Business context and reporting period
This is Cerecor Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019, filed May 9, 2019. The request identifies Avalo Therapeutics, Inc., but the filing itself names Cerecor Inc.; investors should verify the issuer and filing identity. Cerecor combined marketed pediatric products with research and development programs in neurology and rare pediatric diseases.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.41 million | $4.48 million |
| Gross profit / margin | $3.46 million / 64.0% | $3.62 million / 80.7% |
| Operating loss | $7.02 million | $3.75 million |
| Net loss | $7.45 million | $3.88 million |
| Net loss per common share | $0.13 | $0.12 |
| Cash used in operating activities | $3.12 million | $0.28 million |
Revenue increased approximately 21%, while the loss widened. Cash and cash equivalents were $16.12 million at quarter-end, up from $10.65 million at December 31, 2018, largely reflecting a $9.0 million net public-offering raise. Current assets were $26.74 million versus current liabilities of $28.13 million. Total debt was approximately $15.35 million, including $1.05 million current and $14.30 million long-term; the Deerfield obligation accounted for $15.4 million and includes a $15.25 million balloon payment due in January 2021. Stockholders’ equity was $23.12 million.
Material changes versus the prior comparable period
- Product revenue rose by $1.15 million, attributed to product mix, unit growth and a full quarter of sales from products acquired in 2018. Sales-force revenue of $0.22 million in 2018 ceased after the PAI agreement ended.
- Cost of product sales more than doubled to $1.95 million; the filing attributes the increase to higher sales and Lachlan minimum purchase and royalty obligations. Gross margin consequently declined.
- Research and development expense increased to $3.40 million from $1.65 million, primarily reflecting clinical work on CERC-301 and the CERC-801/802/803 programs. Sales and marketing expense rose to $3.11 million from $1.52 million.
- Operating cash outflow increased to $3.12 million from $0.28 million. Financing cash flow included the public offering; the company issued 1,818,182 common shares at $5.50 per share.
Outlook, management commentary, risks and unusual items
- Management expects significant expenses and operating losses as it advances its pipeline and says additional financing will be needed to execute its clinical development strategy. It expects cash and anticipated revenue to fund operations, capital expenditures and specified debt payments through at least May 2020.
- In April 2019, after quarter-end, Cerecor reported positive interim CERC-301 Phase 1 results in neurogenic orthostatic hypotension patients, and positive CERC-801 Phase 1 safety data in healthy volunteers. CERC-801 also received FDA Fast Track designation; CERC-801, CERC-802 and CERC-803 had orphan-drug designations. These are development updates, not proof of approval or commercial success.
- The Lachlan/Ulesfia dispute resulted in an $8.7 million accrued minimum-obligation liability and a $5.2 million indemnity receivable, which management considered fully collectible. The company reported $7.46 million of future minimum purchase and royalty obligations through 2020, with expected indemnification reducing its net exposure. Failure to pay could result in termination of the Ulesfia agreement.
- Other commitments include Karbinal minimum-sales make-whole payments and contingent acquisition consideration. The Avadel product royalty is 15% of applicable net sales through February 2026, capped at $12.5 million.
- Executive leadership changed in April 2019: Simon Pedder became Executive Chairman, Patrick Crutcher was promoted to Chief Strategy Officer, and Peter Greenleaf resigned as CEO but remained on the board.
Important facts for investors to verify
- Confirm the filing issuer: the supplied filing is for Cerecor Inc., not Avalo Therapeutics, Inc.
- Assess cash runway and financing requirements against the company’s stated May 2020 funding horizon and continuing operating cash burn.
- Review the terms, collectibility and timing of the Lachlan indemnity receivable, minimum obligations and potential impact on Ulesfia sales.
- Verify debt-payment capacity, especially the $15.25 million Deerfield balloon due in January 2021.
- Track pipeline trial results, regulatory milestones and the substantial clinical-development spending required before any potential product revenue.
- Consider customer concentration: three customers represented approximately 35%, 33% and 25% of Q1 2019 net product revenue, respectively.