UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K
(Mark One)
For the fiscal year ended December 31, 20162019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission File No. 001‑37590
Cerecor Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 45‑0705648 (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
Telephone: (410) 522-8707
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 | CERC | |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ý
Indicate by check mark whether the registrant (1) has filed 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 such filing requirements for the past 90 days. Yes ☒ý No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b‑2Rule12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer | Non‑accelerated filer ☐ | Smaller reporting company | Emerging growth company ý |
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 ☐ No ☒ý
The aggregate market value of the registrant’s shares of common stock held by non-affiliates of the registrant as of June 30, 2019 (based on the closing price of $5.44 on June 28, 2019, the last business day of the registrant's most recently completed second fiscal quarter) was $81,295,262. Shares of common stock held by each officer and directors and by each person known to be the registrant who owned 10% or more of the outstanding common stock have been excluded in that such person may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 10, 2017,9, 2020, there were 10,744,95957,609,033 outstanding shares of the registrant’s common stock, par value $0.001 per share. The aggregate market value of shares of common stock held by non-affiliates as of December 31, 2016 was $6.8 million.
Documents Incorporated by Reference: Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2016,2019, are incorporated by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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PART I
SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This report and the information incorporated herein by reference contain forward-looking statements that involve a number of risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from results and outcomes discussed in the forward-looking statements.
Forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “plans,” “intends,” “estimates,” “could,” “should,” “would,” “continue,” “seeks,” “aims,” “projects,” “predicts,” “pro forma,” “anticipates,” “potential” or other similar words (including their use in the negative), or by discussions of future matters such asas: the integration of the companies and their personnel; the development of product candidates or products, theproducts; timing and success of trial results of clinical trials, theand regulatory review; potential attributes and benefits of our product candidates,candidates; the useexpansion of Cerecor's drug portfolio; strategic alternatives for the neurological assets and sufficiency of capital resourcesMillipred; and other statements that are not historical. These statements include but are not limited to statements under the captions “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other sections in this report. You should be aware that the occurrence of any of the events discussed under the caption “Risk Factors” and elsewhere in this report could substantially harm our business, results of operations and financial condition and cause our results to differ materially from those expressed or implied by our forward-looking statements. If any of these events occurs, the trading price of our common stock could decline and you could lose all or a part of the value of your shares of our common stock.
The cautionary statements made in this report are intended to be applicable to all related forward-looking statements wherever they may appear in this report. We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
As used in this report, the terms "Cerecor," "Company," "we," "us," and "our" mean Cerecor Inc. and its subsidiaries unless the context indicates otherwise.
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Item 1. BusinessBusiness.
Overview
The Company is also developing CERC-002, CERC-006 and CERC-007. CERC-007 is an anti-IL-18 monoclonal antibody being developed for the treatment of MDD. CERC‑301 belongs to a class of compounds known as antagonists of the N‑methyl‑D‑aspartate, or NMDA, receptor, a receptor subtype of the glutamate neurotransmitter system that is responsible for controlling neurological adaptation. We believe CERC‑301 has the potential to produce a significant reduction in depression symptoms in a matter of days, as compared to weeks or months with conventional therapies, because it specifically blocks the NMDA receptor subunit 2B, or NR2B. We believe this mechanism of action may provide rapid and significant antidepressant activity without the adverse side effect profile of non‑selective NMDA receptor antagonists,autoimmune inflammatory diseases such as ketamine. We recently completedAdult Onset Stills Disease ("AOSD") and Multiple Myeloma. CERC-006 is a Phase 2 clinical trial for CERC-301dual mTOR inhibitor being developed for the treatment of MDD, in which we evaluated the effect of intermittent oral doses of 12 mgcomplex Lymphatic Malformations. CERC-002 is an anti-LIGHT (Lymphotoxin-like, exhibits Inducible expression, and 20 mg versus placebo. In November 2016, we reported that CERC-301 did not meet its primary endpoint in this trial, but we observedcompetes with HSV Glycoprotein D for HVEM, a numerical separation from placeboreceptor expressed by of the 20 mg dose on day 2, which we believe may correspond to a clinically meaningful treatment effectT. We are currently evaluating potential next steps for this program.
The Company continues to explore strategic alternatives for its non-core assets, including CERC-301, as well as its sole commercialized product, Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions.
Recent Developments
Aevi Merger
On February 3, 2020, the Company consummated its two-step merger (the "Merger") with Aevi Genomic Medicine, Inc. ("Aevi") in accordance with the terms of the Agreement and Plan of Merger and Reorganization dated December 5, 2019. The Merger consideration included stock valued at approximately $15.6 million, thus resulting in the issuance of approximately 3.9 million shares of Cerecor common stock to Aevi stockholders, forgiveness of a $4.1 million loan that Cerecor loaned Aevi in December 2019, and contingent value rights ("CVRs") for up to an additional $6.5 million in subsequent payments based on clinical and/or without secondarily generalized seizures,regulatory milestones. Cerecor is in-process of determining the financial effect of the Merger, including whether the Merger will be recorded as an asset purchase or a business combination, and will perform preliminary purchase accounting during the first quarter of 2020.
As part of the Merger, Cerecor acquired CERC-002, CERC-006 and CERC-007, expanding Cerecor's pipeline to six clinical stage assets being developed for rare pediatric and orphan diseases. Effective upon the consummation of the Merger, Cerecor entered into an employment agreement with Mike Cola for him to serve as Cerecor's Chief Executive Officer, an employment agreement with Dr. Garry Neil for him to serve as Cerecor's Chief Medical Officer and appointed Mike Cola and Sol J. Barer, Ph.D. to the Company's Board of Directors.
Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience
On October 10, 2019, the Company entered into, and subsequently closed on, an asset purchase agreement (the "Aytu Purchase Agreement") with Aytu BioScience, Inc. (“Aytu”) to sell the Company’s rights, title and interest in patientsassets relating to its Pediatric Portfolio, namely Aciphex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal™ ER, Flexichamber™, Poly-Vi-Flor® and Tri-Vi-Flor™ (the "Pediatric Portfolio"), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor’s sales force and the assignment of supporting commercial contracts (the "Aytu Divestiture"). Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock (the "Investment") and assumed certain of the Company’s liabilities, including the Company’s payment obligations payable to Deerfield CSF, LLC of $15.1 million and certain other liabilities of $11 million. The Company recognized a gain of $8.0 million upon the close of the Aytu Divestiture. In addition, Aytu assumed future contractual obligations under existing license agreements associated with epilepsy.the Pediatric Portfolio. The Aytu Divestiture closed on November 1, 2019.
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The Company believes the consideration received as a treatmentpart of residual cognitive impairment symptoms in patientsthe Aytu Divestiture, including the extinguishment of the debt obligation and future obligations under the license agreements associated with MDD among other psychiatricthe Pediatric Portfolio, will allow the Company to focus on significant value drivers, which include the near-term development of the CERC-800 assets and neurological conditions frequently impacted by impaired cognition.
the advancement and expansion of the newly acquired CERC-002, CERC-006 and CERC-007 programs.Recent Financings
During the third quarter of 2019, the Company entered into a securities purchase agreement with Armistice Capital Master Fund Ltd. ("Armistice"), BuSpar®, Cymbalta®, Nuplazid™, Prozac®, Serzone® and Zyprexa®. Collectively, our officers and directors have contributedlargest stockholder, pursuant to which the Company sold 1,200,000 shares of the Company’s common stock for a purchase price of $3.132 per share, which represents the average closing price of the Common Stock on Nasdaq for the five trading days immediately preceding September 4, 2019. Net proceeds of the private placement were approximately $3.7 million.
During the first quarter of 2019, the Company closed on an underwritten public offering of common stock for 1,818,182 shares of common stock of the Company, at a price to the submissionpublic of numerous INDs and New Drug Applications, or NDAs,$5.50 per share. Armistice participated in the offering by purchasing 363,637 shares of common stock of the Company from the underwriter at the public price. The net proceeds to the FDA.Company from the offering were approximately $9.0 million.
Our Strategy
We systematically identify and pursue potential productdevelopment candidates, ideally those for which human proof of concept exists in the intended indication, for either the target or the compound, and for which biomarkers are available to measure therapeutic response.compound. We target conditions where current treatments fail to address unmet medical needs, and where we believe we can apply clinical strategies to increase efficacy signal detection with a view to optimizing the clinical development and regulatory pathway for our product candidates.
Our key strategic objectives include:strategy for increasing stockholder value includes:
Acquiring or licensing rights to fundtargeted, complementary differentiated preclinical and clinical stage assets;
Developing the future developmentgo-to-market strategy to quickly and effectively market, launch, and distribute each of our clinical product candidates through financing arrangementsassets that provide us with the capital requiredreceive marketing approval;
Opportunistically out-licensing rights to achieve our development objectives.indications or geographies; and
Opportunistically out-licensing rights or sale of non-core assets.
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CERC-800 Series:Substrate Replacement Therapies for CDGs.
Overview: CERC-801, CERC-802 and CERC-803 are monosaccharide substrate replacement therapies with known therapeutic utility for the treatment of CDGs. Oral administration of these substrates replenishes critical metabolic intermediates that are reduced or absent due to genetic mutation, overcoming single enzyme defects to support glycoprotein synthesis, maintenance and function.
All three CERC-800 compounds have been granted RPDD and ODD by the FDA. There are numerous benefits associated with receipt of ODD, which include seven-year marketing exclusivity (upon approval) in the United States, tax credits (up to 25% of clinical development costs) and waiver of Prescription Drug User Fee Act application fees (filing fees). RPDD provides potential eligibility for receipt of a PRV upon approval of an NDA of each compound. The PRV, which may be sold and transferred an unlimited amount of times, can be used to obtain priority review for a subsequent NDA or biologics license application. Under the current regulations, the PRV program is set to expire on September 30, 2020. At that time, the FDA may not award any new PRVs unless a product was granted RPDD prior to September 30, 2020. Under the two-year sunset provision, these products can receive a PRV if they are approved by September 30, 2022. It is estimatedalso possible that the epilepsy patient population inprogram will be reauthorized prior to the US, Japan,September 30, 2020 expiration. All three CERC-800 compounds have received RPDD. The below chart depicts the potential benefits associated with ODD and five major EU markets (France, Germany, Italy, Spain,RPDD for each of the CERC-800 compounds upon marketing approval:
Additionally, CERC-801 and CERC-802 have been granted FTD by the UK) will increase from 4.6 million cases in 2012FDA. FTD is granted to 5.1 million cases by 2020, representing an increasedrugs being developed for the treatment of 10.7%. The US will have the largest number of diagnosed epilepsy cases across the aforementioned markets, with approximately 2.35 million patients by 2020. It has been reported that there are approximately 150,000 new cases of epilepsy diagnosed annually in the US alone. Epilepsy constitutes an area in whichserious or life-threatening diseases or conditions where there is still significantan unmet medical need and helps to facilitate and expedite development. Sponsors of drugs that receive FTD have the opportunity for more frequent interactions with upthe FDA review team throughout the development program. These may include meetings to 40%discuss study design, data required to support approval, or other aspects of patients not achieving seizure freedom despite therapy with currently available antiepileptic drugs, or AEDs.
rolling review).
CERC-801 and CERC-802 have completed phase 1 studies. The Company has an ongoing retrospective study, the CDG FIRST Trial, which seeks to collect natural history and treatment-related data for patients diagnosed with PGM1-CDG, MPI-CDG or LADII/SLC35C1-CDG who are either treated with or without D-galactose, D-mannose and L-fucose, respectively, as well as patients with other CDGs who are treated with one of the three monosaccharides. Cerecor plans to leverage data from the CDG FIRST Trial, existing clinical and nonclinical data from published literature and sponsor-initiated studies to accelerate development and time to approval of all three compounds under the 505(b)(2) pathway.
Competition: Currently there are not effective in stopping seizures once they are underway and do not cure epilepsy; that is, they are anti-seizure, but not anti-epileptogenic. Therefore, currently available AEDs should be classified as symptomatic drugs against ictogenesis.
Intellectual Property: As the CERC-800 compounds received ODD from the FDA, at a minimum, upon approval, we plan to rely on seven-year marketing exclusivity in the United States. Additionally, if the CERC-800 compounds are granted ODD from EMA, we will rely on ten-year marketing exclusivity in Europe upon approval.
CERC-007: Anti-IL18 Monoclonal Antibody for auto-inflammatory diseases. |
Overview: CERC-007 (formerly AEVI-007) is a fully human, anti-IL-18 monoclonal antibody with treatment-resistant seizures compared to the general population. Consequently, the development of new AEDs with efficacy in treatment-refractory seizures remains an unmet need for improving the quality of life for a substantial proportion of epilepsy sufferers.
AOSD is a serious rare and orphan rheumatological disease affecting adults. The disease is similar to systemic onset juvenile idiopathic arthritis that affects children. The etiology of AOSD is unknown with AED therapy becauseboth genetic and infectious factors being implicated. The hallmarks of the negative effect they can have on activities ofdisease are persistent daily living, such as drivingfever, rash and occupational functioning. For pediatricarthralgias. Many patients reducing cognitivesuffer complications including splenomegaly, heart and behavioral side effects is of particular importance due to the potential impact they can have on learningliver disease. Some AOSD patients develop macrophage activation syndrome, a severe acute complication that might cause rapid multi-organ failure and development. Because these side effects occur while the child’s brain is still developing, long-term effects of the medication remain a possibility. Research has found that adults with childhood-onset epilepsy have fewer educational qualifications and poorer job prospects. Furthermore, the fact that these long term effects were present in adults no longer taking AEDs is indicative that drug treatment or the seizures themselves can permanently impair development. Differential cognitive and behavioral side effects have been established for some AEDs. For example, the sedating AEDs (such as valproate and carbamazepine) can cause fatigue, impaired attention, and depression, while the activating AEDs (such as felbamate and lamotrigine) can cause anxiety, insomnia, and agitation. The most commonly reported adverse effects are also similar to marketed agents and include dizziness, somnolence, irritability, headache, falls, and ataxia.
even death.
Intellectual Property (Licenses): In August 2019, Aevi obtained the right to exercise an exclusive global license from Medimmune Limited, a subsidiary of AstraZeneca, for a Phase 2‑ready fully human monoclonal antibody that targets interleukin 18 ("IL‑18"), CERC‑007. Under the terms of the agreement, we have the right to exercise an exclusive global license to develop and commercialize CERC‑007. In December 2019, Aevi exercised the option and paid AstraZeneca a combined mid‑single digit millions in cash and equity. Up to $162 million may be due to AstraZeneca upon achievement of certain development and sales‑related milestones, in addition to tiered low double‑digit royalties on global annual product sales. Post Merger, Cerecor is fully responsible for the development and commercialization of the program.
CERC-007 is eligible to receive ODD and therefore, at a minimum, upon approval, we plan to rely on seven-year marketing exclusivity in the United States and ten-year marketing exclusivity in Europe. Additionally, we expect to receive biologics data exclusivity, which may extend our marketing exclusivity in the United States to twelve years.
CERC-006: Dual mTOR Inhibitor for Complex Lymphatic Malformations.
Overview: CERC-006 (formerly AEVI-006) is a dual mTOR inhibitor (a class of drugs that inhibit the mammalian target of rapamycin) being developed as a treatment for complex Lymphatic Malformations ("LM"). LM patients often have activating mutations along the PI3K/AKT/mTOR pathway; sirolimus, an mTORC1 inhibitor, has
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Competition: There are currently no FDA or EMA approved drug therapies for Lymphatic Malformations. CERC-006 is a new targeted therapy that may address the activationunderlying cause in the majority of KORthese patients.
Intellectual Property (Licenses): In July 2019, Aevi entered into an exclusive license agreement with OSI Pharmaceuticals, LLC, an indirect wholly, owned subsidiary of Astellas, for the worldwide development and subsequent downstream signaling events. Administrationcommercialization of agents that stimulateAstellas’ novel, second generation mTORC1/2 inhibitor, CERC‑006 (formerly AEVI-006). Under the KOR system, or KOR agonists, that act like dynorphin, decrease dopamine levels in areasterms of the brain involved with executive function, produce anxiety‑likelicense agreement, Aevi paid Astellas an up‑front license fee of $0.5 million and depression‑like behaviors in animals, exacerbate behaviors associated with drug withdrawalAstellas will be eligible to receive milestones payments up to $5.5 million based upon the achievement of specified development and increaseregulatory milestones. Upon commercialization, Astellas will be entitled to a tiered, single‑digit royalty on worldwide annual net sales. Post Merger, Cerecor is fully responsible for the reinforcing effects of substances of abuse.
CERC-006 is eligible to receive ODD and therefore, upon approval, at a minimum, we plan to rely on seven-year marketing exclusivity in the kappa opioid system comes from studies of two prototypical KOR antagonists, nor‑BNIUnited States and JDTic. In studies, such as those discussed by Lalanne et al.ten-year marketing exclusivity in a paper titled Europe.
CERC-002:The Kappa Opioid Receptor from Addiction to Depression and Back and published in Frontiers in Psychiatry in 2014, KOR antagonists induced antidepressant‑like effects in animal models and attenuated symptoms associated with withdrawal, such as anxiety behaviors. The therapeutic potential of KOR antagonism has been suggested in animal models of anhedonia, depression, and anxiety, and KOR antagonists reduced the signs of nicotine, heroin and alcohol withdrawal in rodent models of dependence. In these studiesAnti-LIGHT Monoclonal Antibody for Pediatric-onset Crohn's Disease.
Pediatric-onset Crohn's disease has a more aggressive phenotype than adult onset disease. The genomic rationale for the use of anti-LIGHT antibody in Crohn's disease resulted from Center for Applied Genomics ("CAG") research showing the association to a loss of function mutation in decoy receptor 3 (DcR3). Aevi has subsequently shown that a majority of pediatric patients with active Crohn's disease have elevated levels of free LIGHT, in serum.
Competition: There are currently no FDA or EMA approved drugs aimed at LIGHT in any disease.
Intellectual Property (Licenses): In June 2016, Aevi entered into the Development and Option Agreement with KHK pursuant to which Aevi acquired certain rights with respect to the development and potential commercialization of CERC-002. Regarding CERC‑002, if Cerecor exercises its option under the Development and Option Agreement, KHK has 60 days to select one of two development and commercialization structures as follows:
| – | Plan A: Co‑Development/Co‑Commercialization Arrangement- If KHK selects the co‑development/co‑commercialization arrangement (Plan A), Cerecor will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products in the treatment, prevention, and diagnosis of specified pediatric onset rare and orphan inflammatory diseases (including severe pediatric onset inflammatory bowel diseases such as Crohn’s disease and ulcerative colitis, or IBD) and other specified pediatric onset rare and orphan auto‑immune diseases, or collectively, the Field, in the United States and Canada. Cerecor will also be responsible for development and regulatory approval of the first Antibody Licensed Product in the European Union and then transferring such regulatory approval to KHK or its designee. Cerecor will be responsible for the manufacture of the Antibody Licensed Products for use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories, with KHK purchasing the Antibody Licensed Products from Cerecor. |
Cerecor will be required to pay KHK an initial license fee in the low single‑digit millions of dollars upon the co‑development/co‑commercialization arrangement becoming effective. Cerecor may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Antibody Licensed Products. The parties will share the anticipated costs of development of the first Antibody Licensed Product in the
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| – | Plan B: Licensing Arrangement- If KHK selects the licensing arrangement (Plan B), Cerecor will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products in the Field in the United States, Canada and the European Union. Cerecor will be responsible for the manufacture of the Antibody Licensed Products for use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories. |
Cerecor will be required to drug seeking was bluntedpay KHK an initial license fee in mice who had their KOR system genetically deleted, and was also blocked in wild‑type mice by treatment with nor‑BNI and rats treated with JDTic. In the studies summarized by Lalanne et al., KOR antagonists reduced ethanol intake in a numberlow single‑digit millions of animal models. Overall, we believedollars upon the preclinical datalicensing arrangement becoming effective.
Cerecor may pay KHK up to date supportan additional $28 million upon the emerging consensus that selective kappa opioid antagonists may have antidepressant‑ and antianxiety‑ like effects, reduce addictive substance consumption, and reduce behaviors and signsachievement of drug withdrawal. We believe these studies provide the basis for further evaluation of the use of KOR antagonists, like CERC-501, in mood and substance use disorders.
At a minimum, we intendplan to develop CERC-501 as an adjunctive treatment of MDD. We believe CERC‑501 has potential as an adjunctive treatment of MDD taken once-a-day by mouth.
Early Stage Rare Disease Pipeline
CERC-913: ProTide Nucleotide for Mitochondrial Disorder.
Overview: CERC-913 is a genetically-targeted, small molecule substrate replacement therapy that uses a prodrug approach to overcome a single enzyme defect to treat mitochondrial DNA ("mtDNA") depletion syndromes ("MDS"). A prodrug is a medication or compound that, after administration, is metabolized into a pharmacologically active substance. The ProTide prodrug platform is a clinically-validated approach to nucleoside monophosphate prodrugs. Some patients suffering from MDS lack a nucleoside kinase that produces nucleoside monophosphates for mtDNA synthesis. Direct substrate replacement of nucleoside monophosphates is impractical due to instability in plasma and low cell permeability. By masking a nucleoside monophosphate as a prodrug with improved drug-like properties, we can deliver the substrate to the desired subcellular compartment and bypass the missing nucleoside kinase. CERC-913 is intended for pediatric MDS patients with symptoms that manifest primarily in the liver, with 50% of patients experiencing liver failure in the first few years of life.
CERC-005: Monoclonal Antibody for rare auto-inflammatory disease(s).
Overview: CERC-005 (formerly AEVI-005) is a monoclonal antibody with a novel mechanism of action for auto-inflammatory disorders. Cerecor is studying CERC-005 in an undisclosed ultra-orphan auto-immune pediatric disease. Preclinical research was initiated for this compound in the second quarter of 2018.
Neurology Pipeline
We are currently being conducted to evaluateseeking strategic alternatives including strategic partnerships and collaboration opportunities for our neurology pipeline which include CERC-301 and CERC-406. Detail, including an overview, competition and intellectual property (if applicable), regarding each program is discussed below.
CERC-301:NMDA Receptor for OH.
Overview: CERC-301 is an orally available, NR2B-specific, the use of CERC-501 in treating depressive symptoms, stress-related smoking relapse and cocaine addiction. The followingN‑methyl‑D‑aspartate ("NMDA") receptor antagonist. NMDA receptor is a summary of these three clinical trials:
neurologic adaptation. We believe CERC‑301 may have someselectively blocks the NMDA receptor subunit 2B ("NR2B") (also called GluN2B). CERC-301 is currently being developed for treatment of the following advantages over ketamine and other non‑selective NMDA antagonists:
blood pressure and adjusts heart rate and activates sympathetic nerve system fibers to cause the blood vessels to narrow and correct blood pressure. It may also be more effectivecaused by hypovolemia (a decreased amount of blood in Val homozygotes population, who have higher levelsthe body), resulting from the excessive use of COMT activity and lower prefrontal dopamine receptor activation; and
CERC-406 and COMTi Platform:Adjunctive Treatment of Parkinson's Disease.
Overview: CERC-406 is a preclinical candidate from our proprietary platform of compounds that inhibit catechol-O-methyltransferase ("COMT") within the brain, which we refer to as our COMTi platform. We believe it may have the potential to be developed for the adjunct treatment of Parkinson’s Disease. Preclinically, CERC-406 has demonstrated a greater selectivity for Central Nervous System COMT as compared to peripheral COMT, which we believe may represent an opportunity to treat both the neuromuscular and cognitive manifestations of Parkinson's Disease while minimizing the systemic toxicities associated with the currently approved COMTi’s.
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| • | Competition: There are no approved pharmacologic treatments for cognitive impairment associated in the U.S. at this time. In March 2015, vortioxetine (Brintellix®), marketed in the United States by Lundbeck Pharmaceuticals, which was originally developed and commercialized for the treatment of MDD, received a positive opinion from the Committee for Medicinal Products for Human Use of the European Medicines Agency to expand the label to include information for cognitive function in patients with depression. A supplemental application for the addition of clinical data to the FDA approved product label for Brintellix was not approved by the FDA. |
Our potential products for the treatment of the cognitive and motoric impairment of Parkinson’s disease may compete with existing COMT inhibitors Comtan (entacapone), marketed by Novartis Pharmaceuticals Corp. ("Novartis") (licensed from Orion), Tasmar (tolcapone), marketed by Valeant, and Stalevo (fixed combinations of entacapone and levodopa/carbidopa), also marketed by Novartis (licensed from Orion). Comtan, Tasmar, and Stalevo are all generic in the United States. Currently, no treatments are approved for cognitive impairment in Parkinson’s disease.
compositions of matter and methods of use. The term of any individual patent depends upon the legal term of the patents in the countries in which they are obtained. In most countries where we file, the patent term is 20 years from the earliestexpiration date of filing a non‑provisional patent application.
Intellectual Property Overview
Our success depends in part on our ability to obtain and maintain proprietary protection for the technology and know-how upon which our products are based, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights.
We hold ownership, trademark rights and/or exclusivity to develop and commercialize our products and product candidates covered by patents and patent applications. Our portfolio of patents includes patents or patent applications with claims directed to compositions of matter, including compounds, pharmaceutical formulations, methods of use, methods of manufacturing the compounds, or a company’s initial submissioncombination of a marketing application, plusthese claims. Depending upon the entire time between the submissiontiming, duration and specifics of the marketing application and the FDA’sFDA approval of the application. Patent extension cannot extend the remaining termuse of a compound for a specific indication, some of our U.S. patents may be eligible for a limited patent beyondterm extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. Similar extensions to patent term may be available in other countries for particular patents in Cerecor’s portfolio.
The Company has a totallicense agreement ("License Agreement") and a sponsored research agreement ("Research Agreement") with Children's Hospital of 14Philadelphia ("CHOP"). Under the terms of the License Agreement, the Company has an (i) an exclusive, sublicensable license to use certain patent rights covering potential diagnostic and therapeutic targets, and (ii) an exclusive, non‑sublicensable license to use certain biospecimen and phenotypic data collected from patients with rare and orphan diseases and their family members.
We are actively seeking to augment our portfolio of compounds by focusing on the development of new chemical entities ("NCEs"), which have not previously received FDA approval. Upon approval by the FDA, NCEs are entitled to market and data exclusivity in the United States with respect to generic drug competition for a period of five years from the date of product approval and only one patent applicable to an approved drug may be extended. Similar provisions are available in Europe and other non‑United States jurisdictions to extend the term of a patent that covers an approved drug. In the future, if and when our product candidates receive FDA approval, we expect to apply for patent term extensions on patents covering those product candidates. We intend to seek patent term extensions to any of our issued patents in any jurisdiction where these are available, however there is no guarantee that the applicable authorities, including the FDA in the United States, will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions.related patents have expired.
We face, and will continue to face, intense competition from pharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies, both in the United States and abroad. We compete, or will compete, with existing and new products being developed by our competitors. Some of these competitors are pursuing the development of pharmaceuticals that target the same diseases and conditions that our research and development programs target. Even if
Competition for specific pipeline assets are discussed above within the "Product Pipeline Assets" section.
Manufacturing
We do not have any manufacturing facilities or personnel. We rely on contract manufacturing organizations ("CMOs") to produce our drug candidates in accordance with applicable provisions of the FDA’s current Good Manufacturing Practice ("GMP") regulations for use in our clinical studies. The manufacture of pharmaceuticals is subject to extensive GMP regulations, which impose various procedural and documentation requirements and govern all areas of record keeping, production processes and controls, personnel and quality control.
Sales and Marketing
For our rare disease pipeline assets (CERC-800s, CERC-002, CERC-005, CERC-006, CERC-007 and CERC-913), we intend to retain United States commercialization rights. We may complement with co‑promotion agreements with partners in and outside the United States. We may also seek to commercialize any of our potential collaboratorsapproved products outside of the United States and may do so either through an expansion of our sales force or through collaboration with third parties.
For our neurology pipeline assets (CERC-301 and CERC-406), we are successfulcurrently seeking strategic alternatives including strategic partnerships and collaboration opportunities for their development prior to the assets obtaining marketing approval.
Commercially Marketed Product
The Company currently has one marketed product, Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions and indications. Prednisolone is a man-made form of a natural substance (corticosteroid hormone) made by the adrenal gland. It is used to treat conditions such as arthritis, blood disorders, immune system disorders, skin and eye conditions, respiratory disorders, cancer, and severe allergies. Prednisolone decreases an individual's immune response to various diseases to reduce symptoms such as pain, swelling and allergic-type reactions. Millipred® is supplied in developing5mg tablets.
Millipred® Tablets primarily compete in the generic prednisolone market. We believe our product candidates,primary point of differentiation is that we offer the resulting products would compete withlowest strength prednisolone in the marketplace allowing HCPs greater flexibility when dosing a glucocorticoid steroid across a variety of established drugs inpediatric and adult indications. Additionally, Millipred® utilizes the areas of depression, bipolar depression, schizophrenia, epilepsy, Parkinson’s disease, substance use disorders and pain and impulse control disorders, or ICDs.
Overall Competitive Climate and Risks
identifying and validating targets;
screening compounds against targets;
preclinical and clinical trials of potential pharmaceutical products; and
obtaining FDA and other regulatory clearances.
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In addition, many of our competitors and their collaborators have substantially greater advantages in the following areas:
capital resources;
research and development resources;
manufacturing capabilities; and
sales and marketing.
Smaller companies maymight also prove to be significant competitors, particularly through proprietary research discoveries and collaborative arrangements with large pharmaceutical and established biotechnology companies. Many of our competitors have products that have been approved or are in advanced development. We face competition from other companies, academic institutions, governmental agencies and other public and private research organizations for collaborative arrangements with pharmaceutical and biotechnology companies, in recruiting and retaining highly qualified scientific and management personnel and for licenses to additional technologies. Our competitors, either alone or with their collaborators, may succeed in developing technologies or drugs that are more effective, safer, and more affordable or more easily administered than ours and may achieve patent protection or commercialize drugs sooner than us. Developments by others may render our product candidates or our technologies obsolete. Our failure to compete effectively could have a material adverse effect on our business.
For additional information on risks regarding our competition, refer to the section entitled “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export, pricing, and government contracting related to pharmaceutical products such as those we are developing. The processes for obtaining marketing approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.
United States Government Regulation
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act or FDCA,("FDCA") and its implementing regulations. The process of obtaining marketing approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant to a variety of administrative or judicial sanctions, or other actions, such as the FDA’s delay in review of or refusal to approve a pending NDA, withdrawal of an approval, imposition of a clinical hold or study termination, issuance of Warning Letters or Untitled Letters, mandated modifications to promotional materials or issuance of corrective information, requests for product recalls, consent decrees, corporate integrity agreements, deferred prosecution agreements, product seizures or detentions, refusal to allow product import or export, total or partial suspension of or restriction of or imposition of other requirements relating to production or distribution, injunctions, fines, debarment from government contracts and refusal of future orders under existing contracts, exclusion from participation in federal and state healthcare programs, FDA debarment, restitution, disgorgement or civil or criminal penalties, including fines and imprisonment.
FDA Marketing Approval
Obtaining FDA marketing approval for new products may take many years and require the expenditure of substantial financial resources. In order for FDA to determine that a product is safe and effective for the proposed indication, the product must first undergo testing in animals (preclinical studies). The process required bydata generated from preclinical studies is used to support the FDA before a new drug may be marketed in the United States generally involves the following:
Phase 2 studies evaluate safety and well‑controlled clinical trials,efficacy, as well as explore dosing ranges; these studies are typically conducted in accordance with good clinical practices, or GCP,patient volunteers who suffer from the particular disease condition that the drug is designed to treat; and regulations to establish the
Phase 3 studies evaluate safety and efficacy of the proposed drug product, for each indication;at specific doses, in a large clinical trial
The manufacture of investigational drugs for the conduct of human clinical trials is subject to GMP requirements. Investigational drugssafety and active pharmaceutical ingredients imported into the United States are also subject to regulation by the FDA relating to their labeling and distribution. Further, the export of investigational drug products outside of the United States is subject to regulatory requirements of the receiving country as well as United States export requirements under the FDCA.
submission. The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing to determine whether they are sufficiently complete to permit substantiveand full review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in‑depth substantive review. The FDA reviews an NDA to determine, among other things, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed to assure the product’s continued safety, quality and purity.
After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing, or other information, in order for FDA to reconsider the application. The FDA has a review goal of completing its review of 90% of resubmissions within two or six months after receipt, depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA may issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
FDA review of drugs that are intended for the treatment of serious or life threatening diseases or conditions, and demonstrate the potential to address unmet medical needs or present a significant improvement over existing therapy. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, manufacturing, periodic reporting, product
sampling and distribution, advertising and promotion, and reporting of adverse experiences with the product and drug shortages. After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
The FDA may also impose a number of post‑approval requirements as a condition of approval of an NDA. For example, the FDA may require post‑marketing testing, including Phase 4 clinical trials and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product becomes available in the market.
Other Regulations of the Healthcare Industry
In addition to FDA regulations for the distributionmarketing of prescription pharmaceutical products, there are various other state and federal laws that may restrict business practices in the biopharmaceutical industry. These include the following:
The federal Medicare and Medicaid Anti-Kickback laws, which prohibit persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual, or furnishing or arranging for a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
Other Medicare laws, regulations, rules, manual provisions and policies that prescribe the requirements for coverage and payment for services performed by our customers, including samples, is subject to the Prescription Drug Marketing Act, or PDMA, which, among other things, regulates the distributionamount of drugs and drug samples at the federal level, and sets minimum standards for the registration and regulation of drug distributors by the states. Both the PDMA andsuch payment;
The Foreign Corrupt Practices Act ("FCPA"), which prohibits certain payments made to foreign government officials;
State and foreign law equivalents of the manufacturers’ products are appropriately licensed. Further, under this new legislation, manufactures will have drug product investigation, quarantine, disposition, and FDA and trading partner notification responsibilities related to counterfeit, diverted, stolen, and intentionally adulterated products such that they would result in serious adverse health consequences or death, as well as products that are the subject of fraudulent transactions or which are otherwise unfit for distribution such that they would be reasonably likely to result in serious health consequences or death.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease, or order of any item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. The Anti‑Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are narrowly drawn. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not meet the requirements of a statutory or regulatory exception or safe harbor. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated.
disclosure.
To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable post‑marketing requirements, including safety surveillance, anti‑fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. This is currently not applicable as none of our products are currently sold in a foreign country.
Coverage and Reimbursement
The commercial success of our product candidates and our ability to commercialize any approved product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other third‑party payers provide coverage for and establish adequate reimbursement levels for our therapeutic product candidates. In the United States, the European Union and other potentially significant markets for our product candidates, government authorities and third‑party payers are increasingly imposing additional requirements and restrictions on coverage, attempting to limit reimbursement levels or regulate the price of drugs and other medical products and services, particularly for new and innovative products and therapies, which often has resulted in average selling prices lower than they would otherwise be. For example, in the United States, federal and state governments reimburse covered prescription drugs at varying rates generally below average wholesale price. Federal programs also impose price controls through mandatory ceiling prices on purchases by federal agencies and federally funded hospitals and clinics and mandatory rebates on retail pharmacy prescriptions paid by Medicaid and Tricare. These restrictions and limitations influence the purchase of healthcare services and products. Legislative proposals to reform healthcare or reduce costs under government programs may result in lower reimbursement for our product candidates or exclusion of our product candidates from coverage. Moreover, the Medicare and Medicaid programs increasingly are used as models for how private payers and other governmental payers develop their coverage and reimbursement policies.
In addition, the increased emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and utilization, which may adversely affect our future product sales and results of operations. These pressures can arise from rules and practices of managed care groups, competition within therapeutic classes, availability of generic equivalents, judicial
decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, coverage and reimbursement policies and pricing in general. The cost containment measures that healthcare payers and providers are instituting and any healthcare reform implemented in the future could significantly reduce our revenues from the sale of any approved product candidates. We cannot provide any assurances that we will be able to obtain and maintain third‑party coverage or adequate reimbursement for our product candidates in whole or in part.
Impact of Healthcare Reform on Coverage, Reimbursement, and Pricing
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 or the MMA,(the "MMA") imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription, pharmacy drugs pursuant to federal regulations. Part D plans include both standalone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. In general, Part D prescription drug plan sponsors have flexibility regarding coverage of Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class, with certain exceptions. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, any negotiated prices for our future products covered by a
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Part D prescription drug plan will likely be discounted, thereby lowering the net price realized on our sales to pharmacies. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payers often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from Medicare Part D may result in a similar reduction in payments from non‑governmental payers.
The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payers, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third‑party payers do not consider our product candidates to be cost‑effective compared to other available therapies, they may not cover our product candidates, once approved, as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
The United States and some foreign jurisdictions are considering enacting or have enacted a number of additional legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payers in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives, including, most recently, the Affordable Care Act, which became law in March 2010 and substantially changes the way healthcare is financed by both governmental and private insurers. Among other cost containment measures, the Affordable Care Act establishes an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents; a new Medicare Part D coverage gap discount program; expansion of Medicaid benefits and a new formula that increases the rebates a manufacturer must pay under the Medicaid Drug Rebate Program; and expansion of the 340B drug discount program that mandates discounts to certain hospitals, community centers and other qualifying providers. In the future, there may continue to be additional proposals relating to the reform of the United States healthcare system, some of which could further limit the prices we are able to charge or the amounts of reimbursement available for our product candidates once they are approved.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act or FCPA prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting
controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the United States, can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.
Exclusivity and Approval of Competing Products
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant’s product or a method of using the product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential competitors in support of approval of an abbreviated new drug application or ANDA,("ANDA") or 505(b)(2) NDA. Generally, an ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths, dosage form and route of administration as the listed drug and has been shown to be bioequivalent through in vitro or in vivo testing or otherwise to the listed drug. ANDA applicants are not required to conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, other than the requirement for bioequivalence testing. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the reference listed drug. 505(b)(2) NDAs generally are submitted for changes to a previously approved drug product, such as a new dosage form or indication.
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The ANDA or 505(b)(2) NDA applicant is required to provide a certification to the FDA in the product application concerning any patents listed for the approved product in the FDA’s Orange Book, except for patents covering methods of use for which the applicant is not seeking approval. Specifically, the applicant must certify with respect to each patent that:
the required patent information has not been filed;
the listed patent has expired;
the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or
the listed patent is invalid, unenforceable, or will not be infringed by the new product.
Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except when the ANDA or 505(b)(2) NDA applicant challenges a listed patent or if the listed patent is a patented method of use for which approval is not being sought. A certification that the proposed product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or does not indicate that it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all the listed patents claiming the referenced product have expired.
If the ANDA or 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the application has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of notice of the Paragraph IV certification automatically prevents the FDA from approving the ANDA or 505(b)(2) NDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, a decision in the infringement case that is favorable to the ANDA applicant or other period determined by a court.
Market and data exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications for competing products. The FDCA provides a five‑year period of non‑patent data exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the therapeutic activity of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company that contains the previously approved active moiety. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity or non‑infringement.
The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA, or supplement to an existing NDA or 505(b)(2) NDA if new clinical investigations, other than bioavailability studies, that were conducted or
sponsored by the applicant, are deemed by the FDA to be essential to the approval of the application or supplement. Three‑year exclusivity may be awarded for changes to a previously approved drug product, such as new indications, dosages, strengths or dosage forms of an existing drug. This three‑year exclusivity covers only the conditions of use associated with the new clinical investigations and, as a general matter, does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions of the original, unmodified drug product. Five‑year and three‑year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well‑controlled clinical trials necessary to demonstrate safety and effectiveness.
Pediatric Exclusivity. Pediatric exclusivity is another type of non‑patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non‑patent exclusivity period described above. This six‑month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection cover the drug are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve an ANDA or 505(b)(2) application owing to regulatory exclusivity or listed patents.
Orphan Drug Designation and Exclusivity.The Orphan Drug Act provides incentives for the development of drugs intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals annually in the United States, or affecting more than 200,000 in the United States and for which there is no reasonable expectation that the cost of developing and making the drug available in the United States will be recovered from United States sales. Additionally, sponsors must present a plausible hypothesis for clinical superiority to obtain orphan designation if there is a drug already approved by the FDA that is intended for the same indication and that is considered by the FDA to be the same drug as
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the already approved drug. This hypothesis must be demonstrated to obtain orphan drug exclusivity. Orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical study costs, tax advantages, and user‑fee waivers. In addition, if a product receives FDA approval for the indication for which it has orphan designation, the product is generally entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity. While we have not sought to obtain orphan drug designation for any of our products, we may in the future seek such designation if we determine that the relevant criteria are met.
Foreign Regulation
In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safetydrug development and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. For example, in the European Union, we must obtain authorization of a clinical trial application, or CTA, in each member state in which we intend to conduct a clinical trial. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries.commercialization. The approval process varies from country to country and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others.
European Union Drug Approval Process
To obtain a marketing authorization of a drug in the European Union, we may submit marketing authorization applications or MAAs,("MAAs") either under the so‑called centralized or national authorization procedures.
Centralized procedure
The centralized procedure provides for the grant of a single marketing authorization following a favorable opinion by the European Medicines Agency or EMA("EMA") that is valid in all European Union member states, as well as Iceland, Liechtenstein and Norway. The centralized procedure is compulsory for medicines produced by specified biotechnological processes, products designated as orphan medicinal products, and products with a new active substance indicated for the treatment of
specified diseases, such as HIV/AIDS, cancer, diabetes, neurodegenerative disorders or autoimmune diseases and other immune dysfunctions. The centralized procedure is optional for products that represent a significant therapeutic, scientific or technical innovation, or whose authorization would be in the interest of public health. Under the centralized procedure the maximum timeframe for the evaluation of an MAA by the EMA is 210 days, excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the Committee of Medicinal Products for Human Use or the CHMP.("CHMP"). Accelerated assessment might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health interest, particularly from the point of view of therapeutic innovation. The timeframe for the evaluation of an MAA under the accelerated assessment procedure is of 150 days, excluding stop‑clocks.
National authorization procedures
There are also two other possible routes to authorize medicinal products in several European Union countries, which are available for investigational medicinal products that fall outside the scope of the centralized procedure:
•Decentralized procedure. Using the decentralized procedure, an applicant may apply for simultaneous authorization in more than one European Union country of medicinal products that have not yet been authorized in any European Union country and that do not fall within the mandatory scope of the centralized procedure.
•Mutual recognition procedure. In the mutual recognition procedure, a medicine is first authorized in one European Union Member State, in accordance with the national procedures of that country. Following this, further marketing authorizations can be sought from other European Union countries in a procedure whereby the countries concerned agree to recognize the validity of the original, national marketing authorization.
In the European Union, new products authorized for marketing (i.e., reference products) qualify for eight years of data exclusivity and an additional two years of market exclusivity upon marketing authorization. The data exclusivity period prevents generic applicants from relying on the preclinical and clinical trial data contained in the dossier of the reference product when applying for a generic marketing authorization in the EU during a period of eight years from the date on which the reference product was first authorized in the EU. The market exclusivity period prevents a successful generic applicant from commercializing its product in the EU until ten years have elapsed from the initial authorization of the reference product in the EU. The ten‑year market exclusivity period can be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies.
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Employees
As of December 31, 2016,2019, we had 1518 full‑time employees, eightsix of whom were primarily engaged in research and development activities and three of whom had an M.D. and/or Ph.D. degree.activities. None of our employees isare represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Corporate Information
We were incorporated in 2011 and commenced operations in the second quarter of 2011. Our principal executive offices are located at 540 Gaither Road, Suite 400, Rockville, Maryland 20850, and our phone number is (410) 522-8707. Our website address is www.cerecor.com. The information on, or that can be accessed through, our website is not part of this report.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website at www.cerecor.com as soon as reasonably practicable after electronically filing or furnishing such material to the Securities and Exchange Commission. The Securities and Exchange Commission maintains a website (www.sec.gov) that includes our reports, proxy statements and other information.
Item 1A. Risk FactorsFactors.
You should consider carefully the following information about the risks described below, together with the other information contained in this Annual Report on Form 10-K and in our other public filings, in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our warrants and common stock would likely decline.
Risks Related to Our Financial PositionBusiness and Capital NeedsIndustry
We will requireneed substantial additional capital to continue to fund our operations and to financefor the further advancementcontinued development of our product candidates which may not be available to us on acceptable terms, or at all. Failure to obtain this necessary capital in the near term will force us to delay, limit or terminateand for our product development efforts or cease ourlong-term operations.
the rate and level of patient recruitment into clinical trials, particularly those in cashPhase 2 and cash equivalentsPhase 3 stages of development;
the level of research and $4.3 milliondevelopment investment required to develop product candidates;
changes in current liabilities. Accordingly, we do not currently have sufficient fundsproduct development plans needed to finance our continuing operations beyond address any difficulties that may arise in manufacturing, pre-clinical activities, clinical trials or commercialization;
revenue from sales of Millipred;
the short term orability and willingness to further advanceenter into new agreements with strategic partners, and the terms of these agreements;
the success rate in pre-clinical and clinical efforts;
the costs of future commercialization activities, including product sales, marketing, manufacturing and distribution;
proceeds, if any, from sales of any priority review vouchers received;
revenue, if any, received from commercial sales of product candidates, should any of our product candidates including our planned initiationreceive marketing approval;
the effect of a Phase 2/3 clinical trialcompeting product and market developments;
the timing and amount of milestone payments we are required to make under license agreements acquired through the closing of the merger with CERC-501 as an adjunctive treatmentAevi;
in-licensing and/or acquisition or other transaction costs (if any) for potential product development candidates;
time and costs involved in obtaining regulatory approvals; and
costs of major depressive disorder, or MDD, in the next year, or our plan to commence Phase 1 development of CERC-611 in 2017. filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights.
We will likely require significant amounts of additional capital in the near term to finance our operationsfuture, and pursue any further development of our product candidates. Following the conclusion of our recent Phase 2 clinical trial for CERC-501 for smoking cessation, which failed to meet its primary efficacy endpoint, we plan to initiate a Phase 2/3 clinical trial for CERC-501 in the next year, subjectsuch capital might not be available on favorable terms when needed, if at all. We might never progress to the availability of additional funding. We are assessing the results of our recent Phase 2 clinical trial for CERC-301 for MDD which failedpoint where we have commercially successful product sales or other revenue sufficient to meet its primary efficacy endpoint but we believe suggested a potentially clinically meaningful treatment effect in the 20 mg dose, and will announce potential next steps at a later date. We plan to file an investigational new drug application, or an IND, with the FDA for CERC-611, and commence Phase 1 development in 2017 as an adjunctive therapy for the treatment of partial-onset seizures in patients with epilepsy, subject to the availability of additional funding.
The success of the recently closed Merger with Aevi will depend, in large part, on our ability to realize the anticipated benefits from combining our business with the legacy businesses of Aevi.
The recently closed merger with Aevi involves the integration of two companies that future financingpreviously have operated independently with principal offices in two distinct locations. Significant management attention and resources will be availablerequired to integrate the two companies. The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in sufficient amountsour failure to achieve some or on terms acceptable to us, if at all. If we do not raise additional capital when required or on acceptable terms, we may need to:all of the anticipated benefits of the merger.
using our limited cash and other assets efficiently to develop our business;
appropriately managing the liabilities of our product candidatesbusiness;
potential unknown or ceasecurrently unquantifiable liabilities associated with the merger and the operations altogether;of our business;
potential unknown and unforeseen expenses, delays or regulatory conditions associated with the merger; and
merger. Even if we believewere able to integrate the business operations successfully, there can be no assurance that the data from our clinical trials and analytical testing methods support marketing approval of our product candidatesthis integration will result in the United States,realization of the FDAfull benefits of synergies, innovation and operational efficiencies that may not agree with our analysis and approve our NDA. Any delay in obtaining,be possible from this integration or an inability to obtain, marketing approvals would prevent us from commercializing our product candidates, generating revenues and achieving profitability.that these potential benefits will be achieved within a reasonable period of time.
We have invested a significant portion of our efforts and financial resources in the identification and preclinical and clinical development of product candidates. For example, a significant portion of our financial resources were dedicated to the development of FP01, which we no longer plan to develop. Our ability to generateincrease product revenues which we do not expect will occur for many years, if ever, will depend heavily on our ability to advance our one clinical product candidate and our preclinical product candidates including CERC-611 and CERC-406, into clinical development and successfully complete preclinical testing of our clinical stage product candidates. The outcome of preclinical studies mayand Phase 1 clinical trials might not predict the success of future clinical trials. Preclinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies have nonetheless failed in clinical development. Our inability to successfully complete preclinical development of our product candidates could result in additional costs to us relating to product development and obtaining marketing approval and impair our ability to generate product revenues and commercialization and sales milestone payments and royalties on product sales.
If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates.
Before obtaining required approvals from regulatory authorities for the sale of future product candidates, we alone, or with a partner, must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive and difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. For example, we recently announced neither the Phase 2 clinical trial for CERC-301 for MDD nor the Phase 2 clinical trial for CERC-501 for smoking cessation met its respective primary endpoint. Previously, the Clin301‑201 study for CERC‑301 failed to meet its primary endpoint and our
If we experience delays in clinical testing, we will be delayed in obtaining regulatory approvals and commercializing our product candidates, our costs may increase and our business may be harmed.
We do not know whether any clinical trials will begin as planned, whether the design will be revised prior to or during conduct of the study, completed on schedule or conducted at all. Our product development costs will increase if we experience delays in clinical testing. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product candidates and may harm our business, results of operations and prospects.
Events which may result in a delay or unsuccessful completion of clinical development include:
delays in reaching an agreement with or failure in obtaining authorization from the FDA, other regulatory authorities or institutional review boards, or IRBs, to commence or amend a clinical trial;
imposition of a clinical hold (“Clinical Hold”) or trial termination following an inspection of our clinical trial operations or trial sites by the FDA or other regulatory authorities, or due to concerns about trial design, or a decision by the FDA, other regulatory authorities, IRBs or the company, or recommendation by a data safety monitoring board, to place the trial on hold or otherwise suspend or terminate clinical trials at any time for safety issues or for any other reason;
delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
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deviations from the trial protocol by clinical trial sites and investigators, or failing to conduct the trial in accordance with regulatory requirements;
failure of our third parties, such as CROs, to satisfy their contractual duties or meet expected deadlines;
failure to enter into agreements with third parties to obtain the results of clinical trials;
delays in the importation and manufacture of clinical supply;
delays in the testing, validation and delivery of the clinical supply of the product candidates to the clinical sites;
for clinical trials in selected subject populations, delays in identification and auditing of central or other laboratories and the transfer and validation of assays or tests to be used to identify selected subjects;
delays in recruiting suitable subjects to participate in a trial;
delays in having subjects complete participation in a trial or return for post‑treatment follow‑up;
delays caused by subjects dropping out of a trial due to side effects or disease progression;
delays in adding new investigators and clinical trial sites;
withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials; or
changes in government regulations or administrative actions or lack of adequate funding to continue the clinical trials.
Any inability by us or our partners to timely complete clinical development could result in additional costs to us relating to product development and obtaining marketing approval and impair our ability to generate product revenues and commercialization and sales milestone payments and royalties on product sales. For example, the National Institutes of Health discontinued a Phase 2 trial for CERC-501 for treatment-resistant depression, which was funded by the National Institute of Mental Health, due to slow study progression.
If we are unable to enroll appropriate subjects in clinical trials, we will be unable to complete these trials on a timely basis or at all.
Identifying and qualifying subjects to participate in clinical trials of our product candidates is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit appropriate subjects to participate in testing our product candidates as well as completion of required follow‑up periods. If subjects are unwilling to participate in our trials, because of negative publicity from adverse events in the biotechnology industry or for other reasons, including competitive clinical trials for similar subject populations, the timeline for recruiting subjects, conducting trials and obtaining marketing approval of potential products may be delayed. For example, we have experienced delays in enrolling patients in our CERC-301 Phase 2 clinical trial, due in part we believe to the highly competitive environment for recruiting patients to clinical trials studying depression. In addition, we believe the decision by the National Institutes of Health to discontinue a Phase 2 trial for CERC-501 was due in part to difficulties experienced in enrolling patients into the trial.
Difficulty or delays in patient recruitment into our trials could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether. Many factors affect subject enrollment, including:
the size and nature of the subject population;
the number and location of clinical sites we enroll;
the proximity of subjects to clinical sites;
perceived risks and benefits of the product candidate under trial;
competition with other companies for clinical sites or subjects;
competing clinical trials;
the eligibility and exclusion criteria for the trial;
the design of the clinical trial;
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effectiveness of publicity for the clinical trials;
inability to obtain and maintain subject consents;
ability to monitor subjects adequately during and after the administration of the product candidate and the ability of subjects to comply with the clinical trial requirements;
risk that enrolled subjects will drop out or be withdrawn before completion; and
clinicians’ and subjects’ perceptions as to the potential advantages of the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating.
There is significant competition for recruiting subjects in clinical trials for product candidates for the treatment of depression, substance useneurological disorders and impaired executive function, and we or our partners may be unable to enroll the subjects we need to complete clinical trials on a timely basis or at all. Furthermore, we rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials, and while we have agreements governing their committed activities,
we have limited influence over their actual performance. If we are unable to enroll sufficient subjects in our clinical trials, if enrollment is slower than we anticipate, or if our clinical trials require more subjects than we anticipate, our clinical trials may be delayed or maymight not be completed. If we experience delays in our clinical trials, the commercial prospects of our product candidates will be harmed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues. In addition, many of the factors that could cause a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our lead product candidates or our other product candidates.
We may face significant delays in our clinical studies and trials due to an inability to recruit patients for our clinical studies and trials or to retain patients in the clinical studies and trials we may perform.
We may not be able to locate and enroll enough eligible patients to participate in these trials as required by the FDA, the European Medicines Agency (“EMA “) or similar regulatory authorities outside the United States and the European Union. This may result in our failure to initiate or continue clinical trials for our product candidates or may cause us to abandon one or more clinical trials altogether. In particular, because several of our programs are focused on the treatment of patients with rare, orphan or ultra‑orphan diseases, our ability to enroll eligible patients in these trials may be limited or slower than we anticipate in light of the small patient populations involved and the specific age range required for treatment eligibility in some indications. In addition, our potential competitors, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions and governmental agencies and public and private research institutions, may seek to develop competing therapies, which would further limit the small patient pool available for our studies.
Completion of orphan clinical trials may take considerably more time than other trials, sometimes years, depending on factors such as type, complexity, novelty and intended use of a product candidate. As a result of the uncertainties described above, there can be no assurance that we will meet timelines that we establish for any of our clinical trials.
We may in the future conduct clinical trials for certain of our product candidates at sites outside the United States, and the FDA maymight not accept data from trials conducted in such locations.
We may in the future choose to conduct one or more of our clinical trials outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, the clinical trial must be well designed and conducted and performed by qualified investigators in accordance with ethical principles and current Good Clinical Practice, or GCPs. The trial population must also adequately represent the United StatesU.S. population, and the data must be applicable to the United StatesU.S. population and United States medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical trials conducted outside of the United States must be representative of the population for whom we intend to seek approval in the United States. In addition, while these clinical trials are subject to the applicable local laws, FDA acceptance of the data will be dependent upon its determination that the trials also complied with all applicable United StatesU.S. laws and regulations. There can be no assurance that the FDA will accept data from trials conducted outside of the United States. If the FDA does not accept the data from any of our clinical trials that we determine to conduct outside the United States, it would likely result in the need for additional trials, which would be costly and time‑consuming and delay or permanently halt our development of the product candidate.
We may fail to successfully identify, in‑in‑license, acquire, develop or commercialize potential product candidates.
The success of our business depends in part upon our ability to identify and validate new therapeutic targets and identify, develop and commercialize therapeutics, which we may develop ourselves, in‑license or acquire from others. Research programs
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designed to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Our research efforts may initially show promise in identifying potential therapeutic targets or candidates, yet fail to yield product candidates for clinical development for a number of reasons, including:
Additionally, we may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful. If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business, operating results and prospects and could potentially cause us to cease operations.
We maymight not be successful in our efforts to leverage and expand our COMTi platform to build a pipeline of product candidates or to develop and commercialize our preclinical product candidates, CERC-406 and CERC-611.candidates.
The marketing approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time‑time‑consuming, costly and inherently unpredictable. Our inability to obtain regulatory approval for our product candidates would substantially harm our business.
The time required to obtain approval to market new drugs by the FDA and comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the substantial discretion of the regulatory authorities. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any future product candidates will ever obtain regulatory approval. Moreover, the filing of an NDA for products that have not been granted Orphan Drug Designation requires a payment of a significant NDA userapplication fee under the Prescription Drug User Fee Act (“PDUFA”) upon submission. Any subsequent clinical data submissions to the NDA (i.e. for new indications) are also assessed an NDA application fee. The filing of an NDA for our product candidates may be delayed due to our lack of financial resources to pay such user fee.
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Our product candidates could fail to receive regulatory approval from the FDA or a comparable foreign regulatory authority for many reasons, including:
the FDA or comparable foreign regulatory authorities may disagree on the design or implementation of our clinical trials, including the methodology used in our trial, our chosen endpoints, our statistical analysis, or our proposed product indication. For instance, the FDA may find that the designs that we are utilizing in our planned Phase 2/3 clinical trial of CERC‑501 dodoes not support an adequate and well‑controlled study. The FDA also maymight not agree with the various depression and other disease scales and evaluation tools that we may use in our clinical trials to assess the efficacy of our product candidates. Further, the FDA maymight not agree with our endpoints and/or indications selected for our trials;
development programs;
the FDA or comparable foreign regulatory authorities may disagree with our development plans for our product candidates. For instance, at this time we have not yet discussed our development plans for CERC‑501, CERC-611 or CERC‑406 with the FDA. While we plan to discuss the development of these product candidates with the FDA, the FDA may not agree with our current development approach;candidates;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical trials;
data collected from clinical trials of our product candidates may be insufficient to support the submission and filing of an NDA, other submission or to obtain marketing approval. For example, theapproval, and FDA may require additional studies to show that our product candidates are safe or effective;
there may be changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.
The FDA or comparable foreign regulatory authority may require more information, including additional preclinical or clinical datastudies to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. This lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain approval to market our product candidates, which would significantly harm our business, results of operations and prospects. In addition, even if we were to obtain approval, regulatory authorities may approve any or all of our product candidates for fewer or more limited indications than we request, including more limited patient populations, may require that contraindications, warnings or precautions be included in the product labeling, including a black‑boxedbox warning, may grant approval contingent on the performancewith a requirement of costly post‑marketing clinical trials or other post‑market requirements, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
As appropriate, we intend to seek all available periods of regulatory exclusivity for our product candidates. However, there is no guarantee that we will be granted these periods of regulatory exclusivity or that we will be able to maintain these periods of exclusivity.
The FDA grants product sponsors certain periods of regulatory exclusivity, during which the agency maymight not approve, and in certain instances, maymight not accept, certain marketing applications for competing drugs. For example, product sponsors may be eligible for five years of exclusivity from the date of approval of a new chemical entity, seven years of exclusivity for drugs that are designated to be orphan drugs, and/or a six‑month period of exclusivity added to any existing exclusivity period or patent life for the submission of FDA requested pediatric data. While we intend to apply for all periods of market exclusivity that we may be eligible for, there is no guarantee that we will receive all such periods of market exclusivity. Additionally, under certain circumstances, the FDA may revoke the period of market exclusivity. Thus,As a result, there is no guarantee that we will be able to maintain a period of market exclusivity, even if granted. Moreover, we have not sought to obtain orphan drug designation for any of our product candidates, which the FDA must first grant to be eligible for orphan drug exclusivity, but may if we determine that we may be eligible. In the case of orphan designation, other benefits, such as tax credits and exemption from user fees may be available. If we are not able to obtain or
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maintain orphan drug designation or any period of market exclusivity to which we may be entitled, we will be materially harmed, as we will potentially be subject to greater market competition and may lose the benefits associated with programs.
Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their marketing approval, limit the commercial profile of an approved label, or result in significant negative consequences following any marketing approval.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trialsissue a Clinical Hold and could result in a more restrictive label or the delay or denial of marketing approval by the FDA or other comparable foreign regulatory authority. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Although CERC-301 was generally well tolerated in our recently completed Phase 2 clinical trial for MDD, with no serious adverse events reported and no discontinuations due to adverse events, some adverse events were reported. The most commonly reported adverse events in the trial were increases in blood pressure, dizziness, somnolence and paresthesia. Similarly, although in our previously completed Phase 2 clinical study, Clin301‑201, CERC‑301 was generally well tolerated, there were rates of adverse events similar to that of placebo. The most common treatment emergent adverse events were nervous system disorders, occurring in 25.9% and 26.9%, respectively, of subjects in the two active treatment sequences compared to 22.4% of subjects who received placebo during the entire study. Of the nervous system treatment emergent adverse events, dizziness was most common, occurring in 18.5% and 7.7%, respectively, of subjects in the two active treatment sequences compared to 2.0% of subjects who received placebo during the entire study. Four serious adverse events in three subjects were reported during the conduct of the study, two in a subject randomized to placebo (suicide attempt; alcoholism) and two in subjects that received CERC‑301 (worsening depression with psychotic features and unstable angina). Overall, the adverse events observed in both our most recent and prior studies were generally consistent with the prior clinical trials conducted for CERC‑301, despite having administered an increased dose of CERC-301 in our most recent study. Although CERC-501 was also generally well tolerated in our recently completed Phase 2 clinical trial for smoking cessation, with no serious adverse events reported and no discontinuations due to adverse events, some adverse events were reported. The most commonly reported adverse events, over 5% and greater than placebo in the study, were diarrhea and decreased appetite.
Should our clinical studies of our product candidates reveal undesirable side effects, we could suspend or terminate our trials or the FDA or comparable foreign regulatory authorities as well as IRBs could order us to suspend or cease clinical trials. The FDA or comparable regulatory authorities could also deny approval of our product candidates for any or all targeted indications or only for a limited indication or patient population or could require label warnings, contraindications or precautions, including black box warnings, post‑market studies, testing and surveillance programs or other conditions including distribution restrictions or other risk management mechanisms under a costly risk evaluation and mitigation strategy or REMS.(“REMS”). Drug‑related side effects could affect subject recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.
Additionally, if one or more of our product candidates receives marketing approval, and we or others (regulatory agencies, consumers, etc.) later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
regulatory authorities may withdraw approvals of such product;
regulatory authorities may require additional warnings on the label or other label modifications;
the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;
the FDA may require the establishment or modification of a REMS or other restrictions on marketing and distribution, or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, require us to issue a medication guide outlining the risks of such side effects for distribution to patients or restrict distribution of our products and impose burdensome implementation requirements on us;
regulatory authorities may require that we conduct post‑marketing studies; and
patients.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate or otherwise materially harm the commercial prospects for the product candidate, if approved, and could significantly harm our business, financial condition, results of operations and prospects.
Changes in product candidate manufacturing or formulation may result in additional costs or delay.
As product candidates are developed through preclinical studies to late‑stage clinical trials towards regulatory approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods and formulation, are altered in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. Such changes may also require additional testing, FDA notification or FDA approval.
Similarly, changes in the location of manufacturing or addition of manufacturing facilities may increase our costs and require additional studies and FDA approval. This may require us to ensure that the new facility meets all applicable regulatory requirements,
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is adequately validated and qualified, and to conduct additional studies of product candidates manufactured at the new location. Any of the above could delay completion of clinical trials, require the conduct of bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay regulatory approval of our product candidates and jeopardize our ability to commence product sales and generate revenue.
Even if we complete the necessary clinical trials, we cannot predict when or if we will obtain marketing approval to commercialize a product candidate or the approval may be for a more narrownarrower indication than we expect.
We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate. Even if our product candidates demonstrate safety and efficacy in clinical trials, the regulatory agencies maymight not complete their review processes in a timely manner, or we maymight not be able to obtain marketing approval from the relevant regulatory agencies. Additional delays may result if the FDA, an FDA Advisory Committee or other regulatory authority recommends non‑approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical trials and the review process. Regulatory authorities also may approve a product candidate for fewer or more limited indications than requested, may impose significant limitations in the form of narrow indications, warnings, including black‑box warnings, precautions or contra‑indications with respect to conditions of use or may grant approval subject to the performance of costly post‑marketing clinical trials or other post‑marketing requirements, including a REMS. In addition, regulatory agencies maymight not approve the labeling claims that are necessary or
desirable for the successful commercialization of our product candidates. For instance, in 2007, the FDA requested that makers of all antidepressant medications update an existing black‑box warning about an increased risk of suicidal thought and behavior. Our drugs, if approved, may be required to carry warnings comparable to this and other class‑wide warnings. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates.
Even if we were to obtain approval for our product candidates with the Rare Pediatric Disease Designation, the Rare Pediatric Disease Priority Review Voucher Program may no longer be in effect at the time of such approval or we might not be able to capture the value of the Rare Pediatric Disease Priority Review Voucher Program.
Rare pediatric disease designation by the FDA is granted in the case of serious or life‑threatening diseases affecting fewer than 200,000 people in the United States in which the serious or life‑threatening manifestations are primarily in individuals 18 years of age and younger. The designation provides regulatory incentives for companies to develop and market therapies that treat these conditions. The sponsor of a drug for a rare pediatric disease may be eligible for a priority review voucher upon approval of the drug that can be used to obtain a priority review of a subsequent marketing application. The priority review voucher may be sold or transferred an unlimited number of times. Congress has extended the priority review voucher program until September 30, 2020 with new drug approvals that meet the voucher criteria grandfathered through 2022. This program has been subject to criticism, including by the FDA, and it is possible that even if we obtain approval for some of our product candidates and qualify for such a priority review voucher, the program may no longer be in effect at the time of approval. Also, although priority review vouchers may be sold or transferred to third parties, there is no guaranty that we will be able to realize any value if we were to sell a priority review voucher.
Even if we were able to commercialize our products focused on rare orphan diseases, product sales of these products might not justify the cost of development.
Because of the small patient population for a rare orphan disease, if pricing is not approved or accepted in the market at an appropriate level for an approved therapeutic product with orphan drug designation, such drug may not generate enough revenue to offset costs of development, manufacturing, marketing, and commercialization despite any benefits received from the rare orphan drug designation, such as market exclusivity, assistance in clinical trial design, or a reduction in user fees or tax credits related to development expense. Furthermore, our estimates regarding potential market size for any rare indication may be materially different from what we discover to exist at the time we commence commercialization, if any, for a therapeutic product, which could result in significant changes in our business plan and have a material adverse effect on our business, financial condition, results of operations, and prospects.
Once commercialized, some of our products may face significant competition from non‑prescription competition and consumer substitution, and our operating results will suffer if we fail to compete effectively.
We may be subject to non‑prescription competition and consumer substitution for certain of our pipeline assets. For example, the three preclinical therapies in our pediatric orphan rare disease pipeline, CERC‑801, CERC‑802 and CERC‑803, are ultra‑pure formulations of D‑galactose, D‑mannose and L‑fucose, respectively. These formulations are naturally occurring substances contained in various foods, including dairy products and fruit. Additionally, these formulations, particularly D‑mannose, are also marketed by others as non‑prescription dietary supplements. Once approved by the FDA and commercially available, we cannot be sure physicians will view the pharmaceutical grade purity and tested safety of CERC‑801, CERC‑802 or CERC‑803 as having a superior therapeutic
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profile to the naturally occurring formulations and dietary supplements. In addition, to the extent the net price of CERC‑801, CERC‑802 or CERC‑803, after insurance and offered discounts, is significantly higher than the prices of commercially available formulations marketed by other companies as dietary supplements (through that lack of coverage by insurers or otherwise), physicians and pharmacists may recommend these commercial alternatives instead of writing or filling prescriptions for CERC‑801, CERC‑802 or CERC‑803, or patients may elect on their own to take commercially available supplements. Either of these outcomes may adversely impact our results of operations by limiting how we price our product and limiting the revenue we receive from the sale of CERC‑801, CERC‑802 and CERC‑803 due to reduced market acceptance.
Even if our product candidates receive marketing approval, we will still be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions and market withdrawal and we may be subject to administrative sanctions or penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.
Even if we obtain marketing approval for a product candidate, we would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and annual reporting of safety and other post‑market information. The FDA and comparable foreign regulatory authorities will continue to closely monitor the safety profile of any product even after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of any of our product candidates, they may withdraw approval, require labeling changes or establishment of a REMS or similar strategy, impose significant restrictions on a product’s indicated uses or marketing, or impose ongoing requirements for potentially costly post‑approval studies or post‑market surveillance. In addition, any marketing approvals that we obtain for our product candidates may be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval or contain requirements for potentially costly post‑marketing testing and other requirements, including Phase 4 clinical trials, imposition of a REMS and surveillance to monitor the safety and efficacy of the product candidate. For example, during a meeting with the FDA regarding CERC‑301, the FDA noted that it does not currently accept the explicit labeling claim of a rapid‑acting antidepressant, or RAAD, and indicated that we may therefore be subject to limitations on our ability to label and promote the product as a RAAD if it is approved.
In addition, manufacturers of drug products and their facilities, including contracted facilities, are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practice, or GMP,cGMP regulations and standards. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, we may be subject to reporting obligations and a regulatory agency may impose restrictions on that product, the manufacturing facility, or us, or our suppliers, including requesting recalls or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates, our contractors, the manufacturing facilities for our product candidates or others working on our behalf fail to comply with applicable regulatory requirements, either before or after marketing approval, a regulatory agency may:
issue Warning Letters or Untitled Letters;
mandate modifications to promotional materials or labeling, or require us to provide corrective information to healthcare practitioners;
require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
seek an injunction or impose civil or criminal penalties or monetary fines, restitution or disgorgement, as well as imprisonment;
suspend or withdraw marketing approval;
suspend or terminate any ongoing clinical studies;
refuse to approve pending applications or supplements to applications filed by us;
debar us from submitting marketing applications, exclude us from participation in federal healthcare programs, require a corporate integrity agreement or deferred prosecution agreements, debar us from government contracts and refuse future orders under existing contracts;
suspend or impose restrictions on operations, including restrictions on marketing, distribution or manufacturing of the product, or the imposition of costly new manufacturing requirements or use of alternative suppliers; or
seize or detain products, refuse to permit the import or export of products, or request that we initiate a product recall.
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The occurrence of any event or penalty described above may inhibit our ability to continue our development programs, commercialize our products and generate revenue.
Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress and the public. While the FDA does not restrict physicians from prescribing approved drugs for uses outside of the drugs’ approved labeling, known as off‑label use, pharmaceutical manufacturers are strictly prohibited from promoting and marketing their products for such uses. Violations, including promotion of our products for off‑label uses, are subject to enforcement letters, inquiries, investigations, civil and criminal sanctions by the government, corporate integrity agreements, deferred prosecution agreements, debarment from government contracts and refusal of future orders under existing contracts, and exclusion from participation in federal healthcare programs. Additionally, comparable foreign regulatory authorities will heavily scrutinize advertising and promotion of any product candidate that obtains approval outside of the United States.
In the United States, engaging in the impermissible promotion of our products for off‑label uses can also subject us to false claims litigation under federal and state statutes, which can lead to civil and criminal penalties and fines, debarment from government contracts and refusal of future orders under existing contracts, deferred prosecution agreements, and corporate integrity agreements with governmental authorities that materially restrict the manner in which a company promotes or distributes drug products. These false claims statutes include the federal civil False Claims Act, which allows any individual to bring a lawsuit against a pharmaceutical company on behalf of the federal government alleging submission of false or fraudulent claims, or causing to present such false or fraudulent claims, for payment by a federal program such as Medicare or Medicaid. If the government decides to intervene and prevails in the lawsuit, the individual will share in any fines or settlement funds. If the government does not intervene, the individual may proceed on his or her own. Since 2004, these False Claims Act lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements, such as settlements regarding certain sales practices promoting off‑label drug uses involving fines that are as much as $3.0 billion. This growth in litigation has increased the risk that a pharmaceutical company will have to defend a false claim action, pay settlement fines or restitution, agree to comply with burdensome reporting and compliance obligations, and be excluded from Medicare, Medicaid and other federal and state healthcare programs. If we do not lawfully promote our approved products, we may become subject to such litigation and, if we do not successfully defend against such actions, those actions may have a material adverse effect on our business, financial condition, results of operations and prospects.
The FDA’s policies may change, and additional government regulations may be enacted that could prevent, limit or delay marketing approval, and the sale and promotion of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained, which would adversely affect our business, prospects and ability to achieve or sustain profitability.
If we are unable to, or are delayed in obtaining state regulatory licenses for the distribution of our products, we would not be able to sell our product candidates in such states.
The majority of states require manufacturer and/or wholesaler licenses for the sale and distribution of drugs into that state. The application process is complicated, time consuming, costly and requires dedicated personnel or a third party to oversee and manage. If we are delayed in obtaining these state licenses, or denied the licenses, even with FDA approval, we would not be able to sell or ship product into that state which would adversely affect our sales and revenues.
If any of our product candidates are ultimately regulated as controlled substances, we, our contract manufacturers, as well as distributors, prescribers, and dispensers will be required to comply with additional regulatory requirements which could delay the marketing of our product candidates, and increase the cost and burden of manufacturing, distributing, dispensing, and prescribing our product candidates.
Before we can commercialize our product candidates, the United States Drug Enforcement Administration, or DEA, may need to determine the controlled substance Schedule, taking into account the recommendation of the FDA. This may be a
lengthy process that could delay our marketing of a product candidate and could potentially diminish any regulatory exclusivity periods for which we may be eligible. While we currently do not know whether any of our product candidates will be considered to be controlled substances, certain of our product candidates may be regulated as controlled substances.
If any of our product candidates are regulated as controlled substances, depending on the controlled substance schedule in which the product candidates are placed, we, our contract manufacturers, and any distributers, prescribers, and dispensers of the scheduled product candidates may be subject to significant regulatory requirements, such as registration, security, recordkeeping,
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reporting, storage, distribution, importation, exportation, inventory, quota and other requirements administered by the DEA. Moreover, if any of our product candidates are regulated as controlled substances, we and our contract manufacturers would be subject to initial and periodic DEA inspection. If we or our contract manufacturers are not able to obtain or maintain any necessary DEA registrations, we maymight not be able to commercialize any product candidates that are deemed to be controlled substances or we may need to find alternative contract manufacturers, which would take time and cause us to incur additional costs, delaying or limit our commercialization efforts.
Because of their restrictive nature, these laws and regulations could limit commercialization of our product candidates, should they be deemed to contain controlled substances. Failure to comply with the applicable controlled substance laws and regulations can also result in administrative, civil or criminal enforcement. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate administrative proceedings to revoke those registrations. In some circumstances, violations could result in criminal proceedings or consent decrees. Individual states also independently regulate controlled substances.
Our failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our product candidates outside the United States, which would limit our market opportunities and adversely affect our business.
In order to market and sell our products in other jurisdictions, we must obtain separate marketing approvals and comply with numerous and varying regulatory requirements. The approval procedure varies among countries and can involve additional testing. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. In addition, in many countries outside the United States, we must secure product reimbursement approvals before regulatory authorities will approve the product for sale in that country. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our products in certain countries. Further, clinical trials conducted in one country maymight not be accepted by regulatory authorities in other countries. If we fail to comply with the regulatory requirements in international markets and receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product candidates will be harmed and our business will be adversely affected. We maymight not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions. Approval by one regulatory authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. Also, regulatory approval for any of our product candidates may be withdrawn. However, the failure to obtain approval in one jurisdiction may negatively impact our ability to obtain approval in another jurisdiction. Our failure to obtain approval of any of our product candidates by regulatory authorities in another country may significantly diminish the commercial prospects of that product candidate and our business prospects could decline.
If we obtain approval to commercialize our product candidates outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
If any of our product candidates are approved for commercialization, we may enter into agreements with third parties to market them on a worldwide basis or in more limited geographical regions. We expect that we will be subject to additional risks related to entering into international business relationships, including:
different regulatory requirements for approval of drugs in foreign countries;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;
foreign reimbursement, pricing and insurance regimes;
unexpected changes in tariffs, trade barriers and regulatory requirements;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
foreign taxes;
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difficulties staffing and managing foreign operations;
workforce uncertainty in countries where labor unrest is more common than in the United States;
potential liability under the Foreign Corrupt Practices Act of 1977FCPA or comparable foreign regulations;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.
These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.
We face substantial competition and rapid technological change and the possibility that others may discover, develop or commercialize products before or more successfully than us.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We face competition with respect to our current product candidates and will face competition with respect to any future product candidates from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Many of our competitors have significantly greater financial, technical and human resources. Smaller and early‑stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.
Our competitors may obtain marketing approval of their products more rapidly than we may or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more convenient, more widely used and less costly or have a better safety profile than our products and these competitors may also be more successful than us in manufacturing and marketing their products.
Our competitors will also compete with us in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
There are numerous currently approved therapies for treating depressionthe pediatric conditions our products address and, consequently, competition in the depression marketthese markets is intense. Many of these approved drugs are well established therapies or products and are widely accepted by physicians, patients and third third‑party payors. Some of these drugs are branded and subject to patent protection and non-patentnon‑patent regulatory exclusivity, and others are available on a generic basis. For example, CERC 301 would compete with drugs used as adjunctive therapies for the treatment of MDD such asAbilify, marketed by Otsuka America Pharmaceutical, Inc.; Seroquel XR, marketed by AstraZeneca Pharmaceuticals LP, or AstraZeneca; and bupropion, a generic drug. In addition, to our knowledge, there are five competitive rapid onset antidepressant or anti‑suicide programs in development: esketamine, which is in Phase 3 development by Johnson & Johnson, or J&J, and is being developed to be administered as a nasal spray; AZD8108, which is in Phase 1 development by AstraZeneca and is being developed to be administered orally; Rapastinel, which has completed Phase 2 development by Allergan Plc., or Allergan, which is being developed to be administered intravenously; NRX 1074 by Allergan has completed a single intravenously administered dose Phase 2 study, which, along with oral and intravenous Phase 1 pharmacokinetic, or PK, findings, will be used to select an oral dose for a repeat‑dose Phase 2 study; AV-101, an oral prodrug of 7-chlorokynurenic acid, is in Phase 2 development by VistaGen Therapeutics; and ALKS‑5461, which is in Phase 3 development by Alkermes plc, or Alkermes, and is being developed to be administered orally as an adjunctive therapy and has shown signals of rapid onset as an adjunctive therapy. With respect to CERC‑501, to our knowledge, there are no approved pharmacologic treatments for co‑occurring disorders, however, there are two competitive programs in development: ALKS 5461, which is believed to be acting as a functional KOR antagonist that is now in Phase 3
Insurers and other third‑party payors may also encourage the use of generic products or specific branded products. We expect that any orof our product candidates, if approved, would be priced at a significant premium over competitive generic, including branded generic, products. In addition,products, but, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. This may make it difficult for us to differentiate our product from currently approved therapies, which may adversely impact our business strategy. If we are not able to compete effectively against our current and future competitors, our business will not grow, and our financial condition and operations will suffer. Moreover, many other companies are developing new therapeutics, and we cannot predict what the standard of care will be as our product candidates progress through clinical development.
Even if our product candidates have or receive marketing approval, they maymight not gain adequate market acceptance among physicians, patients and others in the medical community. Our commercial success also depends on coverage and adequate reimbursement of our product candidates by third‑party payors, including government payors, generally, which may be difficult or time‑consuming to obtain, may be limited in scope or maymight not be obtained in all jurisdictions in which we may seek
to market our products. The degree of market acceptance of any of our approved product candidates will depend on a number of factors, including:
the efficacy and safety profile of our product candidates, including relative to marketed products and product candidates in development by third parties;
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prevalence and severity of any side effects of our product candidates;
relative convenience and ease of administration of our product candidates;
cost effectiveness of our product candidates;
the claims we may make for our product candidates based on the approved label or any restrictions placed upon our marketing and distribution of our product candidates;
the time it takes for our product candidates to complete clinical development and receive marketing approval;
how quickly and effectively we alone, or with a partner, can market, launch, and launchdistribute any of our product candidates that receive marketing approval;
the ability to commercialize any of our product candidates that receive marketing approval;
the price of our products, including in comparison to branded or generic competitors;competitors and relative to alternative treatments;
potential or perceived advantages of disadvantages over alternative treatments;
the ability to collaborate with others in the development and commercialization of new products;
whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;
the ability to establish, maintain and protect intellectual property rights related to our product candidates;
the entry of generic versions of our products onto the market;
the number of products in the same therapeutic class as our product candidates;
the effect of current and future healthcare laws on our drug candidates;
the ability to secure favorable managed care formulary positions, including federal healthcare program formularies;
the ability to manufacture commercial quantities of any of our product candidates that receive marketing approval; and
acceptance of any of our product candidates that receive marketing approval by physicians and other healthcare providers.providers; and
potential post‑marketing commitments imposed on regulatory authorities, such as patient registries.
If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, third‑party payors and patients, we maymight not generate or derive sufficient revenue from that product candidate and maymight not become or remain profitable.
Even if we commercialize any of our product candidates, these products may become subject to unfavorable third‑third‑party coverage and reimbursement policies, healthcare reform initiatives, or pricing regulations, any of which could negatively impact our business.
Our ability to commercialize any products successfully will depend in part on the extent to which coverage and adequate reimbursement for these products will be available from government authorities, (such as Medicare and Medicaid), private health insurers, health maintenance organizations and other entities. These third‑party payors determine which medications they will cover and establish reimbursement levels, and increasingly attempt to control costs by limiting coverage and the amount of reimbursement for particular medications. Several third‑party payors are requiring that drug companies provide them with predetermined discounts from list prices, are using preferred drug lists to leverage greater discounts in competitive classes and are challenging the prices charged for drugs. In addition, federal programs impose penalties on drug manufacturers in the form of mandatory additional rebates and/or discounts if commercial
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prices increase at a rate greater than the Consumer Price Index‑Urban, and these rebates and/or discounts, which can be substantial, may impact our ability to raise commercial prices. We cannot be sure that coverage and reimbursement will be available for any product that we commercialize and, if coverage is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain marketing approval. If coverage and reimbursement
are not available or available only to limited levels, we maymight not successfully commercialize any product candidate for which we obtain marketing approval.
There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates for a drug may vary according to the clinical setting in which it is used and may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Prices paid for a drug also vary depending on the class of trade. Prices charged to government customers are subject to price controls and private institutions obtain discounts through group purchasing organizations. Net prices for drugs may be further reduced by mandatory discounts or rebates required by government healthcare programs and demanded by private payors, and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Our inability to promptly obtain coverage and profitable reimbursement rates from both government‑funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
Moreover, the regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay our commercial launch of the product, possibly for lengthy time periods, which could negatively impact the revenues we generate from the sale of the product in that particular country. Adverse pricing limitations may hinder our ability to recoup our investment in one or more product candidates even if our product candidates obtain marketing approval.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications maymight not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
Our current revenue depends on one product; so if we do not grow sales of that product, our revenue might not grow, which could affect our stock price.
Following the sale of our Pediatric Portfolio, we currently have rights to only one commercial pharmaceutical product, Millipred. We do not expect Millipred to generate significant revenue and profits, but we currently rely on it for all our commercial revenue. Our ability to increase revenue in the future will depend on commercializing it successfully, as well as developing and commercializing our current pipeline of product candidates. Any failure to do so could require us to raise additional financing, and could negatively impact our stock price.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.
an annual, nondeductible fee payable by any entity that manufactures or constrain the growth of healthcare spending, enhance remedies against healthcare fraudimports specified branded prescription drugs and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose additional health policy reforms. Among other things, the Affordable Care Act:biologic agents;
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revised the definition of “average manufacturer price,” or AMP, for reporting purposes, which can increase the amount of Medicaid drug rebates manufacturers are required to pay to states, and created a separate AMP for certain categories of drugs provided in non‑retailnon-retail outpatient settings;
a new methodology by which rebates owed by manufacturers under the required 340B discounts to increase;Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
extension of manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expansion of eligibility criteria for Medicaid programs in certain states;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
a new requirement to annually report drug samples that manufacturers and distributors provide to physicians;
a new Patient Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and
enacted substantial new provisions affecting compliance which may affect our business practices with healthcare practitioners.
Further, the Congress and the White House have continued to repealpursue additional legislative and regulatory objectives intended to reduce the cost to federal healthcare programs for pharmaceuticals. For instance, the Know the Lowest Price Act of 2019 became effective on January 1, 2020 and blocks Medicare Advantage plan providers or reformproviders of a Medicare Part D prescription drug plan from using gag clauses that prohibit pharmacists from alerting Medicare customers of differences between their insurance copay and what the Affordable Care Act. However, if the new law is maintained in its current form, it appears likely that itpatient would continue the downward pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.
pay without using health insurance coverage. In addition, other legislative changesthere have been several Congressional inquiries and proposed federal and adopted since the Affordable Care Act was enacted. For example, in August 2011, the President signed into law the Budget Control Act of 2011, which,state legislation designed to, among other things, createdbring more transparency to drug pricing, review the Joint Select Committee on Deficit Reductionrelationship between pricing and manufacturer patient programs, reduce the out of pocket cost of prescription drugs, and reform government program reimbursement methodologies and rebate programs for drugs. In October 2019, for example, the U.S. House of Representatives unanimously passed two pieces of legislation intended to recommendincrease transparency related to Congress proposalsrebates and other price concessions granted to pharmacy benefit managers (“PBMs”) by drug makers. Although this legislation has not been passed into law and was fairly narrow in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reductionscope, the unanimous vote demonstrated the growing bipartisan support to reform the drug rebate system and contain or reduce the costs of at least $1.2 trillionpharmaceuticals for the federal government. Similarly, the Trump administration’s budget proposal for fiscal years 2012 through 2021, triggering the legislation’s automatic reduction toyear 2020 contains several government programs. This includes aggregate reductionsmeasures related to Medicare paymentsParts B and D, Medicaid, and the 340B discount drug program that are intended to providersreduce prescription drug prices by increasing competition, incentivizing lower prices, and reducing out-of-pocket costs for beneficiaries. Although these and other proposals would require additional legislation and/or regulations to become effective, Congress and the White House have each indicated that they will continue to seek new legislative and/or regulatory measures to control drug costs.
At the state level, legislatures have become increasingly aggressive in passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to
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encourage importation from other countries and bulk purchasing. There are presently nearly 130 individual pieces of legislation under consideration at the state level designed to lower the cost of prescription drugs. For instance, legislative and regulatory proposals have been made at the state level in certain states to expand post approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, whether the current regulations, guidance or interpretations will be changed, or what the impact of such changes on April 1, 2013.
our business, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post marketing testing and other requirements.
We expect that the Affordable Care Act, as well as otheradditional state and federal healthcare reform measures that have and maywill be adopted in the future, mayany of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in more rigorous coverage criteriareduced demand for our product candidates or additional pricing pressures. These, and in additional downward pressureother statutory and regulatory burdens may also increase our compliance and operating costs. We continue to evaluate the effect of healthcare reform on the price that we receive for any approved product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our products.
business.
Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop.related to the commercial sale of our products. Product liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. For example, we may be sued if any product we developsell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against claims that our product candidates or products that we may develop caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:
decreased demand for any product candidates or products that we may develop;
termination of clinical trial sites or entire trial programs;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigation;
substantial monetary awards to trial subjects or patients;
loss of revenue;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
diversion of management and scientific resources from our business operations;
the inability to commercialize any products that we may develop; and
a decline in our stock price.
We currently hold $10.0 million inproduct and clinical trial liability insurance coverage, which maybut it might not adequately cover all liabilities that we may incur. We maymight not be able to maintain clinical trial insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. We intend to expand ouralso maintain insurance coverage for our commercially available products, which might not adequately cover all liabilities that we may incur. We might not be able to include the sale of commercial products if we obtain marketing approvalmaintain insurance coverage for our product candidatesapproved products at a reasonable cost or in development, but wean amount adequate to satisfy any liability that may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing.arise. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, whether or not successful, but particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our reputation and business.
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Our relationships with commercial and government customers, healthcare providers, and third‑party payors and others will beare subject to applicable anti‑kickback,anti-kickback, fraud and abuse, transparency and other healthcare related laws, regulations and requirements, which could expose us to criminal sanctions, civil penalties, exclusion from participation in federal healthcare programs, contractual damages and consequences, reputational harm, administrative burdens and diminished profits and future earnings.
Actions resulting in violations of these laws regulations, and requirements may result in civil and criminal liability, damages and restitution, as well as exclusion from participation in federal healthcare programs, corporate integrity agreements, deferred prosecution agreements, debarment from government contracts and grants and refusal of future orders under existing contracts or contractual damages, and other consequences. Restrictions under applicable federal and state healthcare related laws and regulations, include the following:
the federal Anti‑Anti Kickback Statute prohibits persons from, among other things, knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, the referral of an individual for the furnishing or arranging for the furnishing, or the purchase, lease or order, or arranging for or recommending purchase, lease or order, of any good or service for which payment may be made under a federal healthcare program such as Medicare and Medicaid;
program;
the civil federal False Claims Act imposes civil penalties, including through civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent; knowingly making, using or causing to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government; conspiring to defraud the government by getting a false or fraudulent claim paid or approved by the government; or knowingly making, using or causing to be made or used a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government. Civil False Claims Act liability may be imposed for Medicare or Medicaid overpayments, for example, overpayments caused by understated rebate amounts, that are not refunded within 60 days of discovering the overpayment, even if the overpayment was not cause by a false or fraudulent act;
government;
the criminal federal False Claims Act imposes criminal fines or imprisonment against individuals or entities who willfully make or present a claim to the government knowing such claim to be false, fictitious or fraudulent;
the Veterans Health Care Act (“VHCA”) requires manufacturers of covered drugs to offer them for sale on the Federal Supply Schedule, which requires compliance with applicable federal procurement laws and regulations and subjectssubject us to contractual remedies as well as administrative, civil and criminal sanctions;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”) and its implementing regulations, also imposes obligations on certain covered entity health care providers, health plans, and health care clearinghouses as well as their business associates that perform certain services involving individually identifiable health information, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information, as well as directly applicable privacy and security standards and requirements;requirements
the civil monetary penalties statute imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent;
the federal Physician Sunshine Act, created under Section 6002 of the Affordable Care ActACA and its implementing regulations, requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the Centers for
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Medicare and Medicaid Services, or CMS, information related to payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and requires applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined above) and their immediate family members;
the Foreign Corrupt Practices Act, or FCPA prohibits any United StatesU.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations; and
analogous or similar state, federal, and foreign laws, regulations, and requirements such as state anti‑kickbackanti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non‑governmental third‑non-governmental third party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; laws, regulations, and requirements applicable to the award and performance of federal contracts and grants and state, federal and foreign laws that govern the privacy and security of health and other information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. For example, we must ensure that all applicable price concessions are included in prices calculated and reported to federal agencies. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that governmental authorities will conclude that our business practices maydo not comply with current or future statutes, regulations, or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. In addition, recent health care reform legislation has strengthened these laws. For example, recent case law from the Affordable Care Act, among other things, amends the intent requirement ofU.S. Supreme Court interpreted the federal anti‑kickback and certain portions of the HIPAA criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of the statute or specific intent
Act to include liability for implied false certifications, in certain instances. If our operations are found to be in violation of any of these laws or any other governmental regulations or requirements that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, restitution exclusion from government funded healthcare programs, such as Medicare and Medicaid, corporate integrity agreements, deferred prosecution agreements, debarment from government contracts and grants and refusal of future orders under existing contracts, contractual damages, the curtailment or restructuring of our operations and other consequences. If any of the physicians or other healthcare providers or entities with whom we expect to do business are found not to be in compliance with applicable laws, that person or entity may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs. Moreover, availability of any federal grant funds which we may receive or for which we may apply is subject to federal appropriations law. Grant funding may also be withdrawn or denied for other reasons. For instance,
We may be subject to numerous and varying privacy and security laws, and our failure to comply could result in penalties and reputational damage.
We maintain a large quantity of sensitive information, including confidential business information and information associated with clinical trials. Because of the National Institutessensitivity of Mental Health,this information, our privacy and security measures related to such information are very important. Although we have privacy and security measures in place designed to protect sensitive data and our systems, techniques used to obtain unauthorized access or NIMH, decided to discontinuesabotage systems and data change frequently and often are not recognized until launched against a target. It is also possible that, due to the fundingsurreptitious nature of certain data breaches and other incidents, they may remain undetected for an extended period, which may exacerbate harm to the company. We cannot ensure that our privacy and security measures will not be breached or otherwise fail to protect sensitive information or prevent disruption of our operations, including as a result of inadvertent disclosures through technological or human error (including employee or service provider error), malfeasance, hacking, ransomware, social engineering (including phishing schemes), computer viruses, malware, or otherwise. Unauthorized individuals may acquire or obtain unauthorized access to sensitive information. Data breaches, failures of our privacy or security measures, inadvertent disclosures, disruptions of our services, and other incidents could result in serious harm to our reputation, our business might suffer, and we could incur serious liability and other expenses related to litigation (such as damages associated with breach-of-contract claims), penalties for violation of applicable laws or regulations, costly litigation or government investigations, and significant costs for remediation and remediation efforts to prevent future occurrences. The harm associated with these negative results is likely to be exacerbated if the affected information is personally identifiable.
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We may be subject to certain laws and regulations governing the privacy and security of personal information, including regulations pertaining to health information. The legislative and regulatory landscape for privacy and data security continues to evolve, and there has been an increasing focus on privacy and data security issues that may affect our business. In the United States, there are numerous federal and state privacy and data security laws and regulations that govern the collection, use, disclosure, and protection of personal information, including federal and state health information privacy laws, federal and state security breach notification laws, and federal and state consumer protection laws. Each of these laws is subject to varying interpretations by courts and government agencies, creating complex compliance issues for us. If we fail to comply with applicable laws and regulations, we could be subject to lawsuits, penalties, or sanctions. The HHS Office for Civil Rights, which enforces HIPAA, remains active in its enforcement of the law. Additionally, state attorneys general may bring civil actions seeking either injunctions or damages in response to violations of HIPAA that threaten the privacy of state residents. Privacy and data security has become an area of emphasis for some state legislatures, resulting in the enactment of the California Consumer Privacy Act of 2018, among other laws. In addition to the risk associated with enforcement, compliance with these evolving laws, rules, and regulations regarding the privacy, security and protection of personal information could result in higher compliance and technology costs for us and present challenges for our business model.
There are numerous federal and state laws that generally require notice to affected individuals, regulators, and sometimes the media or credit reporting agencies in the event of a Phase 1 studydata breach impacting personal information. For example, at the federal level, HIPAA Breach Notification Rule mandates notification of CERC‑501 that wasbreaches affecting protected health information to be conductedaffected individuals and regulators under conditions set forth in the Rule. Covered Entities must report breaches of unsecured protected health information to affected individuals without unreasonable delay, but not to exceed 60 days of discovery of the breach by a Covered Entity or its agents. Notification must also be made to HHS and, in certain circumstances involving large breaches, to the media. Business Associates must report breaches of unsecured protected health information to Covered Entities. All states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands have enacted data breach notification laws. These laws may impose notification obligations in addition to, or inconsistent with, the HIPAA Breach Notification Rule when a data breach implicates protected health information. In that event that we fail to detect or timely report a data breach it may be subject to significant penalties under federal and state law. In the event that we report a data breach as required by federal or state law, federal or state regulators may initiate an investigation into, and/or litigation related to, our privacy or data security practices. Private plaintiffs may also initiate costly class action litigation following a data breach.
Numerous other countries have, or are developing, laws governing the collection, use, and transmission of personal information. These laws often impose significant compliance obligations. For example, the General Data Protection Regulation (“GDPR”) has imposed more stringent obligations and restrictions on the ability to collect, analyze, and transfer personal information, including health data from clinical trials and substantial fines for breaches of the data protection rules in the European Economic Area. To the extent that our activities are or become subject to the GDPR, we may need to devote significant effort and resources to complying with those legal regimes. Any failure to comply with the rules arising from the GDPR could lead to government enforcement actions and significant penalties against us and adversely impact our operating results.
Our business and operations could suffer in the event of computer system failures, cyber-attacks or deficiencies in our cyber-security.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, research data, our proprietary business information and that of our suppliers, technical information about our products, clinical trial plans and employee records. Similarly, our third-party providers possess certain of our sensitive data and confidential information. The secure maintenance of this information is critical to our operations and business strategy. Despite the implementation of security measures, our internal computer systems, and those of third party as NIMH decidedparties on which we rely, are vulnerable to damage from computer viruses, malware, ransomware, cyber fraud, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over the study would be unlikelyInternet, attachments to provide new information beyond what a NIMH funded Phase 2 study, conducted by the same third party, would provide. Similarly, in January 2016 NIMH decidedemails, persons inside our organization, or persons with access to discontinue the fundingsystems inside our organization. The risk of a Phase 2 studysecurity breach or disruption, particularly through cyber-attacks or cyber-intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of CERC-501 for treatment-resistant depressionattempted attacks and intrusions from around the world have increased. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, encrypted, lost or stolen. Any such access, inappropriate disclosure of confidential or proprietary information or other loss of information, including our data being breached at third-party providers, could result in legal claims or proceedings, liability or financial loss under laws that wasprotect the privacy of personal information, disruption of our operations or the development of our pipeline assets and damage to our reputation, which could adversely affect our business. For example, the loss of clinical trial data from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Furthermore, as a result of cyber-attacks we may inadvertently misappropriate assets that we may not be conducted by the National Institutesable to fully recover.
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If we fail to attract and keep management and other key personnel, as well as our board members, we may be unable to develop our product candidates or otherwise implement our business plan.
Our success will depend on the retention of our directors and members of our management and technical team, including Michael F. Cola, Chief Executive Officer, Dr. Pericles Calias, Chief Scientific Officer, James A. Harrell, Jr., Chief Commercial Officer, Joe Miller, Chief Financial Officer, and Garry A. Neil, Chief Medical Officer, and on our ability to compete in the highly competitive biotechnology and pharmaceuticals industries depends upon our abilitycontinue to attract and retain highly qualified managerial, scientific, medicalskilled and otherqualified personnel. We are highly dependent on Uli Hacksell, Ph.D., our Chief Executive Officer and President and Chairman of our board of directors. The loss of the services of Dr. Hacksell could impede, delay or prevent the development of our product candidates and could negatively impact our ability to successfully implement our business plan. If we lose the services of Dr. Hacksell, we may not be able to find a suitable replacement on a timely basis, or at all, and our business would likely be harmed as a result. We do not maintain a “key man” insurance policy on Dr. Hacksell’s life or the lives of any of our other employees. We employ all of our executive officers and key personnel on an at‑will basis and their employment can be terminated by us or them at any time, for any reason and without notice. In order to retain valuable employees at our company, in addition to salary and cash incentives, we provide incentive stock options that vest over time. The value to employees of stock options that vest over time will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other companies.
any of such individuals.
If our employees, independent contractors, principal investigators, CROs, manufacturers, consultants or vendors commit fraud or other misconduct, including noncompliance with regulatory standards and requirements and insider trading, our business may experience serious adverse consequences.
We are exposed to the risk that our employees, independent contractors, principal investigators, CROs, manufacturers, consultants and vendors may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) FDA regulations,
including those laws requiring the reporting of true, complete and accurate information to the FDA, (2) manufacturing standards, (3) federal and state healthcare fraud and abuse laws and regulations or (4) laws that require the true, complete and accurate reporting of financial information or data. Specifically, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self‑dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. The improper use of information obtained in the course of clinical trials could also result in significant legal sanctions and serious harm to our reputation. In addition, federal procurement laws and regulations impose substantial penalties for misconduct in connection with government contracts and require contractors to maintain a code of business conduct and ethics. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity maymight not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including regulatory enforcement action, the imposition of significant criminal and civil fines, penalties, or other sanctions, including imprisonment, exclusion from participation in federal healthcare programs, and deferred prosecution and corporate integrity agreements.
In addition, during the course of our operations, our directors, executives and employees may have access to material, nonpublic information regarding our business, our results of operations or potential transactions we are considering. We have adopted an Insider Trading and Window Period Policy, but despite the adoption of such policy, we maymight not be able to prevent a director, an executive or an employee from trading in our common stock on the basis of, or while having access to, material, nonpublic information. If a director, executive or employee was to be investigated, or an action was to be brought against a director, executive or employee for insider trading, it could have a negative impact on our reputation and our stock price. Such a claim, with or without merit, could also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to the success of our business.
We may encounter difficulties in managing our growth and expanding our operations successfully.
As we seek to advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, administrative, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial
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performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and sales and marketing personnel. The hiring, training and integration of new employees may be more difficult, costly and/or time‑consuming for us because we have fewer resources than a larger organization. We maymight not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.
If, in the future, we are unable to establishgrow our own sales, or establish marketing and distribution capabilities or enter into licensing or collaboration agreements for these purposes, we maymight not be successful in commercializing our product candidates.
We do not currently have a relatively small number of employees and do not have arobust sales or marketing infrastructure, and we do not have any significant sales, marketing or distribution experience. We will be opportunistic in seeking to either build our own commercial infrastructure to commercialize our product candidates and future products if and when they are approved, or enter into licensing or collaboration agreements to assist in the future development and commercialization of such products.
infrastructure. To develop our internal sales, distribution and marketing capabilities for new product candidates, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that ourany new product candidates will be approved. For product candidates for which we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:
inability of marketing personnel to develop effective marketing materials;
the inability of sales personnel to obtain access to physicians or educate adequate numbers of physicians on the clinical benefits of our products to achieve market acceptance;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines;
the costs associated with training sales personnel on legal compliance matters and monitoring their actions;
liability for sales personnel failing to comply with the applicable legal requirements; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
Where and when appropriate, we may elect to utilize contract sales forces or strategic partners to assist in the commercialization of our product candidates. If we enter into arrangements with third parties to perform sales, marketing and distribution services for our products, the resulting revenues or the profitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed our products ourselves. In addition, we maymight not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources and attention to sell, market and distribute our products effectively. Such third parties may also not comply with the applicable regulatory requirements, which could potentially expose us to regulatory and legal enforcement actions.
Following the closing of the Merger, we assumed the liabilities of the royalty agreement with certain related parties on terms that could raise conflicts of interest and that some stockholders may consider not to be in our best interests.
In July 2019, Aevi entered into a royalty agreement with Michael F. Cola, our Chief Executive Officer, Joseph J. Grano, Jr., Kathleen Jane Grano, Joseph C. Grano, The Grano Children's Trust, Joseph C. Grano, trustee and LeoGroup Private Investment Access, LLC on behalf of Garry A. Neil, our Chief Medical Officer, in exchange for a one-time aggregate payment of $2 million (the “Royalty Agreement”). Collectively, the investors will be entitled to an aggregate amount equal to a low-single digit percentage of the aggregate net sales of Astellas' second generation mTORC1/2 inhibitor, CERC-006 (the “OSI Products”). At any time beginning three years after the date of the first public launch of an OSI Product, we may exercise, at our sole discretion, a buyout option that terminates any further obligations under the Royalty Agreement in exchange for a payment to Investors of an aggregate of 75% of the net present value of the royalty payments. A majority of the independent members of the board of directors or the audit committee of Aevi approved the Royalty Agreement, which liability was assumed by us upon closing of our Merger with Aevi, but these arrangements could present Mr. Cola and Dr. Neil, officers of ours, might have a conflict of interest when making decisions on the priority of the development of our pipeline products. In addition, some stockholders might not consider the terms of the Royalty Agreement to be in their best interests.
We face risks related to health epidemics and other outbreaks, which could significantly disrupt the supply chain for some of our pipeline assets.
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Our business could be adversely impacted by the effects of the coronavirus or other epidemics. Currently, we do not establish sales, marketingare susceptible to risks to our manufacturing and distribution capabilities successfully, either onproduction from the outbreak of the coronavirus in China. For instance, raw materials for the manufacturing of one of our ownpipeline assets are sourced from China and are accordingly subject to disruption or product contamination. We cannot estimate whether this impact might extend to other countries outside of China. At the time of this filing, the outbreak has been largely concentrated in collaboration with third parties, we will not be successfulChina, although cases have been confirmed in commercializingother countries, including the United States. At this point, the extent to which the coronavirus might impact our product candidates.
supply chain is uncertain. However, a health epidemic or other outbreak, including the current coronavirus outbreak, might materially and adversely affect our supply chain, which might negatively affect our business, financial condition and results of operations.
Risks Related to Our Dependence on Third Parties
We maymight not succeed in establishing and maintaining development collaborations, which could adversely affect our ability to develop and commercialize product candidates.
A part of our strategy is to enter into product development collaborations in the future, including collaborations with major biotechnology or pharmaceutical companies for the development or commercialization of our current and future product candidates. We also face significant competition in seeking appropriate development partners and the negotiation process is time‑consuming and complex. We maymight not succeed in our efforts to establish development collaborations or other alternative arrangements for any of our existing or future product candidates and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort and/or third parties maymight not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy.
Furthermore, any collaborations that we enter into maymight not be successful. The success of our development collaborations will depend heavily on the efforts and activities of our collaborators. Collaborators generallyFurthermore, any collaborations that we enter into might not be successful. The success of our development collaborations will depend heavily on the efforts and activities of our collaborators. Our relationship with any future collaborations may pose several risks, including the following:
collaborators have significant discretion in determining the amount and timing of the efforts and resources that they will apply to these collaborations. Disagreements between parties to a development collaboration regardingcollaborations;
collaborators might not perform their obligations as expected;
the nonclinical studies and clinical trials conducted as part of these collaborations might not be successful;
collaborators might not pursue development and commercialization mattersof any product candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on nonclinical study or clinical trial results, changes in the collaborators’ strategic focus or available funding or external factors, such as an acquisition, that divert resources or create competing priorities;
collaborators may delay nonclinical studies and clinical trials, provide insufficient funding for nonclinical studies and clinical trials, stop a nonclinical study or clinical trial or abandon a product candidate, repeat or conduct new nonclinical studies or clinical trials or require a new formulation of a product candidate for nonclinical studies or clinical trials;
We might not have access to, or may be restricted from disclosing, certain information regarding product candidates being developed or commercialized under a collaboration and, consequently, may have limited ability to inform our stockholders about the status of such product candidates;
collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
product candidates developed in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval might not commit sufficient resources to the marketing and distribution of any such product candidate;
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disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development of any product candidates, may cause delays or termination of the research, development or commercialization of such product candidates, may lead to delaysadditional responsibilities for us with respect to such product candidates or may result in litigation or arbitration, any of which would be time consuming and expensive;
collaborators might not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
disputes may arise with respect to the ownership or inventorship of intellectual property developed pursuant to our collaborations;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;
the terms of our collaboration agreement may restrict us from entering into certain relationships with other third parties, thereby limiting our options; and
collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to raise additional capital to pursue further development process or commercializingcommercialization of the applicable product candidate and, in some cases, termination of the development collaboration. These disagreements can be difficult to resolve if neither of the parties has final decision making authority.
candidates.
Even if we are successful in our efforts to establish development collaborations, the terms that we agree upon maymight not be favorable to us and we maymight not be able to maintain such development collaborations if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into development collaboration agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market. Additionally, collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.
If we fail to establish and maintain additional development collaborations related to our product candidates:
the development of certain of our current or future product candidates may be terminated or delayed;
our cash expenditures related to development of certain of our current or future product candidates would increase significantly and we may need to seek additional financing, which maymight not be available on favorable terms, or at all;
we may be required to hire additional employees or otherwise develop expertise, such as sales and marketing expertise, for which we have not budgeted;
we will bear all of the risk related to the development of any such product candidates;
we may have to expend unexpected efforts and funds if we are unable to obtain the results of third third‑party clinical trials; and
the competitiveness of any product candidate that is commercialized could be reduced.
We rely on third parties to conduct, supervise and monitor our clinical trials. The failure of these third parties to successfully carry out their contractual duties or meet expected deadlines could substantially harm our business because we maymight not obtain marketing approval for or commercialize our product candidates in a timely manner or at all.
We rely upon third‑party CROs to monitor and manage data for our clinical programs. We rely on these parties for execution of our clinical trials and, while we have agreements governing their activities, we have limited influence over their actual performance and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our regulatory responsibilities. We, our clinical trial sites, and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, principal investigators and trial sites. If we, any of our CROs or clinical trial sites fail to comply with applicable GCP requirements, the clinical data generated in our clinical trials may be deemed unreliable
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and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications, if at all. In addition, we are required to report certain financial interests of our third‑party investigators if these relationships exceed certain financial thresholds or meet other criteria. The FDA or comparable foreign regulatory authorities may question the integrity of the data from those clinical trials conducted by principal investigators who previously served or currently serve as scientific advisors or consultants to us from time to time and receive cash compensation in connection with such services or otherwise receive compensation from us that could be deemed to impact study outcome, proprietary interests in a product candidate, certain company equity interests, or significant payments of other sorts. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials compliescomply with GCP requirements. In addition, we must conduct our clinical trials with product produced under applicable GMPcGMP requirements. Failure to comply with these regulations may require us to repeat preclinical and clinical trials, which would delay the marketing approval process.
Our CROs and clinical trial sites are not our employees, and, except for remedies available to us under our agreements with such CROs and clinical trial sites, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical, nonclinical and preclinical programs. These CROs and clinical trial sites may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities that could harm our competitive position. If CROs or clinical trial sites do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we maymight not be able to obtain marketing approval for or successfully commercialize our product candidates or we may be subject to regulatory enforcement actions. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed. To the extent we are unable to successfully identify and manage the performance of third‑party service providers in the future, our business may be adversely affected.
Switching or adding CROs involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, prospects, financial condition and results of operations.
We use third parties to manufacture all of our product candidates. This may increase the risk that we will not have sufficient quantities of our product candidates to conduct our clinical trials or such quantities at an acceptable cost, which could result in the delay, prevention, or impairment of clinical development and commercialization of our product candidates.
We do not own or operate, and have no plans to establish, any manufacturing facilities for our product candidates. We have limited personnel with experience in drug manufacturing and we lack the resources and the capabilities to manufacture any of our product candidates on a clinical or commercial scale.
We currently outsource all manufacturing of our product candidates to third parties typically without any guarantee that there will be sufficient supplies to fulfill our requirements or that we may obtain such supplies on acceptable terms. Any delays in obtaining adequate supplies with respect to our product candidates may delay the development or commercialization of our other product candidates.
In addition, we do not currently have any agreements with third‑party manufacturers for the long‑term commercial supply of our product candidates. We may be unable to enter agreements for commercial supply with third‑party manufacturers, or may be unable to do so on acceptable terms. Even if we enter into these agreements, the various manufacturers of each product candidate will likely be single source suppliers to us for a significant period of time.
The facilities used by our contract manufacturers to manufacture our product candidates must be approved by the FDA pursuant to inspections that will be conducted after we submit our NDA to the FDA. While we are ultimately responsible for the manufacture of our product candidates, other than through our contractual arrangements, we do not control the manufacturing process of, and are completely dependent on, our contract manufacturing partners for compliance with the regulatory requirements, known as GMPcGMP requirements for manufacture of both active drug substances and finished drug products for clinical supply and eventually for commercial supply, if we receive regulatory approval. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or other regulatory authorities, we will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. Failure of our contract manufacturers to comply with the applicable regulatory requirements may also subject us to regulatory enforcement actions. In addition, other than through our contractual agreements, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain marketing approval for or market our product candidates, if approved.
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Reliance on third‑party manufacturers subjects us to risks that would not affect us if we manufactured the product candidates ourselves, including:
reliance on the third parties for regulatory compliance and quality assurance;
the possible breach of the manufacturing agreements by the third parties because of factors beyond our control;
the possible misappropriation of our proprietary information, including trade secrets and know‑how;
the possibility of termination or nonrenewal of the agreements by the third parties because of our breach of the manufacturing agreement or based on theirour own business priorities; and
the disruption and costs associated with changing suppliers, including additional regulatory filings.
failure to satisfy our contractual duties or obligations;
inability to meet our product specifications and quality requirements consistently;
delay or inability to procure or expand sufficient manufacturing capacity;
manufacturing and/or product quality issues related to manufacturing development and scale‑up;
costs and validation of new equipment and facilities required for scale‑up;
failure to comply with applicable laws, regulations, and standards, including cGMP and similar foreign standards;
deficient or improper record‑keeping;
contractual restrictions on our ability to engage additional or alternative manufacturers;
inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;
reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure a sufficient supply of these product components, we will be unable to manufacture and sell our product candidates or any future product candidate in a timely fashion, in sufficient quantities or under acceptable terms;
lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;
lack of access or licenses to proprietary manufacturing methods used by third‑party manufacturers to make our product candidates;
operations of our third‑party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier or regulatory sanctions related to the manufacture of our or other company’s products;
carrier disruptions or increased costs that are beyond our control; and
failure to deliver our products under specified storage conditions and in a timely manner.
Our product candidates may compete with other products and product candidates for access to manufacturing facilities. There are a limited number of manufacturers that operate under GMPcGMP regulations and that are both capable of manufacturing for us and willing to do so. If our existing third‑party manufacturers, or the third parties that we engage in the future to manufacture a product for commercial sale or for our clinical trials, should cease to continue to do so for any reason, we likely would experience delays in obtaining sufficient quantities of our product candidates for us to meet commercial demand or to advance our clinical trials while we
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identify and qualify replacement suppliers. If for any reason we are unable to obtain adequate supplies of our product candidates or the drug substances used to manufacture them, it will be more difficult for us to develop our product candidates and compete effectively.
Our suppliers are subject to regulatory requirements, covering manufacturing, testing, quality control, manufacturing, and record keeping relating to our product candidates, and subject to ongoing inspections by the regulatory agencies. Failure by any of our suppliers to comply with applicable regulations may result in long delays and interruptions to our manufacturing capacity while we seek to secure another supplier that meets all regulatory requirements, as well as market disruption related to any necessary recalls or other corrective actions.
We will continue to depend on Aytu to provide us with certain services to manage the operations of Millipred.
In connection with the Aytu Divestiture, we retained the rights to Millipred and entered into a Transition Services Agreement with Aytu. Pursuant to the Transition Services Agreement, Aytu is responsible for managing the commercial operations of Millipred, including providing accounting reporting services and managing the third‑party logistics provider. We exercise no control over the activities of Aytu, other than the contractual rights we have pursuant to our Transition Services Agreement. If Aytu were to fail to fulfill all of its obligations under the Transition Service Agreement, we could suffer operational difficulties or significant losses. If Aytu ceases to provide services pursuant to the Transition Services Agreement, we might not be able to reestablish our commercial infrastructure to replace these services in a timely manner, if at all, which would materially adversely affect our financial position.
The revenue generated by sales of Millipred will be received by Aytu and subsequently transferred to us, and any delay or default in payment by Aytu to us of these revenues could adversely affect our cash flows, financial condition, and results of operations. Pursuant to the Transition Services Agreement, Aytu is responsible for managing the commercial operations of Millipred and is obligated to transfer the revenue generated by sales of Millipred to us on a timely basis. Adverse economic conditions or financial difficulties of Aytu could impair its ability to remit such payment or could cause Aytu to delay such payments. Furthermore, if Aytu were unable to meet its obligations, it could consider restructuring under the bankruptcy laws, which might make it difficult for us to collect all or a significant portion of the revenues generated by Millipred. Our inability to collect our revenues generated by Millipred from Aytu could adversely affect our cash flows, financial condition, and results of operations.
Risks Related to Intellectual Property
If we are unable to obtain or maintain intellectual property rights, or if the scope of patent protection is not sufficiently broad, competitors could develop and commercialize products similar or identical to ours, and we maymight not be able to compete effectively in our market.
Our success depends in significant part on our and our licensors’, licensees’ or collaborators’ ability to establish, maintain and protect patents and other intellectual property rights and operate without infringing the intellectual property rights of others. We have filed numerous patent applications both in the United States and in foreign jurisdictions to obtain patent rights to inventions we have discovered. We have also licensed from third partiesparties’ rights to patent portfolios.
The patent prosecution process is expensive and time‑consuming, and we and our current or future licensors, licensees or collaborators maymight not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we or our licensors, licensees or collaborators will fail to identify patentable aspects of inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover, in some circumstances, we maymight not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are reliant on our licensors, licensees or collaborators. Therefore, these patents and applications maymight not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors, licensees or collaborators fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors, licensees or collaborators are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.
The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our and our current or future licensors’, licensees’ or collaborators’ patent rights are highly uncertain. Our and our licensors’, licensees’ or collaborators’ pending and future patent applications maymight not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. The patent examination process may require us or our licensors, licensees or collaborators to narrow the scope of the claims of our or our licensors’, licensees’ or collaborators’ pending and future patent applications, which may limit the scope of patent protection that may be obtained. Our and our licensors’, licensees’ or collaborators’ patent applications cannot
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be enforced against third parties practicing the technology claimed in such applications unless and until a patent issues from such applications, and then only to the extent the issued claims cover the technology.
Furthermore, given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio maymight not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.our products. We expect to seek extensions of patent terms where these are available in any countries where we are prosecuting patents. This includes in the United States under the Drug Price Competition and Patent Term Restoration Act of 1984, which permits a patent term extension of up to five years beyond the expiration of the patent. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, maymight not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may take advantage of our investment in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might otherwise be the case.
If we breach the license and development agreements related to our product candidates, we could lose the ability to develop and commercialize our product candidates.
Our commercial success depends upon our ability, and the ability of our licensors and collaborators, to develop, manufacture, market and sell our product candidates and use our and our licensors’ or collaborators’ proprietary technologies without infringing the proprietary rights of third parties. If we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose the ability to continue the development and commercialization of our product candidates or face other penalties under these agreements. We have entered into are party to the following agreements:
exclusive license agreements with Merck & Co., Inc. and its affiliates or Merck, pursuant to which Merck has granted us rights to(“Merck”) for the compounds used in CERC‑301CERC-301 and the COMTi platform, including CERC‑406. We have also entered into exclusiveCERC-406;
a license agreementsagreement and a research agreement with Lilly pursuant to which Lilly has granted us rights toThe Children's Hospital of Philadelphia and the compounds used in CERC‑501, as well as an exclusive license,Center for Applied Genomics, and a development and commercializationoption agreement with LillyKyowa Hakko Kirin Co., Ltd. pursuant to which we received exclusive global rightsexclusively license certain technology related to developthe development of CERC-002;
a license agreement with OSI Pharmaceuticals, LLC, a wholly owned subsidiary of Astellas Pharma, Inc., for CERC-006; and commercialize CERC-611.
a license and option agreement with MedImmune Limited, a subsidiary of AstraZeneca plc, for CERC-007.
If we fail to comply with the obligations under these agreements, including payment terms, Merck and Lillyour licensors may have the right to
terminate any of these agreements, in which event we maymight not be able to develop, market or sell CERC‑301, CERC‑501, CERC-611 or anythe relevant product candidate developed from the COMTi platform, including CERC‑406.candidate. Such an occurrence could materially adversely affect the value of the product candidate being developed under any such agreement. Termination of these agreements or reduction or elimination of our rights under these agreements may result in ourus having to negotiate new or reinstated agreements, which maymight not be available to us on equally favorable terms, or at all, or cause us to lose our rights under these agreements, including our rights to intellectual property or technology important to our development programs. Any of these occurrences may harm our business, financial condition and prospects significantly.
We may be required to make significant payments in connection with the license and development agreements we acquired in our Merger with Aevi.
Following the Merger with Aevi, we are now party to license agreements and a research agreement with The Children's Hospital of Philadelphia ("CHOP") and the Center for Applied Genomics ("CAG"), and a Development and Option Agreement with Kyowa Hakko Kirin Co., Ltd. (the "KHK Development and Option Agreement") pursuant to which we exclusively licenses certain technology related to the development of CERC-002 and CERC-005, a license agreement with OSI Pharmaceuticals, LLC, a wholly owned subsidiary of Astellas Pharma, Inc. ("Astellas"), for CERC-006 and a license and option agreement with MedImmune Limited, a subsidiary of AstraZeneca plc ("AstraZeneca"), for CERC-007. We may be required to make significant payments in connection with the license agreements and research agreement with CHOP and have certain ongoing payment obligations with respect to the Research Agreement. If we exercise our option under the terms of KHK Development and Option Agreement, we will be obligated to cover significant development costs for CERC-002 and make significant payments in connection with certain milestones and the sale of resulting products. Pursuant to the exercise of the AZ Option, we are obligated to spend significant amounts to develop the program. If we develop CERC-006, it will have significant obligations to Astellas under the license agreement with OSI Pharmaceuticals, LLC, a wholly owned subsidiary of Astellas. If the obligations become due under the terms any of these agreements, we might not have sufficient funds available to meet our obligations and our development efforts may be negatively impacted. In addition, if we do not have sufficient funds to pay our ongoing obligations under the development agreement with CHOP, we may lose our rights under that agreement, which would negatively impact their development capabilities.
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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non‑non‑compliance with these requirements.
Periodic maintenance and annuity fees on any issued patent are due to be paid to the United States Patent and Trademark Office, or USPTO, and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non‑compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non‑payment of fees and failure to properly legalize and submit formal documents. If we or our licensors or collaborators fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.
Third parties may initiate legal proceedings against us alleging that we infringeinfringed their intellectual property rights, or we may initiate legal proceedings against third parties to challenge the validity or scope of intellectual property rights controlled by third parties, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.
Third parties may initiate legal proceedings against us or our licensors or collaborators alleging that we or our licensors or collaborators infringe their intellectual property rights or we or our licensors or collaborators may initiate legal proceedings against third parties to challenge the validity or scope of intellectual property rights controlled by third parties, including in oppositions, interferences, reexaminations, inter partes reviews or derivation proceedings before the United States or other jurisdictions. These proceedings can be expensive and time‑consuming and many of our or our licensors’ or collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our licensors or collaborators can.
An unfavorable outcome could require us or our licensors or collaborators to cease using the related technology or developing or commercializing our product candidates, or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us or our licensors or collaborators a license on commercially reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non‑exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.
We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time‑time‑consuming and unsuccessful and have a material adverse effect on the success of our business.
Third parties may infringe on our or our licensors’ or collaborators’ patents or misappropriate or otherwise violate our or our licensors’ or collaborators’ intellectual property rights. In the future, we or our licensors or collaborators may initiate legal proceedings to enforce or defend our or our licensors’ or collaborators’ intellectual property rights, to protect our or our licensors’ or collaborators’ trade secrets or to determine the validity or scope of intellectual property rights we own or control. Also, third parties may initiate legal proceedings against us or our licensors or collaborators to challenge the validity or scope of intellectual property rights we own or control. The proceedings can be expensive and time‑consuming and many of our or our licensors’ or collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our licensors or collaborators can. Accordingly, despite our or our licensors’ or collaborators’ efforts, we or our licensors or collaborators maymight not prevent third parties from infringing upon or misappropriating intellectual property rights we own or control, particularly in countries where the laws maymight not protect those
rights as fully as in the United States. Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that ourwe or our licensors’ or collaborators’ patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our or our licensors’ or collaborators’ patents at risk of being invalidated, held unenforceable or interpreted narrowly.
Third party preissuancepre‑issuance submission of prior art to the USPTO, or opposition, derivation, reexamination, inter partes review or interference proceedings, or other preissuancepre‑issuance or post‑grant proceedings in the United States or other jurisdictions provoked by third parties or brought by us or our licensors or collaborators may be necessary to determine the priority of inventions with respect to
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our or our licensors’ or collaborators’ patents or patent applications. An unfavorable outcome could require us or our licensors or collaborators to cease using the related technology and commercializing our product candidates, or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us or our licensors or collaborators a license on commercially reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non‑exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators. In addition, if the breadth or strength of protection provided by our or our licensors’ or collaborators’ patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates. Even if we successfully defend such litigation or proceeding, we may incur substantial costs and it may distract our management and other employees. We could be found liable for monetary damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our warrants or shares of our common stock.
We may be subject to claims by third parties asserting that our employees or we have misappropriated their intellectual property, or claiming ownership of what we regard as our own intellectual property.
Many of our employees, including our senior management, were previously employed at universities or at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Some of these employees executed proprietary rights, non‑disclosure and non‑competition agreements in connection with such previous employment. We may be subject to claims that we or these employees have used or disclosed confidential information or intellectual property, including trade secrets or other proprietary information, of any such employee’s former employer. In addition, we may be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patents or other intellectual property. While it is our policy to require our employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement to each party who in fact develops intellectual property that we regard as our own. We could be subject to ownership disputes arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these claims.
If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel or sustain damages. Such intellectual property rights could be awarded to a third party, and we could be required to obtain a license from such third party to commercialize our technology or products. Such a license maymight not be available on commercially reasonable terms or at all. Even if we successfully prosecute or defend against such claims, litigation could result in substantial costs and distract management.
Our inability to protect our confidential information and trade secrets would harm our business and competitive position.
In addition to seeking patents for some of our technology and products, we also rely on trade secrets, including unpatented know‑how, technology and other proprietary information, to maintain our competitive position. Though we seek to protect these trade secrets, in part, by entering into non‑disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties, as well as by entering into confidentiality and invention or patent assignment agreements with our employees and consultants, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we maymight not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time‑consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect
trade secrets. If a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.
As is the case with other biotechnology and pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve technological and legal complexity, and obtaining and enforcing biopharmaceutical patents is costly, time‑consuming, and inherently uncertain. The Supreme
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Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our and our licensors’ or collaborators’ ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by Congress, the federal courts, and the USPTO the laws and regulations governing patents could change in unpredictable ways that would weaken our and our licensors’ or collaborators’ ability to obtain new patents or to enforce existing patents and patents we and our licensors or collaborators may obtain in the future. Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our and our licensors’ or collaborators’ patent applications and the enforcement or defense of our or our licensors’ or collaborators’ issued patents. On September 16, 2011, the Leahy‑Smith America Invents Act, or the Leahy‑Smith Act was signed into law. The Leahy‑SmithAmerica Invents Act includes a number of significant changes to United States patent law. These include provisions that affect the way patent applications are prosecuted and may also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration of the Leahy‑SmithAmerica Invents Act, and many of the substantive changes to patent law associated with the Leahy‑SmithAmerica Invents Act, and in particular, the first to file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy‑SmithAmerica Invents Act will have on the operation of our business. However, the Leahy‑SmithAmerica Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our or our licensors’ or collaborators’ patent applications and the enforcement or defense of our or our licensors’ or collaborators’ issued patents, all of which could have a material adverse effect on our business and financial condition.
We maymight not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, enforcing and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our or our licensors’ or collaborators’ intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we and our licensors or collaborators maymight not be able to prevent third parties from practicing our and our licensors’ or collaborators’ inventions in all countries outside the United States, or from selling or importing products made using our and our licensors’ or collaborators’ inventions in and into the United States or other jurisdictions. Competitors may use our and our licensors’ or collaborators’ technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we and our licensors or collaborators have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates and our and our licensors’ or collaborators’ patents or other intellectual property rights maymight not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us and our licensors or collaborators to stop the infringement of our and our licensors’ or collaborators’ patents or marketing of competing products in violation of our and our licensors’ or collaborators’ proprietary rights generally. Proceedings to enforce our and our licensors’ or collaborators’ patent rights in foreign jurisdictions could result in substantial costs and divert our and our licensors’ or collaborators’ efforts and attention from other aspects of our business, could put our and our licensors’ or collaborators’ patents at risk of being invalidated or interpreted narrowly and our and our licensors’ or collaborators’ patent applications at risk of not issuing and could provoke third parties to assert claims against us or our licensors or collaborators. We or our licensors or collaborators maymight not prevail in any lawsuits that we or our licensors or collaborators initiate and the damages or other remedies awarded, if any, maymight not be commercially meaningful.
The requirements for patentability may differ in certain countries, particularly developing countries. For example, unlike other countries, China has a heightened requirement for patentability, and specifically requires a detailed description of medical uses of a claimed drug. In India, unlike the United States, there is no link between regulatory approval of a drug and its
patent status. Furthermore, generic or biosimilar drug manufacturers or other competitors may challenge the scope, validity or enforceability of our or our licensors’ or collaborators’ patents, requiring us or our licensors or collaborators to engage in complex, lengthy and costly litigation or other proceedings. Generic or biosimilar drug manufacturers may develop, seek approval for, and launch biosimilar versions of our products. In addition to India, certain countries in Europe and developing countries, including China, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In those countries, we and our licensors or collaborators may have limited remedies if patents are infringed or if we or our licensors or collaborators are compelled to grant a license to a third party, which could materially diminish the value of those patents. This could limit our potential revenue opportunities. Accordingly, our and our licensors’ or collaborators’ efforts to enforce intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we own or license.
Risks Related to Our Financial Position and Capital Needs
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We might require additional capital to continue to fund our operations and to finance the further advancement of our product candidates, which might not be available to us on acceptable terms, or at all. Failure to obtain any necessary capital will force us to delay, limit or terminate our product development efforts or cease our operations.
At December 31, 2019, we had $3.6 million in cash and cash equivalents and $12.2 million in current liabilities. Accordingly, we might not currently have sufficient funds to finance our continuing operations beyond the short term or to further advance any of our product candidates.
As a research and development company, our operations have consumed substantial amounts of cash since inception. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time‑consuming, expensive and uncertain process that takes years to complete, and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates into clinical trials or obtain and advance additional product candidates. Circumstances may cause us to consume capital more rapidly than we currently anticipate. We may need to raise additional funds or otherwise obtain funding through collaborations if we choose to initiate additional clinical trials for product candidates.
Additional fundraising efforts may divert our management from our day‑to‑day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. If we do not raise additional capital when required or on acceptable terms, we may need to:
significantly delay, scale back or discontinue the development or commercialization of one or more of our product candidates or cease operations altogether;
seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available; or
relinquish, or license on unfavorable terms, our rights to technologies or any future product candidates that we otherwise would seek to develop or commercialize itself.
Our future funding requirements, both short and long term, will depend on many factors, including:
the initiation, progress, timing, costs and results of preclinical and clinical studies for our product candidates and future product candidates we may develop;
the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more studies than we currently expect to perform;
the cost to establish, maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patents or other intellectual property rights;
the effect of competing technological and market developments;
market acceptance of any approved product candidates;
the costs of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;
the cost and timing of selecting, auditing and potentially validating a manufacturing site for commercial‑scale manufacturing; and
the cost of developing our sales, marketing and distribution capabilities to accommodate any of our product candidates for which we receive marketing approval and that we determine to commercialize ourselves or in collaboration with our partners.
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Our role as a guarantor of Certain Obligations assigned to Aytu exposes us to risk of loss or illiquidity.
In connection with the Aytu Divestiture, Aytu assumed our financial obligations to Deerfield CSF, LLC (“Deerfield”), which include a $15 million loan due in January 2021 minimum monthly and royalty payments of the higher of 15% of net sales or $100,000 through the earlier of February 2026 (the “Deerfield Obligation”) or reaching the maximum aggregated royalty payment of $12.5 million. The Deerfield Obligation could be accelerated upon default or a breach of covenants. We also assigned payment obligations (“TRIS Obligations”) to Aytu under a supply and distribution agreement with TRIS Pharma (the “Karbinal Agreement”). As a part of these assignments, we also became a guarantor to the Deerfield Obligation and the TRIS Obligation. If Aytu defaults under the terms of the agreement with Deerfield or TRIS, we could be liable as a guarantor for unpaid amounts of the Deerfield Obligation and the TRIS Obligation. We currently do not have cash on hand to permit us to pay the entire amount that could become due under the Deerfield Obligation, and any amount we would be required to pay under the Karbinal Agreement would limit the amount of cash available for development of our clinical pipeline. If we were to become required to pay the Deerfield Obligation, such obligation could significantly impair our ability to continue as a going concern and our ability to continue operations. Even if we were to have sufficient liquidity to pay the TRIS Obligation, or obtain funding to meet the Deerfield Obligation, we might not be able to recover the cost of such a payment and may therefore be exposed to significant losses, which would materially and adversely affect our results of operations.
We have incurred significant net losses in most periods since our inception and we might continue to incur net losses in the future.
Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate an adequate effect or acceptable safety profile, gain marketing approval and become commercially viable. Historically, we financed our operations primarily through private placements of our common and convertible preferred stock and convertible debt. We incurred net loss of $16.1 million for the year ended December 31, 2019. As of December 31, 2019, we had an accumulated deficit of $114.3 million. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development program and from general and administrative costs associated with our operations.
We expect to continue to incur losses in the future and we might never achieve profitability on an annual basis. We may also encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Our future profitability will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have a significant amount of gross net operating losses (“NOLs”) for federal and state purposes. The NOLs accumulated through the end of 2017 will begin to expire in 2031. Unused NOLs for the current tax year and prior tax years will carry forward to offset future taxable income, if any, until such unused losses expire. Unused NOLs generated after December 31, 2017, will not expire and may be carried forward indefinitely but will be only deductible to the extent of 80% of current year taxable income in any given year. In addition, both the deductibility of current and future unused NOL carryovers may be subject to limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “IRC”). Sections 382 and 383 of the IRC subject the future utilization of NOLs and certain other tax attributes, such as research and experimental tax credits, to an annual limitation in the event of certain ownership changes. In general, an “ownership change” is defined as a greater than 50% change (by value) in equity ownership over a three-year period).
In connection with the reporting of our financial condition and results of operations, we are required to make estimates and judgments which involve uncertainties, and any significant differences between our estimates and actual results could have an adverse impact on our financial position, results of operations and cash flows.
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and revenues and related disclosure of contingent assets and liabilities. For example, we estimate returns, wholesaler fees, prompt payment discounts, chargebacks and government rebates. We also estimate clinical trial costs incurred using subject data and information from our CROs. If we underestimate or overestimate these expenses, adjustments to expenses may be necessary in future periods. Any significant differences between our actual results and our estimates and assumptions could negatively impact our financial position, results of operations and cash flows.
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Our operating results fluctuate from quarter to quarter and year‑to‑year, making future operating results difficult to predict.
Our quarterly and annual operating results historically have fluctuated and are likely to continue to fluctuate depending on several factors, many of which are beyond our control. Accordingly, our quarterly and annual results are difficult to predict prior to the end of the quarter or year, and we may be unable to confirm or adjust expectations with respect to our operating results for a particular period until that period has closed. Any failure to meet our quarterly or annual revenue or earnings targets could adversely impact the market price of our securities. Therefore, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance.
We engage in in‑licensing, acquisitions or other strategic transactions that could impact our liquidity, increase our expenses and divert a significant amount of our management’s time.
Since inception, we have acquired or in‑licensed product candidates, most recently product candidates we acquired from our Merger with Aevi. As a part of the Aevi Merger, we issued approximately 3.9 million shares of our common stock at closing, and payment of contingent value rights, which represent the right to receive contingent payments upon the achievement of certain milestones of up to an additional $6,500,000, payable either in shares of our common stock or in cash. From time to time we may consider additional in‑licensing of products and other strategic transactions, such as acquisitions of companies, asset purchases and out‑licensing of product candidates or technologies. Additional potential transactions that we may consider include a variety of different business arrangements, including strategic partnerships, collaborations, joint ventures, business combinations and investments. Any such transaction may require us to incur non‑recurring or other charges, may increase our near and long‑term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:
exposure to unknown liabilities;
disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;
incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions or to fund the operations;
higher than expected acquisition and integration costs;
write‑downs of assets or goodwill or impairment charges;
increased amortization expenses;
difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
impairment of relationships with key suppliers or other counterparties of any acquired businesses due to changes in management and ownership; and
inability to retain key employees of any acquired businesses.
Risks Related to our Stock
If we are not able to comply with the applicable continued listing requirements or standards of The NASDAQ CapitalNasdaq Stock Market, NASDAQNasdaq could delist our common stock.
Our common stock is currently listed on The NASDAQ CapitalNasdaq Stock Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.
In the event that our common stock is delisted from NASDAQThe Nasdaq Stock Market and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counterover‑the‑counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become
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more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
prevent future non‑compliance with The Nasdaq Stock Market’s listing requirements.
The market price of our stock is volatile, and you could lose all or part of your investment.
The market price of our shares of our common stock has been highly volatile and subject to wide fluctuations in response to various factors, some of which we cannot control. From our initial public offering in October 2015 through December 31, 2019, the per share trading price of our common stock has been as high as $7.65 and as low as $0.34. As a result of this volatility, you maymight not be able to sell your shares of our common stock.stock at a favorable price. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, these factors that could negatively affect or result in fluctuations in the market price of shares of our common stock include:
our ability to generate significant product revenues, cash flows and a profit;
the development status of our product candidates, and when any of our product candidates receive marketing approval;
our decision to initiate a clinical trial, not to initiate a clinical trial or to terminate an existing clinical trial;
our failure to commercialize our product candidates, if approved;
the success of competitive products or technologies;
regulatory actions with respect to our products or our competitors’ products;
actual or anticipated changes in our growth rate relative to our competitors;
announcements by usour or our competitors of significant acquisitions, strategic collaborations, joint ventures, collaborations or capital commitments;
results of preclinical studies and clinical trials of our product candidates or those of our competitors;
regulatory or legal developments in the United States and other countries;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the recruitment or departure of key personnel;
the level of expenses related to any of our product candidates or clinical development programs;
the results of our efforts to discover, develop, in‑license or acquire additional product candidates or products;
actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
the performance of third parties on whom we rely to manufacture our products and product candidates, supply API and conduct our clinical trials, including their ability to comply with regulatory requirements;
variations in our financial results or those of companies that are perceived to be similar to us;
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variations in the level of expenses related to our product candidates or preclinical and clinical development programs, including relating to the timing of invoices from, and other billing practices of, our contract research organizationsCROs and clinical trial sites;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
warrant or share price and volume fluctuations attributable to inconsistent trading volume levels of our warrants or shares;
announcement or expectation of additional financing efforts;
sales of our warrants or shares of our common stock by us, our insiders or our other security holders;
changes in the structure of healthcare payment systems;
changes in operating performance and stock market valuations of other pharmaceutical companies;
market conditions in the pharmaceutical and biotechnology sectors;
our execution of collaborative, co‑promotion, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;
additional state and federal healthcare reform measures that could put downward pricing pressure on our products;
the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC and announcements relating to litigation or other disputes, strategic transactions or intellectual property impacting us or our business;
announcement related to litigation;
fluctuations in quarterly operating results, as well as differences between our actual financial and operating results and those expected by investors;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
changes in financial estimates by any securities analysts who follow our warrants or shares of common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our warrants or shares of common stock;
ratings downgrades by any securities analysts who follow our warrants or shares of common stock;
the development and sustainability of an active trading market for our warrants or shares of common stock;
future sales of our warrants or shares of common stock by our officers, directors and significant stockholders;
other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events;
changes in accounting principles; and
general economic, industry and market conditions.
In addition, the stock market in general, and the market for biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of warrants or shares of common stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section, could have a material adverse impact on the market price of our warrants or shares of common stock. When the market price of a stock is volatile, security holders often institute class action litigation against the company that issued the stock. If
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we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Future sales and issuances of shares of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.
We expect that significant additional capital willmay be needed in the future to continue our planned operations, including conducting clinical trials, commercialization efforts, expanded research and development activities and costs associated with operating a public company. To raise capital, we may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights, preferences and privileges senior to our existing stockholders.
We are authorized to grant equity awards, including stock grants and stock options, to our employees, directors and consultants. As of December 31, 2019, there were 2,532,162 shares available for future issuance under the holdersSecond Amended and Restated 2016 Equity Incentive Plan (the "2016 Amended Plan”). During the term of the 2016 Amended Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, by an amount equal to 4% of the total number of outstanding shares of our warrants orcommon stock on the last trading day in December of the prior calendar year. On January 1, 2020, on the terms of the 2016 Amended Plan, an additional 1,775,368 shares were made available for issuance for a total of 4,307,530 shares available for issuance. In addition, as of December 31, 2019, there were 1,118,882 shares available for future issuance under the 2016 Employee Stock Purchase Plan (the “ESPP”). On January 1 of each calendar year, the aggregate number of shares that may be issued under the ESPP will automatically increase by a number equal to the lesser of (i) 1% of the total number of shares of our common stock.
Armistice has significant influence over us, and its interests may decline. In addition,be different from or conflict with those of our other stockholders.
Armistice Capital, LLC (“Armistice”) beneficially owns approximately 59% of our outstanding common stock. As a consequence, Armistice continues to be able to exert a significant degree of influence over our management, affairs, and matters requiring stockholder approval, including the availabilityelection of sharesdirectors, a merger, consolidation or sale of common stock for award underall or substantially all of our equity incentive plan,assets, and any other significant transaction. The interests of Armistice might not always coincide with our interests or the grant of stock options, restricted stock or other forms of stock-based compensation, may adversely affect the market priceinterests of our common stock.other stockholders. For instance, this concentration of ownership may have the effect of delaying or preventing a change in control of us otherwise favored by our other stockholders and could depress our stock price.
Armistice makes investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Armistice may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities might not be available to us. The interests of the Armistice may supersede ours, causing Armistice or their affiliates to compete against us or to pursue opportunities instead of us, for which we have no recourse. Such actions on the part of Armistice and inaction on our part could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Armistice controls a seat on our board of directors. Since Armistice could invest in entities that directly or indirectly compete with us, when conflicts arise between the interests of Armistice and the interests of our stockholders, this director might not be disinterested.
Sales of a significant number of shares of our common stock in the public markets, or the perception that such sales could occur, could depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public markets could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. WeAs additional shares of our common stock become available for resale in the public market pursuant to this offering, and otherwise, the supply of our common stock will increase, which could decrease its price. In addition, some or all of the shares of common stock may be offered from time to time in the open market pursuant to Rule 144, and these sales may have a depressive effect on the market for our shares of common stock. Therefore, we cannot predict the effect that future sales of our common stock would have on the market price of our common stock.
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We have never paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
The continued operation and expansion of our business will require substantial funding. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Consequently, currently stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant.
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 or the (“JOBS Act,Act”) and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our warrants or shares of common stocksecurities less attractive to investors and adversely affect the market price of our warrants or shares of common stock.
securities.
For so long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various requirements applicable to public companies that are not “emerging growth companies” including:
the provisions of Section 404(b) of the Sarbanes‑Oxley Act of 2002, or Sarbanes‑Oxley Act, requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;
the “say on pay” provisions (requiring a non‑binding shareholderstockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non‑binding shareholderstockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain
other business combinations) of the Dodd‑Frank Act and some of the disclosure requirements of the Dodd‑Frank Act relating to compensation of our chief executive officer;
officer.
the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Securities Exchange Act of 1934, as amended or the Exchange Act,(the “Exchange Act”), and instead provide a reduced level of disclosure concerning executive compensation; and
any rules that the Public Company Accounting Oversight Board may adopt requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements.
We may take advantage of these exemptions until we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest of: (i) the first fiscal year following the fifth anniversary of our initial public offering; (ii) the first fiscal year after our annual gross revenues are $1$1.07 billion or more; (iii) the date on which we have, during the previous three‑year period, issued more than $1$1.07 billion in non‑convertible debt securities; or (iv) as of the end of any fiscal year in which the market value of our common stock held by non‑affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.
We have determined to take advantage of some, but not all, of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company.” For example, we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that material weaknesses or significant deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an “emerging growth company,” we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC which may make it more difficult for investors and securities analysts to evaluate our company.us. Even after we no“no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes‑Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stocksecurities less attractive because we may rely on these exemptions. If some investors find our warrants or shares of common stocksecurities less attractive as a result, there may be a less active trading market for our warrants or shares of common stock,securities, and the securities prices may be more volatile and may decline.
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We may be subject to future litigation against us, including securities litigation, which is expensivecould be costly and could divert management attention.
time‑consuming to defend.
The market price of our warrants and shares of common stocksecurities may be volatile, and in the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. Any adverse determination in litigation could also subject us to significant liabilities.
We may also become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our clients in connection with commercial disputes, or employment claims made by our current or former associates. Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, overall financial condition, and operating results. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims, and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the trading price of our stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our securities prices and trading volume could decline.
The trading market for our warrants and shares of common stocksecurities will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have limited, and maymight not sustain, research coverage by securities and industry analysts. If we do not sustain coverage of our company,ourselves, the trading price for our warrants and shares of common stocksecurities would be negatively impacted. If the securities and industry analysts are unable to predict accurately the demand and net of sales our products, that could result in our reported revenues and earnings being lower than the so‑called “market consensus” of our projected revenues, which could negatively affect our stock price. Additionally, if the securities and industry analysts are unable to predict accurately the cost of advancing our pipeline, which could result in our reported costs being different than expectations and could negatively affect our stock price. If we do obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our warrants and shares of common stocksecurities or publishes inaccurate or unfavorable research about our business, our securities prices would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our warrants and shares of common stocksecurities could decrease, which could cause our securities prices and trading volume to decline.
The requirements of being a public company may strain our resources and divert management’s attention, and our minimal public company operating experience may impact our business and stock price.
As a public company, we incur significant legal, accounting and other expenses, that we did not incur as a private company, and these expenses may increase even more after we are no longer an “emerging growth company.” We are subject to the reporting requirements of the Exchange Act, the Sarbanes‑Oxley Act, the Dodd‑Frank Wall Street Reform and Protection Act, as well as rules adopted, and to be adopted, by the SEC, The NASDAQ CapitalNasdaq Stock Market and other applicable securities rules and regulations imposed on public companies, including the establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time‑consuming and costly. The increased costs will increase our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain sufficient coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
Because these rules and regulations are often subject to varying interpretations, it is difficult to accurately estimate or predict the amount or timing of these additional costs. Further, the lack of specificity of many of the rules and regulations may result in an application in practice that may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Our disclosure controls and procedures maymight not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act.Act, Sarbanes‑Oxley Act and The Nasdaq Stock Market rules and regulations. The Sarbanes‑Oxley Act requires, among other things, that we maintain effective disclosure controls and
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procedures and internal control over financial reporting. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well‑conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. We cannot assure, in the future, a material weakness or significant deficiency will not exist or otherwise be discovered. If that were to happen, it could harm our operating results and cause stockholders to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our securities.
These inherent limitations include the realities that judgments in decision‑making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Our amended and restated certificate of incorporation provides that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware iswill be the sole and exclusive forum for certain litigation that may be initiated bysubstantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware iswill be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the company; (ii)our behalf; any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the company to the company or the company’s stockholders; (iii)duty; any action asserting a claim against the companyus arising pursuant to any provision of the Delaware General Corporation Law,DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws; or (iv) any action asserting a claim against the companyus that is governed by the internal affairs doctrine. TheThis choice of forum provision does not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act or the Exchange Act. Accordingly, our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities will be deemed to have notice of and consented to these provisions. These exclusive‑forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorableof its choosing for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if
If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affectharm our business, results of operations, and financial condition. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and other employees.
Some provisions of our charter documents and Delaware law may have anti‑anti‑takeover effects that could discourage an acquisition of us by others, even if an acquisition would benefit our stockholders and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and second amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders, or remove our current management. These provisions include:
authorizing the issuance of “blank check” preferred stock, the terms of which we may establish and shares of which we may issue without stockholder approval;
prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
eliminating the ability of stockholders to call a special meeting of stockholders; and
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or the DGCL which may discourage, delay or prevent someone from
acquiring us or merging with us whether or not it is desired by or beneficial to our stockholders. Under the DGCL, a corporation maymight not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Any provision of our amended and restated certificate of incorporation or second amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our securities.
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Item 1B. Unresolved Staff CommentsComments.
None.
Item 2. PropertiesProperties.
Our headquarters are located in Baltimore,Rockville, Maryland, where we occupy approximately 6,0005,000 square feet of administrative office space. The term of the headquarters' lease expires January 31, 2019.2030. We have the ability to expand this office space based on our growth and employee headcount.
Upon consummation of the Aevi Merger on February 3, 2020, the Company also occupies approximately 5,800 square feet of administrative office space in Wayne, Pennsylvania. The lease expires April 2020 and goes month-to-month thereafter, however both the Company and the landlord have the right to terminate the lease 60 days after written notice is provided.
Item 3. Legal ProceedingsProceedings.
In November 2017, Cerecor acquired TRx Pharmaceuticals, LLC ("TRx") and its wholly-owned subsidiaries, including Zylera Pharmaceuticals, LLC, and its franchise of commercial medications (the "TRx Acquisition"). TRx was owned by Fremantle LLC ("Fremantle") and LRS International, LLC ("LRS", and collectively, the "former TRx owners"). A portion of the consideration for TRx Acquisition included shares of Cerecor common stock. The TRx Acquisition also included certain earn-outs for the former TRx owners for Cerecor achieving gross profit targets in the sales of the TRx acquired products. Currently, the former TRx owners beneficially own more than 10% of Cerecor's outstanding common stock.
Item 4. Mine Safety DisclosuresDisclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesSecurities.
Market Information
Our common stock is listed and publicly traded on the NASDAQ Capital Market under the symbol “CERC.” Our Class A warrants (“CERCW”) expired in October 2018 and our Class B warrants are also listed and publicly traded on the NASDAQ Capital Market under the symbols “CERCW” and “CERCZ,” respectively. Trading of our common stock and warrants commenced on November 13, 2015, the first date that shares of our common stock and warrants were publicly traded. Prior to that time, there was no public market for our common stock and warrants. The following table sets forth the high and low closing trading prices of our common stock and warrants as reported on the NASDAQ Capital Market for each quarter our common stock and warrants were traded("CERCZ") expired in the years ended December 31, 2016 and 2015.
| Year Ended December 31, 2016 | ||||||||
| First Quarter | High | Low | ||||||
| Common stock | $ | 4.92 | $ | 2.90 | ||||
| Class A warrants | $ | 1.50 | $ | 0.64 | ||||
| Class B warrants | $ | 1.08 | $ | 0.65 | ||||
| Second Quarter | ||||||||
| Common stock | $ | 4.01 | $ | 1.94 | ||||
| Class A warrants | $ | 1.20 | $ | 0.63 | ||||
| Class B warrants | $ | 0.98 | $ | 0.40 | ||||
| Third Quarter | ||||||||
| Common stock | $ | 4.91 | $ | 2.21 | ||||
| Class A warrants | $ | 1.61 | $ | 0.45 | ||||
| Class B warrants | $ | 0.85 | $ | 0.35 | ||||
| Fourth Quarter | ||||||||
| Common stock | $ | 5.23 | $ | 0.88 | ||||
| Class A warrants | $ | 1.99 | $ | 0.11 | ||||
| Class B warrants | $ | 1.00 | $ | 0.02 | ||||
| Year Ended December 31, 2015 | ||||||||
| Fourth Quarter (Beginning November 13, 2015): | High | Low | ||||||
| Common stock | $ | 4.50 | $ | 3.10 | ||||
| Class A warrants | $ | 1.50 | $ | 0.51 | ||||
| Class B warrants | $ | 0.79 | $ | 0.27 | ||||
Holders
As of March 2, 2017,9, 2020, there were approximately 6764 holders of record of our common stock. This number does not include beneficial owners whose shares are held by nominees in street name.
Dividends
We have never declared or paid cash dividends on our capital stock. We intend to retain all of our available funds and future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.
Recent Sales of Unregistered Securities
Item 6. Selected Financial DataData.
| Year Ended December 31, | ||||||||||||||||
| Statement of Operations Data: | 2016 | 2015 | 2014 | 2013 | ||||||||||||
| Grant revenue | $ | 1,152,987 | $ | — | $ | — | $ | — | ||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 10,149,879 | 6,587,183 | 12,240,535 | 8,914,084 | ||||||||||||
| General and administrative | 7,083,155 | 4,422,764 | 4,875,030 | 4,020,364 | ||||||||||||
| Loss from operations | (16,080,047 | ) | (11,009,947 | ) | (17,115,565 | ) | (12,934,448 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of warrant liability, unit purchase option liability and investor rights obligation | 72,625 | 1,313,049 | 2,266,161 | (121,115 | ) | |||||||||||
| Interest income (expense), net | (464,181 | ) | (793,205 | ) | (1,206,187 | ) | 10,555 | |||||||||
| Total other income (expense): | (391,556 | ) | 519,844 | 1,059,974 | (110,560 | ) | ||||||||||
| Net loss | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (16,055,591 | ) | $ | (13,045,008 | ) | ||||
| Net loss attributable to common stockholders | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (3,521,153 | ) | $ | (13,126,972 | ) | ||||
| Net loss per share of common stock, basic and diluted | $ | (1.87 | ) | $ | (4.71 | ) | $ | (5.48 | ) | $ | (20.72 | ) | ||||
| Weighted-average shares of common stock outstanding, basic and diluted | 8,830,396 | 2,226,023 | 642,052 | 633,669 | ||||||||||||
| As of December 31, | ||||||||||||||||
| Balance Sheet Data: | 2016 | 2015 | 2014 | 2013 | ||||||||||||
| Cash and cash equivalents | $ | 5,127,958 | $ | 21,161,967 | $ | 11,742,349 | $ | 3,421,480 | ||||||||
| Total assets | 5,768,865 | 21,657,565 | 12,316,894 | 5,075,600 | ||||||||||||
| Long term debt, net of current portion and discount | — | 2,353,482 | 5,308,211 | — | ||||||||||||
| Total current liabilities | 4,311,863 | 5,849,818 | 4,993,816 | 3,065,642 | ||||||||||||
| Total liabilities | 5,561,863 | 8,573,838 | 10,302,027 | 3,065,642 | ||||||||||||
| Convertible preferred stock | — | — | 28,345,531 | 19,856,633 | ||||||||||||
| Common stock | 9,434 | 8,650 | 650 | 643 | ||||||||||||
| Additional paid-in capital | 70,232,651 | 66,638,557 | 16,742,063 | 9,170,468 | ||||||||||||
| Total stockholders’ equity (deficit) | 207,002 | 13,083,727 | (26,330,664 | ) | (17,846,675 | ) | ||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section ofin this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
During the fourth quarter of 2019, the Company sold its rights, titles and interest in, assets relating to its Pediatric Portfolio, namely Aciphex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal™ ER, Flexichamber™, Poly-Vi-Flor® and Tri-Vi-Flor™ (the "Pediatric Portfolio"), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor’s sales force and the assignment of supporting commercial contracts (the "Aytu Divestiture"), retaining as our only commercial product, Millipred, an oral prednisolone indicated across a wide variety of inflammatory conditions. As a result of the Aytu Divestiture, the Pediatric Portfolio met all conditions required in order to be classified as discontinued operations as of December 31, 2019. Accordingly, operating results from the Pediatric Portfolio are reported separately within income (loss) from discontinued operations, net of tax (inclusive of gain on sale) for all periods presented. Unless otherwise noted, the following section focuses on results of operations from continuing operations only.
Comparison of the Years Ended December 31, 2019 and 2018
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Product revenue, net | $ | 6,650 | $ | 6,572 | ||||
| Sales force revenue | — | 456 | ||||||
| License and other revenue | 100 | — | ||||||
| Total revenues, net | $ | 6,750 | $ | 7,028 | ||||
Product revenue, net increased $0.1 million for the NMDA receptor, a receptor subtype of the glutamate neurotransmitter system that is responsible for controlling neurological adaptation. We believe CERC-301 has the potential to produce a significant reduction in depression symptoms in a matter of days,year ended December 31, 2019 as compared to weeks or months with conventional therapies, because it specifically blocks the NMDA receptor subunit 2B, or NR2B. We believe this mechanism of action may provide rapid and significant antidepressant activity without the adverse side effect profile of non-selective NMDA receptor antagonists, such as ketamine. We are currently evaluating potential next steps for this program.year ended December 31, 2018.
As part of the acquisition of TRx Pharmaceuticals, LLC ("TRx") in November 2017, the Company acquired a potentsales and selective transmembrane AMPA receptor regulatory proteins, or TARP, γ-8-dependent α-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid receptor antagonist,marketing agreement with Pharmaceutical Associates, Inc. ("PAI") under which the Company received a monthly marketing fee to promote, market and sell certain products on behalf of PAI, as well as a share of PAI's profits, which we plan to developcollectively categorized as an adjunctive therapysales force revenue. For the year ended December 31, 2018, sales force revenue was $0.5 million. The PAI contract was canceled during the second quarter of 2018 and therefore there is no sales force revenue for the treatmentyear ended December 31, 2019.
License and other revenue
In August 2019, the Company assigned and transferred its rights, title, interest, and obligations with respect to CERC-611 to ES Therapeutics in exchange for gross proceeds of partial-onset seizures, with or without secondarily generalized seizures, in patients with epilepsy. We intend to file an investigational new drug application with$0.1 million, which was recognized as license and other revenue for the FDA and thereafter commence Phase 1 development in 2017, subjectyear ended December 31, 2019. Under the Assignment Agreement, the Company is also eligible for the following potential milestone payments: (a) a $7.5 million payment to the availabilityCompany upon cumulative net sales of additional funding.
The Maxim Group Equity Distribution$(0.6) million of cost of product sales of continuing operations recognized in the current year is driven by the Settlement Agreement
The following table summarizes our research and development expenses for the engagement of SunTrust Robinson Humphrey, Inc., or SunTrust,years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Preclinical expenses | $ | 2,789 | $ | 1,886 | ||||
| Clinical expenses | 4,079 | 1,693 | ||||||
| CMC expenses | 3,728 | 389 | ||||||
| Internal expenses not allocated to programs: | ||||||||
| Salaries, benefits and related costs | 1,909 | 1,223 | ||||||
| Stock-based compensation expense | 464 | 101 | ||||||
| Other | (1,205 | ) | 495 | |||||
| $ | 11,764 | $ | 5,787 | |||||
Research and development expenses increased $6.0 million for the year ended December 31, 2019 compared to the prior year. The overall increase was driven by an increase in research and development activities during the current year as our exclusive financial advisorthe Company continues to assist with our ongoing processdevelop its pipeline assets. Clinical expenses increased $2.4 million primarily due to exploreincreased development costs related to CERC-801, CERC-802, and review a range of strategic alternatives focused on maximizing stockholder value. Potential strategic alternatives that may be explored or evaluatedCERC-803, which were acquired as part of this process includethe Ichorion Acquisition in September 2018, and increased activities related to the CERC-301 clinical study in nOH during the first half of 2019. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $3.3 million for the year ended December 31, 2019 compared to the same period in 2018 due to additional spending on manufacturing to support clinical development. Salaries, benefits and related costs increased by $0.7 million compared to the same period in 2018 due to an acquisition, merger, business combination or other strategic transaction. We have not madeincrease in headcount and salary-related costs needed to maintain and grow our research and development activities as we continue to invest in our pipeline assets. Additionally, stock-based compensation increased by $0.4 million due to an increase in the amount of stock option grants in 2019 driven by an increased headcount, as well as the additional expense related to the annual stock option award that was granted on April 1, 2019.
These increases were partially offset by a decision$1.3 million reversal of research and development expense related to pursue any specific transaction or other strategic alternative,the Company's assignment of its license agreement with respect to CERC-611 to ES Therapeutics in the third quarter of 2019. Pursuant to the Assignment Agreement, the Company assigned and there can be no assurance that this ongoing process will resulttransferred its rights, interest and obligations related to the compound, thus releasing the Company's contingent payment of $1.3 million to Lilly upon the first subject dosage of CERC-611 in any such transaction.
Acquired In-Process Research and Development Expenses
As part of the Ichorion acquisition in September 2018, the Company acquired $18.7 million of in-process research and development ("IPR&D") for three preclinical therapies (CERC-801, CERC-802 and CERC-803) for CDGs. The fair value of our product candidates.the IPR&D was immediately recognized as acquired IPR&D expense as the IPR&D asset has no other alternate use due to the stage of development. There was no acquired IPR&D expense for the year ended December 31, 2019.
General and Administrative Expenses
The following table summarizes our general and administrative expenses of continuing operations for the years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Salaries, benefits and related costs | $ | 4,196 | $ | 3,607 | ||||
| Legal, consulting and other professional expenses | 3,943 | 4,426 | ||||||
| Stock-based compensation expense | 1,550 | 2,136 | ||||||
| Other | 434 | 342 | ||||||
| $ | 10,123 | $ | 10,511 | |||||
General and administrative expenses consist primarily ofdecreased $0.4 million for the year ended December 31, 2019 compared to 2018. The overall decrease was driven by a $0.5 million decrease in legal, consulting and other professional fees patent costs and a $0.6 million decrease in stock-based compensation, largely offset by a $0.6 million increase in salaries, benefits and related costs.
Legal, consulting and other professional expenses decreased $0.5 million, which was driven by a substantial decrease in consulting fees in the current year. The consulting fees incurred in the prior year were related to the integration of the acquisitions of TRx and Avadel Pharmaceuticals PLC's ("Avadel") pediatric products. The Company has since increased corporate headcount and therefore uses less consulting services to meet accounting and reporting requirements. Further, stock-based compensation expense decreased $0.6 million for the year ended December 31, 2019 as compared to the same period in 2018 mainly due to the reversal of expense recognition of $0.3 million of stock-based compensation expense related to the modification of a separated executive's awards in 2018, and due to the current year reversal of the expense recognized of $0.5 million related to the former CEO's unvested market-based options that were forfeited during the second quarter of 2019. These decreases to stock-based compensation were partially offset by expense recognized for stock options granted to executives and the Company's annual stock option awards. The decreases to general and administrative expenses were partially offset by a $0.6 million increase in salaries, benefits and related costs for executivedue to an increase in headcount and other personnel, including stock‑based compensation and travel expenses. Other general and administrative expenses include facility‑related costs, communication expenses and professional fees for legal, including patent‑related expenses, consulting, tax and accounting services, insurance, depreciation and general corporate expenses. We expect oursalary-related costs.
The Company expects general and administrative expenses to decreaseincrease in 2017.2020 due to expected increases to legal, consulting and other professional expenses as a result of integration costs related to the Merger, in addition to increased salaries and stock-based compensation as a result of additional headcount as a result of the Merger.
Sales and Marketing Expenses
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Salaries, benefits and related costs | $ | 628 | $ | 367 | ||||
| Stock-based compensation expense | 191 | 57 | ||||||
| Advertising and marketing expense | 606 | 60 | ||||||
| Other | 59 | 61 | ||||||
| $ | 1,484 | $ | 545 | |||||
Sales and marketing expenses of continuing operations consist of expenses related to advertising and marketing initiatives to support the go-to-market strategy of the CERC-800 compounds and the respective salaries and stock-based compensation to support such initiatives. The increase was primarily driven by a $0.5 million increase in advertising and marketing expense related to developing the go-to-market strategy in the current year in preparation to quickly and effectively market, launch, and distribute each of our pipeline assets, if any, that receive marketing approval in the future. Additionally, during the second quarter of 2018, a sales and marketing executive was hired. As a result, salaries, benefits and related costs and stock-based compensation expense increased $0.3 million and $0.1 million, respectively, due to a full year of such amounts in 2019, as opposed to only three quarters in 2018.
Amortization expense
The following table summarizes our amortization expense of continuing operations for the years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Amortization of intangible assets | $ | 1,339 | $ | 1,829 | ||||
Amortization expense of the continuing operations for the year ended December 31, 2019 relates to the amortization of the Company's acquired Millipred product marketing rights and amortization of the assembled workforce acquired as part of the Ichorion Acquisition. Amortization expense decreased $0.5 million from the previous year because the expense for the year ended December 31, 2018 includes $0.5 million of amortization related to the sales and marketing agreement with PAI, which was terminated in the second quarter of 2018.
Impairment of Intangible Assets
The following table summarizes our expense related to impairment of intangible assets of continuing operations for the years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Impairment of intangible assets | $ | — | $ | 1,862 | ||||
The Company recorded impairment of intangible asset expense of $1.9 million for the year ended December 31, 2018 due to the impairment of the PAI sales and marketing agreement upon termination of that agreement. The Company recorded impairment of intangible assets of $1.4 million for the year ended December 31, 2019 due to the impairment of the Flexichamber asset. However, as Flexichamber was part of the Aytu Divestiture, this expense was included in income (loss) from discontinued operations, net of tax (inclusive of gain on sale) for the year ended December 31, 2019. There was no impairment recognized on intangible assets from continuing operations for the year ended December 31, 2019.
Change in fair value of contingent consideration
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The following table summarizes our change in fair value of contingent consideration from continuing operations for the years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Change in fair value of contingent consideration | $ | (1,256 | ) | $ | (111 | ) | ||
The Company recognized a liability at fair value. This liability is remeasured at each balance sheet date andgain on the change in fair value of contingent consideration of $1.3 million for the year ended December 31, 2019 as compared to a gain of $0.1 million for the same period in 2018. The contingent consideration from continuing operations was related to the potential for future payment of consideration that is contingent upon the achievement of operation and commercial milestones related to the Ulesfia product, which was acquired as part of the Company's acquisition of TRx.
The fair value of contingent consideration was determined at the acquisition date. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability was remeasured at the current fair value with changes recorded within ourin operating expenses in the condensed consolidated statement of operations. The gain recognized in 2019 was related to the Company entering into the Lachlan Settlement Agreement during the second quarter of 2019, which released the Company from the potential contingent payments related to the TRx acquisition, reducing the fair value down to $0 as of June 30, 2019. This represented a gain on the change of fair value of contingent consideration of $1.3 million for the year ended December 31, 2019.
Other income, net
The following table summarizes our other income, net from continuing operations for the years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Change in fair value of Investment in Aytu | $ | 54 | $ | — | ||||
| Change in fair value of warrant liability and unit purchase option liability | (4 | ) | 25 | |||||
| Other (expense) income, net | (24 | ) | 14 | |||||
| Interest income, net | 121 | 16 | ||||||
| $ | 147 | $ | 55 | |||||
Other income, net increased $0.1 million for the year ended December 31, 2019 as compared to the prior year. The increase is driven by a $0.1 million increase in interest income, net in the current year which is the result of the Company opening a money market account during 2019 and having a higher average cash balance year over year. Additionally, for the year ended December 31, 2019, the Company recognized a $0.1 million gain on change in the fair value of the investment related to the Company's Investment in Aytu. As part of our IPO, the underwriterAytu Divestiture, the Company received a unit purchase option, or UPO,9,805,845 shares of Aytu Series G Preferred Stock. The fair value of the Investment was determined on November 1, 2019, the closing date of the Aytu Divestiture. Subsequent to purchase upthis date, at each reporting period, the Investment will be remeasured at current fair value with changes recorded in other income in the condensed consolidated statement of operations. Subsequent to 40,000 units, whereby a unit is comprised of one share of ourDecember 31, 2019, Aytu's common stock one Class A warrant to purchase one share of our common stockprice has been volatile and one Class B warrant to purchase one-half share of our common stock. The UPO is classified astherefore Cerecor may recognize a liability at its respective fair value. This liability is remeasured at each balance sheet date andsignificant gain or loss on the change in fair value is recorded within our statement of operations.the Investment in Aytu for the three months ending March 31, 2020 and any future reporting period based on actual movements in the underlying stock price.
The income tax expense from continuing operations was $0.3 million for the year ended December 31, 2019. The provision for income taxes for the year ended December 31, 2019 is primarily composed of interest on the income tax liability. The Company recognized an immaterial income tax benefit for the year ended December 31, 2018, which was composed of an adjustment benefit from the return to issue additionalprovision true up of a prior year tax liability, offset by state income tax of one subsidiary, and deferred income tax
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expense, all of which were not significant. The annual effective tax rate was (1.75)% and 0.14% for the years ended December 31, 2019 and 2018, respectively.
Liquidity, Capital Resources and Expenditure Requirements
During the first quarter of 2019, the Company closed on an underwritten public offering of common stock for 1,818,182 shares of our Series Bcommon stock of the Company, at a price to the public of $5.50 per share ("public price"). Armistice Capital Master Fund Ltd. ("Armistice"), the Company's largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company at the public price. Cerecor director, Steven J. Boyd, is Armistice's Chief Investment Officer. The net proceeds of the offering were approximately $9.0 million. During the third quarter of 2019, the Company entered into a securities purchase agreement with Armistice, pursuant to which, the Company sold 1,200,000 shares of its common stock for a purchase price of $3.132 per share. Net proceeds of the private placement were approximately $3.7 million. During the fourth quarter of 2019, the Company entered into, and subsequently closed on, the Aytu Purchase Agreement to sell the Company's rights, title and interest in, assets relating to its Pediatric Portfolio and related commercial infrastructure for a combination of cash and preferred stock ($4.5 million in cash, and approximately 9.8 million shares of Aytu convertible preferred stock) and the assumption of certain of the Company's liabilities including the Company’s payment obligations payable to Deerfield of $15.1 million and certain other liabilities of approximately $11.0 million. During the first quarter of 2020, the Company closed on a registered direct offering with institutional investors of 1,306,282 shares of the Company's common stock at a purchase price of $3.98 per share. Armistice participated in the offering by purchasing 1,256,282 shares of common stock from the Company. The net proceeds of the offering were approximately $5.0 million.
In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's existing pipeline assets and acquisitions or in-licensing of new assets. For the year ended December 31, 2019, Cerecor generated a net loss of $16.1 million and negative cash flow from operations of $19.1 million. As of December 31, 2019, Cerecor had an accumulated deficit of $114.3 million and $3.6 million in cash and cash equivalents.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern; however, the Company expects to incur additional losses in the future in connection with research and development activities and will require additional financing to fund its operations and to continue to execute its strategy. The Company plans to use its current cash on hand and the anticipated cash flows from the Company's profits from Millipred product sales and/or the potential proceeds from the out-license or sale of Millipred to a third party to offset costs related to its orphan disease pipeline assets, business development, and costs associated with its organizational infrastructure; however, Cerecor expects to continue to incur significant expenses and operating losses for the immediate future as it continues to invest in the Company's pipeline assets. The Company’s ability to continue as a going concern through 2020 is dependent upon the Company’s ability to raise additional equity and/or debt capital; however, there can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the Company.
Over the long term, the Company's ultimate ability to achieve and maintain profitability is dependent on, among other things, the development, regulatory approval, and commercialization of its pipeline assets, and the potential sale of any PRVs it receives, all being adequate to support its cost structure and pipeline asset development.
These conditions raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued. To alleviate these conditions, the Company is evaluating the potential out-licensing or sale of Millipred to a third party and some combination of rights to future PRV sales, equity or debt financings, collaborations, out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution or licensing arrangements, the sale of current or future assets or possible monetization of the Company's holdings of Aytu equity. If the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible or suspend or curtail planned programs. Due to the uncertainty regarding future financings and/or other potential options to raise additional funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
Uses of Liquidity
The Company uses cash to fund research and development expenses related to its rare pediatric and orphan disease pipeline, business development and costs associated with its organizational infrastructure.
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Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2019 and 2018:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (19,134 | ) | $ | (3,128 | ) | ||
| Investing activities | (443 | ) | 865 | |||||
| Financing activities | 12,559 | 10,404 | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (7,018 | ) | $ | 8,141 | |||
Net cash used in operating activities
Total net cash used in operating activities was $19.1 million for the year ended December 31, 2019, consisting primarily of a net loss of $16.1 million, which was driven by increased research and development activities as the Company continued to fund its pipeline of development assets. Adjustments to reconcile net loss to net cash used in net operating activities included $8.0 million gain recognized on the Aytu Divestiture and a $1.0 million non-cash gain on the change of fair value of contingent consideration liability, partially offset by $3.9 million of non-cash depreciation and amortization and non-cash stock-based compensation of $2.5 million. Additionally, changes in assets and liabilities, net of Aytu Divestiture decreased by a net $2.0 million, mainly driven by decreases in accrued expenses and other liabilities of $6.8 million, license obligations of $1.3 million and income taxes payable of $1.5 million, partially offset increases in accounts receivable of $1.7 million, net, and other receivables, excluding the Aevi loan, of $5.1 million.
The Company expects a significant and likely increase in net cash used in operating activities in 2020 due to our continued investment in the CERC-800 compounds and our increased investment in the pipeline assets recently acquired as part of the Series B preferred stock offeringAevi Merger.
Net cash used in operating activities was accounted$3.1 million for the year ended December 31, 2018 and consisted primarily of a netloss of $40.1 million, offset by non-cash acquired IPR&D of $18.7 million, depreciation and amortization of $4.6 million, non-cash stock-based compensation expense of $2.4 million, impairment of intangible assets of $1.9 million and changes in working capital, primarily, an increase in accrued expenses of $7.8 million, largely related to the Lachlan minimum obligations (prior to entering into the Lachlan Settlement in 2019) and a decrease in escrowed cash receivable of $3.8 million.
Net cash (used in) provided by investing activities
Total net cash used in investing activities was $0.4 million for the year ended December 31, 2019, consisting primarily of the Company's $4.1 million loan to Aevi (which is discussed in detail in Note 7 to the audited consolidated financial statements) and purchase of property and equipment of $0.3 million, largely offset by $4.0 million net cash received from the Aytu Divestiture.
Net cash used in investing activities was $0.9 million for the year ended December 31, 2018 and consisted primarily of $1.4 million of cash acquired from the acquisition of Ichorion partially offset by purchase of property, plant and equipment of $0.6 million, which includes leasehold improvement costs incurred as a freestanding financial instrument, which we referred to as the Investor Rights Obligation. The Investor Rights Obligation expired upon the closingpart of our IPO in accordance with its terms, andlease for the related liability was reduced to zero at that time.Company's corporate headquarters.
Net interest expense iscash provided by financing activities
Net cash provided by financing activities was $12.6 million for the year ended December 31, 2019 and consisted primarily of net proceeds of approximately $9.0 million from the underwritten public offering of common stock for 1,818,182 shares of common stock of the Company, at a price to the public of $5.50 per share, which the Company closed in the first quarter of 2019. The Company also received $3.7 million from a private placement of equity securities with Armistice during the third quarter of 2019. Additionally, for the year ended December 31, 2019, the Company received $0.8 million of proceeds from the exercise of stock options and warrants and $0.2 million of proceeds from sales of common stock under the employee stock purchase plan. This increase was partially offset by $0.9 million of contingent consideration payments related to interest payments pursuantthe Avadel acquisition made prior to the termsAytu Divestiture.
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Net cash provided by financing activities was $10.4 million for the year ended December 31, 2018, which consisted primarily of proceeds of $5.7 million from the warrant exercise by Armistice Capital in December 2018, net proceeds of $3.9 million from a private placement of equity securities to Armistice Capital in August 2014, as well as2018, and $1.1 million of proceeds from option and warrant exercises throughout the amortization ofyear. This increase was partially offset by $0.3 million payment in contingent consideration payments related to the debt discounts and premiums and deferred financing fees in connection with such term debt facility.Avadel acquisition.
Critical Accounting PoliciesEstimates and Significant Judgments and EstimatesAssumptions
While our significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements appearing at the end of this Annual Report on Form 10-K, we believe the following accounting policies are critical to the portrayalunderstanding of our financial condition and results. We have reviewed these critical accounting policies
Stock-Based Compensation
The Company applies the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and estimates withrecognition of compensation expense for all stock‑based awards made to employees, including employee stock options, in the audit committeestatements of ouroperations.
For stock options issued to employees and members of the board of directors.
For stock option grants with market-based conditions, compensation expense is recognized ratably over the respective award. Generally, we issue stock options and restricted stock with only service‑based vesting conditions and record the expense for these awards using the straight‑line method.
The assumptions we used to determine the fair value of stock options granted to employees and nonemployeemembers of the board of directors are as follows:
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||
| Service-based options | 2019 | 2018 | |||||||||||||||||||||||||||||||||||
| Risk-free interest rate | 1.01 | % | — | 1.93 | % | 1.64 | % | — | 1.97 | % | 0.85 | % | — | 1.97 | % | 1.47% | — | 2.59% | 2.51% | — | 3.01% | ||||||||||||||||
| Expected term of options (in years) | 5.0 | — | 6.25 | 5.0 | — | 6.25 | 5.00 | — | 6.25 | 5.0 | — | 6.25 | 5.0 | — | 6.25 | ||||||||||||||||||||||
| Expected stock price volatility | 80 | % | — | 100.0 | % | 70.0 | % | 70.0 | % | 55% | 55% | — | 65% | ||||||||||||||||||||||||
| Expected annual dividend yield | — | % | — | % | — | % | 0% | 0% | |||||||||||||||||||||||||||||
| Market-based options | |||||||||||||||||||||||||||||||||||||
| Risk-free interest rate | 2.32% | 2.84% | |||||||||||||||||||||||||||||||||||
| Expected term of options (in years) | 10.0 | 10.0 | |||||||||||||||||||||||||||||||||||
| Expected stock price volatility | 60% | 60% | |||||||||||||||||||||||||||||||||||
| Expected annual dividend yield | 0% | 0% | |||||||||||||||||||||||||||||||||||
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The estimates involved in the valuations include inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates when valuing our stock options, our stock‑based compensation expense could be materially different. We recognize compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture
Estimated Fair Value and Change in Fair Value of Contingent Consideration
The Company's business acquisitions of Avadel's pediatric products and TRx involved the potential for future payment of consideration that is contingent upon the achievement of operation and commercial milestones and royalty payments on future product sales. The fair value of contingent consideration was determined at the acquisition date utilizing unobservable inputs such as the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate estimate for pre‑vesting forfeitures, we have considered our historical experience of actual forfeitures. If our future actual forfeiture rate is materially different from our estimate, our stock‑based compensation expense could be significantly different from what we haveused to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability was remeasured at the current fair value with changes recorded in the current period.consolidated statements of operations.
There is no change in fair value of contingent consideration included in cost of product sales or research and development costs. For the year ended December 31, 2019 and 2018, the change in fair value of contingent consideration related to royalties on Avadel's pediatric products was included within net income (loss) from discontinued operations, net of tax (inclusive of gain on sale). The change in fair value of contingent consideration related to TRx was included within its common stockown standalone line in operating expenses from continuing operations in the Company's consolidated statements of operations because the contingent consideration was related to a product that was not sold as part of the Aytu Divestiture.
Estimated Fair Value of Investment in Aytu and Change in Fair Value of Investment in Aytu
As consideration for grants made priorthe Aytu Divestiture, the Company received approximately 9.8 million shares of Aytu Series G Convertible Preferred Stock. Pursuant to ASC 323, the date our common stock began trading separately onCompany accounts for this Investment as a financial instrument because Cerecor's Investment does not result in a controlling financial interest as the NASDAQ Capital Market, which was November 13, 2015 and includes all grants made from inception through November 9, 2015. The factors considered included the price for our convertible preferred stock that was sold to investors and the rights, preferences and privileges of our convertible preferred stock and common stock, the trading price of our units between the IPO date and November 13, 2015, our financial condition and results of operations during the relevant periods, including the status of the development of our product candidates, and the status of strategic initiatives. These estimates involve a significant level of judgment.
Estimated Fair Value of Guarantee and subjective factors that it believed were relevant and which may have changed fromChange in Fair Value of Guarantee
As of the closing date of the most recent valuation throughAytu Divestiture on November 1, 2019, Aytu assumed the dateCompany's debt obligation to Deerfield CSF and the contingent consideration liability related to future royalties on Avadel's pediatric products. In conjunction with the closing of the grant.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax assets primarily include net operating loss ("NOL") and tax credit carryforwards, accrued expenses not currently deductible and the cumulative temporary differences related to certain research and patent costs. Certain tax attributes, including NOLs and research and development credit carryforwards, may be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code (the "IRC"). See Note 15 for further information within the Company's consolidated financial statements. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be
On December 22, 2017, the “Tax Cuts and Jobs Act” ("TCJA" or the "Act") was enacted, that significantly reforms the IRC. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and NOL carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. See Note 15 within the Company's consolidated financial statements for further discussion related to the boardtax impact to the Company.
Acquisitions
For acquisitions that meet the definition of directors’ estimatea business under ASC 805, the Company records the acquisition using the acquisition method of accounting. All of the probability of each scenarioassets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the time the valuation was completed.
| Number of Shares | Fair Market | Fair Value of | ||||||||||||||||||
| Underlying Options | Exercise Price | Value per | Options per | |||||||||||||||||
| Date of Issuance | Granted | per Share | Common Share | Share | ||||||||||||||||
| 4/30/2015 | 3,571 | $ | 6.44 | $ | 5.04 | $ | 2.80 | |||||||||||||
| 6/2/2015 | 69,285 | $ | 6.16 | $ | 5.04 | $ | 2.52 | — | 2.80 | |||||||||||
| 10/20/2015 | 350,250 | $ | 6.49 | $ | 4.98 | $ | 2.93 | |||||||||||||
| 11/9/2015 | 100,284 | $ | 5.80 | $ | 4.11 | $ | 2.32 | |||||||||||||
| 1/1/2016 | 360,459 | $ | 3.35 | $ | 3.35 | $ | 2.32 | |||||||||||||
| 1/11/2016 | 21,714 | $ | 3.56 | $ | 3.56 | $ | 2.46 | — | 2.49 | |||||||||||
| 2/24/2016 | 108,591 | $ | 3.01 | $ | 3.01 | $ | 2.10 | |||||||||||||
| 3/14/2016 | 1,000 | $ | 4.45 | $ | 4.45 | $ | 3.11 | |||||||||||||
| 5/18/2016 | 50,142 | $ | 3.52 | $ | 3.52 | $ | 2.53 | |||||||||||||
| 6/30/2016 | 19,044 | $ | 2.20 | $ | 2.20 | $ | 1.53 | |||||||||||||
| 8/17/2016 | 263,000 | $ | 3.77 | $ | 3.77 | $ | 2.70 | |||||||||||||
| 8/24/2016 | 35,000 | $ | 4.38 | $ | 4.38 | $ | 3.10 | |||||||||||||
| 9/30/2016 | 10,303 | $ | 4.23 | $ | 4.23 | $ | 2.83 | |||||||||||||
| 12/31/2016 | 45,989 | $ | 0.88 | $ | 0.88 | $ | 0.66 | |||||||||||||
Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the years endedchief operating decision maker, or decision‑making group, in making decisions on how to allocate resources and assess performance. As of December 31, 20162019, the Company’s chief operating decision makers were the Chief Financial Officer and 2015:the Executive Chairman of the Board. The CFO and the Executive Chairman of the Board view the Company’s operations and manage the business as one operating segment. All long‑lived assets of the Company reside in the United States.
| Year Ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Grant revenue | $ | 1,153 | $ | — | ||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| CERC-301 | $ | 2,890 | $ | 3,110 | ||||
| CERC-501 | 3,122 | 1,481 | ||||||
| CERC-611 | 2,103 | — | ||||||
| COMTi | 124 | 260 | ||||||
| Internal expenses not allocated to programs: | ||||||||
| Salaries, benefits and related costs | 1,534 | 1,367 | ||||||
| Stock-based compensation expense | 141 | 67 | ||||||
| Other | 236 | 302 | ||||||
| $ | 10,150 | $ | 6,587 | |||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Salaries, benefits and related costs | $ | 1,922 | $ | 2,326 | ||||
| Legal, consulting and other professional expenses | 2,806 | 1,289 | ||||||
| Stock-based compensation expense | 1,554 | 328 | ||||||
| Other | 801 | 480 | ||||||
| $ | 7,083 | $ | 4,423 | |||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| CERC-301 | $ | 3,110 | $ | 8,711 | ||||
| CERC-501 | 1,481 | — | ||||||
| COMTi | 260 | 761 | ||||||
| FP01 | — | 28 | ||||||
| Internal expenses not allocated to programs: | ||||||||
| Salaries, benefits and related costs | 1,367 | 2,277 | ||||||
| Stock-based compensation expense | 67 | 202 | ||||||
| Other | 302 | 262 | ||||||
| $ | 6,587 | $ | 12,241 | |||||
| Year Ended | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Salaries, benefits and related costs | $ | 2,326 | $ | 1,619 | ||||
| Legal, consulting and other professional expenses | 1,289 | 1,776 | ||||||
| Stock-based compensation expense | 328 | 885 | ||||||
| Other | 480 | 595 | ||||||
| $ | 4,423 | $ | 4,875 | |||||
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by (used in): | ||||||||||||
| Operating activities | $ | (14,573 | ) | $ | (10,163 | ) | $ | (15,518 | ) | |||
| Investing activities | (35 | ) | (20 | ) | (20 | ) | ||||||
| Financing activities | (1,426 | ) | 19,603 | 23,859 | ||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (16,034 | ) | $ | 9,420 | $ | 8,321 | |||||
one reporting unit.
| Less than | More than | ||||||||||||||||
| Contractual Obligation(1) | Total | one year | 1 ‑ 3 years | 3 years | |||||||||||||
| Debt obligations(2) | $ | 2,332 | $ | 2,332 | $ | — | $ | — | |||||||||
| Operating lease obligations(3) | 314 | 155 | 159 | — | |||||||||||||
| Total contractual obligations | $ | 2,646 | $ | 2,487 | $ | 159 | $ | — | |||||||||
Off‑Balance Sheet Arrangements
Recently Adopted Accounting Pronouncements
69
JOBS Act
The JOBS Act contains provisions that, among other things, reduce reporting requirements for an “emerging growth company.” As an emerging growth company, we have elected to not take advantage of the extended transition period afforded
by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non‑emerging growth companies.
Internal Control Over Financial Reporting
Assessing our staffing and training procedures to improve our internal control over financial reporting is an ongoing process. We are not currently required to comply with all of Section 404 of the Sarbanes‑Oxley Act of 2002, or the Sarbanes‑Oxley Act. For the year ended December 31, 2016,2019, management is required to make an assessment of the effectiveness of our internal control over financial reporting as required by Section 404(a) of the Sarbanes-Oxley Act, as further described in Item 9A of this Annual Report on Form 10-K. The Dodd-Frank Wall Street Reform and Consumer Protection Act exempts non-accelerated filers from compliance with Section 404(b) of the Sarbanes-Oxley Act, which relates to the independent auditor's attestation on the effectiveness of the issuer's internal control over financial reporting. As such, our independent registered public accounting firm has not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting as of December 31, 2016.2019.
70
Item 7A. Quantitative and Qualitative Disclosures About Market RiskRisk.
Interest Rate Risk
Item 8. Financial Statements and Supplementary DataData.
The consolidated financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those consolidated financial statements is found in Item 15 of Part IV of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureDisclosure.
None.
Item 9A. Controls and ProceduresProcedures.
Evaluation of Disclosure Controls and Procedures
In designing and procedures. Based on that evaluation ofevaluating our disclosure controls and procedures, asmanagement recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of December 31, 2016,achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on their evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2019, our disclosure controls and procedures as of such date are effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to, ensureand are effective to, provide assurance at a reasonable level that the information we are required to be disclosed by a companydisclose in the reports that it fileswe file or submitssubmit under the Exchange Act areis recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms. Disclosure controlsforms, and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurancedisclosures as of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.December 31, 2019.
Management's Annual Report on Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our Executive Chairman of the Sarbanes-Oxley Act, our management assessedBoard and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 using2019, based on the criteria set forthInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013)("COSO") (2013 Framework). In adoptingBased on this evaluation under the 2013 Framework, management assessed the applicability of the principles within each component of internal control and determined whether or not they have been adequately addressed within the current system of internal control and adequately documented. Based on this assessment, management, under the supervision and with the participation of our principal executive officer and our principal financial officer have concluded that as of December 31, 2016, our internal control over financial reporting was effective at thea reasonable level of assurance level based on those criteria. as of December 31, 2019.
Changes in Internal Control Over Financial Reporting
71
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of Registered Public Accounting Firm
This annual reportAnnual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to a transition periodan exemption established by rules of the SECJOBS Act for newly publicemerging growth companies.
Item 9B. Other InformationInformation.
The foregoing description of the Amendment to the Cola Employment Agreement is a summary, is not complete and is qualified in its entirety by reference to the Amendment, which will be filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ending March 31, 2020.
PART III
Item 10. Directors, Executive Officers and Corporate GovernanceGovernance.
Item 11. Executive CompensationCompensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersMatters.
Item 13. Certain Relationships and Related Transactions, and Director IndependenceIndependence.
Item 14. Principal Accounting Fees and ServicesServices.
PART IV
Item 15. Exhibits andExhibits; Financial Statement SchedulesSchedules.
| (a) | Documents filed as part of this report. |
| 1. | The following consolidated financial statements of Cerecor Inc. and Report of Ernst & Young, LLP, Independent Registered Public Accounting Firm, are included in this report: |
| 2. | List of financial statement schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements described above. |
| 3. | List of Exhibits required by Item 601 of Regulation S-K. See part (b) below. |
| (b) |
The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated.
Exhibit Number | Description of Exhibit | ||||||||||||||||
| 2.1 * | |||||||||||||||||
| 2.2 * | |||||||||||||||||
| 2.3 * | |||||||||||||||||
| 3.1 | |||||||||||||||||
| 3.1.1 | |||||||||||||||||
74
| 3.1.2 | |||||||||||||||||
| 3.2 | |||||||||||||||||
| 4.1 | |||||||||||||||||
| 4.2 | |||||||||||||||||
| 4.3 | |||||||||||||||||
| 4.4 | |||||||||||||||||
| 4.5 | |||||||||||||||||
| 4.6 | |||||||||||||||||
| 4.7 | |||||||||||||||||
| 4.8 | |||||||||||||||||
| 4.9 | |||||||||||||||||
| 4.10‡ | |||||||||||||||||
| 10.1 ** | |||||||||||||||||
| 10.2 ** | |||||||||||||||||
| 10.3 ** | |||||||||||||||||
75
| 10.4 + | |||||||||||||||||
| 10.5 | |||||||||||||||||
| 10.6 | |||||||||||||||||
| 10.7 | |||||||||||||||||
| 10.8 + | |||||||||||||||||
| 10.9 ** | |||||||||||||||||
| 10.10 | |||||||||||||||||
| 10.11 | |||||||||||||||||
| 10.12 + | |||||||||||||||||
| 10.13 ** | |||||||||||||||||
| 10.14 + | |||||||||||||||||
| 10.15.1 + | |||||||||||||||||
| 10.15.2 +‡ | |||||||||||||||||
| 10.16 + | |||||||||||||||||
76
| 10.17 + | |||||||||||||||||
| 10.18 | |||||||||||||||||
| 10.19 | |||||||||||||||||
| 10.20 | |||||||||||||||||
| 10.21 + | |||||||||||||||||
| 10.22 + | |||||||||||||||||
| 10.23 | |||||||||||||||||
| 10.24 | |||||||||||||||||
| 10.25 | |||||||||||||||||
| 10.26 | |||||||||||||||||
| 10.27 | |||||||||||||||||
| 10.28 | |||||||||||||||||
| 10.29 | |||||||||||||||||
| 10.30 | |||||||||||||||||
77
| 10.31 | |||||||||||||||||
| 10.32 ‡ | |||||||||||||||||
| 21.1 ‡ | |||||||||||||||||
| 23.1 ‡ | |||||||||||||||||
| 31.1 ‡ | |||||||||||||||||
| 31.2 ‡ | |||||||||||||||||
| 32.1 # ‡ | |||||||||||||||||
| 101.INS | XBRL Instance Document. | ||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | ||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||||||||||||||
* The schedules to these agreements have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a copy of any schedule omitted from the agreements to the SEC upon request.
** Confidential treatment requested under 17 C.F.R. §§ 200.80(b)(4) and 230.406. The confidential portions of this exhibit have been omitted and are marked accordingly. The confidential portions have been filed separately with the Securities and Exchange Commission.
+ Management contract or compensatory agreement.
‡ Filed herewith.
# This certification is being furnished solely to accompany this 10-K pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Item 16. 10-K Summary.
None.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Cerecor Inc. |
| /s/ |
Date: March 14, 201711, 2020
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ | March | |||
| (Principal Executive Officer) | ||||
| /s/ | Chief Financial Officer | March | ||
| (Principal Financial and Accounting Officer) | ||||
| /s/ | March | |||
| /s/ | Director | March | ||
| /s/ | Director | March | ||
| /s/ Phil Gutry | Director | March | ||
| Phil Gutry | ||||
| /s/ Uli Hacksell | Director | March 11, 2020 | ||
| Uli Hacksell | ||||
| /s/ Magnus Persson | Director | March | ||
| Magnus Persson | ||||
| /s/ Keith Schmidt | Director | March 11, 2020 | ||
| Keith Schmidt | ||||
79
CERECOR INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cerecor Inc. and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations, convertible preferred stock andchanges in stockholders’ equity (deficit) and cash flows for each of the threetwo years in the period ended December 31, 2016. These2019, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerecor Inc.the Company at December 31, 20162019 and 2015,2018, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2016,2019, in conformity with U.S. generally accepted accounting principles.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring net losses has generated negative cash flows from operations, has an accumulated deficit at December 31, 2016used significant cash in operations, expects to continue to incur losses, and current cash and cash equivalents at December 31, 2016has stated that will not be sufficient to meet its anticipated cash requirements through a period of one year after the date that the financial statements are issued. These factors raise substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans in regard toregarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Baltimore, Maryland
March 14, 201711, 2020
CERECOR INC. and SUBSIDIARIES
Consolidated Balance Sheets
| December 31, | December 31, | |||||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 5,127,958 | $ | 21,161,967 | $ | 3,609,438 | $ | 10,646,301 | ||||||||
| Grants receivable | 132,472 | — | ||||||||||||||
| Accounts receivable, net | 1,001,645 | 822,327 | ||||||||||||||
| Other receivables | 4,240,572 | 5,262,213 | ||||||||||||||
| Inventory, net | 21,334 | 317,923 | ||||||||||||||
| Prepaid expenses and other current assets | 391,253 | 401,550 | 706,968 | 731,954 | ||||||||||||
| Restricted cash—current portion | 11,111 | 58,832 | ||||||||||||||
| Restricted cash, current portion | 17,535 | 18,730 | ||||||||||||||
| Investment in Aytu | 7,628,947 | — | ||||||||||||||
| Current assets of discontinued operations | 497,577 | 4,132,445 | ||||||||||||||
| Total current assets | 5,662,794 | 21,622,349 | 17,724,016 | 21,931,893 | ||||||||||||
| Property and equipment, net | 1,447,663 | 586,512 | ||||||||||||||
| Intangibles assets, net | 2,426,258 | 3,765,254 | ||||||||||||||
| Goodwill | 14,409,088 | 14,409,088 | ||||||||||||||
| Restricted cash, net of current portion | 62,828 | — | 101,945 | 81,725 | ||||||||||||
| Property and equipment, net | 43,243 | 35,216 | ||||||||||||||
| Long-term assets of discontinued operations | — | 29,476,249 | ||||||||||||||
| Total assets | $ | 5,768,865 | $ | 21,657,565 | $ | 36,108,970 | $ | 70,250,721 | ||||||||
| Liabilities and stockholders’ equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Current portion of long term debt, net of discount | $ | 2,353,667 | $ | 3,208,074 | ||||||||||||
| Accounts payable | 1,010,209 | 678,109 | $ | 2,077,524 | $ | 1,446,141 | ||||||||||
| Accrued expenses and other current liabilities | 942,435 | 1,885,458 | 5,640,252 | 14,328,879 | ||||||||||||
| Warrant liability | 5,501 | 27,606 | ||||||||||||||
| Unit purchase option liability | 51 | 50,571 | ||||||||||||||
| Income taxes payable | 551,671 | 2,032,258 | ||||||||||||||
| Contingent consideration, current portion | — | 859,670 | ||||||||||||||
| Current liabilities of discontinued operations | 3,891,012 | 7,549,631 | ||||||||||||||
| Total current liabilities | 4,311,863 | 5,849,818 | 12,160,459 | 26,216,579 | ||||||||||||
| Long term debt, net of current portion and discount | — | 2,353,482 | ||||||||||||||
| Other long term liabilities | 1,250,000 | 370,538 | ||||||||||||||
| Contingent consideration, net of current portion | — | 396,540 | ||||||||||||||
| Deferred tax liability, net | 85,981 | 69,238 | ||||||||||||||
| License obligations | — | 1,250,000 | ||||||||||||||
| Other long-term liabilities | 1,111,965 | 385,517 | ||||||||||||||
| Long-term liabilities of discontinued operations | 1,755,000 | 21,025,099 | ||||||||||||||
| Total liabilities | 5,561,863 | 8,573,838 | 15,113,405 | 49,342,973 | ||||||||||||
| Stockholders’ equity (deficit): | ||||||||||||||||
| Preferred stock—$0.001 par value; 5,000,000 and zero shares authorized at December 31, 2016 and 2015, respectively; zero shares issued and outstanding at December 31, 2016 and 2015 | — | — | ||||||||||||||
| Common stock—$0.001 par value; 200,000,000 shares authorized at December 31, 2016 and 2015; 9,434,141 and 8,650,143 shares issued and outstanding at December 31, 2016 and 2015, respectively | 9,434 | 8,650 | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common Stock—$0.001 par value; 200,000,000 shares authorized at December 31, 2019 and 2018; 44,384,222 and 40,804,189 shares issued and outstanding at December 31, 2019 and 2018, respectively | 44,384 | 40,804 | ||||||||||||||
| Preferred Stock—$0.001 par value; 5,000,000 shares authorized at December 31, 2019 and 2018; 2,857,143 shares issued and outstanding at December 31, 2019 and 2018, respectively | 2,857 | 2,857 | ||||||||||||||
| Additional paid-in capital | 70,232,651 | 66,638,557 | 135,238,941 | 119,082,157 | ||||||||||||
| Accumulated deficit | (70,035,083 | ) | (53,563,480 | ) | (114,290,617 | ) | (98,218,070 | ) | ||||||||
| Total stockholders’ equity | 207,002 | 13,083,727 | 20,995,565 | 20,907,748 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 5,768,865 | $ | 21,657,565 | $ | 36,108,970 | $ | 70,250,721 | ||||||||
See accompanying notes to the consolidated financial statements.
F-3
CERECOR INC. and SUBSIDIARIES
Consolidated Statements of Operations
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Grant revenue | $ | 1,152,987 | $ | — | $ | — | ||||||
| Operating expenses: | ||||||||||||
| Research and development | 10,149,879 | 6,587,183 | 12,240,535 | |||||||||
| General and administrative | 7,083,155 | 4,422,764 | 4,875,030 | |||||||||
| Loss from operations | (16,080,047 | ) | (11,009,947 | ) | (17,115,565 | ) | ||||||
| Other income (expense): | ||||||||||||
| Change in fair value of warrant liability, unit purchase option liability and investor rights obligation | 72,625 | 1,313,049 | 2,266,161 | |||||||||
| Interest income (expense), net | (464,181 | ) | (793,205 | ) | (1,206,187 | ) | ||||||
| Total other income (expense) | (391,556 | ) | 519,844 | 1,059,974 | ||||||||
| Net loss | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (16,055,591 | ) | |||
| Net loss attributable to common stockholders | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (3,521,153 | ) | |||
| Net loss per share of common stock, basic and diluted | $ | (1.87 | ) | $ | (4.71 | ) | $ | (5.48 | ) | |||
| Weighted-average shares of common stock outstanding, basic and diluted | 8,830,396 | 2,226,023 | 642,052 | |||||||||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | ||||||||
| Product revenue, net | $ | 6,650,351 | $ | 6,572,322 | ||||
| Sales force revenue | — | 456,056 | ||||||
| License and other revenue | 100,000 | — | ||||||
| Total revenues, net | 6,750,351 | 7,028,378 | ||||||
| Operating expenses: | ||||||||
| Cost of product sales | (566,523 | ) | 3,260,668 | |||||
| Research and development | 11,764,133 | 5,786,635 | ||||||
| Acquired in-process research and development | — | 18,723,952 | ||||||
| General and administrative | 10,123,320 | 10,511,207 | ||||||
| Sales and marketing | 1,484,044 | 545,218 | ||||||
| Amortization expense | 1,338,996 | 1,828,552 | ||||||
| Impairment of intangible assets | — | 1,861,562 | ||||||
| Change in fair value of contingent consideration | (1,256,211 | ) | (110,923 | ) | ||||
| Total operating expenses | 22,887,759 | 42,406,871 | ||||||
| Loss from continuing operations | (16,137,408 | ) | (35,378,493 | ) | ||||
| Other (expense) income: | ||||||||
| Change in fair value of Investment in Aytu | 53,932 | — | ||||||
| Change in fair value of warrant liability and unit purchase option liability | (3,888 | ) | 25,010 | |||||
| Other (expense) income, net | (24,399 | ) | 13,657 | |||||
| Interest income, net | 121,326 | 16,261 | ||||||
| Total other income, net from continuing operations | 146,971 | 54,928 | ||||||
| Loss from continuing operations before taxes | (15,990,437 | ) | (35,323,565 | ) | ||||
| Income tax expense (benefit) | 280,316 | (49,466 | ) | |||||
| Loss from continuing operations | $ | (16,270,753 | ) | $ | (35,274,099 | ) | ||
| Income (loss) from discontinued operations, net of tax (inclusive of gain on sale) | 198,206 | (4,778,711 | ) | |||||
| Net loss | $ | (16,072,547 | ) | $ | (40,052,810 | ) | ||
| Net (loss) income per share of common stock, basic and diluted: | ||||||||
| Continuing operations | $ | (0.28 | ) | $ | (1.06 | ) | ||
| Discontinued operations | 0.00 | $ | (0.14 | ) | ||||
| Net loss per share of common stock, basic and diluted | $ | (0.28 | ) | $ | (1.20 | ) | ||
| Net (loss) income per share of preferred stock, basic and diluted: | ||||||||
| Continuing operations | $ | (1.42 | ) | |||||
| Discontinued operations | 0.01 | |||||||
| Net loss per share of preferred stock, basic and diluted | $ | (1.41 | ) | |||||
See accompanying notes to the consolidated financial statements.
CERECOR INC. and SUBSIDIARIES
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Cash Flows
| Series A, A-1 and B | Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||
| convertible preferred | Additional | Total | |||||||||||||||||||||||
| stock | Common stock | paid‑in | Accumulated | stockholders’ | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | equity (deficit) | |||||||||||||||||||
| Balance, January 1, 2014 | 40,190,902 | $ | 19,856,633 | 642,844 | $ | 643 | $ | 9,170,468 | $ | (27,017,786 | ) | $ | (17,846,675 | ) | |||||||||||
| Extinguishment upon modification of Series A and A-1 convertible preferred stock and issuance of common stock dividends | — | (6,004,417 | ) | 6,877 | 7 | 6,004,604 | — | 6,004,611 | |||||||||||||||||
| Reclassification of common stock warrants from liabilities to equity | — | — | — | — | 426,303 | — | 426,303 | ||||||||||||||||||
| Conversion of convertible promissory notes in exchange for Series B convertible preferred stock | 5,597,618 | 1,405,003 | — | — | — | — | — | ||||||||||||||||||
| Conversion of demand notes in exchange for Series B convertible preferred stock, net of investor rights obligation | 3,333,331 | 837,313 | — | — | — | — | — | ||||||||||||||||||
| Issuance of Series B convertible preferred stock net of issuance costs and investor rights obligation | 50,017,786 | 12,250,999 | 54,107 | 54,107 | |||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,086,581 | — | 1,086,581 | ||||||||||||||||||
| Net loss | — | — | — | — | — | (16,055,591 | ) | (16,055,591 | ) | ||||||||||||||||
| Balance, December 31, 2014 | 99,139,637 | $ | 28,345,531 | 649,721 | $ | 650 | $ | 16,742,063 | $ | (43,073,377 | ) | $ | (26,330,664 | ) | |||||||||||
| Issuance of securities in initial public offering, including over-allotment and underwriters' unit purchase option, net of offering costs and underwriting discounts, commissions and expenses | — | — | 4,020,000 | 4,020 | 21,161,569 | — | 21,165,589 | ||||||||||||||||||
| Issuance of common stock for conversion of preferred stock upon closing of initial public offering | (99,139,637 | ) | (28,345,531 | ) | 3,980,422 | 3,980 | 28,340,177 | — | 28,344,157 | ||||||||||||||||
| Stock-based compensation | — | — | — | — | 394,748 | — | 394,748 | ||||||||||||||||||
| Net loss | — | — | — | — | — | (10,490,103 | ) | (10,490,103 | ) | ||||||||||||||||
| Balance, December 31, 2015 | — | $ | — | 8,650,143 | $ | 8,650 | $ | 66,638,557 | $ | (53,563,480 | ) | $ | 13,083,727 | ||||||||||||
| Issuance of common stock from sale of shares under common stock purchase agreement, net of offering costs | — | — | 763,998 | 764 | 1,899,223 | 1,899,987 | |||||||||||||||||||
| Shares purchased through employee stock purchase plan | — | — | 20,000 | 20 | (20 | ) | — | — | |||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,694,891 | — | 1,694,891 | ||||||||||||||||||
| Net loss | — | — | — | — | — | (16,471,603 | ) | (16,471,603 | ) | ||||||||||||||||
| Balance, December 31, 2016 | — | $ | — | 9,434,141 | $ | 9,434 | $ | 70,232,651 | $ | (70,035,083 | ) | $ | 207,002 | ||||||||||||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating activities | ||||||||
| Net loss | $ | (16,072,547 | ) | $ | (40,052,810 | ) | ||
| Adjustments to reconcile net loss used in operating activities: | ||||||||
| Depreciation and amortization | 3,883,567 | 4,554,963 | ||||||
| Impairment of intangible assets | 1,449,121 | 1,861,562 | ||||||
| Stock-based compensation, excluding amount included within gain on sale of Pediatric Portfolio | 2,532,257 | 2,431,063 | ||||||
| Acquired in-process research and development, including transaction costs | — | 18,723,952 | ||||||
| Deferred taxes | 16,743 | (16,745 | ) | |||||
| Amortization of inventory fair value adjustment associated with acquisition of TRx and Avadel pediatric products | 107,271 | 300,573 | ||||||
| Non-cash interest expense | — | 302,882 | ||||||
| Gain on Aytu Divestiture | (7,964,924 | ) | — | |||||
| Change in fair value of Investment in Aytu | (53,932 | ) | — | |||||
| Change in fair value of contingent consideration liability | (1,009,169 | ) | 58,366 | |||||
| Change in fair value of warrant liability and unit purchase option liability | 3,888 | (25,010 | ) | |||||
| Changes in assets and liabilities, net of Aytu Divestiture: | ||||||||
| Accounts receivable, net | 1,658,333 | (222,530 | ) | |||||
| Other receivables (excluding Aevi Loan) | 5,120,247 | (2,277,255 | ) | |||||
| Inventory, net | 532,947 | (311,199 | ) | |||||
| Prepaid expenses and other assets | (917,016 | ) | (241,641 | ) | ||||
| Escrowed cash receivable | — | 3,752,390 | ||||||
| Accounts payable | 1,019,358 | 82,451 | ||||||
| Income taxes payable | (1,480,587 | ) | (226,890 | ) | ||||
| Accrued expenses and other liabilities | (6,835,395 | ) | 7,792,259 | |||||
| License obligations | (1,250,000 | ) | — | |||||
| Lease liability, net | 125,506 | — | ||||||
| Other long term liabilities | — | 385,517 | ||||||
| Net cash used in operating activities | (19,134,332 | ) | (3,128,102 | ) | ||||
| Investing activities | ||||||||
| Net cash received from Aytu Divestiture | 3,958,412 | — | ||||||
| Loan to Aevi | (4,139,401 | ) | ||||||
| Avadel pediatric products acquisition | — | (1 | ) | |||||
| Net cash acquired from acquisition of Ichorion Therapeutics, Inc. | — | 1,429,877 | ||||||
| Purchase of property and equipment | (262,013 | ) | (564,415 | ) | ||||
| Net cash (used in) provided by investing activities | (443,002 | ) | 865,461 | |||||
| Financing activities | ||||||||
| Proceeds from exercise of stock options and warrants | 836,188 | 1,083,953 | ||||||
| Proceeds from shares purchased through employee stock purchase plan | 210,777 | 72,236 | ||||||
| Restricted Stock Units withheld for taxes | (33,959 | ) | ||||||
| Proceeds from sale of shares pursuant to common stock private placement, net | 3,708,602 | 3,857,106 | ||||||
| Proceeds from sale of shares of common stock in underwritten public offering, net of offering costs | 8,975,960 | |||||||
| Proceeds from issuance of Series B convertible preferred stock upon warrant exercise, net | — | 5,685,038 | ||||||
| Payment of contingent consideration | (881,932 | ) | (294,435 | ) | ||||
| Payment of long-term debt | (256,140 | ) | — | |||||
| Net cash provided by financing activities | 12,559,496 | 10,403,898 | ||||||
F-5
| (Decrease) increase in cash and cash equivalents | (7,017,838 | ) | 8,141,257 | |||||
| Cash, cash equivalents, and restricted cash at beginning of period | 10,746,756 | 2,605,499 | ||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 3,728,918 | $ | 10,746,756 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for interest | $ | 1,050,000 | $ | 525,000 | ||||
| Cash paid for taxes | $ | 1,803,665 | $ | 354,000 | ||||
| Supplemental disclosures of non-cash investing and financing activities | ||||||||
| Leased asset obtained in exchange for new operating lease liability | $ | 743,025 | $ | — | ||||
| Debt assumed in Avadel Pediatric Products acquisition | $ | — | $ | (15,075,000 | ) | |||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash and cash equivalents | $ | 3,609,438 | $ | 10,646,301 | ||||
| Restricted cash, current portion | 17,535 | 18,730 | ||||||
| Restricted cash, net of current portion | 101,945 | 81,725 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 3,728,918 | $ | 10,746,756 | ||||
See accompanying notes to the consolidated financial statements.
F-6
CERECOR INC. and SUBSIDIARIES
Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Operating activities | ||||||||||||
| Net loss | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (16,055,591 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation | 26,856 | 23,508 | 28,943 | |||||||||
| Loss on disposition of assets | — | — | 17,806 | |||||||||
| Stock-based compensation expense | 1,694,891 | 394,748 | 1,086,581 | |||||||||
| Write off of deferred public offering costs | — | — | 1,064,106 | |||||||||
| Non-cash interest expense | 162,270 | 293,748 | 989,258 | |||||||||
| Change in fair value of warrant liability, unit purchase option liability and investor rights obligation | (72,625 | ) | (1,313,049 | ) | (2,266,161 | ) | ||||||
| Changes in assets and liabilities: | ||||||||||||
| Grant receivable | (132,472 | ) | — | — | ||||||||
| Prepaid expenses and other assets | 22,047 | (41,243 | ) | 353,973 | ||||||||
| Restricted cash | (15,107 | ) | 116,666 | (498 | ) | |||||||
| Accounts payable | 332,100 | (268,709 | ) | (708,366 | ) | |||||||
| Accrued expenses and other liabilities | (119,495 | ) | 1,121,054 | (28,400 | ) | |||||||
| Net cash used in operating activities | (14,573,138 | ) | (10,163,380 | ) | (15,518,349 | ) | ||||||
| Investing activities | ||||||||||||
| Purchase of property and equipment | (34,883 | ) | (19,984 | ) | (19,502 | ) | ||||||
| Net cash used in investing activities | (34,883 | ) | (19,984 | ) | (19,502 | ) | ||||||
| Financing activities | ||||||||||||
| Proceeds from issuance of convertible promissory notes and demand notes | — | — | 2,249,666 | |||||||||
| Proceeds from issuance of term loan, net of costs | — | — | 7,390,000 | |||||||||
| Proceeds from issuance of Series B convertible preferred stock and common stock warrants, net of offering costs | — | — | 14,584,307 | |||||||||
| Payment of fractional shares upon conversion of preferred stock to common stock | — | (1,373 | ) | — | ||||||||
| Proceeds from initial public offering, including over-allotment, net of underwriting discounts, commissions and expenses | — | 23,685,270 | — | |||||||||
| Proceeds from sale of shares under common stock purchase agreement | 2,003,182 | — | — | |||||||||
| Principal payments on term debt | (3,314,225 | ) | (1,811,744 | ) | — | |||||||
| Payment of offering costs | (114,945 | ) | (2,269,171 | ) | (365,253 | ) | ||||||
| Net cash provided by (used in) financing activities | (1,425,988 | ) | 19,602,982 | 23,858,720 | ||||||||
| Increase (decrease) in cash and cash equivalents | (16,034,009 | ) | 9,419,618 | 8,320,869 | ||||||||
| Cash and cash equivalents at beginning of period | 21,161,967 | 11,742,349 | 3,421,480 | |||||||||
| Cash and cash equivalents at end of period | $ | 5,127,958 | $ | 21,161,967 | $ | 11,742,349 | ||||||
| Supplemental disclosures of cash flow information | ||||||||||||
| Cash paid for interest | $ | 348,888 | $ | 568,299 | $ | 173,514 | ||||||
| Supplemental disclosures of non-cash financing activities: | ||||||||||||
| Accrued deferred financing costs | $ | 81,832 | $ | — | $ | — | ||||||
| Conversion of promissory and demand notes into Series B convertible preferred stock | $ | — | $ | — | $ | 2,249,666 | ||||||
| Reclassification of common stock warrants from liabilities to equity | $ | — | $ | — | $ | 426,303 | ||||||
| Allocation of debt and equity proceeds to investor rights obligation | $ | — | $ | — | $ | 2,598,510 | ||||||
| Extinguishment upon modification of Series A and A-1 convertible preferred stock | $ | — | $ | — | $ | 12,534,438 | ||||||
| Additional | Total | ||||||||||||||||||||||||||||
| Common stock | Preferred Stock | paid‑in | Contingently issuable stock | Accumulated | stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Amount | deficit | equity | ||||||||||||||||||||||
| Balance, December 31, 2017 | 31,266,989 | $ | 31,268 | — | $ | — | $ | 83,338,136 | $ | 2,655,464 | $ | (58,165,260 | ) | $ | 27,859,608 | ||||||||||||||
| Issuance of contingently issuable shares in acquisition of TRx | 2,349,968 | 2,350 | — | 2,653,114 | (2,655,464 | ) | — | — | |||||||||||||||||||||
| Issuance of shares pursuant to common stock private placement, net of offering costs | 1,000,000 | 1,000 | — | 3,856,106 | — | — | 3,857,106 | ||||||||||||||||||||||
| Issuance of shares in acquisition of Ichorion assets | 5,774,464 | 5,774 | — | 19,965,780 | — | — | 19,971,554 | ||||||||||||||||||||||
| Issuance of Series B convertible preferred stock upon warrant exercise, net of offering costs | — | 2,857,143 | 2,857 | 5,682,181 | — | — | 5,685,038 | ||||||||||||||||||||||
| Exercise of stock options and warrants | 370,361 | 370 | — | 1,083,583 | — | — | 1,083,953 | ||||||||||||||||||||||
| Shares purchased through employee stock purchase plan | 42,407 | 42 | — | 72,194 | — | — | 72,236 | ||||||||||||||||||||||
| Stock-based compensation | — | — | 2,431,063 | — | — | 2,431,063 | |||||||||||||||||||||||
| Net loss | — | — | — | — | (40,052,810 | ) | (40,052,810 | ) | |||||||||||||||||||||
| Balance, December 31, 2018 | 40,804,189 | $ | 40,804 | 2,857,143 | $ | 2,857 | $ | 119,082,157 | — | $ | (98,218,070 | ) | $ | 20,907,748 | |||||||||||||||
| Issuance of shares of common stock in underwritten public offering, net of offering costs | 1,818,182 | 1,818 | — | 8,974,142 | — | — | 8,975,960 | ||||||||||||||||||||||
| Issuance of shares pursuant to common stock private placement, net of offering costs | 1,200,000 | 1,200 | — | 3,707,402 | — | — | 3,708,602 | ||||||||||||||||||||||
| Exercise of stock options and warrants | 323,177 | 323 | — | 835,865 | — | — | 836,188 | ||||||||||||||||||||||
| Restricted Stock Units vested during the period | 172,500 | 173 | — | (173 | ) | — | — | — | |||||||||||||||||||||
| Restricted Stock Units withheld for taxes | (6,969 | ) | (7 | ) | — | (33,952 | ) | — | — | (33,959 | ) | ||||||||||||||||||
| Shares purchased through employee stock purchase plan | 73,143 | 73 | — | 210,704 | — | — | 210,777 | ||||||||||||||||||||||
| Stock-based compensation | — | — | 2,462,796 | — | — | 2,462,796 | |||||||||||||||||||||||
| Net loss | — | — | — | — | (16,072,547 | ) | (16,072,547 | ) | |||||||||||||||||||||
| Balance, December 31, 2019 | 44,384,222 | $ | 44,384 | 2,857,143 | $ | 2,857 | $ | 135,238,941 | — | $ | (114,290,617 | ) | $ | 20,995,565 | |||||||||||||||
See accompanying notes to the consolidated financial statements.
F-7
CERECOR INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
As of and for the Years Ended December 31, 20162019 and 20152018
1. Business
Cerecor Inc. (the “Company”"Company" or “Cerecor”"Cerecor") was incorporated on January 31, 2011 in Delaware. The Company is a clinical‑stage biopharmaceutical company with the goal offocused on becoming a leader in development and commercialization of treatments for rare pediatric and orphan diseases. The Company is advancing an emerging clinical-stage pipeline of innovative therapies that address unmet patient needs within rare pediatric and orphan diseases. The Company's pediatric rare disease pipeline is led by CERC-801, CERC-802 and CERC-803 ("CERC-800 compounds"), which are therapies for inherited metabolic disorders known as Congenital Disorders of Glycosylation ("CDGs"). The U.S. Food and Drug Administration ("FDA") granted Rare Pediatric Disease designation ("RPDD") and Orphan Drug Designation ("ODD") to all three CERC-800 compounds, thus potentially qualifying the Company to receive a Priority Review Voucher ("PRV") upon approval of each New Drug Application ("NDA"). Each PRV may be sold or transferred an unlimited number of times. The Company plans to leverage the 505(b)(2) NDA pathway for all three compounds to accelerate development and approval. Additionally, CERC-801 and CERC-802 were granted Fast Track Designation ("FTD") from the FDA, which can help facilitate and potentially expedite development of innovative drugs that makeeach compound.
The Company is also developing CERC-002, CERC-006 and CERC-007. CERC-007 is an anti-IL-18 monoclonal antibody being developed for the treatment of autoimmune inflammatory diseases such as Adult Onset Stills Disease ("AOSD") and Multiple Myeloma. CERC-006 is a differencedual mTOR inhibitor being developed for the treatment of complex Lymphatic Malformations. CERC-002 is an anti-LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for HVEM, a receptor expressed by T lymphocytes) monoclonal antibody being developed for the treatment of Pediatric-onset Crohn's Disease.
The Company continues to explore strategic alternatives for its non-core assets, including CERC-301, as well as its sole commercialized product, Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions.
On February 3, 2020, the Company consummated its two-step merger (the "Merger") with Aevi Genomic Medicine, Inc. ("Aevi") in accordance with the terms of the Agreement and Plan of Merger and Reorganization (the "Merger Agreement") dated December 5, 2019. The Merger consideration included stock valued at approximately $15.6 million, resulting in the livesissuance of patientsapproximately 3.9 million shares of Cerecor common stock to Aevi stockholders, forgiveness of a $4.1 million loan that Cerecor loaned Aevi in December 2019 (the "Aevi Loan"), and contingent value rights ("CVRs") for up to an additional $6.5 million in subsequent payments based on clinical and/or regulatory milestones. As part of the Merger, Cerecor acquired CERC-002, CERC-006 and CERC-007, expanding Cerecor's pipeline to six clinical stage assets being developed for rare pediatric and orphan diseases. Effective upon the consummation of the Merger, Cerecor entered into an employment agreement with neurologicalMike Cola for him to serve as Cerecor's Chief Executive Officer, an employment agreement with Dr. Garry Neil for him to serve as Cerecor's Chief Medical Officer and psychiatric disorders. The Company’s operations since inception have been limitedappointed Mike Cola and Sol J. Barer, Ph.D. to organizing and staffingthe Company's Board of Directors. See Note 17 for more information.
During the fourth quarter of 2019, the Company acquiringentered into, and closed on, an asset purchase agreement (the "Aytu Purchase Agreement") with Aytu BioScience, Inc. (“Aytu”) to sell the Company’s rights, title and interest in, assets relating to its pediatric portfolio, namely Aciphex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal™ ER, Flexichamber™, Poly-Vi-Flor®and developingTri-Vi-Flor™ (the "Pediatric Portfolio"), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor’s sales force and the assignment of supporting commercial contracts (the "Aytu Divestiture"). Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock (the "Investment"), and assumed certain product candidates, business planningof the Company’s liabilities, including the Company’s payment obligations payable to Deerfield CSF, LLC of $15.1 million and raising capital.other liabilities of $11.0 million. The Company recognized a gain of $8.0 million upon the closing of the Aytu Divestiture. As a result of the sale of the Pediatric Portfolio, the Pediatric Portfolio met all conditions required in order to be classified as discontinued operations. Therefore, operating results from the Pediatric Portfolio are reported within income (loss) from discontinued operations, net of tax (inclusive of gain on sale) for all periods presented and the gain recognized as a result of the sale is reported within income from discontinued operations, net of tax (inclusive of gain on sale) for the year ended December 31, 2019. In addition, assets and liabilities related to the Pediatric Portfolio are reported as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets as of December 31, 2019 and 2018. See Note 3 for more information regarding the Aytu Divestiture and its accounting treatment.
Cerecor was incorporated in 2011, commenced operations in the second quarter of 2011 and completed an initial public offering in October 2015.
Liquidity - Going Concern
F-8
During the first quarter of 2019, the Company closed on an underwritten public offering of common stock for 1,818,182 shares of common stock of the Company, at a price to the public of $5.50 per share ("public price"). Armistice Capital Master Fund Ltd. ("Armistice"), the Company's largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company at the public price. Cerecor director, Steven J. Boyd, is Armistice's Chief Investment Officer. The net proceeds of the offering were approximately $9.0 million. During the third quarter of 2019, the Company entered into a securities purchase agreement with Armistice, pursuant to which, the Company sold 1,200,000 shares of its common stock for a purchase price of $3.132 per share. Net proceeds of the private placement were approximately $3.7 million. During the fourth quarter of 2019, the Company entered into, and subsequently closed on, the Aytu Purchase Agreement to sell the Company's financial statements have been preparedrights, title and interest in, assets relating to its Pediatric Portfolio and related commercial infrastructure for a combination of cash and preferred stock ($4.5 million in cash, and approximately 9.8 million shares of Aytu convertible preferred stock) and the assumption of certain of the Company's liabilities including the Company’s payment obligations payable to Deerfield of $15.1 million and certain other liabilities of approximately $11.0 million. During the first quarter of 2020, the Company closed on a going-concern basis, which contemplatesregistered direct offering with institutional investors of 1,306,282 shares of the realizationCompany's common stock at a purchase price of $3.98 per share. Armistice participated in the offering by purchasing 1,256,282 shares of common stock from the Company. The net proceeds of the offering were approximately $5.0 million.
In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's existing pipeline assets and the satisfactionacquisitions or in-licensing of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments that might be necessary should the Company be unable to continue to fund its operations. The Company has not generated any product revenues and has not yet achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and if achieved, could be sustained on a continuing basis.
The Company anticipates operating losses to continue foraccompanying consolidated financial statements have been prepared assuming the foreseeable future due to, among other things, costs related to the clinical development of its product candidates, its preclinical programs, business development and its organizational infrastructure. The Company will continue as a going concern; however, the Company expects to incur additional losses in the future in connection with research and development activities and will require substantial additional financing to fund its operations and to continue to execute its strategy. To fully execute its business plan, the Company will need to complete certain research and development activities, have positive clinical trial results and obtain marketing approval for its product candidates, which may span many years, and may ultimately be unsuccessful. Any delays in completing these activities or negative clinical trial results could adversely impact the Company. The Company plans to meetuse its capital requirements primarilycurrent cash on hand and the anticipated cash flows from the Company's profits from Millipred product sales and/or the potential proceeds from the out-license or sale of Millipred to a third party to offset costs related to its orphan disease pipeline assets, business development, and costs associated with its organizational infrastructure; however, Cerecor expects to continue to incur significant expenses and operating losses for the immediate future as it continues to invest in the Company's pipeline assets. The Company’s ability to continue as a going concern through further offerings of2020 is dependent upon the Company’s ability to raise additional equity and/or debt securities, non-dilutive financing arrangements such as federal grants, collaboration agreements or out-licensing arrangements, and to explore strategic alternatives such as an acquisition, merger, or business combination. In the long term, the Company plans to meet its capital requirements through revenue from product sales to the extent its product candidates receive marketing approval and are commercialized. Therecapital; however, there can be no assurance however, that the Companysuch capital will be successfulavailable in obtaining financing at the level needed to sustain operations and develop its product candidatessufficient amounts or on terms acceptable to the Company, thatCompany.
Over the long term, the Company's exploration of strategic alternatives will result in any such transaction, or that the Company will obtain approvals necessaryultimate ability to market its products or achieve and maintain profitability or sustainable, positive cash flow. If the Company fails to raise capital or enter into such arrangements or transactions in the short term, it will have to significantly delay, scale back or discontinueis dependent on, among other things, the development, of one or moreregulatory approval, and commercialization of its product candidates or ceasepipeline assets, and the potential sale of any PRVs it receives, all being adequate to support its operations altogether. The Company currently anticipates that current cashcost structure and cash equivalents will be sufficient to meet its anticipated cash requirements well into the second quarter of 2017. pipeline asset development.
These factorsconditions raise substantial doubt about the Company'sits ability to continue as a going concern within one year ofafter the date that ourthe financial statements wereare issued. To alleviate these conditions, the Company is evaluating the potential out-licensing or sale of Millipred to a third party and some combination of rights to future PRV sales, equity or debt financings, collaborations, out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution or licensing arrangements, the sale of current or future assets or possible monetization of the Company's holdings of Aytu equity. If the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible or suspend or curtail planned programs. Due to the uncertainty regarding future financings and/or other potential options to raise additional funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformityaccordance with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”(the “FASB”). The consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets, and the satisfaction of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments
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relating to the recoverability and classification of recorded assets and liabilities that might be necessary should the Company be unable to continue as a going concern (see Note 1).
Principles of Consolidation
The consolidated financial statements include the accounts of Cerecor Inc. and its wholly-owned subsidiaries after elimination of all intercompany balances and transactions.
Variable Interest Entities
The primary beneficiary of a variable interest entity ("VIE") must consolidate the related assets and liabilities. Certain disclosures are required by sponsors, significant interest holders in VIEs and potential VIEs. The Company regularly assesses its relationships with contractual third-party and other entities for potential VIEs, including its relationship with Aytu and Aevi. In making this assessment, the Company considers the potential that its contracts or other arrangements provide subordinated financial support, absorb losses or rights to residual returns of the entity and the ability to directly or indirectly make decisions about the entities’ activities. Based on the Company’s assessments, management concluded that there were no relationships that constitute a VIE for which the Company was determined to be the primary beneficiary at December 31, 2019. If the Company’s management makes the determination that it is the primary beneficiary of a VIE, the Company will consolidate the statements of operations and financial condition of the VIE into its consolidated financial statements.
Discontinued Operations
As a result of the sale of the Pediatric Portfolio, as of December 31, 2019, the Pediatric Portfolio met all conditions required in order to be classified as discontinued operations. Accordingly, the operating results of the Pediatric Portfolio are reported as income (loss) from discontinued operations, net of tax (inclusive of gain on sale) in the accompanying consolidated financial statements for the years ended December 31, 2019 and 2018. Additionally, the gain recognized as a result of the sale of the Pediatric Portfolio is reported within income from discontinued operations, net of tax (inclusive of gain on sale) for the year ended December 31, 2019. The assets and liabilities related to the Pediatric Portfolio are reported as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets as of December 31, 2019 and 2018. For additional information, see Note 3.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, other comprehensive income and related disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to but not limited to, revenue recognition, cost of product sales, stock-based compensation, fair value measurements (including those relating to contingent consideration, equity Investment in Aytu, and guaranteed liabilities), cash flows used in management's going concern assessment, income taxes, goodwill and other intangible assets, and clinical trial accruals,
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value.
Restricted Cash
The Company providedadopted ASU No. 2016-18, Restricted Cash ("ASU 2016-18") effective January 1, 2018 and now includes restricted cash balances within the landlord with a lettercash, cash equivalents and restricted cash balance on the statement of creditcash flows.
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Accounts Receivable, net
Accounts receivable, net is comprised of amounts due from customers in the amountordinary course of $175,000 as security by the Company of the Company’s obligations under the lease. The letter of credit was supported by funds that were invested in a certificate of deposit. Provided there was no event of default by the Company, the Company requested that the amount of the letter of creditbusiness. Management considers all accounts receivable to be reduced by one‑third (approximately $58,000) at the end of each of the first three years of the lease term. At the expiration of the third year of the lease term, which occurred in the fourth quarter of 2016, the Company deposited with the landlord the sum of $13,000 as a security deposit. This amount is recorded as restricted cash, net of current portion on the balance sheetfully collectible at December 31, 2016.2019, and accordingly, no allowance for doubtful accounts has been recorded. Bad debt expense is charged to operations as amounts are determined to be uncollectible. Accounts receivable are written off when deemed uncollectible and recoveries of receivables previously written off are recorded when received.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. The Company maintains a portion of its cash and cash equivalent balances in the form of a money market account with a financial institution that management believes to be creditworthy. The Company has no financial instruments with off‑balance sheet risk of loss.
Inventory consists primarily of finished goods stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reviews the composition ofinventory at each reporting period in order to identify obsolete, slow-moving, quantities in excess of expected demand, or otherwise non-saleable items. If non-saleableitems are observed and there are no alternate uses for the inventory, the Company will record a write-down to net realizable value in the period that thedecline in value is first recognized. These valuation adjustments are recorded based upon various factors for the Company’s products, including the level ofproduct manufactured by the Company, the level of product in the distribution channel, current and projected product demand, the expected shelf life of theproduct and firm inventory purchase commitments.
Leases
The Company may record debtdetermines if an arrangement is a lease at inception. If an arrangement contains a lease, the Company performs a lease classification test to determine if the lease is an operating lease or a finance lease. The Company has identified one operating lease, which is for its corporate headquarters. Right-of-use ("ROU") assets represent the right to use an underlying asset for the lease term and equity discounts in connection with raising funds throughlease liabilities represent the issuanceCompany's obligation to make lease payments arising from the lease. Operating lease liabilities are recognized on the commencement date of convertible notes or equity instruments. These discounts may arise from (i) the receipt of proceeds less thanlease based on the facepresent value of
the convertible noteslease liability, plus any indirect costs or equity instruments, (ii) allocation of proceeds to beneficial conversion features and/or (iii) recording derivative liabilities related to embedded features. These costsrent prepayments, and reduced by any lease incentives and any deferred lease payments. Operating ROU assets are recorded in property and equipment, net on the condensed consolidated balance sheet and are amortized over the lease term. To determine the present value of lease payments on lease commencement, the Company uses the implicit rate when readily determinable, however, as most leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at commencement date. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Furthermore, the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component for the leased property asset class. Lease expense is recognized on a straight-line basis over the life of the debt to interest expense utilizing the effective interest method.lease and is included within general and administrative expenses.
Property and Equipment
Property and equipment consists of computers, office equipment, furniture, ROU assets (discussed above), and furnitureleasehold improvements and is recorded at cost. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred. Property and equipment are depreciated on a straight‑line basis over their estimated useful lives. The Company uses a life of four years for computers and software, and five years for equipment and furniture. For leasehold improvements, deprecation of the asset will begin at the date it is placed in service and the depreciable life of the leasehold improvement is the shorter of the lease term or the improvement's useful life. The Company uses the lesser of the lease term or ten yearsfor leasehold improvements. Upon retirement or sale, the cost of the disposed asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized.
F-11
For acquisitions that meet the definition of a business under ASC 805, the Company records the acquisition using the acquisition method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The application of the acquisition method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration. For acquisitions that do not meet the definition of a business under ASC 805, the Company accounts for the transaction as an asset acquisition.
Segment Information
Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision‑making group, in making decisions on how to allocate resources and assess performance. As of December 31, 2019, the Company’s chief operating decision makers were the Chief Financial Officer and the Executive Chairman of the Board. The CFO and the Executive Chairman of the Board view the Company’s operations and manages the business as one operating segment. All long‑lived assets of the Company reside in the United States.
Goodwill
Goodwill relates to the amount that arose in connection with the Company's historical acquisitions which were accounted for as business combinations. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. Goodwill is not amortized but is evaluated for impairment on an annual basis or more frequently if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the Company's reporting unit below its carrying amount. The Company recognizes grant revenue when there is (i) reasonable assuranceconsists of compliance withone reporting unit.
Upon disposal of a portion of a reporting unit that constitutes a business, we assign goodwill based on the conditionsrelative fair values of the grantportion of the reporting unit being disposed and (ii) reasonable assurancethe portion of the reporting unit remaining. This approach requires a determination of the fair value of both the business to be disposed of and the business (or businesses) within the reporting unit that will be retained. As a result of the Aytu Divestiture, goodwill was assigned to the Pediatric Portfolio using the relative fair value approach discussed above and is reclassified within discontinued operations.
Intangible Assets
Intangible assets with definite useful lives are amortized over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the grant will be received. In April 2016, the Company received a research and development grant from the National Institute on Drug Abuse ("NIDA") at the National Institutes of Health ("NIH") to provide additional resources for the period of May 2016 through April 2017 for the Company’s now completed Phase 2 clinical trial for CERC-501, “A Randomized, Double-Blind, Placebo-Controlled, Crossover Design Study of CERC-501 in a Human Laboratory Model of Smoking Behavior.” Thecarrying amount of an asset may not be recoverable. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the NIDA award was $1.02 million. Additionally, in July 2016, the Company received a research and development grant from the National Institute on Alcohol Abuse and Alcoholism ("NIAAA") at the NIH to provide additional resources for the period of July 2016 through June 2017 to progress the development of CERC-501 for the treatment of alcohol use disorder. Thecarrying amount of an intangible asset might not be recoverable. Impairment losses are measured and recognized to the NIAAA award was $1.0 million. The Company recognizes revenue under grants in earnings onextent the carrying value of such assets exceeds their fair value.
Product Revenues, net
As a systemic basis inresult of the periodAytu Divestiture, all product revenues related to the related expenditures for which the grants are intended to compensate are incurred. As such, the Company recognized revenue in the amountsPediatric Portfolio (which represented approximately 60% of $1.02 million and $132,000total product revenues for the year ended December 31, 20162019) are included within net income (loss) from discontinued operations, net of tax (inclusive of gain on sale).
The Company generates substantially all of its revenue from sales of prescription pharmaceutical products to its customers and has identified a single product delivery performance obligation, which is the provision of prescription pharmaceutical products to its customers based upon master service agreements in place with wholesaler distributors, purchase orders from retail pharmacies or other direct customers and a contractual arrangement with a specialty pharmacy.
The performance obligation is satisfied at a point in time, when control of the product has been transferred to the customer, either at the time the product has been received by the customer or to a lesser extent when the product is shipped. The Company determines the transaction price based on fixed consideration in its contractual agreements and the transaction price is allocated entirely to the performance obligation to provide pharmaceutical products. In determining the transaction price, a significant financing component does not exist because the timing from when the Company delivers product to when the customers pay for the NIDA awardproduct is less than one year and NIAAA award, respectively. the customers do not pay for product in advance of the transfer of the product.
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Revenues from sales of products are recorded net of any variable consideration for estimated allowances for returns, chargebacks, distributor fees, prompt payment discounts, government rebates, and other common gross-to-net revenue adjustments. The identified variable consideration is recorded as a reduction of revenue at the time revenues from product sales are recognized. The Company recognizes revenue only to the extent that it is probable that a significant revenue reversal will not occur in a future period.
Provisions for returns and government rebates are included within current liabilities in the consolidated balance sheet. Provisions for prompt payment discounts and distributor fees are included as a reduction to accounts receivable. Calculating these items involves estimates and judgments based on sales or invoice data, contractual terms, historical utilization rates, new information regarding changes in these programs’ regulations and guidelines that would impact the amount of the actual rebates, our expectations regarding future utilization rates for these programs, and channel inventory data. These estimates may differ from actual consideration amount received and the Company will re-assess these estimates and judgments each reporting period to adjust accordingly.
The following table presents net revenues disaggregated by type:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Prescription drugs | $ | 6,650,351 | $ | 6,572,322 | ||||
| Sales force revenue | — | 456,056 | ||||||
| License and other revenue | 100,000 | — | ||||||
| Total revenues, net from continuing operations | $ | 6,750,351 | $7,028,378 | |||||
Concentration with Customer
As is typical in the pharmaceutical industry, the Company sells its prescription pharmaceutical products (which include prescription drugs) in the United States primarily through wholesale distributors and a specialty contracted pharmacy. Wholesale distributors account for substantially all of the Company’s net product revenues and trade receivables. In addition, the Company earns revenue from sales of its prescription pharmaceutical products directly to retail pharmacies. For the year ended December 31, 2016,2019, the Company's three largest customers accounted for approximately 41%, 30% and 28%, respectively, of the Company's total net product revenues of prescription drugs from continuing operations. For the year ended December 31, 2018, the Company's three largest customers accounting for approximately 31%, 29% and 28%, respectively, of the Company's total net product revenues of prescription drugs from continuing operations.
Returns and Allowances
Consistent with industry practice, the Company had receivedmaintains a return policy that allows customers to return product within a specified period both prior to and, in certain cases, subsequent to the full $1.02 millionproduct's expiration date. The Company’s return policy generally allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. The provision for returns and allowances consists of estimates for future product returns and pricing adjustments. The primary factors considered in estimating potential product returns include:
•the shelf life or expiration date of each product;
•historical levels of expired product returns;
•external data with respect to inventory levels in the wholesale distribution channel;
•external data with respect to prescription demand for each of the revenue earnedCompany’s products; and
•the estimated returns liability to be processed by year of sale based on analysis of lot information related to actual historical returns.
The Company’s estimate for returns and allowances may be impacted by a number of factors, but the principal factor relates to the level of inventory in the distribution channel.
Rebates
The Company is subject to rebates on sales made under governmental pricing programs. For example, Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically
F-13
billed up to 180 days after the product is shipped, however this can be as much as 270 days after the quarter in which the product is dispensed to the Medicaid participant. In addition to the estimates mentioned above, the Company’s calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Periodically, the Company adjusts the Medicaid rebate provision based on actual claims paid. Due to the delay in billing, adjustments to actual claims paid may incorporate revisions of this provision for several periods. Because Medicaid pricing programs involve particularly difficult interpretations of complex statutes and regulatory guidance, the Company's estimates could differ from actual experience.
In determining estimates for these rebates, the Company considers the terms of the contracts, relevant statutes, historical relationships of rebates to revenues, past payment experience, estimated inventory levels and estimated future trends.
Sales Force Revenue
Pursuant to a marketing agreement with Pharmaceutical Associates, Inc. (“PAI”), the Company received a monthly marketing fee to promote, market and sell certain products on behalf of PAI. The Company was also entitled to a share of PAI's profits under the NIDA award.agreement. Marketing fees and profit-sharing was recognized as sales force revenue when all the performance obligations have been satisfied and to the extent that it was probable that a significant revenue reversal would not occur in a future period. The marketing agreement with PAI was terminated in April 2018.
License and Other Revenue
The Company recognizes revenues from collaboration, license or other research or sale arrangements when or as performance obligations are satisfied. For milestone payments, the Company assesses, at contract inception, whether the milestones are considered probable of being achieved. If it is probable that a significant revenue reversal will occur, the Company will not record revenue until the uncertainty has been resolved. Milestone payments that are contingent upon regulatory approval are not considered probable until the approvals are obtained as it is outside of the control of the Company. If it is probable that significant revenue reversal will not occur, the Company will estimate the milestone payments using the most likely amount method. The Company will re-assess the milestones each reporting period to determine the probability of achievement.
Accounting Policy Elections Related to Adoption of New Revenue Recognition Standard
The Company elected the following practical expedients in applying ASU 2014-09, Revenue from Contracts with Customers ("Topic 606") to its identified revenue streams:
Portfolio approach - contracts within each revenue stream have similar characteristics and the Company believes this approach would not differ materially than if applying Topic 606 to each individual contract.
Modified retrospective approach - the Company applied Topic 606 only to contracts with customers that were not completed at the date of initial application, January 1, 2018.
Significant financing component - the Company does not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Shipping and handling activities - the Company considers any shipping and handling costs that are incurred after the customer has obtained control of the product as a cost to fulfill a promise and will account for them as an expense.
Contract costs - the Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less.
The Company does not incur costs to obtain a contract or costs to fulfill a contract that would result in the capitalization of contract costs. Specifically, internal sales commissions are costs to fulfill a contract and are expensed in the same period that revenue is recognized, which is typically within the same quarterly reporting period. Contract costs are expensed or amortized in “Operating expenses” on the accompanying Consolidated Statements of Operations.
The Company has not made significant changes to the judgments made in applying Topic 606 for the year ended December 31, 2019.
Cost of Product Sales
Cost of product sales is comprised of (i) costs to acquire products sold to customers, (ii) royalty, license payments and other agreements granting the Company rights to sell related products, (iii) distribution costs incurred in the sale of products; (iv) the value of any write-offs of obsolete or damaged inventory that cannot be sold, (v) minimum sale obligations and (vi) minimum purchase obligations.
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The Company acquired the rights to sell certain of its commercial products through license and assignment agreements with the original developers or other parties with interests in these products. These agreements obligate the Company to make payments under varying payment structures based on its net revenue from related products.
Research and Development Costs
Research and development costs are expensed as incurred. These costs include, but are not limited to, employee‑related expenses, including salaries, benefits and stock‑based compensation of research and development personnel; expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical trials and preclinical studies; the cost of acquiring, developing and manufacturing clinical trial materials; other supplies; facilities, depreciation and other expenses, which includesuch as direct and allocated expenses for rent, utilities and insurance; and costs associated with preclinical activities and regulatory operations.operations, pharmacovigilance, quality and travel.
Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, or information provided to the Company by its vendors, such as clinical research organizations, with respect to their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development expense, as the case may be.
Clinical Trial Expense Accruals
As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate trial expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by subject progression and the timing of various aspects of the trial. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress or state of consummation of trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third‑party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed maymight vary and maymight result in it reporting amounts that are too high or too low for any particular period. For
Acquired In-Process Research and Development Expenses
Acquired in-process research and development ("IPR&D") expense includes the years ended December 31, 2016initial costs of IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.
Amortization Expense
Amortization expense includes the amortization of the Company's acquired intangible assets. There is no amortization expense included in cost of product sales or sales and December 31, 2015, there were no material adjustmentsmarketing expense as all amortization expense is included within its own standalone line in operating expenses in the Company's consolidated statements of operations.
Estimated Fair Value and Change in Fair Value of Contingent Consideration
The Company's business acquisitions of Avadel Pharmaceuticals PLC's ("Avadel") pediatric products and TRx Pharmaceuticals, LLC ("TRx") involved the potential for future payment of consideration that is contingent upon the achievement of operation and commercial milestones and royalty payments on future product sales. The fair value of contingent consideration was determined at the acquisition date utilizing unobservable inputs such as the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the Company’s prioracquisition date, at each reporting period, estimates of accrued expenses for clinical trials.
As part of the Aytu Divestiture, Aytu assumed the Company's contingent consideration liability related to future royalties on Avadel's pediatric products. Additionally, as part of a settlement the Company entered into in the second quarter of 2019, the Company was released from its contingent consideration liability related to TRx. Therefore, the Company's contingent consideration liability was $0 as of December 31, 2019. Refer to Note 6 for more information.
Estimated Fair Value of Investment in Aytu and Change in Fair Value of Investment in Aytu
As consideration for the sale of the Pediatric Portfolio to Aytu, the Company received approximately 9.8 million shares of Aytu Series G Convertible Preferred Stock. Pursuant to ASC 323, the Company accounts for this Investment as a Going Concern. The amendmentsfinancial instrument because Cerecor's Investment does not result in this update explicitly require a company’s management to assess an entity’scontrolling financial interest, as the preferred stock received is in-substance common stock and Cerecor does not have the ability to continueexercise significant influence or joint control of Aytu. Therefore, the fair value of the Investment in Aytu was determined at the divestiture date utilizing quoted prices for Aytu's common stock price with a discount for lack of marketability due to our shares being restricted as of December 31, 2019 and subject to a lockup period ending on July 1, 2020. Subsequent to the divestiture date, at each reporting period, the Investment in Aytu will be remeasured at current fair value with the change in fair value recorded to other income, net in the accompanying statements of operations. The Investment in Aytu is recorded in the consolidated balance sheet as a going concerncurrent asset because it is available for sale within one year afterof December 31, 2019.
Estimated Fair Value of Guarantee and Change in Fair Value of Guarantee
As of the closing date of the financial statements are issued,Aytu Divestiture on November 1, 2019, Aytu assumed the Company's debt obligation to Deerfield CSF and the contingent consideration liability related to provide related footnote disclosures in certain circumstances. The new standard is effective infuture royalties on Avadel's pediatric products. In conjunction with the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The new guidance was adopted byclosing of the CompanyAytu Divestiture in the fourth quarter of 2016.2019, the Company entered into a Guarantee, which guarantees the payment of the assumed debt obligation and contingent consideration. The adoptionfair value of this guidancethe Guarantees were determined at the time of the divestiture as the difference between (i) the estimated fair value of the debt and contingent payments, respectively, using Cerecor's estimated cost of debt and (ii) the estimated fair value of the debt and contingent payments, respectively, using Aytu's estimated cost of debt. Subsequent to the close of the Aytu Divestiture, at each reporting period, the Guarantee will be remeasured at its current fair value with changes recorded in income (loss) from discontinued operations, net of tax within the consolidated statements of operations. Refer to Note 3 for more information.
Stock‑Based Compensation
The Company applies the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all stock‑based awards made to employees, including employee stock options, in the statements of operations.
For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black‑Scholes option pricing model. The use of the Black‑Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk‑free interest rates and expected dividend yields of the common stock. For awards subject to service‑based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock‑based compensation expense equal to the grant date fair value of stock options on a straight‑line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
For stock option grants with market-based conditions, compensation expense is recognized ratably over the attribution period. The Company estimates the fair value of the market-based stock option grants using a Monte-Carlo simulation. The Company generally estimates fair value using assumptions, including the risk-free interest rate, the expected volatility of a peer group of similar companies, the expected term of the awards and the expected dividend yield. The expected term for market-based stock option awards is based on the expected term calculated using a Monte-Carlo simulation. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company's stock-based compensation expense could be materially different in the future.
F-16
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax assets primarily include net operating loss ("NOL") and tax credit carryforwards, accrued expenses not currently deductible and the cumulative temporary differences related to certain research and patent costs. Certain tax attributes, including NOLs and research and development credit carryforwards, may be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code (the "IRC"). See Note 15 for further information. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of December 31, 2019, the Company did not impact the Company's financial position, results of operations or cash flows, nor did it significantly impact the Company's disclosures regarding the assessment of its ability to continue as a going concern within one year of the date that our financial statementsbelieve any material uncertain tax positions were issued.present.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidancewhich revises existing practice related to accounting for leases under ASC No. 840, Leases(“ (“ASC 840”) for both lessees and lessors. The new guidance in ASU 2016-02 requires lessees to recognize a right-of-useROU asset and a lease liability for nearly all leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-useROU asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating leases or capitalfinance leases. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while capitalfinance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840).
The Company adopted the standard using the modified retrospective transition method on its effective date of January 1, 2019 and therefore did not adjust prior comparative periods as permitted by the codification improvements issued by FASB in July 2018. Additionally, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. Additionally, the Company made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. As a result of the standard, the Company recorded a lease liability of $1.2 million and a ROU asset of $0.7 million, which is equal to the initial measurement of the lease liability reduced by the unamortized balance of lease incentive received and deferred rent. There was no material impact to our condensed consolidated income statement. For additional information see Note 9.
Other Adopted Accounting Pronouncements
SEC Simplification
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532 Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of GAAP or other regulatory requirements. Among other changes, the amendments provide that disclosure requirements related to the analysis of stockholders' equity are expanded for interim financial statements. An analysis of the changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The Company began providing this disclosure in the first quarter of 2019 within a separate statement.
New Accounting Pronouncements- Pending Adoption
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” ("ASU 2016-13"). This guidance applies to all entities and impacts how entities account for credit losses for most financial assets and other instruments. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses. This guidance is effective for annual reporting periodsfiscal
F-17
years beginning after December 15, 2018, including2019 and interim periods within those fiscal years. Early applicationtherein. The Company is permitted.assessing any potential impacts on its internal controls, business processes, and accounting policies related to both the implementation of, and ongoing compliance with, the new guidance. Upon adoption of the new standard on January 1, 2020, the Company will begin recognizing an allowance using a forward-looking approach to estimate the expected credit loss related to financial assets. The Company is currently evaluating the potential impact of the adoption of this standard, however, does not expect that the adoption of this new standard will have a material impact on the Company's results of operations, financial position, cash flows or disclosures.
Fair Value Measurements
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This new standard modifies certain disclosure requirements on fair value measurements. This new standard will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements.
Income Tax Simplification
In March 2016,December 2019, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The2019-12, Income Taxes (Topic 740)(ASU 2019-12) final guidance is intended to simplify several areas ofthat simplifies the accounting for share-based compensation, including income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax impacts, classification onallocation that is applicable to the statementCompany, the methodology for calculating income taxes in an interim period and the recognition of cash flows and forfeitures. The new standard isdeferred tax liabilities for outside basis differences among other changes. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016,2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods within those fiscal years. Early application is permitted. The Company adopted this standard on January 1, 2017 and itsfor which financial statements have not yet been issued. An entity that elects early adoption will have no impact on its financial position, results of operations or cash flows.
F-18
3. Aytu Divestiture
Overview of Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience
On October 10, 2019, the Company entered into the Aytu Purchase Agreement to sell the Company’s rights, title and interest in, assets relating to its Pediatric Portfolio, namely Aciphex® Sprinkle™ , Cefaclor for Oral Suspension, Karbinal™ ER, Flexichamber™ , Poly-Vi-Flor® and Tri-Vi-Flor™ as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor’s sales force and the assignment of supporting commercial contracts. The Aytu Divestiture closed on November 1, 2019. Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock, and assumed certain of the Company’s liabilities, including the Company’s payment obligations payable to Deerfield CSF, LLC of $15.1 million and certain other liabilities of $11 million primarily related to contingent consideration, Medicaid rebates and sales returns. In addition, Aytu assumed future contractual obligations under existing license agreements associated with the Pediatric Portfolio. Armistice, a significant stockholder of the Company, is also a significant stockholder of Aytu.
Upon closing the Aytu Divestiture, Cerecor terminated all of its sales force personnel, which included both those offered employment by Aytu, as well as any remaining sales force personnel. Additionally, Cerecor retained all rights to Millipred®. Pursuant to a transition services agreement entered into between Aytu and Cerecor, Aytu will manage Millipred® commercial operationsfor a monthly fee of $12,000 for up to 18 months or until the Company establishes an independent commercial infrastructure for the product.
Deerfield Guarantee
On November 1, 2019, in conjunction with the closing of the Aytu Divestiture, the Company entered into a Guarantee in favor of Deerfield CSF ("Deerfield"), which guarantees the payment by Aytu of the assumed liabilities to Deerfield, which includes the debt obligation ("Fixed Payment Guarantee") and the contingent consideration related to future potential royalties on Avadel's pediatric products ("Deferred Payment Guarantee"). Additionally, on November 1, 2019, the Company entered into a Contribution Agreement with Armistice and Avadel that governs contribution rights and obligations of the Company, Armistice and Avadel with respect to amounts that are paid by Armistice and Avadel to Deerfield under certain guarantees made by Armistice and Avadel to Deerfield.
The debt obligation assumed by Aytu consists of fixed monthly payments to Deerfield of $0.1 million until January 2021 and an additional balloon payment of $15.0 million to Deerfield on January 31, 2021. Therefore, Cerecor's Fixed Payment Guarantee will end on January 31, 2021, upon the $15.0 million balloon payment being made to Deerfield. The contingent consideration assumed by Aytu consists of quarterly deferred payments equal to 15% of net sales of certain Pediatric Portfolio paid in arrears each quarter until the earlier of (i) February 5, 2026, or (ii) upon $12.5 million in aggregate deferred payments has been paid to Deerfield. $3.2 million of the contingent consideration was paid to Deerfield prior to the Aytu Divestiture and therefore as of November 1, 2019, Aytu was responsible for the remaining $9.3 million. Aytu is required to pay an amount equal to at least $0.1 million per month except the monthly Deferred Payment due on January 31, 2020 will be at least $0.2 million. Cerecor's Deferred Payment Guarantee will end upon the earlier of (i) February 5, 2026, or (ii) upon $12.5 million in aggregate deferred payments has been paid to Deerfield. Cerecor is required to perform under the Guarantee upon demand by Deerfield, which Deerfield can demand at any time if all or any part of the fixed payments and/or deferred payments are not paid by Aytu when due or upon breach of a covenant. As of December 31, 2019, the maximum potential amount of future payments under the Guarantee was $25.2 million, consisting of $16.1 million for the Fixed Payment Guarantee and $9.1 million for the Deferred Payment Guarantee.
As of December 31, 2019, the fair value of the Guarantee was $1.8 million, consisting of $0.9 million for the Fixed Payment Guarantee and $0.9 million for the Deferred Payment Guarantee. The Guarantee is recorded within long-term liabilities of discontinued operations in the accompanying consolidated balance sheet as of December 31, 2019.
The estimated fair value of Cerecor's Fixed Payment Guarantee as of December 31, 2019 was estimated as the difference between (i) the estimated value of the fixed payments using Cerecor's estimated cost of debt, and (ii) the estimated value of fixed payments using Aytu's estimated cost of debt. Specifically, the significant assumptions used in the estimated fair value of the Fixed Payment Guarantee as of December 31, 2019 include (i) future fixed monthly payments of $0.1 million from January 2020 through January 2021 and the additional balloon payment of $15.0 million due to Deerfield on January 31, 2021, (ii) Cerecor's estimated cost of debt, and (iii) Aytu's estimated cost of debt. Cerecor and Aytu's estimated cost of debt was estimated using a synthetic credit rating model, based on each company's financial performance as of December 31, 2019.
The estimated fair value of Cerecor's Deferred Payment Guarantee as of December 31, 2019 was estimated as the difference between (i) the value of the estimated contingent payments using Cerecor's estimated cost of debt, and (ii) the value of the estimated contingent payments using Aytu's cost of debt. Specifically, the significant assumptions used in estimating the fair value of the Deferred
F-19
Payment Guarantee as of December 31, 2019 include (i) simulated net sales of the Pediatric Products subject to the deferred payments, (ii) the estimated contingent payments according to the contractual terms based on the simulated net sales, (iii) Cerecor's cost of debt, and (iv) Aytu's cost of debt. Cerecor and Aytu's estimated cost of debt was estimated using a synthetic credit rating model, based on each company's financial performance as of December 31, 2019.
Discontinued Operations
As a result of the sale of the Pediatric Portfolio, as of December 31, 2019, the operating results from the Pediatric Portfolio are reported as income (loss) from discontinued operations, net of tax (inclusive of gain on sale) in the accompanying consolidated statements of operations. Accordingly, the accompanying consolidated financial statements for the years ended December 31, 2019 and 2018 reflect the operations and related assets and liabilities of the Pediatric Portfolio as a discontinued operation. During the quarter and year ended December 31, 2019, the Company recognized a gain of $8.0 million upon the close of the transaction, which is included in income (loss) from discontinued operations, net of tax (inclusive of gain on sale) in the accompanying consolidated statement of operation for the year ended December 31, 2019. The gain is comprised of $4.5 million of cash consideration received, $7.6 million of Aytu preferred stock consideration received (which represents its fair value on November 1, 2019 (see Note 6 for more information), $18.8 million of net assets transferred as of November 1, 2019 (excluding debt assumed), $15.1 million of debt assumed as of November 1, 2019, and $0.6 million of transaction expenses incurred.
The following tables summarizes the assets and liabilities of the discontinued operations as of December 31, 2019 and 2018:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Accounts receivable, net | $ | 497,577 | $ | 2,335,228 | ||||
| Other receivables | — | 206,798 | ||||||
| Inventory, net | — | 792,857 | ||||||
| Prepaid expenses and other current assets | — | 797,562 | ||||||
| Total current assets of discontinued operations | 497,577 | 4,132,445 | ||||||
| Intangibles assets, net | — | 27,474,214 | ||||||
| Goodwill | — | 2,002,035 | ||||||
| Total long-term assets of discontinued operations | — | 29,476,249 | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 387,975 | — | ||||||
| Accrued expenses and other current liabilities | 3,503,037 | 5,402,494 | ||||||
| Long-term debt, current portion | — | 1,050,000 | ||||||
| Contingent consideration, current portion | — | 1,097,137 | ||||||
| Total current liabilities of discontinued operations | 3,891,012 | 7,549,631 | ||||||
| Long term debt, net of current portion | — | 14,327,882 | ||||||
| Contingent consideration, net of current portion | — | 6,697,217 | ||||||
| Other long-term liabilities | 1,755,000 | — | ||||||
| Total long-term liabilities of discontinued operations | 1,755,000 | 21,025,099 | ||||||
Subsequent to the closing of the Aytu Divestiture on November 1, 2019, Cerecor retains continuing involvement with the divested Pediatric Portfolio mainly surrounding collection of accounts receivable associated with sales of Pediatric Portfolio prior to November 1, 2019, future sales returns made after November 1, 2019 relating to sales of the Pediatric Portfolio prior to the close date of the Aytu Divestiture and the Deerfield Guarantee of $1.8 million (discussed in detail above).
F-20
As of December 31, 2019, Cerecor is entitled to the $0.5 million of accounts receivable associated with sales of the Pediatric Portfolio prior to November 1, 2019. The Company expects it will collect the accounts receivable in 2020. Additionally, pursuant to the Aytu Purchase Agreement, Aytu assumed sales returns of the Pediatric Portfolio made after the closing date of November 1, 2019 and primarily relating to sales prior to November 1, 2019 only to the extent such post-Closing sales returns exceed $2.0 million and are less than $2.8 million (in other words, Aytu will only assume $0.8 million of such returns). Therefore, Cerecor is liable for future sales returns of the Pediatric Portfolio sold prior to November 1, 2019 in excess of the $0.8 million assumed by Aytu. As of December 31, 2019, the Company estimated its sales return reserve from discontinued operations to be $2.3 million, which is included above in accrued expenses and other current liabilities from discontinued operations. In future periods, as additional information becomes available to the Company, the Company expects to recognize expense (or a benefit) related to actual sales returns of the Pediatric Portfolio in excess (or less than) the returns reserve recorded as of November 1, 2019, which will be recognized in loss from discontinued operations. The Company expects this involvement to continue until sales returns are no longer accepted on sales of the Pediatric Portfolio made prior to November 1, 2019, which, in line with the products' return policies, returns on these products may be accepted through 2023.
The following table summarizes the results of discontinued operations for the year ended December 31, 2019 and 2018:
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Product revenue, net | $ | 10,166,611 | $ | 11,298,423 | ||||
| Operating expenses: | ||||||||
| Cost of product sales | 4,288,234 | 4,217,594 | ||||||
| General and administrative | 137,911 | 165,674 | ||||||
| Sales and marketing | 8,521,190 | 7,977,243 | ||||||
| Amortization expense | 2,425,083 | 2,703,896 | ||||||
| Impairment of intangible assets | 1,449,121 | — | ||||||
| Change in fair value of contingent consideration | 247,042 | 169,289 | ||||||
| Total operating expenses | 17,068,581 | 15,233,696 | ||||||
| Interest expense, net | (793,860 | ) | (827,882 | ) | ||||
| Gain on sale of Pediatric Portfolio | 7,964,924 | — | ||||||
| Income (loss) from discontinued operations before tax | 269,094 | (4,763,155 | ) | |||||
| Income tax expense | 70,888 | 15,556 | ||||||
| Income (loss) from discontinued operations, net of tax (inclusive of gain on sale) | $ | 198,206 | $ | (4,778,711 | ) | |||
The significant non-cash operating items from the discontinued operations for the years ended December 31, 2019 and 2018 are contained below. There were no non-cash investing items from the discontinued operations for the years ended December 31, 2019 and 2018.
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating activities | ||||||||
| Amortization | $ | 2,425,083 | $ | 2,703,896 | ||||
| Impairment of intangible assets | 1,449,121 | — | ||||||
| Stock-based compensation, excluding amount included within gain on sale of Pediatric Portfolio | 327,180 | 137,082 | ||||||
| Amortization of inventory fair value adjustment associated with acquisition of TRx and Avadel Pediatric Product | 107,271 | 170,629 | ||||||
| Non-cash interest expense | — | 302,882 | ||||||
| Gain on Aytu Divestiture | (7,964,924 | ) | — | |||||
| Change in fair value of contingent consideration liability | 247,042 | 169,289 | ||||||
F-21
The Company computes earnings per share ("EPS") using the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared and participation rights in undistributed earnings. The Company has two classes of stock outstanding, common stock and preferred stock. The preferred stock was issued in December 2018, upon Armistice exercising warrants to acquire an aggregate of 2,857,143 shares of the Series B Convertible Preferred Stock ("convertible preferred stock"). The convertible preferred stock has the same rights and preferences as the Company’s common stock, other than being non-voting, and is convertible into shares of common stock on a 1-for-5 ratio. The convertible preferred stock is considered a separate class of stock for EPS purposes, however basic and diluted EPS was not provided for the convertible preferred stock for the year ended December 31, 2018 because the shares were only outstanding for five days in 2018, and therefore, EPS for the preferred stock is immaterial for the year ended December 31, 2018. EPS for both common stock and preferred stock is disclosed for the year ended December 31, 2019.
EPS for common stock and EPS for preferred stock is computed by dividing the sum of distributed earnings and undistributed earnings for each class of stock by the weighted average number of shares outstanding for each class of stock for the period. In applying the two-class method, undistributed earnings are allocated to common stock and preferred stock based on the weighted average shares outstanding during the period, which assumes the convertible preferred stock has been converted to common stock.
Diluted net (loss) income per share includes the potential dilutive effect of common stock equivalents as if such securities were converted or exercised during the period, when the effect is dilutive. Common stock equivalents include: (i) outstanding stock options and restricted stock units, which are included under the "treasury stock method" when dilutive; (ii) common stock to be issued upon the assumed conversion of the Company's unit purchase option (the "UPO") shares, which are included under the "if-converted method" when dilutive; and (iii) common stock to be issued upon the exercise of outstanding warrants, which are included under the "treasury stock method" when dilutive. Because the impact of these items is generally anti-dilutive during periods of net loss, there is no difference between basic and diluted loss per common share for periods with net losses. In periods of net loss, losses are allocated to the participating security only if the security has not only the right to participate in earnings, but also a contractual obligation to share in the Company's losses.
The following table sets forth the computation of basic and diluted net loss per share of common stock for continuing and discontinued operations for the years ended December 31, 2016, 20152019 and 2014:2018, which includes both classes of participating securities:
| Year Ended | ||||||||||||||||
| December 31, 2019 | ||||||||||||||||
| Common stock | Preferred Stock | |||||||||||||||
| Continuing Operations | Discontinued Operations | Continuing Operations | Discontinued Operations | |||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of undistributed net (loss) income | $ | (12,204,552 | ) | $ | 148,673 | $ | (4,066,201 | ) | $ | 49,533 | ||||||
| Denominator: | ||||||||||||||||
| Weighted average shares | 42,878,040 | 42,878,040 | 2,857,143 | 2,857,143 | ||||||||||||
| Basic and diluted net loss per share | $ | (0.28 | ) | $ | 0.00 | $ | (1.42 | ) | $ | 0.01 | ||||||
F-22
| Year ended December 31, | ||||||||||||
| Net loss per share, basic and diluted calculation: | 2016 | 2015 | 2014 | |||||||||
| Net loss | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (16,055,591 | ) | |||
| Extinguishment upon modification of Series A and A-1 convertible preferred stock | — | — | 12,534,438 | |||||||||
| Net loss attributable to common stockholders | $ | (16,471,603 | ) | $ | (10,490,103 | ) | $ | (3,521,153 | ) | |||
| Weighted-average common shares outstanding | 8,830,396 | 2,226,023 | 642,052 | |||||||||
| Net loss per share, basic and diluted | $ | (1.87 | ) | $ | (4.71 | ) | $ | (5.48 | ) | |||
| Year Ended | ||||||||||||
| December 31, 2018 | ||||||||||||
| Common stock | ||||||||||||
| Continuing Operations | Discontinued Operations | Total | ||||||||||
| Numerator: | ||||||||||||
| Net loss | $ | (35,274,099 | ) | $ | (4,778,711 | ) | $ | (40,052,810 | ) | |||
| Deemed distribution to stockholder | 1,657,383 | — | 1,657,383 | |||||||||
| Allocation of undistributed net loss to common stockholders | $ | (36,931,482 | ) | $ | (4,778,711 | ) | $ | (41,710,193 | ) | |||
| Denominator: | ||||||||||||
| Weighted average shares | 34,773,613 | 34,773,613 | 34,773,613 | |||||||||
| Basic and diluted net loss per share | $ | (1.06 | ) | $ | (0.14 | ) | $ | (1.20 | ) | |||
As part of a private placement with Armistice entered into during the fourth quarter of 2018, the Company also entered into a securities purchase agreement with Armistice pursuant to which the Company issued warrants to purchase up to 4,000,000 shares of the Company's common stock with a term of 5.5 years and an exercise price of $12.50 per share (the "incentive warrants"). For accounting purposes, the Company calculated the fair value of the incentive warrants of $1.7 million, which was considered a deemed distribution to Armistice for the year ended December 31, 2018. Therefore, the net loss of $40.1 million for the year ended December 31, 2018 was increased by the deemed distribution of $1.7 million to arrive at the net loss attributable to common stockholders of $41.7 million. While the incentive warrants do have the rights to participate in undistributed earnings, the incentive warrants issued do not share in net losses of the Company. As such, the incentive warrants are excluded from the weighted average shares and warrants outstanding during periods of net loss.
The following outstanding securities at December 31, 2016, 20152019 and 20142018 have been excluded from the computation of diluted weighted shares outstanding, as they wouldcould have been anti-dilutive:
| December 31, | |||||||||
| 2016 | 2015 | 2014 | |||||||
| Series A convertible preferred stock | — | — | 31,116,391 | ||||||
| Series A-1 convertible preferred stock | — | — | 9,074,511 | ||||||
| Series B convertible preferred stock | — | — | 58,948,735 | ||||||
| Stock options | 1,849,359 | 959,188 | 552,726 | ||||||
| Warrants on common stock | 7,400,934 | 7,400,934 | 681,858 | ||||||
| Warrants on preferred stock | — | — | 625,208 | ||||||
| Investor rights obligation | — | — | 53,351,117 | ||||||
| Underwriters' unit purchase option | 40,000 | 40,000 | — | ||||||
| December 31, | ||||||
| 2019 | 2018 | |||||
| Stock options | 4,480,606 | 4,246,597 | ||||
| Warrants on common stock | 4,024,708 | 4,024,708 | ||||
| Restricted Stock Units | 267,500 | 445,000 | ||||
| Underwriters' unit purchase option | 40,000 | 40,000 | ||||
Ichorion Asset Acquisition
On September 24, 2018, the Company entered into, and subsequently consummated the transactions contemplated by, an agreement and plan of merger (the "Ichorion Merger Agreement") by and among the Company and Ichorion Therapeutics, Inc., a Delaware corporation (the “Ichorion Asset Acquisition”), with Ichorion surviving as a wholly owned subsidiary of the Company. The consideration for the Ichorion Asset Acquisition consisted of approximately 5.8 million shares of the Company’s common stock, as adjusted for Estimated Working Capital as defined in the Ichorion Merger Agreement. The shares of common stock issued as part of the acquisition may not be resold until January 2020. Consideration for the Ichorion Asset Acquisition includes certain development milestones worth up to an additional $15.0 million, payable either in shares of the Company's common stock or in cash, at the election of the Company.
The fair value of the common stock shares transferred at closing was approximately $20.0 million using the Company's closing stock price on September 24, 2018 and offset by an estimated discount for lack of marketability calculated using guideline public company volatility for comparable companies. The assets acquired consisted primarily of $18.7 million of IPR&D, $1.6 million of cash and $0.2 million assembled workforce. The Company recorded this transaction as an asset purchase as opposed to a business combination as management concluded that substantially all of the value received was related to one group of similar identifiable assets which was the IPR&D for the three preclinical therapies for inherited metabolic disorders known as CDGs (CERC-801, CERC-802 and CERC-803). The Company considered these assets similar due to similarities in the risks for development, compound type, stage of development, regulatory pathway, patient population and economics of commercialization.
F-23
The fair value of the IPR&D was immediately recognized as Acquired In-Process Research and Development expense as the IPR&D asset has no other alternate use due to the stage of development. The acquired IPR&D expense was not tax deductible for the year ended December 31, 2018. The $0.2 million of transaction costs incurred were recorded to acquire IPR&D expense. The assembled workforce asset recorded to intangible assets will be amortized over an estimated useful life of two years.
The contingent consideration of up to an additional $15.0 million relates to three future development milestones. The first milestone is the first product to be approved for marketing by the FDA on or prior to December 31, 2021. If this milestone is met, the Company is required to make a milestone payment of $6.0 million. The second milestone is the second product being approved for marketing by the FDA on or prior to December 31, 2021. If this milestone is met, the Company is required to make a milestone payment of $5.0 million. The third milestone is a protide molecule being approved by the FDA on or prior to December 31, 2023. If this milestone is met, the Company is required to make a milestone payment of $4.0 million. All milestones are payable in either shares of the Company's common stock or cash, at the election of the Company.
The contingent consideration related to the development milestones will be recognized if and when such milestones are probable and can be reasonably estimated. As of December 31, 2019, no contingent consideration related to the development milestone has been recognized. The Company will continue to monitor the development milestones at each reporting period.
Acquisitions of Businesses
Avadel Pediatric Products Acquisition
As part of the Company's Aytu Divestiture, Cerecor sold its rights, title and interest in each of the marketed pediatric products it initially acquired from Avadel in 2018, which included Aciphex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal™ ER, Flexichamber™.
On February 16, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Avadel US Holdings, Inc., Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., Avadel Therapeutics, LLC and Avadel Pharmaceuticals PLC (collectively, the “Sellers”) to purchase and acquire all rights to the Sellers’ pediatric products. Total consideration transferred to the Sellers consisted of a cash payment of one dollar. In addition, the Company assumed existing seller debt due in January 2021 with a fair value of $15.1 million and contingent consideration relating to royalty obligations through February 2026 with a fair value at acquisition date of approximately $7.9 million. As a result of the Avadel pediatric products acquisition, the Company recorded goodwill of $3.8 million, which is deductible over 15 years for income tax purposes.
The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified pediatric product portfolio that is expected to provide revenue and cost synergies.
During the second quarter of 2018, the Company identified and recorded measurement period adjustments to the preliminary purchase price allocation. These adjustments are reflected in the tables below. The measurement period adjustments were the result of additional analysis performed and information identified during the second quarter of 2018 based on facts and circumstances that existed as of the purchase date. There were no additional measurement adjustments recorded in 2018.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition and as adjusted for measurement period adjustments identified during the second quarter of 2018:
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At February 16, 2018 (preliminary) | Measurement Period Adjustments | At February 16, 2018 (as adjusted) | ||||||||
| Inventory | $ | 2,549,000 | $ | (1,831,000 | ) | $ | 718,000 | |||
| Prepaid assets | — | 570,000 | 570,000 | |||||||
| Intangible assets | 16,453,000 | 1,838,000 | 18,291,000 | |||||||
| Accrued expenses | — | (362,000 | ) | (362,000 | ) | |||||
| Fair value of debt assumed | (15,272,303 | ) | 197,303 | (15,075,000 | ) | |||||
| Fair value of contingent consideration | (7,875,165 | ) | (44,835 | ) | (7,920,000 | ) | ||||
| Total net liabilities assumed | (4,145,468 | ) | 367,468 | (3,778,000 | ) | |||||
| Consideration exchanged | 241,000 | (240,999 | ) | 1 | ||||||
| Goodwill | $ | 4,386,468 | $ | (608,467 | ) | $ | 3,778,001 | |||
The purchase price allocation related to the acquisition of Avadel's pediatric products was finalized in 2018. The fair values of intangible assets, including marketing rights, licenses and developed technology, were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. The fair value of intangible assets both as of the date of acquisition and as adjusted by measurement period adjustments identified during the second quarter of 2018 includes the following:
At February 16, 2018 (preliminary) | Measurement Period Adjustments | At February 16, 2018 (as adjusted) | ||||||||
| Acquired Product Marketing Rights - Karbinal | $ | 6,221,000 | $ | (21,000 | ) | $ | 6,200,000 | |||
| Acquired Product Marketing Rights - AcipHex | 2,520,000 | 283,000 | 2,803,000 | |||||||
| Acquired Product Marketing Rights - Cefaclor | 6,291,000 | 1,320,000 | 7,611,000 | |||||||
| Acquired Developed Technology - Flexichamber | 1,131,000 | 546,000 | 1,677,000 | |||||||
| Acquired IPR&D - LiquiTime formulations | 290,000 | (290,000 | ) | — | ||||||
| Total | $ | 16,453,000 | $ | 1,838,000 | $ | 18,291,000 | ||||
During thesecond quarter of 2019, the Company made a strategic decision to eliminate sales force efforts related to selling Flexichamber (other than the limited inventory currently on hand). As a result of this decision, paired with significant deviations from forecasted sales, management identified an impairment indicator for Flexichamber. Accordingly, during the second quarter of 2019, the Company performed a test for recoverability and concluded that the sum of its estimated future undiscounted cash flows was less than its carrying value of $1.4 million. Management then measured the impairment loss by calculating the excess of Flexichamber's carrying amount over its fair value. Management determined that due to the absence of future material cash flows the fair value of Flexichamber as of June 30, 2019, which is considered a Level 3 nonrecurring fair value measurement, was $0. Accordingly, a full impairment in the amount of $1.4 million was recognized within income (loss) from discontinued operations, net of tax (inclusive of gain on sale) for the year ended December 31, 2019 because Flexichamber was part of the Aytu Divestiture. In addition, because the Company expected the sale of remaining inventory on hand will not generate material cash flows, the Company wrote down the existing inventory on hand as of June 30, 2019 to $0, which resulted in $0.2 million charge to cost of product sales of discontinued operations during the year ended December 31, 2019.
TRx Acquisition
As part of the Company's Aytu Divestiture, Cerecor sold its rights, title and interest in Metafolin (also referred to as Poly-Vi-Flor/Tri-Vi-Flor) which it initially acquired as part of the TRx acquisition.
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On November 17, 2017, the Company entered into, and consummated the transactions contemplated by, an equity interest purchase agreement (the “TRx Purchase Agreement”) by and among the Company, TRx, Fremantle Corporation and LRS International LLC, the selling members of TRx (collectively, the “TRx Sellers”), which provided for the purchase of all of the equity and ownership interests of TRx by the Company (the "TRx Acquisition"). The consideration for the TRx Acquisition consisted of $18.9 million in cash, as adjusted for estimated working capital, estimated cash on hand, estimated indebtedness and estimated transaction expenses, as well as 7,534,884 shares of the Company’s common stock having an aggregate value on the closing date of $8.5 million (the "Equity Consideration") and certain potential contingent payments. Upon closing, the Company issued 5,184,920 shares of its common stock to the TRx Sellers. Pursuant to the TRx Purchase Agreement, the issuance of the remaining 2,349,968 shares were subject to the Company's stockholder approval. In May 2018, stockholder approval was obtained and the remaining shares were issued to the TRx Sellers. The contingent shares were initially recorded to contingently issuable shares, which is recorded within stockholder's equity and were reclassed to common stock and additional paid in capital upon issuance, on the consolidating balance sheet date. As a result of the TRx Acquisition, the Company recorded goodwill of $12.6 million, of which $8.7 million was deductible for income taxes.
During the third quarter of 2018, the Company identified and recorded measurement period adjustments to its preliminary purchase price allocation that was disclosed in prior periods. These adjustments are reflected in the tables below. If the measurement period adjustments were reflected in the consolidated statement of operations for the year ended December 31, 2017 its impact would have been immaterial. The measurement period adjustments were the result of an arbitration ruling discussed in further detail in Note 16, the facts and circumstances of which existed as of the acquisition date.
The following table summarizes the preliminary acquisition-date fair value of the consideration transferred at the date of acquisition both as disclosed in prior periods prior to the third quarter of 2018 and as adjusted for measurement period adjustments identified during the third quarter of 2018:
At November 17, 2017 (preliminary) | Measurement Period Adjustments | At November 17, 2017 (as adjusted) | ||||||||
| Cash | $ | 18,900,000 | $ | — | $ | 18,900,000 | ||||
| Common stock (including contingently issuable shares) | 8,514,419 | — | 8,514,419 | |||||||
| Contingent payments | 2,576,633 | (1,210,000 | ) | 1,366,633 | ||||||
| Total consideration transferred | $ | 29,991,052 | (1,210,000 | ) | 28,781,052 | |||||
The TRx Acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired, and liabilities assumed, were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to leveraging TRx’s research and development, intellectual property, and processes.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition both as disclosed in prior periods prior to the third quarter of 2018 and as adjusted for measurement period adjustments identified during the third quarter of 2018:
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At November 17, 2017 (preliminary) | Measurement Period Adjustments | At November 17, 2017 (as adjusted) | ||||||||
| Fair value of assets acquired: | ||||||||||
| Cash and cash equivalents | $ | 11,068 | $ | — | $ | 11,068 | ||||
| Accounts receivable, net | 2,872,545 | — | 2,872,545 | |||||||
| Inventory | 495,777 | — | 495,777 | |||||||
| Prepaid expenses and other current assets | 134,281 | — | 134,281 | |||||||
| Other receivables | — | 2,764,515 | 2,764,515 | |||||||
| Identifiable Intangible Assets: | — | |||||||||
| Acquired product marketing rights - Metafolin (Poly-Vi-Flor/Tri-Vi-Flor) | 10,465,000 | 1,522,000 | 11,987,000 | |||||||
| PAI sales and marketing agreement | 2,334,000 | 219,000 | 2,553,000 | |||||||
| Acquired product marketing rights - Millipred | 4,714,000 | 342,000 | 5,056,000 | |||||||
| Acquired product marketing rights - Ulesfia | 555,000 | (555,000 | ) | — | ||||||
| Total assets acquired | 21,581,671 | 4,292,515 | 25,874,186 | |||||||
| Fair value of liabilities assumed: | ||||||||||
| Accounts payable | 192,706 | — | 192,706 | |||||||
| Accrued expenses and other current liabilities | 4,850,422 | 3,764,515 | 8,614,937 | |||||||
| Deferred tax liability | 839,773 | 78,840 | 918,613 | |||||||
| Total liabilities assumed | 5,882,901 | 3,843,355 | 9,726,256 | |||||||
| Total identifiable net assets | 15,698,770 | 449,160 | 16,147,930 | |||||||
| Fair value of consideration transferred | 29,991,052 | (1,210,000 | ) | 28,781,052 | ||||||
| Goodwill | $ | 14,292,282 | $ | (1,659,160 | ) | $ | 12,633,122 | |||
The purchase price allocation related to the TRx Acquisition was finalized in 2018. The fair values of intangible assets, including marketing rights, licenses and developed technology, were determined using variations of the income approach, specifically the multi-period excess earnings method. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. The final fair value of intangible assets both as disclosed in prior periods and as adjusted by measurement period adjustments identified during the third quarter of 2018 includes the following:
| At November 17, 2017 (preliminary) | Measurement Period Adjustments | At November 17, 2017 (as adjusted) | ||||||||
| Acquired product marketing rights - Metafolin (Poly-Vi-Flor/Tri-Vi-Flor) | $ | 10,465,000 | $ | 1,522,000 | $ | 11,987,000 | ||||
| PAI sales and marketing agreement | 2,334,000 | 219,000 | 2,553,000 | |||||||
| Acquired product marketing rights - Millipred | 4,714,000 | 342,000 | 5,056,000 | |||||||
| Acquired product marketing rights - Ulesfia | 555,000 | (555,000 | ) | — | ||||||
| Total | $ | 18,068,000 | $ | 1,528,000 | $ | 19,596,000 | ||||
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The Company received written notice to terminate the PAI sales and marketing agreement in the second quarter of 2018. As a result, the Company reassessed the fair value of the PAI sales and marketing agreement on that date (a level III non-recurring fair value measurement) and concluded due to the absence of future cash flows beyond the date of termination that the fair value was $0. An impairment charge was recognized in the year ended December 31, 2018 in the amount of $1.9 million, representing the remaining net book value of the PAI sales and marketing agreement intangible asset.
6. Fair Value Measurements
ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for an identical asset or liability in an active market.
Level 2—inputs to the valuation methodology include quoted prices for a similar asset or liability in an active market or model‑derived valuations in which all significant inputs are observable for substantially the full term of the asset or liability.
Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement of the asset or liability.
The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities from continuing operations that are measured at fair value on a recurring basis:
| December 31, 2016 | December 31, 2019 | |||||||||||||||||||||||
| Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||
| Quoted prices in | Significant other | Significant | Quoted prices in | Significant other | Significant | |||||||||||||||||||
| active markets for | observable | unobservable | active markets for | observable | unobservable | |||||||||||||||||||
| identical assets | inputs | inputs | identical assets | inputs | inputs | |||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Investments in money market funds* | $ | 4,758,539 | $ | — | $ | — | $ | 2,240,230 | $ | — | $ | — | ||||||||||||
| Investment in Aytu | $ | — | $ | 7,628,947 | $ | — | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Warrant liability | $ | — | $ | — | $ | 5,501 | ||||||||||||||||||
| Unit purchase option liability | — | $ | — | $ | 51 | |||||||||||||||||||
| Warrant liability** | $ | — | $ | — | $ | 3,460 | ||||||||||||||||||
| Unit purchase option liability** | $ | — | $ | — | $ | 10,594 | ||||||||||||||||||
| December 31, 2015 | December 31, 2018 | |||||||||||||||||||||||
| Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||
| Quoted prices in | Significant other | Significant | Quoted prices in | Significant other | Significant | |||||||||||||||||||
| active markets for | observable | unobservable | active markets for | observable | unobservable | |||||||||||||||||||
| identical assets | inputs | inputs | identical assets | inputs | inputs | |||||||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Investments in money market funds* | $ | 21,122,553 | $ | — | $ | — | $ | 7,324,932 | $ | — | $ | — | ||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Warrant liability | $ | — | $ | — | $ | 27,606 | ||||||||||||||||||
| Unit purchase option liability | — | $ | — | $ | 50,571 | |||||||||||||||||||
| Contingent consideration | $ | — | $ | — | $ | 1,256,210 | ||||||||||||||||||
| Warrant liability** | $ | — | $ | — | $ | 2,950 | ||||||||||||||||||
| Unit purchase option liability** | $ | — | $ | — | $ | 7,216 | ||||||||||||||||||
*Investments in money market funds are reflected in cash and cash equivalents on the accompanying Balance Sheets.consolidated balance sheets.
**Warrant liability and unit purchase option liability are reflected in accrued expenses and other current liabilities on the accompanying consolidated balance sheets.
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As of December 31, 2019 and 2018, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts receivable, other receivables, accounts payable, accrued expenses and other current liabilities, warrant liability, the underwriters' unit purchase option liability and contingent consideration. The carrying amounts reported in the accompanying consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, other receivables, accounts payable, accrued expenses and other current liabilities approximate their respective fair values because of the short-term nature of these accounts.
Level 2 Valuation
The table presented below is a summary of changes in fair value of the Company's Level 2 valuation for the Investment in Aytu for the year ended December 31, 2019:
| Investment in | |||||
| Aytu | |||||
| Balance at December 31, 2018 | $ | — | |||
| Initial valuation of Investment in Aytu upon issuance of Aytu Preferred Stock | 7,575,015 | ||||
| Change in fair value of Investment in Aytu | 53,932 | ||||
| Balance at December 31, 2019 | $ | 7,628,947 | |||
As part of the consideration for the Aytu Divestiture, Aytu issued to Cerecor 9,805,845 shares of Aytu Series G Convertible Preferred Stock (the "Aytu Series G Preferred Stock" or "Aytu Preferred Stock") at a price of $1.2747 per share, which, pursuant to the Aytu Purchase Agreement, represents a formula averaging the volume weighted average price of Aytu's common stock for the 30-day period ending immediately prior to August 30, 2019 and the 30-day period ending on October 28, 2019. The Aytu Series G Preferred Stock is not transferable until July 1, 2020. Further, the Aytu Series G Preferred Stock becomes convertible at the option of Cerecor and solely in connection with either (i) the distribution of the underlying shares of common stock issuable upon conversion to Cerecor’s stockholders; or (ii) the sale of the underlying shares of common stock issuable upon conversion in open market broker transactions or private sales to unaffiliated third parties. The Aytu Series G Preferred Stock is similar to Aytu's common stock other than it has no voting rights, is subject to a lock-up period and is only convertible to common stock in certain circumstances. Additionally, the Aytu Series G Preferred Stock was restricted as of December 31, 2019.
Upon closing of the Aytu Divestiture on November 1, 2019, the Company recognized $7.6 million as the estimated fair value of the Aytu Series G Preferred Stock on that date. The fair value as of November 1, 2019 was calculated using Aytu's stock price close on November 1, 2019 of $1.03 per share and offset by an estimated discount for lack of marketability of 25% calculated using guideline public company volatility for comparable companies.
Subsequent to the initial measurement, at each reporting period, the Investment in Aytu will be remeasured at the current fair value with the change in fair value recorded to other income, net in the accompanying statements of operations. As of December 31, 2019, the Investment of Aytu was $7.6 million, representing an immaterial change from the initial measurement on November 1, 2019. The fair value as of December 31, 2019 was calculated using Aytu's closing stock price on December 31, 2019 of $0.9725 per share and offset by an estimated discount for lack of marketability of 20% calculated using guideline public company volatility for comparable companies. The Investment in Aytu is recorded in the consolidated balance sheet as a current asset because the Aytu Series G Preferred Stock is available for sale within one year of December 31, 2019. Subsequent to December 31, 2019, Aytu's common stock price has been volatile and therefore Cerecor may recognize a significant gain or loss on the change in fair value of the Investment in Aytu for the three months ending March 31, 2020 and any future reporting period based on actual movements in the underlying stock price.
Level 3 Valuation
The tables presented below are a summary of changes in the fair value of the Company’s Level 3 valuations for the warrant liability, (which relates tounit purchase option liability and contingent consideration from continuing operations for the years ended December 31, 2019 and 2018:
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| Warrant | Unit purchase | Contingent | ||||||||||||||
| liability | option liability | consideration | Total | |||||||||||||
| Balance at December 31, 2018 | $ | 2,950 | $ | 7,216 | $ | 1,256,211 | $ | 1,266,377 | ||||||||
| Change in fair value due to Lachlan Settlement | — | — | (1,277,150 | ) | (1,277,150 | ) | ||||||||||
| Change in fair value | 510 | 3,378 | 20,939 | 24,827 | ||||||||||||
| Balance at December 31, 2019 | $ | 3,460 | $ | 10,594 | $ | — | $ | 14,054 | ||||||||
| Warrant | Unit purchase | Contingent | ||||||||||||||
| liability | option liability | consideration | Total | |||||||||||||
| Balance at December 31, 2017 | $ | 8,185 | $ | 26,991 | $ | 2,577,134 | $ | 2,612,310 | ||||||||
| Purchase price allocation measurement period adjustment of contingent consideration | — | — | (1,210,000 | ) | (1,210,000 | ) | ||||||||||
| Change in fair value | (5,235 | ) | (19,775 | ) | (110,923 | ) | (135,933 | ) | ||||||||
| Balance at December 31, 2018 | $ | 2,950 | $ | 7,216 | $ | 1,256,211 | $ | 1,266,377 | ||||||||
In 2014, the Company issued warrants to purchase 625,208 shares of convertible preferred stock. Upon the closing of the Company's initial public offering ("IPO") in October 2015, these warrants became warrants to purchase 22,328 shares of common stock)stock, in accordance with their terms. The warrants expire in October 2020. The warrants represent a freestanding financial instrument that is indexed to an obligation, which the Company refers to as the warrant liability. The warrant liability is marked-to-market each reporting period with the change in fair value recorded to other income, (expense)net in the accompanying statements of operations until the warrants are exercised, expire or other facts and circumstances lead the warrant liability to be reclassified to stockholders’ equity. The fair value of the warrant liability is estimated using a Black-Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant liability as of December 31, 2016,2019, include (i) volatility of 100%42%, (ii) risk freerisk-free interest rate of 1.65%1.59%, (iii) strike price ($8.40),of $8.40, (iv) fair value of common stock ($0.88),of $5.39, and (v) expected life of 3.80.8 years.
The underwriters’ unit purchase option (the “UPO”) was issued to the underwriters of the Company's initial public offering ("IPO")IPO in 2015 and provides the underwriters the option to purchase up to a total of 40,000 units. The units underlying the UPO will be, immediately upon exercise, separated into shares of common stock, underwriters’ Class A warrants and underwriters’ Class B warrants (such warrants together referred to as the Underwriters’ Warrants). The Underwriters’ Warrants are warrants to purchase shares of common stock (see Note 9 for additional information onstock. The Class B warrants expired in April 2017 and the UPO).Class A warrants expired in October 2018, while the UPO expires in October 2020. The Company classifies the UPO as a liability as it is a freestanding marked-to-market derivative instrument that is precluded from being classified in stockholders’ equity. The UPO liability is marked-to-market each reporting period with the change in fair value recorded to other income, (expense)net in the accompanying statements of operations until the UPO is exercised, expires or other facts and circumstances lead the UPO to be reclassified to stockholders’ equity. The fair value of the UPO liability is estimated using a Black-Scholes option-pricing model within a Monte Carlo simulation model framework.model. The significant assumptions used in preparing the simulation model for valuing the UPO as of December 31, 2016,2019, include (i) volatility range of 65% to 90%42%, (ii) risk freerisk-free interest rate range of 0.44% to 1.64%1.59%, (iii) unit strike price ($7.48),of $7.47, (iv) underwriters’ Class A warrant strike price ($5.23), (v) underwriters’ Class B warrant strike price ($4.49), (vi) fair value of underlying equity ($0.88),of $5.39, and (vii) optimal exercise point(v) expected life of immediately prior to0.8 years.
The Company's business acquisitions of Avadel's pediatric products and TRx (see Note 5) involved the expirationpotential for future payment of consideration that is contingent upon the underwriters’ Class B warrants, which occursachievement of operational and commercial milestones and royalty payments on April 20, 2017.future product sales. The fair value of underlying equitycontingent consideration was determined at the primary driveracquisition date utilizing unobservable inputs such as the estimated amount and timing of projected cash flows, the probability of success (achievement of the decreasecontingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liabilities are remeasured at the current fair value with changes recorded in the consolidated statement of operations.
Prior to the close of the Aytu Divestiture on November 1, 2019, the Company was required to pay a 15% annual royalty on net sales of the acquired Avadel pediatric products through February 2026 up to an aggregate amount of $12.5 million. The fair value of the UPO liability from $50,571future royalty was the expected future value of the contingent payments discounted to a present value. As detailed in Note 3, in connection with the close of the Aytu Divestiture on November 1, 2019, the contingent consideration related to Avadel's pediatric products was assumed by Aytu. Therefore, as of December 31, 20152019, no value was assigned to $51the contingent consideration as of December 31, 2016. This $50,520 gain on2019. On November 1, 2019, in conjunction with the change in fair valueclosing of the UPO liability wasAytu Divestiture, the Company entered into a Guarantee which guarantees the payment by Aytu of the contingent consideration related to future potential royalties on Avadel's pediatric products. For additional information regarding the Guarantee, which is recorded to other income in the accompanying statement of operations.
within discontinued operations, see Note 3.
The investor rights obligation expired in October 2015consideration for the TRx Acquisition included certain potential contingent payments. First, pursuant to the TRx Purchase Agreement, the Company was required to pay $3.0 million to the TRx Sellers upon the closinggross profit related to TRx products achieving or exceeding a gross profit of $12.6 million in 2018. The Company did not achieve this contingent event in 2018 and therefore no value was assigned to the contingent payout for the year ended December 31, 2018. Additionally, the Company was required to pay the following: (1) $2.0 million upon the transfer of the Company’s IPO. While outstanding,Ulesfia NDA to the investor rights obligationCompany ("NDA Transfer Milestone"), and (2) $2.0 million upon FDA approval of a new dosage of Ulesfia ("FDA Approval Milestone"). However, as part of the settlement the Company entered into during the second quarter of 2019 with Lachlan Pharmaceuticals, an Irish company controlled by the previous owners of TRx, among additional terms discussed in Note 16, the Company gave up its right to sell Ulesfia, except for a limited amount of inventory on hand until that inventory is sold or expired. As a result, the settlement released the Company from the potential contingent payments related to the NDA Transfer Milestone and FDA Approval Milestone and therefore, no value was remeasured at each reporting period and changes in fair value were recordedassigned to the two milestones as a component of other income (expense)December 31, 2019 resulting in the Company’s statementsCompany recognizing a gain on the change of operations. The fair value of the investor rights obligation was determined using a valuation model, which considered the probabilitycontingent consideration of achieving certain milestones, the entity’s cost of capital, the estimated period the rights were to be outstanding, consideration received$1.3 million for the instrument with the rights, the number of shares to be issued to satisfy the rights, the price of such shares and any changes in the fair value of the underlying instrument.
Additionally, as a result of the Aytu Divestiture, the Company performed a non-recurring Level 3 valuation to assign goodwill to the disposed Pediatric Portfolio using the relative fair value approach (see Note 3 and 2015:Note 10 for more detail). The Company also recognized impairment of $1.4 million for the year ended December 31,2019 due to the impairment of the Flexichamber asset, which is considered a non-recurring Level 3 valuation. As Flexichamber was a part of the Aytu Divestiture, the impairment expense was included in income (loss) from discontinued operations, net of tax (inclusive of gain on sale) for the year ended December 31, 2019 (see Note 3 and Note 5 for more detail).
| Warrant | Unit purchase | Investor rights | ||||||||||||||
| liability | option liability | obligation | Total | |||||||||||||
| Balance at December 31, 2015 | $ | 27,606 | $ | 50,571 | $ | — | $ | 78,177 | ||||||||
| Change in fair value | (22,105 | ) | (50,520 | ) | — | (72,625 | ) | |||||||||
| Balance at December 31, 2016 | $ | 5,501 | $ | 51 | $ | — | $ | 5,552 | ||||||||
| Warrant | Unit purchase | Investor rights | ||||||||||||||
| liability | option liability | obligation | Total | |||||||||||||
| Balance at December 31, 2014 | $ | 69,684 | $ | — | $ | 1,112,000 | $ | 1,181,684 | ||||||||
| Issuance of unit purchase option | — | 209,542 | — | 209,542 | ||||||||||||
| Expiration of investor rights obligation | — | — | (1,112,000 | ) | (1,112,000 | ) | ||||||||||
| Change in fair value | (42,078 | ) | (158,971 | ) | — | (201,049 | ) | |||||||||
| Balance at December 31, 2015 | $ | 27,606 | $ | 50,571 | $ | — | $ | 78,177 | ||||||||
No other changes in valuation techniques or inputs occurred during the years ended December 31, 20162019 and 2015.2018. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the years ended December 31, 20162019 and 2015.2018.
As discussed in detail in Note 17, on December 5, 2019, the Company entered into a Merger Agreement with Aevi that was subsequently consummated during the first quarter of 2020. In connection with the Merger Agreement, Cerecor agreed to fund certain expenses of Aevi related to the exercise of an exclusive license from MedImmune Limited to develop and commercialize a Phase 2‑ready fully human monoclonal antibody that targets interleukin 18, or IL‑18, AEVI‑007 (the "AZ Option"), as well as fund the operating expenses of Aevi from December 5, 2019 through the earlier of the termination of the Merger Agreement or the closing of the Merger. Cerecor received from Aevi two promissory notes in consideration for the loans for such expenses. In December 2019, Aevi requested and Cerecor funded a $4.1 million advance under the note specific to the AZ Option. Aevi did not request any advances under the note specific to general operating expenses.
Pursuant to the Aevi Loan, the maximum loan amount was $5.0 million, together with interest on the outstanding principal amount of all such advances at an annual rate of 5%. The use of proceeds was limited to fund obligations related to the AZ Option. All unpaid principal and unpaid accrued interest on the Aevi Loan was due and payable in full on December 5, 2020 (unless the Merger Agreement was terminated or upon consummation of the Merger). Upon termination of the Merger Agreement for any reason, Aevi would be required to repay the amount borrowed under the Aevi Loan in full. Upon consummation of the Merger, the Aevi Loan was to be forgiven.
As of December 31, 2019, it was unknown if the Merger would be consummated. Accordingly, as of December 31, 2019, the Company recognized the $4.1 million loaned to Aevi as an other receivable within its accompanying consolidated balance sheet.
As discussed in detail in Note 17, on February 3, 2020, the Merger was consummated in accordance with the terms of the Merger Agreement and the $4.1 million loan that Cerecor advanced to Aevi in December 2019 was forgiven. The Company is in the process of determining the financial effect of the Merger, including whether the Merger will be recorded as an asset purchase or a business combination and will perform preliminary purchase accounting during the first quarter of 2020, however the Company preliminarily plans to treat the Aevi Loan as purchase price consideration.
8. Inventory
Inventory consists of finished goods stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis. The Company reviews the composition of inventory at each reporting period in order to identify obsolete, slow-moving, quantities in excess of expected demand, or otherwise non-saleable items.
F-31
Inventory consisted of the following as of December 31, 2019 and 2018:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Raw materials | $ | — | $ | 11,392 | ||||
| Finished goods | 46,705 | 497,949 | ||||||
| Inventory reserve | (25,371 | ) | (191,418 | ) | ||||
| Inventory, net of continuing operations | $ | 21,334 | $ | 317,923 | ||||
During the years ended December 31, 2019 and 2018, the Company recorded a related charge to cost of goods sold for obsolete inventory of continuing operations of $36,577 and $174,944, respectively.
9. Property and Equipment
Property and equipment as of December 31, 20162019 and 20152018 consisted of the following:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Furniture and equipment | $ | 143,168 | $ | 133,229 | ||||
| Computers and software | 6,708 | 122,065 | ||||||
| Right-of-use asset (Corporate Headquarters' Lease) | 718,628 | — | ||||||
| Leasehold improvements | 657,328 | 463,381 | ||||||
| Total property and equipment | 1,525,832 | 718,675 | ||||||
| Less accumulated depreciation | (78,169 | ) | (132,163 | ) | ||||
| Property and equipment, net | $ | 1,447,663 | $ | 586,512 | ||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Furniture and equipment | $ | 58,126 | $ | 34,918 | ||||
| Computers and software | 72,808 | 61,133 | ||||||
| Total property and equipment | 130,934 | 96,051 | ||||||
| Less accumulated depreciation | (87,691 | ) | (60,835 | ) | ||||
| Property and equipment, net | $ | 43,243 | $ | 35,216 | ||||
Depreciation expense was $26,856$119,488 and $23,508$22,515 for the years ended December 31, 20162019 and December 31, 2015,2018, respectively.
The Company identified one operating lease, which is for its corporate headquarters located in Rockville, Maryland. The annual base rent for the office space is $161,671, subject to annual 2.5% increases over the term of the lease. The lease provides for a rent abatement for a period of 12 months following the Company's date of occupancy. The lease has an initial term of 10 years from the date the Company makes its first annual fixed rent payment, which occurred in January 2020. The Company has the option to extend the lease two times, each for a period of five years, and Other Current Liabilitiesmay terminate the lease as of the sixth anniversary of the first annual fixed rent payment, upon the payment of a termination fee. As of the lease commencement date, it was not reasonably certain that the Company will exercise the renewal periods or early terminate the lease and therefore, the end date of the lease for accounting purposes is January 31, 2030. The remaining term of the lease at December 31, 2019 was 10.1 years.
| December 31, 2019 | ||||
| Property and equipment, net | $ | 718,626 | ||
| Other current liabilities | $ | 155,815 | ||
| Other long-term liabilities | $ | 1,111,965 | ||
The operating lease ROU asset is included in property and equipment and the lease liability is included in accrued expenses and other current liabilities asand other long-term liabilities in our condensed consolidated balance sheets. In order to determine the present value of lease payments, the Company utilized a discount rate of 7.7%. This rate was determined based on available information of the rate of interest the Company would pay to borrow on a collateralized basis at an amount equal to the lease payments in a similar economic environment over a similar term on the transition date.
The components of lease expense for the year ended December 31, 2016 and 2015 consisted of the following:
2019:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Compensation and benefits | $ | 272,601 | $ | 1,128,073 | ||||
| Research and development expenses | 315,937 | 464,719 | ||||||
| General and administrative | 160,116 | 253,132 | ||||||
| Accrued interest | 193,781 | 39,534 | ||||||
| Total accrued expenses and other current liabilities | $ | 942,435 | $ | 1,885,458 | ||||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating lease cost* | $ | 160,767 | $ | 239,259 | ||||
| *Includes short-term leases, which are immaterial. | ||||||||
Because the corporate headquarters lease provides for a 12-month lease abatement, the cash paid for amounts included in the measurement of lease liabilities was $0 as of December 31, 2019.
The following table shows a maturity analysis of the operating lease liability as of December 31, 2019:
| Undiscounted Cash Flows | ||||
| 2020 | $ | 155,815 | ||
| 2021 | 169,510 | |||
| 2022 | 173,748 | |||
| 2023 | 178,092 | |||
| 2024 | 182,544 | |||
| Thereafter | 1,000,746 | |||
| Total lease payments | $ | 1,860,455 | ||
| Less implied interest | (592,675 | ) | ||
| Total | $ | 1,267,780 | ||
Upon consummation of the Aevi Merger on February 3, 2020, the Company also occupies an office in Wayne, Pennsylvania, which is an operating lease. The lease expires April 2020 and goes month-to-month thereafter, however both the Company and the landlord have the right to terminate the lease 60 days after written notice is provided. The monthly rent payment for this lease is $12,050.
| Balance as of December 31, 2017 | $ | 12,290,247 | ||
| Goodwill from acquisition of Avadel's pediatric products | 3,778,001 | |||
| Goodwill purchase price allocation measurement period adjustment from acquisition of TRx Pharmaceuticals | (1,659,160 | ) | ||
| Balance as of December 31, 2018 and as of December 31, 2019 | $ | 14,409,088 | ||
The Company consists of one reporting unit. A portion of the Company's reporting unit was disposed of as part of the Aytu Divestiture, which closed on November 1, 2019. To determine the amount of goodwill allocated to the discontinued operation, the Company undertaking a nine-month toxicology study in non-human primatesassigned goodwill based on the relative fair values of the portion of the reporting unit disposed and delivering a final study report,the portion of the reporting unit remaining (relative to the total estimated enterprise fair value of Cerecor on the closing date of the Aytu Divestiture on November 1, 2019). The estimated fair value of the reporting unit disposed was determined based on the estimated purchase consideration received as part of the Aytu Divestiture. The estimated fair value of the reporting unit remaining was determined based on the estimated enterprise fair value of Cerecor on the closing date of the Aytu Divestiture, which was based on the Company's market capitalization on November 1, 2019 and increased by an estimated enterprise value control premium of 20% calculated using historical market data of similar transactions at comparable companies. Based on the relative fair value approach, the Company will be required to pay Lilly an additional $250,000. Additional payments may be due upon achievement of other development and regulatory milestones, including the first commercial sale. Upon commercialization, the Company is obligated to pay Lilly additional milestones and royalties on net sales.
There were no accumulated impairment losses to goodwill at December 31, 2016. The Company recorded the $2.0 million upfront amount as a research and development expense in the accompanying statement of operations for the year ended2019 or December 31, 2016. Additional payments may be due upon achievement of development and commercialization milestones, including the first commercial sale. Upon commercialization, the Company is obligated to pay Lilly milestone payments and a royalty on net sales.
The changes in intangible assets for the years ended December 31, 2019 and 2018 were as follows:
| Balance as of December 31, 2017 | $ | 7,286,688 | ||
| Additions | 150,000 | |||
| Purchase price allocation measurement period adjustments | 6,000 | |||
| Amortization | (1,815,872 | ) | ||
| Impairment | (1,861,562 | ) | ||
| Balance as of December 31, 2018 | $ | 3,765,254 | ||
| Amortization | (1,338,996 | ) | ||
| Balance as of December 31, 2019 | $ | 2,426,258 | ||
The Company received written notice to terminate the PAI sales and marketing agreement in the second quarter of 2018. As a result the Company received a $7.5reassessed the fair value of the PAI sales and marketing agreement on that date (a level III non‑recurring fair value measurement) and concluded due to the absence of future cash flows beyond the date of termination that the fair value was $0. An impairment charge was recognized in the year ended December 31, 2018 in the amount of $1.9 million, secured term loan from a finance company. The loan is secured by a lienrepresenting the remaining net book value of the PAI sales and marketing agreement intangible asset on the Company’sdate of assessment. No impairment for intangible assets excluding intellectual property, which is subject to a negative pledge. The loan contains certain additional nonfinancial covenants. In connection with the loan agreement, the Company’s cash and investment accounts are subject to account control agreements with the finance company that give the finance company the right to assume control of the accounts in the event of a loan default. Loan defaults are defined in the loan agreement and include, among others, the finance company’s determination that there is a material adverse change in the Company’sfrom continuing operations notwithstanding adverse results of clinical trials. Interest on the loan is at a rate of the greater of 7.95%, or 7.95% plus the prime rate as reported in The Wall Street Journal minus 3.25%. The interest rate effective from loan inception to December 16, 2015 was 7.95%. Effective December 17, 2015, the prime rate as reported by The Wall Street Journal increased 0.25% resulting in the interest rate increasing to 8.20%. Effective December 15, 2016, the prime rate as reported by The Wall Street Journal increased an additional 0.25% resulting in an increase to the current interest rate, which was 8.45%recognized as of December 31, 2016. 2019.
The loan was interest‑onlyfollowing is a summary of intangible assets held by the Company at December 31, 2019 and December 31, 2018, respectively:
| December 31, 2019 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted-Average Remaining Life | |||||||||||
| (in years) | ||||||||||||||
| Acquired Product Marketing Rights | $ | 5,056,000 | $ | (2,685,992 | ) | $ | 2,370,008 | 1.92 | ||||||
| Acquired Assembled Workforce | 150,000 | (93,750 | ) | 56,250 | 0.75 | |||||||||
| Total Intangible Assets | $ | 5,206,000 | $ | (2,779,742 | ) | $ | 2,426,258 | 1.89 | ||||||
| December 31, 2018 | ||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Impairment Loss | Net Carrying Amount | Weighted-Average Remaining Life | ||||||||||||||
| (in years) | ||||||||||||||||||
| Acquired Product Marketing Rights | $ | 5,056,000 | $ | (1,421,996 | ) | $ | — | $ | 3,634,004 | 2.92 | ||||||||
| Sales and Marketing Agreement | 2,553,000 | (691,438 | ) | (1,861,562 | ) | — | — | |||||||||||
| Acquired Assembled Workforce | 150,000 | (18,750 | ) | — | 131,250 | 1.75 | ||||||||||||
| Total Intangible Assets | $ | 7,759,000 | $ | (2,132,184 | ) | $ | (1,861,562 | ) | $ | 3,765,254 | 2.88 | |||||||
Amortization of intangibles for nine months,the next five years and thereafter is repayable in equal monthly paymentsexpected to be as follows:
F-34
| Estimated | ||||
| Amortization | ||||
| For the Years Ending December 31, | Expense | |||
| 2020 | $ | 1,320,246 | ||
| 2021 | 1,106,012 | |||
| 2022 | — | |||
| 2023 | — | |||
| 2024 | — | |||
| Thereafter | — | |||
| Total future amortization expense | $ | 2,426,258 | ||
12. Accrued Expenses and interest of approximately $305,000 over 27 months, which began in June 2015. Debt consisted of the followingOther Current Liabilities
Accrued expenses and other current liabilities as of December 31, 20162019 and 2015:2018 consisted of the following:
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Term loan | $ | 2,374,031 | $ | 5,688,256 | ||||
| Less: debt discount | (20,364 | ) | (126,700 | ) | ||||
| Term Loan, net of debt discount | 2,353,667 | 5,561,556 | ||||||
| Less: current portion, net of debt discount | (2,353,667 | ) | (3,208,074 | ) | ||||
| Long term debt, net of current portion and debt discount | $ | — | $ | 2,353,482 | ||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Sales returns and allowances | $ | 2,284,175 | $ | 1,465,419 | ||||
| Medicaid rebates | 118,271 | 50,246 | ||||||
| Minimum sales commitments, royalties payable, and purchase obligations | 75,000 | 8,954,521 | ||||||
| Compensation and benefits | 1,591,964 | 1,953,065 | ||||||
| Research and development expenses | 920,901 | 278,132 | ||||||
| General and administrative | 360,016 | 1,112,378 | ||||||
| Sales and marketing | 120,056 | 235,721 | ||||||
| Other | 169,869 | 279,397 | ||||||
| Accrued expenses and other current liabilities | $ | 5,640,252 | $ | 14,328,879 | ||||
On October 20, 2015,December 26, 2018, the Company closed its IPOfiled a Certificate of its units. Each unit consistedDesignation of one sharePreferences of Series B Non-Voting Convertible Preferred Stock ("Series B Convertible Preferred Stock" or "convertible preferred stock") of Cerecor Inc. (the “Certificate of Designation of the Series B Preferred Stock”) classifying and designating the rights, preferences and privileges of the Series B Convertible Preferred Stock. The Certificate of Designation of the Series B Convertible Preferred Stock authorized the issuance of 2,857,143 shares of convertible preferred stock to Armistice with a par value of $0.001 per share. The Series B Convertible Preferred Stock is convertible into shares of common stock on a 1-for-5 ratio and holds no voting rights.
Convertible Preferred Stock
December 2018 Armistice Private Placement
On December 27, 2018, the Company entered into a series of transactions as part of a private placement with Armistice in order to generate cash to continue to develop its pipeline assets and for general corporate purposes. The transactions are considered one Class A warranttransaction for accounting purposes. As part of the transaction, the Company exchanged common stock warrants issued on April 27, 2017 to Armistice for thepurchase one shareup to 14,285,714 shares of the Company’s common stock at an exercise price of $4.55$0.40 per share and one Class B warrant(the "original warrants") for like-kind warrants to purchase one-half shareup to 2,857,143 shares of common stock atthe Company's newly designated Series B Convertible Preferred Stock with an exercise price of $3.90$2.00 per full share (the “units”"exchanged warrants"). The Class A warrants expire on October 20, 2018 andArmistice immediately exercised the Class B warrants expire on April 20, 2017. The closing of the IPO resulted in the sale of 4,000,000 units at an initial public offering price of $6.50 per unit for gross proceeds of $26.0 million. The net proceeds of the IPO, after underwriting discounts, commissions and expenses, and before offering expenses, to the Company were approximately $23.6 million. On November 13, 2015, the units separated into common stock, Class A warrants and Class B warrants and began trading separately on the NASDAQ Capital Market.exchanged
In order to provide Armistice an incentive to exercise the exchanged warrants, the Company also entered into a securities purchase agreement with Armistice pursuant to which the Company issued warrants for 20,0004,000,000 shares of common stock 551,900 Class Aof the Company with a term of 5.5 years and an exercise price of $12.50 per share (the "incentive warrants"). For accounting purposes, the Company calculated the fair value of the incentive warrants at $1.7 million, which was considered a deemed distribution to purchase one shareArmistice for the year ended December 31, 2018.
During the first quarter of 2020, Armistice converted 1.6 million of Series B Convertible Preferred Stock (of its approximate 2.9 million shares of convertible preferred stock) into 8.0 million shares of Cerecor's common stock.
Voting
Holders of the Company's convertible preferred stock and 551,900 Class B warrantsare not entitled to purchase one-half share of common stock for additional gross proceeds of $135,319.vote.
Dividends
The commonholders of convertible preferred stock and accompanying Class A warrants and Class B warrants have been classifiedare entitled to stockholders’ equity (deficit)receive dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.
Liquidation
In the event of the Company’s liquidation, dissolution or winding up, holders of the Company’s convertible preferred stock will be entitled to share ratably in the Company’s balance sheet.net assets legally available for distribution to stockholders after the payment of all debts and other liabilities.
Common Stock
February 2020 Financing
On February 6, 2020, the holderCompany closed on a registered direct offering with certain institutional investors for the sale by the Company of 1,306,282 shares of the Company's common stock at a UPO will not receive actual units but will instead receivepurchase price of $3.98 per share, which represents the closing stock price the day prior to entering into the agreement. Armistice participated in the offering by purchasing 1,256,282 shares of common stock and Underwriters’ Warrants, tofrom the extent that any portionCompany. The net proceeds of the Underwriters’ Warrants underlying such units have not otherwise expired. The exercise pricesoffering were approximately $5 million.
Aevi Merger
On February 3, 2020, under the terms of the underwriters’ Class A warrants and underwriter’s Class B warrants underlyingAevi Merger noted below in Note 17, the UPO are $5.23 and $4.49, respectively. The UPO may be exercised for cash or on a cashless basis, at the holder’s option, and expires on October 14, 2020; provided, that, following the expiration of underwriters’ Class B warrants on April 20, 2017, the UPO will be exercisable only forCompany issued 3.9 million shares of common stock and underwriters’ Class A warrants at an exercise price of $7.475 per unit; provided further, that, following the expiration of underwriters’ Class A warrants on October 20, 2018, the UPO will be exercisable only for shares of common stock at an exercise price of $7.47. The Company classified the UPO as a liability as it is a freestanding marked-to-market derivative instrument that is precluded from being classified in stockholders’ equity. The fair value of the UPO is re-measured each reporting period and the change in fair value is recognized in the statement of operations (see Note 4).stock.
On September 8, 2016,4, 2019, the Company entered into a common stocksecurities purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC ("Aspire Capital"),Armistice, pursuant to which Aspire Capital committed to purchase up to an aggregate of $15.0 million ofthe Company sold 1,200,000 shares of the Company’s common stock overfor a purchase price of $3.132 per share, which represents the 30-month term of the Purchase Agreement. Under the Purchase Agreement, on any trading day selected by the Company on which theaverage closing price of the Company’sCommon Stock on Nasdaq for the five trading days immediately preceding September 4, 2019. Net proceeds of the private placement were approximately $3.7 million.
March 2019 Common Stock Offering
On March 8, 2019, the Company closed on an underwritten public offering of common stock exceeds $0.50, the Company may, in its sole discretion, present a purchase notice directing Aspire Capital to purchase up to 50,000for 1,818,182 shares of common stock per day, up to $15.0 million of the Company’s common stock in the aggregate at a per share price calculated by references to the prevailing market price of the Company’s common stock. Upon execution of the Purchase Agreement, the Company, issued and sold to Aspire Capital 250,000 shares of common stock at a price per share of $4.00, for gross proceeds of $1.0 million, and concurrently entered into a registration rights agreement with Aspire Capital registering the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the Purchase Agreement. Additionally, as consideration for Aspire Capital entering into the Purchase Agreement, the Company issued 175,000 shares of common stock as a commitment fee. The net proceeds of the Aspire Capital transaction, after offering expenses, to the Company were approximately $1.9 million forpublic of $5.50 per share. Armistice participated in the year ended December 31, 2016. As of December 31, 2016, the Company had sold 763,998 shares of common stock to Aspire Capital under the Purchase Agreement. Subsequent to December 31, 2016, the Company sold an additional 965,165 shares of common stock to Aspire Capital under the terms of the Purchase Agreement for gross proceeds of approximately $789,000. As of the date of this Annual Report on Form 10-K, the Company may not issue additional shares of common stock to Aspire Capital under the Purchase Agreement unless shareholder approval to issue additional shares is obtained.
363,637 shares of common stock of the Company from the underwriter at the public price. The net proceeds to the Company from the offering were approximately $9.0 million.
December 2018 Armistice Private Placement
As discussed in detail above (see "December 2018 Armistice Private Placement"), on December 27, 2018, the Company exchanged with Armistice previously outstanding warrants for like-kind warrants to purchase up to 2,857,143 shares of the Company's convertible preferred stock with an exercise price of $2.00 per share which Armistice immediately exercised thus acquiring 2,857,143 shares of convertible preferred stock for net proceeds of $5.7 million. The convertible preferred stock is convertible into shares of common stock on a 1-for-5 ratio (or to 14,285,714 shares of common stock in total, subject to adjustment). Additionally, on December 27, 2018, in order to provide Armistice an incentive to exercise the exchanged warrants, the Company entered into a securities purchase agreement with Armistice pursuant to which the Company issued warrants for 4,000,000 shares of common stock of the Company with a term of 5.5 years and an exercise price of $12.50 per share.
August 2018 Armistice Private Placement
On August 17, 2018, the Company entered into a securities purchase agreement with Armistice, pursuant to which the Company sold 1,000,000 shares of the Company’s common stock, $0.001 par value per share for a purchase price of $3.91 per share, which was the closing price of shares of the common stock on August 16, 2018. Net proceeds of this securities purchase agreement were approximately $3.9 million.
Ichorion Asset Acquisition
On September 25, 2018, under the terms of the Ichorion Asset Acquisition noted above in Note 5, the Company issued 5.8 million common stock shares upon closing.
Contingently Issuable Shares
Under the terms of the TRx Acquisition noted above in Note 5, the Company was required to issue common stock having an aggregate value as calculated in the TRx Purchase Agreement on the closing date of $8.1 million (the “Equity Consideration”). Upon closing, the Company issued 5,184,920 shares of its common stock. Pursuant to the TRx Purchase Agreement, the issuance of the remaining 2,349,968 shares as a part of the equity consideration was subject to stockholder approval at the Company's 2018 Annual Stockholder's Meeting. This approval was obtained in May 2018 and the remaining shares were issued to the TRx Sellers.
Voting
Common stock is entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and does not have cumulative voting rights. Accordingly, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election.
Dividends
The holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.
Liquidation
In the event of the Company’s liquidation, dissolution or winding up, holders of the Company’s common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders, including any preferred stock outstanding, after the payment of all debts and other liabilities.
Rights and Preferences
Holders of the Company’s common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the Company’s common stock.
Common Stock Warrants
| Number of shares | Exercise price | Expiration | ||||
| underlying warrants | per share | date | ||||
| 109,976 | $ | 28.00 | February 2017 | |||
| 29,260 | $ | 14.00 | February 2017 | |||
| 90,529 | $ | 28.00 | March 2017 | |||
| 29,557 | $ | 14.00 | March 2017 | |||
| 130,233 | $ | 28.00 | April 2017 | |||
| 2,275,950 | $ | 3.90 | April 2017 | |||
| 20,000 | $ | 4.49 | April 2017 | |||
| 14,284 | $ | 28.00 | July 2017 | |||
| 80,966 | $ | 28.00 | August 2018 | |||
| 4,551,900 | $ | 4.55 | October 2018 | |||
| 40,000* | $ | 5.23 | October 2018 | |||
| 3,571 | $ | 28.00 | December 2018 | |||
| 22,328* | $ | 8.40 | October 2020 | |||
| 2,380 | $ | 8.68 | May 2022 | |||
| 7,400,934 | ||||||
| *Accounted for as a liability instrument (see Note 4) | ||||||
| Number of shares | Exercise price | Expiration | ||||
| underlying warrants | per share | date | ||||
| 22,328* | $ | 8.40 | October 2020 | |||
| 2,380* | $ | 8.68 | May 2022 | |||
| 4,000,000 | $ | 12.50 | June 2024 | |||
| 4,024,708 | ||||||
| *Accounted for as a liability instrument (see Note 6) | ||||||
2016 Equity Incentive Plan
On April 5, 2016, the Company’s boardBoard of directorsDirectors adopted the 2016 Equity Incentive Plan (the “2016 Plan”) as the successor to the 2015 Omnibus Plan (the “2015 Plan”). The 2016 Plan was approved by the Company’s stockholders and became effective on May 18, 2016 (the “2016 Plan Effective Date”).
Upon the 2016 Plan Effective Date, the 2016 Plan reserved and authorized up to 600,000 additional shares of common stock for issuance, as well as 464,476 unallocated shares remaining available for grant of new awards under the 2015 Plan. An Amended and Restated 2016 Equity Incentive Plan (the "2016 Amended Plan") was approved by the Company's stockholders in May 2018, which increased the share reserve by an additional 1.4 million shares. A Second Amended and Restated 2016 Equity Incentive Plan (the "2016 Second Amended Plan") was approved by the Company's stockholders in August 2019, which increased the share reserve by an additional 850,000 shares. During the term of the 2016 Second Amended Plan, the share reserve will automatically increase on the first trading day in January of each calendar year, beginning in 2017, by an amount equal to 4% of the total number of outstanding shares of common stock of the Company on the last trading day in December of the prior calendar year. As of December 31, 2016,2019, there were 666,0692,532,162 shares available for future issuance under the 2016 Second Amended Plan. On January 1, 2020, pursuant to the terms of the 2016 Second Amended Plan an additional 1,775,368 shares were made available for issuance for a total of 4,307,530 shares available for issuance.
Option grants expire after ten years. Employee options typically vest over three or four years. Options granted to directors typically vest over one or three years. Directors may elect to receive stock options in lieu of board compensation, which vest immediately. For stock options granted to employees and non-employee directors, the estimated grant date fair market value of the Company’s stock-based awards is amortized ratably over the individuals’ service periods, which is the period in which the awards vest. ForStock-based compensation expense includes expense related to stock options, issued to non‑employees, the Company measures the options at their fair value on the date at which the related service is complete. Expense is recognized over the period during which services are rendered by such non-employees until completed. At the endrestricted stock units and employee stock purchase plan shares. The amount of each financial reporting period prior to the completion of the service, the fair value of the awards is remeasured using the then current fair market value of the Company's common stock and updated assumptions in the Black-Scholes option pricing model. Stock-basedstock-based compensation expense recognized for the years ending December 31, 20162019 and 20152018 was as follows:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2016 | 2015 | 2019 | 2018 | |||||||||||||
| Research and development | $ | 141,247 | $ | 67,021 | $ | 464,382 | $ | 101,000 | ||||||||
| General and administrative | 1,553,644 | 327,727 | 1,549,844 | 2,135,710 | ||||||||||||
| Sales and marketing | 190,851 | 57,271 | ||||||||||||||
| Total stock-based compensation, continuing operations | 2,205,077 | 2,293,981 | ||||||||||||||
| Total stock-based compensation, discontinued operations | 257,719 | 137,082 | ||||||||||||||
| Total stock-based compensation | $ | 1,694,891 | $ | 394,748 | $ | 2,462,796 | $ | 2,431,063 | ||||||||