Business context and reporting period
This is Flex Pharma, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The request identifies Decoy Therapeutics Inc., but the filing’s registrant is Flex Pharma, Inc.; confirm the intended company.
Flex Pharma sold HOTSHOT, a consumer product for exercise-associated muscle cramps, and was developing FLX-787. In June 2018, it ended Phase 2 trials of FLX-787 in motor neuron disease, including ALS, and Charcot-Marie-Tooth disease after oral tolerability concerns. It began a strategic alternatives review, including a possible sale or merger, and said its reduced team would assess FLX-787 for dysphagia and operate the consumer business.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $245,502 | $335,523 | $424,084 | $578,070 |
| Cost of product revenue | $179,945 | $145,325 | $263,879 | $224,431 |
| Research and development | $6.17 million | $4.08 million | $10.85 million | $7.99 million |
| Selling, general and administrative | $2.99 million | $4.99 million | $6.69 million | $9.59 million |
| Operating loss | $9.10 million | $8.88 million | $17.39 million | $17.22 million |
| Net loss | $9.05 million | $8.80 million | $17.28 million | $17.07 million |
| Net loss per share, basic and diluted | $0.50 | $0.51 | $0.96 | $1.00 |
All revenue came from consumer operations. Revenue fell 27% year over year in both the quarter and first half. Q2 product gross profit was approximately $65,000, or 27% of revenue, versus approximately $190,000, or 57%, a year earlier; the filing cites higher inventory write-offs among cost pressures. The company sold approximately 54,000 HOTSHOT bottles in Q2, compared with 83,000 a year earlier.
At June 30, cash and cash equivalents were $15.76 million, restricted cash was $126,595, and marketable securities were nil. Working capital was $13.1 million; accumulated deficit was $128.3 million. The company reported no long-term debt. For the six months, operating cash use was $17.67 million; investing activities provided $14.12 million, mainly reflecting marketable-security maturities and sales; financing provided $118,010. Cash, cash equivalents and restricted cash declined $3.43 million.
Material changes, outlook and risks
- Quarterly R&D expense rose 51%, mainly due to Phase 2 trial activity, trial close-out costs and restructuring-related expenses. SG&A fell 40%, chiefly from reduced HOTSHOT marketing and lower headcount.
- The company reduced its workforce by approximately 60%, with most reductions completed by quarter-end. It recorded about $918,000 of restructuring expense in Q2 and estimated total restructuring costs of approximately $1.19 million to $3.37 million. Potential retention and severance payments could total up to approximately $2.3 million; some amounts depend on a change in control or other conditions.
- Management said existing cash was expected to fund the reduced operating plan for at least 12 months from the financial statements’ issuance date, assuming limited R&D and continued HOTSHOT sales. Management expected continued losses; additional financing may be needed, and availability is not assured.
- A stockholder class action filed June 19, 2018 alleges misleading statements about FLX-787. The company denies wrongdoing, intends to defend the case, cannot predict the outcome and had accrued no expense for it at June 30.
- Risks include an unsuccessful strategic review, possible cessation of operations, uncertain HOTSHOT demand, further financing needs, clinical and regulatory uncertainty, potential Nasdaq listing noncompliance after the share price fell below $1, and litigation-related costs. No assurance was given that a sale, merger or other transaction would occur.
Most important facts to verify
- Confirm that Flex Pharma, rather than Decoy Therapeutics, is the intended filing.
- Check subsequent disclosures on strategic alternatives, financing, cash runway and any sale, merger or liquidation decision.
- Verify the status and financial impact of the FLX-787 dysphagia assessment and the ended MND and CMT trials.
- Follow developments in the class action, restructuring liabilities and any change-in-control-related payments.
- Review HOTSHOT sales trends, inventory realizability and Nasdaq listing compliance.