UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10‑Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended ~~September 30, 2018~~March 31, 2019
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 001-37590

~~Cerecor Inc.~~CERECOR INC.

(Exact name of registrant as specified in its charter)



Delaware (State of incorporation)	45-0705648 (I.R.S. Employer Identification No.)
~~400 E. Pratt Street,~~540 Gaither Road, Suite ~~606~~400 ~~Baltimore,~~Rockville, Maryland ~~21202~~20850 (Address of principal executive offices)	(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	Name of each exchange on which registered
Common Stock, $0.001 par value	CERC	Nasdaq Capital Market

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b‑2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer þ		Smaller reporting company þ
Emerging growth company þ

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. þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ¨ No þ

As of ~~November 6, 2018,~~May 3, 2019, the registrant had ~~40,806,053~~42,753,659 shares of common stock outstanding.

Table of Contents

CERECOR INC.

FORM 10-Q

For the Quarter Ended ~~September 30, 2018~~March 31, 2019

TABLE OF CONTENTS




				Page

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		a)	Condensed Consolidated Balance Sheets as of ~~September 30, 2018~~March 31, 2019 (Unaudited) and December 31, ~~2017~~2018	3

		b)	Condensed Consolidated Statements of Operations (Unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	4

		c)	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~	5

		d)	d)Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018

		e)	Notes to Unaudited Financial Statements	78

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3429

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		5338

	Item 4.	Controls and Procedures		5338

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings		5439

	Item 1A.	Risk Factors		5439

	Item 6.	Exhibits		5540

	SIGNATURES			5741

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PART I - FINANCIAL INFORMATION

Item 1. Financial ~~Statements~~Statements.

CERECOR INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets


	September 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,838,353		$	2,472,187		$	16,121,388		$	10,646,301
Accounts receivable, net	3,008,538			2,935,025			2,718,396			3,157,555
Other receivables	6,264,485			427,241			5,531,025			5,469,011
Escrowed cash receivable	—			3,752,390
Inventory, net	1,064,469			382,153			1,046,982			1,110,780
Prepaid expenses and other current assets	1,260,304			703,225			1,248,465			1,529,516
Restricted cash-current portion	37,027			1,959
Restricted cash, current portion							77,846			18,730
Total current assets	18,473,176			10,674,180			26,744,102			21,931,893
Property and equipment, net	92,096			44,612			1,477,067			586,512
Intangible assets, net	32,456,075			17,664,480
Intangibles assets, net							30,160,621			31,239,468
Goodwill	16,411,123			14,292,282			16,411,123			16,411,123
Restricted cash, net of current portion	179,735			131,353			77,118			81,725
Total assets	$	67,612,205		$	42,806,907		$	74,870,031		$	70,250,721
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,535,933		$	1,298,980		$	1,249,470		$	1,446,141
Accrued expenses and other current liabilities	18,172,630			7,531,122			21,815,097			19,731,373
Income taxes payable	2,195,048			2,259,148			1,814,650			2,032,258
Long-term debt- current portion	1,050,000			—
Contingent consideration-current portion	1,957,938			—
Long-term debt, current portion							1,050,000			1,050,000
Contingent consideration, current portion							2,205,647			1,956,807
Total current liabilities	24,911,549			11,089,250			28,134,864			26,216,579
Long term debt, net of current portion	14,352,224			—
Long-term debt, net of current portion							14,303,540			14,327,882
Contingent consideration, net of current portion	7,552,537			2,576,633			6,796,641			7,093,757
Deferred tax liability, net	37,990			7,144			75,179			69,238
License obligations	1,250,000			1,250,000			1,250,000			1,250,000
Other long-term liabilities	—			24,272			1,189,277			385,517
Total liabilities	48,104,300			14,947,299			51,749,501			49,342,973
Stockholders’ equity:
Preferred stock—$0.001 par value; 5,000,000 shares authorized at September 30, 2018 and December 31, 2017; zero shares issued and outstanding at September 30, 2018 and December 31, 2017	—			—
Common stock—$0.001 par value; 200,000,000 shares authorized at September 30, 2018 and December 31, 2017; 40,679,634 and 31,266,989 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	40,656			31,268
Common stock—$0.001 par value; 200,000,000 shares authorized at March 31, 2019 and December 31, 2018; 42,753,659 and 40,804,189 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively							42,754			40,804
Preferred stock—$0.001 par value; 5,000,000 shares authorized at March 31, 2019 and December 31, 2018; 2,857,143 shares issued and outstanding at March 31, 2019 and December 31, 2018							2,857			2,857
Additional paid-in capital	112,126,404			83,338,136			128,747,037			119,082,157
Contingently issuable shares	—			2,655,464
Accumulated deficit	(92,659,155		)	(58,165,260		)	(105,672,118		)	(98,218,070		)
Total stockholders’ equity	19,507,905			27,859,608			23,120,530			20,907,748
Total liabilities and stockholders’ equity	$	67,612,205		$	42,806,907		$	74,870,031		$	70,250,721

See accompanying notes to the condensed consolidated financial statements.

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CERECOR INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
Revenues
Product revenue, net $ 4,074,786
$ —
$ 13,045,824

$ —
Sales force revenue —
—
296,875

—
License and other revenue —
25,000,000
—
25,000,000
Grant revenue —
37,592
—

579,597
Total revenues, net 4,074,786
25,037,592
13,342,699

25,579,597

Operating expenses:
Cost of product sales 3,111,290
—
5,397,872

—
Research and development 1,047,877
964,574
3,780,352

2,411,293
Acquired in-process research and development 18,723,952
—
18,723,952
—
General and administrative 1,884,293
2,151,859
7,833,612

4,921,269
Sales and marketing 2,310,760
—
5,889,137

—
Amortization expense 1,065,398
—
3,315,843

—
Impairment of intangible assets 159,687

—
1,861,562

—
Total operating expenses 28,303,257
3,116,433
46,802,330

7,332,562
(Loss) income from operations (24,228,471 ) 21,921,159
(33,459,631 )
18,247,035
Other (expense) income:

Change in fair value of contingent consideration, warrant liability and unit purchase option liability (87,838 ) 64
(383,179 )
(1,586 )
Other income —
—
18,655

—
Interest (expense) income, net (234,854 ) 29,387
(577,664 )
(53,991 )
Total other (expense) income, net (322,692 ) 29,451
(942,188 )
(55,577 )
Net (loss) income before taxes (24,551,163 ) 21,950,610
(34,401,819 )
18,191,458
Income tax expense 52,412
3,230,000
92,076

3,230,000
Net (loss) income $ (24,603,575 ) $ 18,720,610
$ (34,493,895 )
$ 14,961,458
Net (loss) income per share of common stock, basic and diluted $ (0.71 ) $ 0.52
$ (1.05 )
$ 0.65
Weighted-average shares of common stock outstanding, basic 34,648,641
21,382,683
32,749,291
14,952,391
Weighted-average shares of common stock outstanding, diluted 34,648,641
21,407,702
32,749,291

14,960,032



	Three Months Ended
	March 31,
	2019			2018
Revenues
Product revenue, net	$	5,411,443		$	4,260,119
Sales force revenue	—			222,656
Total revenues, net	5,411,443			4,482,775

Operating expenses:
Cost of product sales	1,947,892			863,624
Research and development	3,401,189			1,649,778
General and administrative	2,716,983			2,918,916
Sales and marketing	3,108,902			1,524,816
Amortization expense	1,078,847			1,017,408
Change in fair value of contingent consideration	180,402			262,769
Total operating expenses	12,434,215			8,237,311
Loss from operations	(7,022,772		)	(3,754,536		)
Other (expense) income:
Change in fair value of warrant liability and unit purchase option liability	(47,577		)	(23,251		)
Other (expense) income, net	(9,400		)	18,655
Interest expense, net	(207,941		)	(100,402		)
Total other expense, net	(264,918		)	(104,998		)
Net loss before taxes	(7,287,690		)	(3,859,534		)
Income tax expense	166,358			23,313
Net loss	$	(7,454,048	)	$	(3,882,847	)
Net loss per share of common stock, basic and diluted	$	(0.13	)	$	(0.12	)
Net loss per share of preferred stock, basic and diluted	$	(0.67	)	$	—

See accompanying notes to the condensed consolidated unaudited financial statements.

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CERECOR INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Operating activities
Net (loss) income	$	(34,493,895	)	$	14,961,458
Adjustments to reconcile net (loss) income (used in) provided by operating activities:
Net loss							$	(7,454,048	)	$	(3,882,847	)
Adjustments to reconcile net loss provided by (used in) to net cash used in operating activities:
Depreciation and amortization	3,333,416			17,050			1,098,478			1,023,040
Impairment of intangible assets	1,861,562			—
Stock-based compensation expense	1,796,387			852,210
Acquired in-process research and development, including transaction costs	18,723,952			—
Stock-based compensation							596,693			242,824
Deferred taxes	(47,994		)	—			5,941			15,913
Amortization of inventory fair value associated with acquisition of TRx and Avadel Pediatric Products	262,419			—
Amortization of inventory fair value associated with acquisition of TRx and Avadel							22,603			45,450
Non-cash interest expense	327,224			20,365			—			105,451
Change in fair value of warrant liability and unit purchase option liability	22,328			1,586			47,577			23,251
Change in fair value of contingent consideration	360,850			—
Change in fair value of contingent consideration and long-term royalty obligation							180,402			262,769
Other							21,412			—
Changes in assets and liabilities:
Accounts receivable, net	(73,513		)	—			439,159			104,671
Grants receivable	—			102,337
Other receivables	(3,072,729		)	—			(62,014		)	371,663
Inventory, net	(226,735		)	—			41,195			(554,445		)
Prepaid expenses and other assets	27,571			50,228			281,051			(71,085		)
Escrowed cash receivable	3,752,390			(3,750,803		)	—			(2,065		)
Accounts payable	172,243			(697,695		)	(196,671		)	1,866,960
Income taxes payable	(64,100		)	3,230,000			(217,608		)	7,400
Accrued expenses and other liabilities	6,186,178			341,109			2,074,278			160,627
Net cash (used in) provided by operating activities	(1,152,446		)	15,127,845
Net cash used in operating activities							(3,121,552		)	(280,423		)
Investing activities
Acquisition of Avadel Pediatric Products	(1		)	—
Cash acquired from the acquisition of Ichorion Therapeutics, Inc.	1,429,876			—
Acquisition of business							—			(1		)
Purchase of property and equipment	(65,057		)	(7,990		)	(165,969		)	(19,224		)
Net cash provided by (used in) investing activities	1,364,818			(7,990		)
Net cash used in investing activities							(165,969		)	(19,225		)
Financing activities
Proceeds from option and warrant exercises	508,746			—
Proceeds from sale of shares pursuant to private placement, net	3,857,106			4,650,000
Proceeds from sales of common stock under employee stock purchase plan	8,400			35,430
Proceeds from sale of shares under common stock purchase agreement	—			1,693,498
Proceeds from exercise of stock options and warrants							94,177			363,390
Proceeds from underwritten public offering, net							8,975,960			—
Payment of contingent consideration	(137,008		)	—			(228,678		)	—
Principal payments on term debt	—			(2,374,031		)
Payment of offering costs	—			(279,246		)
Payment of long-term debt							(24,342		)	—
Net cash provided by financing activities	4,237,244			3,725,651			8,817,117			363,390
Increase in cash, cash equivalents and restricted cash	4,449,616			18,845,506			5,529,596			63,742
Cash, cash equivalents, and restricted cash at beginning of period	2,605,499			5,201,897			10,746,756			2,605,499
Cash, cash equivalents, and restricted cash at end of period	$	7,055,115		$	24,047,403		$	16,276,352		$	2,669,241
Supplemental disclosures of cash flow information
Cash paid for interest	$	262,500		$	72,526		$	262,500		$	44,003
Cash paid for taxes							$	378,025		$	—
Supplemental disclosures of non-cash 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 condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:

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	September 30,				March 31,
	2018		2017		2019		2018

Cash and cash equivalents	$	6,838,353	$	23,955,397	$	16,121,388	$	2,523,927
Restricted cash, current	37,027		29,159		77,846		13,955
Restricted cash, non-current	179,735		62,847		77,118		131,359
Total cash, cash equivalents and restricted cash	$	7,055,115	$	24,047,403	$	16,276,352	$	2,669,241

See accompanying notes to the condensed consolidated financial statements.

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CERECOR INC. and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity



	Stockholders’ Equity
							Additional							Total
	Common stock			Preferred Stock			paid‑in		Contingently issuable stock		Accumulated			stockholders’
	Shares	Amount		Shares	Amount		capital		Amount		deficit			equity
Three Months Ended March 31, 2018:
Balance, December 31, 2017	31,266,989	$	31,268	—	$	—	$	83,338,136	$	2,655,464	$	(58,165,260	)	$	27,859,608
Exercise of stock options and warrants	143,346	143		—	—		363,247							363,390
Stock-based compensation	—	—		—	—		242,824		—		—			242,824
Net loss	—	—		—	—		—				(3,882,847		)	(3,882,847		)
Balance, March 31, 2018	31,410,335	$	31,411	—	$	—	$	83,944,207	$	2,655,464	$	(62,048,107	)	$	24,582,975



Three Months Ended March 31, 2019:
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
Exercise of stock options and warrants	31,288	31		—	—		94,146			—					94,177
Stock-based compensation	—	—		—	—		596,693			—		—			596,693
Restricted Stock Units vested during period	100,000	101		—	—		(101		)	—		—			—
Net loss	—	—		—	—		—			—		(7,454,048		)	(7,454,048		)
Balance, March 31, 2019	42,753,659	$	42,754	2,857,143	$	2,857	$	128,747,037		$	—	$	(105,672,118	)	$	23,120,530

See accompanying notes to the condensed consolidated financial statements.

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CERECOR INC. and SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

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 neurology, pediatric healthcare, ~~neurology,~~ and orphan rare diseases. The Company's neurology pipeline is led by CERC-301, which ~~is currently in a~~recently received positive interim results from the Phase I safety study ~~for~~of Neurogenic Orthostatic Hypotension ("nOH"). The Company is also developing ~~three~~two other neurological compounds, one of which is in preclinical testing and the other is in the clinical ~~and preclinical stage compounds.~~ready stage. 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") and Orphan Drug Designation ("ODD") 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 also in the process of developing one other preclinical pediatric orphan rare disease ~~compound, CERC-913.~~compound.

The Company also has a diverse portfolio of marketed products. Our marketed products are led by our prescribed dietary supplements and 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 also markets a number of prescription drugs that treat a range of pediatric diseases, disorders and conditions. Cerecor's prescription drugs include Millipred®, ~~Veripred®,~~ Ulesfia®, Karbinal™ ER, AcipHex® Sprinkle™, and Cefaclor for Oral Suspension. Finally, the Company has one marketed medical device, Flexichamber™.

Cerecor was incorporated in 2011, commenced operations in the second quarter of 2011 and completed an initial public offering in October 2015. In August 2017, the Company sold its worldwide rights to CERC-501 to Janssen Pharmaceuticals, Inc. (“Janssen”) in exchange for initial gross proceeds of $25 million, of which $3.75 million was deposited into a twelve-month escrow to secure indemnification obligations to Janssen. The Company collected the full amount of the escrow in August of 2018. Additionally, there is a potential future $20 million regulatory milestone payment. The terms of the agreement provide that Janssen will assume ongoing clinical trials and be responsible for any new development and commercialization of CERC-501.

On November 17, 2017, the Company acquired TRx Pharmaceuticals, LLC (“TRx”) and its wholly-owned subsidiaries (see "TRx Acquisition" in Note 45 below for a description of ~~the~~this transaction).

On February 16, 2018, Cerecor acquired all rights to Avadel Pharmaceuticals PLC’s (“Avadel”) marketed pediatric products (the “Acquired Products”) in exchange for ~~the assumption of~~Cerecor assuming certain ~~of Avadel's~~ financial obligations of Avadel (see "Avadel Pediatric Products Acquisition" in Note 45 below for a description of ~~the~~this transaction).

On September 25, 2018, the Company acquired Ichorion Therapeutics, Inc., a privately-held biopharmaceutical company focused on developing treatments and increasing awareness of inherited metabolic disorders known as CDGs (see "Ichorion Asset Acquisition" in Note 45 below for a description of ~~the~~this transaction).

Liquidity

~~The~~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 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.~~assets. For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, Cerecor generated a net loss of ~~$34.5~~$7.5 million and negative cash flow from operations of ~~$1.2~~$3.1 million. As of ~~September 30, 2018,~~March 31, 2019, Cerecor had an accumulated deficit of ~~$92.7~~$105.7 million and a balance of ~~$6.8~~$16.1 million in cash and cash equivalents. During the first quarter of 2019, the Company closed 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"), our largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company from the underwriter 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 (see "Common Stock Offering" in Note 9 below for description of the transaction).

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infrastructure, and debt principal and interest payments. Cerecor expects to continue to incur significant expenses and operating losses

~~Table of Contents~~

for the immediate ~~future.~~future as it continues to invest in the Company's pipeline assets. Our ability to achieve and maintain profitability in the future is dependent on, among other things, the development, regulatory approval, and commercialization of our new product candidates and achieving a level of revenues from our existing product sales adequate to support our cost ~~structure.~~structure, which includes significant investment in our pipeline assets.

The Company believes it will require additional financing to continue to execute its clinical development strategy ~~and/or~~and fund future operations. The Company plans to meet its capital requirements through operating cash flows from product sales and some combination of equity or debt financings, collaborations, out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution, or licensing arrangements, or the sale of current or future assets. 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. If the Company raises additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, the Company may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product 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 Company expects our current commercial operations to generate. ~~The~~However, 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 equity, which could be completed with the Company's majority owner, if necessary, and/or through the out-licensing or sale of current or future assets on or before May 2019,anticipated revenue, will enable us to fund our operating expenses, capital expenditure requirements, and other non-operating cash payments, such as ~~principal~~fixed quarterly payments on our outstanding debt balances, through at least ~~November 2019.~~ May 2020.

2. Basis of Presentation and Significant Accounting Policies

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”~~(“FASB”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, ~~that~~which are necessary to present fairly the Company’s financial position, results of operations, and cash flows. The condensed consolidated balance sheet at December 31, ~~2017~~2018 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 or any other future period.~~year. 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”). Certain prior period amounts have been reclassified to conform to the current year presentation.

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, ~~2017~~2018 audited consolidated financial statements.

Reclassification

During the fourth quarter of 2018, the Company concluded that going forward it would ~~net amounts due to distributors against open receivable balances.~~include change in fair value of contingent consideration within its own stand-alone line in operating expenses in the Company's statements of operations. The ~~company~~Company has reclassified $0.3 million from ~~accrued~~other expenses ~~and other current liabilities~~ to ~~accounts receivable, net~~operating expenses in the ~~December~~March 31, ~~2017 balance sheet~~2018 statement of operations to conform with current period presentation.

~~Principles~~Significant Accounting Policies

During the three months ended March 31, 2019, there have been no significant changes to the Company’s summary of ~~Consolidation~~significant accounting policies contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 18, 2019 and amended on April 23, 2019, except for the recently adopted accounting standards described below.

The following significant accounting policy was updated in 2019 to reflect changes upon our adoption of ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02").

~~The condensed 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. 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

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ability to directly or indirectly make decisions about the entities’ activities. Based on the Company’s assessments performed, management concluded that there were no relationships that constitute a VIE for which the Company was determined to be the primary beneficiary at September 30, 2018. 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 condensed consolidated financial statements.

~~Fair Value Measurements~~

Fair value is a market-based measurement, not an entity-specific measurement. The objective of a fair value measurement is to estimate the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal market for that asset or liability, or in the absence of the principal market, the most advantageous market for the asset or liability.

Assets and liabilities subject to fair value measurement disclosures are required to be classified according to a three-level fair value hierarchy with respect to the inputs (or assumptions) used to determine fair value. The level in which an asset or liability is disclosed within the fair value hierarchy is based on the lowest level input that is significant to the related fair value measurement in its entirety. The guidance under the fair value measurement framework applies to other existing accounting guidance in the FASB codification that requires or permits fair value measurements. Refer to related disclosures in Note 5, Fair Value Measurements.

~~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, 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 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) per Share, Basic and Diluted~~

Earnings per share are computed using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares of the unexercised warrants issued in the Armistice private placement (See Note 9) in 2017 are considered participating securities because these warrants contain a non-forfeitable right to dividends irrespective of whether the warrants are ultimately exercised. Under the two-class method, earnings per common share for the common stock and participating warrants are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted-average number of shares of common stock and participating warrants outstanding for the period. In applying the two-class method, undistributed earnings are allocated to common stock and participating warrants based on the weighted-average shares outstanding during the period. As the warrants issued in the Armistice transaction do not share in net losses of the Company, they are excluded from weighted average shares and warrants outstanding during periods of net loss.

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 plans, 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 shares, which are included under the "if-converted method" when 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 (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.

~~Contingently issuable shares~~are included in the calculation of basic income (loss) per share as of the beginning of the period in which all the necessary conditions have been satisfied. Contingently issuable shares are included in diluted net income (loss) per share based on the number of shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period was the end of the contingency period, if the results are dilutive.Leases

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~~Cash and Cash Equivalents~~

The Company ~~considers all highly liquid investments with~~determines if an ~~original maturity~~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 for its corporate headquarters. Right-of-use ("ROU") assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities are recognized on the commencement date of ~~three months or less when purchased to be cash equivalents. The carrying amounts reported~~the lease based on the present value of the future lease payments over the lease term and are included in ~~the~~other long-term liabilities on our condensed consolidated balance ~~sheets for cash and cash equivalents~~sheet. Right-of-use assets are valued at ~~cost, which approximates their fair value.~~the initial measurement of the lease liability, plus any indirect costs or rent prepayments, and reduced by any lease incentives and any deferred lease payments. Operating right-of-use 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, we use the implicit rate when readily determinable, however as most leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date. Our 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 lease and is included within general and administrative expenses.

~~Escrowed Cash Receivable~~Recently Adopted Accounting Pronouncements

~~On August 14, 2017,~~Adoption of ASC 842

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). This guidance 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-use asset and a lease liability for nearly all leases (other than leases that meet the ~~Company sold all~~definition of ~~its rights~~a short-term lease). The lease liability will be equal to ~~CERC-501~~the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to ~~Janssen in exchange~~adjustment such as for initial ~~gross proceeds of $25 million, of which $3.75 million was deposited into~~direct costs. For income statement purposes, the new standard retains a ~~twelve-month escrow~~dual model similar to ~~secure certain indemnification obligations~~ASC 840, requiring leases to ~~Janssen. The Company collected the full escrow amount~~be classified as either operating leases or finance leases. For lessees, operating leases will result in ~~August of 2018.~~

~~Restricted Cash~~

~~Restricted cash consists of the 2016 Employee Stock Purchase Plan deposits, credit card deposits, landlord deposits and payroll processing deposits. The Company has~~straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a ~~$125,000 deposit with ADP~~front-loaded expense pattern (similar to ~~facilitate payroll processing, which will be returned to the company upon termination of the service or a restructuring of the agreement. In exchange~~current accounting by lessees for receiving business credit card services from Silicon Valley Bank, the Company deposited $50,000 as collateral with Silicon Valley Bank. This amount will remain deposited with Silicon Valley Bank for the duration the business credit card services are used by the Company. These deposits are recorded as restricted cash, net of current portion on the balance sheet as of September 30, 2018 and December 31, 2017. The remaining restricted cash balance relates to the 2016 Employee Stock Purchase Plan. The Company established the Employee Stock Purchase Plan in 2016 (the "Plan")capital leases under ASC 840). Eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the Plan administrator. Deposits made by employees for potential future stock purchases are recorded as restricted cash.

The Company adopted ~~ASU 2016-18~~the standard using the simplified transition method on its effective date of January 1, ~~2018~~2019 and ~~now includes restricted cash balances~~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 ~~cash, cash equivalents and restricted cash balance on the statement of cash flows. All prior periods were retrospectively adjusted to conform to the current period presentation.~~

~~Concentration of Credit Risk~~

~~Financial instruments that potentially subject~~new standard, which among other things, allows the Company to ~~concentrations~~carryforward the historical lease classification. As a result of ~~credit risk~~the standard, the Company recorded a lease liability of $1.2 million and a right-of-use 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 (see Note 12 below for more information).

Other Adopted Accounting Pronouncements

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 ~~primarily cash and cash equivalents. The Company maintains a portion~~redundant, outdated, or duplicative of ~~its cash and cash equivalent balances~~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 ~~form of~~balance sheet must be provided in a ~~money market account with a financial institution that management believes to be creditworthy.~~note or separate statement. The Company has ~~no financial instruments~~provided this disclosure beginning in the first quarter of 2019.

3. Revenue from Contracts with ~~off‑balance sheet risk of loss.~~

~~Inventory~~Customers

~~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.~~

~~Goodwill~~

Goodwill relates to the amount that arose in connection with the acquisitions of TRx and Avadel's pediatric products. 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 consists of one reporting unit.

~~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 carrying 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 carrying amount of an intangible

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~~asset might not be recoverable. Impairment losses are measured and recognized to the extent the carrying value of such assets exceeds their fair value.~~

~~Contingent Consideration~~

Some of the Company’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 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 liability is remeasured at current fair value with changes recorded in the condensed consolidated statements of operations.

~~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 of being achieved until the approvals are obtained as it is outside the control of the Company. If it is probable that a 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.

~~Grant Revenue~~

Grant revenues are derived from government grants that support the Company’s efforts on specific research projects. The Company determined that the government agencies providing grants to the Company are not our customers. The Company recognizes grant revenue when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant revenue will be received.

~~Product Revenues, net~~

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 product is less than one year and the customers do not pay for product in advance of the transfer of the product.

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 condensed 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.

customers. The following table presents net revenues disaggregated by ~~type:~~type (in thousands):



	Three Months Ended March 31,
	2019		2018
Prescribed dietary supplements	$	1,791	$	2,231
Prescription drugs	3,620		2,029
Sales force revenue	—		223
Total revenue	$	5,411	$	4,483

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Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Prescribed dietary supplements $ 2,096,851

$ —

$ 5,766,642

$ —
Prescription drugs 1,977,935

—

7,279,182

—
Sales force revenue —

—
296,875

—
License and other revenue —
25,000,000
—
25,000,000
Grant revenue —

37,592
—

579,597
Total revenue $ 4,074,786

$25,037,592
$ 13,342,699

$25,579,597

~~Concentration with Customer~~

As is typical in the pharmaceutical industry, the Company sells its prescription pharmaceutical products (which include prescribed dietary supplements and 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 three months ended ~~September 30, 2018,~~March 31, 2019, the Company’s three largest customers accounted for approximately ~~34%~~35%, ~~31%~~33%, and ~~27%~~25%, respectively, of the Company’s total net product revenues from sale of prescription pharmaceutical products. For the nine months ended September 30, 2018, the Company’s three largest customers accounted for approximately 30%, 30% and 24%, respectively, of the Company’sCompany's total net product revenues from sale of prescription pharmaceutical products.

~~Returns~~

4. Net Loss Per Share

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 ~~Allowances~~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 the fourth quarter of 2018 upon Armistice exercising preferred stock 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 common stock other than being non-voting and convertible to shares of common stock on a 1-to-5 ratio.

~~Consistent with industry practice,~~Under the ~~Company maintains~~two-class method, the convertible preferred stock is considered a ~~return policy that allows customers to return product within a specified period~~separate class of stock for EPS purposes and therefore basic and diluted EPS is provided below for both ~~prior to~~common stock and ~~in certain cases, subsequent to~~preferred stock. EPS for common stock and EPS for preferred stock is computed by dividing the ~~product's expiration date. The Company’s return policy generally allows customers to receive credit~~sum of distributed earnings and undistributed earnings for ~~expired products within six months prior to expiration and within one year after expiration. The provision for returns and allowances consists~~each class of ~~estimates for future product returns and pricing adjustments. The primary factors considered in estimating potential product returns include:~~

stock by 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 the Company’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~~weighted average number of ~~factors, but the principal factor relates to the level~~shares outstanding for each class of ~~inventory in the distribution channel.~~

~~Distribution Fees and Rebates~~

Consistent with pharmaceutical industry practices, the Company establishes contracts with wholesalers that provide for Distribution Service Fees (“DSA fees”). Settlement of DSA fees generally occur on a monthly or quarterly basis based on net salesstock for the period. ~~DSA fee accruals~~In applying the two-class method, undistributed earnings are ~~based on contractual fees~~allocated to ~~be paid to the wholesaler distributors applied to purchases of our products.~~

The Company is also 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 performancecommon stock and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, however 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, our estimates could differ from actual experience.

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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.

~~Chargebacks and Sales Discounts~~

~~Chargeback accruals are~~preferred stock based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Sales discounts accruals are based on payment terms extendedweighted average shares outstanding during the period, which assumes the convertible preferred stock has been converted to ~~customers.~~common stock.

~~Sales Force Revenue~~

~~Pursuant~~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 ~~a Marketing Agreement with Pharmaceutical Associates, Inc. (“PAI”),~~be issued upon the ~~Company received a monthly marketing fee to promote, market and sell certain products on behalf of PAI. The Company also received a matching fee payment for each month~~assumed conversion of the ~~term of~~Company's unit purchase option shares, which are included under the ~~Marketing Agreement if certain provisions calculated in accordance with~~"if-converted method" when dilutive; (iii) prior to issuance, the ~~terms and inputs set forth~~contingently issuable shares in the ~~Marketing Agreement are met. Marketing fees and any matching payments are recognized as sale force revenue when all the performance obligations~~TRx acquisition, if contingencies would have been satisfied ~~as earned on a monthly basis. The Marketing Agreement with PAI was terminated in April 2018.~~

~~Accounting Policy Elections~~

~~The Company elected~~if the ~~following practical expedients in applying 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~~end of the ~~product~~contingency period were as ~~a cost~~of the balance sheet date under the "if-converted method" when dilutive; and (iv) common stock to ~~fulfill a promise~~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 ~~will account~~diluted loss per common share for ~~them as an expense.~~

~~Contract costs -~~periods with net losses. In periods of net loss, losses are allocated to the ~~Company recognizes the incremental costs of obtaining a contract as an expense when incurred~~participating security only 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 Condensed Consolidated Statements of Operations.

~~The Company~~security has not ~~made significant changes~~only the right to ~~the judgments made~~participate in ~~applying ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ ~~(Topic 606) ("ASU 2014-09") for the three and nine months ended September 30, 2018.~~

~~Cost of Product Sales~~

~~Cost of product sales is comprised of (i) costs~~earnings, but also a contractual obligation 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. 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.

~~Shipping, Handling, and Freight~~

~~The Company includes the cost of shipping, handling, and freight associated with product sales as part of cost of goods sold.~~

~~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

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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, such as direct and allocated expenses for rent, utilities and insurance; and costs associated with preclinical activities, regulatory 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.

~~Acquired In-Process Research and Development Expenses~~

Acquired in-process research and development ("IPR&D") expense includes the initial costs of IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.

~~Sales and Marketing Expenses~~

Sales and marketing expenses consist primarily of professional fees, contractual fees, advertising and marketing cost and salaries, benefits and related costs for sales and sales support personnel, including stock‑based compensation and travel expenses.

~~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 marketing expense as all amortization expense is included within its own standalone line in operating expensesshare in the Company's ~~condensed consolidated statements of operations.~~

~~Impairment of Intangible Assets~~

~~Impairment of Intangible assets includes any impairment charges related to the Company's acquired intangible assets.~~

~~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~~

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 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 net operating losses and research and development credit carryforwards, may be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code (the "Code"). See Note 11 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 September 30, 2018, the Company did not believe any material uncertain tax positions were present.

On December 22, 2017, the “Tax Cuts and Jobs Act” ("TCJA") was enacted, that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss 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 11 below for further discussion related to the tax impact to the Company.

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~~Stock‑Based Compensation~~

The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock‑based awards made to employees and non‑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, our stock-based compensation expense could be materially different in the future.

For stock options issued to non‑employees, the Company initially measures the options at their grant date fair values and revalues as the underlying equity instruments vest and are recognized as expense over the earlier of the period ending with the performance commitment date or the date the services are completed in accordance with the provisions of ASC 718 and ASC 505‑50, Equity‑Based Payments to Non‑Employees (“ASC 505‑50”).

~~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 might vary and might result in it reporting amounts that are too high or too low for any particular period.

~~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 Company's management team and consists of the Company's Chief Executive Officer and Chief Financial Officer. The Company and the management 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.

~~Recently Adopted Accounting Pronouncements~~

~~Adoption of ASC 606~~

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~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ ~~(Topic 606) ("ASU 2014-09"). Topic 606, along with amendments issued in 2015, 2016 and 2017, supersedes the revenue recognition requirements in Topic 605,~~ ~~Revenue Recognition~~, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Accounting Standards Codification. ASU 2014-09 provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. On January 1, 2018, the Company adopted the new revenue recognition standard for all contracts not completed as of the adoption date using the modified retrospective method. The implementation of the new revenue recognition standard did not have a material quantitative impact on the Company’s condensed consolidated financial statements as the timing of revenue recognition for product sales did not significantly change. In addition, the Company did not have a material cumulative effect adjustment to Accumulated deficit upon adoption of the new revenue recognition standard on January 1, 2018. The information presented for the periods prior to January 1, 2018 has not been restated and is reported under Topic 605.

The Company recognizes revenue when its performance obligations with its customers have been satisfied. At contract inception, the Company determines if a contract is within the scope of Topic 606 and then evaluates the contract using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

~~Other Adopted Accounting Pronouncements~~

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~ ("ASU 2017-01"). The standard provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. ASU 2017-01 is effective for fiscal periods beginning after December 15, 2017 (including interim periods within those periods) with early adoption permitted. The Company adopted this standard on January 1, 2018.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting~~ (“ASU 2017-09”) to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for all companies for annual periods and interim periods within those annual periods, beginning on or after December 15, 2017. The adoption of this standard on January 1, 2018 did not have a significant impact on the Company’s financial statements.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Restricted Cash ("ASU2016-18"~~). The guidance is intended to address the diversity that currently exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The new standard requires that entities show the changes in the total of cash and cash equivalents, restricted cash and restricted cash equivalents on the statement of cash flows and no longer present transfers between cash and cash equivalents, restricted cash and restricted cash equivalents on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this standard on January 1, 2018. Upon adoption of ASU 2016-18 the Company applied the retrospective transaction method for each period presented and included $0.1 million of restricted cash in the beginning period cash, cash equivalents and restricted cash balance. The September 30, 2017 statement of cash flows has been updated to include $0.1 million of restricted cash.

~~In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16"), which requires companies to~~ recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The adoption of this standard on January 1, 2018 d~~id not~~ ~~have a significant impact on the Company’s financial statements.~~

~~In August 2016, the FASB issued ASU No. 2016-15~~ ~~Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments~~ ("ASU 2016-15"), which reduces existing diversity in the classification of certain cash receipts and cash payments on the statements of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The adoption of this standard on January 1, 2018 did not have a significant impact on the Company’s financial statements.

~~Recent Accounting Pronouncements~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases~~ ~~(Topic 842) ("ASU 2016-02"). This guidance 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-use asset and a lease liability for nearly all leases (other than leases that meet the definition

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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 the 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 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 overall impact to our condensed consolidated financial statements.

~~In January 2017, the FASB issued ASU No. 2017-04 “Intangibles-Goodwill and Other (Topic 350)~~: ~~Simplifying the Test for Goodwill Impairment~~” ("ASU 2017-04"). ASU-2017 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 and early adoption is permitted. The standard will be applied prospectively. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements.

~~3. Net Income (Loss) Per Share of Common Stock, Basic and Diluted~~
losses.

The following table sets forth the computation of basic and diluted net loss per share of common stock and preferred stock for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ which includes both classes of participating securities:

Three Months Ended Nine Months Ended
September 30, September 30,
2018
2017 2018
2017
Basic (loss) income per share:
Net (loss) income $ (24,603,575 ) $ 18,720,610
$ (34,493,895 )
$ 14,961,458
Undistributed (loss) earnings allocable to common shares $ (24,603,575 ) $ 18,720,610
$ (34,493,895 ) $ 14,961,458

Weighted average shares, basic
Common stock 34,648,641
21,382,683
32,749,291

14,952,391
Participating warrants —
14,285,714
—

8,163,265
34,648,641
35,668,397
32,749,291

23,115,656
Basic (loss) income per share:
Common stock $ (0.71 ) $ 0.52
$ (1.05 )
$ 0.65
Participating warrants $ —
$ 0.52
$ —
$ 0.65

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Diluted (loss) income per share:
Net (loss) income $ (24,603,575 ) $ 11,222,732
$ (34,493,895 ) $ 9,677,838
Net income reallocated —
5,256
—
1,746
Undistributed (loss) earnings allocable to common shares $ (24,603,575 ) $ 11,227,988
$ (34,493,895 ) $ 9,679,584

Weighted average shares, basic 34,648,641
21,382,683
32,749,291
14,952,391
Effect of dilutive securities
Stock options —
25,019
—
7,641
Weighted average number of shares - diluted 34,648,641
21,407,702
32,749,291
14,960,032

Diluted (loss) income per share: $ (0.71 )
$ 0.52

$ (1.05 )
$ 0.65



	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2019						2018
	Common stock			Preferred stock			Common stock			Preferred stock
Net loss per share, basic and diluted
Numerator:
Allocation of undistributed net loss	$	(5,537,787	)	$	(1,916,261	)	$	(3,882,847	)	$	—
Denominator:
Weighted average shares	41,284,168			2,857,143			31,316,246			—
Basic and diluted net loss per share	$	(0.13	)	$	(0.67	)	$	(0.12	)	$	—

The following outstanding securities at ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~ have been excluded from the computation of diluted weighted shares outstanding, as they could have been anti-dilutive:

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	Three Months Ended		Nine Months Ended		Three Months Ended
	September 30,		September 30,		March 31,
	2018	2017	2018	2017	2019	2018
Stock options	4,119,187	2,384,560	4,119,187	2,401,938	4,345,305	3,909,384
Warrants on common stock	18,905,064	4,661,145	18,905,064	4,661,145	4,024,708	18,986,659
Restricted Stock Awards	445,000	—	445,000	—
Restricted Stock Units					345,000	—
Underwriters' unit purchase option	40,000	40,000	40,000	40,000	40,000	40,000

~~4. Acquisitions~~

~~Asset~~5. Acquisitions

Ichorion Asset Acquisition

On September 24, 2018, the Company entered into, and subsequently consummated the transactions contemplated by, an ~~Agreement~~agreement and ~~Plan~~plan of ~~Merger~~merger (the "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,~~common stock, par value $0.001 per share, as adjusted for Estimated Working Capital as defined in the Merger Agreement. The shares ~~are subject to a lockup date through December 31, 2019.~~of common stock issued as part of the acquisition may not be resold until January 2020. Consideration for the Ichorion Asset Acquisition ~~included~~includes certain development milestones ~~in the future~~ worth up to an additional $15 million, payable either in shares of ~~Company Common Stock~~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 million ~~using~~based on the Company's stock price close on September ~~24th~~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 has 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. 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 is not tax deductible. The~~ $0.2 million of transaction costs incurred were recorded to ~~Acquired In-Process Research and Development~~acquired 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 million relates to three future development milestones. The first milestone is the first 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 $6 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 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 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.

~~Table~~ As of ~~Contents~~

~~Acquisitions of Businesses~~March 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.

Avadel Pediatric Products Acquisition

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 ofof: (1) a cash payment of one ~~dollar. In addition,~~dollar, (2) the ~~Company assumed~~Company's assumption of existing seller debt due in January 2021 with a fair value of $15.1 million, and (3) contingent consideration ~~referred to as Deferred payments,~~ relating to royalty ~~obligation~~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,~~pediatric products acquisition, the Company ~~has currently~~ 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,

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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. ~~Transaction costs of $0.1 million were included as general and administrative expense in the condensed consolidated statements of operations for the nine months ended September 30, 2018.~~

During the second quarter of 2018, the Company identified and recorded measurement period adjustments to ~~our~~the preliminary purchase price allocation. These adjustments are reflected in the tables below. If the measurement period adjustments were reflected in the first quarter 2018 Form 10-Q it would have increased operating expenses by $0.3 million consisting primarily of increases to cost of product sales of $0.2 million and sales and marketing expense of $0.1 million. 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 ~~the third quarter of~~ 2018.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition ~~both as disclosed in the first quarter 2018 Form 10-Q~~ and as adjusted for measurement period adjustments identified during the second ~~quarter:~~ quarter of 2018:




	At February 16, 2018 (preliminary)			Measurement Period Adjustments			At February 16, 2018 (as adjusted)			At February 16, 2018 (preliminary)			Measurement Period Adjustments			At February 16, 2018 (as adjusted)

Inventory	$	2,549,000		$	(1,831,000	)	$	718,000		$	2,549,000		$	(1,831,000	)	$	718,000
Prepaid assets	—			570,000			570,000			—			570,000			570,000
Intangible assets	16,453,000			1,838,000			18,291,000			16,453,000			1,838,000			18,291,000
Accrued expenses	—			(362,000		)	(362,000		)	—			(362,000		)	(362,000		)
Fair value of debt assumed	(15,272,303		)	197,303			(15,075,000		)	(15,272,303		)	197,303			(15,075,000		)
Fair value of contingent consideration and deferred payments	(7,875,165		)	(44,835		)	(7,920,000		)
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		)	(4,145,468		)	367,468			(3,778,000		)
Consideration exchanged	241,000			(240,999		)	1			241,000			(240,999		)	1
Goodwill	$	4,386,468		$	(608,467	)	$	3,778,001		$	4,386,468		$	(608,467	)	$	3,778,001

Based on valuation estimates utilizing the estimated sales price of inventory less sales and marketing costs and an allowance for profit, a step-up in the value of inventory of $0.3 million was recorded in the opening balance sheet, of which approximately $0.1 million was charged to cost of goods sold during the post-acquisition period, February 16, 2018 through September 30, 2018.

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustmentsrelated to the ~~purchase price allocation will be made as soon as practicable but no later than one year from the February 16, 2018~~ acquisition ~~date.~~

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 ~~preliminary~~ fair value of

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intangible assets, both as ~~disclosed in~~of the ~~first quarter 2018 Form 10-Q~~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)		Useful Life	At February 16, 2018 (preliminary)		Measurement Period Adjustments			At February 16, 2018 (as adjusted)		Useful Life

Acquired Product Marketing Rights - Karbinal	$	6,221,000	$	(21,000	)	$	6,200,000	16 years	$	6,221,000	$	(21,000	)	$	6,200,000	10 years
Acquired Product Marketing Rights - AcipHex	2,520,000		283,000			2,803,000		10 years	2,520,000		283,000			2,803,000		10 years
Acquired Product Marketing Rights - Cefaclor	6,291,000		1,320,000			7,611,000		7 years	6,291,000		1,320,000			7,611,000		7 years
Acquired Developed Technology - Flexichamber	1,131,000		546,000			1,677,000		10 years	1,131,000		546,000			1,677,000		10 years
Acquired IPR&D - LiquiTime formulations	290,000		(290,000		)	—		Indefinite	290,000		(290,000		)	—		Indefinite
Total	$	16,453,000	$	1,838,000		$	18,291,000		$	16,453,000	$	1,838,000		$	18,291,000

TRx Acquisition

On November 17, 2017, the Company entered into, and consummated the transactions contemplated by, an ~~Equity Interest Purchase Agreement~~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 consists~~Acquisition consisted of $18.9 million in cash,

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as adjusted for ~~Estimated Working Capital, Estimated Cash~~estimated working capital, estimated cash on ~~Hand, Estimated Indebtedness~~hand, estimated indebtedness and ~~Estimated Transaction Expenses,~~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~~was 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 ~~condensed~~ consolidating balance sheet date. As a result of the TRx Acquisition, the Company has currently 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 our 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 prior periods it would have decreased general and administrative expenses by $1.0 million, decreased other expense for the change in fair value of contingent consideration by $0.3 million, increased the impairment of intangible assets by $0.2 million, increased intangible amortization expense by $0.1 million and decreased income tax expense by $0.1 million. The measurement period adjustments were the result of an arbitration ruling discussed in further detail in Note 7,13, 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 periods prior ~~periods~~to the third quarter of 2018 and as adjusted for measurement period adjustments identified during the ~~current quarter:~~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

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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 periods prior ~~periods~~to the third quarter of 2018 and as adjusted for measurement period adjustments identified during the ~~current quarter:~~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	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

Based on valuation estimates utilizing the estimated selling price of inventory less sales and marketing costs and an allowance for profit, a step-up in the value of inventory of $0.2 million was recorded in the opening balance sheet, of which approximately $0.2 million was charged to cost of product sales during the nine months ended September 30, 2018.

of TRx 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 ~~preliminary~~final fair value of intangible assets both as disclosed in prior periods and as adjusted by measurement period adjustments identified during the ~~current~~third quarter of 2018 includes the following:

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	At November 17, 2017 (preliminary)		Measurement Period Adjustments			At November 17, 2017 (as adjusted)		Useful Life

Acquired product marketing rights - Metafolin	$	10,465,000	$	1,522,000		$	11,987,000	15 years
PAI sales and marketing agreement	2,334,000		219,000			2,553,000		2 years
Acquired product marketing rights - Millipred	4,714,000		342,000			5,056,000		4 years
Acquired product marketing rights - Ulesfia	555,000		(555,000		)	—
Total	$	18,068,000	$	1,528,000		$	19,596,000

The Company received written notice to terminate the PAI ~~Sales~~sales and ~~Marketing Agreement~~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

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impairment charge was recognized in the ~~nine months ended September 30,~~second quarter of 2018 in the amount of $1.9 million, representing the remaining net book value of the PAI sales and marketing agreement intangible asset.

Pro Forma Impact of Business Combinations

The following supplemental unaudited pro forma information presents Cerecor’s financial results as if the ~~acquisitions~~acquisition of the Avadel ~~Pediatric Products,~~pediatric products, which was completed on February 16, 2018, ~~and of TRx, which was completed on November 17, 2017,~~ had ~~each~~ occurred on January 1, ~~2017:~~

2018:


											Three Months Ended
	Three Months Ended September 30,					Nine Months Ended September 30,					March 31,
	2018			2017		2018			2017		2018
	Pro forma					Pro forma

Total revenues, net	$	4,074,786		$	30,965,291	$	15,047,699		$	41,276,271	$	6,187,775
Net loss	$	(24,603,575	)	$	16,881,075	$	(35,539,494	)	$	8,505,715	$	(4,928,446	)
Diluted net loss per share	$	(0.71	)	$	0.63	$	(1.09	)	$	0.42

Basic and diluted net loss per share of common stock											$	(0.16	)
Basic and diluted net loss per share of preferred stock											$	—

The above unaudited pro forma information was determined based on the historical GAAP results of Cerecor and Avadel's pediatric ~~products and TRx.~~products. The unaudited pro forma ~~condensed~~ consolidated results are provided for informational purposes only and are not necessarily indicative of what Cerecor’s ~~condensed~~ consolidated results of operations would have been had the acquisition of Avadel's pediatric products been completed on the ~~dates~~date indicated or what the ~~condensed~~ consolidated results of operations will be in the future.

5.6. 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.

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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 that are measured at fair value on a recurring basis:

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	March 31, 2019
	Fair Value Measurements Using
	Quoted prices in		Significant other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Investments in money market funds*	$	13,965,626	$	—	$	—
Liabilities
Contingent consideration	$	—	$	—	$	9,002,288
Warrant liability	$	—	$	—	$	17,750
Unit purchase option liability	$	—	$	—	$	39,993



	December 31, 2018
	Fair Value Measurements Using
	Quoted prices in		Significant other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Investments in money market funds*	$	7,324,932	$	—	$	—
Liabilities
Contingent consideration	$	—	$	—	$	9,050,564
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 condensed consolidated balance sheets.

**Warrant liability and unit purchase option liability are reflected in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets.

As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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~~long-term debt, warrant liability, ~~contingent consideration and~~ the ~~underwriters’~~underwriters' unit purchase option ~~liability.~~liability, and contingent consideration. The carrying amounts reported in the accompanying condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, and other current liabilities approximate their respective fair values because of the short-term nature of these accounts. The estimated fair value of the Company’s long-term debt of ~~$15.4~~$14.9 million as of ~~September 30, 2018~~March 31, 2019 was based on current interest rates for similar types of borrowings and is in Level 2 of the fair value hierarchy.

~~The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis:~~

September 30, 2018
Fair Value Measurements Using
Quoted prices in Significant other Significant
active markets for observable unobservable
identical assets inputs inputs
(Level 1) (Level 2) (Level 3)
Assets
Investments in money market funds* $ 2,817,588
$ —
$ —
Liabilities
Contingent consideration $ —
$ —
$ 9,510,475
Warrant liability** $ —
$ —
$ 14,330
Unit purchase option liability** $ —
$ —
$ 43,174

December 31, 2017
Fair Value Measurements Using
Quoted prices in Significant other Significant
active markets for observable unobservable
identical assets inputs inputs
(Level 1) (Level 2) (Level 3)
Assets
Investments in money market funds* $ 471,183
$ —
$ —
Liabilities
Contingent consideration $ —
$ —
$ 2,576,633
Warrant liability** $ —
$ —
$ 8,185
Unit purchase option liability** $ —
$ —
$ 26,991

*Investments in money market funds are reflected in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

**Warrant liability and unit purchase option liability are reflected in accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheets.

Level 3 Valuation

The ~~Company’s acquisitions~~tables presented below are a summary of ~~TRx and Avadel's pediatric products (see Note 4) involve~~changes in the ~~potential for future payment of consideration that is contingent upon the achievement of operational and commercial milestones. The~~ fair value of the Company’s Level 3 valuations for the warrant liability, unit purchase option liability, and contingent consideration ~~is determined using unobservable inputs. These inputs include~~for the ~~estimated amount~~three months ended March 31, 2019 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 acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in the Company’s condensed consolidated statements of operations. Changes in any of the inputs may result in a significantly different fair value adjustment.2018:



	Warrant		Unit purchase		Contingent
	liability		option liability		consideration			Total
Balance at December 31, 2018	$	2,950	$	7,216	$	9,050,564		$	9,060,730
Payment of contingent consideration	—		—		(228,678		)	(228,678		)
Change in fair value	14,800		32,777		180,402			227,979
Balance at March 31, 2019	$	17,750	$	39,993	$	9,002,288		$	9,060,031

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~~The warrant liability (which relates to~~



	Warrant liability		Unit purchase option liability		Contingent consideration		Royalty Obligation		Total
Balance at December 31, 2017	$	8,185	$	26,991	$	2,576,633	$	—	$	2,611,809
Issuance of contingent consideration and royalty	—		—		7,875,165		240,744		8,115,909
Change in fair value	7,405		15,846		199,283		63,486		286,020
Balance at March 31, 2018	$	15,590	$	42,837	$	10,651,081	$	304,230	$	11,013,738

In 2014, the Company issued warrants to purchase 625,208 shares of convertible preferred stock. Upon the closing of our 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 ~~September 30, 2018,~~March 31, 2019, include (i) volatility of ~~52.5%~~50%, (ii) risk free interest rate of ~~2.82%~~2.33%, (iii) strike price ~~($8.40),~~$8.40, (iv) fair value of common stock ~~($4.67),~~$5.84, and (v) expected life of ~~2.05~~1.60 years 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~~were warrants to purchase shares of common ~~stock (see Note 9 for additional information on~~stock. 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 ~~September 30, 2018,~~March 31, 2019, include (i) volatility ~~range~~ of ~~35% to~~ 50%, (ii) risk free interest rate ~~range~~ of ~~2.12% to 2.78%~~2.33%, (iii) unit strike price ~~($7.48),~~$7.47, (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 ~~($4.67).~~$5.84, and (v) expected life of 1.6 years.

The ~~tables presented below are a summary~~Company's business acquisitions of ~~changes in~~Avadel's pediatric products and TRx (see Note 5) involve the ~~fair value~~potential for future payment of consideration that is contingent upon the ~~Company’s Level 3 valuations for the warrant liability, UPO liability~~achievement of operation and ~~contingent consideration for the nine months ended September 30, 2018~~commercial milestones and ~~2017:~~

Warrant liability Unit purchase option liability Contingent Consideration Total
Balance at December 31, 2017 $ 8,185
$ 26,991
$ 2,576,633
$ 2,611,809
Issuance of contingent consideration —
—
7,920,000
7,920,000
Payment of contingent consideration —
—
(137,008 ) (137,008 )
Purchase price allocation measurement period adjustment of contingent consideration —
—
(1,210,000 ) (1,210,000 )
Change in fair value 6,145
16,183
360,850
383,178
Balance at September 30, 2018 $ 14,330
$ 43,174
$ 9,510,475
$ 9,567,979

Warrant Unit purchase
liability option liability Total
Balance at December 31, 2016 $ 5,501
$ 51
$ 5,552
Change in fair value (4,970 ) 6,556
1,586
Balance at September 30, 2017 $ 531
$ 6,607
$ 7,138

royalty payments on future product sales. The fair value of contingent consideration ~~increased $0.4 million~~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 acquisition date, at each reporting period, the contingent consideration liabilities are remeasured at the current fair value with changes recorded in the ~~nine months ended September 30, 2018.~~condensed consolidated statement of operations.

As part of the acquisition of Avadel's pediatric products, the Company will 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 ~~increase in~~ fair value of the future royalty is the expected future value of the contingent ~~consideration is primarily attributable~~payments discounted to ~~an increase~~a present value. The estimated fair value of the royalty payments as of March 31, 2019 was $7.7 million. The significant assumptions used in estimating the fair value of the royalty payment as of March 31, 2019 include (i) the expected net sales of the acquired Avadel pediatric products for that are subject to the 15% royalty based on the Company's net sales forecast and (ii) the risk-adjusted discount rate of 8.4%, which is comprised of the risk-free interest rate of 2.3% and a counterparty risk of 6.1% utilized to discount the expected royalty payments. The liability is reduced by periodic payments.

Additionally, as part of the initial purchase price allocation for the acquisition of Avadel's pediatric products performed during the first quarter of 2018, contingent consideration of $240,744 was assigned to future royalty obligations for the use of the Sellers' LiquiTime process technology. In the second quarter of 2018, we identified measurement period adjustments which included the adjustment of the fair value of the LiquiTime intangible asset down to $0.

The consideration for the TRx acquisition includes certain potential contingent payments. First, pursuant to the TRx Purchase Agreement, the Company would have been required to pay $3.0 million to the Sellers if the gross profit related to TRx products equaled or exceeded $12.6 million in 2018. The Company did not achieve this contingent event in 2018 and therefore no value was assigned to the ~~Avadel Pediatric Products Acquisition,~~contingent payout as of December 31, 2018. Additionally, the Company is required to pay $2.0 million upon the transfer of the Ulesfia

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NDA to the Company ("NDA Transfer Milestone"). Finally, the Company will pay $2.0 million upon FDA approval of a new dosage of Ulesfia ("FDA Approval Milestone"). The main inputs utilized to determine the fair value of each milestone is the probability of the milestone's success, the expected time to successfully reach the milestone, and the risk-adjusted discount rate. The estimated fair value of the NDA Transfer Milestone as of March 31, 2019 was $0.9 million and the significant assumptions used in estimating the fair value include (i) probability of milestone success of 45.0%, (ii) expected time to milestone of 0.2 years, and (iii) risk-adjusted discount rate of 8.5%, which is comprised of the risk-free rate of 2.4% and a counterparty risk of 6.1%. The estimated fair value of the FDA Approval Milestone as of March 31, 2019 was ~~driven by an increase~~$0.4 million. The significant assumptions used in estimating the ~~net sales forecast.~~fair value of the FDA Approval Milestone as of March 31, 2019 include (i) probability of milestone success at 22.5%, (ii) expected time to milestone of 1.3 years, and (iii) risk-adjusted discount rate of 8.4%, which is comprised of the risk-free rate of 2.3% and a counterparty risk of 6.1%.

No other changes in valuation techniques or inputs occurred during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

6.7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of March 31, 2019 and December 31, 2018 consisted of the following:

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	As of				As of
	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Sales returns and allowances	$	6,055,315	$	3,829,030	$	4,249,977	$	3,972,510
Medicaid rebates					2,758,384		2,237,269
Minimum sales commitments, royalties payable, and purchase obligations					10,808,083		9,662,901
Compensation and benefits	1,803,554		1,401,514		1,679,572		1,953,065
Research and development expenses					1,123,051		278,132
Sales and marketing					938,437		1,112,378
General and administrative	1,072,619		1,001,454		187,465		235,721
Minimum sales commitments, royalties payable, and purchase obligations	8,033,438		743,010
Research and development expenses	620,004		299,480
Other	587,700		256,634		70,128		279,397
Total accrued expenses and other current liabilities	$	18,172,630	$	7,531,122	$	21,815,097	$	19,731,373

~~7. Agreements~~

~~Significant changes to our outstanding Agreements since December 31, 2017 are as follows:~~

~~Lachlan Pharmaceuticals~~

In November 2017, the Company acquired TRx and its wholly-owned subsidiaries, including Zylera. The previous owners of TRx beneficially own more than 10% of our outstanding common stock. Zylera, which is now our wholly owned subsidiary, entered into the First Amended and Restated Distribution Agreement (the “Lachlan Agreement”) with Lachlan Pharmaceuticals, an Irish company controlled by the previous owners of TRx (“Lachlan”), effective December 18, 2015. Pursuant to the Lachlan Agreement, Lachlan named Zylera as its exclusive distributor of Ulesfia in the United States and agreed to supply Ulesfia to Zylera exclusively for marketing and sale in the United States.

Pursuant to the Lachlan Agreement, Zylera is obligated to purchase a minimum of 20,000 units per year, or approximately $1.2 million worth of product, from Lachlan, subject to certain termination rights. Zylera must pay Lachlan $58.84 per unit and handling fees that are equal to $3.66 per unit of fully packaged Ulesfia in 2018, and escalate at a rate of 10% annually, as well as reimburse Lachlan for all product liability insurance fees incurred by Lachlan. The Lachlan Agreement also requires that Zylera make certain cumulative net sales milestone payments and royalty payments to Lachlan with a $3 million annual minimum payment unless and until there has been a “Market Change” involving a new successful competitive product. Lachlan is obligated to pay identical amounts to an unrelated third party from which it obtained rights to Ulesfia, with the payments ultimately going to Summers Laboratories, Inc. (“Summers Labs”). Because of the dispute described below, the Company has not made any payments to Lachlan under the Lachlan Agreement subsequent to the acquisition date.

On December 10, 2016, Zylera informed Lachlan that a Market Change had occurred due to the introduction of Arbor Pharmaceuticals' lice product, Sklice®. On June 5, 2017, Lachlan and Zylera entered into joint legal representation along with other unrelated third parties in negotiation and arbitration of a dispute with Summers Labs regarding the existence of a Market Change and the concomitant obligations of the parties. The arbitration panel issued an interim ruling on October 23, 2018 that no market change had occurred up to and including the date of the hearing. The issuance of the final award is scheduled for December 4, 2018. The final award has no direct bearing on the Company as the Company was not a named defendant to the original claim by Summers Labs and a federal court denied Zylera's ability to be a counterclaimant in the matter. However, the Company has interpreted this ruling's impact on the Lachlan agreement to mean that a market change has not occurred, and the minimum purchase obligation and minimum royalty provisions of the contract are active and due for any prior periods as well as going forward for any future periods. The Company has recognized a $6.9 million liability for these minimum obligations in accrued liabilities as of September 30, 2018. Under the terms of the TRx Purchase Agreement, the former TRx owners are required to indemnify the Company for 100% of all pre-acquisition losses related this arbitration, including legal costs, and possible minimum payments in excess of $1 million. Furthermore, the former TRx owners are required to indemnify the Company for 50% of post-acquisition Ulesfia losses, which would include losses resulting from having to fund these minimum obligations. The Company has recorded an indemnity receivable of $6.1 million in other receivables as of September 30, 2018, which the Company believes is fully collectible. The post-acquisition minimum obligations net of amounts recorded within the indemnity receivable of $1.7 million has been recorded in cost of product sales for the three and nine months ended September 30, 2018. If the Company fails to make these minimum obligations timely then the Lachlan Agreement may be terminated by Lachlan, in which case the Company would no longer be able to sell the Ulesfia product, but it would also not be subject to future minimum obligations.

~~Commercial, Supply, and Distribution Agreements~~

~~Acquired Product Marketing Rights - Karbinal~~

~~Table of Contents~~

On February 16, 2018, in connection with the acquisition of Avadel's pediatric products, the Company entered into a supply and distribution agreement with TRIS Pharma (the "Karbinal Agreement"), under which the Company is granted the exclusive right to distribute and sell the product in the United States. The initial term of the Karbinal Agreement is 20 years. The Company will pay TRIS a royalty equal to 23.5% of net sales. Avadel has agreed to offset the 23.5% royalty payable by 8.5%, for a net royalty equal to 15%, in fiscal year 2018 and 2019 for net sales of Karbinal. The make-whole payment is capped at $750,000 each year. The Karbinal Agreement also contains minimum unit sales commitments. The Karbinal Agreement also has multiple commercial milestone obligations that aggregate up to $3.0 million based on cumulative net sales, the first of which is triggered at $40.0 million.

~~Acquired Product Marketing Rights - AcipHex~~

On February 16, 2018, in connection with the acquisition of Avadel's pediatric products, the Company assumed the License and Assignment Agreement for AcipHex (“AcipHex Agreement”) between Eisai, Inc. and FSC Therapeutics, LLC dated June 2014 and the Supply Agreement between Eisai, Inc. and FSC Laboratories, Inc. dated June 2014. Per the AcipHex Agreement, the Company is granted the exclusive license to exploit the products in the territory (U.S.) and an exclusive license to use Eisai trademarks to sell the products. Eisai will manufacture and supply the requirements for supply of the products. The term of the AcipHex Agreement is perpetual unless terminated per the agreement. Eisai will receive (a) a royalty with respect to the sales of AcipHex equal to 15.0% of Net Sales. The royalties are payable until the first commercial sale of an unauthorized generic product in the territory or the date that is five years from the effective date of the agreement. A maximum $8.0 million of sales-based milestone payments is possible should AcipHex accumulated net sales exceed $50.0 million.

~~Acquired Product Marketing Rights- Cefaclor~~

On February 16, 2018, in connection with the acquisition of Avadel's pediatric products, the Company assumed the License, Supply and Distribution Agreement for Cefaclor between Yung Shin Pharm. Ind, Co., Ltd. and FSC Therapeutics, LLC dated March 2015 (“Cefaclor Agreement”). The initial term of the Cefaclor Agreement runs through December 31, 2024 and will automatically renew for additional, successive twelve-month periods unless terminated by either party. Yung Shin will receive a royalty equal to 15.0% of Net Sales of Cefaclor. A maximum $6.5 million of sales-based milestone payments is possible should Cefaclor accumulated net sales exceed $40.0 million.

8. Deerfield Obligation

In relation to the Company's acquisition of Avadel's pediatric products on February 16, 2018, the Company assumed an obligation that Avadel had to Deerfield CSF (the "Deerfield Obligation"). Beginning in July 2018 through October 2020, the Company ~~will~~is required to pay a quarterly payment of $262,500 to Deerfield. In January 2021, a balloon payment of $15,250,000 is due. On the acquisition date, the Company determined the fair value of these payments to be $15,075,000 using a market participant's estimated cost of debt. Management performed a credit risk analysis that determined the Company's credit rating to be B to BB plus the yield on a ten-year treasury security. The difference between the gross value and fair value of these payments will be recorded as interest expense in the Company's condensed consolidated statements of operations through January 2021 using the effective interest method. Interest expense for the three months ended ~~September 30, 2018~~March 31, 2019 was $0.2 ~~million. Interest~~million and is included in interest expense, ~~for~~net on the ~~nine months ended September 30, 2018 was $0.6 million.~~accompanying condensed consolidated statements of operations. The amounts due within the next year are included in current portion of long-term debt on the Company's condensed consolidated balance sheets. The amounts due in greater than one year are included in long-term debt, net of current portion, on the Company's condensed consolidated balance sheets. The Deerfield Obligation was $15.4 million as of ~~September 30, 2018,~~March 31, 2019, of which $1.1 million is recorded as a current liability.

9. Capital Structure

According to the Company's amended and restated certificate of incorporation, the Company is authorized to issue two classes of stock, common stock and preferred stock. ~~As of September 30, 2018,~~At March 31, 2019, the total number of shares of capital stock the Company was authorized to issue was 205,000,000 of which 200,000,000 was common stock and 5,000,000 waspreferred stock. All shares of common andpreferred stock have a par value of $0.001 per share.

On ~~April 27, 2017,~~December 26, 2018, the Company ~~further amended its certificate of incorporation in connection with the closing of the Armistice Private Placement (as defined below) with the filing of~~filed a Certificate of Designation of Preferences ~~Rights and Limitations~~ of Series AB Non-Voting Convertible Preferred Stock (“("Series AB Convertible Preferred ~~Stock”~~Stock" or "convertible preferred stock") of Cerecor Inc. (the “Certificate of ~~Designation”~~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 4,179~~2,857,143 shares of convertible preferred stock. The Series AB Convertible Preferred Stock converts to ~~Armistice with a stated value of $1,000 per share, convertible into 11,940,000~~ shares of ~~the Company’s~~ common stock aton a ~~conversion price of $0.35 per share~~1-for-5 ratio and ~~was approved by its shareholders on June 30, 2017. On July 6, 2017, Armistice converted all of its outstanding shares of Series A Preferred Stock into common stock. Subsequent to~~has the ~~conversion of Armistice’s Series A Preferred Stock into~~same rights, preferences, and privileges as common stock ~~Armistice has a majority~~other than it holds no voting ~~control over the Company.~~rights.

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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 our pipeline assets and for general corporate purposes. The transactions are considered one transaction for accounting purposes. As part of the transaction, the Company exchanged common stock warrants issued on April 27, 2017 to Armistice for the purchase up to 14,285,714 shares of the Company’s common stock at an exercise price of $0.40 per share (the "original warrants") for like-kind warrants to purchase up to 2,857,143 shares of the Company's newly designated Series B Convertible Preferred Stock with an exercise price of $2.00 per share (the "exchanged warrants"). Armistice immediately exercised the exchanged warrants and acquired an aggregate of 2,857,143 shares of the convertible preferred stock. Net proceeds of the transaction were approximately $5.7 million for the year ended December 31, 2018.

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 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 (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.

Voting

Holders of the Company's convertible preferred stock are not entitled to vote.

Dividends

The holders of convertible preferred 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 convertible preferred stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all debts and other liabilities.

Rights and Preferences

Each share of convertible preferred stock converts to shares of common stock on a 1-for-5 ratio. There are no other preemptive or subscription rights and there are no redemption or sinking fund provisions applicable to the Company’s common stock.

Common Stock

~~Ichorion Asset Acquisition~~Common Stock Offering

On ~~September 25, 2018, under~~March 8, 2019, the ~~terms~~Company closed on an underwritten public offering of common stock for 1,818,182 shares of common stock of the ~~Ichorion Asset Acquisition noted~~Company, at a price to the public of $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 gross proceeds to the Company, before deducting underwriting discounts and commissions and offering expenses, were approximately $10.0 million. The net proceeds were approximately $9.0 million.

December 2018 Armistice Private Placement

As discussed in detail above, on December 27, 2018 the Company exchanged previously outstanding warrants for like-kind warrants for 2,857,143 shares of the Company's convertible preferred stock with an exercise price of $2.00 per share. Armistice immediately exercised these warrants for 2,857,143 shares of convertible preferred stock for net proceeds to the Company of $5.7 million. The convertible preferred stock converts to common stock on a 1-for-5 ratio (or to 14,285,714 shares of common stock in ~~Note 4,~~total). 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 ~~5.8 million~~warrants for 4,000,000 shares of common ~~stock shares upon closing.~~

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stock of the Company with a term of 5.5 years and an exercise price of $12.50 per share (the "incentive warrants"). See "December 2018 Armistice Private ~~Placements~~Placement" above for more details.

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 April 27, 2017, the Company entered into a securities purchase agreement with Armistice, pursuant to which Armistice purchased $5.0 million of the Company’s securities, consisting of 2,345,714 shares of the Company’s common stock at a purchase price of $0.35 per share and 4,179 shares of Series A Preferred Stock at a price of $1,000 per share. The Company received $4.65 million in net proceeds from the Armistice Private Placement. The number of shares of common stock that were purchased in the private placement constituted approximately 19.99% of the Company’s outstanding shares of common stock immediately prior to the closing of the Armistice Private Placement. Armistice also received warrants to purchase up to 14,285,714 shares of the Company’s common stock at an exercise price of $0.40 per share. UnderSeptember 25, 2018, under the terms of the ~~securities purchase agreement,~~Ichorion Asset Acquisition noted above in Note 5, the ~~Series A Preferred Stock were not convertible into~~Company issued 5.8 million common stock and the warrants were not exercisable until the Company received approval of the private placement by the Company’s shareholders as required by the rules and regulations of the NASDAQ Capital Market. The Company received shareholder approval for this transaction on June 30, 2017, at which time the warrants became exercisable and the Series A Preferred Stock became convertible into common stock.shares upon closing.

As multiple instruments were issued in a single transaction, the Company initially allocated the issuance proceeds among the preferred stock, common stock and warrants using the relative allocation method. As the warrants were determined to be indexed to the Company’s stock, and would only be settled in common shares, entirely in the control of the Company, the warrant instrument was accounted for as an equity instrument. Fair value of the warrants was initially determined upon issuance using the Black-Scholes Model (level 3 fair value measurement). Armistice converted all of the Series A Preferred Stock into 11,940,000 shares of common stock on July 6, 2017.

Contingently Issuable Shares

Under the terms of TRx acquisition noted above in Note 4,5, 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 and entirely contingent upon gaining such~~ 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 after the payment of all debts and other liabilities.

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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

At ~~September 30, 2018,~~March 31, 2019, the following common stock warrants were outstanding:

Number of shares Exercise price Expiration
underlying warrants per share date
4,551,071 $ 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
14,285,714 $ 0.40
June 2022
18,905,064

*Accounted for as a liability instrument (see Note 5)



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)

~~In October 2018, approximately 0.1 million~~

Table of ~~the 4.6 million warrants listed above with an exercise price of $4.55 were exercised, generating proceeds of approximately $0.6 million. The remaining 4.5 million warrants expired.~~Contents

10. Stock-Based Compensation

2016 Equity Incentive Plan

On April 5, 2016, the Company’s board of directors 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”).

As of the 2016 Plan Effective Date, no additional grants will be made under the 2015 Plan or the 2011 Stock Incentive Plan (the “2011 Plan”), which was previously succeeded by the 2015 Plan effective October 13, 2015. Outstanding grants under the 2015 Plan and 2011 Plan will continue according to their terms as in effect under the applicable plan.

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)~~Plan") was approved by the Company's stockholders in May 2018, which increased the share reserve by an additional 1.4 million shares. 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 common stock of the Company on the last trading day in December of the prior calendar year. As of ~~September 30, 2018,~~March 31, 2019, there were ~~730,067~~2.1 million shares available for future issuance under the 2016 Amended Plan.

Option grants to employees and directors typically expire after ten years. Employee options with service based vesting conditions typically vest over three or four years. Options granted to directors typically vest over three years. Directors may also elect to receive stock options in lieu of cash 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.

For 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 end 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-based compensation expense includes expense related to stock options, restricted stock ~~units~~unit awards, and ESPP shares. The amount of stock-based compensation expense recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018 ~~and 2017~~was as follows:

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Three Months Ended September 30, Nine Months Ended September 30,
2018
2017 2018
2017
Research and development $ 32,202
$ 41,323
$ 64,077

$ 123,883
General and administrative 843,122
222,924
1,599,703

728,327
Sales and marketing 69,809
—
132,607

—
Total stock-based compensation $ 945,133
$ 264,247
$ 1,796,387

$ 852,210

~~Stock-based compensation during the three and nine months ended September 30, 2018 includes $0.3 million of expense related to modifications of awards related to a separated executive.~~



	Three Months Ended March 31,
	2019		2018
Research and development	$	57,376	$	11,497
General and administrative	489,953		207,382
Sales and marketing	49,364		23,945
Total stock-based compensation	$	596,693	$	242,824

Stock options with service-based vesting conditions

The Company has granted awards that contain service-based vesting conditions. The compensation cost for these options is recognized on a straight-line basis over the vesting periods. A summary of option activity for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 is as follows:


	Options Outstanding							Options Outstanding
	Number of shares		Weighted average exercise price		Grant date fair value of options		Weighted average remaining contractual term (in years)	Number of shares		Weighted average exercise price		Grant date fair value of options		Weighted average remaining contractual term (in years)
Balance at December 31, 2017	2,823,489		$	3.93			7.29
Balance at December 31, 2018								3,746,597		$	4.16			7.79
Granted	1,504,700		$	3.88	$	3,475,857		134,379		$	4.78	$	334,624
Exercised	(243,115	)	$	2.08				(31,288	)	$	3.01
Forfeited	(465,887	)	$	2.73				(4,383	)	$	4.25	$	11,297
Balance at September 30, 2018	3,619,187		$	4.18			7.97
Exercisable at September 30, 2018	1,832,581		$	4.88			6.72
Balance at March 31, 2019								3,845,305		$	4.19			7.61
Exercisable at March 31, 2019								2,269,081		$	4.56			6.76

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. As of ~~September 30, 2018,~~March 31, 2019, the aggregate intrinsic value of options outstanding and currently exercisable was ~~$4.4~~$8.1 million and $4.6 million, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2019 was $0.1 million. The total grant date fair value of shares which vested during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$943,270.~~$0.6 million. The

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per‑share weighted‑average grant date fair value of the options granted during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was estimated at ~~$2.31.~~$2.49. There were ~~476,399~~302,901 options that vested during the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 with a weighted average ~~exercise price~~grant date fair value of ~~$3.27.~~$2.09.

At March 31, 2019, there was $3.1 million of total unrecognized compensation cost related to unvested service-based vesting conditions awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years.

Stock options with market-based vesting conditions

~~The~~During 2018, the Company ~~has~~ granted awards that ~~contain~~vest upon the Company's common stock closing at or above $12.50 per share for three consecutive days. A summary of option activity with market-based vesting ~~conditions. Activity~~conditions for the ~~market-based options was as follows for the nine~~three months ended ~~September 30, 2018:~~

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March 31, 2019 is as follows:

Options Outstanding
Number of shares Weighted average exercise price Weighted average remaining contractual term (in years) Aggregate intrinsic value (1)
Balance at December 31, 2017 —

Granted 500,000
$ 4.24

Exercised —

Forfeited —

Balance at September 30, 2018 500,000
$ 4.24
9.49 215,000
Exercisable at September 30, 2018 —



	Options Outstanding
	Number of shares	Weighted average exercise price		Weighted average remaining contractual term (in years)	Aggregate intrinsic value (1)
Balance at December 31, 2018	500,000	$	4.24	9.24
Granted	—
Balance at March 31, 2019	500,000	$	4.24	8.99	$	800,000
Exercisable at March 31, 2019	—

(1) The aggregate intrinsic value in the above table represents the total pre-tax amount that a participant would receive if the option had been exercised on the last day of the respective fiscal period. Options with a market value less than its exercise value are not included in the intrinsic value amount.

~~The weighted-average grant-date fair value of stock options with market-based vesting conditions granted during the first nine months of fiscal year 2018 was $2.52 per share or $1,260,000.~~ At ~~September 30, 2018,~~March 31, 2019, there was ~~$1,030,068~~$805,068 of total unrecognized compensation cost related to ~~nonvested~~unvested market-based vesting conditions awards. This compensation cost is expected to be recognized over ~~the next 2.3~~a weighted-average period of 1.8 years.

Stock-based compensation assumptions

The following table shows the assumptions used to compute stock-based compensation expense for stock options with service-based vesting conditions granted to employees and members of the board of directors under the Black-Scholes valuation model ~~and~~for the ~~assumptions used to compute stock-based compensation expense market-based stock option grants under a Monte Carlo simulation, for nine~~three months ended ~~September 30, 2018:~~March 31, 2019. There were no stock options granted with market-based vesting conditions for the three months ended March 31, 2019.



Service-based options
Expected dividend yield		—%
Expected volatility		~~55 - 65%~~55%
Expected life (in years)		5.0 - 6.25
Risk-free interest rate		~~2.53~~2.23 - ~~2.94%~~2.59%

~~Market-based options~~
~~Expected dividend yield~~		—%
~~Expected volatility~~		~~60%~~
~~Expected life (in years)~~		10
~~Risk-free interest rate~~		~~2.84%~~

Restricted Stock ~~Award~~Units

~~The~~During 2018, the Company ~~has~~ granted restricted stock ~~awards~~units ("~~RSA"~~RSU") to certain employees. The Company measures the fair value of the restricted ~~awards~~units using the stock price onat the date of the grant. The restricted shares vest annually over a ~~four year~~four-year period beginning on the first anniversary of the award. ~~The stock compensation expense on this award~~A summary of RSU grants activity for the ~~nine~~three months ended ~~September 30, 2018 was $227,858. At September 30, 2018, there was $1,670,642 of total unrecognized compensation cost related to the RSA grants. This compensation cost~~March 31, 2019 is ~~expected to be recognized over the next 3.5 years.~~

~~The following table summarizes the Company's RSA grants for nine months ended September 30, 2018:~~as follows:

3023

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Non-vested RSAs Outstanding
Number of shares Weighted average grant date fair value
Non-vested RSAs at December 31, 2017 —
$ —
Granted 445,000
$ 4.27
Vested —
$ —
Forfeited —
$ —
Non-vested RSAs at September 30, 2018 445,000



	RSUs outstanding
	Number of shares		Weighted average grant date fair value
Non-vested RSUs at December 31, 2018	445,000		$	4.27
Vested	(100,000	)	$	4.24
Non-vested RSUs at March 31, 2019	345,000		$	4.27

The stock compensation expense related to RSUs for the three months ended March 31, 2019 was $118,656. At March 31, 2019, there was $1,433,329 of total unrecognized compensation cost related to the RSU grants. The compensation cost is expected to be recognized over a weighted-average period of 3.0 years.

Employee Stock Purchase Plan

On April 5, 2016, the Company’s board of directors approved the 2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s stockholders and became effective on May 18, 2016 (the “ESPP Effective Date”).

Under the ESPP, eligible employees can purchase common stock through accumulated payroll deductions at such times as are established by the administrator. The ESPP is administered by the compensation committee of the Company’s board of directors. Under the ESPP, eligible employees may purchase stock at 85% of the lower of the fair market value of a share of the Company’s common stock (i) on the first day of an offering period or (ii) on the purchase date. Eligible employees may contribute up to 15% of their earnings during the offering period. The Company’s board of directors may establish a maximum number of shares of the Company’s common stock that may be purchased by any participant, or all participants in the aggregate, during each offering or offering period. Under the ESPP, a participant may not accrue rights to purchase more than $25,000 of the fair market value of the Company’s common stock for each calendar year in which such right is outstanding.

Upon the ESPP Effective Date, the Company reserved and authorized up to 500,000 shares of common stock for issuance under the ESPP. On January 1 of each calendar year, the aggregate number of shares that may be issued under the ESPP shall automatically increase by a number equal to the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, and (ii) 500,000 shares of the Company’s common stock, or (iii) a number of shares of the Company’s common stock as determined by the Company’s board of directors or compensation committee. The number of shares increased by ~~94,341 and 312,669~~408,042 on January 1, ~~2017 and January 1, 2018, respectively.~~2019. As of ~~September 30, 2018, 806,390~~March 31, 2019, 1,192,025 shares remained available for issuance.

In accordance with the guidance in ASC 718-50, the ability to purchase shares of the Company’s common stock at the lower of the offering date price or the purchase date price represents an option and, therefore, the ESPP is a compensatory plan under this guidance. Accordingly, stock-based compensation expense is determined based on the option’s grant-date fair value and is recognized over the requisite service period of the option. The Company used the Black-Scholes valuation model and recognized stock-based compensation expense of ~~$31,788~~$35,298 for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, which is included in the table above with ~~all other~~ stock-based ~~compensation.~~compensation from stock options.

Subsequent Equity Grants

On April 1, 2019, the Company granted 1.8 million options with service-based vesting conditions at an exercise price of $6.22 per share to its employees as part of its annual stock option award. One-quarter of the shares subject to the stock option will vest on the first anniversary of the grant date and the remaining three-quarters of the shares will vest in equal monthly installments over the following 36 months.

Furthermore, on April 15, 2019, the Company granted 300,000 options with service-based vesting conditions at an exercise price of $5.17 to its newly appointed Executive Chairman of the Board. One-third of the shares subject to the stock option will vest on the first anniversary of the date of grant and the remaining two-thirds of the shares will vest in equal monthly installments over the following 24 months, based on continuous service.

Additionally, the Company agreed to grant the Executive Chairman of the Board an option to purchase 300,000 additional shares of Company common stock with market-based vesting conditions. The exercise price will equal the market value on the date of the grant with one-third of the shares vesting upon the Company's common stock closing at or above $8.00 per share for three consecutive days, one-third of the shares vesting upon the Company's stock closing at or above $10.50 per share for three consecutive days, and one-t

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hird of these shares vesting upon the Company's stock closing at or above $13.00 per share for three consecutive days. The Company also agreed to grant the Executive Chairman of the Board 250,000 RSUs, of which 50,000 shares will vest immediately on the grant date and the remainder will vest in three equal annual increments based on continued service. These two equity awards will be granted upon the Company having an adequate share reserve available for future issuance under the 2016 Amended Plan as a result of either an increase to the total share reserve subject to shareholder approval or as a result of an increase to the existing available share reserve due to future forfeitures and expirations.

11. Income Taxes

The provision for income taxes was ~~$52,412 and $92,076~~$166,358 for the three ~~and nine~~ months ended ~~September 30, 2018, respectively,~~March 31, 2019 and is comprised of several components including current year state income tax related to one of the Company's wholly owned subsidiaries and current year amortization of ~~tax deductible~~tax-deductible goodwill that gives rise to indefinite lived deferred tax liability impacting the amount of valuation allowance required. Additionally, discrete to the quarter, the Company recorded interest and penalties on the outstanding taxes payable to the IRS and ~~a benefit~~various state authorities.

12. Leases

Corporate Headquarter Lease

The Company identified one operating lease for ~~release of valuation allowance as a result~~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 ~~adjustments made to~~lease. The lease provides for a rent abatement for a period of 12 months following the ~~accounting for~~Company's date of occupancy. The lease has an initial term of 10 years from the ~~TRx Acquisition described earlier.~~

~~The Tax Cuts and Jobs Act of 2017~~ ("TCJA") was passed late in the fourth quarter of 2017, ongoing guidance and accounting interpretation are expected over the next year, and significant data and analysis is required to finalize amounts recorded pursuant to the TCJA. In accordance with Accounting Bulletin No. 118, Income Tax Accounting Implications for the Tax Act (“SAB 118"),date the Company ~~considers~~makes its first annual fixed rent payment, which is expected to occur in January 2020. The Company has the ~~accounting~~option to extend the lease two times, each for a period of five years, and may terminate the ~~deferred tax re-measurements and other items to be incomplete due to~~lease as of the ~~forthcoming guidance and its ongoing analysis~~sixth anniversary of ~~final year-end data and tax positions. SAB 118 allows~~the first annual fixed rent payment, upon the payment of a termination fee. As of the lease commencement date, it is not reasonably certain that the Company ~~to record provisional amounts during a measurement period not to extend beyond one year from~~will exercise the ~~enactment date. Since~~renewal periods or early terminate the ~~Tax Act was passed late in~~lease and therefore the ~~fourth quarter~~end date of ~~2017, ongoing guidance and~~the lease for accounting ~~interpretation are expected over~~purposes is January 31, 2030. The remaining term of the ~~next year, and significant data and analysis~~lease at March 31, 2019 is ~~required to finalize amounts recorded pursuant to the Tax Act, the Company considers the accounting for the deferred tax re-measurements and other~~10.83 years.

Supplemental balance sheet information related to the lease is as follows:



	Three Months Ended March 31,
	2019		2018

Property and equipment, net	$	737,658	$	—

Other long-term liabilities	$	1,189,277	$	—

The operating lease right-of-use asset is included in property and equipment and the lease liability is included in 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 three months ended March 31, 2019 and 2018 were as follows:



	Three Months Ended March 31,
	2019		2018

Operating lease cost*	$	54,606	$	47,559

*Includes short-term leases, which are immaterial.

Because the corporate headquarter lease provides for a 12-month lease abatement, the cash paid for amounts included in the measurement of lease liabilities is $0 for the three months ended March 31, 2019.

The following table shows a maturity analysis of the operating lease liability as of March 31, 2019:

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items to be incomplete due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The Company expects to complete its analysis within the measurement period in accordance with SAB 118. The Company did not change any provisional estimates recognized in 2017 in the current quarter. Any adjustments to these amounts will be recorded to current tax expense in 2018 when the analysis is complete.




	Undiscounted Cash Flows
April 1, 2019 through December 31, 2019	$	—
2020	155,815
2021	169,510
2022	173,748
2023	178,092
Thereafter	1,183,290
Total lease payments	$	1,860,455
Less implied interest	$	(671,178	)
Total	$	1,189,277

~~12.~~13. Commitments and Contingencies

Litigation

The Company is party in various contractual disputes, litigation, and potential claims arising in the ordinary course of business. The Company does not believe that the resolution of these matters will have a material adverse effect on our financial position or results of operations except as otherwise disclosed in this document. See ~~Note 7~~below for further discussion of the Lachlan legal arbitration.

Purchase obligations

The Company has unconditional purchase obligations as a result of recent acquisitions that include agreements to purchase goods that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable at any time without penalty. The unconditional purchase obligations outstanding as of ~~September 30, 2018~~March 31, 2019 include the following:

Lachlan Pharmaceuticals Minimum ~~Purchase~~Obligations and ~~Minimum Royalties Obligations~~Indemnity Receivable

As discussed in Note 7,5, in November 2017, the Company acquired TRx and its wholly-owned subsidiaries, including Zylera. The previous owners of TRx beneficially own more than 10% of our outstanding common stock. Zylera, which is now our wholly owned subsidiary, entered into an agreement with Lachlan Pharmaceuticals, an Irish company controlled by the previous owners of TRx (“Lachlan”), effective December 18, ~~2015.~~2015 (the "Lachlan Agreement"). Pursuant to the Lachlan Agreement, Lachlan named Zylera as its exclusive distributor of Ulesfia in the United States and agreed to supply Ulesfia to Zylera exclusively for marketing and sale in the United States.

The Lachlan Agreement requires Zylera to purchase a minimum of 20,000 units per year, or approximately $1.2 million worth of product, from Lachlan, unless and until there has been a “Market Change” involving a new successful competitive product. Zylera must pay Lachlan $58.84 per unit and handling fees that are equal to ~~$3.66~~$4.03 per unit of fully packaged Ulesfia in ~~2018~~2019 and escalate at a rate of 10% annually. The Lachlan Agreement also requires that Zylera make certain cumulative net sales milestone payments and royalty payments to Lachlan with a $3.0 million annual minimum payment unless and until there has been a “Market Change” involving a new successful competitive product. Lachlan is obligated to pay identical amounts to an unrelated third party from which it obtained rights to Ulesfia, with the payments ultimately flowing to Summers Laboratories, Inc. ("Summers Labs"). Because of the dispute described below, the Company has not made any payments to Lachlan under the Lachlan Agreement subsequent to the acquisition date.

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interest, as stipulated in the contract. The arbitration panel issued a final award on March 1, 2019 that dictated the final amount of reimbursable costs and interest as contemplated in the second interim ruling. The final award has no direct bearing on the Company as the Company was not a named defendant to the original claim by Summers Labs and a federal court denied Zylera's ability to be a counterclaimant in the matter. Furthermore, the Company is not subject to the guarantee or interest provisions identified in the second ruling as these elements of the contractual relationship were not passed down to the Company’s agreement with Lachlan. However, the Company has interpreted this ruling's impact on the Lachlan Agreement to mean that the minimum purchase obligation and minimum royalty provisions of the contract are active and due for any prior periods as well as going forward for any future periods.

The Company has recognized an $8.7 million liability for these minimum obligations in accrued liabilities as of March 31, 2019. Under the terms of the TRx Purchase Agreement, the former TRx owners are required to indemnify the Company for 100% of all pre-acquisition losses related this arbitration, including legal costs, and possible minimum payments in excess of $1 million. Furthermore, the former TRx owners are required to indemnify the Company for 50% of post-acquisition Ulesfia losses, which would include losses resulting from having to fund these minimum obligations. The Company has recorded an indemnity receivable of $5.2 million in other receivables as of March 31, 2019, which the Company believes is fully collectible. For the three months ended March 31, 2019, minimum obligations net of amounts recorded within the indemnity receivable of $0.6 million has been recorded in cost of product sales. If the Company fails to make these minimum obligations timely then the Lachlan Agreement may be terminated by Lachlan, in which case the Company would no longer be able to sell the Ulesfia product, but it would also not be subject to future minimum obligations. Lachlan has not requested payment for the minimum obligations.

The Company expects a successful competitive product will enter the market in early 2021 and therefore the future minimum purchase obligations and royalty payments are expected only through 2020.

As of ~~September 30, 2018,~~March 31, 2019, future minimum purchase obligations and future minimum royalty payments to Lachlan are as follows:




	Q4 2018*		2019*	2020*	2021	2022	Total*		Q2 2019 - Q4 2019*		2020*	2021	2022	Total*

Minimum Purchase Obligations	$	312,501	1,257,326	1,265,378	—		$2,835,205		$	942,994	1,265,378	—	—	$	2,208,372
Minimum Royalties	750,000		3,000,000	3,000,000	—		6,750,000		2,250,000		3,000,000	—	—	5,250,000
Total	$	1,062,501	4,257,326	4,265,378	—		$	9,585,205	$	3,192,994	4,265,378	—	—	$	7,458,372

*Per the TRx Purchase Agreement, the previous owners of TRx are required to indemnify the Company for 50% of post-acquisition Ulesfia losses, which include the future minimum purchase obligations and future minimum royalties disclosed above. Thus, the Company's future net payouts related to the Ulesfia product ~~will~~should be significantly reduced as a result of the indemnification.

Karbinal Royalty ~~Make Whole Payments~~

~~Table of Contents~~

Make-Whole Provision

As discussed in Note 7,5, on February 16, 2018, in connection with the acquisition of Avadel's pediatric products, the Company entered into a supply and distribution agreement with TRIS Pharma (the "Karbinal Agreement"). As part of this agreement, the Company has an annual minimum sales commitment, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units through 2033. The Company is required to pay TRIS a royalty ~~make whole~~make-whole payment of $30 for each unit under the 70,000 units annual minimum sales commitment through 2033. The annual payment is due in August of each year.

The Company paid $0.9 million to TRIS in August 2018 related to the make-whole payment for the commercial year ended July 31, 2018. As of March 31, 2019, the Company has accrued ~~$0.3~~$1.1 million in accrued expenses and other current liabilities related to the Karbinal royalty make whole ~~payment~~ for ~~each of~~the commercial year ending July 31, 2019. For the three ~~and nine~~ months ~~ending September 30, 2018.~~ended March 31, 2019, the make-whole provision of $0.4 million has been recorded in cost of product sales. The future royalty ~~make whole~~make-whole payments isare unknown as the amount owed to TRIS is dependent on the number of units sold.

~~Office Lease~~

~~In 2013, the Company entered into a lease~~Possible future milestone proceeds for corporate office space location in Baltimore, Maryland. The lease provided for three months of rent abatement and includes escalating rent payments. Rent expense is recognized on a straight‑line basis over the term of the lease. Rent expense under the lease amounted to approximately $44,000 and $132,000, respectively, for the three and nine months ended September 30, 2018 and 2017. The lease expires on December 31, 2018.out-licensed compound

~~During the third quarter of 2018,~~In August 2017, the Company ~~entered into~~sold its worldwide rights to CERC-501 to Janssen Pharmaceuticals, Inc. (“Janssen”) in exchange for initial gross proceeds of $25 million. There is a ~~lease for~~potential future $20 million regulatory milestone payment to the ~~Company's new corporate headquarters in Rockville, Maryland. The Company will be occupying the space for $161,671 in annual base rent, subject to annual 2.5% increases over the term~~

Table of Contents

Company. The terms of the ~~lease. The lease provides~~agreement provide that Janssen will assume ongoing clinical trials and be responsible for ~~a rent abatement, pursuant to which the Landlord will forego annual fixed rent~~any new development and ~~additional rent for a period~~commercialization 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, or approximately March 1, 2020, subject to early termination. The Company has the option to extend the lease two times, each for a period of five years, and may terminate the lease as of the sixth anniversary of the rent commencement date, upon the payment of a termination fee in the amount of $308,889. The lease has been classified as an operating lease. An immaterial amount of rent expense was recognized for this property for the three and nine months ended September 30, 2018.

~~As of September 30, 2018, minimum operating lease obligations for the new office space are as follows:~~

Minimum Lease Payments

2019 $ —
2020 138,094
2021 169,165
2022 173,394
2023 177,729
Thereafter 1,198,161
Total $ 1,856,543
CERC-501.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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. 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 as the development of product candidates or products, technology enhancements, possible changes in legislation, and other statements that are not historical. 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. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II – Item 1A, “Risk Factors,” as well as in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on ~~April 2, 2018~~March 18, 2019, as amended on ~~May 25, 2018 and September 7, 2018,~~April 23, 2019 and in our other filings with the SEC. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, ~~2017~~2018 appearing in our Annual Report on Form 10-K filed with the SEC on ~~April 2, 2018,~~ March 18, 2019, as amended on ~~May 25, 2018 and September 7, 2018.~~April 23, 2019.

Overview

~~We are~~Cerecor Inc. (the "Company" or “Cerecor”) is a fully integrated biopharmaceutical company with commercial operations and research and development capabilities. ~~We are~~The Company is building a ~~robust~~ pipeline of innovative therapies in neurology, pediatric healthcare, ~~neurology,~~ and orphan rare diseases. The Company's neurology pipeline is led by CERC-301, which ~~is currently in a~~recently received positive interim results from the Phase I safety study ~~for~~of Neurogenic Orthostatic Hypotension ("nOH"). The Company is also developing ~~three~~2 other neurological compounds, one of which is in preclinical testing and the other is in clinical ~~and preclinical stage compounds.~~ready stage. The Company's pediatric orphan rare disease pipeline is led by CERC-801, CERC-802, and CERC-803. All ~~three~~3 of these compounds are ~~preclinical~~ therapies for inherited metabolic disorders known as Congenital Disorders of Glycosylation ("CDGs") by means of substrate replacement therapy. The ~~FDA~~U.S. Food and Drug Administration ("FDA") has granted Rare Pediatric Disease designation ("RPDD") and Orphan Drug Designation ("ODD") to all ~~three~~3 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. ~~We expect to file Investigational New Drug ("IND") applications with the U.S. Food & Drug Administration ("FDA") for two programs in 2019. Furthermore, we plan~~The Company plans to leverage the 505(b)(2) NDA pathway for all ~~three~~3 compounds to accelerate development and approval. The Company is also in the process of developing ~~one~~1 other preclinical pediatric orphan rare disease ~~compound, CERC-913.~~compound.

~~Cerecor was incorporated in 2011, commenced operations in the second quarter of 2011 and completed an initial public offering in October 2015.~~ Recent Developments

Executive Leadership Changes

In ~~August 2017,~~April 2019, the Company ~~sold~~announced changes to its ~~worldwide rights to CERC-501 to Janssen Pharmaceuticals, Inc. (“Janssen”) in exchange for initial gross proceeds of $25 million, of which $3.75 million~~executive leadership team. Effective April 15, 2019, Dr. Simon Pedder, Ph.D., was ~~deposited into a twelve-month escrow. The Company collected the full escrow in August 2018. Additionally, there is a potential future $20 million regulatory milestone payment. The terms~~appointed Executive Chairman of the ~~agreement provide that Janssen will assume ongoing clinical trials~~Board. Additionally, Patrick Crutcher was promoted to Chief Strategy Officer. Peter Greenleaf resigned from his position as Chief Executive Officer role and ~~be responsible for any new development and commercialization~~remains on the Board of ~~CERC-501.~~Directors.

~~On November 17, 2017, the Company acquired TRx Pharmaceuticals, LLC (“TRx”)~~Research and ~~its wholly-owned subsidiaries (see "TRx Acquisition" in Note 4 for a description of the transaction).~~Development Updates

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On February 16, 2018, Cerecor purchased and acquired all rights to Avadel Pharmaceuticals PLC’s (“Avadel”) marketed pediatric products (the “Acquired Products”) for the assumption of certain of Avadel's financial obligations (see "Avadel Pediatric Products Acquisition" in Note 4 for a description of the transaction).

~~On September 25, 2018,~~In April 2019, the Company ~~acquired Ichorion Therapeutics, Inc., a privately-held biopharmaceutical company focused on developing treatments and increasing awareness~~received positive interim results from the Phase 1 study of ~~inherited metabolic disorders known as CDGs (see "Ichorion Asset Acquisition" in Note 4 for a description of the transaction).~~

~~Our portfolio of product candidates is summarized below:~~

~~CERC-301:~~ ~~Orphan Neurological Indication~~. 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 neurologic adaptation. We believe CERC‑301 selectively blocks the NMDA receptor subunit 2B, or NR2B (also called GluN2B). Given its specific mechanism of action and demonstrated tolerability profile, we believe CERC-301 may be well suited to address unmet medical needs in neurologic indications. We initiated a Phase I study in 2018 for neurogenic orthostatic hypotension (“nOH”), a condition that is part of a larger category called orthostatic hypotension (OH), which is also known as postural hypotension. nOH is caused by dysfunction in the autonomic nervous system and causes people to feel faint when they stand or sit up. We will continue to explore the use of CERC-301 in orphan neurologic conditions in preclinical and clinical studies.

~~CERC-611:~~ ~~Adjunctive Treatment of Partial-Onset Seizures in Epilepsy.~~CERC-611 is a potent and selective antagonist of transmembrane alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid ("AMPA") receptor regulatory protein (“TARP”)-ã8-dependent AMPA receptor in preclinical development. TARPs are a recently discovered family of proteins that have been found to associate with, and modulate the activity of, AMPA receptors. TARP y8-dependent AMPA receptors are localized primarily in the hippocampus, a region of the brain with importance in complex partial seizures and particularly relevant to seizure origination and/or propagation. We believe CERC-611 is the first drug candidate to selectively target and functionally block region-specific AMPA receptors after oral dosing, which we believe may improve the efficacy and side effect profile of CERC-611 over current anti-epileptics. Research also suggests that selectively targeting individual TARPs may enable selective modulation of specific brain circuits without globally affecting synaptic transmission. The clinical strategy for CERC-611 is currently being reevaluated due to a partial clinical hold. The exposure limits imposed by the agency currently allows for subtherapeutic dosing. We are investigating opportunities to broaden the exposure limits. We intend to develop CERC-611 as an adjunctive therapy for the treatment of ~~partial-onset seizures~~Neurogenic Orthostatic Hypotension in ~~patients with epilepsy.~~

~~CERC-406 and CERC-425:~~ ~~Adjunctive Treatment of Parkinson's Disease.~~ ~~CERC-406 and CERC-425 are preclinical candidates from our proprietary platform of compounds that inhibit catechol-O-methyltransferase, or COMT,~~Parkinson’s disease patients. All doses showed clinically meaningful increases in blood pressure over placebo, within the ~~brain,~~six-hour post-dose timepoints. The purpose of the Phase 1 study is to evaluate the single-dose safety, tolerability and pharmacokinetics of CERC-301 in the relevant patient population, as well as explore the effects on blood pressure in nOH patients during an orthostatic challenge at escalating dose levels. The interim results demonstrate a rapid, robust increase in systolic blood pressure (SBP) from baseline to six hours. This early and sustained effect could differentiate CERC-301 from existing nOH treatments. Additionally, all doses tested were safe and well tolerated with no serious adverse events reported. Additionally, in early 2019, a patent was issued for CERC-301, which ~~we refer~~provides Cerecor with intellectual property rights to ~~as our COMTi platform. We believe they may have the potential to be developed for the adjunct treatment of Parkinson’s disease.~~

~~CERC-800's (CERC-801, CERC-802, and CERC-803):~~ ~~Substrate Replacement Therapies for CDGs.~~CERC-801, CERC-802 and CERC-803 represent genetically-targeted, small molecule, substrate replacement therapies with established therapeutic utility for the treatment of CDGs. CDGs are a rapidly expanding group of rare Inborn Errors of Metabolism (IEMs) due to defects in glycosylation. Glycosylation is the process by which carbohydrate complexes are created, modified and attached to proteins and lipids, creating glycoconjugates that are essential for cell structure and function in all tissues and organs. CDG is caused by a specific inherited mutation and more than 100 CDGs have been identified to date. CDGs typically present in infancy and can be associated with a broad spectrum of symptoms that include severe, disabling or life-threatening cases. Oral administration of CERC-801, CERC-802 or CERC-803 can replenish critical metabolic intermediates that are reduced or absent due to genetic mutation, overcoming single enzyme defects to support glycoprotein synthesis, maintenance and function. CERC-801 utilizes D-galactose as the active pharmaceutical ingredient to treat Phosphoglucomutase 1 (PGM1) Deficiency; CERC-802 utilizes D-mannose as the active pharmaceutical ingredient to treat Mannose-Phosphate Isomerase (MPI) Deficiency; and CERC-803 utilizes L-fucose as the active pharmaceutical ingredient to treat Leukocyte Adhesion Deficiency Type II (LADII).

CERC-301 until 2035

The FDA ~~has~~ granted ~~Rare Pediatric Disease designation~~ODD to CERC-801, CERC-802, and ~~CERC-803. Under~~CERC-803 in early 2019. There are numerous benefits associated with receipt of ODD, which include 7-year marketing exclusivity (upon approval) in the ~~FDA’s~~United States, tax credits (up to 25% of clinical development costs) and waiver of Prescription Drug User Fee Act application fees (filing fees). Additionally, CERC-801, CERC-802, and CERC-803 were granted RPDD in 2018. RPDD provides eligibility for receipt of a PRV ~~program,~~ upon ~~the~~ approval of an NDA.

In early 2019, the Company received a ~~NDA~~may proceed letter related to an Investigational New Drug ("IND") application previously submitted to the FDA for CERC-801. Additionally, the FDA designated Fast Track Designation for CERC-801. Fast Track Designation is granted to drugs being developed for the treatment of ~~a rare pediatric disease,~~serious or life-threatening diseases or conditions where there is an unmet medical need. The purpose of the ~~sponsor~~Fast Track Designation provision is to help facilitate development and expedite the review of ~~such application would~~drugs to treat serious and life-threatening conditions so that an approved product can reach the market expeditiously.

Furthermore, in April 2019, the Company announced positive Phase 1 safety data for CERC-801 in healthy volunteers. The single-center, US-based safety, tolerability and pharmacokinetic study was an open-label, randomized, single-dose, four-way crossover study in 16 healthy adult volunteers. CERC-801 was shown to 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. We expect to file IND applicationssafe and well-tolerated at the studied doses, with ~~the FDA for two programs in 2019. Furthermore, we plan~~no serious adverse events. CERC‑801 related adverse events were mild and transient. Cerecor seeks to leverage ~~the 505(b)(2) NDA pathway for all three compounds~~existing clinical and nonclinical data in conjunction with sponsor-initiated studies, such as this Phase 1 study, to accelerate development and ~~approval.~~approval of CERC-801 via the 505(b)(2) pathway.

Recent Financing

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"), our largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company from the underwriter at the public price. Cerecor director Steven J. Boyd is Armistice's Chief Investment Officer. The gross proceeds to the Company, before deducting underwriting discounts and commissions and offering expenses, were approximately $10.0 million. The net proceeds were approximately $9.0 million.

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~~CERC-913: ProTide Nucleotide for Mitochondrial Disorder.~~ 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-913 is in preclinical development and we intend to file an IND in 2020.

Our Strategy

Our strategy for increasing shareholder value includes:

~~Growing sales~~Advancing our pipeline of ~~the existing commercial products in our portfolio, including by identifying~~compounds through development and ~~investing in growth opportunities such as new treatment indications~~to regulatory approval;

Pursuing targeted, differentiated preclinical and ~~new geographic markets;~~clinical stage product candidates;

Acquiring or licensing rights to clinically meaningful and differentiated products that are already on the market for pediatric use or in late-stage development for pediatric ~~indications that are near market launch;~~

~~Pursuing targeted, differentiated preclinical~~indications; and ~~clinical stage product candidates for rare disorders or orphan diseases; and~~

~~Advancing our pipeline of compounds through development and to regulatory approval.~~

For the nine months ended September 30, 2018, the Company generated a net loss of $34.5 million and negative cash flows from operations of $1.2 million. The Company applies a disciplined decision-making methodology as it evaluates the optimal allocationGrowing sales of the ~~Company's resources between~~existing commercial products in our portfolio, including by identifying and investing in ~~the Company's current commercial product line, the Company's development portfolio~~growth opportunities such as new indications and ~~acquisitions or in-licensing of~~ new ~~assets in order to meet its cash flow needs. As of September 30, 2018, Cerecor had an accumulated deficit of $92.7 million and a balance of $6.8 million in cash and cash equivalents.~~ geographic markets.

Product Pipeline Assets

The Company plans to use this cash and the anticipated positive net cash flows from the Company's existing product sales to offset costs related to its pediatric rare disease preclinical programs, clinical development forfollowing table summarizes key information about our neurology programs, business development, costs associated with its organizational infrastructure and debt principal and interest payments. We expect to continue to incur significant expenses and operating losses for the immediate future. Our ability to achieve and maintain profitability in the future is dependent on the development, regulatory approval and commercialization of our new product candidates and ~~achieving a level of revenues from our existing~~further detail regarding each product ~~sales adequate to support our cost structure.~~candidate follows:

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

The Company believes it will require additional financing to continue to execute its clinical development strategy and/or fund future operations. The Company plans to meet its capital requirements through operating cash flows from product salesfollowing table summarizes our revenue for the three months ended March 31, 2019 and some combination of equity or debt financings, collaborations, out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution or licensing arrangements or the sale of current or future assets. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible or suspend or curtail planned programs. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates.2018



	Three Months Ended March 31,
	2019		2018

	(in thousands)
Product revenue, net	$	5,411	$	4,260
Sales force revenue	$	—	$	223

Our plans to aggressively develop our pipeline, including our recently acquired pediatric rare disease preclinical programs, will require substantial cash inflows in excess of what we anticipate our current commercial operations to generate. We expect 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 equity, which could be completed with the Company's majority owner, if necessary, and/or through the out-licensing or sale of current or future assets on or before May 2019, will enable us to fund our operating expenses, capital expenditure requirements, and other non-operating cash payments such as principal payments on our outstanding debt balances through November 2019.Product revenue, net

~~Recent Developments~~

~~Ichorion Asset Acquisition~~

On September 24, 2018, we entered into a merger agreement in which we acquired Ichorion Therapeutics, Inc. The consideration for the merger at closing consisted of 5.8 million shares of the Company’s Common Stock, par value $0.001 per share, as adjusted for Estimated Working Capital. The shares are subject to a lockup date through December 31, 2019.

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~~Consideration for the Ichorion Asset Acquisition included certain development milestones in the future worth up to an additional $15~~Net product revenue increased $1.2 million ~~payable either in shares of Company Common Stock or in cash, at the election of the Company~~

~~Substantially all of the value of Ichorion was related to one group of similar identifiable assets which was the IPR&D~~ for the three ~~preclinical therapies for CDGs (CERC-801, CERC-802 and CERC-803) and~~months ended March 31, 2019 as such the Company accounted for this transaction as an asset acquisition. The Ichorion Asset Acquisition aligns with our strategy to develop treatments for pediatric orphan rare diseases. All three compounds are for therapies for inherited metabolic disorders known as CDGs by means of substrate replacement therapy and are preclinical. The FDA has granted Rare Pediatric Disease designation to all three compounds. Under the FDA’s PRV program, upon the approval of a 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. We expect to file IND applications with the FDA for two programs in 2019. Furthermore, we plan to leverage the 505(b)(2) NDA pathway for all three compounds to accelerate development and approval. The Company is in the process of developing one other preclinical molecule for a pediatric orphan rare disease.

~~See Item 1, Note 4~~compared to the ~~unaudited condensed consolidated financial statements~~same period in ~~this Quarterly Report on Form 10-Q for more information on~~2018. The increase was due to favorable product mix and unit growth driven by the ~~Ichorion Asset Acquisition.~~

~~Avadel Pediatric Products Acquisition~~

On February 16, 2018, the Company purchased and acquired all rights to Avadel Pharmaceuticals PLC’s (“Avadel”) marketed pediatric products (the “Avadel Products”) for the assumption of certain of Avadel's financial obligations to Deerfield CSF, LLC, which includes a loan with a face value of $15 million due in January 2021 and its related interest paymentssales force expansion as well as due to a ~~15% annual royalty on net~~full quarter of sales of products that were acquired during the ~~Avadel Products through February 2026 (the “Avadel Acquisition”). The Avadel Products consist of Karbinal™ ER, AcipHex® Sprinkle™, Cefaclor for Oral Suspension, and Flexichamber™.~~

~~See Item 1, Note 4 to the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q for more information on the Avadel Pediatric Products Acquisition.~~prior year quarter.

~~TRx Acquisition~~Sales force revenue

On November 17, 2017, the Company acquired TRx, including its wholly-owned subsidiary Zylera Pharmaceuticals, LLC and its franchise of commercial medications led by Poly-Vi-Flor® (multivitamin and fluoride supplement tablet, chewable), Tri-Vi-Flor® (multivitamin and fluoride supplement suspension/drops), Millipred®, Veripred® and Ulesfia®. Zylera Pharma Corp, and Princeton, LLC. Under the termsAs part of the ~~transaction, the Company paid $18.9 million~~acquisition of TRx in cash and $8.5 million in Cerecor common stock. TRx shareholders will be eligible to receive up to an additional $7 million in contingent payments upon achievement of certain commercial and regulatory milestones.

~~Lachlan Pharmaceuticals~~

In November 2017, the Company acquired ~~TRx~~a sales and ~~its wholly-owned subsidiaries, including Zylera.~~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. The ~~previous owners~~Company was also entitled to a share of ~~TRx beneficially own more than 10%~~PAI's profits. For the three months ended March 31, 2018, sales force revenue was $0.2 million. The PAI contract was canceled during the second quarter of ~~our outstanding common stock. Zylera, which~~2018 and therefore there is ~~now our wholly owned subsidiary, entered into~~no sales force revenue for the ~~First Amended and Restated Distribution Agreement (the “Lachlan Agreement”) with Lachlan Pharmaceuticals, an Irish company controlled~~three months ended March 31, 2019.

Cost of product sales

Cost of product sales was $1.9 million for the three months ended March 31, 2019, compared to $0.9 million for the three months ended March 31, 2018. The increase of $1.0 million for the three months ended March 31, 2019 compared to the same period in 2018 is driven by the ~~previous owners of TRx (“Lachlan”), effective December 18, 2015. Pursuant to the Lachlan Agreement, Lachlan named Zylera as its exclusive distributor of Ulesfia~~increase in ~~the United States and agreed to supply Ulesfia to Zylera exclusively for marketing and sale in the United States.~~

~~Pursuant to the Lachlan Agreement, Zylera is obligated to purchase a minimum of 20,000 units per year, or approximately $1.2 million worth of~~net product from Lachlan, subject to certain termination rights. Zylera must pay Lachlan $58.84 per unit and handling fees that are equal to $3.66 per unit of fully packaged Ulesfia in 2018, and escalate at a rate of 10% annually,revenue as well as ~~reimburse~~ Lachlan ~~for all product liability insurance fees incurred by Lachlan. The Lachlan Agreement also requires that Zylera make certain cumulative net sales milestone payments~~Pharmaceuticals' minimum purchase and royalty ~~payments~~obligations that arose during the third quarter of 2018 as further discussed in Note 13 to ~~Lachlan with a $3~~the accompanying unaudited financial statements appearing above.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2019 and 2018:



	Three Months Ended March 31,
	2019		2018

	(in thousands)
Preclinical expenses	$	879	$	887
Clinical expenses	1,590		341
CMC expenses	435		107
Internal expenses not allocated to programs:
Salaries, benefits and related costs	435		240
Stock-based compensation expense	57		11
Other	5		64
	$	3,401	$	1,650

Research and development expenses increased $1.8 million ~~annual minimum payment unless~~for the three months ended March 31, 2019 compared to the same period in 2018. The overall increase is driven by an increase in research and ~~until there has been a “Market Change” involving a new successful competitive product. Lachlan is obligated~~development activities during the current year as the Company continues to ~~pay identical amounts~~develop its pipeline of assets. Clinical expenses increased $1.2 million primarily due to increased activities related to the CERC-301 clinical study in nOH during the first quarter of 2019 and activities related to CERC-801, CERC-802, and CERC-803, which were acquired as part of the Ichorion Acquisition in September 2018. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $0.3 million for the three months ended March 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 $0.2 million compared to the same period in 2018 due to an ~~unrelated third party from which it obtained rights to Ulesfia, with~~increase in headcount and salary-related costs.

General and Administrative Expenses

The following table summarizes our general and administrative expenses for the payments ultimately going to Summers Laboratories, Inc. (“Summers Labs”). Because of the dispute described below, the Company has not made any payments to Lachlan under the Lachlan Agreement subsequent to the acquisition date.

~~On December 10, 2016, Zylera informed Lachlan that a Market Change had occurred due to the introduction of Arbor Pharmaceuticals' lice product, Sklice®. On June 5, 2017, Lachlan~~three months ended March 31, 2019 and ~~Zylera entered into joint legal representation along with~~2018:

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	Three Months Ended March 31,
	2019		2018

	(in thousands)
Salaries, benefits, and related costs	$	1,230	$	617
Legal, consulting, and other professional expenses	887		1,986
Stock-based compensation expense	469		207
Other	131		109
	$	2,717	$	2,919

General and administrative expenses decreased $0.2 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The overall decrease was driven by a $1.1 million decrease in legal, consulting, and other ~~unrelated third parties~~professional expenses, partially offset by a $0.6 million increase in ~~negotiation~~salaries, benefits, and ~~arbitration of~~related costs and a ~~dispute with Summers Labs regarding~~$0.3 million increase in stock-based compensation expense.

Legal, consulting, and other professional expenses decreased $1.1 million as compared to the ~~existence of~~same period in 2018 mainly due to a ~~Market Change and~~substantial decrease in consulting fees. The consulting costs incurred in the ~~concomitant obligations~~prior year were related to the integration of the ~~parties. The arbitration panel issued an interim ruling on October 23, 2018 that no market change had occurred up to~~acquisitions of TRx and including the date of the hearing. The issuance of the final award is scheduled for December 4, 2018. The final award has no direct bearing on the Company as the Company was not a named defendant to the original claim by Summers Labs and a federal court denied Zylera's ability to be a counterclaimant in the matter. However, the Company has interpreted this ruling's impact on the Lachlan agreement to mean that a market change has not occurred and the minimum purchase obligation and minimum royalty provisions of the contract are active and due for any prior periods as well as going forward for any future periods.Avadel's pediatric products. The Company has ~~recognized a $6.9~~since increased corporate headcount and therefore utilizes less consulting services to meet accounting and reporting requirements. Additionally, $0.4 million ~~liability for these minimum obligations~~of litigation fees incurred in ~~accrued liabilities as of September 30, 2018.~~the three months ended March 31, 2018 relate to arbitration and legal costs related to Lachlan Pharmaceuticals (explained further in Note 13 to the accompanying unaudited financial statements appearing above). Under the terms of the TRx Purchase Agreement, the former TRx owners are required to indemnify the Company for 100% of all pre-acquisition losses related this arbitration, including legal costs, and possible minimum payments in excess of $1$1.0 million. ~~Furthermore, the former TRx owners are required to indemnify the Company for 50% of post-acquisition Ulesfia losses, which would include losses resulting from having to fund these minimum obligations.~~ The ~~Company has recorded an indemnity receivable of $6.1~~$1.0 million in other receivables as of September 30, 2018, which the Company believes is fully collectible. The post-acquisition minimum obligations net of amounts recorded within the indemnity receivable has been recorded in cost of goods sold for the three and nine months ended September 30, 2018. If the Company fails to make these minimum obligations timely then the Lachlan Agreement may be terminated by Lachlan, in which case the Company would no longer be able to sell the Ulesfia product, but it would also not be subject to future minimum obligations.

~~Components of Operating Results~~

~~License, Other and Grant Revenue~~

Prior to the acquisitions of TRx and Avadel's pediatric products, the Company derived revenue primarily from the sale of CERC-501 to Janssen Pharmaceuticals, Inc. ("Janssen") in August 2017 and research grants from the National Institutes of Health.

In April 2016, the Company received a research and development grant from the National Institute on Drug Abuse, or NIDA, at the National Institutes of Health to provide additional resources for the period from May 2016 through April 2017 for a Phase 2 clinical trial for CERC-501. Additionally, in July 2016, the Company received a research and development grant from the National Institute on Alcohol Abuse and Alcoholism, or NIAAA, at the National Institutes of Health to provide additional resources for the period of July 2016 through December 2017 to progress the development of CERC-501 for the treatment of alcohol use disorder. The Company recognizes revenue under grants in earnings on a systemic basis in the period the related expenditures for which the grants are intended to compensate are incurred. Grant revenues are derived from government grants that support the Company’s efforts on specific research projects. The Company determined that the government agencies providing grants to the Company are not our customers.

~~Product Revenue, Net~~

The Company generates substantially all of our revenue from sales of prescription pharmaceutical products to our customers and have identified a single product delivery performance obligation, which is the provision of prescription pharmaceutical products to our 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 since the timing from when the Company delivers product to when the customers pay for the product is less than one year and the customers do not pay for product in advance of the transfer of the product.

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~~consideration amount received and the Company will re-assess these estimates and judgments each reporting period to adjust accordingly.~~

~~Returns and Allowances~~

Consistent with industry practice, the Company maintains a return policy that allows customers to return product within a specified period both subsequent to and, in certain cases, prior to the product's expiration date. Our 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 our 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. If the Company becomes aware of an increase in the level of inventory of its products in the distribution channel, the Company considers the reasons for the increase to determine whether the Company believes the increase is temporary or other-than-temporary. Increases in inventory levels assessed as temporary will not result in an adjustment to the provision for returns and allowances. Conversely, other-than-temporary increases in inventory levels may be an indication that future product returns could be higher than originally anticipated and, accordingly, the Company may need to adjust the provision for returns and allowances. Some of the factors that may be an indication that an increase in inventory levels will be other-than-temporary include:

~~declining sales trends based on prescription demand;~~

~~regulatory approvals that could shorten the shelf life of our products, which could result in a period of higher returns related to older product still in the distribution channel;~~

~~introduction of new product or generic competition; and~~

~~increasing price competition from generic competitors.~~

~~Distribution Fees and Rebates~~

Consistent with pharmaceutical industry practices, the Company establishes contracts with wholesalers that provide for Distribution Service Fees (“DSA fees”). Settlement of DSA fees may generally occur on a monthly or quarterly basis based on net sales for the period. DSA fee accruals are based on contractual fees to be paid to the wholesaler distributors applied to purchases of our products.

The Company is also 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 us age, contract performance and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, however 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, our 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, our estimates could differ from actual experience.

~~Chargebacks and Sales Discounts~~

Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Sales discounts accruals are based on payment terms extended to customers.

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~~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 also received a matching fee payment for each month of the term of the Marketing Agreement if certain provisions calculated in accordance with the terms and inputs set forth in the Marketing Agreement are met. Marketing fees and any matching payments are recognized as sale force revenue when all the performance obligations have been satisfied, as invoiced on a month basis. This contractthreshold was ~~terminated~~met in ~~April 2018.~~

~~Accounting Policy Elections~~

~~The Company~~ ~~elected the following practical expedients in applying Topic 606 to its identified revenue streams:~~

~~Modified retrospective approach - the Company applied Topic 606 only to contracts with customers which were not completed at the date of initial application, January 1, 2018.~~

Significant financing component - the Company did 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 has not made significant changes to the judgments made in applying ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ ~~(Topic 606) ("ASU 2014-09") for the three and nine months ended September 30, 2018.~~

~~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 and (v) accruals for minimum sale obligations.

~~Research and Development Expenses~~

Our research and development expenses consist primarily of costs incurred manufacturing, developing, testing and seeking marketing approval for our product candidates. These costs include both external costs, which are study‑specific costs, and internal research and development costs, which are not directly allocated to our product candidates.

~~External costs include:~~

expenses incurred under agreements with third‑party contract research organizations and investigative sites that conduct our clinical trials, preclinical studies, as well as manufacturing, quality and regulatory activities;

~~payments made to contract manufacturers for drug substance and acquiring, developing and manufacturing clinical trial materials;~~

~~payments related to acquisitions of our product candidates and preclinical platform; and~~

~~milestone payments, and fees associated with the prosecution and maintenance of patents.~~

~~Internal costs include:~~

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~~personnel‑related expenses, including salaries, benefits and stock‑based compensation expense and travel expenses;~~

consulting costs related to our internal research and development programs; allocated facilities, depreciation and other expenses, which include rent and utilities, as well as other supplies and licensing fees;

~~software licensing;~~

~~questionnaire costs; and~~

~~product liability insurance.~~

Research and development costs are expensed as incurred. The Company records costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by our vendors.

The Company tracks external costs by program and subsequently by product candidate once a product candidate has been selected for development. Product candidates in later stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to the increased size and duration of the clinical trials.

~~As of September 30, 2018, the Company had five full-time employees who were primarily engaged in research and development.~~

~~Acquired In-Process Research and Development Expenses~~

~~General and Administrative Expenses~~

General and administrative expenses consist primarily of professional fees, patent costs and salaries, benefits and related costs for executive 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, integration and general corporate expenses.

~~Sales and Marketing Expenses~~

Sales and marketing expenses consist primarily of professional fees, advertising and marketing cost and salaries, contractual costs and benefits and related costs for sales and sales support personnel, including stock‑based compensation and travel expenses.

~~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 marketing expense as all amortization expense is included within its own standalone line in operating expenses in the Company's condensed consolidated statements of operations.

~~Impairment of Intangible Assets~~

Impairment of intangible assets includes any impairment charges related to the Company's acquired intangible assets. The Company received written notice to terminate the PAI Sales and Marketing Agreement in the second quarter of 2018. An impairment charge was recognized in the nine months ended September 30, 2018 in the amount of $1.9 million, representing the remaining net book value of the PAI sales and marketing agreement intangible asset.

~~Change in Contingent Consideration, Fair Value of Warrant Liability and Unit Purchase Option Liability~~

In 2014, the Company issued warrants to purchase 625,208 shares of Series B convertible preferred stock. Upon the closing of our initial public offering, or IPO, in October 2015 these warrants became warrants to purchase 22,328 shares of common stock, in accordance with their terms. These warrants represent a freestanding financial instrument that is indexed to an obligation, which the Company refers to as the Warrant Liability. These warrants are classified as a liability at fair value. This liability is remeasured at each balance sheet date and the change in fair value is recorded within our statement of operations. The warrants expire in October 2020.

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As part of our IPO, the underwriter received a unit purchase option, or UPO, to purchase up to 40,000 units, whereby a unit is comprised of one share of our common stock, one Class A warrant to purchase one share of our common stock and one Class B warrant to purchase one-half share of our common stock. The Class B warrants expired in April 2017. The UPO is classified as a liability at its respective fair value. This liability is remeasured at each balance sheet date and the change in fair value is recorded within our statement of operations. The UPO expires in October 2020.

The Company’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 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 liability is remeasured at current fair value with changes recorded in the condensed consolidated statements of operations. Changes in any of the inputs may result in a significantly different fair value adjustment.

~~Interest Expense, net~~

~~Net interest expense is primarily related to interest expense pursuant to the terms of our debt obligation assumed on February 16, 2018 as described in Note 8. Deerfield Obligation.~~

~~Critical Accounting Policies and Significant Judgments and Estimates~~

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, the Company bases our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions, including those related to clinical and preclinical trial expenses and stock‑based compensation. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to our critical accounting policies from those disclosed in our 2017 Annual Report on Form 10-K except for the adoption of new accounting standards, including the new standard related to revenue recognition, as described in Note 2 to the interim unaudited condensed consolidated financial statements. For further details regarding revenues and cash flows arising from contracts with customers, refer to Note 2 to the interim unaudited condensed consolidated financial statements.

~~Non-GAAP Financial Metrics~~

In addition to disclosing financial results that are determined in accordance with GAAP, the Company also uses the following non-GAAP financial metrics to understand and evaluate our operating performance:

EBITDA, which the Company defines as GAAP net income adjusted for (i) taxes, (ii) interest expense, (iii) interest income, (iv) amortization of intangible assets, (v) depreciation, and (vi) inventory step-up adjustment recognized in earnings;

Adjusted EBITDA, which the Company defines as EBITDA as defined above further adjusted for (i) share-based compensation expense, (ii) change in fair value of contingent consideration, warrant liability and unit purchase option liability, (iii) restructuring costs, (iv) acquisition and integration-related expenses, (v) impairment of intangible assets, (vi) arbitration costs related to the Lachlan transaction which is further described in Item 1 Note 7, (vii) acquired IPR&D, which is further described in Item 1 Note 4, and (viii) sale or out-licensing of Company assets.

~~The Company updated our definition of Adjusted EBITDA during~~ the third quarter of 2018 and therefore the minimal legal costs related to ~~adjust for acquired IPR&D and sale or out-licensing of Company assets. These updates did not impact previous presentation of prior periods.~~

The Company believes that providing this additional information is useful to the reader to better assess and understand our operating performance, primarily because management typically monitors the business adjusted for these itemsLachlan Pharmaceuticals incurred in addition to GAAP results. These non-GAAP financial metrics should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. Our definition of these non-GAAP metrics may differ from similarly titled metrics used by others. The Company views these non-GAAP financial metrics as a means to facilitate our financial and operational

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decision-making, including evaluation of our historical operating results and comparison to competitors’ operating results. These non-GAAP financial metrics reflect an additional way of viewing aspects of our operations that, when viewed with GAAP results may provide a more complete understanding of factors and trends affecting our business. The determination of the amounts that are adjusted from these non-GAAP financial metrics is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts. Because non-GAAP financial metrics adjust for the effect of items that will increase or decrease our reported results of operations, we strongly encourage investors to review our consolidated financial statements and periodic reports in their entirety.

The following tables present reconciliations of these non-GAAP financial metrics to the most directly comparable GAAP financial measure for the three and nine months ended September 30, 2018 and 2017:

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017

(in thousands)
GAAP Net (loss) income $ (24,604 ) $ 18,721
$ (34,494 )
$ 14,961
Non-GAAP Adjustments:

Income tax expense 52
3,230
92

3,230
Interest expense (income), net 235
(29 ) 578

54
Amortization of intangible assets 1,065
—
3,316

—
Depreciation 5
5
18

17
Inventory step-up adjustment recorded in earnings 85
—
262

—
EBITDA $ (23,162 ) $ 21,927
$ (30,228 )
$ 18,262
Non-GAAP Adjustments:

Share based compensation 945
264
1,796

852
Change in fair value of contingent consideration, warrant liability and unit purchase option liability 88
—
383

2
Restructuring costs 320
400
533

400
Acquisition and integration related expenses —
—
741

—
Impairment of intangible assets 160
—
1,862
—
Lachlan legal arbitration costs (1,038 ) —
(178 )
—
Acquired in-process research and development 18,724
—
18,724
—
Sale or out-licensing of Company assets —
(25,000 ) —
(25,000 )
Total Non-GAAP Adjustments 19,199
(24,336 ) 23,861

(23,746 )
Adjusted EBITDA $ (3,963 ) $ (2,409 ) $ (6,367 )
$ (5,484 )

~~Results of Operations~~

~~Comparison of the Three Months Ended September 30, 2018 and 2017~~

~~The following table summarizes our revenue for~~ the three months ended ~~September 30, 2018 and 2017:~~

Three Months Ended September 30,
2018 2017

(in thousands)
Product revenue, net $ 4,075
$ —
License and other revenue $ —
$ 25,000
Grant revenue $ —
$ 38
$ 4,075
$ 25,038

~~Product Revenue, net~~

~~Table~~March 31, 2019 were offset by a corresponding receivable instead of ~~Contents~~

Product revenue, net was $4.1 million for the three months ended September 30, 2018, and represents revenues from the sale of our pediatric products following the acquisition of TRx in November 2017 and Avadel's pediatric products in February 2018. There were no product revenues reported for the three months ended September 30, 2017.

~~License and Other Revenue~~

There was no license and other revenue for the three months ended September 30, 2018, compared to $25.0 million for the three months ended September 30, 2017. In the third quarter of 2017, the Company sold CERC-501 to Janssen in exchange for initial gross proceeds of $25.0 million.

~~Grant Revenue~~

There was no grant revenue for the three months ended September 30, 2018, compared to $0.04 million for the three months ended September 30, 2017. Our grant revenues related to CERC-501 and were dependent upon the timing and progress of the underlying studies and development activities. The grant revenue and study costs related to these grants were discontinued with the sale of CERC-501 to Janssen in August of 2017.

~~Cost of Product Sales~~

Cost of product sales was $3.1 million for the three months ended September 30, 2018 and relate to the cost of product sales from our recently acquired pediatric products. There are no costs of product sales reported for the three months ended September 30, 2017.

~~Research and Development Expenses~~

~~The following table summarizes our research and development expenses for the three months ended September 30, 2018 and 2017:~~

Three Months Ended September 30,
2018 2017

(in thousands)
Preclinical expenses $ 120
$ 277
Clinical expenses 473
143
CMC expenses 18
136
Internal expenses not allocated to programs:

Salaries, benefits and related costs 324
170
Stock-based compensation expense 32
198
Other 81
41
$ 1,048
$ 965

Research and development expenses were $1.0 million for the three months ended September 30, 2018, increased by $0.1 million compared to the three months ended September 30, 2017. Clinical costs increased by $0.3 million from the prior year period primarily due to activities for our CERC-301 clinical study in nOH. Salaries, benefits and related costs increased $0.2 million from the previous year due to the hiring of a Chief Scientific Officer in the current quarter, as well as an increase in employee benefits and other salary related costs. Stock-based compensation decreased $0.2 million from the previous year due to the acceleration of stock options in the third quarter of 2017 for a senior executive who resigned in the period.

~~Acquired In-Process Research and Development Expenses~~

~~The following table summarizes our acquired in-process research and development expenses for~~ ~~three months ended September 30, 2018 and 2017:~~

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Three Months Ended September 30,
2018 2017

(in thousands)
Acquired in-process research and development $ 18,724
$ —

As part of the asset acquisition of Ichorion, the Company acquired $18.7 million of in-process research and development for three preclinical therapies for inherited metabolic disorders known as CDGs (CERC-801, CERC-802 and CERC-803). 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. There was no acquired in-process research and development expense for the three months ended September 30, 2017.

~~General and Administrative Expenses~~

~~The following table summarizes our~~ general and administrative ~~expenses for the three months ended September 30, 2018 and 2017:~~

Three Months Ended September 30,
2018 2017

(in thousands)
Salaries, benefits and related costs $ 1,139
$ 744
Legal, consulting and other professional expenses (203 ) 1,047
Stock-based compensation expense 843
223
Other 105
138
$ 1,884
$ 2,152

~~General and administrative expenses were $1.9 million for the three months ended September 30, 2018, which is a decrease of $0.3 million compared to the three months ended September 30, 2017.~~expenses. Salaries, benefits, and related costs increased by ~~$0.4~~$0.6 million due ~~primarily~~ to ~~the current period severance costs of a senior executive that was separated~~an increase in ~~the third quarter of 2018. Legal, consulting~~headcount and other professional expenses decreased $1.3 million mainly due to a $1.0 million reversal of legal expenses due to a purchase price allocation measurement period adjustment identified for TRx during the third quarter of 2018.salary-related costs. Stock-based compensation expense increased ~~by $0.6 million primarily~~for the three months ended March 31, 2019 as ~~a result of~~compared to the ~~acceleration of stock options for~~same period in 2018 due to equity awards granted to a senior executive ~~separated~~who joined the Company in late March 2018. Due to the ~~third~~timing of the grant, minimal expense was recognized for the three months ended March 31, 2018, however a full quarter of ~~2018.~~expense was recognized for the three months ended March 31, 2019.

Sales and Marketing Expenses

The following table summarizes our sales and marketing expenses for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2019		2018

	(in thousands)				(in thousands)
Salaries, benefits and related costs	$	1,456	$	—
Logistics, insurance and other commercial operations expenses	338		—
Salaries, benefits, and related costs					$	1,838	$	952
Logistics, insurance, and other commercial operations expenses					339		91
Stock-based compensation expense	70		—		70		24
Advertising and marketing expense	415		—		815		177
Other	32		—		47		280
	$	2,311	$	—	$	3,109	$	1,524

~~The Company began to incur sales~~Sales and marketing expenses ~~upon acquiring TRx~~increased $1.6 million for the three months ended March 31, 2019 as compared to the same period in ~~November 2017.~~2018. Salaries, benefits and related costs ~~resulted from the~~increased $0.9 million as a result of increasing sales and sales support personnel needed to maintain and grow our commercial sales activities in connection with ~~our recent acquisitions~~the acquisition of TRx and Avadel's pediatric products. Logistics, insurance, and other commercial operations expenses ~~were~~increased largely due to an increase of FDA fees incurred ~~in order to support commercial operations.~~for the three months ended March 31, 2019. Advertising and marketing expenses ~~were incurred~~increased $0.6 million due to an increased focus on advertising and marketing initiatives during the current quarter to support the portfolio of pediatric drug products for sale. During the third quarter of 2018, the Company initiated an expansion of the sales force. The Company expects costs to continue to increase in the future periods until the expansion is completed.

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drugs.

Amortization Expense

The following table summarizes our amortization expense for the three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~2018:

Three Months Ended September 30,
2018 2017

(in thousands)
Amortization of intangible assets $ 1,065
$ —

Amortization expense was $1.1 million for the three months ended September 30, 2018. The amortization expense relates to the acquisition of intangible assets as part of the acquisitions of TRx and Avadel's pediatric products. No amortization expense was recognized for the three months ended September 30, 2017.

~~Impairment of intangible assets~~

The Company recorded impairment of intangible asset expense of $0.2 million for the three months ended September 30, 2018 due to a purchase price allocation measurement period adjustment identified for TRx during the third quarter of 2018 and due to the impairment of the PAI sales and marketing agreement intangible upon termination of the corresponding agreement during the second quarter of 2018. No expense related to impairment of intangible assets was recognized for the three months ended September 30, 2017.

~~Other (Expense) Income~~

~~The following table summarizes our other income for the three months ended September 30, 2018 and 2017:~~

Three Months Ended September 30,
2018 2017

(in thousands)
Change in fair value of contingent consideration, warranty liability and unit purchase option liability $ (88 ) $ —
Other income —
—
Interest (expense) income (235 ) 29
$ (323 ) $ 29

Other expense was $0.3 million for the three months ended September 30, 2018 compared to other income of $0.03 million during the same period in 2017. The change was primarily a result of the recognition of interest expense of $0.2 million for the three months ended September 30, 2018 as compared to interest income of $0.03 million in the same period in 2017. The interest expense recognized in the third quarter of 2018 relates to interest expense for the Deerfield Obligation assumed as part of the Avadel's pediatric products acquisition, which took place in the first quarter of 2018.

~~Income Tax Expense~~

The provision for income taxes was $52,412 for the three months ended September 30, 2018. The provision for income taxes is composed of state income tax for one of the Company's wholly owned subsidiaries. Our annual effective tax rate as of September 30, 2018 was approximately 0%.~~The provision for income taxes was $3.2 million for the three months ended September 30, 2017 due to the net income generated from the sale of CERC-501 to Janssen in August of 2017.~~

~~Comparison of the Nine Months Ended September 30, 2018 and 2017~~

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~~The following table summarizes our revenue for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended September 30,
2018 2017

(in thousands)
Product revenue, net $ 13,046
$ —
Sales force revenue 297
—
License and other revenue —
25,000
Grant revenue —
580
$ 13,343
$ 25,580



	Three Months Ended March 31,
	2019		2018

	(in thousands)
Amortization of intangible assets	$	1,079	$	1,017

~~Product Revenue, Net~~

~~Product revenue, net was $13.0 million for~~Amortization expense relates to the ~~nine months ended September 30, 2018, and represents revenues from the sale~~acquisition of ~~our pediatric products following~~intangible assets as part of the acquisition of TRx in November 2017 and Avadel's pediatric products in February 2018. ~~There were no product revenues reported~~

Change in fair value of contingent consideration

The Company recognized a loss on the change in fair value of contingent consideration of $0.2 million for the ~~nine~~three months ended ~~September 30, 2017.~~

~~Sales Force Revenue~~

~~Sales force revenue was~~March 31, 2019 as compared to a loss of $0.3 million for the nine months ended September 30, 2018. There are no sales force revenues reported for nine months ended September 30, 2017. The PAI contract was canceled during the second quarter of 2018, and the Company does not expect additional sales force revenue from the contract.

~~License and Other Revenue~~

There was no license and other revenue for the nine months ended September 30, 2018, compared to $25.0 million for the nine months ended September 30, 2017. In the third quarter of 2017, the Company sold CERC-501 to Janssen in exchange for initial gross proceeds of $25.0 million.

~~Grant Revenue~~

There was no grant revenue for the nine months ended September 30, 2018, compared to $0.6 million for the nine months ended September 30, 2017. Our grant revenues related to CERC-501 and were dependent upon the timing and progress of the underlying studies and development activities. The grant revenue and study costs related to these grants were discontinued with the sale of CERC-501 to Janssen in August of 2017.

~~Cost of Product Sales~~

Cost of product sales was $5.4 million for the nine months ended September 30, 2018 and relate to the cost of product sales from our recently acquired pediatric products. There are no costs of product sales reported for the nine months ended September 30, 2017.

~~Research and Development Expenses~~

~~The following table summarizes our research and development expenses for the nine months ended September 30, 2018 and 2017:~~

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Nine Months Ended September 30,
2018 2017

(in thousands)
Preclinical expenses $ 1,403

$ 347
Clinical expenses 1,122

509
CMC expenses 157

452
Internal expenses not allocated to programs:

Salaries, benefits and related costs 809

758
Stock-based compensation expense 64

124
Other 225

221
$ 3,780

$ 2,411

~~Research and development expenses increased by $1.4 million compared to the~~ same period in 2017. Preclinical expenses increased by $1.1 million compared to nine months ended September 30, 2017, primarily due to toxicology studies in support of clinical development. Clinical costs increased by $0.6 million for the nine months ended September 30, 2018 compared2018. The contingent consideration is related to the ~~same period in 2017 primarily due to activities related to clinical study in nOH. CMC costs decreased $0.3 million~~potential for future payment of consideration that is contingent upon the ~~nine months ended September 30, 2018 compared to the same period in 2017 due to higher prior year spending~~achievement of operation and commercial milestones and royalty payments on ~~clinical trial material stability and drug~~future product ~~to support clinical development.~~

~~Acquired In-Process Research and Development Expenses~~

~~The following table summarizes our acquired in-process research and development expenses~~ ~~for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended September 30,
2018 2017
(in thousands)
Acquired in-process research and development $ 18,724
$ —

Assales as part of the ~~asset acquisition~~Company's acquisitions of ~~Ichorion, the Company acquired $18.7 million of in-process research~~Avadel's pediatric products and ~~development for three preclinical therapies for inherited metabolic disorders known as CDGs (CERC-801, CERC-802 and CERC-803).~~TRx. The fair value of contingent consideration was determined at 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. There was no acquired in-process research and development expense for the nine months ended September 30, 2018.

~~General and Administrative Expenses~~

~~The following table summarizes our general and administrative expenses for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended September 30,
2018 2017

(in thousands)
Salaries, benefits and related costs $ 2,614

$ 1,665
Legal, consulting and other professional expenses 3,324

2,150
Stock-based compensation expense 1,600

728
Other 296
378
$ 7,834

$ 4,921

General and administrative expenses increased by $2.9 million for the nine months ended September 30, 2018 compared to the same period in 2017. Salaries, benefits and related costs increased by $0.9 million for the nine months ended September 30, 2018 compared to the same period of 2017 due to the current year recognition of severance costs of senior executives that was separated in the third quarter of 2018 as well as an increase in employee benefits and other salary related costs. Legal, consulting and other professional expenses increased by $1.2 million compared to the same period of 2017 primarily as a result of the legal, compliance

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and integration costs associated with our acquisitions. Stock-based compensation expense also increased by $0.9 million over the same period comparison primarily as a result of the acceleration of the stock options of a senior executive who was separated in the period, in addition to options granted to new senior executives.

~~Sales and Marketing Expenses~~

~~The following table summarizes our sales and marketing expenses for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended September 30,
2018 2017

(in thousands)
Salaries, benefits and related costs $ 4,086

$ —
Logistics, insurance and other commercial operations expenses 847

—
Stock-based compensation expense 133

—
Advertising and marketing expense 728

—
Other 95

—
$ 5,889

$ —

The Company began to incur sales and marketing expenses upon acquiring TRx in November 2017. Salaries, benefits and related costs resulted from the sales and sales support personnel needed to maintain and grow our commercial sales activities in connection with our recent acquisitions of TRx and Avadel's pediatric products. Logistics, insurance and other commercial operations expenses were incurred in order to support commercial operations. Advertising and marketing expenses were incurred to support the portfolio of pediatric drug products for sale. During the third quarter of 2018, the Company initiated an expansion of the sales force. The Company expects costs to continue to increase in future periods until the expansion is completed.

~~Amortization Expense~~

~~The following table summarizes our amortization expense for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended September 30,
2018 2017
(in thousands)
Amortization of intangible assets $ 3,316
$ —

Amortization expense was $3.3 million for the nine months ended September 30, 2018. No amortization expense was recognized for the nine months ended September 30, 2017. The amortization expense in 2018 relatesacquisition date. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at the current fair value with changes recorded in operating expenses in the condensed consolidated statement of ~~intangible assets as part of the acquisitions of TRx and Avadel's pediatric products.~~

~~Impairment of Intangible Assets~~

The company recorded impairment of intangible asset expense of $1.9 million for the nine months ended September 30, 2018 due to the impairment of the PAI sales and marketing agreement intangible upon termination of the corresponding agreement. No expense related to impairment of intangible assets was recognized for the nine months ended September 30, 2017.operations.

Other ~~Expense~~expense, net

The following table summarizes our other ~~income (expense)~~expense, net for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and ~~2017:~~

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2018:

Nine Months Ended September 30,
2018 2017

(in thousands)
Change in fair value of contingent consideration, warranty liability and unit purchase option liability $ (383 ) $ (2 )
Other income 19
—
Interest expense (578 ) (54 )
$ (942 ) $ (56 )



	Three Months Ended March 31,
	December 31,
	2019			2018

	(in thousands)
Change in fair value of warrant liability and unit purchase option liability	$	(48	)	$	(23	)
Other (expense) income, net	(9		)	19
Interest expense, net	(208		)	(100		)
	$	(265	)	$	(104	)

Other expense, ~~was $0.9~~net increased $0.2 million for the ~~nine~~three months ended September 30, 2018 as compared to $0.1 million for the same period in 2017. The change in fair value of contingent consideration, warranty liability and unit purchase option liability decreased $0.4 million due to the increase in the fair value of the contingent consideration related to the Avadel Pediatric Products Acquisition, which was recorded as other expense. The fair value of the contingent consideration related to the acquisition of Avadel's pediatric products increased due to an increase in the net sales forecast. There was no contingent consideration for the nine months ended September 30, 2017 as it relates to the acquisitions of TRx and Avadel's pediatric products. Additionally, interest expense increased $0.5 million for the nine months ended September 30, 2018March 31, 2019 as compared to the same period in ~~2017.~~2018, which was primarily driven by a $0.1 million increase in interest expense. The interest expense recognized ~~in the nine months ended September 30, 2018~~ relates to interest ~~expense~~ for the Deerfield Obligation, as defined below, assumed as part of the ~~Avadel Pediatric Products Acquisition,~~acquisition of Avadel's pediatric products, which took place on February 16, 2018. Due to the timing of the acquisition, approximately 1.5 months of interest was incurred for the three months ended March 31, 2018 as compared to a full quarter in the ~~first quarter of 2018.~~current year.

Income ~~Tax Expense~~tax expense

The provision for income taxes was ~~$92,076 for the nine months ended September 30, 2018. Our annual effective tax rate as of September 30, 2018 was approximately 0%. The provision for income taxes was $3.2~~$0.2 million for the ~~nine~~three months ended ~~September 30, 2017 due~~March 31, 2019 and includes estimated cash taxes and additionally, discrete to the ~~net income generated from~~quarter, interest and penalties on the ~~sale of CERC-501~~outstanding taxes payable to ~~Janssen in August of 2017.~~the IRS and various state authorities.

Liquidity, ~~and~~ Capital Resources and Expenditure Requirements

~~The~~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 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.~~assets. For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, Cerecor generated a net loss of ~~$34.5~~$7.5 million and negative cash flow from operations of ~~$1.2~~$3.1 million. As of ~~September 30, 2018,~~March 31, 2019, Cerecor had an accumulated deficit of ~~$92.7~~$105.7 million and a balance of ~~$6.8~~$16.1 million in cash and cash equivalents. During the first quarter of 2019, the Company closed 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, our largest stockholder, participated in the offering by purchasing 363,637 shares of common stock of the Company from the underwriter 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 (see "Common Stock Offering" in Note 9 below for description of the transaction).

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The Company plans to use ~~this~~ cash and the anticipated ~~positive net~~ cash flows from the Company's existing product sales to offset costs related to its neurology programs, pediatric rare disease ~~preclinical programs, clinical development for our neurology~~ programs, business development, costs associated with its organizational infrastructure, and debt principal and interest payments. 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. Our ability to achieve and maintain profitability in the future is dependent on, among other things, the development, regulatory approval, and commercialization of our new product candidates and achieving a level of revenues from our existing product sales adequate to support our cost ~~structure.~~structure, which includes significant investment in our pipeline assets.

The Company believes it will require additional financing to continue to execute its clinical development strategy ~~and/or~~and fund future operations. The Company plans to meet its capital requirements through operating cash flows from product sales and some combination of equity or debt financings, collaborations, out-licensing arrangements, strategic alliances, federal and private grants, marketing, distribution, or licensing arrangements or the sale of current or future assets. 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. If the Company raises additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, the Company may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates.

Uses of Liquidity

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The Company uses cash and the anticipated positive net cash flows from the Company's existing product sales to fund research and development expenses related to its neurology and pediatric rare disease pipelines, business development, costs associated with its organizational infrastructure, and debt principal and interest payments.

Ichorion Asset Acquisition

On September 24, 2018, the Company entered into a merger agreement in which we acquired Ichorion Therapeutics, Inc. The consideration for the Ichorion ~~Asset Acquisition~~acquisition at closing consisted of 5.8 million shares of the Company’s Common Stock, par value $0.001 per share, as adjusted for ~~Estimated Working Capital.~~estimated working capital. The shares are subject to a lockup ~~date of~~through December 31, 2019. Consideration for the Merger included certain development milestones ~~in the future~~ worth up to an additional $15 million, payable either in shares of Company ~~Common Stock~~common stock or in cash, at the election of the Company. There will be future cash outflow for research and development costs associated with the development of the assets acquired as part of the Ichorion ~~Asset Acquisition~~acquisition (CERC-801, CERC-802, CERC-803 and CERC-913).

~~TRx Pharmaceuticals, LLC Acquisition~~

On November 17, 2017, Cerecor and TRx Pharmaceuticals, LLC ("TRx") entered into a purchase agreement in which the Company acquired TRx, including subsidiary Zylera Pharmaceuticals, LLC and its franchise of pediatric medications. The consideration for the acquisition consists of $18.9 million in cash, subject to working capital adjustments, as well as approximately 7.5 million shares of our common stock having a market value of $8.5 million and certain contingent consideration with a fair value of $2.6 million.

~~Avadel Pediatric Products Acquisition~~

On February 16, 2018, the Company entered into an Asset Purchase Agreement with Avadel US Holdings, Inc. (“Avadel”), Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., Avadel Therapeutics, LLC and Avadel Pharmaceuticals PLC (collectively “Avadel”) to purchase and acquire all rights in Avadel’s pediatric products. The Company made a nominal cash payment for the acquired assets, and assumed certain of Avadel’s financial obligations to Deerfield CSF, LLC, which include a $15.3 million loan due in January 2021 and certain royalty obligations through February 2026.

Deerfield Debt Obligation

In relation to the Company's acquisition of Avadel's pediatric products on February 16, 2018, the Company assumed an obligation that Avadel had to Deerfield ~~CSF,~~ (the "Deerfield Obligation").

~~Deerfield Debt Obligation~~

September 30, December 31,
2018 2017

Deerfield Obligation $ 15,402,224

$ —
Less: debt discount —

—
Deerfield Obligation, net of debt discount 15,402,224

—
Less: current portion 1,050,000

—
Long term debt, net of current portion and debt discount $ 14,352,224

$ —

Beginning in July 2018 through October 2020, the Company will pay a quarterly payment of ~~$0.3 million~~$262,500 to Deerfield. In January 2021, a balloon payment of ~~$15.3~~$15,250,000 is due. The Deerfield Obligation was $15.4 million as of March 31, 2019, of which $1.1 million is due. On the acquisition date, the Company determined the fair value of these payments to be $15.1 million using its estimated cost of debt. Management performed a credit risk analysis that determined the Company's credit rating to be B to BB plus the yield on a ten-year treasury security. The difference between the gross value and fair value of these payments will be recorded as interest expense in the Company's condensed consolidated statements of operations through January 2021 using the effective interest method. Interest expense for the nine months ended September 30, 2018 was $0.6 million. The amounts due within the next year are included ina current ~~portion of long-term debt on our condensed consolidated balance sheets. The amounts due in greater than one year are included in long-term debt on our condensed consolidated balance sheets.~~liability.

Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2019 and 2018:

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~~The following table summarizes our cash flows for the nine months ended September 30, 2018 and 2017:~~


	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018

	(in thousands)						(in thousands)
Net cash provided by (used in):
Operating activities	$	(1,152	)	$	15,128		$	(3,122	)	$	(280	)
Investing activities	1,365			(8		)	(166		)	(19		)
Financing activities	4,237			3,726			8,817			363
Net increase in cash and cash equivalents	$	4,450		$	18,846
Net increase (decrease) in cash and cash equivalents							$	5,530		$	64

Net cash ~~provided by (used in)~~used in operating activities

Net cash used in operating activities was ~~$1.2~~$3.1 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and consisted primarily of a net loss of ~~$34.5~~$7.5 million, offset by ~~non-cash acquired in-process research and development of $18.7 million,~~ depreciation and amortization of ~~$3.3~~$1.1 million, non-cash stock-based compensation expense of ~~$1.8 million, impairment of intangible assets of $1.9~~$0.6 million, and changes in working capital, primarily, an increase in ~~escrowed cash receivable of $3.8 million and an increase in~~ accrued expenses of ~~$6.2 million.~~$2.0 million, largely related to the Lachlan minimum obligations as discussed in Note 13 to the accompanying unaudited financial statements appearing above. The net loss for the three months ended March 31, 2019 was driven by increased research and development activities incurred as the Company continues to fund its pipeline of development assets and also by increased sales and marketing expenses incurred to support commercial sales activities.

Net cash ~~provided by~~used in operating activities was ~~$15.1~~$0.3 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and consisted primarily of a net ~~income~~loss of ~~$15.0~~$3.9 million, ~~driven by our sale of CERC-501 to Janssen in the third quarter of 2017~~adjusted for ~~$25.0 million, partially offset by~~ non-cash stock-based compensation expense of ~~$0.9~~$0.2 million, depreciation and amortization of $1.0 million, and changes in working capital, primarily driven by a change in accounts payable of $1.9 million and other receivables of $0.4 million, offset by a change in inventory of $0.6 million.

Net ~~Cash provided by (used in)~~cash used in investing activities

~~Our net~~Net cash ~~provided by~~used in investing activities was ~~$1.4~~$0.2 million for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, an increase of approximately $0.2 million over the three months ended March 31, 2018. The increase was primarily driven by the purchase of property and ~~consisted primarily~~equipment in connection with the Company occupying its new corporate headquarters during the first quarter of ~~cash received as part of the Ichorion Asset Acquisition.~~2019.

Net cash used in investing activities was ~~$7,990~~$19,225 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and primarily ~~for the purchase~~consisted of purchases of property and equipment.

Net ~~Cash~~cash provided by financing activities

Net cash provided by financing activities was ~~$4.2~~$8.8 million for the ~~nine~~three months ended ~~September 30, 2018, which~~March 31, 2019 and consisted primarily

~~consisted~~ of net proceeds of ~~$3.9~~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 ~~private placement~~price to the public of ~~equity securities to Armistice Capital and $0.5 million of proceeds from option and warrant exercises,~~$5.50 per share. The increase was partially offset by ~~$0.1~~$0.2 million payment of contingent ~~consideration.~~consideration related to the Avadel acquisition.

Net cash provided by financing activities was ~~$3.7~~$0.4 million for the ~~nine~~three months ended ~~September 30, 2017, which primarily~~March 31, 2018 and consisted of ~~net~~ proceeds from option and warrant exercises.

Critical Accounting Policies, Estimates, and Assumptions

This Management’s Discussion and Analysis of ~~$4.6 million from a private placement~~Financial Condition and Results of equity securities to Armistice Capital, $1.7 million from the sale of common stock to Aspire Capital and Maxim Group under their Purchase and Distribution Agreement, partially offset by principal paymentsOperations is based on our ~~term loan~~unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. In preparing the financial statements in conformity with GAAP, the Company makes estimates and assumptions that have an impact on assets, liabilities, revenue and expenses reported. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk, and financial condition. In our unaudited condensed consolidated financial statements, estimates are used for, but not limited to, revenue recognition, cost of ~~$2.4 million.~~product sales, stock-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 Company believes, given current facts and circumstances, our estimates and assumptions are reasonable, adhere to GAAP and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates, and estimates may vary as new facts and circumstances arise. Our most critical accounting estimates and assumptions are included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 18, 2019 and amended on April 23, 2019.

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Off‑Balance Sheet Arrangements

~~The Company does~~We do not have any off‑balance sheet arrangements, as defined by applicable SEC rules and regulations.

Recently Adopted Accounting Pronouncements

See Item 1 of Part I, “Notes to Unaudited Financial Statements,” Note 2, of this Quarterly Report on Form 10-Q.

JOBS Act

The JOBS Act contains provisions that, among other things, reduce reporting requirements for an “emerging growth company.” As an emerging growth company, ~~the Company has~~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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

~~Interest Rate Risk~~

~~The Company maintains~~As a ~~short-term investment portfolio consisting mainly of highly liquid short-term money market funds, which~~smaller reporting company, we ~~consider~~are not required to be cash equivalents. These investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. The Company does not believe that a 10% increase or decrease in interest rates would have a material effect onprovide the ~~fair value of our investment portfolio due to the short-term nature of these instruments, and accordingly the Company does not expect our operating results or cash flows to be materially affected~~information required by ~~a sudden change in market interest rates.~~this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report on Form 10-Q.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that 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.

Changes in Internal Control Over Financial Reporting

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 period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report of Registered Public Accounting Firm

The ~~Annual~~Quarterly Report on Form ~~10-K~~10-Q does not include an attestation report of our independent registered public accounting firm due to an exemption established by the JOBS Act for emerging growth companies.

~~PART II – OTHER INFORMATION~~

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Lachlan Pharmaceuticals

In November 2017, the Company acquired TRx and its wholly-owned subsidiaries, including Zylera. The previous owners of TRx beneficially own more than 10% of our outstanding common stock. Zylera, which is ~~now~~ our wholly owned subsidiary, entered into the First Amended and Restated Distribution Agreement ~~(the “Lachlan Agreement”)~~ withLachlan, ~~Pharmaceuticals, an Irish company controlled by the previous owners of TRx (“Lachlan”),~~ effective December 18, 2015. Pursuant to the Lachlan Agreement, Lachlan named Zylera as its exclusive distributor of Ulesfia in the United States and agreed to supply Ulesfia to Zylera exclusively for marketing and sale in the United States.

~~Pursuant to the Lachlan Agreement,~~

Zylera is obligated to purchase a minimum of 20,000 units per year, or approximately $1.2 million worth of product, from Lachlan, subject to certain termination rights. Zylera must pay Lachlan $58.84 per unit and handling fees that are equal to $3.66 per unit of fully packaged Ulesfia in 2018, and escalate at a rate of 10% annually, as well as reimburse Lachlan for all product liability insurance fees incurred by Lachlan. The Lachlan Agreement also requires that Zylera make certain cumulative net sales milestone payments and royalty payments to Lachlan with a $3 million annual minimum payment unless and until there has been a “Market Change” involving a new successful competitive product. Lachlan is obligated to pay identical amounts to an unrelated third party from which it obtained rights to Ulesfia, with the payments ultimately ~~going~~flowing to Summers Laboratories, Inc. (“Summers Labs”). Because of the dispute described below, the Company has not made any payments to Lachlan under the Lachlan Agreement subsequent to the acquisition date.

On December 10, 2016, Zylera informed Lachlan that a Market Change had occurred due to the introduction of Arbor Pharmaceuticals' lice product, Sklice®. On June 5, 2017, Lachlan and Zylera entered into joint legal representation along with other unrelated third parties in negotiation and arbitration of a dispute with Summers Labs regarding the existence of a Market Change and the concomitant obligations of the parties. The arbitration panel issued an interim ruling on October 23, 2018 that no ~~market change~~Market Change had occurred up to and including the date of the hearing. The ~~issuance~~arbitration panel issued a second interim ruling on December 26, 2018. The second interim award rejected Summers Labs' request to accelerate future minimum royalties, however, it ruled in favor of Summers Labs that it is owed reimbursement for all reasonable costs and expenses, including legal fees, by Shionogi, as well as interest, as stipulated in the contract. The arbitration panel issued a final award on March 1, 2019 that dictated the final ~~award is scheduled for December 4, 2018.~~amount of reimbursable costs and interest as contemplated in the second interim ruling. The final award has no direct bearing on the Company as the Company was not a named defendant to the original claim by Summers Labs and a federal court denied Zylera's ability to be a counterclaimant in the matter. Furthermore, the Company is not subject to the guarantee or interest provisions identified in the second ruling as these elements of the contractual relationship were not passed down to the Company’s agreement with Lachlan. However, the Company has interpreted this ruling's impact on the Lachlan ~~agreement~~Agreement to mean ~~that a market change has not occurred and~~ the minimum purchase obligation and minimum royalty provisions of the contract are active and due for any prior periods as well as going forward for any future periods.

The Company has recognized ~~a $6.9~~an $8.7 million liability for these minimum obligations in accrued liabilities as of ~~September 30, 2018.~~March 31, 2019. Under the terms of the TRx Purchase Agreement, the former TRx owners are required to indemnify the Company for 100% of all pre-acquisition losses related this arbitration, including legal costs, and possible minimum payments in excess of $1 million. Furthermore, the former TRx owners are required to indemnify the Company for 50% of post-acquisition Ulesfia losses, which would include losses resulting from having to fund these minimum obligations. The Company has recorded an indemnity receivable of ~~$6.1~~$5.2 million in other receivables as of ~~September 30, 2018,~~March 31, 2019, which the Company believes is fully collectible. ~~The post-acquisition~~For the three months ended March 31, 2019, minimum obligations net of amounts recorded within the indemnity receivable of $0.6 million has been recorded in cost of ~~goods sold for the three and nine months ended September 30, 2018.~~product sales. If the Company fails to make these minimum obligations timely then the Lachlan Agreement may be terminated by Lachlan, in which case the Company would no longer be able to sell the Ulesfia product, but it would also not be subject to future minimum obligations. Lachlan has not requested payment for the minimum obligations.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on ~~April 2, 2018~~March 18, 2019 and amended on ~~May 25, 2018 and September 7, 2018,~~April 23, 2019, which could materially affect our business, financial condition, or future results. Our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in our Annual Report on Form ~~10-K.~~10-K, as amended. However, the risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that ~~the Company~~we currently ~~deems~~deem to be immaterial also may materially adversely affect our business, financial condition, or future results of operations and the trading price of our common stock.

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Item 6. Exhibits.



Exhibit Number	Description of Exhibit

~~2.1~~		Agreement and Plan of Merger, dated as of September 24, 2018, by and between Cerecor Inc., ITX Merger Sub, Inc., Second ITX Merger Sub, LLC, Ichorion Therapeutics, Inc., and David Maizenberg, as holders’ representative (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on September 26, 2018).

~~10.1#~~		~~Employment Agreement, dated July 12, 2018, by and between Cerecor Inc. and Joseph M. Miller (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 16, 2018).~~

~~10.2#~~		Separation and Release Agreement, dated July 13, 2018, by and between Cerecor Inc. and Mariam Morris (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on July 16, 2018).

~~10.3#~~		~~Employment Agreement, dated July 16, 2018, by and between Cerecor Inc. and Pericles Calias (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on July 16, 2018).~~

~~10.4~~		Securities Purchase Agreement, dated as of August 17, 2018, by and among Cerecor Inc. and each of the investors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 20, 2018).

~~10.5~~		Registration Rights Agreement, dated as of August 20, 2018, between Cerecor Inc. and each of the investors (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 20, 2018).

~~10.6~~		~~Lease dated September 14, 2018 by and between FB 540 Gaither, LLC and Cerecor Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 18, 2018).~~

31.1		Certification of Principal Executive Officer ~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

~~31.2~~		~~Certification of~~and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of ~~Chief~~Principal Executive Officer and ~~Chief~~Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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~~ Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

~~# Management contract or compensatory agreement.~~

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* This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and ~~are~~is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and ~~are~~is 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.

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

Cerecor Inc.

Date: ~~November 13, 2018~~			~~/s/ Peter Greenleaf~~
			~~Peter Greenleaf~~
			~~Chief Executive Officer~~ ~~(on behalf of the registrant and as the registrant’s Principal Executive Officer)~~

~~Date: November 13, 2018~~May 9, 2019			/s/ Joseph M. Miller
			Joseph M. Miller
			Chief Financial Officer
			(on behalf of the registrant and as the registrant’s principal executive officer, principal financial officer and principal accounting officer) ~~(Principal Financial Officer)~~

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Diluted (loss) income per share:
Net (loss) income	$	(24,603,575	)	$	11,222,732	$	(34,493,895	)	$	9,677,838
Net income reallocated	—			5,256		—			1,746
Undistributed (loss) earnings allocable to common shares	$	(24,603,575	)	$	11,227,988	$	(34,493,895	)	$	9,679,584

Weighted average shares, basic	34,648,641			21,382,683		32,749,291			14,952,391
Effect of dilutive securities
Stock options	—			25,019		—			7,641
Weighted average number of shares - diluted	34,648,641			21,407,702		32,749,291			14,960,032

Diluted (loss) income per share:	$	(0.71	)	$	0.52	$	(1.05	)	$	0.65



	Non-vested RSAs Outstanding
	Number of shares	Weighted average grant date fair value
Non-vested RSAs at December 31, 2017	—	$	—
Granted	445,000	$	4.27
Vested	—	$	—
Forfeited	—	$	—
Non-vested RSAs at September 30, 2018	445,000





	Minimum Lease Payments

2019	$	—
2020	138,094
2021	169,165
2022	173,394
2023	177,729
Thereafter	1,198,161
Total	$	1,856,543