Avalo Therapeutics, Inc. - Quarter Report: 2015 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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FORM 10‑Q

COMMISSION FILE NUMBER: 001-37590

Cerecor Inc.

(Exact name of registrant as specified in its charter)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐  No ☒  *

*            The registrant has not been subject to the filing requirements for the past 90 days as it commenced trading following its initial public offering on October 14, 2015, but has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 since such time.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

As of November 13, 2015, the registrant had 8,630,143 shares of common stock outstanding.

 

 

CERECOR INC.

FORM 10-Q

For the Quarter Ended September 30, 2015 

INDEX 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

CERECOR INC.

Balance Sheets

 

 

See accompanying notes to unaudited financial statements.

CERECOR INC.

Statements of Operations (Unaudited)

 

 

See accompanying notes to unaudited financial statements.

 

CERECOR INC.

Statements of Cash Flows (Unaudited)

 

 

See accompanying notes to unaudited financial statements.

CERECOR INC.

Notes to Unaudited Financial Statements

1. BUSINESS

Description of Business and Organization

Cerecor Inc. (the “Company” or “Cerecor”) was incorporated on January 31, 2011 in Delaware as Ceregen Corporation and subsequently changed the name to Cerecor Inc. in March 2011. The Company is a clinical‑stage biopharmaceutical company with the goal of becoming a leader in the development of innovative drugs that make a difference in the lives of patients with neurological and psychiatric disorders. The Company’s operations since inception have been limited to organizing and staffing the Company, acquiring rights to and developing certain product candidates and its product platform, business planning and raising capital.

Liquidity

The Company has incurred recurring operating losses since inception. For the nine months ended September 30, 2015, the Company incurred a net loss of $6,841,545 and generated negative cash flows from operations of $6,615,100. As of September 30, 2015, the Company had an accumulated deficit of $49,914,920. The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to the clinical development of its product candidates, its product platform, its preclinical programs, business development and the development of its administrative organization.  In October 2015 the Company completed its initial public offering of units (“IPO”), selling 4,000,000 units at an offering price of $6.50 per share, resulting in gross proceeds of $26,000,000 and net proceeds from the offering of approximately $23.6 million, after deducting underwriting discounts and commissions (See note 10). The Company will require substantial additional financing to fund its operations and to continue to execute its strategy. To fully execute its business plan, the Company will need to complete certain research and development activities, have positive clinical trial results and obtain marketing approval for its product candidates, which may span many years, and may ultimately be unsuccessful. Any delays in completing these activities or negative clinical trial results could adversely impact the Company. The Company plans to meet its capital requirements primarily through a combination of equity and debt financings, collaborations, strategic alliances and marketing distribution or licensing arrangements and in the longer term, revenue from product sales to the extent its product candidates receive marketing approval and are commercialized. There can be no assurance, however, that the Company will be successful in obtaining financing at the level needed to sustain operations and develop its product candidates or on terms acceptable to the Company, or that the Company will obtain approvals necessary to market its products or achieve profitability or sustainable, positive cash flow. The Company currently anticipates that current cash and cash equivalents and the net proceeds from its IPO (see Note 10) will be sufficient to meet its anticipated cash requirements for at least the next 12 months. 

 

 

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company’s unaudited financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“GAAP”). In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the Company’s financial position, results of operations and cash flows. The balance sheet at December 31, 2014 has been derived from audited financial statements at that date. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission (“SEC”). The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited financial statements are read in conjunction with the December 31, 2014 audited financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, other comprehensive income and related disclosures. On an ongoing basis, management evaluates its estimates, including estimates related to clinical trial accruals, Investor Rights Obligation (see Note 8), and warrant liability. The Company bases its estimates on historical experience and other market‑specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.

In addition, the Company utilized estimates and assumptions in determining the fair value of its Common Stock prior to its IPO (see Note 10). The Company granted stock options at exercise prices not less than the fair value of its Common Stock as determined by the board of directors, with input from management. Management has used the assistance of a third‑party valuation firm in estimating the fair value of the Common Stock. The board of directors has historically determined the estimated fair value of the Common Stock based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector and the historic prices at which the Company sold shares of its Preferred Stock.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third‑party fees that are directly associated with in‑process equity financings as deferred offering costs (non‑current) until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of additional paid‑in capital generated as a result of the offering. Should the equity financing for which those costs relate no longer be considered probable of being consummated, all deferred offering costs will be charged to operating expenses in the statement of operations at such time. The Company has incurred and deferred offering costs of $1,879,791 during the nine months ended September 30, 2015. We will incur additional offering costs during the fourth quarter as part of our initial public offering. The deferred offering costs were offset against the IPO proceeds upon completion of the offering in October 2015.

Net Loss Per Share of Common Stock, Basic and Diluted

Basic net loss per share of Common Stock is computed by dividing net loss by the weighted‑average number of shares of Common Stock outstanding during the period, excluding the dilutive effects of Preferred Stock, Investor Rights Obligation, warrants on Preferred Stock and Common Stock, stock options and unvested restricted stock. Diluted net loss per share of Common Stock is computed by dividing the net loss by the sum of the weighted‑average number of shares of Common Stock outstanding during the period plus the potential dilutive effects of warrants on Common Stock, stock options and unvested restricted stock outstanding during the period calculated in accordance with the treasury stock method, although these shares and options are excluded if their effect is anti‑dilutive. In addition, the Company analyzes the potential dilutive effect of the outstanding Preferred Stock, Investor Rights Obligation, and warrants on Preferred Stock under the “if‑converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding security converts into Common Stock at the beginning of the period. Because the impact of these items is anti‑dilutive during periods of net loss, there was no difference between basic and diluted net loss per share of Common Stock for the nine months ended September 30, 2014 and 2015.

The following outstanding securities at September 30, 2014 and 2015 have been excluded from the computation of diluted weighted shares outstanding, as they would have been anti‑dilutive:

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. A full valuation allowance has been established against all of the deferred tax assets as it is more likely than not that these assets will not be realized given the Company’s history of operating losses. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position.

The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of September 30, 2015, the Company does not believe any material uncertain tax positions are present.

Pro Forma Net Loss Per Share of Common Stock, Basic and Diluted

On October 20, 2015, the Company consummated its IPO (see Note 10).  The pro forma net loss per share is computed using the pro forma weighted-average shares of Common Stock outstanding, basic and diluted, and gives effect to the automatic conversion of all outstanding shares of  the Company’s Series A Convertible Preferred Stock, Series A-1 Convertible Preferred Stock and Series B Convertible Preferred Stock into an aggregate of 3,980,422 shares of the Company’s Common Stock as of January  1, 2015 or the date of original issuance, if later.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014‑09, Revenue From Contracts With Customers (“ASU 2014‑09”). Pursuant to this update an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606), which delays the effective date of ASU 2014-09 by one year.  As a result, ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual reporting periods beginning after December 15, 2016.  The Company does not believe ASU 2014-09 will have an effect on its current financial statements.

In August 2014, the FASB issued ASU No. 2014‑15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this update will explicitly require a company’s management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The new standard will be effective in the first annual period ending after December 15, 2016. Early application is

permitted. The Company is currently evaluating the potential impact of the adoption of this standard, but believes its adoption will have no impact on its financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015‑03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The standard also aligns the GAAP presentation with International Financial Reporting Standards and will remedy the long‑standing conflict with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which indicates that debt issuance costs do not meet the definition of an asset, because they provide no future economic benefit. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The new guidance was adopted on a retrospective basis for the nine months ended September 30, 2015. The adoption of this guidance did not have a material impact on the Company’s balance sheets.

3. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value standard also establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:

At December 31, 2014 and September 30, 2015, the Company’s financial instruments included cash and cash equivalents, restricted cash, accounts payable, accrued expenses and other current liabilities, long term debt, warrant liability and the Investor Rights Obligation. The carrying amounts reported in the accompanying financial statements for cash and cash equivalents, restricted cash, accounts payable, and accrued expenses and other current liabilities approximate their respective fair values because of the short‑term nature of these accounts. The estimated fair value of the Company’s debt of $6.5 million as of September 30, 2015 was based on current interest rates for similar types of borrowings and is in Level Two of the fair value hierarchy.

The following table presents, for each of the fair value hierarchy levels required under ASC 820, the Company’s assets and liabilities that are measured at fair value on a recurring basis:

 

 

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*Investments in money market funds are reflected in cash and cash equivalents on the accompanying Balance Sheets.

Level 3 Valuation

The Warrant Liability (which relates to warrants to purchase shares of Series B Convertible Preferred Stock) is marked‑to‑market each reporting period with the change in fair value recorded to other income (expense) in the Statements of Operations until the warrants are exercised, expire or other facts and circumstances lead the Warrant Liability to be reclassified to stockholders’ equity. The fair value of the Warrant Liability is estimated using a Black‑Scholes Option Pricing Model. The significant assumptions used in preparing the option pricing model for valuing the Warrant Liability as of December 31, 2014 include (i) volatility of 60.0%, (ii) risk free interest rate of 2.1%, (iii) strike price ($0.2999), (iv) fair value of Series B Convertible Preferred Stock ($0.18), and (v) expected life of 8.23 years. The significant assumptions used in preparing the option pricing model for valuing the Warrant Liability as of September 30, 2015 include (i) volatility of 70.0%, (ii) risk free interest rate of 1.56%, (iii) strike price ($8.40), (iv) fair value of Series B Convertible Preferred Stock ($4.95), and (v) expected life of 5.4 years. Significant decreases in the Company’s stock price volatility will significantly decrease the overall valuation of the Company’s warrant liability, while significant increases in the Company’s stock price volatility will significantly increase the overall valuation.

The Investor Rights Obligation expired in October of 2015 upon the closing of our IPO. While outstanding, the Investor Rights Obligation was remeasured at each reporting period and changes in fair value were recorded as a component of other income (expense) in the Company’s Statement of Operations. The fair value of the Investor Rights Obligation was determined using a valuation model, which considers the probability of achieving certain milestones, the entity’s cost of capital, the estimated period the rights will be outstanding, consideration received for the instrument with the rights, the number of shares to be issued to satisfy the rights, the price of such shares and any changes in the fair value of the underlying instrument. The significant assumptions used in preparing the option pricing model for valuing the Company’s Investor Rights Obligation as of December 31, 2014 include (i) volatility of 60%, (ii) risk free interest

rate ranging from 0.05% to 0.63%, (iii) strike price ($8.40), (iv) fair value of Preferred Stock ranging from $0.00 to $5.04, and (v) expected life ranging from 0.5 to 1.75 years. The significant assumptions used in preparing the option pricing model for valuing the Company’s Investor Rights Obligation as of September 30, 2015 include (i) volatility of 90%, (ii) risk free interest rate of 0.00%, (iii) strike price ($8.40), (iv) fair value of Preferred Stock ranging from $4.57 to $5.32, and (v) expected life of 0.04 years.

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the Warrant Liability and the Investor Rights Obligation for the nine months ended September 30, 2015:

No other changes in valuation techniques or inputs occurred during the nine months ended September 30, 2014 and 2015.  No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the nine months ended September 30, 2014 and 2015.

4. DEFERRED FINANCING COSTS

Deferred financing costs incurred in preparation for our IPO consisted of the following:

 

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

 

6. ASSET ACQUISITION AND LICENSE AGREEMENTS

In February 2015, the Company acquired rights to CERC‑501, which was previously referred to as OpRA Kappa, through an exclusive, worldwide license from Eli Lilly and Company. CERC‑501 is a high‑binding, selective Kappa opioid receptor (“KOR”) antagonist. Pursuant to the license agreement, the Company paid $750,000 to Lilly within 30 days of the execution of the license agreement, which was recorded as research and development expense in the accompanying unaudited Statement of Operations for the nine months ended September 30, 2015. Upon the Company undertaking a 9‑month toxicology study in non‑human primates and delivering a final study report, the Company will be required to pay Lilly an additional $250,000. The Company anticipates undertaking this study and, as a result, accrued the remaining $250,000 as an accrued liability. Additional payments may be due upon achievement of

development and regulatory milestones, including the first commercial sale. Upon commercialization, the Company is obligated to pay Lilly milestones and royalties on net sales.

For the first KOR product the Company develops, the Company is required to make milestone payments in an amount not to exceed, in the aggregate, $19,000,000 upon the achievement of various development and regulatory milestones, including first commercial sale. Additionally, the Company will be required to make sales milestone payments in an amount not to exceed $30,000,000. Upon commercialization of a KOR product, we will pay Eli Lilly a tiered royalty percentage on net sales of a KOR product from mid‑single digits to low‑double digits. The royalty obligation will be on a product by product and country by country basis until the later of (i) the expiration of the last to expire valid patent claim of a patent licensed to us under the license agreement covering the KOR product in such country, or (ii) eleven years from the first commercial sale of the KOR product in such country.

The Company accounted for this transaction as an asset acquisition because it only acquired the assigned rights and technology and did not acquire any processes or activities.

7. DEBT

Debt consisted of the following:

Term Loan

In August 2014, the Company received a $7,500,000 secured term loan from a finance company. The loan is secured by a lien on all of the Company’s assets, excluding intellectual property, which was subject to a negative pledge. The loan contains certain additional nonfinancial covenants. In connection with the loan agreement, the Company’s cash and investment accounts are subject to account control agreements with the finance company that give the finance company the right to assume control of the accounts in the event of a loan default. Loan defaults are defined in the loan agreement and include, among others, the finance company’s determination that there is a material adverse change in the Company’s operations. Interest on the loan is at a rate of the greater of 7.95%, or 7.95% plus the prime rate as reported in The Wall Street Journal minus 3.25%. The current interest rate is 7.95%. The loan was interest‑only for nine months, and is repayable in equal monthly payments of principal and interest of $304,278 over 27 months which began in June 2015. Interest expense, which includes amortization of discount and the accrual of a termination fee, was approximately $640,000 for the nine months ended September 30, 2015 in the accompanying unaudited Statement of Operations.

In connection with the term loan, the Company issued a warrant to purchase 625,208 shares of Series B Convertible Preferred Stock at an exercise price of $0.2999 per share that is exercisable for a period ending five years following the Company’s IPO which is October 2020.  Upon the closing of the Company’s IPO, this warrant became a warrant to purchase 22,328 shares of Common Stock at an exercise price of $8.40, in accordance with its terms.  The Company’s warrant to purchase shares of Series B Convertible Preferred Stock represented a freestanding financial instrument that was indexed to an obligation of the Company to repurchase its Series B Convertible Preferred Stock by transferring assets and, therefore, met the criteria to be classified as a liability under FASB ASC 480, Distinguishing Liabilities from Equity. The Company records the warrant liability at its fair value using the Black‑Scholes option pricing model and revalues the warrant at each reporting date (see Note 3).

 

8. CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

At September 30, 2015, the Company was authorized to issue two classes of stock, Common Stock and Preferred Stock. The total number of shares of capital stock the Company was authorized to issue was 163,405,187 of which 8,214,285 was Common Stock and 155,190,902 was Preferred Stock. All shares of Common and Preferred Stock have a par value of $0.001 per share, 31,116,391 of the authorized shares of Preferred Stock are designated as Series A Convertible Preferred Stock, 9,074,511 of the authorized shares of Preferred Stock are designated as Series A‑1 Convertible Preferred Stock and the remaining 115,000,000 shares have been designated as Series B Convertible Preferred Stock.

In October 2015, each share of Series A Convertible Preferred Stock was converted into 0.04464 shares of Common Stock, each share of Series A‑1 Convertible Preferred Stock was converted into 0.05357 shares of Common Stock and each share of Series B Convertible Preferred Stock was converted into 0.03571 shares of Common Stock.

The Preferred Stock was subject to redemption under certain “deemed liquidation” events, as defined, and as such, the Preferred Stock was considered contingently redeemable for accounting purposes. Accordingly, the Preferred Stock has been recorded within temporary equity in the financial statements. The Company has not adjusted the Preferred Stock to its redemption amount at each reporting period, as the redemption of such Preferred Stock is not deemed probable of occurrence during the periods presented. The redemption of the Preferred Stock is not considered probable as the redemption is contingent on the occurrence of such “deemed liquidation” events, which include (i) the acquisition of the Company by another entity by means of any transaction or a series of related transactions, unless the existing stockholders of the Company continue to hold at least 50% of the voting power of the surviving or acquiring entity after such transaction; and (ii) a sale of all or substantially all of the assets of the Company. The Company has concluded that none of these events were probable during the periods presented.

Since the issuance of Series B Convertible Preferred Stock, all series of Preferred Stock were entitled to a non‑cumulative annual dividend of 8.0%. Dividends are paid when, as, and if declared by the board of directors. In the event of any liquidation, dissolution or winding up of the Company prior to the conversion, the holders of the Preferred Stock will be entitled to a liquidation preference in pari passu before any liquidation preference payments are made to the Common shareholders. The liquidation preference payment is equal to the greater of (i) original issuance plus any declared but unpaid dividends, or (ii) the amount that a Preferred holder would have been entitled to receive if they had converted to common immediately prior to liquidation.

In October 2015 the Company completed its IPO.  In connection with the closing of the IPO, all outstanding shares of the Company’s Series A Convertible Preferred Stock, Series A-1 Convertible Preferred Stock and Series B Convertible Preferred Stock were converted into 3,980,422 shares of Common Stock.

 

Series B Convertible Preferred Stock Transaction

On July 11, 2014, the Company completed an initial closing of an equity offering for shares of its Series B Convertible Preferred Stock and on August 19, 2014 completed a second closing. Pursuant to the terms of the agreement, the Company issued an aggregate of 50,017,786 shares of Series B Convertible Preferred Stock at an original issuance price of $0.2999 per share for gross proceeds of $15,000,000.

In addition, and pursuant to the terms of, several convertible promissory notes issued from April through September 2014, the Company issued 5,597,618 shares of Series B Convertible Preferred Stock upon the conversion of the outstanding principal and interest due under the convertible promissory notes in the aggregate amount of $1,259,016. The conversion price for the convertible promissory notes was equal to $0.22492, or 75% of the original issuance price of the Series B Convertible Preferred Stock. The demand notes issued in July 2014, with an aggregate principal balance of $996,666,  were converted into 3,333,331 shares of Series B Convertible Preferred Stock at a conversion price of $0.2999 per share. See Note 7 for additional information regarding the terms and provisions of the convertible promissory notes and demand notes.

The second closing of the Series B Convertible Preferred Stock equity offering was with the term loan lender. Pursuant to the same terms and conditions of the initial offering, the Company issued 3,334,445 shares of Series B Convertible Preferred Stock to the term loan lender at an original issuance price of $0.2999 per share, for gross proceeds of $1,000,000, which is included in the $15,000,000 described above.

The right of the investors (the “Investor Rights Obligation”) to purchase Series B Convertible Preferred Stock represented a freestanding financial instrument and was indexed to an obligation of the Company to repurchase its Series B Convertible Preferred Stock by transferring assets. As such, the Company accounted for the Investor Rights Obligation as a liability in accordance with FASB ASC 480. The Company adjusted the carrying value of the liability to its estimated fair value at each reporting date (see Note 3).

Common Stock Warrants

At September 30, 2015, the following Common Stock warrants were outstanding (all of which are accounted for as equity instruments):

*each of these warrants expired upon the closing of our IPO (Note 10), in accordance with their terms.

On June 12, 2015, the Company and Maxim Partners LLC (“Maxim”), an underwriter of the Company’s IPO, entered into an agreement to terminate a warrant to purchase 24,306 shares of Common Stock at an exercise price of $21.00 per share. The cancellation of the warrant was effective immediately without any consideration due to Maxim.

Series B Convertible Preferred Stock Warrants

In August 2014, a warrant to purchase 625,208 shares of Series B Convertible Preferred Stock, at an exercise price equal to $0.2999 per share, was issued to the term loan lender in conjunction with the loan of $7.5 million (see Note 7). The fair value was calculated at $115,056 using a Black‑Scholes pricing model using a fair market value of $0.25 per share for its Series B Convertible Preferred Stock.

9.  COMMON STOCK AND STOCK‑BASED COMPENSATION

Common Stock

On September 1, 2015, the Company filed an amendment to its amended and restated certificate of incorporation effecting a 1 for 28 reverse stock split of the Company's Common Stock. All share and per share amounts of common stock in the accompanying financial statements have been restated for all periods to give retroactive effect to the reverse stock split. The shares of common stock retained a par value of $0.001 per share. Accordingly, the

stockholders’ deficit reflects the reverse stock split by reclassifying from Common Stock to Additional Paid-In Capital in an amount equal to the par value of the decreased shares resulting from the reverse stock split.  A description of the Company’s Common Stock as set forth in the Company’s certificate of incorporation in effect following the IPO follows.

Voting

Our Common Stock is entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors, and does not have cumulative voting rights. Accordingly, the holders of a majority of the shares of our Common Stock entitled to vote in any election of directors can elect all of the directors standing for election.

Dividends

Subject to preferences that may be applicable to any then outstanding convertible preferred stock, the holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.

Liquidation

In the event of our liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Convertible Preferred Stock.

Rights and Preferences

Holders of our Common Stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our Preferred Stock that we may designate and issue in the future.

2011 Stock Incentive Plan

On April 28, 2011, the board of directors adopted the 2011 Stock Incentive Plan (the “Plan”) reserving and authorizing up to 178,571 shares of Common Stock for stock‑based compensation awards to attract, retain and reward eligible employees, consultants, and non‑employee directors. The options have a contractual term of ten years. Generally, the options vest annually over three or four years, as determined by the board of directors, upon each option grant, although certain option grants in 2014 were fully vested on the grant date. On January 10, 2012, the board of directors and stockholders of the Company approved an amendment to the Plan authorizing an increase in the aggregate number of shares reserved for issuance under the Plan from 178,571 to 285,714 shares of Common Stock. On May 6, 2013, the board of directors approved an amendment to the Plan authorizing an increase in the aggregate number of shares reserved for issuance under the Plan from 285,714 to 704,428 shares of Common Stock. As of September 30, 2015, there were 254,236 shares remaining under the Plan available for future issuance.

On May 8, 2012, the board of directors approved three grants of non‑qualified stock options outside of the Plan aggregating 167,857 to the President and Chief Executive Officer and two non‑employee directors of the Company at $8.68 per share, one‑third vesting on three consecutive annual anniversaries.

The estimated grant date fair market value of the Company’s stock‑based awards is amortized ratably over the employees’ service periods, which is the period in which the awards vest. Stock‑ based compensation expense recognized was as follows:

 

A summary of option activity is as follows:

 

As of September 30, 2015, there was $0.2 million of total unrecognized compensation expense, related to unvested options granted under the Plan, unvested options granted outside of the Plan, and restricted stock to be recognized as follows:

*Three months remaining in 2015

2015 Omnibus Plan

 

On June 26, 2015, our board of directors adopted the 2015 Omnibus Plan, which was approved by our stockholders on August 31, 2015.  Our 2015 Omnibus Plan became effective upon the business day immediately preceding the date of our final prospectus, which was dated October 14, 2015.

 

As of the date of our 2015 Omnibus Plan, our 2011 Stock Incentive Plan merged with and into our 2015 Omnibus Plan and no additional grants will be made under our 2011 Stock Incentive Plan.  Outstanding grants under our 2011 Stock Incentive Plan will continue in effect according to their terms  as in effect before our 2015 Omnibus Plan merger, and the shares with respect to outstanding grants under our 2011 Stock Incentive Plan will be issued or transferred under our 2015 Omnibus Plan.

 

 

10. SUBSEQUENT EVENTS

Initial Public Offering

On October 20, 2015, the Company consummated the IPO of its units. Each unit consists of one share of Common Stock, one Class A warrant to purchase one share of Common Stock and one Class B warrant to purchase one-half share of Common Stock (the “Units”), pursuant to an underwriting agreement with Maxim (the “Underwriting Agreement”). Pursuant to the terms and conditions of the Underwriting Agreement, the Company agreed to sell to the Representative an aggregate of 4,000,000 Units at a price of $6.50 per Unit, less underwriting discounts and commissions and the underwriter’s expenses. In addition, the Representative was granted an option to purchase up to an additional 600,000 Units on the same terms and conditions in the Underwriting Agreement to cover over-allotments, if any, and a unit purchase option to purchase up to a total of 40,000 units (or 1% of the Company’s Units sold in the offering). Upon the closing of, and based on the final terms thereof, the Company’s IPO, all outstanding shares of the Company’s preferred stock, were automatically converted into 3,980,422 shares of its Common Stock.

The Company received approximately $23.6 million in proceeds (net of the underwriters discount) from the IPO.

On November 10, 2015 Maxim determined that the Units should detach and the shares of Common Stock and the warrants underlying the Units would begin to trade separately on November 13, 2015.

 Amended Certificate of Incorporation

Upon the closing of our IPO and the filing of our amended and restated certificate of incorporation, our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.001 per share.

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form10-Q contains forward-looking statements regarding Cerecor, Inc., or the Company, with respect to our business, financial condition, results of operations and prospects within the meaning of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact.  These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.  Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our other filings with the Securities and Exchange Commission, or the SEC, including our S-1 Registration Statement, which we originally filed with the SEC on June  12, 2015 and subsequently amended and our prospectus, dated October 14, 2015, filed with the SEC on October 15, 2015 pursuant  to Rule 424(b)(4) under the Securities Act, or the Prospectus. 

You should also read the following discussion and analysis of our financial condition and results of operation in conjunction with our Financial Statements as of and for the year ended December 31, 2014 included in our registration statement. 

Overview

We are a clinical stage biopharmaceutical company focused on the development of innovative drugs in patients with neurological and psychiatric disorders. We have a portfolio of clinical and preclinical compounds and are currently pursuing regulatory approval of three product candidates: CERC‑301, CERC‑501 and CERC‑406. We currently hold all commercialization rights to the compounds in our product pipeline. 

Product Pipeline

The table below summarizes certain information regarding our three product candidates:

 

 

CERC-301 is currently in Phase 2 development as an oral, adjunctive treatment of patients with major depressive disorder, or MDD, who are failing to achieve an adequate response to their current antidepressant treatment and are severely depressed. We received fast track designation by the United States Food and Drug Administration, or FDA, in November 2013 for CERC-301 for the treatment of MDD. CERC-301 belongs to a class of compounds known as antagonists, or inhibitors, of the N-methyl-D-aspartate, or NMDA, receptor, a receptor subtype of the glutamate neurotransmitter system that is responsible for controlling neurological adaptation. We believe CERC-301 will be a first-in-class medication that will cause a significant reduction in depression symptoms in a matter of days, as compared to

weeks or months with conventional therapies, because it selectively blocks the NMDA receptor subunit 2B, or NR2B, which we believe provides rapid and significant antidepressant activity without the adverse side effect profile of non selective NMDA receptor antagonists. We are also currently developing CERC-501, which is in Phase 2 development. We intend to first develop CERC-501 for treatment of substance use disorders (e.g. nicotine, alcohol, and/or cocaine) and adjunctive treatment of MDD. If we receive approval for CERC-501 for treatment of substance use disorders and for adjunctive treatment of MDD, we plan to further develop CERC-501 for the concurrent treatment of MDD and substance use disorders, or co-occurring disorders. CERC-501 was acquired in February 2015, and is a potent and selective kappa opioid receptor, or KOR, antagonist. KORs are believed to play key roles in modulating stress, mood and addictive behaviors, which form the basis of co-occurring disorders. We are preparing to initiate a clinical study to evaluate the effect of CERC-501 on aspects of tobacco withdrawal and reinstatement in the first half of 2016. In addition we are considering conducting a Phase 2 clinical study in inadequately treated subjects with major depressive disorder currently on antidepressants, with an initiation date in the second half of 2016, with the intent of thereafter pursuing additional studies focused on the treatment of major depressive disorder, substance use disorders, and, depending on market approval, the treatment of co-occurring disorders. CERC-406 is our preclinical lead candidate from our proprietary platform of compounds that inhibit catechol-O-methyltransferase, or COMT, within the brain, which we refer to as our COMTi platform. We anticipate developing CERC-406 for the treatment of residual cognitive impairment symptoms in patients with MDD.  

We have no current source of revenues to sustain our present activities, and we do not expect to generate revenues until, and unless, the FDA or other regulatory agencies approve our product candidates and we successfully commercialize any such product candidates. We will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts. We will seek to continue funding our operations through the sale of equity, debt financings or other sources, including potential collaborations.

We have historically funded our operations through a research grant and the sale of our common and convertible preferred stock and convertible debt.

Financial Operations Overview

Revenue

 

We have not generated any revenue from commercial product sales. In the future, if any of our product candidates currently under development are approved for commercial sale, we may generate revenue from product sales, or alternatively, we may choose to select a collaborator to commercialize our product candidates in all or selected markets, thereby reducing revenue from product sales and increasing royalties paid from collaborators. We will not generate any commercial revenue, if ever, until one of our product candidates receives marketing approval and we successfully commercialize such product candidates.

Research and Development Expenses

 

Our research and development expenses consist primarily of costs incurred developing, testing and seeking marketing approval for our product candidates.  Our development expenses consist of the following:

 

 

 

 

 

Research and development costs are expensed as incurred. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by our vendors.

 

As we advance our product candidates through clinical development, we expect that the amount of our research and development spending allocated to external spending relative to internal spending will continue to grow for the foreseeable future, while our internal research and development spending should grow at a slower and more controlled pace.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of professional fees, patent costs and salaries, benefits and related costs for executive and other personnel, including stock-based compensation and travel expenses. Other general and administrative expenses include facility-related costs, communication expenses and professional fees for legal, including patent-related expenses, consulting, tax and accounting services, insurance, depreciation and general corporate expenses. We anticipate that our general and administrative expenses will increase in the future with continued research, development and potential commercialization of our existing and future product candidates and expanded compliance obligations of operating as a public company.

 

Results of Operations

Comparison of Three Months Ended September 30, 2015 and 2014

Research and development

The following table summarizes our research and development expenses for the three months ended September 30, 2014 and 2015:

 

Research and development expenses decreased by $3.2 million, from $4.4 million for the three months ended September 30, 2014 to $1.2 million for the three months ended September 30, 2015. This decrease resulted from a $2.4 million decrease in external research and development costs due to two ongoing Phase 2 clinical trials in 2014. These studies were completed in 2014 and due to the failed results in one study, the Company initiated a second Phase 2 study for CERC-301 in 2015.  There was also a decrease of $613,000 in the three months ended September 30, 2015 as compared to the same period in 2014 related to salaries, benefits and related costs due to a reduction in headcount. We expect future research and development expenses to increase due to the continued development of CERC‑301 and our COMTi platform, including CERC‑406, as well as the commencement of the development of CERC‑501.

General and Administrative

The following table summarizes our general and administrative expenses for the three months ended September 30, 2014 and 2015:

 

General and administrative expenses decreased by $0.9 million for the three months ended September 30, 2015 compared to the same period in 2014. During the three months ended September 30, 2014, our salaries, benefits and related costs were $445,000 higher than the three months ended September 30, 2015, due to lower headcount in 2015. Stock compensation expense was $319,000 higher in 2014 due to certain awards to board members that were fully vested at the award date.

Change in Fair Value of Warrants and Investor Rights Obligation

We recognized a gain on the change in fair value of our warrants and Investor Rights Obligation of $1.5 million during the three months ended September 30, 2015, as compared to a gain of $348,000 during the same period in 2014. The Investor Rights Obligation expired upon the closing of the initial public offering of our Units in October 2015 (“IPO”).

The change in fair value during the three months ended September 30, 2014 and 2015 was due to the gain recognized from marking the warrants for shares of Series A‑1 convertible preferred stock to market.

Interest Expense, Net

Interest expense was $201,000 for the three months ended September 30, 2015 compared to $194,000 for the same period in 2014. The expense in the three months ended September 30, 2014 consisted primarily of amortization of debt discounts in connection with our financing activities in the three months ended September 30, 2014 and for interest paid under our secured term loan facility that we entered into in August 2014 compared to three months of interest on our secured term loan during the three months ended September 30, 2015.

Comparison of Nine Months Ended September 30, 2014 and 2015

Research and development

The following table summarizes our research and development expenses for the nine months ended September 30, 2014 and 2015:

 

Research and development expenses decreased by $5.1 million, from approximately $10.0 million for the nine months ended September 30, 2014 to $4.8 million for the nine months ended September 30, 2015.  This decrease resulted from a $5.2 million decrease in external research and development costs due to two ongoing Phase 2 clinical trials in 2014. These studies were completed in 2014 and, due to the failed results in an 8 mg study, the Company initiated a second Phase 2 study for CERC-301 increasing the dosage in 2015. These decreases were offset by the in-licensing of CERC-501 in February 2015 for $1.1 million. There was a decrease of $998,000 related to compensation and benefits related to salaries, benefits and related costs in 2014 as compared to 2015 due to a reduction in headcount. We expect future research and development expenses to increase due to the continued development of CERC‑301 and our COMTi platform, including CERC‑406, as well as the commencement of the development of CERC‑501.

General and Administrative

The following table summarizes our general and administrative expenses for the nine months ended September 30, 2014 and 2015:

General and administrative expenses decreased by $0.8 million for the nine months ended September, 2015 compared to the same period in 2014.  Salaries, benefits and related costs in 2015 were $289,000 lower than in 2014 due to lower headcount.  Stock compensation expense was $473,000 higher in 2014 due to certain awards to board members that were fully vested at the time of the award.

Change in Fair Value of Warrants and Investor Rights Obligation

We recognized a gain on the change in fair value of our warrants and Investor Rights Obligation of $1.1 million during the nine months ended September 30, 2015 compared to a gain of $734,000 in 2014. The change in fair value of

warrants and Investor Rights Obligation is primarily due to the issuance of warrants for shares of Series B convertible preferred stock and our Investor Rights Obligation in 2014 and their respective changes in fair value.

Interest Expense, Net

Interest expense decreased by $359,000 for the nine months ended September 30, 2015 compared to the same period in 2014.  The expense in 2014 was higher due to the amortization of debt discounts, premiums, and deferred financing fees in connection with our financing activities in 2014 as well as the interest paid under our secured term loan facility that was entered into in August 2014.

Financial Condition, Liquidity and Capital Resources

Sources of Liquidity

We finance our operations principally with cash generated from the issuance and sale of equity and debt securities.    On October 20, 2015, the Company consummated the IPO of its Units. The net proceeds of the IPO to the Company were approximately $23.6 million,  before offering expenses. For more information, see Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

 

Cash Flows

We have devoted most of our cash resources to research and development and general and administrative activities. Since our inception, we have incurred net losses and negative cash flows from our operations. We expect to incur significant expenses and operating losses for the foreseeable future as we continue the development and clinical trials of, and seek marketing approval for, our product candidates. We incurred net losses of $6.8 million in the nine months ended September 30, 2015 and $13.5 million for the nine months ended September 30, 2014. At September 30, 2015, we had an accumulated deficit of $49.9 million, a working capital deficit of $3.2 million and cash and cash equivalents of $3.3 million. To date, we have not generated any revenues from the sale of products and we do not anticipate generating any revenues from the sale of our product candidates for the foreseeable future. Historically, we have financed our operations principally through private placements of common and convertible preferred stock, convertible and nonconvertible debt. Through September 30, 2015 we have received aggregate net proceeds of $51.1 million primarily from the issuance of common and convertible preferred stock and debt. We anticipate funding our operations over the next several years from further sales of debt and equity securities.

The following table summarizes our cash flows for the nine months ended September 30, 2014 and 2015:

Net cash used in operating activities

Net cash used in operating activities was $11.6 million for the nine months ended September 30, 2014 and consisted primarily of a net loss of $13.5 million,  which included a non-cash change in fair value of warrant liability and Investor Rights Obligation of $734,000 and a reduction in accounts payable of $322,000.  These items were offset by a  non‑cash increase of $918,000 of stock‑based compensation, non-cash interest expense of $945,000 related to the Series