UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number: 001-36812

FLEX PHARMA, INC.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements related to present facts or current conditions or historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, projected costs, expectations regarding the timing and outcome of the strategic review process, development of our drug product candidates, including the timing of our planned and ongoing clinical trials, and expectations regarding our research and development efforts, the commercial prospects of our consumer product, the expected timing for the reporting of data from our ongoing and future studies, prospects,the plans and objectives of management, are forward looking statements. These factors also include, but are not limited to, those factors set forth in the sections entitled "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures about Market Risk," and "Controls and Procedures" in this Quarterly Report on Form 10-Q, all of which you should review carefully. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Forward-looking statements are not guarantees of future performance and our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the timing and outcome of the evaluationcompletion of our strategic alternatives, including any perceived benefits of our restructuring plan;the merger with Salarius Pharmaceuticals, LLC; the costs associated with ourany pending or threatened litigation; our ability to raise funds for our operations, our ability to continue to sell our consumer product; availability of funding sufficient for our foreseeable and unforeseeable operating expenses and capital expenditure requirements; ability to attract, retain and motivate qualified personnel; the status, timing, costs, results and interpretation of our clinical trials; the uncertainties inherent in conducting clinical trials; results from our ongoing and planned clinical development; expectations of our ability to make regulatory filings and obtain and maintain regulatory approvals; results of early clinical studies as indicative of the results of future trials; other matters that could affect the availability or commercial potential of our drug product candidates; the inherent uncertainties associated with intellectual property; and other factors discussed in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 20172018 and other filings with the Securities and Exchange Commission, or SEC.

As a result of these and other factors, we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

PART I - FINANCIAL INFORMATION

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

The Company operates as two reportable segments, Consumer Operations and Drug Development. See Note 12 for additional discussion and information on the reportable segments.

The Company incurred a loss of $9,051,872$1,384,777 for the three months ended June 30, 2018,2019, a loss of $17,275,099$3,615,207 for the six months ended June 30, 20182019 and had an accumulated deficit of $128,314,157$136,576,482 as of June 30, 2018.2019. The Company had unrestricted cash and cash equivalents of $15,756,971$6,514,215 at June 30, 2018.2019. The Company's operating plan assumes limited research and development activities and that the Consumer Operations segment will continue to sell HOTSHOT.

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, 2018,2019, 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, 20172018 (the “2017“2018 10-K”), have not changed, other than as noted below.

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, 20182019 or December 31, 2017.2018.

TheAs of December 31, 2018, the Company hashad restricted cash in the form of a letter of credit it maintainsmaintained as a security deposit on the lease of its office spaceformer corporate headquarters in Boston, Massachusetts.Massachusetts that was set to expire on August 31, 2019. The Company terminated this lease on December 13, 2018. The letter of credit was released, and the cash became unrestricted on January 4, 2019.

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 $8,000 and $18,000 for the three and six months ended June 30, 2019 and 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, 2017.2018.

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.sheets. 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 20172018 10-K.

The condensed consolidated financial statements as of June 30, 2018,2019, for the three and six months ended June 30, 20182019 and 2017,2018, 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, 2018,2019, and the statements of operations, comprehensive loss, and cash flows and stockholders' equity for the three and six month periods ended June 30, 20182019 and 2017.2018. The results for the three and six months ended June 30, 20182019 are not necessarily indicative of results to be expected for the year ending December 31, 2018,2019, or any other future annual or interim periods.

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.operations, and Falcon Acquisition Sub, LLC, a Delaware limited liability company established for purposes of the merger. All significant intercompany balances and transactions have been eliminated in consolidation.

Recent accounting pronouncements

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.

Revenue recognition

Revenue includes sales of HOTSHOT bottled finished goods to e-commerce customers, specialty retailers and sports teams, including professional and collegiateamateur 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, Revenue from Contracts with Customers ("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:

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.

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.

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, 20182019 or the three and six months ended June 30, 2017. The vast majority2018. All of the Company's revenue was generated from sales within the United States.

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, 20182019 and December 31, 2017,2018, due to their short-term nature.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the following:condensed consolidated balance sheets that sum to the total of such amounts in the condensed consolidated statements of cash flows:

Inventory has been recorded at cost as of June 30, 20182019 and December 31, 2017.2018. Costs capitalized at June 30, 20182019 and December 31, 20172018 relate to HOTSHOT finished goods, as well as raw materials available to be used for future production runs.

The following table presents inventory:

Accrued expenses and other current liabilities consisted of the following:

Restructuring-related costs

In June 2018, the Company's Board of Directors, ("Board")or the 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 September 30, 2018. 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. CashAs of June 30, 2019, the Company had paid $214,000 in retention bonuses, $410,000 in annual bonuses and $185,000 in severance benefits associated with these arrangements. As of June 30, 2019, cash retention benefits totaling approximately $1,210,000$603,000 will be payable to thesethe remaining employees and certain former employees who continue to provide service as consultants, 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, thesethe remaining employees will be eligible for up to approximately $1,125,000,$928,000, in the aggregate, of severance benefits.

As of June 30, 2019, the Company’s stockholders had not yet approved the merger with Salarius, and accordingly, there were no assurances a change in control event willwould take place. TheAs a result, 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, the2019. The Company's probability assessment regarding a change in control event is not expected to change.changed on July 12, 2019 when the merger was approved by the Company's stockholders.

The Company expects to incur between approximately $1,189,000$1,765,000 and $3,372,000$3,343,000 in total costs for its restructuring-related activities, including approximately $918,000 that was$1,355,000 in termination and retention charges and approximately $410,000 related to the annual bonus program, both of which were recorded duringbetween the second quarter of 2018. Approximately $270,000 is expected to be recorded during2018 and the third and fourth quartersfirst quarter of 2018, based on the Company's current probability assessment regarding2019. The range noted above includes approximately $928,000 of severance benefits for retained employees upon a change in control event and termination of retained employees. The range noted above includes approximately $500,000under certain circumstances and $603,000 related to retention benefits only payable upon a change in control event,event. Upon the Company's stockholders approval of the merger with Salarius at the special meeting on July 12, 2019, the payment of these amounts became probable. The merger is expected to close on or about July 19, 2019, at which time, the remaining termination and $1,125,000 of severance benefits only payable upon a change in control event and termination under certain circumstances.retention charges will be paid out.

The following table outlines the Company's restructuring activities for the six months ended June 30, 2018:2019:

The Company's accrued restructuring balance as ofDuring the three months ended June 30, 20182019, there were no restructuring charges recorded.

For the six months ended June 30, 2019, the $11,000 of the reduction in the accrual for restructuring-related activities is included as a component of accruedin research and development expenses and other current liabilities onin the Company's condensed consolidated balance sheet asstatement of operations. Cumulatively through June 30, 2018. Approximately $704,0002019, approximately $957,000 of the restructuring-related and annual

bonus charges for the quarter are included in research and development expenses and approximately $214,000$808,000 are included in selling, general and administrative expenses inexpenses.

For the Company's condensed consolidated statement of operations for the three and six months ended June 30, 2018. Approximately $56,0002019, the reduction in the accrual for restructuring-related activities of approximately $11,000 was incurred by the Company's Drug Development segment. Cumulatively through June 30, 2019, approximately $94,000 of the restructuring-related charges for the three and six months ended June 30, 2018annual bonus charges were incurred by ourthe Company's Consumer Operations segment, approximately $704,000$957,000 were incurred by ourthe Company's Drug Development segment and the remaining charges of approximately $158,000$714,000 related to corporate costs. TheIncluding approximately $1,765,000 of cumulative costs incurred through June 30, 2019, the Company may incur total restructuring-related charges of up to approximately $113,000$114,000 and $1,048,000$1,024,000 within ourits Consumer Operations and Drug Development segments, respectively. The Company may incur up to $2,211,000$2,205,000 of corporate costs that do not relate to a reportable segment.

As of June 30, 2018,2019, 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.

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 14,86017,360 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.2019.

The following is a summary of restricted common stock activity:

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.rights. Terms of stock award agreements, including vesting requirements, were determined by the Board,board of directors, 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 Boardboard of directors 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, 2018,2019, there were 962,5842,487,140 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 arewere 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, 2018:2019:

As of June 30, 2018,2019, there was approximately $2,982,000$1,726,000 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 3.142.35 years.

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. AAs of June 30, 2019, a change in control event iswas not currently considered probable for accounting purposes. Unless and until theThe Company's Board has approved a specific transaction, the Company's

probability assessment regarding a change in control event isdid not expected to change.change until the merger with Salarius was approved by the Company's stockholders at a special meeting on July 12, 2019.

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, 2018,2019, no shares of common stock have been purchased under the ESPP.

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, 20182019 or 2017.

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:

The Company operates as two reportable segments:

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, organizeorganizes 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. Although the Company reduced its research and development efforts in connection with its strategic assessment in

June 2018, the Company continues to manage and operate as two segments and it is unclear to what extent it may resume research and development activities in the future. 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.2. Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to "Corporate"."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, 20182019 and 20172018 are as follows:

The following discussion and analysis should be read in conjunction with the unaudited financial information and the notes thereto included herein, as well as our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could

differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" discussed in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, in other subsequent filings with the SEC, and elsewhere in this Quarterly Report on Form 10-Q. These statements, like all statements in this report, speak only as of the date of this Quarterly Report on Form 10-Q (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

Our Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided in addition to the accompanying unaudited condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

We, Flex Pharma, or the Company, are a biotechnology company that was previously focused on developing innovative and proprietary treatments for muscle cramps, spasms and spasticity associated with severe neurological conditions. In June 2018, we announced that we were ending our ongoing Phase 2 clinical trials of our lead drug product candidate, FLX-787, in patients with motor neuron disease, or MND, primarily with amyotrophic lateral sclerosis, or ALS, and in patients with Charcot-Marie-Tooth disease, or CMT, due to oral tolerability concerns observed in both studies. The wind-down of the activities associated with these studies was completed in the third quarter of 2018.

In the MND study, 31% of patients randomized2016, we launched our consumer product, HOTSHOT®, to receive the oral disintegrating tablet formulation at 30 mg, taken three times a day, discontinuedprevent and treat exercise-associated muscle cramps, or EAMCs. We continue to market and sell HOTSHOT to endurance athletes who drink it before, the end of the 4-week treatment period dueduring and after exercise to oral adverse events. A similar proportion of subjects in the CMT study discontinued due to oral adverse events, after being randomized to the 30 mg dose. No patients randomized to the 0.5 mg low-dose control discontinued due to oral adverse events in either study.prevent and treat EAMCs.

Additionally, inIn June 2018, we 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 engagedFollowing an extensive process of evaluating strategic alternatives for the Company, including identifying and reviewing potential candidates for a strategic acquisition or other transaction, on January 3, 2019, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Salarius Pharmaceuticals, LLC, or Salarius, under which the privately held Salarius will merge with a wholly owned subsidiary of the company. At a special meeting on July 12, 2019, the merger was approved by the Company's stockholders and the merger is expected to actclose on or about July 19, 2019. Upon completion of the merger, the business of Salarius will continue as our strategic financial advisor. Therethe business of the combined company.

We currently operate as the following two reportable segments:

We disclose information about our reportable segments based on the way that we organize segments within the Company for making operating decisions and assessing financial performance. Although the Company reduced its research and development efforts in connection with its strategic assessment in June 2018, the Company continues to manage and operate as two segments and it is unclear to what extent it may resume research and development activities in the future. See Note 12 to our condensed consolidated financial statements for certain financial information related to our reportable segments.

Our research and development expenses to date havepreviously included the costs incurred related to the development and testing of our extract formulation and expenses related to the testing and development of our drug product candidates, including FLX-787, and more recently, costs related to ending our Phase 2 clinical studies in MND and CMT. Research and development costs includeincluded salaries and other compensation-related costs, such as stock-based compensation for research and development employees and termination benefits, costs of clinical studies of our extract formulation and drug product candidates, drug substance production costs, formulation and production costs of clinical supply, including FLX-787, to support clinical studies, costs for consultants who we utilizeutilized to supplement our personnel, fees paid to third parties, facilities and overhead expenses, cost of laboratory supplies and other outside expenses.

Research and development activities have been central to our business model. Drug product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will decrease in the future as a result of ending the Phase 2 clinical trials in MND and CMT, and the related drug development efforts, and the reduction of research and development staff. We cannot predict to what extent we will resume drug development activities for FLX-787 or other drug product candidates beyond our current efforts to assess the potential of FLX-787 in dysphagia.

Selling, general and administrative expenses include salaries and other compensation-related costs, including stock-based compensation, and termination benefits, for personnel in executive and finance and accounting legal, corporate communications and general administration roles. Other significant costs include professional service fees including consulting and legal and professional fees relatingrelated to the merger with Salarius, patent and corporate legal matters, accounting fees, insurance costs, costs for consultants who we utilize to supplement our personnel, travel costs and facility and office-related costs not included in research and development expenses.

Selling, general and administrative expenses also include costs related to our Consumer Operations segment for our consumer brand and HOTSHOT. These costs include personnel costs, costs related to our marketing, sales and promotional activities, including print and digital media campaigns, public relations activities, field marketing efforts, market research, other sales and promotional activities and costs related to the distribution of HOTSHOT. These distribution costs include shipping and handling costs incurred once ourthe product is in salable condition.

Our selling, general and administrative expenses may increase as we complete our strategic assessment,incur costs related to the merger, operate as a public company support our research and development efforts and continue to sell HOTSHOT.

Interest income, net primarily consists of interest income from our cash, cash equivalents and marketable securities, amortization and accretion of investment premiums and realized gains and losses.

The following table sets forth the condensed consolidated results of our operations, including information related to our Consumer Operations and Drug Development segments, for the three months ended June 30, 20182019 compared to the three months ended June 30, 2017.2018.

Our Consumer Operations segment generated all of our revenue during the three months ended June 30, 2018,2019, totaling $0.2 million as compared to $0.3$0.2 million for the three months ended June 30, 2017,2018, through sales of HOTSHOT and expedited shipping and handling purchases. The decrease in revenue of $0.1 millionapproximately $81,000 relates to decreased marketing spend and activity during the three months ended June 30, 20182019 compared to the three months ended June 30, 2017,2018, as we have reduced our Consumer Operations spending while we have been evaluating strategic alternatives for the business.Company and this segment.

Sales via e-commerce represented approximately 85%84% of our total revenue for the three months ended June 30, 20182019 compared to 81%85% for the three months ended June 30, 2017.2018.

During the three months ended June 30, 2018,2019, we sold approximately 54,00035,000 bottles of HOTSHOT at an average total revenue per bottle of $4.55,$4.71, compared to 83,00054,000 bottles at an average total revenue per bottle of $4.04$4.55 during the three months ended June 30, 2017. The increase in average total revenue per bottle is primarily related to increased specialty retailer promotions during the second quarter of 2017, as well a change to the e-commerce trial pack offer in 2018, resulting in higher revenue per bottle compared to the prior year.2018. The decrease in volume of bottles sold in the comparative periods was primarily due to decreased marketing efforts and resulting demand. The higher average revenue per bottle in the current period compared to the prior period is due to increased sale promotions that occurred in the prior year.

All costs of product revenue are recorded by our Consumer Operations segment and relate to the production and sale of HOTSHOT. Cost of product revenue was approximately $36,000 for the three months ended June 30, 2019 and $0.2 million for the three months ended June 30, 2018, and $0.1 million for the three months ended June 30, 2017, and included the cost of HOTSHOT sold, royalty expense inventory write-offs, and depreciation expense of approximately $0 and $35,000 in each periodfor the three months ended June 30, 2019 and 2018, respectively, related to manufacturing equipment used to support production. There were no write-offs of inventory during the three months ended June 30, 2019. Write-offs for the three months ended June 30, 2018 totaled approximately

Research and Development Expenses

Our Drug Development segment incurred the majority of our research and development expenses, which were approximately $29,000 for the three months ended June 30, 2019 compared to $6.2 million for the three months ended June 30, 2018 compared to $4.1 million for the three months ended June 30, 2017.2018. The 51% increase100% decrease of $2.1$6.1 million was primarily related to:

Selling, general and administrative includes expenses that are incurred by our Consumer Operations segment as well as corporate and unallocated amounts that do not relate to a reportable segment. Selling, general and administrative expenses were $1.5 million for the three months ended June 30, 2019 compared to $3.0 million for the three months ended June 30, 2018 compared to $5.0 million for the three months ended June 30, 2017.2018. The 40%50% decrease of $2.0$1.5 million was primarily related to:

Our consolidated loss from operations for the three months ended June 30, 20182019 totaled $9.1$1.4 million. Of this total, $0.6 million of the operating loss was incurred by our Consumer Operations segment, $6.2 million$29,000 was incurred by our Drug Development segment, and the remaining $2.3$1.4 million related to corporate and unallocated costs.costs, which was offset by income of $12,000 incurred by our Consumer Operations segment. The operating lossincome incurred by the Consumer Operations segment was primarily driven by marketing,total revenue generated from HOTSHOT sales and promotionalreduced by costs related to HOTSHOT, including cost of HOTSHOT sold and personnel-related expenses, including stock-based compensation. These costs were slightlypartially offset by the total revenue generated from HOTSHOT sales during the three months ended June 30, 2018.2019. The operating loss incurred by the Drug Development segment relates to costs incurred for FLX-787 formulation and production and clinical study costs, including increased costs associated with the decision

Interest income, net, decreased by $20,533approximately $38,000 in the three months ended June 30, 20182019 compared to the three months ended June 30, 2017,2018, as we had lowerless available cash to invest.

The following table sets forth the condensed consolidated results of operations, including information related to our Consumer Operations and Drug Development segments, for the six months ended June 30, 20182019 compared to the six months ended June 30, 2017.2018.

Our Consumer Operations segment generated all of our revenue during the six months ended June 30, 2018,2019, totaling $0.4$0.3 million, as compared to $0.6$0.4 million for the six months ended June 30, 20172018 through sales of HOTSHOT and expedited shipping and handling purchases. The decrease in revenue is due to decreased marketing efforts in the six months ended June 30, 20182019 compared to the six months ended June 30, 2017,2018, as we have reduced spending in our Consumer Operations segment while we have been evaluating strategic alternatives for the business.

Sales via e-commerce represented approximately 86%85% of our total revenue for the six months ended June 30, 20182019 compared to 84%86% for the six months ended June 30, 2017.2018.

During the six months ended June 30, 2018,2019, we sold approximately 93,00058,000 bottles of HOTSHOT at an average total revenue per bottle of $4.56,$4.65, compared to 135,00093,000 bottles at an average total revenue per bottle of $4.28$4.56 during the six months ended June 30, 2017. The increase in average total revenue per bottle is due to various price promotions that were offered to customers during the second quarter of 2017 to attract new and repeat customers, including a specialty retailer promotion. Additionally, our e-commerce trial pack offer in 2018 generates higher revenue per bottle than the 2017 e-commerce trial pack promotions.2018. The decrease in the number of bottles sold primarily relates to decrease in marketing efforts and resulting demand, as well as our adoption of ASC 606.demand. The higher average revenue per bottle in the current period compared to the prior period is due to increased sale promotions that occurred in the prior year.

All costs of product revenue are recorded by our Consumer Operations segment and relate to the production and sale of HOTSHOT. Cost of product revenue was $0.1 million for the six months ended June 30, 2019 compared to $0.3 million for the six months ended June 30, 2018 compared to $0.2 million for the six months ended June 30, 2017.2018. Cost of product revenue during the six months ended June 30, 2018 includes the cost of HOTSHOT sold, royalty expense, inventory write-offs and depreciation expense of

Research and Development Expenses

Our Drug Development segment incurred the majority of our research and development expenses, which were $31,000 for the six months ended June 30, 2019 compared to $10.9 million for the six months ended June 30, 2018 compared to $8.0 million for the six months ended June 30, 2017.2018. The 36% increase100% decrease of $2.9$10.8 million was primarily related to:

Selling, general and administrative includes expenses that are incurred by our Consumer Operations segment as well as corporate and unallocated amounts that do not relate to a reportable segment. Selling, general and administrative expenses were $3.8 million for the six months ended June 30, 2019 compared to $6.7 million for the six months ended June 30, 2018 compared to $9.6 million for the six months ended June 30, 2017.2018. The 30%43% decrease of $2.9 million was primarily related to:

Our consolidated loss from operations for the six months ended June 30, 20182019 totaled $17.4$3.6 million. Of this total, $1.9 million$41,000 of the operating loss was incurred by our Consumer Operations segment, $10.8 million$30,000 was incurred by our Drug Development segment and the remaining $4.6$3.6 million related to corporate and unallocated costs. The operating loss incurred by the Consumer Operations segment was driven by sales, marketing, promotional and distribution costs related to HOTSHOT, and personnel-related expenses, including stock-based compensation. These costs were slightly offset by the total revenue generated from HOTSHOT sales during the six months ended June 30, 2018.2019. The operating loss incurred by the Drug Development segment relates to costs incurred for FLX-787

Interest income, net, decreased by $38,794approximately $85,000 in the six months ended June 30, 20182019 compared to the six months ended June 30, 2017,2018, as we had lower available cash to invest.

Since inception, we have incurred operating losses and we anticipate that we will continue to incur losses for the foreseeable future. To date, we have generated limited revenue from sales of HOTSHOT, and have generated no revenue from any of our drug product candidates.

We may not be successful in generating significant revenue from HOTSHOT. In addition, we cannot predict to what extent we will resume drug development activities, for FLX-787 or other drug product candidates beyond our current efforts to assess the potential of FLX-787and we may not be successful in dysphagia. We expect that ourgenerating significant revenue from HOTSHOT. Our operating plan assumes limited research and development expensesactivities and that the Consumer Operations segment will decrease in the futurecontinue to sell HOTSHOT. We cannot predict to what extent we will resume drug development activities and until that time, we do not expect to expend significant amounts on research and development expenses as a result of ending our Phase 2 clinical trials in MND and CMT and the related drug development efforts, and the reduction of research and development staff. Our selling, general and administrative expenses may increase as we completecontinue our strategic assessment,efforts related to the merger, operate as a public company, support our research and development efforts and continue to sell HOTSHOT. We will need additional capital to fund our operations. There can be no assurance that we will complete the merger with Salarius. If the merger is not completed, we will reconsider our strategic alternatives which may include a dissolution of the company, pursuit of another strategic transaction or the continued operation of the consumer business. Additional capital may be needed to fund operations but there can be no assurances however, that additional funding will be available on terms acceptable to the Company,us, or at all.

At June 30, 2018,2019, we had $13.1$6.1 million of working capital and our cash and cash equivalents totaled $15.8$6.5 million, which were held in bank deposit accounts and money market funds. The Company held no marketable securities at June 30, 2019 or December 31, 2018. Our cash and cash equivalents and marketable securities balance decreased during the six months ended June 30, 2018,2019, due primarily to our net loss incurred.

Net cash used in operating activities for the six months ended June 30, 20182019 was $17.7$3.4 million, an increasea decrease of $3.8$14.2 million compared to the same period in the prior year. The use of cash for the six months ended June 30, 20182019 was primarily related to our net loss for the period of $17.3$3.6 million, offset by non-cash charges consisting primarily of stock-based compensation expense of $1.4 million, as well as depreciation, amortization and accretion on investments and other non-cash items, which totaled $0.2$0.4 million. Cash used in operations also included a cash outflow of $2.0$0.3 million from changes in operating assets and liabilities.

There was no cash provided by or used in investing activities for the six months ended June 30, 2018 compared to2019. The decrease of $14.1 million from the six months ended June 30, 2017 decreased $16.5 million,2018, related to a $16.6 million decrease in net purchases and sales of marketable securities. This included a $7.6$2.0 million decrease in purchases of marketable securities and a $24.2$16.1 million decrease in proceeds from maturities and sales of marketable securities. We do not have any marketable securities as of June 30, 2019.

NetThere was no cash provided by or used in financing activities for the six months ended June 30, 20182019. The decrease of $0.1 million compared to the six months ended June 30, 2017 increased $0.1 million,2018, related to a $0.1 million increase in proceeds from exercises of common stock. Proceeds from exercisesstock options of common stockapproximately $118,000 during the six months ended June 30, 2018 and June 30, 2017 were $0.1 million and $2,047, respectively.2018.

As of June 30, 2018,2019, we had no long-term debt.

We currently have no ongoing material financial commitments, such as lines of credit or guarantees that are expected to affect our liquidity over the next five years, other than leases.years.

Funding Requirements

Our future funding requirements are difficult to forecast. We expect thatforecast and depend on many factors, including our researchability to complete the merger or, if the merger is not completed, our ability to identify and development expenses will decrease inconsummate another strategic transaction or consider other alternatives such as dissolution of the future due to ending our Phase 2 clinical trials in MND and CMT and related drug development, andCompany. Depending on the reduction in research and development headcount, while our general and administrative costsoutcome of these alternatives, we may increase as we complete our strategic assessment, operate as a public company, support research and development activities and continue to sell HOTSHOT. We will need additional capital to fund our operations. There can be no assurances, however, that additional funding will be available on terms we deem to be acceptable, or at all. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations and these securities may have rights senior to those of ourthe Company’s common stock. If we incurthe Company incurs indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.

We cannot predict to what extent we will resume drug development activities for FLX-787 or other drug product candidates beyond our current efforts to assess the potential of FLX-787 in dysphagia.candidates. To the extent that we pursue drug development activities in the future, the successful development of any drug product candidate is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the development of future drug product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of drug product candidates. This is due to the numerous risks and uncertainties associated with developing drug products, including the uncertainty of:

A change in the outcome of any of these variables with respect to the development of any of our drug product candidates would significantly change the costs and timing associated with the development of that drug product candidate.

The development and growth of HOTSHOT is uncertain, including the timing and resources needed to support successful commercialization. The success of HOTSHOT depends, in large part, on a growth strategy that establishes distribution and placement of the product, attracts consumers and maintains brand loyalty. Delays or unexpected costs related to HOTSHOT could significantly change the costs and timing of expenses associated with our Consumer Operations.consumer operations.

On January 22, 2018, we disclosed that we engaged an investment banking firm to assist with the consideration of strategic alternatives for our consumer business segment. Due toIn connection with the announcementrestructuring plan announced in June 2018, regardingwe elected to reduce the initiation ofexpenses associated with our corporate strategic review, we are now assessing the consumer business segment in conjunction withwhile we assessed strategic alternatives for the corporate assessment process.Company and this segment. The Company is continuing to assess alternatives for the Consumer Operations segment.

Based on our research and development plans and our consumer brand and HOTSHOT expenditure plans, and our expectations of timing related to ending our Phase 2 clinical trials in MND and CMT, and the related drug development work, we expect that our existing cash resources and marketable securities will enable us to fund our costs and expenses, working capital and capital expenditure requirements for at least 12 months from the date the financial statements are issued. We based this estimate on assumptions that may prove to be wrong, however, and we could use our capital resources sooner than we expect.expected.

There have been no material changes to our contractual obligations from those described in our Annual Report on Form 10-K for the year ended December 31, 2017, other than as noted below.

We did not have during the period presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the condensed consolidated balance sheet and the reported amounts of expenses during the reporting period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our consolidated financial statements prospectively from the date of the change in estimate.

There have been no material changes to our critical accounting policies from those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2017, except that we have updated our revenue recognition policy in conjunction with our adoption of ASC 606 as further described in Note 2 and Note 3 to the accompanying unaudited condensed consolidated financial statements.2018.

Readers should refer to our 20172018 Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies and Use of Estimates” and Note 2 to the accompanying financial statements for descriptions of these policies and estimates.

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of June 30, 2018,2019, we had cash and cash equivalents of $15.8 million, and did not have any marketable securities. We invest our cash in a variety of financial instruments, principally money market funds, U.S. government securities, investment-grade corporate notes and commercial paper.$6.5 million. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Available-for-sale securities that we invest in are subject to interest rate risk and may fall in value if market interest rates increase. Due to the short-term durationAs of June 30, 2019, our investment portfoliocash was invested in money market funds, and the low risk profile of our investments, an immediate 100 basis point change in interest rates would

we did not have a material effect onany marketable securities. Therefore, we have minimal market risk related to the fair market value of our portfolio.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2018,2019, we have evaluated, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon our evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

During the six months ended June 30, 2018,2019, there was no significant change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

On June 19, 2018,March 1, 2019, Nahuel Malzone, a putative class action lawsuit was filed againstpurported stockholder of the Company, sent us a written demand letter and certaindraft complaint alleging that (i) the Company and the members of our current executive officers in the United States District Court for the Southern Districtboard 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 our common stock between November 6, 2017 and June 12, 2018. The complaint generally alleges that we and certain of our current officersdirectors violated Sections 10(b) and/or 20(a)Section 14(a) of the Securities Exchange Act of 1934, as amended, the Exchange Act, and Rule 10b-514a-9 promulgated thereunder, by makingfiling a proxy statement, which allegedly falsefailed to disclose and/or misrepresented material information about the proposed merger with Salarius and misleading statements or omissions regarding our business, operational and compliance policies. Specifically,(ii) the complaint allegesmembers of the board of directors, as control persons of the Company, violated Section 20(a) of the Exchange Act in connection with the filing of the allegedly materially deficient proxy statement. Mr. Malzone demanded that we overstated the viability and approval prospects for our product candidate FLX-787 forCompany provide certain corrective disclosures to the treatment of MND and CMT and, as a result, our public statements were materially false and misleading at all relevant times.proxy statement/prospectus/information statement. The complaint seeks unspecified damages, attorneys’ fees, and other costs.