Exhibit 99.2
UNAUDITED FINANCIAL STATEMENTS
Ichorion Therapeutics, Inc.
As of June 30, 2018 and December 31, 2017 and for the Six Months Ended June 30, 2018
Ichorion Therapeutics, Inc.
Unaudited Financial Statements
As of June 30, 2018 and December 31, 2017 and for the Six Months Ended June 30, 2018
Ichorion Therapeutics, Inc.
Balance Sheets
June 30, 2018 (Unaudited) | December 31, 2017 | ||||||||
| Assets | |||||||||
| Current assets: | |||||||||
| Cash | $ | 952,758 | $ | 1,899,072 | |||||
| Prepaid expenses | 19,579 | 92,000 | |||||||
| Total current assets | 972,337 | 1,991,072 | |||||||
| Other assets | 4,650 | 4,650 | |||||||
| Total assets | $ | 976,987 | $ | 1,995,722 | |||||
| Liabilities and stockholders’ equity | |||||||||
| Current liabilities: | |||||||||
| Accounts payable | $ | 134,657 | $ | 83,328 | |||||
| Accrued expenses and other current liabilities | 133,973 | 90,730 | |||||||
| Total current liabilities | 268,630 | 174,058 | |||||||
| Total liabilities | 268,630 | 174,058 | |||||||
| Stockholders’ equity: | |||||||||
| Convertible preferred stock—$0.00001 par value; 864,582 shares authorized at June 30, 2018 and December 31, 2017; 864,582 shares issued and outstanding at June 30, 2018 and December 31, 2017 | 9 | 9 | |||||||
| Common stock—$0.00001 par value; 4,700,000 shares authorized at June 30, 2018 and December 31, 2017; 2,215,824 shares issued and outstanding at June 30, 2018 and December 31, 2017 | 22 | 21 | |||||||
| Additional paid-in capital | 3,061,216 | 2,709,400 | |||||||
| Accumulated deficit | (2,352,890 | ) | (887,766 | ) | |||||
| Total stockholders’ equity | 708,357 | 1,821,664 | |||||||
| Total liabilities and stockholders’ equity | $ | 976,987 | $ | 1,995,722 | |||||
See accompanying notes.
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Ichorion Therapeutics, Inc.
Statement of Operations and Comprehensive Loss (Unaudited)
| Six Months Ended June 30, 2018 | |||||
| Revenue | $ | — | |||
| Operating expenses: | |||||
| Research and development | 1,120,544 | ||||
| General and administrative | 340,236 | ||||
| Total operating expenses | 1,460,780 | ||||
| Loss from operations | (1,460,780 | ) | |||
| Other expense | (4,344 | ) | |||
| Net loss and comprehensive loss | $ | (1,465,124 | ) | ||
See accompanying notes.
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Ichorion Therapeutics, Inc.
Statement of Cash Flows (Unaudited)
Six Months Ended June 30, 2018 | |||||
| Operating activities | |||||
| Net loss | $ | (1,465,124 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||
| Share-based compensation expense and issuance of common stock for services rendered | 351,817 | ||||
| Changes in assets and liabilities: | |||||
| Prepaid expenses | 72,421 | ||||
| Accounts payable | 51,329 | ||||
| Accrued expenses and other liabilities | 43,243 | ||||
| Net cash used in operating activities | (946,314 | ) | |||
| Net decrease in cash | (946,314 | ) | |||
| Cash, beginning of period | 1,899,072 | ||||
| Cash, end of period | $ | 952,758 | |||
See accompanying notes.
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Ichorion Therapeutics, Inc.
Notes to Unaudited Financial Statements
June 30, 2018
1. Business and Basis of Presentation
Business
Ichorion Therapeutics, Inc. (the "Company," or "Ichorion") is a biopharmaceutical company dedicated to developing treatments for rare diseases with unmet medical needs. Ichorion has a primary focus on a group of inherited pediatric disorders known as Inborn Errors of Metabolism.
The Company was incorporated in July 2017 ("Inception") when it also commenced operations. On September 24, 2018 Ichorion entered into and subsequently consummated the transactions contemplated by, and Agreement and Plan of Merger by and among the Company and Cerecor Inc. (NASDAQ: CERC), a fully integrated biopharmaceutical company with commercial operations and research and development capabilities. The consideration consisted of approximately 5.8 million shares of Cerecor Inc.'s Common Stock, par value $0.001 per share, and certain development milestones in the future worth up to an additional $15 million. The fair value of the common stock shares transferred at closing was approximately $20 million.
Basis of Presentation
In the opinion of the Company's management, all adjustments, consisting only of normal recurring adjustments or accruals, considered necessary for a fair presentation have been included. The results of the Company's operations for any interim period are not necessarily indicative of the results that may be expected for any other interim period or for a full fiscal year.
2. Summary of significant accounting polices
Basis of accounting
The Company has prepared its financial statements in accordance with U.S. generally accepted accounting principles ("GAAP").
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including estimates related to but not limited to, share-based compensation and income taxes. Actual results could differ from those estimates.
Cash
The cash balances at June 30, 2018, consisted of cash deposited in non-interest-bearing depository accounts with commercial banks. The carrying amounts reported in the balance sheets for cash are valued at cost, which approximates their fair value.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. While the Company maintains its cash with a financial institution with a high credit rating, it often maintains the deposit in a federally insured financial institution in excess of federally insured limits.
Financial instruments
The balance sheet includes various financial instruments consist primarily of cash, prepaid expenses, other assets, accounts payable, and accrued expenses. The carrying amounts reported in the accompanying financial statements for cash, prepaid expenses, other assets,
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accounts payable, and accrued expenses approximate their respective fair values because of the short-term nature of these accounts. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers are as follows:
| • | Level 1 - Defined as observable inputs such as quoted prices in active markets for identical assets. |
| • | Level 2 - Defined as observable inputs other than Level 1 prices such as quoted prices for similar assets, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 - Defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
The Company has no assets or liabilities that were measured using quoted prices for significant unobservable inputs (Level 3 assets and liabilities) as of June 30, 2018.
Prepaid expenses
The Company's prepaid expenses consist of prepayments for contractor and research and development contracts that are amortized until February 2018 and prepayments for software subscriptions.
Other assets
Other assets consists of the Company's security deposit which is expected to be refunded in full at the end of its lease.
Research and development expenses
Research and development ("R&D") costs are expensed in the period incurred. These costs include but are not limited to salaries and benefits, consultant fees, preclinical studies and clinical trials, regulatory fees, and medical and regulatory affairs compliance activities.
Accounting for share-based compensation
Share-based payments are accounted for in accordance with the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all awards made to employees and non-employees in the statement of operations.
For restricted stock and shares granted to employees, the compensation cost is measured based on the fair value of the Company's common stock on the date of the grant and the resulting fair value is recognized ratably over the requisite service period, which is generally the vesting period of the option. The Company uses an option pricing model to determine fair value. Significant assumptions used in determining the fair value for common stock includes volatility, risk free interest rate, time to liquidity event and discount for lack of marketability.
Equity instruments issued to non-employees for services are accounted for under the provisions of ASC 718 and ASC 505-50, Equity-Based Payments to Non-Employees. Accordingly, the Company initially measures the options at their grant date fair values utilizing the Black-Scholes option pricing model and revalues as the underlying equity instruments vest. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the fair value of the stock on the grant date, expected term of the option, the expected volatility of the stock consistent with the expected life of the option, and risk-free interest rates. The expense is recognized over the earlier of the performance commitment date or the date the required services are completed and are marked to market during the service period.
Income taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Deferred tax assets primarily include net operating loss and tax credit carryforwards, accrued expenses not currently deductible and the cumulative temporary differences related to certain research and patent costs. Certain tax attributes, including net operating losses and research and development credit carryforwards, may be
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subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code (the "Code"). See Note 6 for further information. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2018 and December 31, 2017, the Company did not believe any material uncertain tax positions were present.
On December 22, 2017, the “Tax Cuts and Jobs Act” ("TCJA") was enacted, that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. See Note 6 below for further discussion related to the tax impact to the Company.
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The standard also clarifies the need to evaluate a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with our other deferred tax assets. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory,” which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. This ASU clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective prospectively for the annual period ended December 31, 2018. The Company is currently evaluating the impact on its consolidated financial statements upon the adoption of this guidance.
3. Accrued expenses and other current liabilities
| As of | As of | ||||||||
| June 30, 2018 | December 31, 2017 | ||||||||
| Research and development expenses | $ | 90,443 | $ | 74,131 | |||||
| General and administrative expenses | 14,626 | 6,579 | |||||||
| Legal expenses | 28,402 | 8,250 | |||||||
| Other | 502 | 1,770 | |||||||
| Total accrued expenses and other current liabilities | $ | 133,973 | $ | 90,730 | |||||
4. Capital Structure
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As of June 30, 2018, the total number of shares of capital stock the Company was authorized to issue was 5,564,582 of which 4,700,000 was common stock and 864,582 was preferred stock. All shares of common and preferred stock have a par value of $0.00001 per share.
Convertible Preferred Stock and Common Stock
Issuance
The Company had 2,215,824 shares of common stock outstanding as of June 30, 2018. Upon the Company's incorporation on July 11, 2017, 2,075,000 shares of common stock were issued to the Company's founders and a non-employee consultant. On August 24, 2017, upon entering into the Company's amended and restated certification of incorporation, certain restrictions were placed on these shares, including but not limited to a vesting schedule for the shares and the Company's right to re-purchase unvested shares if the Purchaser ceases to be a service provider of the Company. Pursuant to the vesting schedule, 25% of the shares vested immediately on July 11, 2017. Thereafter, 43,228 shares vest on a monthly basis from the vesting start date until July 11, 2020. In the fourth quarter of 2017, the Company issued 29,124 shares of common stock to a pharmaceutical service company in exchange for research and development services. 54,700 shares of common stock were granted to the pharmaceutical company in exchange for research and development services in the first quarter of 2018. Further, in the first quarter of 2018, the Company granted 57,000 stock options to certain non-employee consultants.
The Company had 864,582 shares of Series Seed Preferred Stock ("Preferred Stock") outstanding as of June 30, 2018. On August 24, 2017, the Company entered into a Series Seed Stock Investment Agreement with Opaleye, L.P., a related party of the company. In connection with the financing, the Company issued an aggregate of 864,562 shares of Preferred Stock, at a price of $2.89157 per share, for aggregate proceeds of approximately $2.5 million.
Voting Rights and Dividends
Holders of preferred stock are entitled to the number of votes equal to the number of common shares due to the holder, if converted. Holders of preferred stock shall vote together with holders of common stock on all actions to be taken by the stockholders of the Company. Holders of preferred stock have rights to dividends as declared by the Board of Directors and have a liquidation preference of $2.89157 per share, plus any declared but unpaid dividends. Holders of common stock have rights to dividends as declared by the Board of Directors but not before the full payment of dividends to all Preferred Stock shareholders.
Liquidation
In the event of liquidation, dissolution, or winding up of the Company, the holders of common shares shall rank junior to holders of Preferred Stock. Holders of Preferred Stock shall receive an amount per share equal to $2.89157, plus any dividends declared but unpaid thereon.
Conversion
The Preferred Stock is convertible into common shares at the election of the stockholder at any time. The number of shares of common stock that a holder of Preferred Stock will receive is equal to the number of shares of the preferred stock multiplied by the conversion rate. The initial conversion rate for the Preferred Stock was 1:1.
Stock issuance subsequent to June 30, 2018
On September 21, 2018 the Company entered into a preferred stock investment agreement with Opaleye, L.P., a related party of the company, in which 466,728 shares of preferred stock were issued at a price of $3.2139 for total proceeds of approximately $1.5 million and a par value per share of $0.00001. The preferred stock converted to common stock on a 1 for 1 basis upon acquisition of the Company by Cerecor, Inc in September 2018. On September 20, 2018 the Company amended and restated it’s certificate of incorporation increasing the authority to issue shares to 4,500,000 of common stock and 1,331,310 of preferred stock.
5. Share-based compensation
Total share-based compensation expense for the six months ended June 30, 2018 was $351,817. Of the total share-based compensation expense recognized for the six months ended June 30, 2018, $210,991 was recorded within research and development costs and $140,826 was recorded within general and administrative expenses.
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Stock options granted to non-employees
In the first quarter of 2018, the Company granted 57,000 stock options to certain non-employee consultants. The stock options vest monthly over two years or a portion vest immediately with the remaining shares vesting in monthly installments over one year. For the period ended June 30, 2018, the fair value of the stock options was determined to be $0.88. The significant assumptions used in determining fair value of the stock options, include (i) volatility of 80% based on results of a study of similar guideline companies in the Company's peer group with publicly available historical information, (ii) risk free interest rate of 2.0%, and (iii) expected term of ten years. Expense for the six months ended June 30, 2018 related to the restricted stock units was $22,555 which was recorded within research and development expense on the statement of operations. At June 30, 2018, there was $27,862 of total unrecognized compensation cost.
Stock Vesting Agreement
On August 24, 2017, the holders of the 2,075,000 shares of common stock, who are the members of the management board and a non-employee consultant, entered into the Stock Vesting Agreement. Certain restrictions placed on the shares of common stock as part of the agreement include a vesting schedule for the shares, the Company's right to re-purchase unvested shares if the Purchaser ceases to be a service provider of the Company, and the acceleration of vesting following involuntary termination with 12 months of a change of control of the Company. Pursuant to the vesting schedule, 25% of the shares vested immediately on July 11, 2017. Thereafter, 43,228 shares vest on a monthly basis from the vesting start date until July 11, 2020.
Pursuant to ASC 718, the vesting terms placed on the previously issued shares were presumed to be compensatory in nature. The compensation cost recognized in the current period was measured based on the fair value of the unvested shares at the grant date (August 24, 2017) recognized on a straight-line basis over the requisite service period. There were 1,513,022 shares unvested on August 24, 2017 with a grant date fair value of $1.05. The Company used an option pricing model to determine the fair value. Significant assumptions used in determining the grant date fair value for the common stock, include (i) volatility of 80% based on results of a study of similar guideline companies in the Company's peer group with publicly available historical information, (ii) risk free interest rate of 1.73%, (iii) time to liquidity event of three years, and (iv) discount for lack of marketability of 40%. Share-based compensation expense related to the Stock Vesting Agreement for the six months ended June 30, 2018 was $271,827. At June 30, 2018, there was $1,122,037 of total unrecognized compensation cost. This compensation cost was expected to be recognized over the next 2.0 years. There were no forfeitures recognized during the six months ended June 30, 2018. Subsequent to June 30, 2018, vesting of these awards were accelerated at the discretion of the Board of Directors as a result of the Company being acquired by Cerecor in September 2018.
Service Provider Agreement
In September 2017, the Company entered into an agreement with a service provider to assist in the development strategy of Ichorion's preclinical drugs. The 3rd party agreed to accept shares of the Company's common stock in lieu of cash for a portion of the services which are outlined in the agreement as milestones. Pursuant to ASC 718, the Company measured the share-based payments to the 3rd party based on the fair value of the share-based payments. For the period ended June 30, 2018, the fair value of the common stock was determined to be $1.05. The Company used an option pricing model to determine fair value. The significant assumptions used in determining fair value for the common stock, include (i) volatility of 80%, (ii) risk free interest rate of 1.73%, (iii) time to liquidity event of three years, and (iv) discount for lack of marketability of 40%. Expense for the six months ended June 30, 2018 related to the service agreement was $57,435 which was recorded within research and development expense on the statement of operations.
6. Income taxes
There was no provision for income taxes for the six months ended June 30, 2018.
The Tax Cuts and Jobs Act of 2017 ("TCJA") was passed late in the fourth quarter of 2017. In addition, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Act ("SAB 118") which allows the Company to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, ongoing guidance and accounting interpretation are expected over the next year, and significant data and analysis is required to finalize amounts recorded pursuant to the Tax Act, the Company considers the accounting for the deferred tax re-measurements and other items to be incomplete due to the forthcoming guidance and its ongoing analysis of final year-end data and tax positions. The FASB has acknowledged that it is appropriate for non-public companies to follow this guidance as it relates to the TCJA. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
7. Commitments and contingencies
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Operating lease
The Company leases office space under a lease expiring in November 2018. Rent expense for the six months ended June 30, 2018 was approximately $8,370.
Other legal matters
From time to time, the Company may become involved in claims and other legal matters arising in the ordinary course of business. Management is not currently aware of any matters that will have a material adverse effect on the consolidated financial position, results of operations, liquidity, or cash flows of the Company.
8. Subsequent events
The Company has evaluated events occurring between June 30, 2018 and December 3, 2018, the date the financial statements were issued. There were no other events in addition to those previously disclosed within the Notes above that require adjustments to or disclosure in the Company's financial statements for the six months ended June 30, 2018.
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