Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION            
Washington, D.C. 20549
 
———————
FORM 10-Q
———————
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: March 31, 2020
 
———————
AVADEL PHARMACEUTICALS PLC
(Exact name of registrant as specified in its charter)
———————
 
Ireland
000-28508
98-1341933
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
 
10 Earlsfort Terrace
Dublin 2, Ireland
D02 T380
(Address of Principal Executive Office and Zip Code)
 
+011-1-485-1200
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report) 
———————
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
American Depositary Shares* 
Ordinary Shares, nominal value $0.01 per share**
AVDL 
N/A
The Nasdaq Global Market
*American Depositary Shares may be evidenced by American Depositary Receipts. Each American Depositary Share represents one (1) Ordinary Share.
 
** Not for trading, but only in connection with the listing of American Depositary Shares on The Nasdaq Global Market.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
At May 7, 2020, 58,129,037 ordinary shares, nominal value $0.01 each, of the Company were outstanding.






TABLE OF CONTENTS
 
 
Page #
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



We own various trademark registrations and applications, and unregistered trademarks, include Avadel, MicroPump, Bloxiverz, Vazculep, Akovaz and Nouress.  All other trade names, trademarks and service marks of other companies appearing in this Quarterly Report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Quarterly Report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

From time to time, we may use our website or our Twitter account (@AvadelPharma) to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available at www.avadelpharmaceuticals.com. Investors are encouraged to review the Investors section of our website because we may post material information on that site that is not otherwise disseminated by us. Information that is contained in and can be accessed through our website or our Twitter posts are not incorporated into, and does not form a part of, this Quarterly Report.


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Cautionary Disclosure Regarding Forward-Looking Statements
 
This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as “may,” “will,” “could,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions, or the negative of these terms, or similar expressions. Accordingly, these statements involve estimates, assumptions, risks and uncertainties which could cause actual results to differ materially from those expressed in them.

This quarterly report on Form 10-Q contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

Our reliance on a single product candidate, FT218, and our ability to obtain regulatory approval of and successfully commercialize FT218, including any delays in submission or approval related to COVID-19;
Our plans and expectations regarding the effectiveness of our restructuring plan announced in February 2019, including our ability to achieve the desired cost savings;
Any further restructuring actions that may be required and our ability to obtain any required consents (including any consents required pursuant to the Indenture governing our exchange notes due 2023, or the 2023 Notes);
Our reliance on a small number of products to generate all or substantially all of our revenue and the competitive pressures that these products face;
The lack of patent protection for three of our approved products, Bloxiverz, Vazculep and Akovaz;
Our ability to successfully launch Nouress in the United States;
Our consideration of strategic alternatives for our Unapproved Marketed Drugs (“UMD”) Program;
Our ability to develop and obtain U.S. Food and Drug Administration (“FDA”) approval for any future potential UMD product candidates;
Our ability to continue to service the 2023 Notes, including making the ongoing interest payments on the 2023 Notes, settling exchanges of the 2023 Notes in cash or completing any required repurchases of the 2023 Notes;
The ability of our product candidates and products to gain market acceptance;
Our ability to enter into strategic partnerships for the development, commercialization, manufacturing and distribution of our products and product candidates;
Our dependence on a limited number of suppliers for the manufacturing of our products and certain raw materials in our products and any failure of such suppliers to deliver sufficient quantities of these raw materials, which could have a material adverse effect on our business;
Our ability to finance our operations on acceptable terms, either through the raising of capital, the incurrence of convertible or other indebtedness or through strategic financing or commercialization partnerships;
Our expectations about the potential market sizes and market participation potential for our approved or proposed products;
The potential impact of COVID-19 on our business and future operating results;
Our ability to retain members of our management team and our employees; and
Competition existing today or that will likely arise in the future.

These forward-looking statements are neither promises nor guarantees of future performance due to a variety of risks and uncertainties and other factors more fully discussed in the “Risk Factors” section in Part I, Item 1A of the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2020 and the risk factors and cautionary statements described in other documents that we file from time to time with the SEC. Given these uncertainties, readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to revise any forward-looking statements to reflect events or developments occurring after the date of this quarterly report, even if new information becomes available in the future.


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PART I – FINANCIAL INFORMATION 
ITEM 1.  FINANCIAL STATEMENTS 
AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
 
 
 
Product sales
 
$
12,243

 
$
16,437

Operating expenses:
 
 

 
 

Cost of products
 
2,457

 
3,266

Research and development expenses
 
5,530

 
7,329

Selling, general and administrative expenses
 
7,913

 
10,446

Intangible asset amortization
 
203

 
201

Changes in fair value of contingent consideration
 
2,478

 
2,134

Restructuring costs
 
159

 
1,228

Total operating expenses
 
18,740

 
24,604

Operating loss
 
(6,497
)
 
(8,167
)
Investment and other income, net
 
(378
)
 
817

Interest expense
 
(3,190
)
 
(3,062
)
Loss on deconsolidation of subsidiary
 

 
(2,673
)
Other expense - changes in fair value of contingent consideration payable
 
(310
)
 
(307
)
Loss before income taxes
 
(10,375
)
 
(13,392
)
Income tax benefit
 
(9,510
)
 
(374
)
Net loss
 
$
(865
)
 
$
(13,018
)
 
 
 
 
 
Net loss per share - basic
 
$
(0.02
)
 
$
(0.35
)
Net loss per share - diluted
 
(0.02
)
 
(0.35
)
 
 
 
 
 
Weighted average number of shares outstanding - basic
 
41,057

 
37,354

Weighted average number of shares outstanding - diluted
 
41,057

 
37,354

 
See accompanying notes to unaudited condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
 
 
 
Net loss
 
$
(865
)
 
$
(13,018
)
Other comprehensive (loss) income, net of tax:
 
 

 
 

Foreign currency translation loss
 
(177
)
 
(161
)
Net other comprehensive (loss) income, net of ($49) and ($18) tax, respectively
 
(644
)
 
374

Total other comprehensive (loss) income, net of tax
 
(821
)
 
213

Total comprehensive loss
 
$
(1,686
)
 
$
(12,805
)
 
See accompanying notes to unaudited condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
 
March 31, 2020
 
December 31, 2019
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
73,506

 
$
9,774

Marketable securities
 
39,977

 
54,384

Accounts receivable
 
8,797

 
8,281

Inventories
 
3,523

 
3,570

Research and development tax credit receivable
 
1,835

 
2,107

Prepaid expenses and other current assets
 
3,337

 
4,264

Total current assets
 
130,975

 
82,380

Property and equipment, net
 
472

 
544

Operating lease right-of-use assets
 
3,365

 
3,612

Goodwill
 
18,491

 
18,491

Intangible assets, net
 
610

 
813

Research and development tax credit receivable
 
6,288

 
6,322

Other non-current assets
 
47,524

 
39,274

Total assets
 
$
207,725

 
$
151,436

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term contingent consideration payable
 
$
5,855

 
$
5,554

Current portion of operating lease liability
 
604

 
645

Accounts payable
 
6,790

 
6,100

Accrued expenses
 
14,858

 
19,810

Income taxes
 
2,297

 
43

  Other current liabilities
 
1,932

 
3,832

Total current liabilities
 
32,336

 
35,984

Long-term debt
 
123,258

 
121,686

Long-term contingent consideration payable, less current portion
 
12,195

 
11,773

Long-term operating lease liability
 
2,205

 
2,319

Other non-current liabilities
 
5,664

 
8,873

Total liabilities
 
175,658

 
180,635

 
 
 
 
 
Shareholders’ equity (deficit):
 
 

 
 

Preferred shares, nominal value of $0.01 per share; 50,000 shares authorized; 488 issued and outstanding at March 31, 2020 and none issued and outstanding at December 31, 2019, respectively
 
5

 

Ordinary shares, nominal value of $0.01 per share; 500,000 shares authorized; 51,812 issued and 46,404 outstanding at March 31, 2020 and 42,927 issued and 37,520 outstanding at December 31, 2019
 
518

 
429

Treasury shares, at cost, 5,407 shares held at March 31, 2020 and December 31, 2019, respectively
 
(49,998
)
 
(49,998
)
Additional paid-in capital
 
497,249

 
434,391

Accumulated deficit
 
(392,080
)
 
(391,215
)
Accumulated other comprehensive loss
 
(23,627
)
 
(22,806
)
Total shareholders’ equity (deficit)
 
32,067

 
(29,199
)
Total liabilities and shareholders’ equity (deficit)
 
$
207,725

 
$
151,436

 See accompanying notes to unaudited condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands) 
(Unaudited)

Three Months Ended March 31, 2020

 
 
Ordinary shares
 
Preferred shares
 
Additional
 
Accumulated
 
Accumulated
other
comprehensive
 
Treasury shares
 
Total
shareholders’
 
 
Shares
 
Amount
 
Shares
 
Amount
 
paid-in capital
 
deficit
 
loss
 
Shares
 
Amount
 
 equity (deficit)
Balance, December 31, 2019
 
42,927

 
$
429

 

 
$

 
$
434,391

 
$
(391,215
)
 
$
(22,806
)
 
5,407

 
$
(49,998
)
 
$
(29,199
)
Net loss
 

 

 

 

 

 
(865
)
 

 

 

 
(865
)
Other comprehensive loss
 

 

 

 

 

 

 
(821
)
 

 

 
(821
)
Exercise of stock options
 
146

 
2

 

 

 
1,387

 

 

 

 

 
1,389

February 2020 private placement
 
8,680

 
87

 
488

 
5

 
60,641

 

 

 

 

 
60,733

Vesting of restricted shares
 
19

 

 

 

 

 

 

 

 

 

Employee share purchase plan share issuance
 
40

 

 

 

 
88

 

 

 

 

 
88

Stock-based compensation expense
 

 

 

 

 
742

 

 

 

 

 
742

Balance, March 31, 2020
 
51,812

 
$
518

 
488

 
$
5

 
$
497,249

 
$
(392,080
)
 
$
(23,627
)
 
5,407

 
$
(49,998
)
 
$
32,067




















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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands) 
(Unaudited)

Three Months Ended March 31, 2019

 
 
Ordinary shares
 
Additional
 
Accumulated
 
Accumulated
other
comprehensive
 
Treasury shares
 
Total
shareholders’
 
 
Shares
 
Amount
 
paid-in capital
 
deficit
 
(loss) income
 
Shares
 
Amount
 
equity (deficit)
Balance, December 31, 2018
 
42,720

 
$
427

 
$
433,756

 
$
(357,989
)
 
$
(23,416
)
 
5,407

 
$
(49,998
)
 
$
2,780

Net loss
 

 

 

 
(13,018
)
 

 

 

 
(13,018
)
Other comprehensive income
 

 

 

 

 
213

 

 

 
213

Vesting of restricted shares
 
1

 

 

 

 

 

 

 

Employee share purchase plan share issuance
 
42

 

 
92

 

 

 

 

 
92

Stock-based compensation expense
 

 

 
351

 

 

 

 

 
351

Balance, March 31, 2019
 
42,763

 
$
427

 
$
434,199

 
$
(371,007
)
 
$
(23,203
)
 
5,407

 
$
(49,998
)
 
$
(9,582
)






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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
 
 
 
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(865
)
 
$
(13,018
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
456

 
369

Remeasurement of acquisition-related contingent consideration
 
2,478

 
2,134

Remeasurement of financing-related contingent consideration
 
310

 
307

Amortization of debt discount and debt issuance costs
 
1,573

 
1,445

Change in deferred tax and income tax deferred charge
 
(8,440
)
 
(222
)
Stock-based compensation expense
 
742

 
351

Loss on deconsolidation of subsidiary
 

 
1,750

Other adjustments
 
573

 
(541
)
Net changes in assets and liabilities
 
 

 
 

Accounts receivable
 
(517
)
 
(1,021
)
Inventories
 
47

 
467

Prepaid expenses and other current assets
 
899

 
(3,228
)
Research and development tax credit receivable
 
160

 
(449
)
Accounts payable & other current liabilities
 
(1,187
)
 
752

Accrued expenses
 
(4,905
)
 
(4,750
)
Accrued income taxes
 
2,253

 
(46
)
Earn-out payments for contingent consideration in excess of acquisition-date fair value
 
(1,774
)
 
(3,181
)
Royalty payments for contingent consideration payable in excess of original fair value
 
(291
)
 
(507
)
Other assets and liabilities
 
(3,148
)
 
(1,818
)
Net cash used in operating activities
 
(11,636
)
 
(21,206
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 

 
(30
)
Proceeds from sales of marketable securities
 
14,788

 
34,864

Purchases of marketable securities
 
(1,562
)
 
(13,444
)
Net cash provided by investing activities
 
13,226

 
21,390

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from the February 2020 private placement
 
60,733

 

Proceeds from stock option exercises and ESPP
 
1,477

 
92

Net cash provided by financing activities
 
62,210

 
92

 
 
 
 
 
Effect of foreign currency exchange rate changes on cash and cash equivalents
 
(68
)
 
29

 
 
 
 
 
Net change in cash and cash equivalents
 
63,732

 
305

Cash and cash equivalents at January 1,
 
9,774

 
9,325

Cash and cash equivalents at March 31,
 
$
73,506

 
$
9,630

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
     Interest paid
 
$
3,234

 
$
3,234

     Income taxes paid
 
$

 
$
72

 
See accompanying notes to unaudited condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data) 
NOTE 1: Summary of Significant Accounting Policies
Nature of Operations.  Avadel Pharmaceuticals plc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is an emerging biopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in narcolepsy patients. FT218 uses our Micropump drug-delivery technology. In addition, we have three approved commercial products developed under our unapproved marketed drug (“UMD”) program, Akovaz, Bloxiverz and Vazculep, and a fourth approved product, Nouress, which are sterile injectable drugs used in the hospital setting.

We are primarily focused on the development and potential United States (“U.S.”) Food and Drug Administration (“FDA”) approval of FT218. In addition, we continue to market and distribute our current approved hospital products portfolio and, pending resolution of the existing patent infringement claim (as described below), we plan to commercialize Nouress. Outside of our product candidate and our existing commercial products, we continue to evaluate opportunities to expand our product portfolio.

FT218 (Micropump sodium oxybate)

FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug- delivery technology for the treatment of EDS and cataplexy in patients suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in Europe and the United States as a twice-nightly formulation indicated for the treatment of EDS and cataplexy in patients with narcolepsy. In December 2019, we completed patient enrollment of our Phase 3 REST-ON clinical trial of FT218 to assess the safety and efficacy of a once-nightly formulation of FT218 for the treatment of EDS and cataplexy in patients suffering from narcolepsy and on April 27, 2020, we announced topline results from our Phase 3 REST-ON clinical trial of FT218.

Existing Commercial Products

To date, we have received FDA approvals for three previously unapproved prescription drugs:

Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz was approved by the FDA in May 2013 and was launched in July 2013. Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery. Bloxiverz was the first FDA-approved version of neostigmine methylsulfate. Today, neostigmine is one of the two most frequently used products for the reversal of the effects of other agents used for neuromuscular blocks.

Vazculep (phenylephrine hydrochloride injection) - Vazculep was approved by the FDA in June 2014 and was launched in October 2014. Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.

Akovaz (ephedrine sulfate injection) - Akovaz, was approved by the FDA in April 2016 and was launched in August 2016. Akovaz was the first FDA approved formulation of ephedrine sulfate, an alpha- and beta- adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.

Nouress

In December 2019, we received FDA approval for Nouress (cysteine hydrochloride injection), a sterile injectable product for use in the hospital setting, and currently have two patents covering that product. Several additional patent applications for Nouress are pending with the U.S. Patent and Trademark Office (“USPTO”). In light of the recently filed patent suit by Exela Pharma Sciences, LLC, we are currently evaluating the timing and process for a commercial launch of Nouress in the U.S.  See Note 18: Commitments and Contingencies.

We were incorporated in Ireland on December 1, 2015 as a private limited company, and re-registered as an Irish public limited company on November 21, 2016. Our headquarters are in Dublin, Ireland and we have operations in St. Louis, Missouri, U.S.


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Basis of Presentation. The unaudited condensed consolidated balance sheet as of March 31, 2020, which is derived from the prior year 2019 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on March 16, 2020.
The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. 
On February 6, 2019, our indirect wholly-owned subsidiary, Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”), filed a voluntary petition for reorganization under Chapter 11 of the United States (“U.S.”) Code (the “Bankruptcy Code”). in the U.S. District Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), Case No. 19-10248. Specialty Pharma is operating and managing its business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. As a result of Specialty Pharma’s voluntary bankruptcy filing on February 6, 2019, we no longer controlled the operations of Specialty Pharma; therefore, we deconsolidated Specialty Pharma effective with the bankruptcy filing and the Company recorded its investment in Specialty Pharma under the cost method. See Note 3: Subsidiary Bankruptcy and Deconsolidation. Our results of operations for the period January 1, 2019 through February 6, 2019 include the results of Specialty Pharma prior to its February 6, 2019 voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Revenue. Revenue includes sales of pharmaceutical products.

Product Sales

We sell products primarily through wholesalers and considers these wholesalers to be our customers. Revenue from product sales is recognized when the customer obtains control of our product and our performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated when the product is delivered based on analysis of historical data for the product or comparable products, as well as future expectations for such products.

For a complete discussion of the accounting for net product revenue, see Note 4: Revenue Recognition.

Accounts Receivable. Accounts receivable are stated at amounts invoiced and certain other gross to net variable consideration deductions. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, payment history, current and forecast economic conditions and other relevant factors. A majority of our accounts receivable are due from four significant customers.
NOTE 2: Newly Issued Accounting Standards
Recent Accounting Guidance Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The FASB’s amendments primarily impact ASC 740, Income Taxes, and may impact both interim and annual reporting periods. ASU 2019-12 will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the impact of adopting ASU 2019-12.

Recently Adopted Accounting Guidance

In August 2018, FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirement for Fair Value Measurement” which amends certain disclosure requirements over Level 1, Level 2 and

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Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We adopted ASU 2018-13 in the first quarter of 2020.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).” This standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. For available-for-sale debt securities with unrealized losses, the standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. The standard limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 is effective for the Company for fiscal years beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early adoption is permitted. We adopted the provisions of ASU 2016-13 in the first quarter of 2020. Adoption of the new standard did not have any impact on our unaudited condensed consolidated financial statements.

NOTE 3: Subsidiary Bankruptcy and Deconsolidation

Bankruptcy Filing and Deconsolidation

As a result of Specialty Pharma’s bankruptcy filing on February 6, 2019, Avadel has ceded authority for managing the business to the Bankruptcy Court, and Avadel management cannot carry on Specialty Pharma’s activities in the ordinary course of business without Bankruptcy Court approval. Avadel manages the day-to-day operations of Specialty Pharma but does not have discretion to make significant capital or operating budgetary changes or decisions and purchase or sell significant assets, as Specialty Pharma’s material decisions are subject to review by the Bankruptcy Court. For these reasons, we concluded that Avadel has lost control of Specialty Pharma, and no longer has significant influence over Specialty Pharma during the pendency of the bankruptcy. Therefore, we deconsolidated Specialty Pharma effective with the filing of the Chapter 11 bankruptcy in February 2019.

In order to deconsolidate Specialty Pharma, the carrying values of the assets and certain liabilities of Specialty Pharma were removed from our unaudited condensed consolidated balance sheet as of February 5, 2019, and we recorded our investment in Specialty Pharma at its estimated fair value of $0. As the estimated fair value of our investment in Specialty Pharma was lower than its net book value immediately prior to the deconsolidation, we recorded a non-cash charge of approximately $2,673 for the three months ended March 31, 2019 associated with the deconsolidation of Specialty Pharma. Subsequent to the deconsolidation of Specialty Pharma, we are accounting for our investment in Specialty Pharma using the cost method of accounting because Avadel does not exercise significant influence over the operations of Specialty Pharma due to the Chapter 11 filing.

On April 26, 2019, Specialty Pharma sold its intangible assets and remaining inventory to an unaffiliated third party in exchange for aggregate cash proceeds of approximately $250, pursuant to an order approving such sale which was issued by the Bankruptcy Court on April 15, 2019. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business.

On July 2, 2019, Specialty Pharma was made aware of a $50,695 claim made by the Internal Revenue Service (IRS) as part of the bankruptcy claims process against Specialty Pharma. On October 2, 2019 the IRS amended the original claim filed in July, reducing the claim to $9,302. Specialty Pharma files its U.S. federal tax return as a member of the Company’s consolidated U.S. tax group. As such, the IRS claim was filed against Specialty Pharma in the bankruptcy proceedings due to IRS tax law requirements for joint and several liability of all members in a consolidated U.S. tax group. Both Specialty Pharma and the Company disagreed with the merits of the amended IRS claim, and Specialty Pharma entered into negotiations regarding the treatment of the claim in the bankruptcy case.  On November 19, 2019, Specialty Pharma and the IRS resolved their dispute, subject to Bankruptcy Court approval in Specialty Pharma's Chapter 11 plan, and without prejudice to the claims, rights and defenses of the IRS and other Avadel entities outside of the bankruptcy case.  The resolution provided for allowance of the IRS claim as a priority claim but for the IRS to receive a distribution of not less than $125 from Specialty Pharma following confirmation of its chapter 11 plan, leaving a substantial amount of the bankruptcy estate for general unsecured creditors.

Debtor in Possession (“DIP”) Financing – Related Party Relationship

In connection with the bankruptcy filing, Specialty Pharma entered into a Debtor in Possession Credit and Security Agreement with Avadel US Holdings (“DIP Credit Agreement”) dated as of February 8, 2019, in an aggregate amount of up to $2,700, of which the funds are to be used by Specialty Pharma solely to fund operations through February 6, 2020. As of March 31, 2020, the Company had funded $407 under the DIP Credit Agreement. As the Company has assessed that it is unlikely that Specialty Pharma will pay back the loan to Avadel and the $407 has been recorded as part of the loss on deconsolidation of subsidiary within the unaudited condensed consolidated statements of loss for the three months ended March 31, 2019.

- 12 -



NOTE 4: Revenue Recognition

The Company generates revenue primarily from the sale of pharmaceutical products to customers.

Product Sales

We sell products primarily through wholesalers and considers these wholesalers to be our customers. Revenue from product sales is recognized when the customer obtains control of our product and our performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated when the product is delivered based on analysis of historical data for the product or comparable products, as well as future expectations for such products.

Reserves to Reduce Gross Revenues to Net Revenues

Revenues from product sales are recorded at the net selling price, which includes estimated reserves to reduce gross product sales to net product sales resulting from product returns, chargebacks, payment discounts, rebates, and other sales allowances that are offered within contracts between the Company and its customers and end users. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable if the amount is payable to the customer, except in the case of the estimated reserve for future expired product returns, which are classified as a liability. The reserves are classified as a liability if the amount is payable to a party other than a customer. Where appropriate, these estimated reserves take into consideration relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates to reduce gross selling price to net selling price to which it expects to be entitled based on the terms of its contracts. The actual selling price ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Product Returns

Consistent with industry practice, the Company maintains a returns policy that generally offers customers a right of return for product that has been purchased from the Company. The Company estimates the amount of product returns and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilities based on analysis of historical data for the product or comparable products, as well as future expectations for such products and other judgments and analysis.

Chargebacks, Discounts and Rebates

Chargebacks, discounts and rebates represent the estimated obligations resulting from contractual commitments to sell products to its customers or end users at prices lower than the list prices charged to our wholesale customers. Customers charge the Company for the difference between the gross selling price they pay for the product and the ultimate contractual price agreed to between the Company and these end users. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargebacks, discounts and rebates are estimated at the time of sale to the customer.

Revenue from licensing arrangements

The terms of the Company’s licensing agreements may contain multiple performance obligations, including certain R&D activities. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees, development, regulatory and commercial milestone payments. Each of these payments results in license revenues.

Disaggregation of revenue

The Company’s source of revenue is from the sale of pharmaceutical products, which are equally affected by the same economic factors as it relates to the nature, amount, timing, and uncertainty of revenue and cash flows. For further detail about the Company’s revenues by product, see Note 17: Revenue by Product.


- 13 -



Contract Balances

The Company does not recognize revenue in advance of invoicing its customers and therefore has no related contract assets.

A receivable is recognized in the period the Company sells its products and when the Company’s right to consideration is unconditional.

There were no material deferred contract costs at March 31, 2020.

Transaction Price Allocated to the Remaining Performance Obligation

For product sales, the Company generally satisfies its performance obligations within the same period the product is delivered. Product sales recognized in the first quarter of 2020 from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.

For certain licenses of intellectual property, specifically those with performance obligations satisfied over time, the Company allocates a portion of the transaction price to that performance obligation and recognizes revenue using an appropriate measure of progress towards development of the product.

The Company has elected certain of the practical expedients from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies the practical expedient in ASC 606 to its stand-alone contracts and does not disclose information about variable consideration from remaining performance obligations for which the Company recognizes revenue.
 
NOTE 5: Fair Value Measurement
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.  

ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. When estimating fair value, depending on the nature and complexity of the asset or liability, we may generally use one or each of the following techniques:  

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.

- 14 -



The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying unaudited condensed consolidated balance sheets:
 
 
As of March 31, 2020
 
As of December 31, 2019
Fair Value Measurements:
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities (see Note 6)
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$

 
$

 
$

 
$
4,404

 
$

 
$

Money market and mutual funds
 
28,472

 

 

 
38,799

 

 

Corporate bonds
 

 
4,013

 

 

 
4,098

 

Government securities - U.S.
 

 
6,085

 

 

 
5,446

 

Other fixed-income securities
 

 
1,407

 

 

 
1,637

 

Total assets
 
$
28,472

 
$
11,505

 
$

 
$
43,203

 
$
11,181

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration payable (see Note 9)
 
$

 
$

 
$
18,050

 
$

 
$

 
$
17,327

Total liabilities
 
$

 
$

 
$
18,050

 
$

 
$

 
$
17,327

A review of fair value hierarchy classifications is conducted on a quarterly basis.  Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the periods ended March 31, 2020 and December 31, 2019, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three month periods ended March 31, 2020 and 2019, respectively, we did not recognize any other-than-temporary impairment loss.
Some of the Company’s financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

Debt

We estimate the fair value of our $143,750 aggregate principal amount of 4.50% exchangeable senior notes due 2023 (the “2023 Notes”), a Level 2 input, based on interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities or recent trading prices obtained from brokers. The estimated fair value of the 2023 Notes at March 31, 2020 of $123,258, which is the same as book value.

See Note 10: Long-Term Debt for additional information regarding our debt obligations.

NOTE 6: Marketable Securities 
The Company has investments in equity and available-for-sale debt securities which are recorded at fair market value. The change in the fair value of equity investments is recognized in our unaudited condensed consolidated statements of loss and the change in the fair value of available-for-sale debt investments is recorded as other comprehensive loss in shareholders’ equity (deficit), net of income tax effects. As of March 31, 2020, we considered any decreases in fair value on our marketable securities to be driven by factors other than credit risk, including market risk.
The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of March 31, 2020 and December 31, 2019, respectively:
 
 
March 31, 2020
Marketable Securities:
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
Money market and mutual funds
 
$
28,370

 
$
410

 
$
(308
)
 
$
28,472

Corporate bonds
 
4,074

 
33

 
(94
)
 
4,013

Government securities - U.S.
 
5,777

 
308

 

 
6,085

Other fixed-income securities
 
1,418

 
7

 
(18
)
 
1,407

Total
 
$
39,639

 
$
758

 
$
(420
)
 
$
39,977


- 15 -



 
 
December 31, 2019
Marketable Securities:
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
Equity securities
 
$
4,234

 
$
170

 
$

 
$
4,404

Money market and mutual funds
 
38,028

 
771

 

 
38,799

Corporate bonds
 
4,021

 
77

 

 
4,098

Government securities - U.S.
 
5,341

 
110

 
(5
)
 
5,446

Other fixed-income securities
 
1,614

 
23

 

 
1,637

Total
 
$
53,238


$
1,151


$
(5
)

$
54,384

 
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We reflect these gains and losses as a component of investment and other income in the accompanying unaudited condensed consolidated statements of loss.
We recognized gross realized gains of $276 and $94 for the three months ended March 31, 2020, and 2019, respectively. These realized gains were offset by realized losses of $872 and $147 for the three months ended March 31, 2020, and 2019, respectively.

The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale debt securities and classified by the contractual maturity date of the securities as of March 31, 2020:
 
 
Maturities
Marketable Debt Securities:
 
Less than 1 Year
 
1-5 Years
 
5-10 Years
 
Greater than 10 Years
 
Total
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
592

 
$
3,030

 
$
391

 
$

 
$
4,013

Government securities - U.S.
 

 
5,269

 
329

 
487

 
6,085

Other fixed-income securities
 
50

 
1,357

 

 

 
1,407

Total
 
$
642

 
$
9,656

 
$
720

 
$
487

 
$
11,505

The Company has classified our investment in available-for-sale marketable debt securities as current assets in the unaudited condensed consolidated balance sheets as the securities need to be available for use, if required, to fund current operations. There are no restrictions on the sale of any securities in our investment portfolio.

The following table shows the gross unrealized losses and fair value of our available-for-sale debt securities at March 31, 2020. The unrealized losses in the table below are driven by factors other than credit risk and have been in a unrealized loss position for less than one year. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases.

Marketable Debt Securities:
 
Fair Value
 
Unrealized Losses
 
 
 
 
 
Corporate bonds
 
$
2,442

 
$
94

Other fixed-income securities
 
694

 
18

Total
 
$
3,136

 
$
112


NOTE 7: Inventories 
The principal categories of inventories, net reserves of $348 and $914 at March 31, 2020 and December 31, 2019, respectively, are comprised of the following:
Inventory:
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Finished goods
 
$
2,845

 
$
3,020

Raw materials
 
678

 
550

Total  
 
$
3,523

 
$
3,570



- 16 -



NOTE 8: Goodwill and Intangible Assets 
The Company’s amortizable and unamortizable intangible assets at March 31, 2020 and December 31, 2019 are as follows: 
 
 
March 31, 2020
 
December 31, 2019
Goodwill and Intangible Assets:
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable intangible assets - Acquired developed technology - Vazculep
 
$
12,061

 
$
(11,451
)
 
$
610

 
$
12,061

 
$
(11,248
)
 
$
813

 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortizable intangible assets - Goodwill
 
$
18,491

 
$

 
$
18,491

 
$
18,491

 
$

 
$
18,491

 
The Company recorded amortization expense related to amortizable intangible assets of $203 and $201 for the three months ended March 31, 2020 and 2019, respectively.
Our amortizable intangible asset is amortized over its estimated useful life, which is seven years, using the straight-line method. At March 31, 2020, total amortization of intangible assets for the year ended December 31, 2020 will be $813. There is no estimated amortization during the years ended December 31, 2021-2024 as the acquired developed technology, Vazculep, will be fully amortized at December 31, 2020.

NOTE 9: Contingent Consideration Payable 
Contingent consideration payable and related activity are reported at fair value and consist of the following at March 31, 2020 and December 31, 2019:
 
 
 
Activity during the three months ended
March 31, 2020
 
 
 
 
 
 
 
Changes in Fair Value of Contingent Consideration Payable
 
 
Contingent Consideration Payable:
Balance,
December 31, 2019
 
Payments
 
Operating Expense
 
Other
Expense
 
Balance, March 31, 2020
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration:
 

 
 

 
 

 
 

 
 

Earn-out payments - Éclat Pharmaceuticals (a) (d)
$
15,472

 
$
(1,774
)
 
$
2,478

 
$

 
$
16,176

Financing-related:
 

 
 

 
 

 
 

 
 
Royalty agreement - Deerfield (b) (d)
1,251

 
(197
)
 

 
188

 
1,242

Royalty agreement - Broadfin (c) (d)
604

 
(94
)
 

 
122

 
632

Total contingent consideration payable
17,327

 
$
(2,065
)
 
$
2,478

 
$
310

 
18,050

Less: current portion
(5,554
)
 
 

 
 

 
 

 
(5,855
)
Long-term contingent consideration payable
$
11,773

 
 

 
 

 
 

 
$
12,195


(a) In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by the Company’s former CEO, and certain other current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity.

(b)
As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company is obligated to pay quarterly a 1.75% royalty on the

- 17 -



net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Éclat products.
(c)
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a former related party and shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company is obligated to pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024.
(d)
Deerfield and Broadfin Healthcare Master Trust disposed of their 2023 Notes and ordinary shares in the Company during the three months ended March 31, 2020 and are no longer considered related parties.
At March 31, 2020, the fair value of each contingent consideration payable listed in (a), (b) and (c) above was estimated using a discounted cash flow model based on estimated and projected annual net revenues or gross profit, as appropriate, of each of the specified Éclat products using an appropriate risk-adjusted discount rate of 14%. These fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related contingent consideration payables, resulting primarily from management’s revision of key assumptions, will be recorded in the unaudited condensed consolidated statements of loss in the line items entitled “Changes in fair value of contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of contingent consideration payable” for items (b) and (c) above. See Note 1: Summary of Significant Accounting Policies under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements in Part II, Item 8 of the Company’s 2019 Annual Report on Form 10-K for more information on key assumptions used to determine the fair value of these liabilities. 
The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (b) and (c) above. These financing-related liabilities are recorded at fair market value on the unaudited condensed consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – change in fair value of contingent consideration payable” on the unaudited condensed consolidated statements of loss.
The following table summarizes changes to the contingent consideration payables, a recurring Level 3 measurement, for the three-month periods ended March 31, 2020 and 2019, respectively:
Contingent Consideration Payable Rollforward:
 
Balance
 
 
 
Balance, December 31, 2018
 
$
28,840

Payments of contingent consideration
 
(3,688
)
Fair value adjustments (1)
 
2,441

Balance, March 31, 2019
 
$
27,593

 
 
 
Balance, December 31, 2019
 
$
17,327

Payments of contingent consideration
 
(2,065
)
Fair value adjustments (1)
 
2,788

Balance, March 31, 2020
 
$
18,050

(1) Fair value adjustments are reported as changes in fair value of contingent consideration and other expense - changes in fair value of contingent consideration payable in the unaudited condensed consolidated statements of loss.  


- 18 -



NOTE 10: Long-Term Debt
Long-term debt is summarized as follows:
 
 
March 31, 2020
 
December 31, 2019
Principal amount of 4.50% exchangeable senior notes due 2023
 
$
143,750

 
$
143,750

Less: debt discount and issuance costs, net
 
(20,492
)
 
(22,064
)
Net carrying amount of liability component
 
123,258

 
121,686

Other debt
 

 

     Subtotal
 
123,258

 
121,686

Less: current maturities
 

 

     Long-term debt
 
$
123,258

 
$
121,686

 
 
 
 
 
Equity component:
 
 
 
 
Equity component of exchangeable notes, net of issuance costs
 
$
(26,699
)
 
$
(26,699
)

NOTE 11: Income Taxes

The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes significant business tax provisions. In particular, the CARES Act modified the rules associated with net operating losses (“NOLs”). Under the temporary provisions of CARES Act, NOL carryforwards and carrybacks may offset 100% of taxable income for taxable years beginning before 2021. In addition, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. During the three months ended March 31, 2020, the income tax benefit includes a discrete tax benefit of $9,124 as a result of our ability under the CARES Act to carry back NOLs incurred to periods when the statutory U.S. Federal tax rate was 35% versus our current U.S. Federal tax rate of 21%.

The income tax benefit was $9,510 for the three months ended March 31, 2020 resulting in an effective tax rate of 91.7%. The income tax benefit was $374 for the three months ended March 31, 2019 resulting in an effective tax rate of 2.7%. The net increase in the effective income tax rate for the three months ended March 31, 2020, as compared to the same period in 2019, is primarily due to the discrete tax benefits recognized under the CARES Act as described above, favorable income tax benefits from the U.S. Orphan Drug and Research & Development Tax Credit and agreement with the IRS in the first quarter of 2020 on audit adjustments resulting from the U.S. Federal Income Tax audit of the tax years 2015, 2016 and 2017, all of which was recorded during the three months ended March 31, 2020.

During the three months ended March 31, 2020, the Company substantially completed the 2015 through 2017 U.S. Federal Tax Audit. Completion of the audit resulted in an assessment of $1,937 for the 2015 through 2017 U.S. Federal Tax Returns compared to the IRS Claims of $50,695 made on July 2, 2019 and the updated IRS Claims of $9,302 on October 2, 2019 made as part of the Specialty Pharma bankruptcy proceedings, which at this time does not include interest and penalties. The Company expects interest and penalties to be approximately $300. While there are still additional approval and administrative procedures to complete, the Company expects the completion of the 2015 through 2017 U.S. Federal Tax Audit to be completed by the quarter ended September 30, 2020. The audit of the 2017 French tax return was also completed during the three months ended March 31, 2020 with no material changes.

NOTE 12: Other Assets and Liabilities 
Various other assets and liabilities are summarized as follows:
Prepaid Expenses and Other Current Assets:
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Valued-added tax recoverable
 
$
257

 
$
1,051

Prepaid and other expenses
 
1,933

 
2,116

Guarantee from Armistice
 
456

 
454

Income tax receivable
 
536

 
536

Other
 
155

 
107

Total  
 
$
3,337

 
$
4,264

 

- 19 -



Other Non-Current Assets:
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Deferred tax assets, net
 
$
37,860

 
$
29,427

Long-term deposits
 
1,477

 
1,477

Guarantee from Armistice
 
1,252

 
1,367

Right of use assets at contract manufacturing organizations
 
6,362

 
6,428

Other
 
573

 
575

Total  
 
$
47,524

 
$
39,274

 
Accrued Expenses
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Accrued compensation
 
$
1,724

 
$
3,944

Accrued social charges
 
192

 
592

Accrued restructuring (see Note 14)
 
1,705

 
2,949

Customer allowances
 
6,200

 
6,470

Accrued contract research organization charges
 
1,802

 
2,098

Accrued contract manufacturing organization costs
 
426

 
735

Other
 
2,809

 
3,022

Total  
 
$
14,858

 
$
19,810

 
Other Non-Current Liabilities:
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Customer allowances
 
$
1,210

 
$
981

Unrecognized tax benefits
 
3,143

 
6,465

Guarantee to Deerfield
 
1,256

 
1,372

Other
 
55

 
55

Total  
 
$
5,664

 
$
8,873


NOTE 13: Equity Transactions

Shelf Registration Statement on Form S-3

In February 2020, we filed with the SEC a new shelf registration statement on Form S-3 (the 2020 Shelf Registration Statement) (File No. 333-236258) that allows issuance and sale by us, from time to time, of:

(a)
up to $250,000 in aggregate of ordinary shares, nominal value US$0.01 per share (the “Ordinary Shares”), each of which may be represented by American Depositary Shares (“ADSs”), preferred shares, nominal value US$0.01 per share (the “Preferred Shares”), debt securities (the “Debt Securities”), warrants to purchase Ordinary Shares, ADSs, Preferred Shares and/or Debt Securities (the “Warrants”), and/or units consisting of Ordinary Shares, ADSs, Preferred Shares, one or more Debt Securities or Warrants in one or more series, in any combination, pursuant to the terms of the 2020 Shelf Registration Statement, the base prospectus contained in the 2020 Shelf Registration Statement (the “Base Prospectus”), and any amendments or supplements thereto (together, the “Securities”); including

(b)
up to $50,000 of ADSs that may be issued and sold from time to time pursuant to the terms of an Open Market Sale AgreementSM (“the Sales Agreement”), entered into with Jefferies LLC on February 4, 2020 (the “Sales Agreement”), the 2020 Shelf Registration Statement, the Base Prospectus and the terms of the sales agreement prospectus contained in the 2020 Shelf Registration Statement.

The transactions costs associated with the 2020 Shelf Registration Statement of approximately $340 were capitalized as a prepaid asset.

February 2020 Private Placement

On February 21, 2020, we announced that we entered into a definitive agreement for the sale of our ADSs and Series A Non-Voting Convertible Preferred Shares (“Series A Preferred”) in a private placement to a group of institutional accredited investors.

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The private placement resulted in gross proceeds of approximately $65,000 before deducting placement agent and other offering expenses, which resulted in net proceeds of $60,733.

Pursuant to the terms of the private placement, we issued 8,680 ADSs and 488 shares of Series A Preferred at a price of $7.09 per share, priced at-the-market under Nasdaq rules. Each share of non-voting Series A Preferred is convertible into one ADS, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.99% of the total number of Avadel ADSs outstanding. The closing of the private placement occurred on February 25, 2020.

Issuance costs of $4,267 were recorded as a reduction of additional paid-in capital.

May 2020 Public Offering

In connection with the shelf registration statement described above, on April 28, 2020 we announced the pricing of an underwritten public offering of 11,630 ordinary shares, in the form of American Depositary Shares (“ADSs”) at a price to the public of $10.75 per ADS. Each ADS represents the right to receive one Ordinary Share. All of the ADSs are being offered by Avadel. The gross proceeds to us from the offering were approximately $125,000, before deducting underwriting discounts and commissions and estimated offering expenses.

In connection with the public offering, we granted the underwriters a 30-day option to purchase up to an additional 1,745 ADSs at the public offering price less the underwriting discounts and commissions. The offering closed on May 1, 2020. See Note 19: Subsequent Events.

NOTE 14: Restructuring Costs
2019 French Restructuring
During the second quarter of 2019, the Company initiated a plan to substantially reduce all of its workforce at its Vénissieux, France site (“2019 French Restructuring”). This reduction was part of an effort to align the Company’s cost structure with our ongoing and future planned projects. The reduction in workforce has been substantially completed as of March 31, 2020. Restructuring charges associated with this plan recognized during the three months ended March 31, 2020 were immaterial.
The following table sets forth activities for the Company’s cost reduction plan obligations for the three months ended March 31, 2020:
2019 French Restructuring Obligation:
 
2020
 
 
 
Balance of restructuring accrual at January 1,
 
$
1,922

Charges for employee severance, benefits and other costs
 
171

Payments
 
(1,294
)
Foreign currency impact
 
(34
)
Balance of restructuring accrual at March 31,
 
$
765

The 2019 French Restructuring liabilities of $765 are included in the unaudited condensed consolidated balance sheet in accrued expenses at March 31, 2020, respectively.

2019 Corporate Restructuring

During the first quarter of 2019, the Company announced a plan to reduce its Corporate workforce by more than 50% (“2019 Corporate Restructuring”). The reduction in workforce is primarily a result of the exit of Noctiva during the first quarter of 2019 (see Note 3: Subsidiary Bankruptcy and Deconsolidation), as well as an effort to better align the Company’s remaining cost structure at our U.S. and Ireland locations with our ongoing and future planned projects. The reduction in workforce was substantially complete at the end of March 31, 2020, and has resulted in employee severance, benefits and other costs of up to approximately $3,000, which are likely to be recognized through May 31, 2020. The restructuring charges associated with this plan recognized during the three months ended March 31, 2020 were immaterial, compared to $1,398 of restructuring charges recognized during the three months ended March 31, 2019.


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The following table sets forth activities for the Company’s cost reduction plan obligations for the three months ended March 31, 2020 and 2019:
2019 Corporate Restructuring Obligation:
 
2020
 
2019
 
 
 
 
 
Balance of restructuring accrual at January 1,
 
$
1,080

 
$

Charges for employee severance, benefits and other costs
 
62

 
1,398

Payments
 
(202
)
 
(754
)
Balance of restructuring accrual at March 31,
 
$
940

 
$
644

The 2019 Corporate Restructuring liabilities of $940 are included in the unaudited condensed consolidated balance sheet in accrued expenses at March 31, 2020.

NOTE 15: Net Loss Per Share 
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during each period. Diluted net (loss) income per share is calculated by dividing net (loss) income by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net loss, diluted net loss per share would be calculated assuming the impact of the conversion of the 2023 Notes, the conversion of our preferred shares, the exercise of outstanding equity compensation awards, and ordinary shares expected to be issued under our employee stock purchase plan (“ESPP”).

We have a choice to settle the conversion obligation under the 2023 Notes in cash, shares or any combination of the two. We utilize the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2023 Notes into shares of our ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.

The dilutive effect of the warrants, stock options, restricted stock units, preferred shares and ordinary shares expected to be issued under or ESPP has been calculated using the treasury stock method.
A reconciliation of basic and diluted net loss per share, together with the related shares outstanding in thousands is as follows: 
 
 
Three Months Ended March 31,
Net Loss Per Share:
 
2020
 
2019
 
 
 
 
 
Net loss
 
$
(865
)
 
$
(13,018
)
 
 
 
 
 
Weighted average shares:
 
 
 
 
Basic shares
 
41,057

 
37,354

Effect of dilutive securities—employee and director equity awards outstanding, preferred shares and 2023 Notes
 

 

Diluted shares
 
41,057

 
37,354

 
 
 
 
 
Net loss per share - basic
 
$
(0.02
)
 
$
(0.35
)
Net loss per share - diluted  
 
$
(0.02
)
 
$
(0.35
)
 
Potential common shares of 15,858 and 19,762 were excluded from the calculation of weighted average shares for the three months ended March 31, 2020 and 2019, respectively, because their effect was considered to be anti-dilutive. For the three months ended March 31, 2020 and 2019, the effects of dilutive securities were entirely excluded from the calculation of net loss per share as a net loss was reported in this period. 


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NOTE 16: Comprehensive Loss 
The following table shows the components of accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019, respectively, net of tax effects: 
 
 
Three Months Ended March 31,
Accumulated Other Comprehensive Loss:
 
2020
 
2019
 
 
 
 
 
Foreign currency translation adjustment:
 
 
 
 
Beginning balance
 
$
(23,738
)
 
$
(23,621
)
Net other comprehensive loss
 
(177
)
 
(161
)
Balance at March 31,
 
$
(23,915
)
 
$
(23,782
)
 
 
 
 
 
Unrealized gain (loss) on marketable debt securities, net
 
 
 
 
Beginning balance
 
$
932

 
$
205

Net other comprehensive (loss) income, net of ($49) and ($18) tax, respectively
 
(644
)
 
374

Balance at March 31,
 
$
288

 
$
579

Accumulated other comprehensive loss at March 31,
 
$
(23,627
)
 
$
(23,203
)
 
The effect on the Company’s unaudited condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive loss was immaterial for all periods presented.

NOTE 17: Revenue by Product 
The Company has determined that it operates in one segment, the development and commercialization of pharmaceutical products, including controlled-release therapeutic products based on its proprietary polymer based technology. The Company’s Chief Operating Decision Maker is the CEO. The CEO reviews profit and loss information on a consolidated basis to assess performance and make overall operating decisions as well as resource allocations. All products are included in one segment because the Company’s products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment. 
The following table presents a summary of total revenues by these products: 
 
 
Three Months Ended March 31,
Revenues by Product:
 
2020
 
2019
 
 
 
 
 
Bloxiverz
 
$
1,401

 
$
2,568

Vazculep
 
5,514

 
9,473

Akovaz
 
5,349

 
3,792

Other
 
(21
)
 
604

Total product sales
 
$
12,243

 
$
16,437



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NOTE 18: Commitments and Contingencies 
Litigation  
The Company is subject to potential liabilities generally incidental to our business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. At March 31, 2020 and December 31, 2019, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s unaudited condensed consolidated financial position, results of operations, cash flows or liquidity.   

Litigation Related to Noctiva

Note 3: Subsidiary Bankruptcy and Deconsolidation briefly describes the Chapter 11 bankruptcy case which our subsidiary Specialty Pharma commenced on February 6, 2019, and which on April 26, 2019 resulted in the bankruptcy court-approved sale of all of Specialty Pharma’s intangible assets and inventory to an unaffiliated third party. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business. During the pendency of the bankruptcy case, all pending litigation against Specialty Pharma is automatically stayed and any new litigation against Specialty Pharma is precluded unless the bankruptcy court orders otherwise. Below are descriptions of a litigation to which Specialty Pharma is a party and a contract dispute involving Specialty Pharma, both of which matters are subject to the automatic stay during the bankruptcy case.

Ferring Litigation. Some of the patents covering the Noctiva product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, Ferring B.V. and Ferring International Center S.A., who manufacture a competing product known as Nocdurna.  Nocdurna was approved by the FDA in June 2018 and commercially launched in the U.S. in November 2018.  Ferring initiated this litigation initially against Serenity Pharmaceuticals, LLC (“Serenity”) (the licensor of the Noctiva Patents) and Reprise Biopharmaceutics, LLC (“Reprise”) on April 28, 2017.  Avadel subsequently joined the litigation on June 28, 2018, shortly after Ferring received FDA approval for Nocdurna.  In this litigation, filed in the United States District Court for the Southern District of New York, Ferring seeks to invalidate and disputes the inventorship of the Noctiva Patents, seeks damages for various alleged breaches of contractual and common law duties, and seeks damages for alleged infringement by Noctiva of Ferring’s “Nocdurna” trademark.  Specialty Pharma, Serenity, and Reprise have defended this litigation, and have made counterclaims against Ferring, including for infringement of the Noctiva Patents and a declaratory judgment of noninfringement with respect to Ferring’s “Nocdurna” trademark. The court dismissed Ferring’s inventorship claim and its claims for alleged breaches of contractual and common law duties, although these dismissals may be appealed by Ferring.  On February 15, 2019, Specialty Pharma and its co-defendants moved to stay the litigation pending completion of the bankruptcy proceeding of Specialty Pharma. On May 15, 2019, that motion was denied due to a pending settlement of the litigation with respect to just Ferring and Specialty Pharma. On February 25, 2020, Ferring and Specialty Pharma jointly moved for bankruptcy court approval of a settlement agreement with respect to the claims alleged in the litigation.  In accordance with the terms of the settlement agreement, promptly following bankruptcy court approval of the settlement agreement, the parties would dismiss with prejudice their respective claims against each other in the litigation.  On March 13, 2020, the Bankruptcy Court entered an order approving the settlement with Ferring.  Pursuant to the terms of the settlement, the parties are to dismiss their respective claims against each other in the District Court litigation in the Southern District of New York, with such dismissals to be effective concurrently.  The joint dismissal has not yet been filed with District Court for the Southern District of New York.

Contract Dispute. On January 21, 2019, Serenity gave notice to Specialty Pharma of an alleged breach of the parties’ Noctiva license agreement. Serenity alleges that Specialty Pharma breached its contractual obligation to devote commercially reasonable efforts to the commercialization of Noctiva and seeks unspecified damages. On January 27, 2019, Specialty Pharma notified Serenity of a claim for $1.7 million in damages as a result of Serenity’s breach of its contractual obligation to pay the costs of the Ferring Litigation. Serenity’s notice to Specialty Pharma invoked the dispute resolution provisions of the Noctiva license agreement, which culminate in arbitration, but neither party has yet initiated an arbitration proceeding or filed suit.

Exela Litigation.  On January 7, 2020, Exela filed a complaint against us and our subsidiary, Avadel Legacy, in the United States District for the District of Delaware. The complaint alleges infringement of a certain Exela patent related to its cysteine hydrochloride product. Exela is most notably seeking i) a declaratory judgment that the Nouress product infringes its patent, ii) an injunction (both preliminary and permanent) precluding the launch of Nouress, and iii) monetary damages (including enhanced damages, prejudgment interest and attorneys’ fees) in the event Nouress is commercially launched and found to infringe Exela’s patent.  The current deadline for Avadel to respond to Exela’s complaint is May 29, 2020.


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Material Commitments

Other than commitments disclosed in Note 16: Contingent Liabilities and Commitments to the Company’s audited consolidated financial statements included in Part II, Item 8 of the Company’s 2019 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt obligations which are disclosed in Note 10: Long-Term Debt and long-term contingent consideration payable as disclosed in Note 9: Contingent Consideration Payable, to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

Guarantees

Deerfield Guarantee

The fair values of our guarantee to Deerfield and the guarantee received by us from Armistice largely offset and when combined are not material.

In connection with our February 2018 divestiture of our pediatric assets, we have guaranteed to Deerfield the quarterly royalty payment of 15% on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. Given our explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee liability was $1,713 at March 31, 2020. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.

Armistice Guarantee

In connection with our February 2018 divestiture of the pediatric assets, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to us the FSC Product Royalties. The Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee asset was $1,708 at March 31, 2020. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

NOTE 19: Subsequent Events
May 2020 Public Offering

On April 28, 2020, we announced the pricing of an underwritten public offering of 11,630 ordinary shares, in the form of ADSs at a price to the public of $10.75 per ADS. Each ADS represents the right to receive one ordinary share. The gross proceeds to us from the offering were approximately $125,000, before deducting underwriting discounts and commissions and estimated offering expenses.

In connection with the public offering, we granted the underwriters a 30-day option to purchase up to an additional 1,745 ADSs at the public offering price less the underwriting discounts and commissions. The offering closed on May 1, 2020.


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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Management’s Discussion and Analysis 
(In thousands, except per share data)
(Unaudited)
 
You should read the discussion and analysis of our financial condition and results of operations set forth in this Item 2 together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this quarterly report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties, and reference is made to the “Cautionary Note Regarding Forward-Looking Statements” set forth immediately following the Table of Contents of this Quarterly Report on Form 10-Q for further information on the forward looking statements herein. In addition, you should read the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2020 and Part II, Item 1A in this quarterly report on Form 10-Q for a discussion of additional important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this quarterly report.
Overview 
General Overview
Avadel Pharmaceuticals plc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is an emerging biopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in narcolepsy patients. FT218 uses our Micropump drug-delivery technology. In addition, we have three approved commercial products developed under our unapproved marketed drug (“UMD”) program, Akovaz, Bloxiverz and Vazculep, and a fourth approved product, Nouress, which are sterile injectable drugs used in the hospital setting.
We are primarily focused on the development and potential United States (“U.S.”) Food and Drug Administration (“FDA”) approval of FT218. In addition, we continue to market and distribute our current approved hospital products portfolio and, pending resolution of the existing patent infringement claim (as described below), we plan to commercialize Nouress. Outside of our product candidate and our existing commercial products, we continue to evaluate opportunities to expand our product portfolio.
FT218 (Micropump sodium oxybate)

FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug-delivery technology for the treatment of EDS and cataplexy in patients suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in Europe and the United States (“U.S.”) as a twice-nightly formulation indicated for the treatment of EDS and cataplexy in patients with narcolepsy.

The REST-ON trial is a randomized, double-blind, placebo-controlled study that enrolled 212 patients and was being conducted in clinical sites in the U.S., Canada, Western Europe and Australia. The last patient, last visit was completed at the end of the first quarter of 2020 and positive top line data from the REST-ON trial was announced on April 27, 2020. Patients who received 9g of once-nightly FT218 demonstrated a statistically significant and clinically meaningful improvement compared to placebo across the three co-primary endpoints of the trial: maintenance of wakefulness test, or MWT, clinical global impression-improvement, or CGI-I, and mean weekly cataplexy attacks. We observed the 9g dose of once-nightly FT218 to be generally well tolerated. Adverse reactions commonly associated with sodium oxybate were observed in a small number of patients (nausea 1.3%, vomiting 5.2%, decreased appetite 2.6%, dizziness 5.2%, somnolence 3.9%, tremor 1.3%, enuresis 9%) and 3.9% of the patients who received 9g of FT218 discontinued the trial due to adverse reactions. We also assessed the three co-primary endpoints in patients who received 7.5g and 6g of once-nightly FT218. Patients who received either 7.5g or 6g of once-nightly FT218 also demonstrated statistically significant, clinically meaningful improvements compared to placebo for each of the three co-primary endpoints. 

In January 2018, the FDA granted FT218 Orphan Drug Designation, which makes the drug eligible for certain development and commercial incentives, including a potential U.S. market exclusivity for up to seven years. Additionally, in April 2019, our first FT218 patent was issued, providing intellectual property protection into 2037. There are additional patent applications currently in development and/or pending at the USPTO, as well as foreign patent offices.


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We believe FT218 has the potential to demonstrate improved dosing compliance, safety and patient satisfaction over the current standard of care for EDS and cataplexy in patients with narcolepsy, which is a twice-nightly sodium oxybate formulation. If approved, we believe FT218 has the potential to take a significant share of the sodium oxybate market. The current market size for the twice-nightly administration of sodium oxybate is estimated at an annualized revenue run rate of $1.7 billion.

Micropump Drug-Delivery Technology

Our Micropump drug-delivery technology allows for the delayed delivery of small molecule drugs taken orally, which has the potential to improve dosing compliance, reduce toxicity and improve patient compliance. Beyond FT218, we believe there could be other product development opportunities for our Micropump drug delivery technology, representing either “life cycle” opportunities, whereby additional intellectual property can be added to a pharmaceutical product to extend the commercial viability of a currently marketed product, or innovative formulation opportunities for new chemical entities.

Unapproved Marketed Drugs Program

The FDA allows certain unapproved prescription drugs to be marketed if (i) they are relied on by health care professionals to treat serious medical conditions, and (ii) there is no FDA-approved drug to treat such condition or insufficient supply of FDA-approved drugs. In most cases, these prescription drugs pre-date the establishment of the FDA. In most cases, these prescription drugs pre-date the establishment of the FDA. Although these products are typically not protected by patents or similar intellectual property, FDA guidance states that, if it approves an NDA for any such products, the FDA is more likely to seek enforcement action, such as seizure or injunction, against remaining unapproved drugs of the same type, potentially after a grace period provided by the FDA. Given the topline data from our Phase 3 trial, we are currently considering strategic alternatives for our UMD program.

Existing Commercial Products

To date, we have received FDA approvals for three previously unapproved prescription drugs:

Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz was approved by the FDA in May 2013 and was launched in July 2013. Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery. Bloxiverz was the first FDA-approved version of neostigmine methylsulfate. Today, neostigmine is one of the two most frequently used products for the reversal of the effects of other agents used for neuromuscular blocks. There are approximately 2,500 vials of neostigmine sold annually in the U.S.
Vazculep (phenylephrine hydrochloride injection) - Vazculep was approved by the FDA in June 2014 and was launched in October 2014. Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia. There are approximately 7,400 vials of Vazculep sold annually in the U.S.

Akovaz (ephedrine sulfate injection) - Akovaz, was approved by the FDA in April 2016 and was launched in August 2016. Akovaz was the first FDA approved formulation of ephedrine sulfate, an alpha- and beta- adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia. There are approximately 6,800 vials of Akovaz sold annually in the U.S.

Nouress

In December 2019, we received FDA approval for Nouress (cysteine hydrochloride injection), a sterile injectable product for use in the hospital setting, and currently have two patents covering that product. Several additional patent applications for Nouress are pending with the USPTO. In light of the recently filed patent suit by Exela Pharma Sciences, LLC, we are currently evaluating the timing and process for a commercial launch of Nouress in the U.S.  See Note 18: Commitments and Contingencies.

We use the revenue from our UMD products to fund the research and development of FT218. In addition, we believe evaluating opportunities to commercialize other unapproved drugs in markets with a limited number of competitors may provide us with near-term revenue growth and potentially provide cash flows that can also be used to fund research and development initiatives for the development of FT218 and other potential product candidates.


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Corporate Information

We were incorporated on December 1, 2015 as an Irish private limited company, and re-registered as an Irish public limited company (“plc”), on November 21, 2016. Our registered address is at 10 Earlsfort Terrace, Dublin 2, Ireland and our phone number is +353-1-920-1000. We file annual, quarterly and current reports, proxy statements and other documents with the U.S. Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 SEC. These filings are also available to the public at www.sec.gov.

We currently have 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), (ii) Avadel Legacy Pharmaceuticals, LLC, (iii) Avadel Management Corporation, (iv) FSC Holding Company, (v) Avadel Operations Company, Inc. and (vi) Avadel CNS Pharmaceuticals LLC. 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. 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. A complete list of our subsidiaries can be found in Exhibit 21.1 of our Annual Report on Form 10-K filed with the SEC on March 16, 2020.

References in these unaudited condensed consolidated financial statements and the notes thereto 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.
Key Business Trends and Highlights 
In operating our business and monitoring our performance, we consider a number of performance measures, as well as trends affecting our industry as a whole, which include the following: 
Healthcare and Regulatory Reform: Various health care reform laws in the U.S. may impact our ability to successfully commercialize our products and technologies. The success of our commercialization efforts may depend on the extent to which the government health administration authorities, the health insurance funds in the E.U. Member States, private health insurers and other third-party payers in the U.S. will reimburse consumers for the cost of healthcare products and services.
Competition and Technological Change: Competition in the pharmaceutical and biotechnology industry continues to be intense and is expected to increase. We compete with academic laboratories, research institutions, universities, joint ventures, and other pharmaceutical and biotechnology companies, including other companies developing niche branded or generic specialty pharmaceutical products or drug delivery platforms. Furthermore, major technological changes can happen quickly in the pharmaceutical and biotechnology industries. Such rapid technological change, or the development by our competitors of technologically improved or differentiated products, could render our drug delivery platforms obsolete or noncompetitive.
Pricing Environment for Pharmaceuticals: The pricing environment continues to be in the political spotlight in the U.S. As a result, the need to obtain and maintain appropriate pricing for our products may become more challenging due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide.
Generics Playing a Larger Role in Healthcare: Generic pharmaceutical products will continue to play a large role in the U.S. healthcare system. Specifically, we have seen, or likely will see, additional generic competition to our current and future products and we continue to expect generic competition in the future.
Access to and Cost of Capital: The process of raising capital and associated cost of such capital for a company of our financial profile can be difficult and potentially expensive. If the need were to arise to raise additional capital, access to that capital may be difficult and/or expensive and, as a result, could create liquidity challenges for the Company.
Net Loss from Operations in 2020: Since we expect sales of our hospital products to decline in 2020 as compared to 2019 and we will incur substantial expenses to further the clinical development of FT218, we expect to incur a net loss in 2020, which we are unable to estimate at this time.


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Impact of COVID-19

Over the past few months, we have seen the profound impact that the novel coronavirus (COVID-19) is having on human health, the global economy and society at large. We have been actively monitoring the COVID-19 situation and have taken measures to mitigate the potential impacts to our employees and business, such as implementing a work from home policy. We believe the impact of COVID-19 and measures to prevent its spread could impact our business in a number of ways, including weakened customer demand, disruptions to our supply chain and third parties that we use and requiring that our employees work from home for an extended period of time.

Financial Highlights

Highlights of our consolidated results for the three months ended March 31, 2020 are as follows: 
Revenue was $12,243 for the three months ended March 31, 2020, compared to $16,437 in the same period last year. This year over year decrease was primarily the result of increased competition driving lower prices as noted above in our discussion of Key Business Trends and Highlights. Our Bloxiverz and Vazculep products experienced price and unit volume declines due to additional competition.
Operating loss was $6,497 for the three months ended March 31, 2020, compared to an operating loss of $8,167 and for the same period last year. The decrease in operating loss for the three months ended March 31, 2020 was largely driven by lower selling, general and administrative (SG&A) expenses of $2,533, a $1,799 decline in research and development (“R&D”) expense and a decrease in restructuring costs of $1,069, partially offset by a $3,385 decline in gross margin (i.e., total revenues minus cost of products).
Net loss was $865 for the three months ended March 31, 2020, respectively, compared to net loss of $13,018 in the same period last year, respectively. Included in the net loss during the three months ended March 31, 2019 was a loss on the deconsolidation of Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”) of $2,673.
Diluted net loss per share was $0.02 for the three months ended March 31, 2020, compared to diluted net loss per share of $0.35 in the same period last year, respectively.
Cash and marketable securities increased $49,325 to $113,483 at March 31, 2020, from $64,158 at December 31, 2019. This increase was driven by the February private placement which resulted in proceeds, net of placement fees of approximately $61,000, partially offset by $11,636 use of cash in operations.

Critical Accounting Estimates 
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could be significantly different from these estimates. 
Our significant accounting policies are described in Note 1 of the audited consolidated financial statements included in our Annual Report Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. For a complete discussion of our critical accounting policies, see the “Critical Accounting Policies” section of the MD&A in our 2019 Form 10-K.


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Results of Operations 
The following is a summary of our financial results (in thousands, except per share amounts) for the three months ended March 31, 2020 and 2019, respectively:
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2020 vs. 2019
Comparative Statements of Loss
 
2020
 
2019
 
$
 
%
 
 
 
 
 
 
 
 
 
Product sales
 
$
12,243

 
$
16,437

 
$
(4,194
)
 
(25.5
)%
Operating expenses:
 
 

 
 

 
 
 
 
Cost of products
 
2,457

 
3,266

 
(809
)
 
(24.8
)%
Research and development expenses
 
5,530

 
7,329

 
(1,799
)
 
(24.5
)%
Selling, general and administrative expenses
 
7,913

 
10,446

 
(2,533
)
 
(24.2
)%
Intangible asset amortization
 
203

 
201

 
2

 
1.0
 %
Changes in fair value of contingent consideration
 
2,478

 
2,134

 
344

 
16.1
 %
Restructuring costs
 
159

 
1,228

 
(1,069
)
 
(87.1
)%
Total operating expenses
 
18,740

 
24,604

 
(5,864
)
 
(23.8
)%
Operating loss
 
(6,497
)
 
(8,167
)
 
1,670

 
20.4
 %
Investment and other income, net
 
(378
)
 
817

 
(1,195
)
 
(146.3
)%
Interest expense
 
(3,190
)
 
(3,062
)
 
(128
)
 
(4.2
)%
Loss on deconsolidation of subsidiary
 

 
(2,673
)
 
2,673

 
100.0
 %
Other expense - changes in fair value of contingent consideration payable
 
(310
)
 
(307
)
 
(3
)
 
(1.0
)%
Loss before income taxes
 
(10,375
)
 
(13,392
)
 
3,017

 
22.5
 %
Income tax benefit
 
(9,510
)
 
(374
)
 
(9,136
)
 
(2,442.8
)%
Net loss
 
$
(865
)
 
$
(13,018
)
 
$
12,153

 
93.4
 %
Net loss per share - diluted
 
$
(0.02
)
 
$
(0.35
)
 
$
0.33

 
94.3
 %
The revenues for each of the Company’s significant products for the three months ended March 31, 2020 and 2019 were as follows: 
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2020 vs. 2019
Product sales:
 
2020
 
2019
 
$
 
%
 
 
 
 
 
 
 
 
 
Bloxiverz
 
$
1,401

 
$
2,568

 
$
(1,167
)
 
(45.4
)%
Vazculep
 
5,514

 
9,473

 
(3,959
)
 
(41.8
)%
Akovaz
 
5,349

 
3,792

 
1,557

 
41.1
 %
Other
 
(21
)
 
604

 
(625
)
 
(103.5
)%
Product sales
 
$
12,243

 
$
16,437

 
$
(4,194
)
 
(25.5
)%

Product sales were $12,243 for the three months ended March 31, 2020, compared to $16,437 for the same prior year period. Bloxiverz’s revenue declined $1,167 when compared to the same period last year, primarily due to lower unit volumes and net selling prices driven largely by new competitors that entered the market. Vazculep’s revenue declined $3,959 compared to the same period last year, due primarily to lower unit volumes and net selling prices driven largely by new competitors that entered the market. Akovaz’s revenue increased $1,557 driven by higher unit volumes driven largely by increased sales to compounders during the current period when compared to the prior period. The decrease in other revenue during the three months ended March 31, 2020 is driven by the deconsolidation of Specialty Pharma on February 6, 2019 as well as lower revenue on our Dextro product as we stopped selling this during the fourth quarter of 2019.


- 30 -



 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2020 vs. 2019
Cost of Products:
 
2020
 
2019
 
$
 
%
 
 
 
 
 
 
 
 
 
Cost of products
 
$
2,457

 
$
3,266

 
$
(809
)
 
(24.8
)%
Percentage of total revenues
 
20.1
%
 
19.9
%
 
 

 
 

Cost of products decreased $809 or 24.8% during the three months ended March 31, 2020 compared to the same prior year period driven by lower sold units. As a percentage of total revenue, cost of products sold was comparable to the prior year.