Avalo Therapeutics, Inc. quarterly report, Q1 FY2018

Business context and reporting period

The supplied filing is Cerecor Inc.’s Form 10-Q for the quarter ended March 31, 2018, filed May 11, 2018. It does not identify Avalo Therapeutics, Inc.; the company name in the request metadata does not match the filing.

Cerecor described itself as an integrated biopharmaceutical company focused on pediatric healthcare, combining marketed products with a drug-development pipeline. The quarter included the February 16 acquisition of Avadel’s marketed pediatric products; Cerecor had acquired TRx Pharmaceuticals in November 2017. Its pipeline included CERC-301, for which FDA cleared an IND to begin studies in neurogenic orthostatic hypotension, and three preclinical candidates.

Financial results and position

Product revenue comprised $2.23 million from prescribed dietary supplements and $2.03 million from prescription drugs; sales-force revenue was $0.22 million. No grant revenue was reported, compared with $0.38 million in Q1 2017. Product cost of sales was $0.86 million, implying approximately $3.40 million of gross profit, or about 80% of product revenue, before other operating expenses.

Operating expenses were $7.97 million, including $1.65 million research and development, $2.92 million general and administrative, $1.52 million sales and marketing, and $1.02 million amortization. Increased costs largely reflect the commercial business and acquisitions; legal, compliance and integration expenses contributed to higher G&A.

At March 31, cash and cash equivalents were $2.52 million; cash, cash equivalents and restricted cash totaled $2.67 million. Working capital was negative $1.4 million. Total assets were $65.36 million and total liabilities $40.78 million. Debt assumed with the Avadel acquisition was $15.38 million, including $0.79 million current and $14.59 million long-term. Additional contingent consideration and royalty liabilities included approximately $10.65 million of contingent consideration and $0.30 million of royalties payable.

Material changes versus the prior comparable period

• Revenue shifted from grant revenue to commercial product sales following the TRx and Avadel acquisitions; the periods are not directly comparable because the acquired businesses were not included for the same duration in Q1 2017.
• Net loss increased by $1.92 million, while loss per share improved from $0.19 to $0.12, reflecting a substantially higher weighted-average share count in 2018.
• Operating cash use fell by about $1.96 million year over year, supported by working-capital movements, including a $1.87 million increase in accounts payable.
• Assets and liabilities rose substantially with acquired product rights, goodwill, assumed debt and contingent obligations. Intangible assets were $33.10 million and goodwill $18.68 million at quarter-end.

Outlook, risks and unusual items

Management expected commercial operations to generate positive cash flows and stated that cash on hand and anticipated operating cash flows were expected to fund expenses and debt payments through at least May 2019. It cautioned that additional financing might be needed if product revenue falls short or development plans require more capital; no specific revenue or earnings guidance was provided.

• Deerfield debt requires quarterly payments of $262,500 from July 2018 through October 2020 and a $15.25 million balloon payment in January 2021. The Avadel transaction also carries royalty obligations through February 2026.
• Product sales and receivables are concentrated: the three largest customers represented approximately 22%, 25% and 29% of product revenue. Returns, rebates, chargebacks, generic competition and distribution-channel inventory create estimation risk.
• PAI gave notice to terminate its sales and marketing agreement. Cerecor expected the termination to likely result in a second-quarter impairment of the agreement’s remaining asset value; $2.3 million had been assigned to it at acquisition.
• A dispute concerning Ulesfia distribution obligations and whether a competitive product constituted a “Market Change” was subject to arbitration. The filing reports no payments to Lachlan in 2017 after the acquisition date.
• Management reported that disclosure controls were ineffective as of March 31 because of a previously disclosed material weakness involving unauthorized cash disbursements. Remediation was completed in Q1, and management stated the weakness no longer existed as of May 11, 2018.
• Fair-value remeasurement of contingent consideration, royalty obligations and warrant-related liabilities contributed to other expense. The Avadel purchase-price allocation remained preliminary.

Investor verification priorities

1. Confirm the issuer identity: this is a Cerecor filing, not an Avalo Therapeutics filing.
2. Assess whether product revenue and gross profit can sustain the expanded cost base, and compare future cash flow with management’s May 2019 funding horizon.
3. Review Deerfield repayment and royalty terms, contingent consideration estimates, and the potential effect of product sales performance on those obligations.
4. Check the PAI termination-related impairment and final Avadel acquisition accounting in subsequent filings.
5. Monitor customer concentration, returns and rebate reserves, the Ulesfia arbitration, and the effectiveness of remediated cash-disbursement controls.