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 branded specialty pharmaceutical company. Our primary focus is on the development and potential U.S. Food and Drug Administration (“FDA”) approval for FT218 which is in a Phase 3 clinical trial for the treatment of narcolepsy patients suffering from excessive daytime sleepiness (EDS) and cataplexy. In addition, we market three sterile injectable drugs used in the hospital setting which were developed under our “unapproved marketed drug” (UMD) program. The Company is headquartered in Dublin, Ireland with operations in St. Louis, Missouri and Lyon, France. For more information, please visit www.avadel.com.
Avadel is developing FT218, an investigational once-nightly formulation of sodium oxybate based on its propriety Micropump® drug delivery technology, for the treatment of EDS and cataplexy in patients suffering from narcolepsy. FT218 is currently being evaluated in a Phase 3 clinical trial called REST-ON. In addition, the Company submitted a new drug application (“NDA”) in March 2019 on a fourth sterile injectable drug which we refer to as AV001, for use in the hospital setting. AV001, if approved, could contribute revenues to Avadel starting in 2020. In May 2019, the FDA accepted the NDA for AV001, with a Prescription Drug User Fee Act (PDUFA) target action date of December 15, 2019.
Our current marketed products include:
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Akovaz® (ephedrine sulfate injection, USP), an alpha- and beta-adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
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•
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Bloxiverz® (neostigmine methylsulfate injection), a cholinesterase inhibitor, is indicated for the reversal of the effects of non-depolarizing neuromuscular blocking agents (NMBAs) after surgery.
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•
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Vazculep® (phenylephrine hydrochloride injection), an alpha-1 adrenergic receptor agonist indicated for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia.
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Each of our Akovaz, Bloxiverz and Vazculep products is used primarily in the hospital setting and was developed under our UMD program.
The Company was incorporated on December 1, 2015 as an Irish private limited company, and re-registered as an Irish public limited company, or plc, on November 21, 2016. Our principal place of business is located at Block 10-1, Blanchardstown Corporate Park, Ballycoolin, Dublin 15, Ireland. Avadel’s phone number is 011-353-1-485-1200. Our website is www.avadel.com, where we make available free of charge our reports (and any amendments thereto) on Forms 10-K, 10-Q and 8-K as soon as reasonably practicable after they are electronically filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”). These filings are also available to the public at www.sec.gov.
The Company is the successor to Flamel Technologies S.A., a French société anonyme (“Flamel”), as the result of the France-to-Ireland redomestication merger of Flamel with and into the Company completed on December 31, 2016 (the “Merger”). In the Merger, we changed our company name to Avadel Pharmaceuticals plc and our jurisdiction of organization to Ireland; we assumed all the assets and liabilities of Flamel; and we issued one Avadel ordinary share (either directly or in the form of an American Depositary Share (ADS)) in exchange for each formerly outstanding share of Flamel, all of which were canceled. Thus, an Avadel ordinary share held (either directly or represented by an ADS) immediately after the Merger continued to represent the same proportional interest in our equity owned by the holder of a share of Flamel immediately prior to the Merger. References in this Annual Report on Form 10-K to “Avadel,” the “Company,” “we,” “our,” “us,” and similar terms shall be deemed to be references to Flamel prior to the completion of the Merger, unless the context otherwise requires. Additional details about the Merger are set forth in Item 1 under the caption “The Reincorporation Merger” of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.
The Company currently has five direct wholly-owned subsidiaries: (a) Avadel US Holdings, Inc., (b) Flamel Ireland Limited, which conducts business under the name Avadel Ireland, (c) Avadel Investment Company Limited, (d) Avadel Finance Ireland Designated Activity Company and (e) Avadel France Holding SAS. Avadel US Holdings, Inc., a Delaware corporation, is the holding entity of (i) Avadel Specialty Pharmaceuticals, LLC (currently the subject of a voluntary Chapter 11 bankruptcy proceeding as noted in Note 3: Subsidiary Bankruptcy and Deconsolidation), (ii) Avadel Legacy Pharmaceuticals, LLC, (iii) Avadel
Management Corporation, (iv) FSC Holding Company and (v) Avadel Operations Company, Inc. Avadel Finance Ireland Designated Activity Company is the holding entity of Avadel Finance Cayman Limited. Flamel Ireland Limited (operating under the trade name Avadel Ireland) is an Irish corporation which, since December 16, 2014, has been the owner of substantially all of Avadel’s intellectual property. Avadel France Holding SAS, a French société par actions simplifiée, is the holding entity of Avadel Research SAS through which Avadel conducts substantially all of its R&D activities.
Basis of Presentation. The unaudited condensed consolidated balance sheet as of September 30, 2019, which is derived from the prior year 2018 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an annual report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC on March 15, 2019.
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 material 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, the Company’s indirect wholly-owned subsidiary, Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”), filed a voluntary petition for reorganization under Chapter 11 of the United States (“U.S.”) Code (the “Bankruptcy Code”). in the U.S. District Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), Case No. 19-10248. Specialty Pharma is operating and managing its business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. As a result of Specialty Pharma’s voluntary bankruptcy filing on February 6, 2019, we no longer controlled the operations of Specialty Pharma; therefore, we deconsolidated Specialty Pharma effective with the bankruptcy filing and the Company recorded its investment in Specialty Pharma under the cost method. See Note 3: Subsidiary Bankruptcy and Deconsolidation. Our results of operations for the period January 1, 2019 through February 6, 2019 include the results of Specialty Pharma prior to its February 6, 2019 voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Our results of operations for the period January 1, 2018 through February 16, 2018 include the results of FSC Therapeutics and FSC Laboratories, Inc., (collectively “FSC”), prior to its February 16, 2018 disposition date. See Note 14: Divestiture of the Pediatric Assets, for additional information. All intercompany accounts and transactions have been eliminated.
Revenue. Revenue includes sales of pharmaceutical products, licensing fees, and, if any, milestone payments for research and development (“R&D”) achievements.
Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when the performance obligations to the customer have been satisfied through the transfer of control of the goods or services. To determine the appropriate revenue recognition for arrangements that the Company believes are within the scope of ASC 606, we perform the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts only when the Company and its customer’s rights and obligations under the contract can be determined, the contract has commercial substance, and it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. For contracts that are determined to be within the scope of ASC 606, the Company identifies the promised goods or services in the contract to determine if they are separate performance obligations or if they should be bundled with other goods and services into a single performance obligation. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Sales and Services
The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the Company’s product, which occurs typically upon receipt by the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates of product returns,
chargebacks, payment discounts, rebates, and other sales allowances and are estimated based on analysis of historical data for the product or comparable products, future expectations for such products and other judgments and analysis.
License Revenue
The Company from time to time may enter into out-licensing agreements which are within the scope of ASC 606 under which it licenses to third parties certain rights to its products or intellectual property. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; development, regulatory, and commercial milestone payments; and sales-based royalty payments. Each of these payments results in license revenue.
For a complete discussion of the accounting for net product revenue and license revenues, see Note 4: Revenue Recognition.
NOTE 2: Newly Issued Accounting Standards
Recent Accounting Guidance Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirement for Fair Value Measurement” which amends certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2018-13.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This update eliminates step 2 from the goodwill impairment test, and requires the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for the Company in the first quarter of 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will assess the timing of adoption and impact of this guidance to future impairment considerations.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments(“ASU 2016-13”).” This standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will be effective for the Company for fiscal years beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early adoption is permitted. We are currently evaluating the impact of our adoption of ASU 2016-13 on our condensed consolidated financial statements.
NOTE 3: Subsidiary Bankruptcy and Deconsolidation
Bankruptcy Filing and Deconsolidation
As a result of Specialty Pharma’s bankruptcy filing on February 6, 2019, Avadel has ceded authority for managing the business to the Bankruptcy Court, and Avadel management cannot carry on Specialty Pharma’s activities in the ordinary course of business without Bankruptcy Court approval. Avadel manages the day-to-day operations of Specialty Pharma, but does not have discretion to make significant capital or operating budgetary changes or decisions and purchase or sell significant assets, as Specialty Pharma’s material decisions are subject to review by the Bankruptcy Court. For these reasons, we have 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. Both Specialty Pharma and the Company disagree with the merits of the amended IRS claim and intend to defend their positions vigorously.
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, 2019, 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 has been recorded as part of the loss on deconsolidation of subsidiary within the unaudited condensed consolidated statements of loss. At September 30, 2019 the fair value of the remaining commitment under the DIP Credit Agreement is not material.
NOTE 4: Revenue Recognition
The Company generates revenue primarily from the sale of pharmaceutical products to customers. From time to time the Company also generates revenue from licensing arrangements whereby the Company provides access to certain of its intellectual property.
Product Sales and Services
Effective January 1, 2018, the Company implemented ASC 606, “Revenue From Contracts With Customers”. The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the Company’s product and the Company’s performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated when the product is delivered based on analysis of historical data for the product or comparable products, as well as future expectations for such products.
Reserves to Reduce Gross Revenues to Net Revenues
Revenues from product sales are recorded at the net selling price, which includes estimated reserves to reduce gross product sales to net product sales resulting from product returns, chargebacks, payment discounts, rebates, and other sales allowances that are offered within contracts between the Company and its customers and end users. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable if the amount is payable to the customer, except in the case of the estimated reserve for future expired product returns, which are classified as a liability. The reserves are classified as a liability if the amount is payable to a party other than a customer. Where appropriate, these estimated reserves take into consideration relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates to reduce gross selling price to net selling price to which it expects to be entitled based on the terms of its contracts. The actual selling price ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.
Product Returns
Consistent with industry practice, the Company maintains a returns policy, that generally offers customers a right of return for product that has been purchased from the Company. The Company estimates the amount of product returns and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities based on analysis of historical data for the product or comparable products, as well as future expectations for such products and other judgments and analysis.
Chargebacks, Discounts and Rebates
Chargebacks, discounts and rebates represent the estimated obligations resulting from contractual commitments to sell products to its customers or end users at prices lower than the list prices charged to our wholesale customers. Customers charge the Company for the difference between the gross selling price they pay for the product and the ultimate contractual price agreed to between the Company and these end users. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargebacks, discounts and rebates are estimated at the time of sale to the customer.
Revenue from licensing arrangements
The terms of the Company’s licensing agreements may contain multiple performance obligations, including certain R&D activities. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments. Each of these payments results in license revenues.
License of Intellectual Property
If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Disaggregation of revenue
The Company’s primary source of revenue is from the sale of pharmaceutical products, which are equally affected by the same economic factors as it relates to the nature, amount, timing, and uncertainty of revenue and cash flows. For further detail about the Company’s revenues by product, see Note 18: Company Operations 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, 2019.
Transaction Price Allocated to the Remaining Performance Obligation
For product sales, the Company generally satisfies its performance obligations within the same period the product is delivered. Product sales recognized in 2019 from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.
For certain licenses of intellectual property, specifically those with performance obligations satisfied over time, the Company allocates a portion of the transaction price to that performance obligation and recognizes revenue using an appropriate measure of progress towards development of the product.
The Company has elected certain of the practical expedients from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies the practical expedient in ASC 606 to its stand-alone contracts and does not disclose information about variable consideration from remaining performance obligations for which the Company recognizes revenue.
NOTE 5: Fair Value Measurement
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business
combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.
ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. When estimating fair value, depending on the nature and complexity of the asset or liability, we may generally use one or each of the following techniques:
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•
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Income approach, which is based on the present value of a future stream of net cash flows.
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•
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Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
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As a basis for considering the assumptions used in these techniques, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
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•
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Level 1 - Quoted prices for identical assets or liabilities in active markets.
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•
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Level 2 - Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
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•
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Level 3 - Unobservable inputs that reflect estimates and assumptions.
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The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying unaudited condensed consolidated balance sheets:
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|
|
|
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|
|
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|
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As of September 30, 2019
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As of December 31, 2018
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Fair Value Measurements:
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Level 1
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Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities (see Note 6)
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|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market and mutual funds
|
|
44,091
|
|
|
—
|
|
|
—
|
|
|
52,996
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
|
—
|
|
|
4,258
|
|
|
—
|
|
|
—
|
|
|
6,339
|
|
|
—
|
|
Government securities - U.S.
|
|
—
|
|
|
5,344
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|
|
—
|
|
|
—
|
|
|
12,701
|
|
|
—
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|
Other fixed-income securities
|
|
—
|
|
|
1,718
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|
|
—
|
|
|
—
|
|
|
9,409
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|
|
—
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|
Total assets
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|
$
|
48,267
|
|
|
$
|
11,320
|
|
|
$
|
—
|
|
|
$
|
62,141
|
|
|
$
|
28,449
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party payable (see Note 10)
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|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,706
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,840
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|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,706
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,840
|
|
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, 2019 and December 31, 2018, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three month periods ended September 30, 2019 and 2018, 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, 2019 is $76,425 compared to a book value of $120,132.
Additionally, the Company’s other debt is reflected in the balance sheet at carrying value. The fair value of these loans is impracticable to estimate as these represent non-interest bearing grants from the French government and are repayable only if the
research project is technically or commercially successful.
See Note 11: Long-Term Debt for additional information regarding our debt obligations.
NOTE 6: Marketable Securities
The Company has investments in equity and available-for-sale debt securities which are recorded at fair market value. The change in the fair value of equity investments is recognized in our unaudited condensed consolidated statements of loss and the change in the fair value of available-for-sale debt investments is recorded as other comprehensive income (loss) in shareholders’ (deficit) equity, net of income tax effects.
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, 2019 and December 31, 2018, respectively:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,200
|
|
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
$
|
4,176
|
|
Money market and mutual funds
|
|
43,306
|
|
|
785
|
|
|
—
|
|
|
44,091
|
|
Corporate bonds
|
|
4,190
|
|
|
69
|
|
|
(1
|
)
|
|
4,258
|
|
Government securities - U.S.
|
|
5,217
|
|
|
129
|
|
|
(2
|
)
|
|
5,344
|
|
Other fixed-income securities
|
|
1,693
|
|
|
26
|
|
|
(1
|
)
|
|
1,718
|
|
Total
|
|
$
|
58,606
|
|
|
$
|
1,009
|
|
|
$
|
(28
|
)
|
|
$
|
59,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Marketable Securities:
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
10,101
|
|
|
$
|
—
|
|
|
$
|
(956
|
)
|
|
$
|
9,145
|
|
Money market and mutual funds
|
|
52,733
|
|
|
316
|
|
|
(53
|
)
|
|
52,996
|
|
Corporate bonds
|
|
6,411
|
|
|
7
|
|
|
(79
|
)
|
|
6,339
|
|
Government securities - U.S.
|
|
12,714
|
|
|
66
|
|
|
(79
|
)
|
|
12,701
|
|
Other fixed-income securities
|
|
9,400
|
|
|
22
|
|
|
(13
|
)
|
|
9,409
|
|
Total
|
|
$
|
91,359
|
|
|
$
|
411
|
|
|
$
|
(1,180
|
)
|
|
$
|
90,590
|
|
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We reflect these gains and losses as a component of investment and other income in the accompanying unaudited condensed consolidated statements of loss.
We recognized gross realized gains of $71 and $143 for the three months ended September 30, 2019, and 2018, respectively. These realized gains were offset by realized losses of $64 and $22 for the three months ended September 30, 2019, and 2018, respectively.
We recognized gross realized gains of $339 and $378 for the nine months ended September 30, 2019, and 2018, respectively. These realized gains were offset by realized losses of $211 and $350 for the nine months ended September 30, 2019 and 2018, respectively. We reflect these gains and losses as a component of investment and other income in the accompanying condensed consolidated statements of income (loss).
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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
|
Marketable Debt Securities:
|
|
Less than 1 Year
|
|
1-5 Years
|
|
5-10 Years
|
|
Greater than 10 Years
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
556
|
|
|
$
|
3,360
|
|
|
$
|
342
|
|
|
$
|
—
|
|
|
$
|
4,258
|
|
Government securities - U.S.
|
|
—
|
|
|
4,600
|
|
|
—
|
|
|
744
|
|
|
5,344
|
|
Other fixed-income securities
|
|
49
|
|
|
1,669
|
|
|
—
|
|
|
—
|
|
|
1,718
|
|
Total
|
|
$
|
605
|
|
|
$
|
9,629
|
|
|
$
|
342
|
|
|
$
|
744
|
|
|
$
|
11,320
|
|
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.
NOTE 7: Inventories
The principal categories of inventories, net reserves of $1,212 and $4,757 at September 30, 2019 and December 31, 2018, respectively, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Inventory:
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Finished goods
|
|
$
|
1,883
|
|
|
$
|
4,270
|
|
Raw materials
|
|
377
|
|
|
500
|
|
Total
|
|
$
|
2,260
|
|
|
$
|
4,770
|
|
Total net reserves decreased by $3,545 during the nine months ended September 30, 2019 largely driven by the deconsolidation of Specialty Pharma.
NOTE 8: Goodwill and Intangible Assets
The Company’s amortizable and unamortizable intangible assets at September 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Goodwill and Intangible Assets:
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired developed technology - Noctiva
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,111
|
|
|
$
|
(7,024
|
)
|
|
$
|
(66,087
|
)
|
|
$
|
—
|
|
Acquired developed technology - Vazculep
|
|
12,061
|
|
|
(11,042
|
)
|
|
1,019
|
|
|
12,061
|
|
|
(10,432
|
)
|
|
—
|
|
|
1,629
|
|
Total amortizable intangible assets
|
|
$
|
12,061
|
|
|
$
|
(11,042
|
)
|
|
$
|
1,019
|
|
|
$
|
85,172
|
|
|
$
|
(17,456
|
)
|
|
$
|
(66,087
|
)
|
|
$
|
1,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
Total unamortizable intangible assets
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
|
$
|
18,491
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,491
|
|
The Company recorded amortization expense related to amortizable intangible assets of $205 and $1,620 for the three months ended September 30, 2019 and 2018, respectively and $610 and $4,996 for the nine months ended September 30, 2019 and 2018, respectively.
During the fourth quarter 2018, certain conditions came to light, largely the lack of a meaningful increase in Noctiva prescriptions despite the substantial investment of resources, which indicated that the carrying value of the asset, may not be fully recoverable. As such, the Company performed an impairment test based on a comparison of the pretax discounted cash flows expected to be generated by the asset, which is a Level 3 fair value estimate, to the recorded value of the asset and concluded that the associated cash flows did not support any of the carrying value of the intangible asset and the Company recorded a full impairment charge of $66,087 at December 31, 2018 related to the acquired developed technology associated with Noctiva. The February 6, 2019 Chapter 11 bankruptcy filing of Specialty Pharma, the subsidiary which markets, sells and distributes Noctiva, confirmed management’s conclusion on the impairment.
Amortizable intangible assets are amortized over their estimated useful lives, which generally range from three to fifteen years. Estimated amortization of intangible assets for the next five years is as follows:
|
|
|
|
|
|
Estimated Annual Amortization Expense:
|
|
Amount
|
|
|
|
2019
|
|
$
|
815
|
|
2020
|
|
814
|
|
2021
|
|
—
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
NOTE 9: Leases
In February 2016, the FASB issued ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. As of January 1, 2019, adoption of the new guidance resulted in the initial recognition of operating lease right-of-use assets of $5,046 and operating lease liabilities of $5,131. At September 30, 2019, the balances of the operating lease right-of-use asset and total operating lease liability were $4,385 and $4,462, respectively, of which $1,596 of the operating lease liability is current.
The Company leases certain facilities for office and manufacturing purposes, comprising approximately 99% of the total lease population. All leased facilities are classified as operating leases with remaining lease terms between one and seven years. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and will include these options in the lease term when they are reasonably certain of being exercised. For all of the Company’s leases, lease and non-lease components are accounted for as a single lease component, as all non-lease components are immaterial to break out separately.
The components of lease costs, which are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of loss for the three and nine months ended September 30 were as follows:
|
|
|
|
|
|
|
|
|
|
Lease cost:
|
|
Three months ended September 30, 2019
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
Operating lease costs (1)
|
|
$
|
411
|
|
|
$
|
1,150
|
|
Sublease income (2)
|
|
82
|
|
|
187
|
|
Total lease cost
|
|
$
|
329
|
|
|
$
|
963
|
|
(1) Variable lease costs were immaterial for the three and nine months ended September 30, 2019.
(2) Represents sublease income received for the vacated office facility in Charlotte, North Carolina, which was acquired with the FSC acquisition in February 2016. The lease and sublease agreements terminate in December 2020. The Company also vacated portions of its office facility in St. Louis, Missouri during May 2019 and August 2019 and started receiving sublease income starting in May 2019 and August 2019 from two different tenants. The lease agreement ends in April 2025 and the sublease agreement that started in May 2019 ends in May 2020, with a one year renewal and the sublease agreement that started in August 2019 ends in July 2020, and can continue thereafter on a month-to-month basis.
During the three and nine months ended September 30, 2019, the Company reduced its operating lease liabilities by $411 and $1,115 for cash paid. In addition, during the nine months ended September 30, 2019, new operating leases commenced resulting
in the recognition of operating lease right-of-use assets and liabilities of $1,000 and $0, respectively, as the entire lease payment was paid on March 31, 2019. There were no new leases during the three months ended September 30, 2019. As of September 30, 2019, the Company is aware of one additional embedded lease that has not yet commenced and will not commence until the time of FDA approval of the product (if approved). Once FDA approval is given and the start date is determined, annual production suite fees of approximately $3,000 to $4,000 would commence and at that time an operating lease right-of-use asset and corresponding operating lease liability will be recorded.
In connection with the 2019 French Restructuring plan discussed in Note 15: Restructuring Costs, during the three months ended September 30, 2019, the Company came to an agreement with the landlord of the leased office space in France, to exit the lease by December 31, 2019 with an early termination payment of approximately $820. The Company accounted for this change in the lease term as a modification of the original lease. As a result of this modification, the right-of-use asset and liability related to the French office lease that was remeasured, and the asset was subsequently tested for impairment as the fair value was less than the book value. Since the fair value was determined to be less than the book value, the Company recorded an impairment to the right of use asset of $826, which was recorded as a restructuring cost in the unaudited condensed consolidated statements of loss.
As of September 30, 2019, our operating leases have a weighted-average remaining lease term of 4.3 years and a weighted-average discount rate of 5.3%. Nearly all of Avadel’s lease contracts do not provide a readily determinable implicit rate. For these contracts, Avadel’s estimated incremental borrowing rate is based on information available at the inception of the lease.
Maturities of the Company’s operating lease liabilities were as follows:
|
|
|
|
|
|
Maturities:
|
|
Operating Leases
|
|
|
|
Remaining three months of 2019
|
|
$
|
1,117
|
|
2020
|
|
879
|
|
2021
|
|
670
|
|
2022
|
|
678
|
|
2023
|
|
690
|
|
Thereafter
|
|
941
|
|
Total lease payments
|
|
4,975
|
|
Less: interest
|
|
513
|
|
Present value of lease liabilities
|
|
$
|
4,462
|
|
Under the prior lease guidance, minimum rental commitments for non-cancelable leases as of December 31, 2018 were:
|
|
|
|
|
|
Lease Commitment:
|
|
Operating Leases
|
|
|
|
2019
|
|
$
|
1,191
|
|
2020
|
|
1,208
|
|
2021
|
|
1,008
|
|
2022
|
|
767
|
|
2023
|
|
695
|
|
Thereafter
|
|
967
|
|
Total minimum lease payments
|
|
$
|
5,836
|
|
NOTE 10: Long-Term Related Party Payable
Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the Nine Months Ended
September 30, 2019
|
|
|
|
|
|
|
|
Changes in Fair Value of Related Party Payable
|
|
|
Long-Term Related Party Payable:
|
Balance,
December 31, 2018
|
|
Payments to
Related Parties
|
|
Operating Expense
|
|
Other
Expense
|
|
Balance, September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out payments - Éclat Pharmaceuticals (a)
|
$
|
25,615
|
|
|
$
|
(8,640
|
)
|
|
$
|
2,384
|
|
|
$
|
—
|
|
|
$
|
19,359
|
|
Financing-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement - Deerfield (b)
|
2,184
|
|
|
(930
|
)
|
|
—
|
|
|
330
|
|
|
1,584
|
|
Royalty agreement - Broadfin (c)
|
1,041
|
|
|
(444
|
)
|
|
—
|
|
|
166
|
|
|
763
|
|
Total related party payable
|
28,840
|
|
|
$
|
(10,014
|
)
|
|
$
|
2,384
|
|
|
$
|
496
|
|
|
21,706
|
|
Less: current portion
|
(9,439
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,588
|
)
|
Total long-term related party payable
|
$
|
19,401
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,118
|
|
Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2019 and June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the Three Months Ended
September 30, 2019
|
|
|
|
|
|
|
|
Changes in Fair Value of Related Party Payable
|
|
|
Long-Term Related Party Payable:
|
Balance,
June 30, 2019
|
|
Payments to
Related Parties
|
|
Operating Expense
|
|
Other
Expense
|
|
Balance, September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn-out payments - Éclat Pharmaceuticals (a)
|
$
|
21,582
|
|
|
$
|
(2,850
|
)
|
|
$
|
627
|
|
|
$
|
—
|
|
|
$
|
19,359
|
|
Financing-related:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty agreement - Deerfield (b)
|
1,799
|
|
|
(309
|
)
|
|
—
|
|
|
94
|
|
|
1,584
|
|
Royalty agreement - Broadfin (c)
|
866
|
|
|
(148
|
)
|
|
—
|
|
|
45
|
|
|
763
|
|
Total related party payable
|
24,247
|
|
|
$
|
(3,307
|
)
|
|
$
|
627
|
|
|
$
|
139
|
|
|
21,706
|
|
Less: current portion
|
(8,264
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,588
|
)
|
Total long-term related party payable
|
$
|
15,983
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,118
|
|
(a) In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by the Company’s former CEO, and certain other current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity.
|
|
(b)
|
As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 1.75% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Eclat products.
|
|
|
(c)
|
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a related party and current shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024.
|
At September 30, 2019, the fair value of each related party 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 15%. These fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related related party payables, resulting primarily from management’s revision of key assumptions, will be recorded in the unaudited condensed consolidated statements of loss in the line items entitled “Changes in fair value of related party contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of related party payable” for items (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 2018 Annual Report on Form 10-K for more information on key assumptions used to determine the fair value of these liabilities.
The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (b) and (c) above. These financing-related liabilities are recorded at fair market value on the unaudited condensed consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – change in fair value of related party payable” on the unaudited condensed consolidated statements of loss.
The following table summarizes changes to the related party payables, a recurring Level 3 measurement, for the nine-month periods ended September 30, 2019 and 2018, respectively:
|
|
|
|
|
|
Related Party Payable Rollforward:
|
|
Balance
|
|
|
|
Balance, December 31, 2017
|
|
$
|
98,925
|
|
Payments of related party payable
|
|
(19,261
|
)
|
Fair value adjustments (1)
|
|
(18,468
|
)
|
Expiration of warrants
|
|
(2,167
|
)
|
Disposition of the pediatric assets
|
|
(20,337
|
)
|
Balance, September 30, 2018
|
|
$
|
38,692
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
28,840
|
|
Payments of related party payable
|
|
(10,014
|
)
|
Fair value adjustments (1)
|
|
2,880
|
|
Balance, September 30, 2019
|
|
$
|
21,706
|
|
(1) Fair value adjustments are reported as changes in fair value of related party contingent consideration and other expense - changes in fair value of related party payable in the unaudited condensed consolidated statements of loss.
NOTE 11: Long-Term Debt
Long-term debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Principal amount of 4.50% exchangeable senior notes due 2023
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Less: debt discount and issuance costs, net
|
|
(23,618
|
)
|
|
(28,059
|
)
|
Net carrying amount of liability component
|
|
120,132
|
|
|
115,691
|
|
Other debt
|
|
35
|
|
|
149
|
|
Subtotal
|
|
120,167
|
|
|
115,840
|
|
Less: current maturities
|
|
(35
|
)
|
|
(106
|
)
|
Long-term debt
|
|
$
|
120,132
|
|
|
$
|
115,734
|
|
|
|
|
|
|
Equity component:
|
|
|
|
|
Equity component of exchangeable notes, net of issuance costs
|
|
$
|
(26,699
|
)
|
|
$
|
(26,699
|
)
|
NOTE 12: Income Taxes
The components of loss before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Loss Before Income Taxes:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Ireland
|
|
$
|
(14,302
|
)
|
|
$
|
(18,314
|
)
|
|
$
|
(36,625
|
)
|
|
$
|
(34,203
|
)
|
United States
|
|
5,952
|
|
|
1,773
|
|
|
12,309
|
|
|
(1,043
|
)
|
France
|
|
1,720
|
|
|
79
|
|
|
(2,530
|
)
|
|
441
|
|
Total loss before income taxes
|
|
$
|
(6,630
|
)
|
|
$
|
(16,462
|
)
|
|
$
|
(26,846
|
)
|
|
$
|
(34,805
|
)
|
The items accounting for the difference between the income tax provision computed at the statutory rate and the Company’s effective tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Income Tax Rate Reconciliation:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Statutory tax rate
|
|
12.5
|
%
|
|
12.5
|
%
|
|
12.5
|
%
|
|
12.5
|
%
|
International tax rates differential
|
|
(4.3
|
)%
|
|
7.0
|
%
|
|
4.1
|
%
|
|
6.9
|
%
|
Change in valuation allowance
|
|
(31.1
|
)%
|
|
(18.3
|
)%
|
|
(27.0
|
)%
|
|
(14.9
|
)%
|
Change in fair value of nondeductible contingent consideration
|
|
4.1
|
%
|
|
8.7
|
%
|
|
(0.1
|
)%
|
|
9.9
|
%
|
Nondeductible stock-based compensation
|
|
—
|
%
|
|
(3.5
|
)%
|
|
(0.2
|
)%
|
|
(2.6
|
)%
|
Unrecognized tax benefits
|
|
(8.8
|
)%
|
|
(3.5
|
)%
|
|
(3.3
|
)%
|
|
(3.1
|
)%
|
State and local income taxes, net of federal
|
|
(0.2
|
)%
|
|
0.1
|
%
|
|
(0.2
|
)%
|
|
0.2
|
%
|
Nondeductible interest expense
|
|
(4.5
|
)%
|
|
—
|
%
|
|
(2.6
|
)%
|
|
—
|
%
|
Other
|
|
(1.3
|
)%
|
|
1.2
|
%
|
|
3.1
|
%
|
|
0.8
|
%
|
Effective income tax rate
|
|
(33.6
|
)%
|
|
4.2
|
%
|
|
(13.7
|
)%
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
Income tax benefit - at statutory tax rate
|
|
$
|
(829
|
)
|
|
$
|
(2,058
|
)
|
|
$
|
(3,355
|
)
|
|
$
|
(4,351
|
)
|
International tax rates differential
|
|
283
|
|
|
(1,153
|
)
|
|
(1,108
|
)
|
|
(2,394
|
)
|
Change in valuation allowance
|
|
2,059
|
|
|
3,007
|
|
|
7,242
|
|
|
5,188
|
|
Change in fair value of nondeductible contingent consideration
|
|
(270
|
)
|
|
(1,431
|
)
|
|
33
|
|
|
(3,436
|
)
|
Nondeductible stock-based compensation
|
|
1
|
|
|
578
|
|
|
50
|
|
|
914
|
|
Unrecognized tax benefits
|
|
581
|
|
|
578
|
|
|
873
|
|
|
1,086
|
|
State and local income taxes, net of federal
|
|
14
|
|
|
(13
|
)
|
|
41
|
|
|
(70
|
)
|
Nondeductible interest expense
|
|
299
|
|
|
—
|
|
|
709
|
|
|
—
|
|
Other
|
|
96
|
|
|
(199
|
)
|
|
(844
|
)
|
|
(297
|
)
|
Income tax provision (benefit) - at effective income tax rate
|
|
$
|
2,234
|
|
|
$
|
(691
|
)
|
|
$
|
3,641
|
|
|
$
|
(3,360
|
)
|
The income tax provision was $2,234 for the three months ended September 30, 2019 and a benefit of $691 for the three months ended September 30, 2018. The increase in the income tax provision for the three months ended September 30, 2019 is primarily the result of a decrease in the amount of nontaxable gain from the revaluation of contingent consideration and an increase in the amount of valuation allowances recorded on foreign income tax losses.
The income tax provision was $3,641 for the nine months ended September 30, 2019 and a benefit of $3,360 for the nine months ended September 30, 2018. The increase in the income tax provision for the nine months ended September 30, 2019 is primarily the result of a decrease the amount of nontaxable gain from the revaluation of contingent consideration and an increase in the amount of valuation allowances recorded on foreign income tax losses.
The IRS commenced an examination of the Company's U.S. income tax returns for 2016 and 2017 during the second quarter 2019.
NOTE 13: Other Assets and Liabilities
Various other assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Valued-added tax recoverable
|
|
$
|
807
|
|
|
$
|
1,378
|
|
Prepaid and other expenses
|
|
2,757
|
|
|
2,145
|
|
Guarantee from Armistice (see Note 14)
|
|
560
|
|
|
534
|
|
Income tax receivable
|
|
594
|
|
|
921
|
|
Research and development tax credit receivable
|
|
270
|
|
|
283
|
|
Short-term deposit
|
|
—
|
|
|
3,350
|
|
Other
|
|
175
|
|
|
225
|
|
Total
|
|
$
|
5,163
|
|
|
$
|
8,836
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Assets:
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
21,636
|
|
|
$
|
23,029
|
|
Long-term deposits
|
|
1,477
|
|
|
1,477
|
|
Guarantee from Armistice (see Note 14)
|
|
5,271
|
|
|
5,697
|
|
Right of use assets at contract manufacturing organizations
|
|
6,494
|
|
|
5,894
|
|
Other
|
|
49
|
|
|
49
|
|
Total
|
|
$
|
34,927
|
|
|
$
|
36,146
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Accrued compensation
|
|
$
|
2,322
|
|
|
$
|
3,971
|
|
Accrued social charges
|
|
482
|
|
|
1,009
|
|
Accrued restructuring (see Note 15)
|
|
1,737
|
|
|
879
|
|
Customer allowances
|
|
6,244
|
|
|
6,541
|
|
Accrued contract research organization charges
|
|
3,389
|
|
|
1,000
|
|
Accrued contract manufacturing organization costs
|
|
1,284
|
|
|
2,028
|
|
Accrued contract sales organization and marketing costs
|
|
—
|
|
|
3,469
|
|
Other
|
|
1,559
|
|
|
2,798
|
|
Total
|
|
$
|
17,017
|
|
|
$
|
21,695
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-Current Liabilities:
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Provision for retirement indemnity
|
|
$
|
—
|
|
|
$
|
1,024
|
|
Customer allowances
|
|
923
|
|
|
1,352
|
|
Unrecognized tax benefits
|
|
7,717
|
|
|
5,315
|
|
Guarantee to Deerfield (see Note 14)
|
|
5,289
|
|
|
5,717
|
|
Other
|
|
43
|
|
|
594
|
|
Total
|
|
$
|
13,972
|
|
|
$
|
14,002
|
|
14: Divestiture of the Pediatric Assets
On February 12, 2018, the Company, together with its subsidiaries Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC (“FSC Therapeutics”), and Avadel US Holdings, Inc. (“Holdings”), as the “Sellers,” entered into an asset purchase agreement (the “Purchase Agreement”) with Cerecor, Inc. (“Cerecor”). The transaction closed on February 16, 2018 wherein Cerecor purchased from the Sellers four pediatric commercial stage assets – Karbinal™ ER, Cefaclor, Flexichamber™ and AcipHex® Sprinkle™, together with certain associated business assets – which were held by FSC. The Company acquired FSC in February 2016 from Deerfield and certain of its affiliates. Pursuant to the Purchase Agreement, Cerecor assumed the Company’s remaining payment obligations to Deerfield under the Membership Interest Purchase Agreement, dated as of February
5, 2016, between Holdings, Flamel Technologies SA (the predecessor of the Company) and Deerfield and certain of its affiliates, which payment obligations consist of the following (collectively, the “Assumed Obligations”): (i) a quarterly payment of $263 beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the FSC products through February 5, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. Cerecor also assumed certain contracts and other obligations related to the acquired assets, and in that connection Holdings agreed to pay Cerecor certain make-whole payments associated with obligations Cerecor is assuming related to a certain supply contract related to Karbinal™ ER.
In conjunction with the divestiture, the Company also entered into the following arrangements:
License and Development Agreement
Also, in connection with the closing under the Purchase Agreement, Flamel Ireland Limited, an Irish limited company operating under the trade name of Avadel Ireland (“Avadel Ireland”) and a wholly-owned subsidiary of the Company, and Cerecor entered into a license and development agreement (the “License and Development Agreement”) pursuant to which, among other things:
|
|
•
|
Avadel Ireland will provide Cerecor with four product formulations utilizing Avadel Ireland’s LiquiTime™ technology, and will complete pilot bioequivalence studies for such product formulations within 18 months;
|
|
|
•
|
Cerecor will reimburse Avadel Ireland for development costs of the four LiquiTime™ products in excess of $1,000 in the aggregate;
|
|
|
•
|
Upon transfer of the four product formulations, Cerecor will assume all remaining development costs and responsibilities for the product development, clinical studies, NDA applications and associated filing fees; and
|
|
|
•
|
Upon regulatory approval and commercial launch of any LiquiTime™ products, Cerecor will pay Avadel Ireland quarterly royalties based on a percentage of net sales of any such products in the mid-single digit range.
|
Effective October 25, 2019, Cerecor and Avadel Ireland agreed to terminate the License and Development Agreement.
Deerfield Guarantee
In connection with the closing under the Purchase Agreement, the Company and Holdings provided their guarantee (the “Deerfield Guarantee”) in favor of Deerfield. Under the Deerfield Guarantee, the Company and Holdings guaranteed to Deerfield the payment by Cerecor of the Assumed Obligations under the Membership Interest Purchase Agreement between the Company and Deerfield dated February 5, 2016. The Assumed Obligations include (i) a quarterly payment of $263 beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. In addition, under the Deerfield Guarantee, the Company and Holdings guaranteed that Deerfield would receive certain minimum annual FSC Product Royalties through February 6, 2026 (the “Minimum Royalties”). Given the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. A valuation was performed, which was based largely on an analysis of the potential timing of each possible cash outflow described above and the likelihood of Cerecor’s default on such payments assuming an S&P credit rating of CCC+. The result of this valuation identified a guarantee liability of $6,643. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield. At September 30, 2019, the carrying value of this liability was $5,851.
Armistice Guarantee
In connection with the closing under the Purchase Agreement, Armistice Capital Master Fund, Ltd., the then majority shareholder of Cerecor, guaranteed to Holdings the payment by Cerecor of the Assumed Obligations, including the Minimum Royalties. A valuation of the guarantee asset was performed in accordance with ASC 460 and a guarantee asset of $6,620 was recorded. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield noted above. At September 30, 2019, the carrying value of this asset was $5,831.
The fair values of the Avadel guarantee to Deerfield and the guarantee received by Avadel from Armistice largely offset and when combined are not material.
Based on management’s review of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the disposition of our pediatric assets and related liabilities did not qualify for discontinued operations reporting. Our results of operations for the period January 1, 2018 through February 16, 2018 include the results of FSC, prior to its February 16, 2018 disposition date.
Recent Updates to Guarantees
On October 10, 2019 Cerecor entered into a purchase and sale agreement with a Aytu BioScience, Inc (“Buyer”) pursuant to which the Buyer will purchase certain assets from Cerecor and assume certain of Cerecor’s liabilities, including all of Cerecor’s liabilities assumed as part of the Purchase Agreement noted above. As part of this transaction, on November 1, 2019, Armistice has agreed to deposit $15,000 in an escrow account governed by an escrow agreement between Armistice and Deerfield having the purpose of securing the $15,000 balloon payment due January 2021 as part of the Membership Interest Purchase Agreement. As part of the Cerecor transaction with the buyer, Deerfield contractually acknowledges and agrees that they will seek payment from the escrow funds before requesting payment from the Company pursuant to the Deerfield Guarantee discussed above. As a result, the Company is in process of assessing the impact this escrow deposit has on the fair values of the guarantees and will adjust such carrying values in the quarter ending December 31, 2019.
The net impact of this transaction was not material to the unaudited condensed consolidated statements of loss.
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 is an effort to align the Group’s cost structure with our ongoing and future planned projects. The reduction in workforce is projected to be substantially complete by the end of calendar year 2019, and to result in employee severance, benefits and other costs of up to approximately $3,500, which are likely to be recognized through December 31, 2019. 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 French 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 (see Note 9: Leases) 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 three and nine months ended September 30, 2019:
|
|
|
|
|
|
2019 French Restructuring Obligation:
|
|
2019
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
—
|
|
Charges for employee severance, benefits and other costs
|
|
2,774
|
|
Payments
|
|
(1,837
|
)
|
Foreign currency impact
|
|
(42
|
)
|
Balance of restructuring accrual at September 30,
|
|
$
|
895
|
|
The 2019 French Restructuring liabilities of $884 and $11 are included in the unaudited condensed consolidated balance sheet in accrued expenses and accounts payable at September 30, 2019, respectively.
2019 Corporate Restructuring
During the first quarter of 2019, the Company announced a plan to reduce its Corporate workforce by more than 50% (“2019 Corporate Restructuring”). The reduction in workforce is primarily a result of the exit of Noctiva during the first quarter of 2019 (see Note 3: Subsidiary Bankruptcy and Deconsolidation), as well as an effort to better align the Company’s remaining cost structure at our U.S. and Ireland locations with our ongoing and future planned projects. The reduction in workforce is projected to be substantially complete by the end of calendar year 2019, and to result in employee severance, benefits and other costs of up to approximately $3,000, which are likely to be recognized through December 31, 2019. The restructuring charges associated with this plan of $607 and $1,570 were recognized during the three and nine months ended September 30, 2019, respectively. Included in the 2019 Corporate Restructuring expense of $607 for the three months ended September 30, 2019 were charges for employee severance, benefit and other costs. 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, 2019:
|
|
|
|
|
|
2019 Corporate Restructuring Obligation:
|
|
2019
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
—
|
|
Charges for employee severance, benefits and other costs
|
|
2,966
|
|
Payments
|
|
(2,113
|
)
|
Balance of restructuring accrual at September 30,
|
|
$
|
853
|
|
2019 Corporate Restructuring liabilities of $853 are included in the unaudited condensed consolidated balance sheet in accrued expenses at September 30, 2019.
2017 French Restructuring
During the first quarter of 2017, the Company announced a plan to reduce its workforce at the Venissieux, France site by approximately 50% (“2017 French Restructuring”). This reduction was an effort to align the Company’s cost structure with our ongoing and future planned projects. In July 2017, the Company completed negotiations with the works council for our French operations and received approval from the French Labor Commission (DIRECCTE) to implement the plan. The reduction was substantially complete at September 30, 2019. The 2017 French restructuring costs for the three months ended September 30, 2019 and 2018 were immaterial. The 2017 French Restructuring income of $168 and restructuring charges of $268 were recognized during the nine months ended September 30, 2019 and 2018, respectively. The following table sets forth activities for the Company’s cost reduction plan obligations for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
2017 French Restructuring Obligation:
|
|
2019
|
|
2018
|
|
|
|
|
|
Balance of restructuring accrual at January 1,
|
|
$
|
879
|
|
|
$
|
1,000
|
|
Charges for employee severance, benefits and other
|
|
(168
|
)
|
|
268
|
|
Payments
|
|
(663
|
)
|
|
(668
|
)
|
Foreign currency impact
|
|
(10
|
)
|
|
(19
|
)
|
Balance of restructuring accrual at September 30,
|
|
$
|
38
|
|
|
$
|
581
|
|
The 2017 French Restructuring accrual is included in the unaudited condensed consolidated balance sheet in other non-current liabilities at September 30, 2019 and 2018.
NOTE 16: Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during each period. Diluted net (loss) income per share is calculated by dividing net (loss) income by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net loss, diluted net loss per share would be calculated assuming the impact of the conversion of the 2023 Notes, the exercise of outstanding equity compensation awards, ordinary shares expected to be issued under our employee stock purchase plan (“ESPP”) and the exercise of contingent consideration warrants, all which have been exercised or have expired during the first quarter of 2018.
We have a choice to settle the conversion obligation under the 2023 Notes in cash, shares or any combination of the two. We utilize the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2023 Notes into shares of our ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.
The dilutive effect of the warrants, stock options, RSU’s and ordinary shares expected to be issued under or ESPP has been calculated using the treasury stock method.
A reconciliation of basic and diluted net loss 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:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,864
|
)
|
|
$
|
(15,771
|
)
|
|
$
|
(30,487
|
)
|
|
$
|
(31,445
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
37,436
|
|
|
36,904
|
|
|
37,382
|
|
|
37,410
|
|
Effect of dilutive securities—employee and director equity awards outstanding and 2023 Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted shares
|
|
37,436
|
|
|
36,904
|
|
|
37,382
|
|
|
37,410
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic
|
|
$
|
(0.24
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.84
|
)
|
Net loss per share - diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.84
|
)
|
Potential common shares of 19,544 and 18,742 were excluded from the calculation of weighted average shares for the three months ended September 30, 2019 and 2018, respectively, because their effect was considered to be anti-dilutive. Potential common shares of 20,512 and 16,647 were excluded from the calculation of weighted average shares for the nine months ended September 30, 2019 and 2018, respectively. For the three and nine months ended September 30, 2019 and 2018, 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 17: Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 30, 2019 and 2018, respectively, net of tax effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Accumulated Other Comprehensive Loss:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment:
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(23,720
|
)
|
|
$
|
(23,435
|
)
|
|
$
|
(23,621
|
)
|
|
$
|
(23,202
|
)
|
Net other comprehensive loss
|
|
(210
|
)
|
|
(60
|
)
|
|
(309
|
)
|
|
(293
|
)
|
Balance at September 30,
|
|
$
|
(23,930
|
)
|
|
$
|
(23,495
|
)
|
|
$
|
(23,930
|
)
|
|
$
|
(23,495
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on marketable debt securities, net
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
872
|
|
|
$
|
(224
|
)
|
|
$
|
205
|
|
|
$
|
(64
|
)
|
Net other comprehensive income (loss), net of ($5), ($18), ($46) and ($88) tax, respectively
|
|
86
|
|
|
68
|
|
|
753
|
|
|
(92
|
)
|
Balance at September 30,
|
|
$
|
958
|
|
|
$
|
(156
|
)
|
|
$
|
958
|
|
|
$
|
(156
|
)
|
Accumulated other comprehensive loss at September 30,
|
|
$
|
(22,972
|
)
|
|
$
|
(23,651
|
)
|
|
$
|
(22,972
|
)
|
|
$
|
(23,651
|
)
|
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 18: Revenue by Product
The Company has determined that it operates in one segment, the development and commercialization of pharmaceutical products, including controlled-release therapeutic products based on its proprietary polymer based technology. The Company’s Chief Operating Decision Maker is the CEO. The CEO reviews profit and loss information on a consolidated basis to assess performance and make overall operating decisions as well as resource allocations. All products are included in one segment because the Company’s products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.
The following table presents a summary of total revenues by these products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Revenues by Product:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Bloxiverz
|
|
$
|
1,466
|
|
|
$
|
3,656
|
|
|
$
|
6,392
|
|
|
$
|
16,691
|
|
Vazculep
|
|
8,786
|
|
|
8,759
|
|
|
27,669
|
|
|
33,097
|
|
Akovaz
|
|
4,208
|
|
|
5,991
|
|
|
13,946
|
|
|
28,083
|
|
Other
|
|
(231
|
)
|
|
1,420
|
|
|
213
|
|
|
4,232
|
|
Total product sales
|
|
14,229
|
|
|
19,826
|
|
|
48,220
|
|
|
82,103
|
|
License revenue
|
|
—
|
|
|
—
|
|
|
—
|
|
|
246
|
|
Total revenues
|
|
$
|
14,229
|
|
|
$
|
19,826
|
|
|
$
|
48,220
|
|
|
$
|
82,349
|
|
NOTE 19: 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, 2019 and December 31, 2018, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s unaudited condensed consolidated financial position, results of operations, cash flows or liquidity.
Litigation Related to Noctiva
Note 3: Subsidiary Bankruptcy and Deconsolidation briefly describes the Chapter 11 bankruptcy case which our subsidiary Specialty Pharma commenced on February 6, 2019, and which on April 26, 2019 resulted in the bankruptcy court-approved sale of all of Specialty Pharma’s intangible assets and inventory to an unaffiliated third party. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business. During the pendency of the bankruptcy case, all pending litigation against Specialty Pharma is automatically stayed and any new litigation against Specialty Pharma is precluded unless the bankruptcy court orders otherwise. Below are descriptions of a litigation to which Specialty Pharma is a party and a contract dispute involving Specialty Pharma, both of which matters are subject to the automatic stay during the bankruptcy case.
Ferring Litigation. Some of the patents covering the NoctivaTM product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, who manufacture a competing product known as Nocdurna. Nocdurna was approved by the FDA in June 2018 and commercially launched in the U.S. in November 2018. In this litigation, Ferring seeks to invalidate and disputes the inventorship of the Noctiva Patents, seeks damages for various alleged breaches of contractual and common law duties, and seeks damages for alleged infringement by NoctivaTM of Ferring’s “Nocdurna” trademark. Specialty Pharma and certain other parties including Serenity Pharmaceuticals, LLC (“Serenity”) (the licensor of the Noctiva Patents) have defended this litigation, and have made counterclaims against Ferring, including for infringement of the Noctiva Patents and a declaratory judgment of noninfringement with respect to Ferring’s “Nocdurna” trademark. The court dismissed Ferring’s inventorship claim and its claims for alleged breaches of contractual and common law duties, although these dismissals may be appealed by Ferring. On February 15, 2019, Specialty Pharma and its co-defendants moved to stay the litigation pending completion of the bankruptcy proceeding of Specialty Pharma. On May 15, 2019, that motion was denied due to an impending settlement of the litigation with respect to just Ferring and Specialty Pharma.
Contract Dispute. On January 21, 2019, Serenity gave notice to Specialty Pharma of an alleged breach of the parties’ Noctiva license agreement. Serenity alleges that Specialty Pharma breached its contractual obligation to devote commercially reasonable efforts to the commercialization of Noctiva and seeks unspecified damages. On January 27, 2019, Specialty Pharma notified Serenity of a claim for $1.7 million in damages as a result of Serenity’s breach of its contractual obligation to pay the costs of the Ferring Litigation. Serenity’s notice to Specialty Pharma invoked the dispute resolution provisions of the Noctiva license agreement, which culminate in arbitration, but neither party has yet initiated an arbitration proceeding or filed suit.
Material Commitments
Due to the Chapter 11 bankruptcy case of Specialty Pharma, the Company’s various commitments to purchase finished product from suppliers has changed from what was included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K. As of September 30, 2019, commitments for these arrangements, at maximum quantities and at contractual prices over the remaining life of the contract, and excluding any waived commitments, are as follows for the years ended December 31:
|
|
|
|
|
|
Purchase Commitments:
|
|
Balance
|
|
|
|
2019
|
|
$
|
7,194
|
|
2020
|
|
1,320
|
|
2021
|
|
1,320
|
|
2022
|
|
1,320
|
|
2023
|
|
220
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
11,374
|
|
Other than commitments disclosed in Note 15: Contingent Liabilities and Commitments to the Company’s audited consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt obligations which are disclosed in Note 10: Long-Term Debt, respectively, to the Company’s consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K and long-term contingent consideration payable as disclosed in Note 10: Long-Term Related Party Payable, to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.