ZILRETTA and any future products and may affect the prices we may obtain.

The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell ~~Zilretta,~~ZILRETTA and ifany other products approved for sale ~~our other potential products,~~ profitably. Among policy makers and third-party ~~payors~~payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality, ~~and/or~~and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been, and may continue to be, significantly affected by major legislative, congressional, and enforcement initiatives. Moreover, in some foreign jurisdictions, pricing of prescription pharmaceuticals is already subject to government control.

~~In March 2010,~~For example, the Patient Protection and Affordable Care Act, as amended, or PPACA, was ~~enacted, which was~~ intended to, among other items, broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add transparency requirements for the healthcare and health insurance industries, impose taxes and fees on the health industry, and impose additional health policy reforms. Among the PPACA provisions of importance to the pharmaceutical industry are the ~~following:~~

an annual, non-deductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;

imposition of additional fees, an increase in ~~the~~required rebates and a ~~manufacturer must pay~~change in their method of calculation, discounts to eligible beneficiaries under ~~the Medicaid Drug Rebate Program to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;~~

~~a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;~~

~~a new~~ Medicare Part D, ~~coverage gap~~expanded discount program, in which manufacturers must agree to offer 50% point-of-sale discounts to negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a conditioneligibility for ~~the manufacturer’s outpatient drugs to be covered under Medicare Part D;~~

~~extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;~~

expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

~~expansion of the~~ entities ~~eligible for discounts~~ under the Public Health Service pharmaceutical pricing ~~program;~~

•

~~new requirements under the federal Open Payments~~ program, created under Section 6002 of PPACA, and its implementing regulations that manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) report annually to CMS information related to “payments or other transfers of value” made or distributed to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and that applicable manufacturers and applicable group purchasing organizations report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members, with data collection and reporting to CMS currently required by March 31^st~~, of each calendar year;~~

~~a requirement to annually report drug samples that manufacturers and distributors provide to physicians;~~

expansion of ~~healthcare~~the range of existing manufacturer liabilities, expanded eligibility for Medicaid programs, additional reporting requirements, expansion of and enhanced penalties under fraud and abuse laws, ~~including the False Claims Act~~ and ~~the Anti-Kickback Statute, new government investigative powers, and enhanced penalties for non-compliance;~~

~~an FDA-approval framework~~improved market access for follow-on biologic ~~products;~~

products. There have been legal and political challenges to PPACA. For example, on June 17, 2021 the U.S. Supreme Court dismissed a ~~new Patient-Centered Outcomes Research Institute~~challenge on procedural grounds that argued the PPACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the PPACA will remain in effect in its current form. It is possible that the PPACA will be subject to ~~oversee, identify priorities~~judicial or Congressional challenges in the future. It is unclear how any such challenges and ~~conduct comparative clinical effectiveness research, along with funding for such research;~~

~~creation~~the healthcare reform efforts of the Independent Payment Advisory Board, which, which, if impaneled, would have authority to recommend certain changes to the Medicare program that do not affect coverage or quality, which, among other things, could result in reduced payments for prescription drugsBiden administration will impact PPACA and ~~those recommendations could have the effect of law even if Congress does not act on the recommendations; and~~

establishment of a Center for Medicare & Medicaid Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of PPACA. In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of PPACA. The Budget Resolution is not a law; however, it is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of PPACA. Further, on January 20, 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of PPACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Congress also could consider subsequent legislation to replace elements of PPACA that are repealed.

our business. We expect that PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and lower reimbursement, as well as additional downward pressure on the price that we receive for any approved product, including Zilretta. There has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices, including several recent U.S. Congressional inquiries and proposed bills designed to, among other things,

increase drug pricing transparency, reduce the cost of drugs under Medicare, review relationships between pricing and manufacturer patient assistance programs, and reform government program drug reimbursement methodologies. Any reduction in reimbursement from Medicare, Medicaid or other government-funded programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize Zilretta and any future products for which we receive regulatory approval. Additionally, we are currently unable to predict what additional legislation or regulation, if any, relating to the healthcare industry may be enacted in the future or what effect recently enacted federal legislation or any such additional legislation or regulation would have on our business.

~~Risks Related to Product Development and Regulatory Compliance~~

We may never obtain regulatory approval of Zilretta for additional indications or any approval of our other product candidates in the United States, or we may never obtain approval for or commercialize Zilretta or our other product candidates outside of the United States, which would limit our ability to realize their full market potential.

While Zilretta has been approved by the FDA for the treatment of patients with OA of the knee, it has not been approved by the FDA for any other indications, and it has not been approved in any other jurisdiction for this indication or for any other indication. In order to market Zilretta for other indications or in other jurisdictions, or in order to market any of our other product candidates, we must obtain regulatory approval for each indication and in each applicable jurisdiction, and we may never be able to get such approval for Zilretta or our other product candidates.

Clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional non-clinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our potential future products in those countries. Other than Zilretta in the United States, we do not have any products approved for sale in any jurisdiction, and we do not have experience in obtaining regulatory approval in international markets. If we do not receive marketing approval for Zilretta for any other indication or from any regulatory agency other than the FDA, we will never be able to commercialize Zilretta for any other indication in the United States or for any indication in any other jurisdiction. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals for our other product candidates, or if regulatory approval in international markets is delayed, our potential market will be reduced and our ability to realize the full market potential of Zilretta or our other product candidates will be harmed. Even if we do receive additional regulatory approvals, we may not be successful in commercializing those opportunities.

Clinical development is a lengthy and expensive process with an uncertain outcome, and results of earlier studies and trials may not be predictive of future trial results. Clinical failure can occur at any stage of clinical development.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of subsequent clinical trials. In particular, the results generated in our completed Zilretta pivotal Phase 3 clinical trial do not ensure that any ongoing or future Zilretta clinical trial, including our ongoing repeat dose safety clinical trial or our planned clinical trials of Zilretta in hip and shoulder OA and bilateral knee OA, will be successful or consistent with the results generated in the Phase 3 trial.

We have conducted preclinical toxicology studies in healthy dogs with single and repeat doses of Zilretta, blank microspheres and immediate-release TA. The immediate-release TA and Zilretta groups produced similar findings in these studies. In the single-dose study, local cartilage findings of reduced extracellular matrix were completely reversed by the end of the nine-month recovery period in both the Zilretta and immediate-release TA study arms. With repeat administrations of Zilretta and immediate-release TA, a larger reduction in extracellular matrix in cartilage partially recovered by six months following the last dose; however, structural changes in cartilage were observed with repeat administrations of both Zilretta and immediate-release TA. Repeat administration of immediate-release TA has a long history of safe clinical use in patients with OA, and in a randomized, double-blind clinical trial conducted in 2003 by Raynauld et al, administration of immediate-release TA or saline every three months for up to two years in 68 OA patients was well-tolerated and demonstrated no deleterious effects in the knee joint when assessed by clinical exam and X-ray evaluation. Using a more sensitive MRI imaging technology in 2015, Driban et al again demonstrated that cartilage structure changes between OA patients treated with immediate-release TA and saline in patients were similar. In 2017, the same authors reporting on the same data set concluded that there was a relative loss of cartilage in the immediate-release TA group. We are studying Zilretta in a repeat dose safety clinical trial and if the data from the repeat dose trial are supportive, we intend to seek inclusion of these data in a supplemental NDA and expansion of the label for Zilretta to include repeat dosing.ZILRETTA. It is also possible that ~~we could observe detrimental effects on joint structure with repeated doses of Zilretta, similar to those outcomes observed in our preclinical studies and third party trials, which~~

~~would limit Zilretta’s commercial potential and could harm our ability to maintain regulatory approval or obtain approval to market Zilretta in~~ additional ~~indications or additional jurisdictions.~~

Product candidates in later stage clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. In addition to the safety and efficacy trials of any product candidate, clinical trial failures may result from a multitude of factors including flaws in trial design, dose selection, placebo effect and patient enrollment criteria. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials. Based upon negative or inconclusive results, we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or preclinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. In any event, our future clinical trials may not be successful.

~~If Zilretta or any other product candidate~~governmental action is ~~found to be unsafe or lack efficacy in particular indications, we will not be able to obtain regulatory approval for the indication and our business could be materially harmed.~~

Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to obtain regulatory approval and commence product sales.

We may experience delays in clinical trials of our products and product candidates. Our clinical trials may not begin on time, have an effective design, enroll a sufficient number of patients, or be completed on schedule, if at all. Our clinical trials can be delayed for a variety of reasons, including:

~~inability to raise funding necessary to initiate or continue a trial;~~

~~delays in obtaining regulatory approval to commence a trial;~~

~~delays in reaching agreement with the FDA on final trial design;~~

~~imposition of a clinical hold for safety reasons or following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities;~~

~~delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;~~

~~delays in obtaining required institutional review board approval at each site;~~

~~delays in recruiting suitable patients to participate in a trial;~~

~~delays in having patients complete participation in a trial or return for post-treatment follow-up;~~

~~clinical sites dropping out of a trial to the detriment of enrollment;~~

~~time required to add new clinical sites; or~~

~~delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.~~

For example, our previously completed Phase 2b dose-ranging clinical trial for Zilretta was initially subject to a clinical hold imposed by the FDA due to the observation of effects of PLGA microspheres on synovial tissue from Zilretta injections. While we were able to begin enrollment initially at non-U.S. sites and later at U.S. sites after the clinical hold was lifted without restriction by the FDA, the hold delayed our completion of the trial and resulted in additional expense. Also in September 16, 2014, the FDA notified us that it had placed a clinical hold on the Zilretta IND due to a single occurrence of what was then reported to be septic arthritis, an infection of the injected knee joint, of a patient in the clinical trial. While the clinical hold was lifted on December 1, 2014 following our successful completion of testing and investigation requested by the FDA, the hold delayed the completion of our previously completed pivotal Phase 2b clinical trial and delayed the initiation of our pivotal Phase 3 clinical trial.

If initiation or completion of our clinical trials are delayed for any of the above reasons or other reasons, our development costs may increase, our approval process could be delayed and our ability to commercialize and commence sales of our product candidates could be materially harmed, which could have a material adverse effect on our business.

The regulatory approval processes of the FDA is lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates or for Zilretta in additional indications, our business will be harmed.

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable but typically takes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the

regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Although we received regulatory approval of Zilretta for the treatment of patients with OA of the knee, it is possible that none of our other product candidates will ever obtain regulatory approval or that we will not be able to obtain regulatory approval for Zilretta in additional indications.

~~Our product candidates could fail to receive regulatory approval for many reasons, including the following:~~

~~the FDA or comparable foreign regulatory authorities may disagree with the design, scope or implementation of our clinical trials;~~

~~we may be unable to demonstrate to the satisfaction of the FDA or comparable foreign regulatory authorities that a product candidate is safe and effective for its proposed indication;~~

~~the results of clinical trials may not meet the level of statistical significance required by the FDA or comparable foreign regulatory authorities for approval;~~

~~we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;~~

~~the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;~~

the data collected from clinical trials of our product candidates may not be sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the United States or elsewhere;

the FDA or comparable foreign regulatory authorities may fail to approve the manufacturing processes or facilities of third party manufacturers with which we contract for clinical and commercial supplies; and

~~the approval policies or regulations of the FDA or comparable foreign regulatory authorities may change significantly in a manner rendering our clinical data insufficient for approval.~~

The lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain regulatory approval to market Zilretta in additional indications or to market our other product candidates at all, which would harm our business, results of operations and prospects.

In addition, even if we were to obtain approval for other product candidates or for Zilretta in other indications, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may grant approval contingent on the performance of costly post-marketing clinical trials, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could harm the commercial prospects for our product candidates. For example, Zilretta has initially been approved for single-dose administration and is not intended for repeat administration, which may limit the extent to which payors reimburse Zilretta and physicians prescribe Zilretta to their patients. While we are conducting a repeat dose clinical trial and intend to use the resulting data to inform our clinical and regulatory perspectives and to create a basis for further interactions with the FDA. If we are unable to expand the label for Zilretta to include repeat dosing, our ability to fully market Zilretta may be limited.

Our product candidates may not receive regulatory approval despite success in clinical trials. If we do not receive regulatory approval for our product candidates, we may not be able to continue our operations. Even if we successfully obtain regulatory approval to market one or more of our product candidates, our revenue will be dependent, to a significant extent, upon the size of the markets in the territories for which we gain regulatory approval. If the markets for patients or indications that we are targeting are not as significant as we estimate, we may not generate significant revenue from sales of such products, if approved.

The FDA granted marketing approval of Zilretta for the treatment of patients with OA of the knee, and we could face liability if a regulatory authority determines that we are promoting Zilretta for any off-label uses.

A company may not promote “off-label” uses for its drug products. An off-label use is the use of a product for an indication that is not described in the product’s FDA-approved label in the United States or for uses in other jurisdictions that differ from those approved by the applicable regulatory agencies. Physicians, on the other hand, may prescribe products for off-label uses. Although the FDA and other regulatory agencies do not regulate a physician’s choice of drug treatment made in the physician’s independent medical judgment, they do restrict promotional communications from pharmaceutical companies or their sales force with respect to off-label uses of products for which marketing clearance has not been issued. A company that is found to have promoted off-label use of its product may be subject to significant liability, including civil and criminal sanctions. Once we begin marketing Zilretta, or if we market any other product, we intend to comply with the requirements and restrictions of the FDA and other regulatory agencies with respect to our promotion of our products, but we cannot be sure that the FDA or other regulatory agencies will agree that we have not violated their restrictions. For example, as part of our promotion strategy for Zilretta we intend to communicate certain results from

our Phase 3 clinical trial and other clinical data that are not included in the product label. While we intend to communicate this data in accordance with FDA guidance and applicable laws, we cannot be certain that the FDA or other regulatory agencies will agree with our use of this data or our sales force may use such data in a way that is inconsistent with our policies.As a result, we may be subject to criminal and civil liability. In addition, our management’s attention could be diverted to handle any such alleged violations. A significant number of pharmaceutical companies have been the target of inquiries and investigations by various U.S. federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and other sales practices, including the Department of Justice and various U.S. Attorneys’ Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices. These investigations have alleged violations of various U.S. federal and state laws and regulations, including claims asserting antitrust violations, violations of the Federal Food, Drug, and Cosmetic Act, or the FDCA, the federal False Claims Act, the Prescription Drug Marketing Act, anti-kickback laws, and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses, we could be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions would have an adverse effect on our revenue, business, financial prospects and reputation.

(*) Even though the FDA has granted approval of Zilretta for the treatment of patients with OA of the knee, the terms of the approval may limit its commercial potential. Additionally, Zilretta is still subject to substantial, ongoing regulatory requirements, and our other product candidates may face future development and regulatory difficulties.

Even though the FDA has granted approval of Zilretta, the scope and terms of the approval may limit our ability to commercialize Zilretta and, therefore, our ability to generate substantial sales revenues. The FDA has approved Zilretta only for the treatment of patients with OA of the knee. If any other ongoing clinical studies of Zilretta are negative, the FDA could decide to withdraw approval, add warnings or narrow the approved indication in the product label.

Zilretta and, if approved, our other product candidates, will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor and report adverse events, or AEs, and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices, or cGMP, and adherence to commitments made in the NDA. If we or a regulatory agency discovers previously unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

We rely on third party collaborators to assist us in meeting our reporting and related obligations. While we work closely with these third parties, we do not control all of their activities. If our third party collaborators do not meet the relevant commitments, we may fail to meet our applicable regulatory requirements.

~~If we fail to comply with applicable regulatory requirements following approval of a product candidate, including Zilretta, a regulatory agency may:~~

~~issue a warning letter asserting that we are in violation of the law;~~

~~seek an injunction or impose civil or criminal penalties or monetary fines;~~

~~suspend or withdraw regulatory approval;~~

~~suspend any ongoing clinical trials;~~

~~refuse to approve a pending NDA or supplements to an NDA submitted by us;~~

~~seize product; or~~

~~refuse to allow us to enter into supply contracts, including government contracts.~~

~~Any government investigation of alleged violations of law could require us to expend significant time and resources~~taken in response ~~and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability~~ to ~~commercialize our products and generate revenue.~~COVID-19.

(*) Any relationships with healthcare professionals, principal investigators, consultants, actual and potential customers, and third-party payors in connection with our current and future business activities are and will continue to be subject, directly or indirectly, to federal and state healthcare laws. If we are unable to comply, or have not fully complied, with such laws, we could face criminal sanctions, civil penalties, administrative penalties, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations.

Our operations may be directly or indirectly subject to various federal and state healthcare laws, including without limitation, fraud and abuse laws, false claims laws, marketing expenditure tracking and disclosure (or “sunshine”) laws, government price reporting, and health information privacy and security laws. Once we begin commercializing Zilretta in the United States with our newly installed sales force, and any other product candidates for which we obtain FDA approval, our potential exposure under such laws will increase significantly, and our costs associated with compliance are also likely to increase. These laws may impact, among other things, our current activities with investigators and research subjects, as well as proposed sales, marketing, promotion, manufacturing, distribution, pricing, discounting, customer, incentive programs, education programs and other business arrangements and activities. In addition, we may be subject to patient privacy regulation by the federal government and by the U.S. states and foreign jurisdictions in which we conduct our business. The laws that may affect our ability to operate include, but are not limited to:

the federal Anti-Kickback Statute, which prohibits, among other things, individuals and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual, or the purchase, order or recommendation of an item or service for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs;

federal civil and criminal false claims laws and civil monetary penalties laws, including the civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their business associates that perform services involving the use or disclosure of individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information;

the federal Open Payments program, created under Section 6002 of the PPACA, and its implementing regulations, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related to “payments or other transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members;

state and foreign law equivalents of each of the above federal laws and regulations, such as anti-kickback and false claims laws which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by any third-party payor, including commercial insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, and often are not preempted by HIPAA, thus complicating compliance efforts;

~~the Foreign Corrupt Practices Act, a U.S. law which regulates certain financial relationships with foreign government officials (which could include, for example, certain medical professionals);~~

~~federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and~~

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state and federal government price reporting laws that require us to calculate and report complex pricing metrics to government programs, where such reported prices may be used in the calculation of reimbursement, rebates and/or discounts on our marketed drugs (participation in these programs and compliance with the applicable requirements may subject us to potentially significant discounts on our products, increased infrastructure costs, and potentially limit our ability to offer certain marketplace discounts).

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices, including activities undertaken by third parties on our behalf, may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil, criminal, and administrative penalties, damages, fines, disgorgement, imprisonment, possible exclusion from participation in Medicare, Medicaid and other government healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, and curtailment or restructuring of our operations. Moreover, while we do not bill third-party payors directly and our customers make the ultimate decision on how to submit claims, from time-to-time we may provide reimbursement guidance to patients and healthcare providers. If a government authority were to conclude that we provided improper advice and/or encouraged the submission of a false claim for reimbursement, we could face action against us by government authorities. If any of the physicians or other providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs and imprisonment. If any of the above occur, it could adversely affect our ability to operate our business and our results of operations. In addition, the approval and commercialization of any of our product candidates outside of the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

~~(*) If we fail to develop, acquire or in-license other potential future product candidates or products, our business and prospects will be limited.~~

Our long-term growth strategy is to develop, acquire or in-license and commercialize a portfolio of potential future product candidates in addition to Zilretta. Our primary means of expanding our pipeline of product candidates is to develop improved formulations and delivery methods for existing FDA-approved products and/or select and acquire or in-license product candidates for the treatment of therapeutic indications that complement or augment our current pipeline, or that otherwise fit into our development or strategic plans on terms that are acceptable to us. Developing new formulations or delivery methods of existing or potential future product candidates or identifying, selecting and acquiring or in-licensing promising product candidates requires substantial technical, financial and human resources expertise. Efforts to do so may not result in the actual development, acquisition or in-license of a particular product candidate, potentially resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. If we are unable to add additional product candidates to our pipeline, our long-term business and prospects will be limited.

~~Risks Related to Our Reliance on Third Parties~~

~~We rely completely on third parties to manufacture our commercial supplies of Zilretta and our preclinical and clinical drug supplies for our other product candidates.~~

If we were to experience an unexpected loss of supply of Zilretta or our other product candidates for any reason, whether as a result of manufacturing, supply or storage issues or otherwise, we could experience disruptions in commercial supply of Zilretta or delays, suspensions or terminations of clinical trials or regulatory submissions. We do not currently have nor do we plan to acquire the infrastructure or capability internally to manufacture our preclinical and clinical drug supplies and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. The facilities used by our contract manufacturers or other third party manufacturers to manufacture our products and product candidates, including Patheon with respect to supplies of Zilretta, must obtain and maintain approval by the FDA. While we work closely with our third party manufacturers on the manufacturing process for our products and product candidates, including quality audits, we generally do not control the implementation of the manufacturing process of, and are completely dependent on, our contract manufacturers or other third party manufacturers for compliance with cGMP regulatory requirements and for manufacture of both active drug substances and finished drug products. If our contract manufacturers or other third party manufacturers cannot successfully manufacture material that conforms to applicable specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities.

In addition, we have no control over the ability of our contract manufacturers or other third party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our products and product candidates or if it withdraws any such approval in the future, we may

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need to find alternative manufacturing facilities, which would significantly impact our ability to commercialize, develop, or obtain or maintain regulatory approval for our products and product candidates.

We are particularly reliant on Patheon with respect to maintaining Zilretta manufacturing suites. These Patheon facilities had to be approved by the FDA as a condition to regulatory approval for Zilretta, as we rely exclusively on Patheon for commercial supplies of Zilretta. In addition, because Patheon manufactures Zilretta in the United Kingdom, or U.K., it will need to maintain and update its facility license with the applicable U.K. regulatory agencies and any delay or inability to do so would delay or prevent Patheon from being able to produce commercial supplies of Zilretta. Furthermore, the manufacturing process for Zilretta is unique and involves specialized equipment and proprietary processes, which subjects us to heighted risks that Patheon will experience delays in the manufacturing process.

We also rely on our manufacturers to purchase from third party suppliers the materials necessary to produce our product candidates for our clinical trials. There are a limited number of suppliers for raw materials that we use to manufacture our drugs and we may need to assess alternate suppliers to prevent a possible disruption of the manufacture of the materials necessary to produce our product candidates for our clinical trials and for commercial sale of Zilretta. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a product candidate to complete the clinical trial, any significant delay in the supply of a product candidate, or the raw material components thereof, for an ongoing clinical trial due to the need to replace a contract manufacturer or other third party manufacturer could considerably delay completion of our clinical trials, product testing and potential regulatory approval of our product candidates. If our manufacturers or we are unable to purchase these raw materials for Zilretta or for any other approved products, there would be a shortage in supply, which would impair our ability to generate revenue from the sale of our products, including Zilretta.

We expect to continue to depend on contract manufacturers or other third party manufacturers for the foreseeable future. We have entered into long-term commercial supply agreements with our current contract manufacturers in order to maintain adequate supplies to manufacture finished Zilretta drug product. We may, however, be unable to enter into such agreements or do so on commercially reasonable terms for potential future product candidates, which could have a material adverse impact upon our business.

We rely on certain sole sources of supply for our product candidates and any disruption in the chain of supply may cause delay in developing, obtaining approval for, and commercializing our product candidates, including Zilretta.

Currently, we use the following sole sources of supply for manufacturing Zilretta: Farmabios SpA for TA, Evonik Corporation for PLGA, and Patheon for finished microspheres drug product. Because of the unique equipment and process for loading TA onto PLGA microspheres, transferring finished drug product manufacturing activities for Zilretta to an alternate supplier would be a time-consuming and costly endeavor, and there are only a limited number of manufacturers that we believe are capable of performing this function for us. Switching Zilretta finished drug suppliers may involve substantial cost and could result in a delay in our desired commercial timeline. For Zilretta, we expect that for the foreseeable future Patheon will be the only manufacturer qualified as a commercial supplier with the FDA. As a result, if supply from Patheon is interrupted, there could be a significant disruption in commercial supply. Any alternative vendor would need to be qualified through an NDA supplement, which could result in further delay. The FDA or other regulatory agencies outside of the United States may also require additional studies if a new Zilretta supplier is relied upon for commercial production.

These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of Zilretta or any of our other product candidates, cause us to incur higher costs and prevent us from commercializing them successfully. Furthermore, if our suppliers fail to deliver the required commercial quantities of active pharmaceutical ingredient on a timely basis and at commercially reasonable prices and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical trials may be delayed or we could lose potential revenue in the event of a product stockout for Zilretta or any of our other product candidate that is approved and launched.

~~Manufacturing issues may arise that could increase product and regulatory approval costs or disrupt or delay commercialization.~~

As we scale up manufacturing of our products and product candidates, we may encounter product, packaging, equipment and process-related issues that may require refinement or resolution in order to proceed with our planned clinical trials and obtain or maintain regulatory approval for commercial marketing. In the future, we may identify impurities or other product related issues, which could result in increased scrutiny by regulatory authorities, suspensions of commercial activities or product recalls, delays in our clinical program and regulatory approval, increases in our operating expenses, or failure to obtain or maintain approval for our products or product candidates.

We rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.

We rely upon and plan to continue to rely upon third party CROs to monitor and manage data for our preclinical and clinical programs. We rely on these parties for execution of our preclinical studies and clinical trials, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the CROs does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with FDA laws and regulations regarding current good clinical practice, or GCP, which are also required by the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities in the form of International Council on Harmonization guidelines for all of our products in clinical development. Regulatory authorities enforce GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP regulations. While we have agreements governing activities of our CROs, we have limited influence over their actual performance. In addition, portions of the clinical trials for our product candidates are being conducted outside of the United States, which will make it more difficult for us to monitor CROs and perform visits of our clinical trial sites and will force us to rely heavily on CROs to ensure the proper and timely conduct of our clinical trials and compliance with applicable regulations, including GCP. Failure to comply with applicable regulations in the conduct of the clinical trials for our product candidates may require us to repeat clinical trials, which would delay the regulatory approval process.

Some of our CROs have an ability to terminate their respective agreements with us if, among other reasons, it can be reasonably demonstrated that the safety of the subjects participating in our clinical trials warrants such termination, if we make a general assignment for the benefit of our creditors or if we are liquidated. If any of our relationships with these third party CROs terminate, we may not be able to enter into arrangements with alternative CROs or to do so on commercially reasonable terms. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our preclinical and clinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. Consequently, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase substantially and our ability to generate revenue could be delayed significantly.

Switching or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

We may not be successful in establishing development and commercialization collaborations, which could adversely affect, and potentially prohibit, our ability to fully commercialize Zilretta or to develop our product candidates.

Because developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products are expensive, we are exploring collaborations with third parties outside of the United States that have more resources and experience. For example, we are exploring selective partnerships with third parties for Zilretta’s development and commercialization outside of the United States. If we are unable to obtain a partner for Zilretta, we may be unable to advance the development of Zilretta in territories outside of the United States, which may limit its market potential. In situations where we enter into a development and commercial collaboration arrangement for a product candidate, we may also seek to establish additional collaborations for development and commercialization in territories outside of those addressed by the first collaboration arrangement for such product candidate. If any of our product candidates, in addition to Zilretta, receives marketing approval, we may enter into sales and marketing arrangements with third parties with respect to otherwise unlicensed or unaddressed territories outside of the United States. There are a limited number of potential partners, and we expect to face competition in seeking appropriate partners. If we are unable to enter into any development and commercial collaborations and/or sales and marketing arrangements on acceptable terms, or at all, we may be unable to successfully develop and seek regulatory approval for our product candidates and/or effectively market and sell Zilretta and any other future approved products, if any, in all of the territories outside of the United States where it may otherwise be valuable to do so.

We may not be successful in maintaining development and commercialization collaborations, and our partners may not devote sufficient resources to the development or commercialization of our products or product candidates or may otherwise fail in development or commercialization efforts, which could adversely affect our ability to develop or commercialize certain of our products or product candidates and our financial condition and operating results.

Even if we are able to establish collaboration arrangements, any such collaboration may not ultimately be successful, which could have a negative impact on our business, results of operations, financial condition and growth prospects. If we partner with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. It is possible that a partner may not devote sufficient resources to the development or commercialization of our product candidate or may otherwise fail in development or commercialization efforts, in which event the development and commercialization of such product candidate could be delayed or terminated and our business could be substantially harmed. In addition, the terms of any collaboration or other arrangement that we establish may not prove to be favorable to us or may not be perceived as favorable, which may negatively impact the trading price of our common stock. In some cases, we may be responsible for continuing development of a product or product candidate or research program under collaboration and the payment we receive from our partner may be insufficient to cover the cost of this development. Moreover, collaborations and sales and marketing arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain.

We may become subject to a number of additional risks associated with our dependence on collaborations with third parties, the occurrence of which could cause our collaboration arrangements to fail. Conflicts may arise between us and partners, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the division of development or commercialization responsibilities or expenses, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any such conflicts arise, a partner could act in its own self-interest, which may be adverse to our best interests. Any such disagreement between us and a partner could result in one or more of the following, each of which could delay or prevent the development or commercialization of our products or product candidates, and in turn prevent us from generating sufficient revenue to achieve or maintain profitability:

~~reductions in the payment of royalties or other payments we believe are due pursuant to the applicable collaboration arrangement;~~

~~actions taken by a partner inside or outside our collaboration which could negatively impact our rights or benefits under our collaboration; or~~

~~unwillingness on the part of a partner to keep us informed regarding the progress of its development and commercialization activities or to permit public disclosure of the results of those activities.~~

~~Risks Related to Our Business Operations and Industry~~

~~Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.~~

We are highly dependent on the principal members of our executive team, the loss of whose services may adversely impact the achievement of our objectives. While we have entered into employment agreements or offer letters with each of our executive officers, any of them could leave our employment at any time, as all of our employees are “at will” employees. Recruiting and retaining other qualified employees for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the turnover rate can be high. For example, Yamo Deniz, M.D., our Chief Medical Officer, is currently on short-term disability for personal reasons. While other members of our management team have assumed Dr. Deniz’s primary responsibilities during his absence, we do not know when or if Dr. Deniz will resume his position with us and we may be required to recruit a long-term replacement for the position. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical companies for individuals with similar skill sets. In addition, failure to succeed in clinical studies may make it more challenging to recruit and retain qualified personnel. The inability to recruit or the loss of the services of any executive or key employee might impede the progress of our development and commercialization objectives.

~~(*) We have recently undergone a significant expansion of our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.~~

As of September 30, 2017, we had 139 full-time employees. Following the approval of Zilretta in the United States, we hired a sales force of approximately 100 additional full-time employees. In addition, as our company matures, we expect to further expand our employee base to increase our managerial, scientific and engineering, operational, sales, marketing, financial and other resources and to hire more consultants and contractors. This growth will impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a

substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Future growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of our existing or future product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to successfully commercialize Zilretta and, if approved, our other product candidates, and compete effectively will depend, in part, on our ability to effectively manage our recent and future growth.

~~We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability.~~

The use of our product candidates in clinical trials and the sale of Zilretta and any other products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our product candidates. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

~~impairment of our business reputation and perception of our products in the market;~~

~~withdrawal or suspension of marketing approvals;~~

~~withdrawal of clinical trial participants;~~

~~costs due to related litigation;~~

~~distraction of management’s attention from our primary business;~~

~~substantial monetary awards to patients or other claimants;~~

~~the inability to commercialize our product candidates; and~~

~~decreased demand for our products approved for commercial sale.~~

Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could adversely affect our results of operations and business.

~~If we obtain approval to commercialize any approved products outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.~~

We plan to enter into agreements with third parties to market Zilretta, and if approved, our other product candidates, outside of the United States. We expect that we will be subject to additional risks related to entering into international business relationships, including:

~~different regulatory requirements for drug approvals in foreign countries;~~

~~reduced protection for intellectual property rights;~~

~~unexpected changes in tariffs, trade barriers and regulatory requirements;~~

~~economic weakness, including inflation, or political instability in particular foreign economies and markets;~~

~~compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;~~

~~foreign taxes, including withholding of payroll taxes;~~

~~foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incidental to doing business in another country;~~

~~workforce uncertainty in countries where labor unrest is more common than in the United States;~~

~~production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and~~

~~business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters, including earthquakes, typhoons, floods and fires.~~

We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.

Despite the implementation of security measures, our internal computer systems and those of third parties with which we contract are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in our operations, and could result in a material disruption of our commercial and clinical activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and our development programs and the development of our product candidates could be delayed.

~~Business interruptions could delay us in the process of developing or commercializing our products and product candidates.~~

Our headquarters are located in Burlington, Massachusetts. We are vulnerable to natural disasters such as hurricanes, tornadoes and severe storms, as well as other events that could disrupt our operations. We do not carry insurance for natural disasters and we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations.

~~Risks Related to Our Intellectual Property~~

~~(*) If we are unable to obtain or protect intellectual property rights related to our products and product candidates, we may not be able to compete effectively in our market.~~

We rely upon a combination of patents, trade secret protection, confidentiality agreements and proprietary know how, and intend to seek marketing exclusivity for any approved product, including Zilretta, in order to protect the intellectual property related to our products and product candidates, and to date we have three issued patents covering Zilretta in the United States. The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our products and product candidates in the United States or in other foreign countries. Even for our issued patents and if other patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. If this were to occur, early generic competition could be expected against Zilretta and potentially our product candidates in development. Also, a third party may challenge our ownership of patents and patent applications assigned to us, or may challenge our exclusive rights to patents and patent applications that we license from third parties. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. If the additional patent applications we hold with respect to Zilretta or our product candidates fail to issue or if their breadth or strength of protection is threatened, it could dissuade companies from collaborating with us to develop them and threaten our ability to commercialize any resulting products. We cannot offer any assurances about which, if any, patents will issue or whether any issued patents will not be found invalid and unenforceable or will go unthreatened by third parties. Further, if we encounter delays in regulatory approvals for additional indications or in additional jurisdictions, the period of time during which we could market Zilretta or any product candidate under patent protection could be reduced. Furthermore, patent applications by third parties can result in an interference proceeding in the United States being provoked by a third party or instituted by us to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. See “Business—Patents and Patent Applications” in our Annual Report on Form 10-K for additional information regarding our material patents and patent applications.

In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug development process that involve proprietary know-how, information or technology that is not covered by patents. For example, we maintain trade secrets with respect to certain of the formulation and manufacturing techniques related to the TA-formulated PLGA microspheres in Zilretta, including those that relate to precise pharmaceutical release. Although we generally require all of our employees to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary know-how, information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the non-patented intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.

~~Third party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.~~

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions and inter party reexamination proceedings before the U.S. PTO. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are commercializing or developing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our products and product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Zilretta and/or our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications which may later result in issued patents that our products or product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our products or product candidates, any drug substance formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block our ability to commercialize such product or product candidate unless we obtain a license under the applicable patents, or until such patents expire. Similarly, if any third party patent were held by a court of competent jurisdiction to cover aspects of our formulations or methods of use, the holders of any such patent may be able to block our ability to develop and commercialize the applicable product or product candidate unless we obtain a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.

Parties making claims against us may request and/or obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our products or product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties or redesign our infringing products or manufacturing processes, which may be impossible or require substantial time and monetary expenditure. We cannot predict whether any such license would be available at all or whether it would be available on commercially reasonable terms. Furthermore, even in the absence of litigation, we may need to obtain licenses from third parties to advance our research, manufacture clinical trial supplies or allow commercialization of our product candidates. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we would be unable to further develop and commercialize one or more of our products or product candidates, which could harm our business significantly. We cannot provide any assurances that third party patents do not exist which might be enforced against our products, resulting in either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation to third parties.

~~We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.~~

Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on any issued patent are due to be paid to the U.S. PTO and foreign patent agencies in several stages over the lifetime of the patent. The U.S. PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our licensors that control the prosecution and maintenance of our licensed patents fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

~~We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.~~

We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ former employers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and if we are successful, litigation could result in substantial cost and be a distraction to our management and other employees.

~~Risks Related to Ownership of Our Common Stock~~

The market price of our common stock may be highly volatile, you may not be able to resell your shares at a desired market price, and you could lose all or part of your investment.

The trading price of our common stock is likely to be ~~volatile. Our stock price could be subject to wide fluctuations in response~~volatile due to a variety of factors, including the following:



~~the~~ success or perceived success of the ~~commercial launch~~commercialization of ~~Zilretta;~~

ZILRETTA;



the impact and duration of COVID-19 and actions taken to mitigate its spread;



inability to obtain approval for additional indications for ZILRETTA;



failure to successfully develop and commercialize additional product candidates;



changes in the structure of healthcare payment systems;



adverse results or delays in clinical trials;



inability to obtain additional funding;



changes in laws or regulations applicable to our products or product candidates;



inability to obtain adequate ~~product~~ supply for our products or product candidates, or the inability to do so at acceptable prices;



adverse regulatory decisions;



introduction of new products or technologies by our competitors;



failure to meet or exceed product development or financial projections we provide to the public;



failure to meet or exceed the estimates and projections of the investment community;



the perception of the pharmaceutical industry by the public, legislatures, regulators, and the investment community;



announcements of significant acquisitions, strategic partnerships, joint ventures, or capital commitments by us or our competitors;



disputes or other developments relating to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection for our technologies;



additions or departures of key scientific or management personnel;



significant lawsuits, including patent, product liability, or stockholder litigation;



changes in the market valuations of similar companies;

•

~~sales of our common stock by us or our stockholders in the future; and~~



sales of our common stock by us or our stockholders in the future; and



trading volume of our common stock.

The trading price of our common stock may also be dependent upon the valuations and recommendations of the analysts who cover our company. If our results do not meet these analysts’ forecasts, the expectations of our investors, or any financial guidance or expectations we provide to investors, the market price of our common stock could decline. Our ability to meet analysts’ forecasts (including revenue and profitability), investors’ expectations, and our own guidance or financial expectations is substantially dependent on our ability to increase sales of ZILRETTA and to successfully commercialize ZILRETTA in the United States. Because we have not yet fully commercialized ZILRETTA, we and the analysts who cover our company have limited ability to accurately predict future sales results, and actual results may differ materially from expectations.

In addition, the stock market in general, and the Nasdaq Global Market in particular, ~~have~~has experienced extreme price and volume fluctuations, and we have in the past experienced volatility that ~~have often~~we believe has been unrelated or disproportionate to our operating performance. For example, during the ~~operating performance~~first quarter of ~~these companies.~~2020, the closing price of our common stock ranged from $5.53 to $21.13 per share. Broad market and industry factors may continue to negatively affect the market price of our common stock, regardless of our ~~actual~~ operating performance.

~~Our principal stockholders~~ For example, there have been instances of groups of investors buying shares of a company’s stock in order to drive up its market price, thereby causing traders who have bet that the stock price would fall and ~~management own~~contracted to sell shares of that stock with a plan to buy those shares after the share price has fallen (i.e., those who have “shorted” the stock) to buy in as well to forestall even greater losses; this is known as a “short squeeze.” These short squeezes have caused extreme volatility in both the stock prices of the companies involved and in the market and have led to the shares of those companies trading at a significantly inflated price per share that is disconnected from the underlying value of the company. Many investors who have purchased shares in those companies at an inflated share price face the risk of losing a significant ~~percentage~~portion of ~~our stock and are able to exert significant control over matters subject to stockholder approval.~~

As of December 31, 2016, our executive officers, directors and stockholders affiliated with our officers and directors beneficially owned approximately 17.1% of our voting stock. Therefore, these stockholders may havetheir original investment, as in many cases the ability to influence us through this ownership position. These stockholders may be able to determine or significantly influence all matters requiring stockholder approval. For example, these stockholders, acting together, may be able to control or significantly influence elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers forprice per share has declined steadily as interest in those stocks has abated. While we do not believe that our common stock ~~that you may believe are in your best interest as one~~has been the target of ~~our stockholders.~~

~~We are an “emerging growth company,” and we cannot~~a short squeeze, there can be ~~certain if the reduced reporting requirements applicable to emerging growth companies will make~~no assurance that our common stock ~~less attractive to investors.~~

~~We are an “emerging growth company,” as defined~~will not be impacted by unusual trading activity in the Jumpstart Our Business Startup Act, or JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenue of at least $1 billion, (b) December 31, 2019, (c) the date on which we are deemed to be a large accelerated filer, which would occur at the beginning of a year if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (d) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknessesfuture or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the ~~trading price of our common stock.~~

~~We will continue to incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.~~

We completed our initial public offering on February 18, 2014. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, which require, among other things, that we file with the SEC annually, quarterly and current reports with respect to our business and financial condition. We have incurred and will continue to incur costs associated with the preparation and filing of these reports. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, and the Nasdaq Global Market have imposed various other requirements on public companies. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and proxy access. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we operate our business. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, these rules and regulations have made it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

~~Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.~~

~~Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market~~ price of our common stock ~~and could impair~~will not become significantly disconnected from our ability to raise capital through the sale of additional equity and/or convertible debt securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.underlying value.

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans or the conversion of our debt securities, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We may need significant additional capital in the future to continue our planned operations. To the extent we raise additional capital by issuing equity ~~securities;~~securities, our stockholders may experience substantial dilution. We may sell ~~common stock, convertible securities or other~~such equity securities in one or more transactions at prices, under terms, and in a manner as we may determine from time to time. ~~If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales.~~ These sales may ~~also~~ result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.

Pursuant to our 2013 equity incentive plan, ~~our management is~~we are authorized to grant stock options and other equity-based awards to our employees, directors, and consultants. The number of shares available for future grant under ~~the 2013~~this plan ~~will~~ automatically ~~increase~~increases each year by 4% of all shares of our capital stock outstanding as of December 31 of the prior calendar year, subject to the ability of our board of directors to ~~take action to~~ reduce the size of ~~the increase in~~ any ~~given year.~~such increase. Currently, we plan to register the increased number of shares available for issuance under ~~the 2013~~this plan each year. If our board of directors elects to increase the number of shares available for future grant by ~~the maximum~~a significant amount each year, our stockholders ~~may~~would experience additional dilution, which could cause our stock price to fall.

WeIf the 2024 Convertible Notes are ~~at risk~~not redeemed or repurchased on or before their maturity date of ~~securities class action litigation.~~

~~In the past, securities class action litigation has often been brought against~~May 1, 2024, we will be required to convert all or a company following a decline in the market price of its securities. This risk is especially relevant for us because pharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

~~Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.~~

~~Section 382~~portion of the ~~Internal Revenue Code of 1986, as amended, or Section 382, contains rules that limit~~amounts due under the ability of a company that undergoes an ownership change to utilize its net operating losses, or NOLs, and tax credits existing as of the date of such ownership change. Under the rules, such an ownership change is generally any change in ownership of more than 50% of a company’s stock within a rolling three-year period. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning, directly or indirectly, 5% or more of the stock of a company and any change in ownership arising from new

issuances of stock by the company. During the quarter ended June 30, 2014, we completed a Section 382 study through February 11, 2014. The results of this study showed that as of February 11, 2014, one historical ownership change within the meaning of Section 382 had occurred in 2009. As a result of this Section 382 limitation, approximately $0.3 million of NOLs will expire unutilized. In addition, we completed another Section 382 study through December 31, 2014. The results of this study showed that we experienced an ownership change in 2014 as part of the follow-on offering, however, none of the NOLs will expire due to the Section 382 limitation associated with the ownership change, assuming sufficient future taxable income and no future limitations. Subsequent ownership changes as defined by Section 382 may further limit the amount of NOL carryforwards that could be utilized annually to offset future taxable income.

~~We do not intend to pay dividends on our~~2024 Convertible Notes into common stock, ~~so any returns will be limited to the value of our stock.~~

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Additionally, our credit and security agreement with MidCap and Silicon Valley Bank contains covenants that restrict our ability to pay dividends. Any return to stockholders will therefore be limited to the appreciation of their stock.

Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing sowhich would ~~benefit our stockholders, and may prevent or frustrate attempts by~~cause our stockholders to ~~replace or remove~~experience additional dilution and could cause our ~~current management.~~stock price to fall.

Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management. These provisions include:ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;~~

~~limiting the removal of directors by the stockholders;~~

~~creating a staggered board of directors;~~

~~prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;~~

~~eliminating the ability of stockholders to call a special meeting of stockholders; and~~

~~establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.~~

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder of such corporation for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

~~ITEM 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

Recent sales of Unregistered Securities

None.

~~ITEM 3.~~

~~DEFAULTS UPON SENIOR SECURITIES~~

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

~~ITEM 4.~~

~~MINE SAFETY DISCLOSURES~~

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

5043

ITEM 6. EXHIBITS


Exhibit number		Description of document
2.1*		Agreement and Plan of Merger, dated as of October 11, 2021, by and among Flexion Therapeutics, Inc., Pacira BioSciences, Inc., and Oyster Acquisition Company Inc. (Exhibit 2.1, Current Report on Form 8-K, filed with the SEC on October 12, 2021).
3.1⁽¹⁾		Amended and Restated Certificate of Incorporation of Flexion (Exhibit 3.1, Current Report on Form 8-K, filed with the ~~Registrant~~SEC on February 19, 2014).
3.2
~~3.2~~⁽¹⁾		Amended and Restated Bylaws of Flexion (Exhibit 3.2, Current Report on Form 8-K, filed with the ~~Registrant~~SEC on February 19, 2014)..
4.1
~~4.1~~⁽²⁾		Form of Common Stock Certificate of Flexion (Exhibit 4.1, Registration Statement on Form S-1 (File No. 333-193233), as amended, filed with the ~~Registrant~~SEC on January 29, 2014)..
4.2
~~4.2~~⁽³⁾		Indenture, dated May 2, 2017, by and between ~~the Registrant~~Flexion and Wells Fargo Bank, National Association, as trustee (Exhibit 4.1, Current Report on Form 8-K, filed with the SEC on May 2, 2017).
4.3
~~4.3~~⁽³⁾		Form of Note representing ~~the Registrant’s~~Flexion’s 3.375% Convertible Senior Notes due 2024 (included as Exhibit A to the Indenture filed as Exhibit ~~4.4)~~4.1, Current Report on Form 8-K, filed with the SEC on May 2, 2017).
10.1⁽⁴⁾		~~Offer Letter,~~Form of Tender and Support Agreement, dated ~~February 15, 2017 and~~ as ~~amended July 19, 2017, between~~of October 11, 2021 (Exhibit 10.1, Current Report on Form 8-K, filed with the ~~Registrant and Yamo Deniz, M.D.~~SEC on October 12, 2021).
~~10.2~~⁽⁵⁾10.2**		Manufacturing and Supply Agreement, dated July 31, 2015, by and between Flexion ~~Therapeutics, Inc. 2013 Equity Incentive Plan, as amended,~~ and ~~Forms of Stock Option Agreement, Notice of Exercise and Stock Option Grant Notice thereunder.~~Patheon UK Limited.
~~31.1~~10.3**		Technical Transfer and Service Agreement, dated July 31, 2015, by and between Flexion and Patheon UK Limited.
31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of the Principal Accounting and ~~Principal~~ Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
32.1

~~32.1~~		Certification of the Principal Executive Officer and Principal Accounting and Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~.2002.
101.INS		Inline eXtensible Business Reporting Language (XBRL) Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
~~101.INS~~		~~XBRL Instance Document~~

~~101.SCH~~		Inline XBRL Taxonomy Extension Schema Document
101.CAL
~~101.CAL~~		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
~~101.DEF~~		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
~~101.LAB~~		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
~~101.PRE~~		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

~~(1)~~

~~Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on February 19, 2014.~~

~~(2)~~

~~Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-193233), as amended.~~

~~(3)~~

~~Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on May 2, 2017.~~

~~(4)~~

~~Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the SEC on August 8, 2017.~~

~~(5)~~

~~Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on September 14, 2017.~~

* Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Flexion agrees to furnish supplementally to the SEC a copy of any omitted exhibits or schedules upon request; provided that Flexion may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act.

** Pursuant to Item 601(b)(10) of Regulation S-K, certain portions of this exhibit have been omitted by means of marking such portions with asterisks because Flexion has determined that the information is not material and would likely cause competitive harm to Flexion if publicly disclosed.

5144

~~SIGNATURES~~

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: November ~~6, 2017~~12, 2021	By:	~~By:~~		/s/ Michael D. Clayman
				Michael D. Clayman
				Chief Executive Officer
			(Principal Executive Officer)


Date: November 12, 2021	By:	/s/ Frederick W. Driscoll
		Frederick W. Driscoll
		Chief Financial Officer
		(Principal Accounting and Financial Officer)


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)


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


Large accelerated filer	☐	Accelerated filer	☒☐
Non-accelerated filer	☒	Smaller reporting company	☒
~~Non-accelerated filer~~	☐ ~~(Do not check if a smaller reporting company)~~	~~Smaller reporting company~~	☐
Emerging growth company	☒☐


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2021, and December 31, ~~2016~~2020 (Unaudited)	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, ~~2017~~2021 and ~~2016~~2020 (Unaudited)	4
	Condensed Consolidated Statements of ~~Stockholder’s Equity (Deficit)~~Changes in Stockholders’ Deficit (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2021, and ~~2016~~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	1724
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	2435
	Item 4. Controls and Procedures	2536
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	2637
	Item 1A. Risk Factors	2637
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5043
	Item 3. Defaults Upon Senior Securities	5043
	Item 4. Mine Safety Disclosures	5043
	Item 5. Other Information	5043
	Item 6. Exhibits	5144
	Signatures	5245


	September 30, 2017			December 31, 2016			September 30, 2021			December 31, 2020
Assets
Current assets:
Current assets
Cash and cash equivalents	$	159,179		$	30,915		$	136,824		$	107,704
Marketable securities		175,921			174,688			5,229			67,576
Accounts receivable, net								29,375			30,025
Inventories								14,669			15,394
Prepaid expenses and other current assets		3,609			3,790			6,659			5,112
Total current assets	$	338,709		$	209,393			192,756			225,811
Property and equipment, net		11,481			11,664			19,480			19,538
Long-term investments		—			4,725
Restricted cash		600			480
Right-of-use assets								5,695			6,577
Total assets	$	350,790		$	226,262		$	217,931		$	251,926
Liabilities and Stockholders’ Equity
Current liabilities:
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable	$	3,960		$	2,161		$	7,492		$	6,928
Accrued expenses and other current liabilities		12,276			6,245			24,875			20,008
Deferred revenue								10,000			10,000
Operating lease liabilities								1,619			1,526
Current portion of long-term debt		9,967			9,134			0			16,806
Total current liabilities	$	26,203		$	17,540			43,986			55,268
Long-term operating lease liability, net								5,328			6,123
Long-term debt, net		15,260			21,399			80,087			44,114
2024 convertible notes, net		135,275			-			170,418			162,786
Other long-term liabilities		399			291			489			295
Total liabilities	$	177,137		$	39,230			300,308			268,586
Commitments and contingencies
Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2017 and December 31, 2016 and 0 shares issued and outstanding at September 30, 2017 and December 31, 2016		—			—
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 31,983,903 and 31,667,469 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively		32			32
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								0			0
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		472,322			398,757			780,954			765,607
Accumulated other comprehensive loss		(62	)		(71	)		0			(11	)
Accumulated deficit		(298,639	)		(211,686	)		(863,381	)		(782,305	)
Total stockholders’ equity		173,653			187,032
Total liabilities and stockholders’ equity	$	350,790		$	226,262
Total stockholders' deficit								(82,377	)		(16,660	)
Total liabilities and stockholders' deficit							$	217,931		$	251,926


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


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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			Three Months Ended						Nine Months Ended
Revenue	$	—		$	—		$	—		$	—
Operating expenses:
													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		12,846			9,047			35,371			29,933			14,771			10,092			41,487			43,733
General and administrative		18,375			8,388			46,533			18,295
Selling, general and administrative														26,986			27,312			81,993			81,341
Total operating expenses		31,221			17,435			81,904			48,228			45,484			42,534			138,271			137,961
Loss from operations		(31,221	)		(17,435	)		(81,904	)		(48,228	)		(24,158	)		(18,870	)		(64,181	)		(78,719	)
Other income (expense):
Other (expense) income
Interest income		1,095			421			2,450			1,052			54			62			531			584
Interest expense		(3,843	)		(561	)		(7,363	)		(1,039	)		(5,787	)		(5,125	)		(16,156	)		(14,848	)
Other expense		(219	)		(207	)		(136	)		(567	)		(421	)		(457	)		(1,270	)		(581	)
Total other income (expense)		(2,967	)		(347	)		(5,049	)		(554	)
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	$	(34,188	)	$	(17,782	)	$	(86,953	)	$	(48,782	)	$	(30,312	)	$	(24,638	)		(81,076	)		(94,059	)
Net loss per share basic and diluted	$	(1.07	)	$	(0.65	)	$	(2.73	)	$	(2.04	)
Net loss per common share, basic and diluted													$	(0.60	)	$	(0.50	)	$	(1.62	)	$	(2.16	)
Weighted average common shares outstanding, basic and diluted		31,931			27,524			31,821			23,938			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		18			38			9			(70	)
Unrealized gains (losses) from available-for-sale securities, net of tax of $0														2			(9	)		11			(68	)
Total other comprehensive income (loss)		18			38			9			(70	)		2			(9	)		11			(68	)
Comprehensive loss	$	(34,170	)	$	(17,744	)	$	(86,944	)	$	(48,852	)	$	(30,310	)	$	(24,647	)	$	(81,065	)	$	(94,127	)

	Common Stock
	Shares		Par Value		Additional Paid-in-Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholder's Equity (Deficit)
Balance at December 31, 2014		21,440	$	21	$	238,402	$	(5	)	$	(93,477	)	$	144,941
Exercise of stock options		109		1		592							$	593
Employee Stock Purchase Plan		21		—		276								276
Stock-based compensation expense						4,583								4,583
Net loss											(46,315	)		(46,315	)
Other comprehensive loss								(92	)					(92	)
Balance at December 31, 2015		21,570	$	22	$	243,853	$	(97	)	$	(139,792	)	$	103,986
Issuance of Common Stock net of issuance costs		10,040		10		147,491								147,501
Exercise of stock options		30		-		167								167
Employee Stock Purchase Plan		27		—		476								476
Stock-based compensation expense						6,770								6,770
Net loss											(71,894	)		(71,894	)
Other comprehensive income								26						26
Balance at December 31, 2016		31,667	$	32	$	398,757	$	(71	)	$	(211,686	)	$	187,032
Exercise of stock options		261		—		3,076							$	3,076
Employee Stock Purchase Plan		56		—		453								453
Stock-based compensation expense						7,570								7,570
Convertible debt						62,466								62,466
Net loss											(86,953	)		(86,953	)
Other comprehensive income								9						9
Balance at September 30, 2017		31,984	$	32	$	472,322	$	(62	)	$	(298,639	)	$	173,653


	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	)

	December 31, 2016
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper	$	7,769	$	—	$	—		$	7,769
U.S. government obligations		75,524		5		(12	)		75,517
Corporate bonds		96,193		1		(66	)		96,128
	$	179,486	$	6	$	(78	)	$	179,414

(In thousands, except per share amounts)	Shares Issuable Under Options			Weighted Average Exercise Price
Outstanding as of December 31, 2016		3,268		$	14.84
Granted		982			22.11
Exercised		(261	)		11.47
Cancelled		(251	)		18.48
Outstanding as of September 30, 2017		3,738		$	17.63
Options vested and expected to vest at September 30, 2017		3,738		$	17.63
Options exercisable at September 30, 2017		1,450		$	14.34

	For the three months ended September 30,						For the nine months ended September 30,
(In thousands)	2017			2016			2017			2016
Numerator:
Net loss	$	(34,188	)	$	(17,782	)	$	(86,953	)	$	(48,782	)
Net loss:	$	(34,188	)	$	(17,782	)	$	(86,953	)	$	(48,782	)
Denominator:
Weighted average common shares outstanding, basic and diluted		31,931			27,524			31,821			23,938
Net loss per share, basic and diluted	$	(1.07	)	$	(0.65	)	$	(2.73	)	$	(2.04	)

	For the three months ended September,				For the nine months ended September,
	2017		2016		2017		2016
Shares issuable upon conversion of the 2024 convertible notes		7,514,937		-		4,171,895		-
Stock Options		3,680,096		2,359,370		3,514,511		2,265,023
Restricted stock units		126,219		189,300		168,196		187,220
Total		11,321,252		2,548,670		7,854,602		2,452,243

Year	Aggregate Minimum Payments
2017	$	293,440
2018		1,341,672
2019		1,491,101
2020		1,533,276
2021		1,575,620
2022		1,446,770
2023		1,202,874
Total	$	8,884,753