NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE
1
:
Summary of Significant Accounting Policies
Nature of Operations.
Avadel Pharmaceuticals plc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is a branded specialty pharmaceutical company. Our primarily focus is on the development and potential FDA approval for FT218 which is in a Phase 3 clinical trial for the treatment of narcolepsy patients suffering from excessive daytime sleepiness (EDS) and cataplexy. In addition, we market three sterile injectable drugs used in the hospital setting which were developed under our “unapproved marketed drug” (UMD) program. The Company is headquartered in Dublin, Ireland with operations in St. Louis, Missouri and Lyon, France. For more information, please visit www.avadel.com..
Our current marketed products include:
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Akovaz®
(ephedrine sulfate injection, USP), an alpha- and beta-adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia
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Bloxiverz®
(neostigmine methylsulfate injection), a cholinesterase inhibitor, is indicated for the reversal of the effects of non-depolarizing neuromuscular blocking agents (NMBAs) after surgery.
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Vazculep®
(phenylephrine hydrochloride injection), an alpha-1 adrenergic receptor agonist indicated for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia.
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Each of our
Akovaz
,
Bloxiverz
and
Vazculep
products is used primarily in the hospital setting and was developed under our UMD program
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Noctiva™
, a vasopressin analog indicated for the treatment of nocturia due to nocturnal polyuria in adults who awaken at least two times per night to void. Due to disappointing results after a substantial investment of resources after
Noctiva’s
commercial launch in March 2018
, Avadel Specialty Pharmaceuticals LLC, (“Specialty Pharma”),
the Avadel subsidiary responsible for the marketing and sale of
Noctiva,
made a voluntary filing for Chapter 11 bankruptcy protection on February 6, 2019. Although Specialty Pharma currently continues its marketing and sales efforts for this product, Avadel anticipates that Specialty Pharma will discontinue all activities with respect to
Noctiva
during 2019 as a result of the bankruptcy.
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The Company was incorporated in Ireland on December 1, 2015 as a private limited company, and re-registered as an Irish public limited company on November 21, 2016. Our headquarters are in Dublin, Ireland and we have operations in St. Louis, Missouri, United States, and Lyon, France.
The Company is the successor to Flamel Technologies S.A., a French
société anonyme
(“Flamel”), as the result of the Merger described above, in which Flamel merged with and into the Company at 11:59:59 p.m., Central Europe Time, on December 31, 2016 (the “Merger”) pursuant to the agreement between Flamel and Avadel entitled Common Draft Terms of Cross-Border Merger dated as of June 29, 2016 (the “Merger Agreement”). Immediately prior to the Merger, the Company was a wholly owned subsidiary of Flamel. In accordance with the Merger Agreement, as a result of the Merger:
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Flamel ceased to exist as a separate entity and the Company continued as the surviving entity and assumed all of the assets and liabilities of Flamel.
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our authorized share capital is
$5,500
divided into
500,000
ordinary shares with a nominal value of
$0.01
each and
50,000
preferred shares with a nominal value of
$0.01
each
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all outstanding ordinary shares of Flamel,
€0.122
nominal value per share, were canceled and exchanged on a one-for-one basis for newly issued ordinary shares of the Company,
$0.01
nominal value per share. This change in nominal value of our outstanding shares resulted in our reclassifying
$5,937
on our balance sheet from ordinary shares to additional paid-in capital
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our Board of Directors is authorized to issue preferred shares on a non-pre-emptive basis, for a maximum period of five years, at which point such an authorization may be renewed by shareholders. The Board of Directors has discretion to dictate terms attached to the preferred shares, including voting, dividend, conversion rights, and priority relative to other classes of shares with respect to dividends and upon a liquidation.
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all outstanding American Depositary Shares (ADSs) representing ordinary shares of Flamel were canceled and exchanged on a one-for-one basis for ADSs representing ordinary shares of the Company.
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Thus, the Merger changed the jurisdiction of our incorporation from France to Ireland, and an ordinary share of the Company held (either directly or represented by an ADS) immediately after the Merger continued to represent the same proportional interest in our equity owned by the holder of a share of Flamel immediately prior to the Merger.
Prior to completion of the Merger, the Flamel ADSs were listed on the Nasdaq Global Market (“Nasdaq”) under the trading symbol “FLML”; and immediately after the Merger the Company’s ADSs were listed for and began trading on Nasdaq on January 3, 2017 under the trading symbol “AVDL.”
Further details about the reincorporation, the Merger and the Merger Agreement are contained in our definitive proxy statement filed with the SEC on July 5, 2016.
Under Irish law, the Company can only pay dividends and repurchase shares out of distributable reserves, as discussed further in the Company’s proxy statement filed with the SEC as of July 5, 2016. Upon completion of the Merger, the Company did not have any distributable reserves. On February 15, 2017, the Company filed a petition with the High Court of Ireland seeking the court’s confirmation of a reduction of the Company’s share premium so that it can be treated as distributable reserves for the purposes of Irish law. On March 6, 2017, the High Court issued its order approving the reduction of the Company’s share premium by
$317,254
which can be treated as distributable reserves.
Basis of Presentation.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The consolidated financial statements include the accounts of the Company and all subsidiaries. All intercompany accounts and transactions have been eliminated.
Our results of operations for the period January 1, 2018 through February 16, 2018 and for the years ended
December 31, 2017
and
2016
include the results of FSC Therapeutics and FSC Laboratories, Inc., (collectively “FSC”), prior to its February 16, 2018 disposition date. See
Note
16
: Divestiture of the Pediatric Assets
, for additional information. All intercompany accounts and transactions have been eliminated.
Revenue.
Revenue includes sales of pharmaceutical products, licensing fees, and, if any, milestone payments for research and development (“R&D”) achievements.
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” using the modified retrospective transition method applied to all open contracts as at December 31, 2017. The adoption of the new standard did not have a material effect on the overall timing or amount of revenue recognized when compared to prior accounting standards. See
Note
3
: Revenue Recognition
for expanded disclosures related to this new pronouncement.
ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when the performance obligations to the customer have been satisfied through the transfer of control of the goods or services. To determine the appropriate revenue recognition for arrangements that the Company believes are within the scope of ASC 606, we perform the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts only when the Company and its customer’s rights and obligations under the contract can be determined, the contract has commercial substance, and it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. For contracts that are determined to be within the scope of ASC 606, the Company identifies the promised goods or services in the contract to determine if they are separate performance obligations or if they should be bundled with other goods and services into a single performance obligation. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Sales
The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Revenue from product sales is recognized when the customer obtains control of the Company’s product, which occurs typically upon receipt by the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates of product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated based on analysis of historical data for the product or comparable products, future expectations for such products and other judgments and analysis.
For generic products and branded products where the ultimate net selling price to customer is estimable, the Company recognizes revenues upon delivery to the wholesaler. For new product launches the Company recognizes revenue if sufficient data is available to determine product acceptance in the marketplace such that product returns may be estimated based on historical or analog product data and there is probable evidence of reorders and consideration is made of wholesaler inventory levels. As part of the third quarter 2016 launch of Akovaz, the Company determined that sufficient data was available to determine the ultimate net selling price to the customer and therefore recognized revenue upon delivery to our wholesaler customers.
Prior to the second quarter 2016, the Company did not have sufficient historical or analog product data to estimate certain revenue deductions. As such, we could not accurately estimate the ultimate net selling price of our hospital portfolio of products and as a result delayed revenue recognition until the wholesaler sold the product through to end customers.
During the second quarter of 2016, it was determined that we now had sufficient evidence, history, data and internal controls to estimate the ultimate selling price of our products upon shipment from our warehouse to our customers, the wholesalers. Accordingly, we discontinued the sell-through revenue approach and now recognize revenue once the product is delivered to the wholesaler. As a result of this change in accounting estimate, we recognized
$5,981
in additional revenue, or
$0.05
per diluted share, for the twelve months ended December 31, 2016 that previously would have been deferred until sold by the wholesalers to the hospitals.
License Revenue
The Company from time to time may enter into out-licensing agreements under which it licenses to third parties certain rights to its products or intellectual property. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; development, regulatory, and commercial milestone payments; and sales-based royalty payments. Each of these payments results in license revenue.
For a complete discussion of the accounting for net product revenue and license revenues, see
Note
3
: Revenue Recognition
.
Government Grants.
The Company receives financial support for various research or investment projects from governmental agencies.
From time to time we receive funds, primarily from the French government, to finance certain R&D projects. These funds are repayable on commercial success of the project. In the absence of commercial success, the Company is released of our obligation to repay the funds and as such the funds are recognized in the consolidated statements of (loss) income as an offset to R&D expense. The absence of commercial success must be formally confirmed by the granting authority. Should the Company wish to discontinue the R&D to which the funding is associated, the granting authority must be informed and a determination made as to how much, if any, of the grant must be repaid.
Research and Development (“R&D”).
R&D expenses consist primarily of costs related to clinical studies and outside services, personnel expenses, and other R&D expenses. Clinical studies and outside services costs relate primarily to services performed by clinical research organizations and related clinical or development manufacturing costs, materials and supplies, filing fees, regulatory support, and other third-party fees. Personnel expenses relate primarily to salaries, benefits and stock-based compensation. Other R&D expenses primarily include overhead allocations consisting of various support and facilities-related costs. R&D expenditures are charged to operations as incurred.
The Company recognizes R&D tax credits received from the French government for spending on innovative R&D as an offset of R&D expenses.
Advertising Expenses.
We expense the costs of advertising as incurred. Advertising expenses were
$17,562
,
$2,214
and
$1,294
for the years ended December 31, 2018, 2017 and 2016, respectively.
Stock-based Compensation.
The Company accounts for stock-based compensation based on the estimated grant-date fair value. The fair value of stock options and warrants is estimated using Black-Scholes option-pricing valuation models (“Black-Scholes model”). As required by the Black-Sholes model, estimates are made of the underlying volatility of AVDL stock, a risk-free rate and an expected term of the option or warrant. We estimated the expected term using a simplified method, as we do not have enough historical exercise data for a majority of such options and warrants upon which to estimate an expected term. The Company recognizes compensation cost, net of an estimated forfeiture rate, using the accelerated method over the requisite service period of the award.
Income Taxes.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and
tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize interest and penalties related to unrecognized tax benefits in the income tax expense line in the accompanying consolidated statements of (loss) income. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheets.
Cash and Cash Equivalents.
Cash and cash equivalents consist of cash on hand, cash on deposit and fixed term deposits which are highly liquid investments with original maturities of less than three months.
Marketable Securities.
The Company’s marketable securities are considered to be available for sale and are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive income (“AOCI”) in shareholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, if any, which are reported in earnings in the current period. The cost of securities sold is based upon the specific identification method.
Accounts Receivable.
Accounts receivable are stated at amounts invoiced net of allowances for doubtful accounts and certain other gross to net variable consideration deductions. The Company makes judgments as to our ability to collect outstanding receivables and provides allowances for the portion of receivables deemed uncollectible. Provision is made based upon a specific review of all significant outstanding invoices. A majority of accounts receivable is due from four significant customers.
Inventories.
Inventories consist of raw materials and finished products, which are stated at lower of cost or net realizable value, using the first-in, first-out (“FIFO”) method. Raw materials used in the production of pre-clinical and clinical products are expensed as R&D costs when consumed. The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow-moving on a case by case basis.
Property and Equipment.
Property and equipment is stated at historical cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
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Laboratory equipment
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4-8 years
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Software, office and computer equipment
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3 years
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Leasehold improvements, furniture, fixtures and fittings
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5-10 years
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Goodwill.
Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. The Company has determined that we operate in a single segment and has a single reporting unit associated with the development and commercialization of pharmaceutical products. The annual test for goodwill impairment is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step indicates impairment, then, in the second step, the loss is measured as the excess of recorded goodwill over the implied fair value of the goodwill. Implied fair value of goodwill is the excess of the fair value of the reporting unit as a whole over the fair value of all separately identified assets and liabilities within the reporting unit. The Company tests goodwill for impairment annually and when events or changes in circumstances indicate that the carrying value may not be recoverable. During the fourth quarter of 2018, we performed our required annual impairment test of goodwill and have determined that no impairment of goodwill existed at December 31, 2018 or 2017.
Long-Lived Assets.
Long-lived assets include fixed assets and intangible assets. Intangible assets consist primarily of purchased licenses and intangible assets recognized as part of the Éclat acquisition. Acquired IPR&D has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset, for which amortization of such intangible assets is computed using the straight-line method over the estimated useful life of the assets.
Long-lived assets are reviewed for impairment whenever conditions indicate that the carrying value of the assets may not be fully recoverable. Such impairment tests are based on a comparison of the pretax undiscounted cash flows expected to be generated by the asset to the recorded value of the asset or other market based value approaches. If impairment is indicated, the asset value is written down to its market value if readily determinable or its estimated fair value based on discounted cash flows. Any significant changes in business or market conditions that vary from current expectations could have an impact on the fair value of these assets and any potential associated impairment. During the fourth quarter of 2018, we recorded a $66,087 impairment charge to the entire acquired developed technology related to Noctiva (see
Note 9: Goodwill and Intangible Assets
). The Company had determined that no impairment existed at December 31, 2017.
Acquisition-related Contingent Consideration.
The acquisition-related contingent consideration payables arising from the acquisition of Éclat Pharmaceuticals (i.e., our hospital products) and FSC (our pediatrics products), which was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018, are accounted for at fair-value (see
Note 11: Long-Term Related Party Payable
and
Note 16: Divestiture of the Pediatric Assets
). The fair value of the warrants issued in connection with the Éclat acquisition were estimated using a Black-Scholes model. A portion of these warrants were exercised on February 23, 2018 and the remaining warrants expired on March 12, 2018. See
Note 11: Long-Term Related Party Payable
. The fair value of acquisition-related contingent consideration payable is estimated using a discounted cash flow model based on the long-term sales or gross profit forecasts of the specified hospital or pediatric products using an appropriate discount rate. There are a number of estimates used when determining the fair value of these earn-out payments. These estimates include, but are not limited to, the long-term pricing environment, market size, market share the related products are forecast to achieve, the cost of goods related to such products and an appropriate discount rate to use when present valuing the related cash flows. These estimates can and often do change based on changes in current market conditions, competition, management judgment and other factors. Changes to these estimates can have and have had a material impact on our consolidated statements of (loss) income and balance sheets. Changes in fair value of these liabilities are recorded in the consolidated statements of (loss) income within operating expenses as changes in fair value of related party contingent consideration.
Financing-related Royalty Agreements.
We also entered into two royalty agreements with related parties in connection with certain financing arrangements. We elected the fair value option for the measurement of the financing-related contingent consideration payable associated with the royalty agreements with certain Deerfield and Broadfin entities, both of whom are related parties (see
Note 11: Long-Term Related Party Payable
). The fair value of financing-related royalty agreements is estimated using the same components used to determine the fair value of the acquisition-related contingent consideration noted above, with the exception of cost of products sold. Changes to these components can also have a material impact on our consolidated statements of (loss) income and balance sheets. Changes in the fair value of this liability are recorded in the consolidated statements of (loss) income as other income (expense) - changes in fair value of related party payable.
Foreign Currency Translation.
At December 31, 2018, the reporting currency of the Company and our wholly-owned subsidiaries is the U.S. dollar. Prior to December 31, 2016, each of the Company’s non-U.S. subsidiaries and the parent entity, Flamel, used the Euro as their functional currency. At December 31, 2016, in conjunction with the Merger described above, Avadel determined the U.S. dollar is our functional currency. Subsidiaries and entities that do not use the U.S. dollar as their functional currency translate 1) profit and loss accounts at the average exchange rates during the reporting period, 2) assets and liabilities at period end exchange rates and 3) shareholders’ equity accounts at historical rates. Resulting translation gains and losses are included as a separate component of shareholders’ equity in accumulated other comprehensive loss. Assets and liabilities, excluding available-for-sale marketable securities, denominated in a currency other than the subsidiary’s functional currency are translated to the subsidiary’s functional currency at period end exchange rates with resulting gains and losses recognized in the consolidated statements of (loss) income.
Use of Estimates.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including marketable securities and contingent liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the periods presented. These estimates and assumptions are based on the best information available to management at the balance sheet dates and depending on the nature of the estimate can require significant judgments. Changes to these estimates and judgments can have and have had a material impact on our consolidated statements of (loss) income and balance sheets. Actual results could differ from those estimates under different assumptions or conditions.
NOTE
2
: Effect of New Accounting Standards
Recently Adopted Accounting Guidance
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.” The standard requires the service component of pension and other postretirement benefit expense to be presented in the same statement
of income lines as other employee compensation costs, however, the other components will be presented outside of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The Company adopted this standard in the first quarter of 2018 and it had an immaterial impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
.” ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows under Topic 230. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company adopted this standard in the first quarter of 2018 and it had an immaterial impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 “
Revenue from Contracts with Customers
” which supersedes the most current revenue recognition requirements. This ASU requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. Through May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provide supplemental adoption guidance and clarification to ASU 2014-09, respectively. The Company adopted this pronouncement under the modified retrospective method of transition in the first quarter of 2018. The adoption of the new standard did not have a material effect on the overall timing or amount of revenue recognized when compared to current accounting standards. The impact to the Company of adopting the new revenue standard primarily relates to additional and expanded disclosures. See
Note
3
: Revenue Recognition
.
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
.” The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance required the change in fair value of equity investments with readily determinable fair values to be recognized through the statement of income. Upon adoption, the change in the fair value of our available-for-sale equity investments is recognized in our consolidated statement of income (loss) rather than as a component of our consolidated statement of comprehensive income (loss). The Company adopted this standard in the first quarter of 2018 and it had an immaterial impact on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, “
Fair Value Measurement (Topic 820):
Disclosure Framework— Changes to the Disclosure Requirement for Fair Value Measurement
” which amends certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2018-13.
In January 2017, the FASB issued ASU 2017-04, “
Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.”
This update eliminates step 2 from the goodwill impairment test, and requires the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for the Company in the first quarter of 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will assess the timing of adoption and impact of this guidance to future impairment considerations.
In February 2016, the FASB issued ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. In July 2018, the FASB issued ASU 2018-11 “Targeted Improvements”, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods, which the Company has elected.
On adoption, the Company currently expects to recognize additional operating liabilities of approximately
$5,100
, with corresponding Right of Use (ROU) assets of approximately the same amount based on the present value of the remaining minimum rental payments. The new standard also provides practical expedients for a company’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term
leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.
NOTE
3
: Revenue Recognition
The Company generates revenue primarily from the sale of pharmaceutical products to customers. From time to time the Company also generates revenue from licensing arrangements whereby the Company provides access to certain of its intellectual property.
Periods prior to January 1, 2018
Product Sales and Services
Revenue is generally realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. The Company recorded revenue from product sales when title and risk of ownership transferred to the customer, which was typically upon delivery to the customer and when the selling price was determinable.
Licensing Revenues
From time to time, the Company enters into licensing agreements for the license of technology used for developing modified controlled release of oral pharmaceutical products. Non-refundable fees where the Company had continuing performance obligations were deferred and recognized ratably over the projected performance period. Milestone payments, which were typically related to regulatory, commercial or other achievements by the Company or their licensees and distributors, were recognized as revenues when the milestone was accomplished and collection was reasonably assured.
Periods commencing January 1, 2018
Product Sales and Services
Effective January 1, 2018, the Company implemented ASC 606, Revenue From Contracts With Customers. The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the Company’s product and the Company’s performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price deductions in arriving at reported net product sales. These adjustments include estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated when the product is delivered based on analysis of historical data for the product or comparable products, as well as future expectations for such products.
Reserves to reduce Gross Revenues to Net Revenues
Revenues from product sales are recorded at the net selling price, which includes estimated reserves to reduce gross product sales to net product sales resulting from product returns, chargebacks, payment discounts, rebates, and other sales allowances that are offered within contracts between the Company and its customers and end users. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable if the amount is payable to the customer, except in the case of the estimated reserve for future expired product returns, which are classified as a liability. The reserves are classified as a liability if the amount is payable to a party other than a customer. Where appropriate, these estimated reserves take into consideration relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates to reduce gross selling price to net selling price to which it expects to be entitled based on the terms of its contracts. The actual selling price ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
Product Returns
Consistent with industry practice, the Company maintains a returns policy, that generally offers customers a right of return for product that has been purchased from the Company. The Company estimates the amount of product returns and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return
liabilities based on analysis of historical data for the product or comparable products, as well as future expectations for such products.
Chargebacks, Discounts and Rebates
Chargebacks, discounts and rebates represent the estimated obligations resulting from contractual commitments to sell products to its customers or end users at prices lower than the list prices charged to our wholesale customers. Customers charge the Company for the difference between the gross selling price they pay for the product and the ultimate contractual price agreed to between the Company and these end users. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargebacks, discounts and rebates are estimated at the time of sale to the customer.
Revenue from licensing arrangements
The terms of the Company’s licensing agreements may contain multiple performance obligations, including certain R&D activities. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments. Each of these payments results in license revenues.
License of Intellectual Property
If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Disaggregation of revenue
The Company’s primary source of revenue is from the sale of pharmaceutical products, which are equally affected by the same economic factors as it relates to the nature, amount, timing, and uncertainty of revenue and cash flows. For further detail about the Company’s revenues by product, see
Note
21
: Company Operations by Product, Customer and Geography.
Contract Balances
The Company does not recognize revenue in advance of invoicing its customers and therefore has no related contract assets.
A receivable is recognized in the period the Company sells its products and when the Company’s right to consideration is unconditional. See the consolidated balance sheets for the balance of accounts receivable at
December 31, 2018
.
See below for contract liability discussion and balance related to a license agreement.
There were no material deferred contract costs at
December 31, 2018
.
Transaction Price Allocated to the Remaining Performance Obligation
For product sales, the Company generally satisfies its performance obligations within the same period the product is delivered. Product sales recognized in 2018 from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.
For certain licenses of intellectual property, specifically those with performance obligations satisfied over time, the Company allocates a portion of the transaction price to that performance obligation and recognizes revenue using an appropriate measure of progress towards development of the product.
In December 2018, the Company reached an agreement to exit a contract and our remaining performance obligations and recognized the remaining
$1,600
of deferred revenue, which represented the unsatisfied performance obligations associated with a license agreement. At December 31, 2018, the deferred revenue balance related to this obligation is
$0
.
The Company has elected certain of the practical expedients from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company
applies the practical expedient in ASC 606 to its stand-alone contracts and does not disclose information about variable consideration from remaining performance obligations for which the Company recognizes revenue.
NOTE
4
: Fair Value Measurements
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
ASC 820, Fair Value Measurements and Disclosures defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. When estimating fair value, depending on the nature and complexity of the asset or liability, we may generally use one or each of the following techniques:
|
|
•
|
Income approach, which is based on the present value of a future stream of net cash flows.
|
|
|
•
|
Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
|
As a basis for considering the assumptions used in these techniques, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1 - Quoted prices for identical assets or liabilities in active markets.
|
|
|
•
|
Level 2 - Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
|
|
|
•
|
Level 3 - Unobservable inputs that reflect estimates and assumptions.
|
The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
As of December 31, 2017
|
Fair Value Measurements:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (see
Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
9,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
|
52,996
|
|
|
—
|
|
|
—
|
|
|
44,481
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
|
—
|
|
|
6,339
|
|
|
—
|
|
|
—
|
|
|
9,262
|
|
|
—
|
|
Government securities - U.S.
|
|
—
|
|
|
12,701
|
|
|
—
|
|
|
—
|
|
|
19,050
|
|
|
—
|
|
Other fixed-income securities
|
|
—
|
|
|
9,409
|
|
|
—
|
|
|
—
|
|
|
4,250
|
|
|
—
|
|
Total assets
|
|
$
|
62,141
|
|
|
$
|
28,449
|
|
|
$
|
—
|
|
|
$
|
44,949
|
|
|
$
|
32,562
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party payable (see
Note 11)
|
|
—
|
|
|
—
|
|
|
28,840
|
|
|
—
|
|
|
—
|
|
|
98,925
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
98,925
|
|
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the fiscal year ended
December 31, 2018
, there were no transfers in and out of Level 1, 2, or 3. During the twelve months ended
December 31, 2018
,
2017
and
2016
, we did not recognize any other-than-temporary impairment loss.
Some of the Company’s financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
Debt
We estimate the fair value of our
$143,750
aggregate principal amount of
4.50%
exchangeable senior notes due 2023 (the “2023 Notes”), a Level 2 input, based on interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities or recent trading prices obtained from brokers. The estimated fair value of the 2023 Notes at
December 31, 2018
based on recent trading activity was
$81,490
compared to a book value of
$115,691
.
Additionally, the Company’s other debt is reflected in the balance sheet at carrying value, which approximates fair value, as these represent non-interest bearing grants from the French government and are repayable only if the research project is technically or commercially successful.
See
Note
10
: Long-Term Debt
for additional information regarding our debt obligations.
NOTE
5
:
Marketable Securities
The Company has investments in available-for-sale marketable securities which are recorded at fair market value. Prior to January 1, 2018, unrealized gains and losses on all securities are recorded as other comprehensive income (loss) in shareholders’ equity, net of income tax effects.
On January 1, 2018, the Company adopted ASU 2016-01, which requires the change in the fair value of available-for-sale equity investments to be recognized in our consolidated statements of (loss) income rather than as a component of our consolidated statement of comprehensive income (loss). For the year ended
December 31, 2018
, the net unrealized loss on our available-for-sale equity investments, recorded as a component of investment income in the accompanying consolidated statements of (loss) income, was
$956
. The net unrealized gain on our available-for-sale equity investments was immaterial for the year ended December 31, 2017 and
$344
for the year ended December 31,
2016
. These amounts were recorded as other comprehensive income in shareholders’ equity, net of income tax effects for the year ended
December 31, 2017
.
The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of
December 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
10,101
|
|
|
$
|
—
|
|
|
$
|
(956
|
)
|
|
$
|
9,145
|
|
Money market funds
|
|
52,733
|
|
|
316
|
|
|
(53
|
)
|
|
52,996
|
|
Corporate bonds
|
|
6,411
|
|
|
7
|
|
|
(79
|
)
|
|
6,339
|
|
Government securities - U.S.
|
|
12,714
|
|
|
66
|
|
|
(79
|
)
|
|
12,701
|
|
Other fixed-income securities
|
|
9,400
|
|
|
22
|
|
|
(13
|
)
|
|
9,409
|
|
Total
|
|
$
|
91,359
|
|
|
$
|
411
|
|
|
$
|
(1,180
|
)
|
|
$
|
90,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
443
|
|
|
$
|
31
|
|
|
$
|
(6
|
)
|
|
$
|
468
|
|
Money market funds
|
|
44,525
|
|
|
—
|
|
|
(44
|
)
|
|
44,481
|
|
Corporate bonds
|
|
9,285
|
|
|
1
|
|
|
(24
|
)
|
|
9,262
|
|
Government securities - U.S.
|
|
19,080
|
|
|
—
|
|
|
(30
|
)
|
|
19,050
|
|
Other fixed-income securities
|
|
4,259
|
|
|
—
|
|
|
(9
|
)
|
|
4,250
|
|
Total
|
|
$
|
77,592
|
|
|
$
|
32
|
|
|
$
|
(113
|
)
|
|
$
|
77,511
|
|
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of
$317
,
$1,677
, and
$1,265
for the twelve months ended
December 31, 2018
,
2017
, and
2016
, respectively. These realized gains were offset by realized losses of
$565
,
$1,390
, and
$586
for the twelve-months ended
December 31, 2018
,
2017
, and
2016
, respectively. We reflect these gains and losses as a component of investment income in the accompanying consolidated statements of (loss) income.
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
Marketable Debt Securities:
|
|
Less than 1 Year
|
|
1-5 Years
|
|
5-10 Years
|
|
Greater than 10 Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
1,511
|
|
|
$
|
4,828
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,339
|
|
Government securities - U.S.
|
|
771
|
|
|
11,145
|
|
|
281
|
|
|
504
|
|
|
12,701
|
|
Other fixed-income securities
|
|
—
|
|
|
9,409
|
|
|
—
|
|
|
—
|
|
|
9,409
|
|
Total
|
|
$
|
2,282
|
|
|
$
|
25,382
|
|
|
$
|
281
|
|
|
$
|
504
|
|
|
$
|
28,449
|
|
The Company has classified our investment in available-for-sale marketable securities as current assets in the consolidated balance sheets as the securities need to be available for use, if required, to fund current operations. There are no restrictions on the sale of any securities in our investment portfolio.
NOTE
6
:
Inventories
The principal categories of inventories, net reserves of
$4,757
and
$1,039
at December 31,
2018
and
2017
, respectively, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Inventory:
|
|
2018
|
|
2017
|
|
|
|
|
|
Finished goods
|
|
$
|
4,270
|
|
|
$
|
4,774
|
|
Raw materials
|
|
500
|
|
|
1,383
|
|
Total
|
|
$
|
4,770
|
|
|
$
|
6,157
|
|
Total net reserves increased by
$3,718
during the year ended December 31, 2018 driven largely by approximately
$2,583
of reserves related to Noctiva inventory.
NOTE
7
:
Property and Equipment, net
The principal categories of property and equipment, net at
December 31, 2018
and
2017
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net:
|
|
2018
|
|
2017
|
|
|
|
|
|
Laboratory equipment
|
|
$
|
8,864
|
|
|
$
|
10,135
|
|
Software, office and computer equipment
|
|
2,487
|
|
|
3,115
|
|
Furniture, fixtures and fittings
|
|
3,715
|
|
|
4,779
|
|
Less - accumulated depreciation
|
|
(13,155
|
)
|
|
(15,028
|
)
|
Total
|
|
$
|
1,911
|
|
|
$
|
3,001
|
|
Depreciation expense for the years ended
December 31, 2018
,
2017
and
2016
was
$811
,
$1,224
and
$601
, respectively.
NOTE
8
:
Acquisitions
On February 5, 2016, the Company acquired FSC, a specialty pharmaceutical company dedicated to providing innovative solutions to unmet medical needs for pediatric patients, from Deerfield CSF, LLC, a Deerfield Management company (“Deerfield CSF”), a related party. The Company disposed of these pediatric assets on February 16, 2018. See
Note
16
: Divestiture of the Pediatric Assets
.
This acquisition was accounted for using the acquisition method of accounting and, accordingly, its results were included in the Company’s consolidated financial statements from the date of acquisition until the date of divestiture. Total consideration to acquire FSC was
$21,659
, and was funded with a combination of the following, partially offset by $
467
as a result of a net working capital settlement from the seller:
|
|
•
|
$15,000
long-term liability to Deerfield CSF. Under the terms of the acquisition agreement, the Company will pay
$1,050
annually for
five
years with a final payment in January 2021 of
$15,000
.
|
|
|
•
|
an estimate of $
6,659
in contingent consideration to Deerfield CSF. Under the terms of the acquisition agreement, the Company shall pay quarterly a
15%
royalty on the net sales of certain FSC products, up to
$12,500
for a period not exceeding
ten
years.
|
These items were reported in related party payable within the Company’s consolidated balance sheet at December 31, 2017, and is further disclosed in
Note
11
: Long-Term Related Party Payable
. These related party payables were disposed of as a part of the February 2018 sale.
See Note
16
:
Divestiture of the Pediatric Assets
.
The fair values assigned to the acquired assets and liabilities were recognized as follows:
|
|
|
|
|
|
|
|
|
Assigned Fair Value:
|
|
Amount
|
|
|
|
Accounts receivable
|
|
$
|
142
|
|
Inventories
|
|
1,135
|
|
Prepaid expenses and other current assets
|
|
1,712
|
|
Intangible assets:
|
|
|
|
Acquired product marketing rights
|
|
16,600
|
|
Acquired developed technology
|
|
4,300
|
|
Deferred tax assets
|
|
853
|
|
Other assets
|
|
277
|
|
Accounts payable and other liabilities
|
|
(3,827
|
)
|
Total
|
|
$
|
21,192
|
|
A portion of the transaction attributable to certain intangible assets was taxable for income tax purposes which resulted in recording some of the assets at fair value for both book and tax purposes. Transaction expenses were not material. The useful lives on FSC acquired intangible assets ranged from
nine
to
fifteen
years.
After its acquisition on February 5, 2016, FSC contributed
$5,985
to the Company’s net sales for the twelve-month period ended December 31, 2016. FSC incurred a loss of
$5,839
for the twelve-month period ended December 31, 2016.
Had the FSC acquisition been completed as of the beginning of 2016, the Company’s unaudited pro forma net revenue and net loss for the twelve months ended December 31, 2016 would have been as follows:
|
|
|
|
|
|
Pro Forma Net Revenue and Income (Loss):
|
|
2016
|
|
|
|
Net revenue
|
|
$
|
150,721
|
|
Net loss
|
|
(42,290
|
)
|
On February 12, 2018, the Company, together with its subsidiaries Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC (“FSC Therapeutics”), and Avadel US Holdings, Inc. (“Holdings”), as the “Sellers,” entered into an asset purchase agreement (the “Purchase Agreement”) with Cerecor, Inc. (“Cerecor”). The transaction closed on February 16, 2018 wherein Cerecor purchased from the Sellers four pediatric commercial stage assets – Karbinal™ ER, Cefaclor, Flexichamber™ and AcipHex® Sprinkle™, together with certain associated business assets – which were held by FSC.
See
Note 16: Divestiture of the Pediatric Assets
.
NOTE
9
:
Goodwill and Intangible Assets
The Company’s amortizable and unamortizable intangible assets at
December 31, 2018
and
2017
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Goodwill and Intangible Assets:
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net Carrying Amount
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired developed technology - Noctiva
|
|
$
|
73,111
|
|
|
$
|
(7,024
|
)
|
|
$
|
(66,087
|
)
|
|
$
|
—
|
|
|
$
|
73,111
|
|
|
$
|
(1,401
|
)
|
|
$
|
71,710
|
|
Acquired developed technology - Vazculep
|
|
12,061
|
|
|
(10,432
|
)
|
|
—
|
|
|
1,629
|
|
|
12,061
|
|
|
(9,616
|
)
|
|
2,445
|
|
Acquired product marketing rights
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,600
|
|
|
(2,132
|
)
|
|
14,468
|
|
Acquired developed technology
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,300
|
|
|
(634
|
)
|
|
3,666
|
|
Total amortizable intangible assets
|
|
$
|
85,172
|
|
|
$
|
(17,456
|
)
|
|
$
|
(66,087
|
)
|
|
$
|
1,629
|
|
|
$
|
106,072
|
|
|
$
|
(13,783
|
)
|
|
$
|
92,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
Total unamortizable intangible assets
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
(1)
These intangible assets were purchased by the buyer as part of the disposition of the pediatrics products on February 16, 2018. See
Note
16
: Divestiture of the Pediatric Assets
.
The Company recorded amortization expense related to amortizable intangible assets of
$6,619
,
$3,659
and
$13,888
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
During the year ended
December 31, 2017
, the Company acquired
$73,111
in developed technology as part of the Exclusive License and Assignment Agreement (ELAA) with Serenity Pharmaceuticals, LLC. The aggregate cost was composed of an upfront payment of
$50,000
, an accrued payment of
$20,000
which was paid for Noctiva during the year ended
December 31, 2018
, and
$3,111
of transaction costs. The Company amortizes the developed technology over a
13
year period, which began October 1, 2017.
During the fourth quarter 2018, certain conditions came to light, largely the lack of a meaningful increase in Noctiva prescriptions despite the substantial investment of resources, which indicated that the carrying value of the asset, may not be fully recoverable. As such, the Company performed an impairment test based on a comparison of the pretax discounted cash flows expected to be generated by the asset,
which is a Level 3 fair value estimate,
to the recorded value of the asset and concluded that the associated cash flows did not support any of the carrying value of the intangible asset and the Company recorded a full impairment charge
of
$66,087
at December 31, 2018 related to the acquired developed technology associated with Noctiva.
The February 6, 2019 Chapter 11 bankruptcy filing of Specialty Pharma, the subsidiary which markets, sells and distributes Noctiva, confirmed management’s conclusion on the impairment.
This impairment charge is included in the line “Impairment of intangible asset” in the consolidated statements of (loss) income.
Amortizable intangible assets are amortized over their estimated useful lives, which range from
three
to
fifteen
years, using the straight-line method. At
December 31, 2018
, total future amortization of intangible assets for the next five years is as follows:
|
|
|
|
|
|
Estimated Amortization Expense:
|
|
Amount
|
|
|
|
2019
|
|
$
|
815
|
|
2020
|
|
814
|
|
2021
|
|
—
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
NOTE
10
:
Long-Term Debt
Long-Term debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Principal amount of 4.50% exchangeable senior notes due 2023
|
|
$
|
143,750
|
|
|
$
|
—
|
|
Less: unamortized debt discount and issuance costs, net
|
|
(28,059
|
)
|
|
—
|
|
Net carrying amount of liability component
|
|
115,691
|
|
|
—
|
|
Other debt
|
|
149
|
|
|
267
|
|
Subtotal
|
|
115,840
|
|
|
267
|
|
Less: current maturities
|
|
(106
|
)
|
|
(111
|
)
|
Long-term debt
|
|
$
|
115,734
|
|
|
$
|
156
|
|
|
|
|
|
|
Equity component:
|
|
|
|
|
Equity component of exchangeable notes, net of issuance costs
|
|
$
|
(26,699
|
)
|
|
$
|
—
|
|
Issuance of Debt Securities
On February 16, 2018, Avadel Finance Cayman Limited, a Cayman Islands exempted company (the “Issuer”) and an indirect wholly-owned subsidiary of the Company, issued
$125,000
aggregate principal amount of
4.50%
exchangeable senior notes due 2023 (the “2023 Notes”) in a private placement (the “Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the Offering, the Issuer granted the initial purchasers of the 2023 Notes a 30-day option to purchase up to an additional
$18,750
aggregate principal amount of the 2023 Notes, which was fully exercised on February 16, 2018. Net proceeds received by the Company, after issuance costs and discounts, were approximately
$137,560
.
The Company pays
4.50%
cash interest per year on the principal amount of the 2023 Notes, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2018, to holders of record at the close of business on the preceding January 15 or July 15, respectively. Interest accrues on the principal amount of the 2023 Notes from and including the date the 2023 Notes were issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date. The 2023 Notes are general, unsecured obligations of the Issuer, and are fully and unconditionally guaranteed by the Company on a senior unsecured basis. There are no financial debt covenants associated with the 2023 Notes.
The 2023 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness and effectively junior to any of the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness.
The 2023 Notes will be exchangeable at the option of the holders at an initial exchange rate of
92.6956
ADSs per $1 principal amount of 2023 Notes, which is equivalent to an initial exchange price of approximately
$10.79
per ADS. Such initial exchange price represents a premium of approximately
20%
to the
$8.99
per ADS closing price on The Nasdaq Global Market on February 13, 2018. Upon the exchange of any 2023 Notes, the Issuer will pay or cause to be delivered, as the case may be, cash, ADSs or a combination of cash and ADSs, at the Issuer’s election. Holders of the 2023 Notes may convert their 2023 Notes, at their option, only under the following circumstances prior to the close of business on the business day immediately preceding August 1, 2022, under the circumstances and during the periods set forth below and regardless of the conditions described below, on or after August 1, 2022 and prior to the close of business on the business day immediately preceding the maturity date:
|
|
•
|
Prior to the close of business on the business day immediately preceding August 1, 2022, a holder of the 2023 Notes may surrender all or any portion of its 2023 Notes for exchange at any time during the
five
business day period immediately after any
five
consecutive trading day period (the “Measurement Period”) in which the trading price per $1 principal amount of 2023 Notes, as determined following a request by a holder of the 2023 Notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the ADSs and the exchange rate on each such trading day.
|
|
|
•
|
If a transaction or event that constitutes a fundamental change or a make-whole fundamental change occurs prior to the close of business on the business day immediately preceding August 1, 2022, regardless of whether a holder of the 2023 Notes has the right to require the Company to repurchase the 2023 Notes, or if Avadel is a party to a merger event that
|
occurs prior to the close of business on the business day immediately preceding August 1, 2022, all or any portion of a the holder’s 2023 Notes may be surrendered for exchange at any time from or after the date that is
95
scheduled trading days prior to the anticipated effective date of the transaction (or, if later, the earlier of (x) the business day after the Company gives notice of such transaction and (y) the actual effective date of such transaction) until
35
trading days after the actual effective date of such transaction or, if such transaction also constitutes a fundamental change, until the related fundamental change repurchase date.
|
|
•
|
Prior to the close of business on the business day immediately preceding August 1, 2022, a holder of the 2023 Notes may surrender all or any portion of its 2023 Notes for exchange at any time during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the ADSs for at least
20
trading days (whether or not consecutive) during the period of
30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to
130%
of the exchange price on each applicable trading day.
|
|
|
•
|
If the Company calls the 2023 Notes for redemption pursuant to Article 16 to the Indenture prior to the close of business on the business day immediately preceding August 1, 2022, then a holder of the 2023 Notes may surrender all or any portion of its 2023 Notes for exchange at any time prior to the close of business on the second business day prior to the redemption date, even if the 2023 Notes are not otherwise exchangeable at such time. After that time, the right to exchange shall expire, unless the Company defaults in the payment of the redemption price, in which case a holder of the 2023 Notes may exchange its 2023 Notes until the redemption price has been paid or duly provided for.
|
The Company considered the guidance in ASC 815-15,
Embedded Derivatives
, to determine if this instrument contains an embedded feature that should be separately accounted for as a derivative. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional, as defined by ASC 815-40. The Company determined that this exception applies due, in part, to our ability to settle the 2023 Notes in cash, ADSs or a combination of cash and ADSs, at our option. The Company has therefore applied the guidance provided by ASC 470-20,
Debt with Conversion and Other Options
which requires that the 2023 Notes be separated into debt and equity components at issuance and a value be assigned to each. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2023 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2023 Notes and the fair value of the liability of the 2023 Notes on its issuance date. The excess of the principal amount of the liability component over its carrying amount (the “Debt Discount”) is amortized to interest expense using the effective interest method over the term of the 2023 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In connection with the issuance of the 2023 Notes, we incurred approximately
$6,190
of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total
$6,190
of debt issuance costs,
$1,201
were allocated to the equity component and recorded as a reduction to additional paid-in capital and
$4,989
were allocated to the liability component and recorded as a reduction to debt on our consolidated balance sheets. The portion allocated to the liability component is amortized to interest expense using the effective interest method over the same
five
-year term as the related 2023 Notes.
Other Debt
French government agencies provide financing to French companies for R&D. At
December 31, 2018
and
2017
, the Company had outstanding loans of
$149
and
$267
, respectively for various programs. These loans do not bear interest and are repayable only in the event the research project is technically or commercially successful. Potential repayment is scheduled to occur through 2019.
During the years ended
December 31, 2018
,
2017
and
2016
, the Company repaid
$193
,
$115
and
$277
, of loans associated with specific research projects, respectively. In addition, during 2017, the Company received a waiver of repayment for the remaining portion of certain loans of
$539
, on the basis of limited commercial and technical success. Amounts waived are reported as reductions to R&D expenses in the Company’s consolidated statements of (loss) income.
No
such waivers were received during 2018 or 2016.
NOTE
11
:
Long-Term Related Party Payable
Long-term related party payable and related activity are reported at fair value and consist of the following at
December 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the Twelve Months Ended December 31, 2018
|
|
|
|
|
|
|
|
|
Changes in Fair Value of
Related Party Payable
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
Payments to
Related Parties
|
|
Operating (Gain)
Expense
|
|
Other
Income
|
|
Expiration of Warrants
|
|
Disposal
|
|
Balance,
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants - Éclat Pharmaceuticals
(a)
|
|
$
|
2,479
|
|
|
$
|
—
|
|
|
$
|
(312
|
)
|
|
$
|
—
|
|
|
$
|
(2,167
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Earn-out payments - Éclat Pharmaceuticals
(b)
|
|
67,744
|
|
|
(19,468
|
)
|
|
(22,661
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,615
|
|
Royalty agreement - FSC
(c)
|
|
5,740
|
|
|
(645
|
)
|
|
242
|
|
|
—
|
|
|
—
|
|
|
(5,337
|
)
|
|
—
|
|
Financing-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement - Deerfield
(d)
|
|
5,392
|
|
|
(1,922
|
)
|
|
—
|
|
|
(1,286
|
)
|
|
—
|
|
|
—
|
|
|
2,184
|
|
Royalty agreement - Broadfin
(e)
|
|
2,570
|
|
|
(916
|
)
|
|
—
|
|
|
(613
|
)
|
|
—
|
|
|
—
|
|
|
1,041
|
|
Long-term liability - FSC
(f)
|
|
15,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,000
|
)
|
|
—
|
|
Total related party payable
|
|
98,925
|
|
|
$
|
(22,951
|
)
|
|
$
|
(22,731
|
)
|
|
$
|
(1,899
|
)
|
|
$
|
(2,167
|
)
|
|
$
|
(20,337
|
)
|
|
28,840
|
|
Less: Current portion
|
|
(25,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,439
|
)
|
Total long-term related party payable
|
|
$
|
73,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,401
|
|
Each of the above items is associated with related parties as further described in
Note
22
: Related Party Transactions.
|
|
(a)
|
As part of the consideration for the Company’s acquisition of Éclat Pharmaceuticals, LLC on March 13, 2012, the Company issued
two
warrants to a related party with a
six
-year term which allow for the purchase of a combined total of
3,300
ordinary shares of Avadel. One warrant was exercisable for
2,200
ordinary shares at an exercise price of
$7.44
per share, and the other warrant was exercisable for
1,100
ordinary shares at an exercise price of
$11.00
per share. On February 23, 2018, the related party exercised in full the warrant for
2,200
ordinary shares. On March 12, 2018, the remaining warrant for
1,100
ordinary shares expired worthless.
|
The fair value of the warrants was estimated on a quarterly basis using a Black-Scholes option pricing model with the following assumptions as of December 31:
|
|
|
|
|
|
|
Assumptions for the Warrant Valuation:
|
|
2017
|
|
|
|
|
|
Stock price
|
|
$
|
8.20
|
|
|
Weighted average exercise price per share
|
|
8.63
|
|
|
Expected term (years)
|
|
0.25
|
|
|
Expected volatility
|
|
37.90
|
%
|
|
Risk-free interest rate
|
|
1.39
|
%
|
|
Expected dividend yield
|
|
—
|
|
|
These Black-Scholes fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. The fair value of the warrant consideration is most sensitive to movement in the Company’s share price and expected volatility at the balance sheet date.
Expected term
: The expected term of the options or warrants represents the period of time between the grant date and the time the options or warrants are either exercised or forfeited, including an estimate of future forfeitures for outstanding options or warrants. Given the limited historical data and the grant of stock options and warrants to a limited population, the simplified method has been used to calculate the expected life.
Expected volatility
: The expected volatility is calculated based on an average of the historical volatility of the Company’s stock price.
Risk-free interest rate
: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and a maturity that approximates the expected term.
Expected dividend yield
: The Company has not distributed any dividends since our inception and has no plan to distribute dividends in the foreseeable future.
At the closing date of the 2012 Éclat acquisition and at December 31, 2017, it was uncertain whether the Company would ultimately fulfill its obligation under these warrants using ordinary shares or cash. Accordingly, pursuant to the guidance of ASC 480, the Company determined that these warrants should be classified as a liability. This classification as a liability was further supported by the Company’s determination, pursuant to the guidance of ASC 815-40-15-7(i), that these warrants could also not be considered as being indexed to the Company’s own ordinary shares, on the basis that the exercise price for the warrants is determined in U.S. dollars, although the functional currency of the Company at the closing date of the Éclat acquisition was the Euro.
|
|
(b)
|
In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by certain current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to
20%
of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity.
|
|
|
(c)
|
In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part included a commitment to pay quarterly a
15%
royalty on the net sales of certain FSC products, up to
$12,500
for a period not exceeding
ten
years. This obligation was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018.
See Note
16
: Divestiture of the Pediatric Assets.
|
|
|
(d)
|
As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of
$2,600
in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a
1.75%
royalty on the net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Eclat products.
|
|
|
(e)
|
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a related party and current shareholder, the Company received cash of
$2,200
in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a
0.834%
royalty on the net sales of certain Éclat products until December 31, 2024.
|
|
|
(f)
|
In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part consisted of payments totaling
$1,050
annually for
five
years with a final payment in January 2021 of
$15,000
. Substantially all of FSC’s, and its subsidiaries, assets were pledged as collateral under this agreement. This obligation was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018.
See Note
16
: Divestiture of the Pediatric Assets.
|
At
December 31, 2018
, the fair value of each related party payable listed in (b), (d) and (e) above was estimated using a discounted cash flow model based on estimated and projected annual net revenues or gross profit, as appropriate, of each of the specified Éclat products using an appropriate risk-adjusted discount rate of
15%
. These fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related related party payables, resulting primarily from management’s revision of key assumptions, will be recorded in the consolidated statements of (loss) income in the line items entitled “Changes in fair value of related party contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of related party payable” for items (d) and (e) above. See
Note
1
: Summary of Significant Accounting Policies
under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements for more information on key assumptions used to determine the fair value of these liabilities.
The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (d) and (e) above. These financing-related liabilities are recorded at fair market value on the consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – changes in fair value of related party payable” on the consolidated statements of (loss) income.
The following table summarizes changes to the related party payables, a recurring Level 3 measurement, for the twelve-month periods ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
Related Party Payable:
|
|
Balance
|
|
|
|
Balance at December 31, 2015
|
|
$
|
122,693
|
|
Additions
(2)
|
|
21,659
|
|
Payments of related party payable
|
|
(30,838
|
)
|
Fair value adjustments
(1)
|
|
55,833
|
|
Balance at December 31, 2016
|
|
169,347
|
|
Payments of related party payable
|
|
(37,311
|
)
|
Fair value adjustments
(1)
|
|
(33,111
|
)
|
Balance at December 31, 2017
|
|
98,925
|
|
Payments of related party payable
|
|
(22,951
|
)
|
Fair value adjustments
(1)
|
|
(24,630
|
)
|
Expiration of warrants
|
|
(2,167
|
)
|
Disposition of the pediatrics assets
|
|
(20,337
|
)
|
Balance at December 31, 2018
|
|
$
|
28,840
|
|
(1)
Fair value adjustments are reported as “(Gain) loss - changes in fair value of related party contingent consideration” and “Other income (expense) - changes in fair value of related party payable” in the consolidated statements of (loss) income.
(2)
Relates to the acquisition of FSC. See items (c) and (f) above.
NOTE
12
:
Income Taxes
The components of (loss) income before income taxes for the years ended twelve months ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Ireland
|
|
$
|
(42,604
|
)
|
|
$
|
(3,123
|
)
|
|
$
|
(22,866
|
)
|
United States
|
|
(70,340
|
)
|
|
92,754
|
|
|
32,786
|
|
France
|
|
(253
|
)
|
|
3,029
|
|
|
(19,638
|
)
|
Total (loss) income before income taxes
|
|
$
|
(113,197
|
)
|
|
$
|
92,660
|
|
|
$
|
(9,718
|
)
|
The income tax provision consists of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax (Benefit) Provision:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
United States - Federal
|
|
$
|
—
|
|
|
$
|
18,064
|
|
|
$
|
30,738
|
|
United States - State
|
|
330
|
|
|
331
|
|
|
1,081
|
|
France
|
|
—
|
|
|
265
|
|
|
5,267
|
|
Total current
|
|
330
|
|
|
18,660
|
|
|
37,086
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
United States - Federal
|
|
(19,503
|
)
|
|
4,686
|
|
|
(6,443
|
)
|
United States - State
|
|
1,280
|
|
|
1,043
|
|
|
(23
|
)
|
France
|
|
—
|
|
|
—
|
|
|
938
|
|
Total deferred
|
|
(18,223
|
)
|
|
5,729
|
|
|
(5,528
|
)
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
$
|
(17,893
|
)
|
|
$
|
24,389
|
|
|
$
|
31,558
|
|
The reconciliation between Domestic income taxes at the statutory rate and the Company’s (benefit) provision for income taxes is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to Effective Income Tax Rate:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
12.5
|
%
|
|
12.5
|
%
|
|
12.5
|
%
|
Differences in international tax rates
|
|
8.0
|
%
|
|
22.2
|
%
|
|
(31.9
|
)%
|
Nondeductible changes in fair value of contingent consideration
|
|
4.0
|
%
|
|
(11.6
|
)%
|
|
(165.0
|
)%
|
Income tax deferred charge
|
|
—
|
%
|
|
—
|
%
|
|
(9.7
|
)%
|
Change in valuation allowances
|
|
(5.3
|
)%
|
|
(0.7
|
)%
|
|
11.8
|
%
|
Nondeductible stock-based compensation
|
|
(1.3
|
)%
|
|
(0.4
|
)%
|
|
(14.8
|
)%
|
Cross border merger
|
|
—
|
%
|
|
0.3
|
%
|
|
(100.6
|
)%
|
Unrealized tax benefits
|
|
(1.3
|
)%
|
|
1.4
|
%
|
|
(15.2
|
)%
|
State and local taxes (net of federal)
|
|
(0.3
|
)%
|
|
0.3
|
%
|
|
(9.6
|
)%
|
Change in U.S. tax law
|
|
(0.2
|
)%
|
|
3.8
|
%
|
|
—
|
%
|
Nondeductible interest expense
|
|
(1.1
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
|
0.7
|
%
|
|
(1.5
|
)%
|
|
(2.3
|
)%
|
Effective income tax rate
|
|
15.7
|
%
|
|
26.3
|
%
|
|
(324.8
|
)%
|
|
|
|
|
|
|
|
Income tax (benefit) provision - at statutory tax rate
|
|
$
|
(14,149
|
)
|
|
$
|
11,582
|
|
|
$
|
(1,215
|
)
|
Differences in international tax rates
|
|
(9,039
|
)
|
|
20,557
|
|
|
3,097
|
|
Nondeductible changes in fair value of contingent consideration
|
|
(4,559
|
)
|
|
(10,779
|
)
|
|
16,036
|
|
Income tax deferred charge
|
|
—
|
|
|
—
|
|
|
938
|
|
Change in valuation allowances
|
|
5,998
|
|
|
(610
|
)
|
|
(1,143
|
)
|
Nondeductible stock-based compensation
|
|
1,499
|
|
|
(375
|
)
|
|
1,436
|
|
Cross-border merger
|
|
—
|
|
|
265
|
|
|
9,773
|
|
Unrecognized tax benefits
|
|
1,440
|
|
|
1,296
|
|
|
1,475
|
|
State and local taxes (net of federal)
|
|
299
|
|
|
252
|
|
|
934
|
|
Change in U.S. tax law
|
|
274
|
|
|
3,513
|
|
|
—
|
|
Nondeductible interest expense
|
|
1,269
|
|
|
—
|
|
|
—
|
|
Other
|
|
(925
|
)
|
|
(1,312
|
)
|
|
227
|
|
Income tax (benefit) provision - at effective income tax rate
|
|
$
|
(17,893
|
)
|
|
$
|
24,389
|
|
|
$
|
31,558
|
|
In 2018, the income tax provision decreased by $42,282 when compared to the same period in 2017. The decrease in the income tax provision was primarily driven by a significant reduction in the amount of taxable income recorded in the U.S. and Ireland in 2018, when compared to 2017. There was also a significant increase in valuation allowance in 2018, when compared to the same period in 2017 as a result of the decrease in taxable income in Ireland. In 2018, there was a significant decrease in amounts related to change in U.S. tax law due to the 2017 U.S. Tax Cuts and Jobs Act.
In 2017, the income tax provision decreased by $7,169 when compared to the same period in 2016. The decrease in the income tax provision was primarily driven by a significant reduction in the amount of taxable income recorded in the U.S. in 2017, when compared to 2016. In 2017, the Company did not incur any significant additional income tax provision associated with the Cross-Border Merger as a majority of the transaction was completed in 2016. In 2017, the Company recorded $3,513 of tax provision associated with the U.S. Tax Cuts and Jobs Act signed into law in the U.S. in December of 2017.
Unrecognized Tax Benefits
The Company or one of its subsidiaries files income tax returns in Ireland, France, U.S. and various states. With few exceptions, the Company is no longer subject to Irish, French, U.S. Federal, and state and local examinations for years before 2014. The Internal Revenue Service (IRS) commenced an examination of the Company's U.S. income tax return for 2015 in the 4th quarter of 2016. The French tax authority commenced an examination of the Company's French tax return for 2017 in the first quarter of 2019.
The following table summarizes the activity related to the Company’s unrecognized tax benefits for the twelve months ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefit Activity
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Balance at January 1:
|
|
$
|
3,954
|
|
|
$
|
1,686
|
|
|
$
|
448
|
|
Additions based on tax positions related to the current year
|
|
1,087
|
|
|
2,268
|
|
|
1,578
|
|
Increases (decreases) for tax positions of prior years
|
|
274
|
|
|
—
|
|
|
(340
|
)
|
Balance at December 31:
|
|
$
|
5,315
|
|
|
$
|
3,954
|
|
|
$
|
1,686
|
|
The Company does not expect within the next twelve months, as a result of activities performed in various jurisdictions, that the unrecognized tax benefits will change. However, interest and penalties could change by up to
$500
.
At
December 31, 2018
, 2017, and 2016, there are
$4,597
,
$3,349
, and
$1,565
of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended
December 31, 2018
, 2017, and 2016, the Company recognized approximately
$725
,
$304
, and
$26
in interest and penalties. The Company had approximately
$1,057
, and
$331
for the payment of interest and penalties accrued at
December 31, 2018
, and 2017, respectively.
Deferred Tax Assets (Liabilities)
Deferred income tax provisions reflect the effect of temporary differences between consolidated financial statement and tax reporting of income and expense items. The net deferred tax assets/liabilities at
December 31, 2018
and 2017 resulted from the following temporary differences:
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets and Liabilities:
|
|
2018
|
|
2017
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
19,510
|
|
|
$
|
9,831
|
|
Amortization
|
|
20,642
|
|
|
7,563
|
|
Stock based compensation
|
|
4,587
|
|
|
4,375
|
|
Fair value royalty agreements
|
|
—
|
|
|
635
|
|
Fair value contingent consideration
|
|
384
|
|
|
870
|
|
Other
|
|
479
|
|
|
406
|
|
Gross deferred tax assets
|
|
45,602
|
|
|
23,680
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Amortization
|
|
(308
|
)
|
|
(2,419
|
)
|
Accounts receivable
|
|
(661
|
)
|
|
(936
|
)
|
Prepaid expenses
|
|
(405
|
)
|
|
(1,094
|
)
|
Gross deferred tax liabilities
|
|
(1,374
|
)
|
|
(4,449
|
)
|
|
|
|
|
|
Less: valuation allowances
|
|
(21,199
|
)
|
|
(15,354
|
)
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
23,029
|
|
|
$
|
3,877
|
|
At December 31, 2018, the Company had
$72,453
of net operating losses in Ireland and
$3,259
of net operating losses in France that do not have an expiration date and
$25,840
of net operating losses and carryforwards in the U.S. Of the
$25,840
of net operating losses and carryforwards in the U.S.,
$10,365
were acquired due to the acquisition of FSC in 2016 and
$15,475
is due to the losses and carryforwards generated at U.S. Holdings in 2018. The portion due to the acquisition of FSC will expire in 2034 through 2035. A valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that a deferred tax asset will not be realized. This assessment is based on an evaluation of the level of historical taxable income and projections for future taxable income. While the Company believes it is more likely than not that it will be able to realize the deferred tax assets in the U.S., the Company continues to monitor changes in the U.S. hospital products market as unfavorable changes could ultimately impact our assessment of the realizability of our U.S. deferred tax assets. The U.S. net operating losses
are subject to an annual limitation as a result of the FSC acquisition under Internal Revenue Code Section 382 and may not be fully utilized before they expire.
We recorded a valuation allowance against all of our net operating losses in Ireland and France as of both December 31, 2018, and December 31, 2017. We intend to continue maintaining a full valuation allowance on the Irish and French net operating losses until there is sufficient evidence to support the reversal of all or some portion of these allowances.
At December 31, 2018, the Company has unremitted earnings of
$2,798
outside of Ireland as measured on a U.S. GAAP basis. Whereas the measure of earnings for purposes of taxation of a distribution may be different for tax purposes, these earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends or if the Company were to sell our stock in the subsidiaries, net of any prior income taxes paid. It is not practicable to estimate the amount of deferred tax liability on such earnings, if any.
Research and Development Tax Credits Receivable
The French and Irish governments provide tax credits to companies for spending on innovative R&D. These credits are recorded as an offset of R&D expenses and are credited against income taxes payable in years after being incurred or, if not so utilized, are recoverable in cash after a specified period of time, which may differ depending on the tax credit regime. As of December 31, 2018, the Company’s research tax credit receivable, net amounts to
$7,555
and represents a French gross research tax credit of
$6,922
and an Irish gross research tax credit of
$633
. As of December 31, 2017, the Company’s net research tax credit receivable amounted to
$5,272
and represented a French gross research tax credit of
$4,754
and an Irish gross research tax credit of
$518
.
Income Tax Deferred Charge
On December 16, 2014, we transferred all of our intangible intellectual property from our French entity to our Irish entity as part of a global reorganization. The intellectual property includes patents on drug delivery platforms, clinical data sets and other intangible assets related to the pipeline of proprietary products in development. This intra-entity transaction resulted in a charge of
$14,088
of related taxes to the French government in December 2014. As this represents an intra-entity transaction, no deferred tax asset was originally recognized, but rather was recorded as
$986
of prepaid expenses and
$13,102
of a long-term income tax deferred charge asset in accordance with ASC 740-10-25-3 (e). This income tax deferred charge asset is amortized over the tax life of the asset at a rate of
7%
per year and will result in tax relief in Ireland of
$8,500
from 2016 to 2029, subject to the ability to realize tax benefits for additional deductions. At December 31, 2016, the balance of these respective accounts was classified as prepaid expenses of
$814
and income tax deferred charge asset of
$10,342
. In 2017, the Company adopted the provisions of ASU 2016-16, related to Intra-Entity Transfers of Assets Other Than Inventory. Adoption of ASU 2016-16 eliminated the
$11,156
income tax deferred charge recorded within the consolidated balance sheet as of December 31, 2016. In addition to the elimination of the income tax deferred charge, the Company recorded a deferred tax asset of
$7,954
related to the remaining unamortized tax basis of the intangible intellectual property. A full valuation allowance was recorded against the deferred tax asset as sufficient evidence does not exist at this time that the Company will be able to utilize these benefits.
Cross-Border Merger
In 2016, we changed our jurisdiction of incorporation from France to Ireland by merging with and into our wholly owned Irish subsidiary. Information about the reincorporation was included in the definitive proxy statement filed with the Securities and Exchange Commission on July 5, 2016. Prior to the merger, the Company submitted a request to the French tax authorities seeking to benefit from a special regime for mergers and demergers, conditional upon a formal consent of the French tax authority, which would allow for the deferral of a portion of the tax cost of the cross-border merger. In 2017, the Company received a letter from the French tax authorities indicating that our request to benefit from the special regime had been declined. Completion of the cross-border merger resulted in the recognition of a net income tax provision of
$4,266
, after considering tax benefits from the utilization of current and prior year French net operating losses. The Company was able to utilize
$4,266
of French research and development tax credits to offset the remaining cost of the transaction. The Company also removed
$111,495
of French net operating losses as the carryforward of these losses was contingent on receiving favorable consent from the French tax authority. The French net operating losses had a full valuation allowance, resulting in no impact to the income tax provision from their removal.
2017 Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the base erosion anti-abuse tax (“BEAT”) and a new minimum tax. As a result of the Act being signed into law, the Company recognized a charge of
$274
and
$3,513
in 2018 and 2017, respectively, related to the re-measurement of its U.S. net deferred tax assets and certain unrecognized tax benefits at the lower enacted corporate tax rates. A majority of the provisions in the Tax Act are effective January 1, 2018.
NOTE
13
:
Post-Retirement Benefit Plans
Post-Retirement Benefit Contributions to French Government Agencies
The Company is required by French law for our French employees to deduct specific monthly payroll amounts to support post-retirement benefit programs sponsored by the relevant government agencies in France. As the ultimate obligation is maintained by the French government agencies, there is no additional liability recorded by the Company in connection with these plans. (Income) expenses recognized for these plans were
$(69)
in
2018
,
$123
in
2017
, and
$348
in
2016
.
The 2018 and 2017 pension expense does not include the retirement indemnity curtailment gains of
$148
and
$717
, respectively, which was associated with the reduction of certain defined benefit retirement plan liabilities due to the reduction in force. See
Note
17
: Restructuring Costs - France
for more discussion.
Retirement Indemnity Obligation – France
French law requires the Company to provide for the payment of a lump sum retirement indemnity to French employees based upon years of service and compensation at retirement. The retirement indemnity has been actuarially calculated on the assumption of voluntary retirement at a government-defined retirement age. Benefits do not vest prior to retirement. Any actuarial gains or losses are recognized in the Company’s consolidated statements of (loss) income in the periods in which they occur.
The benefit obligation is calculated as the present value of estimated future benefits to be paid, using the following assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefit Obligation Assumptions:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Compensation rate increase
|
|
2.75
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
Discount rate
|
|
1.50
|
%
|
|
1.25
|
%
|
|
1.31
|
%
|
Employee turn-over
|
|
Actuarial standard and average of the last 5 years
|
Average age of retirement
|
|
60 to 65 years actuarial standard based on age and professional status
|
Certain actuarial assumptions, such as discount rate, have a significant effect on the amounts reported for net periodic benefit cost and accrued retirement indemnity benefit obligation amounts. The discount rate is determined annually by benchmarking a published long-term bond index using the iBoxx € Corporates AA 10+ index.
Changes in the funded status of the retirement indemnity benefit plans were as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
Retirement Benefit Obligation Activity:
|
|
2018
|
|
2017
|
|
|
|
|
|
Retirement indemnity benefit obligation, beginning of year
|
|
$
|
1,303
|
|
|
$
|
2,431
|
|
Service cost
|
|
93
|
|
|
132
|
|
Interest cost
|
|
17
|
|
|
21
|
|
Plan amendment
|
|
—
|
|
|
(829
|
)
|
Benefits paid
|
|
(12
|
)
|
|
—
|
|
Curtailment gain
|
|
(148
|
)
|
|
(717
|
)
|
Actuarial loss
|
|
(178
|
)
|
|
(25
|
)
|
Exchange rate changes
|
|
(51
|
)
|
|
290
|
|
Retirement indemnity benefit obligation, end of year
|
|
$
|
1,024
|
|
|
$
|
1,303
|
|
The lump sum retirement indemnity is accrued on the Company’s consolidated balance sheets within non-current other liabilities, excluding the current portion. As these are not funded benefit plans, there are no respective assets recorded.
The future expected benefits to be paid over the next five years and for the five years thereafter is as follows for the years ended December 31:
|
|
|
|
|
|
Future Retirement Indemnity Benefit Obligation:
|
|
Balance
|
|
|
|
|
2019
|
|
$
|
—
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
2022
|
|
17
|
|
2023
|
|
—
|
|
Next five years
|
|
158
|
|
Total
|
|
$
|
175
|
|
NOTE
14
:
Other Assets and Liabilities
Various other assets and liabilities are summarized for the years ended December 31, as follows:
|
|
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Valued-added tax recoverable
|
|
$
|
1,378
|
|
|
$
|
1,206
|
|
Prepaid and other expenses
|
|
2,145
|
|
|
7,106
|
|
Guarantee from Armistice (see
Note 16
)
|
|
534
|
|
|
—
|
|
Income tax receivable
|
|
921
|
|
|
518
|
|
Research and development tax credit receivable
|
|
283
|
|
|
—
|
|
Short-term deposit
|
|
3,350
|
|
|
—
|
|
Other
|
|
225
|
|
|
128
|
|
Total
|
|
$
|
8,836
|
|
|
$
|
8,958
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Assets:
|
|
2018
|
|
2017
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
23,029
|
|
|
$
|
3,877
|
|
Long-term deposits
|
|
1,477
|
|
|
3,350
|
|
Guarantee from Armistice (see
Note 16
)
|
|
5,697
|
|
|
—
|
|
Right of use assets at contract manufacturing organizations
|
|
5,894
|
|
|
2,909
|
|
Other
|
|
49
|
|
|
113
|
|
Total
|
|
$
|
36,146
|
|
|
$
|
10,249
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses:
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
3,971
|
|
|
$
|
3,157
|
|
Accrued social charges
|
|
1,009
|
|
|
1,204
|
|
Accrued restructuring (see
Note 17
)
|
|
879
|
|
|
1,000
|
|
Customer allowances
|
|
6,541
|
|
|
10,613
|
|
Accrued ELAA payment
|
|
—
|
|
|
20,000
|
|
Accrued contract research organization charges
|
|
1,000
|
|
|
156
|
|
Accrued contract manufacturing organization costs
|
|
2,028
|
|
|
2,327
|
|
Accrued contract sales organization and marketing costs
|
|
3,469
|
|
|
7,641
|
|
Other
|
|
2,798
|
|
|
4,828
|
|
Total
|
|
$
|
21,695
|
|
|
$
|
50,926
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities:
|
|
2018
|
|
2017
|
|
|
|
|
|
|
Provision for retirement indemnity
|
|
$
|
1,024
|
|
|
$
|
1,303
|
|
Customer allowances
|
|
1,352
|
|
|
1,636
|
|
Unrecognized tax benefits
|
|
5,315
|
|
|
3,954
|
|
Guarantee to Deerfield (see
Note 16
)
|
|
5,717
|
|
|
—
|
|
Other
|
|
594
|
|
|
191
|
|
Total
|
|
$
|
14,002
|
|
|
$
|
7,084
|
|
NOTE
15
:
Contingent Liabilities and Commitments
Litigation
The Company is subject to potential liabilities generally incidental to our business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. At December 31, 2018 and December 31, 2017, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.
Some of the patents covering our Noctiva
TM
product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, who manufacture a competing product known as Nocdurna. Nocdurna was approved by the FDA in June 2018 and commercially launched in the U.S. in November 2018. In this litigation (the “Ferring Litigation”), Ferring seeks to invalidate and disputes the inventorship of the Noctiva Patents, seeks damages for various alleged breaches of contractual and common law duties, and seeks damages for alleged infringement by Noctiva
TM
of Ferring’s “Nocdurna” trademark. Avadel’s indirectly wholly owned subsidiary, Specialty Pharma and certain other parties including Serenity Pharmaceuticals, LLC (“Serentiy”) (the licensor of the Noctiva Patents) have been actively defending this litigation, and have made certain counterclaims against Ferring, including for infringement of the Noctiva Patents and a declaratory judgment of noninfringement with respect to Ferring’s “Nocdurna” trademark. The court has dismissed Ferring’s inventorship claim and its claims for alleged breaches of contractual and common law duties, although these dismissals may be appealed by Ferring. On February 15, 2019, Specialty Pharma and its co-defendants moved to stay the litigation pending completion of the bankruptcy proceeding of Specialty Pharma. Adverse outcomes from this litigation could have material adverse effects on the value of the Specialty Pharma’s license to Noctiva
TM
.
On January 21, 2019, Serenity provided notice to Specialty Pharma of an alleged breach of the parties’ Noctiva license agreement. Serenity alleges principally that Specialty Pharma breached its contractual obligation to devote commercially reasonable efforts to the commercialization of Noctiva and seeks unspecified damages. On January 27, 2019, Specialty Pharma notified Serenity of a claim for $1.7 million in damages as a result of Serenity’s breach of its contractual obligation to pay the costs of the Ferring Litigation. Serenity’s notice to Specialty Pharma invoked the dispute resolution provisions of the Noctiva license agreement, which culminate in arbitration, but neither party has yet initiated an arbitration proceeding or filed suit. Adverse outcomes from this potential litigation could have material adverse effects on the financial position of Specialty Pharma.
On February 6, 2019, Specialty Pharma commenced a Chapter 11 bankruptcy case under the U.S. Bankruptcy Code to fulfill its strategic objective of divesting from the business of marketing and distributing Noctiva™. As a result of the commencement of the bankruptcy case, all pending litigation against Specialty Pharma is automatically stayed and will remain stayed during the pendency of the Chapter 11 case unless and until the bankruptcy court enters an order modifying or lifting the stay. The automatic stay of the bankruptcy code also precludes the commencement of any new litigation against Specialty Pharma unless the bankruptcy court orders otherwise. See Part I, Item 3 of this Annual Report on Form 10-K for more discussion.
Material Commitments
At December 31, 2018, the Company has various commitments to purchase finished product from customers
.
Commitments for these arrangements, at maximum quantities and at contractual prices over the remaining life of the contract, and excluding any waived commitments, are as follows for the years ended December 31:
|
|
|
|
|
|
Purchase Commitments:
|
|
Balance
|
|
|
|
2019
|
|
$
|
10,754
|
|
2020
|
|
5,948
|
|
2021
|
|
4,880
|
|
2022
|
|
4,880
|
|
2023
|
|
220
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
26,682
|
|
The Company also has a commitment with a contract manufacturer related to the construction and preparation of a production suite at the contract manufacturer’s facility, which is substantially complete at December 31, 2018. Subsequent to the initial build and preparation of the production suite, this commitment also includes annual production suite fees of approximately $3,000 to $4,000 which would commence at the time of FDA approval of the product and continue thereafter for five years. These amounts are not included in the table above, as the start date has not been determined.
Included in the purchase commitments above, is approximately $15,308 of an obligation of Specialty Pharma, which on February 6, 2019, filed for Chapter 11 bankruptcy protection.
For the year ended
December 31, 2018
, the Company paid
$9,965
related to the above purchase commitments.
The Company and our subsidiaries lease office facilities under noncancelable operating leases expiring at various dates. Rent expense, net of rental income, was
$1,213
,
$1,146
and
$970
in 2018, 2017, and 2016, respectively. Minimum rental commitments for non-cancelable leases in effect at December 31, 2018 are as follows:
|
|
|
|
|
|
Lease Commitment:
|
|
Balance
|
|
|
|
2019
|
|
$
|
1,191
|
|
2020
|
|
1,208
|
|
2021
|
|
1,008
|
|
2022
|
|
767
|
|
2023
|
|
695
|
|
Thereafter
|
|
967
|
|
Total
|
|
$
|
5,836
|
|
Other than the above commitments, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt, long-term related party payable, and post-retirement benefit plan obligations which are disclosed
in
Note
10
: Long-Term Debt, Note
11
: Long-Term Related Party Payable,
and
Note
13
: Post-Retirement Benefit Plans
, respectively.
Contractual Obligations
The following table presents contractual obligations of the Company at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations:
|
|
Total
|
|
Less than
1 Year
|
|
1 to 3
Years
|
|
3 to 5
Years
|
|
More than
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and interest
|
|
$
|
173,009
|
|
|
$
|
6,575
|
|
|
$
|
12,981
|
|
|
$
|
153,453
|
|
|
$
|
—
|
|
Long-term related party payable
(undiscounted)
|
|
51,284
|
|
|
9,439
|
|
|
8,713
|
|
|
7,250
|
|
|
25,882
|
|
Purchase commitments
|
|
26,682
|
|
|
10,754
|
|
|
10,828
|
|
|
5,100
|
|
|
—
|
|
Operating leases
|
|
5,836
|
|
|
1,191
|
|
|
2,217
|
|
|
1,461
|
|
|
967
|
|
Total contractual cash obligations
|
|
$
|
256,811
|
|
|
$
|
27,959
|
|
|
$
|
34,739
|
|
|
$
|
167,264
|
|
|
$
|
26,849
|
|
Included in the purchase commitments total above, is approximately $15,308 of an obligation of Specialty Pharma, which on February 6, 2019, filed for Chapter 11 bankruptcy protection.
NOTE
16
: Divestiture of the Pediatric Assets
On February 12, 2018, the Company, together with its subsidiaries Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC (“FSC Therapeutics”), and Avadel US Holdings, Inc. (“Holdings”), as the “Sellers,” entered into an asset purchase agreement (the “Purchase Agreement”) with Cerecor, Inc. (“Cerecor”). The transaction closed on February 16, 2018 wherein Cerecor purchased from the Sellers four pediatric commercial stage assets – Karbinal™ ER, Cefaclor, Flexichamber™ and AcipHex® Sprinkle™, together with certain associated business assets – which were held by FSC.
The Company acquired FSC in February 2016 from Deerfield and certain of its affiliates. Pursuant to the Purchase Agreement, Cerecor assumed the Company’s remaining payment obligations to Deerfield under the Membership Interest Purchase Agreement, dated as of February 5, 2016, between Holdings, Flamel Technologies SA (the predecessor of the Company) and Deerfield and certain of its affiliates, which payment obligations consisted of the following (collectively, the “Assumed Obligations”): (i) a quarterly payment of
$263
beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of
$2,625
; (ii) a payment in January 2021 of
$15,263
; and (iii) a quarterly royalty payment of
15%
on net sales of the FSC products through February 5, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately
$10,300
. Cerecor also assumed certain contracts and other obligations related to the acquired assets, and in that connection Holdings agreed to pay Cerecor certain make-whole payments associated with obligations Cerecor is assuming related to a certain supply contract related to Karbinal™ ER.
In conjunction with the divestiture, the Company also entered into the following arrangements:
License and Development Agreement
Also, in connection with the closing under the Purchase Agreement, Flamel Ireland Limited, an Irish limited company operating under the trade name of Avadel Ireland (“Avadel Ireland”) and a wholly-owned subsidiary of the Company, and Cerecor entered into a license and development agreement (the “License and Development Agreement”) pursuant to which, among other things:
|
|
•
|
Avadel Ireland will provide Cerecor with four product formulations utilizing Avadel Ireland’s LiquiTime™ technology, and will complete pilot bioequivalence studies for such product formulations within 18 months;
|
|
|
•
|
Cerecor will reimburse Avadel Ireland for development costs of the four LiquiTime™ products in excess of
$1,000
in the aggregate;
|
|
|
•
|
Upon transfer of the four product formulations, Cerecor will assume all remaining development costs and responsibilities for the product development, clinical studies, NDA applications and associated filing fees; and
|
|
|
•
|
Upon regulatory approval and commercial launch of any LiquiTime™ products, Cerecor will pay Avadel Ireland quarterly royalties based on a percentage of net sales of any such products in the mid-single digit range.
|
Deerfield Guarantee
In connection with the closing under the Purchase Agreement, the Company and Holdings provided their guarantee (the “Deerfield Guarantee”) in favor of Deerfield. Under the Deerfield Guarantee, the Company and Holdings guaranteed to Deerfield the payment by Cerecor of the Assumed Obligations under the Membership Interest Purchase Agreement between the Company and Deerfield dated February 5, 2016. The Assumed Obligations include (i) a quarterly payment of
$263
beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of
$2,625
; (ii) a payment in January 2021 of
$15,263
; and (iii) a quarterly royalty payment of
15%
on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately
$10,300
. In addition, under the Deerfield Guarantee, the Company and Holdings guaranteed that Deerfield would receive certain minimum annual FSC Product Royalties through February 6, 2026 (the “Minimum Royalties”). Given the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. A valuation was performed, which was based largely on an analysis of the potential timing of each possible cash outflow described above and the likelihood of Cerecor’s default on such payments assuming an S&P credit rating of CCC+. The result of this valuation identified a guarantee liability of
$6,643
. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield. At
December 31, 2018
, the carrying value of this liability was
$6,253
.
Armistice Guarantee
In connection with the closing under the Purchase Agreement, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to Holdings the payment by Cerecor of the Assumed Obligations, including the Minimum Royalties. A valuation of the guarantee asset was performed in accordance with ASC 460 “
Guarantees
” and a guarantee asset of
$6,620
was recorded. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield noted above. At
December 31, 2018
, the carrying value of this asset was
$6,231
.
The fair values of the Avadel guarantee to Deerfield and the guarantee received by Avadel from Armistice largely offset and when combined are not material.
Based on management’s review of ASU 2014-08, “
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”
, the disposition of our pediatric assets and related liabilities did not qualify for discontinued operations reporting. Our results of operations for the period January 1, 2018 through February 16, 2018 and for the years ended
December 31, 2017
and
2016
include the results of FSC, prior to its February 16, 2018 disposition date.
The net impact of this transaction was not material to the consolidated statements of (loss) income.
NOTE
17
: Restructuring Costs
- France
During the first quarter of 2017, the Company announced a plan to reduce our workforce at our Venniseux, France site by approximately
50%
. This reduction is an effort to align the Company’s cost structure with our ongoing and future planned projects. In July 2017, the Company completed negotiations with the works council for our French operations and received approval from the French Labor Commission (DIRECCTE) to implement the plan. The reduction is substantially complete at December 31, 2018. Restructuring charges for the year ended December 31, 2018 of
$1,016
, include a provision related to a dispute with severed employees of
$776
related to severance benefits and is also net of the curtailment gain of
$148
. Restructuring charges of
$2,542
for the year ended December 31, 2017, are net of the curtailment gain of
$717
. The following table sets forth activities for the Company’s cost reduction plan obligations for the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
Restructuring Obligation:
|
|
2018
|
|
2017
|
|
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
1,000
|
|
|
$
|
—
|
|
Charges for employee severance, benefits and other
|
|
1,164
|
|
|
3,259
|
|
Payments
|
|
(1,261
|
)
|
|
(2,600
|
)
|
Foreign currency impact
|
|
(24
|
)
|
|
341
|
|
Balance of restructuring accrual at December 31,
|
|
$
|
879
|
|
|
$
|
1,000
|
|
The restructuring accrual at
December 31, 2018
is included the consolidated balance sheet in accrued expenses.
NOTE
18
:
Equity Instruments and Stock-Based Compensation
Capital Stock
We have
500,000
shares of authorized ordinary shares with a nominal value of
$0.01
per common share. As of
December 31, 2018
, we had
42,720
and
37,313
shares of ordinary shares issued and outstanding, respectively. The Board of Directors is authorized to issue preferred shares in series, and with respect to each series, to fix its designation, relative rights (including voting, dividend, conversion, sinking fund, and redemption rights), preferences (including dividends and liquidation) and limitations. We have
50,000
shares of authorized preferred shares,
$0.01
nominal value,
no
ne of which is currently outstanding.
Share Repurchases
In March 2017, the Board of Directors approved an authorization to repurchase up to
$25,000
of Avadel ordinary shares represented by ADSs. Under this authorization, which has an indefinite duration, share repurchases may be made in the open market, in block transactions on or off the exchange, in privately negotiated transactions, or through other means as determined by the Board of Directors and in accordance with the regulations of the Securities and Exchange Commission. The timing and amount of repurchases, if any, will depend on a variety of factors, including the price of our shares, cash resources, alternative investment opportunities, corporate and regulatory requirements and market conditions. This share repurchase program may be modified, suspended or discontinued at any time without prior notice. We may also from time to time establish a trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 to facilitate purchases of our shares under this program. Additionally, on February 12, 2018, the Board of Directors approved an authorization to repurchase up to $18,000 of Avadel ordinary shares represented by American Depository Shares in connection with our Convertible Notes Offering completed on February 16, 2018. See
Note 10: Long-Term Debt
. In March 2018, the Board of Directors approved an authorization to repurchase up to $7,000 of Avadel ordinary shares represented by American Depository Shares, bring the total authorization to $50,000.
As of
December 31, 2018
, the Company had repurchased
5,407
ordinary shares for
$49,998
.
Stock-Based Compensation
Compensation expense included in the Company’s consolidated statements of (loss) income for all stock-based compensation arrangements was as follows for the periods ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation Expense:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
880
|
|
|
$
|
672
|
|
|
$
|
3,523
|
|
Selling, general and administrative
|
|
6,972
|
|
|
7,400
|
|
|
11,156
|
|
Total stock-based compensation expense
|
|
$
|
7,852
|
|
|
$
|
8,072
|
|
|
$
|
14,679
|
|
As of
December 31, 2018
, the Company expects
$6,726
of unrecognized expense related to granted, but non-vested stock-based compensation arrangements to be incurred in future periods. This expense is expected to be recognized over a weighted average period of
2.3
years.
The excess tax benefit related to stock-based compensation recorded by the Company was $0 for the year ended December 31, 2018 and not material for the years ended December 31, 2017 and 2016.
Upon exercise of stock options or warrants, or upon the issuance of restricted share awards, the Company issues new shares.
At
December 31, 2018
, there were
1,873,147
shares authorized for stock option grants, warrant grants and restricted share award grants in subsequent periods.
Determining the Fair Value of Stock Options and Warrants
The Company measures the total fair value of stock options and warrants on the grant date using the Black-Scholes option-pricing model and recognizes each grant’s fair value as compensation expense over the period that the option or warrant vests. Options are granted to employees of the Company and become exercisable ratably over
four
years following the grant date and expire
ten
years after the grant date. Prior to 2017, warrants were typically issued to the Company’s Board of Directors as compensation for services rendered and generally become exercisable within
one
year following the grant date, and expire
four
years after the grant date. Beginning in 2017, the Company issues stock options to our Board of Directors as compensation for services rendered and generally become exercisable within
one
year following the grant date, and expire
four
years after the grant date.
The weighted-average assumptions under the Black-Scholes option-pricing model for stock option and warrant grants as of
December 31, 2018
,
2017
and
2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Stock Option and Warrant Assumptions:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Stock option grants:
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
6.25
|
|
|
6.25
|
|
|
6.25
|
|
Expected volatility
|
|
56.59
|
%
|
|
58.82
|
%
|
|
58.39
|
%
|
Risk-free interest rate
|
|
2.68
|
%
|
|
2.20
|
%
|
|
2.04
|
%
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Warrant grants:
|
|
|
|
|
|
|
|
|
|
Expected term (years)
|
|
—
|
|
|
0
|
|
|
2.50
|
|
Expected volatility
|
|
—
|
%
|
|
—
|
%
|
|
60.57
|
%
|
Risk-free interest rate
|
|
—
|
%
|
|
—
|
%
|
|
0.82
|
%
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected term
: The expected term of the options or warrants represents the period of time between the grant date and the time the options or warrants are either exercised or forfeited, including an estimate of future forfeitures for outstanding options or warrants. Given the limited historical data and the grant of stock options and warrants to a limited population, the simplified method has been used to calculate the expected life.
Expected volatility
: The expected volatility is calculated based on an average of the historical volatility of the Company’s stock price for a period approximating the expected term.
Risk-free interest rate
: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and a maturity that approximates the expected term.
Expected dividend yield
: The Company has not distributed any dividends since our inception, and has no plan to distribute dividends in the foreseeable future.
Stock Options
A summary of the combined stock option activity and other data for the Company’s stock option plans for the year ended
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Activity and Other Data:
|
|
Number of Stock
Options
|
|
Weighted Average
Exercise Price per Share
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
Stock options outstanding, January 1, 2018
|
|
5,041
|
|
|
$
|
11.34
|
|
|
|
|
|
|
Granted
|
|
138
|
|
|
6.67
|
|
|
|
|
|
|
Exercised
|
|
(82
|
)
|
|
6.52
|
|
|
|
|
|
|
Forfeited
|
|
(428
|
)
|
|
10.04
|
|
|
|
|
|
|
Expired
|
|
(68
|
)
|
|
12.41
|
|
|
|
|
|
Stock options outstanding, December 31, 2018
|
|
4,601
|
|
|
$
|
11.39
|
|
|
7.25 years
|
|
$
|
—
|
|
Stock options exercisable, December 31, 2018
|
|
3,005
|
|
|
$
|
11.99
|
|
|
6.66 years
|
|
$
|
—
|
|
The aggregate intrinsic value of options exercisable at
December 31, 2018
,
2017
and
2016
was
$0
,
$1,161
, and
$58
, respectively.
The weighted average grant date fair value of options granted during the years ended
December 31, 2018
,
2017
and
2016
was
$3.60
,
$5.20
and
$6.14
per share, respectively.
Warrants
A summary of the combined warrant activity and other data for the year ended
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Activity and Other Data:
|
|
Number of
Warrants
|
|
Weighted Average Exercise Price per Share
|
|
Weighted Average Remaining
Contractual Life
|
|
Aggregate Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
Warrants outstanding, January 1, 2018
|
|
894
|
|
|
$
|
16.77
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Expired
|
|
(298
|
)
|
|
14.87
|
|
|
|
|
|
Warrants outstanding, December 31, 2018
|
|
596
|
|
|
$
|
17.72
|
|
|
1.03 years
|
|
$
|
—
|
|
Warrants exercisable, December 31, 2018
|
|
596
|
|
|
$
|
17.72
|
|
|
1.03 years
|
|
$
|
—
|
|
Each of the above warrants is convertible into
one
ordinary share. There was
no
aggregate intrinsic value of warrants exercised during the years ended
December 31, 2018
,
2017
and
2016
.
The weighted average grant date fair value of warrants granted during the year ended December 31,
2016
was
$2.99
per share. There were
no
warrants granted during the years ended December 31, 2018 and 2017.
At January 1, 2018, an additional
3,300
warrants were outstanding and exercisable relative to consideration paid for the Company’s acquisition of Éclat Pharmaceuticals, LLC on March 13, 2012. These warrants are not considered stock-based compensation and are therefore excluded from the above tables, and instead are addressed within
Note
11
: Long-Term Related Party Payable
. On February 23, 2018, the related party exercised in full the warrant to purchase
2,200
ordinary shares. On March 12, 2018 the remaining warrants to purchase
1,100
ordinary shares expired.
Restricted Share Awards
Restricted share awards represent Company shares issued free of charge to employees of the Company as compensation for services rendered. The Company measures the total fair value of restricted share awards on the grant date using the Company’s stock price at the time of the grant. Restricted share awards granted prior to 2016 generally cliff vest at the end of a
four
-year vesting period, and are expensed over a
two
or
four
-year service period. Restricted share awards granted during 2016 are fully expensed at the date of grant as they contain no service requirement. Employees, however, have a
two
-year acquisition period from grant date and are then free to trade these awards. Restricted share awards granted during and after 2017 vest over a
three
-year period; two-thirds (2/3) vesting on the second anniversary of the grant date and the remaining one-third (1/3) vesting on the third anniversary of the grant date. Beginning in 2018, the Company issues restricted share awards to our Board of Directors vesting over a three-year period; one-third (1/3) vesting on each of the three anniversaries of the grant date. Compensation expense for such awards granted during and after 2017 is recognized over the applicable vesting period.
A summary of the Company’s restricted share awards as of
December 31, 2018
, and changes during the year then ended, is reflected in the table below.
|
|
|
|
|
|
|
|
|
Restricted Share Activity and Other Data:
|
|
Number of Restricted Share Awards
|
|
Weighted Average Grant Date
Fair Value
|
|
|
|
|
|
Non-vested restricted share awards outstanding, January 1, 2018
|
|
819
|
|
|
$
|
11.51
|
|
Granted
|
|
279
|
|
|
5.87
|
|
Vested
|
|
(548
|
)
|
|
12.78
|
|
Forfeited
|
|
(59
|
)
|
|
8.95
|
|
Non-vested restricted share awards outstanding, December 31, 2018
|
|
491
|
|
|
$
|
7.20
|
|
The weighted average grant date fair value of restricted share awards granted during the years ended
December 31, 2018
,
2017
and 2016 was
$5.87
,
$8.95
and
$12.11
, respectively.
Employee Share Purchase Plan
In 2017, the Board of Directors approved of the Avadel Pharmaceuticals plc 2017 Avadel Employee Share Purchase Plan (“ESPP”). The total number of Company ordinary shares, nominal value
$0.01
per share, or ADSs representing such ordinary shares (collectively, “Shares”) which may be issued under the ESPP is
1,000
. The purchase price at which a Share will be issued or sold for a given offering period will be established by the Compensation Committee of the Board (“Committee”) (and may differ among participants, as determined by the Committee in its sole discretion) but will in no event be less than
85%
of the lesser of: (a) the fair market value of a Share on the offering date; or (b) the fair market value of a Share on the purchase date. As of December 31, 2018, the Company has issued
25
ordinary shares to employees.
NOTE
19
:
Net (Loss) Income Per Share
Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of shares outstanding during each period. Diluted net (loss) income per share is calculated by dividing net (loss) income by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net (loss) income, diluted net (loss) income per share would be calculated assuming the impact of the conversion of the 2023 Notes, the exercise of outstanding equity compensation awards, ordinary shares expected to be issued under our employee stock purchase plan (“ESPP”) and the exercise of contingent consideration warrants, all which have been exercised or have expired during the first quarter of 2018.
We have a choice to settle the conversion obligation under the 2023 Notes in cash, shares or any combination of the two. We utilize the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2023 Notes into shares of our ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.
The dilutive effect of the warrants, stock options, RSU’s and ordinary shares expected to be issued under or ESPP has been calculated using the treasury stock method.
A reconciliation of basic and diluted net (loss) income per share, together with the related shares outstanding in thousands for the years ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Per Share:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(95,304
|
)
|
|
$
|
68,271
|
|
|
$
|
(41,276
|
)
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
37,325
|
|
|
40,465
|
|
|
41,248
|
|
Effect of dilutive securities—employee and director equity awards outstanding and 2023 Notes
|
|
—
|
|
|
1,300
|
|
|
—
|
|
Diluted shares
|
|
37,325
|
|
|
41,765
|
|
|
41,248
|
|
|
|
|
|
|
|
|
Net (loss) income per share - basic
|
|
$
|
(2.55
|
)
|
|
$
|
1.69
|
|
|
$
|
(1.00
|
)
|
Net (loss) income per share - diluted
|
|
$
|
(2.55
|
)
|
|
$
|
1.63
|
|
|
$
|
(1.00
|
)
|
Potential common shares of
17,529
,
6,368
, and
8,564
were excluded from the calculation of weighted average shares for the years ended
December 31, 2018
,
2017
and
2016
, respectively, because their effect was considered to be anti-dilutive. For the years ended December 31, 2018 and 2016, the effects of dilutive securities were entirely excluded from the calculation of net (loss) income per share as a net loss was reported in these periods.
NOTE
20
:
Comprehensive (Loss) Income
The following table shows the components of accumulated other comprehensive (loss) income for the twelve months ended December 31, net of immaterial tax effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive (Loss) Income:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(23,202
|
)
|
|
$
|
(23,336
|
)
|
|
$
|
(22,312
|
)
|
Net other comprehensive (loss) income
|
|
(419
|
)
|
|
134
|
|
|
(1,024
|
)
|
Balance at December 31,
|
|
(23,621
|
)
|
|
(23,202
|
)
|
|
(23,336
|
)
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable securities, net
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
(64
|
)
|
|
(229
|
)
|
|
(345
|
)
|
Net other comprehensive income, net of ($18), $28, $16, tax, respectively
|
|
269
|
|
|
165
|
|
|
116
|
|
Balance at December 31,
|
|
205
|
|
|
(64
|
)
|
|
(229
|
)
|
Accumulated other comprehensive loss at December 31,
|
|
$
|
(23,416
|
)
|
|
$
|
(23,266
|
)
|
|
$
|
(23,565
|
)
|
NOTE
21
:
Company Operations by Product, Customer and Geographic Area
The Company has determined that we operate in
one
segment, the development and commercialization of pharmaceutical products, including controlled-release therapeutic products based on our proprietary polymer based technology. The Company’s Chief Operating Decision Maker is the interim CEO. The interim CEO reviews profit and loss information on a consolidated basis to assess performance and make overall operating decisions as well as resource allocations. All products are included in one segment because the Company’s products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.
The following table presents a summary of total revenues by these products for the twelve months ended
December 31, 2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Product:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Bloxiverz
|
|
$
|
20,850
|
|
|
$
|
45,596
|
|
|
$
|
82,896
|
|
Vazculep
|
|
42,916
|
|
|
38,187
|
|
|
39,796
|
|
Akovaz
|
|
33,759
|
|
|
80,617
|
|
|
16,831
|
|
Noctiva
|
|
1,204
|
|
|
—
|
|
|
—
|
|
Other
|
|
2,694
|
|
|
8,441
|
|
|
7,699
|
|
Total product sales
|
|
101,423
|
|
|
172,841
|
|
|
147,222
|
|
License revenue
|
|
1,846
|
|
|
404
|
|
|
3,024
|
|
Total revenues
|
|
$
|
103,269
|
|
|
$
|
173,245
|
|
|
$
|
150,246
|
|
Concentration of credit risk with respect to accounts receivable is limited due to the high credit quality comprising a significant portion of the Company’s customers. Management periodically monitors the creditworthiness of our customers and believes that we have adequately provided for any exposure to potential credit loss.
The following table presents a summary of total revenues by significant customer for the twelve months ended
December 31, 2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Significant Customer:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
26,794
|
|
|
$
|
44,762
|
|
|
$
|
51,648
|
|
Customer B
|
|
25,413
|
|
|
37,965
|
|
|
39,359
|
|
Customer C
|
|
18,620
|
|
|
25,691
|
|
|
30,916
|
|
Customer D
|
|
9,653
|
|
|
53,342
|
|
|
17,728
|
|
Others
|
|
20,943
|
|
|
11,081
|
|
|
7,571
|
|
Total product sales
|
|
101,423
|
|
|
172,841
|
|
|
147,222
|
|
License revenue
|
|
1,846
|
|
|
404
|
|
|
3,024
|
|
Total revenues
|
|
$
|
103,269
|
|
|
$
|
173,245
|
|
|
$
|
150,246
|
|
As of
December 31, 2018
, the Company had four customers, each of which are substantial wholesale distributors, and accounted for
10%
or more of the accounts receivable balance. One customer accounted for
32%
, or
$3,571
, a second customer accounted for
24%
or
$2,755
, a third customer accounted for
24%
or
$2,789
, and a fourth customer accounted for
10%
or
$1,174
. As of
December 31, 2018
, the Company had no significant past due account receivable balances.
The following table summarizes revenues by geographic region for the twelve months ended
December 31, 2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Geographic Region:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
101,423
|
|
|
$
|
172,841
|
|
|
$
|
147,283
|
|
Ireland
|
|
1,846
|
|
|
404
|
|
|
2,963
|
|
Total revenues
|
|
$
|
103,269
|
|
|
$
|
173,245
|
|
|
$
|
150,246
|
|
Currently we depend on a single contract manufacturing organization for the manufacture of Bloxiverz, Vazculep and Noctiva and two contract manufacturing organizations for the manufacture of Akovaz, from which we derive a majority of our revenues. Additionally, we purchase certain raw materials used in our products from a limited number of suppliers, including a single supplier for certain key ingredients.
Non-monetary long-lived assets primarily consist of property and equipment, goodwill and intangible assets. The following table summarizes non-monetary long-lived assets by geographic region as of
December 31, 2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived Assets by Geographic Region:
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
27,761
|
|
|
$
|
116,536
|
|
|
$
|
42,021
|
|
France
|
|
1,365
|
|
|
2,257
|
|
|
2,524
|
|
Ireland
|
|
6,028
|
|
|
1,360
|
|
|
202
|
|
Total
|
|
$
|
35,154
|
|
|
$
|
120,153
|
|
|
$
|
44,747
|
|
NOTE
22
:
Related Party Transactions
In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield Capital L.P (“Deerfield”), a significant shareholder of the Company. At December 31, 2018, the remaining consideration obligation for this transaction consisted of commitments to make earnout payments to Breaking Stick of
20%
of any gross profit generated by certain Éclat products (the “Products”). Breaking Stick is majority owned by Deerfield, with a minority interest owned by certain current and former employees. The Company entered into a Security Agreement dated March 13, 2012 with Breaking Stick, whereby Breaking Stick was granted a security interest in various tangible and intangible assets related to the Products to secure the obligations of Éclat and Avadel US Holdings, Inc., including the full and prompt payment of royalties to Breaking Stick under the Royalty Agreement.
As part of a February 2013 debt financing transaction conducted with Deerfield Management, Éclat entered into a Royalty Agreement with Horizon Santé FLML, Sarl and Deerfield Private Design Fund II, L.P., both affiliates of the Deerfield Entities (together, “Deerfield PDF/Horizon”). The Royalty Agreement provides for the Company to pay Deerfield PDF/Horizon
1.75%
of the net sales of the Products sold by the Company and any of our affiliates until
December 31, 2024
, with royalty payments
paid in arrears for each calendar quarter during the term of the Royalty Agreement. The Company has also entered into a Security Agreement dated February 4, 2013 with Deerfield PDF/Horizon, whereby Deerfield PDF/Horizon was granted a security interest in the various tangible and intangible assets related to the Products to secure the obligations of Éclat and Avadel US Holdings, Inc., including the full and prompt payment of royalties to Deerfield PDF/Horizon under the Royalty Agreement.
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund (“Broadfin”), the Company also entered into a Royalty Agreement with Broadfin, a significant shareholder of the Company, dated as of December 3, 2013 (the “Broadfin Royalty Agreement”). Pursuant to the Broadfin Royalty Agreement, the Company is required to pay a royalty of
0.834%
on the net sales of certain products sold by the Company and any of our affiliates until
December 31, 2024
with royalty payments paid in arrears for each calendar quarter during the term of the Royalty Agreement. The Company has also entered into a Security Agreement dated December 3, 2013 with Broadfin, whereby Broadfin was granted a security interest in the various tangible and intangible assets related to the Products to secure the obligations of Éclat and Avadel US Holdings, Inc., including the full and prompt payment of royalties to Broadfin under the Royalty Agreement.
The Company entered into an agreement dated February 5, 2016 to acquire FSC Holdings, LLC (“FSC”), a specialty pharmaceutical company dedicated to providing innovative solutions to unmet medical needs for pediatric patients, from Deerfield CSF, LLC, a Deerfield Management company (“Deerfield”), a related party. Under the terms of the acquisition, which was completed on February 8, 2016, the Company was to pay
$1,050
annually for
five
years with a final payment in January 2021 of
$15,000
for a total of
$20,250
to Deerfield for all of the equity interests in FSC. The Company will also pay Deerfield a
15%
royalty per annum on net sales of the current FSC products, up to
$12,500
for a period not exceeding
ten
years. These obligations were assumed by Cerecor in connection with the divestiture of the Company’s pediatric products on February 16, 2018. In connection with the divestiture, the Company provided their guarantee in favor of Deerfield and in return, Armistice Capital Master Fund, Inc., the majority shareholder of Cerecor, guaranteed to the Company the payment by Cerecor of the Assumed Obligations mentioned in
Note
16
: Divestiture of the Pediatric Assets.
See
Note 16
for further discussion around the divestiture.
NOTE
23
:
Subsequent Events
Corporate Restructuring
. In February 2019, Avadel announced a corporate restructuring in order to focus efforts and resources on the clinical development of FT218. In conjunction with the restructuring, Avadel will reduce its workforce by more than 50%, and Specialty Pharma made a voluntary filing for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on February 6, 2019. As noted above, Specialty Pharma is a special-purpose entity and wholly-owned subsidiary responsible solely for the sales, marketing and distribution of
Noctiva
. These restructuring actions were taken to exit
Noctiva
™ quickly and efficiently, and are not expected to materially impact any other aspect of the Company’s business, including the ability to operate its sterile injectables hospital business, complete the FT218 Phase 3 clinical trial, and complete development of the Company’s fourth UMD product. The Company estimates that it will incur approximately $10 to $15 million of one-time pre-tax charges for severance and other costs related to the restructuring.
For the years ended December 31, 2018 and 2017, the Company generated sales of
$1,204
and
$0
, respectively, and incurred selling, general and administrative expenses of
$62,268
and
$13,536
, respectively and research and development expenses of
$2,782
and
$1,688
, respectively, related to the Noctiva product.