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Aug. 6, 2020, 7:43 a.m. EDT

10-Q: CERECOR INC.

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(EDGAR Online via COMTEX) -- 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," "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 the Securities and Exchange Commission, or SEC, on March 11, 2020, 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, 2019 appearing in our Annual Report on Form 10-K filed with the SEC on March 11, 2020.

Overview

Cerecor Inc. (the "Company" or "Cerecor") is a biopharmaceutical company focused on becoming a leader in development and commercialization of treatments for rare pediatric and orphan diseases. The Company is advancing an emerging clinical-stage pipeline of innovative therapies that address unmet patient needs within rare pediatric and orphan diseases. The Company's pediatric rare disease pipeline includes CERC-801, CERC-802 and CERC-803 ("CERC-800 compounds"), which are therapies for inherited metabolic disorders known as Congenital Disorders of Glycosylation ("CDGs"). The U.S. Food and Drug Administration ("FDA") granted Rare Pediatric Disease Designation ("RPDD") and Orphan Drug Designation ("ODD") to all three CERC-800 compounds, thus potentially qualifying the Company to receive a Priority Review Voucher ("PRV") upon approval of each new drug application ("NDA"). The Company is also developing CERC-002, CERC-006 and CERC-007. CERC-002 is an anti-LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for HVEM, a receptor expressed by T lymphocytes) monoclonal antibody being developed for the treatment of COVID-19 acute respiratory distress syndrome ("ARDS") and Pediatric-onset Crohn's Disease. CERC-006 is a dual mTOR inhibitor being developed for the treatment of complex Lymphatic Malformations and has been granted ODD and RPDD by the FDA, thus potentially qualifying the Company to receive a PRV upon approval of an NDA. CERC-007 is an anti-IL-18 monoclonal antibody being developed for the treatment of autoimmune inflammatory diseases such as Adult Onset Stills Disease ("AOSD") and Multiple Myeloma.

The Company continues to explore strategic alternatives for its commercialized product, Millipred(R), an oral prednisolone indicated across a wide variety of inflammatory conditions. The Company has been in discussions with Simon Pedder, a former member of its Board of Directors, about potentially transferring its non-core neurology pipeline assets, CERC-301 and CERC-406, to a new company formed by Dr. Pedder, although it has not agreed to binding terms, and any such transaction might not happen until the second half of 2020, if at all.

Recent Developments

On June 11, 2020, the Company closed an underwritten public offering of 15,180,000 shares of its common stock (inclusive of 1,980,000 shares that were sold pursuant to the underwriter's full exercise of its option to purchase additional shares of Cerecor's common stock) for net proceeds of approximately $35.4 million. Armistice Capital, LLC ("Armistice"), whose Chief Investment Officer Steve Boyd is a Cerecor director, participated in the offering by purchasing 2,000,000 shares of common stock, on the same terms as all other investors. Additionally, certain of the Company's officers participated in the offering by purchasing an aggregate of 110,000 shares of common stock, on the same terms as all other investors.

Research and Development Update

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In July 2020, the Company announced that the first patient was enrolled in a proof-of-concept trial evaluating the safety and efficacy of the anti-LIGHT monoclonal antibody, CERC-002, in patients with COVID-19 cytokine storm-induced ARDS. The proof-of-concept, randomized, multicenter, double-blind, placebo-controlled trial will enroll approximately 82 subjects hospitalized with COVID-19 ARDS. The primary objective of the study is to demonstrate that treatment with CERC-002 results in fewer instances of respiratory failure and death versus the standard of care. Top-line data is expected in the fourth quarter of 2020. Prior to enrollment, in May 2020, the Company received clearance from the FDA to proceed with the proof-of-concept trial. The scientific rationale for the proof-of-concept trial is supported by recent biomarker data demonstrating elevated levels of LIGHT in patients hospitalized with COVID-19 cytokine storm-induced ARDS.

In May 2020, Cerecor entered into an Amended and Restated Clinical Development and Option Agreement (the "New CDOA") with Kyowa Kirin Co., Ltd., formerly known as Kyowa Hakko Kirin Co., Ltd ("KKC") relating to the development and potential commercialization of CERC-002 in the treatment of COVID-19 ARDS. The New CDOA grants Cerecor an additional option to obtain exclusive rights for the development, manufacture and commercialization of CERC-002 in the treatment, prevention, and diagnosis of acute lung injury ("ALI") and ARDS, for an initial license fee in the low single-digit millions of dollars upon exercise of the option. The New CDOA includes additional terms, such as certain regulatory milestone payments and profit sharing specifically related to CERC-002 in the ARDS/ALI Field.

During the second quarter of 2020, the Company concluded its CDG FIRST trial, which was a retrospective trial evaluating the use of monosaccharide replacement therapy in PGMI-CDG, MPI-CDG and LADII-CDG. The Company plans to use data from this trial to inform future trial design and endpoints for forthcoming pivotal trials for the CERC-800s.

During the first quarter of 2020, the Company paused its Phase 1b open-label, multi-center, dose-escalation proof-of-concept study for CERC-002 for the treatment of Pediatric-onset Crohn's Disease due to a moratorium placed on endoscopy as a result of COVID-19. The Company resumed this trial in July 2020.

In the third quarter of 2020, the FDA granted ODD and RPDD to CERC-006. There are numerous benefits associated with receipt of ODD, which include seven-year marketing exclusivity (upon FDA approval) in the United States, exemption of FDA application fees and tax credits for qualified clinical trials. RPDD provides potential eligibility for receipt of a PRV upon approval of an NDA.

The following chart summarizes key information about our emerging clinical-stage rare disease pipeline and anticipated research & development milestones:

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[[Image Removed: cerc-20200630_g1.jpg]]

Our Strategy

Advancing our pipeline of compounds through development and to regulatory approval;

Results of Operations

During the fourth quarter of 2019, the Company sold to Aytu BioScience its rights, titles and interest in, assets relating to its Pediatric Portfolio as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor's sales force and the assignment of supporting commercial contracts, retaining as our only commercial product, Millipred, an oral prednisolone indicated across a wide variety of inflammatory conditions (the "Aytu Divestiture"). As a result, the Pediatric Portfolio met all conditions required in order to be classified as discontinued operations. Accordingly, unless otherwise noted, the following section focuses on results of operations from continuing operations only for all periods discussed.

Comparison of the Three Months Ended June 30, 2020 and 2019

Product Revenue, net

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Net product revenue was $1.3 million for the three months ended June 30, 2020, which was relatively consistent with the net product revenue for the three months ended June 30, 2019 of $1.4 million.

Cost of Product Sales

Cost of product sales was $0.1 million for the three months ended June 30, 2020, as compared to $(1.5) million for the three months ended June 30, 2019. The $1.5 million reversal of expense for the three months ended June 30, 2019 was driven by a settlement agreement the Company entered into related to the Ulesfia product during the second quarter of 2019, which fully released the Company of its minimum purchase obligations and minimum royalty provisions related to the Ulesfia product.







        Research and Development Expenses
            The following table summarizes our research and development expenses for the
        three months ended June 30, 2020 and 2019:
                                                                 Three Months Ended June 30,
                                                                2020                         2019
                                                                        (in thousands)
        Preclinical expenses                              $       1,572                   $   667
        Clinical expenses                                         1,347                     1,691
        CMC expenses                                              1,204                       755
        Internal expenses not allocated to programs:
        Salaries, benefits and related costs                      1,201                       474
        Stock-based compensation expense                            391                       121
        Other                                                       202                         5
                                                          $       5,917                   $ 3,713
        


Research and development expenses increased $2.2 million for the three months ended June 30, 2020 compared to the same period in 2019. The overall increase was driven by an increase in research and development activities in the current year as the Company expanded its pipeline assets as a result of the Aevi Merger and continued to develop its existing pipeline assets during the quarter.

Preclinical expenses increased $0.9 million primarily due to additional spending related to the Aevi Merger. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $0.4 million for the three months ended June 30, 2020 compared to the same period in 2019 due to additional spending on manufacturing to support clinical development as a result of the Company acquiring the rights to additional assets from the Aevi Merger. These increases were partially offset by a $0.3 million decrease in clinical expenses driven by minimal spend on clinical development of CERC-301 as the Company began exploring strategic alternatives for the asset during 2019.

Salaries, benefits and related costs increased by $0.7 million compared to the same period in 2019 mainly due to an increase in headcount as a result of the Aevi Merger and salary-related costs to grow our research and development activities as we continue to invest in our expanded pipeline. Stock-based compensation increased by $0.3 million mainly due to an increase in stock option grants as a result of the increased headcount due to the Aevi Merger and the Company's annual stock option grant in April 2020.







        General and Administrative Expenses
            The following table summarizes our general and administrative expenses for
        the three months ended June 30, 2020 and 2019:
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                                                                                       Three Months Ended June 30,
                                                                                         2020                  2019
                                                                                              (in thousands)
        Salaries, benefits and related costs                                       $       1,756           $   1,226
        Legal, consulting and other professional expenses                                  1,804                 774
        Stock-based compensation expense                                                   2,286                 196
        Other                                                                                255                 145
                                                                                   $       6,101           $   2,341
        


General and administrative expenses were $6.1 million for the three months ended June 30, 2020, which represents a $3.8 million increase from the prior period. The increase was largely driven by a $2.1 million increase in stock-based compensation expense as a result of $0.8 million of expense recognized related to an equity award granted to the Company's Chairman of the Board during the second quarter of 2020, expense recognized related to the modifications of certain former executives' and board members' equity awards due to leadership changes during the quarter and an increase in stock option grants as a result of the Company's annual grant in April 2020 and increased headcount as a result of the Aevi Merger. Additionally, legal, consulting and other professional expenses increased by $1.0 million due to increased patent costs driven by the additional assets acquired as part of Aevi Merger, increased recruiting costs, and increased legal fees related to leadership changes and contract reviews performed. Salaries, benefits and related costs increased $0.5 million mainly due to a severance accrual related to the resignation of an executive during the second quarter of 2020.







        Sales and Marketing Expenses
            The following table summarizes our sales and marketing expenses for the
        three months ended June 30, 2020 and 2019:
                                                          Three Months Ended June 30,
                                                        2020                            2019
                                                                 (in thousands)
        Salaries, benefits and related costs      $        183                        $ 121
        Stock-based compensation expense                    87                           57
        Advertising and marketing expense                  366                          148
        Other                                               17                            -
                                                  $        653                        $ 326
        


Sales and marketing expenses of continuing operations consist of expenses related to advertising and marketing initiatives to support the go-to-market strategy of our pipeline assets and the respective salaries and stock-based compensation to support such initiatives. The overall $0.3 million increase for the three months ended June 30, 2020 as compared to the same period in 2019 was primarily driven by a $0.2 million increase in advertising and marketing expense related to market research and a $0.1 million increase in salaries, benefits and related costs driven by increased headcount to support such initiatives.







        Amortization Expense
        The following table summarizes our amortization expense for the three months
        ended June 30, 2020 and 2019:
                                                       Three Months Ended June 30,
                                                     2020                            2019
                                                              (in thousands)
        Amortization of intangible assets      $        404                        $ 335
        


Amortization expense of the continuing operations relates to the amortization of the Company's acquired Millipred product marketing rights and amortization of the assembled workforce acquired as part of the Aevi Merger. As a result of the asset acquisition accounting treatment of the Aevi Merger in the first quarter of 2020, the Company recorded an assembled workforce intangible asset of $0.7 million, which was assigned a two-year useful life. Therefore, the $0.1 million increase to amortization expense for the three months ended June 30, 2020 as compared to the prior period was primarily driven by the amortization expense of the assembled workforce acquired as part of the Aevi Merger.







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        Other (Expense) Income, Net
            The following table summarizes our other income (expense), net for the three
        months ended June 30, 2020 and 2019:
                                                                                    Three Months Ended June 30,
                                                                                      2020                2019
                                                                                          (in thousands)
        Change in fair value of Investment in Aytu                               $   (1,872)          $       -
        Change in fair value of warrant liability and unit purchase option
        liability                                                                         3                  19
        Other income (expense), net                                                     396                   -
        Interest income, net                                                              9                  38
                                                                                 $   (1,464)          $      57
        


Other expense, net increased $1.5 million for the three months ended June 30, 2020 as compared to the prior period. Other expense, net is mainly comprised of a $1.9 million loss on change in the fair value of the Company's Investment in Aytu. As consideration of the Aytu Divestiture in November 2019, the Company received 9,805,845 shares of Aytu Series G Preferred Stock, which was remeasured at the current fair value each reporting period with the change in fair value recorded to other (expense) income, net in the accompanying statements of operations. In April 2020, the Company converted its shares of Aytu Preferred Stock into approximately 9.8 million shares of common and sold that common stock for net proceeds of approximately $12.8 million. Therefore, the Company's Investment in Aytu was $0 as of June 30, 2020, which represented a $1.9 million loss on change in the fair value for the three months ended June 30, 2020. The loss was driven by a decrease in Aytu's stock price from March 31, 2020 to the dates the Company sold its shares of Aytu common stock in mid-April 2020.

The increase in other expense, net was partially offset by other income recognized on the $0.4 million Payroll Protection Program ("PPP") Loan received by the Company during the second quarter of 2020. The PPP Loan Program is part of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") which serves to provide certain small businesses with liquidity to support their operations during the COVID-19 pandemic. PPP Loans are eligible for forgiveness under certain conditions. The Company believes it meets the criteria for forgiveness and plans to submit an application for forgiveness during the third quarter of 2020. Therefore, the Company recognized $0.4 million as other income for the three months ended June 30, 2020.

Income Tax (Benefit) Expense

The following table summarizes our income tax (benefit) expense for the three months ended June 30, 2020 and 2019:

(in thousands)

The Company recognized an income tax benefit of $0.5 million for the three months ended June 30, 2020 and income tax expense of $0.1 million for the three months ended June 30, 2019. The 2020 tax benefit recognized was a result of a current year tax law change and the ability of the Company to now carry back certain losses related to the CARES Act and related state tax provisions. The expense recognized for the three months ended June 30, 2019 was a result of interest on an unpaid tax liability related to the 2017 tax year and state taxes.

Comparison of the Six Months Ended June 30, 2020 and 2019

Product Revenue, net

Net product revenue was $4.1 million for the six months ended June 30, 2020, which was relatively consistent with the net product revenue for the six months ended June 30, 2019.

Cost of Product Sales

Cost of product sales were $0.1 million for the six months ended June 30, 2020, as compared to $(0.7) million for the six months ended June 30, 2019. During the second quarter of 2019, the Company entered into a settlement agreement related to the







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Ulesfia product, which fully released the Company of its minimum purchase obligations and minimum royalty provisions related to the Ulesfia product resulting in a reversal of expense of approximately $1.6 million. The reversal of expense was partially offset by minimum royalty obligations related to the Ulesfia product recognized in the first quarter of 2019 prior to entering into the settlement agreement.







        Research and Development Expenses
            The following table summarizes our research and development expenses for the
        six months ended June 30, 2020 and 2019:
                                                                 Six Months Ended June 30,
                                                                2020                      2019
                                                                      (in thousands)
        Preclinical expenses                              $       2,818                $ 1,547
        Clinical expenses                                         1,944                  3,280
        CMC expenses                                              2,370                  1,190
        Internal expenses not allocated to programs:
        Salaries, benefits and related costs                      2,514                    908
        Stock-based compensation expense                            772                    178
        Other                                                       267                     11
                                                          $      10,685                $ 7,114
        


Research and development expenses increased $3.6 million for the six months ended June 30, 2020 compared to the same period in 2019. The overall increase was driven by an increase in research and development activities in the current year as the Company expanded its pipeline assets as a result of the Aevi Merger and continued to develop its existing pipeline assets during the quarter.

Salaries, benefits and related costs increased by $1.6 million compared to the same period in 2019 mainly due to an increase in headcount as a result of the Aevi Merger and salary-related costs to grow our research and development activities as we continue to invest in our expanded pipeline. Additionally, the Company recognized $0.3 million of severance within salaries, benefits and related costs for the six months ended June 30, 2020 related to a separation agreement entered into with a research and development executive during the first quarter of 2020. There was no severance for the six months ended June 30, 2019.

Preclinical expenses increased $1.3 million primarily due to additional spending related to the Aevi Merger. Similarly, Chemistry, Manufacturing, and Controls ("CMC") expenses increased $1.2 million for the six months ended June 30, 2020 compared to the same period in 2019 due to additional spending on manufacturing to support development of the Company's expanded pipeline. These increases were partially offset by a $1.3 million decrease in clinical expenses driven by minimal spend on clinical development of the Company's non-core neurology assets as the Company began exploring strategic alternatives for the asset during 2019.

Acquired In-Process Research and Development Expenses

On February 3, 2020, the Company consummated its merger with Aevi, which was recorded as an asset acquisition. As a result, the Company acquired $25.5 million of in-process research and development ("IPR&D") for two clinical stage pipeline assets for rare and orphan diseases (CERC-006 and CERC-007). 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 six months ended June 30, 2019.







        General and Administrative Expenses
            The following table summarizes our general and administrative expenses for
        the six months ended June 30, 2020 and 2019:
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                                                                                        Six Months Ended June 30,
                                                                                         2020                 2019
        . . .
        


Aug 06, 2020

COMTEX_368971591/2041/2020-08-06T07:42:42

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