NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization and operations
The Company
Flex Pharma, Inc. (the "Company") is a biotechnology company that was focused on developing innovative and proprietary treatments for muscle cramps, spasms and spasticity associated with severe neurological conditions. In June 2018, the Company announced that it was ending its ongoing Phase 2 clinical trials of FLX-787 in patients with motor neuron disease ("MND"), primarily with amyotrophic lateral sclerosis ("ALS"), and in patients with Charcot-Marie-Tooth disease ("CMT"), due to oral tolerability concerns observed in both studies.
Additionally, in June 2018, the Company initiated a process to explore a range of strategic alternatives for enhancing stockholder value, including the potential sale or merger of the Company. Wedbush PacGrow has been engaged to act as the Company’s strategic financial advisor. The Company also announced the restructuring of the organization to reduce its cost structure in order to preserve liquidity. In connection with the restructuring plan, the Company reduced its workforce by approximately
60%
, with the majority of reduction completed as of June 30, 2018. While the strategic assessment is ongoing, the Company will continue to operate with a reduced internal team that will focus their efforts on assessing the potential of FLX-787 in dysphagia (difficulty swallowing) and operating its consumer business, which sells HOTSHOT®, the Company's consumer product launched in 2016 to prevent and treat exercise-associated muscle cramps.
The Company's evaluation of strategic alternatives and its restructuring plans entails significant risks and uncertainties, including the risks and uncertainties set forth in Item 1A under the heading "Risk Factors" and Item 2 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K. There can be no assurance that the Company's evaluation of potential strategic alternatives will result in any transaction.
The Company operates as
two
reportable segments, Consumer Operations and Drug Development. See Note 12 for additional discussion and information on the reportable segments.
Liquidity
The Company incurred a loss of
$9,051,872
for the three months ended
June 30, 2018
, a loss of
$17,275,099
for the
six
months ended
June 30, 2018
and had an accumulated deficit of
$128,314,157
as of June 30, 2018. The Company had unrestricted cash and cash equivalents of
$15,756,971
at
June 30, 2018
. The Company's operating plan assumes limited research and development activities and that the Consumer Operations segment will continue to sell HOTSHOT.
In the event that the Company does not complete a sale or merger, the Company may (i) elect to continue to sell HOTSHOT and operate its consumer business or (ii) elect to pursue a dissolution and liquidation of the Company. If the Company dissolves and liquidates, the Company's common stockholders may lose their entire investment. The amount of assets available for distribution to the Company's stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will be needed for commitments and contingent liabilities.
Based on the Company's operating plan, the Company believes that its existing cash and cash equivalents will be sufficient to allow the Company to fund its current operating plan for at least 12 months from the date the financial statements are issued.
The Company cannot predict the outcome of its strategic assessment or whether and to what extent it will resume drug development activities for FLX-787 or other drug product candidates beyond its current efforts to assess the potential of FLX-787 in dysphagia and to what extent it will promote and sell HOTSHOT or other consumer products in the future. Accordingly, it is difficult to predict future cash needs. Management does expect the Company to incur losses for the foreseeable future. The Company's ability to achieve profitability in the future is dependent upon achieving a level of revenues adequate to support the Company's cost structure. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital. If the Company raises funds through the issuance of additional equity, whether through private placements or additional public offerings, such an issuance would dilute the stockholders' ownership in the Company. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all.
2. Summary of significant accounting policies and recent accounting pronouncements
The accompanying unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the condensed consolidated financial statements. As of
June 30, 2018
, the Company’s significant accounting policies, which are detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
(the “
2017
10-K”), have not changed, other than as noted below.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at their carrying values, net of any allowances for doubtful accounts. Accounts receivable consist primarily of amounts due from specialty retailers and sports teams, for which collection is probable based on the customer's intent and ability to pay. Receivables are evaluated for collection probability on a regular basis and an allowance for doubtful accounts is recorded, if necessary. No allowance for doubtful accounts was deemed necessary at June 30, 2018 or December 31, 2017.
Restricted cash
The Company has restricted cash in the form of a letter of credit it maintains as a security deposit on the lease of its office space in Boston, Massachusetts.
Advertising expense
Advertising expense consists of media and production costs related to print and digital advertising. All advertising is expensed as incurred. Total advertising expenses are included in selling, general and administrative expenses in the condensed consolidated statement of operations, and were approximately
$264,000
and
$772,000
for the
three and six
months ended
June 30, 2018
and approximately
$1,250,000
and
$1,915,000
for the
three and six
months ended
June 30, 2017
.
Shipping and handling costs
Shipping and handling costs related to the movement of inventory to the Company's co-packer and from the co-packer to the Company's third-party warehousing and fulfillment partners are capitalized as inventory and expensed as cost of product revenue when revenue is recognized. Shipping and handling costs to move finished goods from the Company's third-party warehousing and fulfillment partners to customer locations are included in selling, general and administrative expenses in the condensed consolidated statement of operations, and were approximately
$29,000
and
$54,000
for the
three and six
months ended
June 30, 2018
,
and approximately
$47,000
and
$81,000
for the
three and six
months ended
June 30, 2017
.
Restructuring-related costs
The Company records employee termination costs in accordance with Accounting Standards Codification ("ASC") Topic 712, "
Compensation - Nonretirement and Postemployment Benefits"
(ASC 712), if the termination benefits are paid as part of an ongoing benefit arrangement, which includes benefits provided as part of the Company's established severance policy or as part of an executive employment agreement. The Company accrues employee termination costs associated with an on-going benefit arrangement if the obligation is attributable to prior services rendered, the rights to the benefits have vested, the payment is probable and the Company can reasonably estimate the liability. The Company accounts for employee termination benefits that represent a one-time benefit in accordance with ASC Topic 420, "
Exit or Disposal Cost Obligations"
(ASC 420). Upon communication of the termination to the employee, the Company expenses these costs over the employee’s future service period, if any.
Restructuring-related costs are recorded within research and development expenses and selling, general and administrative expenses on the Company's condensed consolidated statement of operations. Liabilities associated with the Company's restructuring activities are recorded as a component of accrued expenses and other current liabilities on its condensed consolidated balance sheet. See Note 7 for additional information on the Company's current restructuring plan.
Unaudited interim financial information
Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
2017
10-K.
The condensed consolidated financial statements as of
June 30, 2018
, for the
three and six
months ended
June 30, 2018
and
2017
, and the related information contained within the notes to the condensed consolidated financial statements, are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as annual audited consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s condensed consolidated financial position as of
June 30, 2018
, and the statements of operations, comprehensive loss and cash flows for the
three and six
month periods ended
June 30, 2018
and
2017
. The results for the
three and six
months ended
June 30, 2018
are not necessarily indicative of results to be expected for the year ending
December 31, 2018
, or any other future annual or interim periods.
Basis of presentation and use of estimates
The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the ASC and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company's management evaluates its estimates, which include, but are not limited to, estimates related to clinical study accruals, estimates related to inventory realizability, stock-based compensation expense and amounts of expenses during the reported period. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
Principles of consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: TK Pharma, Inc., a Massachusetts Securities Corporation, and Flex Innovation Group LLC, a Delaware limited liability company, which contains the Company's consumer-related operations. All significant intercompany balances and transactions have been eliminated in consolidation.
Recent accounting pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers ("ASC 606")
. ASC 606 supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition ("ASC 605")
and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective transition method. See Note 3 for further details.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The ASU requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows arising from leases.
In July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842, Leases.
This ASU is intended to clarify or correct unintended application of the guidance outlined in ASU No. 2016-02. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. While the Company is currently evaluating the impact this standard will have on its consolidated financial statements, the Company expects that upon adoption, it will recognize right-of-use assets and lease liabilities and those amounts could be material.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The update amends the guidance in ASU Topic 230 and clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The Company adopted ASU No. 2016-15 in the first quarter of 2018, retrospectively. The adoption of ASU No. 2016-15 did not have a significant impact on the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows
, which amends ASU Topic 230. This update requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities are no longer required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. The Company adopted ASU No. 2016-18 in the first quarter of 2018, retrospectively, resulting in a change to the presentation of restricted cash on the condensed consolidated statement of cash flows.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of such amounts in the condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Cash and cash equivalents
|
$
|
15,756,971
|
|
|
$
|
19,186,036
|
|
Restricted cash
|
126,595
|
|
|
126,595
|
|
Cash, cash equivalents and restricted cash shown on the condensed consolidated statement of cash flows
|
$
|
15,883,566
|
|
|
$
|
19,312,631
|
|
In May 2017, the FASB issued ASU No. 2017-09,
Stock Compensation (Topic 718): Scope of Modification Accounting
, to provide clarity and reduce diversity in practice, cost and complexity when applying the guidance of Topic 718. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted and the guidance should be applied prospectively. The Company adopted this guidance in the first quarter of 2018, which did not impact the Company's condensed consolidated financial statements or disclosures.
In June 2018, the FASB issued ASU No. 2018-07,
Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that year. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements, but expects that the guidance will impact the way the Company currently records stock-based compensation costs for non-employee awards.
The Company believes that the impact of other recently issued standards that are not yet effective will not have a material effect on its consolidated financial position or results of operations upon adoption.
3. Revenue from contracts with customers
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to contracts not yet completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are
presented under ASC 606, while prior period amounts are not adjusted and are reported in accordance with the Company's historical accounting under ASC 605.
The primary impact of the adoption of ASC 606 related to the timing of revenue recognized for e-commerce sales, due to e-commerce refund rights. Under ASC 606, the Company recognizes revenue when control of the promised good is transferred to the customer, and reflects the consideration to which the Company expects to be entitled to receive in exchange for the good. This has resulted in accelerated revenue recognition for e-commerce sales, as under ASC 605, all revenue and related costs were deferred and recognized once the refund period lapsed.
The cumulative effect of applying the new guidance to all contracts that were not completed as of January 1, 2018 was recorded as an adjustment to accumulated deficit of approximately
$40,000
as of the adoption date, which was primarily the result of reducing deferred revenue by approximately
$70,000
and deferred cost of product revenue and selling fees by approximately
$30,000
, that were recorded on the consolidated balance sheet at December 31, 2017. The Company would have recognized approximately
$10,000
and
$28,000
of additional total revenue during the
three and six
months ended
June 30, 2018
, respectively, if the Company had continued to recognize revenue under ASC 605.
The adoption of ASC 606 did not impact income taxes, as the Company fully reserves its net deferred tax assets. Therefore, the change to the Company's net deferred tax asset position due to adoption was offset by a corresponding change to the valuation allowance.
Revenue recognition
Revenue includes sales of HOTSHOT bottled finished goods to e-commerce customers, specialty retailers and sports teams, including professional and collegiate teams. Revenue also consists of payments made by customers for expedited shipping and handling.
The Company expenses fulfillment costs as incurred because the amortization period would be less than one year in accordance with the ASC 606 practical expedient.
In accordance with ASC 606, the Company applies the following steps to recognize revenue for the sale of bottled finished goods that reflects the consideration to which the Company expects to be entitled to receive in exchange for the promised goods:
|
|
1.
|
Identify the contract with a customer
|
A contract with a customer exists when the Company enters into an enforceable contract with a customer. The contract is based on either the acceptance of standard terms and conditions on the websites for e-commerce customers, or the execution of terms and conditions contracts with specialty retailers and sports teams. These contracts define each party's rights, payment terms and other contractual terms and conditions of the sale. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.
|
|
2.
|
Identify the performance obligations in the contract
|
Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. The Company has concluded the sale of bottled finished goods and related shipping and handling are accounted for as a single performance obligation.
|
|
3.
|
Determine the transaction price
|
The transaction price is determined based on the consideration to which the Company will be entitled to receive in exchange for transferring goods to the customer. For sales through June 18, 2018, the Company offered refunds to e-commerce customers, upon request, within
30
days of delivery. For sales subsequent to June 18, 2018, the Company now offers refunds to e-commerce customers, upon request, within
14
days of delivery. The Company estimates the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For specialty retailers and sports teams, the Company does not offer a right of return or refund and revenue is recognized at the time products are delivered to customers.
Discounts provided to customers are accounted for as an element of the transaction price and as a reduction to revenue, and were approximately
$9,000
and
$17,000
for the
three and six
months ended
June 30, 2018
, respectively, and approximately
$74,000
and
$120,000
for the
three and six
months ended
June 30, 2017
, respectively.
Revenue is presented net of taxes collected from customers and remitted to governmental authorities.
|
|
4.
|
Determine the satisfaction of performance obligation
|
Revenue is recognized when control of the bottled finished goods is transferred to the customer. Control of the bottled finished goods is transferred at a point in time, upon delivery to the customer. The period of time between the satisfaction of the performance obligation and when payment is due from the customer is not significant.
Concentrations of credit risk
The Company had no customers that represented greater than 10% of total revenue during the
three and six
months ended
June 30, 2018
or the
three and six
months ended
June 30, 2017
. The vast majority of revenue was generated from sales within the United States.
4. Fair value measurements
The Company records cash equivalents and marketable securities at fair value. ASC Topic 820,
Fair Value Measurements and Disclosures,
established a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3 – Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.
The following tables summarize the cash equivalents and marketable securities measured at fair value on a recurring basis as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance as of
June 30, 2018
|
Cash equivalents
|
$
|
6,293,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,293,640
|
|
|
$
|
6,293,640
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,293,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance as of
December 31, 2017
|
Cash equivalents
|
$
|
5,046,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,046,205
|
|
Marketable securities:
|
|
|
|
|
|
|
|
U.S. government agency securities
|
—
|
|
|
8,986,259
|
|
|
—
|
|
|
8,986,259
|
|
Commercial paper
|
—
|
|
|
4,440,689
|
|
|
—
|
|
|
4,440,689
|
|
Corporate debt securities
|
—
|
|
|
702,775
|
|
|
—
|
|
|
702,775
|
|
|
$
|
5,046,205
|
|
|
$
|
14,129,723
|
|
|
$
|
—
|
|
|
$
|
19,175,928
|
|
Cash equivalents and marketable securities have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third-party pricing services or other market observable data. The third-party pricing services utilize industry standard valuation models, including both income and market based approaches and observable market inputs to determine value. The Company's cash equivalents consist of money market funds that are valued based on publicly available quoted market prices for identical securities as of
June 30, 2018
. After completing its validation procedures, the Company did not adjust or override any fair value carrying amounts as of
June 30, 2018
.
The carrying amounts reflected in the condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate their fair values at
June 30, 2018
and
December 31, 2017
, due to their short-term nature.
The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of assets or liabilities between Level 1 and Level 2 during the
six
months ended
June 30, 2018
or the year ended
December 31, 2017
. The Company had no financial assets or liabilities that were classified as Level 3 at any time during the
six
months ended
June 30, 2018
or the year ended
December 31, 2017
.
5. Cash equivalents and marketable securities
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents as of
June 30, 2018
and
December 31, 2017
consisted of money market funds.
The Company held no marketable securities as of
June 30, 2018
. Marketable securities as of
December 31, 2017
consisted of U.S. government agency securities, commercial paper and corporate debt securities. Management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company classifies its marketable securities as available-for-sale pursuant to ASC 320,
Investments – Debt and Equity Securities
. Marketable securities are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in stockholders’ equity and a component of total comprehensive income (loss) in the condensed consolidated statement of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were no realized gains on marketable securities during the
three and six
months ended
June 30, 2018
, or during the
three and six
months ended
June 30, 2017
.
The Company reviews marketable securities for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a marketable security’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statement of operations if the Company has experienced a credit loss, has the intent to sell the marketable security, or if it is more likely than not that the Company will be required to sell the marketable security before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.
The Company held
no
marketable securities at
June 30, 2018
. Marketable securities at
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
As of December 31, 2017
|
|
|
|
|
|
|
|
Current (due within 1 year):
|
|
|
|
|
|
|
|
U.S. government agency securities
|
$
|
8,987,254
|
|
|
$
|
38
|
|
|
$
|
(1,033
|
)
|
|
$
|
8,986,259
|
|
Commercial paper
|
4,440,689
|
|
|
—
|
|
|
—
|
|
|
4,440,689
|
|
Corporate debt securities
|
703,027
|
|
|
—
|
|
|
(252
|
)
|
|
702,775
|
|
Total
|
$
|
14,130,970
|
|
|
$
|
38
|
|
|
$
|
(1,285
|
)
|
|
$
|
14,129,723
|
|
At
December 31, 2017
, the Company held
six
debt securities that were in an unrealized loss position, all of which had been in a continuous loss position for less than 12 months. The aggregate fair value of debt securities in an unrealized loss position was
$8,191,315
at
December 31, 2017
. There were
no
individual securities that were in a significant unrealized loss position as of
December 31, 2017
.
At
December 31, 2017
, all investments held by the Company were classified as current. Investments classified as current have maturities of less than one year. Investments classified as noncurrent are those that (i) have a maturity greater than one year and (ii) management does not intend to liquidate within the next year, although these funds are available for use and therefore classified as available-for-sale.
6. Inventory
Inventory has been recorded at cost as of
June 30, 2018
and
December 31, 2017
. Costs capitalized at
June 30, 2018
and
December 31, 2017
relate to HOTSHOT finished goods, as well as raw materials available to be used for future production runs.
The following table presents inventory:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
7,240
|
|
|
$
|
17,411
|
|
Finished goods
|
268,453
|
|
|
414,480
|
|
Total inventory
|
$
|
275,693
|
|
|
$
|
431,891
|
|
In the second quarter of 2018, the Company wrote off raw materials that are not expected to be used in future production runs, as well as finished goods inventory no longer expected to be used for product sampling. In the prior year, the Company wrote off raw materials not expected to be used in future production runs.
Write-offs totaled approximately
$85,000
for the
three and six
months ended
June 30, 2018
, and approximately
$17,800
for the
three and six
months ended
June 30, 2017
, and were included in cost of product revenue in the accompanying condensed consolidated statement of operations.
7. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Phase 2 MND and CMT clinical trial-related costs
|
$
|
1,402,929
|
|
|
$
|
1,850,115
|
|
Restructuring-related costs
|
548,882
|
|
|
—
|
|
Payroll and other employee-related costs
|
313,794
|
|
|
874,246
|
|
Professional fees
|
157,262
|
|
|
227,980
|
|
Other research and development-related costs
|
146,895
|
|
|
652,285
|
|
Consumer product-related costs
|
18,834
|
|
|
107,595
|
|
Total
|
$
|
2,588,596
|
|
|
$
|
3,712,221
|
|
Phase 2 MND and CMT clinical trial-related costs
In June 2018, the Company announced that it was ending its ongoing Phase 2 clinical trials of FLX-787 in MND and CMT due to oral tolerability concerns observed in both studies.
The close out of the studies resulted in increased expense during the second quarter of 2018, and accrued costs as of June 30, 2018 totaling approximately
$1,400,000
. All remaining work for the studies is expected to be completed during the third quarter of 2018. Previously, the Company expected work for the studies to take place through mid-2019.
Restructuring-related costs
In June 2018, the Company's Board of Directors ("Board") approved a corporate restructuring plan to reduce the Company's cost structure. In connection with the corporate restructuring plan, the Company reduced its workforce by approximately
60%
, with the majority of the reduction completed as of June 30, 2018.
Also, in June 2018, the Board approved employee retention arrangements and certain increased severance payments related to the corporate restructuring plan, to incentivize certain employees to remain with the Company through a potential sale or merger. Cash retention benefits totaling approximately
$1,210,000
will be payable to these employees upon the occurrence of a change in control event, including a sale or merger of the Company. Of this total,
$500,000
relates to amounts payable only upon a change in control event, and
$710,000
relates to amounts payable upon a change in control event or at certain timepoints through early 2019 if the individuals are employed by the Company and in good standing at the date of payment, even if a change in control event has not occurred. Upon a change in control event and termination without cause, these employees will be eligible for up to approximately
$1,125,000
, in the aggregate, of severance benefits.
The Company records employee termination costs in accordance with ASC 712, if the termination benefits are paid as part of an ongoing benefit arrangement, which includes benefits provided as part of the Company's established severance policy or as part of an executive employment agreement. The Company accrues employee termination costs associated with an on-going benefit arrangement if the obligation is attributable to prior services rendered, the rights to the benefits have vested, the payment is probable and the Company can reasonably estimate the liability. The Company accounts for employee termination benefits that represent a one-time benefit in accordance with ASC 420. Upon communication of the termination to the employee, the Company expenses these costs over the employee’s future service period, if any.
During the quarter ended June 30, 2018, the Company has recognized approximately
$918,000
of expense for restructuring-related activities. This total is comprised of approximately
$863,000
recorded as termination benefits under ongoing benefit arrangements for terminated employees, approximately
$22,000
as one-time termination benefit costs for terminated employees, approximately
$18,000
in retention benefits for
seven
retained employees who have retention bonuses not triggered by a change in control event and approximately
$15,000
of other restructuring related costs including consulting and legal fees. There are currently no assurances a change in control event will take place. The Company does not consider the payment of severance benefits for retained employees or the payment of retention benefits only payable upon a change in control to be probable for accounting purposes as of June 30, 2018. Unless and until the Company's Board has approved a specific transaction, the Company's probability assessment regarding a change in control event is not expected to change.
The Company expects to incur between approximately
$1,189,000
and
$3,372,000
in total costs for its restructuring-related activities, including approximately
$918,000
that was recorded during the second quarter of 2018. Approximately
$270,000
is expected to be recorded during the third and fourth quarters of 2018, based on the Company's current probability assessment regarding a change in control event and termination of retained employees. The range noted above includes approximately
$500,000
related to retention benefits only payable upon a change in control event, and
$1,125,000
of severance benefits only payable upon a change in control event and termination under certain circumstances.
The following table outlines the Company's restructuring activities for the six months ended June 30, 2018:
|
|
|
|
|
Opening balance
|
$
|
—
|
|
Charges:
|
|
Employee termination benefits
|
885,768
|
|
Employee retention benefits
|
17,602
|
|
Other
|
14,995
|
|
Payments
|
(369,483
|
)
|
Accrued restructuring balance as of June 30, 2018
|
$
|
548,882
|
|
The Company's accrued restructuring balance as of June 30, 2018 is included as a component of accrued expenses and other current liabilities on the Company's condensed consolidated balance sheet as of June 30, 2018. Approximately
$704,000
of the restructuring-related charges for the quarter are included in research and development expenses and approximately
$214,000
are included in selling, general and administrative expenses in
the Company's condensed consolidated statement of operations for the three and six months ended June 30, 2018. Approximately
$56,000
of the restructuring-related charges for the three and six months ended June 30, 2018 were incurred by our Consumer Operations segment, approximately
$704,000
were incurred by our Drug Development segment and the remaining charges of approximately
$158,000
related to corporate costs. The Company may incur total restructuring-related charges of up to approximately
$113,000
and
$1,048,000
within our Consumer Operations and Drug Development segments, respectively. The Company may incur up to
$2,211,000
of corporate costs that do not relate to a reportable segment.
Litigation
On June 19, 2018, a putative class action lawsuit was filed against the Company and certain of its current executive officers in the United States District Court for the Southern District of New York, captioned Teofilina Rumaldo v. Flex Pharma, Inc., et al., Case No. 1:18-cv-05493. The complaint purports to be brought on behalf of stockholders who purchased the Company’s common stock between November 6, 2017 and June 12, 2018. The complaint generally alleges that the Company and certain of its current officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements or omissions regarding the Company’s business, operational and compliance policies. Specifically, the complaint alleges that the Company overstated the viability and approval prospects for its product candidate FLX-787 for the treatment of MND and CMT and, as a result, the Company’s public statements were materially false and misleading at all relevant times. The complaint seeks unspecified damages, attorneys’ fees and other costs. The Company denies any allegations of wrongdoing and intends to vigorously defend against this lawsuit. The Company is unable, however, to predict the outcome of this matter at this time and has not accrued any expense related to this lawsuit as of June 30, 2018.
8. Common stock
As of
June 30, 2018
, the Company had authorized
100,000,000
shares of common stock,
$0.0001
par value per share. Each share of common stock is entitled to
one
vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors. The Company does not intend to declare dividends for the foreseeable future.
Restricted common stock to founders
In March 2014, the Company sold
4,553,415
shares of restricted common stock to the founders of the Company ("recipients"), for
$0.0004
per share, for total proceeds of
$1,950
. In April 2014, based upon anti-dilution provisions granted to the recipients, an additional
867,314
shares of restricted common stock were sold to the same recipients, after which the anti-dilution provisions were terminated. The restricted common stock vested
25%
upon issuance, and the remaining
75%
vested ratably over
four years
, during which time the Company had the right to repurchase the unvested shares held by a recipient if the relationship between such recipient and the Company ceased. Such shares were not accounted for as outstanding until they vested. Unvested restricted common stock awards to non-employees were re-measured at each vest date and each financial reporting date. All restricted common stock sold to recipients had vested as of June 30, 2018, and is no longer subject to re-valuation or eligible for repurchase.
The following is a summary of restricted common stock activity:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 31, 2017
|
169,654
|
|
|
$
|
0.10
|
|
Issued
|
—
|
|
|
—
|
|
Vested
|
(169,654
|
)
|
|
0.10
|
|
Forfeited
|
—
|
|
|
—
|
|
Unvested at June 30, 2018
|
—
|
|
|
$
|
—
|
|
Restricted common stock to consultants
During 2016, the Company issued
18,194
shares of restricted common stock to non-employee consultants and advisors. Such shares are not accounted for as outstanding until they vest. There were
14,860
shares of restricted common stock issued to consultants outstanding as of
June 30, 2018
. Unvested restricted common stock awards to non-employees are re-measured at each vest date and each financial reporting date.
The following is a summary of restricted common stock activity:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
Unvested at December 31, 2017
|
5,334
|
|
|
$
|
10.51
|
|
Issued
|
—
|
|
|
—
|
|
Vested
|
(2,000
|
)
|
|
9.61
|
|
Forfeited
|
—
|
|
|
—
|
|
Unvested at June 30, 2018
|
3,334
|
|
|
$
|
11.05
|
|
9. Stock-based compensation
In March 2014, the Company adopted the Flex Pharma, Inc. 2014 Equity Incentive Plan (the "2014 Plan"), under which it had the ability to grant incentive stock options ("ISOs"), non-qualified stock options, restricted stock awards, restricted stock units and stock appreciation rights to purchase up to
116,754
shares of common stock. In April 2014, the Company amended the 2014 Plan to reserve for the issuance of up to
1,451,087
shares of common stock pursuant to equity awards. In September 2014, the Company further amended the 2014 Plan to reserve for the issuance of up to
2,070,200
shares of common stock pursuant to equity awards. Terms of stock award agreements, including vesting requirements, were determined by the Board, subject to the provisions of the 2014 Plan. For options granted under the 2014 Plan, the exercise price equaled the fair market value of the common stock as determined by the Board on the date of grant. No further awards will be granted under the 2014 Plan.
In January 2015, the Company's Board adopted, and the Company's stockholders approved, the 2015 Equity Incentive Plan (the "2015 Plan"), which became effective immediately prior to the closing of the Company's initial public offering ("IPO"). The 2015 Plan provides for the grant of ISOs, nonstatutory stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance-based stock awards and other stock-based awards. Additionally, the 2015 Plan provides for the grant of performance-based cash awards. ISOs may be granted only to the Company's employees. All other awards may be granted to the Company's employees, including officers, and to non-employee directors and consultants. As of
June 30, 2018
, there were
962,584
shares remaining available for the grant of stock awards under the 2015 Plan.
The Company has awarded stock options to its employees, directors, advisors and consultants, pursuant to the plans described above. Stock options subsequent to the completion of the Company's IPO are granted with an exercise price equal to the closing market price of the Company's common stock on the date of grant. Stock options generally vest over
one
to
four years
and have a contractual term of
ten years
. Stock options are valued using the Black-Scholes option pricing model and compensation cost is recognized based on the resulting value over the service period. Unvested awards to non-employees are re-measured at each vest date and at each financial reporting date. The following table summarizes stock option activity for employees and non-employees for the
six
months ended
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2017
|
2,580,491
|
|
|
$
|
6.65
|
|
|
7.55
|
|
$
|
803,600
|
|
Granted
|
1,467,544
|
|
|
2.81
|
|
|
|
|
|
Exercised
|
(97,310
|
)
|
|
1.21
|
|
|
|
|
|
Forfeited
|
(621,282
|
)
|
|
6.17
|
|
|
|
|
|
Expired
|
(230,630
|
)
|
|
9.82
|
|
|
|
|
|
Outstanding at June 30, 2018
|
3,098,813
|
|
|
$
|
4.86
|
|
|
7.35
|
|
$
|
42,136
|
|
Exercisable at June 30, 2018
|
1,440,107
|
|
|
$
|
6.72
|
|
|
4.99
|
|
$
|
42,136
|
|
Vested or expected to vest at June 30, 2018
|
3,098,813
|
|
|
$
|
4.86
|
|
|
7.35
|
|
$
|
42,136
|
|
Total stock-based compensation expense recognized for employee and non-employee restricted common stock, and stock options granted to employees and non-employees is included in the Company's condensed consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Three Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
Research and development
|
$
|
244,869
|
|
|
$
|
391,602
|
|
|
$
|
631,406
|
|
|
$
|
786,019
|
|
Selling, general and administrative
|
266,124
|
|
|
681,744
|
|
|
788,527
|
|
|
1,476,079
|
|
Total
|
$
|
510,993
|
|
|
$
|
1,073,346
|
|
|
$
|
1,419,933
|
|
|
$
|
2,262,098
|
|
As of
June 30, 2018
, there was approximately
$2,982,000
of total unrecognized compensation cost related to unvested equity awards. Total unrecognized compensation cost will be adjusted for the re-measurement of non-employee awards as well as future changes in employee and non-employee forfeitures, if any. The Company expects to recognize that cost over a remaining weighted-average period of
3.14 years
.
In June 2018, the Company extended the
three
-month post termination exercisability of
877,137
option awards held by
six
employees and
one
adviser to
one
-year post termination. The Company also extended the
three
-month post termination exercisability of
500,000
option awards held by
one
employee to
three
-years post termination. The valuation of these awards did not change as a result of the modification of these awards and as such, the Company did not recognize any additional compensation expense related to the modification.
On June 14, 2018, the Company granted
654,544
stock options, in the aggregate, to
seven
employees as part of the Company's retention arrangements with these employees. These awards vest monthly over
48
months as the employees provide continuous service, and expense is being recognized over this period. The awards are exercisable for
one
to
three
-years post termination depending on the employee to which the stock options were granted. The awards vest in full upon a change in control event and termination of the employees under certain circumstances. A change in control event is not currently considered probable for accounting purposes. Unless and until the Company's Board has approved a specific transaction, the Company's probability assessment regarding a change in control event is not expected to change.
Employee stock purchase plan
In 2015, the Company's Board adopted, and the Company's stockholders approved, the 2015 Employee Stock Purchase Plan (the "ESPP"). As of
June 30, 2018
, no shares of common stock have been purchased under the ESPP.
10. Income taxes
Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using statutory rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Based upon the Company's history of operating losses and the uncertainty surrounding the realization of the favorable tax attributes in future tax returns, the Company has recorded a full valuation allowance against the Company’s otherwise recognizable net deferred tax assets. There was
no
significant income tax provision or benefit for the
six
months ended
June 30, 2018
or
2017
.
In March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which was effective immediately. The SEC issued SAB 118 to address concerns about a reporting entity's ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and, if possible, to provide a reasonable estimate. The Company's accounting for certain income tax effects is incomplete, but it has determined reasonable estimates for those effects and has included provisional amounts in its condensed consolidated financial statements as of June 30, 2018 and December 31, 2017.
11. Net loss per share
Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period, determined using the treasury stock method and the if-converted method, for convertible securities, if inclusion of these is dilutive.
As the Company has reported a net loss for the periods presented, diluted net loss per common share is the same as basic net loss per common share.
The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or if-converted method, have been excluded from the computation of diluted weighted-average shares outstanding for the periods indicated, because including them would have had an anti-dilutive impact:
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
Options to purchase common stock
|
3,098,813
|
|
|
2,668,187
|
|
Unvested restricted common stock
|
3,334
|
|
|
685,890
|
|
Total
|
3,102,147
|
|
|
3,354,077
|
|
12. Segment Information
The Company operates as
two
reportable segments:
|
|
•
|
The Consumer Operations segment, which reflects the total revenue and costs and expenses related to HOTSHOT and the Company's consumer operations.
|
|
|
•
|
The Drug Development segment, which reflects the costs and expenses related to the Company's efforts to develop innovative and proprietary drug products; previously to treat muscle cramps, spasms and spasticity
|
associated with severe neurological conditions and currently to assess the potential of FLX-787 in dysphagia.
The Company discloses information about its reportable segments based on the way that the Company's Chief Operating Decision Maker, who the Company has identified as the Chief Executive Officer, and management, organize segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its reportable segments based on revenue and operating income or loss. The accounting policies of the segments are the same as those described herein as well as those described in Note 2 to the audited consolidated financial statements in the 2017 Form 10-K. Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to "Corporate". No asset information has been provided for the Company's reportable segments as management does not measure or allocate such assets on a reportable segment basis.
Information for the Company's reportable segments for the
three
months ended
June 30, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
Consumer Operations
|
Drug Development
|
Corporate
|
Consolidated
|
Total revenue
|
$
|
245,502
|
|
—
|
|
—
|
|
$
|
245,502
|
|
Interest income, net
|
$
|
—
|
|
—
|
|
51,809
|
|
$
|
51,809
|
|
Loss from operations
|
$
|
645,687
|
|
6,170,488
|
|
2,287,506
|
|
$
|
9,103,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
Consumer Operations
|
Drug Development
|
Corporate
|
Consolidated
|
Total revenue
|
$
|
335,523
|
|
—
|
|
—
|
|
$
|
335,523
|
|
Interest income, net
|
$
|
—
|
|
—
|
|
72,342
|
|
$
|
72,342
|
|
Loss from operations
|
$
|
2,760,496
|
|
3,960,335
|
|
2,156,134
|
|
$
|
8,876,965
|
|
Information for the Company's reportable segments for the
six
months ended
June 30, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
Consumer Operations
|
Drug Development
|
Corporate
|
Consolidated
|
Total revenue
|
$
|
424,084
|
|
—
|
|
—
|
|
$
|
424,084
|
|
Interest income, net
|
$
|
—
|
|
—
|
|
111,402
|
|
$
|
111,402
|
|
Loss from operations
|
$
|
1,902,993
|
|
10,834,565
|
|
4,648,943
|
|
$
|
17,386,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
Consumer Operations
|
Drug Development
|
Corporate
|
Consolidated
|
Total revenue
|
$
|
578,070
|
|
—
|
|
—
|
|
$
|
578,070
|
|
Interest income, net
|
$
|
—
|
|
—
|
|
150,196
|
|
$
|
150,196
|
|
Loss from operations
|
$
|
4,748,306
|
|
7,788,616
|
|
4,686,292
|
|
$
|
17,223,214
|
|