Flex Pharma, Inc. — FY2016 Form 10-K
Filing identity: The supplied filing is for Flex Pharma, Inc. (NASDAQ: FLKS), not Decoy Therapeutics Inc. It covers the fiscal year ended December 31, 2016; fourth-quarter figures are also disclosed. The financial statements received an unqualified audit opinion.
Business context and reporting period
Flex Pharma was a development-stage biotechnology company pursuing treatments for muscle cramps and spasms. Its lead candidate, FLX-787, was in exploratory Phase 2 trials in Australia for MS and ALS. The company launched its HOTSHOT consumer beverage in June 2016. It reported Consumer Operations and Drug Development as separate segments beginning in Q2 2016.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $1.01 million | $0 |
| Cost of product revenue | $0.66 million | $0 |
| Research and development | $20.38 million | $12.75 million |
| Selling, general and administrative | $19.86 million | $16.46 million |
| Operating loss | $39.89 million | $29.21 million |
| Net loss | $39.49 million | $29.14 million |
| Net loss per share, basic and diluted | $2.43 | $2.08 |
| Operating cash flow | $(32.05) million | $(20.75) million |
HOTSHOT generated approximately $990,000 in product revenue and $20,745 in other revenue. The company sold about 210,000 bottles, with average total revenue of $4.81 per bottle; approximately 92% of revenue came from e-commerce. Product gross profit was approximately $348,000, or a 34% gross margin, before operating expenses. Inventory write-offs of approximately $282,000 were included in product cost.
At year-end, cash, cash equivalents and marketable securities totaled $61.07 million, working capital was $58.58 million, total assets were $63.21 million, and stockholders’ equity was $59.32 million. The company reported no long-term debt. Operating cash use increased by $11.3 million year over year. Management estimated that existing funds would support its operating plan through early 2019, subject to assumptions; the filing says additional funding would be needed to advance and commercialize drug candidates.
Fourth-quarter and year-over-year changes
Q4 2016 revenue was $298,904, compared with no revenue in Q4 2015. Q4 2016 net loss was $7.90 million, versus $7.89 million in Q4 2015. For FY2016, revenue began with the HOTSHOT launch, while net loss increased 36% and R&D expense increased 60% from FY2015. Management attributed higher R&D costs mainly to clinical studies, IND-supporting preclinical work, and clinical supply manufacturing; higher SG&A reflected launch-related staffing, marketing, and corporate costs.
Cash and marketable securities declined from $93.65 million at year-end 2015 to $61.07 million at year-end 2016. The company’s accumulated deficit reached $76.65 million. Its Consumer Operations segment reported a $10.02 million operating loss in 2016; Drug Development reported a $19.62 million operating loss, with $10.24 million of corporate and unallocated operating loss.
Outlook, risks and unusual items
- Management expected to initiate U.S. Phase 2 trials of FLX-787 in motor neuron disease, primarily ALS, and CMT in 2017, subject to FDA review of the relevant INDs and protocols. These were plans, not confirmed trial outcomes.
- In January 2017, the company decided to delay further development of FLX-787 for nocturnal leg cramps and focus drug development on severe neurological conditions. One of three nocturnal-leg-cramp studies did not meet its prespecified endpoints overall; management cited patient-selection concerns.
- HOTSHOT sales remained early and limited, with risks including consumer adoption, repeat purchases, seasonality, premium pricing, advertising substantiation and food-versus-supplement regulatory classification.
- The company relied on a sole-source co-packer and certain sole-source raw-material suppliers for HOTSHOT. Supply disruption, inventory shelf life and further write-offs could affect sales and margins.
- Clinical success, FDA approval, adequate financing, market acceptance and third-party reimbursement were uncertain. The company reported cumulative losses, expected continuing losses and had no drug products approved for sale.
- A perpetual founder royalty agreement provides for aggregate royalties of 2% of gross sales of qualifying products. Approximately $20,000 of royalty expense was recorded in 2016.
- After year-end, Flex Pharma signed a Boston headquarters lease running September 2017 through August 2019, adding $933,186 to future minimum lease payments. No material legal proceedings were reported.
Key facts investors should verify
- Confirm the issuer: the filing is Flex Pharma, Inc., notwithstanding the request metadata naming Decoy Therapeutics Inc.
- Review the assumptions underlying management’s early-2019 cash runway estimate, including clinical-trial and HOTSHOT spending, and assess future financing needs.
- Track FDA review and initiation of the planned U.S. trials, trial endpoints, enrollment, safety findings and subsequent efficacy results for FLX-787.
- Assess HOTSHOT sell-through, repeat purchases, channel mix, gross margin and inventory levels against the company’s shelf-life and sales assumptions.
- Consider the effect of the founder royalty, new lease commitments, potential dilution from future fundraising and the limitations of the company’s patent protection.