Filing identity and reporting period
The supplied filing is Flex Pharma, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2016, not a filing under the name Decoy Therapeutics Inc. Investors should verify the issuer identity.
Flex Pharma was a biotechnology company developing treatments for muscle cramps and spasms. In the second quarter, it launched HOTSHOT, its first consumer product, and began reporting Consumer Operations and Drug Development as separate segments.
Financial results and liquidity
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $112,685 | $112,685 | None |
| Cost of revenue | $110,931 | $307,951 | None |
| Research and development | $6.09 million | $10.48 million | $3.19 million and $6.00 million, respectively |
| Selling, general and administrative | $5.38 million | $10.49 million | $3.90 million and $7.12 million, respectively |
| Operating loss | $11.47 million | $21.17 million | $7.09 million and $13.12 million, respectively |
| Net loss | $11.36 million | $20.96 million | $7.08 million and $13.10 million, respectively |
| Net loss per share | $0.71 | $1.31 | $0.47 and $1.04, respectively |
Quarterly revenue less cost of revenue was approximately $1,754, a gross margin of about 1.6%; for the six-month period, cost of revenue exceeded revenue by approximately $195,000. Six-month cost of revenue included approximately $226,000 of inventory write-offs. HOTSHOT sales were the company’s only revenue, and approximately 88% of second-quarter net revenue came from e-commerce.
At June 30, cash and cash equivalents were $38.94 million, marketable securities were $35.91 million, and unrestricted cash, cash equivalents and marketable securities totaled $74.85 million. Total current assets were $77.40 million and current liabilities were $3.40 million. Total liabilities were $3.41 million; the company reported no long-term debt. Stockholders’ equity was $74.82 million and accumulated deficit was $58.11 million.
For the first six months, operating cash use was $18.50 million, investing cash use was $9.25 million, and financing cash provided was $8,043. Cash and cash equivalents declined by $27.75 million to $38.94 million. The prior-year period included $80.44 million of net IPO proceeds in financing cash flow.
Material changes versus 2015
- Revenue began with the HOTSHOT launch; there was no revenue in the comparable 2015 periods.
- Six-month operating loss increased by $8.05 million, while net loss increased by $7.86 million. Management attributed higher R&D spending primarily to clinical studies and preclinical work, and higher SG&A to consumer-brand launch activity and additional personnel.
- Cash used in operating activities rose to $18.50 million from $8.61 million. The company also purchased and sold marketable securities, resulting in $9.25 million of net investing cash use.
Outlook, risks and notable items
- Management expected continued operating losses and increases in R&D, commercialization and working-capital costs. It said existing cash and marketable securities were expected to fund the current operating plan for at least 12 months; MD&A separately projected funding through mid-2018. The estimate depends on assumptions that may prove incorrect.
- The company initiated a human proof-of-concept study for nocturnal leg cramps and a Phase 2 study of FLX-787 in multiple-sclerosis patients. In July 2016, it reported completion of enrollment in the nocturnal-leg-cramp study and expected topline results by year-end 2016.
- HOTSHOT was early in commercialization, with limited revenue and a 12-month shelf life. E-commerce revenue recognition was deferred until the 21-day refund period expired. Inventory write-downs may recur if sales fall short of expectations.
- Key risks include reliance on a sole-source co-packer and certain sole-source raw-material suppliers, dependence on limited fulfillment and distribution partners, inventory concentrated at one warehouse, and the need to attract and retain customers cost-effectively. Clinical, regulatory, commercialization and additional-funding outcomes remain uncertain.
- The company reported no material legal proceedings, no off-balance-sheet arrangements and no material change in contractual obligations. Management concluded disclosure controls were effective and that substantial doubt about going concern did not exist under the accounting standard discussed in the filing.
Investor verification checklist
- Confirm issuer identity: the filing names Flex Pharma, Inc., whereas the request metadata names Decoy Therapeutics Inc.
- Reconcile the stated cash runway: at least 12 months in the notes versus through mid-2018 in MD&A, and assess spending against subsequent results.
- Review HOTSHOT sales, repeat purchasing, customer-acquisition costs, channel mix and gross economics as commercialization develops.
- Track inventory levels, shelf-life exposure, future write-offs and dependence on sole-source manufacturing, suppliers and warehousing.
- Verify clinical-study results, timelines, funding needs and any subsequent financing or dilution.