SEC Filing Summary
Entity and period: The supplied filing is Flex Pharma, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 6, 2019. It does not identify Decoy Therapeutics Inc.; verify that this is the intended filing. The 10-K also reports unaudited fourth-quarter results.
Business context and reporting period
Flex Pharma had been developing FLX-787 for muscle cramps and related conditions, while selling HOTSHOT, its exercise-associated muscle-cramp beverage. In June 2018, the company stopped its Phase 2 trials in motor neuron disease and Charcot-Marie-Tooth disease because of oral tolerability concerns, completed trial wind-down in Q3, and reduced its workforce by about 60%. HOTSHOT was the company’s only revenue source. As of March 1, 2019, it had four full-time employees.
On January 3, 2019, Flex Pharma agreed to merge with privately held Salarius Pharmaceuticals. The merger was pending at filing; if completed, Salarius would become the combined company’s business.
Financial results and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $838,142 | $1,274,499 |
| Cost of product revenue | $430,750 | $506,530 |
| Gross profit and margin | $407,392; 48.6% | $767,969; 60.2% |
| Research and development | $11.91 million | $16.99 million |
| Selling, general and administrative | $10.57 million | $18.50 million |
| Operating loss | $22.07 million | $34.73 million |
| Net loss | $21.92 million | $34.43 million |
| Net loss per share, basic and diluted | $1.22 | $1.99 |
| Cash used in operating activities | $23.60 million | $27.72 million |
| Cash, cash equivalents and marketable securities at year-end | $9.83 million | $33.32 million |
Revenue fell 34%, mainly as reduced marketing and promotion lowered HOTSHOT demand. The company sold about 184,000 bottles in 2018 versus 298,000 in 2017; average revenue per bottle rose to $4.56 from $4.28. Operating and net losses narrowed as R&D and SG&A spending declined after the clinical shutdown and restructuring. FY 2018 included about $85,000 of inventory write-offs and $1.37 million of restructuring-related expense.
At December 31, 2018, working capital was $9.21 million, total assets were $10.39 million, and total liabilities were $1.11 million. The balance sheet reports no borrowings. Management said available cash was expected to fund the current operating plan for at least 12 months from the financial statements’ issuance, based on limited R&D and continued HOTSHOT sales. The filing warns that this estimate depends on assumptions and cash could be used sooner.
Unaudited Q4 2018 revenue was $163,067 and net loss was $2.01 million, compared with Q4 2017 revenue of $282,828 and net loss of $8.03 million. Q4 2018 R&D expense declined to $187,759 from $4.26 million, reflecting the trial wind-down.
Material changes and outlook
- Operating cash use improved year over year, but cash and cash equivalents declined to $9.83 million from $19.19 million; the company also held $14.13 million of marketable securities at the prior year-end and none at 2018 year-end.
- Flex Pharma adopted ASC 606 in 2018. The filing says this accelerated recognition of certain e-commerce revenue; 2018 revenue would have been about $44,000 lower under the prior method.
- The merger agreement valued Flex Pharma at $10.5 million, subject to net-cash adjustment, and Salarius at $36.6 million, subject to financing-related adjustment. Existing Flex Pharma stockholders were expected to own approximately 19.9% of the combined company on a partially diluted basis, subject to stated exclusions and adjustments.
- If the merger does not close, management identified liquidation, another strategic transaction, or continued operation of HOTSHOT as alternatives; liquidation was described as the most likely course. The company cautioned that stockholders could lose all or a significant portion of their investment.
- No financial guidance for revenue or earnings is provided. Management expected lower R&D expense after ending the trials, while merger-related and ongoing public-company costs could affect SG&A.
Risks, contingencies, and unusual items
- The Salarius merger was subject to stockholder approval and other closing conditions. Termination could involve a $350,000 fee, up to $200,000 of expense reimbursement in certain circumstances, and continued transaction costs.
- Nasdaq had notified the company of minimum-bid-price noncompliance; it received an additional compliance period through August 12, 2019. The company had regained compliance with the minimum market-value requirement in November 2018.
- Retention, change-in-control and severance arrangements could result in substantial payments. The filing described up to approximately $1.9 million in potential retention, change-in-control bonus and severance payments; certain amounts depended on a change in control or termination.
- A proposed merger-related shareholder demand letter was received March 1, 2019, alleging deficient proxy disclosures; the company was reviewing it. A separate securities class action filed in 2018 was dismissed with prejudice in December 2018.
- HOTSHOT depended on a sole-source co-packer and certain sole-source ingredient suppliers, and most inventory was held at one warehouse. Consumer demand, seasonal sales, product claims, regulation, product liability and marketing effectiveness were additional risks.
- The company reported $110.9 million of federal and $105.4 million of state net operating loss carryforwards, but maintained a full valuation allowance against deferred tax assets. Potential ownership changes, including the merger, could limit use of tax attributes.
Most important facts for investors to verify
- Confirm the intended issuer: the provided document is Flex Pharma, Inc., not Decoy Therapeutics Inc.
- Check the merger’s final status, closing conditions, net-cash adjustments, financing and resulting ownership dilution.
- Verify current unrestricted cash, subsequent cash use, liabilities, contingent reserves and the likely amount available in any liquidation.
- Review HOTSHOT sales trends, gross margins, inventory exposure and the company’s ability to sustain operations with limited marketing.
- Assess the status and potential cost of the merger-related shareholder demand and any other legal or Nasdaq listing matters.