Filing summary
Important issuer mismatch: The request identifies Avalo Therapeutics, Inc., but the supplied Form 10-Q is for Cerecor Inc. This summary reflects Cerecor’s filing for the quarter ended June 30, 2018, filed August 9, 2018; it should not be treated as an Avalo filing.
Business context and reporting period
Cerecor described itself as an integrated pharmaceutical company with marketed pediatric products and a development pipeline. The portfolio expanded through the November 2017 TRx acquisition and the February 2018 acquisition of Avadel’s pediatric products. Pipeline programs included CERC-301, in a Phase I safety study for neurogenic orthostatic hypotension, CERC-611, and preclinical candidates CERC-406 and CERC-425.
Financial performance and liquidity
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Revenue | $4.79 million | $9.27 million |
| Product revenue | $4.71 million | $8.97 million |
| Product gross profit and margin | $3.29 million; approximately 69.8% | $6.68 million; approximately 74.5% |
| Operating loss | $5.74 million | $9.23 million |
| Net loss | $6.01 million | $9.89 million |
| Net loss per share, basic and diluted | $0.19 | $0.31 |
| Cash used in operations | Not separately stated for the quarter | $0.61 million |
Product gross profit and margin are calculated from reported product revenue less cost of product sales; they exclude other revenue and operating expenses.
At June 30, 2018, cash and cash equivalents were $2.18 million and total cash, cash equivalents and restricted cash were $2.36 million. Current assets were $11.84 million versus current liabilities of $19.05 million. Debt assumed with the Avadel acquisition was $15.43 million, including $1.05 million classified as current; the obligation includes quarterly payments beginning July 2018 and a $15.25 million balloon payment due in January 2021. Total liabilities were $42.93 million and stockholders’ equity was $19.22 million.
Material changes versus the prior comparable period
- Product sales drove revenue: product revenue was zero in the 2017 comparison periods. Reported total revenue was $157,800 in Q2 2017 and $542,006 in the first half of 2017, primarily grant revenue. Cerecor cautioned that the acquisitions materially changed the business, limiting straightforward year-over-year comparability.
- Net loss increased from $1.80 million to $6.01 million for Q2 and from $3.76 million to $9.89 million for the first half. The 2018 periods included acquired-product commercial costs, intangible amortization, and acquisition-related expenses.
- First-half operating cash use improved to $0.61 million from $4.00 million in 2017. Management attributed 2018 cash use in part to working-capital movements and noncash expenses; financing cash flow was $0.40 million, compared with $4.33 million in 2017.
- The company recorded a $1.70 million impairment after termination of the PAI sales and marketing agreement. It also reported $2.25 million of first-half intangible amortization.
- Accounts payable rose to $2.94 million from $1.30 million at year-end 2017; accrued expenses and other current liabilities increased to $10.33 million from $7.53 million. Accrued product returns and allowances were $6.07 million.
Outlook, commentary, risks and unusual items
- Management expected cash on hand, the anticipated $3.8 million release of Janssen-sale escrow in August 2018, and anticipated product revenue to fund operating needs and debt payments through August 2019. It also stated that additional financing might be required; future funding could involve equity or debt, collaborations, grants, or licensing arrangements.
- The company expected commercial operations to generate positive cash flow, but this was a forecast, not reported performance. Its ability to fund development depends on product profitability, spending, and access to financing.
- The Deerfield obligation assumed with the Avadel products carries quarterly payments of $262,500 through October 2020 and a $15.25 million payment due in January 2021. Acquisition-related royalty and milestone obligations also apply to products.
- A dispute involving the Ulesfia distribution agreement and whether a “Market Change” voided minimum payment obligations was in arbitration. Briefing and oral argument were scheduled for August 2018, with a decision expected in late September or early October. Cerecor said it had made no payments to Lachlan after the acquisition date.
- Three customers represented approximately 33%, 28%, and 24% of Q2 net product revenue, creating significant customer concentration. Product returns, rebates, chargebacks, and distributor fees depend on estimates and channel data.
- Cerecor reported that disclosure controls were effective at a reasonable assurance level at June 30, 2018, after management said issues underlying an ineffective conclusion in its amended Q1 report had been remediated during Q2.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is Cerecor Inc., not Avalo Therapeutics, Inc.
- Verify receipt and availability of the anticipated $3.8 million Janssen escrow release and reassess the stated funding runway.
- Assess product-level sales, gross margins, returns and rebate accruals, customer concentration, and whether commercial cash flow became positive.
- Review the Deerfield payment schedule and the Ulesfia arbitration outcome and any resulting obligations.
- Track integration and development spending, potential financing needs, and progress of CERC-301 and CERC-611.