Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2017
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AVADEL PHARMACEUTICALS PLC
(Exact name of registrant as specified in its charter)
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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)
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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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 | ¨ | (Do not check if a smaller reporting company) | |
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 November 2, 2017, 39,762,209 ordinary shares, nominal value $0.01 each, of the Company were outstanding.
TABLE OF CONTENTS
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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 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). The words “will,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “project” and similar expressions, and the negatives thereof, identify forward-looking statements, each of which speaks only as of the date the statement is made. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements.
Although we believe that our forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business and operations, our business is subject to significant risks and there can be no assurance that actual results of our research, development and commercialization activities and our results of operations will not differ materially from our expectations.
More information on factors that could cause actual results or events to differ materially from those anticipated is set forth in Part II, Item 1A (“Risk Factors”) of this quarterly report on Form 10-Q and is included from time to time in our other reports filed with the Securities and Exchange Commission (SEC), including our annual report on Form 10-K for the year ended December 31, 2016, in particular under the captions “Forward-Looking Statements” and “Risk Factors.”
All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the risk factors and other cautionary statements included or referenced in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Product sales and services | $ | 39,147 | $ | 31,340 | $ | 138,009 | $ | 104,858 | ||||||||
License and research revenue | 528 | 747 | 484 | 2,303 | ||||||||||||
Total | 39,675 | 32,087 | 138,493 | 107,161 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of products and services sold | 3,790 | 2,844 | 12,253 | 10,657 | ||||||||||||
Research and development expenses | 8,095 | 8,143 | 22,093 | 21,135 | ||||||||||||
Selling, general and administrative expenses | 11,563 | 12,740 | 35,804 | 33,491 | ||||||||||||
Intangible asset amortization | 564 | 3,702 | 1,692 | 10,918 | ||||||||||||
(Gain)/loss - changes in fair value of related party contingent consideration | (9,906 | ) | 20,848 | (30,107 | ) | 52,989 | ||||||||||
Restructuring (income) costs | (549 | ) | — | 3,173 | — | |||||||||||
Total operating expenses | 13,557 | 48,277 | 44,908 | 129,190 | ||||||||||||
Operating income (loss) | 26,118 | (16,190 | ) | 93,585 | (22,029 | ) | ||||||||||
Investment income, net | 1,110 | 490 | 2,689 | 1,080 | ||||||||||||
Interest expense, net | (263 | ) | (264 | ) | (789 | ) | (702 | ) | ||||||||
Other income (expense) - changes in fair value of related party payable | 768 | (1,828 | ) | 2,988 | (6,135 | ) | ||||||||||
Foreign exchange gain (loss) | (133 | ) | 1,249 | (127 | ) | (12 | ) | |||||||||
Income (loss) before income taxes | 27,600 | (16,543 | ) | 98,346 | (27,798 | ) | ||||||||||
Income tax provision | 5,921 | 3,451 | 21,830 | 18,212 | ||||||||||||
Net income (loss) | $ | 21,679 | $ | (19,994 | ) | $ | 76,516 | $ | (46,010 | ) | ||||||
Net income (loss) per share - basic | $ | 0.54 | $ | (0.48 | ) | $ | 1.87 | $ | (1.12 | ) | ||||||
Net income (loss) per share - diluted | 0.52 | (0.48 | ) | 1.81 | (1.12 | ) | ||||||||||
Weighted average number of shares outstanding - basic | 40,061 | 41,241 | 40,839 | 41,241 | ||||||||||||
Weighted average number of shares outstanding - diluted | 41,339 | 41,241 | 42,194 | 41,241 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (loss) | $ | 21,679 | $ | (19,994 | ) | $ | 76,516 | $ | (46,010 | ) | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation gain (loss) | (229 | ) | 1,567 | 18 | 3,927 | |||||||||||
Net other comprehensive income (loss), net of $92, $152, $0 and ($49) tax, respectively | (512 | ) | (2,405 | ) | 126 | (958 | ) | |||||||||
Total other comprehensive income (loss), net of tax | (741 | ) | (838 | ) | 144 | 2,969 | ||||||||||
Total comprehensive income (loss) | $ | 20,938 | $ | (20,832 | ) | $ | 76,660 | $ | (43,041 | ) | ||||||
See accompanying notes to condensed consolidated financial statements.
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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 37,449 | $ | 39,215 | ||||
Marketable securities | 78,161 | 114,980 | ||||||
Accounts receivable | 24,080 | 17,839 | ||||||
Inventories, net | 5,870 | 3,258 | ||||||
Prepaid expenses and other current assets | 3,373 | 5,894 | ||||||
Total current assets | 148,933 | 181,186 | ||||||
Property and equipment, net | 3,180 | 3,320 | ||||||
Goodwill | 18,491 | 18,491 | ||||||
Intangible assets, net | 94,256 | 22,837 | ||||||
Research and development tax credit receivable | 3,547 | 1,775 | ||||||
Income tax deferred charge | — | 10,342 | ||||||
Other | 9,020 | 7,531 | ||||||
Total assets | $ | 277,427 | $ | 245,482 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 301 | $ | 268 | ||||
Current portion of long-term related party payable | 30,986 | 34,177 | ||||||
Accounts payable | 8,564 | 7,105 | ||||||
Deferred revenue | 1,927 | 2,223 | ||||||
Accrued expenses | 47,997 | 17,222 | ||||||
Income taxes | 7,026 | 1,200 | ||||||
Other | 507 | 226 | ||||||
Total current liabilities | 97,308 | 62,421 | ||||||
Long-term debt, less current portion | 614 | 547 | ||||||
Long-term related party payable, less current portion | 76,131 | 135,170 | ||||||
Other | 6,911 | 5,275 | ||||||
Total liabilities | 180,964 | 203,413 | ||||||
Shareholders' equity: | ||||||||
Preferred shares, $0.01 nominal value; 50,000 shares authorized; none issued or outstanding at September 30, 2017 and December 31, 2016, respectively | — | — | ||||||
Ordinary shares, nominal value of $0.01; 500,000 shares authorized; 41,435 and 41,371 issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 414 | 414 | ||||||
Treasury shares, at cost, 1,673 and 0 shares held at September 30, 2017 and December 31, 2016, respectively | (17,506 | ) | — | |||||
Additional paid-in capital | 391,416 | 385,020 | ||||||
Accumulated deficit | (254,440 | ) | (319,800 | ) | ||||
Accumulated other comprehensive loss | (23,421 | ) | (23,565 | ) | ||||
Total shareholders' equity | 96,463 | 42,069 | ||||||
Total liabilities and shareholders' equity | $ | 277,427 | $ | 245,482 | ||||
See accompanying notes to condensed consolidated financial statements.
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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 76,516 | $ | (46,010 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,664 | 11,555 | ||||||
Loss on disposal of property and equipment | — | 110 | ||||||
Loss (gain) on sale of marketable securities | (550 | ) | 666 | |||||
Foreign exchange loss | 127 | 12 | ||||||
Grants recognized in research and development expenses | — | (70 | ) | |||||
Remeasurement of related party acquisition-related contingent consideration | (30,107 | ) | 52,989 | |||||
Remeasurement of related party financing-related contingent consideration | (2,988 | ) | 6,135 | |||||
Change in deferred tax and income tax deferred charge | 322 | (5,680 | ) | |||||
Stock-based compensation expense | 6,019 | 10,541 | ||||||
Increase (decrease) in cash from: | ||||||||
Accounts receivable | (6,240 | ) | (7,594 | ) | ||||
Inventories | (2,612 | ) | 2,080 | |||||
Prepaid expenses and other current assets | 1,924 | 671 | ||||||
Research and development tax credit receivable | (1,576 | ) | (1,794 | ) | ||||
Accounts payable & other current liabilities | 804 | 1,291 | ||||||
Deferred revenue | (283 | ) | (2,198 | ) | ||||
Accrued expenses | 9,324 | 2,700 | ||||||
Accrued income taxes | 5,826 | — | ||||||
Earn-out payments for related party contingent consideration in excess of acquisition-date fair value | (24,729 | ) | (14,486 | ) | ||||
Royalty payments for related party payable in excess of original fair value | (3,446 | ) | (1,790 | ) | ||||
Other long-term assets and liabilities | (517 | ) | 2,032 | |||||
Net cash provided by operating activities | 30,478 | 11,160 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (533 | ) | (1,000 | ) | ||||
Acquisitions of businesses | — | 628 | ||||||
Purchase of intangible assets | (52,139 | ) | — | |||||
Proceeds from sales of marketable securities | 153,398 | 46,483 | ||||||
Purchases of marketable securities | (115,893 | ) | (96,199 | ) | ||||
Net cash used in investing activities | (15,167 | ) | (50,088 | ) | ||||
Cash flows from financing activities: | ||||||||
Earn-out payments for related party contingent consideration | (961 | ) | (6,834 | ) | ||||
Royalty payments for related party payable | — | (1,117 | ) | |||||
Reimbursement of loans | — | (61 | ) | |||||
Cash proceeds from issuance of ordinary shares and warrants | 376 | — | ||||||
Share repurchases | (16,707 | ) | — | |||||
Net cash used in financing activities | (17,292 | ) | (8,012 | ) | ||||
Effect of foreign currency exchange rate changes on cash and cash equivalents | 215 | 656 | ||||||
Net decrease in cash and cash equivalents | (1,766 | ) | (46,284 | ) | ||||
Cash and cash equivalents at January 1, | 39,215 | 65,064 | ||||||
Cash and cash equivalents at September 30, | $ | 37,449 | $ | 18,780 | ||||
See accompanying notes to 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 (“Avadel,” the “Company,” “we,” “our,” or “us”) is a specialty pharmaceutical company engaged in identifying, developing, and commercializing niche branded pharmaceutical products mainly in the U.S. Our business model consists of three distinct strategies:
• | the development of differentiated, patent protected products through application of the Company’s proprietary patented drug delivery platforms, Micropump® and LiquiTime®, that target high-value solid, liquid oral and alternative dosage forms through the U.S. Food and Drug Administration (FDA) 505(b)(2) approval process, which allows a sponsor to submit an application that doesn’t depend on efficacy, safety, and toxicity data created by the sponsor. In addition to Micropump® and LiquiTime®, the Company has two other proprietary drug delivery platforms, Medusa™ (hydrogel depot technology for use with large molecules and peptides) and Trigger Lock™ (controlled release of opioid analgesics with potential abuse deterrent properties). |
• | the identification of Unapproved Marketed Drugs (“UMDs”), which are currently sold in the U.S., but unapproved by the FDA, and the pursuit of approval for these products via a 505(b)(2) New Drug Application (NDA). To date, the Company has received three drug approvals through this “unapproved-to-approved” strategy, including: Bloxiverz® (neostigmine methylsulfate injection), Vazculep® (phenylephrine hydrochloride injection) and Akovaz® (ephedrine sulfate injection). As a potential source of near-term revenue growth, Avadel is working on the development of a fourth product for potential NDA submission and seeks to identify additional product candidates for development with this strategy. |
• | the acquisition of commercial and or late-stage products or businesses. On September 1, 2017, the Company entered into an Exclusive License and Assignment Agreement ("ELAA") with Serenity Pharmaceuticals, LLC. The ELAA grants the Company the sole right to commercialize and further develop Noctiva™ in the United States. Noctiva is a proprietary low-dose formulation of desmopressin acetate administered through a patent-protected intranasal delivery system. It is the first and only product approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of nocturia due to nocturnal polyuria. Additionally, the Company markets three branded pediatric-focused pharmaceutical products in the primary care space, and a 510(k) approved device all of which were purchased through the acquisition of FSC Laboratories and FSC Pediatrics ("FSC") on February 5, 2016. We will consider further acquisitions and the Company continues to look for assets that could fit strategically into our current or potential future commercial sales force. |
The Company was incorporated in Ireland on December 1, 2015 as a private limited company, and re-registered as an Irish public limited company on November 21, 2016. Our headquarters is in Dublin, Ireland and we have operations in St. Louis, Missouri, United States, and Lyon, France.
The Company is the successor to Flamel Technologies S.A., a French société anonyme (“Flamel”), as the result of the merger of Flamel with and into the Company which was completed at 11:59:59 p.m., Central Europe Time, on December 31, 2016 (the “Merger”) pursuant to the agreement between Flamel and Avadel entitled Common Draft Terms of Cross-Border Merger dated as of June 29, 2016 (the “Merger Agreement”). Immediately prior to the Merger, the Company was a wholly owned subsidiary of Flamel. As a result of the Merger Agreement:
• | Flamel ceased to exist as a separate entity and the Company continued as the surviving entity and assumed all of the assets and liabilities of Flamel. |
• | our authorized share capital is $5,500 divided into 500,000 ordinary shares with a nominal value of $0.01 each and 50,000 preferred shares with a nominal value of $0.01 each |
◦ | all outstanding ordinary shares of Flamel, €0.122 nominal value per share, were canceled and exchanged on a one-for-one basis for newly issued ordinary shares of the Company, $0.01 nominal value per share. This change in nominal value of our outstanding shares resulted in our reclassifying $5,937 on our balance sheet from ordinary shares to additional paid-in capital |
◦ | our Board of Directors is authorized to issue preferred shares on a non-pre-emptive basis, for a maximum period of five years, at which point it may be renewed by shareholders. The Board of Directors has discretion to dictate terms attached to the preferred shares, including voting, dividend, conversion rights, and priority relative to other classes of shares with respect to dividends and upon a liquidation. |
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• | all outstanding American Depositary Shares (ADSs) representing ordinary shares of Flamel were canceled and exchanged on a one-for-one basis for ADSs representing ordinary shares of the Company. |
Thus, the Merger changed the jurisdiction of our incorporation from France to Ireland, and an ordinary share of the Company 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 these 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.
Prior to completion of the Merger, the Flamel ADSs were listed on the Nasdaq Global Market (“Nasdaq”) under the trading symbol “FLML”; and immediately after the Merger the Company’s ADSs were listed for and began trading on Nasdaq on January 3, 2017 under the trading symbol “AVDL.”
Further details about the reincorporation, the Merger and the Merger Agreement are contained in our definitive proxy statement filed with the Securities and Exchange Commission on May 1, 2017, and within the 2016 Annual Report on Form 10-K.
Under Irish law, the Company can only pay dividends and repurchase shares out of distributable reserves, as discussed further in the Company's proxy statement filed with the SEC as of July 5, 2016. Upon completion of the Merger, the Company did not have any distributable reserves. On February 15, 2017, the Company filed a petition with the High Court of Ireland seeking the court's confirmation of a reduction of the Company's share premium so that it can be treated as distributable reserves for the purposes of Irish law. On March 6, 2017, the High Court issued its order approving the reduction of the Company's share premium by $317,254 which can be treated as distributable reserves.
Basis of Presentation. The Condensed Consolidated Balance Sheet as of December 31, 2016, which is primarily derived from the prior year 2016 audited consolidated financial statements, and the interim 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 condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2017.
The 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.
Foreign Currency Translation. The reporting currency of the Company and our wholly-owned subsidiaries is the U.S. dollar. Subsidiaries that do not use the U.S. dollar as their functional currency translate:
• | profit and loss accounts at the weighted average exchange rates during the reporting period, |
• | assets and liabilities at period end exchange rates, and |
• | shareholders' equity accounts at historical rates. |
Resulting translation gains and losses are included as a separate component of shareholders' equity in Accumulated Other Comprehensive Loss. Assets and liabilities, excluding available-for-sale marketable securities, denominated in a currency other than the subsidiary's functional currency are translated to the subsidiary's functional currency at period end exchange rates with resulting gains and losses recognized in the condensed consolidated statements of income (loss).
Revenue. Revenue includes sales of pharmaceutical products, amortization of licensing fees, and, if any, milestone payments for R&D achievements.
Product Sales and Services
Revenue is generally realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. The Company records revenue from product sales when title and risk of ownership have been transferred to the customer, which
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is typically upon delivery to the customer and when the selling price is determinable. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of 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 based on analysis of historical data for the product or comparable products, as well as future expectations for such products.
For generic products and branded products sold in mature markets where the ultimate net selling price to customer is estimable, the Company recognizes revenues upon delivery to the wholesaler. For new product launches the Company recognizes revenue once sufficient data is available to determine product acceptance in the marketplace such that product returns may be estimated based on historical data and there is evidence of reorders and consideration is made of wholesaler inventory levels. As part of the third quarter 2016 launch of Akovaz, the Company determined that sufficient data was available to determine the ultimate net selling price to the customer and therefore recognized revenue upon delivery to our wholesaler customers.
Prior to the second quarter 2016, the Company did not have sufficient historical data to estimate certain revenue deductions. As such, it could not accurately estimate the ultimate net selling price of our Éclat portfolio of products and as a result delayed revenue recognition until the wholesaler sold the product through to end customers.
During the second quarter of 2016, the Company determined that it had sufficient evidence, history, data and internal controls to estimate the ultimate selling price of our products upon delivery to our customers, the wholesalers. Accordingly, we discontinued the sell through revenue approach and now recognize revenue once the product is shipped from our warehouse.
License and Research Revenue
The Company’s license and research revenues consist of fees and milestone payments. Non-refundable fees where we have continuing performance obligations are deferred and are recognized ratably over our projected performance period. We recognize milestone payments, which are typically related to regulatory, commercial or other achievements by us or our licensees and distributors, as revenues when the milestone is accomplished and collection is reasonably assured.
NOTE 2 : Newly Issued Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs." The standard requires the service component of pension and other postretirement benefit expense to be presented in the same statement of income lines as other employee compensation costs, however, the other components will be presented outside of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The standard is effective starting in 2018, with early adoption permitted. Retrospective application is required for the guidance on the statement of income presentation. Prospective application is required for the guidance on the cost capitalization in assets. The Company does not believe this standard will materially impact our consolidated financial statements.
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 fiscal 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will assess the timing of adoption and impact of this guidance to future impairment considerations.
In January, 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." This update provides a screen to determine whether or not a set of assets is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set of assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. This guidance is effective for the Company in the first quarter of fiscal 2018. Early adoption is permitted for transactions not previously reported in the Company's consolidated financial statements. In September, 2017 the Company entered into an ELAA to acquire from Serenity Pharmaceuticals, LLC intellectual property rights to further develop and commercialize Noctiva in the United States. The Company elected to early adopt ASU 2017-01 and determined the intangible assets acquired as part of the ELAA should be accounted for as an acquisition of a single group of assets and not as a business combination.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory," which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than
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inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company elected to early-adopt ASU 2016-16 on a modified-retrospective basis as of January 1, 2017. Adoption of ASU 2016-16 eliminated the $11,156 income tax deferred charge recorded within the consolidated balance sheet as of December 31, 2016 and such elimination is reflected as an adjustment to accumulated deficit as of January 1, 2017.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows under Topic 230. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company does not believe this standard will materially impact our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” which supersedes the most current revenue recognition requirements. This ASU requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. Through May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provide supplemental adoption guidance and clarification to ASU 2014-09, respectively. These ASUs will be effective for annual and interim periods beginning after December 15, 2017 with early adoption for annual and interim periods beginning after December 15, 2016 permitted and should be applied retrospectively to each prior reporting period presented or as a modified retrospective adjustment as of the date of adoption.
The Company is currently evaluating this pronouncement to determine the impact of adoption on our consolidated financial statements, including which transition approach will be applied. The Company has decided not to early adopt the new pronouncement. The Company has assembled an implementation team consisting of a project manager as well as a cross functional project team responsible for assessing the impact the new revenue pronouncement will have on its consolidated financial statements and related disclosures. The implementation team is in the assessment phase, which consists of in depth analysis around the Company’s contracts and will result in a comparison of historical accounting policies and practices to the requirements of the new revenue pronouncement. The implementation team will then identify any potential changes to business processes, systems and controls necessary to support recognition and disclosure under the new revenue pronouncement.
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. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The new guidance will require the change in fair value of equity investments with readily determinable fair values to be recognized through the statement of income. We are currently evaluating the full impact of the standard; however, upon adoption, the change in the fair value of our available-for-sale equity investments will be recognized in our consolidated statement of income (loss) rather than as a component of our consolidated statement of comprehensive income (loss).
NOTE 3 : Fair Value Measurement
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
ASC 820, Fair Value Measurements and Disclosures defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. When estimating fair value, depending on the nature and complexity of the asset or liability, we may generally use one or each of the following techniques:
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• | 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 consolidated balance sheets:
As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
Fair Value Measurements: | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Marketable securities (see Note 4) | ||||||||||||||||||||||||
Equity securities | $ | 454 | $ | — | $ | — | $ | 4,033 | $ | — | $ | — | ||||||||||||
Money market funds | 44,312 | — | — | — | — | — | ||||||||||||||||||
Corporate bonds | — | 18,986 | — | — | 57,348 | — | ||||||||||||||||||
Government securities - U.S. | — | 11,133 | — | — | 42,814 | — | ||||||||||||||||||
Government securities - Non-U.S. | — | 69 | — | — | 233 | — | ||||||||||||||||||
Other fixed-income securities | — | 3,207 | — | — | 10,471 | — | ||||||||||||||||||
Other securities | — | — | — | — | 81 | — | ||||||||||||||||||
Total assets | $ | 44,766 | $ | 33,395 | $ | — | $ | 4,033 | $ | 110,947 | $ | — | ||||||||||||
Related party payables (see Note 7) | — | — | 107,117 | — | — | 169,347 | ||||||||||||||||||
Total liabilities | $ | — | $ | — | $ | 107,117 | $ | — | $ | — | $ | 169,347 | ||||||||||||
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the periods ended September 30, 2017 and December 31, 2016, there were no transfers into and out of Level 1, 2, or 3. During the three and nine month periods ended September 30, 2017 and 2016, 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. Additionally, the Company's long-term debt is reflected in the balance sheet at carrying value, which approximates fair value, as these represent non-interest bearing grants from the French government and are repayable only if the research project is technically or commercially successful.
NOTE 4 : Marketable Securities
The Company has investments in available-for-sale marketable securities which are recorded at fair market value. Unrealized gains and losses are recorded as other comprehensive income (loss) in shareholders’ equity, net of income tax effects.
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The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of September 30, 2017 and December 31, 2016, respectively:
As of September 30, 2017 | ||||||||||||||||
Marketable Securities: | Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Equity securities | $ | 438 | $ | 26 | $ | (10 | ) | $ | 454 | |||||||
Money market funds | 44,311 | 1 | — | 44,312 | ||||||||||||
Corporate bonds | 19,014 | 84 | (112 | ) | 18,986 | |||||||||||
Government securities - U.S. | 11,220 | 21 | (108 | ) | 11,133 | |||||||||||
Government securities - Non-U.S. | 70 | — | (1 | ) | 69 | |||||||||||
Other fixed-income securities | 3,212 | — | (5 | ) | 3,207 | |||||||||||
Total | $ | 78,265 | $ | 132 | $ | (236 | ) | $ | 78,161 | |||||||
As of December 31, 2016 | ||||||||||||||||
Marketable Securities: | Adjusted Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
Equity securities | $ | 3,689 | $ | 409 | $ | (65 | ) | $ | 4,033 | |||||||
Corporate bonds | 57,871 | 89 | (612 | ) | 57,348 | |||||||||||
Government securities - U.S. | 43,049 | 515 | (750 | ) | 42,814 | |||||||||||
Government securities - Non-U.S. | 247 | — | (14 | ) | 233 | |||||||||||
Other fixed-income securities | 10,281 | 221 | (31 | ) | 10,471 | |||||||||||
Other securities | 81 | — | — | 81 | ||||||||||||
Total | $ | 115,218 | $ | 1,234 | $ | (1,472 | ) | $ | 114,980 | |||||||
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $2,978 and $635 for the three months ended September 30, 2017, and 2016, respectively. These realized gains were offset by realized losses of $2,432 and $756 for the three months ended September 30, 2017, and 2016, respectively. We recognized gross realized gains of $4,228 and $709 for the nine months ended September 30, 2017, and 2016, respectively. These realized gains were offset by realized losses of $3,755 and $1,430 for the nine months ended September 30, 2017, and 2016, respectively. We reflect these gains and losses as a component of investment income in the accompanying condensed consolidated statements of income (loss).
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities as of September 30, 2017:
Maturities | ||||||||||||||||||||
Marketable Debt Securities: | Less than 1 Year | 1-5 Years | 5-10 Years | Greater than 10 Years | Total | |||||||||||||||
Corporate bonds | 1,361 | 16,219 | 1,136 | 270 | 18,986 | |||||||||||||||
Government securities - U.S. | 172 | 8,547 | 348 | 2,066 | 11,133 | |||||||||||||||
Government securities - Non-U.S. | — | — | 69 | — | 69 | |||||||||||||||
Other fixed-income securities | — | 2,473 | 734 | — | 3,207 | |||||||||||||||
Total | $ | 1,533 | $ | 27,239 | $ | 2,287 | $ | 2,336 | $ | 33,395 | ||||||||||
The Company has classified our investment in available-for-sale marketable securities as current assets in the 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.
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NOTE 5 : Inventories
The principal categories of inventories, net of reserves of $2,039 and $3,223 at September 30, 2017 and December 31, 2016, respectively, are comprised of the following:
Inventory: | September 30, 2017 | December 31, 2016 | ||||||
Finished goods | $ | 4,605 | $ | 2,429 | ||||
Raw materials | 1,265 | 829 | ||||||
Total | $ | 5,870 | $ | 3,258 | ||||
NOTE 6 : Goodwill and Intangible Assets
The Company's amortizable and unamortizable intangible assets at September 30, 2017 and December 31, 2016 are as follows:
As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
Goodwill and Intangible Assets: | Gross Value | Accumulated Amortization | Net Carrying Amount | Gross Value | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||||
Acquired developed technology - Noctiva | $ | 73,111 | $ | — | $ | 73,111 | $ | — | $ | — | $ | — | ||||||||||||
Acquired developed technology - Vazculep | 12,061 | (9,411 | ) | 2,650 | 12,061 | (8,801 | ) | 3,260 | ||||||||||||||||
Acquired product marketing rights | 16,600 | (1,854 | ) | 14,746 | 16,600 | (1,019 | ) | 15,581 | ||||||||||||||||
Acquired developed technology | 4,300 | (551 | ) | 3,749 | 4,300 | (304 | ) | 3,996 | ||||||||||||||||
Total amortizable intangible assets | $ | 106,072 | $ | (11,816 | ) | $ | 94,256 | $ | 32,961 | $ | (10,124 | ) | $ | 22,837 | ||||||||||
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 $564 and $3,702 for the three months ended September 30, 2017 and 2016, respectively. The Company recorded amortization expense related to amortizable intangible assets of $1,692 and $10,918 for the nine months ended September 30, 2017 and 2016, respectively.
During the period, the Company acquired $73,111 in developed technology as part of the ELAA with Serenity Pharmaceuticals, LLC. The aggregate cost was composed of an upfront payment of $50,000, an accrued payment of $20,000 due within one year, and $3,111 of transaction costs. The Company will amortize the developed technology over a 13 year period beginning October 1, 2017.
Amortizable intangible assets are amortized over their estimated useful lives, which range from three to fifteen years. Estimated amortization of intangible assets for the next five years is as follows:
Estimated Amortization Expense: | Amount | |||
2017 | $ | 3,664 | ||
2018 | 7,882 | |||
2019 | 7,882 | |||
2020 | 7,882 | |||
2021 | 7,067 | |||
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NOTE 7 : Long-Term Related Party Payable
Long-term related party payable and related activity are reported at fair value and consist of the following for the three months ended September 30, 2017:
Activity during the Three Months Ended September 30, 2017 | |||||||||||||||||||
Changes in Fair Value of Related Party Payable | |||||||||||||||||||
Long-Term Related Party Payable: | Balance, June 30, 2017 | Payments to Related Parties | Operating Expense / (Income) | Other Expense / (Income) | Balance, September 30, 2017 | ||||||||||||||
Acquisition-related contingent consideration: | |||||||||||||||||||
Warrants - Éclat Pharmaceuticals (a) | $ | 10,400 | $ | — | $ | (2,173 | ) | $ | — | $ | 8,227 | ||||||||
Earn-out payments - Éclat Pharmaceuticals (b) | 84,094 | (8,214 | ) | (7,685 | ) | — | 68,195 | ||||||||||||
Royalty agreement - FSC (c) | 8,010 | (296 | ) | (48 | ) | — | 7,666 | ||||||||||||
Financing-related: | |||||||||||||||||||
Royalty agreement - Deerfield (d) | 6,743 | (784 | ) | — | (520 | ) | 5,439 | ||||||||||||
Royalty agreement - Broadfin (e) | 3,212 | (374 | ) | — | (248 | ) | 2,590 | ||||||||||||
Long-term liability - FSC (f) | 15,000 | — | — | — | 15,000 | ||||||||||||||
Total related party payable | 127,459 | $ | (9,668 | ) | $ | (9,906 | ) | $ | (768 | ) | 107,117 | ||||||||
Less: Current portion | (40,615 | ) | (30,986 | ) | |||||||||||||||
Total long-term related party payable | $ | 86,844 | $ | 76,131 | |||||||||||||||
Long-term related party payable and related activity are reported at fair value and consist of the following for the nine months ended September 30, 2017:
Activity during the Nine Months Ended September 30, 2017 | |||||||||||||||||||
Changes in Fair Value of Related Party Payable | |||||||||||||||||||
Long-Term Related Party Payable: | Balance, December 31, 2016 | Payments to Related Parties | Operating Expense / (Income) | Other Expense / (Income) | Balance, September 30, 2017 | ||||||||||||||
Acquisition-related contingent consideration: | |||||||||||||||||||
Warrants - Éclat Pharmaceuticals (a) | $ | 11,217 | $ | — | $ | (2,990 | ) | $ | — | $ | 8,227 | ||||||||
Earn-out payments - Éclat Pharmaceuticals (b) | 121,377 | (24,729 | ) | (28,453 | ) | — | 68,195 | ||||||||||||
Royalty agreement - FSC (c) | 7,291 | (961 | ) | 1,336 | — | 7,666 | |||||||||||||
Financing-related: | |||||||||||||||||||
Royalty agreement - Deerfield (d) | 9,794 | (2,332 | ) | — | (2,023 | ) | 5,439 | ||||||||||||
Royalty agreement - Broadfin (e) | 4,668 | (1,113 | ) | — | (965 | ) | 2,590 | ||||||||||||
Long-term liability - FSC (f) | 15,000 | — | — | — | 15,000 | ||||||||||||||
Total related party payable | 169,347 | $ | (29,135 | ) | $ | (30,107 | ) | $ | (2,988 | ) | 107,117 | ||||||||
Less: Current portion | (34,177 | ) | (30,986 | ) | |||||||||||||||
Total long-term related party payable | $ | 135,170 | $ | 76,131 | |||||||||||||||
(a) | As part of the consideration for the Company’s acquisition of Éclat on March 13, 2012, the Company issued two warrants to a related party with a six-year term which allow for the purchase of a combined total of 3,300 ordinary shares of Avadel. One warrant is exercisable for 2,200 shares at an exercise price of $7.44 per share, and the other warrant is exercisable for 1,100 shares at an exercise price of $11.00 per share. |
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The fair value of the warrants is estimated on a quarterly basis using a Black-Scholes option pricing model with the following assumptions as of September 30:
Assumptions for the Warrant Valuation: | September 30, 2017 | September 30, 2016 | ||||||
Stock price | $ | 10.50 | $ | 12.40 | ||||
Weighted average exercise price per share | 8.63 | 8.63 | ||||||
Expected term (years) | 0.50 | 1.50 | ||||||
Expected volatility | 40.30 | % | 58.40 | % | ||||
Risk-free interest rate | 1.20 | % | 0.68 | % | ||||
Expected dividend yield | — | — | ||||||
These Black-Scholes 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. The fair value of the warrant consideration is most sensitive to movement in the Company’s share price and expected volatility at the balance sheet date.
Expected term: The expected term of the options or warrants represents the period of time between the grant date and the time the options or warrants are either exercised or forfeited, including an estimate of future forfeitures for outstanding options or warrants. Given the limited historical data and the grant of stock options and warrants to a limited population, the simplified method has been used to calculate the expected life.
Expected volatility: The expected volatility is calculated based on an average of the historical volatility of the Company's stock price.
Risk-free interest rate: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and a maturity that approximates the expected term.
Expected dividend yield: The Company has not distributed any dividends since our inception and has no plan to distribute dividends in the foreseeable future.
At the closing date of the 2012 Éclat acquisition and at September 30, 2017, it was uncertain as to whether the Company would ultimately fulfill our obligation under these warrants using Company shares or cash. Accordingly, pursuant to the guidance of ASC 480, the Company determined that these warrants should be classified as a liability. This classification as a liability was further supported by the Company’s determination, pursuant to the guidance of ASC 815-40-15-7(i), that these warrants could also not be considered as being indexed to the Company’s own stock, on the basis that the exercise price for the warrants is determined in U.S. dollars, although the functional currency of the Company at the closing date of the Éclat acquisition was the Euro.
(b) | 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 products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity. |
(c) | In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part included a commitment to pay quarterly a 15% royalty on the net sales of certain FSC products, up to $12,500 for a period not exceeding ten years. |
(d) | 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. |
(e) | 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. |
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(f) | In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part consists of payments totaling $1,050 annually for five years with a final payment in January 2021 of $15,000. Substantially all of FSC's, and its subsidiaries, assets are pledged as collateral under this agreement. |
At September 30, 2017, the fair value of each related party payable listed in (b) through (e) 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 and FSC products using an appropriate risk-adjusted discount rate ranging from 15% to 22%. 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 consolidated statements of income (loss) in the line items entitled "Changes in fair value of related party contingent consideration" for items noted in (b) and (c) above and in "Other income (expense) - changes in fair value of related party payable" for items (d) and (e) 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 2016 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 our royalty agreements detailed in items (d) and (e) above. These financing-related liabilities are recorded at fair market value on the consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – changes in fair value of related party payable” on the consolidated statements of income (loss).
The following table summarizes changes to the related party payables, a recurring Level 3 measurement, for the nine-month periods ended September 30, 2017 and 2016, respectively:
Related Party Payable Rollforward: | Balance | |||
Balance at December 31, 2015 | $ | 122,693 | ||
Additions (2) | 22,695 | |||
Payment of related party payables | (24,227 | ) | ||
Fair value adjustments (1) | 59,124 | |||
Balance at September 30, 2016 | 180,285 | |||
Balance at December 31, 2016 | 169,347 | |||
Payment of related party payable | (29,135 | ) | ||
Fair value adjustments (1) | (33,095 | ) | ||
Balance at September 30, 2017 | $ | 107,117 | ||
(1) Fair value adjustments are reported as Changes in fair value of related party contingent consideration and Other income (expense) - changes in fair value of related party payable in the Condensed Consolidated Statements of Income (Loss).
(2) Relates to the acquisition of FSC. See items (c) and (f) above.
NOTE 8 : Income Taxes
The components of income (loss) before income taxes are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Income (Loss) Before Income Taxes: | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Ireland | $ | (6,111 | ) | $ | (3,485 | ) | $ | 1,924 | $ | (17,413 | ) | |||||
United States | 29,627 | (6,814 | ) | 96,288 | 4,948 | |||||||||||
France | 3,313 | (6,244 | ) | (1,950 | ) | (15,333 | ) | |||||||||
Other | 771 | — | 2,084 | — | ||||||||||||
Total income before income taxes | $ | 27,600 | $ | (16,543 | ) | $ | 98,346 | $ | (27,798 | ) | ||||||
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The items accounting for the difference between the income tax provision computed at the statutory rate and the Company's effective tax rate are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Income Tax Rate Reconciliation: | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Statutory tax rate | 12.5 | % | 33.3 | % | 12.5 | % | 33.3 | % | ||||||||
International tax rates differential | 24.9 | % | (3.6 | )% | 20.5 | % | (13.3 | )% | ||||||||
Valuation allowance on net operating loss | (1.6 | )% | (2.0 | )% | 0.5 | % | (15.3 | )% | ||||||||
Nondeductible change in fair value of contingent consideration | (12.8 | )% | (38.9 | )% | (10.9 | )% | (62.0 | )% | ||||||||
Other | (1.6 | )% | (9.6 | )% | (0.3 | )% | (8.2 | )% | ||||||||
Effective income tax rate | 21.4 | % | (20.8 | )% | 22.3 | % | (65.5 | )% | ||||||||
Income tax provision - at statutory tax rate | $ | 3,449 | $ | (5,509 | ) | $ | 12,294 | $ | (9,257 | ) | ||||||
International tax rates differential | 6,861 | 591 | 20,120 | 3,706 | ||||||||||||
Valuation allowance on net operating loss | (438 | ) | 339 | 476 | 4,252 | |||||||||||
Nondeductible change in fair value of contingent consideration | (3,521 | ) | 6,436 | (10,751 | ) | 17,236 | ||||||||||
Other | (430 | ) | 1,594 | (309 | ) | 2,275 | ||||||||||
Income tax provision - at effective income tax rate | $ | 5,921 | $ | 3,451 | $ | 21,830 | $ | 18,212 | ||||||||
In 2016, we changed our jurisdiction of incorporation from France to Ireland by merging with and into our wholly owned Irish subsidiary. Accordingly, beginning in the fourth quarter of 2016, the Company reports the Irish tax jurisdiction as our domestic jurisdiction. For periods prior to the fourth quarter of 2016, the French tax jurisdiction was the domestic jurisdiction.
The income tax provision for the three months ended September 30, 2017 and 2016 was $5,921 and $3,451, respectively. The increase in the income tax provision for the three months ended September 30, 2017 is primarily the result of increases in income in the United States, which was partially offset by a reduction in the amount of nondeductible contingent consideration.
The income tax provision for the nine months ended September 30, 2017 and 2016 was $21,830 and $18,212, respectively. The increase in the income tax provision for the nine months ended September 30, 2017 is primarily the result of increases in income in the United States and Ireland, which was partially offset by a reduction in the amount of nondeductible contingent consideration.
NOTE 9 : Other Assets and Liabilities
Various other assets and liabilities are summarized as follows:
Prepaid Expenses and Other Current Assets: | September 30, 2017 | December 31, 2016 | ||||||
Valued-added tax recoverable | $ | 1,049 | $ | 736 | ||||
Prepaid expenses | 1,002 | 3,442 | ||||||
Advance to suppliers and other current assets | 726 | 1,265 | ||||||
Income tax receivable | 596 | 451 | ||||||
Total | $ | 3,373 | $ | 5,894 | ||||
Other Non-Current Assets: | September 30, 2017 | December 31, 2016 | ||||||
Deferred tax assets | $ | 7,110 | $ | 7,432 | ||||
Other | 1,910 | 99 | ||||||
Total | $ | 9,020 | $ | 7,531 | ||||
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Accrued Expenses: | September 30, 2017 | December 31, 2016 | ||||||
Accrued compensation | $ | 3,456 | $ | 3,291 | ||||
Accrued social charges | 827 | 794 | ||||||
Accrued employee severance (see Note 10) | 1,926 | — | ||||||
Customer allowances | 13,453 | 7,981 | ||||||
Accrued amounts due to contract research organization | 1,472 | 1,764 | ||||||
Accrued ELAA payment | 20,000 | — | ||||||
Accrued CMO charges | 2,380 | 936 | ||||||
Other | 4,483 | 2,456 | ||||||
Total | $ | 47,997 | $ | 17,222 | ||||
Other Non-Current Liabilities: | September 30, 2017 | December 31, 2016 | ||||||
Provision for retirement indemnity | $ | 2,137 | $ | 2,431 | ||||
Customer allowances | 1,883 | 905 | ||||||
Unrecognized tax benefits | 2,456 | 1,565 | ||||||
Other | 435 | 374 | ||||||
Total | $ | 6,911 | $ | 5,275 | ||||
NOTE 10 : Restructuring Costs
During the first quarter of 2017, the Company announced a plan to reduce our workforce at our Lyon, France site by approximately 50%. This reduction is 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 and received approval from the French Labor Commission (DIRECCTE) to implement the plan. The reduction is substantially complete at the end of the third quarter. However, the Company expects to incur other cost of up to approximately $500, which are likely to be recognized through the first half of 2018. Restructuring income of $549 and charges of $3,173 were recognized during the three and nine months ended September 30, 2017. No similar amounts were recorded during the three and nine months ended September 30, 2016. The restructuring income resulted from a retirement indemnity curtailment gain of $549 in the three months ended September 30, 2017 associated with the reduction of certain defined benefit retirement plan liabilities due to the reduction in force.
The following table sets forth activities for the Company’s cost reduction plan obligations for the nine months ended September 30, 2017. There were no restructuring related charges in the nine months ended September 30, 2016:
Severance Obligation: | 2017 | |||
Balance of accrued costs at January 1, | $ | — | ||
Charges for employee severance, benefits and other | 3,722 | |||
Payments | (2,164 | ) | ||
Foreign currency impact | 368 | |||
Balance of accrued costs at September 30, | $ | 1,926 | ||
Total accrued employee severance in the Company’s condensed consolidated balance sheet at September 30, 2017 is included under current liabilities in “Accrued expenses.”
NOTE 11 : Net Income (Loss) Per Share
Basic net income (loss) per share is calculated using the weighted average number of shares outstanding during each period. The diluted net income (loss) per share calculation includes the impact of dilutive equity compensation awards and contingent consideration warrants.
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A reconciliation of basic and diluted net income (loss) per share, together with the related shares outstanding in thousands is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Net Income (Loss) Per Share: | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) | $ | 21,679 | $ | (19,994 | ) | $ | 76,516 | $ | (46,010 | ) | ||||||
Weighted average shares: | ||||||||||||||||
Basic shares | 40,061 | 41,241 | 40,839 | 41,241 | ||||||||||||
Effect of dilutive securities—options and warrants outstanding | 1,278 | — | 1,355 | — | ||||||||||||
Diluted shares | 41,339 | 41,241 | 42,194 | 41,241 | ||||||||||||
Net income (loss) per share - basic | $ | 0.54 | $ | (0.48 | ) | $ | 1.87 | $ | (1.12 | ) | ||||||
Net income (loss) per share - diluted | $ | 0.52 | $ | (0.48 | ) | $ | 1.81 | $ | (1.12 | ) | ||||||
Potential common shares of 5,008 and 6,860 were excluded from the calculation of weighted average shares for the three months ended September 30, 2017 and 2016, respectively, because their effect was considered to be anti-dilutive. Potential common shares of 5,086 and 6,860 were excluded from the calculation of weighted average shares for the nine months ended September 30, 2017 and 2016, respectively, because their effect was considered to be anti-dilutive.
NOTE 12 : Comprehensive Income (Loss)
The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016, respectively, net of tax effects:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Accumulated Other Comprehensive Loss: | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Foreign currency translation adjustment: | ||||||||||||||||
Beginning balance | $ | (23,089 | ) | $ | (19,952 | ) | $ | (23,336 | ) | $ | (22,312 | ) | ||||
Foreign currency translation gain (loss) | (229 | ) | 1,567 | 18 | 3,927 | |||||||||||
Balance at September 30, | $ | (23,318 | ) | $ | (18,385 | ) | $ | (23,318 | ) | $ | (18,385 | ) | ||||
Unrealized gain (loss) on marketable securities, net | ||||||||||||||||
Beginning balance | $ | 409 | $ | 1,102 | $ | (229 | ) | $ | (345 | ) | ||||||
Net other comprehensive income (loss), net of $92, $152, $0 and ($49) tax, respectively | (512 | ) | (2,405 | ) | 126 | (958 | ) | |||||||||
Balance at September 30, | $ | (103 | ) | $ | (1,303 | ) | $ | (103 | ) | $ | (1,303 | ) | ||||
Accumulated other comprehensive loss at September 30, | $ | (23,421 | ) | $ | (19,688 | ) | $ | (23,421 | ) | $ | (19,688 | ) | ||||
The effect on the Company’s condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive loss was immaterial for all periods presented.
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NOTE 13 : Shareholders’ Equity
The following table presents a reconciliation of the Company’s beginning and ending balances in shareholders’ equity for the nine months ended September 30, 2017:
Shareholders' Equity: | 2017 | |||
Shareholders' equity - January 1, | $ | 42,069 | ||
Net income | 76,516 | |||
Adjustment to accumulated deficit (see Note 2) | (11,156 | ) | ||
Other comprehensive income | 144 | |||
Stock option exercised | 377 | |||
Stock-based compensation expense | 6,019 | |||
Share repurchases | (17,506 | ) | ||
Shareholders' equity - September 30, | $ | 96,463 | ||
Share Repurchases
In March 2017, the Board of Directors approved an authorization to repurchase up to $25,000 of Avadel ordinary shares represented by American Depositary Shares. Under this authorization, which has an indefinite duration, share repurchases may be made in the open market, in block transactions on or off the exchange, in privately negotiated transactions, or through other means as determined by the Board of Directors and in accordance with the regulations of the Securities and Exchange Commission. The timing and amount of repurchases, if any, will depend on a variety of factors, including the price of our shares, cash resources, alternative investment opportunities, corporate and regulatory requirements and market conditions. This share repurchase program may be modified, suspended or discontinued at any time without prior notice. We may also from time to time establish a trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 to facilitate purchases of our shares under this program. As of September 30, 2017, the Company had repurchased 1,673 ordinary shares for $17,506, of which $799 remained unsettled within accounts payable at September 30, 2017.
NOTE 14 : Company Operations 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 CEO. The CEO and the Board review 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 majority of the Company's products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.
The following table presents a summary of total revenues by these products:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Revenues by Product: | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Bloxiverz | $ | 9,920 | $ | 15,591 | $ | 37,541 | $ | 65,958 | ||||||||
Vazculep | 9,573 | 9,340 | 29,906 | 29,167 | ||||||||||||
Akovaz | 18,561 | 5,568 | 65,110 | 5,568 | ||||||||||||
Other | 1,093 | 841 | 5,452 | 4,165 | ||||||||||||
Total product sales and services | 39,147 | 31,340 | 138,009 | 104,858 | ||||||||||||
License and research revenue | 528 | 747 | 484 | 2,303 | ||||||||||||
Total revenues | $ | 39,675 | $ | 32,087 | $ | 138,493 | $ | 107,161 | ||||||||
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NOTE 15 : Commitments and Contingencies
Litigation
The Company is subject to potential liabilities generally incidental to our business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. At September 30, 2017 and December 31, 2016, there were no contingent liabilities with respect to any threat of litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.
Material Commitments
The Company has a commitment to purchase finished product from a contract manufacturer for a six-year period commencing in 2018. Commitments for this arrangement, 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 Commitment: | Balance | |||
2018 | $ | 3,241 | ||
2019 | 3,704 | |||
2020 | 3,704 | |||
2021 | 3,704 | |||
2022 | 3,704 | |||
Thereafter | 3,704 | |||
Total | $ | 21,761 | ||
Other than commitments disclosed in Note 14 - Contingent Liabilities and Commitments to the Company's consolidated financial statements included in Part II, Item 8 of the Company’s 2016 Annual Report on Form 10-K and those noted above, 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 9 - Long-Term Debt and Note 12 – Post-Retirement Benefit Plans, respectively, to the Company's consolidated financial statements included in Part II, Item 8 of the Company’s 2016 Annual Report on Form 10-K and long-term contingent consideration payable as disclosed in Note 7 – Long-Term Related Party Payable, to the Company's condensed consolidated financial statements included in Part I, Item 1 of this report.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis
(In thousands, except per share data)
(Unaudited)
You should read the discussion and analysis of our financial condition and results of operations set forth in this Item 2 together with our 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 Disclosure Regarding Forward-Looking Statements” set forth immediately following the Table of Contents of the Company’s 2016 Annual Report on Form 10-K filed with the SEC on March 28, 2017 (the “2016 Annual Report”) for further information on the forward-looking statements herein. In addition, you should read the “Risk Factors” section in Part I, Item 1A of the 2016 Annual Report for a discussion of 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
Nature of Operations
Avadel Pharmaceuticals plc (“Avadel,” the “Company,” “we,” “our,” or “us”) is a specialty pharmaceutical company engaged in identifying, developing, and commercializing niche branded pharmaceutical products mainly in the U.S. Our business model consists of three distinct strategies:
• | the development of differentiated, patent protected products through application of the Company’s proprietary patented drug delivery platforms, Micropump® and LiquiTime®, that target high-value solid and liquid oral and alternative dosages forms through the U.S. Food and Drug Administration (FDA) 505(b)(2) approval process, which allows a sponsor to submit an application that doesn’t depend on efficacy, safety, and toxicity data created by the sponsor. In addition to Micropump® and LiquiTime®, the Company has two other proprietary drug delivery platforms, Medusa™ (hydrogel depot technology for use with large molecules and peptides) and Trigger Lock™ (controlled release of opioid analgesics with potential abuse deterrent properties). |
• | the identification of Unapproved Marketed Drugs (“UMDs”), which are currently sold in the U.S., but unapproved by the FDA, and the pursuit of approval for these products via a 505(b)(2) New Drug Application (NDA). To date, the Company has received approvals through this “unapproved-to-approved” avenue for three products: Bloxiverz® (neostigmine methylsulfate injection), Vazculep® (phenylephrine hydrochloride injection) and Akovaz® (ephedrine sulfate injection). As a potential source of near-term revenue growth, Avadel is working on the development of a fourth product for potential NDA submission and seeks to identify additional product candidates for development with this strategy. |
• | the acquisition of commercial and or late-stage products or businesses. On September 1, 2017, the Company entered into an Exclusive License and Assignment Agreement ("ELAA") with Serenity Pharmaceuticals, LLC . The ELAA grants the Company the sole right to commercialize and further develop Noctiva™ in the United States. Noctiva is a proprietary low-dose formulation of desmopressin acetate administered through a patent-protected intranasal delivery system. It is the first and only product approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of nocturia due to nocturnal polyuria. Additionally, the Company markets three branded pediatric-focused pharmaceutical products in the primary care space, and a 510(k) approved device all of which were purchased through the acquisition of FSC Laboratories and FSC Pediatrics ("FSC") on February 5, 2016. We will consider further acquisitions and the Company continues to look for assets that could fit strategically into our current or potential future commercial sales force. |
The Company was incorporated in Ireland on December 1, 2015 as a private limited company, and re-registered as an Irish public limited company on November 21, 2016. Our headquarters is in Dublin, Ireland and we have operations in St. Louis, Missouri, United States, and Lyon, France.
The Company is the successor to Flamel Technologies S.A., a French société anonyme (“Flamel”), as the result of the merger of Flamel with and into the Company which was completed at 11:59:59 p.m., Central Europe Time, on December 31, 2016 (the “Merger”) pursuant to the agreement between Flamel and Avadel entitled Common Draft Terms of Cross-Border Merger dated as of June 29, 2016 (the “Merger Agreement”). Immediately prior to the Merger, the Company was a wholly owned subsidiary of Flamel. As a result of the Merger Agreement:
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• | Flamel ceased to exist as a separate entity and the Company continued as the surviving entity and assumed all of the assets and liabilities of Flamel. |
• | our authorized share capital is $5,500 divided into 500,000 ordinary shares with a nominal value of $0.01 each and 50,000 preferred shares with a nominal value of $0.01 each |
◦ | all outstanding ordinary shares of Flamel, €0.122 nominal value per share, were canceled and exchanged on a one-for-one basis for newly issued ordinary shares of the Company, $0.01 nominal value per share. This change in nominal value of our outstanding shares resulted in our reclassifying $5,937 on our balance sheet from ordinary shares to additional paid-in capital |
◦ | our Board of Directors is authorized to issue preferred shares on a non-pre-emptive basis, for a maximum period of five years, at which point it may be renewed by shareholders. The Board of Directors has discretion to dictate terms attached to the preferred shares, including voting, dividend, conversion rights, and priority relative to other classes of shares with respect to dividends and upon a liquidation. |
• | all outstanding American Depositary Shares (ADSs) representing ordinary shares of Flamel were canceled and exchanged on a one-for-one basis for ADSs representing ordinary shares of the Company. |
Thus, the Merger changed the jurisdiction of our incorporation from France to Ireland, and an ordinary share of the Company 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 these 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.
Prior to completion of the Merger, the Flamel ADSs were listed on the Nasdaq Global Market (“Nasdaq”) under the trading symbol “FLML”; and immediately after the Merger the Company’s ADSs were listed for and began trading on Nasdaq on January 3, 2017 under the trading symbol “AVDL.”
Further details about the reincorporation, the Merger and the Merger Agreement are contained in our definitive proxy statement filed with the Securities and Exchange Commission on May 1, 2017, and within the Company's 2016 Annual Report on Form 10-K.
Under Irish law, the Company can only pay dividends and repurchase shares out of distributable reserves, as discussed further in the Company's proxy statement filed with the SEC as of July 5, 2016. Upon completion of the Merger, the Company did not have any distributable reserves. On February 15, 2017, the Company filed a petition with the High Court of Ireland seeking the court's confirmation of a reduction of the Company's share premium so that it can be treated as distributable reserves for the purposes of Irish law. On March 6, 2017, the High Court issued its order approving the reduction of the Company's share premium which can be treated as distributable reserves.
Strategy
The Company's business strategy is designed to drive overall sales and earnings growth while maintaining a return on invested capital at an appropriate premium above the Company's cost of capital. Our key areas of focus address the most significant opportunities and challenges we face, including:
• | Unapproved to Approved Marketed Drug Development: The Company derives a majority of its sales and cash flow from FDA approvals through this “unapproved-to-approved” strategy for three products: Bloxiverz® (neostigmine methylsulfate injection), Vazculep® (phenylephrine hydrochloride injection) and Akovaz® (ephedrine sulfate injection). During the thr |