UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Cerecor Inc.

As of November 6, 2017,2018, the registrant had 26,054,85740,806,053 shares of common stock outstanding.

CERECOR INC.

FORM 10-Q

 

See accompanying notes to unauditedthe condensed consolidated financial statements.

See accompanying notes to the condensed consolidated unaudited financial statements.

 

See accompanying notes to unauditedthe condensed consolidated financial statements.

Cerecor Inc. (the “Company”Company or “Cerecor”) is a fully integrated biopharmaceutical company with commercial operations and research and development capabilities. The Company is building a robust pipeline of innovative therapies in pediatric healthcare, neurology, and orphan rare diseases. The Company's neurology pipeline is led by CERC-301, which is currently in a Phase I safety study for Neurogenic Orthostatic Hypotension ("nOH"). The Company is also developing three other neurological clinical and preclinical stage compounds. The Company's pediatric orphan rare disease pipeline is led by CERC-801, CERC-802 and CERC-803. All three of these compounds are preclinical therapies for inherited metabolic disorders known as Congenital Disorders of Glycosylation ("CDGs") by means of substrate replacement therapy. The U.S. Food and Drug Administration ("FDA") has granted Rare Pediatric Disease designation ("RPDD") to all three compounds. Under the FDA’s Rare Pediatric Disease Priority Review Voucher ("PRV") program, upon the approval of a new drug application ("NDA") for the treatment of a rare pediatric disease, the sponsor of such application would be eligible for a PRV that can be used to obtain priority review for a subsequent new drug application or biologics license application. The PRV may be sold or transferred an unlimited number of times. The Company expects to file Investigational New Drug ("IND") applications with the FDA for two programs in 2019. Furthermore, the Company plans to leverage the 505(b)(2) NDA pathway for all three compounds to accelerate development and approval. The Company is developing innovative drug candidates for commercialization, license or sale to make a differencealso in the livesprocess of patients with neurologicdeveloping one other preclinical pediatric orphan rare disease compound, CERC-913.

The Company also has a diverse portfolio of marketed products. Our marketed products are led by our prescribed dietary supplements and psychiatric disorders.prescribed drugs. Our prescribed dietary supplements include Poly-Vi-Flor and Tri-Vi-Flor which are prescription vitamin and fluoride supplements used in infants and children to treat or prevent deficiency of essential vitamins and fluoride. The Company’s operations since inception have been limited to organizingCompany also markets a number of prescription drugs that treat a range of pediatric diseases, disorders and staffingconditions. Cerecor's prescription drugs include Millipred®, Veripred®, Ulesfia®, Karbinal™ ER, AcipHex® Sprinkle™ and Cefaclor for Oral Suspension. Finally, the Company acquiring rights tohas one marketed medical device, Flexichamber™.

Cerecor was incorporated in 2011, commenced operations in the second quarter of 2011 and developing certain product candidates, business planning and raising capital.

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 current commercial product line, the Company's development portfolio and acquisitions or in-licensing of new assets in order to meet its cash flow needs. For the nine months ended September 30, 2018, Cerecor generated a net loss of $34.5 million and negative cash flow from operations of $1.2 million.  As of September 30, 2017, the Company2018, Cerecor had an accumulated deficit of $55.1$92.7 million and a balance of $24.0$6.8 million in cash and cash equivalents.  The Company anticipates operating lossesplans to continue foruse this cash and the foreseeable future dueanticipated positive net cash flows from the Company's existing product sales to among other things,offset costs related to its pediatric rare disease preclinical programs, additional clinical development of its product candidates,for our neurology programs, business development, and costs associated with its organizational infrastructure. infrastructure and debt principal and interest payments. Cerecor expects to continue to incur significant expenses and operating losses

The Company believes it will require substantial additional financing to fund its operations and to continue to execute its strategy.clinical development strategy and/or fund future operations. The Company plans to meet its capital requirements primarily through aoperating cash flows from product sales and some combination of equity or debt financings, collaborations, or out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution or licensing arrangements and inor the longer term, revenue from product sales to the extent its product candidates receive marketing approval and are commercialized. There can be no assurance, however, that the Company will be successful in obtaining financing at the level needed to sustain operations and develop its product candidatessale of current or on terms acceptable to the Company, or that the Company will obtain approvals necessary to market its products or achieve profitability or sustainable positive cash flow.future assets. If the Company failsis not able to raise capitalsecure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible or enter into any suchsuspend or curtail planned programs. If the Company raises additional funds through collaborations, strategic alliances or licensing arrangements it willwith third parties, the Company may have to further delay, scale backrelinquish valuable rights to our technologies, future revenue streams, research programs or discontinueproduct candidates.

Our plan to aggressively develop our pipeline, including our recently acquired pediatric rare disease preclinical programs, will require substantial cash inflows in excess of what the developmentCompany expects our current commercial operations to generate.  The Company expects that our existing cash and cash equivalents, together with the proceeds from the execution of management's plan to complete one or more financings through the issuance of its product candidates equity, which could be completed with the Company's majority owner, if necessary, and/or cease its operations altogether.

 

Basis of Presentation

 

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance 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 (the “FASB”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments whichthat are necessary to present fairly the Company’s financial position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 20162017 has been derived from audited financial statements at that date. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year.year or any other future period. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission (“SEC”).

The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited condensed consolidated financial statements are read in conjunction with the December 31, 20162017 audited consolidated financial statements.

Use of Estimates

 

The preparation of condensed 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, share-based compensation, fair value measurements (including those relating to contingent consideration), cash flows used in management's going concern assessment, income taxes, goodwill and other intangible assets, and clinical trial accruals, the warrant liability and the unit purchase option liability.accruals. The Company bases its estimates on historical experience and other market‑specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

 

Net Income (Loss) Perper Share, Basic and Diluted

Diluted net income (loss) 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 issued under the Company's Long-Term Incentive Planslong-term incentive plans, which are included under the "treasury stock method" when dilutive,dilutive; (ii) common stock to be issued upon the assumed conversion of the Company's unit purchase option shares, which are included under the "if-converted method" when dilutive,dilutive; (iii) prior to issuance the contingently issuable shares in the TRx acquisition if contingencies would have been satisfied if the end of the contingency period were as of the balance sheet date under the “if converted method” when dilutive; and (iii)(iv) 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 addition, net losses are not allocated to the participating securities.

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.

On August 14.14, 2017, the Company sold all of its rights to CERC-501 to Janssen in exchange for initial gross proceeds of $25.0$25 million, of which $3.75 million was deposited into a twelve monthtwelve-month escrow to secure certain indemnification obligations to Janssen Pharmaceuticals, Inc.Janssen. The Company evaluates its escrowed cash receivable balance each reporting period and establishes a reserve for amounts deemed uncollectible. No reserve was recorded ascollected the full escrow amount in August of September 30, 2017.

Restricted Cash

The Company establishedRestricted cash consists of the 2016 Employee Stock Purchase Plan in 2016. Eligible employees can purchase common stock through accumulateddeposits, credit card deposits, landlord deposits and payroll deductions at such times as are established byprocessing deposits. The Company has a $125,000 deposit with ADP to facilitate payroll processing, which will be returned to the Plan administrator. At September 30, 2017, $29,200company upon termination of deposits had been made by employees for potential future stock purchases.

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 credit worthy.creditworthy. The Company has no financial instruments with off‑balance sheet risk of loss.

 

Goodwill relates to the amount that arose in connection with raising funds through the issuanceacquisitions of convertible notes or equity instruments. These discounts may arise from (i)TRx and Avadel's pediatric products. Goodwill represents the receiptexcess of proceeds less than the facepurchase price over the fair value of the convertible notesnet 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 equity instruments, (ii) allocation of proceeds to beneficial conversion features and/more frequently if an event occurs or (iii) recording derivative liabilities related to embedded features. For debt instruments, these costs are amortized overcircumstances change that would more-likely-than-not reduce the lifefair value of the debt to interest expense utilizing the effective interest method. For equity instruments, these costs are netted against the gross proceeds received from the issuance of the equity.

Intangible assets with definite useful lives of the respective assets are expensed to operations as incurred. Property and equipment are depreciated on a straight‑line basisamortized over their estimated useful lives. The Company uses a lifelives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of four yearsan asset may not be recoverable. Intangible assets subject to amortization are reviewed for computersimpairment whenever events or changes in circumstances indicate that the carrying amount of an intangible

asset might not be recoverable. Impairment losses are measured and software, and five years for equipment and furniture. Upon retirement or sale,recognized to the costextent the carrying value of such assets exceeds their fair value.

Some of the disposed assetCompany’s business acquisitions involve the potential for future payment of consideration that is contingent upon the achievement of operational and commercial milestones and royalty payments on future product sales. The preliminary fair value of contingent consideration liabilities was determined at the acquisition date using unobservable level 3 inputs. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the related accumulated depreciation are removed fromrisk-adjusted discount rate used to present value the accounts and any resulting gain or lossprobability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is recognized.remeasured at current fair value with changes recorded in the condensed consolidated statements of operations.

The Company recognizes revenues from collaboration, license or other research or sale arrangements when persuasive evidenceor as performance obligations are satisfied. For milestone payments, the Company assesses, at contract inception, whether the milestones are considered probable of an arrangement exists, deliverybeing achieved. If it is probable that a significant revenue reversal will occur, the Company will not record revenue until the uncertainty has occurred or services have been rendered,resolved. Milestone payments that are contingent upon regulatory approval are not considered probable of being achieved until the priceapprovals are obtained as it is fixed or determinable and collectabilityoutside the control of the Company. If it is reasonably assured. Revenue from potential future milestones, if substantive, is recognized whenprobable that a significant revenue reversal will not occur, the Company will estimate the milestone is achieved andpayments using the payment is due and collectible.most likely amount method. The Company will re-assess the milestones each reporting period to determine the probability of achievement.

Grant Revenue Recognition

Research and Development Expenses

 

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, regulatory operations, pharmacovigilance, quality and regulatory operations.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.

Comprehensive Loss

 

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non‑owner sources. Comprehensive loss was equal to net loss for all periods presented.

Income Taxes

 

Stock‑Based Compensation

 

For stock options issued to employees and members of the board of directors for their services, on the board of directors, 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.

 

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

Segment Information

 

Operating segments are identified as components of an enterprise about 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. The Company’s chief operating decision maker is currently represented by the chief executive officer.Company's management team and consists of the Company's Chief Executive Officer and Chief Financial Officer. The Company and the chief executive officermanagement team view the Company’s operations and manage its business as one operating segment. All long‑lived assets of the Company reside in the United States. The Company and the management team view the Company’s operations and manage its business as one operating segment.    

RecentRecently Adopted Accounting Pronouncements

 

of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use 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 capital leases. For lessees, operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while capital leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). The new standard is effective for annual reportingthe Company beginning January 1, 2019. In July 2018, the FASB issued both codification improvements, which clarify how to apply certain aspects of the standard, and an update to the transition methods allowable. Companies can either adopt the new standard at the earliest period presented using a modified retrospective approach or continue to apply the guidance under the current lease standard in the comparative periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted.presented. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption, if necessary. The Company expects to apply the new guidance at the effective date, without adjusting the comparative periods. The Company anticipates that ASU 2016-02 will have an impact to our condensed consolidated balance sheet, as the Company will record an asset and a liability in connection with our leased office space. The Company does not expect an impact to our condensed statement of operations. The Company is in the process of identifying its lease agreements that will be impacted by the new standard and is currently further evaluating the potentialoverall impact of the adoption of this standard on itsto our condensed consolidated financial statements.

The following table sets forth the computation of basic and diluted net income (loss)loss per share of common stock for the three and nine months ended September 30, 2018 and 2017, and 2016:

AtAs of September 30, 20172018 and December 31, 2016,2017, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and other current liabilities, short term and long term debt, (prior to its payoff in August 2017), the term loan warrant liability, contingent consideration and the underwriters’ unit purchase option liability. The carrying amounts reported in the accompanying condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short‑termshort-term nature of these accounts. The estimated fair value of the Company’s long-term debt of $15.4 million as of September 30, 2018 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy.

The warrant liability (which relates to warrants to purchase shares of common stock as part of the term loan agreement)stock) is marked‑to‑marketmarked-to-market each reporting period with the change in fair value recorded to other income (expense) 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‑ScholesBlack-Scholes option-pricing model. The significant assumptions used in preparing the option pricing model for valuing the warrant liability as of September 30, 2017,2018, include (i) volatility of 65%52.5%, (ii) risk free interest rate of 1.63%2.82%, (iii) strike price ($8.40), (iv) fair value of common stock ($0.85)4.67), and (v) expected life of 3.12.05 years.

 

The underwriters’ unit purchase option (the “UPO”) was issued to the underwriters of the Company’sCompany'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.stock (see Note 9 for additional information on the UPO). 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‑marketmarked-to-market each reporting period with the change in fair value recorded to other income (expense) in the accompanying statements of operations until the UPO is exercised, expireexpires 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. The significant assumptions used in preparing the simulation model for valuing the UPO as of September 30, 2017,2018, include (i) volatility range of 65%35% to 75%50%, (ii) risk free interest rate range of 0.74%2.12% to 1.63%2.78%, (iii) unit strike price ($7.48), (iv) underwriters’ Class A warrant strike price ($5.23), (v) underwriters’ Class B warrant strike price ($4.49), and (vi) fair value of underlying equity ($0.85), and (vii) optimal exercise point of immediately prior to the expiration of the underwriters’ Class B warrants, which occurred on April 20, 2017.4.67).

 

The tabletables presented below isare a summary of changes in the fair value of the Company’s Level 3 valuations for the warrant liability, UPO liability and unit purchase option liabilitycontingent consideration for the nine months ended September 30, 2018 and 2017:

 

Accrued expenses and other current liabilities consisted of the following: