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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-37590
CERECOR INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
45-0705648
(I.R.S. Employer Identification No.)
540 Gaither Road, Suite 400
Rockville, Maryland 20850
(Address of principal executive offices)
(410522-8707
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value

CERCNasdaq Capital Market
    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 ☐ 
    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No ☐
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b‑2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
    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 5, 2020, the registrant had 74,910,047 shares of common stock outstanding.


Table of Contents

CERECOR INC.
 
FORM 10-Q
 
For the Quarter Ended September 30, 2020
 
TABLE OF CONTENTS 
      
     Page
    
  
      
   
      
  a) 
     
  b) 
     
 c)
d)
    
  e) 
     
  
     
  
     
  
 
     
  
     
  
  
    
  
2


Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
CERECOR INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets
 
September 30, 2020December 31, 2019
(unaudited)
Assets        
Current assets:  
Cash and cash equivalents$33,391,427 $3,609,438 
Accounts receivable, net1,671,121 1,001,645 
Other receivables4,285,393 4,240,572 
Inventory, net9,060 21,334 
Prepaid expenses and other current assets1,544,101 706,968 
Restricted cash, current portion131,844 17,535 
Investment in Aytu 7,628,947 
Current assets of discontinued operations 497,577 
Total current assets41,032,946 17,724,016 
Property and equipment, net1,707,806 1,447,663 
Intangible assets, net1,888,675 2,426,258 
Goodwill14,409,088 14,409,088 
Restricted cash, net of current portion148,642 101,945 
Total assets$59,187,157 $36,108,970 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$1,926,989 $2,077,524 
Accrued expenses and other current liabilities8,810,722 5,640,252 
Income taxes payable 551,671 
Current liabilities of discontinued operations5,833,729 3,891,012 
Total current liabilities16,571,440 12,160,459 
Royalty obligation2,000,000  
Deferred tax liability, net114,981 85,981 
Other long-term liabilities1,933,699 1,111,965 
Long-term liabilities of discontinued operations 1,755,000 
Total liabilities20,620,120 15,113,405 
Stockholders’ equity:  
Common stock—$0.001 par value; 200,000,000 shares authorized at September 30, 2020 and December 31, 2019; 74,900,047 and 44,384,222 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
74,899 44,384 
Preferred stock—$0.001 par value; 5,000,000 shares authorized at September 30, 2020 and December 31, 2019; 1,257,143 and 2,857,143 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
1,257 2,857 
Additional paid-in capital200,638,553 135,238,941 
Accumulated deficit(162,147,672)(114,290,617)
Total stockholders’ equity38,567,037 20,995,565 
Total liabilities and stockholders’ equity$59,187,157 $36,108,970 
 
See accompanying notes to the unaudited condensed consolidated financial statements.
3

Table of Contents

CERECOR INC. and SUBSIDIARIES
 
Condensed Consolidated Statements of Operations (Unaudited)
 
Three Months EndedNine Months Ended
 September 30,September 30,
 2020201920202019
Revenues:
Product revenue, net$1,110,794 $2,101,232 $5,202,423 $6,069,543 
License and other revenue 100,000  100,000 
Total revenues, net1,110,794 2,201,232 5,202,423 6,169,543 
Operating expenses:
Cost of product sales76,636 132,382 220,775 (611,747)
Research and development8,871,574 1,743,435 19,556,194 8,857,220 
Acquired in-process research and development  25,549,344  
General and administrative4,573,292 2,638,023 13,350,380 7,654,266 
Sales and marketing462,318 214,207 1,792,108 936,343 
Amortization expense403,500 334,748 1,237,583 1,004,243 
Change in fair value of contingent consideration   (1,256,210)
Total operating expenses14,387,320 5,062,795 61,706,384 16,584,115 
Loss from continuing operations(13,276,526)(2,861,563)(56,503,961)(10,414,572)
Other income:
Change in fair value of Investment in Aytu  5,207,789  
Other income, net18,668 52,711 446,897 83,273 
Total other income, net from continuing operations18,668 52,711 5,654,686 83,273 
Loss from continuing operations before taxes(13,257,858)(2,808,852)(50,849,275)(10,331,299)
Income tax expense (benefit)3,282 121,640 (2,607,530)305,759 
Loss from continuing operations$(13,261,140)$(2,930,492)$(48,241,745)$(10,637,058)
(Loss) income from discontinued operations, net of tax(197,505)(1,085,962)384,690 (7,056,543)
Net loss$(13,458,645)$(4,016,454)$(47,857,055)$(17,693,601)
Net (loss) income per share of common stock, basic and diluted:
Continuing operations$(0.16)$(0.05)$(0.68)$(0.19)
Discontinued operations(0.01)(0.02)0.00 (0.12)
Net loss per share of common stock, basic and diluted$(0.17)$(0.07)$(0.68)$(0.31)
Net (loss) income per share of preferred stock, basic and diluted:
Continuing operations$(0.82)$(0.26)$(3.40)$(0.94)
Discontinued operations(0.01)(0.09)0.02 (0.62)
Net loss per share of preferred stock, basic and diluted$(0.83)$(0.35)$(3.38)$(1.56)
 
See accompanying notes to the unaudited condensed consolidated financial statements.
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CERECOR INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
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 Nine Months Ended September 30,
 20202019
Operating activities        
Net loss$(47,857,055)$(17,693,601)
Adjustments to reconcile net loss used in operating activities:
Depreciation and amortization1,304,882 3,266,313 
Impairment of intangible assets 1,449,121 
Stock-based compensation5,349,428 1,942,196 
Acquired in-process research and development25,549,344  
Deferred taxes29,000 28,823 
Amortization of inventory fair value associated with acquisition of TRx and Avadel's pediatric products 107,272 
Change in fair value of Investment in Aytu(5,207,789) 
Change in fair value of warrant liability and unit purchase option liability(14,054)(6,823)
Change in value of Guarantee(1,755,000) 
Change in fair value of contingent consideration (1,009,168)
Changes in assets and liabilities:
Accounts receivable, net(171,899)(1,798,216)
Other receivables(4,184,225)5,260,807 
Inventory, net12,274 601,241 
Prepaid expenses and other assets(743,983)(140,503)
Accounts payable(548,039)(619,669)
Income taxes payable288,329 (1,017,804)
Accrued expenses and other liabilities1,775,039 (6,573,918)
License obligations (1,250,000)
Lease liability, net9,794  
Net cash used in operating activities(26,163,954)(17,453,929)
Investing activities  
Proceeds from sale of Investment in Aytu, net12,836,736  
Net cash paid in merger with Aevi(1,250,650) 
Purchase of property and equipment(62,658)(262,011)
Net cash provided by (used in) investing activities11,523,428 (262,011)
Financing activities  
Proceeds from underwritten public offering, net35,427,963 8,975,960 
Proceeds from registered direct offering, net5,136,184  
Proceeds from sale of shares pursuant to common stock private placement, net3,887,991 3,737,400 
Proceeds from exercise of stock options and warrants92,342 257,993 
Proceeds from shares purchased through employee stock purchase plan 132,910 127,537 
Restricted Stock Units withheld for taxes(93,869)(33,959)
Payment of contingent consideration (567,911)
Payment of long-term debt (73,026)
Net cash provided by financing activities44,583,521 12,423,994 
Increase (decrease) in cash, cash equivalents and restricted cash29,942,995 (5,291,946)
Cash, cash equivalents, and restricted cash at beginning of period3,728,918 10,746,756 
Cash, cash equivalents, and restricted cash at end of period$33,671,913 $5,454,810 
Supplemental disclosures of cash flow information  
Cash paid for interest$ $787,500 
Cash paid for taxes$316,000 $1,326,025 
Supplemental disclosures of non-cash activities
Issuance of common stock in Aevi Merger$15,495,578 $ 
Leased asset obtained in exchange for new operating lease liability$376,448 $743,025 
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    The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
September 30,
20202019
Cash and cash equivalents$33,391,427 $5,250,651 
Restricted cash, current131,844 102,214 
Restricted cash, non-current148,642 101,945 
Total cash, cash equivalents and restricted cash$33,671,913 $5,454,810 
See accompanying notes to the unaudited condensed consolidated financial statements.

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CERECOR INC. and SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)


 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 SharesAmountSharesAmountcapitaldeficitequity
Three Months Ended September 30, 2020
Balance, June 30, 202074,900,047 $74,899 1,257,143 $1,257 $199,191,022 $(148,689,027)$50,578,151 
Stock-based compensation— — 1,447,531 — 1,447,531 
Net loss— — — $(13,458,645)(13,458,645)
Balance, September 30, 202074,900,047 $74,899 1,257,143 $1,257 $200,638,553 $(162,147,672)$38,567,037 

Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
SharesAmountSharesAmountcapitaldeficitequity
Nine Months Ended September 30, 2020
Balance, December 31, 201944,384,222 $44,384 2,857,143 $2,857 $135,238,941 $(114,290,617)$20,995,565 
Conversion of preferred stock to common stock8,000,000 8,000 (1,600,000)(1,600)(6,400)—  
Issuance of shares related to Aevi Merger3,893,361 3,894 — 15,491,684 — 15,495,578 
Issuance of shares pursuant to registered direct offering, net of offering costs1,306,282 1,306 — 5,134,878 — 5,136,184 
Issuance of shares pursuant to common stock private placement, net of offering costs1,951,219 1,951 — 3,886,040 — 3,887,991 
Issuance of shares of common stock in underwritten public offering, net of offering costs15,180,000 15,180 — 35,412,783 — 35,427,963 
Exercise of stock options and warrants50,239 50 — 92,292 — 92,342 
Restricted Stock Units vested during period111,667 111 — (111)—  
Restricted Stock Units withheld for taxes(35,279)(35)— (93,834)— (93,869)
Shares purchased through employee stock purchase plan58,336 58 — 132,852 — 132,910 
Stock-based compensation— — 5,349,428 — 5,349,428 
Net loss— — — $(47,857,055)(47,857,055)
Balance, September 30, 202074,900,047 $74,899 1,257,143 $1,257 $200,638,553 $(162,147,672)$38,567,037 

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 Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
 SharesAmountSharesAmountcapitaldeficitequity
Three Months Ended September 30, 2019
Balance, June 30, 201942,898,251 $42,898 2,857,143 $2,857 $129,545,721 $(111,895,217)$17,696,259 
Issuance of shares pursuant to common stock private placement, net of offering costs1,200,000 1,200 — 3,736,200 — 3,737,400 
Exercise of stock options and warrants539 1 — 1,175 — 1,176 
Restricted Stock Units vested during period11,250 11 — (11)—  
Restricted Stock Units withheld for taxes(3,246)(3)— (15,898)— (15,901)
Stock-based compensation— — 818,794 — 818,794 
Net loss— — — (4,016,454)(4,016,454)
Balance, September 30, 201944,106,794 $44,107 2,857,143 $2,857 $134,085,981 $(115,911,671)$18,221,274 
Common stockPreferred StockAdditional paid-inAccumulatedTotal stockholders’
SharesAmountSharesAmountcapitaldeficitequity
Nine Months Ended September 30, 2019
Balance, December 31, 201840,804,189 $40,804 $2,857,143 $2,857 $119,082,157 $(98,218,070)$20,907,748 
Issuance of shares of common stock in underwritten public offering, net of offering costs1,818,182 1,818 — 8,974,142 — 8,975,960 
Issuance of shares pursuant to common stock private placement, net of offering costs1,200,000 1,200 — 3,736,200 — 3,737,400 
Exercise of stock options and warrants74,952 75 — 257,918 — 257,993 
Restricted Stock Units vested during period172,500 173 — (173)—  
Restricted Stock Units withheld for taxes(6,969)(7)— (33,952)— (33,959)
Shares purchased through employee stock purchase plan43,940 44 — 127,493 — 127,537 
Stock-based compensation— — 1,942,196 — 1,942,196 
Net loss— — — (17,693,601)(17,693,601)
Balance, September 30, 201944,106,794 $44,107 $2,857,143 $2,857 $134,085,981 $(115,911,671)$18,221,274 
                                                                                
See accompanying notes to the unaudited condensed consolidated financial statements.

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CERECOR INC. and SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements 

 

1. Business

Cerecor Inc. (the "Company" or "Cerecor") is a biopharmaceutical company focused on becoming a leader in development and commercialization of treatments for rare and orphan diseases. The Company is advancing its clinical-stage pipeline of innovative therapies that address unmet patient needs within rare and orphan diseases. The Company's rare disease pipeline includes CERC-801, CERC-802 and CERC-803 ("CERC-800 compounds"), which are therapies for inherited metabolic disorders known as Congenital Disorders of Glycosylation ("CDGs"). The U.S. Food and Drug Administration ("FDA") granted Rare Pediatric Disease Designation ("RPDD") and Orphan Drug Designation ("ODD") to all three CERC-800 compounds, thus potentially qualifying the Company to receive a Priority Review Voucher ("PRV") upon approval of each new drug application ("NDA"). The Company is also developing CERC-002, CERC-006 and CERC-007. CERC-002 is an anti-LIGHT (Lymphotoxin-like, exhibits Inducible expression, and competes with HSV Glycoprotein D for HVEM, a receptor expressed by T lymphocytes) monoclonal antibody being developed for COVID-19 acute respiratory distress syndrome and for severe pediatric-onset Crohn's disease. CERC-006 is a dual mTOR inhibitor being developed for the treatment of complex lymphatic malformations and has been granted ODD and RPDD by the FDA, thus potentially qualifying the Company to receive a fourth PRV upon approval of an NDA. CERC-007 is an anti-IL-18 monoclonal antibody being developed for the treatment of autoimmune inflammatory diseases such as adult onset Still's disease and multiple myeloma.

The Company continues to explore strategic alternatives for its commercialized product, Millipred®, an oral prednisolone indicated across a wide variety of inflammatory conditions, and for its non-core neurology pipeline assets.

On February 3, 2020, the Company closed on its merger (the "Merger" or the "Aevi Merger") with Aevi Genomic Medicine, Inc. ("Aevi"), in which Cerecor acquired the rights to CERC-002, CERC-006 and CERC-007. Additionally, certain members of Aevi's leadership joined Cerecor's management and board of directors, most notably Mike Cola, Chief Executive Officer, Dr. Garry Neil, Chief Scientific Officer and Dr. Sol Barer, Chairman of the Board. See Note 6 for more information.

Cerecor was incorporated and commenced operation in 2011 and completed its initial public offering in October 2015.

Liquidity

In June 2020, the Company closed an underwritten public offering of 15,180,000 shares of its common stock (inclusive of 1,980,000 shares that were sold pursuant to the underwriter’s full exercise of its option to purchase additional shares of Cerecor’s common stock) for net proceeds of approximately $35.4 million. In March 2020, the Company entered into a securities purchase agreement with its largest stockholder, Armistice Capital, LLC ("Armistice"), pursuant to which the Company sold 1,951,219 shares of the Company’s common stock for net proceeds of approximately $3.9 million. In February 2020, the Company closed a registered direct offering with institutional investors of 1,306,282 shares of the Company's common stock for net proceeds of approximately $5.1 million. See Note 9 for more information regarding these financings. Additionally, in April 2020, the Company converted its shares of Aytu preferred stock that were acquired in the fourth quarter of 2019 to Aytu common stock, which it subsequently sold for net proceeds of approximately $12.8 million. As of September 30, 2020, Cerecor had $33.4 million in cash and cash equivalents.

In order to meet its cash flow needs, the Company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the Company's resources between investing in the Company's existing pipeline assets and acquisitions or in-licensing of new assets. For the nine months ended September 30, 2020, Cerecor generated a net loss of $47.9 million and negative cash flows from operations of $26.2 million. As of September 30, 2020, Cerecor had an accumulated deficit of $162.1 million.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern; however, the Company expects to incur additional losses in the future in connection with its research and development activities and will require additional financing to fund its operations and to continue to execute its business strategy. The Company plans to use its current cash on hand, the anticipated cash flows from the Company's profits from Millipred product sales and/or the potential proceeds from a possible out-license or sale of Millipred to a third party to offset costs related to development of its pipeline assets, business development, and costs associated with its organizational infrastructure; however, Cerecor expects to continue to incur significant expenses and operating losses for the immediate future as it continues to invest in the Company's pipeline assets. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise additional equity and/or debt capital, sell non-core assets and/or obtain government funding; however, there can be no assurance that it will be able to do so nor that such activities will generate sufficient amounts, if any, on terms acceptable to the Company. Over the long term, the
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Company's ultimate ability to achieve and maintain profitability will depend on, among other things, the development, regulatory approval, and commercialization of its pipeline assets, and the potential receipt and sale of any PRVs it receives, in order to support its cost structure and pipeline asset development.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements included in this Quarterly Report were issued. To alleviate these conditions, the Company is evaluating the potential out-licensing or sale of Millipred, its non-core pipeline assets, sale of rights to any future issued PRVs, equity or debt financings, collaborations, other out-licensing arrangements, strategic alliances, federal and private grants, marketing, other distribution or licensing arrangements, or the sale of current or future assets. If the Company raises additional funds through collaborations, strategic alliances or licensing arrangements with third parties, the Company might have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible or suspend or curtail planned programs. Due to the uncertainty regarding future financings and other potential options to raise additional funds, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements in this Quarterly Report were issued.

2. Basis of Presentation and Significant Accounting Policies
 
Basis of Presentation
 
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Updates ("ASU") of the Financial Accounting Standards Board ("FASB").

In the opinion of management, the accompanying unaudited condensed consolidated 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 condensed consolidated balance sheet at December 31, 2019 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 condensed consolidated financial statements are read in conjunction with the December 31, 2019 audited consolidated financial statements.

Significant Accounting Policies

During the nine months ended September 30, 2020, there were no significant changes to the Company’s summary of significant accounting policies contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 11, 2020, except for the policy related to the Payroll Protection Program Loan and the recently adopted accounting standards described below.

Payroll Protection Program Loan

The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") provides stimulus measures, including the Payroll Protection Loan Program ("PPP"), to provide certain small businesses with liquidity to support their operations (such as to retain employees and maintain payroll and lease payments) during the COVID-19 pandemic. Cerecor received a $0.4 million PPP Loan during the second quarter of 2020. PPP Loans have a 1% fixed annual interest rate and mature in two years, however are eligible for forgiveness under certain conditions. If there is reasonable assurance that the PPP Loan will be forgiven, the Company may elect to account for the loan either as debt under ASC 470 or as a government grant. If accounted for as a government grant, the Company may elect to present the loan as either a credit in the income statement within other income or as a reduction to the related expense. As discussed in Note 14, as of September 30, 2020, the Company believes it meets the criteria for forgiveness including having incurred the related expenses during the second quarter of 2020. Therefore, the Company elected to recognized the PPP Loan as other income within the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020.

Recently Adopted Accounting Pronouncements
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Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). This guidance applies to all entities and impacts how entities account for credit losses for most financial assets and other instruments. For available-for-sale debt securities, entities will be required to recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. For trade receivables, loans and held-to-maturity debt securities, entities will be required to estimate lifetime expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods therein.

Upon adoption of the new standard on January 1, 2020, the Company began recognizing an allowance using a forward-looking approach to estimate the expected credit loss related to financial assets. The Company began monitoring the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers’ credit profiles. Over 95% of sales were generated from three major industry wholesalers for the three and nine months ended September 30, 2020. Additionally, pursuant to the new standard, at each reporting period, the Company adjusts the Guarantee liability through earnings based on expected credit losses in accordance with Topic 326. The Company evaluated the impact of the adoption of this standard on its financial statements, concluding there was no significant impact on the Company's results of operations, financial position, cash flows or disclosures.

Fair Value Measurements
    
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This new standard modifies certain disclosure requirements on fair value measurements. This new standard became effective for the Company on January 1, 2020. The Company evaluated the impact of the adoption of this new standard on its financial statements, concluding there was no significant impact.

Income Tax Simplification

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)(ASU 2019-12)", which provides final guidance that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation that is applicable to the Company, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences among other changes. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects early adoption must adopt all the amendments in the same period. The Company elected to early adopt the ASU 2019-12 as of January 1, 2020. Management concluded that the adoption of the new standard did not have a material impact to income taxes reported on the financial statements for the three and nine months ended September 30, 2020.

3. Aytu Divestiture

Overview of Sale of Pediatric Portfolio and Related Commercial Infrastructure to Aytu BioScience

On October 10, 2019, the Company entered into the Aytu Purchase Agreement to sell the Company’s rights, title and interest in assets relating to its Pediatric Portfolio, namely Aciphex® Sprinkle™, Cefaclor for Oral Suspension, Karbinal™ ER, Flexichamber™ , Poly-Vi-Flor® and Tri-Vi-Flor™ (the "Pediatric Portfolio"), as well as the corresponding commercial infrastructure consisting of the right to offer employment to Cerecor’s sales force and the assignment of supporting commercial contracts (the "Aytu Divestiture"). The Aytu Divestiture closed on November 1, 2019. Aytu paid consideration of $4.5 million in cash and approximately 9.8 million shares of Aytu convertible preferred stock, and assumed certain of the Company’s liabilities, including the Company’s payment obligations payable to Deerfield CSF, LLC of $15.1 million and certain other liabilities of $11.0 million primarily related to contingent consideration, Medicaid rebates and sales returns. The Company recognized a gain of $8.0 million upon the closing of the Aytu Divestiture for the year ended December 31, 2019. In addition, Aytu assumed future contractual obligations under existing license agreements associated with the Pediatric Portfolio. Armistice, a significant stockholder of the Company and Armistice's Chief Investment Officer, Steve Boyd, serves on each company's board of directors.

Upon close of the Aytu Divestiture, Cerecor terminated all of its sales force personnel, which included those offered employment by Aytu, as well as any remaining sales force personnel. Cerecor retained all rights to Millipred®. Pursuant to a transition services agreement entered into between Aytu and Cerecor, Aytu is managing Millipred® commercial operations for a
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monthly fee of $12,000 for up to 18 months or until the Company establishes an independent commercial infrastructure for the product.

Upon the sale of the Pediatric Portfolio to Aytu, the Pediatric Portfolio met all conditions to be classified as discontinued operations. Therefore, the accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 and as of December 31, 2019 reflect the operations, net of taxes, and related assets and liabilities of the Pediatric Portfolio as discontinued operations. Refer to the "Discontinued Operations" section below for more information, including Cerecor's continuing involvement.

Deerfield Guarantee

On November 1, 2019, in conjunction with the closing of the Aytu Divestiture, the Company entered into a Guarantee in favor of Deerfield CSF, LLC ("Deerfield"), which guarantees the payment by Aytu of the assumed liabilities to Deerfield, which includes the debt obligation ("Fixed Payment Guarantee") and the contingent consideration related to future potential royalties on Avadel's pediatric products ("Deferred Payment Guarantee"), collectively referred to as the "Guarantee". Additionally, on November 1, 2019, the Company entered into a Contribution Agreement with Armistice and Avadel that governs contribution rights and obligations of the Company, Armistice and Avadel with respect to amounts that are paid by Armistice and Avadel to Deerfield under certain guarantees made by Armistice and Avadel to Deerfield.

The debt obligation assumed by Aytu consists of fixed monthly payments to Deerfield of $0.1 million until January 2021 and an additional balloon payment of $15.0 million to Deerfield on January 31, 2021. Aytu publicly reported that it had paid the $15.0 million balloon payment to Deerfield before it came due in June 2020, thus satisfying that portion of the debt obligation assumed as part of the divestiture. Cerecor's Fixed Payment Guarantee will end on January 31, 2021, upon the final monthly payment of $0.1 million. The contingent consideration assumed by Aytu consists of quarterly deferred payments equal to 15% of net sales of certain Pediatric Portfolio or at least $0.3 million paid in arrears each quarter until the earlier of (i) February 5, 2026, or (ii) when $12.5 million in aggregate deferred payments have been paid to Deerfield. Of the contingent consideration, $3.2 million was paid to Deerfield prior to the Aytu Divestiture and therefore as of November 1, 2019, Aytu was responsible for the remaining $9.3 million. Aytu is required to pay an amount equal to at least $0.1 million per month. Cerecor's Deferred Payment Guarantee will end upon the earlier of (i) February 5, 2026, or (ii) upon $12.5 million in aggregate deferred payments has been paid to Deerfield. Cerecor is required to make payment under the Guarantee upon demand by Deerfield, which Deerfield can demand at any time if all or any part of the fixed payments and/or deferred payments are not paid by Aytu when due or upon breach of a covenant. The remaining minimum commitments payable as most recently publicly reported by Aytu was $7.3 million as of June 30, 2020, which represents Cerecor's estimated maximum potential future payments under the Guarantee.

The fair value of the Guarantee, which relates to the Company's obligation to make future payments if Aytu defaults, was determined at the time of the divestiture as the difference between (i) the estimated fair value of the debt and contingent payments, respectively, using Cerecor's estimated cost of debt and (ii) the estimated fair value of the debt and contingent payments, respectively, using Aytu's estimated cost of debt. Subsequent to the close of the Aytu Divestiture, at each reporting period, the value of the Guarantee is determined based on the expected credit loss of the Guarantee with changes recorded in (loss) income from discontinued operations, net of tax within the consolidated statements of operations. In 2020, Aytu's credit rating significantly improved as a result of recent developments to Aytu's business, including but not limited to, recent financings and expansion of its revenue products that substantially enhanced Aytu's cash position and its ability to meet its financial commitments. Based on these facts, management concluded that the expected credit loss of the Guarantee was de minimis as of September 30, 2020, thus recognizing no change in value in income from discontinued operations, net of tax within the accompanying condensed consolidated statement of operations for the three months ended September 30, 2020 and a $1.8 million gain on the change in value in income from discontinued operations, net of tax within the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2020.

Discontinued Operations

The following tables summarizes the assets and liabilities of the discontinued operations as of September 30, 2020 and December 31, 2019:
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 September 30, 2020December 31,
 (unaudited)2019
Assets        
Current assets:  
Accounts receivable, net$ $497,577 
Total current assets of discontinued operations$ $497,577 
Liabilities  
Current liabilities:
Accounts payable$ $387,975 
Accrued expenses and other current liabilities5,833,729 3,503,037 
Total current liabilities of discontinued operations5,833,729 3,891,012 
Other long-term liabilities 1,755,000 
Total long-term liabilities of discontinued operations$ $1,755,000 
    
Cerecor retains continuing involvement with the divested Pediatric Portfolio related to future sales returns made after November 1, 2019 of sales of the Pediatric Portfolio prior to the close date of the Aytu Divestiture and the Deerfield Guarantee. Pursuant to the Aytu Purchase Agreement, Aytu assumed sales returns of the Pediatric Portfolio made after the closing date of November 1, 2019 and primarily relating to sales prior to November 1, 2019 only to the extent such post-Closing sales returns exceed $2.0 million and are less than $2.8 million (in other words, Aytu will only assume $0.8 million of such returns). Therefore, Cerecor is liable for future sales returns of the Pediatric Portfolio sold prior to November 1, 2019 in excess of the $0.8 million assumed by Aytu. As of September 30, 2020, the Company estimated its sales return reserve from discontinued operations to be $1.5 million, which is included above in accrued expenses and other current liabilities from discontinued operations. Changes in the Company's estimate of sales returns related to the Pediatric Portfolio is included within discontinued operations on the statement of operations and is shown within product sales, net in the table summarizing the results of discontinued operations below. In future periods, as additional information becomes available to the Company, the Company expects to recognize expense (or a benefit) related to actual sales returns of the Pediatric Portfolio in excess (or less than) the returns reserve recorded, which will be recognized within discontinued operations. The Company expects this involvement to continue until sales returns are no longer accepted on sales of the Pediatric Portfolio made prior to November 1, 2019, which, in line with the products' return policies, returns on these products may be accepted through 2023. The remaining liability within accrued expenses and other liabilities of discontinued operations as of September 30, 2020 largely relates to cash Cerecor collected on behalf of Aytu for post-divestiture sales of the Pediatric Portfolio, which will be remitted to Aytu. The collection of accounts receivable from Cerecor to Aytu was fully transitioned to Aytu during the second quarter of 2020.

The following table summarizes the results of discontinued operations for the three and nine months ended September 30, 2020 and 2019:
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 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(unaudited)(unaudited)
Product revenue, net$(197,505)$3,412,044 $(1,370,310)$9,304,580 
Operating expenses:
Cost of product sales 1,302,679  3,852,878 
General and administrative 41,374  124,121 
Sales and marketing 2,416,338  7,739,955 
Amortization expense 702,665  2,190,865 
Impairment of intangible assets   1,449,121 
Change in fair value of contingent consideration (197,219) 247,042 
Total operating expenses 4,265,837  15,603,982 
Other (expense) income:
Change in value of Guarantee  1,755,000  
Interest expense, net (238,158) (714,473)
Total other (expense) income (238,158)1,755,000 (714,473)
(Loss) income from discontinued operations before tax(197,505)(1,091,951)384,690 (7,013,875)
Income tax (benefit) expense (5,989) 42,668 
(Loss) income from discontinued operations, net of tax$(197,505)$(1,085,962)$384,690 $(7,056,543)
    
The significant non-cash operating items from the discontinued operations for the nine months ended September 30, 2020 and 2019 are contained below. There were no non-cash investing items from the discontinued operations for the nine months ended September 30, 2020 and 2019.
 Nine Months Ended September 30,
 20202019
Operating activities
Amortization$ $2,190,865 
Impairment of intangible assets 1,449,121 
Stock-based compensation, excluding amount included within gain on sale of Pediatric Portfolio 313,790 
Change in fair value of contingent consideration liability 247,042 
Change in value of Guarantee(1,755,000) 

4. Revenue

The Company generates substantially all of its revenue from sales of prescription drugs to its customers. Revenue from sales of prescription drugs was $1.1 million and $2.1 million for the three months ended September 30, 2020 and 2019, respectively. Revenue from sales of prescription drugs was $5.2 million and $6.1 million for the nine months ended September 30, 2020 and 2019, respectively.

As is typical in the pharmaceutical industry, the Company sells its prescription drugs in the United States primarily through wholesale distributors and a specialty contracted pharmacy. Wholesale distributors account for substantially all of the Company’s net product revenues and trade receivables. In addition, the Company earns revenue from sales of its prescription drugs directly to retail pharmacies. For the three months ended September 30, 2020, the Company’s three largest customers accounted for approximately 40%, 24%, and 34% of the Company's total net product revenues from sale of prescription drugs from continuing operations. For the nine months ended September 30, 2020, the Company’s three largest customers accounted for approximately 43%, 28%, and 27%of the Company's total net product revenues from sale of prescription drugs from continuing operations.

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The Company has a License and Supply Agreement for Millipred with Watson Laboratories, Inc., which is now part of Teva Pharmaceutical Industries Ltd. ("Teva"). Pursuant to the License and Supply Agreement, the Company is required to make license payments of $75,000 in February and August of each year through April 2021, and purchase inventory on an ad-hoc basis. Dr. Sol Barer is the Chairman of Cerecor's Board of Directors and he also serves as the Chairman of Teva's Board of Directors.

During the third quarter of 2020, the Company received notice from Teva of its termination of the License and Supply Agreement, effective April 1, 2021. Cerecor will continue to have the right under the agreement to sell the existing inventory on hand at April 1, 2021 for a period of six months after such date. The Company is currently in negotiations with Teva to extend the term of the License and Supply Agreement, however there can be no guarantee that any such extension will be granted. Finally, the Company continues to explore strategic alternatives for this product.

5. Net Loss Per Share

The Company computes earnings per share ("EPS") using the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared and participation rights in undistributed earnings. The Company has two classes of stock outstanding, common stock and preferred stock. The preferred stock was issued in December 2018, upon Armistice exercising warrants to acquire an aggregate of 2,857,143 shares of the Series B Convertible Preferred Stock ("convertible preferred stock"). The convertible preferred stock has the same rights and preferences as the Company’s common stock, other than being non-voting, and is convertible into shares of common stock on a 1-for-5 ratio. During the first quarter of 2020, Armistice converted 1.6 million shares of Series B Convertible Preferred Stock into 8.0 million shares of Cerecor's common stock. Under the two-class method, the convertible preferred stock is considered a separate class of stock for EPS purposes and therefore basic and diluted EPS is provided below for both common stock and preferred stock.

EPS for common stock and EPS for preferred stock is computed by dividing the sum of distributed earnings and undistributed earnings for each class of stock by the weighted average number of shares outstanding for each class of stock for the period. In applying the two-class method, undistributed earnings are allocated to common stock and preferred stock based on the weighted average shares outstanding during the period, which assumes the convertible preferred stock has been converted to common stock.

Diluted net (loss) income per share includes the potential dilutive effect of common stock equivalents as if such securities were converted or exercised during the period, when the effect is dilutive. Common stock equivalents include: (i) outstanding stock options and restricted stock units, which are included under the "treasury stock method" when dilutive; and (ii) common stock to be issued upon the exercise of outstanding warrants, which are included under the "treasury stock method" when dilutive. Because the impact of these items is generally anti-dilutive during periods of net loss, there is no difference between basic and diluted loss per common share for periods with net losses. In periods of net loss, losses are allocated to the participating security only if the security has not only the right to participate in earnings, but also a contractual obligation to share in the Company's losses.

The following table sets forth the computation of basic and diluted net (loss) income per share of common stock and preferred stock for the three and nine months ended September 30, 2020 and 2019, which includes both classes of participating securities: 
Three Months Ended
 September 30, 2020
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(12,234,411)$(182,214)$(1,026,729)$(15,291)
Denominator:
Weighted average shares74,900,047 74,900,047 1,257,143 1,257,143 
Basic and diluted net loss per share$(0.16)$(0.01)$(0.82)$(0.01)

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Three Months Ended
 September 30, 2019
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(2,202,802)$(816,299)$(727,690)$(269,663)
Denominator:
Weighted average shares43,244,481 43,244,481 2,857,143 2,857,143 
Basic and diluted net loss per share$(0.05)$(0.02)$(0.26)$(0.09)

Nine Months Ended
 September 30, 2020
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net (loss) income$(43,510,912)$346,965 $(4,730,833)$37,725 
Denominator:
Weighted average shares63,920,795 63,920,795 1,389,990 1,389,990 
Basic and diluted net (loss) income per share$(0.68)$0.00 $(3.40)$0.02 

Nine Months Ended
 September 30, 2019
Common stockPreferred stock
Continuing OperationsDiscontinued OperationsContinuing OperationsDiscontinued Operations
Numerator:
Allocation of undistributed net loss$(7,958,896)$(5,279,871)$(2,678,162)$(1,776,672)
Denominator:
Weighted average shares42,453,928 42,453,928 2,857,143 2,857,143 
Basic and diluted net loss per share$(0.19)$(0.12)$(0.94)$(0.62)