Filing summary
Issuer mismatch: The supplied filing is Cerecor Inc.’s Form 10-K, not a filing under the name Avalo Therapeutics, Inc. It reports fiscal year ended December 31, 2019; it is not a standalone fourth-quarter report. The filing was signed March 11, 2020.
Business context and reporting period
Cerecor described itself as a biopharmaceutical company focused on rare pediatric and orphan diseases. Its lead programs were CERC-801, CERC-802 and CERC-803 for congenital disorders of glycosylation. It also retained Millipred as its sole marketed product and was developing other pipeline programs.
In November 2019, Cerecor sold its pediatric product portfolio and associated commercial infrastructure to Aytu BioScience, retaining Millipred. In February 2020, after year-end, it completed its merger with Aevi Genomic Medicine, adding CERC-002, CERC-006 and CERC-007. The Aevi merger’s accounting was still being assessed when the 10-K was filed.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Continuing-operations revenue | $6.75 million | $7.03 million |
| Loss from continuing operations | $16.27 million | $35.27 million |
| Net loss | $16.07 million | $40.05 million |
| Net cash used in operating activities | $19.13 million | $3.13 million |
| Cash and cash equivalents at year-end | $3.61 million | $10.65 million |
| Total assets | $36.11 million | $70.25 million |
| Total liabilities | $15.11 million | $49.34 million |
Continuing-operations revenue was principally product sales ($6.65 million); the balance included $0.10 million of license revenue. The divested portfolio contributed $10.17 million of 2019 revenue and was presented as discontinued operations. Cerecor reported an $8.0 million gain on the Aytu sale within discontinued operations.
Research and development expense increased to $11.76 million from $5.79 million, reflecting increased development and manufacturing activity. General and administrative expense was $10.12 million, versus $10.51 million; sales and marketing expense increased to $1.48 million from $0.55 million. The 2019 cost-of-product-sales line was negative $0.57 million, largely because of a settlement-related reversal; it should not be read as a normal positive gross margin. The net loss improved year over year in part because 2018 included $18.7 million of acquired in-process R&D expense.
At year-end, current assets were $17.72 million and current liabilities were $12.16 million. Current assets included a $7.63 million Aytu preferred-stock investment, which was restricted from transfer until July 1, 2020. Cerecor had no continuing-operations contingent-consideration liability at year-end, but retained guarantees tied to obligations assumed by Aytu.
Material changes versus the prior year
- Continuing revenue declined about 4%, as 2018 sales-force revenue ended after the PAI agreement was terminated; product revenue was broadly stable.
- R&D expense more than doubled, while operating cash use rose substantially, reflecting increased pipeline investment and working-capital movements.
- The Aytu divestiture reduced reported assets and liabilities and generated a gain, but Cerecor remained a guarantor of specified obligations assumed by Aytu.
- The February 2020 Aevi merger expanded the pipeline and involved approximately 3.9 million Cerecor shares, forgiveness of a $4.1 million loan, and CVRs for up to $6.5 million of milestone payments.
Outlook, risks and unusual items
Management expected R&D spending and operating cash use to increase in 2020 as it advanced the CERC-800 programs and the newly acquired Aevi assets. It forecast no revenue, earnings or clinical milestones. Management stated that continued operations through 2020 depended on raising additional capital and concluded that substantial doubt existed about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The auditor’s report also highlighted this going-concern uncertainty.
- Funding and dilution: Cerecor reported $3.6 million of cash at year-end, a $16.1 million net loss and $19.1 million of operating cash use. A February 2020 registered direct offering raised approximately $5.0 million net, but the filing gave no assurance that further funding would be available on acceptable terms.
- Guarantees: Cerecor guaranteed specified Deerfield obligations assumed by Aytu. The maximum potential future payments under the guarantees were $25.2 million; their recorded fair value was $1.8 million. The company also remained exposed to assigned TRIS obligations if Aytu failed to pay.
- Litigation contingency: Former TRx owners threatened a lawsuit seeking relief described as up to $18.2 million. No suit had been filed as of the report date; mediation was planned. Cerecor disputed the claims, considered a loss possible but not probable, and recorded no accrual.
- Valuation exposure: The Aytu preferred-stock investment was subject to a lockup and market-price volatility; Cerecor warned that subsequent price movements could produce a significant gain or loss.
- Clinical and operational risks: Pipeline candidates require further development and regulatory approval; patient recruitment, outsourced manufacturing and supply-chain disruption—including coronavirus-related disruption—could delay programs.
- Unusual settlement accounting: The Ulesfia settlement involved a $2.3 million cash payment and reversals of previously recorded liabilities and indemnity receivables, contributing to negative cost of product sales and a $1.3 million contingent-consideration gain.
Most important facts for investors to verify
- Confirm the issuer and filing identity: this document is Cerecor Inc.’s 2019 Form 10-K, despite the Avalo Therapeutics metadata.
- Review subsequent liquidity, financing needs and the company’s going-concern status after the February 2020 offering and Aevi merger.
- Track Aytu’s payments on assumed obligations and Cerecor’s continuing guarantee exposure, including the Deerfield balloon payment due in January 2021.
- Monitor the TRx owners’ threatened claims and any mediation, filed action or change in the company’s loss assessment.
- Check the realizable value and transferability of Cerecor’s Aytu preferred shares, and the final accounting and costs of the Aevi merger.
- Verify clinical progress, cash requirements and any milestone or regulatory developments for the CERC-800 and acquired Aevi programs.