Avalo Therapeutics(AVTX) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents Cerecor Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2020 Item 1. Financial Statements This section presents Cerecor Inc.'s unaudited condensed consolidated financial statements for the quarter ended March 31, 2020, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining business operations, significant accounting policies, recent acquisitions and divestitures, revenue recognition, capital structure, stock-based compensation, income taxes, leases, and commitments and contingencies Condensed Consolidated Balance Sheets%20Condensed%20Consolidated%20Balance%20Sheets) This section details Cerecor Inc.'s financial position, presenting assets, liabilities, and equity as of March 31, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets | Metric | March 31, 2020 ($) | December 31, 2019 ($) | | :-------------------------- | :----------------- | :-------------------- | | Total Current Assets | 25,485,477 | 17,724,016 | | Total Assets | 44,119,621 | 36,108,970 | | Total Current Liabilities | 15,329,871 | 12,160,459 | | Total Liabilities | 18,530,879 | 15,113,405 | | Total Stockholders' Equity | 25,588,742 | 20,995,565 | - Total assets increased by $8.01 million (22.2%) from December 31, 2019, to March 31, 2020, primarily driven by an increase in current assets, notably Investment in Aytu and Cash and cash equivalents[7] - Total liabilities increased by $3.42 million (22.6%) over the same period, mainly due to an increase in current liabilities, including a new Royalty obligation of $2.0 million[7] Condensed Consolidated Statements of Operations%20Condensed%20Consolidated%20Statements%20of%20Operations) This section outlines Cerecor Inc.'s financial performance, reporting revenues, expenses, and net loss for the three months ended March 31, 2020 and 2019 Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2020 ($) | Three Months Ended March 31, 2019 ($) | | :----------------------------------------- | :------------------------------------ | :------------------------------------ | | Total Revenues, net | 2,753,865 | 2,576,369 | | Total Operating Expenses | 34,166,375 | 7,581,311 | | Loss from continuing operations | (31,412,510) | (5,004,942) | | Total other income (expense), net | 7,100,891 | (26,760) | | Loss from continuing operations before taxes | (24,311,619) | (5,031,702) | | Income tax (benefit) expense | (2,156,855) | 130,672 | | Loss from continuing operations | (22,154,764) | (5,162,374) | | Income (loss) from discontinued operations | 1,037,658 | (2,291,674) | | Net loss | (21,117,106) | (7,454,048) | | Net loss per share (basic and diluted) | (0.34) | (0.13) | - Net loss significantly increased to $21.1 million for Q1 2020 from $7.5 million in Q1 2019, primarily due to a substantial increase in operating expenses, particularly acquired in-process research and development[9] - Acquired in-process research and development expense was $25.5 million in Q1 2020, compared to $0 in Q1 2019, reflecting the Aevi Merger[9] - Other income (expense) saw a positive swing of $7.1 million in Q1 2020, mainly from a $7.1 million change in fair value of Investment in Aytu[9] Condensed Consolidated Statements of Cash Flows%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents Cerecor Inc.'s cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2020 and 2019 Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2020 ($) | Three Months Ended March 31, 2019 ($) | | :--------------------------------- | :------------------------------------ | :------------------------------------ | | Net cash used in operating activities | (5,740,074) | (3,121,552) | | Net cash used in investing activities | (1,250,650) | (165,969) | | Net cash provided by financing activities | 9,098,382 | 8,817,117 | | Increase in cash, cash equivalents and restricted cash | 2,107,658 | 5,529,596 | | Cash, cash equivalents, and restricted cash at end of period | 5,836,576 | 16,276,352 | - Net cash used in operating activities increased to $5.7 million in Q1 2020 from $3.1 million in Q1 2019, driven by a higher net loss partially offset by non-cash adjustments like acquired IPR&D[10] - Net cash used in investing activities increased significantly to $1.3 million in Q1 2020, primarily due to transaction costs from the Aevi merger[10] - Net cash provided by financing activities remained strong at $9.1 million in Q1 2020, mainly from registered direct offerings and private placements[10] Condensed Consolidated Statements of Changes in Stockholders' Equity%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This section details changes in Cerecor Inc.'s stockholders' equity, including net loss and share issuances, for the three months ended March 31, 2020 and 2019 Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | March 31, 2020 ($) | December 31, 2019 ($) | | :----------------------------------------- | :----------------- | :-------------------- | | Common Shares Outstanding | 59,560,252 | 44,384,222 | | Preferred Stock Shares Outstanding | 1,257,143 | 2,857,143 | | Total Stockholders' Equity | 25,588,742 | 20,995,565 | | Net Loss | (21,117,106) | (7,454,048) | - Stockholders' equity increased by $4.59 million from December 31, 2019, to March 31, 2020, despite a net loss, primarily due to new share issuances from the Aevi Merger and financing activities[16] - Common shares outstanding increased significantly due to the Aevi Merger (3.9 million shares), registered direct offering (1.3 million shares), and private placement (1.95 million shares), and conversion of preferred stock (8.0 million shares)[16] - Preferred stock shares decreased by 1.6 million due to conversion to common stock[16] Notes to Unaudited Financial Statements%20Notes%20to%20Unaudited%20Financial%20Statements) This section provides detailed explanations of Cerecor Inc.'s business, accounting policies, and specific financial statement items and transactions 1. Business This note describes Cerecor Inc.'s biopharmaceutical focus on rare pediatric and orphan diseases, its pipeline, and recent strategic transactions - Cerecor Inc. is a biopharmaceutical company focused on developing and commercializing treatments for rare pediatric and orphan diseases[17][150] - The company's pipeline includes CERC-800 compounds (CERC-801, CERC-802, CERC-803) for Congenital Disorders of Glycosylation (CDGs), which have received Rare Pediatric Disease Designation (RPDD) and Orphan Drug Designation (ODD) from the FDA, potentially qualifying for Priority Review Vouchers (PRVs)[17][150] - CERC-801 and CERC-802 also have Fast Track Designation (FTD)[17][150] - Additional pipeline assets include CERC-002 (Pediatric-onset Crohn's Disease), CERC-006 (complex Lymphatic Malformations), and CERC-007 (autoimmune inflammatory diseases like AOSD and Multiple Myeloma)[18][151] - On February 3, 2020, Cerecor completed a merger with Aevi Genomic Medicine, Inc., acquiring CERC-002, CERC-006, and CERC-007, expanding its clinical-stage pipeline to six assets[20][153][154] - In Q4 2019, the company divested its Pediatric Portfolio to Aytu BioScience, Inc. for cash and Aytu convertible preferred stock, classifying these operations as discontinued[21] 2. Basis of Presentation and Significant Accounting Policies This note outlines the preparation of Cerecor Inc.'s financial statements and the adoption of new accounting standards - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and include all necessary normal recurring adjustments for fair presentation[29][31] - The company adopted new accounting standards effective January 1, 2020, including ASU No. 2016-13 (Financial Instruments - Credit Losses), ASU No. 2018-13 (Fair Value Measurement), and ASU 2019-12 (Income Tax Simplification)[34][36][37] - The adoption of these new standards had no significant impact on the company's results of operations, financial position, cash flows, or disclosures for the three months ended March 31, 2020[35][36][37] 3. Aytu Divestiture This note details the sale of Cerecor Inc.'s Pediatric Portfolio to Aytu BioScience, Inc., including financial terms and guarantee obligations - Cerecor sold its Pediatric Portfolio to Aytu BioScience, Inc. on November 1, 2019, for $4.5 million cash and 9.8 million shares of Aytu convertible preferred stock, and Aytu assumed $26.1 million in liabilities[38] - Cerecor entered into a Guarantee with Deerfield CSF, LLC for Aytu's assumed debt obligations ($15.1 million fixed payment and $9.3 million contingent royalties)[40][41] - The maximum potential future payment under this Guarantee was $24.5 million as of March 31, 2020[40][41] - A $1.8 million gain on the change in value of the Guarantee was recognized in Q1 2020 due to Aytu's improved credit rating[42] - The Pediatric Portfolio's operating results are reported as discontinued operations, showing income of $1.04 million in Q1 2020 compared to a loss of $2.29 million in Q1 2019[44][48] Discontinued Operations Financial Summary | Metric | Three Months Ended March 31, 2020 ($) | Three Months Ended March 31, 2019 ($) | | :----------------------------------------- | :------------------------------------ | :------------------------------------ | | Product revenue, net | (717,342) | 2,835,074 | | Total operating expenses | — | 4,852,905 | | Change in value of Guarantee | 1,755,000 | — | | Income (loss) from discontinued operations, net of tax | 1,037,658 | (2,291,674) | 4. Revenue from Contracts with Customers This note describes Cerecor Inc.'s primary revenue sources from prescription drug sales and customer concentration - The company's primary revenue source is prescription drug sales, totaling $2.8 million for the three months ended March 31, 2020, and $2.6 million for the same period in 2019[50] - Sales are primarily made through wholesale distributors and a specialty contracted pharmacy, with the three largest customers accounting for approximately 39%, 32%, and 27% of total net product revenues from continuing operations in Q1 2020[51] 5. Net Loss Per Share This note explains the calculation of Cerecor Inc.'s net loss per share, including the impact of convertible preferred stock and anti-dilutive securities - The company computes EPS using the two-class method, considering common stock and Series B Convertible Preferred Stock as separate classes[52][54] - In Q1 2020, Armistice converted 1.6 million shares of Series B Convertible Preferred Stock into 8.0 million shares of common stock[54][90] Net Loss Per Share (Basic and Diluted) | Metric | March 31, 2020 ($/share) | March 31, 2019 ($/share) | | :----------------------------------------- | :----------------------- | :----------------------- | | Common Stock - Continuing operations | $(0.36) | $(0.09) | | Common Stock - Discontinued operations | $0.02 | $(0.04) | | Net loss per share of common stock | $(0.34) | $(0.13) | | Preferred Stock - Continuing operations | $(1.78) | $(0.46) | | Preferred Stock - Discontinued operations | $0.08 | $(0.21) | | Net loss per share of preferred stock | $(1.70) | $(0.67) | Anti-Dilutive Securities Excluded from Diluted EPS | Security Type | March 31, 2020 | March 31, 2019 | | :------------------------- | :------------- | :------------- | | Stock options | 7,712,680 | 4,345,305 | | Warrants on common stock | 4,024,708 | 4,024,708 | | Restricted Stock Units | 267,500 | 345,000 | | Underwriters' unit purchase option | 40,000 | 40,000 | 6. Asset Acquisition This note details Cerecor Inc.'s merger with Aevi Genomic Medicine, Inc., treated as an asset purchase, and the associated consideration and acquired assets - On February 3, 2020, Cerecor completed a two-step merger with Aevi Genomic Medicine, Inc., treated as an asset purchase[62][169] - Merger consideration included approximately $15.5 million in stock (3.9 million shares of common stock), forgiveness of a $4.1 million loan, and contingent value rights (CVRs) for up to an additional $6.5 million based on development milestones[63][154] - Cerecor acquired $24.0 million in acquired in-process research and development (IPR&D) for CERC-006 and CERC-007, which was immediately expensed due to no alternate use, and $0.7 million in assembled workforce intangible asset[64][169] - Contingent consideration includes a $2.0 million payment upon Phase II study enrollment for CERC-002, CERC-006, or CERC-007 by February 3, 2022, and a $4.5 million payment upon NDA approval for CERC-006 or CERC-007 by February 3, 2025[65][143] 7. Fair Value Measurements This note describes Cerecor Inc.'s fair value measurement hierarchy and the valuation of financial instruments, including investments and liabilities - The company categorizes fair value measurements into a three-level hierarchy based on input observability: Level 1 (quoted prices for identical assets), Level 2 (observable inputs for similar assets), and Level 3 (unobservable inputs)[68][69] Fair Value Measurements (March 31, 2020) | Asset/Liability | Level 1 ($) | Level 2 ($) | Level 3 ($) | | :------------------------- | :---------- | :---------- | :---------- | | Investments in money market funds | 4,436,860 | — | — | | Investment in Aytu | — | 14,708,768 | — | | Warrant liability | — | — | 760 | | Unit purchase option liability | — | — | 2,014 | - The Investment in Aytu, classified as Level 2, increased in fair value by $7.1 million to $14.7 million as of March 31, 2020[74] - In April 2020, Cerecor converted and sold its Aytu Preferred Stock, generating net proceeds of approximately $12.8 million[75][157] - Level 3 liabilities (warrant liability and UPO liability) decreased by $11,280 in Q1 2020, with fair values estimated using a Black-Scholes option-pricing model[76][77][78] 8. Accrued Expenses and Other Current Liabilities This note provides a breakdown of Cerecor Inc.'s accrued expenses and other current liabilities, highlighting changes over the period Accrued Expenses and Other Current Liabilities | Category | March 31, 2020 ($) | December 31, 2019 ($) | | :------------------------------------- | :----------------- | :-------------------- | | Research and development expenses | 1,873,361 | 920,901 | | Compensation and benefits | 1,413,014 | 1,591,964 | | General and administrative | 1,035,454 | 120,056 | | Sales and marketing | 207,950 | 360,016 | | Sales returns and allowances | 1,361,410 | 2,284,175 | | Medicaid rebates | 95,410 | 118,271 | | Other | 207,606 | 244,869 | | Total accrued expenses and other current liabilities | 6,194,205 | 5,640,252 | - Total accrued expenses and other current liabilities increased by $0.55 million from December 31, 2019, to March 31, 2020, primarily due to a significant increase in R&D expenses and general and administrative accruals[85] - A $0.3 million accrual for executive separation payments was recognized in Q1 2020, included in compensation and benefits[85] 9. Capital Structure This note details Cerecor Inc.'s authorized capital stock, preferred stock conversions, recent financings, and outstanding warrants - The company is authorized to issue 205,000,000 shares of capital stock, comprising 200,000,000 common stock and 5,000,000 preferred stock, both with a par value of $0.001 per share[87] - Series B Convertible Preferred Stock (2,857,143 shares authorized) converts to common stock at a 1-for-5 ratio and has no voting rights[88][92] - In Q1 2020, Armistice converted 1.6 million preferred shares into 8.0 million common shares[90] - Recent financings in Q1 2020 include a $3.9 million private placement (1,951,219 common shares) and a $5.0 million registered direct offering (1,306,282 common shares), with Armistice participating in both[92][93][158][159] - The Aevi Merger resulted in the issuance of 3.9 million common shares[94] Outstanding Common Stock Warrants (March 31, 2020) | Number of Shares | Exercise Price per Share ($) | Expiration Date | | :----------------- | :--------------------------- | :-------------- | | 22,328 | 8.40 | October 2020 | | 2,380 | 8.68 | May 2022 | | 4,000,000 | 12.50 | June 2024 | 10. Stock-Based Compensation This note outlines Cerecor Inc.'s stock-based compensation plans, expenses, and unrecognized compensation costs - The 2016 Equity Incentive Plan (and its amendments) governs stock-based awards, with 3,425,288 shares available for future issuance as of March 31, 2020[102] Stock-Based Compensation Expense (Continuing Operations) | Category | Three Months Ended March 31, 2020 ($) | Three Months Ended March 31, 2019 ($) | | :--------------------------- | :------------------------------------ | :------------------------------------ | | Research and development | 381,769 | 57,376 | | General and administrative | 679,600 | 469,125 | | Sales and marketing | 54,954 | 20,828 | | Total | 1,116,323 | 547,329 | - Total stock-based compensation increased to $1.12 million in Q1 2020 from $0.60 million in Q1 2019, driven by increased headcount from the Aevi Merger and new option grants[104][107][168][171] - In February 2020, 2.4 million inducement options were granted to Aevi Merger executives, and approximately 1.0 million options were granted to a non-employee board member and other Aevi employees[107] - As of March 31, 2020, unrecognized compensation cost for service-based options was $11.6 million (expected recognition over 3.3 years) and for RSUs was $1.0 million (expected recognition over 1.8 years)[109][113] 11. Income Taxes This note explains Cerecor Inc.'s income tax benefit or expense, including the impact of tax law changes Income Tax (Benefit) Expense | Metric | Three Months Ended March 31, 2020 ($) | Three Months Ended March 31, 2019 ($) | | :------------------------- | :------------------------------------ | :------------------------------------ | | Income tax (benefit) expense | (2,156,855) | 130,672 | - The company recognized an income tax benefit of $2.2 million in Q1 2020, compared to an expense of $0.1 million in Q1 2019[121][175] - The Q1 2020 benefit was due to a current year tax law change (CARES Act) allowing the company to carry back losses from 2018-2020, leading to a refund claim for its 2017 tax liability[121][175] 12. Leases This note describes Cerecor Inc.'s lease arrangements for properties and related balance sheet impacts - Cerecor occupies two leased properties: its corporate headquarters in Rockville, Maryland (10-year initial term from January 2020) and an administrative office in Wayne, Pennsylvania (expired April 30, 2020)[122][123] Lease-Related Balance Sheet Information | Metric | March 31, 2020 ($) | December 31, 2019 ($) | | :----------------------------- | :----------------- | :-------------------- | | Property and equipment, net (ROU asset) | 710,230 | 718,626 | | Other current liabilities (lease liability) | 166,403 | 155,815 | | Other long-term liabilities (lease liability) | 1,094,307 | 1,111,965 | - Operating lease cost for Q1 2020 was $54,508[127] Operating Lease Liability Maturity Analysis (March 31, 2020) | Period | Undiscounted Cash Flows ($) | | :----------------------------------- | :-------------------------- | | April 1, 2020 through December 31, 2020 | 124,285 | | 2021 | 169,510 | | 2022 | 173,748 | | 2023 | 178,092 | | 2024 | 182,544 | | 2025 | 187,108 | | Thereafter | 813,638 | | Total lease payments | 1,828,925 | | Less implied interest | (568,215) | | Total | 1,260,710 | 13. Commitments and Contingencies This note details Cerecor Inc.'s legal disputes, guarantee obligations, license agreements, and potential future milestone payments - The company is involved in a legal dispute with former TRx owners regarding a $3.0 million gross profit earn-out target from 2018, with potential claims up to $18.2 million[130][131][202] - A pre-lawsuit mediation is tentatively set for June 2020[130][131][202] - Cerecor assigned Karbinal royalty make-whole payment obligations to Aytu but could be ultimately liable if Aytu defaults[134] - The company has a License and Supply Agreement for Millipred with Teva, requiring $75,000 license payments semi-annually through April 2021[135] - Potential future milestone proceeds include $7.5 million and $12.5 million from ES Therapeutics for CERC-611 upon cumulative net sales milestones, and a $20.0 million regulatory milestone from Janssen for CERC-501 upon NDA acceptance[136][137] - Cerecor assumed a Royalty Agreement from Aevi, obligating low-single digit percentage payments on net sales of CERC-006 (OSI Products) to certain investors, including current CEO and CMO[139][140][141] - Contingent development milestones from the Aevi Merger could result in payments of $2.0 million (Phase II enrollment by Feb 2022) and $4.5 million (NDA approval for CERC-006/007 by Feb 2025)[143] - Contingent development milestones from the Ichorion Acquisition could result in payments of $6.0 million (first product FDA approval by Dec 2021), $5.0 million (second product FDA approval by Dec 2021), and $4.0 million (protide molecule FDA approval by Dec 2023)[146] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Cerecor Inc.'s financial condition and operational results for the three months ended March 31, 2020, compared to the same period in 2019. It covers the company's strategic focus on rare pediatric and orphan diseases, recent developments including the Aevi Merger and financings, detailed analysis of revenue and expenses, liquidity challenges, and critical accounting policies Overview This section provides a high-level summary of Cerecor Inc.'s biopharmaceutical focus, pipeline, and strategic product considerations - Cerecor Inc. is a biopharmaceutical company focused on developing and commercializing treatments for rare pediatric and orphan diseases[150] - The company is advancing a clinical-stage pipeline, including CERC-800 compounds for CDGs (with RPDD, ODD, and FTD designations) and CERC-002, CERC-006, and CERC-007 for various autoimmune and lymphatic conditions[150][151] - Cerecor is exploring strategic alternatives for its sole commercialized product, Millipred®, and potentially transferring non-core neurology assets (CERC-301, CERC-406)[152] Recent Developments This section highlights Cerecor Inc.'s key recent events, including the Aevi merger, leadership changes, financings, and COVID-19 related pipeline adjustments - On February 3, 2020, Cerecor completed a merger with Aevi Genomic Medicine, Inc., acquiring CERC-002, CERC-006, and CERC-007, and expanding its pipeline to six clinical-stage assets[153][154] - New leadership appointments in April 2020 include Dr. Sol J. Barer as Chairman of the Board, and promotions of Dr. Garry Neil to Chief Scientific Officer and Dr. Jeffrey Wilkins to Chief Medical Officer[155] - In April 2020, the company sold its Aytu common stock, generating net proceeds of approximately $12.8 million[157] - Recent financings in Q1 2020 include a $3.9 million private placement and a $5.0 million registered direct offering, both with participation from Armistice Capital, LLC[158][159] - The company is exploring CERC-002 as a potential treatment for COVID-19 induced Acute Respiratory Distress Syndrome (ARDS) and Acute Lung Injury (ALI), while pausing its Phase 1b study for Pediatric-onset Crohn's Disease due to COVID-19 related endoscopy moratoriums[160][161] Our Strategy This section outlines Cerecor Inc.'s strategic objectives for pipeline advancement, asset acquisition, market development, and non-core asset management - Advancing pipeline compounds through development to regulatory approval[163] - Acquiring or licensing targeted, complementary preclinical and clinical stage assets[163] - Developing go-to-market strategies for approved assets[163] - Opportunistically out-licensing rights for indications or geographies[163] - Opportunistically out-licensing rights or selling non-core assets[163] Results of Operations This section analyzes Cerecor Inc.'s financial performance, detailing changes in revenues, cost of sales, and various operating expenses for the reporting periods - Net product revenue from continuing operations was $2.8 million in Q1 2020, consistent with $2.6 million in Q1 2019[165] - Cost of product sales decreased to $0.1 million in Q1 2020 from $0.8 million in Q1 2019, mainly due to a shift in product mix and the cessation of Ulesfia royalty obligations[165] Research and Development Expenses (in thousands) | Category | Three Months Ended March 31, 2020 (in thousands $) | Three Months Ended March 31, 2019 (in thousands $) | | :------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Preclinical expenses | 1,245 | 879 | | Clinical expenses | 596 | 1,590 | | CMC expenses | 1,166 | 435 | | Salaries, benefits and related costs | 1,313 | 435 | | Stock-based compensation expense | 382 | 57 | | Other | 66 | 5 | | Total Research and Development Expenses | 4,768 | 3,401 | - R&D expenses increased by $1.4 million (40.2%) in Q1 2020, driven by expanded pipeline assets from the Aevi Merger and increased CMC expenses, partially offset by reduced clinical spend on CERC-301[167][168] - Acquired in-process research and development expenses were $25.5 million in Q1 2020 (zero in Q1 2019) due to the Aevi Merger[169] General and Administrative Expenses (in thousands) | Category | Three Months Ended March 31, 2020 (in thousands $) | Three Months Ended March 31, 2019 (in thousands $) | | :------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Salaries, benefits and related costs | 1,012 | 1,230 | | Legal, consulting and other professional expenses | 784 | 887 | | Stock-based compensation expense | 706 | 469 | | Other | 174 | 90 | | Total General and Administrative Expenses | 2,676 | 2,676 | - General and administrative expenses remained consistent at $2.7 million in Q1 2020, with a decrease in salaries/benefits offset by an increase in stock-based compensation[171] Sales and Marketing Expenses (in thousands) | Category | Three Months Ended March 31, 2020 (in thousands $) | Three Months Ended March 31, 2019 (in thousands $) | | :--------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Salaries, benefits and related costs | 134 | 185 | | Stock-based compensation expense | 55 | 21 | | Advertising and marketing expense | 481 | 190 | | Other | 7 | — | | Total Sales and Marketing Expenses | 677 | 396 | - Sales and marketing expenses increased by $0.3 million (71.0%) in Q1 2020, primarily due to increased advertising and marketing for pipeline assets[172] - Amortization expense increased by $0.1 million in Q1 2020, driven by the amortization of the assembled workforce intangible asset acquired in the Aevi Merger[173] - Other income, net, increased by $7.1 million in Q1 2020, primarily due to a $7.1 million gain on the change in fair value of the Investment in Aytu[174] - Income tax benefit of $2.2 million was recognized in Q1 2020, compared to an expense of $0.1 million in Q1 2019, due to the CARES Act allowing loss carrybacks[175] Liquidity and Capital Resources This section discusses Cerecor Inc.'s cash position, capital raises, and management's assessment of its ability to continue as a going concern - As of March 31, 2020, Cerecor had $5.7 million in cash and cash equivalents and an accumulated deficit of $135.4 million[179] - The company generated a net loss of $21.1 million and negative cash flow from operations of $5.7 million for the three months ended March 31, 2020[177][179] - Recent capital raises include $5.0 million from a registered direct offering and $3.9 million from a private placement in Q1 2020, plus $12.8 million from the sale of Aytu common shares in April 2020[176] - Management concluded that substantial doubt exists about the company's ability to continue as a going concern within one year, necessitating additional financing, asset sales, or collaborations[180][182] Cash Flows Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2020 (in thousands $) | Three Months Ended March 31, 2019 (in thousands $) | | :--------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | Operating activities | (5,740) | (3,122) | | Investing activities | (1,251) | (166) | | Financing activities | 9,098 | 8,817 | | Net increase in cash and cash equivalents | 2,107 | 5,529 | - Net cash used in operating activities increased due to higher net loss, partially offset by non-cash adjustments like acquired IPR&D and the gain on Aytu investment[184] - Net cash used in investing activities increased due to transaction costs from the Aevi Merger[189] - Net cash provided by financing activities was primarily from equity offerings[190] Critical Accounting Policies, Estimates, and Assumptions This section describes the significant accounting policies, estimates, and assumptions underlying Cerecor Inc.'s financial statements - The company's financial statements rely on estimates and assumptions impacting reported assets, liabilities, revenue, and expenses, including revenue recognition, cost of product sales, stock-based compensation, fair value measurements, cash flows for going concern assessment, income taxes, goodwill, intangible assets, and clinical trial accruals[192] - No material changes to critical accounting policies occurred during the three months ended March 31, 2020, other than recently adopted accounting standards detailed in Note 2[192] Off‑Balance Sheet Arrangements This section confirms Cerecor Inc. has no off-balance sheet arrangements as defined by SEC regulations - The company does not have any off-balance sheet arrangements as defined by SEC rules and regulations[193] Recently Adopted Accounting Pronouncements This section refers to Note 2 for details on Cerecor Inc.'s recently adopted accounting pronouncements - Refer to Note 2 of the Unaudited Financial Statements for details on recently adopted accounting pronouncements[193] JOBS Act This section clarifies Cerecor Inc.'s election regarding the extended transition period for new accounting standards under the JOBS Act - As an 'emerging growth company,' Cerecor has elected not to use the extended transition period for complying with new or revised accounting standards provided by the JOBS Act[194] - The company will comply with new or revised accounting standards on the relevant dates required for non-emerging growth companies[194] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Cerecor Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide information on market risk[196] Item 4. Controls and Procedures Management, including the principal executive officer and principal financial officer, evaluated the effectiveness of Cerecor Inc.'s disclosure controls and procedures as of March 31, 2020, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting were identified during the period - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2020[197] - No material changes in internal control over financial reporting were identified during the quarter ended March 31, 2020[199] PART II. OTHER INFORMATION This part presents additional information including legal proceedings, risk factors, and exhibits for the reporting period Item 1. Legal Proceedings Cerecor Inc. is involved in a legal dispute with the former owners of TRx Pharmaceuticals, LLC, regarding a $3.0 million gross profit earn-out target from the 2017 TRx Acquisition. The former owners are threatening a lawsuit seeking up to $18.2 million for alleged improper conduct and losses, but no lawsuit has been filed as of the report date, with parties agreeing to pre-lawsuit mediation - Cerecor is in a legal dispute with former TRx owners over a $3.0 million gross profit earn-out target from the 2018 TRx Acquisition[201][202] - The former TRx owners are threatening a lawsuit seeking $3.0 million (potentially trebled), $9.2 million for alleged losses, and removal of stock restrictions, totaling a possible loss range of $0 to $18.2 million[131][202] - No lawsuit has been filed as of the report date, and the parties have agreed to a pre-lawsuit mediation tentatively set for June 2020[131][202] Item 1A. Risk Factors This section updates the risk factors previously disclosed in the company's Annual Report on Form 10-K, with a particular focus on the potential adverse impacts of the COVID-19 pandemic on Cerecor Inc.'s business, including supply chain disruptions, delays in regulatory processes, challenges in clinical trial enrollment, and overall economic conditions - The COVID-19 pandemic poses significant risks, including potential adverse effects on business operations, supply chain, and financial condition[204][205] - The spread of COVID-19 may delay FDA meetings, clinical trial initiations, patient enrollment, and commercialization efforts, increasing operating expenses and adversely affecting financial results[206][208][209] - Global economic conditions impacted by COVID-19 could impair the company's ability to raise capital[207] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including various agreements and certifications - Contingent Value Rights Agreement (Exhibit 10.1)[211] - Employment Agreements for Michael F. Cola and Garry A. Neil (Exhibits 10.2, 10.3)[212] - Securities Purchase Agreements (Exhibits 10.4, 10.6)[213] - Registration Rights Agreement (Exhibit 10.7)[214] - Separation Agreement with Pericles Calias (Exhibit 10.8)[215] - Various Sponsored Research and License Agreements related to Aevi Genomic Medicine (Exhibits 10.9* - 10.24*)[216] - XBRL Instance Document and Taxonomy Extension Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[217] - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Act (Exhibits 31.1+, 31.2+, 32.1+†)[219][220][221] SIGNATURES The Quarterly Report on Form 10-Q was duly signed on behalf of Cerecor Inc. by Christopher Sullivan, Interim Chief Financial Officer, on May 7, 2020 - The report was signed by Christopher Sullivan, Interim Chief Financial Officer, on May 7, 2020[225]