AVALO THERAPEUTICS, INC. 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," "might," "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 theSecurities and Exchange Commission , orSEC , onMarch 8, 2021 , and in our other filings with theSEC . Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with theSEC 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 endedDecember 31, 2020 appearing in our Annual Report on Form 10-K filed with theSEC onMarch 8, 2021 . OverviewCerecor Inc. (the "Company" or "Cerecor") is a biopharmaceutical company focused on becoming a leader in the development and commercialization of treatments for immunologic, immuno-oncologic and rare genetic disorders. The Company is advancing its clinical-stage pipeline of innovative therapies that address unmet patient needs within rare and orphan diseases. The Company's rare disease pipeline includes CERC-801, CERC-802 and CERC-803 ("CERC-800 compounds"), which are in development for congenital disorders of glycosylation and CERC-006, an oral mTORc1/c2 inhibitor in development for the treatment of complex lymphatic malformations. The Company is also developing two monoclonal antibodies, CERC-002 and CERC-007. CERC-002, targets the cytokine LIGHT (TNFSF14) and is in clinical development for treatment of inflammatory bowel disease and COVID-19 acute respiratory distress syndrome ("ARDS"). CERC-007 targets the cytokine IL-18 and is in clinical development for the treatment of Still's disease (adult onset Still's disease ("AOSD") and systemic juvenile idiopathic arthritis) and multiple myeloma ("MM"). CERC-006, 801, 802 and 803 have all received Orphan Drug Designation and Rare Pediatric Disease Designation, which makes all four eligible for a priority review voucher ("PRV") upon approval from theU.S. Food and Drug Administration ("FDA").
The Company has one commercialized product, Millipred®, a non-core asset, which is an oral prednisolone indicated across a wide variety of inflammatory conditions.
Management's primary evaluation of the success of the Company is the ability to
progress its pipeline assets forward towards commercialization or
opportunistically out-licensing rights to indications or geographies. This
success depends not only on the operational execution of the programs, but also
the ability to secure sufficient funding to support the programs. We believe the
ability to achieve the anticipated milestones (as presented in the Research and
Development Updates milestone chart below), represents our most immediate
evaluation points.
We have made significant progress in 2021 toward our key goal of advancing the
pipeline as highlighted by the CERC-002 Crohn's Phase 1b first cohort data
release, CERC-002 COVID-19 ARDS Phase 2 proof-of-concept data release and
subsequent receipt of fast-track designation ("FTD"), completion of the first
cohort of the CERC-007 Multiple Myeloma Phase 1b trial, obtaining FTD for
CERC-803 and enrollment of the first patient in the CERC-007 AOSD Phase 1b
open-label proof-of-concept trial. We also believe our licensing activity during
the first half of 2021, including in-licenses of immunology and immuno-oncology
assets (including the expanded license agreement for CERC-002 and the license
agreement for CERC-008) and out-licenses of non-core assets, enhances our focus
on the development of innovative therapies in areas of high unmet need within
the fields of immunology, immuno-oncology, and rare genetic disorders. Finally,
we executed a combination of debt and equity financings in 2021 for total net
proceeds of approximately $65 million as of the filing date of this Quarterly
Report on Form 10-Q, which strengthens and extends our financial resources to
advance our clinical pipeline towards these key development milestones.
Recent Developments
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Table of Contents InJune 2021 , the Company entered into a$35.0 million venture debt financing agreement (the "Loan Agreement") with Horizon Technology Finance Corporation ("Horizon") andPowerscourt Investments XXV, LP ("Powerscourt, together with Horizon, the "Lenders"). On the closing date, the Company received$20.0 million , with the remaining$15.0 million fundable upon the Company achieving certain predetermined milestones. In the third quarter of 2021, the Company received$10.0 million in gross proceeds under the Loan Agreement. This advance was made available in connection with the Company's successful positive initial results from a Phase1b proof-of-concept study evaluating CERC-002 in adult patients with moderate-to-severe Crohn's disease. The remaining$5.0 million may be funded upon achieving certain predetermined milestones. InJune 2021 , Dr.Sol Barer notified the Board of Directors of the Company that he resigned from the Board, effectiveJune 15, 2021 .Dr. Barer's resignation was not related to any disagreement with the Company on any matter relating to the Company's operations, policies or practices.Dr. Barer will serve as a strategic advisor to the Board and the Company for a period of at least one year, during which he will serve on the Company'sScientific Advisory Board . FollowingDr. Barer's resignation, the Board appointedMichael Cola , who is also the Company's Chief Executive Officer, as Chairman of the Board and Dr.Suzanne Bruhn as the Lead Independent Director of the Board. InJuly 2021 , the Company entered into an "at-the-market" sales agreement withCantor Fitzgerald & Co. andRBC Capital Markets, LLC (together, the "Agents"), pursuant to which the Company may sell from time to time, shares of its common stock having an aggregate offering price of up to$50 million through the Agents (the "ATM Program"). As of the filing date of this Quarterly Report on Form 10-Q, the Company has not yet sold any shares of our common stock under the ATM Program.
Research and Development Updates
OnJune 22, 2021 , the Company entered into an exclusive patent license agreement withSanford Burnham Prebys Medical Discovery Institute under which the Company obtained an exclusive license to a portfolio of issued patents and patent applications covering an immune checkpoint program, which the Company refers to as CERC-008. The license further enhances the Company's development pipeline of novel biologics that address immunology and immuno-oncology targets. During the second quarter of 2021, the Company out-licensed and assigned, respectively, its rights to its non-core neurology pipeline assets (compounds used in CERC-301 and the COMTi platform, including CERC-406) toAlto Neuroscience, Inc. ("Alto") andES Therapeutics, LLC ("ES"), respectively. The Company intends to focus on developing innovative therapies in areas of high unmet need within the fields of immunology, immuno-oncology, and rare genetic disorders. As part of the transactions, the Company received initial upfront payments, and is eligible to receive additional payments upon achievement of specified development, regulatory and sales-based milestones. The Company is also entitled to royalty payments based on net sales of CERC-301. InJuly 2021 , the Company announced positive initial results from a Phase 1b proof-of-concept study evaluating CERC-002 in adult patients with moderate-to-severe Crohn's disease who had previously failed three or more lines of biologics therapies, including anti-TNF treatments. The results showed a mean reduction in LIGHT levels of approximately 80% compared to baseline signifying a dramatic and rapid reduction of LIGHT levels correlating to the pharmacodynamic effect of CERC-002 (1.0 mg/kg), as well as clinically meaning endoscopic improvement in 75% (3/4) of subjects, as determined by colonoscopy (SES-CD score). CERC-002 was tolerated with no drug related severe adverse events. These initial results support expansion to patients with moderate to severe ulcerative colitis refractory to anti-TNF alpha therapies. Based on the results of the first cohort (n=4) of data, the Company will continue dose exploration by proceeding to the next planned cohort without trial modification. The second cohort (3.0 mg/kg dose) is fully enrolled and complete data results are anticipated in the second half of 2021.
The following chart summarizes key information about our clinical-stage pipeline and anticipated research & development milestones:
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Our Strategy
Our strategy for increasing stockholder value includes:
•Advancing our pipeline of compounds through development and to regulatory
approval;
•Acquiring or licensing rights to targeted, complementary differentiated
preclinical and clinical stage compounds;
•Developing the go-to-market strategy to quickly and effectively market, launch,
and distribute each of our compounds that receive regulatory approval; and
•Opportunistically out-licensing rights to indications or geographies.
Results of Operations
Comparison of the Three Months Ended
Product Revenue, net
Net product revenue was$2.7 million for the three months endedJune 30, 2021 , as compared to$1.3 million for the three months endedJune 30, 2020 . During the first quarter of 2021, the Company's inventory on hand became short-dated (which the Company considers inventory within six months of expiration) due to manufacturing delays and therefore the Company recorded a full sales return allowance on sales of short-dated inventory given the high likelihood of return. The Company received the delayed inventory lot inApril 2021 and began selling this lot immediately. As a result, net revenue increased for the three months endedJune 30, 2021 as compared to the prior year period due to the increased demand to backfill the short-dated inventory. In addition, Aytu BioScience, Inc. ("Aytu"), who the Company sold its rights, title and interest in assets relating to certain commercialized products in 2019, managed Millipred® commercial operations throughJune 30, 2021 pursuant to transition service agreements. We are currently finalizing our trade and distribution channel to allow us to control third party distribution in the third quarter of 2021. As of the filing date of this Quarterly Report on 10-Q, Aytu continues to distribute Millipred®.
The Company expects net revenues to continue to return to levels consistent with prior periods over the remainder of 2021.
License Revenue
License revenue was$0.6 million for the three months endedJune 30, 2021 , which relates to upfront fee received as a result of the out-license and assignment, respectively, of the Company's rights to its non-core neurology pipeline assets, CERC-301 and 30
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Table of Contents CERC-406 to Alto and ES, respectively. ES is a wholly-owned subsidiary ofArmistice Capital Master Fund Ltd. , (an affiliate ofArmistice Capital, LLC and collectively "Armistice"), which is a significant stockholder of the Company and whose chief investment officer,Steven Boyd , currently serves on the Board of the Company. The transaction with ES was approved in accordance withCerecor's related party transaction policy.
Cost of Product Sales
Cost of product sales was$0.1 million for the three months endedJune 30, 2021 , which was consistent with the cost of product sales for the three months endedJune 30, 2020 . We are currently finalizing our trade and distribution channel to allow us to control third party distribution of Millipred® in the third quarter of 2021. As of the filing date of this Quarterly Report on 10-Q, Aytu continues to distribute Millipred®. The Company has a license and supply agreement for the Millipred® product with a wholly owned subsidiary of Teva Pharmaceutical Industries Ltd. ("Teva"), which expires onSeptember 30, 2023 . BeginningJuly 1, 2021 ,Cerecor is required to pay Teva fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a$0.5 million quarterly minimum payment. Beginning in the third quarter of 2021, we expect cost of product sales to increase as compared to historic periods.
Research and Development Expenses
The following table summarizes our research and development expenses for the
three months ended
Three Months Ended June 30,
2021 2020
Preclinical expenses $ 2,110 $ 1,637
Clinical expenses 2,460 1,325
CMC expenses 4,905 1,327
License and milestone expenses 400 -
Internal expenses: Salaries, benefits and related costs 2,160
1,201
Stock-based compensation expense 467 391
Other 67 36
$ 12,569 $ 5,917
Research and development expenses increased $6.7 million for the three months
ended June 30, 2021 compared to the same period in 2020. The Company's merger
with Aevi Genomic Medicine Inc. ("Aevi") (the "Aevi Merger" or the "Merger") in
February 2020 was a transformative event as it significantly broadened our
pipeline by adding the rights to three new assets, as well as bringing in
critical leadership to guide the Company and development of the expanded
pipeline. Given the timing of the Merger, the first half of 2020 was spent
integrating and initiating the additional programs. Therefore, the main driver
of the increase is attributable to the maturing expanded pipeline, particularly
as it relates to CMC and clinical expenses.
Notably, Chemistry, Manufacturing, and Controls ("CMC") expenses
increased $3.6 million due to additional spending on manufacturing to support
development of the progressing pipeline and to ensure the Company has adequate
drug on-hand for upcoming trials. Clinical expenses increased $1.1 million
primarily due to increased clinical trial spend as we approach the completion of
the initial cohorts of ongoing trials. Preclinical expenses increased
$0.5 million due to increased non-clinical toxicity studies and biomarker
studies to support clinical development. Finally, we recognized a $0.4 million
upfront license fee related to an asset in-licensed during the period.
Salaries, benefits and related costs increased by
We expect research and development expense to continue to outpace historic periods, as the Company advances its maturing pipeline in anticipation of multiple clinical data readouts over the next twelve months.
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General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
three months ended
Three Months Ended June 30,
2021 2020
Salaries, benefits and related costs $ 1,118 $ 1,756
Legal, consulting and other professional expenses 2,685 1,804
Stock-based compensation expense 2,503 2,286
Other 312 255
$ 6,618 $ 6,101
General and administrative expenses were $6.6 million for the three months ended
June 30, 2021 , which represents a $0.5 million increase from the prior year
period. The increase was largely driven by a $0.9 million increase in legal,
consulting and other professional expenses, of which $0.5 million was related to
patent expenses of an in-licensed asset and the remainder primarily due to
expenses incurred to execute the licensing agreements executed during the
period. This increase was partially offset by a $0.6 million decrease in
salaries, benefits and related costs for the quarter due to a severance accrual
in the prior year related to the resignation of an executive during the second
quarter of 2020, which did not repeat for the three months ended June 30, 2021 .
During the three months ended June 30, 2021 and June 30, 2020 , there were
stock-based compensation modifications recorded related modifications of awards
previously granted to former executives and board members which drove minimal
change period over period.
We expect general and administrative expenses to continue to increase compared
to historic periods as a result of the increased infrastructure to support the
Company's expanded research and development efforts.
Sales and Marketing Expenses
The following table summarizes our sales and marketing expenses for the three
months ended
Three Months Ended June 30,
2021 2020
Salaries, benefits and related costs $ 182 $ 183
Stock-based compensation expense 104 87
Advertising and marketing expense 432 366
Other 68 17
$ 786 $ 653
Sales and marketing expenses consist of expenses related to initiatives to
support the go-to-market strategy of our pipeline assets. Sales and marketing
expenses were relatively consistent for the three months ended June 30, 2021 and
2020.
Amortization Expense
The following table summarizes our amortization expense for the three months
ended
Three Months Ended June 30,
2021 2020
Amortization of intangible assets $ 428
Amortization expense relates to the amortization of the assembled workforces and other intangible assets acquired as part of previous acquisitions and mergers and was largely consistent for the three months endedJune 30, 2021 and 2020. Other (Expense) Income, Net 32
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The following table summarizes our other (expense) income, net for the three
months ended
Three Months Ended June 30,
2021 2020
Change in fair value of Investment in Aytu (as defined below) $ - $ (1,872)
Other (expense) income, net (5) 398
Interest (expense) income, net (239) 9
$ (244) $ (1,465)
Other expense, net decreased $1.2 million for the three months ended June 30,
2021 , as compared to the prior year. For the three months ended June 30, 2020 ,
other expense, net was mainly comprised of a $1.9 million loss on the change in
the fair value of an investment of the Company. As consideration of the
Company's divestiture of certain commercialized products to Aytu in 2019, the
Company received 9.8 million shares of Aytu preferred stock (the "Investment in
Aytu"), which was remeasured at its current fair value each reporting period. In
the second quarter of 2020, the Company sold the common stock underlying the
investment for net proceeds of $12.8 million , which represented a loss of
$1.9 million from its fair value on March 31, 2020 .
Additionally, the Company recognized interest expense of $0.2 million for the
three months ended June 30, 2021 related to the venture debt agreement entered
into in June 2021 .
Income Tax Benefit
The following table summarizes our income tax expense (benefit) for the three
months ended
Three Months Ended June 30,
2021 2020
Income tax benefit $ (199) $ (454)
The Company recognized an income tax benefit of $0.2 million for the three
months ended June 30, 2021 compared to an income tax benefit of $0.5 million for
the three months ended June 30, 2020 . The tax benefit recognized for the three
months ended June 30, 2020 was a result of a tax law change and the ability of
the Company to carry back certain losses for taxes related to the Coronavirus
Aid, Relief and Economic Security Act ("CARES Act") and related state
provisions. The income tax benefit in the current period was a result of the
updated estimate of interest receivable and abatement of penalties on the refund
claim, as the final refund payment was received from the Internal Revenue
Service in the second quarter of 2021.
Comparison of the Six Months Ended
Product Revenue, net
Net product revenue was$3.2 million for the six months endedJune 30, 2021 , as compared to$4.1 million for the six months endedJune 30, 2020 . During the first quarter of 2021, the Company's inventory on hand became short-dated (which the Company considers inventory within six months of expiration) due to manufacturing delays and therefore the Company recorded a full sales return allowance on sales of short-dated inventory given the high likelihood of return. The Company received the delayed inventory lot inApril 2021 and began selling this lot immediately. As a result of the full sales return allowance recognized in the first quarter of 2021, net revenue decreased for the six months endedJune 30, 2021 as compared to the prior year period. In addition, Aytu managed Millipred® commercial operations throughJune 30, 2021 pursuant to transition service agreements. We are currently finalizing our trade and distribution channel to allow us to control third party distribution in the third quarter of 2021. As of the filing date of this Quarterly Report on 10-Q, Aytu continues to distribute Millipred®.
The Company expects net revenues to continue to return to levels consistent with prior periods over the remainder of 2021.
License Revenue, net
License revenue was$0.6 million for the six months endedJune 30, 2021 , which relates to upfront fee received as a result of the out-license and assignment, respectively, of the Company's rights to its non-core neurology pipeline assets, CERC-301 and 33
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Table of Contents CERC-406 to Alto and ES, respectively. ES is a wholly-owned subsidiary of Armistice, which is a significant stockholder of the Company and whose chief investment officer,Steven Boyd , currently serves on the Board of the Company. The transaction with ES was approved in accordance withCerecor's related party transaction policy.
Cost of Product Sales
Cost of product sales was$0.2 million for the six months endedJune 30, 2021 , which was consistent with the cost of product sales for the six months endedJune 30, 2020 . We are currently finalizing our trade and distribution channel to allow us to control third party distribution of Millipred® in the third quarter of 2021. As of the filing date of this Quarterly Report on 10-Q, Aytu continues to distribute Millipred®. The Company has a license and supply agreement for the Millipred® product with a wholly owned subsidiary of Teva, which expires onSeptember 30, 2023 . BeginningJuly 1, 2021 ,Cerecor is required to pay Teva fifty percent of the net profit of the Millipred® product following each calendar quarter, subject to a$0.5 million quarterly minimum payment. Beginning in the third quarter of 2021, we expect cost of product sales to increase as compared to historic periods.
Research and Development Expenses
The following table summarizes our research and development expenses for the six
months ended
Six Months Ended June 30,
2021 2020
Preclinical expenses $ 4,344 $ 2,915
Clinical expenses 7,900 1,896
CMC expenses 9,639 2,521
License and milestone expenses 10,900 -
Internal expenses: Salaries, benefits and related costs 4,097
2,514
Stock-based compensation expense 765 772
Other 129 67
$ 37,774 $ 10,685
Research and development expenses increased $27.1 million for the six months
ended June 30, 2021 compared to the same period in 2020. The Aevi Merger, which
closed in February 2020 , was a transformative event as it significantly
broadened our pipeline by adding the rights to three new assets, as well as
bringing in critical leadership to guide the Company and development of the
expanded pipeline. Given the timing of the Merger, the first half of 2020 was
spent integrating and initiating the additional programs. Therefore, the main
driver of the increase is attributable to the maturing expanded pipeline,
particularly as it relates to CMC and clinical expenses
In addition, we recognized a $10.0 million upfront license fee related to the
expanded indication license agreement for CERC-002 entered into with Kyowa Kirin
Co. ("KKC") in March 2021 and also recognized a $0.4 million upfront license fee
related to an asset in-licensed during the period. Additionally, we recognized a
$0.5 million development milestone payment to Astellas Pharma, Inc. for CERC-006
(which was subsequently paid in July 2021 ).
CMC expenses increased $7.1 million due to additional spending on manufacturing
to support development of the progressing pipeline and to ensure the Company has
adequate drug on-hand for anticipated trials. Clinical expenses increased
$6.0 million primarily due to costs incurred to advance the pipeline as we
approach multiple clinical data read outs across our pipeline. Salaries,
benefits and related costs increased by $1.6 million mainly due to an increase
in headcount to grow our research and development activities as we continue to
invest in our expanded pipeline.
We expect research and development expense to continue to outpace historic periods, as the Company advances its maturing pipeline in anticipation of multiple clinical data readouts over the next twelve months.
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Table of Contents In the first quarter of 2020, the Company consummated its merger with Aevi, resulting in us acquiring$25.5 million of in-process research and development ("IPR&D"). The fair value of the IPR&D was immediately recognized as acquired in-process research and development expense given such asset has no other alternate use due to the stage of development. There was no acquired IPR&D for the six months endedJune 30, 2021 .
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
six months ended
Six Months Ended June 30,
2021 2020
Salaries, benefits and related costs $ 2,038 $ 2,768
Legal, consulting and other professional expenses 5,277 2,588
Stock-based compensation expense 3,548 2,988
Other 667 433
$ 11,530 $ 8,777
General and administrative expenses were $11.5 million for the six months ended
June 30, 2021 , which represents a $2.8 million increase from the prior year
period. The increase was largely driven by a $2.7 million increase in legal,
consulting and other professional expenses. The largest driver was higher legal
costs in the current period, including costs to execute the KKC expanded
indication license agreement and the other licensing agreements executed in the
current year. Additionally, director and officer insurance expense increased in
the current year.
Stock-based compensation expense increased $0.6 million for the six months ended
June 30, 2021 . The increase was largely driven by $1.4 million of expense
related to the modifications of a former board members stock options during the
second quarter of 2021, partially offset by increased expense in the prior year
due to equity award grants and modifications to certain former executives and
board members due to leadership changes in the first half of 2020.
These increases were partially offset by a $0.7 million decrease in salaries,
benefits and related costs for the quarter due to a severance accrual in the
prior year related to the resignation of an executive during the second quarter
of 2020, which did not repeat for the six months ended June 30, 2021 .
We expect general and administrative expenses to continue to increase compared
to historic periods as a result of the increased infrastructure to support the
Company's expanded research and development efforts.
Sales and Marketing Expenses
The following table summarizes our sales and marketing expenses for the six
months ended
Six Months Ended June 30,
2021 2020
Salaries, benefits and related costs $ 371 $
317
Stock-based compensation expense 209
142
Advertising and marketing expense 562 848
Other 79 23
$ 1,221 $ 1,330
Sales and marketing expenses consist of expenses related to initiatives to
support the go-to-market strategy of our pipeline assets. For the six months
ended June 30, 2020 , we incurred costs related to market research projects for
multiple programs and indications that did not repeat in the current year,
driving a $0.3 million decrease. This decrease was largely offset by slightly
higher salaries, benefits and related costs and stock-based compensation expense
incurred in the current year, leading to an overall decrease of $0.1 million .
Amortization Expense
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The following table summarizes our amortization expense for the six months ended
Six Months Ended June 30,
2021 2020
Amortization of intangible assets $ 853 $
834
Amortization expense relates to the amortization of the assembled workforces and other intangible assets acquired as part of previous acquisitions and mergers and was largely consistent for the six months endedJune 30, 2021 and 2020.
Other (Expense) Income, Net
The following table summarizes our other (expense) income, net for the six
months ended
Six Months Ended June 30,
2021 2020
Change in fair value of Investment in Aytu (as defined below) $ - $ 5,208
Other (expense) income (5) 410
Interest (expense) income, net (222) 18
$ (227) $ 5,636
Other (expense), net was $0.2 million for the six months ended June 30, 2021
compared to other income, net of $5.6 million for the six months ended June 30,
2020 . For the six months ended June 30, 2020 , other income, net was mainly
comprised of a $5.2 million gain on the change in fair value of the Company's
previous Investment in Aytu. Each reporting period, the Company's Investment in
Aytu was remeasured at its fair value. In the second quarter of 2020, the
Company sold the common stock underlying its Investment in Aytu for net proceeds
of $12.8 million , which represented a gain of $5.2 million from its fair value
on December 31, 2019 .
Additionally, the Company recognized interest expense of $0.2 million for the
six months ended June 30, 2021 related to the venture debt agreement entered
into in June 2021 .
Income Tax Benefit
The following table summarizes our income tax expense (benefit) for the six
months ended
Six Months Ended June 30,
2021 2020
Income tax benefit $ (188) $ (2,611)
The Company recognized an income income tax benefit of $0.2 million for the six
months ended June 30, 2021 compared to an income tax benefit of $2.6 million for
the six months ended June 30, 2020 . The tax benefit recognized for the six
months ended June 30, 2020 was a result of a tax law change signed into law as
part of the CARES Act, which allowed the Company to carry back certain losses
for taxes paid in fiscal year 2017 and thus resulted in a refund claim. The
income tax benefit in the current period was a result of the updated estimate of
interest receivable and abatement of penalties on the refund claim, as the final
refund payment was received from the Internal Revenue Service in the second
quarter of 2021.
Liquidity and Capital Resources
As ofJune 30, 2021 ,Cerecor had$40.4 million in cash and cash equivalents. InJune 2021 , the Company entered into a$35.0 million venture debt financing agreement (the "Loan Agreement") with Horizon Technology Finance Corporation ("Horizon") andPowerscourt Investments XXV, LP ("Powerscourt, together with Horizon, the "Lenders"). In accordance with the Loan Agreement,$20.0 million of the$35.0 million loan was funded on the closing date (the "Initial Note"), with the remaining$15.0 million fundable upon the Company achieving certain predetermined milestones. The Company received net proceeds of$19.6 million in the second quarter of 2021 and will pay approximately$1.7 million of debt issuance costs in the third quarter of 2021 for total expected net proceeds of$17.9 million (related to the Initial Note funded in the second quarter). The Loan Agreement contains certain covenants and certain other specified events that could result in an event of default, which if not cured 36
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or waived, could results in the acceleration of all or a substantial portion of
the notes. As of
In the third quarter of 2021, the Company received$10.0 million in gross proceeds (the "Second Note") under the Loan Agreement. The Second Note was made available in connection with the Company's successful positive initial results from a Phase1b proof-of-concept study evaluating CERC-002 in adult patients with moderate-to-severe Crohn's disease.
In
In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's existing pipeline assets and acquisitions or in-licensing of new assets. For the six months endedJune 30, 2021 ,Cerecor generated a net loss of$47.8 million and negative cash flows from operations of$37.5 million . As ofJune 30, 2021 ,Cerecor had an accumulated deficit of$225.6 million . The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern; however, losses are expected to continue as the Company continues to invest in its research and development pipeline assets. The Company will require additional financing to fund its operations and to continue to execute its business strategy at least one year after the date the condensed consolidated financial statements included herein were issued. These conditions raise substantial doubt about the Company's ability to continue as a going concern. To mitigate these conditions and to meet the Company's capital requirements, management plans to use its current cash on hand along with some combination of the following: (i) dilutive and/or non-dilutive financings, (ii) federal and/or private grants, (iii) other out-licensing or strategic alliances/collaborations of its current pipeline assets, and (iv) out-licensing or sale of its non-core assets. If the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates. Subject to limited exceptions, our venture debt financing agreement prohibits us from incurring certain additional indebtedness, making certain asset dispositions, and entering into certain mergers, acquisitions or other business combination transactions without prior consent of the Lender. If the Company requires but is unable to obtain additional funding, the Company may be forced to make reductions in spending, delay, suspend, reduce or eliminate some or all of its planned research and development programs, or liquidate assets where possible. Due to the uncertainty regarding future financing and other potential options to raise additional funds, management has concluded that substantial doubt exists with respect to the Company's ability to continue as a going concern within one year after the date that the financial statements in this Quarterly Report were issued.
Over the long term, the Company's ultimate ability to achieve and maintain profitability will depend on, among other things, the development, regulatory approval, and commercialization of its pipeline assets, and the potential receipt and sale of any PRVs it receives.
Uses of Liquidity
The Company uses cash to primarily fund the ongoing development of our research and development pipeline assets and costs associated with its organizational infrastructure. Cash Flows
The following table summarizes our cash flows for the six months ended
Six Months Ended June 30,
2021 2020
Net cash (used in) provided by:
Operating activities $ (37,503) $ (14,294)
Investing activities (21) 11,586
Financing activities 59,043 44,583
Net increase in cash and cash equivalents $ 21,519 $ 41,875
Net cash used in operating activities
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Table of Contents Net cash used in operating activities was$37.5 million for the six months endedJune 30, 2021 and consisted primarily of a net loss of$47.8 million , which was primarily driven by research and development activities as the Company continued to fund its pipeline of development assets. The six months endedJune 30, 2021 included a full period of development of the expanded pipeline from the Aevi Merger compared to a partial period in the prior year (in which the focus was integration as opposed to pipeline development). Changes in net liabilities increased by$4.6 million , mainly driven by a$4.9 million increase in accrued expenses which is primarily related to accrued research and development expense. Furthermore, other receivables decreased by$1.2 million . These were partially offset by increased accounts receivable of$1.9 million . Net cash used in operating activities was$14.3 million for the six months endedJune 30, 2020 and consisted primarily of a net loss of$34.4 million and non-cash adjustments to reconcile net loss to net cash used in operating activities including a$5.2 million realized gain related to the change in fair value of the Investment in Aytu and a$1.8 million gain related to the change in the value of the Guarantee associated with the Aytu Divestiture. This decrease was offset by the following non-cash adjustments: non-cash acquired IPR&D expense of$25.5 million and non-cash stock-based compensation of$3.9 million . Additionally, changes in net assets, increased by a net$2.8 million , mainly driven by a$1.9 million increase in other receivables. Other receivables increased mainly due to a$2.2 million income tax receivable.
Net cash used in investing activities
Net cash used in investing activities was minimal for the six months ended
Net cash used in investing activities was$11.6 million for the six months endedJune 30, 2020 and consisted primarily of net proceeds of$12.8 million from the sale of the common stock during the second quarter of 2020 underlying the Company's previous Investment in Aytu, slightly offset by transaction costs incurred as part of the Aevi Merger.
Net cash provided by financing activities
Net cash provided by financing activities was$59.0 million for the six months endedJune 30, 2021 and consisted primarily of net proceeds of$37.7 million from an underwritten public offering of 13,971,889 shares of common stock and 1,676,923 pre-funded warrants. Armistice, which is a significant stockholder of the Company and whose chief investment officer,Steven Boyd , currently serves on the Board of the Company, participated in the offering by purchasing 2,500,000 shares of common stock, on the same terms as all other investors. Certain affiliates ofNantahala Capital Management LLC (collectively, "Nantahala"), which beneficially owned greater than 5% of the Company's outstanding common stock at the time of the offering and, therefore, were considered a related party pursuant to the Company's written related person transaction policy, purchased 1,400,000 shares of common stock, on the same terms as all other investors. Nantahala also purchased the pre-funded warrants to purchase up to an aggregate of 1,676,923 shares of common stock at a purchase price of$2.599 , which represents the per share public offering price for the common stock less the$0.001 per share exercise price for each pre-funded warrant. Additionally, net cash provided by financing activities includes net proceeds of$19.6 million received in the second quarter of 2021 as part of the Loan Agreement entered into inJune 2021 . The Company will pay approximately$1.7 million of debt issuance costs in the third quarter of 2021 for total expected net proceeds of$17.9 million (related to the Initial Note funded in the second quarter). Net cash provided by financing activities was$44.6 million for the six months endedJune 30, 2020 and consisted primarily of net proceeds of$35.4 million from an underwritten public offering of common stock for 15,180,000 shares of common stock of the Company. The Company also received$5.1 million from a registered direct offering with certain institutional investors, which included Armistice, that closed inFebruary 2020 for the sale of 1,306,282 shares of common stock of Company and net proceeds of$3.9 million from a private placement of equity securities with Armistice duringMarch 2020 .
Critical Accounting Policies, Estimates, and Assumptions
This Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our unaudited condensed consolidated financial statements
included in this Quarterly Report, 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 product sales, stock-based compensation, fair value measurements, 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, that 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
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Table of Contents estimates and assumptions are included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onMarch 8, 2021 . There have been no material changes to our critical accounting policies during the six months endedJune 30, 2021 .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable
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