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 a biopharmaceutical company. The Company is registered as an Irish public limited company. The Company’s headquarters are in Dublin, Ireland with operations in Dublin, Ireland and St. Louis, Missouri, United States (“U.S.”).
The Company’s lead product candidate, LUMRYZ, also known as FT218, is an investigational once-at-bedtime, extended-release formulation of sodium oxybate for the treatment of cataplexy or excessive daytime sleepiness (“EDS”) in adults with narcolepsy. On July 18, 2022, the U.S. Food and Drug Administration (“FDA”) granted tentative approval to LUMRYZ for this indication. Tentative approval indicates that LUMRYZ has met all required quality, safety, and efficacy standards necessary for approval in the U.S. The Company is primarily focused on obtaining final FDA approval of LUMRYZ.
A decision on final FDA approval of LUMRYZ is pending disposition of U.S. Patent No. 8731963 (the “REMS Patent”), which is listed in the FDA’s Orange Book. The decision on final FDA approval could occur on or about the expiration of the REMS Patent on June 17, 2023 or sooner if the patent is earlier removed from the FDA’s Orange Book or a court earlier determines that patent is not infringed, invalid or otherwise unenforceable. The FDA’s tentative approval can be subject to change based on new information that may come to the FDA’s attention between such time as the tentative approval and potential final approval. The Company cannot legally market LUMRYZ in the U.S. until final approval is granted by the FDA.
Outside of the Company’s lead product candidate, the Company continues to evaluate opportunities to expand its product portfolio. As of the date of this Quarterly Report, the Company does not have any commercialized products in its portfolio.
Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has a recent history of generating losses and negative cash flows from operations, an accumulated shareholders’ deficit as of the date of these unaudited condensed consolidated financial statements and approximately $60,715 of cash and cash equivalents and $45,760 of marketable securities available for use to fund its operations, debt service and capital requirements. The Company’s ability to generate revenue is expected to start following the launch of LUMRYZ, which is dependent, in part, on final approval of LUMRYZ by the FDA. As of September 30, 2022, the Company has $26,375 aggregate principal amount of its 4.50% exchangeable senior notes due February 2023 (the “February 2023 Notes”) and $117,375 aggregate principal amount of its 4.50% exchangeable senior notes due October 2023 (the “October 2023 Notes”) (together, the “2023 Notes”). The Company does not currently have sufficient available liquidity to repay the outstanding balance of the October 2023 Notes. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued.
In response to these conditions and events, the Company is evaluating various financing strategies to obtain sufficient additional liquidity to meet its operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. The potential sources of financing that the Company is evaluating include one or any combination of royalty financing, secured or unsecured debt, convertible debt and equity. In addition, the Company’s financing strategy could also include refinancing or negotiating new terms for the 2023 Notes. The Company also currently has authorized and available the use of its at-the-market offering program (“ATM Program”), described in more detail below, which could provide the Company up to approximately $135,000 (as of September 30, 2022), net of commissions, if fully utilized. While the Company has the ability to utilize the ATM Program, it intends to pursue the other financing strategies described above. Based on the Company’s ability to raise funds through the ATM Program, the Company has determined that it is probable that such proceeds would provide sufficient additional capital to meet the Company’s operating, debt service and capital requirements for the next twelve months following the date of this Quarterly Report. As a result, the Company has concluded that management’s plans are probable of being achieved to alleviate the substantial doubt about the Company’s ability to continue as a going concern.
The sources of financing described above that could be available to the Company and the timing and probability of obtaining sufficient capital depends, in part, on obtaining final FDA approval of LUMRYZ, resolving any legal and regulatory matters that could preclude the Company from launching LUMRYZ and future capital market conditions. If the Company’s current assumptions regarding timing of potential final approval, the timing of the launch of LUMRYZ or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, the Company may have to further
reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of LUMRYZ in order to extend its cash resources.
At-the-Market Offering Program
On February 5, 2020, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) with respect to an ATM Program under which the Company may offer and sell its American Depositary Shares (“ADSs”, and such ADSs sold under the ATM Program, “ATM ADSs”) through Jefferies as its sales agent. The Company agreed to pay Jefferies a commission up to 3.0% of the aggregate gross sales proceeds of such ATM ADSs. The initial aggregate offering price of the ATM Program was up to $50,000 of ADSs pursuant to its prospectus, dated February 14, 2020, included with the Company’s Registration Statement on Form S-3 (File No. 333-236258) (the “2020 Prospectus”). In August 2022, the Company filed an additional prospectus, dated September 12, 2022, included with the Company’s new Registration Statement on Form S-3 (File No. 333-267198) (the “2022 Prospectus”), in order to allocate up to $100,000 in additional ADSs to the ATM Program.
As of September 30, 2022, the Company had issued and sold 1,768 ADSs, resulting in net proceeds to the Company of approximately $10,532, pursuant to the 2020 Prospectus. The Company may offer and sell up to an additional $39,142 of ADSs under the ATM Program that remain available for sale pursuant to the 2020 Prospectus and also up to $100,000 of ADSs available for sale under the ATM Program pursuant to the 2022 Prospectus.
Basis of Presentation. The unaudited condensed consolidated balance sheet as of September 30, 2022, which is derived from the prior year 2021 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with 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 2021 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 16, 2022.
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.
NOTE 2: 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, the Company uses 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, the Company 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:
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| | As of September 30, 2022 | | As of December 31, 2021 |
Fair Value Measurements: | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | |
Marketable securities (see Note 3) | | | | | | | | | | | | |
Mutual and money market funds | | $ | 31,481 | | | $ | — | | | $ | — | | | $ | 78,098 | | | $ | — | | | $ | — | |
Corporate bonds | | — | | | 9,178 | | | — | | | — | | | 16,479 | | | — | |
Government securities - U.S. | | — | | | 3,458 | | | — | | | — | | | 9,471 | | | — | |
Other fixed-income securities | | — | | | 1,643 | | | — | | | — | | | 2,465 | | | — | |
Total assets | | $ | 31,481 | | | $ | 14,279 | | | $ | — | | | $ | 78,098 | | | $ | 28,415 | | | $ | — | |
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, 2022 and December 31, 2021, respectively, there were no transfers in and out of Level 3. During the three and nine months ended September 30, 2022 and 2021, respectively, the Company did not recognize any allowances for credit losses.
Some of the Company’s financial instruments, such as cash and cash equivalents and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
Debt
The Company estimates the fair value of its $26,375 aggregate principal amount of its February 2023 Notes and its $117,375 aggregate principal amount of its October 2023 Notes 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 (a Level 2 input). The estimated fair values of the February 2023 Notes and the October 2023 Notes at September 30, 2022 are $25,584 and $101,970, respectively. See Note 4: Long-Term Debt for additional information regarding the Company’s debt obligations.
NOTE 3: Marketable Securities
The Company has investments in available-for-sale debt securities which are recorded at fair market value. The change in the fair value of available-for-sale debt investments is recorded as accumulated other comprehensive loss in shareholders’ (deficit) equity, net of income tax effects. As of September 30, 2022, the Company considered any decreases in fair value on its 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, 2022 and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
Marketable Securities: | | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
Mutual and money market funds | | $ | 32,922 | | | $ | 220 | | | $ | (1,661) | | | $ | 31,481 | |
Corporate bonds | | 9,885 | | | — | | | (707) | | | 9,178 | |
Government securities - U.S. | | 3,827 | | | — | | | (369) | | | 3,458 | |
Other fixed-income securities | | 1,691 | | | — | | | (48) | | | 1,643 | |
Total | | $ | 48,325 | | | $ | 220 | | | $ | (2,785) | | | $ | 45,760 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Marketable Securities: | | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
Mutual and money market funds | | $ | 78,331 | | | $ | 813 | | | $ | (1,046) | | | $ | 78,098 | |
Corporate bonds | | 16,478 | | | 94 | | | (93) | | | 16,479 | |
Government securities - U.S. | | 9,530 | | | 39 | | | (98) | | | 9,471 | |
Other fixed-income securities | | 2,473 | | | 2 | | | (10) | | | 2,465 | |
Total | | $ | 106,812 | | | $ | 948 | | | $ | (1,247) | | | $ | 106,513 | |
The Company determines realized gains or losses on the sale of marketable securities on a specific identification method. The Company reflects these gains and losses as a component of investment and other income, net in the accompanying unaudited condensed consolidated statements of loss.
The Company recognized gross realized gains of $64 and $22 for the three months ended September 30, 2022 and 2021, respectively. These realized gains were offset by gross realized losses of $61 and $66 for the three months ended September 30, 2022 and 2021, respectively. We recognized gross realized gains of $372 and $74 for the nine months ended September 30, 2022 and 2021, respectively. These realized gains were offset by gross realized losses of $1,092 and $173 for the nine months ended September 30, 2022 and 2021, respectively.
The following table summarizes the estimated fair value of the Company’s 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, 2022:
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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 | | $ | 1,602 | | | $ | 7,576 | | | $ | — | | | $ | — | | | $ | 9,178 | |
Government securities - U.S. | | — | | | 1,992 | | | 600 | | | 866 | | | 3,458 | |
| | | | | | | | | | |
Other fixed-income securities | | — | | | 1,451 | | | 192 | | | — | | | 1,643 | |
Total | | $ | 1,602 | | | $ | 11,019 | | | $ | 792 | | | $ | 866 | | | $ | 14,279 | |
The Company has classified its investment in available-for-sale marketable debt securities as current assets in the consolidated balance sheets as the securities need to be available for use, if required, to fund current operations. There are no restrictions on the sale of any securities in the Company’s investment portfolio.
The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale debt securities at September 30, 2022. The unrealized losses in the table below are driven by factors other than credit risk. The Company does not intend to sell the investments and it is not more likely than not that it will be required to sell the investments before recovery of their amortized cost bases.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | Greater than 12 months | | Total |
Marketable Debt Securities: | | Fair value | | Unrealized Losses | | Fair value | | Unrealized Losses | | Fair value | | Unrealized Losses |
Corporate bonds | | $ | 6,264 | | | $ | 440 | | | $ | 2,914 | | | $ | 267 | | | $ | 9,178 | | | $ | 707 | |
Government securities - U.S. | | 1,042 | | | 63 | | | 2,416 | | | 306 | | | 3,458 | | | 369 | |
Other fixed-income securities | | 1,065 | | | 17 | | | 578 | | | 31 | | | 1,643 | | | 48 | |
Total | | $ | 8,371 | | | $ | 520 | | | $ | 5,908 | | | $ | 604 | | | $ | 14,279 | | | $ | 1,124 | |
NOTE 4: Long-Term Debt
Long-term debt is summarized as follows:
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
Principal amount of 4.50% exchangeable senior notes due February 2023 | | $ | 26,375 | | | $ | 143,750 | |
Principal amount of 4.50% exchangeable senior notes due October 2023 | | 117,375 | | | — | |
Less: unamortized debt discount and issuance costs, net | | (7,517) | | | (1,353) | |
Net carrying amount of debt | | 136,233 | | | 142,397 | |
| | | | |
| | | | |
Less: current maturities, net of $76 unamortized debt discount and issuance costs | | 26,299 | | | — | |
Long-term debt | | $ | 109,934 | | | $ | 142,397 | |
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For the three months ended September 30, 2022 and 2021, the total interest expense was $3,564 and $1,929, respectively, with coupon interest expense of $1,646 and $1,617 for each period, respectively, and the amortization of debt issuance costs and debt discount, totaling $1,918 and $312 for each period, respectively.
For the nine months ended September 30, 2022 and 2021, the total interest expense was $9,087 and $5,788, respectively, with coupon interest expense of $4,852 and $4,851 for each period, respectively, and the amortization of debt issuance costs and debt discount of $4,147 and $937 for each period, respectively. Current period interest expense also includes $88 of additional interest expense owed to be in compliance with certain terms of the February 2023 Notes indenture and is not applicable to future periods.
On February 16, 2018, Avadel Finance Cayman Limited, a Cayman Islands exempted company and an indirect wholly-owned subsidiary of the Company (the “Issuer”), issued $125,000 aggregate principal amount of its February 2023 Notes in a private placement (the “Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the Offering, the Issuer granted the initial purchasers of the February 2023 Notes a 30-day option to purchase up to an additional $18,750 aggregate principal amount of the February 2023 Notes, which was fully exercised on February 16, 2018. Net proceeds received by the Company, after issuance costs and discounts, were approximately $137,560. The February 2023 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness and effectively junior to any of the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness.
On April 5, 2022, the Issuer completed the exchange of $117,375 of its February 2023 Notes for a new series of its October 2023 Notes (the “Exchange Transaction”). The remaining $26,375 aggregate principal amount of the February 2023 Notes were not exchanged and maintain a maturity date of February 1, 2023.
The Company accounted for the October 2023 Notes as a modification to the February 2023 Notes. The Company paid $4,804 in fees to note holders of the October 2023 Notes that are amortized over the remaining term of the October 2023 Notes. The Company paid approximately $5,450 in fees to third parties that were expensed as part of the completed Exchange Transaction. Additionally, the fair value of the unseparated, embedded conversion feature increased by $5,508, which reduced the carrying amount of the convertible debt instrument as an unamortized debt discount, with a corresponding increase in additional paid-in capital. The $5,508 are amortized over the remaining term of the October 2023 Notes as a component of interest expense.
The 2023 Notes will be exchangeable at the option of the holders at an initial exchange rate of 92.6956 ADSs per $1 principal amount of 2023 Notes (so long as the principal amount of such holder’s 2023 Notes not exchanged is at least $200), which is equivalent to an initial exchange price of approximately $10.79 per ADS. Upon the exchange of any 2023 Notes, the Issuer will pay or cause to be delivered, as the case may be, cash, ADSs or a combination of cash and ADSs, at the Issuer’s election.
February 2023 Notes
Holders of the February 2023 Notes may convert their February 2023 Notes, at their option, prior to the close of business on the business day immediately preceding the maturity date.
October 2023 Notes
Holders of the October 2023 Notes may convert their October 2023 Notes, at their option, only under the following circumstances prior to the close of business on the business day immediately preceding May 1, 2023, under the circumstances and during the periods set forth below and regardless of the conditions described below, on or after May 1, 2023 and prior to the close of business on the business day immediately preceding the maturity date:
•Prior to the close of business on the business day immediately preceding May 1, 2023, a holder of the October 2023 Notes may surrender all or any portion of its October 2023 Notes for exchange at any time during the five business day period immediately after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1 principal amount of October 2023 Notes, as determined following a request by a holder of the October 2023 Notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the ADSs and the exchange rate on each such trading day.
•If a transaction or event that constitutes a fundamental change or a make-whole fundamental change occurs prior to the close of business on the business day immediately preceding May 1, 2023, regardless of whether a holder of the October 2023 Notes has the right to require the Company to repurchase the October 2023 Notes, or if Avadel is a party to a merger event that occurs prior to the close of business on the business day immediately preceding May 1, 2023, all or any portion of a holder’s October 2023 Notes may be surrendered for exchange at any time from or after the date that is 95 scheduled trading days prior to the anticipated effective date of the transaction (or, if later, the earlier of (x) the business day after the Company gives notice of such transaction and (y) the actual effective date of such transaction) until 35 trading days after the actual effective date of such transaction or, if such transaction also constitutes a fundamental change, until the related fundamental change repurchase date.
•Prior to the close of business on the business day immediately preceding May 1, 2023, a holder of the October 2023 Notes may surrender all or any portion of its October 2023 Notes for exchange at any time during any calendar quarter commencing after the calendar quarter ending on March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the ADSs for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the exchange price on each applicable trading day.
•If the Company calls the October 2023 Notes for redemption pursuant to Article 16 to the Indenture prior to the close of business on the business day immediately preceding May 1, 2023, then a holder of the October 2023 Notes may surrender all or any portion of its October 2023 Notes for exchange at any time prior to the close of business on the second business day prior to the redemption date, even if the October 2023 Notes are not otherwise exchangeable at such time. After that time, the right to exchange shall expire, unless the Company defaults in the payment of the redemption price, in which case a holder of the October 2023 Notes may exchange its October 2023 Notes until the redemption price has been paid or duly provided for.
The Company, at its option, may redeem for cash all of the October 2023 Notes if the last reported sale price (as defined by the indenture) of the ADSs has been at least 130% of the Exchange Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice to redeem the October 2023 Notes.
The Company considered the guidance in ASC 815-15, Embedded Derivatives, to determine if this instrument contains an embedded feature that should be separately accounted for as a derivative. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional, as defined by ASC 815-40. The Company determined that this exception applies due, in part, to the Company’s ability to settle the 2023 Notes in cash, ADSs or a combination of cash and ADSs, at the Company’s option. The Company has therefore applied the guidance provided by ASC 470-20, Debt with Conversion and Other Options, as amended by ASU 2020-06.
NOTE 5: Income Taxes
The income tax provision was $70 for the three months ended September 30, 2022 resulting in an effective tax rate of (0.3)%. The income tax benefit was $5,101 for the three months ended September 30, 2021 resulting in an effective tax rate of 18.8%. The change in the effective income tax rate for the three months ended September 30, 2022, as compared to the prior period in 2021, is primarily due to the valuation allowances that were recorded against the net operating losses during the current period.
The income tax provision was $25,940 for the nine months ended September 30, 2022 resulting in an effective tax rate of (30.9)%. The income tax benefit was $11,473 for the nine months ended September 30, 2021 resulting in an effective tax rate of 17.3%. The change in the effective income tax rate for the nine months ended September 30, 2022, as compared to the prior period in 2021, is primarily due to the valuation allowances that were recorded against the deferred tax assets during the current period.
The Company's cumulative loss position was significant negative evidence in assessing the need for a valuation allowance on its deferred tax assets. Given the weight of objectively verifiable historical losses from operations, the Company recorded a full valuation allowance on its deferred tax assets. The Company will be able to reverse the valuation allowance when it has shown its ability to generate taxable income on a consistent basis in future periods. The valuation allowance does not have an impact on the Company's ability to utilize any net operating losses or other tax attributes to offset cash taxes payable as these items are still eligible to be used.
During the nine months ended September 30, 2022, the Company collected all of the outstanding receivables due to the Company related to net operating loss carrybacks under the Coronavirus Aid, Relief, and Economic Security Act for losses incurred during 2019, which were carried back to 2015.
NOTE 6: Other Assets and Liabilities
Various other assets and liabilities are summarized as follows:
| | | | | | | | | | | | | | |
Prepaid Expenses and Other Current Assets: | | September 30, 2022 | | December 31, 2021 |
| | | | |
Prepaid and other expenses | | $ | 3,745 | | | $ | 3,179 | |
Other | | 567 | | | 271 | |
Guarantee from Armistice | | 277 | | | 279 | |
Income tax receivable | | 81 | | | 29,097 | |
Total | | $ | 4,670 | | | $ | 32,826 | |
| | | | | | | | | | | | | | |
Other Non-Current Assets: | | September 30, 2022 | | December 31, 2021 |
| | | | |
Right of use assets at contract manufacturing organizations | | $ | 10,979 | | | $ | 8,549 | |
Guarantee from Armistice | | 564 | | | 771 | |
Other | | 177 | | | 329 | |
Deferred tax assets | | — | | | 24,128 | |
Total | | $ | 11,720 | | | $ | 33,777 | |
| | | | | | | | | | | | | | |
Accrued Expenses | | September 30, 2022 | | December 31, 2021 |
| | | | |
Accrued professional fees | | $ | 4,419 | | | $ | 2,678 | |
Accrued restructuring | | 1,515 | | | 41 | |
Accrued compensation | | 1,293 | | | 3,167 | |
Accrued outsource contract costs | | 738 | | | 1,048 | |
Customer allowances | | — | | | 217 | |
Total | | $ | 7,965 | | | $ | 7,151 | |
| | | | | | | | | | | | | | |
Other Current Liabilities: | | September 30, 2022 | | December 31, 2021 |
| | | | |
Income tax payable | | $ | 3,265 | | | $ | — | |
Guarantee to Deerfield | | 278 | | | 280 | |
Accrued interest | | 199 | | | 4,920 | |
Other | | 15 | | | 70 | |
Total | | $ | 3,757 | | | $ | 5,270 | |
| | | | | | | | | | | | | | |
Other Non-Current Liabilities: | | September 30, 2022 | | December 31, 2021 |
| | | | |
Tax liabilities | | $ | 5,161 | | | $ | 3,143 | |
Guarantee to Deerfield | | 566 | | | 774 | |
Total | | $ | 5,727 | | | $ | 3,917 | |
NOTE 7: Share Based Compensation
2022 Performance-Based Stock Options
In August 2022, the Board of Directors approved the grant of performance-based stock options to certain executive officers and employees. These performance-based stock options vest upon both the achievement of certain commercial milestones and specific service conditions. As of September 30, 2022, 2,165 performance-based stock options were outstanding, none of which had vested. The weighted-average grant date fair value of the performance-based stock options was $3.71. The Company has not yet recognized any related share-based compensation expense as the commercial milestones have not been met; however, in the event that the performance conditions are met, $8,032 will be recognized by the Company for the performance-based stock options outstanding as of September 30, 2022.
NOTE 8: 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 per share is calculated by dividing net loss - diluted 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 the Company’s preferred shares, the exercise of outstanding equity compensation awards, and ordinary shares expected to be issued under the Company’s Employee Share Purchase Plan (“ESPP”).
The Company has a choice to settle the conversion obligations under the 2023 Notes in cash, shares or any combination of the two. The Company utilizes 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 the Company’s ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.
The dilutive effect of the stock options, restricted stock units, preferred shares and ordinary shares expected to be issued under the Company’s ESPP has been calculated using the treasury stock method. The dilutive effect of the performance share unit awards (“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 per share, together with the related shares outstanding, in thousands, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Net Loss Per Share: | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Net loss | | $ | (20,146) | | | $ | (22,002) | | | $ | (110,014) | | | $ | (55,028) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average shares: | | | | | | | | |
Basic shares | | 60,201 | | | 58,585 | | | 59,359 | | | 58,506 | |
Effect of dilutive securities—employee and director equity awards outstanding, preferred shares and 2023 Notes | | — | | | — | | | — | | | — | |
| | | | | | | | |
Diluted shares | | 60,201 | | | 58,585 | | | 59,359 | | | 58,506 | |
| | | | | | | | |
Net loss per share - basic | | $ | (0.33) | | | $ | (0.38) | | | $ | (1.85) | | | $ | (0.94) | |
Net loss per share - diluted | | $ | (0.33) | | | $ | (0.38) | | | $ | (1.85) | | | $ | (0.94) | |
Potential ordinary shares of 18,722 and 15,684 were excluded from the calculation of weighted average shares for the three months ended September 30, 2022 and 2021, respectively, and potential ordinary shares of 18,925 and 15,497 were excluded from the calculation of weighted average shares for the nine months ended September 30, 2022 and 2021 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 and nine months ended September 30, 2022 and 2021, the effects of dilutive securities were entirely excluded from the calculation of net loss per share as a net loss was reported in these periods.
NOTE 9: Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 30, 2022 and 2021, respectively, net of tax effects:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Accumulated Other Comprehensive Loss: | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Foreign currency translation adjustment: | | | | | | | | |
Beginning balance | | $ | (24,697) | | | $ | (23,229) | | | $ | (23,855) | | | $ | (22,627) | |
Net other comprehensive loss | | (647) | | | (237) | | | (1,489) | | | (839) | |
Balance at September 30, | | $ | (25,344) | | | $ | (23,466) | | | $ | (25,344) | | | $ | (23,466) | |
| | | | | | | | |
Unrealized (loss) gain on marketable debt securities, net | | | | | | | | |
Beginning balance | | $ | (1,631) | | | $ | 879 | | | $ | (85) | | | $ | 1,576 | |
Net other comprehensive loss, net of income tax benefit of $—, $59, $— and $220, respectively | | (934) | | | (157) | | | (2,480) | | | (854) | |
Balance at September 30, | | $ | (2,565) | | | $ | 722 | | | $ | (2,565) | | | $ | 722 | |
Accumulated other comprehensive loss at September 30, | | $ | (27,909) | | | $ | (22,744) | | | $ | (27,909) | | | $ | (22,744) | |
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 10: Commitments and Contingencies
Litigation
The Company is subject to potential liabilities generally incidental to the Company’s 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, 2022 and December 31, 2021, there were no contingent liabilities with respect to any litigation, arbitration or
administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.
First Jazz Complaint
On May 12, 2021, Jazz Pharmaceuticals, Inc. (“Jazz”) filed a formal complaint (the “First Complaint”) initiating a lawsuit in the United States District Court for the District of Delaware (the “Court”) against Avadel Pharmaceuticals plc, Avadel US Holdings, Inc., Avadel Management Corporation, Avadel Legacy Pharmaceuticals, LLC, Avadel Specialty Pharmaceuticals, LLC, and Avadel CNS Pharmaceuticals, LLC (collectively, the “Avadel Parties”). In the First Complaint, Jazz alleges the sodium oxybate product (“Proposed Product”) described in the NDA owned by Avadel CNS Pharmaceuticals, LLC (“Avadel CNS”) will infringe at least one claim of U.S. Patent No. 8731963, 10758488, 10813885, 10959956 and/or 10966931 (collectively, the “patents-in-suit”). The First Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.
On June 3, 2021, the Avadel Parties timely filed their Answer and Counterclaims (the “Avadel Answer”) with the Court in response to the First Complaint. The Avadel Answer generally denies the allegations set forth in the First Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patents-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of each patent-in-suit, and ii) a declaratory judgment of invalidity of each patent-in-suit.
On June 18, 2021, Jazz filed its Answer (“Jazz Answer”) with the Court in response to the Avadel Answer. The Jazz Answer generally denies the allegations set forth in the Avadel Answer and sets forth a single affirmative defense asserting that Avadel has failed to state a claim for which relief can be granted.
On June 21, 2021, the Court issued an oral order requiring the parties to i) confer regarding proposed dates to be included in the Court’s scheduling order for the case, and ii) submit a proposed order, including a proposal for the length and timing of trial, to the Court by no later than July 21, 2021.
On July 30, 2021, the Court issued a scheduling order establishing timing for litigation events including i) a claim construction hearing date of August 2, 2022, and ii) a trial date of October 30, 2023.
On October 18, 2021, consistent with the scheduling order, Jazz filed a status update with the Court indicating that Jazz did not intend to file a preliminary injunction with the Court at this time. Jazz further indicated that it would provide the Court with an update regarding whether preliminary injunction proceedings may be necessary after receiving further information regarding the FDA’s action on Avadel CNS’s NDA.
On January 4, 2022, the Court entered an agreed order dismissing this case with respect to Avadel Pharmaceuticals plc, Avadel US Holdings, Inc., Avadel Specialty Pharmaceuticals, LLC, Avadel Legacy Pharmaceuticals, LLC, and Avadel Management Corporation. A corresponding order was entered in the two below cases on the same day.
On February 25, 2022, Jazz filed an amended Answer to the Avadel Parties’ Counterclaims (“the Jazz First Amended Answer”). The Jazz First Amended Answer is substantially similar to the Jazz Answer except insofar as it adds an affirmative defense for judicial estoppel and unclean hands. Corresponding amended answers were filed in the two below cases on the same day.
On June 23, 2022, Avadel CNS filed a Renewed Motion for Judgment on the Pleadings, with respect to its counterclaim against Jazz seeking to have U.S. Patent No. 8731963 (the “REMS Patent”) de-listed from the Orange Book and seeking to have the motion resolved concurrent with the parties’ Markman hearing on August 31, 2022. On July 7, 2022, Jazz filed a response it styled as Objections to Avadel CNS’ Motion for Judgment on the Pleadings. On July 14, 2022, Avadel CNS replied to Jazz’s response, and on July 21, 2022, Avadel CNS requested oral argument on its delisting motion simultaneous with the Markman hearing. On August 24, 2022, the Court ordered Jazz to respond substantively to Avadel CNS’ motion, which Jazz did on August 26, 2022. Avadel CNS filed its reply on August 28, 2022.
On August 23, 2022, the Markman hearing was postponed. On September 7, 2022, the case was reassigned to a new judge, and the Markman hearing was held on October 25, 2022. At the Markman hearing, Avadel CNS reiterated its request for an expedited hearing on the Renewed Motion for Judgment on the Pleadings for the de-listing of the REMS Patent. On October 28, 2022, the Court granted Avadel CNS’ request and scheduled the hearing for November 15, 2022.
Second Jazz Complaint
On August 4, 2021, Jazz filed another formal complaint (the “Second Complaint”) initiating a lawsuit in the Court against the Avadel Parties. In the Second Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS will infringe at least one claim of U.S. Patent No. 11077079. The Second Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.
On September 9, 2021, the Avadel Parties timely filed their Answer and Counterclaims (the “Second Avadel Answer”) with the Court in response to the Second Complaint. The Second Avadel Answer generally denies the allegations set forth in the Second Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of the patent-in-suit, and ii) a declaratory judgment of invalidity of the patent-in-suit.
On October 22, 2021, the Court issued an oral order stating that this case should proceed on the same schedule as the case filed on May 12, 2021.
On September 7, 2022, the case was reassigned to a new judge.
Third Jazz Complaint
On November 10, 2021, Jazz filed another formal complaint (the “Third Complaint”) initiating a lawsuit in the Court against the Avadel Parties. In the Third Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS will infringe at least one claim of U.S. Patent No. 11147782. The Third Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses. This case will proceed on the same schedule as the cases associated with the First and Second Complaints above.
On December 21, 2021, the Court entered a revised schedule for the First, Second and Third Complaints, setting a new claim construction date of August 31, 2022.
On January 7, 2022, Avadel CNS timely filed its Answer and Counterclaims (the “Third Avadel Answer”) with the Court in response to the Third Complaint. The Third Avadel Answer generally denies the allegations set forth in the Third Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of the patent-in-suit, and ii) a declaratory judgment of invalidity/unenforceability of the patent-in-suit.
On September 7, 2022, the case was reassigned to a new judge.
Fourth Jazz Complaint
On July 15, 2022, Jazz filed another formal complaint (the “Fourth Complaint”) initiating a lawsuit in the Court against Avadel CNS. In the Fourth Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS will infringe at least one claim of the REMS Patent, which was asserted in the First Complaint. The FDA required Avadel CNS to file a Paragraph IV certification against the REMS Patent, which Avadel CNS did under protest, consistent with its Renewed Motion for Judgment on the Pleadings for the de-listing of the REMS Patent from the Orange Book, which is pending in response to the above First Jazz Complaint action. Avadel CNS provided the required notice of its Paragraph IV certification to Jazz, and Jazz reasserted the REMS Patent in a separate action following receipt of that notice. The Fourth Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.
On September 7, 2022, the case was reassigned to a new judge.
On September 21, 2022, Jazz served the Fourth Complaint. On October 21, 2022, Avadel CNS timely filed its Answer and Counterclaims (the “Fourth Avadel Answer”) with the Court in response to the Fourth Complaint. The Fourth Avadel Answer generally denies the allegations set forth in the Fourth Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims for i) a declaratory judgment of non-infringement of the patent-in-suit, ii) a declaratory judgment of invalidity/unenforceability of the patent-in-suit, iii) de-listing of the patent-in-suit from the Orange Book; iv) monopolization under the Sherman Antitrust Act of 1890 (the “Sherman Act”); and v) attempted monopolization under the Sherman Act.
Avadel Complaint
On April 14, 2022, Avadel CNS and Avadel Pharmaceuticals plc (collectively the “Avadel Plaintiffs”) filed a formal complaint (the “Avadel Complaint”) initiating a lawsuit in the Court against Jazz and Jazz Pharmaceuticals Ireland Ltd. (collectively, the “Jazz Parties”). In the Avadel Complaint, the Avadel Plaintiffs allege that the Jazz Parties breached certain confidential disclosure agreements and misappropriated certain of the Avadel Plaintiffs’ trade secrets. The Avadel Complaint further includes typical relief requests such as injunctive relief, monetary damages and attorneys’ fees, costs and expenses, as well as seeking correction of inventorship of certain Jazz patents, for which the Jazz Parties claim ownership, to include former Avadel Plaintiffs’ scientists.
On June 2, 2022, Jazz answered the Avadel Complaint. The Answer generally denies the allegations set forth in the Avadel Complaint and includes various affirmative defenses.
On July 8, 2022, Jazz filed a Motion for Judgment on the Pleadings seeking to have all Counts dismissed for failure to state a claim upon which relief can be granted. The Avadel Plaintiffs’ response to that Motion was filed with the Court on July 29, 2022. Jazz’s reply was filed with the Court on August 5, 2022.
On September 7, 2022, the case was reassigned to a new judge.
Administrative Procedure Act Complaint
On July 21, 2022, Avadel CNS filed an Administrative Procedure Act suit against the FDA, the U.S. Department of Health and Human Services, the Secretary of Health and Human Services and the Commissioner of Food and Drugs (the “Federal Defendants”) in the United States District Court for the District of Columbia (the “DC Court”) related to the NDA for LUMRYZ (sodium oxybate). This suit alleges that the FDA’s decision requiring Avadel CNS to file a patent certification concerning the REMS Patent was arbitrary, capricious and contrary to law and asks the DC Court to vacate the FDA’s decision and order the FDA to take final action on the LUMRYZ NDA. On July 28, 2022, the DC Court granted Jazz’s unopposed motion to intervene in the case to defend the FDA’s decision. The DC Court also entered an expedited briefing schedule governing Avadel CNS’s motion for preliminary injunction or, in the alternative, summary judgment, and the Federal Defendant’s and Jazz’s oppositions to that motion and anticipated cross-motions for summary judgment. On August 19, 2022, the Federal Defendants and Jazz filed their combined oppositions to Avadel CNS’s motion for preliminary injunction or, in the alternative, summary judgment, and cross-motions for summary judgment. On September 2, 2022, Avadel CNS filed its combined reply in support of its motion for preliminary injunction or, in the alternative, summary judgment, and opposition to the cross-motions for summary judgment. On September 14, 2022, the Federal Defendants and Jazz filed their replies in support of their cross-motions for summary judgment. On October 7, 2022, the DC Court heard oral arguments of Avadel CNS’s motion and the Federal Defendants and Jazz’s cross-motions. On November 3, 2022, the DC Court issued its opinion determining that Avadel CNS is not entitled to seek relief under the APA because of the availability of adequate alternative relief in the Court, specifically, in the form of its counterclaim to have the REMS Patent de-listed from the FDA’s Orange Book described above in the section regarding the First Jazz Complaint.
Material Commitments
Other than commitments disclosed in Note 15: Contingent Liabilities and Commitments to the Company's consolidated financial statements included in the 2021 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business.
Guarantees
The fair values of the Company’s guarantee to Deerfield Capital L.P. (“Deerfield”) and the guarantee received by the Company from Armistice Capital Master Fund, Ltd. largely offset and when combined are not material.
Deerfield Guarantee
In connection with the Company’s February 2018 divestiture of the Company’s pediatric assets, the Company 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 the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee liability was $844 at September 30, 2022. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.
Armistice Guarantee
In connection with the Company’s February 2018 divestiture of the pediatric assets, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, Inc., guaranteed to the Company the FSC Product Royalties. The Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee asset was $841 at September 30, 2022. 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, 2022, the Company did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
NOTE 11: Restructuring Costs
2022 Corporate Restructuring Plan
In June 2022, the Company announced a plan to optimize its cost structure to reduce total quarterly cash operating expenses, excluding inventory purchases.
The Company’s cost structure optimization efforts included a nearly 50% reduction in its workforce that was completed at the end of August 2022 (the “2022 Corporate Restructuring Plan”). Restructuring income of $69 associated with this plan, comprised primarily of adjustments to the estimate of severance related costs, were recorded in the three months ended September 30, 2022. Restructuring charges of $3,523 associated with this plan, comprised primarily of severance related costs, were recorded in the nine months ended September 30, 2022.
The following table sets forth activities for the Company’s 2022 Corporate Restructuring Plan obligations as of September 30, 2022:
| | | | | | | | | | |
2022 Corporate Restructuring Plan Obligation: | | 2022 | | |
| | | | |
Balance of 2022 Corporate Restructuring Plan accrual at January 1, | | $ | — | | | |
Charges for employee severance, benefits and other costs | | 3,592 | | | |
Payments | | (2,043) | | | |
Other adjustments | | (69) | | | |
Balance of 2022 Corporate Restructuring Plan accrual at September 30, | | $ | 1,480 | | | |
The 2022 Corporate Restructuring Plan liabilities of $1,480 are included in the unaudited condensed consolidated balance sheet in accrued expenses at September 30, 2022.
NOTE 12: Subsequent Events
On November 4, 2022, the Company repurchased $8,875 of its February 2023 Notes for $8,653 of cash consideration through an open market purchase.