NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
NOTE 1: Summary of Significant Accounting Policies
Nature of Operations. Avadel Pharmaceuticals plc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is a biopharmaceutical company. The Company is registered as an Irish public limited company. The Company’s headquarters are in Dublin, Ireland with operations in Dublin, Ireland and St. Louis, Missouri, United States (“U.S.”).
The Company’s lead product candidate, FT218, is an investigational once-nightly, extended-release formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) or cataplexy in adults with narcolepsy. The Company is primarily focused on the development and potential United States (“U.S.”) Food and Drug Administration (“FDA”) approval of FT218. In December 2020, the Company submitted a New Drug Application (“NDA”) to the FDA for FT218 to treat excessive daytime sleepiness or cataplexy in adults with narcolepsy. In February 2021, the NDA for FT218 was accepted by the FDA and was assigned a Prescription Drug User Fee Act (“PDUFA”) target action date of October 15, 2021. On October 15, 2021, the Company announced that the FDA informed Avadel that the review of the NDA for FT218 was ongoing beyond its previously assigned target action date. As of the date of this Quarterly Report, the FDA’s review of the Company’s NDA for FT218 remains ongoing.
Outside of the Company’s lead product candidate, the Company continues to evaluate opportunities to expand its product portfolio. As of the date of this Quarterly Report, the Company does not have any approved or commercialized products in its portfolio.
Basis of Presentation. The unaudited condensed consolidated balance sheet as of March 31, 2022, which is derived from the prior year 2021 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2021 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 16, 2022.
The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.
NOTE 2: Fair Value Measurement
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, the Company uses fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.
ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may generally use one or each of the following techniques:
•Income approach, which is based on the present value of a future stream of net cash flows.
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
As a basis for considering the assumptions used in these techniques, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
•Level 1 - Quoted prices for identical assets or liabilities in active markets.
•Level 2 - Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
•Level 3 - Unobservable inputs that reflect estimates and assumptions.
The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying unaudited condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2022 | | As of December 31, 2021 |
Fair Value Measurements: | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | |
Marketable securities (see Note 3) | | | | | | | | | | | | |
Mutual and money market funds | | $ | 42,776 | | | $ | — | | | $ | — | | | $ | 78,098 | | | $ | — | | | $ | — | |
Corporate bonds | | — | | | 13,912 | | | — | | | — | | | 16,479 | | | — | |
Government securities - U.S. | | — | | | 3,988 | | | — | | | — | | | 9,471 | | | — | |
Other fixed-income securities | | — | | | 1,932 | | | — | | | — | | | 2,465 | | | — | |
Total assets | | $ | 42,776 | | | $ | 19,832 | | | $ | — | | | $ | 78,098 | | | $ | 28,415 | | | $ | — | |
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the periods ended March 31, 2022 and December 31, 2021, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three months ended March 31, 2022 and 2021, respectively, the Company did not recognize any allowances for credit losses.
Some of the Company’s financial instruments, such as cash and cash equivalents and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
Debt
The Company estimates the fair value of its $143,750 aggregate principal amount of its 4.50% exchangeable senior notes due February 2023 (the “February 2023 Notes”) based on interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities or recent trading prices obtained from brokers (a Level 2 input). The estimated fair value of the February 2023 Notes at March 31, 2022 is $145,547. See Note 4: Long-Term Debt for additional information regarding the Company’s debt obligations.
NOTE 3: Marketable Securities
The Company has investments in available-for-sale debt securities which are recorded at fair market value. The change in the fair value of available-for-sale debt investments is recorded as accumulated other comprehensive loss in shareholders’ equity, net of income tax effects. As of March 31, 2022, the Company considered any decreases in fair value on its marketable securities to be driven by factors other than credit risk, including market risk.
The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of March 31, 2022 and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
Marketable Securities: | | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
Mutual and money market funds | | $ | 43,446 | | | $ | 341 | | | $ | (1,011) | | | $ | 42,776 | |
Corporate bonds | | 14,338 | | | 12 | | | (438) | | | 13,912 | |
Government securities - U.S. | | 4,188 | | | 3 | | | (203) | | | 3,988 | |
Other fixed-income securities | | 1,968 | | | — | | | (36) | | | 1,932 | |
Total | | $ | 63,940 | | | $ | 356 | | | $ | (1,688) | | | $ | 62,608 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
Marketable Securities: | | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
Mutual and money market funds | | $ | 78,331 | | | $ | 813 | | | $ | (1,046) | | | $ | 78,098 | |
Corporate bonds | | 16,478 | | | 94 | | | (93) | | | 16,479 | |
Government securities - U.S. | | 9,530 | | | 39 | | | (98) | | | 9,471 | |
Other fixed-income securities | | 2,473 | | | 2 | | | (10) | | | 2,465 | |
Total | | $ | 106,812 | | | $ | 948 | | | $ | (1,247) | | | $ | 106,513 | |
The Company determines realized gains or losses on the sale of marketable securities on a specific identification method. The Company reflects these gains and losses as a component of investment and other (expense) income, net in the accompanying unaudited condensed consolidated statements of loss.
The Company recognized gross realized gains of $304 and $11 for the three months ended March 31, 2022 and 2021, respectively. These realized gains were offset by realized losses of $790 and $68 for the three months ended March 31, 2022 and 2021, respectively.
The following table summarizes the estimated fair value of the Company’s investments in marketable debt securities, accounted for as available-for-sale debt securities and classified by the contractual maturity date of the securities as of March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturities |
Marketable Debt Securities: | | Less than 1 Year | | 1-5 Years | | 5-10 Years | | Greater than 10 Years | | Total |
| | | | | | | | | | |
Corporate bonds | | $ | 3,878 | | | $ | 9,733 | | | $ | 301 | | | $ | — | | | $ | 13,912 | |
Government securities - U.S. | | — | | | 2,214 | | | 722 | | | 1,052 | | | 3,988 | |
| | | | | | | | | | |
Other fixed-income securities | | — | | | 1,384 | | | 548 | | | — | | | 1,932 | |
Total | | $ | 3,878 | | | $ | 13,331 | | | $ | 1,571 | | | $ | 1,052 | | | $ | 19,832 | |
The Company has classified its investment in available-for-sale marketable securities as current assets in the consolidated balance sheets as the securities need to be available for use, if required, to fund current operations. There are no restrictions on the sale of any securities in the Company’s investment portfolio.
The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale debt securities at March 31, 2022. The unrealized losses in the table below are driven by factors other than credit risk. The Company does not intend to sell the investments and it is not more likely than not that it will be required to sell the investments before recovery of their amortized cost bases.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | Greater than 12 months | | Total |
Marketable Debt Securities: | | Fair value | | Unrealized Losses | | Fair value | | Unrealized Losses | | Fair value | | Unrealized Losses |
Corporate bonds | | $ | 11,041 | | | $ | 360 | | | $ | 1,137 | | | $ | 78 | | | $ | 12,178 | | | $ | 438 | |
Government securities - U.S. | | 1,975 | | | 73 | | | 1,892 | | | 130 | | | 3,867 | | | 203 | |
Other fixed-income securities | | 1,811 | | | 36 | | | — | | | — | | | 1,811 | | | 36 | |
Total | | $ | 14,827 | | | $ | 469 | | | $ | 3,029 | | | $ | 208 | | | $ | 17,856 | | | $ | 677 | |
NOTE 4: Long-Term Debt
Long-term debt is summarized as follows:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Principal amount of 4.50% exchangeable senior notes due 2023 | | $ | 143,750 | | | $ | 143,750 | |
Less: unamortized debt discount and issuance costs, net | | (1,041) | | | (1,353) | |
Net carrying amount of debt | | 142,709 | | | 142,397 | |
| | | | |
| | | | |
Less: current maturities, net of $191 unamortized debt discount and issuance costs | | 26,184 | | | — | |
Long-term debt | | $ | 116,525 | | | $ | 142,397 | |
| | | | |
| | | | |
| | | | |
For the three months ended March 31, 2022 and 2021, the total interest expense was $2,017 and $1,929, respectively, with coupon interest expense of $1,617 for each period and the amortization of debt issuance costs and debt discount of $312 for each period. Current period interest expense also included $88 of additional interest expense owed to be in compliance with certain terms of the February 2023 Notes indenture and is not applicable to future periods.
On February 16, 2018, Avadel Finance Cayman Limited, a Cayman Islands exempted company and an indirect wholly-owned subsidiary of the Company (the “Issuer”), issued $125,000 aggregate principal amount of its February 2023 Notes in a private placement (the “Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the Offering, the Issuer granted the initial purchasers of the February 2023 Notes a 30-day option to purchase up to an additional $18,750 aggregate principal amount of the February 2023 Notes, which was fully exercised on February 16, 2018. Net proceeds received by the Company, after issuance costs and discounts, were approximately $137,560. The February 2023 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness and effectively junior to any of the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness.
On April 5, 2022, the Issuer completed the exchange of $117,375 of its February 2023 Notes for a new series of its Exchangeable Senior Notes due October 2, 2023 (the “October 2023 Notes”, together with the February 2023 Notes, the “2023 Notes”) (the “Exchange Transaction”). The remaining $26,375 aggregate principal amount of the February 2023 Notes were not exchanged and will maintain a maturity date of February 1, 2023. Due to the Exchange Transaction, $117,375 of the February 2023 Notes will be classified as long-term debt as of March 31, 2022.
The 2023 Notes will be exchangeable at the option of the holders at an initial exchange rate of 92.6956 ADSs per $1 principal amount of 2023 Notes (so long as the principal amount of such holder’s 2023 Notes not exchanged is at least $200), which is equivalent to an initial exchange price of approximately $10.79 per ADS. Upon the exchange of any 2023 Notes, the Issuer will pay or cause to be delivered, as the case may be, cash, ADSs or a combination of cash and ADSs, at the Issuer’s election.
February 2023 Notes
Holders of the February 2023 Notes may convert their February 2023 Notes, at their option, only under the following circumstances prior to the close of business on the business day immediately preceding August 1, 2022, under the circumstances and during the periods set forth below and regardless of the conditions described below, on or after August 1, 2022 and prior to the close of business on the business day immediately preceding the maturity date:
•Prior to the close of business on the business day immediately preceding August 1, 2022, a holder of the February 2023 Notes may surrender all or any portion of its February 2023 Notes for exchange at any time during the five business day period immediately after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1 principal amount of February 2023 Notes, as determined following a request by a holder of the
2023 Notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the ADSs and the exchange rate on each such trading day.
•If a transaction or event that constitutes a fundamental change or a make-whole fundamental change occurs prior to the close of business on the business day immediately preceding August 1, 2022, regardless of whether a holder of the February 2023 Notes has the right to require the Company to repurchase the February 2023 Notes, or if Avadel is a party to a merger event that occurs prior to the close of business on the business day immediately preceding August 1, 2022, all or any portion of a the holder’s February 2023 Notes may be surrendered for exchange at any time from or after the date that is 95 scheduled trading days prior to the anticipated effective date of the transaction (or, if later, the earlier of (x) the business day after the Company gives notice of such transaction and (y) the actual effective date of such transaction) until 35 trading days after the actual effective date of such transaction or, if such transaction also constitutes a fundamental change, until the related fundamental change repurchase date.
•Prior to the close of business on the business day immediately preceding August 1, 2022, a holder of the February 2023 Notes may surrender all or any portion of its February 2023 Notes for exchange at any time during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of the ADSs for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the exchange price on each applicable trading day.
•If the Company calls the February 2023 Notes for redemption pursuant to Article 16 to the Indenture prior to the close of business on the business day immediately preceding August 1, 2022, then a holder of the February 2023 Notes may surrender all or any portion of its February 2023 Notes for exchange at any time prior to the close of business on the second business day prior to the redemption date, even if the February 2023 Notes are not otherwise exchangeable at such time. After that time, the right to exchange shall expire, unless the Company defaults in the payment of the redemption price, in which case a holder of the February 2023 Notes may exchange its February 2023 Notes until the redemption price has been paid or duly provided for.
October 2023 Notes
Holders of the October 2023 Notes may convert their October 2023 Notes, at their option, only under the following circumstances prior to the close of business on the business day immediately preceding May 1, 2023, under the circumstances and during the periods set forth below and regardless of the conditions described below, on or after May 1, 2023 and prior to the close of business on the business day immediately preceding the maturity date:
•Prior to the close of business on the business day immediately preceding May 1, 2023, a holder of the October 2023 Notes may surrender all or any portion of its October 2023 Notes for exchange at any time during the five business day period immediately after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1 principal amount of October 2023 Notes, as determined following a request by a holder of the October 2023 Notes, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the ADSs and the exchange rate on each such trading day.
•If a transaction or event that constitutes a fundamental change or a make-whole fundamental change occurs prior to the close of business on the business day immediately preceding May 1, 2023, regardless of whether a holder of the October 2023 Notes has the right to require the Company to repurchase the October 2023 Notes, or if Avadel is a party to a merger event that occurs prior to the close of business on the business day immediately preceding May 1, 2023, all or any portion of a the holder’s October 2023 Notes may be surrendered for exchange at any time from or after the date that is 95 scheduled trading days prior to the anticipated effective date of the transaction (or, if later, the earlier of (x) the business day after the Company gives notice of such transaction and (y) the actual effective date of such transaction) until 35 trading days after the actual effective date of such transaction or, if such transaction also constitutes a fundamental change, until the related fundamental change repurchase date.
•Prior to the close of business on the business day immediately preceding May 1, 2023, a holder of the October 2023 Notes may surrender all or any portion of its October 2023 Notes for exchange at any time during any calendar quarter commencing after the calendar quarter ending on March 31, 2022 (and only during such calendar quarter), if the last reported sale price of the ADSs for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the exchange price on each applicable trading day.
•If the Company calls the October 2023 Notes for redemption pursuant to Article 16 to the Indenture prior to the close of business on the business day immediately preceding May 1, 2023, then a holder of the October 2023 Notes may surrender all or any portion of its October 2023 Notes for exchange at any time prior to the close of business on the second business day prior to the redemption date, even if the October 2023 Notes are not otherwise exchangeable at such time. After that time, the right to exchange shall expire, unless the Company defaults in the payment of the redemption price, in which case a holder of the October 2023 Notes may exchange its October 2023 Notes until the redemption price has been paid or duly provided for.
The Company, at its option, may redeem for cash all of the October 2023 Notes if the last reported sale price (as defined by the indenture) of the ADSs has been at least 130% of the Exchange Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice to redeem the October 2023 Notes.
The Company considered the guidance in ASC 815-15, Embedded Derivatives, to determine if this instrument contains an embedded feature that should be separately accounted for as a derivative. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional, as defined by ASC 815-40. The Company determined that this exception applies due, in part, to the Company’s ability to settle the 2023 Notes in cash, ADSs or a combination of cash and ADSs, at the Company’s option. The Company has therefore applied the guidance provided by ASC 470-20, Debt with Conversion and Other Options, as amended by ASU 2020-06.
NOTE 5: Income Taxes
The income tax benefit was $4,323 for the three months ended March 31, 2022 resulting in an effective tax rate of 14.1%. The income tax benefit was $2,607 for the three months ended March 31, 2021 resulting in an effective tax rate of 16.2%. The increase in the income tax benefit for the three months ended March 31, 2022, when compared to the same period in 2021, is primarily due to an increase in net operating losses recognized in the United States.
NOTE 6: Other Assets and Liabilities
Various other assets and liabilities are summarized as follows:
| | | | | | | | | | | | | | |
Prepaid Expenses and Other Current Assets: | | March 31, 2022 | | December 31, 2021 |
| | | | |
Income tax receivable | | $ | 29,122 | | | $ | 29,097 | |
Prepaid and other expenses | | 5,317 | | | 3,179 | |
Guarantee from Armistice | | 278 | | | 279 | |
Other | | 156 | | | 271 | |
Total | | $ | 34,873 | | | $ | 32,826 | |
| | | | | | | | | | | | | | |
Other Non-Current Assets: | | March 31, 2022 | | December 31, 2021 |
| | | | |
Deferred tax assets | | $ | 28,578 | | | $ | 24,128 | |
Right of use assets at contract manufacturing organizations | | 10,082 | | | 8,549 | |
Guarantee from Armistice | | 702 | | | 771 | |
Other | | 273 | | | 329 | |
Total | | $ | 39,635 | | | $ | 33,777 | |
| | | | | | | | | | | | | | |
Accrued Expenses | | March 31, 2022 | | December 31, 2021 |
| | | | |
Accrued professional fees | | $ | 7,063 | | | $ | 2,678 | |
Accrued compensation | | 1,755 | | | 3,167 | |
Accrued outsource contract costs | | 574 | | | 1,048 | |
Accrued restructuring | | 40 | | | 41 | |
Customer allowances | | — | | | 217 | |
Total | | $ | 9,432 | | | $ | 7,151 | |
| | | | | | | | | | | | | | |
Other Current Liabilities: | | March 31, 2022 | | December 31, 2021 |
| | | | |
Accrued interest | | $ | 1,094 | | | $ | 4,920 | |
Guarantee to Deerfield | | 279 | | | 280 | |
Other | | 69 | | | 70 | |
Total | | $ | 1,442 | | | $ | 5,270 | |
| | | | | | | | | | | | | | |
Other Non-Current Liabilities: | | March 31, 2022 | | December 31, 2021 |
| | | | |
Tax liabilities | | $ | 3,143 | | | $ | 3,143 | |
Guarantee to Deerfield | | 704 | | | 774 | |
Total | | $ | 3,847 | | | $ | 3,917 | |
NOTE 7: Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during each period. Diluted net loss per share is calculated by dividing net loss - diluted by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net loss, diluted net loss per share would be calculated assuming the impact of the conversion of the 2023 Notes, the conversion of the Company’s preferred shares, the exercise of outstanding equity compensation awards, and ordinary shares expected to be issued under the Company’s Employee Share Purchase Plan (“ESPP”).
The Company has a choice to settle the conversion obligation under the 2023 Notes in cash, shares or any combination of the two. The Company utilizes the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2023 Notes into shares of the Company’s ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.
The dilutive effect of the stock options, restricted stock units, preferred shares and ordinary shares expected to be issued under the Company’s ESPP has been calculated using the treasury stock method. The dilutive effect of the performance share unit awards (“PSUs”) will be calculated using the treasury stock method, if and when the contingent vesting condition is achieved.
A reconciliation of basic and diluted net loss per share, together with the related shares outstanding in thousands is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
Net Loss Per Share: | | | | | | 2022 | | 2021 |
| | | | | | | | |
Net loss | | | | | | $ | (26,424) | | | $ | (13,445) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average shares: | | | | | | | | |
Basic shares | | | | | | 58,824 | | | 58,443 | |
Effect of dilutive securities—employee and director equity awards outstanding, preferred shares and 2023 Notes | | | | | | — | | | — | |
| | | | | | | | |
Diluted shares | | | | | | 58,824 | | | 58,443 | |
| | | | | | | | |
Net loss per share - basic | | | | | | $ | (0.45) | | | $ | (0.23) | |
Net loss per share - diluted | | | | | | $ | (0.45) | | | $ | (0.23) | |
Potential ordinary shares of 17,696 and 15,275 were excluded from the calculation of weighted average shares for the three months ended March 31, 2022 and 2021, respectively, because either their effect was considered to be anti-dilutive or they were related to shares from PSUs for which the contingent vesting condition had not been achieved. For the three months ended March 31, 2022 and 2021, the effects of dilutive securities were entirely excluded from the calculation of net loss per share as a net loss was reported in these periods.
NOTE 8: Comprehensive Loss
The following table shows the components of accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021, respectively, net of tax effects:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
Accumulated Other Comprehensive Loss: | | | | | | 2022 | | 2021 |
| | | | | | | | |
Foreign currency translation adjustment: | | | | | | | | |
Beginning balance | | | | | | $ | (23,855) | | | $ | (22,627) | |
Net other comprehensive loss | | | | | | (185) | | | (718) | |
Balance at March 31, | | | | | | $ | (24,040) | | | $ | (23,345) | |
| | | | | | | | |
Unrealized (loss) gain on marketable debt securities, net | | | | | | | | |
Beginning balance | | | | | | $ | (85) | | | $ | 1,576 | |
Net other comprehensive loss, net of income tax benefit (expense) of $330 and $(55), respectively | | | | | | (917) | | | (537) | |
Balance at March 31, | | | | | | $ | (1,002) | | | $ | 1,039 | |
Accumulated other comprehensive loss at March 31, | | | | | | $ | (25,042) | | | $ | (22,306) | |
The effect on the Company’s unaudited condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive loss was immaterial for all periods presented.
NOTE 9: Commitments and Contingencies
Litigation
The Company is subject to potential liabilities generally incidental to the Company’s business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. At March 31, 2022 and December 31, 2021, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.
First Complaint
On May 12, 2021, Jazz Pharmaceuticals, Inc. (“Jazz”) filed a formal complaint (the “First Complaint”) initiating a lawsuit in the United States District Court for the District of Delaware (the “Court”) against Avadel Pharmaceuticals plc, Avadel US Holdings, Inc., Avadel Management Corporation, Avadel Legacy Pharmaceuticals, LLC, Avadel Specialty Pharmaceuticals, LLC, and Avadel CNS Pharmaceuticals, LLC (collectively, the “Avadel Parties”). In the First Complaint, Jazz alleges the sodium oxybate product (“Proposed Product”) described in the NDA owned by Avadel CNS Pharmaceuticals, LLC will infringe at least one claim of US Patent No. 8731963, 10758488, 10813885, 10959956 and/or 10966931 (collectively, the “patents-in-suit”). The First Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.
On June 3, 2021, the Avadel Parties timely filed their Answer and Counterclaims (the “Avadel Answer”) with the Court in response to the First Complaint. The Avadel Answer generally denies the allegations set forth in the First Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patents-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of each patent-in-suit, and ii) a declaratory judgment of invalidity of each patent-in-suit.
On June 18, 2021, Jazz filed its Answer (“Jazz Answer”) with the Court in response to the Avadel Answer. The Jazz Answer generally denies the allegations set forth in the Avadel Answer and sets forth a single affirmative defense asserting that Avadel has failed to state a claim for which relief can be granted.
On June 21, 2021, the Court issued an oral order requiring the parties to i) confer regarding proposed dates to be included in the Court’s scheduling order for the case, and ii) submit a proposed order, including a proposal for the length and timing of trial, to the Court by no later than July 21, 2021.
On July 30, 2021, the Court issued a scheduling order establishing timing for litigation events including i) a claim construction hearing date of August 2, 2022, and ii) a trial date of October 30, 2023.
On October 18, 2021, consistent with the scheduling order, Jazz filed a status update with the Court indicating that Jazz did not intend to file a preliminary injunction with the Court at this time. Jazz further indicated that it would provide the Court with an update regarding whether preliminary injunction proceedings may be necessary after receiving further information regarding the FDA’s action on Avadel’s NDA.
On January 4, 2022, the Court entered an agreed order dismissing this case with respect to Avadel Pharmaceuticals plc, Avadel US Holdings, Inc., Avadel Specialty Pharmaceuticals, LLC, Avadel Legacy Pharmaceuticals, LLC, and Avadel Management Corporation. A corresponding order was entered in the two below cases on the same day.
On February 25, 2022, Jazz filed an amended Answer to Avadel’s Counterclaims (“the Jazz First Amended Answer”). The Jazz First Amended Answer is substantially similar to the Jazz Answer except insofar as it adds an affirmative defense for judicial estoppel and unclean hands. Corresponding amended Answers were filed in the two below cases on the same day.
Second Complaint
On August 4, 2021, Jazz filed another formal complaint (the “Second Complaint”) initiating a lawsuit in the Court against the Avadel Parties. In the Second Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS Pharmaceuticals, LLC will infringe at least one claim of US Patent No. 11077079. The Second Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.
On September 9, 2021, the Avadel Parties timely filed their Answer and Counterclaims (the “Second Avadel Answer”) with the Court in response to the Second Complaint. The Second Avadel Answer generally denies the allegations set forth in the Second Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of the patent-in-suit, and ii) a declaratory judgment of invalidity of the patent-in-suit.
On October 22, 2021, the Court issued an oral order stating that this case should proceed on the same schedule as the case filed on May 12, 2021
Third Complaint
On November 10, 2021, Jazz filed another formal complaint (the “Third Complaint”) initiating a lawsuit in the Court against the Avadel Parties. In the Third Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS Pharmaceuticals, LLC will infringe at least one claim of US Patent No. 11147782. The Third Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses. This case will proceed on the same schedule as the cases associated with the First and Second Complaints above.
On January 7, 2022, Avadel CNS Pharmaceuticals LLC timely filed its Answer and Counterclaims (the “Third Avadel Answer”) with the Court in response to the Third Complaint. The Third Avadel Answer generally denies the allegations set forth in the Third Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of the patent-in-suit, and ii) a declaratory judgment of invalidity/unenforceability of the patent-in-suit.
On December 21, 2021, the Court entered a revised schedule for the First, Second and Third Complaints, setting a new claim construction date of August 31, 2022.
Material Commitments
Other than commitments disclosed in Note 15: Contingent Liabilities and Commitments to the Company's consolidated financial statements included in the 2021 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business.
Guarantees
Deerfield Guarantee
The fair values of the Company’s guarantee to Deerfield and the guarantee received by the Company from Armistice Capital Master Fund, Ltd. largely offset and when combined are not material.
In connection with the Company’s February 2018 divestiture of the Company’s pediatric assets, the Company guaranteed to Deerfield the quarterly royalty payment of 15% on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. Given the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee liability was $983 at March 31, 2022. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.
Armistice Guarantee
In connection with the Company’s February 2018 divestiture of the pediatric assets, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, Inc., guaranteed to the Company the FSC Product Royalties. The Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee asset was $980 at March 31, 2022. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.
Off-Balance Sheet Arrangements
As of March 31, 2022, the Company did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
NOTE 10: Subsequent Events
Exchange Transaction Closing
On April 5, 2022, Avadel completed the exchange of $117,375 of its February 2023 Notes for a new series of its Exchangeable Senior Notes due October 2, 2023. The remaining $26,375 aggregate principal amount of the February 2023 Notes were not exchanged and will maintain a maturity date of February 1, 2023. The Company paid $4,804 in fees paid to noteholders of the October 2023 Notes and $5,449 in fees paid to third parties as part of the completed Exchange Transaction. See Note 4: Long-Term Debt for additional information regarding the Company’s debt obligations.
Jazz Litigation
On April 14, 2022, Avadel CNS Pharmaceuticals LLC and Avadel Pharmaceuticals plc (collectively the “Avadel Plaintiffs”) filed a formal complaint (the “Avadel Complaint”) initiating a lawsuit in the Court against Jazz and Jazz Pharmaceuticals Ireland Ltd. (collectively, the “Jazz Parties”). In the Avadel Complaint, the Avadel Plaintiffs allege that the Jazz Parties breached certain confidential disclosure agreements and misappropriated certain of Avadel’s trade secrets. The Avadel Complaint further includes typical relief requests such as injunctive relief, monetary damages and attorneys’ fees, costs and expenses, as well as seeking correction of inventorship of certain Jazz patents to include former Avadel scientists.