Decoy Therapeutics Inc. quarterly report, Q2 FY2017

Business context and reporting period

This is Flex Pharma, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017—not a filing identified in its text as Decoy Therapeutics Inc. Flex Pharma develops treatments for muscle cramps and spasticity and sells HOTSHOT, a consumer product for exercise-associated cramps. The company reported two segments: Consumer Operations and Drug Development.

After quarter-end, Flex Pharma initiated a U.S. Phase 2 trial of FLX-787 in patients with motor neuron disease, primarily ALS; it expected to begin a Phase 2 CMT trial in Q3 2017. FLX-787 was also in an exploratory Phase 2 study for MS-related spasticity in Australia.

Financial results and liquidity

HOTSHOT generated all revenue. Q2 revenue rose 198% year over year; six-month revenue rose 413%, reflecting the product’s 2016 launch. In Q2, about 83,000 bottles were sold at average total revenue of $4.04 per bottle, versus 24,000 at $4.70 in the prior-year quarter; the company attributed the lower per-bottle figure to promotions. E-commerce represented about 81% of Q2 revenue. Approximate gross margin, calculated from reported total revenue less cost of product revenue, was 57% for Q2 and 61% for the first half.

R&D expense fell 33% in Q2 and 24% in the first half, mainly due to lower prior-year study activity and lower stock-based compensation, partly offset by U.S. trial startup costs. SG&A fell 7% in Q2 and 9% in the first half; increased HOTSHOT marketing offset some reductions in compensation and other costs. Interest income declined as investable cash was lower. No significant income tax provision or benefit was recorded.

At June 30, 2017, cash and cash equivalents were $39.1 million, marketable securities were $8.0 million, and combined unrestricted cash, equivalents and securities were $47.1 million. Working capital was $44.0 million. Total liabilities were $5.1 million; the company reported no long-term debt. Six-month investing cash inflow of $30.6 million primarily reflected marketable-security maturities and sales, not operating cash generation. Management projected available resources would fund its plans into early 2019, while warning actual cash use could exceed assumptions. It also stated it would need additional capital unless it achieved sufficient revenue.

Changes, outlook, risks and unusual items

• Losses narrowed year over year: first-half net loss improved by $3.9 million, while operating cash use decreased by $4.6 million.
• Management expected operating losses for at least several years and did not provide revenue or earnings guidance. It anticipated significant R&D and consumer commercialization spending and possible future equity, debt, or partner funding.
• Management expected topline results from the COMMEND ALS/MND Phase 2 trial in mid-2018. It planned the COMMIT CMT trial for Q3 2017. The company said it would end its small Australian exploratory ALS study after announcing the U.S. trial.
• FDA granted FLX-787 Fast Track designation for severe ALS muscle cramps in July 2017. This supports closer FDA interaction; it is not marketing approval or evidence of efficacy.
• Funding risks include trial cost, clinical and regulatory uncertainty, commercialization challenges, potential dilution or debt restrictions, and the possibility that further capital may not be available on acceptable terms. HOTSHOT sales may vary with seasonality, customer acquisition, repeat purchases and retail distribution.
• HOTSHOT relies on a single co-packer and certain sole-source raw-material suppliers. The company recorded $17,767 of inventory write-offs in the first half of 2017, compared with $225,950 in the first half of 2016.
• Management said resources would cover at least 12 months from issuance and separately forecast funding into early 2019. The corporate headquarters lease extension increased future minimum lease payments by $933,186 through 2019.
• Leadership changed during the period: William McVicar became interim CEO in June and permanent CEO in July; the former CEO remained board chair. The filing identifies the CEO and Chief Medical Officer as key personnel and reports no key-person insurance.
• The company reported effective disclosure controls, no material legal proceedings, and no material changes to previously disclosed risk factors other than key-personnel dependence.

Important facts for investors to verify

• Confirm issuer identity: the supplied filing is for Flex Pharma, Inc., notwithstanding the request metadata naming Decoy Therapeutics Inc.
• Track trial initiation, enrollment, endpoints, safety and data timing for COMMEND and COMMIT; verify subsequent FDA and clinical updates.
• Assess HOTSHOT’s sales growth, repeat purchasing, promotional pricing, gross margin, inventory requirements and dependence on e-commerce and the single co-packer.
• Compare actual cash burn with management’s early-2019 runway estimate and monitor any capital raises, dilution or changes to planned development spending.
• Review the underlying 10-K and later filings for updated risks, lease commitments, revenue recognition effects and subsequent events.