Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

Acquisitions

3 Months Ended

Mar. 31, 2018

4. Acquisitions

Avadel Pediatric Products Acquisition

On February 16, 2018, the Company entered into an Asset Purchase Agreement (the “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 a cash payment of $1 and contingent consideration with a fair value of $240,744 at the acquisition date related to future royalty obligations for the use of the Sellers' LiquiTime process technology. In addition, the Company assumed existing seller debt due in January 2021 with a fair value of $(15.3) million and contingent consideration, referred to as Deferred payments, relating to royalty obligation through February 2026 with a fair value at acquisition date of approximately $7.9 million. As a result of the Avadel Acquisition, the Company recorded goodwill of $4.4 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 is 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. Transaction costs of $0.1 million were included as general and administrative expense in the condensed consolidated statements of operations for the three months ended March 31, 2018.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition:



	At
	February 16,
	2018 (preliminary)

Inventory	$	2,549,000
Intangible assets	16,453,000
Fair value of debt assumed	(15,272,303		)
Fair value of contingent consideration and deferred payments	(7,875,165		)
Total net liabilities assumed	(4,145,468		)
Consideration exchanged	240,745
Goodwill	$	4,386,213

Based on valuation estimates utilizing the income approach, a step-up in the value of inventory of $1,597,000 was recorded in the opening balance sheet, of which approximately $16,196 was charged to cost of goods sold during the post-acquisition period, February 16, 2018 through March 31, 2018.

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired and liabilities assumed. Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the February 16, 2018 acquisition date.

The fair values of intangible assets, including marketing rights, licenses, developed technology and IPR&D, were determined using variations of the income approach. Varying discount rates were also applied to the projected net cash flows. We believe the assumptions are representative of those a market participant would use in estimating fair value. The preliminary fair value of intangible assets includes the following:



	At
	February 16,		Useful
	2018 (preliminary)		Life

Acquired Product Marketing Rights - Karbinal	$	6,221,000	16 years
Acquired Product Marketing Rights - AcipHex	2,520,000		10 years
Acquired Product Marketing Rights - Cefaclor	6,291,000		7 years
Acquired Developed Technology - Flexichamber	1,131,000		10 years
Acquired IPR&D - LiquiTime formulations	290,000		Indefinite
Total	$	16,453,000

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 consists 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 (the "Equity Consideration") and certain contingent payments, if any become payable. 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 is subject to Cerecor stockholder approval and entirely contingent upon gaining such stockholder approval. These shares have been recorded within stockholder's equity on the condensed consolidating balance sheet date. As a result of the TRx Acquisition, the Company recorded goodwill of $14.3 million, of which $9.2 million was deductible for income taxes.

The November 17, 2017 acquisition-date fair value of the consideration transferred is as follows:



Cash	$	18,900,000
Common stock (including contingently issuable shares)	8,514,419
Contingent payments	2,576,633
Total consideration transferred	$	29,991,052

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 provisional amounts recognized for assets acquired and liabilities assumed as of the acquisition date. There were no measurement adjustments recorded through March 31, 2018. The purchase price of $30.0 million was allocated as follows:



	Amounts Recognized
	as of Acquisition Date
	(as previously reported)
Fair value of assets acquired:
Cash and cash equivalents	$	11,068
Accounts receivable, net	2,872,545
Inventory	495,777
Prepaid expenses and other current assets	134,281
Identifiable Intangible Assets:
Acquired product marketing rights - Metafolin	10,465,000
PAI sales and marketing agreement	2,334,000
Acquired product marketing rights - Millipred	4,714,000
Acquired product marketing rights - Ulesfia	555,000
Total assets acquired	$	21,581,671

Fair value of liabilities assumed:
Accounts payable	$	192,706
Accrued expenses and other current liabilities	4,850,422
Deferred tax liability	839,773
Total liabilities assumed	5,882,901
Total identifiable net assets	15,698,770
Fair value of consideration transferred	29,991,052
Goodwill	$	14,292,282

Based on valuation estimates utilizing the income approach, a step-up in the value of inventory of $0.2 million was recorded in the opening balance sheet, of which approximately $29,254 was charged to cost of goods sold during the three months ended March 31, 2018.

The intangible assets acquired included a sales and marketing agreement with an estimated useful life of two years; and the product marketing rights to Metafolin, Millipred, and Ulesfia, which are estimated to have useful lives of fifteen, four, and three years, respectively. The fair values of intangible assets, including product marketing rights, 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 Company has received written notice to terminate the PAI Sales and Marketing Agreement. As such, once the 30 day notice period has ended, the contract will be terminated. The termination will likely result in an impairment write-off of the remaining asset value in the second quarter of 2018. There was $2.3 million of fair value assigned to the agreement at the acquisition date as part of our purchase price allocation.

Pro Forma Impact of Business Combinations

The following supplemental unaudited pro forma information presents Cerecor’s financial results as if the acquisitions of the Avadel pediatric products business, which was completed on February 16, 2018, and of TRx, which was completed on November 17, 2017, had each occurred on January 1, 2017:




	Three Months Ended March 31,
	2018			2017
	Pro forma			Pro forma

Total revenues, net	$	6,187,775		$	5,052,790
Net loss	$	(4,928,446	)	$	(3,732,319	)
Diluted net loss per share	$	(0.16	)	$	(0.36	)

The above unaudited pro forma information was determined based on the historical GAAP results of Cerecor, TRx, and Avadel. The unaudited pro forma condensed 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 been completed on the dates indicated or what the condensed consolidated results of operations will be in the future.