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AVADEL PHARMACEUTICALS PLC - Quarter Report: 2019 March (Form 10-Q)



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, 2019
 
———————
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.)
 
Block 10-1, Blanchardstown Corporate Park
Ballycoolin
Dublin 15, Ireland
(Address of Principal Executive Office and Zip Code)
 
+353-1-485-1200
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report) 
———————
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
¨
(Do not check if a 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 6, 2019, 37,355,511 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.
 



- 2 -



Cautionary Note 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 and Section 21E of the Securities Exchange Act of 1934. These include statements as to our future expectations, beliefs, plans, strategies, objectives, events, conditions, financial performance, prospects, or other events. In some cases, forward-looking statements can be identified by the use of words such as “will,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “project” and similar expressions, and the negatives thereof.

Our forward-looking statements are based on estimates and assumptions that are made within the bounds of our knowledge of our business and operations and that we consider reasonable. However, our business and operations are subject to significant risks and as a result there can be no assurance that actual results of our research, development and commercialization activities and the results of our business and operations will not differ materially from the results contemplated in such forward-looking statements.  Factors that could cause actual results to differ from expectations in our forward-looking statements include: 

(a) risks relating to our 2018 net loss and recent restructuring plan, including risks relating to the following:
our ability to fully pursue our business strategy is limited due to a decrease in our available liquid assets;
our recent restructuring plan may not be as effective as we anticipated and may have unintended negative impacts;
further restructuring actions, if needed, may require third-party consents that may not be granted;
the Chapter 11 bankruptcy filing by our subsidiary Avadel Specialty Pharmaceuticals LLC (“Specialty Pharma”) may have unexpected adverse results; and
a management-directed audit of the development program for our FT218 sodium oxybate product could result in changes that increase the cost of the program and further delay its completion;

(b) The other risks specified in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on March 15, 2019, including the following:
our three products Bloxiverz®, Vazculep® and Akovaz®, which are not patent protected and have a small number of customers, produce a majority of our revenues, and such products could face further competition resulting in a loss of market share and/or forcing us to further reduce our prices for those products;
we could fail to develop our current “unapproved marketed drug” (UMD) product candidate or future potential UMD product candidates, or competitors could develop such products and apply for FDA approval of such products before us;
we could experience failure or delay in completing the Phase 3 clinical trial for our FT218 product, and if the FDA ultimately approves such product, the approval may not include any period of market exclusivity;
We may not have sufficient cash or the ability to raise sufficient cash to service our $143.75 million Exchangeable Senior Notes due 2023 (“2023 Notes”), including the amounts necessary to repay the 2023 Notes at maturity, to settle exchanges of the 2023 Notes in cash, or to repurchase the 2023 Notes as required following a “fundamental change” event described in the indenture governing the 2023 Notes.
our products may not reach the commercial market or gain market acceptance;
we must invest substantial sums in research and development in order to remain competitive;
we depend on one or a limited number of providers to develop certain of our products and drug delivery technologies, to manufacture certain of our products and to provide certain raw materials used in our products;
our competitors may develop and market technologies or products that are more effective or safer than ours, or obtain regulatory approval and market such technologies or products before we do;
we face challenges in protecting intellectual property underlying our products and drug delivery technologies; and
we depend on key personnel to execute our business plan.

Forward-looking statements speak only as of the date they are made and are not guarantees of future performance. Accordingly, you should not place undue reliance on forward-looking statements. We do not undertake any obligation to publicly update or revise the forward-looking statements contained in this Quarterly Report.



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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,
 
 
2019
 
2018
 
 
 
 
 
Revenues:
 
 

 
 

Product sales
 
$
16,437

 
$
33,161

License revenue
 

 
132

Total revenues
 
16,437

 
33,293

Operating expenses:
 
 

 
 

Cost of products
 
3,266

 
6,592

Research and development expenses
 
7,329

 
9,951

Selling, general and administrative expenses
 
10,446

 
24,487

Intangible asset amortization
 
201


1,767

Changes in fair value of related party contingent consideration
 
2,134

 
2,968

Restructuring costs
 
1,228

 
153

Total operating expenses
 
24,604

 
45,918

Operating loss
 
(8,167
)
 
(12,625
)
Investment and other income, net
 
817

 
54

Interest expense
 
(3,062
)
 
(1,597
)
Loss on deconsolidation of subsidiary
 
(2,673
)
 

Other income - changes in fair value of related party payable
 
(307
)
 
(395
)
Loss before income taxes
 
(13,392
)
 
(14,563
)
Income tax benefit
 
(374
)
 
(2,327
)
Net loss
 
$
(13,018
)
 
$
(12,236
)
 
 
 
 
 
Net loss per share - basic
 
$
(0.35
)
 
$
(0.32
)
Net loss per share - diluted
 
(0.35
)
 
(0.32
)
 
 
 
 
 
Weighted average number of shares outstanding - basic
 
37,354

 
38,559

Weighted average number of shares outstanding - diluted
 
37,354

 
38,559

 
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,
 
 
2019
 
2018
 
 
 
 
 
Net loss
 
$
(13,018
)
 
$
(12,236
)
Other comprehensive (loss) income, net of tax:
 
 

 
 

Foreign currency translation (loss) gain
 
(161
)
 
249

Net other comprehensive income (loss), net of ($18) and ($59) tax, respectively
 
374

 
(238
)
Total other comprehensive income, net of tax
 
213

 
11

Total comprehensive loss
 
$
(12,805
)
 
$
(12,225
)
 
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, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
9,630

 
$
9,325

Marketable securities
 
70,221

 
90,590

Accounts receivable
 
11,772

 
11,330

Inventories
 
4,258

 
4,770

Prepaid expenses and other current assets
 
6,556

 
8,836

Total current assets
 
102,437

 
124,851

Property and equipment, net
 
1,749

 
1,911

Operating lease right-of-use assets
 
5,802

 

Goodwill
 
18,491

 
18,491

Intangible assets, net
 
1,428

 
1,629

Research and development tax credit receivable
 
7,591

 
7,272

Other non-current assets
 
36,124

 
36,146

Total assets
 
$
173,622

 
$
190,300

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$
104

 
$
106

Current portion of long-term related party payable
 
9,391

 
9,439

Current portion of operating lease liability
 
982

 

Accounts payable
 
4,150

 
3,503

Deferred revenue
 
115

 
114

Accrued expenses
 
14,689

 
21,695

  Other current liabilities
 
1,927

 
3,526

Total current liabilities
 
31,358

 
38,383

Long-term debt, less current portion
 
117,178

 
115,734

Long-term related party payable, less current portion
 
18,202

 
19,401

Long-term operating lease liability
 
3,889

 

Other non-current liabilities
 
12,577

 
14,002

Total liabilities
 
183,204

 
187,520

 
 
 
 
 
Shareholders’ (deficit) equity:
 
 

 
 

Preferred shares, nominal value of $0.01 per share; 50,000 shares authorized; none issued or outstanding at March 31, 2019 and December 31, 2018, respectively
 

 

Ordinary shares, nominal value of $0.01 per share; 500,000 shares authorized; 42,762 issued and 37,355 outstanding at March 31, 2019 and 42,720 issued and 37,313 outstanding at December 31, 2018
 
427

 
427

Treasury shares, at cost, 5,407 shares held at March 31, 2019 and December 31, 2018, respectively
 
(49,998
)
 
(49,998
)
Additional paid-in capital
 
434,199

 
433,756

Accumulated deficit
 
(371,007
)
 
(357,989
)
Accumulated other comprehensive loss
 
(23,203
)
 
(23,416
)
Total shareholders’ (deficit) equity
 
(9,582
)
 
2,780

Total liabilities and shareholders’ (deficit) equity
 
$
173,622

 
$
190,300

 See accompanying notes to unaudited condensed consolidated financial statements.

- 6 -



AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
(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
 
(deficit) equity
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
)

Three Months Ended March 31, 2018

 
 
Ordinary shares
 
Additional
 
Accumulated
 
Accumulated
other
comprehensive
 
Treasury Shares
 
Total
shareholders’
 
 
Shares
 
Amount
 
paid-in capital
 
deficit
 
(loss) income
 
Shares
 
Amount
 
equity
Balance, December 31, 2017
 
41,463

 
$
414

 
$
393,478

 
$
(262,685
)
 
$
(23,266
)
 
2,117

 
$
(22,361
)
 
$
85,580

Net loss
 

 

 

 
(12,236
)
 

 

 

 
(12,236
)
Other comprehensive income
 

 

 

 

 
11

 

 

 
11

Exercise of warrants
 
603

 
6

 
2,905

 

 

 

 

 
2,911

Expiration of warrants
 

 

 
2,167

 

 

 

 

 
2,167

Stock-based compensation expense
 

 

 
2,134

 

 

 

 

 
2,134

Equity component of 2023 Notes
 

 

 
26,699

 

 

 

 

 
26,699

Share repurchases
 

 

 

 

 

 
2,307

 
(20,212
)
 
(20,212
)
Balance, March 31, 2018
 
42,066

 
$
420

 
$
427,383

 
$
(274,921
)
 
$
(23,255
)
 
4,424

 
$
(42,573
)
 
$
87,054







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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
(Unaudited)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
 
 
 
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(13,018
)
 
$
(12,236
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
369

 
1,985

Amortization of premiums on marketable securities
 
9

 
518

Remeasurement of related party acquisition-related contingent consideration
 
2,134

 
2,968

Remeasurement of related party financing-related contingent consideration
 
307

 
395

Amortization of debt discount and debt issuance costs
 
1,445

 
657

Change in deferred tax and income tax deferred charge
 
(222
)
 
(2,851
)
Stock-based compensation expense
 
351

 
2,134

Loss on deconsolidation of subsidiary
 
1,750

 

Other adjustments
 
(550
)
 
139

Net changes in assets and liabilities
 
 

 
 

Accounts receivable
 
(1,021
)
 
(1,891
)
Inventories
 
467

 
(466
)
Prepaid expenses and other current assets
 
(3,228
)
 
(2,285
)
Research and development tax credit receivable
 
(449
)
 
(494
)
Accounts payable & other current liabilities
 
752

 
6,374

Accrued expenses
 
(4,750
)
 
(5,854
)
Accrued income taxes
 
(46
)
 
32

Earn-out payments for related party contingent consideration in excess of acquisition-date fair value
 
(3,181
)
 
(5,790
)
Royalty payments for related party payable in excess of original fair value
 
(507
)
 
(825
)
Other assets and liabilities
 
(1,818
)
 
(518
)
Net cash used in operating activities
 
(21,206
)
 
(18,008
)
 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 
(30
)
 
(41
)
Proceeds from sales of marketable securities
 
34,864

 
194,400

Purchases of marketable securities
 
(13,444
)
 
(275,098
)
Net cash provided by (used in) investing activities
 
21,390

 
(80,739
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Earn-out payments for related party contingent consideration
 

 
(402
)
Proceeds from debt issuance
 

 
143,750

Payments for debt issuance costs
 

 
(5,391
)
Share repurchases
 

 
(18,000
)
Proceeds from exercise of warrants
 

 
2,911

Other financing activities, net
 
92

 
47

Net cash provided by financing activities
 
92

 
122,915

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

 
179

 
 
 
 
 
Net change in cash and cash equivalents
 
305

 
24,347

Cash and cash equivalents at January 1,
 
9,325

 
16,564

Cash and cash equivalents at March 31,
 
$
9,630

 
$
40,911

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

 
$
263

     Income taxes paid
 
$
72

 
$
90

 
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 a branded specialty pharmaceutical company.  Our primary focus is on the development and potential FDA approval for FT218 which is in a Phase 3 clinical trial for the treatment of narcolepsy patients suffering from excessive daytime sleepiness (EDS) and cataplexy.  In addition, we market three sterile injectable drugs used in the hospital setting which were developed under our “unapproved marketed drug” (UMD) program.   The Company is headquartered in Dublin, Ireland with operations in St. Louis, Missouri and Lyon, France. For more information, please visit www.avadel.com.

Avadel is developing FT218, an investigational once-nightly formulation of sodium oxybate based on its propriety Micropump® drug delivery technology, for the treatment of EDS and cataplexy in patients suffering from narcolepsy. FT218 is currently being evaluated in a Phase 3 clinical trial called REST-ON. In addition, the Company submitted an NDA in March 2019 on UMD #4, which, if approved, could contribute revenues to Avadel starting in 2020.

Our current marketed products include:
Akovaz® (ephedrine sulfate injection, USP), an alpha- and beta-adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.

Bloxiverz® (neostigmine methylsulfate injection), a cholinesterase inhibitor, is indicated for the reversal of the effects of non-depolarizing neuromuscular blocking agents (NMBAs) after surgery.

Vazculep® (phenylephrine hydrochloride injection), an alpha-1 adrenergic receptor agonist indicated for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia.

Each of our Akovaz, Bloxiverz and Vazculep products is used primarily in the hospital setting and was developed under our UMD program.

The Company was incorporated on December 1, 2015 as an Irish private limited company, and re-registered as an Irish public limited company, or plc, on November 21, 2016. Our principal place of business is located at Block 10-1, Blanchardstown Corporate Park, Ballycoolin, Dublin 15, Ireland. Avadel’s phone number is 011-353-1-485-1200. Our website is www.avadel.com, where we make available free of charge our reports (and any amendments thereto) on Forms 10-K, 10-Q and 8-K as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These filings are also available to the public at www.sec.gov.

The Company is the successor to Flamel Technologies S.A., a French société anonyme (“Flamel”), as the result of the France-to-Ireland redomestication merger of Flamel with and into the Company completed on December 31, 2016 (the “Merger”). In the Merger, we changed our company name to Avadel Pharmaceuticals plc and our jurisdiction of organization to Ireland; we assumed all the assets and liabilities of Flamel; and we issued one Avadel ordinary share (either directly or in the form of an American Depositary Share (ADS)) in exchange for each formerly outstanding share of Flamel, all of which were canceled. Thus, an Avadel ordinary share held (either directly or represented by an ADS) immediately after the Merger continued to represent the same proportional interest in our equity owned by the holder of a share of Flamel immediately prior to the Merger. References in this Annual Report on Form 10-K to “Avadel,” the “Company,” “we,” “our,” “us,” and similar terms shall be deemed to be references to Flamel prior to the completion of the Merger, unless the context otherwise requires. Additional details about the Merger are set forth in Item 1 under the caption “ - The Reincorporation Merger.” of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.

The Company currently has five direct wholly-owned subsidiaries: (a) Avadel US Holdings, Inc., (b) Flamel Ireland Limited, which conducts business under the name Avadel Ireland, (c) Avadel Investment Company Limited, (d) Avadel Finance Ireland Designated Activity Company and (e) Avadel France Holding SAS. Avadel US Holdings, Inc., a Delaware corporation, is the holding entity of (i) Avadel Specialty Pharmaceuticals, LLC (currently the subject of a voluntary Chapter 11 bankruptcy proceeding as noted in Note 3: Subsidiary Bankruptcy and Deconsolidation), (ii) Avadel Legacy Pharmaceuticals, LLC, (iii) Avadel Management Corporation, (iv) FSC Holding Company and (v) Avadel Operations Company, Inc. Avadel Finance Ireland Designated Activity Company is the holding entity of Avadel Finance Cayman Limited. Flamel Ireland Limited (operating under

- 9 -



the trade name Avadel Ireland) is an Irish corporation which, Since December 16, 2014, has been the owner of substantially all of Avadel’s intellectual property. Avadel France Holding SAS, a French société par actions simplifiée, is the holding entity of Avadel Research SAS through which Avadel conducts substantially all of its R&D activities. A complete list of the Company’s subsidiaries can be found in Exhibit 21.1 of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.

Basis of Presentation. The unaudited condensed consolidated balance sheet as of March 31, 2019, which is primarily derived from the prior year 2018 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an annual report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2018 Annual Report on Form 10-K filed with the SEC on March 15, 2019.
The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All material intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. 
On February 6, 2019, the Company’s indirect wholly owned subsidiary, Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”), filed a voluntary petition for reorganization under Chapter 11 of the United States (“U.S.”) Code (the “Bankruptcy Code”). in the U.S. District Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), Case No. 19-10248. Specialty Pharma is operating and managing its business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. As a result of Specialty Pharma’s voluntary bankruptcy filing on February 6, 2019, we no longer controlled the operations of Specialty Pharma; therefore, we deconsolidated Specialty Pharma effective with the bankruptcy filing and the Company recorded its investment in Specialty Pharma under the cost method. See Note 3: Subsidiary Bankruptcy and Deconsolidation.
Our results of operations for the period January 1, 2018 through February 16, 2018 include the results of FSC Therapeutics and FSC Laboratories, Inc., (collectively “FSC”), prior to its February 16, 2018 disposition date. See Note 14: Divestiture of the Pediatric Assets, for additional information. All intercompany accounts and transactions have been eliminated.
Revenue. Revenue includes sales of pharmaceutical products, licensing fees, and, if any, milestone payments for research and development (“R&D”) achievements. 
Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when the performance obligations to the customer have been satisfied through the transfer of control of the goods or services. To determine the appropriate revenue recognition for arrangements that the Company believes are within the scope of ASC 606, we perform the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts only when the Company and its customer’s rights and obligations under the contract can be determined, the contract has commercial substance, and it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. For contracts that are determined to be within the scope of ASC 606, the Company identifies the promised goods or services in the contract to determine if they are separate performance obligations or if they should be bundled with other goods and services into a single performance obligation. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales and Services 

The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the Company’s product, which occurs typically upon receipt by the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates of product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated based on analysis of historical data for the product or comparable products, future expectations for such products and other judgments and analysis.


- 10 -



License Revenue 

The Company from time to time may enter into out-licensing agreements which are within the scope of ASC 606 under which it licenses to third parties certain rights to its products or intellectual property. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, upfront license fees; development, regulatory, and commercial milestone payments; and sales-based royalty payments. Each of these payments results in license revenue.

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

NOTE 2: Newly Issued Accounting Standards
Recently Adopted Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. In July 2018, the FASB issued ASU 2018-11 “Targeted Improvements”, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods, which the Company has elected. The impact of this new guidance is further discussed in Note 9: Leases.

Recent Accounting Guidance Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirement for Fair Value Measurement” which amends certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2018-13.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This update eliminates step 2 from the goodwill impairment test, and requires the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for the Company in the first quarter of 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will assess the timing of adoption and impact of this guidance to future impairment considerations.

NOTE 3: Subsidiary Bankruptcy and Deconsolidation

Bankruptcy Filing and Deconsolidation

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

In order to deconsolidate Specialty Pharma, the carrying values of the assets and certain liabilities of Specialty Pharma were removed from our unaudited condensed consolidated balance sheet as of February 5, 2019, and we recorded our investment in Specialty Pharma at its estimated fair value of $0. As the estimated fair value of our investment in Specialty Pharma was lower than its net book value immediately prior to the deconsolidation, we recorded a non-cash charge of approximately $2,673 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

- 11 -



Court on April 15, 2019. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business.

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, 2019, the Company had funded $407 under the DIP Credit Agreement. As the Company has assessed that it is unlikely that Specialty Pharma will pay back the loan to Avadel, the $407 has been recorded as part of the loss on deconsolidation of subsidiary within the unaudited condensed consolidated statements of loss. At March 31, 2019 the fair value of the remaining commitment under the DIP Credit Agreement is not material.

NOTE 4: Revenue Recognition

The Company generates revenue primarily from the sale of pharmaceutical products to customers. From time to time the Company also generates revenue from licensing arrangements whereby the Company provides access to certain of its intellectual property.

Product Sales and Services

Effective January 1, 2018, the Company implemented ASC 606, “Revenue From Contracts With Customers”. The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the Company’s product and the Company’s performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price deductions 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.


- 12 -



Chargebacks, Discounts and Rebates

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

Revenue from licensing arrangements

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

License of Intellectual Property

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Disaggregation of revenue

The Company’s primary source of revenue is from the sale of pharmaceutical products, which are equally affected by the same economic factors as it relates to the nature, amount, timing, and uncertainty of revenue and cash flows. For further detail about the Company’s revenues by product, see Note 18: Company Operations by Product.

Contract Balances

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

A receivable is recognized in the period the Company sells its products and when the Company’s right to consideration is unconditional. See the unaudited condensed consolidated balance sheets for the balance of accounts receivable at March 31, 2019.

See below for contract liability discussion and balance related to a license agreement.

There were no material deferred contract costs at March 31, 2019.

Transaction Price Allocated to the Remaining Performance Obligation

For product sales, the Company generally satisfies its performance obligations within the same period the product is delivered. Product sales recognized in 2019 from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.

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

The Company has elected certain of the practical expedients from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies the practical expedient in ASC 606 to its stand-alone contracts and does not disclose information about variable consideration from remaining performance obligations for which the Company recognizes revenue.
 


- 13 -



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.
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, 2019
 
As of December 31, 2018
Fair Value Measurements:
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities (see Note 6)
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
9,825

 
$

 
$

 
$
9,145

 
$

 
$

Money market funds
 
48,947

 

 

 
52,996

 

 

Corporate bonds
 

 
3,463

 

 

 
6,339

 

Government securities - U.S.
 

 
4,285

 

 

 
12,701

 

Other fixed-income securities
 

 
3,701

 

 

 
9,409

 

Total assets
 
$
58,772

 
$
11,449

 
$

 
$
62,141

 
$
28,449

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Related party payable (see Note 10)
 

 

 
27,593

 

 

 
28,840

Total liabilities
 
$

 
$

 
$
27,593

 
$

 
$

 
$
28,840

A review of fair value hierarchy classifications is conducted on a quarterly basis.  Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the periods ended March 31, 2019 and December 31, 2018, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three month periods ended March 31, 2019 and 2018, respectively, we did not recognize any other-than-temporary impairment loss.
Some of the Company’s financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

Debt

We estimate the fair value of our $143,750 aggregate principal amount of 4.50% exchangeable senior notes due 2023 (the “2023 Notes”), a Level 2 input, based on interest rates that would be currently available to the Company for issuance of similar types of

- 14 -



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, 2019 is $58,568 compared to a book value of $117,136.

Additionally, the Company’s other debt is reflected in the balance sheet at carrying value. The fair value of these loans impracticable to estimate as these represent non-interest bearing grants from the French government and are repayable only if the research project is technically or commercially successful.

See Note 11: Long-Term Debt for additional information regarding our debt obligations.

NOTE 6: Marketable Securities 
The Company has investments in available-for-sale marketable securities which are recorded at fair market value. The change in the fair value of available-for-sale equity investments is recognized in our unaudited condensed consolidated statements of loss and the change in the fair value of all other available-for-sale investments is recorded as other comprehensive income (loss) in shareholders’ (deficit) equity, net of income tax effects.
The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of March 31, 2019 and December 31, 2018, respectively:
 
 
March 31, 2019
Marketable Securities:
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
Equity securities
 
$
10,133

 
$
23

 
$
(331
)
 
$
9,825

Money market funds
 
48,438

 
509

 

 
48,947

Corporate bonds
 
3,442

 
30

 
(9
)
 
3,463

Government securities - U.S.
 
4,249

 
43

 
(7
)
 
4,285

Other fixed-income securities
 
3,673

 
30

 
(2
)
 
3,701

Total
 
$
69,935

 
$
635

 
$
(349
)
 
$
70,221

 
 
December 31, 2018
Marketable Securities:
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
Equity securities
 
$
10,101

 
$

 
$
(956
)
 
$
9,145

Money market funds
 
52,733

 
316

 
(53
)
 
52,996

Corporate bonds
 
6,411

 
7

 
(79
)
 
6,339

Government securities - U.S.
 
12,714

 
66

 
(79
)
 
12,701

Other fixed-income securities
 
9,400

 
22

 
(13
)
 
9,409

Total
 
$
91,359


$
411


$
(1,180
)

$
90,590

 
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We reflect these gains and losses as a component of investment income in the accompanying unaudited condensed consolidated statements of loss.
We recognized gross realized gains of $94 and $213 for the three months ended March 31, 2019, and 2018, respectively. These realized gains were offset by realized losses of $147 and $134 for the three months ended March 31, 2019, and 2018, respectively.

- 15 -



The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities as of March 31, 2019:
 
 
Maturities
Marketable Debt Securities:
 
Less than 1 Year
 
1-5 Years
 
5-10 Years
 
Greater than 10 Years
 
Total
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
688

 
$
2,775

 
$

 
$

 
$
3,463

Government securities - U.S.
 

 
3,841

 

 
444

 
4,285

Other fixed-income securities
 
50

 
3,651

 

 

 
3,701

Total
 
$
738

 
$
10,267

 
$

 
$
444

 
$
11,449

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

NOTE 7: Inventories 
The principal categories of inventories, net reserves of $1,085 and $4,757 at March 31, 2019 and December 31, 2018, respectively, are comprised of the following:
Inventory:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Finished goods
 
$
3,720

 
$
4,270

Raw materials
 
538

 
500

Total  
 
$
4,258

 
$
4,770


Total net reserves decreased by $3,672 during the three months ended March 31, 2019 driven largely by the deconsolidation of Specialty Pharma.

NOTE 8: Goodwill and Intangible Assets 
The Company’s amortizable and unamortizable intangible assets at March 31, 2019 and December 31, 2018 are as follows: 
 
 
March 31, 2019
 
December 31, 2018
Goodwill and Intangible Assets:
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Value
 
Accumulated
Amortization
 
Impairment
 
Net Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Acquired developed technology - Noctiva
 
$

 
$

 
$

 
$
73,111

 
$
(7,024
)
 
$
(66,087
)
 
$

Acquired developed technology - Vazculep
 
12,061

 
(10,633
)
 
1,428

 
12,061

 
(10,432
)
 

 
1,629

Total amortizable intangible assets
 
$
12,061

 
$
(10,633
)
 
$
1,428

 
$
85,172

 
$
(17,456
)
 
$
(66,087
)
 
$
1,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Goodwill
 
$
18,491

 
$

 
$
18,491

 
$
18,491

 
$

 
$

 
$
18,491

Total unamortizable intangible assets
 
$
18,491


$


$
18,491


$
18,491


$


$

 
$
18,491

 
The Company recorded amortization expense related to amortizable intangible assets of $201 and $1,767 for the three months ended March 31, 2019 and 2018, respectively.
During the fourth quarter 2018, certain conditions came to light, largely the lack of a meaningful increase in Noctiva prescriptions despite the substantial investment of resources, which indicated that the carrying value of the asset, may not be fully recoverable.

- 16 -



As such, the Company performed an impairment test based on a comparison of the pretax discounted cash flows expected to be generated by the asset, which is a Level 3 fair value estimate, to the recorded value of the asset and concluded that the associated cash flows did not support any of the carrying value of the intangible asset and the Company recorded a full impairment charge of $66,087 at December 31, 2018 related to the acquired developed technology associated with Noctiva. The February 6, 2019 Chapter 11 bankruptcy filing of Specialty Pharma, the subsidiary which markets, sells and distributes Noctiva, confirmed management’s conclusion on the impairment.
Amortizable intangible assets are amortized over their estimated useful lives, which generally range from three to fifteen years. Estimated amortization of intangible assets for the next five years is as follows: 
Estimated Amortization Expense:
 
Amount
 
 
 
2019
 
$
815

2020
 
814

2021
 

2022
 

2023
 


NOTE 9: Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. As January 1, 2019, adoption of the new guidance resulted in the initial recognition of operating lease right-of-use assets of $5,046 and operating lease liabilities of $5,131. At March 31, 2019, the balances of the operating lease right-of-use asset and total operating lease liability are $5,802 and $4,871, respectively, of which $982 of the operating lease liability is current.

The Company leases certain facilities for office and manufacturing purposes, comprising approximately 99% of the total lease population. All leased facilities are classified as operating leases with remaining lease terms between one and seven years. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and will include these options in the lease term when they are reasonably certain of being exercised. For all of the Company’s leases, lease and non-lease components are accounted for as a single lease component, as all non-lease components are immaterial to break out separately.

The components of lease costs, which is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of loss for the period ended March 31 were as follows ($ in thousands):
Lease cost:
 
2019
 
 
 
Operating lease costs (1)
 
$
345

Sublease income (2)
 
44

Total lease cost
 
$
301


(1) Variable lease costs were immaterial for the three months ended March 31, 2019.
(2) Represents sublease income received for the vacated office facility in Charlotte, North Carolina, which was acquired with the FSC acquisition in February 2016. The lease and sublease agreements terminate in December 2020.

During the three months ended March 31, 2019, the Company reduced its operating lease liabilities by $310 for cash paid. In addition, new operating leases commenced resulting in the recognition of operating lease right-of-use assets and liabilities of $1,000 and $0, respectively, as the entire lease payment was paid on March 31, 2019. As of March 31, 2019, the Company is aware of one additional embedded lease that has not yet commenced and will not commence until the time of FDA approval of the product (if approved). Once FDA approval is given and the start date is determined, annual production suite fees of approximately $3,000 to $4,000 would commence and at that time, and an operating lease right-of-use asset and corresponding operating lease liability will be recorded.


- 17 -



As of March 31, 2019, our operating leases have a weighted-average remaining lease term of 5.2 years and a weighted-average discount rate of 5.3%. Nearly all of Avadel’s lease contracts do not provide a readily determinable implicit rate. For these contracts, Avadel’s estimated incremental borrowing rate is based on information available at the inception of the lease.

Maturities of the Company’s operating lease liabilities were as follows ($ in thousands):
Maturities:
 
Operating Leases
 
 
 
Remaining nine months of 2019
 
$
920

2020
 
1,225

2021
 
1,004

2022
 
764

2023
 
693

Thereafter
 
942

Total lease payments
 
5,548

Less: interest
 
677

Present value of lease liabilities
 
$
4,871


Under the prior lease guidance, minimum rental commitments for non-cancelable leases as of December 31, 2018 were ($ in thousands):
Lease Commitment:
 
Operating Leases
 
 
 
2019
 
$
1,191

2020
 
1,208

2021
 
1,008

2022
 
767

2023
 
695

Thereafter
 
967

Total minimum lease payments
 
$
5,836


NOTE 10: Long-Term Related Party Payable 
Long-term related party payable and related activity are reported at fair value and consist of the following at March 31, 2019 and December 31, 2018:
 
 
 
Activity during the Three Months Ended
March 31, 2019
 
 
 
 
 
 
 
Changes in Fair Value of Related Party Payable
 
 
Long-Term Related Party Payable:
Balance,
December 31, 2018
 
Payments to
Related Parties
 
Operating Expense
 
Other
Expense
 
Balance, March 31, 2019
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration:
 

 
 

 
 

 
 

 
 

Earn-out payments - Éclat Pharmaceuticals (a)
$
25,615

 
$
(3,180
)
 
$
2,134

 
$

 
$
24,569

Financing-related:
 

 
 

 
 

 
 

 

Royalty agreement - Deerfield (b)
2,184

 
(344
)
 

 
208

 
2,048

Royalty agreement - Broadfin (c)
1,041

 
(164
)
 

 
99

 
976

Total related party payable
28,840

 
$
(3,688
)
 
$
2,134

 
$
307

 
27,593

Less: Current portion
(9,439
)
 
 

 
 

 
 

 
(9,391
)
Total long-term related party payable
$
19,401

 
 

 
 

 
 

 
$
18,202

(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 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

- 18 -



products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity.
(b)
As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 1.75% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Eclat products.
(c)
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a related party and current shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024.
At March 31, 2019, the fair value of each related party payable listed in (a), (b) and (c) above was estimated using a discounted cash flow model based on estimated and projected annual net revenues or gross profit, as appropriate, of each of the specified Éclat products using an appropriate risk-adjusted discount rate of 15%. These fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related related party payables, resulting primarily from management’s revision of key assumptions, will be recorded in the unaudited condensed consolidated statements of loss in the line items entitled “Changes in fair value of related party contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of related party payable” for items (b) and (c) above. See Note 1: Summary of Significant Accounting Policies under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K for more information on key assumptions used to determine the fair value of these liabilities. 
The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (b) and (c) above. These financing-related liabilities are recorded at fair market value on the unaudited condensed consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – change in fair value of related party payable” on the unaudited condensed consolidated statements of loss.
The following table summarizes changes to the related party payables, a recurring Level 3 measurement, for the three-month periods ended March 31, 2019 and 2018, respectively:
Related Party Payable Rollforward:
 
Balance
 
 
 
Balance, December 31, 2017
 
$
98,925

Payments of related party payable
 
(7,017
)
Fair value adjustments (1)
 
3,363

Expiration of warrants
 
(2,167
)
Disposition of the pediatric assets
 
(20,337
)
Balance, March 31, 2018
 
$
72,767

 
 
 
Balance, December 31, 2018
 
$
28,840

Payments of related party payable
 
(3,688
)
Fair value adjustments (1)
 
2,441

Balance, March 31, 2019
 
$
27,593

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


- 19 -



NOTE 11: Long-Term Debt
Long-Term debt is summarized as follows:
 
 
March 31, 2019
 
December 31, 2018
Principal amount of 4.50% exchangeable senior notes due 2023
 
$
143,750

 
$
143,750

Less: debt discount and issuance costs, net
 
(26,614
)
 
(28,059
)
Net carrying amount of liability component
 
117,136

 
115,691

Other debt
 
146

 
149

     Subtotal
 
117,282

 
115,840

Less: current maturities
 
(104
)
 
(106
)
     Long-term debt
 
$
117,178

 
$
115,734

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

NOTE 12: Income Taxes
The components of loss before income taxes are as follows: 
 
 
Three Months Ended March 31,
Loss Before Income Taxes:
 
2019
 
2018
 
 
 
 
 
Ireland
 
$
(10,234
)
 
$
(4,927
)
United States
 
(3,443
)
 
(9,835
)
France
 
285

 
199

Total loss before income taxes
 
$
(13,392
)
 
$
(14,563
)
 

- 20 -



The items accounting for the difference between the income tax provision computed at the statutory rate and the Company’s effective tax rate are as follows:
 
 
Three Months Ended March 31,
Income Tax Rate Reconciliation:
 
2019
 
2018
 
 
 
 
 
Statutory tax rate  
 
12.5
 %

12.5
 %
International tax rates differential
 
5.0
 %

8.9
 %
Change in valuation allowance
 
(11.4
)%

(4.7
)%
Change in fair value of nondeductible contingent consideration
 
(3.1
)%

(3.8
)%
Nondeductible stock-based compensation
 
(0.4
)%

(1.1
)%
Unrecognized tax benefits
 
(0.9
)%

(1.5
)%
State and local income taxes, net of federal
 
 %

0.1
 %
Nondeductible interest expense
 
(1.2
)%
 
 %
Other
 
2.2
 %

5.6
 %
Effective income tax rate
 
2.7
 %

16.0
 %
 
 
 
 
 
Income tax benefit - at statutory tax rate
 
$
(1,673
)
 
$
(1,820
)
International tax rates differential
 
(668
)
 
(1,298
)
Change in valuation allowance
 
1,520

 
690

Change in fair value of nondeductible contingent consideration
 
413

 
551

Nondeductible stock-based compensation
 
51

 
160

Unrecognized tax benefits
 
124

 
220

State and local income taxes, net of federal
 
2

 
(19
)
Nondeductible interest expense
 
157

 

Other
 
(300
)
 
(811
)
Income tax benefit - at effective income tax rate
 
$
(374
)
 
$
(2,327
)
 
The income tax benefit for the three months ended March 31, 2019 was $374 compared to an income tax benefit of $2,327 for the three months ended March 31, 2018. The decrease in the income tax benefit for the three months ended March 31, 2019 is primarily the result of a decrease in the amount of loss generated in the United States, when compared to the same prior year period.

NOTE 13: Other Assets and Liabilities 
Various other assets and liabilities are summarized as follows:
Prepaid Expenses and Other Current Assets:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Valued-added tax recoverable
 
$
1,100

 
$
1,378

Prepaid and other expenses
 
2,607

 
2,145

Guarantee from Armistice (see Note 14)
 
543

 
534

Income tax receivable
 
996

 
921

Research and development tax credit receivable
 
270

 
283

Short-term deposit
 

 
3,350

Other
 
1,040

 
225

Total  
 
$
6,556

 
$
8,836

 

- 21 -



Other Non-Current Assets:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Deferred tax assets, net
 
$
23,216

 
$
23,029

Long-term deposits
 
1,477

 
1,477

Guarantee from Armistice (see Note 14)
 
5,555

 
5,697

Right of use assets at contract manufacturing organizations
 
5,827

 
5,894

Other
 
49

 
49

Total  
 
$
36,124

 
$
36,146

 
Accrued Expenses
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Accrued compensation
 
$
1,726

 
$
3,971

Accrued social charges
 
1,018

 
1,009

Accrued restructuring (see Note 15)
 
419

 
879

Customer allowances
 
6,616

 
6,541

Accrued contract research organization charges
 
1,383

 
1,000

Accrued contract manufacturing organization costs
 
1,030

 
2,028

Accrued contract sales organization and marketing costs
 

 
3,469

Other
 
2,497

 
2,798

Total  
 
$
14,689

 
$
21,695

 
Other Non-Current Liabilities:
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Provision for retirement indemnity
 
$
1,003

 
$
1,024

Customer allowances
 
619

 
1,352

Unrecognized tax benefits
 
5,315

 
5,315

Guarantee to Deerfield (see Note 14)
 
5,574

 
5,717

Other
 
66

 
594

Total  
 
$
12,577

 
$
14,002


14: Divestiture of the Pediatric Assets

On February 12, 2018, the Company, together with its subsidiaries Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC (“FSC Therapeutics”), and Avadel US Holdings, Inc. (“Holdings”), as the “Sellers,” entered into an asset purchase agreement (the “Purchase Agreement”) with Cerecor, Inc. (“Cerecor”). The transaction closed on February 16, 2018 wherein Cerecor purchased from the Sellers four pediatric commercial stage assets – Karbinal™ ER, Cefaclor, Flexichamber™ and AcipHex® Sprinkle™, together with certain associated business assets – which were held by FSC.  The Company acquired FSC in February 2016 from Deerfield and certain of its affiliates. Pursuant to the Purchase Agreement, Cerecor assumed the Company’s  remaining payment obligations to Deerfield under the Membership Interest Purchase Agreement, dated as of February 5, 2016, between Holdings, Flamel Technologies SA (the predecessor of the Company) and Deerfield and certain of its affiliates, which payment obligations consist of the following (collectively, the “Assumed Obligations”): (i) a quarterly payment of $263 beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the FSC products through February 5, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300.  Cerecor also assumed certain contracts and other obligations related to the acquired assets, and in that connection Holdings agreed to pay Cerecor certain make-whole payments associated with obligations Cerecor is assuming related to a certain supply contract related to Karbinal™ ER.


- 22 -



In conjunction with the divestiture, the Company also entered into the following arrangements:

License and Development Agreement

Also, in connection with the closing under the Purchase Agreement, Flamel Ireland Limited, an Irish limited company operating under the trade name of Avadel Ireland (“Avadel Ireland”) and a wholly-owned subsidiary of the Company, and Cerecor entered into a license and development agreement (the “License and Development Agreement”) pursuant to which, among other things:

Avadel Ireland will provide Cerecor with four product formulations utilizing Avadel Ireland’s LiquiTime™ technology, and will complete pilot bioequivalence studies for such product formulations within 18 months;

Cerecor will reimburse Avadel Ireland for development costs of the four LiquiTime™ products in excess of $1,000 in the aggregate;

Upon transfer of the four product formulations, Cerecor will assume all remaining development costs and responsibilities for the product development, clinical studies, NDA applications and associated filing fees; and
Upon regulatory approval and commercial launch of any LiquiTime™ products, Cerecor will pay Avadel Ireland quarterly royalties based on a percentage of net sales of any such products in the mid-single digit range. 

Deerfield Guarantee

In connection with the closing under the Purchase Agreement, the Company and Holdings provided their guarantee (the “Deerfield Guarantee”) in favor of Deerfield. Under the Deerfield Guarantee, the Company and Holdings guaranteed to Deerfield the payment by Cerecor of the Assumed Obligations under the Membership Interest Purchase Agreement between the Company and Deerfield dated February 5, 2016. The Assumed Obligations include (i) a quarterly payment of $263 beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. In addition, under the Deerfield Guarantee, the Company and Holdings guaranteed that Deerfield would receive certain minimum annual FSC Product Royalties through February 6, 2026 (the “Minimum Royalties”). Given the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. A valuation was performed, which was based largely on an analysis of the potential timing of each possible cash outflow described above and the likelihood of Cerecor’s default on such payments assuming an S&P credit rating of CCC+. The result of this valuation identified a guarantee liability of $6,643. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield. At March 31, 2019, the carrying value of this liability was $6,119.

Armistice Guarantee

In connection with the closing under the Purchase Agreement, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to Holdings the payment by Cerecor of the Assumed Obligations, including the Minimum Royalties. A valuation of the guarantee asset was performed in accordance with ASC 460 and a guarantee asset of $6,620 was recorded. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield noted above. At March 31, 2019, the carrying value of this asset was $6,097.

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

Based on management’s review of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the disposition of our pediatric assets and related liabilities did not qualify for discontinued operations reporting. Our results of operations for the period January 1, 2018 through February 16, 2018 include the results of FSC, prior to its February 16, 2018 disposition date.

The net impact of this transaction was not material to the unaudited condensed consolidated statements of loss.


- 23 -



NOTE 15: Restructuring Costs
2019 Corporate Restructuring
During the first quarter of 2019, the Company announced a plan to reduce our 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 Deconsoldiation), as well as an effort to better align the Company’s remaining cost structure at our U.S. and Ireland locations with our ongoing and future planned projects. The reduction in workforce is projected to be substantially complete by the end of the fiscal year 2019, and to result in employee severance, benefits and other costs of up to approximately $3,000, which are likely to be recognized through December 31, 2019. 2019 Corporate Restructuring charges of $1,398 were recognized during the three months ended March 31, 2019.
The following table sets forth activities for the Company’s cost reduction plan obligations for the three months ended March 31, 2019:
2019 Corporate Restructuring Obligations:
 
2019
 
 
 
Balance of restructuring accrual at January 1,
 
$

Charges for employee severance, benefits and other costs
 
1,398

Payments
 
(754
)
Balance of restructuring accrual at March 31,
 
$
644

Restructuring liabilities of $356 and $288 are included in the unaudited condensed consolidated balance sheet in accrued expenses and accounts payable, respectively, at March 31, 2019.
2017 French Restructuring
During the first quarter of 2017, the Company announced a plan to reduce our workforce at our Venniseux, France site by approximately 50% (“2017 French Restructuring”).  This reduction was an effort to align the Company’s cost structure with our ongoing and future planned projects. In July 2017, the Company completed negotiations with the works council for our French operations and received approval from the French Labor Commission (DIRECCTE) to implement the plan. The reduction was substantially complete at March 31, 2019. The 2017 French Restructuring income of $170 and restructuring charges of $153 were recognized during the three months ended March 31, 2019 and 2018, respectively. The following table sets forth activities for the Company’s cost reduction plan obligations for the three months ended March 31, 2019 and 2018:
2017 French Restructuring Obligation:
 
2019
 
2018
 
 
 
 
 
Balance of restructuring accrual at January 1,
 
$
879

 
$
1,000

Charges for employee severance, benefits and other
 
(170
)
 
153

Payments
 
(638
)
 
(359
)
Foreign currency impact
 
(8
)
 
30

Balance of restructuring accrual at March 31,
 
$
63

 
$
824

The 2017 French Restructuring accrual is included in the unaudited condensed consolidated balance sheet in accrued expenses at March 31, 2019 and 2018.

NOTE 16: Net Loss Per Share 
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during each period. Diluted net (loss) income per share is calculated by dividing net (loss) income by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net loss, diluted net loss per share would be calculated assuming the impact of the conversion of the 2023 Notes, the exercise of outstanding equity compensation awards, ordinary shares expected to be issued under our employee stock purchase plan (“ESPP”) and the exercise of contingent consideration warrants, all which have been exercised or have expired during the first quarter of 2018.

We have a choice to settle the conversion obligation under the 2023 Notes in cash, shares or any combination of the two. We utilize the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This

- 24 -



method assumes the conversion of the 2023 Notes into shares of our ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.

The dilutive effect of the warrants, stock options, RSU’s and ordinary shares expected to be issued under or ESPP has been calculated using the treasury stock method.
A reconciliation of basic and diluted net loss per share, together with the related shares outstanding in thousands is as follows: 
 
 
Three Months Ended March 31,
Net Loss Per Share:
 
2019
 
2018
 
 
 
 
 
Net loss
 
$
(13,018
)
 
$
(12,236
)
 
 
 
 
 
Weighted average shares:
 
 

 
 

Basic shares
 
37,354

 
38,559

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

 

Diluted shares
 
37,354

 
38,559

 
 
 
 
 
Net loss per share - basic
 
$
(0.35
)

$
(0.32
)
Net loss per share - diluted  
 
$
(0.35
)

$
(0.32
)
 
Potential common shares of 19,762 and 19,374 were excluded from the calculation of weighted average shares for the three months ended March 31, 2019 and 2018, respectively, because their effect was considered to be anti-dilutive. For the three months ended March 31, 2019 and 2018, the effects of dilutive securities were entirely excluded from the calculation of net loss per share as a net loss was reported in this period. 

NOTE 17: Comprehensive Loss 
The following table shows the components of accumulated other comprehensive loss for the three months ended March 31, 2019 and 2018, respectively, net of tax effects: 
 
 
Three Months Ended March 31,
Accumulated Other Comprehensive Loss:
 
2019
 
2018
 
 
 
 
 
Foreign currency translation adjustment:
 
 

 
 

Beginning balance
 
$
(23,621
)
 
$
(23,202
)
Net other comprehensive (loss) income
 
(161
)
 
249

Balance at March 31,
 
$
(23,782
)
 
$
(22,953
)
 
 
 
 
 
Unrealized gain (loss) on marketable securities, net
 
 

 
 

Beginning balance
 
$
205

 
$
(64
)
Net other comprehensive income (loss), net of ($18) and ($59) tax, respectively
 
374

 
(238
)
Balance at March 31,
 
$
579

 
$
(302
)
Accumulated other comprehensive loss at March 31,
 
$
(23,203
)
 
$
(23,255
)
 
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.


- 25 -



NOTE 18: Company 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 our proprietary polymer based technology. The Company’s Chief Operating Decision Maker is the interim CEO. The interim 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:
 
2019
 
2018
 
 
 
 
 
Bloxiverz
 
$
2,568

 
$
7,491

Vazculep
 
9,473

 
12,961

Akovaz
 
3,792

 
10,217

Other
 
604

 
2,492

Total product sales
 
16,437

 
33,161

License revenue
 

 
132

Total revenues
 
$
16,437

 
$
33,293


NOTE 19: Commitments and Contingencies 
Litigation  
The Company is subject to potential liabilities generally incidental to our business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. At March 31, 2019 and December 31, 2018, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s unaudited condensed consolidated financial position, results of operations, cash flows or liquidity.   

Litigation Related to Noctiva

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

Ferring Litigation. Some of the patents covering the NoctivaTM product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, who manufacture a competing product known as Nocdurna.  Nocdurna was approved by the FDA in June 2018 and commercially launched in the U.S. in November 2018.  In this litigation, Ferring seeks to invalidate and disputes the inventorship of the Noctiva Patents, seeks damages for various alleged breaches of contractual and common law duties, and seeks damages for alleged infringement by NoctivaTM of Ferring’s “Nocdurna” trademark.  Specialty Pharma and certain other parties including Serenity Pharmaceuticals, LLC (“Serenity”) (the licensor of the Noctiva Patents) have defended this litigation, and have made counterclaims against Ferring, including for infringement of the Noctiva Patents and a declaratory judgment of noninfringement with respect to Ferring’s “Nocdurna” trademark. The court dismissed Ferring’s inventorship claim and its claims for alleged breaches of contractual and common law duties, although these dismissals may be appealed by Ferring.  On February 15, 2019, Specialty Pharma and its co-defendants moved to stay the litigation pending completion of the bankruptcy proceeding of Specialty Pharma.

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

- 26 -



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

Material Commitments
Due to the Chapter 11 bankruptcy case of Specialty Pharma, discussed in Note 3: Subsidiary Bankruptcy and Deconsolidation, the Company’s various commitments to purchase finished product from customers has changed from what was included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K. As of March 31, 2019, commitments for these arrangements, at maximum quantities and at contractual prices over the remaining life of the contract, and excluding any waived commitments, are as follows for the years ended December 31:

Purchase Commitments:
 
Balance
 
 
 
2019
 
$
7,194

2020
 
1,320

2021
 
1,320

2022
 
1,320

2023
 
220

Thereafter
 

Total
 
$
11,374


Other than commitments disclosed in Note 15: Contingent Liabilities and Commitments to the Company’s audited consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt and post-retirement benefit plan obligations which are disclosed in Note 10: Long-Term Debt and Note 13: Post-Retirement Benefit Plans, respectively, to the Company’s consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K and long-term contingent consideration payable as disclosed in Note 10: Long-Term Related Party Payable, to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.

- 27 -



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 15, 2019 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 a branded specialty pharmaceutical company.  Our primary focus is on the development and potential FDA approval for FT218 which is in a Phase 3 clinical trial for the treatment of narcolepsy patients suffering from excessive daytime sleepiness (EDS) and cataplexy.  In addition, we market three sterile injectable drugs used in the hospital setting which were developed under our “unapproved marketed drug” (UMD) program.   The Company is headquartered in Dublin, Ireland with operations in St. Louis, Missouri and Lyon, France. For more information, please visit www.avadel.com.
Avadel is developing FT218, an investigational once-nightly formulation of sodium oxybate based on its propriety Micropump® drug delivery technology, for the treatment of EDS and cataplexy in patients suffering from narcolepsy. FT218 is currently being evaluated in a Phase 3 clinical trial called REST-ON. In addition, the Company submitted an NDA in March 2019 on UMD #4, which, if approved, could contribute revenues to Avadel starting in 2020.
Our current marketed products include:

Akovaz® (ephedrine sulfate injection, USP), an alpha- and beta-adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
Bloxiverz® (neostigmine methylsulfate injection), a cholinesterase inhibitor, is indicated for the reversal of the effects of non-depolarizing neuromuscular blocking agents (NMBAs) after surgery.

Vazculep® (phenylephrine hydrochloride injection), an alpha-1 adrenergic receptor agonist indicated for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia.

Each of our Akovaz, Bloxiverz and Vazculep products is used primarily in the hospital setting and was developed under our UMD program.
Business Strategies
Our primary business strategy is to focus on the development and potential FDA approval for FT218 which is in a Phase 3 clinical trial for the treatment of narcolepsy patients suffering from EDS and cataplexy. In addition, we will continue to maximize our current approved hospital products portfolio, including obtaining FDA approval for and the commercialization of our fourth UMD product. Additionally, we will continue to evaluate opportunities to expand our product portfolio. These strategies are described below in greater detail.
FT218 (Micropump® sodium oxybate): FT218 (Micropump® sodium oxybate): Avadel is developing a product that uses our Micropump® drug-delivery technology for the treatment of EDS and cataplexy in patients suffering from narcolepsy. Avadel currently refers to this product as FT218. FT218 is a Micropump®-based formulation of sodium oxybate. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric

- 28 -



acid. Sodium oxybate has been described as a therapeutic agent with high medical value. 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 preparation for a clinical trial of FT218, Avadel reached an agreement with the FDA for the design and planned analysis of our pivotal Phase 3 study, Rest-On through a Special Protocol Assessment (“SPA”). A SPA is an acknowledgment by the FDA that the design and planned analysis of a pivotal clinical trial adequately addresses the objectives necessary to support a regulatory submission. Pursuant to the SPA, in December 2016, Avadel initiated patient enrollment and dosing for the Rest-On clinical trial 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. The study is a randomized, double-blind, placebo-controlled study of 264 patients being conducted in 45 to 55 clinical sites in the U.S., Canada, Western Europe and Australia. Avadel believes that, if successful, this study could demonstrate improved efficacy, safety and patient satisfaction over the current primary product serving this market, which is a twice nightly sodium oxybate formulation, which the marketer generated revenues of approximately $1.4 billion in 2018.

To date, due in part to narcolepsy being a rare disease with a small patient population with no significant geographic concentration, we have not completed patient enrollment for the FT218 clinical trial, nor have we announced a projected completion date for this clinical trial. Recently, we have engaged a third-party pharmaceutical consulting firm to assist us in evaluating our clinical development program for FT218 with the goal of ensuring an approvable and commercially viable FDA submission. This evaluation is currently under way, and while the results are not known at this time, they could cause us to modify our development plan with respect to FT218 in ways that materially increase the ultimate cost of development, further delay its completion or identify presently unknown risks with the product.

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 as the only once-nightly formulation. However, please see the information set forth under the caption “- Risks Related to Regulatory and Legal Matters - If FT218 is approved by the FDA, we may not obtain orphan drug marketing exclusivity” in the “Risk Factors” included in Part I, Item 1A of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.

Development of Micropump®-Based Products
Avadel’s versatile Micropump® drug delivery technology presents product development opportunities, 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 (“NCEs”). FT218 is formulated using this technology. If approved by the FDA, this product will be commercialized either by Avadel and/or by partners via licensing/distribution agreements.
Unapproved Marketed Drug (“UMD”) Products
In 2006, the U.S. Food and Drug Administration (FDA) issued its Marketed Unapproved Drugs - Compliance Policy Guide with the intention to incentivize pharmaceutical companies to pursue approvals for pharmaceutical products, many of which pre-date the establishment of the FDA. Although these products are not protected by patents or similar intellectual property, the FDA’s Compliance Policy Guide dictates that should FDA approve a new drug application (NDA) for any such products via a 505(b)(2) process, the FDA will remove competing unapproved manufacturers until a generic application is approved. Avadel believes that over a thousand unapproved drugs are marketed in the United States today and, while many of these products are outdated therapies, we strategically evaluate those UMD products that are more commonly used as candidates for possible future FDA approval and marketing under our UMD program.
To date, Avadel has received FDA approvals for three UMD products which we currently market under the brand names Bloxiverz® (neostigmine methylsulfate injection), Vazculep® (phenylephrine hydrochloride injection) and Akovaz® (ephedrine sulfate injection).

Additional UMD Products. Avadel is developing and intends to seek FDA approval of a NDA for UMD #4, a sterile injectable product used in the hospital setting. The Company submitted an NDA in March 2019 on UMD #4, which, if approved, could contribute revenues to Avadel starting in 2020. In addition, Avadel continues to monitor and evaluate other UMDs with large existing markets and limited competition for feasibility of possible future NDAs. Avadel believes its strategy to create opportunities to commercialize UMD products in markets with a limited number of competitors may have a limited number of opportunities given the lack of patent protection from competition. Avadel believes this shorter-term strategy may provide us with near term revenue growth and provide cash flows that can be used to fund R&D and inorganic initiatives for other products.


- 29 -



Corporate Information

The Company was incorporated on December 1, 2015 as an Irish private limited company, and re-registered as an Irish public limited company, or plc, on November 21, 2016. Our principal place of business is located at Block 10-1, Blanchardstown Corporate Park, Ballycoolin, Dublin 15, Ireland. Avadel’s phone number is 011-353-1-485-1200. Our website is www.avadel.com, where we make available free of charge our reports (and any amendments thereto) on Forms 10-K, 10-Q and 8-K as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These filings are also available to the public at www.sec.gov.
The Company is the successor to Flamel Technologies S.A., a French société anonyme (“Flamel”), as the result of the France-to-Ireland redomestication merger of Flamel with and into the Company completed on December 31, 2016 (the “Merger”). In the Merger, we changed our company name to Avadel Pharmaceuticals plc and our jurisdiction of organization to Ireland; we assumed all the assets and liabilities of Flamel; and we issued one Avadel ordinary share (either directly or in the form of an American Depositary Share (ADS)) in exchange for each formerly outstanding share of Flamel, all of which were canceled. Thus, an Avadel ordinary share held (either directly or represented by an ADS) immediately after the Merger continued to represent the same proportional interest in our equity owned by the holder of a share of Flamel immediately prior to the Merger. References in this Annual Report on Form 10-K to “Avadel,” the “Company,” “we,” “our,” “us,” and similar terms shall be deemed to be references to Flamel prior to the completion of the Merger, unless the context otherwise requires. Additional details about the Merger are set forth in Item 1 under the caption “ - The Reincorporation Merger.” of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.
The Company currently has five direct wholly-owned subsidiaries: (a) Avadel US Holdings, Inc., (b) Flamel Ireland Limited, which conducts business under the name Avadel Ireland, (c) Avadel Investment Company Limited, (d) Avadel Finance Ireland Designated Activity Company and (e) Avadel France Holding SAS. Avadel US Holdings, Inc., a Delaware corporation, is the holding entity of (i) Avadel Specialty Pharmaceuticals, LLC (currently the subject of a voluntary Chapter 11 bankruptcy proceeding as noted in Note 3: Subsidiary Bankruptcy and Deconsolidation), (ii) Avadel Legacy Pharmaceuticals, LLC, (iii) Avadel Management Corporation, (iv) FSC Holding Company and (v) Avadel Operations Company, Inc. Avadel Finance Ireland Designated Activity Company is the holding entity of Avadel Finance Cayman Limited. Flamel Ireland Limited (operating under the trade name Avadel Ireland) is an Irish corporation which, Since December 16, 2014, has been the owner of substantially all of Avadel’s intellectual property. Avadel France Holding SAS, a French société par actions simplifiée, is the holding entity of Avadel Research SAS through which Avadel conducts substantially all of its R&D activities. A complete list of the Company’s subsidiaries can be found in Exhibit 21.1 of the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.
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.

- 30 -



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.
Possible Net Loss from Operations in 2019: In part because we expect sales of our hospital products to significantly decline from 2018’s levels and we will incur substantial expenses to further the clinical development of FT218, we likely will incur a net loss in 2019, the amount of which is not known to us at this time.

Financial Highlights

Highlights of our consolidated results for the three months ended March 31, 2019 are as follows: 
Revenue was $16,437 for the three months ended March 31, 2019, compared to $33,293 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. We experienced price and unit volume declines across all our hospital products due to additional competition.
Operating loss was $8,167 for the three months ended March 31, 2019, compared to operating loss of $12,625 and for the same period last year. The decrease in operating loss for the three months ended March 31, 2019 was largely driven by lower selling, general and administrative (SG&A) expenses of $14,041 driven by the exit of the Noctiva business in 2019 of approximately $10,100, the disposition of FSC in the first quarter 2018 of approximately $2,700 and lower intangible amortization of $1,566 due to the impairment of the Noctiva intangible at December 31, 2018, partially offset by lower gross margin (sales minus cost of goods sold) of $13,530.
Net loss was $13,018 for the three months ended March 31, 2019, compared to net loss of $12,236 and in the same period last year. Included in the net loss in the first quarter of 2019 was a loss on the deconsolidation of Avadel Specialty Pharmaceuticals, LLC of $2,673. As a result of Avadel Specialty Pharmaceuticals, LLC bankruptcy filing on February 6, 2019, the company concluded that it no longer controls the operations of this subsidiary and accordingly deconsolidated this subsidiary.
Diluted net loss per share was $0.35 for the three months ended March 31, 2019, compared to diluted net loss per share of $0.32 in the same period last year.
Cash and marketable securities decreased $20,064 to $79,851 at March 31, 2019, from $99,915 at December 31, 2018. This decrease was largely driven from $21,206 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 must make 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, 2018 (the “2018 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 2018 Form 10-K. Effective January 1, 2019, the Company implemented ASC 842, Leases. On January 1, 2019, the impact of adopting this new accounting standard required the Company to recognize $5,046 and $5,131 of assets and liabilities, respectively, related to the Company’s operating leases. Other than this new leasing standard, there were no other significant changes to our critical accounting policies during the three months ended March 31, 2019. See Note 9: Leases in the notes to the unaudited condensed consolidated financial statements for further information.

- 31 -



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, 2019 and 2018, respectively:
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Comparative Statements of Loss
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Product sales
 
$
16,437

 
$
33,161

 
$
(16,724
)
 
(50.4
)%
License revenue
 

 
132

 
(132
)
 
(100.0
)%
Total revenues
 
16,437

 
33,293

 
(16,856
)
 
(50.6
)%
Operating expenses:
 
 

 
 

 


 


Cost of products
 
3,266

 
6,592

 
(3,326
)
 
(50.5
)%
Research and development expenses
 
7,329

 
9,951

 
(2,622
)
 
(26.3
)%
Selling, general and administrative expenses
 
10,446

 
24,487

 
(14,041
)
 
(57.3
)%
Intangible asset amortization
 
201

 
1,767

 
(1,566
)
 
(88.6
)%
Changes in fair value of related party contingent consideration
 
2,134

 
2,968

 
(834
)
 
(28.1
)%
Restructuring costs
 
1,228

 
153

 
1,075

 
702.6
 %
Total operating expenses
 
24,604

 
45,918

 
(21,314
)
 
(46.4
)%
Operating loss
 
(8,167
)
 
(12,625
)
 
4,458

 
(35.3
)%
Loss on deconsolidation of subsidiary
 
(2,673
)
 

 
(2,673
)
 
n/a

Investment and other income, net
 
817

 
54

 
763

 
1,413.0
 %
Interest expense
 
(3,062
)
 
(1,597
)
 
(1,465
)
 
(91.7
)%
Other income - changes in fair value of related party payable
 
(307
)
 
(395
)
 
88

 
22.3
 %
Loss before income taxes
 
(13,392
)
 
(14,563
)
 
1,171

 
8.0
 %
Income tax benefit
 
(374
)
 
(2,327
)
 
1,953

 
83.9
 %
Net loss
 
$
(13,018
)
 
$
(12,236
)
 
$
(782
)
 
(6.4
)%
Net loss per share - diluted
 
$
(0.35
)
 
$
(0.32
)
 
$
(0.03
)
 
(9.4
)%
The revenues for each of the Company’s significant products for the three months ended March 31, 2019 and 2018 were as follows: 
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Revenues:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Bloxiverz
 
$
2,568

 
$
7,491

 
$
(4,923
)
 
(65.7
)%
Vazculep
 
9,473

 
12,961

 
(3,488
)
 
(26.9
)%
Akovaz
 
3,792

 
10,217

 
(6,425
)
 
(62.9
)%
Other
 
604

 
2,492

 
(1,888
)
 
(75.8
)%
Product sales
 
16,437

 
33,161

 
(16,724
)
 
(50.4
)%
License revenue
 

 
132

 
(132
)
 
(100.0
)%
Total revenues
 
$
16,437

 
$
33,293

 
$
(16,856
)
 
(50.6
)%
 
Total revenues were $16,437 for the three months ended March 31, 2019, compared to $33,293 for the same prior year period. Bloxiverz’s revenue declined $4,923 in the current quarter when compared to the same prior year period primarily due to lower unit volumes and net selling price driven largely by new competition which entered the market driving price and unit volumes lower. Vazculep’s revenue decreased $3,488 during the quarter when compared to the prior year period due primarily to lower net selling prices and lower volumes in the current period when compared to the same prior year period. Akovaz’s revenue declined $6,425 driven largely by lower unit volumes and net selling price due to new competition which entered the market driving price and unit volumes lower. Other revenues, which includes Noctiva and the pediatric products declined during the three months

- 32 -



ended March 31, 2019 compared to the same period in the prior year due to the primarily due to the bankruptcy of Specialty Pharma and related deconsolidation on February 6, 2019 and the February 2018 divestiture of the pediatric products.
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Cost of Products:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Cost of products
 
$
3,266

 
$
6,592

 
$
(3,326
)
 
(50.5
)%
Percentage of total revenues
 
19.9
%
 
19.8
%
 
 

 
 

 
Cost of products decreased $3,326 or 50.5% during the three months ended March 31, 2019 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 period.
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Research and Development Expenses:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Research and development expenses
 
$
7,329

 
$
9,951

 
$
(2,622
)
 
(26.3
)%
Percentage of total revenues
 
44.6
%
 
29.9
%
 
 

 
 

 
Research and development expenses decreased $2,622 or (26.3)% during the three months ended March 31, 2019 as compared to the same period in 2018. This decline was a result of $1.3 million of lower spending associated with the exit of Noctiva and $1.2 million of cost reductions at the Company’s Lyon, France R&D center. The Company continues to invest a substantial portion of R&D in its FT218 development program.
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Selling, General and Administrative Expenses:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
10,446

 
$
24,487

 
$
(14,041
)
 
(57.3
)%
Percentage of total revenues
 
63.6
%
 
73.5
%
 
 

 
 

 
Selling, general and administrative expenses decreased $14,041 or 57.3% during the three months ended March 31, 2019 as compared to the same prior year period. This decrease was primarily due to a decrease of $10,100 of sales and marketing costs related to the exit of Noctiva during the current quarter when compared to the same period of the prior year. The decrease is also related to $2,700 of costs during the three months ended March 31, 2018 related to our pediatrics products which were divested in February 2018.
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Intangibles Asset Amortization:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Intangible asset amortization
 
$
201

 
$
1,767

 
$
(1,566
)
 
(88.6
)%
Percentage of total revenues
 
1.2
%
 
5.3
%
 
 

 
 

 
Intangible asset amortization expense decreased $1,566 or 88.6% during the three months ended March 31, 2019 driven by the impairment of the intangible asset related to Noctiva at December 31, 2018.

- 33 -



 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Changes in Fair Value of Related Party Contingent Consideration:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Changes in fair value of related party contingent consideration
 
$
2,134

 
$
2,968

 
$
(834
)
 
(28.1
)%
Percentage of total revenues
 
13.0
%
 
8.9
%
 
 

 
 

 
We compute the fair value of the related party contingent consideration using several significant assumptions and when these assumptions change, due to underlying market conditions, the fair value of these liabilities change as well. Each of the underlying assumptions used to determine the fair values of these contingent liabilities can, and often do, change based on adjustments in current market conditions, competition and other factors. These changes can have a material impact on our unaudited condensed consolidated statements of loss and balance sheet.  

As a result of changes in the underlying assumptions used to determine the estimated fair values of our acquisition-related contingent consideration earn-out payments - Éclat, we recorded gains of $2,134 and $2,968 and lowered the fair value of the acquisition-related contingent consideration earn-out payments - Éclat for the three months ended March 31, 2019 and 2018, respectively. As noted in our critical accounting estimates included in the 2018 Form 10-K, there are numerous assumptions and estimates we use when determining the fair value of the acquisition-related earn-out payments - Éclat. These assumptions include estimates of pricing, market size, the market share the related products are forecast to achieve, the cost of goods related to such products and an appropriate discount rate to use when present valuing the related cash flows.

For the three months ended March 31, 2019, as a result of changes to these estimates when compared to the same estimates at December 31, 2018, we recorded an increase in the fair value of our contingent consideration liabilities due to changes in certain underlying market conditions of the acquisition-related contingent consideration earn-out payments - Éclat.

For the three months ended March 31, 2018, as a result of changes to these estimates when compared to the same estimates at December 31, 2017, we recorded an increase in the fair value of our contingent consideration liabilities, largely due to changes in certain underlying market conditions of the acquisition-related contingent consideration earn-out payments - Éclat.

 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Restructuring Costs
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Restructuring costs
 
$
1,228

 
$
153

 
$
1,075

 
702.6
%
Percentage of total revenues
 
7.5
%
 
0.5
%
 
 

 
 

 
Restructuring charges of $1,228 primarily comprising severance and legal costs were recognized during the three months ended March 31, 2019. These charges were primarily related to severance and legal costs. During the first quarter of 2019, the Company announced a plan to reduce its Corporate workforce at our U.S. and Ireland sites by more than 50%.  This reduction is an effort to align the Company’s cost structure with our ongoing and future planned projects. See Note 15: Restructuring Costs for further details.
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Investment and Other Income, net
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Investment and other income, net
 
$
817

 
$
54

 
$
763

 
1,413.0
%
Percentage of total revenues
 
5.0
%
 
0.2
%
 
 

 
 

Investment and other income, net increased for the three months ended March 31, 2019 when compared to the same period in the prior year driven by higher realized and unrealized gains on our marketable securities during the current period when compared to the prior period.

- 34 -



 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Interest Expense
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Interest expense
 
$
3,062

 
$
1,597

 
$
1,465

 
91.7
%
Percentage of total revenues
 
18.6
%
 
4.8
%
 
 

 
 

Interest expense increased $1,465 for the three months end March 31, 2019 when compared to the same period in the prior year as a result of a full quarter of imputed interest recorded in 2019 versus half of this amount in 2018 due to the 2023 Notes February 2018 issuance.
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Loss on Deconsolidation of Subsidiary
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Loss on deconsolidation of subsidiary
 
$
(2,673
)
 
$

 
$
(2,673
)
 
n/a
Percentage of total revenues
 
(16.3
)%
 
%
 
 

 
 

As a result of Avadel Specialty Pharmaceuticals, LLC bankruptcy filing on February 6, 2019, the Company concluded that it no longer controls its operations and accordingly deconsolidated this subsidiary. The Company recorded a loss on the deconsolidation as a result of removing the net assets and certain liabilities of this subsidiary from our unaudited condensed consolidated financial statements. See Note 3: Subsidiary Bankruptcy and Deconsolidation for more discussion.

 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Other Income - Changes in Fair Value of Related Party Payable
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Other income - changes in fair value of related party payable
 
$
(307
)
 
$
(395
)
 
$
88

 
22.3
%
Percentage of total revenues
 
(1.9
)%
 
(1.2
)%
 
 

 
 

 
We recorded income of $307 and $395 to reduce the fair value of these liabilities during the three months ended March 31, 2019 and 2018, respectively, due to the same reasons associated with the Éclat product sales forecasts as described in the section “Changes in Fair Value of Related Party Contingent Consideration” for these periods. As noted in our critical accounting estimates section included in the 2018 Form 10-K, there are a number of assumptions and estimates we use when determining the fair value of the related party payable payments. These estimates include pricing, market size, the market share the related products are forecast to achieve and an appropriate discount rate to use when present valuing the related cash flows. These estimates often do change based on changes in current market conditions, competition and other factors.

 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Income Tax Benefit:
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Income tax benefit
 
$
(374
)
 
$
(2,327
)
 
$
1,953

 
83.9
%
Percentage of loss before income taxes
 
(2.8
)%
 
(16.0
)%
 
 

 
 

 

- 35 -



The items accounting for the difference between the income tax provision computed at the statutory rate and the Company’s effective tax rate for the three months ended March 31, 2019 and 2018, are as follows: 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
 
 
 
Statutory tax rate  
 
12.5
 %
 
12.5
 %
International tax rates differential
 
5.0
 %
 
8.9
 %
Change in valuation allowance
 
(11.4
)%
 
(4.7
)%
Change in fair value of nondeductible contingent consideration
 
(3.1
)%
 
(3.8
)%
Nondeductible stock-based compensation
 
(0.4
)%
 
(1.1
)%
Unrecognized tax benefits
 
(0.9
)%
 
(1.5
)%
State and local income taxes, net of federal
 
 %
 
0.1
 %
Nondeductible interest expense
 
(1.2
)%
 
 %
Other
 
2.2
 %
 
5.6
 %
Effective income tax rate
 
2.7
 %
 
16.0
 %
 
 
 
 
 
Income tax benefit - at statutory tax rate
 
$
(1,673
)
 
$
(1,820
)
International tax rates differential
 
(668
)
 
(1,298
)
Change in valuation allowance
 
1,520

 
690

Change in fair value of nondeductible contingent consideration
 
413

 
551

Nondeductible stock-based compensation
 
51

 
160

Unrecognized tax benefits
 
124

 
220

State and local income taxes, net of federal
 
2

 
(19
)
Nondeductible interest expense
 
157

 

Other
 
(300
)
 
(811
)
Income tax benefit - at effective income tax rate
 
$
(374
)
 
$
(2,327
)
 
The income tax benefit for the three months ended March 31, 2019 was $374 compared to an income tax benefit of $2,327 for the three months ended March 31, 2018. The decrease in the income tax benefit for the three months ended March 31, 2019 is primarily the result of a decrease in the amount of loss generated in the United States, when compared to the same prior year period.
Liquidity and Capital Resources 
The Company’s cash flows from operating, investing and financing activities, as reflected in the unaudited condensed consolidated statements of cash flows, are summarized in the following table: 
 
 
 
 
 
 
Three Months Ended
 
 
Three Months Ended March 31,
 
Increase / (Decrease)
 
 
 
2019 vs. 2018
Net cash provided by (used in):
 
2019
 
2018
 
$
 
%
 
 
 
 
 
 
 
 
 
Operating activities
 
$
(21,206
)
 
$
(18,008
)
 
$
(3,198
)
 
(17.8
)%
Investing activities
 
21,390

 
(80,739
)
 
102,129

 
126.5
 %
Financing activities
 
92

 
122,915

 
(122,823
)
 
(99.9
)%
 
Operating Activities 
Net cash used in operating activities of $21,206 for the three months ended March 31, 2019 increased $3,198 compared to the same prior year period. This decrease in operating cash flow is primarily due to lower cash earnings (net income or loss adjusted for non-cash credits and charges) of $1,134 when compared to the same period last year. The decrease in operating cash flow was also due to higher cash used for accounts payable and other current liabilities of $5,622 when compared to the same period last

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year, partially offset by lower cash payments for related party contingent consideration of $2,927 during the current period when compared to the prior period.
Investing Activities 
Cash provided by investing activities was $21,390 for the three months ended March 31, 2019, was related to net cash proceeds received from the excess of sales over purchases of marketable securities. Cash used in investing activities of $80,739 during the same prior year period was related to the use of cash to purchase marketable securities in excess of sales of marketable securities.
Financing Activities 
Cash provided by financing activities for the three months ended March 31, 2019 was $92, which decreased $122,823 for the same prior year period. During the three months ended March 31, 2018, $143,750 of cash was provided by financing activities through the issuance of the 2023 Notes. A portion of the proceeds from the offering of the 2023 Notes was used for share repurchases totaling $18,000 and to pay direct expenses associated with the issuance of the 2023 Notes of $5,391 during the first quarter of 2018.
Liquidity and Risk Management 
The adequacy of our cash resources depends on the outcome of certain business conditions including the cost of our FT218 clinical development plan, our cost structure, our hospital products revenue projections and other factors set forth in “Risk Factors” within Part I, Item 1A of the 2018 Form 10-K and within Part II, Item 1A of this quarterly report on Form 10-Q. To grow and invest in our business, we will need to commit substantial resources, which could result in future losses or otherwise limit our opportunities or affect our ability to operate our business. Our assumptions concerning the outcome of certain business conditions may prove to be wrong or other factors may adversely affect our business, and as a result we could exhaust or significantly decrease our available cash and marketable securities balances which could, among other things, force us to raise additional funds and/or force us to reduce our expenses, either of which could have a material adverse effect on our business. If available to us raising additional capital may be accomplished through one or more public or private debt or equity financings, collaborations or partnering arrangements. Any equity financing would be dilutive to our shareholders.
Borrowings
In February 2018, we issued the 2023 Notes. We received net proceeds of approximately $137,560 from the sale of the 2023 Notes, after deducting fees and expenses of $6,190.

Share Repurchase Programs
The Company fully completed its authorized share buyback program during the year ended December 31, 2018.

Other Matters 
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, 2019 and December 31, 2018, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s unaudited condensed consolidated financial position, results of operations, cash flows or liquidity. 
Litigation Related to Noctiva

Note 3: Subsidiary Bankruptcy and Deconsolidation briefly describes the Chapter 11 bankruptcy case which our subsidiary Specialty Pharma commenced on February 6, 2019, and which on April 26, 2019 resulted in the bankruptcy court-approved sale of all of Specialty Pharma’s intangible assets and inventory to an unaffiliated third party. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business. During the pendency of the bankruptcy case, all pending litigation against Specialty Pharma is automatically stayed and any new litigation against Specialty Pharma is precluded unless the bankruptcy court orders otherwise. Below are descriptions of a litigation to which Specialty Pharma is a party and a contract dispute involving Specialty Pharma, both of which matters are subject to the automatic stay during the bankruptcy case.
Ferring Litigation. Some of the patents covering the NoctivaTM product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, who manufacture a competing product known as Nocdurna. 

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Nocdurna was approved by the FDA in June 2018 and commercially launched in the U.S. in November 2018.  In this litigation, Ferring seeks to invalidate and disputes the inventorship of the Noctiva Patents, seeks damages for various alleged breaches of contractual and common law duties, and seeks damages for alleged infringement by NoctivaTM of Ferring’s “Nocdurna” trademark.  Specialty Pharma and certain other parties including Serenity Pharmaceuticals, LLC (“Serenity”) (the licensor of the Noctiva Patents) have defended this litigation, and have made counterclaims against Ferring, including for infringement of the Noctiva Patents and a declaratory judgment of noninfringement with respect to Ferring’s “Nocdurna” trademark. The court dismissed Ferring’s inventorship claim and its claims for alleged breaches of contractual and common law duties, although these dismissals may be appealed by Ferring.  On February 15, 2019, Specialty Pharma and its co-defendants moved to stay the litigation pending completion of the bankruptcy proceeding of Specialty Pharma.

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

Material Commitments  
Due to the Chapter 11 bankruptcy case of Specialty Pharma, discussed in Note 3: Subsidiary Bankruptcy and Deconsolidation, the Company’s various commitments to purchase finished product from customers has changed from what was included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K. As of March 31, 2019, commitments for these arrangements, at maximum quantities and at contractual prices over the remaining life of the contract, and excluding any waived commitments, are as follows for the years ended December 31:

Purchase Commitments:
 
Balance
 
 
 
2019
 
$
7,194

2020
 
1,320

2021
 
1,320

2022
 
1,320

2023
 
220

Thereafter
 

Total
 
$
11,374


Other than commitments disclosed in Note 15: Contingent Liabilities and Commitments to the Company’s audited consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt and post-retirement benefit plan obligations which are disclosed in Note 10: Long-Term Debt and Note 13: Post-Retirement Benefit Plans, respectively, to the Company’s consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K and long-term contingent consideration payable as disclosed in Note 10: Long-Term Related Party Payable, to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.
Contractual Obligations 
Disclosures regarding contractual obligations are included in Part II, Item 7 of the Company’s 2018 Annual Report on Form 10-K and updated in Note 10: Long-Term Related Party Payable to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 
Interest Rate Risk
The Company is subject to interest rate risk as a result of its portfolio of marketable securities. The primary objectives of our investment policy are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and competitive yield. Although our investments are subject to market risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or certain types of investment. Our investment policy allows us to maintain a portfolio of cash equivalents and marketable securities

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in a variety of instruments, including U.S. federal government and federal agency securities, European Government bonds, corporate bonds or commercial paper issued by U.S. or European corporations, money market instruments, certain qualifying money market mutual funds, certain repurchase agreements, tax-exempt obligations of states, agencies, and municipalities in the U.S and Europe, and equities. 
ITEM 4.     CONTROLS AND PROCEDURES. 
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2019, the end of the period covered by this quarterly report on Form 10-Q.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on their evaluation, as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of March 31, 2019
Changes in Internal Control over Financial Reporting 
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that occurred during the three months ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION 
ITEM 1.
LEGAL PROCEEDINGS. 
The information contained in Note 19: Commitments and Contingencies  to the Company’s unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report is incorporated by reference herein.
ITEM 1A.    RISK FACTORS. 
There have been no material changes in our risk factors from those previously disclosed in the Company’s 2018 Annual Report. 

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 
The Company fully completed its authorized share buyback program during the year ended December 31, 2018.
 
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES. 
None.
ITEM 4.    MINE SAFETY DISCLOSURES. 
Not applicable.
ITEM 5.    OTHER INFORMATION. 
None.

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ITEM 6.    EXHIBITS. 
Exhibit No.
 
Description
 
 
 
31.1*
 
31.2*
 
32.1**
 
32.2**
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
______________________ 
*    Filed herewith. 
**          Furnished herewith. 

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SIGNATURES 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
AVADEL PHARMACEUTICALS PLC
 
(Registrant)
 
 
 
Date: May 8, 2019
By:
/s/ Michael F. Kanan
 
 
Michael F. Kanan
 
 
Senior Vice President and Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)
 



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