Business context and reporting period
Entity discrepancy: The supplied filing is Cerecor Inc.’s Form 10-Q, not an Avalo Therapeutics filing. It covers the quarter and six months ended June 30, 2016; the financial statements are unaudited. Cerecor was a clinical-stage biopharmaceutical company developing CERC-301, CERC-501 and CERC-406, with no approved products or product-sale revenue.
Financial performance and position
- Revenue: $650,488 in both the three- and six-month 2016 periods, versus none in the comparable 2015 periods. Revenue was recognized from a $1.0 million NIH/NIDA research grant as related expenses were incurred.
- Losses and expenses: Q2 2016 operating loss was $3.49 million and net loss was $3.52 million, versus $2.89 million and $2.91 million, respectively, in Q2 2015. Six-month operating loss was $8.43 million and net loss was $8.66 million, versus $5.38 million and $6.15 million in 2015. No meaningful product gross margin was reported.
- Per-share results: Basic and diluted net loss per share was $0.41 for Q2 and $1.00 for six months, versus $4.48 and $9.47 in 2015. Weighted-average shares rose from 649,721 to 8,650,143, so per-share comparisons reflect the substantially larger post-IPO share count.
- Cash flow: Six-month operating cash use was $7.43 million, investing cash use $19,000 and financing cash use $1.84 million, including $1.62 million of term-loan principal payments. Cash and cash equivalents fell $9.28 million to $11.88 million.
- Liquidity and debt: Current assets were $13.13 million and current liabilities $6.59 million, implying working capital of about $6.55 million. Total assets were $13.17 million and stockholders’ equity $5.57 million. Term debt was $4.07 million gross ($4.00 million net of discount), of which $3.39 million was current. The secured loan carried an 8.20% rate and was due in Q3 2017.
Material changes versus the prior comparable period
- Q2 R&D expense increased $626,000 to $2.50 million, mainly from CERC-501 Phase 2 trial enrollment; CERC-301 expense declined as prior-year trial wrap-up costs subsided.
- Q2 G&A expense increased $621,000 to $1.64 million, reflecting public-company, professional-services, personnel and business-development costs. Six-month G&A rose to $4.29 million from $1.78 million, including $781,266 of expense from modifying the former CEO’s stock options.
- Six-month net loss increased by $2.51 million. Stock-based compensation rose to $1.15 million from $292,213, while net interest expense declined as the loan balance was repaid.
- Cash declined from $21.16 million at December 31, 2015 to $11.88 million at June 30, 2016. The company reported 8,650,143 common shares outstanding at both dates.
Outlook, risks and unusual items
Management expected existing cash to fund operating and capital requirements only through the end of 2016 and said substantial additional financing would be needed. Recurring losses and negative operating cash flows raised substantial doubt about the company’s ability to continue as a going concern. Management anticipated continued losses and increasing R&D and public-company costs; there was no quantified longer-term earnings or revenue guidance.
Key risks include the need and ability to obtain financing on acceptable terms, uncertain clinical and regulatory outcomes, and difficulty enrolling trial participants. The filing notes enrollment delays in the CERC-301 depression trial and enrollment difficulties in an NIH CERC-501 trial. The term loan is secured by company assets other than intellectual property and includes default provisions, including a lender determination of a material adverse change. A separate NIH/NIAAA grant of approximately $1.0 million for CERC-501 alcohol-use-disorder development was awarded July 20, 2016. No material legal proceedings were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm that this Cerecor filing is the intended source; it does not identify Avalo Therapeutics.
- Assess the company’s financing needs and cash runway against the end-2016 estimate, including subsequent cash use and financing.
- Verify clinical-trial enrollment progress and the status, conditions and cash receipts of the NIH grants.
- Review term-loan repayment, security and covenant/default terms, and any refinancing or repayment developments.
- Consider the impact of IPO-related share-count changes, outstanding warrants and equity-plan authorizations on dilution.