Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.19.3
Acquisitions
9 Months Ended
Sep. 30, 2019
Business Combinations and Asset Acquisitions [Abstract] [Abstract]  
Acquisitions
5. Acquisitions

Asset Acquisitions

Ichorion Asset Acquisition

On September 24, 2018, the Company entered into, and subsequently consummated the transactions contemplated by, an agreement and plan of merger (the "Merger Agreement") by and among the Company and Ichorion Therapeutics, Inc., a Delaware corporation (the “Ichorion Asset Acquisition”), with Ichorion surviving as a wholly owned subsidiary of the Company.  The consideration for the Ichorion Asset Acquisition consisted of approximately 5.8 million shares of the Company’s common stock, par value $0.001 per share, as adjusted for Estimated Working Capital, as defined in the Merger Agreement. The shares of common stock issued as part of the acquisition may not be resold until January 2020. Consideration for the Ichorion Asset Acquisition includes certain development milestones worth up to an additional $15.0 million, payable either in shares of the Company's common stock or in cash, at the election of the Company.

The fair value of the common stock shares transferred at closing was approximately $20.0 million based on the Company's stock price close on September 24, 2018 and offset by an estimated discount for lack of marketability calculated using guideline public company volatility for comparable companies. The assets acquired consisted primarily of $18.7 million of acquired in-process research and development ("IPR&D"), $1.6 million of cash and $0.2 million assembled workforce. The Company recorded this transaction as an asset purchase as opposed to a business combination as management concluded that substantially all of the value received was related to one group of similar identifiable assets which was the IPR&D for the three preclinical therapies for inherited metabolic disorders known as CDGs (CERC-801, CERC-802 and CERC-803). The Company considered these assets similar due to similarities in the risks for development, compound type, stage of development, regulatory pathway, patient population and economics of commercialization.  The fair value of the IPR&D was immediately recognized as Acquired In-Process Research and Development expense as the IPR&D asset has no other alternate use due to the stage of development. The $0.2 million of transaction costs incurred were recorded to acquired IPR&D expense. The assembled workforce asset recorded to intangible assets will be amortized over an estimated useful life of two years.

The contingent consideration of up to an additional $15.0 million relates to three future development milestones. The first milestone is the first product being approved for marketing by the FDA on or prior to December 31, 2021. If this milestone is met, the Company is required to make a milestone payment of $6.0 million. The second milestone is the second product being approved for marketing by the FDA on or prior to December 31, 2021. If this milestone is met, the Company is required to make a milestone payment of $5.0 million. The third milestone is a protide molecule being approved by the FDA on or prior to December 31, 2023. If this milestone is met, the Company is required to make a milestone payment of $4.0 million. All milestones are payable in either shares of the Company's common stock or cash, at the election of the Company.

The contingent consideration related to the development milestones will be recognized if and when such milestones are probable and can be reasonably estimated. As of September 30, 2019, no contingent consideration related to the development milestone has been recognized. The Company will continue to monitor the development milestones at each reporting period.

Avadel Pediatric Products Acquisition
On February 16, 2018, the Company entered into an asset purchase agreement with Avadel US Holdings, Inc., Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., Avadel Therapeutics, LLC and Avadel Pharmaceuticals PLC (collectively, the “Sellers”) to purchase and acquire all rights to the Sellers’ pediatric products. Total consideration transferred to the Sellers consisted of: (1) a cash payment of one dollar, (2) the Company's assumption of existing seller debt due in January 2021 with a fair value of $15.1 million, and (3) contingent consideration relating to royalty obligations through February 2026 with a fair value at acquisition date of approximately $7.9 million. As a result of the Avadel pediatric products acquisition, the Company recorded goodwill of $3.8 million, which is deductible over 15 years for income tax purposes.
The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized was attributable primarily to strategic opportunities related to an expanded commercial footprint and diversified pediatric product portfolio that is expected to provide revenue and cost synergies.
During the second quarter of 2018, the Company identified and recorded measurement period adjustments to the preliminary purchase price allocation. These adjustments are reflected in the tables below. The measurement period adjustments were the result of additional analysis performed and information identified during the second quarter of 2018 based on facts and circumstances that existed as of the purchase date. There were no additional measurement adjustments recorded in 2018.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition and as adjusted for measurement period adjustments identified during the second quarter of 2018:    
 
 
 
 
 
 
 
 
 
 
 
    
At February 16,
2018 (preliminary)
Measurement Period Adjustments
At February 16,
2018 (as adjusted)
 
 
 
 
 
Inventory
 
$
2,549,000

$
(1,831,000
)
$
718,000

Prepaid assets
 

570,000

570,000

Intangible assets
 
16,453,000

1,838,000

18,291,000

Accrued expenses
 

(362,000
)
(362,000
)
Fair value of debt assumed
 
(15,272,303
)
197,303

(15,075,000
)
Fair value of contingent consideration
 
(7,875,165
)
(44,835
)
(7,920,000
)
Total net liabilities assumed
 
(4,145,468
)
367,468

(3,778,000
)
Consideration exchanged
 
241,000

(240,999
)
1

     Goodwill
 
$
4,386,468

$
(608,467
)
$
3,778,001


The purchase price allocation related to the acquisition of Avadel's pediatric products was finalized in 2018. The fair values of intangible assets, including marketing rights, licenses and developed technology, were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. The fair value of intangible assets both as of the date of acquisition and as adjusted by measurement period adjustments identified during the second quarter of 2018 includes the following:
 
 
 
 
 
 
 
 
 
 
 
 
At February 16,
2018 (preliminary)
Measurement Period Adjustments
At February 16,
2018 (as adjusted)
 
 
 
 
 
Acquired Product Marketing Rights - Karbinal
 
$
6,221,000

$
(21,000
)
$
6,200,000

Acquired Product Marketing Rights - AcipHex
 
2,520,000

283,000

2,803,000

Acquired Product Marketing Rights - Cefaclor
 
6,291,000

1,320,000

7,611,000

Acquired Developed Technology - Flexichamber
 
1,131,000

546,000

1,677,000

Acquired IPR&D - LiquiTime formulations
 
290,000

(290,000
)

     Total
 
$
16,453,000

$
1,838,000

$
18,291,000


Subsequent to the finalization of the purchase price allocation related to the acquisition of Avadel's pediatric products, during the second quarter of 2019, the Company made a strategic decision to eliminate sales force efforts related to selling Flexichamber (other than the limited inventory currently on hand). As a result of this decision, paired with significant deviations from forecasted sales, management identified an impairment indicator for Flexichamber during the second quarter of 2019. Accordingly, during the second quarter of 2019, the Company performed a test for recoverability and concluded that the sum of its estimated future undiscounted cash flows was less than its carrying value of $1.4 million. Management then measured the impairment loss by calculating the excess of Flexichamber's carrying amount over its fair value. Management determined that due to the absence of future material cash flows that the fair value of Flexichamber as of June 30, 2019, which is considered a Level 3 nonrecurring fair value measurement, was $0. Accordingly, a full impairment was recognized in the impairment of intangible asset line for Flexichamber in the amount of $1.4 million for the nine months ended September 30, 2019. In addition, because the Company expects the sale of remaining inventory on hand will not generate material cash flows, the Company wrote down the existing inventory on hand as of June 30, 2019 to $0, which resulted in $0.2 million charge to cost of product sales during the nine months ended September 30, 2019.

TRx Acquisition    

On November 17, 2017, the Company entered into, and consummated the transactions contemplated by, an equity interest purchase agreement (the “TRx Purchase Agreement”) by and among the Company, TRx, Fremantle Corporation and LRS International LLC, the selling members of TRx (collectively, the “TRx Sellers”), which provided for the purchase of all of the equity and ownership interests of TRx by the Company (the "TRx Acquisition"). The consideration for the TRx Acquisition consisted of $18.9 million in cash, as adjusted for estimated working capital, estimated cash on hand, estimated indebtedness and estimated transaction expenses, as well as 7,534,884 shares of the Company’s common stock having an aggregate value on the closing date of $8.5 million and certain potential contingent payments. Upon closing, the Company issued 5,184,920 shares of its common stock to the TRx Sellers.  Pursuant to the TRx Purchase Agreement, the issuance of the remaining 2,349,968 shares was subject to the Company's stockholder approval. In May 2018, stockholder approval was obtained and the remaining shares were issued to the TRx Sellers. The contingent shares were initially recorded to contingently issuable shares, which is recorded within stockholder's equity and were reclassed to common stock and additional paid in capital upon issuance, on the consolidating balance sheet date. As a result of the TRx Acquisition, the Company has currently recorded goodwill of $12.6 million, of which $8.7 million was deductible for income taxes.

During the third quarter of 2018, the Company identified and recorded measurement period adjustments to our preliminary purchase price allocation that was disclosed in prior periods. These adjustments are reflected in the tables below. The measurement period adjustments were the result of an arbitration ruling discussed in further detail in Note 13, the facts and circumstances of which existed as of the acquisition date.

The following table summarizes the preliminary acquisition-date fair value of the consideration transferred at the date of acquisition both as disclosed in periods prior to the third quarter of 2018 and as adjusted for measurement period adjustments identified during the third quarter of 2018:
 
 
 
 
 
 
 
 
 
 
 
    
At November 17,
2017 (preliminary)
Measurement Period Adjustments
At November 17, 2017 (as adjusted)
 
 
 
 
 
Cash
 
$
18,900,000

$

$
18,900,000

Common stock (including contingently issuable shares)
 
8,514,419


8,514,419

Contingent payments
 
2,576,633

(1,210,000
)
1,366,633

Total consideration transferred
 
$
29,991,052

(1,210,000
)
28,781,052


The TRx Acquisition was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired, and liabilities assumed, were recorded at fair value as of the date of acquisition, with the remaining purchase price recorded as goodwill. The goodwill recognized is attributable primarily to strategic opportunities related to leveraging TRx’s research and development, intellectual property, and processes.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition both as disclosed in periods prior to the third quarter of 2018 and as adjusted for measurement period adjustments identified during the third quarter of 2018:
 
 
 
 
 
 
 
 
 
 
 
    
At November 17,
2017 (preliminary)
Measurement Period Adjustments
At November 17, 2017 (as adjusted)
 
 
 
 
 
Fair value of assets acquired:
 
 
 
 
Cash and cash equivalents
 
$
11,068

$

$
11,068

Accounts receivable, net
 
2,872,545


2,872,545

Inventory
 
495,777


495,777

Prepaid expenses and other current assets
 
134,281


134,281

Other receivables
 

2,764,515

2,764,515

Identifiable Intangible Assets:
 
 
 

Acquired product marketing rights - Metafolin
 
10,465,000

1,522,000

11,987,000

PAI sales and marketing agreement
 
2,334,000

219,000

2,553,000

Acquired product marketing rights - Millipred
 
4,714,000

342,000

5,056,000

Acquired product marketing rights - Ulesfia
 
555,000

(555,000
)

Total assets acquired
 
21,581,671

4,292,515

25,874,186

 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
 
Accounts payable
 
192,706


192,706

Accrued expenses and other current liabilities
 
4,850,422

3,764,515

8,614,937

Deferred tax liability
 
839,773

78,840

918,613

Total liabilities assumed
 
5,882,901

3,843,355

9,726,256

Total identifiable net assets
 
15,698,770

449,160

16,147,930

Fair value of consideration transferred
 
29,991,052

(1,210,000
)
28,781,052

Goodwill
 
$
14,292,282

$
(1,659,160
)
$
12,633,122

The purchase price allocation related to the acquisition of TRx was finalized in 2018. The fair values of intangible assets, including marketing rights, licenses and developed technology, were determined using variations of the income approach, specifically the multi-period excess earnings method. Varying discount rates were also applied to the projected net cash flows. The Company believes the assumptions are representative of those a market participant would use in estimating fair value. The final fair value of intangible assets both as disclosed in prior periods and as adjusted by measurement period adjustments identified during the third quarter of 2018 includes the following:
 
 
 
 
 
 
 
 
 
 
 
 
At November 17,
2017 (preliminary)
Measurement Period Adjustments
At November 17, 2017 (as adjusted)
 
 
 
 
 
Acquired product marketing rights - Metafolin
 
$
10,465,000

$
1,522,000

$
11,987,000

PAI sales and marketing agreement
 
2,334,000

219,000

2,553,000

Acquired product marketing rights - Millipred
 
4,714,000

342,000

5,056,000

Acquired product marketing rights - Ulesfia
 
555,000

(555,000
)

     Total
 
$
18,068,000

$
1,528,000

$
19,596,000


The Company received written notice to terminate the Pharmaceutical Associates, Inc. ("PAI") sales and marketing agreement in the second quarter of 2018. As a result, the Company reassessed the fair value of the PAI sales and marketing agreement on that date (a level III non-recurring fair value measurement) and concluded due to the absence of future cash flows beyond the date of termination that the fair value was $0. An impairment charge was recognized in the second quarter of 2018 in the amount of $1.9 million, representing the remaining net book value of the PAI sales and marketing agreement intangible asset.

Pro Forma Impact of Business Combinations
    
The following supplemental unaudited pro forma information presents Cerecor’s financial results as if the acquisition of Avadel pediatric products, which was completed on February 16, 2018, had occurred on January 1, 2018:

 
Nine Months Ended
 
September 30,
 
2018
 
 
Total revenues, net
$
15,047,699

Net loss
$
(35,539,494
)
     Basic and diluted net loss per share of common stock
$
(1.09
)
     Basic and diluted net loss per share of preferred stock
$


The above unaudited pro forma information was determined based on the historical GAAP results of Cerecor and Avadel's pediatric products. The unaudited pro forma consolidated results are provided for informational purposes only and are not necessarily indicative of what Cerecor’s condensed consolidated results of operations would have been had the acquisition of Avadel's pediatric products been completed on the date indicated or what the consolidated results of operations will be in the future.