Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019March 31, 2020
OR
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                                  to

Commission File Number: 001-36812

FLEX PHARMA,SALARIUS PHARMACEUTICALS, INC.
(Exact name of Registrantregistrant as specified in its charter)
Delaware
46-5087339
(State or Other Jurisdictionother jurisdiction of
Incorporationincorporation or Organization)organization)
46-5087339
(I.R.S. Employer
Identification Number)
31 St. James Avenue, 6
th Floor, Boston, MA 02116
2450 Holcombe Blvd., Suite J 608, Houston, TX 77021
(Address of principal executive offices)(Zip Code)


(346) 772-0346
Registrant's Telephone Number, Including Area Code: (617) 874-1821telephone number, including area code

(Former Name, Former Addressname, former address and Former Fiscal Year,former fiscal year, If Changed Since Last Report: Not Applicable
changed since last report)

Securities registered pursuant to Section 12(b) of the Act
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $ 0.0001 par valueSLRXThe Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted 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 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.
Large Accelerated Filer☐Accelerated Filer☐Non-accelerated Filer☒Smaller Reporting Company☒ Emerging Growth Company☒
Large Accelerated Filero
Accelerated Filero
Non-accelerated Filerý
Smaller Reporting Companyý
 Emerging Growth Companyý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ý☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o ☐No ý☒

 Securities registered pursuant to Section 12(b)As of the ActMay 5, 2020, there were13,650,752shares of common stock outstanding.


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SALARIUS PHARMACEUTICALS, INC.
TABLE OF CONTENTS

Title of each class Trading Symbol(s)Name of each exchange on which registered
Common Stock, $ 0.0001 par valueFLKSThe Nasdaq Stock Market LLC

As of July 12, 2019, there were 18,069,476 shares of common stock outstanding.


FLEX PHARMA, INC.
TABLE OF CONTENTS

Page
Page
Financial Information
Item 1.
4
Condensed Consolidated Balance Sheets
4
Condensed Consolidated Statements of Operations
5
Condensed Consolidated Statements of Comprehensive Loss
6
Condensed Consolidated Statements of Cash Flows
76
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
87
Notes toCondensed Consolidated Financial Statements
98
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
2923
3023
3024
3024
3027
3129
Mine Safety Disclosures
3130
Item 5.
Other Information
31
Item 6.
Exhibits
32
SIGNATURES
33


Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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, containedThe information in this Quarterly Report on Form 10-Q, including the information incorporated herein by reference, include forward-looking statements regarding our strategy, future operations, future financial position, projected costs, expectations regardingwithin the timing and outcomemeaning of Section 27A of the strategic review process,Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the expectations regarding our research and development efforts, the commercial prospectsSecurities Exchange Act of our consumer product, and the plans and objectives of management,1934, as amended (the “Exchange Act”). These are forward looking statements. These factors alsostatements that include, but are not limited to, those factors set forth instatements about future periods; the sections entitled "Risk Factors," "Legal Proceedings," "Management's DiscussionCompany's strategy and Analysisongoing development programs; the Company's clinical trials, including status, costs, goals, timing and other expectations related thereto; the Company’s belief as to the potential of Financial Conditionits lead compound, SP-2577; the Company's strategic collaborations and Results of Operations," "Quantitativelicense agreements, intellectual property, FDA approval process and Qualitative Disclosures about Market Risk,"government regulation; the potential for Seclidemstat to target the epigenetic dysregulation underlying Ewing sarcoma 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,advanced solid tumors including, but are not limited to, theprostate, breast, ovarian, melanoma, colorectal and other cancers; expected timing and outcomeresults of clinical studies; the nature, strategy and focus of the completionCompany; the development and commercial potential of any product candidates; the Company's ability to regain and maintain compliance with Nasdaq's continued listing standards; the Company’s expectations as to revenue, cash flow, and expenses; critical accounting policies; the potential impact of the mergerCOVID-19 pandemic on the Company’s business, operations, cash flow and ability to obtain additional financing; the sufficiency of the Company's cash on hand for future operating and capital requirements; the Company's liquidity position, future capital requirements, and need for, and ability to secure, additional financing; the ability of the Company to access additional financing under the Grant Contract with Salarius Pharmaceuticals, LLC;Cancer Prevention and Research Institute of Texas; and the costs associated with any pending or threatened litigation; ourCompany's operating losses and ability to continue to sell our consumer product; availability of funding sufficient for our foreseeableas a going concern. These forward-looking statements are based on current expectations and unforeseeable operating expensesbeliefs and capital expenditure requirements; ability to attract, retaininvolve numerous risks and motivate qualified personnel; the inherent uncertainties, associated with intellectual property; and other factorsincluding those discussed under “Part I — Item 1A — Risk Factors,” in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 20182019, and under Part II — Item 1A — Risk Factors in this Quarterly Report on Form 10-Q. These risks and uncertainties that could cause actual results to differ materially from expectations or those expressed in these forward-looking statements. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. When used in this report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “indicate,” “seek,” “should,” “would,” “aim,” “target” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. All statements, other filings with the Securities and Exchange Commission, or SEC.than statements of historical fact, are statements that could be deemed forward-looking statements.

As a resultIf any of these and other factors, we may not actually achieverisks or uncertainties materializes or any of these assumptions proves incorrect, our results could differ materially from the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on ourin this report. All forward-looking statements.statements in this report are current only as of the date of this report. We do not assumeundertake any obligation to publicly update any forward-looking statements, whether as a result of new information, futurestatement to reflect events or otherwise, except as required by law.circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.



Table of Contents
PART I - FINANCIAL INFORMATION


Item 1.Financial Statements

FLEX PHARMA,SALARIUS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 March 31,
2020		December 31,
2019
 
Assets  
Current assets:  
Cash and cash equivalents$9,646,940  $3,738,900  
Grants receivable from CPRIT591,129  —  
Prepaid expenses and other current assets646,360  955,899  
Total current assets10,884,429  4,694,799  
Property and equipment, net21,889  25,016  
Goodwill8,865,909  8,865,909  
Other assets293,147  308,674  
Total assets$20,065,374  $13,894,398  
Liabilities and stockholders' equity (deficit)  
Current liabilities: 
Accounts payable$979,823  $1,790,966  
Accrued expenses and other current liabilities795,567  160,783  
Note payable252,679  502,332  
Deferred revenue—  541,701  
Warrant liability34,692  317,762  
Total liabilities2,062,761  3,313,544  
Commitments and contingencies (Note 6)
Stockholders' equity (deficit):  
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; 468,694 issued and outstanding47  —  
Common stock, $0.0001 par value; 100,000,000 shares authorized; 13,650,838 and 4,519,533 shares issued at March 31, 2020 and December 31, 2019, and 13,645,677 and 4,511,174 shares outstanding at March 31, 2020 and December 31, 2019, respectively1,364  451  
Additional paid-in capital32,161,718  22,657,103  
Accumulated deficit(14,160,516) (12,076,700) 
Total stockholders' equity18,002,613  10,580,854  
Total liabilities and stockholders' equity$20,065,374  $13,894,398  
 June 30,
2019		 December 31,
2018
    
Assets 
  
Current assets: 
  
Cash and cash equivalents$6,514,215
 $9,829,624
Restricted cash—
 126,595
Accounts receivable28,278
 9,939
Inventory130,920
 186,920
Prepaid expenses and other current assets435,972
 162,088
Total current assets7,109,385
 10,315,166
Property and equipment, net27,954
 74,460
Total assets$7,137,339
 $10,389,626
Liabilities and stockholders' equity 
  
Current liabilities:   
Accounts payable$805,516
 $342,530
Accrued expenses and other current liabilities230,752
 764,340
Total current liabilities1,036,268
 1,106,870
Total liabilities1,036,268
 1,106,870
Stockholders' equity: 
  
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at June 30, 2019 and December 31, 2018; none issued or outstanding at June 30, 2019 and December 31, 2018—
 —
Common stock, $0.0001 par value; 100,000,000 shares authorized at June 30, 2019 and December 31, 2018; 18,069,476 and 18,069,476 shares issued at June 30, 2019 and December 31, 2018, and 18,068,642 and 18,067,392 shares outstanding at June 30, 2019 and December 31, 2018, respectively1,807
 1,807
Additional paid-in capital142,675,746
 142,242,224
Accumulated deficit(136,576,482) (132,961,275)
Total stockholders' equity6,101,071
 9,282,756
Total liabilities and stockholders' equity$7,137,339
 $10,389,626

See accompanying notes to condensed consolidated financial statements.

4
FLEX PHARMA,
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SALARIUS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Revenue:
Grant revenue$1,132,830  $655,635  
Operating expenses:
Research and development1,643,371  699,929  
General and administrative1,859,017  1,488,490  
Total operating expenses3,502,388  2,188,419  
Loss before other income (expense)(2,369,558) (1,532,784) 
Change in fair value of warrant liability283,070  —  
Interest income net2,672  10,708  
Net loss$(2,083,816) $(1,522,076) 
Loss per common share — basic and diluted$(0.22) $(0.64) 
Weighted-average number of common shares outstanding — basic and diluted9,534,842  2,372,940  
 Three Months Ended June 30, 2019 Three Months Ended June 30, 2018 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018
Net product revenue$163,071
 $241,416
 $267,291
 $417,671
Other revenue1,634
 4,086
 2,391
 6,413
Total revenue164,705
 245,502
 269,682
 424,084
Costs and expenses:     
  
Cost of product revenue36,148
 179,945
 83,477
 263,879
Research and development29,294
 6,174,589
 31,000
 10,854,770
Selling, general and administrative1,497,401
 2,994,649
 3,796,986
 6,691,936
Total costs and expenses1,562,843
 9,349,183
 3,911,463
 17,810,585
Loss from operations(1,398,138) (9,103,681) (3,641,781) (17,386,501)
Interest income, net13,361
 51,809
 26,574
 111,402
Net loss$(1,384,777) $(9,051,872) $(3,615,207) $(17,275,099)
Net loss attributable to common stockholders$(1,384,777) $(9,051,872) $(3,615,207) $(17,275,099)
Net loss per share attributable to common stockholders — basic and diluted$(0.08) $(0.50) $(0.20) $(0.96)
Weighted-average number of common shares outstanding — basic and diluted18,068,429
 18,037,274
 18,068,120
 17,965,989


See accompanying notes to condensed consolidated financial statements.


5
FLEX PHARMA,
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SALARIUS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS CASH FLOWS
(Unaudited)

 Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Operating activities  
Net loss$(2,083,816) $(1,522,076) 
Adjustments to reconcile net loss to net cash used in operating activities: 
Depreciation, amortization and impairment4,233  114,707  
Equity-based compensation expense38,409  35,407  
Change in fair value of warrant liability(283,070) —  
Changes in operating assets and liabilities: 
Grants receivable(591,129) —  
Prepaid expenses and other current assets298,959  30,743  
Accounts payable(911,301) 589,700  
Accrued expenses and other current liabilities361,382  (462,816) 
Due to/from related party—  1,256  
Deferred revenue(541,701) (655,634) 
Net cash used in operating activities(3,708,034) (1,868,713) 
Financing activities
Proceeds from issuance of equity securities, net9,865,727  1,508,179  
Payments on note payable(249,653) —  
Net cash provided by financing activities9,616,074  1,508,179  
Net increase (decrease) in cash, cash equivalents and restricted cash5,908,040  (360,534) 
Cash, cash equivalents and restricted cash at beginning of period3,738,900  6,131,781  
Cash, cash equivalents and restricted cash at end of period$9,646,940  $5,771,247  
Supplemental disclosure of cash flow information:
Cash paid for interest$3,061  $—  
Non-cash investing and financing activities:
Accrued issuance costs for public offering$398,561  $—  
Issuance of shares for license$—  $110,474  
Conversion of liabilities to equity$—  $2,869,412  
 Three Months Ended June 30, 2019 Three Months Ended June 30, 2018 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018
Net loss$(1,384,777) $(9,051,872) $(3,615,207) $(17,275,099)
Other comprehensive gain (loss):       
Unrealized gain (loss) on available-for-sale securities—
 (93) —
 1,247
Comprehensive loss$(1,384,777) $(9,051,965) $(3,615,207) $(17,273,852)


See accompanying notes to condensed consolidated financial statements.

6

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FLEX PHARMA,SALARIUS PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018
Operating activities 
  
Net loss$(3,615,207) $(17,275,099)
Adjustments to reconcile net loss to net cash used in operating activities: 
 

Depreciation expense46,506
 124,000
Stock-based compensation expense433,522
 1,419,933
Amortization and accretion on investments—
 11,537
Other non-cash items—
 22,274
Changes in operating assets and liabilities: 
  
Accounts receivable(18,339) (184)
Inventory56,000
 139,206
Prepaid expenses and other current assets(273,884) (93,909)
Accounts payable462,986
 (859,107)
Accrued expenses and other current liabilities(533,588) (1,127,164)
Deferred rent—
 (29,410)
Net cash used in operating activities(3,442,004) (17,667,923)
Investing activities 
  
Purchases of marketable securities—
 (1,997,751)
Proceeds from maturities and sales of marketable securities—
 16,117,184
Proceeds from sales of property and equipment—
 1,415
Net cash provided by investing activities—
 14,120,848
Financing activities 
  
Proceeds from exercise of common stock—
 118,010
Net cash provided by financing activities—
 118,010
Net decrease in cash, cash equivalents and restricted cash(3,442,004) (3,429,065)
Cash, cash equivalents and restricted cash at beginning of period9,956,219
 19,312,631
Cash, cash equivalents and restricted cash at end of period$6,514,215
 $15,883,566

See accompanying notes to condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)

                 
  Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity
             
  Shares Amount Shares Amount    
Balance at December 31, 2017 —
 $—
 17,797,178
 $1,780
 $140,184,630
 $(1,247) $(111,079,275) $29,105,888
Vesting of restricted common stock —
 —
 171,029
 17
 (17) —
 —
 —
Issuance of common stock from option exercises —
 —
 12,645
 1
 54,912
 —
 —
 54,913
Stock-based compensation expense —
 —
 —
 —
 908,940
 —
 —
 908,940
Unrealized gain on available-for-sale securities —
 —
 —
 —
 —
 1,340
 —
 1,340
Adjustment related to adoption of new accounting pronouncement using the modified retrospective transition method —
 —
 —
 —
 —
 —
 40,217
 40,217
Net loss —
 —
 —
 —
 —
 —
 (8,223,227) (8,223,227)
Balance at March 31, 2018 —
 —
 17,980,852
 1,798
 141,148,465
 93
 (119,262,285) 21,888,071
Vesting of restricted common stock —
 —
 625
 —
 —
 —
 —
 —
Issuance of common stock from option exercises —
 —
 84,665
 9
 63,088
 —
 —
 63,097
Stock-based compensation expense —
 —
 —
 —
 510,993
 —
 —
 510,993
Unrealized gain on available-for-sale securities —
 —
 —
 —
 —
 (93) —
 (93)
Net loss —
 —
 —
 —
 —
 —
 (9,051,872) (9,051,872)
Balance at June 30, 2018 —
 —
 18,066,142
 1,807
 141,722,546
 —
 (128,314,157) 13,410,196
                 
Balance at December 31, 2018 —
 —
 18,067,392
 1,807
 142,242,224
 —
 (132,961,275) 9,282,756
Vesting of restricted common stock —
 —
 625
 —
 —
 —
 —
 —
Stock-based compensation expense —
 —
 —
 —
 220,975
 —
 —
 220,975
Net loss —
 —
 —
 —
 —
 —
 (2,230,430) (2,230,430)
Balance at March 31, 2019 —
 —
 18,068,017
 1,807
 142,463,199
 —
 (135,191,705) 7,273,301
Vesting of restricted common stock —
 —
 625
 —
 —
 —
 —
 —
Stock-based compensation expense —
 —
 —
 —
 212,547
 —
 —
 212,547
Net loss —
 —
 —
 —
 —
 —
 (1,384,777) (1,384,777)
Balance at June 30, 2019 —
 $—
 18,068,642
 $1,807
 $142,675,746
 $—
 $(136,576,482) $6,101,071

 Common StockPreferred StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders' Equity (Deficit)
 SharesAmountSharesAmount
Balance at December 31, 20182,032,763  $203  —  —  $3,869,120  $(5,140,437) $(1,271,114) 
Issuance of equity securities960,489  96  —  —  4,377,495  —  4,377,591  
Issuance of equity securities for license12,907  1  —  —  110,473  —  110,474  
Equity-based compensation expense9,550  1  —  —  35,406  —  35,407  
Net loss—  —  —  —  —  (1,522,076) (1,522,076) 
Balance at March 31, 20193,015,709  301  —  —  8,392,494  (6,662,513) 1,730,282  
Balance at December 31, 20194,511,174  451  —  —  22,657,103  (12,076,700) 10,580,854  
Issuance of equity securities, net8,353,480  835  1,246,519  125  9,466,206  —  9,467,166  
Preferred shares converted to common shares777,825  78  (777,825) (78) —  —  —  
Equity-based compensation expense3,198  —  —  —  38,409  —  38,409  
Net loss—  —  —  —  —  (2,083,816) (2,083,816) 
Balance at March 31, 202013,645,677  $1,364  468,694  47  $32,161,718  $(14,160,516) $18,002,613  
See accompanying notes to condensed consolidated financial statements.

7

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FLEX PHARMA,SALARIUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. OrganizationORGANIZATION AND OPERATIONS

Nature of Business

Salarius Pharmaceuticals, Inc. (“Salarius” or the “Company”), together with its subsidiaries, Salarius Pharmaceuticals, LLC, Flex Innovation Group LLC, and operations
The Company
FlexTK Pharma, Inc., or the Company, is a clinical-stage biotechnology company that was previously focused on developing innovative and proprietaryeffective treatments for muscle cramps, spasmscancers with high unmet medical need caused by dysregulated gene expression.Epigenetics refers to the regulatory system that affects gene expression and spasticity associated with severe neurological conditions. In June 2018, the Company announced that itCompany's lead epigenetic enzyme technology was ending its ongoing Phase 2 clinical trialslicensed from the University of its lead drug product candidate, FLX-787,Utah Research Foundation 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 2016, the Company launched its consumer product, HOTSHOT®, to prevent and treat exercise-associated muscle cramps, or EAMCs.2011. The Company continues to market and sell HOTSHOT to endurance athletes who drink it before, during and after exercise to prevent and treat EAMCs.is located in Houston, Texas.
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. Following an extensive process of evaluating strategic alternatives for the Company, on
Merger with Flex Pharma, Inc.

On January 3, 2019, the CompanyFlex Pharma, Inc. ("Flex Pharma"), Salarius Pharmaceuticals LLC ("Private Salarius") and Falcon Acquisition Sub, LLC (“Merger Sub”), a wholly owned subsidiary of Flex Pharma, entered into an Agreement and Plan of Merger or(the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub merged with and into Private Salarius, Pharmaceuticals, LLC, orwith Private Salarius under which the privately held Salarius will merge withcontinuing as a wholly owned subsidiary of the Company. At a special meeting on July 12, 2019, theFlex Pharma. The merger was approved by the Company's stockholders and the merger is expected to closecompleted on or about July 19, 2019. Upon completionAfter the merger, Flex Pharma was renamed Salarius Pharmaceuticals, Inc. The merger was accounted for as a reverse acquisition with Private Salarius being deemed the acquiring company for accounting purposes. See Note 3.

Risks Related to Covid-19 Pandemic
The outbreak of COVID-19 has spread worldwide. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s operations and those of third parties on which the Company relies. While the potential economic impact brought by, and the duration of, the merger, the business of Salarius will continue as the business of the combined company.
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 $1,384,777 for the three months ended June 30, 2019, a loss of $3,615,207 for the six months ended June 30, 2019 and had an accumulated deficit of $136,576,482 as of June 30, 2019. The Company had unrestricted cash and cash equivalents of $6,514,215 at June 30, 2019. 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 the merger with Salarius is not completed, the Company will reconsider its strategic alternatives, including to (i) pursue a dissolution and liquidation of the Company, (ii) pursue another strategic transaction or (iii) continue to market HOTSHOT and operate its consumer business. 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 would depend heavily on the timing of such liquidation as well as the amount of cash that would be needed for commitments and contingent liabilities.
Based on the Company's current 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 the merger or whether and to what extent it will resume drug development activities and to what extent it will promote and sell HOTSHOT or other consumer products in the future. Accordingly, itCOVID-19 pandemic is difficult to assess or predict, future cash needs. Management does expect the Company to continue to incur losses forimpact of the foreseeable future. The Company'sCOVID-19 pandemic on the global financial markets may reduce the Company’s ability to achieve profitability inaccess capital, which could negatively impact the futureCompany’s long-term liquidity. The ultimate impact of the COVID-19 pandemic is dependent upon achieving a level of revenues adequatehighly uncertain and subject to support the Company's cost structure.change. The Company may never achieve profitability,does not yet know the full extent of potential delays or impacts on its business, financing or other activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and unlessbusiness and until it does, the Company will continue to need to raise additional capital. If the Company raises funds through the sale of equity or convertible debt securities, the issuance of those securities could result in substantial dilution of the stockholders' ownership in the Company. There can be no assurances, however, that additional funding will be availablethird parties 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, 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, 2018 (the “2018 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, 2019 or December 31, 2018.
Restricted cash
As of December 31, 2018, the Company had restricted cash in the form of a letter of credit it maintained as a security deposit on the lease of its former corporate headquarters in Boston, 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
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.
Shipping and handling costswe rely.
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 $20,000 and $35,000 for the three and six months ended June 30, 2019, and approximately $29,000 and $54,000 for the three and six months ended June 30, 2018.
Restructuring-related costs
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 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 consolidated balance 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 2018 10-K.

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

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 ASCAccounting Standard Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

As described above, the merger with Flex Pharma closed on July 19, 2019. The preparation ofmerger was accounted for as a reverse acquisition with Private Salarius being deemed the acquiring company for accounting purposes. Private Salarius’ historical financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in thehave replaced Flex Pharma’s historical consolidated financial statements with respect to periods prior to the completion of the merger with retroactive adjustments to Private Salarius' legal capital to reflect the legal capital of Flex Pharma. Flex Pharma (renamed Salarius Pharmaceuticals, Inc.) remains the continuing registrant and accompanying notes. On an ongoing basis,reporting company. Accordingly, the Company's management evaluates its estimates,historical financial and operating data of Salarius Pharmaceuticals, Inc., which include, but arecovers periods prior to the closing date of the merger, reflects the assets, liabilities and results of operations of Private Salarius and does not limitedreflect the assets, liabilities and results of operations of Flex Pharma for the periods prior to estimates related to clinical study accruals, estimates related to inventory realizability, stock-based compensation expense and amounts of expenses during the reported period.July 19, 2019. The Company baseshas retrospectively adjusted its estimates on historical experienceStatement of Changes in Stockholders’ Equity (Deficit) and other market-specific or other relevant assumptionsthe weighted average shares used in determining loss per common share to reflect the conversion of the outstanding common unit, profits interest common unit and Series A Preferred unit of
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Private Salarius that it believesconverted into shares of the Company’s common stock upon the merger, and to be reasonable underreflect the circumstances. Actual results may differ from those estimates or assumptions.effect of the 25 to 1 reverse stock split of the Company’s common stock which occurred upon the merger.

Principles of consolidationConsolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: TK Pharma, Inc., a Massachusetts Securities Corporation, Flex Innovation Group LLC, a Delaware limited liability company which contains the Company's consumer-related operations, and Falcon Acquisition Sub, LLC, a Delaware limited liability company established for purposes of the merger.subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Recent accounting pronouncements

Unaudited Interim Financial Information

The accompanying interim financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2019 included elsewhere in the Company's Annual Report on Form 10-K filed with the SEC on March 23, 2020. In the opinion of management, the unaudited interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of March 31, 2020 and the results of operations for the three months ended March 31, 2020 and 2019. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2019 balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by GAAP for complete financial statements.

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America as defined by the FASB ASC requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents

Salarius considers all highly-liquid investments with original maturities of three months or less to be cash equivalents.

At March 31, 2020 and December 31, 2019, Salarius also held approximately $0 and $1.0 million, respectively, which represents funds received from Cancer Prevention and Research Institution of Texas ("CPRIT"). These funds were used for costs for allowable expenses, primarily research and development expenses. The grant has a mandatory fund matching requirement. Subject to CPRIT review, the Company believes that all matching fund requirements have been met at March 31, 2020.


Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the three months ended March 31, 2020 and March 31, 2019 , impairment charges related to long-lived assets were $0 and $110,474, respectively.

Goodwill

Goodwill is not amortized but is tested at least annually for impairment at the reporting unit level. The Company has determined that the reporting unit is the single operating segment disclosed in its current financial statements.

Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carrying value, including goodwill. If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized. Additional impairment assessments may be performed on an interim basis if the Company encounters events or changes in circumstances that would indicate that, more likely than not, the carrying
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value of goodwill has been impaired. There was no impairment of goodwill during the three months ended March 31, 2020 or March 31, 2019, respectively.

Financial Instruments and Credit Risks

Financial instruments that potentially subject the Company to credit risk include cash and cash equivalents and restricted cash. Cash is deposited in demand accounts in federally insured domestic institutions to minimize risk. Insurance is provided through the Federal Deposit Insurance Corporation (“FDIC”). Although the balances in these accounts exceed the federally insured limit from time to time, the Company has not incurred losses related to these deposits.

Warrants
In conjunction with the reverse merger transaction, the Company issued rights to receive warrants to purchase the Company’s common stock. Further, on February 2016,11, 2020, the Company issued warrants to purchase the Company's common stock in a registered public offering. The Company determines whether the warrants should be classified as a liability or equity. For warrants classified as liabilities, the Company estimates the fair value of the warrants at each reporting period using Level 3 inputs with changes in fair value recorded in the Condensed Consolidated Statement of Operations within Change in fair value of warrant liability. The estimates in valuation models are based, in part, on subjective assumptions, including but not limited to stock price volatility, the expected life of the warrants, the risk-free interest rate and the fair value of the common stock underlying the warrants, and could differ materially in the future. The Company will continue to adjust the fair value of the warrant liability at the end of each reporting period for changes in fair value from the prior period until the earlier of the exercise or expiration of the applicable warrant.

Clinical Trial Accruals
The Company’s preclinical and clinical trials are performed by third party contract research organizations (CROs) and/or clinical investigators, and clinical supplies are manufactured by contract manufacturing organizations (CMOs). Invoicing from these third parties may be monthly based upon services performed or based upon milestones achieved. The Company accrues these expenses based upon its assessment of the status of each clinical trial and the work completed, and upon information obtained from the CROs and CMOs. The Company’s estimates are dependent upon the timeliness and accuracy of data provided by the CROs and CMOs regarding the status and cost of the studies, and may not match the actual services performed by the organizations. This could result in adjustments to the Company’s research and development expenses in future periods. To date the Company has had no significant adjustments.

Grants Receivable and Revenue Recognition

Salarius’ source of revenue has been from a grant received from CPRIT. Grant revenue is recognized when qualifying costs are incurred and there is reasonable assurance that conditions of the grant have been met. Cash received from grants in advance of incurring qualifying costs is recorded as deferred revenue and recognized as revenue when qualifying costs are incurred. When grant funds are received after costs have been incurred, the Company records revenue and a corresponding grants receivable.

Research and Development Costs

Research and development costs consist of expenses incurred in performing research and development activities, including pre-clinical studies and clinical trials. Research and development costs include salaries and personnel-related costs, consulting fees, fees paid for contract research services, the costs of laboratory equipment and facilities, license fees and other external costs. Research and development costs are expensed when incurred.


Equity-Based Compensation

Salarius measures equity-based compensation based on the grant date fair value of the awards and recognizes the associated expense in the financial statements over the requisite service period of the award, which is generally the vesting period.

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The Company uses the Black-Scholes option valuation model and the Backsolve method (which is similar to the Black-Scholes valuation model and produces similar results) to estimate the fair value of the stock-based compensation and incentive units. Assumptions utilized in these models including expected volatility calculated based on implied volatility from traded stocks of peer companies, dividend yield and risk-free interest rate. Additionally, forfeitures are accounted for in compensation cost as they occur.

Loss Per Share

Basic net loss per share is calculated by dividing the net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Since the Company was in a loss position for all periods presented, diluted net loss per share is the same as basic net loss per share for all periods, as the inclusion of all potential common shares outstanding is anti-dilutive.

The number of anti-dilutive shares, consisting of common shares underlying (i) common stock options, (ii) stock purchase warrants, (iii) unvested restricted stock, (iv) convertible preferred stock and (v) rights entitling holders to receive warrants to purchase the Company's common shares, which have been excluded from the computation of diluted loss per share, was 10,597,729 and 30,395 shares as of March 31, 2020 and 2019, respectively.

Income Taxes
Income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes ("ASC 740"), which provides for deferred taxes using an asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore, a valuation allowance has been established for the full amount of the deferred tax assets.
The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of March 31, 2020 and December 31, 2019, the Company did not have any significant uncertain tax positions and no interest or penalties have been charged. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company is subject to routine audits by taxing jurisdictions.

Subsequent Events

The Company’s management reviewed all material events through the date that the financial statements were issued for subsequent event disclosure consideration.

Application of New Accounting Standards
In January 2017, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02").2017-04, “Intangibles-Goodwill and Other,” which is intended to simplify the subsequent measurement of goodwill. The ASU requires lesseespronouncement allows an entity, during its annual or interim goodwill impairment evaluation, to recognizecompare the assets and liabilities on their balance sheet forfair value of a reporting unit with its carrying amount. An impairment charge is immediately recognized by which the rights and obligations created by most leases and continue to recognize expenses on their income statements overcarrying amount exceeds the lease term. It also requires disclosures designed to give financial statement users information on the amount, timing and uncertainty of cash flows arising from leases. The guidancefair value. This ASU is effective for annual reporting periods beginning after December 15, 2018,fiscal
years, and interim periods within those years.years, beginning after December 15, 2019. The Company adopteddoes not expect adoption of this ASU No. 2016-02 in the first quarter of 2019, which did not materiallyto have a material impact the Company's condensedon its consolidated financial statements or disclosures.statements.


Pronouncements Not Yet Adopted
In August 2018,December 2019, the FASB issued ASU No. 2018-13, Fair Value Measurement2019-12, Simplifying the Accounting for Income Taxes (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement740). The guidance eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period
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allocation and calculating income taxes in interim periods. This guidance also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual reportingand interim periods in fiscal years beginning after December 15, 2019, and interim periods within those years.2020. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2018-13this change will have on its consolidated financial statementsstatements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement of all expected credit losses for financial assets including trade receivables held at the reporting date based on historical experience, current conditions, and disclosures.


reasonable and supportable forecasts. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses guidance. The FASB also subsequently issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 842), which did not change the core principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed amounts previously written off and expected to be written off. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 for public business entities, excluding smaller reporting companies. Early adoption is permitted. As a smaller reporting company, the guidance will be effective for the Company during the first quarter of 2023. The Company believes thatis in the process of assessing the impact of other recently issued standards that are not yet effectiveadoption will not have a material effect on its consolidated financial position or resultsstatements.

NOTE 3. REVERSE ACQUISITION AND DISPOSAL

Reverse Acquisition

On January 3, 2019, Flex Pharma, Private Salarius and Merger Sub entered into the Merger Agreement. Pursuant to the Merger Agreement, Merger Sub merged with and into Private Salarius, with Private Salarius continuing as a wholly owned subsidiary of operations upon adoption.Flex Pharma, with Flex Pharma deemed the legal acquiror and Private Salarius deemed the accounting acquiror, as described below. The merger was completed on July 19, 2019. After the merger, Flex Pharma was renamed Salarius Pharmaceuticals, Inc. The merger was accounted for as a reverse acquisition business acquisition with Private Salarius being deemed the acquiring company for accounting purposes. Private Salarius, as the accounting acquirer, recorded the assets acquired and liabilities assumed of Flex Pharma in the merger at their fair values as of the acquisition date. Private Salarius’ historical financial statements have replaced Flex Pharma’s historical consolidated financial statements with respect to periods prior to the completion of the merger with retroactive adjustments to Private Salarius' legal capital to reflect the legal capital of Flex Pharma. Flex Pharma (which was renamed Salarius Pharmaceuticals, Inc. in connection with the merger) remains the continuing registrant and reporting company.

Private Salarius was determined to be the accounting acquirer based on the following facts and circumstances: (1) members of Private Salarius owned approximately 80.7% of the voting interests of the combined company immediately following the closing of the transaction; (2) the majority of the board of directors of the combined company was composed of directors designated by Private Salarius under the terms of the Merger Agreement; and (3) existing members of Private Salarius management became the management of the combined company.
3. Revenue from contracts with customers
Revenue recognitionThe business purposes of the merger included, among other purposes, obtaining the following potential advantages: (i) the combined organization’s resources would be immediately available to support Private Salarius’ research on Seclidemstat; and (ii) the public company status would allow the Company greater potential access to additional capital.
Revenue includes sales
At the closing of HOTSHOT bottled finished goodsthe merger, each outstanding common unit, profits interest common unit and Series A Preferred unit of Private Salarius converted into shares of the Company’s common stock (subject to e-commerce customers, specialty retailersthe payment of cash in lieu of fractional shares and sports teams, including professionalafter giving effect to a 25 to 1 reverse stock split of the Company’s common stock) at the conversion ratio formulae described in the Merger Agreement.

In addition, at the closing of the merger, the Company distributed one right per share of common stock to stockholders of record as of the close of business on July 18, 2019. Each right entitles such stockholders to receive
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a warrant to purchase shares of the Company’s common stock six months and amateur teams. Revenue also consistsone day following the closing date of payments made by customers for expedited shipping and handling.the merger. See Note 8.

The Company expenses fulfillment costsaccounted for the acquisition as incurred becausea reverse merger using purchase accounting. Because the amortization period wouldmerger qualifies as a reverse acquisition and given that Private Salarius was a private company at the time of the merger and therefore its value was not readily determinable, the fair value of the merger consideration was deemed to be less than one year in accordance withequal to the ASC 606, Revenue from Contracts with Customers ("ASC 606"), practical expedient.
In accordance with ASC 606,sum of the quoted market capitalization of the Company appliesat the following steps to recognize revenue formerger date, the salefair value of bottled finished goodsthe Flex Pharma options that reflectsfully vested upon the consideration to whichmerger together, and the Company expects to be entitledfair value of the rights to receive in exchange forwarrants that were granted to the promised goods:pre-merger Flex Pharma stockholders. Total purchase consideration is as follows:

Flex Pharma market capitalization at closing$10,963,526 
Fair value of rights to warrants1,629,095 
Fair value of Flex Pharma outstanding options on the merger date132,227 
Total purchase consideration$12,724,848 

The Company recorded all tangible and intangible assets acquired and liabilities assumed at their preliminary estimated fair values on the merger date. The following represents the allocation of the estimated purchase consideration:

Fair value of assets acquired
Cash$5,405,826 
Accounts receivable15,168 
Inventory122,235 
Prepaid expense and other current assets106,319 
Goodwill and intangibles8,937,899 
Total fair value of assets acquired14,587,447 
1.Fair value of liabilities assumedIdentify 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.
Accounts payable, accrued liabilities and other current liabilities1,862,599 
Total fair value of liabilities assumed1,862,599 
2.Net assets acquiredIdentify the performance obligations in the contract$12,724,848 
Performance obligations promised


Unaudited Pro Forma Disclosure

The following unaudited pro forma financial information summarizes the results of operations for the three months ended March 31, 2020 and 2019 as if the merger described above had been completed as of January 1, 2019. Pro forma information primarily reflects adjustments relating to the reversal of transaction costs. Assuming that the merger had been completed as of January 1, 2019, the transaction costs would have been expensed in the prior period.

Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Revenues$1,132,830  $655,635  
Net loss(2,083,816) (9,415,074) 
Net loss per share(0.22) (3.97) 

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NOTE 4. GRANTS RECEIVABLE
Grants receivable represents qualifying costs incurred and there is reasonable assurance that conditions of the grant have been met but the corresponding funds have not been received as of the reporting date. Grants receivable balances are $591,129 and $0 as of March 31, 2020 and December 31, 2019, respectively.

NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at March 31, 2020 and December 31, 2019 consisted of the following:
 March 31, 2020December 31, 2019
Prepaid clinical trial expenses$140,964  $202,743  
Prepaid insurance360,608  617,096  
Other prepaid and current assets144,788  136,060  
Total prepaid expenses and other current assets$646,360  $955,899  

Prepaid insurance is comprised of prepaid directors' and officers' insurance. In July 2019, the Company financed their directors' and officers' insurance premium with a contract are identifiedshort term note, the principal amount of which is approximately $0.9 million bearing interest at a rate of 4.61%. The note payable balances were $252,679 and $502,332, which were included within Current Liabilities on the Condensed Consolidated Balance Sheets at March 31, 2020 and December 31, 2019, respectively.

NOTE 6. COMMITMENTS AND CONTINGENCIES

License Agreement with the University of Utah Research Foundation

In 2011, the Company entered into a license agreement with the University of Utah, under which, the Company acquired an exclusive license to and epigenetic enzyme lysine specific demethylase 1 ("LSD 1"). In exchange for the license, the Company issued 2% equity ownership in the Company based on a fully diluted basis at the goods that will be transferredeffective date of the agreement and subject to certain adjustments specified in the agreement, granted revenue sharing rights on any resulting products or processes to commence on first commercial sale, and milestone payments based upon regulatory approval of any resulting product or process as well as on the second anniversary of first commercial sale.

Cancer Prevention and Research Institute of Texas

In June 2016, the Company entered into a Cancer Research Grant Contract with CPRIT. Pursuant to the customer that are both capablecontract, CPRIT awarded the Company a grant of being distinctup to $18.7 million to fund the development of LSD-1 inhibitor. This is a 3-year grant award which originally expired on May 31, 2019. However, a six-month extension was approved by CPRIT in May 2019 and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract.an additional six-month extension through May 2020. The Company has concludedapplied for an extension with a proposed contract end date of November 30, 2020.

The Company will retain ownership over any intellectual property developed under the salecontract ("Project Result"). With respect to non-commercial use of bottled finished goodsany Project Result, the Company agreed to grant to CPRIT a nonexclusive, irrevocable, royalty-free, perpetual, worldwide license with right to sublicense any necessary additional intellectual property rights to exploit all Project Results by CPRIT, other governmental entities and related shippingagencies of the State of Texas, and handlingprivate or independent institutions of higher education located in Texas, for education, research and other non-commercial purposes.

The Company is obligated to make revenue-sharing payments to CPRIT with respect to net sales of any product covered by the contract, up to a maximum repayment of certain percentage of the aggregate amount paid to the Company by CPRIT under the CPRIT contract. The payments are accounted fordetermined as a single performance obligation.percentage of net sales, which may be reduced if the Company is required to obtain a license from a third party to sell any such product. In addition, upon meeting the foregoing limitation on revenue-sharing payments, the Company agreed to make continued revenue-sharing payments to CPRIT of less than 1% of net sales.
3.Determine the transaction price
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The transaction priceCPRIT grant is determined based on the considerationsubject to whichfunding conditions including a matching funds requirement where the Company will be entitled to receive in exchange for transferring goods tomatch 50% of funding from the customer. For sales through June 18, 2018,CPRIT grant. As of March 31, 2020, the Company offered refunds to e-commerce customers, upon request, within 30 dayshas received an aggregate of delivery. For sales subsequent to June 18, 2018,$9.6 million from the CPRIT grant and there was $9.1 million of funds available for the Company now offers refunds to e-commerce customers,draw 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, as necessary. 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 $1,000 and $2,000 for the three and six months ended June 30, 2019, respectively, and approximately $9,000 and $17,000 for the three and six months ended June 30, 2018, respectively.
Revenue is presented net of taxes collectedmeeting certain requirements. There was no funding received 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 revenueCPRIT during the three and six months ended June 30,March 31, 2020. At March 31, 2020 and December 31, 2019, or the threeCompany had deferred revenue of $0 and six months ended June 30, 2018. All$541,701, respectively, related to the CPRIT contract. At March 31, 2020 and December 31, 2019, the Company had grants receivable of $591,129 and $0, respectively, related to the Company's revenue was generated from sales within the United States.CPRIT contract.

4.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain assets and liabilities are carried at fair value under GAAP. Fair value measurements
The Company records cash equivalents atis defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value. ASC Topic 820, Fair Value Measurementsvalue must maximize the use of observable inputs and Disclosures, established aminimize the use of unobservable inputs. A fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs)three levels of inputs, of which the first two are considered observable and the Company’s own assumptions (unobservable inputs). The hierarchy consists of three levels:last is considered unobservable, are used to measure fair value:
Level 1 –- Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Quoted- Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets, quoted prices in marketsor liabilities; or other inputs that are not active,observable or inputs which arecan be corroborated by observable directly or indirectly,market data for substantially the full term of the assetassets or liability.liabilities.
Level 3 – Unobservable- Significant unobservable inputs that reflect the Company’sincluding Salarius’ own assumptions aboutin determining fair value.
The Company believes the assumptions market participants would use in pricingrecorded values of its financial instruments, including cash and cash equivalents, accounts payable and note payable approximate their fair values due to the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.short-term nature of these instruments.
The following tables summarizetable sets forth a summary of changes in the cash equivalentsfair value of Level 3 liabilities, the warrant associated with the Flex Pharma merger measured at fair value on a recurring basis as of June 30, 2019 and Decemberfor the three months ended March 31, 2018:2020:
DescriptionBalance at December 31, 2019Change in Fair ValueBalance at March 31, 2020
Warrant liability$317,762  $283,070  $34,692  


 Level 1 Level 2 Level 3 
Balance as of
June 30, 2019
Cash equivalents$2,360,092
 $—
 $—
 $2,360,092
 $2,360,092
 $—
 $—
 $2,360,092

 Level 1 Level 2 Level 3 
Balance as of
December 31, 2018
Cash equivalents$2,333,771
 $—
 $—
 $2,333,771
 $2,333,771
 $—
 $—
 $2,333,771
Cash equivalents 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, 2019. After completing its validation procedures, the Company did not adjust or override any fair value carrying amounts as of June 30, 2019.NOTE 8. STOCKHOLDERS' EQUITY
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, 2019 and December 31, 2018, 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, 2019 or the year ended December 31, 2018. The Company had no financial assets or liabilities that were classified as Level 3 at any time during the six months ended June 30, 2019 or the year ended December 31, 2018.
5. Cash equivalents
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, 2019 and December 31, 2018 consisted of money market funds.
The Company held no marketable securities at June 30, 2019 and December 31, 2018.

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 theaccompanying condensed consolidated statements of cash flows:stockholders' equity (deficit) and the footnotes to the interim financial statements have been retroactively adjusted to reflect the equity structure (that is, the number and type of equity interests issued) of Flex Pharma, the legal parent (accounting acquiree) of the merger closed on July 19, 2019, with the retained earnings and other equity balances of the Private Salarius before the merger. Private Salarius' equity was restated using the exchange ratio established in the merger agreement to reflect the number of shares of Flex Pharma issued in the merger. Concurrent with the merger, the Company's shareholders approved a 1-for-25 reverse stock split, which became effective on July 19, 2019. Total shares owned by Flex Pharma pre-merger shareholders (net of fraction shares paid in cash) was 8,353,480 shares after reverse stock-split.
Common Stock and Preferred Stock
On February 11, 2020, the Company completed a public offering with total gross proceeds of approximately $11.0 million, which includes the full exercise of the underwriter's over-allotment option to purchase an additional 1,252,173 shares and warrants prior to deducting underwriting discounts and commissions and offering expenses payable by Salarius. The offering is comprised of 7,101,307 Class A units, priced at a public offering price of $1.15 per unit, with each unit consisting of one share of common stock and a five-year warrant to purchase one share of
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Table of Contents
 June 30, 2019 December 31, 2018
Cash and cash equivalents$6,514,215
 $9,829,624
Restricted cash—
 126,595
Cash, cash equivalents and restricted cash shown on the condensed consolidated statement of cash flows$6,514,215
 $9,956,219

6. Inventory
Inventorycommon stock at an exercise price of $1.15 per share, and 1,246,519 Class B units, priced at a public offering price of $1.15 per unit, with each unit consisting of one share of Series A convertible preferred stock and a five-year warrant to purchase one share of common stock with and exercise price of $1.15 per share. A total of 8,343,480 shares of common stock, 1,246,519 shares of Series A convertible preferred stock, and warrants to purchase up to 9,599,999 shares of common stock were issued in the offering, including the full exercise of the over-allotment option. The convertible preferred stock issued in this transaction includes a beneficial ownership limitation on conversion, but has been recorded at cost asno dividend rights (except to the extent that dividends are also paid on the common stock). The conversion price of June 30, 2019 and December 31, 2018. Costs capitalized at June 30, 2019 and December 31, 2018 relate to HOTSHOT finished goods,the Series A convertible preferred stock in the offering as well as raw materials available to be used for future production runs.
The following table presents inventory:
 June 30, 2019 December 31, 2018
Raw materials$7,247
 $7,247
Finished goods123,673
 179,673
Total inventory$130,920
 $186,920

There were no inventory write-offs during the three and six months ended June 30, 2019. Write-offs totaled approximately $85,000 for the three and six months ended June 30, 2018, and were included in cost of product revenue in the accompanying condensed consolidated statement of operations. In the second quarter of 2018, the Company wrote off raw materials that were not expected to be used in future production runs, as well as finished goods inventory no longer expected to be used for product sampling.

7. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consistedexercise price of the following:warrants are fixed and do not contain any variable pricing features or any price based anti-dilutive features.
 June 30, 2019 December 31, 2018
Professional fees$171,474
 $269,544
Payroll and other employee-related costs48,797
 417,997
Consumer product-related costs10,481
 5,360
Restructuring-related costs—
 68,593
Other research and development-related costs—
 2,846
Total$230,752
 $764,340

Restructuring-related costs

In June 2018, the Company's BoardFebruary 2020, 777,825 shares of Directors, or the Board, approved a corporate restructuring planSeries A convertible preferred stock were converted to reduce the Company's cost structure. In connection with the corporate restructuring plan, the Company reduced itscommon stock.

workforce by approximately 60%, with the reduction completed as of September 30, 2018. As of June 30, 2019, the Company had paid $51,000 in retention bonuses and $889,000 in severance benefits associated with these arrangements.
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. As 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 $603,000 will be payable to the 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. Upon a change in control event and termination without cause, the remaining employees will be eligible for up to approximately $928,000, in the aggregate, of severance benefits.
During the six months ended June 30, 2019, the Company recognized a reduction in the accrual for restructuring-related activities of approximately $11,000, which is composed of approximately $3,000 for one-time termination benefit costs and approximately $8,000 for termination benefits under ongoing benefit arrangements for terminated employees as certain benefit payments are no longer expected to occur. Cumulatively, through June 30, 2019, the Company recognized expense for restructuring-related activities of approximately $1,355,000 which is composed of approximately $1,029,000 of termination benefits under ongoing benefit arrangements for terminated employees, approximately $97,000 as one-time termination benefit costs for terminated employees, approximately $214,000 in retention benefits for seven retained employees who had retention bonuses not triggered by a change in control event and approximately $15,000 of other restructuring related costs including consulting and legal fees.
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 would take place. As 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, 2019. The Company's probability assessment regarding a change in control event changed on July 12, 2019 when the merger was approved by the Company's stockholders.
The Company expects to incur between approximately $1,765,000 and $3,343,000 in total costs for its restructuring-related activities, including approximately $1,355,000 in termination and retention charges and approximately $410,000 related to the annual bonus program, both of which were recorded between the second quarter of 2018 and the first quarter of 2019. The range noted above includes approximately $928,000 of severance benefits for retained employees upon a change in control event and termination under certain circumstances and $603,000 related to retention benefits only payable upon a change in control 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 retention charges will be paid out.
The following table outlines the Company's restructuring activities for the six months ended June 30, 2019:
Accrued restructuring balance as of December 31, 2018$68,593
Adjustments: 
      Employee termination benefits(11,228)
Payments(57,365)
Accrued restructuring balance as of June 30, 2019$—

During the three months ended June 30, 2019, 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 in research and development expenses in the Company's condensed consolidated statement of operations. Cumulatively through June 30, 2019, approximately $957,000 of the restructuring-related and annual

bonus charges are included in research and development expenses and approximately $808,000 are included in selling, general and administrative expenses.

For the six months ended June 30, 2019, 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 and annual bonus charges were incurred by the Company's Consumer Operations segment, approximately $957,000 were incurred by the Company's Drug Development segment and the remaining charges of approximately $714,000 related to corporate costs. Including approximately $1,765,000 of cumulative costs incurred through June 30,March 31, 2019 the Company may incur total restructuring-related chargesissued 960,489 common shares (4,035 Series A preferred units and 350 profit interest units of upPrivate Salarius) for $4,377,591 (net of offering cost of $10,617).

In December 2018, the Company agreed to approximately $114,000issue an unrelated party 12,907 common shares (91 common units of Private Salarius) to acquire licenses for the DNMT1 inhibitor. The issuance was approved in January 2019 and $1,024,000 within its Consumer Operationsthe license was granted in 2018. .


Right to Warrants

Pursuant to the Merger Agreement (See Note 3), Flex Pharma distributed one right per share of common stock to stockholders of record as of the close of business on July 18, 2019. Each right entitles such stockholders to receive a warrant to purchase the Company's common shares on January 20, 2020. These warrants are exercisable, in the aggregate, into 142,711 shares of the Company's common stock with a 5-year term from January 20, 2020, and Drug Development segments, respectively.an exercise price of $15.17 per share. The Company may incur up to $2,205,000 of corporate costs that do not relatewarrants are subject to a reportable segment.
8. Common stock
Ascashless exercise, at the option of June 30, 2019, the Company, had authorized 100,000,000at the closing of an issuance and sale of the Company’s common stock in certain qualified financing, upon the closing of which the holders of warrants shall be entitled to receive a number of shares of common stock $0.0001 par value per share. Each shareequal to the greater of two formulae defined by the Merger Agreement, which are based on the volume weighted average price of the Company's 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 byduring the board of directors. The Company does not intend to declare dividends for10 consecutive trading days ending on the foreseeable future.
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 17,360 shares of restricted common stock issued to consultants outstanding as of June 30, 2019.
The following is a summary of restricted common stock activity:
 
Number of
Shares
 
Weighted-Average
Grant Date
Fair Value
Unvested at December 31, 20182,084
 $11.05
Issued—
 —
Vested(1,250) 11.05
Forfeited—
 —
Unvested at June 30, 2019834
 $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. Terms of stock award agreements, including vesting requirements, were determined by the 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 board of directors ontrading day immediately preceding the date of grant. No further awardsexercise. As a result, the warrants have been classified as a liability.

The Company accounted for these warrants at fair value using Level 3 inputs. The Company determined the fair value of this warrant liability using a Black-Scholes valuation model as the Company believes the value will beclosely approximate the value from the binomial asset pricing model that consisted of a conditional probability weighted expected return method that values the Company’s equity securities assuming various possible future outcomes to estimate the allocation of value within one or more of the scenarios. Using this method, unobservable inputs included the Company’s equity value, expected timing of possible outcomes, risk free interest rates and stock
price volatility.

Variables used in the Black-Scholes model are as follows:

March 31, 2020December 31, 2019
Discount rate0.37%1.69%
Expected life (years)4.81 years5.06 years
Expected volatility113.17%103.07%
Expected dividend—%—%

Wedbush Warrant

On July 19, 2019, upon the closing of the merger, the Company elected to issue warrants to purchase 42,928 common shares to Wedbush Securities Inc. ("Wedbush") to satisfy $500,000 of the $1,000,000 success fee payable to Wedbush at the closing of the merger. The remaining $500,000 success fee was paid in cash. These warrants have an exercise price of $18.90 and a 5-year term. As of March 31, 2020, all warrants issued to Wedbush were outstanding.
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NOTE 9. EQUITY-BASED COMPENSATION
Equity Incentive Plans
The Company has granted under the 2014 Plan.
In January 2015, the Company's Board adopted,options to employees, directors, and the Company's stockholders approved,consultants under the 2015 Equity Incentive Plan (the "2015 Plan"), which became effective immediately prior. On July 19, 2019, the Company completed a merger with Flex Pharma and Flex Pharma had fully vested options to the closingpurchase 90,279 common shares outstanding as of the Company's initial public offering ("IPO").date of the merger that continue to be exercisable. The 2015 Plan provides for the grant of ISOs,incentive stock options ("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, 2019,March 31, 2020, there were 2,487,14034,087 shares remaining available for the grant of stock awards under the 2015 Plan.
TheOn March 23, 2020, the Company has awarded 182,000 stock options to its employees directors, advisors and consultants,directors, pursuant to the plansplan described above. Stock options subsequent to the completion of the Company's IPO were 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. Expected volatilities utilized in the model are based on implied volatilities from traded stocks of peer companies. Similarly, the dividend yield is based on historical experience and the estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The expected term of the options is based on the average period the stock options are expected to remain outstanding. The fair value of the option grants of $92,007 has been estimated with the following assumptions for the three months ended March 31, 2020:

Risk-free interest rate0.48 %
Volatility 113.17 %
Expected life (years) 5.80
Expected dividend yield 0 %

The following table summarizes stock option activity for employees and non-employees for the sixthree months ended June 30, 2019:March 31, 2020:
 Shares 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining
Contractual
Term (in years)
 Aggregate
Intrinsic
Value
Outstanding at December 31, 20182,320,981
 $4.10
 7.61 $—
Granted—
 —
    
Exercised—
 —
    
Forfeited—
 —
    
Expired(23,945) 4.41
    
Outstanding at June 30, 20192,297,036
 $4.10
 7.11 $—
Exercisable at June 30, 20191,346,425
 $5.11
 6.05 $—
Vested or expected to vest at June 30, 20192,297,036
 $4.10
 7.11 $—
 SharesWeighted-Average
Exercise Price		Weighted-Average
Remaining
Contractual
Term (in years)		Aggregate
Intrinsic
Value
Outstanding at December 31, 2019166,233  $34.42  6.53$—  
Granted182,000  0.61  
Forfeited(10,000) —  
Outstanding at March 31, 2020338,233  $17.01  8.18$—  
Exercisable at March 31, 202084,711  $59.85  3.23$—  
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, 2019 Three Months Ended June 30, 2018 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018
Research and development$19,323
 $244,869
 $38,765
 $631,406
Selling, general and administrative193,224
 266,124
 394,757
 788,527
Total$212,547
 $510,993
 $433,522
 $1,419,933
As of June 30, 2019,March 31, 2020, there was approximately $1,726,000$489,641 of total unrecognized compensation cost related to unvested equity awards.stock options. Total unrecognized compensation cost will be adjusted for future changes in employee and non-employee forfeitures, if any. The Company expects to recognize that cost over a remaining weighted-average period of 2.353.27 years.


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NOTE 10. SUBSEQUENT EVENTS

On June 14, 2018,April 9, 2020, the Company granted 654,544 stock options, inwas notified (the “Notice”) by Nasdaq Stock Market, LLC (“Nasdaq”) that on April 8, 2020 the aggregate, to seven employees as partaverage closing price of the Company's retention arrangements with these employees. These awards vest monthlyCompany’s common stock (the “Common Stock”) over 48 months as the employees provide continuous service, and expenseprior 30 consecutive trading days had fallen below $1.00 per share, which is being recognized over this period.the minimum average closing price required to maintain listing on Nasdaq under Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Requirement”). The awards are exercisable for one to three-years post termination dependingNotice has no immediate effect on the employeelisting or trading of the Company’s common stock. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has 180 calendar days, to whichregain compliance with the Minimum Bid Requirement. To regain compliance, the closing bid price of the Company’s common stock options were granted. The awards vest in full uponmust be at least $1.00 per share for a change in control eventminimum of ten consecutive business days during this 180-day period.
On April 20, 2020, the Company was notified by Nasdaq that it has determined to toll the compliance periods for bid price and termination under certain circumstances. Asmarket value of publicly held shares (“MVPHS”) requirements (collectively, the “Price-based Requirements”) through June 30, 2019,2020. In that regard, on April 16, 2020, Nasdaq filed an immediately effective rule change with the Securities and Exchange Commission. As a changeresult, companies presently in control event was not considered probablecompliance periods for accounting purposes. The Company's

probability assessment regarding a change in control event did not change until the merger with Salarius was approved by the Company's stockholdersany Price-based Requirements will remain at a special meeting on July 12, 2019.
Employee stock purchase plan
As of June 30, 2019, 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 allsame stage of the deferred tax assetsprocess and will not be realized. Based uponsubject to being delisted for these concerns. Starting on July 1, 2020, companies will receive the Company's historybalance of operating losses andany pending compliance period in effect at the uncertainty surrounding the realizationstart of the favorable tax attributes in future tax returns,tolling period to regain compliance.
Accordingly, since the Company had 173 calendar days remaining in its bid price compliance period as of April 16, 2020, it will, upon reinstatement of the Price-based Requirements, still has recorded173 calendar days from July 1, 2020, or until December 21, 2020, subject to any extensions granted by Nasdaq, to regain compliance. The Company can regain compliance, either during the suspension or during the compliance period resuming after the suspension by evidencing compliance with the Price-based Requirements for 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, 2019 or 2018.minimum of 10 consecutive trading days.
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.
AsOn April 13, 2020, the Company has reportedwas granted a net loss forloan of approximately $180,000 from Paycheck Protection Program established under the periods presented, diluted net lossCARES Act. The loan matures on April 13, 2022 and bears interest at a rate of 0.5% per common share isannum. The loan will be forgiven if the same as basic net loss per common share.
The following potentially dilutive securities outstanding, priorCompany use it to pay payroll costs including benefit, mortgage interest, rent, and utilities payment over the 8 weeks after getting the loan, by submitting a request to the uselender that is servicing the loan.
18
Table 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:
Contents

 June 30, 2019 June 30, 2018
Options to purchase common stock2,297,036
 3,098,813
Unvested restricted common stock834
 3,334
Total2,297,870
 3,102,147

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.
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, organizes 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. 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, 2019 and 2018 are as follows:
Three Months Ended June 30, 2019Consumer OperationsDrug DevelopmentCorporateConsolidated
Total revenue$164,705
—
—
$164,705
Interest income, net$—
—
13,361
$13,361
Income (loss) from operations$11,821
(29,294)(1,380,665)$(1,398,138)
Three Months Ended June 30, 2018Consumer OperationsDrug DevelopmentCorporateConsolidated
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)
Information for the Company's reportable segments for the six months ended June 30, 2019 and 2018 are as follows:
Six Months Ended June 30, 2019Consumer OperationsDrug DevelopmentCorporateConsolidated
Total revenue$269,682
—
—
$269,682
Interest income, net$—
—
26,574
$26,574
Loss from operations$(41,287)(29,678)(3,570,816)$(3,641,781)
Six Months Ended June 30, 2018Consumer OperationsDrug DevelopmentCorporateConsolidated
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)

13. Subsequent Event

At a special meeting of the Company's stockholders held on July 12, 2019, the merger with Salarius was approved by the Company's stockholders. The merger is expected to close on or about July 19, 2019.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2018.2019, filed with the SEC on March 23, 2020. 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"Part I - Item 1A - Risk Factors" discussed in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, for the year ended December 31, 2019, filed with the SEC on March 23, 2020, 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.
IntroductionOverview
We are a clinical-stage biotechnology company focused on developing effective treatments for cancer with high, unmet medical need caused by dysregulated gene expression. Epigenetics refers to the regulatory system that affects gene expression and our lead epigenetic enzyme technology was licensed from the University of Utah Research Foundation in 2011.

We are focused on strategies addressing dysregulated gene expression, epigenetic strategies for cancer treatment. Epigenetics refers to the system that regulates gene expression through conformational changes to the chromatin rather than changes to the DNA sequence itself. Our compound, Seclidemstat (“SP-2577”), is a small molecule that inhibits the epigenetic enzyme lysine specific demethylase 1 (“LSD1”). LSD1 is an enzyme that removes mono- and di-methyl marks on histones (core protein of chromatin) to alter gene expression. LSD1’s enzymatic activity can cause genes to turn on or off and thereby affect the cell’s gene expression and overall activity. In addition, LSD1 can act via its scaffolding properties, independently of its enzymatic function, to alter gene expression and modulate cell fate. In healthy cells, LSD1 is necessary for stem cell maintenance and cell development processes. However, in several cancers LSD1 is highly expressed and acts aberrantly to incorrectly silence or activate genes leading to disease progression. High levels of LSD1 expression are often associated with aggressive cancer phenotypes and poor patient prognosis. Hence, development of targeted LSD1 inhibitors is of interest for the treatment of various cancers. SP-2577 uses a novel, reversible mechanism to effectively inhibit LSD1’s enzymatic and scaffolding properties and thereby treat and prevent cancer progression.
Our Management's Discussionfirst indication of interest for SP-2577 is a devastating bone and Analysissoft-tissue cancer called Ewing sarcoma. Ewing sarcoma mostly afflicts adolescents and young adults, with the median age of Financial Conditiondiagnosis being 15. The most commonly expressed fusion oncoprotein in Ewing sarcoma is the EWS-FLI fusion protein, which is present in approximately 85% of Ewing sarcoma cases. The LSD1 enzyme associates with EWS-FLI (and other E26 Transformation-Specific (“ETS”) fusion proteins) and Resultsis thought to promote tumorigenesis. We believe the SP-2577 molecule helps inhibit EWS-FLI activity by disrupting EWS-FLI from associating with coregulators (including LSD1) that are necessary for its cancer promoting activity. Therefore, we believe that SP-2577 can potentially reverse the aberrant gene expression and thereby possibly prevent Ewing sarcoma cell proliferation and even promote cell death. Preclinical studies of Operations,SP-2577 in certain Ewing sarcoma animal models show a significant tumor reduction as well as a significant survival benefit compared to untreated animals. Our ongoing Phase 1/2 clinical trial is designed as a single agent dose escalation followed by a dose expansion study. The trial can enroll up to 50 relapsed or MD&A,refractory Ewing sarcoma patients. The primary objectives of the study are to assess the safety and tolerability of SP-2577. Secondary objectives include assessing preliminary efficacy of SP-2577.
As LSD1 can associate with over 60 regulatory proteins other than EWS-FLI, we believe that LSD1 may also play a critical role in progression of various other cancer types. These include both solid tumors and hematologic malignancies. In the second quarter of 2019, we initiated a second company-sponsored Phase 1 trial to study SP-2577 in Advanced Solid Tumors. The Advanced Solid Tumor (“AST”) trial is provideda single agent dose escalation, dose expansion study enrolling patients with advanced malignancies, excluding Ewing sarcoma or central nervous system tumors.
In addition, recent data from “LSD1 Ablation Stimulates Anti-tumor Immunity and Enables Checkpoint Blockade” by W. Sheng, et al. and “Inhibition of Histone Lysine-specific Demethylase 1 Elicits Breast Tumor Immunity and Enhances Antitumor Efficacy of Immune Checkpoint Blockade” by Y. Qin, et al. suggests that LSD1 plays a role in additiontumor immune activity and can sensitize tumors to checkpoint inhibitors. These recent works have sparked interest
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in combining LSD1 inhibitors with checkpoint inhibitors. We are conducting preclinical work with SP-2577 in this area.
We have no products approved for commercial sale and have not generated any revenue from product sales. We have never been profitable and have incurred operating losses in each year since inception. We had an accumulated deficit of $14,160,516 as of March 31, 2020. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.
The lack of revenue from product sales to date and recurring losses from operations since our inception raise substantial doubt about our ability to continue as a going concern. Our financial statements are prepared using Generally Accepted Accounting Principles in the United States of America (“GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our financial statements do not include any adjustments relating to the accompanying unaudited condensed consolidated financial statementsrecoverability and notesclassification of recorded asset amounts and classification of liabilities should we be unable to assist readerscontinue as a going concern.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our product candidates, add personnel necessary to continue to operate as a public company upon closing of the merger, and work to develop an advanced clinical pipeline of product candidates. We expect that our operating losses will fluctuate significantly from quarter-to-quarter and year-to-year due to timing of clinical development programs and efforts to achieve regulatory approval.
As of March 31, 2020, we had cash and cash equivalents of $9,646,940, which includes $0 for funds received from Cancer Prevention and Research Institution of Texas ("CPRIT"). As of March 31, 2020, CPRIT fund matching requirements had been fully met. As of March 31, 2020, we have received an aggregate of $9.6 million from the CPRIT grant and there was $9.1 million of funds available for us to draw upon meeting certain requirements. The Company has applied for an extension with a proposed contract end date of November 30, 2020.

We believe that our $9.6 million in understandingcash and cash equivalents currently on hand are sufficient to fund our anticipated operating and capital requirements through at least 12 months from the date this quarterly report on Form 10-Q is filed, however we will continue to require substantial additional capital to continue our clinical development activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations as a whole. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of operations, financial condition,our development, regulatory and cash flows. MD&A is organizedcommercialization efforts. Failure to raise capital as follows:
Overview - A discussion of our business and overall analysis of financial and other highlights in order to provide context for the remainder of MD&A.
Results of Operations - An analysis of our financial results comparing the three and six months ended June 30, 2019 to the three and six months ended June 30, 2018.
Liquidity and Capital Resources - An analysis of changes in our unaudited condensed consolidated balance sheets and cash flows, and discussion ofwhen needed, on favorable terms or at all, would have a negative impact on our financial condition and potential sources of liquidity.
Critical Accounting Policies and Significant Judgments and Estimates - A discussion of critical accounting policies and those that require us to make subjective estimates and judgments.
Overview
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 2016, we launched our consumer product, HOTSHOT®, to prevent and treat exercise-associated muscle cramps, or EAMCs. We continue to market and sell HOTSHOT to endurance athletes who drink it before, during and after exercise to prevent and treat EAMCs.
In 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. Following 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 close on or about July 19, 2019. Upon completion of the merger, the business of Salarius will continue as the business of the combined company.
We expect to devote significant time and resources to the completion of this merger. However, there can be no assurances that such activities will result in the completion of the merger. Further, the completion of the merger may ultimately not deliver the anticipated benefits or enhance shareholder value.
If the merger is not completed, we will reconsider our strategic alternatives, including one of the following courses of action:
Dissolve and liquidate our assets. If, for any reason, the merger does not close, our board of directors will most likely conclude that it is in the best interest of stockholders to dissolve the Company and liquidate our assets. In that event, the Company would be required to pay all of our debts and contractual obligations, and to set aside certain reserves for potential future claims. There would be no assurances as to the amount or timing of available cash remaining to distribute to stockholders after paying our obligations and setting aside funds for reserves.


Pursue another strategic transaction. We may resume the process of evaluating a potential strategic transaction in order to attempt another strategic transaction like the merger.

Operate the consumer business. Although less likely than the alternatives above, our board of directors may elect to continue to market and sell HOTSHOT and continue to operate our consumer business.

We currently operate as two reportable segments:
The Consumer Operations segment, which reflects the total revenue and costs and expense for HOTSHOT and our consumer operations; and

The Drug Development segment, which reflects the costs and expenses related to our effortsability to develop innovative and proprietary drug products; previously to treat muscle cramps, spasmscommercialize our product candidates and spasticity associated with severe neurological conditions.
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.
We have incurred an operating loss since our inception and we anticipate that we will continue to incur operating losses for the foreseeable future. Our net loss was $1.4 million and $3.6 million for the three and six months ended June 30, 2019, and $9.1 million and $17.3 million for the three and six months ended June 30, 2018. Our accumulated deficit was $136.6 million as of June 30, 2019. To date, we have financed our operations with net proceeds from the private placement of our preferred stock and our initial public offering. If the merger is not completed, we will need to reassess our strategic options and we may need additional capital to fund our future operations. There can be no
We intend, when required, to obtain additional capital through the sale of equity securities in one or more offerings or through issuances of debt instruments. We may also consider new collaborations or selectively partnering our technology. However, we cannot provide any assurance that we will be successful in accomplishing any of our plans to obtain additional capital or be able to do so on favorable terms or on terms acceptable to us.

Special Note About Coronavirus (COVID-19)

The COVID-19 pandemic is significantly affecting the United States, global economies, and businesses worldwide. While the potential magnitude and duration of the economic and social impact of the COVID-19 pandemic is difficult to assess or predict, the impact on the global financial markets may, in the future, reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity. The COVID-19 pandemic could also have a material and negative impact on our liquidity, capital resources (including our ability to secure additional funds or,financing if such funds are available, whether the terms or conditions will be acceptable to us.
Components of Operating Results
Revenue
We recognize revenueand when control of the promised good is transferred to the customer,needed), our business and it reflects the consideration to which we expect to be entitled to receive in exchange for the good.
Revenue includes sales of HOTSHOT finished goods to e-commerce customers, specialty retailersoperations, and sports teams, including professional and amateur teams. Revenue also consists of payments made by customers for expedited shipping and handling. Revenue is recognized when control of the promised goods is transferred to the customer. Control of the promised goods is transferred upon delivery to the customer. For sales through June 18, 2018, we offered refunds to e-commerce customers, upon request, within 30 days of delivery. For sales subsequent to June 18, 2018, we now offer refunds to e-commerce customers, upon request, within 14 days of delivery. We do not offer a right of return or refund to specialty retailers or sports teams. Discounts provided to customers are accounted for as a reduction of product revenue. Total revenue is presented net of any taxes collected from customers and remitted to governmental authorities.
When purchasing via our branded website, customers may purchase HOTSHOT in packs of 3, 6, 12 or 24 bottles, and are offered a first-time purchase discount for a 3 pack. We also sell HOTSHOT via third-party e-commerce websites, including a retailer that offers international shipping. Generally, we realize higher revenue per bottle from our e-commerce sales as opposed to third-party website, sports team and specialty retailer sales. HOTSHOT is generally sold to specialty retailers and sports teams in multi-pack cases.
While the Company continues to operate its Consumer Operations segment and sells HOTSHOT, future sales of HOTSHOT are expected to vary from quarter to quarter and will be impacted by the number of visitors attracted to our branded website and third-party websites, those that purchase, seasonality and the amount of repeat sales that we are able to generate through e-commerce. Future sales will also be impacted by the amount of revenue that we are able to generate through retail channels. Our inability to generate sufficient revenues could have a material adverse impact on our Consumer Operations.
Cost of Product Revenue

We outsource the manufacture of HOTSHOT to a co-packer. Cost of product revenue includes the cost of raw materials utilized to produce HOTSHOT, co-packing fees, repacking fees, in-bound freight charges and warehouse and transportation charges incurred to bring the finished goods to salable condition. All other costs incurred after this condition is met are considered selling costs and included in selling, general and administrative expenses.
Cost of product revenue includes write-offs of inventory that becomes obsolete, that has a cost basis in excess of its estimated realizable value, or that exceeds projected sales. The amount of inventory write-offs will vary based upon factors such as inventory levels, production levels, projected sales of HOTSHOT and shelf-lives of our inventory components. If we are not successful in generating sufficient levels of revenue from HOTSHOT or if our other estimates prove to be inaccurate, future inventory write-offs may be required.
Cost of product revenue also includes depreciation expense related to manufacturing equipment purchased to support production,workforce, as well as royalty amounts payablethose of the third parties with which we do business or upon which we rely. While, the situation is fluid and we do not yet know the full extent of potential delays or impacts on us or on healthcare systems or the global economy in general, Salarius has worked to adapt to the unexpected and challenging circumstances resulting from the COVID-19 pandemic and at this time we are experiencing minimal COVID-19 disruptions to our clinical programs, our manufacturing capabilities, or our financing capabilities. However, we may experience disruptions in the future that have and could further adversely impact our business operations as well as our preclinical studies and clinical trials.
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Although at this time we are experiencing minimal disruption to our clinical trials, our ongoing Phase 1/2 clinical trial can enroll up to 50 relapsed or refractory Ewing sarcoma patients and in the future we may encounter delays in enrolling
Although at this time we are experiencing minimal disruption to our clinical trials, our ongoing Phase 1/2 clinical trial can enroll up to 50 relapsed or refractory Ewing sarcoma patients and in the future we may encounter delays in enrolling new patients due to concerns or healthcare resource constraints as a result of the COVID-19 pandemic. In addition, although at this time we have experienced no disruptions to manufacturing capabilities, certain aspects of our supply chain may be disrupted as certain of our founders on HOTSHOT sales.
Researchthird party suppliers and Development Expenses
Ourmanufacturers have paused their operations in response to the COVID-19 pandemic or have otherwise encountered delays in providing supplies and services. We continue to evaluate the extent to which these delays will impact our ability to manufacture our product candidates for our clinical trials and conduct other research and development expenses previously includedoperations and maintain applicable timelines. The ultimate impact of 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 costs related to ending our Phase 2 clinical studies in MND and CMT. Research and development costs included 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 utilized 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 toCOVID-19 pandemic on our business model. Drug product candidates in later stages ofoperations as well as our preclinical studies and clinical development generally have higher development costs than those in earlier stages of clinical development, primarily duetrials remains uncertain and subject to the increased sizechange and duration of later-stage clinical trials.will depend on future developments, which cannot be accurately predicted. We cannot predict to what extent we will resume drug development activities for FLX-787 or other drug product candidates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries and other compensation-related costs, including stock-based compensation, for personnel in executive and finance and accounting roles. Other significant costs include professional service fees including consulting and legal and professional fees related to the merger with Salarius, patent and corporate legal matters, accounting fees, insurance costs, costs for consultants who we utilize to supplement our personnel, 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 the product is in salable condition.
Our selling, general and administrative expenses may increase as we incur costs related to the merger, operate as a public company and continue to sell HOTSHOT.monitor the situation closely.
Interest Income, Net
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.
Results of Operations
Three Months Ended June 30, 2019March 31, 2020 Compared to the Three Months Ended June 30, 2018March 31, 2019
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, 2019March 31, 2020 compared to the three months ended June 30, 2018.March 31, 2019.
 Three Months Ended March 31, 2020Three Months Ended March 31, 2019Change
$%
Grant revenue$1,132,830  $655,635  $477,195  73 %
Research and development expenses(1,643,371) (699,929) (943,442) 135 %
General and administrative expenses(1,859,017) (1,488,490) (370,527) 25 %
Change in fair value of warrant liability283,070  —  283,070  — %
Interest income, net2,672  10,708  (8,036) (75)%
Net loss$(2,083,816) $(1,522,076) $(561,740) 37 %


 Three Months Ended June 30, 2019 Three Months Ended June 30, 2018 Change
$ %
Net product revenue$163,071
 $241,416
 $(78,345) (32)%
Other revenue1,634
 4,086
 (2,452) (60)%
Total revenue164,705
 245,502
 (80,797) (33)%
Costs and expenses: 
      
Cost of product revenue36,148
 179,945
 (143,797) (80)%
Research and development29,294
 6,174,589
 (6,145,295) (100)%
Selling, general and administrative1,497,401
 2,994,649
 (1,497,248) (50)%
Total costs and expenses1,562,843
 9,349,183
 (7,786,340) (83)%
Loss from operations(1,398,138) (9,103,681) 7,705,543
 (85)%
Interest income, net13,361
 51,809
 (38,448) (74)%
Net loss$(1,384,777) $(9,051,872) $7,667,095
 (85)%
TotalGrant Revenue
Our Consumer Operations segment generated all of our
Grant revenue, which was derived solely from the CPRIT grant, was $1,132,830 during the three months ended June 30, 2019, totaling $0.2 million asMarch 31, 2020 compared to $0.2 million$655,635 during the three months ended March 31, 2019. The increase in revenue from the CPRIT grant was due to an increase in overall expenses which resulted in an increase in the amount of expenses reimbursable under the grant. Given the nature of the development process, grant revenue will fluctuate depending on the stage of development and the timing of expenses.
Research and Development Expenses
Research and development expenses were $1,643,371 during the three months ended March 31, 2020 compared to $699,929 during the three months ended March 31, 2019. The increase of $943,442 was principally due to the production of tablets for use in clinical trials, increased consulting fee related to clinic trials and a pre-clinical study for our next generation Seclidemstat program, and increased clinical trial costs resulting from the increased number of patients enrolled and additional clinical trial sites.
General and Administrative Expenses
General and administrative expenses were $1,859,017 for the three months ended June 30, 2018, through sales of HOTSHOT and expedited shipping and handling purchases. The decrease in revenue of approximately $81,000 relatesMarch 31, 2020 compared to decreased marketing spend and activity during$1,488,490 for the three months ended June 30,March 31, 2019. The net increase of $370,527 resulted from the costs related to the Company' transformation into a public company during July 2019 more than offsetting reduced spending for professional fees and legal costs compared to the same period in the prior year. During the current period the transformation accounted for higher director and officer insurance expense, and fees related to its NASDAQ listing and investor relations costs. Additionally, compensation expense increased compared to the three months ended June 30, 2018, as we have reduced our Consumer Operations spending while we have been evaluating strategic alternativesMarch 31, 2019 resulting from the payment of bonuses and increased personnel, These higher costs
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were partially offset by decreased legal and professional services expenses resulting from 2019 costs incurred for the Company and this segment.

Sales via e-commerce represented approximately 84% of our total revenue for the three months ended June 30, 2019 compared to 85% for the three months ended June 30, 2018.

During the three months ended June 30, 2019, we sold approximately 35,000 bottles of HOTSHOT at an average total revenue per bottle of $4.71, compared to 54,000 bottles at an average total revenue per bottle of $4.55 during the three months ended June 30, 2018. The decrease in volume of bottles soldannounced reverse merger with Flex Pharma that did not recur in the comparative periodscurrent period.
Change in Fair Value of Warrant Liability
The change in fair value of warrant liability of $283,070 was primarily due to decreased marketing efforts and resulting demand. The higher average revenue per bottle in the current period compared tofluctuation of the prior period is due to increased sale promotions that occurred in the prior year.
Cost of Product Revenue
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 included the cost of HOTSHOT sold, royalty expense and depreciation expense of approximately $0 and $35,000 for 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 $85,000 and relate to 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.

Research and Development Expenses
Our Drug Development segment incurred the majorityprice of our research and development expenses, which were approximately $29,000 for the three months ended June 30,common stock ($3.78 per share on December 31, 2019 compared to $6.2 million for$0.68 per share on March 31, 2020). The Company recognized a gain of $283,070 due the three months ended June 30, 2018. The 100% decreasechange in fair value of $6.1 million was primarily related to:warrant liability.
$3.0 million decrease in clinical trial costs, primarily related to the decision to end our Phase 2 clinical trials of FLX-787 in MND and CMT, and other supporting studies in the second quarter of 2018;
$1.4 million decrease in manufacturing and formulation of drug product to support clinical studies, the majority of which ceased during the second quarter of 2018;

$1.1 million decrease in salary and benefit costs due to decreased headcount in 2019 compared to the prior year;
$0.3 million decrease in consulting expenses due to the reduction of our research and development activities due to our ongoing strategic assessment;
$0.2 million decrease related to stock-based compensation expense, related to the elimination of headcount compared to the prior year; and
$0.1 million decrease in other expenses, mainly insurance and office related costs, related to elimination of headcount compared to the prior year, as these expenses are allocated.
Selling, General and Administrative Expenses
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. The 50% decrease of $1.5 million was primarily related to:
$0.6 million decrease related to salaries and benefits as Consumer Operations and corporate headcount decreased from the prior year;
$0.4 million decrease in marketing and consulting costs within our Consumer Operations segment for HOTSHOT due to decreased marketing and cash conservation efforts;
$0.2 million decrease in office and other expenses mainly due to the termination of our lease agreement for our former corporate headquarters in Boston, MA, and other cost saving initiatives;
$0.2 million decrease in consulting and legal and professional expenses as we decreased activity due to our ongoing strategic assessment, offset by an increase of $0.5 million in merger related fees, which consisted of legal and professional fees incurred in Q2 2019; and
$0.1 million decrease related to stock-based compensation expense, related to decreased headcount compared to the prior year.
Loss from Operations
Our consolidated loss from operations for the three months ended June 30, 2019 totaled $1.4 million. Of this total, $29,000 was incurred by our Drug Development segment, $1.4 million related to corporate and unallocated costs, which was offset by income of $12,000 incurred by our Consumer Operations segment. The operating income incurred by the Consumer Operations segment was driven by total revenue generated from HOTSHOT sales reduced by costs related to HOTSHOT, including cost of HOTSHOT sold and personnel-related expenses, including stock-based compensation. These costs were partially offset by the total revenue generated from HOTSHOT sales during the three months ended June 30, 2019. The operating loss incurred by the Drug Development segment relates to stock-based compensation and office related expenses.
Interest Income, net
Interest income, net, decreased by approximately $38,000 in the three months ended June 30, 2019 compared to the three months ended June 30, 2018, as we had less available cash to invest.
Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
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, 2019 compared to the six months ended June 30, 2018.

 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018 Change
$ %
Net product revenue$267,291
 $417,671
 $(150,380) (36)%
Other revenue2,391
 6,413
 (4,022) (63)%
Total revenue269,682
 424,084
 (154,402) (36)%
Costs and expenses: 
  
    
Cost of product revenue83,477
 263,879
 (180,402) (68)%
Research and development31,000
 10,854,770
 (10,823,770)—
(100)%
Selling, general and administrative3,796,986
 6,691,936
 (2,894,950) (43)%
Total costs and expenses3,911,463
 17,810,585
 (13,899,122) (78)%
Loss from operations(3,641,781) (17,386,501) 13,744,720
 (79)%
Interest income, net26,574
 111,402
 (84,828) (76)%
Net loss$(3,615,207) $(17,275,099) $13,659,892
 (79)%
Total Revenue
Our Consumer Operations segment generated all of our revenue during the six months ended June 30, 2019, totaling $0.3 million, as compared to $0.4 million for the six months ended June 30, 2018 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, 2019 compared to the six months ended June 30, 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 85% of our total revenue for the six months ended June 30, 2019 compared to 86% for the six months ended June 30, 2018.

During the six months ended June 30, 2019, we sold approximately 58,000 bottles of HOTSHOT at an average total revenue per bottle of $4.65, compared to 93,000 bottles at an average total revenue per bottle of $4.56 during the six months ended June 30, 2018. The decrease in the number of bottles sold primarily relates to decrease in 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.
Cost of Product Revenue
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. Cost of product revenue includes the cost of HOTSHOT sold, royalty expense, inventory write-offs and depreciation expense of approximately $23,000 and $70,000 for the six 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 six months ended June 30, 2019. Write-offs for the six months ended June 30, 2018 totaled approximately $85,000 and relate to 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.

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. The 100% decrease of $10.8 million was primarily related to:
$5.9 million decrease in clinical trial costs, primarily related to the decision to end our Phase 2 clinical trials of FLX-787 in MND and CMT, and other supporting studies in the second quarter of 2018;

$1.8 million decrease in manufacturing and formulation of drug product to support clinical studies, the majority of which ceased during the second quarter of 2018;
$1.7 million decrease in salary and benefit costs due to decreased headcount in 2019 compared to the prior year;
$0.6 million decrease related to stock-based compensation expense, related to the elimination of headcount compared to the prior year and the final vesting of restricted common stock issued to the founders in 2014 during the first quarter of 2018;
$0.5 million decrease in consulting expenses due to the reduction of our research and development activities due to our ongoing strategic assessment; and
$0.3 million decrease in other expenses, mainly insurance and office related costs, related to elimination of headcount compared to the prior year, as these expenses are allocated.

Selling, General and Administrative Expenses
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. The 43% decrease of $2.9 million was primarily related to:
$1.3 million decrease related to salaries and benefits as Consumer Operations and corporate headcount decreased from the prior year;
$1.1 million decrease in marketing and consulting costs within our Consumer Operations segment for HOTSHOT due to decreased marketing and cash conservation efforts;
$0.4 million decrease related to stock-based compensation expense, related to decreased headcount compared to the prior year.
$0.3 million decrease in office and other expenses mainly due to the termination of our lease agreement for our former corporate headquarters in Boston, MA, and other cost saving initiatives;
$0.1 million decrease in travel expenses due to the elimination of headcount in 2019 compared to prior year; and
$0.3 million increase in consulting and legal and professional expenses related to $1.7 million in merger related fees, which consisted of $1.2 million of legal and professional fees and $0.6 million of banking fees incurred during the first six months of 2019, offset by a reduction of $1.4 million as we decreased other activity due to our ongoing strategic assessment.

Loss from Operations
Our consolidated loss from operations for the six months ended June 30, 2019 totaled $3.6 million. Of this total, $41,000 of the operating loss was incurred by our Consumer Operations segment, $30,000 was incurred by our Drug Development segment and the remaining $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, 2019. The operating loss incurred by the Drug Development segment relates to costs incurred for stock-based compensation and office related expenses.
Interest Income, net
Interest income, net, decreased by approximately $85,000 in the six months ended June 30, 2019 compared to the six months ended June 30, 2018, as we had lower available cash to invest.
Liquidity and Capital Resources
Overview

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 limitedrevenue solely from CPRIT grant, and have not generated any revenue from sales of HOTSHOT, and have generated noproduct sales.
We do not know when, or if, we will generate any revenue from any of our drug product candidates.
sales. We cannot predict to what extent we will resume drug development activities, and we may not be successful in generating significant revenue from HOTSHOT. Our operating plan assumes limited research and development activities and that the Consumer Operations segment will continue 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 researchgenerate any revenue from product sales unless and until we obtain regulatory approval for and commercializes any of our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing 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 increasemanufacturing activities, particularly as we continue the research, development, manufacture and clinical trials of, and seek regulatory approval for our efforts related to the merger, operate as a public company, and continue to sell HOTSHOT. 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 dissolutionproduct candidates.
As 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 that additional funding will be available on terms acceptable to us, or at all.
Sources of Liquidity
At June 30, 2019,March 31, 2020, we had $6.1 million$8,821,668 of working capital and our cash and cash equivalents totaled $6.5 million,$9,646,940, which were held in bank deposit accounts and money market funds. The Company held no marketable securities at June 30, 2019 or December 31, 2018. Our cash and cash equivalents balance decreasedincreased during the sixthree months ended June 30, 2019,March 31, 2020, primarily due primarily to our net loss incurred.public offering closed on February 11, 2020.
We expect to complete the merger with Salarius on or about July 19, 2019. However, in the event that we do not complete the merger, we may pursue a dissolution and liquidation of the Company. If the decision is made to dissolve and liquidate the Company, our common stockholders may lose their entire investment. The amount of assets available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will be needed for commitments and contingent liabilities.Cash Flows
 Three Months Ended March 31, 2020Three Months Ended March 31, 2019
Net cash used in:  
Operating activities$(3,708,034) $(1,868,713) 
Financing activities9,616,074  1,508,179  
Net increase (decrease) in cash and cash equivalents$5,908,040  $(360,534) 
Cash Flows
 Six Months Ended June 30, 2019 Six Months Ended June 30, 2018
Net cash (used in) provided by: 
  
Operating activities$(3,442,004) $(17,667,923)
Investing activities—
 14,120,848
Financing activities—
 118,010
Net decrease in cash and cash equivalents$(3,442,004) $(3,429,065)
Operating Activities
Net cash used in operating activities was $3,708,034 and $1,868,713 for the sixthree months ended June 30,March 31, 2020, and March 31, 2019, respectively, an increase of $1,839,321. This cash spending increase was $3.4 million,primarily due to increased clinical trial and related research costs plus the Company's increased spending for the transformation into a decreasepublic company during 2020.
Financing Activities
Net cash provided by financing activities was $9,616,074 for the first quarter of $14.2 millionthe year 2020, compared to $1,508,179 for the same period inof the prior year. The use of cash for the six months ended June 30, 2019 was primarily related to our net loss for the period of $3.6 million, offset by non-cash charges consisting primarily of stock-based compensation expense of $0.4 million. Cash used in operations also included a cash outflow of $0.3 million from changes in operating assets and liabilities.
The $0.3 million cash outflow from changes in operating assets and liabilities was driven primarily by outflows from a decrease in accrued expenses and other current liabilities of $0.5 million and an increase in prepaid expenses and other current assets of $0.3 million. The decrease in accrued expenses and other current liabilities primarily related to the payout of annual bonuses inyear 2019. The increase of prepaid expenses and other current assets primarily relates to insurance payments made in the first quarter of 2019. These outflows were offset by inflows, primarily from an increase in accounts payable of $0.5 million, which relates to the timing of invoices for merger-related fees.
Investing Activities

There was no cash provided by or used in investingfinancing activities forresulted from the sixCompany completing a public offering on February 11, 2020 with net proceeds of approximately $9.8 million, partially offset by the payment of $249,653 towards the principal on an insurance financing note by the Company. There were no such payments during the three months ended June 30, 2019. The decrease of $14.1 million from the six months ended June 30, 2018, related to a decrease in net purchases and sales of marketable securities. This included a $2.0 million decrease in purchases of marketable securities and a $16.1 million decrease in proceeds from maturities and sales of marketable securities. We do not have any marketable securities as of June 30,March 31, 2019.
Financing Activities
There was no cash provided by or used in financing activities for the six months ended June 30, 2019. The decrease of $0.1 million compared to the six months ended June 30, 2018, related to proceeds from exercises of stock options of approximately $118,000 during the six months ended June 30, 2018.
As of June 30, 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.
Funding Requirements

Our future funding requirements are difficult to forecast and depend on many factors, including our ability to complete the merger or, if the merger is not completed, our ability to identify and consummate another strategic transaction or consider other alternatives such as dissolution of the Company. Depending on the outcome of these alternatives, we may 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 the Company’s common stock. If the 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.
Drug Product Candidates
We cannot predict to what extent we will resume drug development activities for FLX-787 or other drug product 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:

receiving regulatory approval to conduct clinical trials;

successfully enrolling, and completing, clinical trials;

receiving marketing approvals from applicable regulatory authorities;

establishing arrangements with third-party manufacturers;

obtaining and maintaining patent and trade secret protection and regulatory exclusivity; and

launching commercial sales of our products, if and when approved, whether alone or in collaboration with others.

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.

Consumer Brand and Products
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.

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. In connection with the restructuring plan announced in June 2018, we elected to reduce the expenses associated with our consumer business segment while we assessed strategic alternatives for the Company and this segment. The Company is continuing to assess alternatives for the Consumer Operations segment.
Outlook
Based on our research and development plans and our consumer brand and HOTSHOT expenditure plans, we expect that our existing cash resources 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 expected.
Contractual Obligations
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, 2018.
Off-Balance Sheet Arrangements
We did not have during the period presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
Critical Accounting Policies and Significant Judgments and Estimates
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
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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 condensed 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, 2018.filed with SEC on March 23, 2020.
Readers should refer to our 2018 Form 10-K under “Management’s DiscussionAnnual Report on Form10-K filed with SEC on March 23, 2020, Note 2, Basis of Presentation and Analysis of Financial Condition and Results of Operation—CriticalSignificant Accounting Policies and Use of Estimates” and Note 2 to the accompanying financial statements for descriptions of these policies and estimates.
Application of New Accounting Standards
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other,” which is intended to simplify the subsequent measurement of goodwill. The pronouncement allows an entity, during its annual or interim goodwill impairment evaluation, to compare the fair value of a reporting unit with its carrying amount. An impairment charge is immediately recognized by which the carrying amount exceeds the fair value. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. We do not expect adoption of this ASU to have a material impact on our condensed consolidated financial statements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

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, 2019, we had cash and cash equivalents of $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. As of June 30, 2019, our cash was invested in money market funds, andNot applicable.

we did not have any marketable securities. Therefore, we have minimal market risk related to the fair market value of our portfolio.
Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure“disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our periodic and current reports that we file under the Exchange Act with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer and principal accounting officer), as appropriate, to allow timely decisions regarding required disclosure.

AsIn designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of June 30, 2019, wethe disclosure controls and procedures are met. Our disclosure controls and procedures have evaluated,been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under the supervision and all potential future conditions.

Based on management’s evaluation (with the participation of our management, includingprincipal executive officer and principal financial officer), as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and theour Chief Financial Officer the effectiveness(our principal financial and accounting officer) have concluded that, as of the design and operation ofsuch date, our disclosure controls and procedures pursuant to(as defined in Rules 13a-15(e) and 15d-15(e) under the 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 Act) were effective at the reasonable assurance level.


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Changes in Internal Control over Financial Reporting

During the sixthree months ended June 30, 2019,March 31, 2020, 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

Item 1.Legal Proceedings
On March 1, 2019, Nahuel Malzone,
We are not a purported stockholderparty to any material legal proceedings on the date of this report. We may from time to time become involved in legal proceedings arising in the Company, sent us a written demand letter and draft complaint alleging that (i) the Companyordinary course of business, and the membersresolution of our board of directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended, the Exchange Act, and Rule 14a-9 promulgated thereunder, by filing a proxy statement, which allegedly failed to disclose and/or misrepresented material information about the proposed merger with Salarius and (ii) the members 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 the Company provide certain corrective disclosures to the proxy statement/prospectus/information statement. The Company is currently assessing its response to the draft complaint.any such claims could be material.

.

Item 1A.Risk Factors
You should carefully review and consider the information regarding
For a discussion of certain factors that could materially affect our business, financial condition, or futureand operating results, set forthyou should carefully review and consider the information under Part“Part I, Item 1A. (Risk Factors)1A- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, or2019, filed with the SEC on March 23, 2020, as well as the risk factors set forth below. The risk factors below are in addition to and supplement (and with respect to certain matters, update) the risk factors discussed in our Annual Report.

ThereReport on Form 10-K. Other than as set forth below, there have been no material changes to the risk factors included in our Annual Report on Form 10-K filed with the SEC on March 23, 2020.

Risks Related to Our Business and Our Industry
The COVID-19 pandemic could adversely affect our business, results of operations, and financial condition.
To date, the COVID-19 pandemic has negatively impacted the global economy and the magnitude, severity, and duration of this impact is unclear and difficult to assess. Salarius has worked to adapt to the unexpected and challenging circumstances resulting from the COVID-19 pandemic and we have experienced minimal COVID-19 disruptions to our clinical programs, our manufacturing capabilities and our financing capabilities during the three months ended March 31, 2020.Both our Ewing Sarcoma clinical study and our Advanced Solid Tumor clinical study are active and continue to enroll patients. Salarius plans to release clinical data from both studies, as previously disclosed, during 2020 and 2021.However, the impact of COVID-19 changes daily and is difficult to predict.

To combat the spread of COVID-19, the United States and other locations in which we operate have imposed measures such as quarantines and “shelter-in-place” orders that are restricting business operations and travel and requiring individuals to work from home (“WFH”), which has impacted all aspects of our business as well as those of the third-parties we rely upon for certain supplies and services.The continuation of WFH and other restrictions for an extended period of time may negatively impact our productivity, research and development, operations, preclinical studies and clinical trials, business and financial results. Among other things, the COVID-19 pandemic may result in:

•a global economic recession or depression that could significantly and negatively impact our business or those of third parties upon which we rely for services and supplies;

•constraints on our ability to conduct our operations and our preclinical studies and clinical trials;

•delays in our ability to extend the term of the CPRIT grant;

•reduced productivity in our business operations, research and development, marketing, and other activities;

•disruptions to our third-party manufacturers and suppliers;

•increased costs resulting from WFH or from our efforts to mitigate the impact of COVID-19; and

•reduced access to financing to fund our operations due to a deterioration of credit and financial markets.
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We will continue to monitor the situation but the continued disruption of the COVID-19 pandemic and its effects on the worldwide economy could negatively and materially impact our operating and financial operating results. The resumption of normal business operations may be delayed and a resurgence of COVID-19 could occur resulting in continued disruption to us or third parties with whom we do business. As a result, the effects of the COVID-19 pandemic could have a material adverse impact on our business, results of operations and financial condition for the fiscalremainder of 2020 and beyond.

Risks Related to Salarius’ Financial Condition and Capital Requirements
We will continue to require substantial additional capital to fund our clinical activities and operations and the impact of the COVID-19 pandemic on the financial markets will likely negatively impact our ability to raise additional financing.
We are a clinical development-stage biopharmaceutical company with a limited operating history. We have no products approved for commercial sale and have not generated any revenue from product sales. We have never been profitable and have incurred operating losses in each year since inception. Our net losses were $6,936,263 and $2,083,816 for the year ended December 31, 2018.2019 and the three months ended March 31, 2020, respectively. We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should we be unable to continue in existence.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Recent salesWe will continue to require substantial additional capital to continue our clinical development and potential commercialization activities. Accordingly, we will need to raise substantial additional capital to continue to fund our operations. The amount and timing of unregistered securities; repurchasesour future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. To date, we have financed our operations primarily through the sale of equity securitiessecurities. Our stock price has been negatively impacted in part by the downturn in the financial markets due to the COVID-19 pandemic.This in turn will likely negatively impact our ability to raise funds through equity-related financings.Further, the global economic downturn may impair our ability to obtain additional financing through other means, such as debt financing.There can be no assurance we will be able to secure additional financing on favorable terms to us, or at all.Further any debt financing may contain restrictive covenants which limit our operating flexibility and any equity financing will likely result in additional and possibly significant dilution to existing stockholders. Failure to raise sufficient capital, as and when needed, would have a significant and negative impact on our financial condition and our ability to develop our product candidates.
None.Risks Related to Salarius’ Reliance on Third Parties

We rely on third parties to conduct our clinical trials, manufacture our product candidates, and perform other services. If these parties are not able to successfully perform due to the impact of the COVID-19 pandemic or otherwise, there may be delays in our ability to successfully complete clinical development, obtain regulatory approval or commercialize our product candidates and our business could be substantially harmed.

UseWe have relied upon and plan to continue to rely upon third-parties such as CROs, hospitals, etc. to conduct, monitor and manage our ongoing clinical programs. We rely on these parties for execution of Proceedsclinical trials and manage and control only some aspects of their activities. In addition, third parties may not prioritize Salarius’ clinical trials relative to those of other customers due to resource or other constraints as a result of COVID-19. Due to the continued impact of COVID-19 pandemic or otherwise, we may experience enrollment at a slower pace at certain of our clinical trial sites than initially anticipated.Further, our clinical trial sites may be required to suspend enrollment due to travel restrictions, workplace safety concerns, quarantine, facility closures, and other governmental restrictions.As a result, results from our clinical trials may be delayed, which in turn would have a material adverse impact on our clinical trial plans and timelines and impair our ability to successfully complete clinical development, obtain regulatory approval, or commercialize our product candidates. This in turn would substantially harm our business and operations.
Salarius expects to rely on third parties to manufacture its clinical product supplies and to produce and process its product candidates, if approved.Salarius’ commercialization of any of its product candidates could be stopped, delayed or made less profitable if those third parties are unable to provide Salarius with sufficient quantities of drug product, or to do so at acceptable quality levels or prices due to the COVID-19 pandemic or otherwise.
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Salarius currently relies on outside vendors to manufacture its clinical supplies of its product candidates and plans to continue relying on third parties to manufacture its product candidates on a commercial scale, if approved.The COVID-19 pandemic has placed a significant strain on the pharmaceutical industry, manufacturers of clinical supplies, healthcare-related supplies and resources, and the healthcare-related manufacturing sector in general.The impact of the COVID-19 pandemic has exacerbated the risks to which Salarius is subject due to its reliance on third-party manufacturers.For example, Salarius may be unable to identify manufacturers on acceptable terms or at all or third-party manufacturers may not be able to execute Salarius’ manufacturing procedures appropriately or may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply its clinical trials or to successfully produce, store and distribute its products.
Additionally, Salarius’ manufacturers may experience manufacturing difficulties due to resource constraints, the impact of the COVID-19 pandemic, or as a result of labor disputes or unstable political environments. If Salarius’ manufacturers were to encounter any of these difficulties, or otherwise fail to comply with their contractual obligations, Salarius’ ability to provide its product candidates to patients in clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require Salarius to commence new clinical trials at additional expense or terminate clinical trials completely.
Risks Related to Salarius’ Business Operations
Due to its limited number of employees, Salarius’ operations could be significantly and disproportionately impacted if any of its personnel were to test positive for COVID-19.
Salarius is a small company with a limited number of employees performing multiple tasks each. Salarius is also highly dependent on David J. Arthur, its president and chief executive officer, the loss of whose services may adversely impact the achievement of its objectives. There is currently a shortage of highly qualified personnel in Salarius’ industry, which is likely to continue. Additionally, this shortage of highly qualified personnel is particularly acute in the area where Salarius is located. If any of Salarius’ personnel were to test positive for COVID-19, it would likely significantly impair Salarius’ operations.The loss of services of any of Salarius’ personnel, including Mr. Arthur, particularly for an extended period due to COVID-19 or otherwise, would likely impede the progress of Salarius’ research, development, and commercialization objectives and would negatively impact Salarius’ ability to succeed in its product development strategy.

We may face business disruption and related risks resulting from President Trump's recent invocation of the Defense Production Act, either of which could have a material adverse effect on our business.
In February 2015,response to the COVID-19 pandemic, President Trump invoked the Defense Production Act, codified at 50 U.S.C. §§ 4501 et seq. (the “Defense Production Act”). Pursuant to the, Defense Production Act the federal government may, among other things, require domestic industries to provide essential goods and services needed for the national defense. While we completedhave not experienced any significant impact on our initialbusiness as a result of such actions, we continue to assess the potential impact COVID-19 and the invocation of the Defense Production Act may have on our ability to effectively conduct our commercialization efforts and development programs and otherwise conduct our business operations as planned.There can be no assurance that we will not be further impacted by the COVID-19 pandemic or by any action taken by the federal government under the Defense Production Act, including downturns in business sentiment generally or in our industry and business in particular.
Risks Related to Our Common Stock
If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our stockholders to sell their securities.
The Nasdaq Stock Market has experienced significant volatility and declines due to the COVID-19 pandemic.In addition, we have a limited public offering pursuantfloat and our stock price has experienced a significant decline since the reverse merger.Between January 1, 2020 and April 30, 2020, our closing stock price has fluctuated from a high of $3.82 at January 3, 2020 to a registration statementlow of $0.57 at March 24, 2020.In addition, Nasdaq requires listing issuers to comply with certain standards in order to remain listed on Form S-1 (File No. 333-201276), whichits exchange.
On April 9, 2020, we were notified by Nasdaq that on April 8, 2020 the SEC declared effective on January 28, 2015. Inaverage closing price of our initial public offering, we issued and sold 5,491,191 shares of common stock (inclusiveover the prior 30 consecutive trading days had fallen below $1.00 per share, which is the minimum average closing
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price required to maintain listing on Nasdaq under Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Requirement”).In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have 180 calendar days, to regain compliance with the Minimum Bid Requirement. To regain compliance, the closing bid price of our common stock sold by us pursuant to the exercise of an overallotment option granted to the underwriters in connection with the offering)must be at a public offering price of $16.00least $1.00 per share for aggregate gross offering proceedsa minimum of $87.9 million. The managing underwritersten consecutive business days during this 180-day period. During this 180-day period, we would anticipate reviewing our options to regain compliance with the minimum bid requirements, including conducting a reverse stock split.If we do not achieve compliance with the Minimum Bid Requirement during the initial 180 calendar day period, we may be eligible for an additional 180 calendar days compliance period. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other Nasdaq initial listing standards, with the exception of the bid price requirement, and would need to provide written notice of our intention to cure the deficiency during the second compliance period. However, if it appears to Nasdaq staff that we will not be able to cure the deficiency, or if we do not meet the other listing standards, Nasdaq could provide notice that our common stock will become subject to delisting. In the event we receive notice that our common stock is being delisted, Nasdaq rules permit the us to appeal any delisting determination by the Nasdaq staff.There can be no assurance that we will be able to regain compliance with the Minimum Bid Requirement or maintain compliance with the other listing requirements.
On April 20, 2020, we were notified by Nasdaq that it has determined to toll the compliance periods for bid price and market value of publicly held shares requirements (collectively, the “Price-based Requirements”) through June 30, 2020. In that regard, on April 16, 2020, Nasdaq filed an immediately effective rule change with the SEC. As a result, companies presently in compliance periods for any Price-based Requirements will remain at that same stage of the process and will not be subject to being delisted for these concerns. Starting on July 1, 2020, companies will receive the balance of any pending compliance period in effect at the start of the tolling period to regain compliance.

Accordingly, since we had 173 calendar days remaining in our bid price compliance period as of April 16, 2020, we will, upon reinstatement of the Price-based Requirements, still have 173 calendar days from July 1, 2020, or until December 21, 2020, to regain compliance.
If, for any reason, Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, a reduction in some or all of the following may occur, each of which could materially adversely affect our stockholders:
•the liquidity of our common stock;

•the market price of our common stock;

•our ability to obtain financing for the continuation of our operations;

•the number of institutional and general investors that will consider investing in our common stock;

•the number of market makers in our common stock;

•the availability of information concerning the trading prices and volume of our common stock; and

•the number of broker-dealers willing to execute trades in shares of our common stock.
To the extent that we are unable to resolve any listing deficiency, there is a risk that our common stock may be delisted from Nasdaq, which would adversely impact liquidity of our common stock and potentially result in even lower bid prices for our initial public offering were Jefferies LLC, Piper Jaffray & Co., JPM Securities LLC, Cantor Fitzgerald & Co., and Roth Capital Partners, LLC.common stock.

The aggregate net proceeds received by us from our initial public offering were $79.9 million, net of underwriting discounts and commissions and offering expenses payable by us. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning 10% or more of any class of our equity securities or to any other affiliates.

Proceeds from our initial public offering are being used for general corporate purposes, costs related to the merger with Salarius and costs to support the continued marketing and sales of HOTSHOT.

Item 3.Defaults Upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures
Not applicable.

Item 5.Other Information

None.As previously disclosed in the Current Report on Form 8-K that the Company filed with the SEC on April 24, 2020, the Company entered into an employment agreement with Mark J. Rosenblum, its Chief Financial Officer and Executive Vice President of Finance (the "Employment Agreement"), with the following terms:


Cash Compensation. Mr. Rosenblum’s annual base salary will equal $265,000 (“Base Salary”) and he will be eligible to receive a target annual bonus of at least 35% of his base salary, to be earned based upon the
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achievement of performance objectives to be determined by the Compensation Committee of the Board of Directors of the Company.
Benefits. Mr. Rosenblum will be eligible to participate in any company-sponsored benefit plans and programs, including medical, dental, life and disability insurance, holidays and other perquisites, at a level appropriate for his position and duties and to the extent that the Company makes such benefits generally available to executives of the Company. The Company may from time to time, in its sole discretion, amend, adjust or discontinue the benefits available to the Company’s executives and employees.
Termination for Cause or as a Result of Death, Disability or Resignation. If Mr. Rosenblum is terminated by the Company for “cause” or if his employment is terminated as a result of his death or “disability” or Mr. Rosenblum’s resignation without “good reason”, the Company shall pay Mr. Rosenblum (i) any unpaid Base Salary accrued up to the date of termination, (ii) accrued but unused vacation, (iii) benefits payable to Mr. Rosenblum pursuant to the terms and conditions of any benefit plan or program in which he participated during the term of his employment and (iv) unreimbursed business expenses.
Termination without Cause or Resignation for Good Reason. If the Company terminates Mr. Rosenblum’s employment other than for “cause,” or in the event Mr. Rosenblum terminates with “good reason,” then Mr. Rosenblum will receive (i) severance pay in an amount equal to nine months of his then current Base Salary which shall be paid in equal installments over such period and (ii) a monthly payment as a reimbursement that in the aggregate is equal to nine months of COBRA benefits at active employee rates.
The information under this Item 5 is being provided to clarify that Mr. Rosenblum's title under the Employment Agreement is Chief Financial Officer and Executive Vice President of Finance.
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Item 6.Exhibits
Exhibit
number
 Description of Document
   
2.1
(1)
Agreement and Plan of Merger dated January 3, 2019 by and among the Registrant, Falcon Acquisition Sub, LLC and Salarius Pharmaceuticals, LLC.

   
3.1
(2)
Amended and Restated Certificate of Incorporation of the Registrant.
   
3.2
(3)
Amended and Restated Bylaws of the Registrant.
   
4.1
(4)
Form of Common Stock Certificate of the Registrant.
   
4.2
(5)
Amended and Restated Investors' Rights Agreement, dated July 23, 2014, by and among the Company and certain of its stockholders.
   
31.1
 
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
   
31.2
 
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
   
32.1
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
   
101
 The following materials from Flex Pharma, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language):(i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations (iii) Unaudited Condensed Consolidated Statements of Comprehensive Loss, (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

Exhibit
number		Description of Document
3.1 
3.2 
3.3 
3.4 
4.1 
4.2 
4.3 
10.1+ 
10.2+ 
10.3+ 
31.1 
31.2 
32.1* 
101.0 The following materials from Salarius Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language):(i) Unaudited Condensed Consolidated Balance Sheets, (ii) Unaudited Condensed Consolidated Statements of Operations (iii) Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit), (iv) Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Unaudited Consolidated Financial Statements.

(1) Incorporated by reference to+ Management contract or compensatory plans or arrangements.
* The material contained in Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 001-36812), filed32.1 is not deemed “filed” with the SEC on January 4, 2019.
(2) Incorporatedand is not to be incorporated by reference to Exhibit 3.1into any filing of the Company under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the Registrant's Current Report on Form 8-K (File No. 001-36812), filed withextent that the SEC on February 9, 2015.registrant specifically incorporates it by reference.
(3) Incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K (File No. 001-36812), filed with the SEC on February 9, 2015.
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(4) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No. 333-201276), as amended, filed with the SEC on January 13, 2015.
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(5) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-201276), filed with the SEC on December 29, 2014.










SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SALARIUS PHARMACEUTICALS, INC.
FLEX PHARMA, INC.
  By: /s/ William McVicarDavid J. Arthur
William McVicar, Ph.D.David J. Arthur
President and Chief Executive Officer (Principal Executive Officer)
  By: /s/ John McCabeMark J. Rosenblum
John McCabeMark J. Rosenblum
Chief Financial Officer and Executive Vice President of Finance (Principal Financial Officer and Principal Accounting Officer)
Date:July 17, 2019May 14, 2020



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