Business context and reporting period
The supplied filing is Flex Pharma, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2015—not a filing for Decoy Therapeutics Inc. Flex Pharma was a biotechnology company developing treatments for muscle cramps and spasms, alongside a consumer product for athletes. It had not generated revenue and reported operating losses.
Financial results and position
- Revenue: None to date.
- Third-quarter 2015: Research and development expense was $3.45 million and selling, general and administrative expense was $4.72 million. Total operating expenses were $8.17 million; net loss was $8.15 million, compared with a $1.99 million net loss in Q3 2014.
- Nine months ended September 30, 2015: Operating expenses were $21.28 million and net loss was $21.25 million, compared with $4.28 million and $4.27 million, respectively, from inception through September 30, 2014. The comparison covers different-length periods because the company began operations in February 2014.
- Margins: Not meaningful because the company had no revenue.
- Cash flow: Operating cash used was $15.31 million and investing cash used was $10.23 million; financing provided $80.84 million, primarily from the IPO. Cash and cash equivalents rose by $55.31 million during the nine-month period.
- Liquidity: Cash, cash equivalents and marketable securities totaled $99.16 million at September 30, 2015. Total current liabilities were $2.32 million and total liabilities were $2.76 million. The company reported no long-term debt.
- Other: Accumulated deficit was $29.26 million. Stock-based compensation expense was $4.89 million for the nine-month period.
Material changes versus the prior comparable period
- Q3 operating expenses increased $6.17 million year over year, reflecting expanded clinical and research activity, increased staffing, consumer-brand development and public-company costs.
- Q3 net loss increased $6.17 million year over year. For the nine-month comparison, expenses and net loss were substantially higher than in the company’s shorter inception-period comparison.
- The February 2015 IPO generated approximately $79.9 million in net proceeds. Preferred stock converted into common stock at the IPO closing.
Outlook, risks and notable items
- Management expected to launch its cornerstone consumer product in Q2 2016, initially targeting Los Angeles, Boulder and Boston. It expected launch-related and operating expenses to rise.
- Management stated that existing cash and marketable securities were expected to fund operations through mid-2018, subject to assumptions that could prove incorrect. A note to the financial statements separately said resources were sufficient for at least the next 12 months.
- Management expected continued operating losses and said additional funding would be needed to support consumer-product growth and drug development. Drug candidates were in preclinical development; future clinical, regulatory, manufacturing and commercialization outcomes remained uncertain.
- The company reported statistically significant cramp-intensity results in three controlled studies in healthy volunteers. A July 2015 athlete field study reported fewer cramps versus a prior baseline period, but did not include a placebo; management acknowledged placebo effects as a limitation.
- Market risks included interest-rate sensitivity in cash investments and corporate debt securities; management said an immediate 100-basis-point rate change would not materially affect portfolio fair value. Five debt securities were in an unrealized-loss position, but the losses were not considered other-than-temporary.
- No material legal proceedings, off-balance-sheet arrangements or material changes to previously disclosed contractual obligations were reported. Management said disclosure controls were effective.
Most important facts to verify
- Confirm the issuer: the provided filing identifies Flex Pharma, Inc., not Decoy Therapeutics Inc.
- Reconcile the stated cash runway: “through mid-2018” in MD&A versus “at least the next 12 months” in the financial-statement note.
- Review subsequent evidence on the planned Q2 2016 consumer-product launch, its funding needs and commercial progress.
- Assess clinical and regulatory progress, especially given the early-stage status of drug candidates and the lack of a placebo in the cited athlete field study.
- Consider the growth in operating expenses and the possibility that additional capital may be required sooner than management expected.