(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Cerecor Inc. (the "Company" or "Cerecor" or "we") is a biopharmaceutical company focused on becoming a leader in development and commercialization of treatments for rare and orphan diseases. We are advancing a diverse pipeline of six assets in eight clinical development programs across immunology, oncology, and rare diseases. The management team spent the majority of their time in 2020 focusing on both progressing the pipeline and also on financing activities to fund pipeline development. These will also be the primary areas of focus in 2021.
On February 3, 2020, the Company consummated its merger with Aevi Genomic Medicine, Inc. ("Aevi"), in which Cerecor acquired the rights to CERC-002, CERC-006 and CERC-007 (the "Aevi Merger"). The Aevi Merger was a transformative event in 2020 and it significantly broadened Cerecor's pipeline by adding the rights to these three key new assets, as well as bringing in critical leadership to guide the Company and research and development of the expanded pipeline.
The Company successfully raised capital in 2020 and early 2021 which we believe is principally due to successfully improving our pipeline, development milestones and leadership team but also due in part to a robust biotechnology favorable capital markets environment which may not continue. The Company will continue to focus on raising capital, however, with a broader focus on both non-dilutive and dilutive funding opportunities, as well as potential business development related opportunities such as the out-license or partnering of Company assets. The Company believes the potential monetization of the priority review vouchers that may be granted in 2022 (if each compound is approved by the U.S. Food and Drug Administration) related to CERC-801, CERC-802 and CERC-803, which are in development for therapies for congenital disorders of glycosylation, to be an important part of the Company's capital plan.
The COVID-19 pandemic presented both challenges and opportunities to the Company in 2020 and we expect that to continue in 2021. The Company adapted to new ways to work remotely and, pursuant to the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), the Company benefited from favorable tax reform and loan programs. Most importantly, the Company created, initiated and executed a successful exploratory Phase 2 randomized, double-blind placebo-controlled proof of concept trial for the treatment of COVID-19 associated mild-to-moderate acute respiratory distress syndrome ("ARDS"). We are excited by the efficacy data of our primary endpoint (patients alive and free of respiratory failure over 28 days) and mortality. The development path for this compound in COVID-19 ARDS and/or potentially generalized ARDS will be an important focus of 2021. The rapidly changing environment of COVID-19 continues to present both risks and opportunities in the successful development of this asset.
Management's primary evaluation of the success of the Company is the ability to progress its pipeline assets forward towards commercialization or successful out-license. We believe the ability to timely achieve the anticipated milestones as presented in the section entitled "Business" in Item 1 of this Annual Report on Form 10-K represents our most immediate evaluation points as to the progress of our goal to move the pipeline forward.
As discussed briefly above, on February 3, 2020, the Company consummated the Aevi Merger, in which Cerecor acquired the rights to CERC-002, CERC-006 and CERC-007, thus expanding the Company's core pipeline to six assets in eight clinical development programs across immunology, oncology and rare diseases. We expect operating expenses, notably research and development expenses, to continue to outpace historic periods, as the Company advances its expanded pipeline.
Cerecor also entered into an employment agreement with Aevi's Chief Executive Officer, Mike Cola, for him to serve as Cerecor's Chief Executive Officer and an employment agreement with Aevi's Chief Scientific Officer, Dr. Garry Neil, for him to serve as Cerecor's Chief Medical Officer (shortly thereafter promoted to Chief Scientific Officer). Additionally, Mr. Cola and Dr. Sol Barer, the former Chairman of the Board of Aevi, were appointed to the Company's Board of Directors. Dr. Barer serves as the Chairman of Table of Contents
the Company's Board.
During the fourth quarter of 2019, the Company sold to Aytu BioScience, Inc. ("Aytu") its rights, titles and interest in, assets relating to certain commercialized products (the "Pediatric Portfolio"), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor's sales force and the assignment of supporting commercial contracts (the "Aytu Divestiture"). Thus, our only commercial product is Millipred(R), an oral prednisolone indicated across a wide variety of inflammatory conditions.
Upon the sale of the Pediatric Portfolio to Aytu, the Pediatric Portfolio met all conditions required 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.
Financial Operations Overview
Research and development expense for the year ended December 31, 2020 significantly increased as compared to the prior year, which was driven by the advancement of our expanded and maturing pipeline. Additionally, there was a $25.5 million acquired in-process research and development ("IPR&D") charge in 2020 directly related to the Aevi Merger. There was also a moderate increase to general and administrative expense related to the infrastructure needed to support the Company's expansion of its research and development efforts. Such increases were the main drivers to our net loss of $63.5 million for the year ended December 31, 2020. Additionally, our net cash used in operations significantly increased to $40.5 million for the year ended December 31, 2020, which was also driven by the advancement of our expanded and maturing pipeline. We expect such trends to continue to outpace historic periods, as we continue to advance our pipeline in anticipation of multiple clinical data readouts in 2021.
As of December 31, 2020, Cerecor had $18.9 million in cash and cash equivalents. In January 2021, the Company closed an underwritten public offering for net proceeds of approximately $37.6 million. We plan to use our current cash on hand along with cash inflows from investing and/or financing activities to support the ongoing clinical development of our expanded and maturing pipeline and for general corporate purposes to support such pipeline development.
Smaller Reporting Company Status
We are a "smaller reporting company," as such term is defined in Rule 12b-2 of the Exchange Act, meaning that the market value of our common stock held by non-affiliates is less than $700 million and our annual revenue is less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our common stock held by non-affiliates is less than $250 million or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our common stock held by non-affiliates is less than $700 million. As of December 31, 2020, we lost our status as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012. Notwithstanding, our status as a "smaller reporting company" allows us to take advantage of many of the same exemptions from disclosure requirements applicable to us as a former emerging growth company, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
Product Revenue, net
Net product revenue was $6.7 million for the year ended December 31, 2020, which was consistent with the net product revenue for the year ended December 31, 2019.
In the fourth quarter of 2020, the Company entered into an amended License and Supply Agreement for the Millipred(R) product with a wholly owned subsidiary of Teva Pharmaceutical Industries Ltd. ("Teva"), which extends the original license agreement for a period of thirty months (from April 1, 2021 through September 30, 2023). Beginning April 1, 2021, Cerecor will 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. We are currently exploring strategic alternatives for our non-core assets, which includes Millipred(R) . Therefore, Table of Contents
our ability to increase revenue in the future will depend on developing and commercializing our current clinical pipeline of product candidates.
License and Other Revenue
During the third quarter of 2019, the Company assigned and transferred its rights, title, interest, and obligations with respect to CERC-611 to ES Therapeutics, LLC ("ES Therapeutics") in exchange for initial gross proceeds of $0.1 million, which was recognized as license and other revenue for the year ended December 31, 2019. The Company is also eligible for potential milestone payments upon achievement of certain targets of cumulative net sales of the licensed product. There was no license and other revenue for the year ended December 31, 2020.
Cost of Product Sales
Cost of product sales were $0.3 million for the year ended December 31, 2020, as compared to $(0.6) million for the year ended December 31, 2019. During the second quarter of 2019, the Company entered into a settlement agreement related to the 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 years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 (in thousands) Preclinical expenses $ 6,487 $ 2,982 Clinical expenses 10,803 3,826 CMC expenses 7,645 3,788 Internal expenses not allocated to programs: Salaries, benefits and related costs 5,763 1,909 Stock-based compensation expense 1,339 464 Other 155 (1,205) $ 32,192 $ 11,764
Research and development expenses increased $20.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The overall increase was driven by an increase in research and development activities in 2020 as the Company expanded and advanced its pipeline assets, including the rights to the additional assets acquired in the Aevi Merger.
Clinical expenses increased $7.0 million primarily due to costs incurred for the CERC-002 proof-of-concept trial in patients with COVID-19 ARDS, which began in July 2020, and increased spending related to development of the other core pipeline assets. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $3.9 million due to additional spending on manufacturing to support clinical development of the expanded pipeline. Preclinical expenses increased $3.5 million primarily due to the development of a more robust pipeline given the rights acquired to develop additional assets in the Aevi Merger.
Salaries, benefits and related costs increased by $3.9 million 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 $0.9 million mainly due to an increase in stock option grants as a result of the increased headcount.
The $1.4 million increase to other expenses was primarily driven by the reversal of $1.3 million of research and development expense for the year ended December 31, 2019, which was reversed as a result of the Company's assignment of the CERC-611 license agreement to ES Therapeutics in the third quarter of 2019. As part of the assignment, the Company was released of a contingent payment liability of $1.3 million to Eli Lilly and Company ("Lilly") upon the first subject dosage of CERC-611 in a multiple Table of Contents
ascending dose study, which was previously recorded as a license obligation on the balance sheet. The decrease of the license obligation to $0 resulted in an offset of research and development expense for the year ended December 31, 2019. There was no such reversal in the year ended December 31, 2020.
We expect research and development expenses to continue to outpace historic periods, as the Company advances its expanded and maturing pipeline in anticipation of multiple clinical data readouts in 2021.
Acquired In-Process Research and Development Expenses
On February 3, 2020, the Company consummated its merger with Aevi. As a result, the Company acquired $25.5 million of IPR&D. 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 year ended December 31, 2019.
General and Administrative Expenses The following table summarizes our general and administrative expenses of continuing operations for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 (in thousands) Salaries, benefits and related costs $ 4,704 $ 4,196 Legal, consulting and other professional expenses 6,606 3,943 Stock-based compensation expense 5,135 1,550 Other 972 434 $ 17,417 $ 10,123
General and administrative expenses increased $7.3 million for the year ended December 31, 2020 compared to the same period in 2019. The increase was largely driven by a $3.6 million increase to stock-based compensation expense as a result of equity awards granted to newly appointed executive leadership and board members.
Legal, consulting and other professional expenses increased by $2.7 million, which was largely driven by a $0.9 million expense recognized related to a payment made pursuant to a settlement agreement entered into during the third quarter with the former owners of TRx. The remainder of this increase was attributable to a variety of factors including increased recruiting costs incurred to grow headcount to support the expanded pipeline development.
We expect general and administrative expenses to moderately increase compared to historic periods as a result of 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 of continuing operations for the years ended December 31, 2020 and 2019: Year Ended December 31, 2020 2019 (in thousands) Salaries, benefits and related costs $ 749 $ 628 Stock-based compensation expense 315 191 Advertising and marketing expense 1,240 606 Other 37 59 $ 2,341 $ 1,484
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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 $0.9 million increase for the year ended December 31, 2020 as compared to the prior year was driven by a $0.6 million increase in advertising and marketing expense related to market research, a $0.1 million increase in salaries, benefits and related costs driven by increased headcount to support such initiatives.
The following table summarizes amortization expense for the years ended December 31, 2020 and 2019:
Year Ended December 31, 2020 2019 (in thousands) Amortization of intangible assets $ 1,741 $ 1,339
Amortization expense relates to the amortization of the assembled workforces acquired as part of previous acquisitions and mergers. In 2020, as a result of the asset acquisition accounting treatment of the Aevi Merger, the Company recorded an assembled workforce intangible asset of $0.9 million, which was assigned a two-year useful life. Therefore, the $0.3 million increase to amortization expense was primarily driven by the amortization of the assembled workforce acquired as part of the Aevi Merger.
Change in fair value of contingent consideration
The following table summarizes our change in fair value of contingent consideration from continuing operations for the years ended December 31, 2020 and 2019:
Year Ended December 31, 2020 2019 (in thousands) Change in fair value of contingent consideration $ - $ (1,256)
The Company recognized a gain on the change in fair value of contingent consideration of $1.3 million for the year ended December 31, 2019. The contingent consideration was related to the potential for future payment of consideration that was contingent upon the achievement of operation and commercial milestones related to the Ulesfia product, which was acquired as part of the Company's acquisition of TRx in 2017.
During the second quarter of 2019, the Company entered into a settlement agreement related to the Ulesfia product, which released the Company from the potential contingent payments related to the TRx Acquisition, reducing the fair value down to $0. This represented a gain on the change of fair value of contingent consideration of $1.3 million for the year ended December 31, 2019. As the Company was released from the contingent payment in 2019, there was no change in fair value of contingent consideration for the year ended December 31, 2020.
Other income, net
The following table summarizes our other income, net from continuing operations for the years ended December 31, 2020 and 2019:
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Year Ended December 31, 2020 2019 (in thousands) Change in fair value of Investment in Aytu (as defined below) $ 5,208 $ 54 Other (expense) income, net 410 (28) Interest income, net 49 121 $ 5,667 $ 147
Other income, net increased $5.5 million for the year ended December 31, 2020 as compared to the prior year. Other income, net is mainly comprised of a $5.2 million gain on change in the fair value of the Company's investment in Aytu. As consideration of the Aytu Divestiture in 2019, the Company received 9,805,845 shares of Aytu Series G Preferred Stock (the "Investment in Aytu"), which was remeasured at the current fair value each reporting period. In April 2020, the Company converted its shares of Aytu Series G Preferred Stock into 9,805,845 shares of common stock and sold that common stock for net proceeds of approximately $12.8 million, which resulted in the Company recognizing a realized gain of $5.2 million from its estimated fair value as of the divestiture date. The gain was primarily driven by a significant increase in Aytu's stock price from December 31, 2019 to the dates the Company sold its shares of Aytu common stock in mid-April 2020. Additionally, the Company recognized $0.4 million of other income for the year ended December 31, 2020 related to the Paycheck Protection Program ("PPP") Loan received during the second quarter of 2020 as the Company believes it meets the criteria for loan forgiveness. Both transactions were unique to 2020, thus causing the increase as compared to the prior year period.
Income tax (benefit) expense
The Company recognized an income tax benefit of $2.8 million for the year ended December 31, 2020 and income tax expense of $0.3 million for the year ended December 31, 2019. The tax benefit recognized for the year ended December 31, 2020 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 for taxes paid in fiscal year 2017. This benefit was recognized in the first and second quarters. The expense recognized for the year ended December 31, 2019 was a primarily the result of estimated state cash taxes and interest on an unpaid tax liability. The annual effective tax rate was 4.21% and (1.75)% for the years ended December 31, 2020 and 2019, respectively.
Liquidity and Capital Resources, including Capital Expenditure and Cash Requirements
In 2020, the Company closed three equity offerings for net proceeds of approximately $44.4 million and in April 2020, the Company sold an investment for net proceeds of $12.8 million. The Company also closed an underwritten public offering in January 2021 for net proceeds of approximately $37.6 million. As of December 31, 2020, Cerecor had $18.9 million in cash and cash equivalents.
The CARES Act provides stimulus measures, including the PPP, to provide certain small businesses with liquidity to support their operations (such as to retain employees and maintain payroll and lease payments) during the COVID-19 pandemic. Cerecor received a $0.4 million PPP loan during the second quarter of 2020. PPP loans have a 1% fixed annual interest rate and mature in two years, and are eligible for forgiveness under certain conditions. If approved by the lender, the lender will submit the forgiveness application to the Small Business Administration (the "SBA") for ultimate approval. The SBA has 90 days from receipt to approve or reject the forgiveness application. As of December 31, 2020, the Company believes it meets the criteria for forgiveness and submitted an application for forgiveness with its lender in 2020.
In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's existing pipeline assets and acquisitions or in-licensing of new assets. For the year ended December 31, 2020, Cerecor generated a net loss of $63.5 million and negative cash flows from operations of $40.5 million. As of December 31, 2020, Cerecor had an accumulated deficit of $177.8 million.
The accompanying 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 core 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 financial statements included herein were issued. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
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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) equity and/or debt 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. 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 financings and other potential options to raise . . .
Mar 08, 2021
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