FLEXION THERAPEUTICS, INC. 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 endedDecember 31, 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 theSecurities and Exchange Commission , orSEC , onMarch 10, 2021 .
Forward-Looking Statements
This discussion and analysis contains "forward-looking statements" that is 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 reflect our current expectations regarding future development activities, results of operations, financial condition, cash flow, performance and business prospects, and opportunities, as well as assumptions made by and information currently available to our management. Forward-looking statements, include any statement that does not directly relate to a current historical fact. We have tried to identify forward-looking statements by using words such as "may," "will," "expect," "anticipate," "estimate," "intend," "plan," "predict," "potential," "believe," "should" and similar expressions. Although we believe 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. Overview We are a biopharmaceutical company focused on the discovery, development, and commercialization of novel, local therapies for the treatment of patients with musculoskeletal conditions, beginning with osteoarthritis, the most common form of arthritis, referred to as OA. OnOctober 6, 2017 , theU.S. Food and Drug Administration ("FDA"), approved our product, ZILRETTA, for marketing inthe 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 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 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 control of post-operative pain. We were incorporated inDelaware inNovember 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, providing general and administrative support for these operations, and protecting our intellectual property. From our inception throughJune 30, 2021 , we have funded our operations primarily through the sale of our common stock, convertible preferred stock, and convertible debt, as well as debt financing. Until such time, if ever, as we can generate substantial 22 --------------------------------------------------------------------------------
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.
Financing Transaction
OnNovember 4, 2020 , we entered into an Equity Distribution Agreement (the "Distribution Agreement") withGoldman Sachs & Co. LLC andCredit 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 ofJune 30, 2021 , 134,048 shares have been sold under the Distribution Agreement, for total net proceeds of$1.7 million .
Impact of the Coronavirus Global Pandemic ("COVID-19")
InDecember 2019 , a novel strain of coronavirus, which causes the COVID-19 disease, was first reported inWuhan, China and has since become a global pandemic. COVID-19 has presented a substantial public health and economic challenge around the world and has affected our employees, patients, communities, and business operations, as well as theU.S. economy and financial markets. We believe the impact of COVID-19 on healthcare providers is lessening, and, based on recent surveys, orthopedic practices report that patient flows have returned to approximately 90% of their pre-COVID levels.
While we are encouraged by the growth of ZILRETTA purchases by healthcare providers in the second quarter of 2021, the future impact of COVID-19, including the Delta variant of the virus, on our business remains uncertain and unpredictable.
Q2 2021 Commercial Metrics Historically, we have provided commercial metrics presenting a cumulative view of ZILRETTA utilization spanning back to the product launch in late 2017. InMay 2021 , we introduced updated metrics to provide more relevant insights and visibility into the commercial performance of ZILRETTA on a quarterly basis. Net sales in the second quarter were$28.2 million , representing growth of 15% over the first quarter net sales of$24.6 million . Total demand for ZILRETTA by healthcare providers in the second quarter (56,798 units) grew by 7% over the first quarter of 2021 (53,089 units). In the second quarter, 2,105 accounts purchased ZILRETTA as compared to 2,044 accounts in Q1 2021. Of the accounts that purchased ZILRETTA in Q2 2021, 90% purchased product in a prior quarter and approximately 42% of ZILRETTA purchases came from accounts purchasing more than 100 units. Pipeline Updates
ZILRETTA/FX006 (triamcinolone acetonide extended-release injectable suspension) - IA treatment for OA
ZILRETTA is the first and only extended-release IA therapy for patients confronting OA-related knee pain, and we believe that ZILRETTA's extended-release profile may also provide effective treatment for OA pain in other large joints, including the shoulder. We intend to initiate a registration trial investigating ZILRETTA in shoulder OA in 2021.
FX201 (humantakinogene hadenovec) - Locally Administered Gene Therapy for the Treatment of OA
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 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 FX201 has the potential to both reduce
pain 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 August
1 , 40 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. Additional data readouts are anticipated
by the end of 2021, including the interrogation of synovial fluid from patients
to assess biological activity of FX201 locally in the joint and potential
correlation with clinical endpoints over time.
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--------------------------------------------------------------------------------FX301 (funapide in a proprietary thermosensitive hydrogel) - Locally Administered NaV1.7 Inhibitor for the Treatment of Post-Operative Pain
InSeptember 2019 , we entered into a definitive agreement with Xenon Pharmaceuticals that provides us with the global rights to develop and 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 can 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 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 FX301, which the FDA cleared inFebruary 2021 . InMarch 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 will be conducted in two parts beginning with a SAD portion, which will investigate 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 receive either FX301 or placebo. A Safety Monitoring Committee will review data from each dose cohort before the study escalates into higher doses. InJuly 2021 , we fully enrolled the SAD portion of the trial. The data from the SAD portion of the trial will be reviewed, and a decision made regarding expanding a selected dose and volume cohort by another 36 patients. This would support broader understanding of the safety and efficacy in that cohort. Results from this trial could potentially be available in late 2021. Financial Overview Revenue Product Revenue Net product sales consist of sales of ZILRETTA, which was approved by the FDA onOctober 6, 2017 , and launched inthe United States inOctober 2017 . We had not generated any revenue prior to the launch of ZILRETTA.
License Revenue
OnMarch 30, 2020 , we entered into an exclusive license agreement with HK Tainuo and Jiangsu Tainuo, a subsidiary ofChina Shijiazhuang Pharmaceutical Co, Ltd. , for the development and commercialization of ZILRETTA inGreater China (consisting of mainlandChina ,Hong Kong andMacau , andTaiwan ). 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 ofJune 30, 2020 , and the remaining$5.0 million was received as ofSeptember 30, 2020 . We are 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 applicableHong Kong withholding taxes. HK Tainuo is responsible for the clinical development, product registration, and commercialization of ZILRETTA inGreater 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 ofJune 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.
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--------------------------------------------------------------------------------Research and Development Expenses
Our research and development activities include: preclinical studies, clinical trials, and chemistry, manufacturing, and controls, or CMC, activities. Our research and development expenses consist primarily of:
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expenses incurred under agreements with consultants, contract research
organizations ("CROs"), and investigative sites that conduct our preclinical
studies and clinical trials;
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costs of acquiring, developing, and manufacturing clinical trial materials;
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personnel costs, including salaries, benefits, stock-based compensation, and
travel expenses for employees engaged in scientific research and development
functions;
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costs related to compliance with certain regulatory requirements;
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expenses related to the in-license of certain technologies; and
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allocated expenses for rent and maintenance of facilities, insurance, and other
general overhead.
We expense research and development 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 Results of Operations section
below. Inventory acquired prior to receipt of the marketing approval of a
product candidate is recorded as research and development expense as incurred.
Our research and development expenses are expected to increase relative to the
prior year and for the foreseeable future. Due to the expense reduction measures
taken in 2020 in response to the COVID-19 pandemic, in particular a deferral of
spending related to clinical trials, research and development expenses were
lower than pre-pandemic levels. 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 will increase as we
conduct additional clinical trials for ZILRETTA, including our planned
registration trial in shoulder OA, and conduct further development activities
for our pipeline programs, including our on-going clinical trials of FX2021 and
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, post-marketing development of ZILRETTA, or development of any
product candidates in our pipeline. The duration, costs, and timing associated
with the further development of 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. 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 or the
product candidates in our pipeline.
Selling, General and Administrative Expenses
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 selling, general, and administrative expenses will increase as compared to the prior year, including external marketing expenses and the operation of our field sales force. We are currently pursuing a sales force optimization effort, which we expect to complete in the second half of 2021, which may impact the extent of selling expenses in the foreseeable future.
Other Income (Expense)
Interest 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
Interest expense consists of contractual interest on our 2024 Convertible Notes, which accrue interest at a rate of 3.375% per annum, payable semi-annually, our term loan facility, which, prior toJuly 30, 2021 , accrued interest at a floating interest rate equal to the greater of the prime rate as reported in theWall Street Journal ("Prime Rate") plus 1.50% or 6.50% per annum, and our revolving credit facility, which, prior toJuly 30, 2021 , accrued interest at a floating interest rate equal to the greater of the Prime Rate or 5.50% per annum. Also included in interest expense is the amortization of the final payment on the term loan and the debt discount related to the convertible notes, which is being amortized to interest expense using the effective interest method over the expected life of the debt. 25 --------------------------------------------------------------------------------
Other income (expense)
Other income (expense) consists of the amortization of premiums or accretion of discounts related to our marketable securities, realized gains (losses) on redemptions of our marketable 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 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 inthe 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 endedDecember 31, 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 six months endedJune 30, 2021 . RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended
The following tables summarize our results of operations for the three and six months endedJune 30, 2021 : Three Months Ended June 30, % Increase/ (In thousands) 2021 2020 Change (Decrease) Revenues: Product revenue, net$ 28,175 $ 15,451 $ 12,724 82.4 % Operating expenses: Cost of sales 4,979 5,481 (502 ) (9.2 )% Research and development 12,669 12,507 162 1.3 % Selling, general and administrative 27,409 24,730 2,679 10.8 % Total operating expenses 45,057 42,718 2,339 5.5 % Loss from operations (16,882 ) (27,267 ) 10,385 (38.1 )% Other (expense) income: Interest income 177 95 82 86.3 % Interest expense (5,180 ) (5,002 ) (178 ) 3.6 % Other expense (323 ) (197 ) (126 ) 64.0 % Total other (expense) income (5,326 ) (5,104 ) (222 ) 4.3 % Loss before income taxes (22,208 ) (32,371 ) 10,163 (31.4 )% Income tax expense - 248 (248 ) NM Net loss$ (22,208 ) $ (32,619 ) 10,411 (31.9 )% 26
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Six Months Ended June 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Revenues:
Product revenue, net $ 52,764 $ 35,578 $ 17,186 48.3 %
Operating expenses:
Cost of sales 11,064 7,757 3,307 42.6 %
Research and development 26,716 33,641 (6,925 ) (20.6 )%
Selling, general and administrative 55,007 54,029 978 1.8 %
Total operating expenses 92,787 95,427 (2,640 ) (2.8 )%
Loss from operations (40,023 ) (59,849 ) 19,826 (33.1 )%
Other (expense) income:
Interest income 477 522 (45 ) (8.6 )%
Interest expense (10,369 ) (9,723 ) (646 ) 6.6 %
Other expense (849 ) (123 ) (726 ) 590.2 %
Total other (expense) income (10,741 ) (9,324 ) (1,417 ) 15.2 %
Loss before income taxes (50,764 ) (69,173 ) 18,409 (26.6 )%
Income tax expense - 248 (248 ) NM
Net loss $ (50,764 ) $ (69,421 ) 18,657 (26.9 )%
Product Revenue
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 six
months ended June 30, 2021 and 2020:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands, except
for % of sales) 2021 % of Sales 2020 % of Sales 2021 % of Sales 2020 % of Sales
Product revenue, gross $ 34,552 100.0% $ 18,079 100.0% $ 64,458 100.0% $ 40,794 100.0%
Adjustments to product
revenue, gross
Provider discounts and
rebates (3,100 ) (9.0)% (893 ) (4.9)% (5,803 ) (9.0)% (1,428 ) (3.5)%
All other (3,277 ) (9.5)% (1,735 ) (9.6)%
(5,891 ) (9.1)% (3,788 ) (9.3)%
Product revenue, net
Net product revenue for the three months endedJune 30, 2021 and 2020, was$28.2 million and$15.5 million , respectively. The period-over-period increase was due to an increase in the number of ZILRETTA units sold, which resulted in an increase in net revenue of$13.4 million , offset by a decrease of$0.7 million , which was attributable to a decrease in the net price per unit primarily due to provider rebate offerings and other discounts. Net revenue for the three months endedJune 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. Net product revenue for the six months endedJune 30, 2021 and 2020, was$52.8 million and$35.6 million , respectively. The period-over-period increase was due to an increase in the number of ZILRETTA units sold, which resulted in an increase in net revenue of$19.4 million , offset by a decrease of$2.2 million , which was attributable to a decrease in the net price per unit primarily due to provider rebate offerings and other discounts. 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$5.0 million and$5.5 million for the three months endedJune 30, 2021 and 2020, respectively. For the three months endedJune 30, 2021 , cost of sales was comprised of$2.8 million related to the actual cost of units sold,$2.1 million of unabsorbed manufacturing and overhead costs related to the operation of the facility at Patheon, and$0.1 million related to the write-down of short-dated inventory that is not expected to be sold prior to expiry. For the three months endedJune 30, 2020 , cost of sales was comprised of$1.6 million related to the actual cost of units sold,$3.4 million of unabsorbed overhead associated with the voluntary, temporary suspension of manufacturing activities at Patheon due to COVID-19 impacts on sales of ZILRETTA, and$0.5 million of period costs and other adjustments. Cost of sales was$11.1 and$7.8 million for the six months endedJune 30, 2021 and 2020, respectively. For the six months endedJune 30, 2021 , costs of sales consisted of$5.3 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, and$0.6 million related to the write-down of short-dated inventory that is not expected to be sold prior to expiry. For the six months endedJune 30, 2020 , cost of sales consisted of 27 --------------------------------------------------------------------------------
Research and Development Expenses
Three Months Ended June 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Direct research and development expenses
by program:
ZILRETTA $ 1,459 $ 2,319 $ (860 ) (37.1 )%
FX201 1,889 1,243 646 52.0 %
FX301 1,896 1,480 416 28.1 %
Portfolio expansion 290 31 259 835.5 %
Other 503 258 245 95.0 %
Total direct research and development
expenses 6,037 5,331 706 13.2 %
Personnel and other costs 6,632 7,176 (544 ) (7.6 )%
Total research and development expenses $ 12,669 $ 12,507 $ 162 1.3 %
Six Months Ended June 30,
% Increase/
(In thousands) 2021 2020 Change (Decrease)
Direct research and development expenses
by program:
ZILRETTA $ 2,644 $ 7,145 $ (4,501 ) (63.0 )%
FX201 3,357 4,958 $ (1,601 ) (32.3 )%
FX301 6,039 3,202 $ 2,837 88.6 %
Portfolio expansion 465 207 258 124.6 %
Other 962 899 63 7.0 %
Total direct research and development
expenses 13,467 16,411 (2,944 ) (17.9 )%
Personnel and other costs 13,249 17,230
(3,981 ) (23.1 )%
Total research and development expenses
Research and development expenses were$12.7 million and$12.5 million for the three months endedJune 30, 2021 and 2020, respectively. For the three months endedJune 30, 2021 , development expenses for ZILRETTA decreased by$0.9 million due to a reduction in ZILRETTA life cycle management activities. Salary and other employee-related costs and stock-based compensation expense also decreased by$0.5 million as a result of lower headcount. These decreases were partially offset by increases of$0.6 million and$0.4 million , respectively, related to the FX201 and FX301 pipeline programs due to increased clinical trial activity. Research and development expenses were$26.7 million and$33.6 million for the six months endedJune 30, 2021 and 2020, respectively. The decrease in research and development expense of$6.9 million was primarily due to a decrease of$4.5 million in development expense for ZILRETTA due to a reduction in ZILRETTA life cycle management activities, a decrease of$1.6 million related to FX201, which is largely due to 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, partially offset by increased clinical trial activity in 2021, and a decrease of$4.0 million in salary and other employee-related costs and stock-based compensation expense related to lower headcount. Decreases were partially offset by an increase of$2.8 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$0.3 million increase in costs related to our portfolio expansion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$27.4 million and$24.7 million for the three months endedJune 30, 2021 and 2020, respectively. Selling expenses were$18.9 million and$16.8 million for the three months endedJune 30, 2021 and 2020, respectively. The year-over-year increase in selling expenses of$2.1 million was primarily due to the partial resumption of industry conferences and physician speaker programs and increases in business travel during the quarter. General and administrative expenses were$8.5 million and$7.9 million for the three months endedJune 30, 2021 and 2020, respectively, which represents an increase of$0.6 million . Selling, general and administrative expenses were$55.0 million and$54.0 million for the six months endedJune 30, 2021 and 2020, respectively. Selling expenses were$37.9 million and$37.3 million for the six months endedJune 30, 2021 and 2020, respectively. The year-over-year increase in selling expenses of$0.6 million was primarily due to the partial resumption of industry conferences and physician speaker programs and increases in business travel. General and administrative expenses were$17.1 million and$16.7 million for the six months endedJune 30, 2021 and 2020, respectively, which represents an increase of$0.4 million . 28
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Other Income (Expense)
Interest income was$0.2 million and$0.1 million for the three months endedJune 30, 2021 and 2020, respectively. The increase in interest income was primarily due to an increase in the average investment balance as well as an increase in interest rates over the period. Interest income was$0.5 million and$0.5 million for the six months endedJune 30, 2021 and 2020. Interest expense was$5.2 million and$5.0 million for the three months endedJune 30, 2021 and 2020, respectively. Interest expense was$10.4 million and$9.7 million for the six months endedJune 30, 2021 and 2020, respectively. The increase in interest expense was attributed to the restructuring of our 2019 term loan inMay 2020 , which resulted in interest being paid on a higher principal amount, as well as an increase in the amortization of the debt discount on the 2024 Convertible Notes. We recorded other expense of$0.3 million for the three months endedJune 30, 2021 , compared to$0.2 million for the three months endedJune 30, 2020 . The increase in other expense was primarily due to changes in the price of debt securities, resulting in increased amortization of premiums. Other expense was$0.8 million and$0.1 million for the six months endedJune 30, 2021 and 2020.
Liquidity and Capital Resources
For the six months endedJune 30, 2021 , we generated$52.8 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$169.7 million , for fiscal years 2020, 2019, and 2018, respectively, and$50.8 million for the six months endedJune 30, 2021 . As ofJune 30, 2021 , we had an accumulated deficit of$833.1 million . We anticipate that we will continue to incur losses over the next few years. Since our inception throughJune 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 during 2014, 2016, 2017, and most recently inMay 2020 , as well as our term loan facility entered into in 2015 and 2019 and our 2024 Convertible Notes issuance in 2017. 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 COVID19 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 expenses will increase in 2021 and beyond and, as a result, we 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. As ofJune 30, 2021 , we had cash, cash equivalents, and marketable securities of$131.2 million . Based on our current operating plan we anticipate that our existing cash, cash equivalents, and marketable securities will fund our operations for at least the next 12 months from the issuance date of the financial statements included in this report. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with an objective of capital preservation. OnJuly 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") withSilicon 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 onFebruary 1, 2024 , which may be extended toJuly 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 withSilicon 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 onAugust 1, 2023 (if the second tranche is undrawn) orAugust 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 29 -------------------------------------------------------------------------------- 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. OnNovember 4, 2020 , we entered into the Distribution Agreement withGoldman Sachs & Co. LLC andCredit 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 ofJune 30, 2021 , 134,048 shares had been sold under the Distribution Agreement, for total net proceeds of$1.7 million . The following table shows a summary of our cash flows for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, (In thousands) 2021 2020 Cash flows used in operating activities$ (37,236 ) $ (48,607 ) Cash flows provided by investing activities 42,296
31,370
Cash flows (used in) provided by financing activities (5,135 )
118,083
Net (decrease) increase in cash and cash equivalents $ (75 ) $
100,846
Operating activities used$37.2 million of cash in the six months endedJune 30, 2021 . Cash used in operating activities resulted primarily from our net loss for the period of$50.8 million plus changes in our operating assets and liabilities of$3.4 million , partially offset by non-cash charges of$17.0 million . Changes in our operating assets and liabilities consisted primarily of a$5.1 million increase in accounts receivable, a$0.4 million increase in prepaid expenses and other current assets, and a$0.7 million decrease in lease liabilities primarily due to principal lease payments, partially offset by a$2.5 million decrease in inventory, and an increase of$0.2 million in accounts payable and accrued expenses. Our non-cash charges consisted primarily of$8.6 million of stock-based compensation expense,$5.0 million related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes,$0.9 million related to the amortization of right-of-use assets,$1.0 million of depreciation,$0.5 million of non-cash interest expense related to amortization of the final payment due on the 2019 term loan,$0.4 million of amortization of premiums paid for the purchase of marketable securities, and$0.6 million related to provision for inventory from the write-down of short-dated ZILRETTA inventory that is not expected to be sold prior to expiry. Operating activities used$48.6 million of cash in the six months endedJune 30, 2020 . The cash flow used in operating activities resulted primarily from our net loss for the period of$69.4 million , partially offset by changes in our operating assets and liabilities of$5.8 million and non-cash charges of$15.1 million . Changes in our operating assets and liabilities consisted primarily of a$15.6 million decrease in accounts receivable, a$0.3 million decrease in prepaid expenses and other current assets, and a$5.0 million increase in deferred revenue related to the license agreement with HK Tainuo, partially offset by a$2.5 million increase in inventory, a decrease of$11.9 million in accounts payable and accrued expenses, and a$0.7 million decrease in lease liabilities and other long-term liabilities primarily due to principal lease payments. Our non-cash charges consisted primarily of$8.4 million of stock-based compensation expense,$4.6 million related to the amortization of the debt discount and debt issuance costs related to the 2024 Convertible Notes,$0.8 million related to the amortization of right-of-use assets,$0.8 million of depreciation,$0.3 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$0.1 million of net accretion of discounts related to our investments.
Net Cash Provided by Investing Activities
Net cash provided by investing activities was$42.3 million in the six months endedJune 30, 2021 . Net cash provided by investing activities consisted primarily of cash received for the redemption and sale of marketable securities of$45.6 million , partially offset by cash used to purchase marketable securities of$2.0 million and capital expenditures of$1.3 million , primarily relating to the purchase of equipment associated with the expansion of our manufacturing facilities at Patheon. 30 -------------------------------------------------------------------------------- Net cash provided by investing activities was$31.4 million in the six months endedJune 30, 2020 . Net cash provided by investing activities consisted primarily of cash received for the redemption and sale of marketable securities of$49.4 million , partially offset by cash used to purchase marketable securities of$12.5 million and$5.5 million used for capital expenditures, primarily relating to the purchase of equipment associated with the expansion of our manufacturing facilities at Patheon.
Net cash used in financing activities was$5.1 million for the six months endedJune 30, 2021 , which consisted of$7.6 million related the payment of principal on our 2019 term loan and public offering costs paid during the period of$0.1 million , partially offset by$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. Net cash provided by financing activities was$118.1 million for the six months endedJune 30, 2020 , of which$97.2 million related to the net proceeds received from the offering of our common stock, offset by public offering costs paid during the period of$0.1 million ,$0.9 million relating to employee stock purchases through our employee stock purchase plan, as well as$20.0 million borrowed under the revolving credit facility associated with our 2019 term loan.
Contractual Obligations
For a discussion of our contractual obligations, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K. There have not been any material changes to such contractual obligations or potential milestone payments sinceDecember 31, 2020 , other than as described in Notes 9, 12, and 13 to our unaudited consolidated financial statements included elsewhere in this report.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements.
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