(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 8, 2021, 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, 2020 appearing in our Annual Report on Form 10-K filed with the SEC on March 8, 2021.
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. 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 therapies for congenital disorders of glycosylation and CERC-006, an oral mTORC1/2 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 the treatment of severe pediatric-onset Crohn's disease and COVID-19 acute respiratory distress syndrome. CERC-007 targets the cytokine IL-18 and is in clinical development for the treatment of Still's disease (adult onset Still's disease and systemic juvenile idiopathic arthritis) and multiple myeloma. CERC-006, 801, 802 and 803 have all received Orphan Drug Designation and Rare Pediatric Designation, which makes all four eligible for a priority review voucher ("PRV") upon approval from the U.S. Food and Drug Administration ("FDA").
The Company continues to explore strategic alternatives for its commercialized product, Millipred(R), an oral prednisolone indicated across a wide variety of inflammatory conditions, and for its non-core neurology pipeline assets.
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 successful 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 that the expanded license agreement with Kyowa Kirin Co. ("KKC") will allow us to explore CERC-002 in other indications and to enhance the pipeline asset's potential for business development opportunities. Finally, the financing executed in January for net proceeds of $37.7 million provided cash runway for the development of our pipeline.
We expect COVID-19 to continue to present both challenges and opportunities to our business. However, there were no recent developments impacting the Company related to COVID-19.
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Research and Development Updates
On March 25, 2021, the Company entered into an expanded license agreement with KKC for exclusive worldwide rights to develop, manufacture and commercialize CERC-002, KKC's first-in-class fully human anti-LIGHT (TNFSF14) monoclonal antibody for all indications. KKC has an option to retain the rights in Japan. The Company paid a $10.0 million upfront license fee to KKC in April 2021. KKC is also eligible to receive additional payments based on achievement of regulatory and commercial milestones, as well as royalties, and a share of sublicensing income.
In May 2021, the Company announced that it dosed its first patient in a Phase 1b open-label dose-escalation clinical trial of CERC-007 in patients with adult onset Still's disease ("AOSD"). The Phase 1b clinical trial is a global multi-center, open label trial of CERC-007 that will enroll approximately 12 subjects with active AOSD. The primary objective of the study is to determine the safety and tolerability of CERC-007 in AOSD patients. Key secondary endpoints include assessing pharmacokinetic profile of CERC-007 and determining the effect of CERC-007 on systemic clinical manifestations and systemic markets of inflammation in subjects with AOSD.
In May 2021, the Company announced the FDA had granted FTD to CERC-002 for treatment of hospitalized patients with COVID-19. FTD is granted to drugs being developed for the treatment of serious or life-threatening diseases or conditions where there is an unmet medical need. The purpose of the provision is to help facilitate development and expedite the review of drugs to treat serious or life-threatening conditions so that an approved product can reach the market expeditiously. Sponsors of drugs that receive FTD have the opportunity for more frequent interactions with the FDA review team throughout the development program. Under FTD, a Biologic License Application ("BLA") for CERC-002 is eligible for both rolling submission and priority review.
The following chart summarizes key information about our clinical-stage pipeline and anticipated research & development milestones:
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Advancing our pipeline of compounds through development and to regulatory approval;
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
Product Revenue, net
Net product revenue was $0.5 million for the three months ended March 31, 2021, as compared to $2.8 million for the three months ended March 31, 2020. During the first quarter of 2021, the Company's inventory on hand became short-dated (which the Company considers to be within six months of expiration), due to manufacturing delays. The Company recorded a full allowance of $2.9 million for returns on the sale of short-dated inventory given the high likelihood of return. This led to a minimal amount of net sales being recognized in the first quarter of 2021, which drove the decrease as compared to the three months ended March 31, 2020. The Company received the delayed inventory lot in April 2021. Therefore, we expect net revenues of Millipred(R) to return to levels consistent with prior periods over 2021, however we continue to explore strategic alternatives for our non-core assets, which includes Millipred(R). Accordingly, our ability to increase revenue in the future will depend on developing and commercializing our current clinical pipeline of product candidates.
Cost of Product Sales
Cost of product sales was $0.1 million for the three months ended March 31, 2021, which was consistent with the cost of product sales for the three months ended March 31, 2020.
The Company has a license and supply agreement for the Millipred(R) product with a wholly owned subsidiary of Teva Pharmaceutical Industries Ltd. ("Teva"), which expires on September 30, 2023. As part of a prior amendment to extend the contract to its current term, Cerecor agreed pay Teva fifty percent of the net profit of the Millipred(R) product following each calendar quarter, subject to a $0.5 million quarterly minimum payment, which was set to begin April 1, 2021. In May 2021, the Company and Teva entered into an amendment in which the net profit split will be delayed until July 1, 2021. Dr. Sol Barer is the Chairman of Cerecor's board of directors and also serves as the Chairman of Teva's board of directors. 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 March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Preclinical expenses $ 2,234 $ 1,277 Clinical expenses 5,440 570 CMC expenses 4,734 1,193 License and milestone expenses 10,500 - Internal expenses: Salaries, benefits and related costs 1,937 1,313 Stock-based compensation expense 298 382 Other 63 33 $ 25,206 $ 4,768
Research and development expenses increased $20.4 million for the three months ended March 31, 2021 compared to the same period in 2020. The Company's merger with Aevi Genomic Medicine Inc. ("Aevi") (the "Aevi Merger" or the "Merger"), which closed in February 2020, was a transformative event as it significantly broadened our pipeline by adding the rights to three new Table of Contents
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, a main driver of the increase was due to a full quarter of expanded development activities for the three months ended March 31, 2021 (compared to preliminary activities for the prior year period).
In addition, the increase was driven by a $10.0 million upfront license fee, which was recorded in March of 2021 and paid in April 2021, related to the expanded indication license agreement for CERC-002 entered into with KKC in March 2021. Furthermore, clinical expenses increased $4.9 million primarily due to costs incurred to advance the pipeline, most notably the CERC-800 compounds and CERC-007. Chemistry, Manufacturing, and Controls ("CMC") expenses increased $3.5 million due to additional spending on manufacturing to support development of the progressing pipeline. Preclinical expenses increased $1.0 million due to an increase in non-clinical toxicity studies and biomarker studies to support clinical development.
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.
Acquired In-Process Research and Development Expenses
In the first quarter of 2020, the Company consummated its merger with Aevi, resulting in the Company 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 in-process research and development for the three months ended March 31, 2021.
General and Administrative Expenses The following table summarizes our general and administrative expenses for the three months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Salaries, benefits and related costs $ 920 $ 1,012 Legal, consulting and other professional expenses 2,592 784 Stock-based compensation expense 1,045 706 Other 354 174 $ 4,911 $ 2,676
General and administrative expenses were $4.9 million for the three months ended March 31, 2021, which represents a $2.2 million increase from the prior year period. The increase was largely driven by a $1.8 million increase in legal, consulting and other professional expenses. The largest drivers was higher legal costs in the current quarter, including costs to execute the KKC expanded indication license agreement and to advance other business development activities.
Stock-based compensation expense increased $0.3 million as a result of increased headcount in the first quarter of 2021 (inclusive of a full quarter of expense for the executive leadership team, as opposed to a partial period in the prior year due to timing of the Aevi Merger) and as a result of service-based options granted to employees in January 2021 as part of its annual stock option award.
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 March 31, 2021 and 2020 (in thousands): 27 -------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2021 2020 Salaries, benefits and related costs $ 189 $ 134 Stock-based compensation expense 105 55 Advertising and marketing expense 129 481 Other 12 7 $ 435 $ 677
Sales and marketing expenses consist of expenses related to initiatives to support the go-to-market strategy of our pipeline assets. For the three months ended March 31, 2020, we incurred costs related to market research projects for multiple programs and indications that did not repeat in the current year, thus driving the $0.2 million decrease.
The following table summarizes our amortization expense for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31, 2021 2020
Amortization of intangible assets $ 424 $ 431
Amortization expense relates to the amortization of the assembled workforces acquired as part of previous acquisitions and mergers and was consistent for the three months ended March 31, 2021 and 2020. 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.
Other Income, Net The following table summarizes our other income, net for the three months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Change in fair value of Investment in Aytu (as defined below) $ - $ 7,080 Change in other income - 11 Interest income, net 17 10 $ 17 $ 7,101
Other income, net decreased $7.1 million for the three months ended March 31, 2021, as compared to the prior year. For the three months ended March 31, 2020, other income, net was mainly comprised of a $7.1 million gain on change in the fair value of the Company's investment in Aytu. As consideration of the Company's divestiture of certain commercialized products to Aytu BioScience, Inc. ("Aytu") in 2019 (the "Aytu Divestiture"), the Company received 9,805,845 shares of Aytu Series G Preferred Stock (the "Investment in Aytu"), which was remeasured at fair value each reporting period. As of March 31, 2020, the Investment in Aytu was $14.7 million, representing a change in fair value of $7.1 million from the prior reporting period (driven by a significant increase in Aytu's stock price from December 31, 2019 to March 31, 2020). The Company subsequently converted such shares into common stock and sold that common stock for net proceeds of approximately $12.8 million in April 2020.
Income Tax Expense (Benefit)
The following table summarizes our income tax expense (benefit) for the three months ended March 31, 2021 and 2020 (in thousands):
Income tax expense (benefit) $ 11 $ (2,157)
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The Company recognized minimal income tax expense for the three months ended March 31, 2021 compared to an income tax benefit of $2.2 million for the three months ended March 31, 2020. The tax benefit recognized for the three months ended March 31, 2020 was a result of a tax law change signed into law as part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which allowed the Company to carry back certain losses for taxes paid in fiscal year 2017. Due to the full valuation allowance against the Company's deferred tax assets and current year losses, minimal tax expense was recognized for the three months ended March 31, 2021.
Liquidity and Capital Resources
In January 2021, the Company closed an underwritten public offering of 13,971,889 shares of its common stock and 1,676,923 pre-funded warrants for net proceeds of approximately $37.7 million. As of March 31, 2021, Cerecor had $38.3 million in cash and cash equivalents.
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 three months ended March 31, 2021, Cerecor generated a net loss of $30.7 million and negative cash flows from operations of $18.3 million. As of March 31, 2021, Cerecor had an accumulated deficit of $208.5 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 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.
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, (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 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 are 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 three months ended March 31, 2021 and 2020 (in thousands): Three Months Ended March 31, 2021 2020 Net cash (used in) provided by: Operating activities $ (18,316) $ (5,739) Investing activities (21) (1,251) Financing activities 37,825 9,098 Net increase in cash and cash equivalents $ 19,488 $ 2,108
Net cash used in operating activities
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Net cash used in operating activities was $18.3 million for the three months ended March 31, 2021 and consisted primarily of a net loss of $30.7 million, which was primarily driven by research and development activities as the Company continued to fund its pipeline of development assets. The three months ended March 31, 2020 included a one-time non-cash acquired IPR&D expense of $25.5 million recorded in connection with the Aevi Merger, while the three months ended March 31, 2021 did not include a similar offset to cash used in operating activities. Additionally, the three months ended March 31, 2021 included a full quarter of development of the expanded pipeline from the Aevi Merger compared to a partial quarter in the prior year (in which the focus was integration as opposed to pipeline development). Changes in net liabilities increased by $10.4 million, mainly driven by a $9.3 million increase in accounts payable and $1.7 million increase in accrued expenses, partially offset by increased accounts receivable of $1.0 million. Accounts payable as of March 31, 2021 included the $10.0 million upfront license fee related to the expanded KKC license agreement for CERC-002, which was entered into March 2021. The Company subsequently paid the $10.0 million fee in April 2021.
Net cash used in operating activities was $5.7 million for the three months ended March 31, 2020 and consisted primarily of a net loss of $21.1 million, which was driven by research and development activities, and non-cash adjustments to reconcile net loss to net cash used in operating activities including a $7.1 million 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 $1.1 million.
Net cash used in investing activities
Net cash used in investing activities was minimal for the three months ended March 31, 2021 and consisted primarily of the purchase of property and equipment.
Net cash used in investing activities was $1.3 million for the three months ended March 31, 2020 and consisted primarily of transaction costs incurred as part of the Aevi Merger, partially offset by the cash acquired as part of the Merger.
Net cash provided by financing activities
Net cash provided by financing activities was $37.8 million for the three months ended March 31, 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 . . .
May 13, 2021
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