Business context and reporting period
Filing identity discrepancy: The supplied filing is Cerecor Inc.’s Form 10-Q for the quarter ended June 30, 2019, not a filing by Avalo Therapeutics, Inc. The summary below reflects the filing text provided.
Cerecor operated a portfolio of marketed pediatric products and was developing candidates in pediatric rare diseases and neurology. Its pipeline included CERC-801/802/803 for congenital disorders of glycosylation, CERC-913 for mitochondrial DNA depletion syndrome, CERC-301 for neurogenic orthostatic hypotension, and CERC-406 for Parkinson’s disease.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $4.45 million in 2019; $4.79 million in 2018 | $9.86 million in 2019; $9.27 million in 2018 |
| Operating loss | $5.98 million in 2019; $5.75 million in 2018 | $13.00 million in 2019; $9.51 million in 2018 |
| Net loss | $6.22 million in 2019; $6.01 million in 2018 | $13.68 million in 2019; $9.89 million in 2018 |
| Net loss per common share | $0.11 in 2019; $0.19 in 2018 | $0.24 in 2019; $0.31 in 2018 |
| Operating cash flow | Not separately presented for the quarter | $(9.84) million in 2019; $(0.61) million in 2018 |
Second-quarter product revenue declined about 6% year over year, which management attributed to product mix and lower volume. First-half product revenue rose about 10%, supported by product mix, unit growth, sales-force expansion, and a full period of sales from acquired products. First-half revenue no longer included sales-force revenue from the PAI agreement, which ended in 2018.
Second-quarter cost of product sales was a credit of $0.14 million, largely reflecting a $1.6 million net benefit from the Lachlan settlement, partly offset by a $0.2 million Flexichamber inventory write-down. Accordingly, the reported quarter’s product-cost and margin presentation is not representative of ordinary product economics. First-half cost of product sales was $1.81 million.
At June 30, 2019, cash and cash equivalents were $9.39 million ($9.57 million including restricted cash), versus $10.65 million and $10.75 million, respectively, at year-end. Current assets were $13.90 million and current liabilities $18.77 million. Total assets were $59.62 million, total liabilities $41.92 million, and stockholders’ equity $17.70 million. Long-term debt carrying value was approximately $15.33 million, including $1.05 million current; the obligation includes quarterly payments of $262,500 through October 2020 and a $15.25 million balloon payment due January 2021. The company raised net proceeds of approximately $9.0 million in a March 2019 common-stock offering.
Material changes versus the prior comparable period
- First-half net loss increased to $13.68 million from $9.89 million, principally as research and development spending rose to $7.11 million from $2.73 million and sales and marketing expense rose to $6.05 million from $3.58 million.
- First-half operating cash use increased to $9.84 million from $0.61 million. The 2019 cash-flow result included substantial working-capital movements associated with the Lachlan settlement.
- Research and development investment increased as clinical, manufacturing, and pipeline-development activities expanded. General and administrative expense declined to $5.10 million from $5.95 million, partly reflecting lower consulting and legal costs.
- The company recorded a $1.45 million impairment of the Flexichamber intangible asset and wrote down related inventory after deciding to discontinue sales-force efforts for the product. Flexichamber’s fair value was assessed at zero.
- Under the May 2019 Lachlan settlement, Cerecor paid $2.3 million, terminated the Ulesfia agreement, and was released from associated current and future liabilities. The settlement reversed previously recorded obligations and indemnity receivables and produced a net $1.6 million benefit in cost of product sales, as well as a $1.3 million contingent-consideration gain.
Outlook, commentary, risks and unusual items
- Management expected cash, cash equivalents, and anticipated product revenue to fund operations, capital expenditures, and debt payments through at least August 2020. It also said additional financing would be required to execute its clinical-development strategy and fund future operations; absent adequate funding, spending cuts, delayed payments, asset sales, or program curtailments could be necessary.
- Management expected significant expenses and operating losses to continue as it invested in its pipeline. Profitability depends on development, regulatory approval, and commercialization of candidates and adequate revenue from marketed products.
- After quarter-end, the company reported positive final Phase 1 results for CERC-301 and FDA acceptance of the CERC-802 IND; it also reported enrollment of the first patient in the CDG FIRST natural-history study. These are development updates, not evidence of approval or commercial success.
- On August 8, 2019, Cerecor assigned CERC-611 rights to ES Therapeutics, an Armistice subsidiary, for a $0.1 million upfront payment and potential sales-based milestones. The assignment released Cerecor from a recorded $1.3 million contingent payment to Lilly and other potential obligations. The transaction involved a significant stockholder’s affiliate.
- A dispute with former TRx owners over a 2018 gross-profit target remained unresolved; the company estimated possible loss exposure of $0 to $3.0 million and said it planned to defend its position.
- Three customers represented approximately 91% of second-quarter net product revenue (38%, 27%, and 26%), indicating significant customer concentration. The filing also identified dependence on additional financing, continued operating losses, product-development and regulatory risks, and a substantial 2021 debt balloon payment.
- The filing stated that disclosure controls were effective at a reasonable-assurance level and that no material change in internal control over financial reporting occurred during the period.
Most important facts for investors to verify
- Confirm the intended issuer: the provided filing is for Cerecor Inc., not Avalo Therapeutics, Inc.
- Assess cash burn against the company’s stated runway through at least August 2020, and determine whether additional financing was obtained or needed.
- Review the Deerfield debt terms and the company’s ability to meet the January 2021 $15.25 million balloon payment.
- Track the TRx gross-profit dispute and potential exposure of up to $3.0 million, as well as the financial effects and product consequences of the Ulesfia settlement.
- Evaluate customer concentration, underlying product revenue trends, and the extent to which reported cost of sales and earnings benefited from settlement-related items.
- Verify subsequent clinical, regulatory, and commercial progress for CERC-301 and the CERC-800 programs, and the terms and related-party implications of the CERC-611 assignment.