Filing Summary
Issuer note: The supplied filing is Flex Pharma, Inc.’s Form 10-Q, not a filing for Decoy Therapeutics Inc. It covers the quarter and nine months ended September 30, 2016; financial statements are unaudited.
Business context and reporting period
Flex Pharma was developing treatments for muscle cramps and spasms and launched its consumer product, HOTSHOT, in the second quarter of 2016. It reported Consumer Operations and Drug Development as separate segments. The filing describes HOTSHOT sales and early-stage drug development, including lead candidate FLX-787.
Financial performance and position
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 | Nine months ended Sep. 30, 2016 | Nine months ended Sep. 30, 2015 |
|---|---|---|---|---|
| Total revenue | $599,074 | $0 | $711,759 | $0 |
| Cost of product revenue | $221,090 | $0 | $529,041 | $0 |
| Research and development | $5.67 million | $3.45 million | $16.15 million | $9.44 million |
| Selling, general and administrative | $5.45 million | $4.72 million | $15.94 million | $11.84 million |
| Operating loss | $(10.74) million | $(8.17) million | $(31.90) million | $(21.28) million |
| Net loss | $(10.64) million | $(8.15) million | $(31.59) million | $(21.25) million |
| Basic and diluted loss per share | $(0.65) | $(0.53) | $(1.96) | $(1.57) |
HOTSHOT generated all revenue. The implied gross margin after product costs was approximately 63% for the quarter and 26% for the nine-month period; these figures include inventory write-offs and are not presented by the company as a reported margin measure. E-commerce through the company’s branded website accounted for approximately 93% of quarterly revenue and 92% of nine-month revenue.
At September 30, 2016, cash and cash equivalents were $27.8 million and marketable securities were $39.5 million, totaling $67.3 million in cash, cash equivalents and marketable securities. Working capital was $65.2 million. Total liabilities were $3.9 million; the company reported no long-term debt. Accumulated deficit was $68.7 million.
For the first nine months of 2016, operating cash use was $25.8 million, investing cash use was $13.1 million, and financing provided $22,096. Cash and cash equivalents fell by $38.9 million to $27.8 million. Stock-based compensation was $5.4 million. The filing does not provide a clear reported gross-margin figure.
Material changes versus prior periods
- Revenue began with the HOTSHOT launch; the comparable 2015 periods had no revenue.
- Nine-month operating expenses increased 53% and operating loss increased 50% year over year, mainly reflecting increased clinical and preclinical development spending and consumer-business launch costs.
- Nine-month net loss increased 49% year over year. Quarterly net loss increased 30%.
- Nine-month operating cash use rose from $15.3 million to $25.8 million. Cash and cash equivalents declined from $66.7 million at year-end 2015; the company also held $39.5 million of marketable securities at September 30, 2016.
- The company recorded $258,684 of HOTSHOT inventory write-offs in the first nine months, including $32,734 in the third quarter.
Outlook, commentary and risks
Management expected continued operating losses and significant research, development, selling and administrative expenses. It stated that existing resources were expected to fund the operating plan for at least the next 12 months; the MD&A separately estimated funding through late 2018, subject to assumptions and the possibility of faster cash use. Management said additional capital would be needed for future operations and could involve equity, debt, partnerships or other funding; availability on acceptable terms was not assured.
FDA feedback indicated that cramp frequency could be an acceptable primary efficacy endpoint for FLX-787 and recommended a parallel design for a planned IND-opening study. One exploratory nocturnal leg-cramp study did not show statistically significant results on its prespecified endpoints in the full crossover analysis; a restricted subset showed a trend (p=0.06). A second study reported statistically significant results in early study arms, with later results potentially affected by carryover. The company planned a Phase 2 nocturnal leg-cramp study for the first half of 2017, after IND submission. An exploratory Phase 2 study in ALS patients in Australia had begun. These are early results and do not establish future efficacy or approval.
Key risks include clinical and regulatory uncertainty; limited HOTSHOT sales and the challenge of attracting repeat customers cost-effectively; inventory shelf life and possible further write-offs; reliance on a sole-source co-packer and certain sole-source raw-material suppliers; reliance on limited fulfillment partners and a single warehouse; and website, system and data-security disruptions. No material legal proceedings or off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm issuer identity: the filing is for Flex Pharma, Inc., not Decoy Therapeutics Inc.
- Review subsequent HOTSHOT sales, customer retention, channel mix, return experience and inventory write-offs.
- Check actual cash burn and runway against management’s late-2018 estimate and the separate 12-month liquidity statement.
- Track FLX-787 IND submission, Phase 2 study timing and design, and whether exploratory findings are replicated in adequately powered studies.
- Assess the company’s dependence on sole-source manufacturing and supply, its contingency plans, and any need for additional financing.