Annual report pursuant to Section 13 and 15(d)

Aytu Divestiture

Aytu Divestiture

12 Months Ended

Dec. 31, 2019

Discontinued Operations and Disposal Groups [Abstract]

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™ 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 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 million primarily related to contingent consideration, Medicaid rebates and sales returns. In addition, Aytu assumed future contractual obligations under existing license agreements associated with the Pediatric Portfolio. Armistice, a significant stockholder of the Company, is also a significant stockholder of Aytu.

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

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 ("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"). 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. Therefore, Cerecor's Fixed Payment Guarantee will end on January 31, 2021, upon the $15.0 million balloon payment being made to Deerfield. The contingent consideration assumed by Aytu consists of quarterly deferred payments equal to 15% of net sales of certain Pediatric Portfolio paid in arrears each quarter until the earlier of (i) February 5, 2026, or (ii) upon $12.5 million in aggregate deferred payments has been paid to Deerfield. $3.2 million of the contingent consideration 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 except the monthly Deferred Payment due on January 31, 2020 will be at least $0.2 million. 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 perform 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. As of December 31, 2019, the maximum potential amount of future payments under the Guarantee was $25.2 million, consisting of $16.1 million for the Fixed Payment Guarantee and $9.1 million for the Deferred Payment Guarantee.

As of December 31, 2019, the fair value of the Guarantee was $1.8 million, consisting of $0.9 million for the Fixed Payment Guarantee and $0.9 million for the Deferred Payment Guarantee. The Guarantee is recorded within long-term liabilities of discontinued operations in the accompanying consolidated balance sheet as of December 31, 2019.

The estimated fair value of Cerecor's Fixed Payment Guarantee as of December 31, 2019 was estimated as the difference between (i) the estimated value of the fixed payments using Cerecor's estimated cost of debt, and (ii) the estimated value of fixed payments using Aytu's estimated cost of debt. Specifically, the significant assumptions used in the estimated fair value of the Fixed Payment Guarantee as of December 31, 2019 include (i) future fixed monthly payments of $0.1 million from January 2020 through January 2021 and the additional balloon payment of $15.0 million due to Deerfield on January 31, 2021, (ii) Cerecor's estimated cost of debt, and (iii) Aytu's estimated cost of debt. Cerecor and Aytu's estimated cost of debt was estimated using a synthetic credit rating model, based on each company's financial performance as of December 31, 2019.

The estimated fair value of Cerecor's Deferred Payment Guarantee as of December 31, 2019 was estimated as the difference between (i) the value of the estimated contingent payments using Cerecor's estimated cost of debt, and (ii) the value of the estimated contingent payments using Aytu's cost of debt. Specifically, the significant assumptions used in estimating the fair value of the Deferred Payment Guarantee as of December 31, 2019 include (i) simulated net sales of the Pediatric Products subject to the deferred payments, (ii) the estimated contingent payments according to the contractual terms based on the simulated net sales, (iii) Cerecor's cost of debt, and (iv) Aytu's cost of debt. Cerecor and Aytu's estimated cost of debt was estimated using a synthetic credit rating model, based on each company's financial performance as of December 31, 2019.

Discontinued Operations

As a result of the sale of the Pediatric Portfolio, as of December 31, 2019, the operating results from the Pediatric Portfolio are reported as income (loss) from discontinued operations, net of tax (inclusive of gain on sale) in the accompanying consolidated statements of operations. Accordingly, the accompanying consolidated financial statements for the years ended December 31, 2019 and 2018 reflect the operations and related assets and liabilities of the Pediatric Portfolio as a discontinued operation. During the quarter and year ended December 31, 2019, the Company recognized a gain of $8.0 million upon the close of the transaction, which is included in income (loss) from discontinued operations, net of tax (inclusive of gain on sale) in the accompanying consolidated statement of operation for the year ended December 31, 2019. The gain is comprised of $4.5 million of cash consideration received, $7.6 million of Aytu preferred stock consideration received (which represents its fair value on November 1, 2019 (see Note 6 for more information), $18.8 million of net assets transferred as of November 1, 2019 (excluding debt assumed), $15.1 million of debt assumed as of November 1, 2019, and $0.6 million of transaction expenses incurred.

The following tables summarizes the assets and liabilities of the discontinued operations as of December 31, 2019 and 2018:



	December 31,
	2019		2018
Assets
Current assets:
Accounts receivable, net	$	497,577	$	2,335,228
Other receivables	—		206,798
Inventory, net	—		792,857
Prepaid expenses and other current assets	—		797,562
Total current assets of discontinued operations	497,577		4,132,445
Intangibles assets, net	—		27,474,214
Goodwill	—		2,002,035
Total long-term assets of discontinued operations	—		29,476,249

Liabilities
Current liabilities:
Accounts payable	387,975		—
Accrued expenses and other current liabilities	3,503,037		5,402,494
Long-term debt, current portion	—		1,050,000
Contingent consideration, current portion	—		1,097,137
Total current liabilities of discontinued operations	3,891,012		7,549,631
Long term debt, net of current portion	—		14,327,882
Contingent consideration, net of current portion	—		6,697,217
Other long-term liabilities	1,755,000		—
Total long-term liabilities of discontinued operations	1,755,000		21,025,099

Subsequent to the closing of the Aytu Divestiture on November 1, 2019, Cerecor retains continuing involvement with the divested Pediatric Portfolio mainly surrounding collection of accounts receivable associated with sales of Pediatric Portfolio prior to November 1, 2019, future sales returns made after November 1, 2019 relating to sales of the Pediatric Portfolio prior to the close date of the Aytu Divestiture and the Deerfield Guarantee of $1.8 million (discussed in detail above).

As of December 31, 2019, Cerecor is entitled to the $0.5 million of accounts receivable associated with sales of the Pediatric Portfolio prior to November 1, 2019. The Company expects it will collect the accounts receivable in 2020. Additionally, 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 December 31, 2019, the Company estimated its sales return reserve from discontinued operations to be $2.3 million, which is included above in accrued expenses and other current liabilities from discontinued operations. 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 as of November 1, 2019, which will be recognized in loss from 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 following table summarizes the results of discontinued operations for the year ended December 31, 2019 and 2018:



	Year Ended December 31,
	2019			2018
Product revenue, net	$	10,166,611		$	11,298,423

Operating expenses:
Cost of product sales	4,288,234			4,217,594
General and administrative	137,911			165,674
Sales and marketing	8,521,190			7,977,243
Amortization expense	2,425,083			2,703,896
Impairment of intangible assets	1,449,121			—
Change in fair value of contingent consideration	247,042			169,289
Total operating expenses	17,068,581			15,233,696
Interest expense, net	(793,860		)	(827,882		)
Gain on sale of Pediatric Portfolio	7,964,924			—
Income (loss) from discontinued operations before tax	269,094			(4,763,155		)
Income tax expense	70,888			15,556
Income (loss) from discontinued operations, net of tax (inclusive of gain on sale)	$	198,206		$	(4,778,711	)

The significant non-cash operating items from the discontinued operations for the years ended December 31, 2019 and 2018 are contained below. There were no non-cash investing items from the discontinued operations for the years ended December 31, 2019 and 2018.



	Year Ended December 31,
	2019			2018
Operating activities
Amortization	$	2,425,083		$	2,703,896
Impairment of intangible assets	1,449,121			—
Stock-based compensation, excluding amount included within gain on sale of Pediatric Portfolio	327,180			137,082
Amortization of inventory fair value adjustment associated with acquisition of TRx and Avadel Pediatric Product	107,271			170,629
Non-cash interest expense	—			302,882
Gain on Aytu Divestiture	(7,964,924		)	—
Change in fair value of contingent consideration liability	247,042			169,289