NOTES TO THE UNAUDITED CONDENSED 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 an emerging biopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in narcolepsy patients. FT218 uses our Micropump drug-delivery technology. In addition, we have three approved commercial products developed under our unapproved marketed drug (“UMD”) program, Akovaz, Bloxiverz and Vazculep, and a fourth approved product, Nouress, which are sterile injectable drugs used in the hospital setting.
We are primarily focused on the development and potential United States (“U.S.”) Food and Drug Administration (“FDA”) approval of FT218. In addition, we continue to market and distribute our current approved hospital products portfolio and, pending resolution of the existing patent infringement claim (as described below), we plan to commercialize Nouress. Outside of our product candidate and our existing commercial products, we continue to evaluate opportunities to expand our product portfolio.
FT218 (Micropump sodium oxybate)
FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug- delivery technology for the treatment of EDS and cataplexy in patients suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in Europe and the United States as a twice-nightly formulation indicated for the treatment of EDS and cataplexy in patients with narcolepsy. In December 2019, we completed patient enrollment of our Phase 3 REST-ON clinical trial of FT218 to assess the safety and efficacy of a once-nightly formulation of FT218 for the treatment of EDS and cataplexy in patients suffering from narcolepsy and on April 27, 2020, we announced topline results from our Phase 3 REST-ON clinical trial of FT218.
Existing Commercial Products
To date, we have received FDA approvals for three previously unapproved prescription drugs:
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•
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Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz was approved by the FDA in May 2013 and was launched in July 2013. Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery. Bloxiverz was the first FDA-approved version of neostigmine methylsulfate. Today, neostigmine is one of the two most frequently used products for the reversal of the effects of other agents used for neuromuscular blocks.
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•
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Vazculep (phenylephrine hydrochloride injection) - Vazculep was approved by the FDA in June 2014 and was launched in October 2014. Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
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•
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Akovaz (ephedrine sulfate injection) - Akovaz, was approved by the FDA in April 2016 and was launched in August 2016. Akovaz was the first FDA approved formulation of ephedrine sulfate, 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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Nouress
In December 2019, we received FDA approval for Nouress (cysteine hydrochloride injection), a sterile injectable product for use in the hospital setting, and currently have two patents covering that product. Several additional patent applications for Nouress are pending with the U.S. Patent and Trademark Office (“USPTO”). In light of the recently filed patent suit by Exela Pharma Sciences, LLC, we are currently evaluating the timing and process for a commercial launch of Nouress in the U.S. See Note 18: Commitments and Contingencies.
We were 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, U.S.
Basis of Presentation. The unaudited condensed consolidated balance sheet as of March 31, 2020, which is derived from the prior year 2019 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on March 16, 2020.
The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.
On February 6, 2019, our indirect wholly-owned subsidiary, Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”), filed a voluntary petition for reorganization under Chapter 11 of the United States (“U.S.”) Code (the “Bankruptcy Code”). in the U.S. District Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), Case No. 19-10248. Specialty Pharma is operating and managing its business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. As a result of Specialty Pharma’s voluntary bankruptcy filing on February 6, 2019, we no longer controlled the operations of Specialty Pharma; therefore, we deconsolidated Specialty Pharma effective with the bankruptcy filing and the Company recorded its investment in Specialty Pharma under the cost method. See Note 3: Subsidiary Bankruptcy and Deconsolidation. Our results of operations for the period January 1, 2019 through February 6, 2019 include the results of Specialty Pharma prior to its February 6, 2019 voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Revenue. Revenue includes sales of pharmaceutical products.
Product Sales
We sell products primarily through wholesalers and considers these wholesalers to be our customers. Revenue from product sales is recognized when the customer obtains control of our product and our performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales are subject to a variety of price adjustments 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.
For a complete discussion of the accounting for net product revenue, see Note 4: Revenue Recognition.
Accounts Receivable. Accounts receivable are stated at amounts invoiced and certain other gross to net variable consideration deductions. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, payment history, current and forecast economic conditions and other relevant factors. A majority of our accounts receivable are due from four significant customers.
NOTE 2: Newly Issued Accounting Standards
Recent Accounting Guidance Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The FASB’s amendments primarily impact ASC 740, Income Taxes, and may impact both interim and annual reporting periods. ASU 2019-12 will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the impact of adopting ASU 2019-12.
Recently Adopted Accounting Guidance
In August 2018, 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. We adopted ASU 2018-13 in the first quarter of 2020.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).” This standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. The standard limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 is effective for the Company for fiscal years beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early adoption is permitted. We adopted the provisions of ASU 2016-13 in the first quarter of 2020. Adoption of the new standard did not have any impact on our unaudited condensed consolidated financial statements.
NOTE 3: Subsidiary Bankruptcy and Deconsolidation
Bankruptcy Filing and Deconsolidation
As a result of Specialty Pharma’s bankruptcy filing on February 6, 2019, Avadel has ceded authority for managing the business to the Bankruptcy Court, and Avadel management cannot carry on Specialty Pharma’s activities in the ordinary course of business without Bankruptcy Court approval. Avadel manages the day-to-day operations of Specialty Pharma but does not have discretion to make significant capital or operating budgetary changes or decisions and purchase or sell significant assets, as Specialty Pharma’s material decisions are subject to review by the Bankruptcy Court. For these reasons, we concluded that Avadel has lost control of Specialty Pharma, and no longer has significant influence over Specialty Pharma during the pendency of the bankruptcy. Therefore, we deconsolidated Specialty Pharma effective with the filing of the Chapter 11 bankruptcy in February 2019.
In order to deconsolidate Specialty Pharma, the carrying values of the assets and certain liabilities of Specialty Pharma were removed from our unaudited condensed consolidated balance sheet as of February 5, 2019, and we recorded our investment in Specialty Pharma at its estimated fair value of $0. As the estimated fair value of our investment in Specialty Pharma was lower than its net book value immediately prior to the deconsolidation, we recorded a non-cash charge of approximately $2,673 for the three months ended March 31, 2019 associated with the deconsolidation of Specialty Pharma. Subsequent to the deconsolidation of Specialty Pharma, we are accounting for our investment in Specialty Pharma using the cost method of accounting because Avadel does not exercise significant influence over the operations of Specialty Pharma due to the Chapter 11 filing.
On April 26, 2019, Specialty Pharma sold its intangible assets and remaining inventory to an unaffiliated third party in exchange for aggregate cash proceeds of approximately $250, pursuant to an order approving such sale which was issued by the Bankruptcy Court on April 15, 2019. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business.
On July 2, 2019, Specialty Pharma was made aware of a $50,695 claim made by the Internal Revenue Service (IRS) as part of the bankruptcy claims process against Specialty Pharma. On October 2, 2019 the IRS amended the original claim filed in July, reducing the claim to $9,302. Specialty Pharma files its U.S. federal tax return as a member of the Company’s consolidated U.S. tax group. As such, the IRS claim was filed against Specialty Pharma in the bankruptcy proceedings due to IRS tax law requirements for joint and several liability of all members in a consolidated U.S. tax group. Both Specialty Pharma and the Company disagreed with the merits of the amended IRS claim, and Specialty Pharma entered into negotiations regarding the treatment of the claim in the bankruptcy case. On November 19, 2019, Specialty Pharma and the IRS resolved their dispute, subject to Bankruptcy Court approval in Specialty Pharma's Chapter 11 plan, and without prejudice to the claims, rights and defenses of the IRS and other Avadel entities outside of the bankruptcy case. The resolution provided for allowance of the IRS claim as a priority claim but for the IRS to receive a distribution of not less than $125 from Specialty Pharma following confirmation of its chapter 11 plan, leaving a substantial amount of the bankruptcy estate for general unsecured creditors.
Debtor in Possession (“DIP”) Financing – Related Party Relationship
In connection with the bankruptcy filing, Specialty Pharma entered into a Debtor in Possession Credit and Security Agreement with Avadel US Holdings (“DIP Credit Agreement”) dated as of February 8, 2019, in an aggregate amount of up to $2,700, of which the funds are to be used by Specialty Pharma solely to fund operations through February 6, 2020. As of March 31, 2020, the Company had funded $407 under the DIP Credit Agreement. As the Company has assessed that it is unlikely that Specialty Pharma will pay back the loan to Avadel and the $407 has been recorded as part of the loss on deconsolidation of subsidiary within the unaudited condensed consolidated statements of loss for the three months ended March 31, 2019.
NOTE 4: Revenue Recognition
The Company generates revenue primarily from the sale of pharmaceutical products to customers.
Product Sales
We sell products primarily through wholesalers and considers these wholesalers to be our customers. Revenue from product sales is recognized when the customer obtains control of our product and our performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales are subject to a variety of price adjustments 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 and other judgments and analysis.
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.
Disaggregation of revenue
The Company’s 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 17: Revenue by Product.
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.
There were no material deferred contract costs at March 31, 2020.
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 the first quarter of 2020 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.
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 5: Fair Value Measurement
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:
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•
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Income approach, which is based on the present value of a future stream of net cash flows.
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|
•
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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:
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•
|
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.
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|
•
|
Level 3 - Unobservable inputs that reflect estimates and assumptions.
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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 unaudited condensed consolidated balance sheets:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
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|
As of December 31, 2019
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Fair Value Measurements:
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|
Level 1
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|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (see Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,404
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market and mutual funds
|
|
28,472
|
|
|
—
|
|
|
—
|
|
|
38,799
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
|
—
|
|
|
4,013
|
|
|
—
|
|
|
—
|
|
|
4,098
|
|
|
—
|
|
Government securities - U.S.
|
|
—
|
|
|
6,085
|
|
|
—
|
|
|
—
|
|
|
5,446
|
|
|
—
|
|
Other fixed-income securities
|
|
—
|
|
|
1,407
|
|
|
—
|
|
|
—
|
|
|
1,637
|
|
|
—
|
|
Total assets
|
|
$
|
28,472
|
|
|
$
|
11,505
|
|
|
$
|
—
|
|
|
$
|
43,203
|
|
|
$
|
11,181
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable (see Note 9)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,050
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,327
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,050
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,327
|
|
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 periods ended March 31, 2020 and December 31, 2019, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three month periods ended March 31, 2020 and 2019, respectively, 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 March 31, 2020 of $123,258, which is the same as book value.
See Note 10: Long-Term Debt for additional information regarding our debt obligations.
NOTE 6: Marketable Securities
The Company has investments in equity and available-for-sale debt securities which are recorded at fair market value. The change in the fair value of equity investments is recognized in our unaudited condensed consolidated statements of loss and the change in the fair value of available-for-sale debt investments is recorded as other comprehensive loss in shareholders’ equity (deficit), net of income tax effects. As of March 31, 2020, we considered any decreases in fair value on our marketable securities to be driven by factors other than credit risk, including market risk.
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 March 31, 2020 and December 31, 2019, respectively:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Money market and mutual funds
|
|
$
|
28,370
|
|
|
$
|
410
|
|
|
$
|
(308
|
)
|
|
$
|
28,472
|
|
Corporate bonds
|
|
4,074
|
|
|
33
|
|
|
(94
|
)
|
|
4,013
|
|
Government securities - U.S.
|
|
5,777
|
|
|
308
|
|
|
—
|
|
|
6,085
|
|
Other fixed-income securities
|
|
1,418
|
|
|
7
|
|
|
(18
|
)
|
|
1,407
|
|
Total
|
|
$
|
39,639
|
|
|
$
|
758
|
|
|
$
|
(420
|
)
|
|
$
|
39,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,234
|
|
|
$
|
170
|
|
|
$
|
—
|
|
|
$
|
4,404
|
|
Money market and mutual funds
|
|
38,028
|
|
|
771
|
|
|
—
|
|
|
38,799
|
|
Corporate bonds
|
|
4,021
|
|
|
77
|
|
|
—
|
|
|
4,098
|
|
Government securities - U.S.
|
|
5,341
|
|
|
110
|
|
|
(5
|
)
|
|
5,446
|
|
Other fixed-income securities
|
|
1,614
|
|
|
23
|
|
|
—
|
|
|
1,637
|
|
Total
|
|
$
|
53,238
|
|
|
$
|
1,151
|
|
|
$
|
(5
|
)
|
|
$
|
54,384
|
|
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We reflect these gains and losses as a component of investment and other income in the accompanying unaudited condensed consolidated statements of loss.
We recognized gross realized gains of $276 and $94 for the three months ended March 31, 2020, and 2019, respectively. These realized gains were offset by realized losses of $872 and $147 for the three months ended March 31, 2020, and 2019, respectively.
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale debt securities and classified by the contractual maturity date of the securities as of March 31, 2020:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
Marketable Debt Securities:
|
|
Less than 1 Year
|
|
1-5 Years
|
|
5-10 Years
|
|
Greater than 10 Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
592
|
|
|
$
|
3,030
|
|
|
$
|
391
|
|
|
$
|
—
|
|
|
$
|
4,013
|
|
Government securities - U.S.
|
|
—
|
|
|
5,269
|
|
|
329
|
|
|
487
|
|
|
6,085
|
|
Other fixed-income securities
|
|
50
|
|
|
1,357
|
|
|
—
|
|
|
—
|
|
|
1,407
|
|
Total
|
|
$
|
642
|
|
|
$
|
9,656
|
|
|
$
|
720
|
|
|
$
|
487
|
|
|
$
|
11,505
|
|
The Company has classified our investment in available-for-sale marketable debt securities as current assets in the unaudited condensed 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.
The following table shows the gross unrealized losses and fair value of our available-for-sale debt securities at March 31, 2020. The unrealized losses in the table below are driven by factors other than credit risk and have been in a unrealized loss position for less than one year. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases.
|
|
|
|
|
|
|
|
|
|
Marketable Debt Securities:
|
|
Fair Value
|
|
Unrealized Losses
|
|
|
|
|
|
Corporate bonds
|
|
$
|
2,442
|
|
|
$
|
94
|
|
Other fixed-income securities
|
|
694
|
|
|
18
|
|
Total
|
|
$
|
3,136
|
|
|
$
|
112
|
|
NOTE 7: Inventories
The principal categories of inventories, net reserves of $348 and $914 at March 31, 2020 and December 31, 2019, respectively, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Inventory:
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Finished goods
|
|
$
|
2,845
|
|
|
$
|
3,020
|
|
Raw materials
|
|
678
|
|
|
550
|
|
Total
|
|
$
|
3,523
|
|
|
$
|
3,570
|
|
NOTE 8: Goodwill and Intangible Assets
The Company’s amortizable and unamortizable intangible assets at March 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Goodwill and Intangible Assets:
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets - Acquired developed technology - Vazculep
|
|
$
|
12,061
|
|
|
$
|
(11,451
|
)
|
|
$
|
610
|
|
|
$
|
12,061
|
|
|
$
|
(11,248
|
)
|
|
$
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable intangible assets - Goodwill
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
The Company recorded amortization expense related to amortizable intangible assets of $203 and $201 for the three months ended March 31, 2020 and 2019, respectively.
Our amortizable intangible asset is amortized over its estimated useful life, which is seven years, using the straight-line method. At March 31, 2020, total amortization of intangible assets for the year ended December 31, 2020 will be $813. There is no estimated amortization during the years ended December 31, 2021-2024 as the acquired developed technology, Vazculep, will be fully amortized at December 31, 2020.
NOTE 9: Contingent Consideration Payable
Contingent consideration payable and related activity are reported at fair value and consist of the following at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the three months ended
March 31, 2020
|
|
|
|
|
|
|
|
Changes in Fair Value of Contingent Consideration Payable
|
|
|
Contingent Consideration Payable:
|
Balance,
December 31, 2019
|
|
Payments
|
|
Operating Expense
|
|
Other
Expense
|
|
Balance, March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out payments - Éclat Pharmaceuticals (a) (d)
|
$
|
15,472
|
|
|
$
|
(1,774
|
)
|
|
$
|
2,478
|
|
|
$
|
—
|
|
|
$
|
16,176
|
|
Financing-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement - Deerfield (b) (d)
|
1,251
|
|
|
(197
|
)
|
|
—
|
|
|
188
|
|
|
1,242
|
|
Royalty agreement - Broadfin (c) (d)
|
604
|
|
|
(94
|
)
|
|
—
|
|
|
122
|
|
|
632
|
|
Total contingent consideration payable
|
17,327
|
|
|
$
|
(2,065
|
)
|
|
$
|
2,478
|
|
|
$
|
310
|
|
|
18,050
|
|
Less: current portion
|
(5,554
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,855
|
)
|
Long-term contingent consideration payable
|
$
|
11,773
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,195
|
|
(a) 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 the Company’s former CEO, and certain other 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.
|
|
(b)
|
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 is obligated to 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 Éclat products.
|
|
(c)
|
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a former related party and shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company is obligated to pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024.
|
|
|
(d)
|
Deerfield and Broadfin Healthcare Master Trust disposed of their 2023 Notes and ordinary shares in the Company during the three months ended March 31, 2020 and are no longer considered related parties.
|
At March 31, 2020, the fair value of each contingent consideration payable listed in (a), (b) and (c) 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 14%. 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 contingent consideration payables, resulting primarily from management’s revision of key assumptions, will be recorded in the unaudited condensed consolidated statements of loss in the line items entitled “Changes in fair value of contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of contingent consideration payable” for items (b) and (c) above. See Note 1: Summary of Significant Accounting Policies under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements in Part II, Item 8 of the Company’s 2019 Annual Report on Form 10-K 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 (b) and (c) above. These financing-related liabilities are recorded at fair market value on the unaudited condensed consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – change in fair value of contingent consideration payable” on the unaudited condensed consolidated statements of loss.
The following table summarizes changes to the contingent consideration payables, a recurring Level 3 measurement, for the three-month periods ended March 31, 2020 and 2019, respectively:
|
|
|
|
|
|
Contingent Consideration Payable Rollforward:
|
|
Balance
|
|
|
|
Balance, December 31, 2018
|
|
$
|
28,840
|
|
Payments of contingent consideration
|
|
(3,688
|
)
|
Fair value adjustments (1)
|
|
2,441
|
|
Balance, March 31, 2019
|
|
$
|
27,593
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
17,327
|
|
Payments of contingent consideration
|
|
(2,065
|
)
|
Fair value adjustments (1)
|
|
2,788
|
|
Balance, March 31, 2020
|
|
$
|
18,050
|
|
(1) Fair value adjustments are reported as changes in fair value of contingent consideration and other expense - changes in fair value of contingent consideration payable in the unaudited condensed consolidated statements of loss.
NOTE 10: Long-Term Debt
Long-term debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Principal amount of 4.50% exchangeable senior notes due 2023
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Less: debt discount and issuance costs, net
|
|
(20,492
|
)
|
|
(22,064
|
)
|
Net carrying amount of liability component
|
|
123,258
|
|
|
121,686
|
|
Other debt
|
|
—
|
|
|
—
|
|
Subtotal
|
|
123,258
|
|
|
121,686
|
|
Less: current maturities
|
|
—
|
|
|
—
|
|
Long-term debt
|
|
$
|
123,258
|
|
|
$
|
121,686
|
|
|
|
|
|
|
Equity component:
|
|
|
|
|
Equity component of exchangeable notes, net of issuance costs
|
|
$
|
(26,699
|
)
|
|
$
|
(26,699
|
)
|
NOTE 11: Income Taxes
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes significant business tax provisions. In particular, the CARES Act modified the rules associated with net operating losses (“NOLs”). Under the temporary provisions of CARES Act, NOL carryforwards and carrybacks may offset 100% of taxable income for taxable years beginning before 2021. In addition, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. During the three months ended March 31, 2020, the income tax benefit includes a discrete tax benefit of $9,124 as a result of our ability under the CARES Act to carry back NOLs incurred to periods when the statutory U.S. Federal tax rate was 35% versus our current U.S. Federal tax rate of 21%.
The income tax benefit was $9,510 for the three months ended March 31, 2020 resulting in an effective tax rate of 91.7%. The income tax benefit was $374 for the three months ended March 31, 2019 resulting in an effective tax rate of 2.7%. The net increase in the effective income tax rate for the three months ended March 31, 2020, as compared to the same period in 2019, is primarily due to the discrete tax benefits recognized under the CARES Act as described above, favorable income tax benefits from the U.S. Orphan Drug and Research & Development Tax Credit and agreement with the IRS in the first quarter of 2020 on audit adjustments resulting from the U.S. Federal Income Tax audit of the tax years 2015, 2016 and 2017, all of which was recorded during the three months ended March 31, 2020.
During the three months ended March 31, 2020, the Company substantially completed the 2015 through 2017 U.S. Federal Tax Audit. Completion of the audit resulted in an assessment of $1,937 for the 2015 through 2017 U.S. Federal Tax Returns compared to the IRS Claims of $50,695 made on July 2, 2019 and the updated IRS Claims of $9,302 on October 2, 2019 made as part of the Specialty Pharma bankruptcy proceedings, which at this time does not include interest and penalties. The Company expects interest and penalties to be approximately $300. While there are still additional approval and administrative procedures to complete, the Company expects the completion of the 2015 through 2017 U.S. Federal Tax Audit to be completed by the quarter ended September 30, 2020. The audit of the 2017 French tax return was also completed during the three months ended March 31, 2020 with no material changes.
NOTE 12: Other Assets and Liabilities
Various other assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Valued-added tax recoverable
|
|
$
|
257
|
|
|
$
|
1,051
|
|
Prepaid and other expenses
|
|
1,933
|
|
|
2,116
|
|
Guarantee from Armistice
|
|
456
|
|
|
454
|
|
Income tax receivable
|
|
536
|
|
|
536
|
|
Other
|
|
155
|
|
|
107
|
|
Total
|
|
$
|
3,337
|
|
|
$
|
4,264
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Assets:
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
37,860
|
|
|
$
|
29,427
|
|
Long-term deposits
|
|
1,477
|
|
|
1,477
|
|
Guarantee from Armistice
|
|
1,252
|
|
|
1,367
|
|
Right of use assets at contract manufacturing organizations
|
|
6,362
|
|
|
6,428
|
|
Other
|
|
573
|
|
|
575
|
|
Total
|
|
$
|
47,524
|
|
|
$
|
39,274
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Accrued compensation
|
|
$
|
1,724
|
|
|
$
|
3,944
|
|
Accrued social charges
|
|
192
|
|
|
592
|
|
Accrued restructuring (see Note 14)
|
|
1,705
|
|
|
2,949
|
|
Customer allowances
|
|
6,200
|
|
|
6,470
|
|
Accrued contract research organization charges
|
|
1,802
|
|
|
2,098
|
|
Accrued contract manufacturing organization costs
|
|
426
|
|
|
735
|
|
Other
|
|
2,809
|
|
|
3,022
|
|
Total
|
|
$
|
14,858
|
|
|
$
|
19,810
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities:
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Customer allowances
|
|
$
|
1,210
|
|
|
$
|
981
|
|
Unrecognized tax benefits
|
|
3,143
|
|
|
6,465
|
|
Guarantee to Deerfield
|
|
1,256
|
|
|
1,372
|
|
Other
|
|
55
|
|
|
55
|
|
Total
|
|
$
|
5,664
|
|
|
$
|
8,873
|
|
NOTE 13: Equity Transactions
Shelf Registration Statement on Form S-3
In February 2020, we filed with the SEC a new shelf registration statement on Form S-3 (the 2020 Shelf Registration Statement) (File No. 333-236258) that allows issuance and sale by us, from time to time, of:
|
|
(a)
|
up to $250,000 in aggregate of ordinary shares, nominal value US$0.01 per share (the “Ordinary Shares”), each of which may be represented by American Depositary Shares (“ADSs”), preferred shares, nominal value US$0.01 per share (the “Preferred Shares”), debt securities (the “Debt Securities”), warrants to purchase Ordinary Shares, ADSs, Preferred Shares and/or Debt Securities (the “Warrants”), and/or units consisting of Ordinary Shares, ADSs, Preferred Shares, one or more Debt Securities or Warrants in one or more series, in any combination, pursuant to the terms of the 2020 Shelf Registration Statement, the base prospectus contained in the 2020 Shelf Registration Statement (the “Base Prospectus”), and any amendments or supplements thereto (together, the “Securities”); including
|
|
|
(b)
|
up to $50,000 of ADSs that may be issued and sold from time to time pursuant to the terms of an Open Market Sale AgreementSM (“the Sales Agreement”), entered into with Jefferies LLC on February 4, 2020 (the “Sales Agreement”), the 2020 Shelf Registration Statement, the Base Prospectus and the terms of the sales agreement prospectus contained in the 2020 Shelf Registration Statement.
|
The transactions costs associated with the 2020 Shelf Registration Statement of approximately $340 were capitalized as a prepaid asset.
February 2020 Private Placement
On February 21, 2020, we announced that we entered into a definitive agreement for the sale of our ADSs and Series A Non-Voting Convertible Preferred Shares (“Series A Preferred”) in a private placement to a group of institutional accredited investors.
The private placement resulted in gross proceeds of approximately $65,000 before deducting placement agent and other offering expenses, which resulted in net proceeds of $60,733.
Pursuant to the terms of the private placement, we issued 8,680 ADSs and 488 shares of Series A Preferred at a price of $7.09 per share, priced at-the-market under Nasdaq rules. Each share of non-voting Series A Preferred is convertible into one ADS, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.99% of the total number of Avadel ADSs outstanding. The closing of the private placement occurred on February 25, 2020.
Issuance costs of $4,267 were recorded as a reduction of additional paid-in capital.
May 2020 Public Offering
In connection with the shelf registration statement described above, on April 28, 2020 we announced the pricing of an underwritten public offering of 11,630 ordinary shares, in the form of American Depositary Shares (“ADSs”) at a price to the public of $10.75 per ADS. Each ADS represents the right to receive one Ordinary Share. All of the ADSs are being offered by Avadel. The gross proceeds to us from the offering were approximately $125,000, before deducting underwriting discounts and commissions and estimated offering expenses.
In connection with the public offering, we granted the underwriters a 30-day option to purchase up to an additional 1,745 ADSs at the public offering price less the underwriting discounts and commissions. The offering closed on May 1, 2020. See Note 19: Subsequent Events.
NOTE 14: Restructuring Costs
2019 French Restructuring
During the second quarter of 2019, the Company initiated a plan to substantially reduce all of its workforce at its Vénissieux, France site (“2019 French Restructuring”). This reduction was part of an effort to align the Company’s cost structure with our ongoing and future planned projects. The reduction in workforce has been substantially completed as of March 31, 2020. Restructuring charges associated with this plan recognized during the three months ended March 31, 2020 were immaterial.
The following table sets forth activities for the Company’s cost reduction plan obligations for the three months ended March 31, 2020:
|
|
|
|
|
|
2019 French Restructuring Obligation:
|
|
2020
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
1,922
|
|
Charges for employee severance, benefits and other costs
|
|
171
|
|
Payments
|
|
(1,294
|
)
|
Foreign currency impact
|
|
(34
|
)
|
Balance of restructuring accrual at March 31,
|
|
$
|
765
|
|
The 2019 French Restructuring liabilities of $765 are included in the unaudited condensed consolidated balance sheet in accrued expenses at March 31, 2020, respectively.
2019 Corporate Restructuring
During the first quarter of 2019, the Company announced a plan to reduce its Corporate workforce by more than 50% (“2019 Corporate Restructuring”). The reduction in workforce is primarily a result of the exit of Noctiva during the first quarter of 2019 (see Note 3: Subsidiary Bankruptcy and Deconsolidation), as well as an effort to better align the Company’s remaining cost structure at our U.S. and Ireland locations with our ongoing and future planned projects. The reduction in workforce was substantially complete at the end of March 31, 2020, and has resulted in employee severance, benefits and other costs of up to approximately $3,000, which are likely to be recognized through May 31, 2020. The restructuring charges associated with this plan recognized during the three months ended March 31, 2020 were immaterial, compared to $1,398 of restructuring charges recognized during the three months ended March 31, 2019.
The following table sets forth activities for the Company’s cost reduction plan obligations for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
2019 Corporate Restructuring Obligation:
|
|
2020
|
|
2019
|
|
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
1,080
|
|
|
$
|
—
|
|
Charges for employee severance, benefits and other costs
|
|
62
|
|
|
1,398
|
|
Payments
|
|
(202
|
)
|
|
(754
|
)
|
Balance of restructuring accrual at March 31,
|
|
$
|
940
|
|
|
$
|
644
|
|
The 2019 Corporate Restructuring liabilities of $940 are included in the unaudited condensed consolidated balance sheet in accrued expenses at March 31, 2020.
NOTE 15: Net Loss Per Share
Basic net loss per share is calculated by dividing net loss 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, diluted net loss per share would be calculated assuming the impact of the conversion of the 2023 Notes, the conversion of our preferred shares, the exercise of outstanding equity compensation awards, and ordinary shares expected to be issued under our employee stock purchase plan (“ESPP”).
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, restricted stock units, preferred shares 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 per share, together with the related shares outstanding in thousands is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Net Loss Per Share:
|
|
2020
|
|
2019
|
|
|
|
|
|
Net loss
|
|
$
|
(865
|
)
|
|
$
|
(13,018
|
)
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
Basic shares
|
|
41,057
|
|
|
37,354
|
|
Effect of dilutive securities—employee and director equity awards outstanding, preferred shares and 2023 Notes
|
|
—
|
|
|
—
|
|
Diluted shares
|
|
41,057
|
|
|
37,354
|
|
|
|
|
|
|
Net loss per share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.35
|
)
|
Net loss per share - diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.35
|
)
|
Potential common shares of 15,858 and 19,762 were excluded from the calculation of weighted average shares for the three months ended March 31, 2020 and 2019, respectively, because their effect was considered to be anti-dilutive. For the three months ended March 31, 2020 and 2019, the effects of dilutive securities were entirely excluded from the calculation of net loss per share as a net loss was reported in this period.
NOTE 16: Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019, respectively, net of tax effects:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Accumulated Other Comprehensive Loss:
|
|
2020
|
|
2019
|
|
|
|
|
|
Foreign currency translation adjustment:
|
|
|
|
|
Beginning balance
|
|
$
|
(23,738
|
)
|
|
$
|
(23,621
|
)
|
Net other comprehensive loss
|
|
(177
|
)
|
|
(161
|
)
|
Balance at March 31,
|
|
$
|
(23,915
|
)
|
|
$
|
(23,782
|
)
|
|
|
|
|
|
Unrealized gain (loss) on marketable debt securities, net
|
|
|
|
|
Beginning balance
|
|
$
|
932
|
|
|
$
|
205
|
|
Net other comprehensive (loss) income, net of ($49) and ($18) tax, respectively
|
|
(644
|
)
|
|
374
|
|
Balance at March 31,
|
|
$
|
288
|
|
|
$
|
579
|
|
Accumulated other comprehensive loss at March 31,
|
|
$
|
(23,627
|
)
|
|
$
|
(23,203
|
)
|
The effect on the Company’s unaudited condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive loss was immaterial for all periods presented.
NOTE 17: Revenue by Product
The Company has determined that it operates in one segment, the development and commercialization of pharmaceutical products, including controlled-release therapeutic products based on its proprietary polymer based technology. The Company’s Chief Operating Decision Maker is the CEO. The 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:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Revenues by Product:
|
|
2020
|
|
2019
|
|
|
|
|
|
Bloxiverz
|
|
$
|
1,401
|
|
|
$
|
2,568
|
|
Vazculep
|
|
5,514
|
|
|
9,473
|
|
Akovaz
|
|
5,349
|
|
|
3,792
|
|
Other
|
|
(21
|
)
|
|
604
|
|
Total product sales
|
|
$
|
12,243
|
|
|
$
|
16,437
|
|
NOTE 18: Commitments and Contingencies
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 March 31, 2020 and December 31, 2019, 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 unaudited condensed consolidated financial position, results of operations, cash flows or liquidity.
Litigation Related to Noctiva
Note 3: Subsidiary Bankruptcy and Deconsolidation briefly describes the Chapter 11 bankruptcy case which our subsidiary Specialty Pharma commenced on February 6, 2019, and which on April 26, 2019 resulted in the bankruptcy court-approved sale of all of Specialty Pharma’s intangible assets and inventory to an unaffiliated third party. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business. During the pendency of the bankruptcy case, all pending litigation against Specialty Pharma is automatically stayed and any new litigation against Specialty Pharma is precluded unless the bankruptcy court orders otherwise. Below are descriptions of a litigation to which Specialty Pharma is a party and a contract dispute involving Specialty Pharma, both of which matters are subject to the automatic stay during the bankruptcy case.
Ferring Litigation. Some of the patents covering the Noctiva product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, Ferring B.V. and Ferring International Center S.A., 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. Ferring initiated this litigation initially against Serenity Pharmaceuticals, LLC (“Serenity”) (the licensor of the Noctiva Patents) and Reprise Biopharmaceutics, LLC (“Reprise”) on April 28, 2017. Avadel subsequently joined the litigation on June 28, 2018, shortly after Ferring received FDA approval for Nocdurna. In this litigation, filed in the United States District Court for the Southern District of New York, 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 of Ferring’s “Nocdurna” trademark. Specialty Pharma, Serenity, and Reprise have defended this litigation, and have made 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 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. On May 15, 2019, that motion was denied due to a pending settlement of the litigation with respect to just Ferring and Specialty Pharma. On February 25, 2020, Ferring and Specialty Pharma jointly moved for bankruptcy court approval of a settlement agreement with respect to the claims alleged in the litigation. In accordance with the terms of the settlement agreement, promptly following bankruptcy court approval of the settlement agreement, the parties would dismiss with prejudice their respective claims against each other in the litigation. On March 13, 2020, the Bankruptcy Court entered an order approving the settlement with Ferring. Pursuant to the terms of the settlement, the parties are to dismiss their respective claims against each other in the District Court litigation in the Southern District of New York, with such dismissals to be effective concurrently. The joint dismissal has not yet been filed with District Court for the Southern District of New York.
Contract Dispute. On January 21, 2019, Serenity gave notice to Specialty Pharma of an alleged breach of the parties’ Noctiva license agreement. Serenity alleges 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.
Exela Litigation. On January 7, 2020, Exela filed a complaint against us and our subsidiary, Avadel Legacy, in the United States District for the District of Delaware. The complaint alleges infringement of a certain Exela patent related to its cysteine hydrochloride product. Exela is most notably seeking i) a declaratory judgment that the Nouress product infringes its patent, ii) an injunction (both preliminary and permanent) precluding the launch of Nouress, and iii) monetary damages (including enhanced damages, prejudgment interest and attorneys’ fees) in the event Nouress is commercially launched and found to infringe Exela’s patent. The current deadline for Avadel to respond to Exela’s complaint is May 29, 2020.
Material Commitments
Other than commitments disclosed in Note 16: Contingent Liabilities and Commitments to the Company’s audited consolidated financial statements included in Part II, Item 8 of the Company’s 2019 Annual Report on Form 10-K, 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 obligations which are disclosed in Note 10: Long-Term Debt and long-term contingent consideration payable as disclosed in Note 9: Contingent Consideration Payable, to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.
Guarantees
Deerfield Guarantee
The fair values of our guarantee to Deerfield and the guarantee received by us from Armistice largely offset and when combined are not material.
In connection with our February 2018 divestiture of our pediatric assets, we have guaranteed to Deerfield the 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. Given our explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee liability was $1,713 at March 31, 2020. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.
Armistice Guarantee
In connection with our February 2018 divestiture of the pediatric assets, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to us the FSC Product Royalties. The Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee asset was $1,708 at March 31, 2020. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.
Off-Balance Sheet Arrangements
As of March 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
NOTE 19: Subsequent Events
May 2020 Public Offering
On April 28, 2020, we announced the pricing of an underwritten public offering of 11,630 ordinary shares, in the form of ADSs at a price to the public of $10.75 per ADS. Each ADS represents the right to receive one ordinary share. The gross proceeds to us from the offering were approximately $125,000, before deducting underwriting discounts and commissions and estimated offering expenses.
In connection with the public offering, we granted the underwriters a 30-day option to purchase up to an additional 1,745 ADSs at the public offering price less the underwriting discounts and commissions. The offering closed on May 1, 2020.