Quarterly report pursuant to Section 13 or 15(d)

Aytu Divestiture

Aytu Divestiture

9 Months Ended

Sep. 30, 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™ (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

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:


	September 30, 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	5,833,729		3,503,037
Total current liabilities of discontinued operations	5,833,729		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:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(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,
	2020		2019
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)		—