Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.10.0.1
Acquisitions
 9 Months Ended
Sep. 30, 2018
Business Combinations and Asset Acquisitions [Abstract] [Abstract]  
Acquisitions
4. 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 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 are subject to a lockup date through December 31, 2019. Consideration for the Ichorion Asset Acquisition included certain development milestones in the future worth up to an additional $15 million, payable either in shares of Company 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 million using the Company's stock price close on September 24th 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 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 has 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 acquired IPR&D expense is not tax deductible.  The $0.2 million of transaction costs incurred were recorded to Acquired In-Process Research and Development expense. The assembled workforce asset recorded to intangible assets will be amortized over an estimated useful life of two years.

The contingent consideration related to the development milestones will be recognized if and when such milestones are probable and can be reasonably estimated.

Acquisitions of Businesses

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 one dollar. In addition, the Company assumed existing seller debt due in January 2021 with a fair value of $15.1 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 Pediatric Products Acquisition, the Company has currently 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 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 nine months ended September 30, 2018.
During the second quarter of 2018, the Company identified and recorded measurement period adjustments to our preliminary purchase price allocation. These adjustments are reflected in the tables below. If the measurement period adjustments were reflected in the first quarter 2018 Form 10-Q it would have increased operating expenses by $0.3 million consisting primarily of increases to cost of product sales of $0.2 million and sales and marketing expense of $0.1 million. 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 the third quarter of 2018.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition both as disclosed in the first quarter 2018 Form 10-Q and as adjusted for measurement period adjustments identified during the second quarter:    
 
 
 
 
 
 
 
 
 
 
 
    
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 and deferred payments
 
(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


Based on valuation estimates utilizing the estimated sales price of inventory less sales and marketing costs and an allowance for profit, a step-up in the value of inventory of $0.3 million was recorded in the opening balance sheet, of which approximately $0.1 million was charged to cost of goods sold during the post-acquisition period, February 16, 2018 through September 30, 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 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 preliminary fair value of intangible assets both as disclosed in the first quarter 2018 Form 10-Q and as adjusted by measurement period adjustments identified during the second quarter includes the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At February 16,
2018 (preliminary)
Measurement Period Adjustments
At February 16,
2018 (as adjusted)
Useful Life
 
 
 
 
 
 
Acquired Product Marketing Rights - Karbinal
 
$
6,221,000

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

16 years
Acquired Product Marketing Rights - AcipHex
 
2,520,000

283,000

2,803,000

10 years
Acquired Product Marketing Rights - Cefaclor
 
6,291,000

1,320,000

7,611,000

7 years
Acquired Developed Technology - Flexichamber
 
1,131,000

546,000

1,677,000

10 years
Acquired IPR&D - LiquiTime formulations
 
290,000

(290,000
)
—

Indefinite
     Total
 
$
16,453,000

$
1,838,000

$
18,291,000

 


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 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 were 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 condensed 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. If the measurement period adjustments were reflected in prior periods it would have decreased general and administrative expenses by $1.0 million, decreased other expense for the change in fair value of contingent consideration by $0.3 million, increased the impairment of intangible assets by $0.2 million, increased intangible amortization expense by $0.1 million and decreased income tax expense by $0.1 million. The measurement period adjustments were the result of an arbitration ruling discussed in further detail in Note 7, 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 prior periods and as adjusted for measurement period adjustments identified during the current quarter:
 
 
 
 
 
 
 
 
 
 
 
    
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 prior periods and as adjusted for measurement period adjustments identified during the current quarter:
 
 
 
 
 
 
 
 
 
 
 
    
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


Based on valuation estimates utilizing the estimated selling price of inventory less sales and marketing costs and an allowance for profit, a step-up in the value of inventory of $0.2 million was recorded in the opening balance sheet, of which approximately $0.2 million was charged to cost of product sales during the nine months ended September 30, 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 November 17, 2017 acquisition date.
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 preliminary fair value of intangible assets both as disclosed in prior periods and as adjusted by measurement period adjustments identified during the current quarter includes the following:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At November 17,
2017 (preliminary)
Measurement Period Adjustments
At November 17, 2017 (as adjusted)
Useful Life
 
 
 
 
 
 
Acquired product marketing rights - Metafolin
 
$
10,465,000

$
1,522,000

$
11,987,000

15 years
PAI sales and marketing agreement
 
2,334,000

219,000

2,553,000

2 years
Acquired product marketing rights - Millipred
 
4,714,000

342,000

5,056,000

4 years
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 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 nine months ended September 30, 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 acquisitions of Avadel Pediatric Products, 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 September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
Pro forma
Pro forma
 
Pro forma
Pro forma
 


 


Total revenues, net
$
4,074,786

$
30,965,291

 
$
15,047,699

$
41,276,271

Net loss
$
(24,603,575
)
$
16,881,075

 
$
(35,539,494
)
$
8,505,715

     Diluted net loss per share
$
(0.71
)
$
0.63

 
$
(1.09
)
$
0.42

 


 




The above unaudited pro forma information was determined based on the historical GAAP results of Cerecor, Avadel's pediatric products and TRx. 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.