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 controlled release drug-delivery technology.
We are primarily focused on the development and potential United States (“U.S.”) Food and Drug Administration (“FDA”) approval of FT218. Outside of our lead product candidate, we continue to evaluate opportunities to expand our product portfolio.
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.
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 U.S. 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. On July 13, 2020, we announced the dosing of the first patient of our open-label extension/switch study of FT218 as a potential treatment for EDS and cataplexy in patients with narcolepsy.
Previously Approved FDA Products
On June 30, 2020 (“Closing Date”), we announced the sale of our portfolio of sterile injectable drugs used in the hospital setting (the “Hospital Products”), including our three commercial products, Akovaz, Bloxiverz and Vazculep, as well as Nouress, which is approved by the FDA to Exela Sterile Medicines LLC (“Exela Buyer”) (the “Transaction”) pursuant to an asset purchase agreement between Avadel U.S. Holdings Inc., Avadel Legacy Pharmaceuticals, LLC, Exela Holdings, Inc. and the Exela Buyer (“Purchase Agreement”). Pursuant to the Purchase Agreement, Exela Buyer paid us $14,500 on the Closing Date and will pay an additional $27,500 in ten equal monthly installments which began in September 2020 for total aggregate consideration of $42,000. The following four FDA approved products were included in the sale of the hospital products:
•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.
•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.
•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.
•Nouress (cysteine hydrochloride injection) - Nouress was approved by the FDA in December 2019. Nouress is a sterile injectable product for use in the hospital setting, and two issued U.S. patents currently cover that product. Several additional patent applications for Nouress are pending with the U.S. Patent and Trademark Office (“USPTO”).
Basis of Presentation. The unaudited condensed consolidated balance sheet as of September 30, 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 U.S. (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 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.
Reclassifications
Certain reclassifications are made to prior year amounts whenever necessary to conform with the current year presentation. In Note 9: Goodwill and Intangible Assets, we presented the December 31, 2019 amortizable intangible assets - Acquired developed technology - Vazculep amount as total accumulated depreciation in this Form 10-Q as compared to showing year-to-date amortization in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on March 16, 2020.
Revenue. Prior to June 30, 2020, we generated revenue primarily from the sale of pharmaceutical products to customers, which we refer to as the Hospital Products. On June 30, 2020, we sold the Hospital Products. See Note 4: Disposition of the Hospital Products.
Product Sales
Prior to June 30, 2020, we sold products primarily through wholesalers and considered these wholesalers to be our customers. Revenue from product sales was recognized when the customer obtained control of our product and our performance obligations were met, which occurred typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales were subject to a variety of price adjustments in arriving at reported net product sales. These adjustments included 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 5: Revenue Recognition.
Accounts Receivable. Prior to the sale of the Hospital Products on June 30, 2020, 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. As of September 30, 2020, we have collected all of the accounts receivable outstanding as of June 30, 2020.
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.
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 $2,840 for the nine months ended September 30, 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. On November 19, 2019, Specialty Pharma and the IRS resolved their dispute, subject to the Bankruptcy Court’s approval of 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 50% of the proceeds, but in no event less than $125 from Specialty Pharma following confirmation of its disclosure statement and Chapter 11 plan of liquidation.
On July 24, 2020, Specialty Pharma sought bankruptcy court approval of a settlement agreement by and between it, Avadel US Holdings, Inc. and Serenity Pharmaceuticals, LLC (“Serenity”) (the “Serenity Settlement Agreement”). Before the commencement of Specialty Pharma's bankruptcy case, Serenity asserted claims against Specialty Pharma and Avadel US Holdings collectively in an amount no less than $50,000, and after the commencement of the bankruptcy case, Serenity asserted a $3,096 claim against Specialty Pharma and voted to reject its Chapter 11 plan of liquidation. The Serenity Settlement Agreement provides for a global resolution of these disputes by way of an $800 payment from Avadel US Holdings to Serenity, a mutual exchange of general releases, and the withdrawal of Serenity's claim and vote in Specialty Pharma's bankruptcy case. The Serenity Settlement Agreement was approved by order of the Bankruptcy Court on August 12, 2020.
At a hearing conducted on October 6, 2020, the Bankruptcy Court granted final approval of Specialty Pharma’s disclosure statement and confirmed its Chapter 11 plan of liquidation. Pursuant to the plan, the appointment of a Plan Administrator was also approved. The Plan Administrator will be responsible for making distributions to creditors, managing the final windup and dissolution of Specialty Pharma, and taking other steps in accordance with the plan of liquidation. The plan of liquidation became effective on October 20, 2020.
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 September 30, 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, the $407 was recorded as part of the loss on deconsolidation of subsidiary within the unaudited condensed consolidated statements of (loss) income for the nine months ended September 30, 2019.
NOTE 4: Disposition of the Hospital Products
On the Closing Date, we announced the sale of our Hospital Products, to the Exela Buyer pursuant to the Purchase Agreement.
Pursuant to the Purchase Agreement, the Exela Buyer paid $14,500 on the Closing Date and will pay an additional $27,500 in ten equal monthly installments beginning 90 days following the Closing Date for total aggregate consideration of $42,000. During the three months ended September 30, 2020, we collected the first installment payment of $2,750. In connection with the sale of the Hospital Products, the parties also agreed to cause the dismissal of the pending civil litigation related to Nouress in the District Court for the District of Delaware.
We were party to a Membership Interest Purchase Agreement, dated March 13, 2012, by and among us, Avadel Legacy, Breaking Stick Holdings, LLC, Deerfield Private Design International II, L.P. (“Deerfield International”), Deerfield Private Design Fund II, L.P. (“Deerfield Fund”) and Horizon Santé FLML, Sarl (“Horizon”) (the “Deerfield MIPA”) and a Royalty Agreement, dated February 4, 2013, by and among us, Avadel Legacy, the Deerfield Fund and Horizon (the “Deerfield Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Deerfield Royalty Agreement for obligations that arise after the Closing date.
We were also party to a Royalty Agreement, dated December 3, 2013, by and between us, Avadel Legacy and Broadfin Healthcare Master Fund, Ltd. (the “Broadfin Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Broadfin Royalty Agreement for obligations that arise after the Closing Date.
We recorded a net gain on the sale of the Hospital Products of $45,760 during the nine months ended September 30, 2020 which has been recorded on the unaudited condensed consolidated statement of income (loss). The $45,760 gain represents the aggregate consideration of $42,000, transaction fees of $2,928, plus the assets and liabilities either transferred to the Exela Buyer or eliminated by us due to the sale of the Hospital Products, which are listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Prepaid expenses and other current assets
|
|
$
|
(134)
|
|
|
|
Inventories
|
|
(4,922)
|
|
|
|
Goodwill
|
|
(1,654)
|
|
|
|
Intangible assets, net
|
|
(407)
|
|
|
|
Other non-current assets
|
|
(1,095)
|
|
|
|
Total long-term contingent consideration payable
|
|
14,900
|
|
|
|
Net liabilities disposed of
|
|
6,688
|
|
|
|
Aggregate consideration
|
|
42,000
|
|
|
|
Less transaction fees
|
|
(2,928)
|
|
|
|
Net gain on the sale of the Hospital Products
|
|
$
|
45,760
|
|
|
|
We evaluated various qualitative and quantitative factors related to the disposition of the Hospital Products and determined that it did not meet the criteria for presentation as a discontinued operation.
The unaudited pro forma condensed combined financial statements included below are being provided for information purposes only and are not necessarily indicative of the results of operations or financial position that would have resulted if the Transaction had actually occurred on the date indicated. The pro forma adjustments are based on available information and assumptions that the Company believes are attributable to the sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Balance Sheets
|
|
|
As of December 31, 2019
|
|
|
As Reported
|
|
Pro Forma Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,774
|
|
|
$
|
12,935
|
|
|
(a)
|
|
$
|
22,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
3,570
|
|
|
(3,570)
|
|
|
(b)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
4,264
|
|
|
27,500
|
|
|
(c)
|
|
31,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
18,491
|
|
|
(1,654)
|
|
|
(d)
|
|
16,837
|
|
Intangible assets, net
|
|
813
|
|
|
(813)
|
|
|
(e)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
|
39,274
|
|
|
(9,702)
|
|
|
(f)
|
|
29,572
|
|
Total assets
|
|
$
|
151,436
|
|
|
$
|
24,696
|
|
|
|
|
$
|
176,132
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term contingent consideration payable
|
|
$
|
5,554
|
|
|
$
|
(5,054)
|
|
|
(g)
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
19,810
|
|
|
2,800
|
|
|
(h)
|
|
22,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term contingent consideration payable, less current portion
|
|
11,773
|
|
|
(11,773)
|
|
|
(g)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
180,635
|
|
|
(14,027)
|
|
|
|
|
166,608
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
(391,215)
|
|
|
38,723
|
|
|
(i)
|
|
(352,492)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ (deficit) equity
|
|
(29,199)
|
|
|
38,723
|
|
|
|
|
9,524
|
|
Total liabilities and shareholders’ equity (deficit)
|
|
$
|
151,436
|
|
|
$
|
24,696
|
|
|
|
|
$
|
176,132
|
|
Adjustments to the pro forma unaudited condensed combined balance sheet
(a) This adjustment represents the receipt of $14,500 cash consideration from the Exela Buyer at the closing of the Transaction less $1,565 placed into escrow for the estimated earn outs and royalties payable to Breaking Stick Holdings L.L.C., Horizon Santé FLML, Sarl, Deerfield Private Design Fund II, L.P., all affiliates of Deerfield Capital L.P. ("Deerfield") and Broadfin Healthcare Master Fund ("Broadfin") for the current quarter ended.
(b) This adjustment reflects the elimination of Inventories that were purchased as part of the Transaction.
(c) This adjustment reflects the Transaction consideration in the form of ten monthly installment payments of $2,750 (totaling $27,500) beginning 90 days from the Closing date.
(d) This adjustment reflects the elimination of $1,654 of Goodwill based on the relative fair value of the Hospital Products as a portion of the overall value of the Company.
(e) This adjustment reflects the elimination of the unamortized balance of the Intangible asset on acquired developed technology for Vazculep.
(f) This adjustment reflects the elimination of $1,228 of other long-term assets and $8,474 of deferred tax assets at December 31, 2019. The eliminated deferred tax assets are tax attributes of the Hospital Products.
(g) This adjustment reflects the elimination of short and long term related party payables, less the expected amounts due to Deerfield and Broadfin after taking into consideration the escrow discussed in Note (a). As part of the Transaction, the buyer agreed to assume the quarterly earn-out and royalty payments for periods after the close of the Transaction. The Company will no longer be responsible for these payments.
(h) This adjustment reflects the estimated transaction fees payable related to the Transaction.
(i) This adjustment reflects the estimated gain of $38,723 arising from the Transaction for the year ended December 31, 2019. This estimated gain has not been reflected in the pro forma unaudited condensed combined statements of loss as it is considered to be nonrecurring in nature. No adjustment has been made to the sale proceeds to give effect to any potential post-closing adjustments under the terms of the Purchase Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Statement of Income (Loss)
|
|
|
Nine Months Ended September 30, 2020
|
|
|
As Reported
|
|
Pro Forma Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
22,334
|
|
|
$
|
(22,175)
|
|
|
(j)
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
2,259
|
|
|
(8,489)
|
|
|
(k)
|
|
(6,230)
|
|
Operating income
|
|
20,075
|
|
|
(13,686)
|
|
|
|
|
6,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
9,048
|
|
|
$
|
(13,251)
|
|
|
(l)
|
|
$
|
(4,203)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Statement of Loss
|
|
|
Nine Months Ended September 30, 2019
|
|
|
As Reported
|
|
Pro Forma Adjustments
|
|
Notes
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
48,220
|
|
|
$
|
(48,007)
|
|
|
(j)
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
64,985
|
|
|
(14,398)
|
|
|
(m)
|
|
50,587
|
|
Operating loss
|
|
(16,765)
|
|
|
(33,609)
|
|
|
|
|
(50,374)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(26,846)
|
|
|
$
|
(33,113)
|
|
|
(n)
|
|
$
|
(59,959)
|
|
Adjustments to the pro forma unaudited condensed combined statements of income (loss)
(j) This adjustment reflects Product sales attributable to the Hospital Products.
(k) This adjustment reflects the following estimated expenses attributable to the Hospital Products:
•Cost of products of $3,540.
•Research and Development expenses of $407.
•Selling, general and administrative expenses of $809.
•Intangible asset amortization on acquired development technology for Vazculep of $406.
•Changes in fair value of related party contingent consideration of $3,327. The Company will no longer be responsible for these payments.
(l) This amount reflects the adjustments noted in (j) and (k) above, as well as estimated Changes in fair value of related party payable of $435 attributable to the Hospital Products. The Company will no longer be responsible for these payments.
(m) This adjustment reflects the following estimated expenses attributable to the Hospital Products:
•Cost of products of $8,972.
•Research and Development expenses of $1,604.
•Selling, general and administrative expenses of $828.
•Intangible asset amortization on acquired development technology for Vazculep of $610.
•Changes in fair value of related party contingent consideration of $2,384. The Company will no longer be responsible for these payments.
(n) This amount reflects the adjustments noted in (j) and (m) above, as well as the reversal of estimated Changes in fair value of related party payable of $496 attributable to the Hospital Products. The Company will no longer be responsible for these payments.
NOTE 5: Revenue Recognition
Prior to June 30, 2020, we generated revenue primarily from the sale of pharmaceutical products to customers. On June 30, 2020, we sold the Hospital Products. See Note 4: Disposition of the Hospital Products.
Product Sales
Prior to June 30, 2020, we sold products primarily through wholesalers and considered these wholesalers to be our customers. Revenue from product sales was recognized when the customer obtained control of our product and our performance obligations were met, which occurred typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales were subject to a variety of price adjustments in arriving at reported net product sales. These adjustments included 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 were recorded at the net selling price, which included 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 were based on the amounts earned or to be claimed on the related sales and were 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.
Disaggregation of revenue
The Company’s source of revenue was 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 19: 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 September 30, 2020.
Transaction Price Allocated to the Remaining Performance Obligation
For product sales, the Company generally satisfied its performance obligations within the same period the product was delivered. Product sales recognized in the second quarter of 2020 from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.
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 6: 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:
•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 unaudited condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
As of December 31, 2019
|
Fair Value Measurements:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (see Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,404
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market and mutual funds
|
|
104,186
|
|
|
—
|
|
|
—
|
|
|
38,799
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
|
—
|
|
|
20,415
|
|
|
—
|
|
|
—
|
|
|
4,098
|
|
|
—
|
|
Government securities - U.S.
|
|
—
|
|
|
20,216
|
|
|
—
|
|
|
—
|
|
|
5,446
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fixed-income securities
|
|
50
|
|
|
3,600
|
|
|
—
|
|
|
—
|
|
|
1,637
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
104,236
|
|
|
$
|
44,231
|
|
|
$
|
—
|
|
|
$
|
43,203
|
|
|
$
|
11,181
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration payable (see Note 10)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,327
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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 September 30, 2020 and December 31, 2019, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three and nine month periods ended September 30, 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 September 30, 2020 is $116,636 compared to a book value of $126,520.
See Note 11: Long-Term Debt for additional information regarding our debt obligations.
NOTE 7: 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) income 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 September 30, 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 September 30, 2020 and December 31, 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and mutual funds
|
|
$
|
103,204
|
|
|
$
|
1,041
|
|
|
$
|
(59)
|
|
|
$
|
104,186
|
|
Corporate bonds
|
|
20,212
|
|
|
227
|
|
|
(24)
|
|
|
20,415
|
|
Government securities - U.S.
|
|
20,015
|
|
|
202
|
|
|
(1)
|
|
|
20,216
|
|
|
|
|
|
|
|
|
|
|
Other fixed-income securities
|
|
3,625
|
|
|
29
|
|
|
(4)
|
|
|
3,650
|
|
Total
|
|
$
|
147,056
|
|
|
$
|
1,499
|
|
|
$
|
(88)
|
|
|
$
|
148,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) income.
We recognized gross realized gains of $136 and $71 for the three months ended September 30, 2020, and 2019, respectively. These realized gains were offset by realized losses of $8 and $64 for the three months ended September 30, 2020, and 2019, respectively. We recognized gross realized gains of $426 and $339 for the nine months ended September 30, 2020, and 2019, respectively. These realized gains were offset by realized losses of $886 and $211 for the nine months ended September 30, 2020 and 2019, respectively. We reflect these gains and losses as a component of investment income in the accompanying unaudited condensed 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 debt securities and classified by the contractual maturity date of the securities as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
Marketable Debt Securities:
|
|
Less than 1 Year
|
|
1-5 Years
|
|
5-10 Years
|
|
Greater than 10 Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
4,355
|
|
|
$
|
14,274
|
|
|
$
|
1,786
|
|
|
$
|
—
|
|
|
$
|
20,415
|
|
Government securities - U.S.
|
|
—
|
|
|
17,749
|
|
|
739
|
|
|
1,728
|
|
|
20,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fixed-income securities
|
|
50
|
|
|
3,600
|
|
|
—
|
|
|
—
|
|
|
3,650
|
|
Total
|
|
$
|
4,405
|
|
|
$
|
35,623
|
|
|
$
|
2,525
|
|
|
$
|
1,728
|
|
|
$
|
44,281
|
|
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 September 30, 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
|
|
$
|
8,371
|
|
|
$
|
24
|
|
|
Government securities - U.S.
|
|
267
|
|
|
1
|
|
|
Other fixed-income securities
|
|
2,151
|
|
|
4
|
|
|
Total
|
|
$
|
10,789
|
|
|
$
|
29
|
|
|
NOTE 8: Inventories
The principal categories of inventories, net of reserves of $0 and $914 at September 30, 2020 and December 31, 2019, respectively, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Finished goods
|
|
$
|
—
|
|
|
$
|
3,020
|
|
Raw materials
|
|
—
|
|
|
550
|
|
Total
|
|
$
|
—
|
|
|
$
|
3,570
|
|
The decrease in inventory at September 30, 2020 is a result of the June 30, 2020 disposition of the Hospital Products. See Note 4: Disposition of the Hospital Products.
NOTE 9: Goodwill and Intangible Assets
The Company’s amortizable and unamortizable intangible assets at September 30, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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 (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,061
|
|
|
$
|
(11,248)
|
|
|
|
|
$
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable intangible assets - Goodwill (2)
|
|
$
|
16,836
|
|
|
$
|
—
|
|
|
$
|
16,836
|
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
|
|
$
|
18,491
|
|
(1) This intangible asset was assumed by the Exela Buyer as part of the disposition of the Hospital Products on June 30, 2020. See Note 4: Disposition of the Hospital Products.
(2) In connection with the disposition of the Hospital Products (see Note 4: Disposition of the Hospital Products), the Company allocated goodwill of $1,655 on a relative fair value basis to the Hospital Products and included this amount in the net gain on the disposition of the Hospital Products on the unaudited condensed consolidated statements of (loss) income during the nine months ended September 30, 2020.
The Company recorded amortization expense related to amortizable intangible assets of $0 and $205 for the three months ended September 30, 2020 and 2019, respectively, and $406 and $610 for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 10: Contingent Consideration Payable
Contingent consideration payable and related activity are reported at fair value and consist of the following at September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the nine months ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value of Contingent Consideration Payable
|
|
|
|
|
Contingent Consideration Payable:
|
Balance,
December 31, 2019
|
|
|
|
Payments
|
|
Operating Expense
|
|
Other
Expense
|
|
Disposition of the Hospital Products
|
|
Balance, September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out payments - Éclat Pharmaceuticals (a) (d)
|
$
|
15,472
|
|
|
|
|
$
|
(5,323)
|
|
|
$
|
3,327
|
|
|
$
|
—
|
|
|
(13,476)
|
|
|
$
|
—
|
|
Financing-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement - Deerfield (b) (d)
|
1,251
|
|
|
|
|
(587)
|
|
|
—
|
|
|
272
|
|
|
(936)
|
|
|
—
|
|
Royalty agreement - Broadfin (c) (d)
|
604
|
|
|
|
|
(279)
|
|
|
—
|
|
|
163
|
|
|
(488)
|
|
|
—
|
|
Total contingent consideration payable
|
17,327
|
|
|
|
|
$
|
(6,189)
|
|
|
$
|
3,327
|
|
|
$
|
435
|
|
|
$
|
(14,900)
|
|
|
—
|
|
Less: current portion
|
(5,554)
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Long-term contingent consideration payable
|
$
|
11,773
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2020 and June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the three months ended
September 30, 2020
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value of Contingent Consideration Payable
|
|
|
|
|
Contingent Consideration Payable:
|
Balance,
June 30, 2020
|
|
|
|
Payments
|
|
Operating Expense
|
|
Other
Expense
|
|
|
|
Balance, September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out payments - Éclat Pharmaceuticals (a) (d)
|
$
|
1,656
|
|
|
|
|
$
|
(1,587)
|
|
|
$
|
(69)
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Financing-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement - Deerfield (b) (d)
|
175
|
|
|
|
|
(175)
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Royalty agreement - Broadfin (c) (d)
|
83
|
|
|
|
|
(83)
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Total contingent consideration payable
|
1,914
|
|
|
|
|
$
|
(1,845)
|
|
|
$
|
(69)
|
|
|
$
|
—
|
|
|
|
|
—
|
|
Less: current portion
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Long-term contingent consideration payable
|
$
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
(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. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay,
perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.
(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. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.
(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. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of the Company under the Broadfin Royalty Agreement.
(d)Deerfield and Broadfin Healthcare Master Trust disposed of their 2023 Notes and ordinary shares in the Company during the six months ended June 30, 2020 and are no longer considered related parties.
Before the sale of the Hospital Products on June 30, 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) income 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.
Prior to June 30, 2020, the Company chose 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) income.
The following table summarizes changes to the contingent consideration payables, a recurring Level 3 measurement, for the nine-month periods ended September 30, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
Contingent Consideration Payable Rollforward:
|
|
Balance
|
|
|
|
Balance, December 31, 2018
|
|
$
|
28,840
|
|
Payments of contingent consideration
|
|
(10,014)
|
|
Fair value adjustments (1)
|
|
2,880
|
|
Balance, September 30, 2019
|
|
$
|
21,706
|
|
|
|
|
Balance, December 31, 2019
|
|
$
|
17,327
|
|
Payments of contingent consideration
|
|
(6,189)
|
|
Fair value adjustments (1)
|
|
3,762
|
|
Disposition of the Hospital Products
|
|
(14,900)
|
|
Balance, September 30, 2020
|
|
$
|
—
|
|
(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) income.
NOTE 11: Long-Term Debt
Long-term debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Principal amount of 4.50% exchangeable senior notes due 2023
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Less: unamortized debt discount and issuance costs, net
|
|
(17,230)
|
|
|
(22,064)
|
|
Net carrying amount of liability component
|
|
126,520
|
|
|
121,686
|
|
|
|
|
|
|
|
|
|
|
|
Less: current maturities
|
|
—
|
|
|
—
|
|
Long-term debt
|
|
$
|
126,520
|
|
|
$
|
121,686
|
|
|
|
|
|
|
Equity component:
|
|
|
|
|
Equity component of exchangeable notes, net of issuance costs
|
|
$
|
(26,699)
|
|
|
$
|
(26,699)
|
|
NOTE 12: 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 the 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 nine months ended September 30, 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%. During the nine months ended September 30, 2020, the Company received $3,351 in cash tax refunds from carryback claims related to the CARES Act from the carryback of 2018 tax losses. During the three months ended September 30, 2020 the Company filed refund claims for $18,753 associated with the carryback of 2019 tax losses.
The income tax benefit was $5,040 for the three months ended September 30, 2020 resulting in an effective tax rate of 30.1%. The income tax expense was $2,234 for the three months ended September 30, 2019 resulting in an effective tax rate of (33.6)%. The net increase in the effective income tax rate for the three months ended September 30, 2020, as compared to the same period in 2019, was primarily due to decreased income in the U.S. due to the sale of the Hospital Products.
The income tax benefit was $9,258 for the nine months ended September 30, 2020 resulting in an effective tax rate of (102.3)%. The income tax provision was $3,641 for the nine months ended September 30, 2019 resulting in an effective tax rate of (13.7)%. The net decrease in the effective income tax rate for the nine months ended September 30, 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, which did not occur during the nine months ended September 30, 2019, partially offset by increased income in the U.S. due to the sale of the Hospital Products during the nine months ended September 30, 2020.
During the nine months ended September 30, 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 settled the $1,937 assessment.
NOTE 13: Other Assets and Liabilities
Various other assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Valued-added tax recoverable
|
|
$
|
353
|
|
|
$
|
1,051
|
|
Prepaid and other expenses
|
|
1,426
|
|
|
2,116
|
|
Short-term deposit
|
|
1,477
|
|
|
—
|
|
Guarantee from Armistice
|
|
364
|
|
|
454
|
|
Income tax receivable
|
|
18,593
|
|
|
536
|
|
Short term note receivable from Exela (see Note 4)
|
|
24,750
|
|
|
—
|
|
Other
|
|
91
|
|
|
107
|
|
Total
|
|
$
|
47,054
|
|
|
$
|
4,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Assets:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
15,479
|
|
|
$
|
29,427
|
|
Long-term deposits
|
|
—
|
|
|
1,477
|
|
Guarantee from Armistice
|
|
1,117
|
|
|
1,367
|
|
Right of use assets at contract manufacturing organizations
|
|
5,201
|
|
|
6,428
|
|
Other
|
|
467
|
|
|
575
|
|
Total
|
|
$
|
22,264
|
|
|
$
|
39,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Accrued compensation
|
|
$
|
1,897
|
|
|
$
|
3,944
|
|
Accrued social charges
|
|
394
|
|
|
592
|
|
Accrued restructuring (see Note 15)
|
|
728
|
|
|
2,949
|
|
Customer allowances
|
|
6,588
|
|
|
6,470
|
|
Accrued transaction fees related to the disposition of the Hospital Products
|
|
2,500
|
|
|
—
|
|
Accrued contract research organization charges
|
|
361
|
|
|
2,098
|
|
Accrued contract manufacturing organization costs
|
|
1,009
|
|
|
735
|
|
Other
|
|
2,921
|
|
|
3,022
|
|
Total
|
|
$
|
16,398
|
|
|
$
|
19,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Current Liabilities:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Accrued interest
|
|
$
|
1,078
|
|
|
$
|
2,695
|
|
Due to Exela
|
|
1,817
|
|
|
—
|
|
Guarantee to Deerfield
|
|
365
|
|
|
455
|
|
Other
|
|
171
|
|
|
725
|
|
Total
|
|
$
|
3,431
|
|
|
$
|
3,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities:
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Customer allowances
|
|
$
|
659
|
|
|
$
|
981
|
|
Unrecognized tax benefits
|
|
3,143
|
|
|
6,465
|
|
Guarantee to Deerfield
|
|
1,121
|
|
|
1,372
|
|
Other
|
|
15
|
|
|
55
|
|
Total
|
|
$
|
4,938
|
|
|
$
|
8,873
|
|
NOTE 14: 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, 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 totaled approximately $428 of which $214 was charged against additional paid-in capital during the nine months ended September 30, 2020 as a result of the May 2020 Public Offering, discussed below. The remaining costs of $214 are recorded as a prepaid asset at September 30, 2020.
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 $60,570.
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 $4,430 have been 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 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 were offered by us and the gross proceeds to us from the offering were approximately $125,000, before deducting underwriting discounts and commissions and offering expenses, which resulted in net proceeds of $116,924. The offering closed on May 1, 2020.
August 2020 Treasury Shares Retirement
In August 2020, the Company retired all of our 5,407 treasury shares, or $49,998 previously repurchased ordinary shares. As a result, we reduced additional paid-in capital by $49,944 and ordinary shares by $54 during the three and nine months ended September 30, 2020. The portion allocated to additional paid-in capital is determined pro rata by applying a percentage, determined by dividing the number of shares to be retired by the number of shares issued and outstanding as of the retirement date, to the balance of additional paid-in capital as of the retirement date. Based on this calculation, the entirety of the excess of repurchase price over par of $49,944 was allocated to additional paid-in capital.
NOTE 15: 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 was completed during the three months ended June 30, 2020. Restructuring charges associated with this plan recognized during the three and nine months ended September 30, 2020 were immaterial. Restructuring charges associated with this plan of $1,259 and $3,198 were recognized during the three and nine months ended September 30, 2019. Included in the 2019 restructuring charges of $3,198 were charges for employee severance, benefits and other costs of $2,774, a charge of $598 related to fixed asset impairment, a charge of $826 related to the early termination penalty related to the office lease termination as well as a benefit of $1,000 related to the reversal of the French retirement indemnity obligation.
The following table sets forth activities for the Company’s cost reduction plan obligations for the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 French Restructuring Obligation:
|
|
2020
|
|
2019
|
|
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
1,922
|
|
|
$
|
—
|
|
Charges for employee severance, benefits and other costs
|
|
173
|
|
|
2,774
|
|
Payments
|
|
(1,813)
|
|
|
(1,837)
|
|
Foreign currency impact
|
|
(45)
|
|
|
(42)
|
|
Balance of restructuring accrual at September 30,
|
|
$
|
237
|
|
|
$
|
895
|
|
The 2019 French Restructuring liabilities of $237 are included in the unaudited condensed consolidated balance sheet in accrued expenses at September 30, 2020.
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 completed during the three months ended September 30, 2020. The restructuring charges associated with this plan recognized during the three and nine months ended September 30, 2020 were immaterial, compared to the restructuring charges of $607 and $1,570 recognized during the three and nine months ended September 30, 2019, respectively. Included in the 2019 Corporate Restructuring charges of $1,570 for the nine months ended September 30, 2019, were charges for employee severance, benefit and other costs of $2,966, as well as a benefit of $1,396 related to share based compensation forfeitures related to the employees affected by the global reduction in workforce.
The following table sets forth activities for the Company’s cost reduction plan obligations for the nine months ended September 30, 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
|
|
206
|
|
|
2,966
|
|
|
|
Payments
|
|
(794)
|
|
|
(2,113)
|
|
|
|
|
|
|
|
|
|
|
Balance of restructuring accrual at September 30,
|
|
$
|
492
|
|
|
$
|
853
|
|
|
|
The 2019 Corporate Restructuring liabilities of $492 are included in the unaudited condensed consolidated balance sheet in accrued expenses at September 30, 2020.
NOTE 16: Share-Based Compensation
2020 Performance Share Units (“PSUs”)
At the Annual Meeting of Stockholders held in August 2020, the 2020 Omnibus Incentive Compensation Plan was approved which provided for the grant of PSUs to certain executive officers and employees. These PSUs vest upon the achievement of certain regulatory milestones. As of September 30, 2020 152 PSUs were outstanding, none had vested and the weighted-average grant date fair value of all shares was $8.29 per share. The Company has not yet recognized any PSU-related stock-based compensation expense as the regulatory milestones have not yet been met; however, in the event the performance conditions are met before a certain date, approximately 150% of the outstanding shares, or $1,900 of compensation expense will be recognized by the Company for the PSUs outstanding as of September 30, 2020.
On October 20, 2020, we granted 105 of PSUs to current employees, with the weighted-average grant date fair value of the PSUs of $5.36 per share.
NOTE 17: 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 - diluted 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 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. The dilutive effect of the PSUs will be calculated using the treasury stock method, if and when the contingent vesting condition is achieved.
A reconciliation of basic and diluted net (loss) income per share, together with the related shares outstanding in thousands is as follows:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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Net (Loss) Income Per Share:
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2020
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2019
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2020
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2019
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Net (loss) income
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$
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(11,703)
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$
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(8,864)
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$
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18,306
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$
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(30,487)
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Weighted average shares:
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Basic shares
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58,213
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37,436
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51,206
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37,382
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Effect of dilutive securities—employee and director equity awards outstanding, preferred shares and 2023 Notes
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—
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—
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1,643
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—
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Diluted shares
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58,213
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37,436
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52,849
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37,382
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Net (loss) income per share - basic
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$
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(0.20)
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$
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(0.24)
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$
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0.36
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$
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(0.82)
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Net (loss) income per share - diluted
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$
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(0.20)
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$
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(0.24)
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$
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0.35
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$
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(0.82)
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Potential common shares of 15,969 and 19,544 were excluded from the calculation of weighted average shares for the three months ended September 30, 2020 and 2019, respectively, and potential common shares of 15,789 and 20,512 were excluded from the calculation of weighted average shares for the nine months ended September 30, 2020 and 2019, respectively, because either their effect was considered to be anti-dilutive or they were related to shares from PSUs for which the contingent vesting condition had not been achieved. For the three months ended September 30, 2020 and for the three and nine months ended September 30, 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 18: Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 30, 2020 and 2019, respectively, net of tax effects:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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Accumulated Other Comprehensive Loss:
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2020
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2019
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2020
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2019
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Foreign currency translation adjustment:
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Beginning balance
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$
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(23,733)
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$
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(23,720)
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$
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(23,738)
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$
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(23,621)
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Net other comprehensive income (loss)
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534
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(210)
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539
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(309)
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Balance at September 30,
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$
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(23,199)
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$
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(23,930)
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$
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(23,199)
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$
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(23,930)
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Unrealized gain on marketable debt securities, net
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Beginning balance
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$
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1,215
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$
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872
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$
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932
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$
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205
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Net other comprehensive income, net of $(1), $(5), $(131) and $(46) tax, respectively
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66
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86
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349
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753
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Balance at September 30,
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$
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1,281
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$
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958
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$
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1,281
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$
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958
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Accumulated other comprehensive loss at September 30,
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$
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(21,918)
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$
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(22,972)
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$
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(21,918)
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$
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(22,972)
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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 19: 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 Chief Executive Officer (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 product sales by these products:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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Product Sales by Product:
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2020
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2019
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2020
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2019
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Bloxiverz
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$
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—
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$
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1,466
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$
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2,201
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$
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6,392
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Vazculep
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—
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8,786
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10,429
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27,669
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Akovaz
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—
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4,208
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9,545
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13,946
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Other
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—
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(231)
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159
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213
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Total product sales
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$
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—
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$
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14,229
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$
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22,334
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$
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48,220
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On June 30, 2020, we sold the Hospital Products. See Note 4: Disposition of the Hospital Products.
NOTE 20: 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 September 30, 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. There is currently no pending or threatened litigation or disputes to which Specialty Pharma is or would be a party. All prior litigation and disputes involving Specialty Pharma have been dismissed or resolved.
Material Commitments
We have been relieved of all purchase 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 due to the sale of the Hospital Products described in Note 4: Disposition of the Hospital Products.
During the three months ended September 30, 2020, we entered into a commitment with a contract manufacturer related to the purchase and validation of equipment to be used in the manufacture of FT218. The total cost of this commitment is estimated to be approximately $3,800 and is expected to be completed by the end of 2021.
Material commitments in the normal course of business include long-term debt obligations which are disclosed in Note 11: Long-Term Debt to the Company’s unaudited condensed consolidated financial statements. Our long-term contingent consideration payable as disclosed in Note 10: Contingent Consideration Payable has also been relieved due to the sale of the Hospital Products.
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 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 $1,486 at September 30, 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 $1,481 at September 30, 2020. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.