Decoy Therapeutics Inc. annual report, FY2017

Business context and reporting period

The supplied filing is Flex Pharma, Inc.’s audited Form 10-K for the fiscal year ended December 31, 2017—not a filing for Decoy Therapeutics Inc. or a standalone 2017 fourth quarter. The company is a clinical-stage biotechnology business developing FLX-787 for muscle cramps and related symptoms, and sells HOTSHOT, a consumer beverage. The filing reports annual results; fourth-quarter figures below are unaudited.

Financial and operating performance

All 2017 revenue came from HOTSHOT; there was no drug-product revenue. Product revenue increased 27%, while total revenue rose 26%. The company sold about 298,000 bottles versus 210,000 in 2016, but average revenue per bottle fell from $4.81 to $4.28, partly due to promotions. The improved gross margin and smaller net loss partly reflect lower costs and expenses; the company remained substantially loss-making. Year-end working capital was $28.69 million, total assets $34.99 million, and total liabilities $5.89 million. The company reported no long-term debt and no material off-balance-sheet arrangements.

In the unaudited fourth quarter, revenue was $282,828 and net loss was $8.03 million, compared with fourth-quarter 2016 revenue of $298,904 and net loss of $7.90 million. Quarterly operating cash flow is not separately provided in the filing text.

Material changes versus the prior comparable period

• Annual revenue increased, driven by a full year of HOTSHOT sales in 2017; e-commerce’s share of revenue declined from about 92% to 82% as specialty-retailer and sports-team sales grew.
• Research and development expense fell 17%, mainly because prior-year development activities were completed or reduced, partly offset by startup and trial costs for U.S. Phase 2 studies.
• SG&A declined 7%, including lower stock-based compensation and personnel costs, partly offset by higher consumer advertising and promotion.
• Cash, cash equivalents and marketable securities declined by $27.76 million year over year. Operating cash use was partly offset by maturities and sales of marketable securities; investing cash flow was positive $24.49 million.

Outlook, commentary and risks

Management estimated existing funds would support its operating plan to mid-2019, subject to assumptions, and said additional capital would be needed to develop and potentially commercialize drug candidates. The filing also states that available funds were not expected to be sufficient to obtain marketing approval for any targeted drug candidate. No drug candidate had FDA marketing approval.

• FLX-787 was being studied in Phase 2 trials for MS, motor neuron disease (primarily ALS), and Charcot-Marie-Tooth disease. The company reported statistically significant reductions in cramp-associated pain intensity and stiffness in eight per-protocol completers of a small Australian ALS/PLS trial; other measures were trends, and results are preliminary.
• Management expected MS trial topline results in the first quarter of 2018 and MND and CMT trial results by early 2019. ALS had FDA Fast Track designation; this does not mean the candidate is approved.
• On January 22, 2018, the company announced it had engaged an investment bank to explore strategic alternatives for the consumer business. The filing gives no assurance that a transaction would result. This announcement is described in the body of the filing, although the financial-statement subsequent-events note says no subsequent events required disclosure.
• Key risks include clinical-trial failure or delay, substantial ongoing cash burn and need for financing, limited HOTSHOT sales and uncertain consumer demand, reliance on sole-source suppliers and a co-packer, regulatory and product-claim risks, and limited patent protection. The company had written off about $42,000 of inventory in 2017, versus about $282,000 in 2016.
• The financial statements received an unqualified independent audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness because of the company’s emerging-growth-company exemption.

Important facts for investors to verify

• Confirm the issuer identity: the request names Decoy Therapeutics Inc., while the filing and financial statements identify Flex Pharma, Inc. (ticker FLKS).
• Verify the cash runway assumptions, quarterly cash burn, and any subsequent financing or strategic-transaction developments; the stated runway was an estimate, not a guarantee.
• Track enrollment, trial design, safety, and full results for the FLX-787 Phase 2 programs; the highlighted Australian findings came from a small per-protocol group.
• Assess HOTSHOT’s revenue growth, lower average revenue per bottle, promotional dependence, inventory exposure, and consumer-business strategic review.
• Review the full audited financial statements and notes for cash-flow detail, stock-based compensation, inventory and royalty obligations, and the potential limitation of tax attributes under ownership-change rules.