Quarterly report pursuant to Section 13 or 15(d)

Aytu Divestiture

Aytu Divestiture

3 Months Ended

Mar. 31, 2020

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 $11.0 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 and Armistice's Chief Investment Officer, Steve Boyd, serves on each company's board of directors.

Upon closing 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. Additionally, Cerecor retained all rights to Millipred^®. Pursuant to a transition services agreement entered into between Aytu and Cerecor, Aytu is managing 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, 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. 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) 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 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 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. As of March 31, 2020, the maximum potential amount of future payments under the Guarantee was $24.5 million, consisting of $15.9 million for the Fixed Payment Guarantee and $8.6 million for the Deferred Payment 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 income (loss) from discontinued operations, net of tax within the consolidated statements of operations. As of March 31, 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 March 31, 2020 and thus a $1.8 million gain on the change in value was recognized in income from discontinued operations, net of tax within the accompanying condensed consolidated statement of operations for the three months ended March 31, 2020.

Discontinued Operations

As a result of the sale of the Pediatric Portfolio, the operating results from the Pediatric Portfolio are reported as loss from discontinued operations, net of tax in the accompanying condensed consolidated statements of operations. Accordingly, the accompanying condensed consolidated financial statements for the three months ended March 31, 2020 and 2019 reflect the operations and related assets and liabilities of the Pediatric Portfolio as a discontinued operation.

The following tables summarizes the assets and liabilities of the discontinued operations as of March 31, 2020 and December 31, 2019:



	March 31, 2020		December 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 liabilities	6,409,668		3,503,037
Total current liabilities of discontinued operations	6,409,668		3,891,012
Other long-term liabilities	—		1,755,000
Total long-term liabilities of discontinued operations	—		1,755,000

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, 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 (discussed in detail above).

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 March 31, 2020, the Company estimated its sales return reserve from discontinued operations to be $2.4 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 as of November 1, 2019, 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. Additionally, Cerecor and Aytu are in process of transitioning the collection of accounts receivables associated with post-divestiture sales of the divested Pediatric Portfolio from Cerecor to Aytu. Cash received by Cerecor related to post-divestiture sales is remitted to Aytu on a quarterly basis until the accounts receivable collection process is fully transitioned to Aytu. As of March 31, 2020, Cerecor accrued a $3.9 million liability within accrued expenses and other current liabilities related to cash it will remit to Aytu related to post-divestiture sales. The Company expects this involvement to continue until the second quarter of 2020.

The following table summarizes the results of discontinued operations for the three months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
	2020			2019
Product revenue, net	$	(717,342	)	$	2,835,074

Operating expenses:
Cost of product sales	—			1,195,344
General and administrative	—			41,374
Sales and marketing	—			2,712,626
Amortization expense	—			744,099
Change in fair value of contingent consideration	—			159,462
Total operating expenses	—			4,852,905
Other income (expense):
Change in value of Guarantee	1,755,000			—
Interest expense, net	—			(238,158		)
Total other income (expense)	1,755,000			(238,158		)
Income (loss) from discontinued operations before tax	1,037,658			(2,255,989		)
Income tax expense	—			35,685
Income (loss) from discontinued operations, net of tax	$	1,037,658		$	(2,291,674	)

The significant non-cash operating items from the discontinued operations for the three months ended March 31, 2020 and 2019 are contained below. There were no non-cash investing items from the discontinued operations for the three months ended March 31, 2020 and 2019.



	Three Months Ended March 31,
	2020			2019
Operating activities
Amortization	$	—		$	744,099
Stock-based compensation, excluding amount included within gain on sale of Pediatric Portfolio	—			49,364
Change in fair value of contingent consideration liability	—			159,462
Change in value of Guarantee	(1,755,000		)	—