Explanatory Note
SUMMARY OF THE MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
Our business is subject to numerous material and other risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Annual Report on Form 10-K. The principal risks and uncertainties affecting our business include the following:
•Our lead product candidate and future product candidates will generally be subject to regulatory approval. If we or our pharmaceutical and biotechnology company partners do not obtain such approvals, or if such approvals are delayed, our ability to generate future revenues may be adversely affected.
•Our lead product candidate and future product candidates may be subject to continuing regulation, and we on our own, and in conjunction with our pharmaceutical partners, may be subject to adverse consequences if we or they fail to comply with applicable regulations.
•Disruptions at the United States (“U.S.”) Food and Drug Administration (“FDA”), the Drug Enforcement Administration and other government agencies caused by funding shortages or global health concerns, including coronavirus disease (COVID-19), could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.
•We are subject to U.S. federal and state and international laws and regulations prohibiting “kickbacks” and false claims that, if violated, could subject us to substantial penalties, and any challenges to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
•We may rely on collaborations with third parties to commercialize certain of our product candidates in development and such strategy involves risks that could impair our prospects for realizing profits from such products.
•We depend on a single provider of certain services related to the development of our product candidate, and any interruption of operations of such provider could significantly delay or have a material adverse effect on our business.
•We depend on a limited number of suppliers for the manufacturing of our product candidate and certain raw materials and any failure of such suppliers to manufacture or supply sufficient quantities of product or these raw materials could have a material adverse effect on our business.
•Clinical development of drugs is costly and time-consuming, and the outcomes are uncertain. A failure to prove that our product candidate and future product candidates are safe and effective in clinical trials could materially and adversely affect our business, financial condition, results of operations and growth prospects.
•We rely on third parties to conduct our clinical trials, and if they do not properly and successfully perform their contractual, legal and regulatory duties, we may not be able to obtain regulatory approvals for or commercialize our product candidate or future product candidates.
•Changes in U.S. or ex-U.S. patent laws could diminish the value of patents in general, thereby impairing our ability to protect our product candidate or future product candidates.
•Third parties may claim that our product candidate or future product candidates infringe their rights, and we may incur significant costs resolving these claims. Additionally, legal proceedings related to such claims could materially delay or otherwise adversely affect commercialization plans related to our product candidate, if approved.
•Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
•Our future products may not gain market acceptance.
•COVID-19 may materially and adversely affect our business and our financial results.
•We and companies to which we have licensed or will license our future products or drug delivery technologies and subcontractors we engage for services related to the development and manufacturing of our product candidate and future product candidates are subject to extensive regulation by the FDA and other regulatory authorities. Our and their failure to meet strict regulatory requirements could adversely affect our business.
Cautionary Disclosure Regarding Forward-Looking Statements
This Amendment No. 1 (this “Amendment”Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) amends , and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as “may,” “will,” “could,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions, or the negative of these terms, or similar expressions. Accordingly, these statements involve estimates, assumptions, risks and uncertainties which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus, and in particular those factors referenced in the section “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
This Annual Report on Form 10-K contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
•Our reliance on a single lead product candidate, FT218, and our ability to obtain regulatory approval of and successfully commercialize FT218, including any delays in approval related to COVID-19;
•The ability of FT218, if approved, to gain market acceptance;
•Our ability to enter into strategic partnerships for the commercialization, manufacturing and distribution of FT218, if approved;
•Our dependence on a limited number of suppliers for the manufacturing of our lead product candidate and certain raw materials in our lead product candidate and any failure of such suppliers to deliver sufficient quantities of these raw materials, which could have a material adverse effect on our business;
•Our ability to finance our operations on acceptable terms, either through the raising of capital, the incurrence of convertible or other indebtedness or through strategic financing or commercialization partnerships;
•Our expectations about the potential market size and market participation for our product candidate;
•Any further restructuring actions that may be required and our ability to obtain any required consents (including any consents required pursuant to the Indenture governing our exchange notes due 2023, or the 2023 Notes);
•Our ability to continue to service the 2023 Notes, including making the ongoing interest payments on the 2023 Notes, settling exchanges of the 2023 Notes in cash or completing any required repurchases of the 2023 Notes;
•The potential impact of COVID-19 on our business and future operating results;
•Our ability to retain members of our management team and our employees; and
•Competition existing today or that will likely arise in the future.
These forward-looking statements are neither promises nor guarantees of future performance due to a variety of risks and uncertainties and other factors more fully discussed in the “Risk Factors” section in Part I, Item 1A of this Annual Report on Form 10-K and the risk factors and cautionary statements described in other documents that we file from time to time with the SEC. Given these uncertainties, readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake to update any forward-looking statements after the date of this Annual Report or the respective dates of documents incorporated by reference herein or therein that include forward-looking statements.
Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to revise any forward-looking statements to reflect events or developments occurring after the date of this Annual Report, even if new information becomes available in the future.
NOTE REGARDING TRADEMARKS
We own various trademark registrations and applications, and unregistered trademarks, including Avadel®, Micropump®, LiquiTime®and Medusa®. All other trade names, trademarks and service marks of other companies appearing in this Annual Report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Annual Report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or
display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
From time to time, we may use our website, LinkedIn or our Twitter account (@AvadelPharma) to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available at www.avadelpharmaceuticals.com. Investors are encouraged to review the Investors section of our website because we may post material information on that site that is not otherwise disseminated by us. Information that is contained in and can be accessed through our website or our Twitter posts are not incorporated into, and does not form a part of, this Annual Report.
PART I
Item 1. Business.
(Dollar amounts in thousands, except per-share amounts and as otherwise noted)
General Overview
Avadel Pharmaceuticals plc’splc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) Annual Report on Form 10-Kis a biopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly, extended-release formulation of sodium oxybate for the fiscal year endedtreatment of excessive daytime sleepiness (“EDS”) and cataplexy in adults with narcolepsy. We are 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 and cataplexy in adults with narcolepsy.The NDA for FT218 was accepted by the FDA in February 2021 and assigned a Prescription Drug User Fee Act (“PDUFA”) target action date of October 15, 2021.
Outside of our lead product candidate, we continue to evaluate opportunities to expand our product portfolio. As of December 31, 2020, we do not have any approved and commercialized products in our portfolio.
FT218
FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug-delivery technology for the treatment of EDS and cataplexy in adults suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in the U.S. for the treatment of EDS and cataplexy in patients with narcolepsy and is approved in Europe for the treatment of cataplexy in patients with narcolepsy. Since 2002, sodium oxybate has only been available as a formulation that must be taken twice nightly, first at bedtime, and then again 2.5 to 4 hours later.
On December 16, 2020, we announced the submission of our NDA to the FDA for FT218. On February 26, 2021, the FDA notified us of formal acceptance of the NDA with an assigned PDUFA target action date of October 15, 2021.
The REST-ON trial was a randomized, double-blind, placebo-controlled study that enrolled 212 patients and was conducted in clinical sites in the U.S., Canada, Western Europe and Australia. The last patient, last visit was completed at the end of the first quarter of 2020 and positive top line data from the REST-ON trial was announced on April 27, 2020. Patients who received 9 g of once-nightly FT218, the highest dose administered in the trial, demonstrated a statistically significant and clinically meaningful improvement compared to placebo across the three co-primary endpoints of the trial: maintenance of wakefulness test, or MWT, clinical global impression-improvement, or CGI-I, and mean weekly cataplexy attacks. The lower doses assessed, 6 g and 7.5 g also demonstrated a statistically significant and clinically meaningful improvement on all three co-primary endpoints compared to placebo. We observed the 9 g dose of once-nightly FT218 to be generally well tolerated. Adverse reactions commonly associated with sodium oxybate were observed in a small number of patients (nausea 1.3%, vomiting 5.2%, decreased appetite 2.6%, dizziness 5.2%, somnolence 3.9%, tremor 1.3% and enuresis 9%), and 3.9% of the patients who received 9 g of FT218 discontinued the trial due to adverse reactions.
In January 2018, the FDA granted FT218 Orphan Drug Designation, which makes the drug eligible for certain development and commercial incentives, including potential U.S. market exclusivity for up to seven years. Additionally, several FT218-related U.S. patents have been issued, and there are additional patent applications currently in development and/or pending at the U.S. Patent and Trademark Office (“USPTO”), as well as foreign patent offices.
In July 2020, we announced that the first patient was dosed initiating an open-label extension (“OLE”)/switch study of FT218 as a potential treatment for EDS and cataplexy in patients with narcolepsy. The OLE/switch study is examining the long-term safety and maintenance of efficacy of FT218 in patients with narcolepsy who participated in the REST-ON study, as well as dosing and preference data for patients switching from twice-nightly sodium oxybate to once-nightly FT218 regardless if they participated in REST-ON or not. We anticipate that the study will enroll up to 250 patients, many of which will be enrolled in North American clinical trial sites that participated in the REST-ON study.
We believe FT218 has the potential to demonstrate improved dosing compliance, safety and patient satisfaction over the current standard of care for EDS and cataplexy in patients with narcolepsy, which is a twice-nightly sodium oxybate formulation. If approved, we believe FT218 has the potential to take a significant share of the sodium oxybate market. The current market size for the twice-nightly administration of sodium oxybate is estimated at an annualized revenue run rate of $1.8 billion.
Micropump Drug-Delivery Technology
Our Micropump drug-delivery technology allows for the controlled delivery of small molecule drugs taken orally, which has the potential to reduce safety issues and improve a number of things like efficacy, dosing compliance and patient satisfaction. Beyond FT218, we believe there could be other product development opportunities for our Micropump drug-delivery technology, representing either i) life cycle opportunities, whereby additional intellectual property-protected drug delivery technology can be added to a pharmaceutical product to extend the commercial viability of that product, or ii) innovative formulation opportunities for known active pharmaceutical ingredients as well as new chemical entities.
Previously Approved FDA Products
On June 30, 2020 (the “Original Form 10-K”“Closing Date”), Avadel Legacy Pharmaceuticals, LLC (the “Avadel Seller”) announced the sale of the portfolio of sterile injectable drugs used in the hospital setting (the “Hospital Products”), which included our three commercial products, Akovaz, Bloxiverz and Vazculep, as filedwell as Nouress, which was approved by the U.S. FDA to Exela Sterile Medicines LLC (“Exela Buyer”) pursuant to an asset purchase agreement by and among the Avadel Seller, Avadel US Holdings, Inc., the Exela Buyer and Exela Holdings, Inc. This sale included the following FDA approved products:
•Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery.
•Vazculep (phenylephrine hydrochloride injection) - Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
•Akovaz (ephedrine sulfate injection) - Akovaz was the first FDA approved formulation of ephedrine sulfate, an alpha- and beta- adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
•Nouress (cysteine hydrochloride injection)- Nouress is a sterile injectable product for use in the hospital setting to provide parenteral nutrition to neonates.
Corporate Information
We are registered as an Irish public limited company. Our principal place of business is located at 10 Earlsfort Terrace, Dublin 2, Ireland and our phone number is 00 353 1 920 1000. We file annual, quarterly and current reports, proxy statements and other documents with the
U.S. Securities and Exchange Commission
(the “SEC”(“SEC”)
on March 16, 2018. We are filing this Amendment solely for the following two purposes: | · | To include the information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K, which we expected to be incorporated by reference from our definitive proxy statement for the 2018 Annual General Meeting of Shareholders. As we no longer anticipate filing our definitive proxy statement within 120 days of the fiscal year ended December 31, 2017, Part III of the Original Form 10-K is hereby amended. |
| · | To re-file, with slightly modified redactions, the License and Development Agreement by and between Cerecor, Inc. and Flamel Ireland Limited operating under the trade name of Avadel Ireland dated as of February 16, 2018, that was filed as Exhibit 10.44 to the Original Form 10-K (the “Exhibit”). |
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, new certifications by the Company’s principal executive officer and principal financial officer are filed as exhibits to this Form 10-K/A. Except as expressly noted in this Amendment, this Amendment does not reflect events occurring after the Original Form 10-K or modify or update in any way any of the other disclosures contained in the Original Form 10-K. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K and our other SEC filings.
Cautionary Disclosure Regarding Forward-Looking Statements
This Amendment contains forward-looking statements. We may make additional written or oral forward-looking statements from time to time in filings with the Securities and Exchange Commission or otherwise. The words “will,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “project” and similar expressions, and the negatives thereof, identify forward-looking statements, which speak only as of the date the statement is made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934amended (the “Exchange Act”). AlthoughOur website is www.avadel.com, where we believe thatmake available free of charge our forward-looking statementsreports (and any amendments thereto) on Forms 10-K, 10-Q and 8-K as soon as reasonably practicable after they are basedelectronically filed with or furnished to the SEC. These filings are also available to the public at www.sec.gov. We do not incorporate the information on reasonable assumptions withinor accessible through our website into this Annual Report on Form 10-K.
We currently have five direct wholly-owned subsidiaries: (a) Avadel US Holdings, Inc., (b) Flamel Ireland Limited is an Irish limited company, which conducts business under the boundsname Avadel Ireland, (c) Avadel Investment Company Limited, (d) Avadel Finance Ireland Designated Activity Company and (e) Avadel France Holding SAS. Avadel US Holdings, Inc., a Delaware corporation, is the holding entity of (i) Avadel Specialty Pharmaceuticals, LLC, (ii) Avadel Legacy Pharmaceuticals, LLC, (iii) Avadel Management Corporation, and (iv) Avadel CNS Pharmaceuticals LLC. Avadel Finance Ireland Designated Activity Company is the holding entity of Avadel Finance Cayman Limited. Avadel France Holding SAS is the holding entity of Avadel Research SAS. A complete list of our knowledgesubsidiaries can be found in Exhibit 21.1 to this Annual Report on Form 10-K.
Competition and Market Opportunities
Competition
Competition in the pharmaceutical and biotechnology industry is intense and is expected to increase. We compete with academic laboratories, research institutions, universities, joint ventures, and other pharmaceutical and biotechnology companies, including other companies developing brand or generic specialty pharmaceutical products or drug delivery platforms. Some of these competitors may also be our business and operations, our business is subject to significant risks and therepartners. There can be no assurance that actual resultsour competitors will not obtain patent protection or other intellectual property rights that would make it difficult or impossible for us to compete with their products. Furthermore, major technological changes can happen quickly in the pharmaceutical and biotechnology
industries. Such rapid technological change, or the development by our competitors of technologically improved or differentiated products, could render our products, including our drug delivery technologies, obsolete or noncompetitive.
The pharmaceutical industry has dramatically changed in recent years, largely as a function of the growing importance of generic drugs. The growth of generics (typically small molecules) and of large molecules (biosimilars) has been accelerated by the demand for less expensive pharmaceutical products. As a result, the pricing power of pharmaceutical companies will be more tightly controlled in the future.
In addition, consolidation has reduced our pool of potential partners and acquisition opportunities within the biopharmaceutical space.
Potential competition for FT218
If FT218 receives FDA approval, it will compete with the currently approved twice-nightly oxybate formulations, as well as a number of daytime wake promoting agents including lisdexamfetamine, detroamphetamine, methylphenidate, amphetamine, modafinil, armodafinil, solriamfetol and pitolisant, which are widely prescribed, or prescribed concomitantly with sodium oxybate. If approved, we anticipate FT218 may face competition from manufacturers of generic twice-nightly sodium oxybate formulations, who have reached settlement agreements with the current marketer, which allows for entry of an authorized generic in 2023. In addition, there are other products in development that may be approved in the future that could have an impact on the sodium oxybate market prior to FT218’s potential FDA approval, including, for example, reboxetine, orexin 2 receptor agonists, flecainide / modafinil combination, histamine H3 antagonists/inverse agonists, or GABAB agonists.
Market Opportunities
In today’s pharmaceutical market, a drug has to demonstrate significant therapeutic improvements over the current standard of care in order to obtain third party payer coverage. Alternatively, changes in the delivery of a drug must create a demonstrable reduction in costs. Dosing convenience, by itself, is not sufficient to gain reimbursement acceptance. Biopharmaceutical companies must demonstrate, through extensive clinical trials, the therapeutic efficacy of their new formulations. The FDA has encouraged drug companies developing enhanced formulations to use a condensed regulatory pathway: the 505(b)(2) NDA. Many biopharmaceutical companies today are using this approach or the supplemental NDA pathway (“sNDA”). An NDA or sNDA is necessary to market an already approved drug for a new indication, or in a different dosage form or formulation. However, the sNDA approach requires cross-referencing the originator’s drug dossier, and eventually an alliance with the originator for commercialization.
Avadel’s Drug Delivery Technologies
We own drug delivery technologies that address key formulation challenges, potentially allowing the development of differentiated drug products for administration in various forms (e.g., capsules, tablets, sachets or liquid suspensions for oral use; or injectables for subcutaneous administration) that could be applied to a broad range of drugs (novel, already-marketed, or off-patent).
A brief discussion of each of our research,drug delivery technologies is set forth below.
•Micropump. OurMicropump technology allows for the development of modified release solid, oral dosage formulations of drugs. Micropump-carvedilol and commercialization activities and our results of operations will not differ materially from our expectations. Factors that could cause actual results to differ from expectationsMicropump-aspirin formulations have been approved in the U.S. Further, Micropump technology is being employed in our forward-looking statements include, among others, those specifiedinvestigational FT218 product.
•LiquiTime. OurLiquiTime technology allows for development of modified release oral products in a liquid suspension formulation, which may make such formulations particularly well suited for children and/or patients having issues swallowing tablets or capsules. Although we own this technology, we are currently not pursuing any commercial pharmaceutical drug development opportunities using it.
•Medusa. Our Medusa technology allows for the development of modified-release injectable dosage formulations of drugs (e.g., peptides, polypeptides, proteins, and small molecules). Although we own this technology, we are currently not pursuing any commercial pharmaceutical drug development opportunities using it.
Proprietary Intellectual Property
Parts of our product pipeline and strategic alliances utilize our drug delivery platforms and related products of which certain features are the subject of patents or patent applications. As a matter of policy, we seek patent protection of our inventions and also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to maintain and develop competitive positions.
•FT218 Patents. We have been awarded several FT218-related U.S. patents having expiry dates from mid-2037 to early-2040. We have a number of additional FT218-related patent applications pending at the USPTO as well as at non-U.S. patent offices.
•Drug Delivery Technology Patents. Our drug delivery technologies are the subject of certain patents, including: (i) for Micropump, patents relating to coating technologies that provide for controlled release of an active ingredient (expiring in 2025 in the U.S. and 2022 in non-U.S. jurisdictions); (ii) for LiquiTime, patents relating to film-coated microcapsules and a method comprising orally administering such microcapsules to a patient (expiring in 2023); and (iii) for Medusa, patents relating to an aqueous colloidal suspension of low viscosity based on submicronic particles of water-soluble biodegradable polymer PO (polyolefin) carrying hydrophobic groups (expiring in 2023).
The patent positions of biopharmaceutical companies like us are generally uncertain and involve complex legal, scientific and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and patent scope can be reinterpreted by the courts after issuance. Moreover, many jurisdictions permit third parties to challenge issued patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any of our licensed or owned patents will provide sufficient protection from competitors. Any of our licensed or owned patents may be challenged, circumvented, or invalidated by third parties. For more information, please see the information set forth under the caption “Risks Related to Our Intellectual Property – If we cannot adequately protect our intellectual property and proprietary information, we may be unable to effectively compete” in the “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.
Supplies and Manufacturing
We attempt to maintain multiple suppliers in order to mitigate the Original Form 10-K,risk of shortfall and inability to supply market demand. Nevertheless, for FT218, we will rely on a limited number of suppliers for sourcing active pharmaceutical ingredients (“APIs”).
We will outsource the production of FT218 to current good manufacturing practices (“cGMP”) -compliant and FDA-audited contract manufacturing organizations (“CMOs”) pursuant to supply agreements and have no present plans to acquire manufacturing facilities.
Government Regulation
The design, testing, manufacturing and marketing of certain new or substantially modified drugs, biological products or medical devices must be approved, cleared or certified by regulatory agencies, regulatory authorities and notified bodies under applicable laws and regulations, the requirements of which may vary from country to country. This regulatory process is lengthy, expensive and uncertain. In the U.S., the FDA regulates such products under various federal statutes, including the Federal Food, Drug, and Cosmetic Act (“FDCA”) and the Public Health Service Act.
New Drug Product Development and Approval Process
Regulation by governmental authorities in the U.S. and other countries has a significant impact on the development, manufacture, and marketing of drug products and on ongoing research and product development activities. The products of Avadel’s pharmaceutical partners as well as its own products require regulatory approval by governmental agencies and regulatory authorities prior to commercialization. In particular, these products are subject to stringent manufacturing requirements known as cGMP which are promulgated by the FDA in the U.S. and by other authorities in other jurisdictions, and rigorous, pre-clinical and clinical testing and other pre-market approval requirements by the FDA, the European Commission and regulatory authorities in other countries. In the U.S. and the European Union, various statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources.
Regulatory approval, when and if obtained, may be limited in scope. In particular, regulatory approvals may restrict the marketing of a product to specific uses. Approved drugs, as well as their manufacturers, are subject to ongoing review (including requirements and restrictions related to record keeping and reporting, FDA, European Commission and EU Member States competent authorities’ approval of certain changes in manufacturing processes or product labeling, product promotion and advertising, and pharmacovigilance, which includes monitoring and reporting adverse reactions, maintaining safety measures, and conducting dossier reviews for marketing authorization renewal). Discovery of previously unknown problems with these products may result in restrictions on their manufacture, sale or use, or in their withdrawal from the market. Failure to comply with regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as other actions affecting the potential products and commercial prospects of Avadel or Avadel’s pharmaceutical partners who may utilize Avadel’s technologies. Any failure by Avadel or our pharmaceutical partners to comply with current or new and changing regulatory obligations, and any failure to obtain and maintain, or any delay in obtaining, regulatory approvals, could materially adversely affect our business.
The process for new drug product development and approval has many steps, including:
Risks relating
Chemical and Formulation Development. Pharmaceutical formulation taking into account the chemistry and physical characteristics of the drug or biological substance, is the beginning of a new product. If initial laboratory experiments reveal that the concept for a new drug product looks promising, then a variety of further development steps and tests complying with internationally recognized guidance documents will have to our license agreementbe continued, in order to provide for a product ready for testing in animals and, after sufficient animal test results, also in humans.
Concurrent with Serenity Pharmaceuticals, LLCpre-clinical studies and clinical trials, companies must continue to develop information about the properties of the drug product and finalize a process for manufacturing the product in accordance with cGMP. The manufacturing process must be capable of consistently producing quality batches of the product, and the manufacturer must develop and validate methods for testing the quality, purity and potency of the final products. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product does not undergo unacceptable deterioration over its shelf-life.
Pre-Clinical Testing. Once a drug candidate is identified for development, the candidate enters the pre-clinical testing stage. This includes laboratory evaluation of product chemistry and formulation, as well as animal studies of pharmacology (mechanism of action, pharmacokinetics) and toxicology which may have to be conducted over lengthy periods of time, to assess the potential safety and efficacy of the product as formulated. Pre-clinical tests must be conducted in compliance with good laboratory practice regulations, the Animal Welfare Act and its regulations in the U.S. and the Clinical Trials Directive and related national laws and guidelines in the EU Member States. Violations of these laws and regulations can, in some cases, lead to invalidation of the studies, then requiring such studies to be replicated. In some cases, long-term pre-clinical studies are conducted while clinical studies are ongoing.
Investigational New Drug Application.
U.S. The entire body of chemical or biochemical, pharmaceutical and pre-clinical development work necessary to administer investigational drugs to human volunteers or patients is summarized in an Investigational New Drug (“Serenity”IND”) including:application to the FDA. The IND becomes effective, if not rejected by the FDA within thirty (30) days after filing. There is no assurance that the submission of an IND will eventually allow a company to commence clinical trials. All clinical trials must be conducted under the supervision of a qualified investigator in accordance with good clinical practice regulations to ensure the quality and integrity of clinical trial results and data. These regulations include the requirement that, with limited exceptions, all subjects provide informed consent. In addition, an institutional review board (“IRB”), composed primarily of physicians and other qualified experts at the hospital or clinic where the proposed studies will be conducted, must review and approve each human study. The IRB also continues to monitor the study and must be kept aware of the study’s progress, particularly as to adverse events and changes in the research. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if adverse events occur. Failure to adhere to good clinical practices and the protocols, and failure to obtain IRB approval and informed consent, may result in FDA rejection of clinical trial results and data, and may delay or prevent the FDA from approving the drug for commercial use.
| ◦ | consumer purchases of Noctiva are subject to risks related to reimbursement from government agencies and other third parties; |
| ◦ | our internal analyses may overstate the market opportunity
European Union. The European equivalent to the IND is the Investigational Medicinal Product Dossier (“IMPD”) which likewise must contain pharmaceutical, pre-clinical and, if existing, previous clinical information on the drug substance and product. An overall risk-benefit assessment critically analyzing the non-clinical and clinical data in relation to the potential risks and benefits of the proposed trial must also be included. The intended clinical trial must be submitted for authorization by the regulatory authority(ies) of each EU Member States in which the trial is intended to be conducted prior to its commencement. The trial must be conducted in accordance with the protocol as approved by an Ethics Committee(s) in each EU Member State
(EU equivalent to IRBs). Before submitting an application to the competent authority, the sponsor must register the trial in the EudraCT database where in the U.S. it will be provided with a unique EudraCT number.
Clinical Trials. Typically, clinical testing involves the administration of the drug product first to healthy human volunteers and then to patients with conditions needing treatment under the supervision of a qualified principal investigator, usually a physician, pursuant to a ‘protocol’ or clinical plan reviewed by the FDA and the competent authorities of the EU Member States along with the IRB or Ethics Committee (via the IND or IMPD submission). The protocol details matter such as a description of the condition to be treated, the objectives of the study, a description of the patient population eligible for the study, and the parameters to be used to monitor safety and efficacy. Clinical trials are time-consuming and costly, and typically are conducted in three sequential phases, which sometimes may overlap. Phase I trials consist of testing the product in the United States for the drug desmopressin acetate (the “Drug”) or we may not effectively exploit such market opportunity; |
| ◦ | significant safety or drug interaction problems could arise with respect to the Drug; |
| ◦ | we may not successfully increase awareness of nocturia and the potential benefits of the Drug; |
| ◦ | patents and proprietary rights associated with the Drug may not provide adequate protection; |
| ◦ | patents licensed to us under our license agreement with Serenity that cover the Drug are subject to litigation and if Serenity is unsuccessful in defending this litigation, we may lose its exclusive rights to such patents; and |
| ◦ | the need for our management to focus attention on the development and commercialization of the Drug could cause our ongoing business operations to suffer. |
we depend on a small number of products and customerspatients or normal volunteers, primarily for safety, in one or more dosages, as well as characterization of a drug’s pharmacokinetic and/or pharmacodynamic profile. In Phase 2, in addition to safety, the product is studied in a patient population to evaluate the product’s efficacy for the majority of our revenuesspecific, targeted indications and to determine dosage tolerance and optimal dosage. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded patient population at geographically dispersed sites. With limited exceptions, all patients involved in a clinical trial must provide informed consent prior to their participation. Meeting clinical endpoints in early stage clinical trials does not assure success in later stage clinical trials. Phase 1, 2, and 3 testing may not be completed successfully within any specified time period, if at all.
The FDA and the losscompetent authorities of EU Member States monitor the progress of each clinical trial phase conducted under an IND or IMPD and may, at their discretion, reevaluate, alter, suspend or terminate clinical trials at any point in this process for various reasons, including a finding that patients are being exposed to an unacceptable health risk or a determination that it is unethical to continue the study. The FDA, the European Commission and the competent authorities of EU Member States can also request that additional clinical trials be conducted as a condition to product approval. The IRB, the Ethics Committee, and sponsor also may order the temporary or permanent discontinuance of a clinical trial at any time for a variety of reasons, particularly if safety concerns arise. Such holds can cause substantial delay and, in some cases, may require abandonment of product development. These clinical studies must be conducted in conformance with the FDA’s bioresearch monitoring regulations, the EU Clinical Trials Directive and/or internationally recognized guidance such as the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (“ICH”).
New Drug Application. After the completion of the clinical trial phases of development, if the sponsor concludes substantial evidence exists that the drug candidate is effective and that the drug is safe for its intended use, a new Drug Application (“NDA”) may be submitted to the FDA. The application must contain all of the information on the drug candidate gathered to that date, including data from the pre-clinical and clinical trials, information pertaining to the preparation of the drug, analytical methods, product formulation, details on the manufacture of finished products, proposed product packaging, labeling and stability (shelf-life). NDAs are often over 100,000 pages in length. If FDA determines that a Risk Evaluation and Mitigation Strategy (“REMS”) is necessary to ensure that the benefits of the drug outweigh the risks, a sponsor may be required to include as part of the application a proposed REMS, including a package insert directed to patients, a plan for communication with healthcare providers, restrictions on a drug’s distribution, or a medication guide to provide better information to consumers about the drug’s risks and benefits. Submission of an NDA does not assure FDA approval for marketing.
The FDA reviews all submitted NDAs before it accepts them for filing (the U.S. prerequisite for dossier review). The FDA may refuse to file the application and request additional information rather than accepting an application for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA to determine, among other things, whether a product is safe and effective for its intended use. As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation. There is a strong presumption for advisory committee review for any drug containing an active ingredient not previously approved. The FDA is not bound by the recommendation of an advisory committee. Under the Prescription Drug User Fee Act (“PDUFA”), submission of an NDA with clinical data requires payment of a fee. In return, the FDA assigns an action date of 10 months from acceptance of the application to return of a first ‘complete response,’ in which the FDA may approve the product or request additional information (PDUFA also provides for an expedited, six-month, “priority review” process. There can be no assurance an application will be approved within the performance goal timeframe established under PDUFA, if at all. If the FDA’s evaluation of the NDA is not favorable, the FDA usually will outline the deficiencies in the submission and request additional testing or information. Notwithstanding the submission of any requested additional information, or even in lieu of asking for additional information, the FDA may decide the marketing application does not satisfy the regulatory criteria for approval and issue a complete response letter, communicating the Agency’s decision not to approve the application.
FDA approval of an NDA will be based, among other factors, on the Agency’s review of the pre-clinical and clinical data submitted, a risk/benefit analysis of the product, and an evaluation of the manufacturing processes and facilities. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA has substantial discretion in the approval process and may disagree with an applicant’s interpretation of the data submitted in its NDA. For instance, FDA may require Avadel to provide data from additional preclinical studies or clinical trials to support approval of certain development steps or the NDA itself. Among the conditions for NDA approval is the requirement that each prospective manufacturer’s quality control and manufacturing procedures conform to cGMP standards and requirements. Manufacturing establishments often are subject to Pre-Approval Inspections prior to NDA approval to assure compliance with cGMP manufacturing commitments made in the relevant marketing application.
Patent Restoration and Exclusivity. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, establishes two abbreviated approval pathways for drug products that are in some way follow-on versions of already approved products.
Generic Drugs. A generic version of an approved drug is approved by means of an Abbreviated New Drug Application (“ANDA”), by which the sponsor demonstrates the proposed product is the same as the approved, brand-name drug, which is referred to as the “Reference Listed Drug” (“RLD”). Generally, an ANDA must contain data and information showing the proposed generic product and RLD (1) have the same active ingredient, in the same strength and dosage form, to be delivered via the same route of administration, (2) are intended for the same uses, and (3) are bioequivalent. This is instead of independently demonstrating the proposed product’s safety and effectiveness, which are inferred from the product being the same as the RLD, which the FDA previously found to be safe and effective.
505(b)(2) NDAs. If a product is similar, but not identical, to an already approved product, it may be submitted for approval via an NDA under Section 505(b)(2) of the Act. Unlike an ANDA, this does not excuse the sponsor from demonstrating the proposed product’s safety and effectiveness. Rather, the sponsor is permitted to rely to some degree on published scientific literature and the FDA’s finding that the RLD is safe and effective, and must submit its own data of safety and effectiveness to an extent necessary because of the differences between the products.
RLD Patents. An NDA sponsor must advise the FDA about patents that claim the drug substance or drug product or a method of using the drug. When the drug is approved, those patents are among the information about the product that is listed in the FDA publication, Approved Drug Products with Therapeutic Equivalence Evaluations, which is referred to as the “Orange Book”. The sponsor of an ANDA or 505(b)(2) application seeking to rely on an approved product as the RLD must make one of theseseveral certifications regarding each listed patent. A “Paragraph III” certification is the sponsor’s statement that it will wait for the patent to expire before obtaining approval for its product. A “Paragraph IV” certification is a challenge to the patent; it is an assertion that the patent does not block approval of the later product, because the patent is invalid, unenforceable, and/or not infringed by the new product.
Once the FDA accepts for filing an ANDA or 505(b)(2) application containing a Paragraph IV certification, the applicant must within 20 days provide notice to the RLD NDA holder and patent owner that the application with patent challenge has been submitted, and provide the factual and legal basis for the applicant’s assertion that the patent is invalid, unenforceable, or not infringed. If the NDA holder or patent owner file suit against the ANDA or 505(b)(2) applicant for patent infringement within 45 days of receiving the Paragraph IV notice, the FDA is prohibited from approving the ANDA or 505(b)(2) application for a period of 30 months from the date of receipt of the notice. If the RLD has new chemical entity (“NCE”) exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval. The FDA may approve the proposed product before the expiration of the 30-month stay i) if a court finds the patent invalid, unenforceable, or not infringed, ii) if the court shortens the period because the parties have failed to cooperate in expediting the litigation, or iii) if the parties reach a settlement agreement and notify the FDA of same.
As an alternative to Paragraph IV certification, and only with respect to method of use patents, an applicant can ‘carve around’ a “Patent Use Code” associated with a particular patent in the FDA’s Orange Book. A Patent Use Code is supposed to describe an indication/use of the RLD that is i) set forth in the RLD label and ii) covered by the corresponding method of use patent. As such, in lieu of a Paragraph IV certification, an applicant can demonstrate to the FDA that its proposed label does not include the method of use described by the RLD’s Patent Use Code for the corresponding method of use patent and, thus, ‘carve around’ that Patent Use Code. If a ‘carve around’ is successful, the notice requirement and 30-month stay on FDA approval of the application described above with respect to a Paragraph IV certification for that particular method of use patent does not apply.
Regulatory Exclusivities. The Hatch-Waxman Act may provide periods of regulatory exclusivity for products that would serve as RLDs. If a product is a “new chemical entity,” or customersNCE, - generally meaning that the active moiety has never before been approved in any drug - there may be a period of five years from the product’s approval during which the FDA may not accept for filing any ANDA or 505(b)(2) application for a drug with the same active moiety. An ANDA or 505(b)(2) application may be submitted after four years, however, if the sponsor makes a Paragraph IV certification challenging a listed patent.
An RLD that is not an NCE may qualify for a three-year period of exclusivity, if the NDA contains clinical data necessary for approval. In that instance, the exclusivity period does not preclude filing or review of the ANDA or 505(b)(2) application; rather, the FDA is precluded from granting final approval to the ANDA or 505(b)(2) application until three years after approval of the RLD. Additionally, the exclusivity applies only to the conditions of approval that required submission of the clinical data. For example, if an NDA is submitted for an RLD that is not an NCE, but that seeks approval for a new indication, and clinical data were required to demonstrate the safety or effectiveness of the RLD for that use, the FDA could reduce our revenues significantly.not approve an ANDA or 505(b)(2) application for another product with that active moiety for that use. For example, Coreg CRTM received three-year exclusivity for the clinical trials that demonstrated the safety and efficacy of the new, controlled-release dosage form; that exclusivity, which has expired, blocked other controlled-release products.
For a brief discussion of potential marketing exclusivity that could be available under certain conditions with respect to Avadel’s lead product candidate FT218, please see the information set forth under the caption “Risks Related to Regulatory and Legal Matters – If FT218 is approved by the FDA, we may dependnot obtain orphan drug marketing exclusivity” in the “Risk Factors” included in Part I, Item 1A of this Annual Report on partnership arrangementsForm 10-K.
Patent Term Restoration. Under the Hatch-Waxman Act, a portion of the patent term lost during product development and FDA review of an NDA or strategic alliances505(b)(2) application is restored if approval of the application is the first permitted commercial marketing of a drug containing the active ingredient. The patent term restoration period is generally one-half the time between the effective date of the IND and the date of submission of the NDA, plus the time between the date of submission of the NDA and the date of FDA approval of the product. The maximum period of restoration is five years, and the patent cannot be extended to more than 14 years from the date of FDA approval of the product. Only one patent claiming each approved product is eligible for restoration and the patent holder must apply for restoration within 60 days of approval. The USPTO, in consultation with the FDA, reviews and approves the application for patent term restoration. In the event that Avadel applies for patent term extensions on patents covering Avadel’s products, the FDA and the USPTO may not agree with Avadel’s assessment of whether such extensions are available, and may refuse to grant extensions to Avadel’s patents, or may grant more limited extensions than Avadel requests. Moreover, Avadel may not receive an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements.
Regulation of Combination Drugs. Medical products containing a combination of drugs, biologic, or device products may be regulated as ‘combination products’ in the U.S. A combination product generally is defined as a product comprising components from two or more regulatory categories (e.g., drug/device, device/biologic, drug/biologic). Each component of a combination product is subject to the requirements established by the FDA for that type of component, whether a drug, biologic or device.
To determine which FDA center or centers will review a combination product submission, companies may submit a request for assignment to the FDA. Those requests may be handled formally or informally. In some cases, jurisdiction may be determined informally based on FDA experience with similar products. However, informal jurisdictional determinations are not binding on the FDA. Companies also may submit a formal Request for Designation to the FDA Office of Combination Products. The Office of Combination Products will review the request and make its jurisdictional determination within 60 days of receiving a Request for Designation.
In order to facilitate pre-market review of combination products, the FDA designates one of its centers to have primary jurisdiction for the commercializationpre-market review and regulation of someboth components. The determination whether a product is a combination product or two separate products is made by the FDA on a case-by-case basis. It is possible that Avadel’s delivery platforms, when coupled with a drug or medical device component, could be considered and regulated by the FDA as a combination product.
If the primary mode of action is determined to be a drug, the product will be reviewed by the Center for Drug Evaluation and Research (“CDER”) either in consultation with another center or independently. If the primary mode of action is determined to be a medical device, the product would be reviewed by Center for Devices and Radiological Health (“CDRH”) either in consultation with another center, such as CDER, or independently. In addition, FDA could determine that the product is a
biologic and subject to the jurisdiction of the Center for Biologic Evaluation and Research (“CBER”), although it is also possible that a biological product will be regulated by CDER.
Marketing Approval and Reporting Requirements. If the FDA approves an NDA, the product becomes available for physicians to prescribe. The FDA may require post-marketing studies, also known as Phase IV studies, as a condition of approval to develop additional information regarding the safety of a product. These studies may involve continued testing of a product and development of data, including clinical data, about the product’s effects in various populations and any side effects associated with long-term use. After approval, the FDA may require post-marketing studies or clinical trials, as well as periodic status reports, if new safety information develops. These post-marketing studies may include clinical trials to investigate known serious risks or signals of serious risks or identify unexpected serious risks. Failure to conduct these studies in a timely manner may result in substantial civil fines and can result in withdrawal of approval. Avadel has several Phase IV obligations with its current approvals.
In addition, the FDA may require distribution to patients of a medication guide such as a Risk Evaluation and Mitigation Strategies (“REMS”) for prescription products that the agency determines pose a serious and significant health concern in order to provide information necessary to patients’ safe and effective use of such products. We expect our FT218 product, if approved by the FDA will be subject to a REMS program.
In the European Union, the marketing authorization of a medicinal product may be made conditional on the conduct of Phase IV post-marketing studies. Failure to conduct these studies in relation to centrally authorized products can lead to the imposition of substantial fines. Moreover, Phase IV studies are often conducted by companies in order to obtain further information on product efficacy and positioning on the failuremarket in view of any third partycompetitors and to fulfillassist in application for pricing and reimbursement.
Other Post-Marketing Obligations. Any products manufactured and/or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping requirements, reporting of adverse experiences with the product, submitting other periodic reports, drug sampling and distribution requirements, notifying the FDA and gaining its duties under such an arrangementapproval of certain manufacturing or alliancelabeling changes, complying with certain electronic records and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy information to the FDA, and complying with FDA promotion and advertising requirements. For example, the FDA has required Avadel to conduct post-marketing clinical and non-clinical studies for several of its products completed between 2016 and 2019.
Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and to list their products with the FDA. The FDA periodically inspects manufacturing facilities in the U.S. and elsewhere in order to assure compliance with the applicable cGMP regulations and other requirements. Facilities also are subject to inspections by other U.S. federal, foreign, state or local agencies. In complying with the cGMP regulations, manufacturers must continue to expend time, money and effort in recordkeeping and quality control to assure that the product meets applicable specifications and other post-marketing requirements. Failure of Avadel or its licensees to comply with FDA’s cGMP regulations or other requirements could have a materialsignificant adverse effect on ourAvadel’s business, financial condition and results of operation.operations.
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Also, newly discovered or developed safety or efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, additional pre-clinical or clinical studies, or even in some instances, revocation or withdrawal of the approval. Violations of regulatory requirements at any stage, including after approval, may result in various adverse consequences, including the FDA’s delay in approving or refusal to approve a product, withdrawal or recall of an approved product from the market, other voluntary or FDA-initiated action that could delay or restrict further marketing, and the imposition of civil fines and criminal penalties against the manufacturer and NDA holder. In addition, later discovery of previously unknown problems may result in restrictions on the product, manufacturer or NDA holder, including withdrawal of the product from the market. Furthermore, new government requirements may be established that could delay or prevent regulatory approval of Avadel’s products under development, or affect the conditions under which approved products are marketed.
The Food and Drug Administration Amendments Act of 2007 (“FDAAA”) provides the FDA with expanded authority over drug products after approval. This legislation enhances the FDA’s authority with respect to post-marketing safety surveillance, including, among other things, the authority to require additional post-marketing studies or clinical trials, labeling changes as a result of safety findings, registering clinical trials, and making clinical trial results publicly available.
In the European Union, stringent pharmacovigilance regulations oblige companies to appoint a suitably qualified and experienced Qualified Person resident in the European Economic Area, to prepare and submit to the competent authorities
adverse event reports within specific time lines, prepare Periodic Safety Update Reports (“PSURs”) and provide other supplementary information, report to authorities at regular intervals and take adequate safety measures agreed with regulatory agencies as necessary. Failure to undertake these obligations can lead to the imposition of substantial fines.
Other Regulation
Controlled Substances Act. Narcotics and other APIs, such as sodium oxybate and ephedrine sulfate are “controlled substances” under the Controlled Substances Act. The U.S. federal “Controlled Substances Act” (“CSA”), Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, regulates the manufacture and distribution of narcotics and other controlled substances, including stimulants, depressants and hallucinogens in the U.S. The CSA is administered by the “Drug Enforcement Administration” (“DEA”), a division of the U.S. Department of Justice, and is intended to prevent the abuse or diversion of controlled substances into illicit channels of commerce. Avadel had several products marketed under this Act and have at least one product under development.
Any person or firm that manufactures, distributes, dispenses, imports, or exports any controlled substance (or proposes to do so) must register with the DEA. The applicant must register for a specific business activity related to controlled substances, including manufacturing or distributing, and may engage in only the activity or activities for which it is registered. The DEA conducts periodic inspections of registered establishments that handle controlled substances and allots quotas of controlled drugs to manufacturers and marketers’ failure to comply with relevant DEA regulations, particularly as manifested in the loss or diversion of controlled substances, can result in regulatory action including civil penalties, refusal to renew necessary registrations, or proceedings to revoke those registrations. In certain circumstances, violations can lead to criminal prosecution. In addition to these federal statutory and regulatory obligations, there may be state and local laws and regulations relevant to the handling of controlled substances or listed chemicals.
cGMP. Current Good Manufacturing Practices rules apply to the manufacturing of drugs and medical devices. In addition to regulations enforced by the FDA, Avadel is also subject to French, U.S. and other countries’ rules and regulations governing permissible laboratory activities, waste disposal, handling of toxic, dangerous or radioactive materials and other matters. Avadel’s R&D involves the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Although Avadel believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by French, EU, U.S. and other foreign rules and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated.
Health Care Fraud and Abuse. Avadel is subject to a number of federal and state laws pertaining to health care “fraud and abuse,” such as anti-kickback and false claims laws. Under anti-kickback laws, it is illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance via regulations and that there are few court decisions addressing industry practices, it is possible that Avadel’s practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third-party payors (such as the Medicare and Medicaid programs) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Avadel’s sales and marketing activities relating to its products could be subject to scrutiny under these laws. Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including fines and civil monetary penalties, the possibility of exclusion from federal health care programs (including Medicare and Medicaid) and corporate integrity agreements, which impose, among other things, rigorous operational and monitoring requirements on companies. In addition, similar sanctions and penalties can be imposed upon executive officers and employees, including criminal sanctions against executive officers. As a result of the potential penalties that can be imposed on companies and individuals if convicted, allegations of such violations often result in settlements even if the company or individual being investigated admits no wrongdoing. Settlements often include significant civil sanctions, including fines and civil monetary penalties, and corporate integrity agreements. If the U.S. government were to allege or convict Avadel or its executive officers of violating these laws, Avadel’s business could be harmed. In addition, private individuals have the ability to bring similar actions. In addition to the reasons noted above, Avadel’s activities could be subject to challenge due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities. There also are an increasing number of U.S. federal and state laws that require manufacturers to make reports to states on pricing, marketing information, and payments and other transfers of value to healthcare providers. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the lack of clarity in laws and their implementation, Avadel’s reporting actions could be subject to the penalty provisions of the pertinent authorities.
Healthcare Privacy and Security Laws. Avadel may be subject to, or its marketing activities may be limited by the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology and
Clinical Health Act and their respective implementing regulations, which established uniform standards for certain “covered entities” (healthcare providers, health plans and healthcare clearinghouses) governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of protected health information. Among other things, HIPAA’s privacy and security standards are directly applicable to “business associates” – independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. In addition to possible civil and criminal penalties for violations, state attorney generals are authorized to file civil actions for damages or injunctions in U.S. federal courts to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. In the EU/EEA, Directive 95/46/EEC (as amended) or its successor applies to identified or identifiable personal data processed by automated means (e.g., a computer database of customers) and data contained in, or intended to be part of, non-automated filing systems (traditional paper files) as well as transfer of such data to a country outside of the EU/EEA.
“Sunshine” and Marketing Disclosure Laws. There are an increasing number of U.S. federal and state “sunshine” laws that require pharmaceutical manufacturers to make reports to states on pricing and marketing information. Several U.S. states have enacted legislation requiring pharmaceutical companies to, among other things, establish marketing compliance programs, file periodic reports with the state, and make periodic public disclosures on sales and marketing activities, and prohibiting certain other sales and marketing practices. In addition, a similar recently implemented federal requirement requires manufacturers, including pharmaceutical manufacturers, to track and report to the federal government certain payments and other transfers of value made to physicians and other healthcare professionals and teaching hospitals and ownership or investment interests held by physicians and their immediate family members. The U.S. federal government began disclosing the reported information on a publicly available website in 2014. These laws may adversely affect Avadel’s sales, marketing, and other activities with respect to its medicines in the U.S. by imposing administrative and compliance burdens on us. If Avadel fails to track and report as required by these laws or otherwise comply with these laws, it could be subject to the penalty provisions of the pertinent U.S. state and federal authorities.
Government Price Reporting. For those marketed medicines which are covered in the U.S. by the Medicaid programs, Avadel has various obligations, including government price reporting and rebate requirements, which generally require medicines be offered at substantial rebates/discounts to Medicaid and certain purchasers (including “covered entities” purchasing under the 340B Drug Discount Program). Avadel is also required to discount such medicines to authorized users of the Federal Supply Schedule of the General Services Administration, under which additional laws and requirements apply. These programs require submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations, and the guidance governing such calculations is not always clear. Compliance with such requirements can require significant investment in personnel, systems and resources, but failure to properly calculate Avadel’s prices, or offer required discounts or rebates could subject it to substantial penalties. One component of the rebate and discount calculations under the Medicaid and 340B programs, respectively, is the “additional rebate”, a complex calculation which is based, in part, on the rate at which a branded drug price increases over time more than the rate of inflation (based on the CPI-U). This comparison is based on the baseline pricing data for the first full quarter of sales associated with a branded drug’s NDA, and baseline data cannot generally be reset, even on transfer of the NDA to another manufacturer. This “additional rebate” calculation can, in some cases where price increases have been relatively high versus the first quarter of sales of the NDA, result in Medicaid rebates up to 100 percent of a drug’s “average manufacturer price” and 340B prices of one penny.
Healthcare Reimbursement
In both U.S. and non-U.S. markets, sales of Avadel’s potential products as well as products of pharmaceutical and biotechnology companies that incorporate Avadel’s technology into their products, if any, will depend in part on the availability of reimbursement by third-party payers, such as government health administration authorities, private health insurers and other organizations. The U.S. market for pharmaceutical products is increasingly being shaped by managed care organizations, pharmacy benefit managers, cooperative buying organizations and large drugstore chains. Third-party payers are challenging the price and cost effectiveness of medical products and services. Uncertainty particularly exists as to the reimbursement status of newly approved healthcare products. There can be no assurance reimbursement will be available to enable Avadel to maintain price levels sufficient to realize an appropriate return on our product development investment. Legislation and regulations affecting the pricing of pharmaceuticals may change before Avadel’s proposed products are approved for marketing and any such changes could further limit reimbursement for medical products and services.
Human Capital Resources
As of December 31, 2020, we had approximately 32 employees, all of which were full-time. None of our employees are subject to a union or other collective bargaining agreement. We believe that our relations with our employees are satisfactory.
At Avadel, the way we work is as important as the results we achieve. Avadel is patient-focused, results-oriented, resilient, and ethical (the “Avadel Values”). In everything we do, we live the Avadel Values. We provide reimbursement to our employees for seminars, conferences and educational and professional training. In alignment with our business strategy, it is our goal to empower all employees to take full advantage of their professional growth opportunities, to lead them to long-term job satisfaction and organizational success. Through professional development, our employees can broaden their skills for their current and future roles.
Our commitment to our employees includes benefit and compensation programs that value the contributions our employees make. We strive to provide pay, benefits, and services that are competitive and create incentives to attract and retain employees. In addition to competitive pay, we offer bonus and stock-based compensation packages for all levels of employees within the organization as well as a company match for employee retirement programs. We also offer competitive health, dental and life insurance and vacation pay, for all employees.
We expect to add employees in 2021 in anticipation of the potential launch of FT218, pending FT218’s approval by the FDA.
Item 1A. Risk Factors.
An investment in Avadel involves a high degree of risk. You should carefully consider the risks described below, as well as the other information included or incorporated by reference in this Annual Report on Form 10-K, before making an investment decision. Avadel’s business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks. The market or trading price of Avadel’s securities could decline due to any of these risks. In addition, please read “Cautionary Disclosure Regarding Forward-Looking Statements” in this Annual Report on Form 10-K, where we describe additional uncertainties associated with Avadel’s business and with the forward-looking statements included or incorporated by reference in this Annual Report on Form 10-K. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair Avadel’s business and operations.
Risks Related to Our Product Candidate and Future Product Candidates and Clinical Development
Our product candidate and future product candidates will generally be subject to regulatory approval. If we or our pharmaceutical and biotechnology company partners do not obtain such approvals, or if such approvals are delayed, our ability to generate future revenues may be adversely affected.
Our lead product candidate, FT218, as well as product candidates we may wish to market in the future, may not gain regulatory approval and reach the commercial market for a numbervariety of reasons,reasons. We submitted a NDA, for FT218 in December 2020. In February 2021, the FDA assigned FT218 a PDUFA target action date of October 15, 2021.
In the U.S., federal, state and local government agencies, primarily the FDA, regulate all pharmaceutical products, including existing products and those under development. Neither we nor our pharmaceutical and biotechnology partners can control whether we obtain regulatory approval for any of these products or, if obtained, the timing thereof. There may be significant delays in expected product releases while attempting to obtain regulatory approval for products incorporating our technologies. If we or our partners are not successful in timely obtaining such approvals, our revenues and profitability may decline.
Applicants for FDA approval often must submit to the FDA extensive clinical and pre-clinical data, as well as information about product manufacturing processes and facilities and other supporting information. Varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a drug product. The FDA also may require us, or our partners to conduct additional pre-clinical studies or clinical trials.
Similarly, although we anticipate submitting applications for approval for our development products that rely on existing data to demonstrate safety and effectiveness, the FDA may determine that additional studies particular to our product candidate and future product candidates are necessary. If the FDA requires such additional studies, it would impact development plans for those products.
Changes in FDA approval policy during the development period, or changes in regulatory review for each submitted new product application, also may delay an approval or result in rejection of an application. For instance, under the FDAAA, we or our partners may be required to develop REMS to ensure the safe use of our lead product candidate. If the FDA disagrees with such REMS proposals, it may be more difficult and costly to obtain regulatory approval for our lead product candidate. Similarly, FDAAA provisions may make it more likely that the FDA will refer a marketing application for a new product to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. This review may add to the time for approval, and, although the FDA is not bound by the recommendation of an advisory committee, objections or concerns expressed by an advisory committee may cause the FDA to delay or deny approval.
The FDA has substantial discretion in the approval process and may disagree with our or our partners’ interpretations of data and information submitted in an application, which would adversely affectalso could cause delays of an approval or rejection of an application. Even if the FDA approves a product, the approval may limit the uses or indications for which the product may be marketed, restrict distribution of the product or require further studies.
The FDA may also withdraw product approvals for failure to comply with regulatory requirements or if problems follow initial marketing. In the same way, medicinal products for supply on the EU market are subject to marketing authorization by either the European Commission, following an opinion by the European Medicines Agency (“EMA”), or by the competent authorities of EU Member States. Applicants for marketing authorization must submit extensive technical and clinical data essentially in the form of the ICH Common Technical Document. The data is subject to extensive review by the competent authorities, and after such review the data may be considered inappropriate or insufficient. If applications for marketing authorization by pharmaceutical and biotechnology company partners are delayed or rejected, if the therapeutic indications for which the product is approved are limited, or if conditional marketing authorization imposing post-marketing clinical trials or surveillance is
imposed, our future revenues.revenues, operating results and liquidity may decline and earnings may be negatively impacted.
we
We must invest substantial sums in research and development (“R&D”) in order to remain competitive, and we may not fully recover these investments.
To be successful in the highly-competitive pharmaceutical industry, we depend uponmust commit substantial resources each year to R&D in order to develop new products and enhance our technologies. In 2020, we spent $20,442 on R&D, the majority of which was on our lead product candidate, FT218. Our ongoing investments in R&D for FT218 as well as possible future products could result in higher costs without a limitedproportionate increase, or any increase, in revenues. The R&D process is lengthy and carries a substantial risk of failure. If our R&D does not yield sufficient products that achieve commercial success, our future operating results will be adversely affected.
Risks Related to Regulation
Our product candidate and future product candidates may not reach the commercial market for a number of reasons.
Drug development is an inherently uncertain process with a high risk of failure at every stage of development. Successful R&D of pharmaceutical products is difficult, expensive and time consuming. Many product candidates fail to reach the market. Our success will depend on the development and the successful commercialization of new drugs and products that utilize our drug delivery technologies.
Even if our product candidates and current drug delivery technologies appear promising during development, there may not be successful commercial applications developed for them for a number of reasons, including:
•the FDA, the EMA, the competent authority of an EU Member State or an Institutional Review Board (“IRB”), or an Ethics Committee (EU equivalent to IRB), or our partners may delay or halt applicable clinical trials;
•we or our partners may face slower than expected rate of patient recruitment and enrollment in clinical trials, or may devote insufficient funding to the clinical trials;
•our drug delivery technologies and drug products may be found to be ineffective or to cause harmful side effects, or may fail during any stage of pre-clinical testing or clinical trials;
•we or our partners may find that certain products cannot be manufactured on a commercial scale and, therefore, may not be economical or feasible to produce;
•we or our partners may face delays in completing our clinical trials due to circumstances outside of our control, including natural disasters, labor or civil unrest, global health concerns or pandemics or acts of war or terrorism; or
•our product candidate and future product candidates could fail to obtain regulatory approval or, if approved, could fail to achieve market acceptance, could fail to be included within the pricing and reimbursement schemes of the U.S. or EU Member States, or could be precluded from commercialization by proprietary rights of third parties.
Disruptions at the FDA, the U.S. Drug Enforcement Administration and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of our business may rely, which could negatively impact our business.
As of June 23, 2020, the FDA noted it was continuing to ensure timely reviews of applications for medical products during the COVID-19 pandemic in line with its user fee performance goals and conducting mission critical U.S. and non-U.S. inspections to ensure compliance of manufacturing facilities with FDA quality standards. However, the FDA may not be able to maintain this pace and delays or setbacks are possible in the future. On July 10, 2020, the FDA announced its goal of restarting domestic on-site inspections during the week of July 20, but such activities will depend on data about the virus’ trajectory in a given state and locality and the rules and guidelines that are put in place by state and local governments. The FDA has developed a rating system to assist in determining when and where it is safest to conduct prioritized domestic inspections. Should the FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the review cycle due to restrictions on travel, the FDA has stated that it generally intends to issue a complete response letter. Further, if there is inadequate information to make a determination on the acceptability of a facility, the FDA may defer action on the application until an inspection can be completed. In 2020, several companies announced receipt of complete response letters due to the FDA’s inability to complete required inspections for their applications. Regulatory authorities outside the U.S. may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities. We cannot guarantee that the FDA will be able to complete any required inspections or take other necessary actions in respect to our product candidate or future product candidates.
Our product candidate and future product candidates, if approved by the FDA, may not obtain desired regulatory exclusivities, including orphan drug exclusivity.
Orphan drug status may be granted by the FDA to certain products intended to treat diseases and conditions that affect fewer than 200,000 individuals in the U.S. or, if they affect more than 200,000 individuals in the U.S., there is no reasonable expectation of recovering the cost of developing and making the product available in the U.S. for the applicable disease or condition.
Our lead product candidate, FT218, obtained orphan drug designation for the treatment of narcolepsy from the FDA in January 2018. Generally, a product with orphan drug designation that subsequently receives the first FDA approval for the disease or condition for which it has such designation will be entitled to certain U.S. marketing exclusivity for a period of seven years. FT218 would not be the first sodium oxybate product with such FDA approval. However, if the FDA concludes that FT218 is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care, the FDA could award FT218 with such marketing exclusivity. A designated orphan drug may not however receive orphan drug exclusivity. Among other factors, the FDA will consider the results of our FT218 Phase 3 clinical trial with respect to the efficacy and safety of the previously approved sodium oxybate product. Thus, there can be no assurance that FT218 will receive orphan drug status exclusivity, if approved. In addition, even if such orphan drug marketing exclusivity rights were granted by the FDA, such exclusivity rights may be lost if the FDA later determines that our request for such designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition to be treated with the product. Further, even with respect to the indications for which we have received orphan designation, we may not be the first to obtain marketing approval for any particular orphan indication due to the uncertainties associated with developing pharmaceutical products, and thus, for example, approval of our lead product candidate could be blocked for seven years if another company previously obtained approval and orphan drug exclusivity in the U.S. for the same drug and same condition.
We are subject to U.S. federal and state and international laws and regulations prohibiting “kickbacks” and false claims that, if violated, could subject us to substantial penalties, and any challenges to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.
We are subject to extensive and complex U.S. federal and state and international laws and regulations, including but not limited to, healthcare “fraud and abuse” laws, such as anti-kickback and false claims laws and regulations pertaining to government benefit program reimbursement, price reporting and regulations, and sales and marketing practices. These laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or to alter one or more of our sales or marketing practices. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our revenues, profitability, and financial condition. In the current environment, there appears to be a greater risk of investigations of possible violations of these laws and regulations. This increased risk is reflected by recent enforcement activity and pronouncements by the US Office of Inspector General of the Department of Health and Human Services that it intends to continue to vigorously pursue fraud and abuse violations by pharmaceutical companies, including through the potential to impose criminal penalties on pharmaceutical company executives. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.
Healthcare reform and restrictions on reimbursements may limit our financial returns.
Our ability to successfully commercialize our product candidate and future product candidates and technologies, if approved, may depend on the extent to which the government health administration authorities, the health insurance funds in the EU Member States, private health insurers and other third-party payor in the U.S. will reimburse consumers for the cost of these products, which would affect the volume of drug products sold by pharmaceutical and biotechnology companies that incorporate our technology into their products. Third party payor are increasingly challenging both the need for, and the price of, novel therapeutic drugs and uncertainty exists as to the reimbursement status of newly approved therapeutics. The commercial success of our product candidate and future product candidates, if approved, depends in part on the conditions under which products incorporating our technology are reimbursed. Adequate third-party reimbursement may not be available for such drug products to enable us to maintain price levels sufficient to realize an appropriate return on our investments in research and product development, which could materially and adversely affect our business. We cannot predict the effect that changes in the healthcare system, especially cost containment efforts, may have on our business. Any changes or changes due to future legislation governing the pricing and reimbursement of healthcare products in the EU Member States may adversely affect our business.
Regulatory reforms may adversely affect our ability to sell our future products profitably.
From time to time, the U.S. Congress, the Council of the European Union and the European Parliament, as well as the legislators of the EU Member States, adopt changes to the statutes that the FDA, the European Commission and the competent authorities of the EU Member States enforce in ways that could significantly affect our business. In addition, the FDA, the European Commission and the competent authorities of the EU Member States often issue new regulations or guidance, or revise or reinterpret their current regulations and guidance in ways that may significantly affect our business and our product candidate and future product candidates. It is impossible to predict whether legislative changes will be enacted or FDA, EU or EU Member State’s regulations, guidance or interpretations changed, and what the impact of any such changes may be. Any such changes could have a significant impact on the path to approval of our proposed products or of competing products, and on our obligations and those of our pharmaceutical industry partners.
Even if we receive marketing approval for our product candidates in the U.S., we may never seek or receive regulatory approval to market our product candidates outside of the U.S., or receive pricing and reimbursement outside the U.S. at acceptable levels. We cannot be certain that we will be able, or willing, to support the submission of a marketing authorization application, or MAA, to the EMA for FT218, or that we will decide to file an MAA with the EMA, or that any such MAA will ever be approved.
Even if we receive marketing approval for FT218 or any of our other product candidates in the U.S., we may not seek, or may seek but never receive, regulatory approval to market our product candidates outside of the U.S. or in any particular country or region, including in the EU. In order to market any product outside of the U.S., we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries. Approval procedures vary among countries and can involve additional non-clinical studies or clinical trials, additional work related to manufacturing and analytical testing on controls, and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in other countries. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. In particular, in many countries outside of the U.S., products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval may require additional studies and data, and can result in substantial delays in bringing products to market in such countries and such investment may not be justified from a business standpoint given the market opportunity or level of required investment. For example, we anticipate having additional discussions with the EMA to further clarify and evaluate what additional data and information would be required and what other requirements would need to be met for a possible MAA submission for FT218 in the EU, and potential post-marketing clinical development obligations if we file an MAA and our application is approved. We may not find an acceptable regulatory path forward for FT218 in the EU. Even if after additional feedback from the EMA, we decide to generate any required additional data and information and meet any other requirements to be able to file an MAA and the MAA is approved, we may have significant post-approval obligations.
Even if we are able to successfully develop our product candidates and obtain marketing approval in a country, we may not be able to obtain pricing and reimbursement approvals in such country at acceptable levels or at all, and any pricing and reimbursement approval we may obtain may be subject to onerous restrictions such as caps or other hurdles or restrictions on reimbursement. Failure to obtain marketing and pricing approval in countries outside the U.S. without onerous restrictions or limitations related to pricing or any delay or other setback in obtaining such approval, would impair our ability to market our product candidates successfully or at all in such foreign markets. Any such impairment would reduce the size of our potential market or revenue potential, which could have a material adverse impact on our business, results of operations and prospects.
Any setback or delay in obtaining regulatory approval for our product candidates or in our ability to commence marketing of our products, if approved, may have a material adverse effect on our business and prospects.
Risks Related to our Reliance on Third-Parties
We may rely on collaborations with third parties to manufacturecommercialize certain of our product candidates in development and such strategy involves risks that could impair our prospects for realizing profits from such products.
We expect that the commercialization of some of our products in development, which utilize our drug delivery technologies, may require collaboration with third-party partners involving strategic alliances, licenses, product divestitures or other arrangements. We may not be successful in entering into such collaborations on favorable terms, if at all, or our collaboration partners may not adequately perform under such arrangements, and as a result our ability to delivercommercialize these products will be negatively affected and our prospects will be impaired.
We depend on a single provider of certain rawservices related to the development of our product candidate and any interruption of operations of such provider could significantly delay or have a material adverse effect on our business.
Currently, we use a single source provider for the development, supply of clinical materials used inand potentially the supply of commercial batches for our products andlead product candidate, FT218. If the failuresupplies of any such third party to efficiently manufacture suchthese products or materials were interrupted for any reason, including but not limited to, natural disasters, labor or civil unrest, global health concerns or pandemics or acts of war or terrorism, the manufacturing and supply of certain products could be delayed. If the supplies of these products or materials were interrupted for any reason, our manufacturing of our lead product candidate could be delayed. These delays could be extensive and expensive, especially in situations where a substitution was not readily available or required variations of existing regulatory approvals and certifications or additional regulatory approval. For example, an alternative supplier may be required to pass an inspection by the FDA, EMA or the competent authorities of EU Member States for compliance with current cGMP, requirements before supplying us with product or before we may incorporate that supplier’s ingredients into the manufacturing of our product candidate by our contract, development, and manufacturing organizations (“CDMOs”). Failure to obtain adequate supplies in a timely deliver sufficient quantities of raw materials, as applicable,manner could have a material adverse effect on our business, financial condition and results of operations.
We outsource important activities to consultants, advisors and outside contractors.
We outsource many key functions of our business and therefore rely on a substantial number of consultants, advisors and outside contractors. If we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by such third parties is compromised for any reason, our development activities may be extended, delayed or terminated which would have an adverse effect on our development program and our business.
We depend on key personnel to execute our business plan. If we cannot attract and retain key personnel, we may not be able to successfully implement our business plan.
Our success depends in large part upon our ability to attract and retain highly qualified personnel. During our operating history, we have assigned many key responsibilities within our Company to a relatively small number of individuals, each of whom has played key roles in executing various important components of our business. We do not maintain material key person life insurance for any of our key personnel. If we lose the services of Greg Divis, our Chief Executive Officer, or other members of our senior executive team, we may have difficulty executing our business plan in the manner we currently anticipate. Further, because each of our key personnel is involved in numerous roles in various components of our business, the loss of any one or more of such individuals could have an adverse effect on our business.
Clinical development of drugs is costly and time-consuming, and the outcomes are uncertain. A failure to prove that our product candidate and future product candidates are safe and effective in clinical trials could materially and adversely affect our business, financial condition, results of operations and growth prospects.
Clinical trials are expensive and can take many years to complete, and the outcome is uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of potential medicine candidates may not be predictive of the results of later-stage clinical trials. Drug candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical testing. For example, we are currently conducting an open-label extension (“OLE”)/switch study of FT218 to examine the long-term safety and maintenance of efficacy of FT218 in patients with narcolepsy who participated in our REST-ON trial, as well as dosing and preference data for patients switching from twice-nightly sodium oxybate to once-nightly FT218 regardless if they participated in REST-ON or not. If any participants in the OLE/switch study report any serious adverse events that are deemed to be related to FT218 or if FT218 is not observed to have long-term efficacy, our business, financial condition, results of operations and growth prospects could be material and adversely affected.
In addition to issues relating to the results generated in clinical trials, clinical trials can be delayed or halted for a variety of reasons, including:
•failure in obtaining regulatory approval to commence a trial;
•failure in reaching agreement on acceptable terms with prospective contract research organizations (“CROs”) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
•failure in obtaining institutional review board or ethics committee approval at each site;
•failure in recruiting suitable patients to participate in a trial;
•failure in having patients complete a trial or return for post-treatment follow-up;
•failure in clinical sites dropping out of a trial;
•failure in adding new sites; or
•failure in manufacturing sufficient quantities of medicine candidates for use in clinical trials.
We rely and expect to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our future clinical trials and while we have and intend to have agreements governing their committed activities, we will have limited influence over their actual performance.
We rely on third parties to conduct our clinical trials, and if they do not properly and successfully perform their contractual, legal and regulatory duties, we may not be able to obtain regulatory approvals for or commercialize our product candidate and future product candidates.
We rely on CROs and other third parties to assist us in designing, managing, monitoring and otherwise carrying out our clinical trials, including with respect to site selection, contract negotiation and data management. We do not control these third parties and, as a result, they may not treat our clinical studies as a high priority, which could result in delays. We are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol, as well as the FDA’s and non-U.S. regulatory agencies’ requirements, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to ensure that the data and results are credible and accurate and that the trial participants are adequately protected. The FDA and non-U.S. regulatory agencies enforce good clinical practices through periodic inspections of trial sponsors, principal investigators and trial sites. If we, CROs or other third parties assisting us or our study sites fail to comply with applicable good clinical practices, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or its non-U.S. counterparts may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA or non-U.S. regulatory agencies will determine that any of our clinical trials comply with good clinical practices. In addition, our clinical trials must be conducted with product produced under the FDA’s cGMP regulations and similar regulations outside of the U.S. Our failure, or the failure of our product suppliers, to comply with these regulations may require us to repeat or redesign clinical trials, which would delay the regulatory approval process.
If third parties do not successfully carry out their duties under their agreements with us, if the quality or accuracy of the data they obtain is compromised due to failure to adhere to our clinical protocols, including dosing requirements, or regulatory requirements, or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, our clinical trials may not meet regulatory requirements. If our clinical trials do not meet regulatory requirements or if these third parties need to be replaced, our clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidate and future product candidates or succeed in our efforts to create approved line extensions for certain of our existing products or generate additional useful clinical data in support of these products.
If we or our partners, including any CDMOs that we use, fail to comply with these laws and regulations, the FDA, the European Commission, competent authorities of EU Member States, or other regulatory organizations, may take actions that could significantly restrict or prohibit commercial distribution of our product candidate, future product candidates and products that incorporate our technologies. If the FDA, the European Commission or competent authorities of EU Member States determine that we are not in compliance with these laws and regulations, they could, among other things:
•issue warning letters;
•impose fines;
•seize products or request or order recalls;
•issue injunctions to stop future sales of products;
•refuse to permit products to be imported into, or exported out of, the U.S. or the E.U.;
•suspend or limit our production;
•withdraw or vary approval of marketing applications;
•order the competent authorities of EU Member States to withdraw or vary national authorization; and
•initiate criminal prosecutions.
Risks Related to Our Intellectual Property
If we cannot adequately protect our intellectual property and proprietary information, we may be unable to effectively compete.
Our success depends, in part, on our ability to obtain and enforce patents and other intellectual property rights for our product candidate and future product candidates and technology, including our drug delivery technologies, and to preserve our trade secrets and other proprietary information. If we cannot do so, our competitors may exploit our technologies and deprive us of the ability to realize revenues and profits from our product candidate and future product candidates and technologies.
To the extent any of our product candidate and future product candidates may benefit from protections afforded by patents, we face the risk that patent law relating to the scope of claims in the pharmaceutical and biotechnology fields is continually evolving and can be the subject of uncertainty and may change in a way that would limit protection. Our patents may not be exclusive, valid or enforceable. For example, our patents may not protect us against challenges by companies that submit drug marketing applications to the FDA, or the competent authorities of EU Member States or other jurisdictions in which we may attempt to compete, in particular where such applications rely, at least in part, on safety and efficacy data from our product candidate and future product candidates. In addition, competitors may obtain patents that may have an adverse effect on our ability to conduct business, or they may discover ways to circumvent our patents. The scope of any patent protection may not be sufficiently broad to cover our product candidate and future product candidates or to exclude competing products. Any patent applications we have made or may make relating to our potential products or technologies may not result in patents being issued. Even after issuance, our patents may be challenged in the courts or patent offices in the U.S. and elsewhere. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical product candidates, or limit the duration of the patent protection of our product candidate and future product candidates. Further, patent protection once obtained is limited in time, after which competitors may use the covered product or technology without obtaining a license from us. Because of the time required to obtain regulatory marketing approval, the remaining period of effective patent protection for a marketed product is frequently substantially shorter than the full duration of the patent. While a patent term extension can be requested under certain circumstances, the grant of such a request is not guaranteed.
Our partnerships with third parties expose us to risks that they will claim intellectual property rights on our inventions or fail to keep our unpatented products or technology confidential.
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.
We also rely on trademarks, copyrights, trade secrets and know-how to develop, maintain and strengthen our competitive position.
To protect our product candidate, trade secrets and proprietary technologies, we rely, in part, on confidentiality agreements with our employees, suppliers, consultants, advisors and partners. These agreements may not provide adequate protection for our trade secrets and other proprietary information in the event of any unauthorized use or disclosure, or if others lawfully develop the information. If these agreements are breached, we cannot be certain we will have adequate remedies. Further, we cannot guarantee that third parties will not know, discover or independently develop equivalent proprietary information or technologies, or that they will not gain access to our trade secrets or disclose our trade secrets to the public. Therefore, we cannot guarantee we can maintain and protect unpatented proprietary information and trade secrets. Misappropriation or other loss of our intellectual property would adversely affect our competitive position and may cause us to incur substantial litigation or other costs.
Changes in U.S. or ex-U.S. patent laws could diminish the value of patents in general, thereby impairing our ability to protect our product candidate and future product candidates.
Changes in either the patent laws or interpretation thereof in the U.S. or in ex-U.S. jurisdictions could increase uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. For example, the Leahy-Smith America Invents Act of 2011 (“AIA”), changed the previous U.S. “first-to-invent” system to the current system that awards a patent to the “first-inventor-to-file” for an application for a patentable invention. This change alters the pool of available materials that can be used to challenge patents in the U.S. and limits the ability to rely on prior research to lay claim to patent rights. Under the current system, disputes are resolved through new derivation proceedings, and the AIA includes mechanisms to allow challenges to issued patents in reexamination, inter partes review and post grant proceedings. The AIA also includes bases and procedures that may make it easier for competitors to challenge our patents, which could result in
increased competition and have a material adverse effect on our business and results of operations. The AIA may also make it harder to challenge third-party patents and place greater importance on being the first inventor to file a patent application on an invention. The AIA amendments to patent filing and litigation procedures in the U.S. may result in litigation being more complex and expensive and divert the efforts of our technical and management personnel.
In addition, the patent positions of companies in the development and commercialization of pharmaceuticals may be particularly uncertain. Depending on future actions by the U.S. Congress, the U.S. federal courts, and the USPTO, or by similarly legislative, judicial, and regulatory authorities in other jurisdictions, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce our intellectual property in the future.
Third parties may claim that our product candidate or future product candidates infringe their rights, and we may incur significant costs resolving these claims. Additionally, legal proceedings related to such claims could materially delay or otherwise adversely affect commercialization plans related to our product candidate, if approved.
Third parties may claim infringement of their patents and other intellectual property rights by the manufacture, use, import, offer for sale or sale of our drug delivery technologies or our other products. For example, in connection with us seeking regulatory approval for a product candidate, a third party may allege that our product candidate infringes its patents or other intellectual property rights and file suit to delay/prevent regulatory approval and/or commercialization of such product. In response to any claim of infringement, we may choose or be forced to seek licenses, defend infringement actions or challenge the validity or enforceability of those patent rights in court or administrative proceedings. If we cannot obtain required licenses on commercially reasonably terms, or at all, are found liable for infringement or are not able to have such patent rights declared invalid or unenforceable, our business could be materially harmed. We may be subject to claims (and even held liable) for significant monetary damages (including enhanced damages and/or attorneys’ fees), encounter significant delays in bringing products to market or be precluded from the manufacture, use, import, offer for sale or sale of products or methods of drug delivery covered by the patents of others. Even if a license is available, it may not be available on commercially reasonable terms or may be non-exclusive, which could result in our competitors gaining access to the same intellectual property. We may not have identified, or be able to identify in the future, U.S. or non-U.S. patents that pose a risk of potential infringement claims.
In addition to the possibility of intellectual property infringement claims, a third party could submit a citizen’s petition to the FDA requesting relief that, if granted, could materially adversely affect the NDA and/or underlying product candidate. For example, such a third-party petition could, if granted, materially adversely affect the likelihood and/or timing of NDA approval, content of final product labeling, and/or resulting regulatory exclusivity (if any) for such product.
Parties making claims against us may be able to sustain the costs of patent litigation more effectively than we can because they have substantially greater resources. In addition, any claims, with or without merit, that our product candidate, future product candidates or drug delivery technologies infringe proprietary rights of third parties could be time-consuming, result in costly litigation or divert the efforts of our technical and management personnel, any of which could disrupt our relationships with our partners and could significantly harm our financial positions and operating results.
If we or our partners are required to obtain licenses from third parties, our revenues and royalties on any future commercialized products could be reduced.
The development of certain products based on our drug delivery technologies may require the use of raw materials (e.g., proprietary excipient), active ingredients, drugs (e.g., proprietary proteins) or technologies developed by third parties. The extent to which efforts by other researchers have resulted or will result in patents and the extent to which we or our partners are forced to obtain licenses from others, if available, on commercially reasonable terms is currently unknown. If we or our partners must obtain licenses from third parties, fees may be required for such licenses, which could reduce the net revenues and royalties we receive on any future commercialized products that incorporate our drug delivery technologies.
Patent terms may be inadequate to protect our competitive position on our product candidate or future product candidates for an adequate amount of time.
Patents have a limited lifespan. In the U.S., if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidate and future product candidates are obtained, once the patent life has expired, we may be open to competition from competitive products, including generics or biosimilars. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting
such candidates might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the U.S. in several stages over the lifetime of the patents and/or applications. We rely on our outside counsel to coordinate payment of these fees due to patent agencies. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on our product candidate and future product candidates in all countries throughout the world would be prohibitively expensive, and intellectual property rights in some countries outside the U.S. can be less extensive than those in the U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the U.S., or from selling or importing products made using our inventions in and into the U.S. or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the U.S. These products may compete with our product candidate and future product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in non-U.S. jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in non-U.S. jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property we develop or license.
Risks Related to Acceptance, Sales, Marketing and Competition
Our future products may not gain market acceptance.
Our future products and technologies may not gain market acceptance among physicians, patients, healthcare payor and medical communities. The degree of market acceptance of any product or technology will depend on a number of factors, including, but not limited to:
•the scope of regulatory approvals, including limitations or warnings in a product’s regulatory-approved labeling; or other restrictions under a FDA Risk Evaluations and Mitigations Strategies (“REMS”), program;
•in the case of our product candidates that are controlled substances regulated by the U.S. Drug Enforcement Agency (“DEA”), scheduling classification;
•demonstration of the clinical safety and efficacy of the product or technology;
•the absence of evidence of undesirable side effects of the product or technology that delay or extend trials;
•the lack of regulatory delays or other regulatory actions;
•its cost-effectiveness and related access to payor coverage;
•its potential advantage over alternative treatment methods;
•the availability of third-party reimbursement; and
•the marketing and distribution support it receives.
If any of our future products or technologies fail to achieve market acceptance, our ability to generate revenue will be limited, which would have a material adverse effect on our business.
If our competitors develop and market technologies or products that are safer or more effective or safer than ours, or obtain regulatory approval for and market such technologies or products before we do, our commercial opportunity will be diminished or eliminated.
Competition in the pharmaceutical and biotechnology industry is intense and is expected to increase. We compete with academic laboratories, research institutions, universities, joint ventures and other pharmaceutical and biotechnology companies, including companies developing drug delivery technologies or niche brand or generic specialty pharmaceutical products. Some of these competitors may also be our business partners.
Our drug delivery technologies compete with technologies provided by several other companies. In particular, delivery technologies and products, could be developed that, if successful, could compete against our drug delivery technologies or future products.
Many of our competitors have substantially greater financial, technological, manufacturing, marketing, managerial and R&D resources and experience than we do. Furthermore, acquisitions of competing drug delivery companies by large pharmaceutical companies could enhance our competitors’ resources. Accordingly, our competitors may succeed in developing competing technologies and products, obtaining regulatory approval and gaining market share for their products more rapidly than we do.
Our future revenues may be negatively affected by healthcare reforms and increasing pricing pressures.
Future prices for our pharmaceutical products, if approved, will be substantially affected by reimbursement policies of third-party payors such as government healthcare programs, private insurance plans and managed care organizations; by our contracts with the drug wholesalers who will distribute our products; and by competitive market forces generally. In recent years, third-party payors have been exerting downward pressure on prices at which products will be reimbursed, and the drug wholesale industry has been undergoing consolidation which gives greater market power to the remaining, larger drug wholesalers. Further, the trend toward increased availability of generic products has contributed to overall pricing pressures in the pharmaceutical industry. In the United States, the Medicare Modernization Act (“MMA”), contains provisions that call for the promulgation of regulations that expand pharmacists’ and wholesalers’ ability to import cheaper versions of an approved drug and competing products from Canada, where there are government price controls. Further, the MMA provides that these changes to U.S. importation laws will not take effect, unless and until the Secretary of the HHS certifies that the changes will pose no additional risk to the public’s health and safety and will result in a significant reduction in the cost of products to consumers. On September 23, 2020, the Secretary of the HHS made such certification to Congress, and on October 1, 2020, FDA published a final rule that allows for the importation of certain prescription drugs from Canada. Under the final rule, States and Indian Tribes, and in certain future circumstances pharmacists and wholesalers, may submit importation program proposals to the FDA for review and authorization. Since the issuance of the final rule, several industry groups have filed federal lawsuits challenging multiple aspects of the final rule, and authorities in Canada have passed rules designed to safeguard the Canadian drug supply from shortages. On September 25, 2020, CMS stated drugs imported by States under this rule will not be eligible for federal rebates under Section 1927 of the Social Security Act and manufacturers would not report these drugs for “best price” or Average Manufacturer Price purposes. Since these drugs are not considered covered outpatient drugs, CMS further stated it will not publish a National Average Drug Acquisition Cost for these drugs. Separately, the FDA also issued a final guidance document outlining a pathway for manufacturers to obtain an additional National Drug Code (“NDC”), for an FDA-approved drug that was originally intended to be marketed in a non-U.S. country and that was authorized for sale in that country. The market implications of the final rule and guidance are unknown at this time. Proponents of drug reimportation may attempt to pass legislation that would directly allow reimportation under certain circumstances. Legislation or regulations allowing the reimportation of drugs, if enacted, could decrease the price we receive for any products that we may develop and adversely affect our future revenues and prospects for profitability. Similarly, any future changes in laws, regulations, practices or policies, in the drug wholesale industry, or in the prevalence of generic products, may adversely affect our financial condition and results of operations.
If we cannot keep pace with the rapid technological change in our industry, we may lose business, and our productsproduct candidates, if approved, and technologies could become obsolete or noncompetitive.
Our success also depends, in part, on maintaining a competitive position in the development of products and technologies in a rapidly evolving field. Major technological changes can happen quickly in the biotechnology and pharmaceutical industries. If we cannot maintain competitive products and technologies, our competitors may succeed in developing competing technologies
or obtaining regulatory approval for products before us, and the products of our competitors may gain market acceptance more rapidly than our product candidate and future product candidates. Such rapid technological change, or the development by our competitors of technologically improved or different products, could render our product candidate and future product candidates or technologies obsolete or noncompetitive.
If we are unable to establish effective sales, marketing and distribution capabilities for our product candidate, if approved, or enter into agreements with third parties to market, sell and distribute our product candidate, if approved, or if we are unable to achieve market acceptance for such product candidate, our business, results of operations, financial condition and prospects will be materially adversely affected.
We are continuing to build the systems, processes, policies, relationships and materials necessary for launch of FT218 in the U.S. for the treatment of cataplexy or EDS in adults with narcolepsy. If we receive regulatory approval to market or sell FT218, but are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected. We may encounter issues, delays or other challenges in launching or commercializing FT218. For example, our results may be negatively impacted if we have not adequately sized our field teams or if our targeting strategy is inadequate or if we encounter deficiencies or inefficiencies in our infrastructure or processes. We may encounter unexpected limitations in the scope, breadth or amount of reimbursement covering FT218 or other limitations or issues related to the price. Any of these issues could impair our ability to successfully commercialize the product or to generate substantial revenues or profits or to meet our expectations with respect to the amount or timing of revenues or profits. There is no guarantee that we will be successful in our launch or commercialization efforts with respect to FT218, if approved, or with respect to any other product candidate that may be approved in the future.
Even if we receive marketing approval for our product candidate, we may still face significant post-marketing obligations and future development and regulatory difficulties.
Even if we receive marketing approval for our product candidates, regulatory authorities may impose significant and potentially costly post-marketing obligations, including post-marketing studies and additional CMC work. For example, we expect to have post-marketing commitments if FT218 is approved by the FDA. Regulatory authorities may also impose significant restrictions on our products, including restrictions on indicated uses or marketing.
Our products, if approved, will also be subject to ongoing FDA requirements governing the labeling, packaging, storage and promotion of the product and record keeping and submission of safety and other post-market information. The FDA has significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks, safety and efficacy in pediatric populations or alternate doses or dose regimens. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a REMS. For example, FT218 will require such a REMS, if approved. Any REMS required by the FDA may lead to increased costs to assure compliance with additional post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue.
Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with our products, if approved, such as adverse events of unanticipated severity or frequency, or problems with the facility where our products are manufactured or in the manufacturing process, a regulatory agency may impose restrictions on our products, the manufacturer or us, including requiring withdrawal of such products from the market or suspension of manufacturing. If we, our product candidates or approved products, or the manufacturer for our product candidates or products, fail to comply with applicable regulatory requirements, a regulatory agency may, among other things:
•issue warning letters or untitled letters;
•seek an injunction or impose civil or criminal penalties or monetary fines;
•suspend or withdraw marketing approval;
•suspend any ongoing clinical trials;
•refuse to approve pending applications or supplements to applications submitted by us;
•suspend or impose restrictions on operations, including costly new manufacturing requirements; or
•seize or detain products, refuse to permit the import or export of products, or require that we initiate a product recall.
We will need to develop and expand our company to support the commercial launch of our product candidate, if approved, and we may encounter difficulties in managing this development and expansion, which could disrupt our operations.
We expect that we will continue to increase our workforce and the scope of our operations, including as we build our commercial sales capabilities. To manage our anticipated development and expansion, we must continue to implement and
improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Also, our management may need to divert a disproportionate amount of its attention away from its day-to-day activities and devote a substantial amount of time to managing these development activities. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. This may result in weaknesses in our infrastructure; or give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. If our management is unable to effectively manage our expected development and expansion, our expenses may increase more than anticipated, our ability to generate or increase our revenue could be reduced and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize FT218, if approved, and compete effectively will depend, in part, on our ability to effectively manage the future development and expansion of our company.
Risks Related to Our 2020 Net Income and 2019 Restructuring Plan
Our net income and use of cash in operating activities may limit our ability to fully pursue our business strategy.
We reported net income of $7,028 in 2020, which includes a $45,760 gain from the sale of the Hospital Products. We reported cash used in operating activities of $48,734. Cash and marketable securities as of December 31, 2020 totaled $221,402 driven by the February 2020 Private Placement, the May 2020 Public Offering, and proceeds from the June 30, 2020 sale of the Hospital Products. Our business strategy is to primarily focus on the development and potential FDA approval of FT218 for the treatment of cataplexy or excessive daytime sleepiness (“EDS”) in adults with narcolepsy. The successful pursuit of all components of our strategy will require substantial financial resources, and there can be no assurance that our existing cash and marketable securities assets and the cash generated by our operations will be adequate for these purposes. We will likely incur a net loss in 2021 and, if we use existing cash and marketable securities, there is no guarantee that we would be able to generate additional cash through our operations or through financing. Failure to implement any component of our strategy may prevent us from achieving profitability in the future or may otherwise have a material adverse effect on our financial condition and results of operation.
If we need to take further restructuring actions, necessary third-party consents may not be granted.
In February 2019, we announced a restructuring plan intended to achieve future cost savings through, among other actions, a reduction of our overall workforce by approximately 50 percent. Our management may determine we need to take further restructuring actions to achieve additional cost savings, to generate additional capital needed for our business strategy, or for other purposes. Certain restructuring scenarios that management consider could require obtaining the consent of third parties, such as holders of our Exchangeable Senior Notes (the “2023 Notes”). For example, the voluntary bankruptcy filing by Avadel Specialty Pharmaceuticals LLC (“Specialty Pharma”) required the consent of holders of a majority in principal amount of our 2023 Notes in order to avoid a default under the Indenture governing such 2023 Notes. While we were successful in obtaining that consent, there can be no assurance we will be successful in obtaining additional consents in the future from such holders or from other third parties whose consents may be required. Failure to obtain these third-party consents would prevent us from taking additional restructuring actions, which could have a material adverse effect on our cash flow, financial resources and ability to successfully pursue our business strategy.
Risks Related to Our Business and Industry
COVID-19 may materially and adversely affect our business and our financial results.
The COVID-19 pandemic has spread globally. The continued spread of COVID-19 could adversely impact our operations, including our ability to fully enroll and complete our OLE/switch study of FT218, initiate and complete any future clinical trials, manufacture sufficient supply of our lead product candidate or to manufacture FT218 at sufficient scale for commercialization, if approved. We submitted our New Drug Application (“NDA”) for FT218 in December 2020, and although the FDA noted it is continuing to ensure timely reviews of applications for medical products during the COVID-19 pandemic, the FDA may not be able to continue its current pace and review timelines could be extended, which could adversely affect our ability to obtain regulatory approval for and to commercialize FT218, particularly on our current projected timelines, increase our operating expenses and have a material adverse effect on our business and financial results.
In addition, COVID-19 has resulted in significant governmental measures being implemented to control the spread of the virus, including quarantines, travel restrictions, social distancing and business shutdowns. We have taken temporary precautionary measures intended to help minimize the risk of the virus to our employees, including temporarily allowing employees to work remotely. We have suspended non-essential travel worldwide for our employees and are discouraging employee attendance at large gatherings. These measures could negatively affect our business. For instance, temporarily allowing employees to work
remotely may induce absenteeism, disrupt our operations or increase the risk of a cybersecurity incident. COVID-19 has also caused volatility in the global financial markets and threatened a slowdown in the global economy, which may negatively affect our ability to raise additional capital on attractive terms or at all.
Two vaccines for COVID-19 were granted Emergency Use Authorization by the FDA in late 2020, and more are likely to be authorized in the coming months. The resultant demand for vaccines and potential for manufacturing facilities and materials to be commandeered under the Defense Production Act of 1950, or equivalent foreign legislation, may make it more difficult to obtain materials or manufacturing slots for the products needed for our OLE/switch clinical trial, which could lead to delays in this trial.
The extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot adequatelybe predicted with confidence, such as the duration of the pandemic, the severity of COVID-19 or the effectiveness of actions to contain and treat COVID-19, particularly in the geographies where we or our third party suppliers and contract manufacturers, or contract research organizations operate. We cannot presently predict the scope and severity of any potential business shutdowns or disruptions. If we or any of the third parties with whom we engage, however, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively affected, which could have a material adverse impact on our business and our results of operations and financial condition.
We may fail to effectively execute our business strategy.
Our business strategy is to continue to seek FDA approval for FT218. There can be no assurance that we will be successful in this objective; and failure in could negatively impact our business and operating results.
Risks Related to Data Security
Failure to comply with domestic and international privacy and security laws could result in the imposition of significant civil and criminal penalties.
The costs of compliance with privacy and security laws, including protecting electronically stored information from cyber-attacks, and potential liability associated with any compliance failures could adversely affect our business, financial condition and results of operations. We are subject to various domestic and international privacy and security regulations, including but not limited to HIPAA and the General Data Protection Regulation (“GDPR”), (Regulation EU 2016/679). HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many U.S. states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. GDPR requires Avadel to ensure personal data collected by Avadel is gathered legally and under strict conditions and to protect such personal data from misuse and exploitation. If Avadel fails to comply with GDPR, we will face significant fines and penalties that could adversely affect our business, financial condition and results of operations.
Security breaches and other disruptions could compromise confidential information and expose us to liability and cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store on our networks various intellectual property including our proprietary business information and that of former customers, suppliers and business partners. The secure maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information systems and infrastructure may be vulnerable to disruptions such as computer hacking, phishing attacks, ransomware, dissemination of computer viruses, worms and other destructive or disruptive software, attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, investigations by regulatory authorities in the U.S. and EU Member States, disruption to our operations and damage to our reputation, any of which could adversely affect our business.
We could suffer financial loss or the loss of valuable confidential information. Although we develop and maintain systems and controls designed to prevent these events from occurring and we have a process to identify and mitigate threats, the development and maintenance of these systems, controls and processes is costly and requires ongoing monitoring and updating as technologies change and efforts to overcome security measures become increasingly sophisticated. Moreover, despite our
efforts, the possibility of these events occurring cannot be eliminated entirely and there can be no assurance that any measures we take will prevent cyber-attacks or security breaches that could adversely affect our business.
Risks Related to Litigation and Legal Matters
We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may infringe our patents or other intellectual property. If we were to initiate legal proceedings against a third party to enforce a patent covering our product candidate or future product candidates, the defendant could counterclaim that the patent is invalid and/or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, written description or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. There is risk that a court could rule in favor of the defendant with respect to such a counterclaim of patent invalidity and/or unenforceability.
Interference or derivation proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or at all, or if a non-exclusive license is offered and our competitors gain access to the same technology. Our defense of litigation or interference or derivation proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us bring our product candidate and future product candidates to market.
Because of the substantial amount of discovery that can occur in connection with intellectual property-related litigation and/or administrative proceedings, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation/proceeding. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.
We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
We employ or may employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we endeavor to ensure that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying any awarded monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and/or be a distraction to management and other employees.
We and companies to which we have licensed, or will license our future products or drug delivery technologies and subcontractors we engage or may engage for services related to the development and manufacturing of our lead product candidate or future product candidates are subject to extensive regulation by the FDA and other regulatory authorities. Our and their failure to meet strict regulatory requirements could adversely affect our business.
We, and companies to which we will license our future products or drug delivery technologies, as well as companies acting as subcontractors for our product developments, including but not limited to non-clinical, pre-clinical and clinical studies, and manufacturing, are subject to extensive regulation by the FDA, other U.S. authorities and equivalent non-U.S. regulatory authorities, particularly the European Commission and the competent authorities of EU Member States. Those regulatory authorities may conduct periodic audits or inspections of the applicable facilities to monitor compliance with regulatory standards and we remain responsible for the compliance of our subcontractors. If the FDA or another regulatory authority finds failure to comply with applicable regulations, the authority may institute a wide variety of enforcement actions, including:
•warning letters or untitled letters;
•fines and civil penalties;
•delays in clearing or approving, or refusal to clear or approve, products;
•withdrawal, suspension or variation of approval of products; product recall or seizure;
•orders to the competent authorities of EU Member States to withdraw or vary national authorization;
•orders for physician notification or device repair, replacement or refund;
•interruption of production;
•operating restrictions;
•injunctions; and
•criminal prosecution.
Any adverse action by a competent regulatory agency could lead to unanticipated expenditures to address or defend such action and may impair our ability to produce and market applicable products, which could significantly impact our revenues and royalties that we would be eligible to receive from our potential customers.
We may face product liability claims related to clinical trials for our product candidate or future product candidates or their misuse.
The testing, including through clinical trials, manufacturing and marketing, and the use of our product candidate and future product candidates may expose us to potential product liability and other claims. If any such claims against us are successful, we may be required to make significant compensation payments. Any indemnification that we have obtained, or may obtain, from CROs or pharmaceutical and biotechnology companies or hospitals conducting human clinical trials on our behalf may not protect us from product liability claims or from the costs of related litigation. Insurance coverage is expensive and difficult to obtain, and we may be unable to sustainobtain coverage in the future on acceptable terms, if at all. We currently maintain general liability insurance and product liability insurance. We cannot be certain that the coverage limits of our insurance policies or those of our strategic partners will be adequate. If we are unable to obtain sufficient insurance at an acceptable cost, a product liability claim or recall could adversely affect our financial condition.
Similarly, any indemnification we have obtained, or may obtain, from pharmaceutical and biotechnology companies with whom we are developing, or will develop, our future products may not protect us from product liability claims from the consumers of those products or from the costs of related litigation.
If we use hazardous biological and/or chemical materials in a manner that causes injury, we may be liable for significant damages.
Our R&D activities involve the controlled use of potentially harmful biological and/or chemical materials, and are subject to U.S., state, EU, national and local laws and regulations governing the use, storage, handling and disposal of those materials and specified waste products. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials, including fires and/or explosions, storage tank leaks and ruptures and discharges or releases of toxic or hazardous substances. These operating risks can cause personal injury, property damage and environmental contamination, and may result in the shutdown of affected facilities and the imposition of civil or criminal penalties. The occurrence of any of these events may significantly reduce the productivity and profitability of a particular manufacturing facility and adversely affect our operating results.
We currently maintain property, business interruption and casualty insurance with limits that we believe to be commercially reasonable but may be inadequate to cover any actual liability or damages.
Risks Related to Ownership of Our Securities
The price of ADSs representing our ordinary shares has been volatile and may continue to be volatile.
The trading price of American Depositary Shares representing our ordinary shares (“ADSs”) has been, and is likely to continue to be, highly volatile. The market value of an investment in ADSs may fall sharply at any time due to this volatility. During the year ended December 31, 2020, the closing sale price of ADSs as reported on the Nasdaq Global Market ranged from $4.06 to $11.75. During the year ended December 31, 2019, the closing sale price of ADSs as reported on the Nasdaq Global Market ranged from $1.09 to $7.70. The market prices for securities of drug delivery, specialty pharma, biotechnology and pharmaceutical companies historically have been highly volatile. Factors that could adversely affect our share price include, among others:
•fluctuations in our operating results;
•announcements of technological partnerships, innovations or new products by us or our competitors;
•actions with respect to the acquisition of new or complementary businesses;
•governmental regulations;
•developments in patent or other proprietary rights owned by us or others;
•public concern as to the safety of drug delivery technologies developed by us or drugs developed by others using our platform;
•the results of pre-clinical testing and clinical studies or trials by us or our competitors;
•adverse events related to our product candidate or future product candidates;
•lack of efficacy of our product candidate or future product candidates;
•litigation;
•decisions by our pharmaceutical and biotechnology company partners relating to the products that may incorporate our technologies;
•the perception by the market of specialty pharma, biotechnology, and high technology companies generally;
•general market conditions, including the impact of the current financial environment; and
•the dilutive impact of any new equity or convertible debt securities we may issue or have issued.
Our largest shareholders own a significant percentage of the share capital and voting rights of the Company.
As of December 31, 2020, RTW Investments LP. owned approximately 9.3% of Avadel’s outstanding shares (in the form of ADSs), Avoro Capital Advisors LLC owned approximately 7.5% of our outstanding shares (in the form of ADSs) and Vivo Opportunity, LLC and certain of its affiliates owned approximately 6.1% of our outstanding shares (in the form of ADSs). To the extent these shareholders continue to hold a large percentage of our share capital and voting rights, they will remain in a position to exert heightened influence in the election of the directors of the Company and in other corporate actions that require shareholder approval, as well as change of control transactions.
Risks Related to Our Financial Condition
We realized net income in 2020 due to the gain on the sale of the Hospital Products, but we will likely incur a net loss in 2021, and if we are not able to regain profitability in the future, the value of our shares may fall.
We reported net income of $7,028 and a net loss $33,226 for the years ended December 31, 2020 and 2019, respectively. In addition, we will incur substantial expenses to develop our product candidate and we will likely incur a net loss in 2021 as well, the amount of which is not known to us at this time. We cannot predict if we will be able to regain profitability. If we are unable to earn a profit in future periods, the market price of our shares may fall. Our ability to operate profitably depends upon a number of factors, many of which are beyond our direct control. These factors include:
•our ability to develop partnerships and additional commercial applications for our future products;
•our ability to control our costs; and
•general economic conditions.
We may not be successful in our transition to a commercial company.
We do not know when, or if, we will generate any revenue from FT218. There can be no guarantee that the FDA will approve our NDA for FT218 by the target action PDUFA date of October 15, 2021, or if at all, and, if approved, there can be no guarantee that we will be able to launch and successfully commercialize FT218.
We do not expect to generate significant revenue, or any revenue at all, unless or until we obtain marketing approval of, and begin to sell, FT218. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:
•obtain marketing approval for FT218;
•set an acceptable price for FT218;
•obtain commercial quantities of FT218 at acceptable cost levels;
•commercialize FT218 in the United States or in other key territories by entering into partnership or co-promotion arrangements with third parties;
•obtain third-party coverage or adequate reimbursement for FT218;
•achieve market acceptance of FT218 in the medical community and with third-party payers, including placement in accepted clinical guidelines for the conditions for which FT218 is intended to target; and
•lawfully prevent/delay the introduction by third parties of competitive advantage.once-nightly (e.g., generic) products to FT218.
If FT218 is approved by the FDA and becomes available for commercial sale, we expect to incur significant sales and marketing costs to both prepare for and support its commercialization. Even if we receive marketing approval and expend these costs, FT218 may not be commercially successful. We may not generate revenue from FT218 if approved. If we are unable to generate product revenue, we may be unable to continue operations without continued funding.
We may require additional financing, which may not be available on favorable terms or at all, and which may result in dilution of the equity interest of the holders of ADSs.
We may require additional financing to fund the development and possible acquisition of new products and businesses. We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. If we cannot obtain financing when needed, or obtain it on favorable terms, we may be required to curtail our plans to continue to develop drug delivery technologies, develop new products, or acquire additional products and businesses. Other factors that will affect future capital requirements and may require us to seek additional financing include:
•the development and acquisition of new products and drug delivery technologies;
•the progress of our research and product development programs; and
•the timing of, and amounts received from, future product sales, product development fees and licensing revenue and royalties.
If adequate funds are not available, we may be required to significantly reduce or refocus our product development efforts, resulting in loss of sales, increased costs and reduced revenues. Alternatively, to obtain needed funds for acquisitions or operations, we may seek to issue additional ADSs representing our ordinary shares, or issue equity-linked debt, or we may choose to issue preferred shares, in either case through public or private financings. Additional funds may not be available on terms that are favorable to us and, in the case of such equity financings, may result in dilution to the holders of ADSs. See also the discussion elsewhere in these Risk Factors under the caption “Our net income and use of cash in operating activities may limit our ability to fully pursue our business strategy.”
We have broad discretion in the use of our cash and may not use it effectively.
Our management has broad discretion in the use of our cash, and may not apply our cash in ways that ultimately increases the value of any investment in our securities. We currently intend to use our cash to fund marketing activities for any future commercialized products, to fund certain clinical trials for product candidates, to fund R&D activities for potential new product candidates, and for working capital, capital expenditures and general corporate purposes. As in the past we expect to invest our excess cash in available-for-sale marketable securities, including corporate bonds, U.S. government securities, other fixed income securities and equities; and these investments may not yield a favorable return. If we do not invest or apply our cash effectively, our financial position and the price of ADSs may decline.
We currently do not intend to pay dividends and cannot assure the holders of our ADSs that we will make dividend payments in the future.
We have never declared or paid a cash dividend on any of our ordinary shares or ADSs and do not anticipate declaring cash dividends in the foreseeable future. Declaration of dividends will depend upon, among other things, future earnings, if any, the operating and financial condition of our business, our capital requirements, general business conditions and such other factors as our Board of Directors deems relevant.
Our effective tax rate could be highly volatile and could adversely affect our operating results.
we depend on key personnel
Our future effective tax rate may be adversely affected by a number of factors, many of which are outside of our control, including:
•the jurisdictions in which profits are determined to executebe earned and taxed;
•changes in the valuation of our business plandeferred tax assets and liabilities;
•changes in share-based compensation expense;
•changes in domestic or international tax laws or the lossinterpretation of any one or moresuch tax laws;
•changes in available tax credits;
•adjustments to estimated taxes upon finalization of these key personnel may limitvarious tax returns; and
•the resolution of issues arising from tax audits with various tax authorities.
Any significant increase in our future effective tax rates could impact our results of operations for future periods adversely.
Our ability to effectively pursueuse our business plan.net operating loss carryforwards and certain other tax attributes may be limited.
Forward-looking statements
As of December 31, 2020, we had $46,003 of net operating losses in the U.S. Of the $46,003 of net operating losses in the U.S., $10,365 were acquired due to the acquisition of FSC and $35,638 are due to the losses at US Holdings. The portion due to the acquisition of FSC will expire in 2034 through 2035. The U.S. net operating losses acquired as part of the acquisition of FSC are subject to inherent risksan annual limitation under Internal Revenue Code Section 382 and uncertainties, some$1,473 of which cannotthe $10,365 will not be predictedfully utilized before they expire. The remaining $35,638 of net operating losses do not have an expiration date.
Under U.S. federal tax legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (“Tax Act”), U.S. federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such U.S. federal net operating losses is limited. Under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986 (the “Code”) if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage-point cumulative change (by value) in the equity ownership of certain shareholders over a rolling three-year period), the corporation’s ability to use its pre-change net operating losses and other pre-change tax attributes to offset its post-change taxable income or
quantified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.taxes may be limited. We
undertake no obligation to update these forward-looking statementsmay also experience ownership changes as a result of
new information,this offering or future
events or otherwise. You should not place undue reliance on these forward-looking statements.PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Directors
Background
The following table provides summary information about eachissuances of our directors.
| Nominee | | Director
Since | | Principal Occupation or Experience | | Committees |
| | | | | | | |
| Michael S. Anderson | | 2012 | | Chief Executive Officer of Avadel Pharmaceuticals plc | | - |
| | | | | | | |
| Francis J.T. Fildes | | 2008 | | Former senior executive in the pharmaceutical industry | | (1*)(2) |
| | | | | | | |
| Christophe Navarre | | 2014 | | Chief Executive Officer of Moët Hennessy | | (1)(3) |
| | | | | | | |
| Craig R. Stapleton | | 2011 | | Former U.S. Ambassador to France, Senior Advisor to Stone Point Capital | | (1)(2)(3)(4) |
| | | | | | | |
| Peter Thornton | | 2017 | | Chief Financial Officer, Director at Technopath Clinical Diagnostics | | (2*)(3) |
| | | | | | | |
| Benoit Van Assche | | 2014 | | Former senior executive in the chemical, pharmaceutical and healthcare industries | | (1)(2)(3*) |
* Chairman of Committee
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Nominating and Corporate Governance Committee
(4) Appointedstock or as a Non-Executive Chairmanresult of the Boardsubsequent shifts in our stock ownership, some of Directors in 2014
Set forth below is information for each director concerning the individual’s age, principal occupation, employment and directorships during the past five years, positions with the Company, the year in which he first became a director of the Company and his term of office as a director. Also set forth below is a brief discussion of the specific experience, qualifications, attributes or skillsare outside our control. We have completed an analysis to determine that led to the Board’s conclusion that, in light of our business and structure, each director should serve as a director as of the date of this Form 10-K/A.
Michael S. Anderson, age 69, hasno events have been a member of the Board since June 2012. Mr. Anderson has been Chief Executive Officer of Avadel since March 2012. Prior to joining Avadel, Mr. Anderson was Chief Executive Officer of Éclat Pharmaceuticals LLC since its creation in November 2010 until it was acquired by Avadel in March 2012. Before his employment at Éclat, Mr. Anderson was President and CEO of the generic business division of KV Pharmaceutical Company, a company engagedtriggered in the development of proprietary drug delivery systems and formulation technologies, an executive at ETHEX Corporation, a pharmaceutical company which engaged in developing and marketing of multisource drugs, and President and CEO of Ther-Rx Corporation, a leader in women’s healthcare. Mr. Anderson also has worked for Schein Pharmaceuticals, a generic pharmaceuticals company, and started his career at A.H Robins, a pharmaceuticals company. Based on his experience as a seasoned and disciplined executive in the pharmaceutical industry, Mr. Anderson brings to the Board over 47 years of experience.
Dr. Francis J.T. Fildes, age 73, has been a member of Avadel’s Board since February 2008. Dr. Fildes was Managing Director of Fildes Partners Ltd, a management consultancy business to the bio-pharmaceutical and healthcare industries, which he founded in September 2002 and held until November 2014. Prior to this, Dr. Fildes held the position of Senior Vice President: Head of Global Drug Development for AstraZeneca a global pharmaceutical company, from April 1999 until December 2002. Since leaving AstraZeneca, Dr. Fildes has also been a Director of ProStrakan Pharmaceuticals plc and Keryx Inc, both public biopharmaceutical companies and Strakan Ltd, Proskelia SA and Pyramed Pharma, three privately funded bio-pharmaceutical Companies. Dr. Fildes is a Fellow of the Royal Society of Medicine and a Fellow of the Royal Society of Chemistry. Based on his experience as an executive, a director and consultant in the pharmaceutical industry, Dr. Fildes brings to the Board and the Compensation and Audit Committees over 40 years of experience.
Mr. Christophe Navarre, age 59, has been a member of Avadel’s Board since June 2014. Since May 1997, Mr. Navarre has been Chief Executive Officer of Moët Hennessy, the Wines and Spirits division of LVMH Moët Hennessy Louis Vuitton SA, a worldwide luxury brands company. Mr. Navarre is also a board member of the Comité Colbert, a luxury brand trade association, a member of the Heineken Advisory Board, and President of the Fédération des Exportateurs de Vins et Spiritueux de France, the French wine export association. He is an Officer of the French Legion of Honor, a Commandeur de l’Ordre du Mérite Agricole and an Officier de l’Ordre de la Couronne in Belgium. Based on his experiences as a successful business leader and board member of public and private companies, Mr. Navarre brings to the Board and the Compensation and Nominating and Corporate Governance Committees over 34 years of experience.
The Honorable Craig R. Stapleton, age 73, has been a member of the Board of Directors since June 2011, and became Chairman of the Board in July 2014. He currently serves as a Senior Advisor to Stone Point Capital. He served as President of Marsh and McLennan Real Estate Advisors of New York from 1982 until 2001. From 1989 to 1998 Stapleton co-owned the Texas Rangers baseball team with George W. Bush. In July 2009, he became a co-owner of the St. Louis Cardinals. He has served on the Board of Directors for companies including Allegheny Properties, IDS Realty Inc., Investors Savings and Loan, Metro PCS, and TB Woods, Abercrombie and Fitch, and Carlile Bank. Mr. Stapleton served as the United States Ambassador to France from 2005-2009 and as Ambassador to the Czech Republic from 2001 to 2004. He has also served on the Board of the Peace Corps. He is the Chairman of the Vaclav Havel Foundation, Chairman of the American Friends of Compiegne, and a Trustee of the George W. Bush Library Foundation. He has served on the Visiting Committee for Harvard College Athletics and the Committee on University Resources and Athletics. Ambassador Stapleton brings over 40 years of broad perspective and experience.
Mr. Peter Thornton, age 53, is the Chief Financial Officer of Technopath Clinical Diagnostics, an Irish company that provides quality control materials and software solutions to clinical laboratories, a position he has held since January 2014. Prior to joining Technopath Clinical Diagnostics, from September 2011 to December 2013 Mr. Thornton was Senior Vice President - Business Integration for Alkermes plc, a global biopharmaceuticals company headquartered in Dublin, Ireland; from July 2007 to September 2011 he was Senior Vice President - Corporate and Business Development for Elan Drug Technologies, an Elan Corporation plc division engaged in developing and manufacturing drug delivery technology based pharmaceutical products; from September 2006 to July 2007 he was President and Chief Operating Officer of Circ Pharma Limited, a specialty pharmaceutical company; and from June 2004 to September 2006 he was Chief Financial Officer of Agenus Inc., a NASDAQ-listed biotechnology company. Mr. Thornton has previously served as a non-executive director of both public and private companies and currently holds two non-executive directorships in private companies. Mr. Thornton worked for the international public accounting firm of KPMG for seven years in Ireland and France and is a fellow of Chartered Accountants Ireland. He holds a Bachelor of Commerce degree from University College Cork, Ireland. Based on his experience in the pharmaceutical industry and as a chief financial officer, Mr. Thornton brings to the Board, Audit Committee and the Nominating and Corporate Governance Committee over 25 years of experience.
Mr. Benoit (Ben) Van Assche, age 72, has been a member of the Board since June 2014. Mr. Van Assche is a member of the international jury that assists the government of the Walloon Region in its policy towards clusters of competitiveness, in particular the BioWin health cluster, a position he has held since December 2006. From 1985 to 2005 he served as member of the Executive Committee of UCB Pharma, with responsibility for the worldwide pharmaceutical and chemical business. Prior to this he worked in international roles for Alcon and Baxter. He has been Director and Chairman of Bone Therapeutics, a biotech company specialized in cell therapy for bone diseases, from April 2008 until June 2013 and Executive Chairman and Director of Armonea, a chain of nursing homes and senior service residences from May 2008 until December 2012. From 2004 to 2006 Mr. Van Assche served as a board member and Chairman of Essenscia, the federation of chemical activities and life sciences in Belgium. Based on his experience as a director and senior executive in the chemical, pharmaceutical and healthcare industries, Mr. Van Assche brings to the Board and the Compensation, Audit, and Nominating and Corporate Governance Committees over 40 years of experience.
Board Independence
All of our directors, with the exception of Mr. Anderson, have beenpast. If any ownership changes are determined to be independent undertriggered in the rulesfuture, our ability to use our current net operating losses to offset post-change taxable income or taxes would be subject to limitation. We will be unable to use our net operating losses if we do not attain profitability sufficient to offset our available net operating losses prior to their expiration.
As of December 31, 2020, we had approximately $118,070 of net operating losses in Ireland that do not have an expiration date. While these losses do not have an expiration date, substantial changes in the activities performed in these jurisdictions could have an impact on our ability to utilize these tax attributes in the future.
Risks Related to the 2023 Notes
Servicing our 2023 Notes may require a significant amount of cash, and we may not have sufficient cash or the ability to raise the funds necessary to settle exchanges of the Nasdaq Global Market. As2023 Notes in cash, repay the Notes at maturity, or repurchase the 2023 Notes as required following a fundamental change.
In February 2018, we issued $143,750 aggregate principal amount of our
Chief Executive Officer, Mr. Anderson is not independent.Audit Committee
The Board has an Audit Committee composed of Mr. Thornton (Chairman), Francis J.T. Fildes, Benoit Van Assche, and Ambassador Craig Stapleton. The Board has determined that allSenior Exchangeable Notes. Prior to February 2023, the 2023 Notes are convertible at the option of the membersholders only under certain conditions or upon the occurrence of certain events. If holders of the Audit Committee are independent within the meaning of applicable SEC regulations and the listing standards of Nasdaq and that Mr. Thornton, as the chair2023 Notes elect to exchange their 2023 Notes, unless we elect to deliver solely our ADSs to settle such exchanges, we will be required to make cash payments in respect of the Committee, is qualified as an audit committee financial expert within the meaning of SEC regulations. The Board has also determined that Mr. Thornton has accounting and related financial management expertise within the meaning2023 Notes being exchanged. Holders of the listing standards2023 Notes also have the right to require us to repurchase all or a portion of Nasdaq and that each member is financially literate withintheir 2023 Notes upon the meaningoccurrence of such listing standards. The Board has also determined that Mr. Thornton (i) is independent withina fundamental change (as defined in the meaning of applicable SEC regulations andindenture governing the listing standards of Nasdaq, (ii) is qualified as an audit committee financial expert within the meaning of SEC regulations, and (iii) has accounting and related financial management expertise within the meaning2023 Notes) at a repurchase price equal to 100% of the listing standardsprincipal amount of Nasdaqthe 2023 Notes to be repurchased, plus accrued and that heunpaid interest. If the 2023 Notes have not previously been exchanged or repurchased, we will be required to repay the 2023 Notes in cash at maturity. Our ability to make cash payments in connection with exchanges of the 2023 Notes, repurchase the 2023 Notes in the event of a fundamental change, or to repay or refinance the 2023 Notes at maturity will depend on market conditions and our future performance, which is financially literate withinsubject to economic, financial, competitive, and other factors many of which are beyond our control. We had limited net income in 2020 and we will likely incur a net loss in 2021. As a result, we may not have enough available cash or be able to obtain financing at the meaningtime we are required to repurchase or repay the 2023 Notes or in the event we elect to pay cash with respect to 2023 Notes being exchanged.
The conditional exchange feature of
such listing standards.the 2023 Notes, if triggered, may adversely affect our financial condition and operating results. CodeIn the event the conditional exchange feature of Business Conduct and Ethics, and Financial Integrity Policy
We have adoptedthe 2023 Notes is triggered, holders of 2023 Notes will be entitled to exchange the 2023 Notes at any time during specified periods at their option. If one or more holders elect to exchange their 2023 Notes, unless we elect to satisfy our exchange obligation by causing to be delivered solely ADSs (other than paying cash in lieu of any fractional ADSs), we would be required to settle a written Code of Business Conduct and Ethics (the “Code”) that applies toportion or all of our employees, as wellexchange obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to exchange their 2023 Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2023 Notes as a Financial Integrity Policy (the “Financial Integrity Policy”) that applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Senior Tax Director and Controller (or persons performing similar functions). These documents covercurrent rather than long-term liability, which would result in a broad range of professional conduct, including employment policies, conflicts of interest, intellectual property and the protection of confidential information, as well as adherence to all laws and regulations applicable to the conductmaterial reduction of our business. A copynet working capital.
The accounting method for convertible and exchangeable debt securities that may be settled in cash, such as the 2023 Notes, could have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separately account for the liability and equity components of the
Code andconvertible or exchangeable debt instruments (such as the
Financial Integrity Policy is available2023 Notes) that may be settled entirely or partially in cash upon conversion or exchange in a manner that reflects the issuer’s economic interest cost. However, entities must first consider the guidance in ASC 815-15, Embedded Derivatives (“ASC 815-15”), to determine if an 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. Should this exception apply, the effect of ASC 470-20 on the
Corporate Governance section of our website, whichaccounting for the 2023 Notes is
located at www.Avadel.com,under “About-Corporate Responsibility”. If we make any substantive amendments to, or grant any waivers from,that the
Code or Financial Integrity Policy for any officer or director, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K by disclosing the nature of such amendment or waiver on our website or in a current report on Form 8-K.Executive Officers
Identification of Executive Officers
Our executive officers serve at the discretion of the Board, and serve until they resign, are removed or are otherwise disqualified to serve, or until their successors are elected and qualified. Our executive officers presently include:
Michael S. Anderson – Chief Executive Officer. For information regarding Mr. Anderson, see “Nominees for Election as Directors” above.
Gregory J. Divis – Executive Vice President and Chief Operating Officer. Gregory J. Divis, age 51, was appointed Executive Vice President and Chief Commercial Officer in January 2017, and was promoted to Chief Operating Officer in March 2018. Mr. Divis brings to this role more than 25 years of experience in the pharmaceutical industry, and is responsible for managing commercial strategy and execution across all of the Company's portfolio products. Prior to joining Avadel, Mr. Divis served as an Operating Partner for Linden Capital, a middle-market healthcare-focused private equity firm from June 2015 to December 2016. Prior to Linden Capital, from June 2010 to November 2014 Mr. Divis was the President and Chief Executive Officer of K-V Pharmaceutical Company ("K-V"), a company engaged in the development of proprietary drug delivery systems and formulation technologies. On August 4, 2012, K-V and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code and, on September 16, 2013, successfully emerged pursuant to a plan of reorganization. Following bankruptcy, K-V changed its name to Lumara Health, Inc., strengthened its business and engaged in a series of transactions culminating in its acquisition by AMAG Pharmaceuticals in November 2014. Mr. Divis has also held such notable roles as President, Ther-Rx Corporation, Vice-President, Business Development & Lifecycle Management at Sanofi-Aventis and Vice-President and General Manager, UK and Ireland, for Schering-Plough Corporation. Mr. Divis is a graduate of the University of Iowa.
Sandra L. Hatten – Senior Vice President of Quality and Regulatory Affairs.Sandra L. Hatten, age 61, was appointed Senior Vice President of Quality and Regulatory Affairs of Avadel in June 2015. Prior to joining Avadel, Ms. Hatten was employed from October 2010 to June 2015 by Mallinckrodt, plc, a global specialty biopharmaceutical company, where she served as Senior Vice President of Quality and Regulatory Compliance from February 2014 until June 2015. From October 2010 until September 2012, Ms. Hatten was employed by Mallinckrodt, as Director and Sr. Director of Quality. From September 2012 until February 2014, Ms. Hatten held the position of Vice President, Quality and Regulatory Compliance with Mallinckrodt. Ms. Hatten has more than 30 years of experience in the pharmaceutical industry, during which she has held leadership roles in quality and operations for branded as well as generic drug manufacturers, where she has been responsible for establishing and implementing broad-based quality programs across multiple sites. Ms. Hatten holds bachelor’s and master’s degrees from Marshall University in Huntington, West Virginia.
Phillandas T. Thompson – Senior Vice President, General Counsel and Corporate Secretary. Phillandas T. (Phil) Thompson, age 44, has been Senior Vice President and General Counsel of Avadel since November 2013. Before joining Avadel, Mr. Thompson was employed from January 2012 until November 2013 at West-Ward Pharmaceutical Corp. as Vice President, Legal Affairs, from January 2010 until November 2011 at Paddock Laboratories, Inc. as Vice President, General Counsel, from April 2006 until January 2010 at KV Pharmaceutical Co as Vice President, Strategic Business Transactions and Assistant General Counsel, and from October 2002 until March 2006 at Barr Laboratories, Inc. as Associate General Counsel. Prior to his employment with Barr Laboratories, Mr. Thompson was a corporate associate at White & Case, LLP. Mr. Thompson is a member of the New York Bar, the Missouri Bar, and the Minnesota Bar and has several other professional affiliations. Mr. Thompson earned a B.A. from Washington University in St. Louis and is also a graduate of the University of Michigan Law School (Juris Doctor) and the University of Michigan Business School (Master of Business Administration).
Michael F. Kanan – Senior Vice President and Chief Financial Officer. Michael F. Kanan, age 55, was appointed Senior Vice President and Chief Financial Officer of Avadel in November 2015. Prior to joining Avadel, Mr. Kanan was employed by Sigma-Aldrich Corp. from April 2009 until November 2015, where he served as Vice President Finance, Corporate Controller and Chief Accounting Officer from April 2009 until November 2015. Sigma-Aldrich was a life science and high technology company which was acquired by Merck KGaA, a health care, life science and performance materials company based in Germany, in November 2015. Mr. Kanan began his career at the international accounting firm Deloitte & Touche, and also held accounting and finance leadership positions with Hutchinson Group, a subsidiary of Total S.A., and Meritor, a global supplier of drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets. Mr. Kanan holds a Bachelor of Arts degree in Accounting from Michigan State University and became a CPA in 1987.
David Monteith – Vice President of Research and Development. Dr. David Monteith, age 54, was appointed Vice President of Research and Development in October 2014. Prior to joining Avadel, Dr. Monteith was employed from 2009 to 2014 at Merck & Co., Inc., a global healthcare solutions company, where he held the position of Associate Vice President of Pharmaceutical Development for Emerging Markets. From 2000 to 2009, Dr. Monteith was employed by Schering-Plough Corporation, a pharmaceutical company that merged with Merck & Co., Inc. in November 2009 in various positions from Associate Director, Pharmaceutical Development to Senior Director, Product Value Enhancement. With over 25 years of experience in the pharmaceutical industry, Dr. Monteith has held senior leadership roles in the areas of drug delivery and pharmaceutical drug product development. Dr. Monteith is a graduate in Pharmacy from the University of Strathclyde, Glasgow where he also obtained his Ph.D. from the Department of Pharmaceutics. He later also received an MBA from the University of Warwick, UK.
David P. Gusky – Corporate Controller and Chief Accounting Officer. David P. Gusky, age 41, was appointed Corporate Controller and Chief Accounting Officer of Avadel in December 2015. Prior to joining Avadel, Mr. Gusky was employed by Sigma-Aldrich Corp. from May 2006 until November 2015, where he served as Director of Financial Planning & Analysis from November 2013 until November 2015. Sigma-Aldrich was a life science and high technology company which was acquired by Merck KGaA, a health care, life science and performance materials company based in Germany, in November 2015. Mr. Gusky began his career at the international accounting firm Deloitte & Touche, and also held finance management positions with Solutia, Inc., a global manufacturer of performance materials and specialty chemicals. Mr. Gusky holds Bachelors of Science degrees in Accountancy and Finance and a Masters of Accountancy from the of Missouri-Columbia.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons beneficially owning more than ten percent of a registered class of the Company’s equity securities to file reports of beneficial ownership and changes in such ownership on Forms 3, 4 and 5 with the SEC and the NYSE. These persons are alsocomponent would be required to furnish the Company with copies of all Forms 3, 4 and 5 that they file. Based solely on the Company’s review of the copies of such Forms it has received, the Company believes that all of its executive officers, directors and greater than ten percent beneficial owners complied with all filing requirements applicable to them during the calendar year ended December 31, 2017, other than (i) the filing of a Form 4 for Ms. Sandra Hatten reporting two transactions, which was inadvertently filed late on September 15, 2017 on behalf of Ms. Hatten, and (ii) the filing of a Form 4 for Mr. Dave Gusky reporting one transaction, which was inadvertently filed late on March 5, 2018 on behalf of Mr. Gusky.
| Item 11. | Executive Compensation. |
Director Compensation
Non-Employee Director Compensation
We compensate our non-executive directors with a basic cash fee plus supplementary fees to chairpersons and for meeting attendance. The amount of each component of such director cash compensation may change from year to year, and is generally established by the Board in conjunction with our annual general meeting of shareholders for the period until the next annual general meeting. The cash fees we pay under these policies must stay within an aggregate maximum limit on cash fees paid to our directors during any calendar year which is approved by our shareholders at each annual general meeting. In June 2017, the director cash fees were established as follows for the period until our annual general shareholders meeting in 2018: €32,750 per each non-executive director; supplementary fees of €40,000 to Ambassador Craig Stapleton as the Chairman of the Board, €20,000 to Mr. Peter Thornton as the Chair of the Audit Committee, €10,000 to Dr. Francis Fildes as the Chair of the Compensation Committee, and €10,000 to Mr. Ben Van Assche as the Chair of the Nomination and Corporate Governance Committee; and meeting attendance fees of €2,000 per meeting attended in person or telephonically up to a limit of €16,000. In addition, at our general meeting of shareholders in 2017, our shareholders approved the issuance of stock options to purchase 175,000 ordinary shares to our directors, which were distributed as described in footnote (2) to the “Director Compensation” table below. In addition, at our general meeting of shareholders in 2017, our shareholders approved the issuance of stock options to purchase 175,000 ordinary shares to our directors, which were distributed as described in footnote (2) to the “Director Compensation” table below.
The following table presents information relating to total compensation of our directors for the year ended December 31, 2017. The following table does not present information for Mr. Anderson, our Chief Executive Officer and President, who did not receive additional compensation as a director in 2017 and whose compensation isbe included in the Summary Compensation Table elsewhere in this Form 10-K/A.
| Name(1) | | Fees Earned
or Paid in
Cash($)(1) | | | Stock
Awards
($)(2) | | | Total
Compensation
($) | |
| | | | | | | | | | |
| Ambassador Craig R. Stapleton | | | 102,548 | | | | 210,000 | | | | 312,548 | |
| Peter Thornton | | | 70,908 | | | | 210,000 | | | | 280,908 | |
| Francis J.T. Fildes | | | 68,648 | | | | 210,000 | | | | 278,648 | |
| Christophe Navarre | | | 57,348 | | | | 210,000 | | | | 267,348 | |
| Benoit Van Assche | | | 68,648 | | | | 210,000 | | | | 278,648 | |
| (1) | Fees earned or paid in cash were translated to U.S. Dollars at the rate of 1.13 U.S. Dollars per Euro. |
| (2) | On June 28, 2017, each of the non-employee directors were awarded stock options to purchase 35,000 ordinary shares at an exercise price of $10.51 under the Company’s Omnibus Incentive Compensation Plan. The compensation represents the grant date fair value computed by us for financial reporting purposes, computed in accordance with FASB ASC Topic 718. For a full description of the assumptions we use in computing these amounts, see Note 16 to our consolidated financial statements for the year ended December 31, 2017 which are included in our annual report on Form 10-K filed with the SEC on March 16, 2018. All of the foregoing stock options will vest in a one-year period following the award date. |
Executive Compensation
Compensation Discussionadditional paid-in capital section of shareholders’ equity on Avadel’s consolidated balance sheet, and Analysis
In this Compensation Discussion and Analysis, we give an overview and analysis of our compensation philosophy, our compensation program, the decisions we made in 2017 under those programs with respect to our named executive officers. Included in this discussion is specific information about the compensation earned or paid in 2016 and 2017 to the following named executive officers: (i) the individual who served as Chief Executive Officer of the Company during 2017, (ii) the individual who served as Chief Financial Officer during 2017, and (iii) the next three most highly compensated executive officers of the Company who received total compensation of $100,000 or more during the fiscal year ended December 31, 2017 (the “Named Executive Officers”). Our Named Executive Officers for 2017 are:
Name | | Position |
Michael S. Anderson | | Chief Executive Officer |
Gregory J. Divis | | Executive Vice President, Chief Operating Officer |
Michael F. Kanan | | Senior Vice President and Chief Financial Officer |
Phillandas T. Thompson | | Senior Vice President, General Counsel and Corporate Secretary |
David Monteith | | Vice President, Research and Development |
Compensation Philosophy and Objectives
The Compensation Committee’s executive compensation programs are designed to: (i) attract, retain and motivate executives with significant industry knowledge and the experience and leadership capability necessary for us to achieve success; and (ii) align incentives for our named executive officers with our corporate strategies and business objectives and goals; and (iii) achieve key strategic performance measures aligned with the long-term interests of our shareholders.
Compensation Components
Our executive compensation program has three primary components: base salary, annual cash incentive awards and equity awards.
| • | Base Salary. We fix the base salary of each of our executive officers at a level we believe enables us to hire and retain individuals in a competitive environment and rewards satisfactory individual performance and a satisfactory level of contribution to our overall business goals. We take into account the base salaries paid by similarly-situated companies in our peer group and, to the extent practicable, we set base salary levels for similarly-situated executives within the Company at comparable levels to avoid divisiveness and encourage teamwork, collaboration, and a cooperative working environment. |
| • | Cash Incentive Awards. We provide annual cash incentive awards that are based upon the achievement of corporate and individual objectives established by the Compensation Committee and the Board of Directors. These cash incentive awards are designed to focus our executive officers on achieving key clinical, regulatory, commercial, operational, strategic and financial objectives. |
| • | Equity Awards. We use stock options and restricted shares to reward long-term performance. These equity awards are intended to provide significant incentive value for each executive officer if the Company performance is outstanding and the Company achieves its long-term goals to align executive compensation with long-term shareholder interests. |
In addition to the primary components of compensation described above, we provide our Named Executive Officers with employee benefits that are generally available to our salaried employees. These benefits include health and medical benefits, flexible spending plans, matching 401(k) contributions and group life insurance.
We have also entered into agreements with our Named Executive Officers under which they are provided certain benefits in the event their employment with the Company is terminated without cause or by the Named Executive Officer for good reason, following a change in control of the Company.
Compensation Policies and Process
The Compensation Committee has oversight of our compensation philosophy and programs and annually reviews and recommends all compensation decisions relating to our Chief Executive Officer, our Named Executive Officers and all other executive officers of the Company. The Chief Executive Officer provides specific information to the committee relative to the performance of the other members of the executive management team. However, the Chief Executive Officer is always excused from the Compensation Committee meetings when his compensation or employment is discussed. The Compensation Committee considers any recommendations by the Chief Executive Officer; however, the committee recommends final compensation for all executives. All compensation decisions are assessed within the framework of the Company’s financial position and general economic conditions. Our Board typically reviews and approves the compensation decisions made by the Compensation Committee.
Our Compensation Committee has engaged the Radford Consulting (“Radford”), an Aon Hewitt company specializing in executive compensation, as its independent compensation consultant. In connection with the Compensation Committee’s executive compensation decisions for 2017, Radford reviewed and advised on principal aspects of our executive compensation program and performed the following services:
conducted a competitive assessment of the Company’s then current executive compensation arrangements, including analyzing peer group proxy statements, compensation survey data, and other publicly available data;
provided recommendations on the composition of the Company’s peer group; and
reviewed and advised on equity compensation and on industry best practices.
The Compensation Committee has determined that the work of Radford and the individual compensation advisors employed by Radford does not create any conflict of interest. In making that determination, the Compensation Committee took into consideration the following factors: (i) the provision of other services to the Company by the consultant; (ii) the amount of fees the Company paid the consultant as a percentage of the consultant’s total revenue; (iii) the consultant’s policies and procedures that are designed to prevent conflicts of interest; (iv) any business or personal relationship of the consultant or the individual compensation advisors employed by the consultant with any Company executive officer; (v) any business or personal relationship of the individual compensation advisors with any member of the Compensation Committee; and (vi) any Company stock owned by the consultant or the individual compensation advisors employed by the consultant.
Peer Group
In an effort to provide competitive total compensation to our executive officers, the Compensation Committee approved a group of comparable companies as our peer group as recommended by Radford. The peer group was selected on the basis of similarity to the Company on the following criteria: business comparability, stage of product development and commercialization, number of employees, market capitalization and revenue. The following companies were identified as our “peer group” for 2017:
2017 Peer Group |
| | |
Acorda Therapeutics | | INSYS Therapeutics |
AMAG Pharmaceuticals, Inc. | | Momenta Pharmaceuticals, Inc. |
Amarin Corporation | | Pacira Pharmaceuticals |
ANI Pharmaceuticals | | PTC Therapeutics, Inc. |
Arena Pharmaceuticals, Inc. | | Recro Pharma |
BioCryst Pharmaceuticals, Inc. | | Retrophin, Inc. |
BioDelivery Sciences | | Spectrum Pharmaceuticals, Inc. |
DepoMed Inc. | | Sucampo Pharmaceuticals |
Eagle Pharmaceuticals, Inc. | | Supernus Pharmaceuticals, Inc. |
ImmunoGen, Inc. | | Vanda Pharmaceuticals, Inc. |
Base Salary
The Company provides base salaries to attract and retain executives with the proper experiences and skill sets required to assist us in achieving our specific business objectives, as well as our future growth and success. Base salaries provide a guaranteed base level of compensation that reflects a belief that base salary for senior executive officers should be targeted at market-competitive levels. Base salaries for a particular fiscal year are generally established at the end of the prior year. In establishing the base salaries for 2017, the Compensation Committee considered each Named Executive Officer’s role and level of responsibility at the Company, recent individual performance, perceived impact on Company results and overall Company performance. Based on the peer group and other market data presented by Radford, the Compensation Committee noted that the base salaries of our Named Executive Officers are currently positioned at the market 25th percentile in the aggregate. However, given our transition from a non-commercial to a commercial company, the Compensation Committee desires to implement a revised compensation program in the future designed to gradually migrate our Named Executive Officers base salaries to the 50th percentile of the base salaries paid to similarly situated officers at our peer group companies. The base salaries of our Named Executive Officers during 2016 and 2017 were as follows: Michael S. Anderson – $565,500 in 2016 and $581,946 in 2017, an increase of 3.0%; Gregory J. Divis (who joined the Company in January 2017) – $375,000 in 2017; Michael F. Kanan – $325,000 in 2016 and $357,500 in 2017, an increase of 10.0%; Phillandas T. Thompson – $297,052 in 2016 and $326,757 in 2017, an increase of 10.0%; and David Monteith – $283,250 in 2016 and $311,575 in 2017, an increase of 10.0%.
Annual Cash Incentive
The goal of the annual cash incentive program in 2017 was to align a meaningful portion of the total compensation potential for the Named Executive Officers to the achievement of specified quantitative and qualitative Company performance targets, as well as individual performance targets. The achievement of these targets advances the Company’s specific business objectives and result in long-term shareholder value. The target levels of the annual cash incentive awards were established as part of the Named Executive Officer’s individual employment agreements. Each of these employment agreements provide that the Named Executive Officer will receive an annual cash incentive award determined at the discretion of the Compensation Committee and the Board based on the Company’s performance against its objectives and individualized objective and subjective criteria, with a target award amount equal to a percentage of the Named Executive Officer’s base salary. The award criteria include specific objectives, relating to the achievement of clinical, regulatory, commercial, business and/or financial milestones.
Our approved 2017 corporate goals consisted of:
generate target $175 million in revenues and $38 million of adjusted operating income, and $18 million of adjusted operating cash flow;
advance the sodium oxybate clinical program, focusing on patient enrollment numbers and the scale up and manufacture of registration stability batches;
complete acquisition or licensing opportunities to increase sales on an annualized basis equal to $50 million;
advance the Company’s internal development pipeline; and
achieve profitable sales level of the pediatric products.
The Compensation Committee determined that the Company’s corporate performance score was 84.5% for 2017 based solely on the Compensation Committee’s assessment of the Company’s level of achievement against the approved 2017 corporate performance goals set forth above.
Chief Executive Officer. The Compensation Committee awarded an annual cash incentive with respect to 2017 for our Chief Executive Officer in the amount of $279,334. Such amount was determined by the Committee in December 2017 based on an assessment of the factors listed above and other factors including:
the Company’s achievement with respect to pre-established Company financial and strategic objectives, which included: (i) achievement of a revenue target, (ii) achievement of meaningful business development in completing a company acquisition, (iii) successful completion of action plan to reincorporate to Ireland, and (iv) achievement of the Company’s readiness to implement its new identity; and
achievement of individual performance targets that were pre-established, which included recruitment of key members of our management team, as well as providing overall leadership and vision for our management team to execute upon.
Other Named Executive Officers. The process for determining the annual cash incentive for our other Named Executive Officers, is generally similar to what is described above with respect to our Chief Executive Officer. For 2017, the Compensation Committee took into account the Company’s performance with respect to the financial and strategic performance goals discussed above. The Compensation Committee assessed the individual performance of the other Named Executive Officers and also considered the recommendations of our Chief Executive Officer. The other Named Executive Officers reported directly to our Chief Executive Officer and so, the Compensation Committee believes, the Chief Executive Officer was in a position to provide a meaningful assessment of their capabilities and contributions to the Company.
The Compensation Committee determined 2017 annual cash incentives for the other Named Executive Officers in the following amounts: Gregory J. Divis – $158,438; Michael F. Kanan – $120,835; Phillandas T. Thompson – $110,444; and David Monteith – $99,081.
Equity Compensation
The Compensation Committee believes that equity compensation awards help to align the interests of our executive officers with those of shareholders because the value of the equity awardscomponent would be treated as original issue discount for purposes of accounting for the debt component of the 2023 Notes. As a result, Avadel would be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the 2023 Notes to their face amount over the term of the 2023 Notes. Avadel would report lower net income in its financial results because ASC 470-20 would require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect Avadel’s reported or future financial results, the trading price of the ADSs and the trading price of the 2023 Notes.
In addition, under certain circumstances, convertible or exchangeable debt instruments (such as the 2023 Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the ADSs deliverable upon exchange of the 2023 Notes are not included in the calculation of diluted earnings per share except to the recipient increasesextent that the exchange value of the 2023 Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of ADSs that would be necessary to settle such excess, if we elected to settle such excess in ADSs, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If Avadel is unable to use the treasury stock method in
accounting for the ADSs deliverable upon exchange of the 2023 Notes, then Avadel’s diluted earnings per share would be adversely affected.
Exchanges of the 2023 Notes will dilute the ownership interest of Avadel’s existing shareholders and holders of the ADSs, including holders who had previously exchanged their 2023 Notes and received ADSs upon exchange, to the extent our exchange obligation includes ADSs.
The exchange of some or all of the 2023 Notes will dilute the ownership interests of Avadel’s existing shareholders and holders of the ADSs to the extent our exchange obligation includes ADSs. Any sales in the public market of the ADSs issuable upon such exchange of the 2023 Notes could adversely affect prevailing market prices of the ADSs and, in turn, the price of the 2023 Notes. In addition, the existence of the 2023 Notes may encourage short selling by market participants because the exchange of the 2023 Notes could depress the price of the ADSs.
The fundamental change repurchase feature of the 2023 Notes may delay or prevent an otherwise beneficial takeover attempt of Avadel.
The indenture governing the 2023 Notes will require us to repurchase the 2023 Notes for cash upon the occurrence of a fundamental change and, in certain circumstances, to increase the exchange rate for a holder that exchanges its 2023 Notes in connection with a make-whole fundamental change. A takeover of Avadel may trigger the requirement that we repurchase the 2023 Notes and/or increase the exchange rate, which could make it more costly for a potential acquirer to engage in a combinatory transaction with us or Avadel. Such additional costs may have the effect of delaying or preventing a takeover of Avadel that would otherwise be beneficial to investors.
If we pay dividends, the dividends may be subject to Irish dividend withholding tax
In certain circumstances, as an Irish tax resident company, we may be required to deduct Irish dividend withholding tax (currently at the rate of 20%) from dividends paid to its shareholders. Shareholders that are resident in the U.S., EU countries (other than Ireland) or other countries with which Ireland has signed a tax treaty (whether the treaty has been ratified or not) generally should not be subject to Irish withholding tax so long as the shareholder has provided its broker, for onward transmission to our qualifying intermediary or other designated agent (in the case of shares held beneficially), or us or our transfer agent (in the case of shares held directly), with all the necessary documentation by the appropriate due date prior to payment of the dividend. However, some shareholders may be subject to withholding tax, which could adversely affect the price of ordinary shares and the value of their 2023 Notes.
General Risk Factors
Provisions of our articles of association could delay or prevent a third-party’s effort to acquire us.
Our articles of association could delay, defer or prevent a third-party from acquiring us, even where such a transaction would be beneficial to the holders of ADSs, or could otherwise adversely affect the price of ADSs. For example, certain provisions of our articles of association:
•permit our board of directors to issue preferred shares with such rights and preferences as they may designate, subject to applicable law;
•impose advance notice requirements for shareholder proposals and director nominations to be considered at annual shareholder meetings; and
•require the approval of a supermajority of the voting power of our shares entitled to vote at a general meeting of shareholders to amend or repeal any provisions of our articles of association.
We believe these provisions, if implemented in compliance with applicable law, may provide some protection to holders of ADSs from coercive or otherwise unfair takeover tactics. These provisions are not intended to make us immune from takeovers. They will, however, apply even if some holders of ADSs consider an offer to be beneficial and could delay or prevent an acquisition that our Board of Directors determines is in the best interest of the holders of ADSs. Certain of these provisions may also prevent or discourage attempts to remove and replace incumbent directors.
In addition, mandatory provisions of Irish law could prevent or delay an acquisition of the Company by a third party. For example, Irish law does not permit shareholders of an Irish public limited company to take action by written consent with less than unanimous consent. In addition, an effort to acquire us may be subject to various provisions of Irish law relating to
mandatory bids, voluntary bids, requirements to make a cash offer and minimum price requirements, as well as substantial acquisition rules and rules requiring the disclosure of interests in ADSs in certain circumstances.
These provisions may discourage potential takeover attempts or bids for our ordinary shares at a premium over the market price or they may adversely affect the market price of, and the voting and other rights of the holders of, ADSs. These provisions could also discourage proxy contests and make it more difficult for holders of ADSs to elect directors other than the candidates nominated by our board of directors and could depress affect the market price of ADSs.
Irish law differs from the laws in effect in the U.S. and might afford less protection to the holders of ADSs.
Holders of ADSs could have more difficulty protecting their interests than would the shareholders of a U.S. corporation. As an Irish company, we are governed by Irish law, including the Irish Companies Act 2014 and the Irish Takeover Rules, which differs in some significant, and possibly material, respects from provisions set forth in various U.S. state laws applicable to U.S. corporations and their shareholders, including provisions relating to interested directors, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors.
The duties of directors and officers of an Irish company are generally owed to the company only. Therefore, under Irish law shareholders of Irish companies do not generally have a right to commence a legal action against directors or officers and may only do so in limited circumstances. Directors of an Irish company must act with due care and skill, honestly and in good faith with a view to the best interests of the company. Directors must not put themselves in a position in which their duties to the company and their personal interests conflict and must disclose any personal interest in any contract or arrangement with the appreciationcompany or any of our subsidiaries. A director or officer can be held personally liable to the company in respect of a breach of duty to the company.
Judgments of U.S. courts, including those predicated on the civil liability provisions of the federal securities laws of the U.S., may not be enforceable in Irish courts.
An investor in the U.S. may find it difficult to:
•effect service of process within the U.S. against us and our non-U.S. resident directors and officers;
•enforce U.S. court judgments based upon the civil liability provisions of the U.S. federal securities laws against us and our non-U.S. resident directors and officers in Ireland; or
•bring an original action in an Irish court to enforce liabilities based upon the U.S. federal securities laws against us and our non-U.S. resident directors and officers.
Judgments of U.S. courts, including those predicated on the civil liability provisions of the federal securities laws of the United States, may not be enforceable in Cayman Islands courts.
We have been advised by our Cayman Islands legal counsel, Maples and Calder, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us or Avadel judgments of courts of the U.S. predicated upon the civil liability provisions of the securities laws of the U.S. or any State; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us or Avadel predicated upon the civil liability provisions of the securities laws of the U.S. or any State, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the U.S., the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
Holders of ADSs have fewer rights than shareholders and have to act through the Depositary to exercise those rights.
Holders of ADSs do not have the same rights as shareholders and, accordingly, cannot exercise rights of shareholders against us. The Bank of New York Mellon, as depositary (the “Depositary”), is the registered shareholder of the deposited shares underlying the ADSs. Therefore, holders of ADSs will generally have to exercise the rights attached to those shares through the Depositary. We will use reasonable efforts to request that the Depositary notify the holders of ADSs of upcoming votes and ask for voting instructions from them. If a holder fails to return a voting instruction card to the Depositary by the date established
by the Depositary for receipt of such voting instructions, or if the Depositary receives an improperly completed or blank voting instruction card, or if the voting instructions included in the voting instruction card are illegible or unclear, then such holder will be deemed to have instructed the Depositary to vote its shares, and the Depositary shall vote such shares in favor of any resolution proposed or approved by our Board of Directors and against any resolution not so proposed or approved.
U.S. Holders of ordinary shares or ADSs may suffer adverse U.S. tax consequences if we are classified as a passive foreign investment company.
Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, including cash, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. For purposes of these tests, passive income includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. Our status as a PFIC depends on the composition of our income and the composition and value of our assets (for which purpose the total value of our assets may be determined in part by the market value of the ordinary shares or ADSs, which are subject to change) from time to time. If we are characterized as a PFIC, U.S. Holders (as defined below under “Material U.S. Federal Income Tax Considerations for U.S. Holders”) of ordinary shares or ADSs may suffer materially adverse tax consequences, including having gains realized on the sale of ordinary shares or ADSs treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on ordinary shares or ADSs by individuals who are U.S. Holders, and having interest charges apply to distributions by us and the proceeds of sales of ordinary shares or ADSs. See “Material U.S. Federal Income Tax Considerations for U.S. Holders—PFIC rules.”
We believe that we were not a PFIC for the taxable year ending December 31, 2020 and, based on the expected value of our assets, including any goodwill, and the expected nature and composition of our income and assets, we do not anticipate that we will be a PFIC for our current taxable year. However, our status as a PFIC is a fact-intensive determination subject to various uncertainties, and we cannot provide any assurances regarding our PFIC status for the current, prior or future taxable years.
Certain U.S. Holders that own 10 percent or more of the vote or value of ordinary shares or ADSs may suffer adverse U.S. tax consequences because our non-U.S. subsidiaries are expected to be classified as controlled foreign corporations.
Each ‘‘Ten Percent Shareholder’’ (as defined below) in a non-U.S. corporation that is classified as a ‘‘controlled foreign corporation,’’ or a CFC, for U.S. federal income tax purposes generally is required to include in income for U.S. federal tax purposes such Ten Percent Shareholder’s pro rata share of the CFC’s ‘‘Subpart F income’’ and investment of earnings in U.S. property, even if the CFC has made no distributions to its shareholders. Subpart F income generally includes dividends, interest, rents, royalties, ‘‘global intangible low-taxed income,’’ gains from the sale of securities and income from certain transactions with related parties. In addition, a Ten Percent Shareholder that realizes gain from the sale or exchange of shares in a CFC may be required to classify a portion of such gain as dividend income rather than capital gain. A non-U.S. corporation generally will be classified as a CFC for U.S. federal income tax purposes if Ten Percent Shareholders own, directly or indirectly, more than 50% of either the total combined voting power of all classes of stock of such corporation entitled to vote or of the total value of the stock of such corporation. A ‘‘Ten Percent Shareholder’’ is a U.S. person (as defined by the Code) who owns or is considered to own 10% or more of the total combined voting power of all classes of stock entitled to vote or 10% or more of the total value of all classes of stock of such corporation.
We believe that we were not a CFC in the 2020 taxable year, but that our non-U.S. subsidiaries were CFCs in the 2020 taxable year. We anticipate that our non-U.S. subsidiaries will remain CFCs in the 2021 taxable year, and it is possible that we may become a CFC in the 2021 taxable year or in a subsequent taxable year. The determination of CFC status is complex and includes attribution rules, the application of which is not entirely certain. U.S. Holders should consult their own tax advisors with respect to the potential adverse U.S. tax consequences of becoming a Ten Percent Shareholder in a CFC, including the possibility and consequences of becoming a Ten Percent Shareholder in one or more of our non-U.S. subsidiaries that are anticipated to be treated as CFCs. If we are classified as both a CFC and a PFIC, we generally will not be treated as a PFIC with respect to those U.S. Holders that meet the definition of a Ten Percent Shareholder during the period in which we are a CFC, subject to certain exceptions.
A transfer of ordinary shares may be subject to Irish stamp duty.
Transfers of ordinary shares (as opposed to ADSs) could be subject to Irish stamp duty (currently at the rate of 1% of the higher of the price paid or the market value of the shares acquired). Payment of Irish stamp duty is generally a legal obligation of the transferee. Although transfers of ADSs are not subject to Irish stamp duty, the potential for stamp duty to arise on transfers of ordinary shares could adversely affect the price of our ordinary shares. Furthermore, the Compensation Committee believes granting equity awards that vest over time encourages executives to remain with the Company. The authority to grant equity awards to our executive officers lies with the Compensation Committeeshares or ADSs.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We have commercial and Board. The Compensation Committee takes into consideration the peer group data provided by Radfordadministrative activities located in Chesterfield, Missouri. Our current office space consists of 24,236 square feet, and the recommendationslease expires in 2025. Additionally, we maintained the lease on the former headquarters of FSC Laboratories, Inc. located in Charlotte, North Carolina. This office space consisted of 6,300 square feet and the lease expired on December 31, 2020.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K for more information regarding our Chief Executive Officer (other thaninvestment activities and principal capital expenditures over the last two years.
Item 3. Legal Proceedings.
While we may be engaged in various claims and legal proceedings in the ordinary course of business, we are not involved (whether as a defendant or otherwise) in, and, we have no knowledge of any threat of, any litigation, arbitration or administrative or other proceeding that management believes will have a material adverse effect on our consolidated financial position or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.Market for himself). Generally, the Compensation Committee has granted stock options to our executive officers upon commencementRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of their employment with the Company. These initial stock options vest over a four year period and are in connection with the executive officer’s employment agreement. At least annually, typically in December, the Compensation Committee considers annual equity awardsEquity Securities.
Common Stock Data (per share):
The principal trading market for our
executive officers. These awards consist of both stock options and restricted shares.In determiningsecurities in ADSs is the number of stock options and restricted shares to grant to a particular Named Executive Officer, the Compensation Committee takes into account numerous factors, including: the executive’s role and level of responsibility within the Company, the Company’s performance with respect to the financial and strategic goals and objectives for that year, and comparative peer group data as presented by Radford. The Compensation Committee has not adopted any formal policies or guidelines for determining the allocation of stock options versus restricted shares. However, in general, the Compensation Committee will recommend a mix of equity awards more weighted towards stock options than restricted shares principally because the Compensation Committee recognizes that restricted shares provide immediate value to recipients upon vesting and therefore involve less risk than stock options. In 2017, the Compensation Committee awarded the following restricted sharesNasdaq Global Market under the Company’s Omnibus Incentive Compensation Plan: 25,000 to the Chief Executive Officer; 22,500 to Gregory J. Divis; 18,000 to Michael F. Kanan; 18,000 to Phillandas T. Thompson; and 15,000 to David Monteith.
In 2017, the Compensation Committee awarded the Chief Executive Officer stock options to purchase 150,000symbol “AVDL”. There is no foreign trading market for our ordinary shares, atADSs or any other equity security issued by us. Each ADS represents one ordinary share, nominal value $0.01. Each ADS is evidenced by an exercise priceADR. The Bank of $8.95, and awarded toNew York Mellon is the other Named Executive Officers stock options to purchaseDepositary for the following numbersADRs.
As of
March 4, 2021, there were 58,465,151 ordinary shares
each at an exerciseoutstanding, and our closing stock price
of $8.95was $7.56 per
share: 100,000 to Gregory J. Divis, 80,000 to Michael F. Kanan, 80,000 to Phillandas T. Thompson; and 60,000 to David Monteith. All of the foregoing stock options will vest in equal amounts over a four-year period following the award date.
Compensation Risk Assessment
The Company regularly reviews compensation plans and practices to ensure they are appropriately structured and aligned with business objectives, and not designed to encourage executives to take unwarranted risks. Specifically, the overall design of the compensation philosophy and plans mitigate risks because: (1) the financial performance objectives of the short and long-term incentive plans are reviewed and approved annually by the Board; (2) the plans consist of multiple performance objectives, thus lessening the focus on any one in particular; and (3) short and long-term incentive payouts are capped for all participants.
General Employee Benefits
Avadel offers competitive health, dental and life insurance and vacation pay, generally for all employees. The senior executives are eligible to participate in all of the above programs. In addition, the senior executives are eligible to receive matching 401(k) plan contributions on the same basis as other employees.
Severance and Change-in-Control Benefits
Pursuant to employment agreements, each of our Named Executive Officers has a provision in his or her employment agreement with the Company that entitles such Named Executive Officer to certain specified benefits in the event of termination of their employment under specified circumstances, including termination following a change in control of the Company. These benefits are described in the “Employment Agreement” section below, and certain estimates of these severance and change-in-control benefits are provided in “Estimated Payments Upon Termination or Change in Control” below.
Retirement Benefits
The Company believes that offering competitive retirement benefits is important to attract and retain top executives. The Company’s U.S.-based executives participate in a traditional defined contribution 401(k) plan. For our Company’s 401(k) plan, the Company generally contributed approximately $10,800 to each eligible executive’s 401(k) account during 2017, which was the maximum contribution match allowable under the Company’s 401(k) Plan, provided the participant contributed the maximum in order to receive the maximum match and contributed based off of $270,000 of wages, the maximum allowable under the IRS limits.
For executives not based in the U.S., the Company has taken steps in recent years to align certain features of its pension or retirement plans, recognizing that benefit formulas are driven by local market competition and trends. Additional details regarding retirement benefits are provided in the tables below entitled “Summary Compensation Table.”
Tax Considerations
Section 162(m) of the Internal Revenue Code generally limits to $1 million the U.S. federal tax deductibility of compensation paid in one year to any employee. Performance-based compensation is not subject to the limits on deductibility of Section 162(m), provided that such compensation meets certain requirements, including shareholder approval of material terms of compensation.
The Compensation Committee attempts to provide the Named Executive Officers with incentive compensation programs that will preserve the tax deductibility of compensation paid by the Company, to the extent reasonably practicable and to the extent consistent with the Company’s other compensation objectives. The Compensation Committee believes, however, that shareholder interests are best served by not restricting the Compensation Committee’s discretion and flexibility in structuring compensation programs, even though such programs may result in certain non-deductible compensation expenses.
Our compensation arrangements for executive officers, including our Named Executive Officers, do not provide tax gross-ups for any type of payments, including payments for severance or in connection with a change of control.
Securities Trading Policy
The Company has a policy that prohibits executive officers and directors from trading in the Company’s securities while aware of material non-public information, or engaging in hedging transactions or short sales and trading in “puts” and “calls” involving the Company’s securities. This policy is described in our Standards of Business Conduct, which may be viewed on our website at www.Avadel.com in the “Investors” section. In addition, executive officers and directors are prohibited from pledging the Company’s securities.
2017 Compensation of Named Executives Officers
Summary Compensation Table
The following table sets forthreports the compensation paid or accrued duringhigh and low trading prices of the fiscal years ended December 31, 2017, 2016ADSs on the Nasdaq Global Market for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 Price Range | | 2019 Price Range |
| | High | | Low | | High | | Low |
| | | | | | | |
| First quarter | $ | 10.64 | | | $ | 4.06 | | | $ | 3.29 | | | $ | 1.44 | |
| Second quarter | 11.75 | | | 7.25 | | | 3.19 | | | 1.09 | |
| Third quarter | 8.98 | | | 5.02 | | | 4.47 | | | 1.92 | |
| Fourth quarter | 7.95 | | | 5.03 | | | 7.70 | | | 3.34 | |
Holders
As of March 4, 2021, there were 78 holders of record of our ordinary shares and
201565 accounts registered with The Bank of New York Mellon, the Depositary of our ADS program, as holders of ADSs, one of which ADS accounts is registered to
the Depositary Trust Corporation (DTC). Because our
Named Executive Officers:| | | | | | | | | | | Equity-based
Incentive Plan
Compensation | | | | | | | | | | |
Name and
Principal Position | | Year | | Base
Salary
($)
(1) | | | Bonus
($) | | | Stock
Awards
($) (2) | | | Option
Awards
($)
(3) | | | Non-Equity
Incentive Plan
Compensation
($)
(4) | | | All
Other
Compensation
($)
(5) | | | Total
Compensation
($) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Michael S. Anderson | | 2017 | | | 581,946 | | | | - | | | | 223,750 | | | | 757,500 | | | | 279,334 | | | | 18,891 | | | | 1,861,421 | |
| Chief Executive | | 2016 | | | 565,500 | | | | - | | | | 991,500 | | | | 1,180,000 | | | | 330,525 | | | | 18,447 | | | | 3,085,972 | |
| Officer | | 2015 | | | 550,000 | | | | - | | | | - | | | | 1,664,000 | | | | 250,000 | | | | 20,627 | | | | 2,484,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gregory J. Divis | | 2017 | | | 375,000 | | | | | | | | 201,375 | | | | 505,000 | | | | 158,438 | | | | 22,800 | | | | 1,262,613 | |
| Executive Vice President, | | 2016 | | | - | | | | - | | | | - | | | | 885,000 | | | | - | | | | - | | | | 885,000 | |
| Chief Operating Officer | | 2015 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Michael F. Kanan | | 2017 | | | 357,500 | | | | - | | | | 161,100 | | | | 404,000 | | | | 120,835 | | | | 22,800 | | | | 1,066,235 | |
| Senior Vice President | | 2016 | | | 325,000 | | | | - | | | | 187,200 | | | | 590,000 | | | | 126,750 | | | | 22,600 | | | | 1,251,550 | |
| and Chief Financial Officer | | 2015 | | | 33,854 | | | | - | | | | - | | | | 935,000 | | | | - | | | | - | | | | 968,854 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Phillandas T. Thompson | | 2017 | | | 326,757 | | | | - | | | | 161,100 | | | | 404,000 | | | | 110,444 | | | | 19,800 | | | | 1,022,101 | |
| Senior Vice President, | | 2016 | | | 297,052 | | | | - | | | | 459,000 | | | | 590,000 | | | | 115,850 | | | | 19,600 | | | | 1,481,502 | |
| General Counsel & Corporate Secretary | | 2015 | | | 288,400 | | | | - | | | | - | | | | 832,000 | | | | 86,520 | | | | 19,600 | | | | 1,226,520 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| David Monteith | | 2017 | | | 311,575 | | | | | | | | 134,250 | | | | 303,000 | | | | 99,081 | | | | 10,800 | | | | 858,706 | |
| Vice President of | | 2016 | | | 283,250 | | | | - | | | | 359,850 | | | | 442,500 | | | | 110,467 | | | | 10,600 | | | | 1,206,667 | |
| Research & Development | | 2015 | | | 275,000 | | | | - | | | | - | | | | 291,200 | | | | 84,915 | | | | - | | | | 651,115 | |
| (1) | Represents salaries before any employee contributions under our 401(k) Plan. |
| (2) | Stock awards represent equity compensation for meeting Company and personal performance targets or for having signed an employment contract with the Company. Represents the grant date fair value computed by us for financial reporting purposes, computed in accordance with FASB ASC Topic 718. For a full description of the assumptions we use in computing these amounts, see Note 16 to our consolidated financial statements for the year ended December 31, 2017 which are included in our annual report on Form 10-K filed with the SEC on March 16, 2018. |
| (3) | Option awards represent equity compensation for meeting Company and personal performance targets or for having signed an employment contract with the Company. Represents the grant date fair value computed by us for financial reporting purposes, computed in accordance with FASB ASC Topic 718. For a full description of the assumptions we use in computing these amounts, see Note 16 to our consolidated financial statements for the year ended December 31, 2017 which are included in our annual report on Form 10-K filed with the SEC on March 16, 2018. The actual value a Named Executive Officer may receive depends on market prices and there can be no assurance that the amounts reflected in the Option Awards column will actually be realized. No gain to a named executive officer is possible without an appreciation in stock value after the date of grant. |
| (4) | Non-equity incentive plan compensation represents cash bonuses for meeting Company and personal performance targets. |
| (5) | See the All Other Compensation Table below. |
All Other Compensation Table
The table below reflects the types and dollar amountsADSs are generally held of perquisites, additional compensationrecord by brokers, nominees and other personal benefits provided to the named executive officers during fiscal year 2017. For purposes of computing the dollar amountsinstitutions as participants in DTC on behalf of the items listed below,beneficial owners of such ADSs, we usedare unable to estimate the actual out-of-pocket coststotal number of beneficial owners of the ADSs held by these record holders.
Dividends
We have never declared or paid a cash dividend on any of our shares and do not anticipate declaring cash dividends in the foreseeable future.
Equity Compensation Plan
The information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to
usItem 12 of
providing the perquisite or other personal benefit to the named executive officer.| Name | | Year | | 401K Match
($) | | | Car
Allowance
($) | | | Personal Tax
Preparation Fees
($) | | | Total All Other
Compensation
($) | |
| | | | | | | | | | | | | | | |
| | 2017 | | | 10,800 | | | | 8,091 | | | | - | | | | 18,891 | |
| Michael S. Anderson | | 2016 | | | 10,600 | | | | 7,847 | | | | - | | | | 18,447 | |
| | | 2015 | | | 10,600 | | | | 6,960 | | | | 3,067 | | | | 20,627 | |
| | | 2017 | | | 10,800 | | | | 12,000 | | | | - | | | | 22,800 | |
| Gregory J. Divis | | 2016 | | | - | | | | - | | | | - | | | | - | |
| | | 2015 | | | - | | | | - | | | | - | | | | - | |
| | | 2017 | | | 10,800 | | | | 12,000 | | | | - | | | | 22,800 | |
| Michael F. Kanan | | 2016 | | | 10,600 | | | | 12,000 | | | | - | | | | 22,600 | |
| | | 2015 | | | - | | | | - | | | | - | | | | - | |
| | | 2017 | | | 10,800 | | | | 9,000 | | | | - | | | | 19,800 | |
| Phillandas T. Thompson | | 2016 | | | 10,600 | | | | 9,000 | | | | - | | | | 19,600 | |
| | | 2015 | | | 10,600 | | | | 9,000 | | | | - | | | | 19,600 | |
| | | 2017 | | | 10,800 | | | | - | | | | - | | | | 10,800 | |
| David Monteith | | 2016 | | | 10,600 | | | | - | | | | - | | | | 10,600 | |
| | | 2015 | | | - | | | | - | | | | - | | | | - | |
GrantsPart III of Plan-Based Awards 2017
The following table presents information regarding grantsthis Annual Report on Form 10-K.
Issuer Purchases of plan-based awards to the named executive officersEquity Securities
We did not repurchase any of our equity securities during the year ended December 31,
2017:| | | | | Estimated Possible Payouts Under
Non-Equity Incentive Plan
Awards(1) | | | Estimated Future Payouts Under
Equity
Incentive Plan Awards (1) | | | All Other
Stock
Awards:
Number of
Shares of
Stock or | | | Exercise or
Base Price | | | Grant Date
Fair Value | |
| Name | | Grant
Date | | Threshold
($) | | | Target
($) | | | Maximum
($) | | | Threshold
(#) | | | Target
(#) | | | Maximum
(#) | | | Units
(#) | | | of Option
Awards | | | of Award
($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Michael S. Anderson | | 12/12/2017 | | | - | | | | 349,168 | | | | - | | | | - | | | | 25,000 | | | | - | | | | 150,000 | | | $ | 8.95 | | | | 757,500 | |
| Gregory J. Divis | | 12/12/2017 | | | - | | | | 187,500 | | | | - | | | | - | | | | 22,500 | | | | - | | | | 100,000 | | | $ | 8.95 | | | | 505,000 | |
| Michael F. Kanan | | 12/12/2017 | | | - | | | | 143,000 | | | | - | | | | - | | | | 18,000 | | | | - | | | | 80,000 | | | $ | 8.95 | | | | 404,000 | |
| Phillandas T. Thompson | | 12/12/2017 | | | - | | | | 130,703 | | | | - | | | | - | | | | 18,000 | | | | - | | | | 80,000 | | | $ | 8.95 | | | | 404,000 | |
| David Monteith | | 12/12/2017 | | | - | | | | 124,630 | | | | - | | | | - | | | | 15,000 | | | | - | | | | 60,000 | | | $ | 8.95 | | | | 303,000 | |
| (1) | The Compensation Committee has not established thresholds or maximum levels associated with non-equity and equity incentive plan awards. |
The following table sets forth specified information concerning stock options stock awards
Recent Sales of Unregistered Securities
Securities Purchase Agreement
On February 21, 2020, we announced that we entered into a definitive agreement for
each of the
named executive officers outstanding as of December 31, 2017:| | | | | Outstanding Equity Awards at Fiscal Year-End 2017 | | | |
| | | | | Option Awards | | Stock Awards | |
| Name | | Grant Date | | Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable (1) | | | Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable (1) | | | Option
Exercise
Price ($) | | | Option
Expiration
Date | | Number
of Shares
or Units
of Stock
That
Have Not
Vested (#) (2) | | | Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested ($) (2) | |
| | | | | | | | | | | | | | | | | | | | |
| Michael S. Anderson | | 3/12/2012 | | | 275,000 | | | | - | | | | 6.93 | | | 3/12/2022 | | | - | | | | - | |
| | | 2/1/2013 | | | 80,500 | | | | - | | | | 4.07 | | | 2/1/2023 | | | - | | | | - | |
| | | 12/11/2014 | | | 150,000 | | | | 50,000 | | | | 16.30 | | | 12/11/2024 | | | - | | | | - | |
| | | 12/11/2014 | | | - | | | | - | | | | - | | | - | | | 50,000 | | | | 410,000 | |
| | | 12/10/2015 | | | 100,000 | | | | 100,000 | | | | 14.35 | | | 12/10/2025 | | | - | | | | - | |
| | | 8/10/2016 | | | - | | | | - | | | | - | | | - | | | 50,000 | | | | 410,000 | |
| | | 12/14/2016 | | | 50,000 | | | | 150,000 | | | | 10.40 | | | 12/14/2026 | | | - | | | | - | |
| | | 12/14/2016 | | | - | | | | - | | | | - | | | - | | | 30,000 | | | | 246,000 | |
| | | 12/12/2017 | | | - | | | | 150,000 | | | | 8.95 | | | 12/12/2027 | | | | | | | - | |
| | | 12/12/2017 | | | - | | | | - | | | | - | | | - | | | 25,000 | | | | 205,000 | |
| Gregory J. Divis | | 12/14/2016 | | | 37,500 | | | | 112,500 | | | | 10.40 | | | 12/14/2026 | | | - | | | | - | |
| | | 12/12/2017 | | | - | | | | 100,000 | | | | 8.95 | | | 12/12/2027 | | | - | | | | - | |
| | | 12/12/2017 | | | - | | | | - | | | | - | | | - | | | 22,500 | | | | 184,500 | |
| Michael F. Kanan | | 10/28/2015 | | | 50,000 | | | | 50,000 | | | | 16.21 | | | 10/28/2025 | | | - | | | | - | |
| | | 12/14/2016 | | | 25,000 | | | | 75,000 | | | | 10.40 | | | 12/14/2026 | | | - | | | | - | |
| | | 12/14/2016 | | | - | | | | - | | | | - | | | - | | | 18,000 | | | | 147,600 | |
| | | 12/12/2017 | | | - | | | | 80,000 | | | | 8.95 | | | 12/12/2027 | | | - | | | | - | |
| | | 12/12/2017 | | | - | | | | - | | | | - | | | - | | | 18,000 | | | | 147,600 | |
| Phillandas T. Thompson | | 12/12/2013 | | | 100,000 | | | | - | | | | 7.36 | | | 12/12/2023 | | | - | | | | - | |
| | | 12/11/2014 | | | 71,250 | | | | 23,750 | | | | 16.30 | | | 12/11/2024 | | | - | | | | - | |
| | | 12/11/2014 | | | - | | | | - | | | | - | | | - | | | 10,000 | | | | 82,000 | |
| | | 12/10/2015 | | | 50,000 | | | | 50,000 | | | | 14.35 | | | 12/10/2025 | | | - | | | | - | |
| | | 8/10/2016 | | | - | | | | - | | | | - | | | - | | | 20,000 | | | | 164,000 | |
| | | 12/14/2016 | | | 25,000 | | | | 75,000 | | | | 10.40 | | | 12/14/2026 | | | - | | | | - | |
| | | 12/14/2016 | | | - | | | | - | | | | - | | | - | | | 18,000 | | | | 147,600 | |
| | | 12/12/2017 | | | - | | | | 80,000 | | | | 8.95 | | | 12/12/2027 | | | - | | | | - | |
| | | 12/12/2017 | | | - | | | | - | | | | - | | | - | | | 18,000 | | | | 147,600 | |
| David Monteith | | 12/11/2014 | | | 82,500 | | | | 27,500 | | | | 16.30 | | | 12/11/2024 | | | - | | | | - | |
| | | 12/11/2014 | | | | | | | | | | | | | | | | | 2,500 | | | | 20,500 | |
| | | 12/10/2015 | | | 17,500 | | | | 17,500 | | | | 14.35 | | | 12/10/2025 | | | - | | | | - | |
| | | 8/10/2016 | | | - | | | | - | | | | - | | | - | | | 15,000 | | | | 123,000 | |
| | | 12/14/2016 | | | 18,750 | | | | 56,250 | | | | 10.40 | | | 12/14/2026 | | | - | | | | - | |
| | | 12/14/2016 | | | - | | | | - | | | | - | | | - | | | 15,000 | | | | 123,000 | |
| | | 12/12/2017 | | | - | | | | 60,000 | | | | 8.95 | | | 12/12/2027 | | | - | | | | - | |
| | | 12/12/2017 | | | - | | | | - | | | | - | | | - | | | 15,000 | | | | 123,000 | |
| (1) | Options become exercisable as to 25% of the ADSs on each of the first four anniversaries after the applicable grant date. |
| (2) | Stock awards granted prior to 8/10/2016 become vested on the fourth anniversary of the grant date for U.S. residents. In addition, if the beneficiary remains an employee of the Company at the second anniversary of the grant date, the beneficiary may take claim to the shares on the fourth anniversary period even if the beneficiary is not employed with the Company after the second anniversary. Stock awards granted on 8/10/2016 and12/14/2016 become vested on the second anniversary of the grant date and are issued on such second anniversary even if the beneficiary is not employed with the Company subsequent to the grant date. Stock awards granted on 12/12/2017 and later become vested as to 2/3 of the grant on the second anniversary of the grant date and the remaining 1/3 of the grant on the third anniversary of the grant fate, with vesting of these restricted shares subject to the employee remaining in continuous service until the applicable anniversary of the date of grant. |
Employment Agreements
We have written employment agreements with eachsale of our Named Executive Officers. Each employment agreement provides that the individual’s employment will continue until either we or the Named Executive Officer provides written noticeADSs and Series A Non-Voting Convertible Preferred Shares (“Series A Preferred”) in a private placement to a group of terminationinstitutional accredited investors. The private placement resulted in accordance withgross proceeds of approximately $65,000 before deducting placement agent and other offering expenses which resulted in net proceeds of $60,570.
Pursuant to the terms of the agreement. In addition, eachprivate placement, we issued 8,680,225 ADSs and 487,614 shares of Series A Preferred at a price of $7.09 per share, priced at-the-market under Nasdaq rules. Each share of non-voting Series A Preferred is convertible into one ADS, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.99% of the
total number of Avadel ADSs outstanding. The closing of the private placement occurred on February 25, 2020. Proceeds from the private placement will be used to fund continued clinical and program development of FT218, including our open-label extension study for REST-ON, a switch study to evaluate patients switching from twice-nightly sodium oxybate to once-nightly FT218, as well as for general corporate purposes.
The private placement was exempt from registration pursuant to Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving a public offering.
Share Performance Graph
The following graph compares the cumulative 5-year return provided to shareholders of Avadel’s ADSs relative to the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Biotechnology Index. We believe these
agreements prohibitindices are the
Named Executive Officer from disclosing confidential informationmost appropriate indices against which the total shareholder return of Avadel should be measured. The Nasdaq Biotechnology Index has been selected because it is an index of U.S. quoted biotechnology and
competing with us during the termpharmaceutical companies. An investment of
their employment with the Company$100 (with reinvestment of all dividends) is assumed to have been made in our ADSs and
for a specified time period thereafter. The agreements also contain customary non-solicitation and non-disparagement provisions. Under the terms of their respective employment agreements,in each of the
Named Executive Officersindexes on January 1, 2016 and our relative performance is
entitledtracked through December 31, 2020. The comparisons shown in the graph are based upon historical data and we caution that the stock price performance shown in the graph is not indicative of, or intended to
receive an annual base salary, subject to annual review, an annual cash incentive and an annual equity award, each component of which is subject toforecast, the
discretionpotential future performance of our
board.
Payments upon Termination of Employment
Pursuant to their employment agreements, each of our Named Executive Officers (other than Mr. Monteith, whose severance benefit is described below) is entitled to certain severance benefits in the event he or she terminates his or her employment for “Good Reason” or if his or her employment is terminated by the Company for any reason other than for “Cause,” including non-renewal by the Company at the end of the employment term. Upon such a termination, the Named Executive Officer (other than Mr. Monteith) is entitled to receive (1) base salary for a period of 12 months (18 months in the case of Mr. Anderson); (2) all accrued but unpaid bonuses for any completed fiscal year and vacation pay, expense reimbursement and other benefits due under any Company-provided benefit plans, policies and arrangements; and (3) payment of monthly COBRA health insurance premiums for up to 12 months (18 months in the case of Mr. Anderson).
In addition, if such a termination occurs during a Change in Control Period (as defined below), the Named Executive Officer (other than Mr. Monteith) is entitled to receive amounts provided in (1) and (3) of the above paragraph plus (i) the highest of (x) their target bonus in effect for the fiscal year in which the applicable change in control occurs, or (y) their target bonus in effect for the fiscal year in which the termination of employment occurs; or (z) their actual bonus forstock.
This performance
during the calendar year prior to the calendar year during which the termination of employment occurs; (ii) the amount provided in (2) of the above paragraph, as applicable; and (iii) the immediate vesting of 100% of their outstanding and unvested stock options and any other equity awards under the Company’s compensation plans. For purposes of these agreements:“Good Reason” is defined as (i) the failure of the Company to timely pay to the employee any compensation owed under the agreement; (ii) the Company’s diminution in the employee’s authority, duties or responsibilities in any material respect or the Company’s assignment to the employee of duties that are materially inconsistent with the duties stated in the agreement; (iii) the relocation of the place of the employee’s employment more than sixty (60) miles outside the greater St. Louis metropolitan area; (iv) a material breach by the Company of the agreement; or (v) the failure of the Company to have the agreement assumed in full by any successor in the case of any merger, consolidation, or sale of all or substantially all of the assets of the Company.
“Cause” means: (i) conviction of or plea of nolo contendere to a felony or crime involving moral turpitude; (ii) fraud, theft, or misappropriation of any asset or property of the Company, including, without limitation, any theft or embezzlement or any diversion of any corporate opportunity; (iii) breach of any of the material obligations contained in the agreement; (iv) conduct materially contrary to the material policies of the Company; (v) material failure to meet the goals and objectives established by the Company without cure within a reasonable period of time after written notice thereof; or (vi) conduct that results in a material detriment to the Company, its program, or goals or is inimical to the Company's reputation and interests without cure within a reasonable period of time after written notice thereof.
“Change of Control Period” means the period beginning six (6) months prior to, and ending eighteen (18) months following, a Change of Control.
“Change of Control” means the occurrence of any of the following events: (i) A change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (‘Person’), acquires ownership of the equity interests of the Company that, together with the stock held by such Person, constitutes more than fifty percent (50%) of the total voting power of the stock of the Company; provided, however, that for purposes of this subsection, the acquisition of additional stock by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the stock of the Company will not be considered a Change or Control; or (ii) A change in the effective control of the Company which occurs on the date that a majority of the members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of such definition, if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change of Control; or (iii) A change in the ownership of a substantial portion of the Company's assets which occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions.
The benefits provided are designed to protect earned benefits in the case that one or more of such Named Executive Officers is terminated without cause or as a result of a change in control of the Company, in order to encourage such Named Executive Officers to act in the best interests of the shareholders at all times during the course of a change in control transaction or other significant event involving our Company.
In the employment agreement with Mr. Monteith, in the event his employment with the Company is terminated for any reason other than for cause, he is entitled to severance benefits equal to (1) base salary for a period of 12 months and (2) payment of monthly COBRA health insurance premiums for up to 12 months.
The following tables set forth information regarding potential payments that each Named Executive Officer would have received if the Named Executive Officer’s employment had terminated as of December 31, 2017 under the circumstances set forth below.
Termination Payments(1)
| Name | | Cash Payment ($) | | | Value of
Benefits ($) | |
| | | | | | | |
| Michael S. Anderson | | | 1,152,253 | | | | 31,588 | |
| Gregory J. Divis | | | 533,438 | | | | 21,204 | |
| Michael F. Kanan | | | 478,335 | | | | 21,059 | |
| Phillandas T. Thompson | | | 437,201 | | | | 6,948 | |
| David Monteith | | | 311,575 | | | | 21,059 | |
Termination Payments in Connection with a Change in Control of the Company(2)
| Name | | Cash
Payment ($) | | | Value of
Benefits ($) | | | Acceleration
of Equity
Awards ($)(3) | |
| | | | | | | | | | |
| Michael S. Anderson | | | 1,222,087 | | | | 31,588 | | | | 205,000 | |
| Gregory J. Divis | | | 562,500 | | | | 21,204 | | | | 184,500 | |
| Michael F. Kanan | | | 500,500 | | | | 21,059 | | | | 147,600 | |
| Phillandas T. Thompson | | | 457,460 | | | | 6,948 | | | | 147,600 | |
| David Monteith | | | 311,575 | | | | 21,059 | | | | - | |
| (1) | Based on the compensation arrangements with the Named Executive Officers in effect for 2018, the amounts payable in respect of an applicable termination during 2018 would be as follows: Michael Anderson - $899,106 cash payment and $20,436 value of benefits; Gregory J. Divis - $425,000 cash payment and $19,174 value of benefits; Michael F. Kanan - $386,100 cash payment and $19,724 value of benefits; Phillandas T. Thompson - $365,968 cash payment and $6,500 value of benefits; and David Monteith - $320,922 cash payment and $19,724 value of benefits. |
| (2) | Based on the compensation arrangements with the Named Executive Officers in effect for 2018, the amounts payable in respect of an applicable termination during a Change in Control Period during 2018 would be as follows: Michael Anderson - $1,258,748 cash payment, $20,436 value of benefits, and $175,250 in acceleration of equity awards; Gregory J. Divis - $637,500 cash payment, $19,174 value of benefits, and $157,725 in acceleration of equity awards; Michael F. Kanan - $540,540 cash payment, $19,724 value of benefits, and $126,180 in acceleration of equity awards; Phillandas T. Thompson - $512,355 cash payment, $6,500 value of benefits, and $126,180 in acceleration of equity awards; and David Monteith - $320,922 cash payment and $19,724 value of benefits. |
| (3) | Only option awards for which the exercise price is lower than the market value of the underlying shares are included as part of the acceleration value. Additionally, unvested restricted stock awards with employment conditions beyond the anticipated termination date are included as part of the acceleration value based on the market value of the underlying shares. |
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board that it be included in this Form 10-K/A.
| THE COMPENSATION COMMITTEE |
| |
| Francis J.T. Fildes, Chairman |
| Christophe Navarre |
| Craig Stapleton |
| Benoit C. Van Assche |
The “Compensation Committee Report” abovegraph shall not be deemed incorporated by reference by“filed” for purposes of Section 18 of the Exchange Act. Notwithstanding any general statement incorporating this Form 10-K/A intoto the contrary set forth in any filingof our filings under the Securities Act of 1933 or the Exchange Act that might incorporate future filings, including this Annual Report on Form 10-K, in whole or in part, this performance graph shall not be incorporated by reference into any such filings except as may be expressly set forth by specific reference in any such filing.
Item 6. Quarterly Financial Data (Unaudited):
The following tables present certain unaudited consolidated quarterly financial information for each quarter of 2020 and 2019. Year-to-date net income (loss) per share amounts may be different than the sum of the applicable quarters due to differences in weighted average shares outstanding for the respective periods.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020: | March 31 | | June 30 | | September 30 | | December 31 |
| | | | | | | |
| Revenues | $ | 12,243 | | | $ | 10,091 | | | $ | — | | | $ | — | |
Gross profit (a) | 9,786 | | | 6,806 | | | — | | | — | |
Operating (loss) income (b) | (6,497) | | | 40,269 | | | (13,697) | | | (14,260) | |
| Net (loss) income | (865) | | | 30,874 | | | (11,703) | | | (11,278) | |
| Net (loss) income per share - basic | (0.02) | | | 0.57 | | | (0.20) | | | (0.19) | |
| Net (loss) income per share - diluted | (0.02) | | | 0.49 | | | (0.20) | | | (0.19) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019: | March 31 | | June 30 | | September 30 | | December 31 |
| | | | | | | |
| Revenues | $ | 16,437 | | | $ | 17,554 | | | $ | 14,229 | | | $ | 10,995 | |
Gross profit (a) | 13,171 | | | 13,932 | | | 11,406 | | | 8,581 | |
| Operating loss | (8,167) | | | (4,451) | | | (4,147) | | | (7,347) | |
| Net loss | (13,018) | | | (8,605) | | | (8,864) | | | (2,739) | |
| Net loss per share - basic | (0.35) | | | (0.23) | | | (0.24) | | | (0.07) | |
| Net loss per share - diluted | (0.35) | | | (0.23) | | | (0.24) | | | (0.07) | |
(a) Gross profit is computed by subtracting cost of products from total revenues.
(b) Operating income for the quarter ended June 30, 2020 includes a gain on the sale of the hospital business of $45,760.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
(In thousands, except per share data)
You should read the discussion and analysis of our financial condition and results of operations set forth in this Item 7 together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, 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 Content of this Annual Report on Form 10-K for further information on the forward looking statements herein. In addition, you should read the “Risk Factors” section of this Annual Report on Form 10-K 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 Annual Report on Form 10-K.
Information pertaining to fiscal year 2018 was included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019, on pages 42 through 56, under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which was filed with the SEC on March 16, 2020.
Overview
Nature of Operations
Avadel Pharmaceuticals plc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is a biopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly, extended-release formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in adults with narcolepsy. We are 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 and cataplexy in adults with narcolepsy.The NDA for FT218 was accepted by the FDA in February 2021 and assigned a Prescription Drug User Fee Act (“PDUFA”) target action date of October 15, 2021.
Outside of our lead product candidate, we continue to evaluate opportunities to expand our product portfolio. As of December 31, 2020, we do not have any approved and commercialized products in our portfolio.
FT218
FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug-delivery technology for the treatment of EDS and cataplexy in adults suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in the U.S. for the treatment of EDS and cataplexy in patients with narcolepsy and is approved in Europe for the treatment of cataplexy in patients with narcolepsy. Since 2002, sodium oxybate has only been available as a formulation that must be taken twice nightly, first at bedtime, and then again 2.5 to 4 hours later.
On December 16, 2020, we announced the submission of our NDA to the FDA for FT218. On February 26, 2021, the FDA notified us of formal acceptance of the NDA with an assigned PDUFA target action date of October 15, 2021.
The REST-ON trial was a randomized, double-blind, placebo-controlled study that enrolled 212 patients and was conducted in clinical sites in the U.S., Canada, Western Europe and Australia. The last patient, last visit was completed at the end of the first quarter of 2020 and positive top line data from the REST-ON trial was announced on April 27, 2020. Patients who received 9 g of once-nightly FT218, the highest dose administered in the trial, demonstrated a statistically significant and clinically meaningful improvement compared to placebo across the three co-primary endpoints of the trial: maintenance of wakefulness test, or MWT, clinical global impression-improvement, or CGI-I, and mean weekly cataplexy attacks. The lower doses assessed, 6 g and 7.5 g also demonstrated a statistically significant and clinically meaningful improvement on all three co-primary endpoints compared to placebo. We observed the 9 g dose of once-nightly FT218 to be generally well tolerated. Adverse reactions commonly associated with sodium oxybate were observed in a small number of patients (nausea 1.3%, vomiting 5.2%, decreased appetite 2.6%, dizziness 5.2%, somnolence 3.9%, tremor 1.3% and enuresis 9%), and 3.9% of the patients who received 9 g of FT218 discontinued the trial due to adverse reactions.
In January 2018, the FDA granted FT218 Orphan Drug Designation, which makes the drug eligible for certain development and commercial incentives, including potential U.S. market exclusivity for up to seven years. Additionally, several FT218-related U.S. patents have been issued, and there are additional patent applications currently in development and/or pending at the U.S. Patent and Trademark Office (“USPTO”), as well as foreign patent offices.
In July 2020, we announced that the first patient was dosed initiating an open-label extension (“OLE”)/switch study of FT218 as a potential treatment for EDS and cataplexy in patients with narcolepsy. The OLE/switch study is examining the long-term safety and maintenance of efficacy of FT218 in patients with narcolepsy who participated in the REST-ON study, as well as dosing and preference data for patients switching from twice-nightly sodium oxybate to once-nightly FT218 regardless if they participated in REST-ON or not. We anticipate that the study will enroll up to 250 patients, many of which will be enrolled in North American clinical trial sites that participated in the REST-ON study.
We believe FT218 has the potential to demonstrate improved dosing compliance, safety and patient satisfaction over the current standard of care for EDS and cataplexy in patients with narcolepsy, which is a twice-nightly sodium oxybate formulation. If approved, we believe FT218 has the potential to take a significant share of the sodium oxybate market. The current market size for the twice-nightly administration of sodium oxybate is estimated at an annualized revenue run rate of $1.8 billion.
Micropump Drug-Delivery Technology
Our Micropump drug-delivery technology allows for the controlled delivery of small molecule drugs taken orally, which has the potential to reduce safety issues and improve a number of things like efficacy, dosing compliance and patient satisfaction. Beyond FT218, we believe there could be other product development opportunities for our Micropump drug-delivery technology, representing either i) life cycle opportunities, whereby additional intellectual property-protected drug delivery technology can be added to a pharmaceutical product to extend the commercial viability of that product, or ii) innovative formulation opportunities for known active pharmaceutical ingredients as well as new chemical entities.
Previously Approved FDA Products
On June 30, 2020 (the “Closing Date”), Avadel Legacy Pharmaceuticals, LLC (the “Avadel Seller”) announced the sale of the portfolio of sterile injectable drugs used in the hospital setting (the “Hospital Products”), which included our three commercial products, Akovaz, Bloxiverz and Vazculep, as well as Nouress, which was approved by the U.S. FDA to Exela Sterile Medicines LLC (“Exela Buyer”) pursuant to an asset purchase agreement by and among the Avadel Seller, Avadel US Holdings, Inc., the Exela Buyer and Exela Holdings, Inc. This sale included the following FDA approved products:
•Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery.
•Vazculep (phenylephrine hydrochloride injection) - Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
•Akovaz (ephedrine sulfate injection) - Akovaz was the first FDA approved formulation of ephedrine sulfate, an alpha- and beta- adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
•Nouress (cysteine hydrochloride injection)- Nouress is a sterile injectable product for use in the hospital setting to provide parenteral nutrition to neonates.
Key Business Trends and Highlights
In operating our business and monitoring our performance, we consider a number of performance measures, as well as trends affecting our industry as a whole, which include the following:
•Healthcare and Regulatory Reform: Various health care reform laws in the U.S. may impact our ability to successfully commercialize our products and technologies. The success of our commercialization efforts may depend on the extent to which the government health administration authorities, the health insurance funds in the E.U. Member States, private health insurers and other third-party payers in the U.S. will reimburse consumers for the cost of healthcare products and services.
•Competition and Technological Change:Competition in the pharmaceutical and biotechnology industry continues to be intense and is expected to increase. We compete with academic laboratories, research institutions, universities, joint ventures, and other pharmaceutical and biotechnology companies, including other companies developing niche branded or generic specialty pharmaceutical products or drug delivery platforms. Furthermore, major technological changes can happen quickly in the pharmaceutical and biotechnology industries. Such rapid technological change, or the development by our competitors of technologically improved or differentiated products, could render our drug delivery platforms obsolete or noncompetitive.
•Pricing Environment for Pharmaceuticals: The pricing environment continues to be in the political spotlight in the U.S. As a result, the need to obtain and maintain appropriate pricing for our products may become more challenging due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide.
•Generics Playing a Larger Role in Healthcare: Generic pharmaceutical products will continue to play a large role in the U.S. healthcare system. Specifically, we have seen, or likely will see, additional generic competition to our current and future products and we continue to expect generic competition in the future.
•Access to and Cost of Capital: The process of raising capital and associated cost of such capital for a company of our financial profile can be difficult and potentially expensive. If the need were to arise to raise additional capital, access to that capital may be difficult and/or expensive and, as a result, could create liquidity challenges for us.
•Net Loss from Operations in 2021:We sold our Hospital Products at June 30, 2020 and will no longer generate revenue from sales of these products. We will incur substantial expenses to further the clinical development and prepare for the launch of FT218, if approved, and expect to incur a net loss in 2021, which we are unable to estimate at this time.
Impact of COVID-19
Since early 2020, we have seen the profound impact that the novel coronavirus (“COVID-19”) is having on human health, the global economy and society at large. We have been actively monitoring the COVID-19 situation and have taken measures to mitigate the potential impacts to our employees and business, such as implementing a work from home policy. We believe the impact of COVID-19 and measures to prevent its spread could impact our business in a number of ways, including: i) possibly delaying any remaining development activities for FT218, the FDA review timeline of FT218, and/or our ongoing RESTORE open-label extension/switch study, ii) disruptions to our supply chain and third parties; and iii) requiring our employees to work from home for an extended period of time. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.
Financial Highlights
Highlights of our consolidated results for the year ended December 31, 2020 are as follows:
•Revenue was $22,334 for the year ended December 31, 2020 compared to $59,215 in the same period last year. This year over year decrease was primarily the result of the sale of the Hospital Products on June 30, 2020 and increased competition driving lower prices as noted above in our discussion of Key Business Trends and Highlights.
•Operating income was $5,815 for the year ended December 31, 2020 compared to an operating loss of $24,112 for the year ended December 31, 2019. The change from operating loss to operating income was due to the gain on the sale of the Hospital Products of $45,760. R&D expenses decreased in the current year by $12,475 and restructuring expenses decreased by $6,484, which also contributed to the change. Further, there was a decline in gross margin in the current year (i.e., total revenues minus cost of products) of $30,498 due to the June 30, 2020 sale of the Hospital Products.
•Net income was $7,028 for the year ended December 31, 2020 compared to net loss of $33,226 in the same period last year.
•Diluted net income per share was $0.13 for the year ended December 31, 2020 compared to diluted net loss per share of $0.89 in the same period last year.
•Cash and marketable securities increased by $157,244 to $221,402 at December 31, 2020 from $64,158 at December 31, 2019. This increase was largely driven by the February 2020 private placement which resulted in proceeds, net of placement agent and other expenses of approximately $61,000, the May 2020 public offering, which resulted in proceeds, net of expenses and underwriting fees of approximately $117,000, cash proceeds from the disposition of the Hospital Products of $25,500, partially offset by $48,734 use of cash in operations during the year ended December 31, 2020.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates under different assumptions or conditions.
The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.
Revenue. Prior to June 30, 2020, revenue included sales of pharmaceutical products, licensing fees, and, if any, milestone payments for research and development (“R&D”) achievements.
Product Sales
Prior to June 30, 2020, we sold products primarily through wholesalers and considered these wholesalers to be our customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of our product, which occurs typically upon receipt by the customer. Our gross product sales are subject to a variety of price adjustments in arriving at reported net product sales. These adjustments include estimates of product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated based on analysis of historical data for the product or comparable products, future expectations for such products and other judgments and analysis.
License and Milestone Revenue
From time to time we may enter into out-licensing agreements which are within the scope of ASC 606 under which it licenses to third parties certain rights to its products or intellectual property. The terms of these arrangements typically include payment to us of one or more of the following: non-refundable, upfront license fees; development, regulatory, and commercial milestone payments; and sales-based royalty payments. Each of these payments results in license revenue. During the years ended December 31, 2020 and 2019, we did not recognize any revenue from license agreements.
Research and Development (“R&D”). R&D expenses consist primarily of costs related to clinical studies and outside services, personnel expenses, and other R&D expenses. Clinical studies and outside services costs relate primarily to services performed by clinical research organizations and related clinical or development manufacturing costs, materials and supplies, filing fees, regulatory support, and other third-party fees. Personnel expenses relate primarily to salaries, benefits and share-based compensation. Other R&D expenses primarily include overhead allocations consisting of various support and facilities-related costs. R&D expenditures are charged to operations as incurred. Raw materials used in the production of pre-clinical and clinical products are expensed as R&D costs.
We recognize R&D tax credits received from the French and Irish government for spending on innovative R&D as an offset of R&D expenses.
Share-based Compensation. We account for share-based compensation based on the estimated grant-date fair value. The fair value of stock options and warrants is estimated using Black-Scholes option-pricing valuation models (“Black-Scholes model”). As required by the Black-Sholes model, estimates are made of the underlying volatility of AVDL stock, a risk-free rate and an expected term of the option or warrant. We estimated the expected term using a simplified method, as we do not have enough historical exercise data for a majority of such options and warrants upon which to estimate an expected term. We recognize compensation cost, net of an estimated forfeiture rate, using the accelerated method over the requisite service period of the award.
Income Taxes. Our income tax benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in Ireland, France and the U.S. Significant judgments and estimates are required in the determination of the consolidated income tax benefit.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income or loss, tax-planning
strategies, and results of recent operations. The assumptions about future taxable income or loss require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We record unrecognized tax benefits as liabilities and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
We have not recorded a deferred tax liability for any income or withholding taxes that may arise as the result of the distribution of unremitted earnings within our Company. At December 31, 2020, we had unremitted earnings of $3,725 outside of Ireland as measured on a U.S. GAAP basis. Based on our estimates that future domestic cash generation will be sufficient to meet future domestic cash needs along with our specific plans for reinvestment, we have not recorded a deferred tax liability for any income or withholding taxes that may arise from a distribution that would qualify as a dividend for tax purposes. It is not practicable to estimate the amount of deferred tax liability on such remittances, if any.
Goodwill. Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. We have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of pharmaceutical products. We test goodwill for impairment annually and when events or changes in circumstances indicate that the carrying value may not be recoverable. We performed our required impairment test of goodwill and have determined that no impairment of goodwill existed at December 31, 2020 and 2019.
Long-Lived Assets. Long-lived assets include fixed assets and intangible assets. Prior to the sale of the Hospital Products on June 30, 2020, intangible assets consisted primarily of purchased licenses and intangible assets recognized as part of the Éclat Pharmaceuticals acquisition. Acquired in-process research and development (“IPR&D”) had an indefinite life and was not amortized until completion and development of the project, at which time the IPR&D became an amortizable asset, for which amortization of such intangible assets was computed using the straight-line method over the estimated useful life of the assets.
Long-lived assets are reviewed for impairment whenever conditions indicate that the carrying value of the assets may not be fully recoverable. Such impairment tests are based on a comparison of the pretax undiscounted cash flows expected to be generated by the asset to the recorded value of the asset or other market-based value approaches. If impairment is indicated, the asset value is written down to its market value if readily determinable or its estimated fair value based on discounted cash flows. Any significant changes in business or market conditions that vary from current expectations could have an impact on the fair value of these assets and any potential associated impairment. During the fourth quarter of 2018, we recorded a $66,087 impairment charge to the entire acquired developed technology related to Noctiva. We determined that no impairment existed at December 31, 2019. On June 30, 2020, we transferred our remaining intangible asset to the Exela Buyer as part of the disposition of the Hospital Products. We determined that no impairment existed at December 31, 2020 on our remaining long-lived assets.
Acquisition-related Contingent Consideration. Prior to the sale of the Hospital Products on June 30, 2020, the acquisition-related contingent consideration payables arising from the acquisition of Éclat Pharmaceuticals (i.e., our hospital products) and FSC (our pediatrics products), which was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018, were accounted for at fair value (see Note 13: Contingent Consideration Payable and Note 18: Divestiture of the Pediatric Assets). The fair value of the warrants issued in connection with the Éclat acquisition were estimated using a Black-Scholes model. A portion of these warrants were exercised on February 23, 2018 and the remaining warrants expired on March 12, 2018. See Note 13: Contingent Consideration Payable. The fair value of acquisition-related contingent consideration payable is estimated using a discounted cash flow model based on the long-term sales or gross profit forecasts of the specified hospital or pediatric products using an appropriate discount rate. There are a number of estimates used when determining the fair value of these earn-out payments. These estimates include, but are not limited to, the long-term pricing environment, market size, market share the related products are forecast to achieve, the cost of goods related to such products and an appropriate discount rate to use when present valuing the related cash flows. These estimates can and often do change based on changes in current market conditions, competition, management judgment and other factors. Changes to these estimates can have and have had a material impact on our consolidated statements of income (loss) and balance sheets. Changes in fair value
of these liabilities are recorded in the consolidated statements of income (loss) within operating expenses as changes in fair value of contingent consideration.
Financing-related Royalty Agreements. We were previously a party to two royalty agreements in connection with certain financing arrangements. We elected the fair value option for the measurement of the financing-related contingent consideration payable associated with the royalty agreements with certain Deerfield and Broadfin entities (the “Deerfield and Broadfin Royalty Agreements”) (see Note 13: Contingent Consideration Payable). Prior to the sale of the Hospital Products on June 30, 2020, the fair value of financing-related royalty agreements was estimated using the same components used to determine the fair value of the acquisition-related contingent consideration noted above, with the exception of cost of products sold. Changes to these components can also have a material impact on our consolidated statements of income (loss) and balance sheets. Changes in the fair value of this liability are recorded in the consolidated statements of income (loss) as other (expense) income - changes in fair value of contingent consideration payable. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield and Broadfin Royalty Agreements were assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of the Company under the Securities Exchange ActDeerfield and Broadfin Royalty Agreements.
Results of 1934,Operations
The following is a summary of our financial results (in thousands, except per share amounts):
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Comparative Statements of Income (Loss): | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Product sales | | $ | 22,334 | | | $ | 59,215 | | | | | $ | (36,881) | | | (62.3) | % | | | | |
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| Operating expenses: | | | | | | | | | | | | | | |
| Cost of products | | 5,742 | | | 12,125 | | | | | (6,383) | | | (52.6) | % | | | | |
| Research and development expenses | | 20,442 | | | 32,917 | | | | | (12,475) | | | (37.9) | % | | | | |
| Selling, general and administrative expenses | | 32,405 | | | 30,183 | | | | | 2,222 | | | 7.4 | % | | | | |
| Intangible asset amortization | | 406 | | | 816 | | | | | (410) | | | (50.2) | % | | | | |
| Changes in fair value of contingent consideration | | 3,327 | | | 845 | | | | | 2,482 | | | 293.7 | % | | | | |
| Gain on sale of Hospital Products | | (45,760) | | | — | | | | | (45,760) | | | (100.0) | % | | | | |
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| Restructuring (income) costs | | (43) | | | 6,441 | | | | | (6,484) | | | (100.7) | % | | | | |
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| Total operating expenses | | 16,519 | | | 83,327 | | | | | (66,808) | | | (80.2) | % | | | | |
| Operating income (loss) | | 5,815 | | | (24,112) | | | | | 29,927 | | | 124.1 | % | | | | |
| Investment and other (expense) income, net | | (832) | | | 1,069 | | | | | (1,901) | | | (177.8) | % | | | | |
| Interest expense | | (12,994) | | | (12,483) | | | | | (511) | | | (4.1) | % | | | | |
| Gain from release of certain liabilities | | 3,364 | | | — | | | | | 3,364 | | | 100.0 | % | | | | |
| Loss on deconsolidation of subsidiary | | — | | | (2,678) | | | | | 2,678 | | | 100.0 | % | | | | |
| Other expense - changes in fair value of contingent consideration payable | | (435) | | | (378) | | | | | (57) | | | (15.1) | % | | | | |
| Loss before income taxes | | (5,082) | | | (38,582) | | | | | 33,500 | | | 86.8 | % | | | | |
| Income tax benefit | | (12,110) | | | (5,356) | | | | | (6,754) | | | (126.1) | % | | | | |
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| Net income (loss) | | $ | 7,028 | | | $ | (33,226) | | | | | $ | 40,254 | | | 121.2 | % | | | | |
| Net income (loss) per share - diluted | | $ | 0.13 | | | $ | (0.89) | | | | | $ | 1.02 | | | 114.6 | % | | | | |
The product sales for each of our significant products were as amended, exceptfollows:
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Product Sales | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Bloxiverz | | $ | 2,201 | | | $ | 7,479 | | | | | $ | (5,278) | | | (70.6) | % | | | | |
| Vazculep | | 10,429 | | | 33,152 | | | | | (22,723) | | | (68.5) | % | | | | |
| Akovaz | | 9,545 | | | 18,642 | | | | | (9,097) | | | (48.8) | % | | | | |
| Other | | 159 | | | (58) | | | | | 217 | | | 374.1 | % | | | | |
| Product sales | | 22,334 | | | 59,215 | | | | | (36,881) | | | (62.3) | % | | | | |
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Total product sales were $22,334 for the year ended December 31, 2020, compared to $59,215 for the same prior year period. The decline in product sales is driven by the sale of the Hospital Products on June 30, 2020 as well as increased competition.
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Cost of Products | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Cost of products | | $ | 5,742 | | | $ | 12,125 | | | | | $ | (6,383) | | | (52.6) | % | | | | |
| Percentage of sales | | 25.7 | % | | 20.5 | % | | | | | | | | | | |
Cost of products decreased by $6,383, or 52.6% during the year ended December 31, 2020 compared to the extent thatprior year driven by the June 30, 2020 sale of the Hospital Products.
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Research and Development Expenses | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Research and development expenses | | $ | 20,442 | | | $ | 32,917 | | | | | $ | (12,475) | | | (37.9) | % | | | | |
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Research and development (“R&D”) expenses decreased by $12,475 or 37.9% during the year ended December 31, 2020 as compared to the same period in 2019. The decline was driven by lower R&D expenses related to the development of FT218 of approximately $8,700 due to the completion of the Phase 3 clinical study during the first quarter of 2020, as well as lower payroll, benefits and share-based compensation of approximately $3,800 related to the 2019 Corporate and French restructuring plans. See Note 19: Restructuring Costs. The Company continues to invest a substantial portion of R&D in its FT218 development program.
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Selling, General and Administrative Expenses | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Selling, general and administrative expenses | | $ | 32,405 | | | $ | 30,183 | | | | | $ | 2,222 | | | 7.4 | % | | | | |
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Selling, general and administrative (“SG&A”) expenses increased by $2,222 or 7.4% during the year ended December 31, 2020 as compared to the prior year. This increase was primarily due to an increase in consulting and professional fees, marketing research costs, insurance costs and legal fees totaling approximately $8,800, partially offset by a decrease in payroll and benefits of approximately $2,200 due to the 2019 restructuring plans and a decrease in travel and entertainment costs of approximately $900 due to COVID. In addition, there was a decrease of approximately $2,200 of sales and marketing costs related to the exit of Noctiva during the first quarter 2019 and a decrease of approximately $1,000 related to non-recurring adjustments to certain liabilities related to the Hospital Products.
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Intangibles Asset Amortization | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Intangible asset amortization | | $ | 406 | | | $ | 816 | | | | | $ | (410) | | | (50.2) | % | | | | |
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Intangible asset amortization expense for the years ended December 31, 2020 and 2019 relates to the amortization of our acquired developed technology - Vazculep. This intangible asset was written off as a result of the sale of the Hospital Products to the Exela Buyer on June 30, 2020. See Note 4: Disposition of the Hospital Products.
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| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Changes in Fair Value of Contingent Consideration | | 2020 | | 2019 | | | | $ | | % | | | | |
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| Changes in fair value of contingent consideration | | $ | 3,327 | | | $ | 845 | | | | | $ | 2,482 | | | 293.7 | % | | | | |
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Prior to the sale of the Hospital Products on June 30, 2020, we
specifically incorporate this information by reference,computed the fair value of the contingent consideration using several significant assumptions and
shall not otherwise be deemed filed under such Acts.Compensation Risk Assessment
when these assumptions change, due to underlying market conditions, the fair value of these liabilities change as well. Each of the underlying assumptions used to determine the fair values of these contingent liabilities can, and often do, change based on adjustments in current market conditions, competition and other factors. These changes had a material impact on our consolidated statements of income (loss) and balance sheets. As part of its oversightthe sale of the Hospital Products on June 30, 2020, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.
As a result of changes in the underlying assumptions used to determine the estimated fair values of our executiveacquisition-related contingent consideration earn-out payments - Éclat, we recorded expense of $3,327 and $845 and increased the fair value of the acquisition-related contingent consideration earn-out payments - Éclat for the years ended December 31, 2020 and 2019, respectively. Subsequent to June 30, 2020, we had no remaining liability.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Gain on the Sale of the Hospital Products | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Gain on the sale of the Hospital Products | | $ | (45,760) | | | $ | — | | | | | $ | (45,760) | | | (100.0) | % | | | | |
| | | | | | | | | | | | | | |
On June 30, 2020, we sold our assets, rights and interests related to Bloxiverz, Vazculep, Akovaz and Nouress to the Exela Buyer pursuant to an asset purchase agreement by and among us and the Exela Buyer. We recognized a net gain of $45,760 on this transaction. See Note 4: Disposition of the Hospital Products.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Restructuring (Income) Costs | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Restructuring (income) costs | | $ | (43) | | | $ | 6,441 | | | | | $ | (6,484) | | | (100.7) | % | | | | |
| | | | | | | | | | | | | | |
Restructuring income of $43 and costs of $6,441 were recognized during the years ended December 31, 2020 and 2019, respectively. Restructuring income during the year ended December 31, 2020, was driven by share-based compensation program,forfeitures as a result of the Compensation Committee considers2019 Corporate restructuring actions. Restructuring costs for the impactyear ended December 31, 2019 were primarily related to the 2019 French and Corporate restructuring plans and mainly included severance, legal costs. See Note 19: Restructuring Costs for further details.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Investment and Other (Expense) Income, net | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Investment and other (expense) income, net | | $ | (832) | | | $ | 1,069 | | | | | $ | (1,901) | | | (177.8) | % | | | | |
| | | | | | | | | | | | | | |
Investment and other expense was $832 for the year ended December 31, 2020 as compared to investment and other income of $1,069 for the year ended December 31, 2019. Expense in the current year was driven by an $800 legal settlement related to a bankruptcy claim, an increase in net unrealized losses and net realized losses on our marketable securities during the current period when compared to the prior period of approximately $2,100, and higher currency remeasurement losses of
approximately $400 due to the weakening of the U.S. dollar during the year ended December 31, 2020, partially offset by a legal settlement of $1,750 which was incurred during the twelve months ended December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Interest Expense | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Interest expense | | $ | (12,994) | | | $ | (12,483) | | | | | $ | (511) | | | (4.1) | % | | | | |
| | | | | | | | | | | | | | |
Interest expense of $12,994 and $12,483 for the years ended December 31, 2020 and 2019, respectively, is related to interest on the 2023 Notes that were issued in February 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Gain from release of certain liabilities | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Gain from release of certain liabilities | | $ | 3,364 | | | $ | — | | | | | $ | 3,364 | | | 100.0 | % | | | | |
| | | | | | | | | | | | | | |
Subsequent to the finalization of the bankruptcy, we recognized a non-cash gain of $3,364 from the release of certain liabilities that had been retained following the deconsolidation of Specialty Pharma in February 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Loss on Deconsolidation of Subsidiary | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Loss on deconsolidation of subsidiary | | $ | — | | | $ | (2,678) | | | | | $ | 2,678 | | | 100.0 | % | | | | |
| | | | | | | | | | | | | | |
As a result of Specialty Pharma’s bankruptcy filing on February 6, 2019, we concluded that we no longer controlled its operations and accordingly deconsolidated this subsidiary. We recorded a loss during the year ended December 31, 2019 on the deconsolidation as a result of removing the net assets and certain liabilities of this subsidiary from our consolidated financial statements. See Note 3: Subsidiary Bankruptcy and Deconsolidation for more discussion.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Other Expense - Changes in Fair Value of Contingent Consideration Payable | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Other expense - changes in fair value of contingent consideration payable | | $ | (435) | | | $ | (378) | | | | | $ | (57) | | | (15.1) | % | | | | |
| | | | | | | | | | | | | | |
We recorded expense of $435 and $378 to increase the fair value of these liabilities during the years ended December 31, 2020 and 2019, respectively, due to the same reasons associated with changes in certain underlying market conditions as described in the section “Changes in Fair Value of Contingent Consideration” for these periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Years Ended December 31, | | Increase / (Decrease) | | |
| Income Taxes | | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | | |
| Income tax benefit | | $ | (12,110) | | | $ | (5,356) | | | | | $ | (6,754) | | | (126.1) | % | | | | |
| Percentage of income (loss) before income taxes | | 238.3 | % | | 13.9 | % | | | | | | | | | | |
In 2020, the income tax benefit increased by $6,754 when compared to the same period in 2019. The increase in the income tax benefit in 2020 was primarily driven by the tax benefits from the sale of our executive compensation program,hospital products and passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in the U.S. The Company recorded additional tax benefit in 2020 from the Orphan Drug and R&D tax credit in the U.S. Tax benefit from the intercompany asset transfer recorded in 2019 did not recur, resulting in a partial offset of tax benefits described above. See Note 14: Income Taxes for more discussion.
Liquidity and Capital Resources
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | Years Ended December 31, | | Increase / (Decrease) | | |
| Net Cash (Used In) Provided By | 2020 | | 2019 | | | | $ | | % | | | | |
| | | | | | | | | | | | | |
| Operating activities | $ | (48,734) | | | $ | (38,325) | | | | | $ | (10,409) | | | (27.2) | % | | | | |
| Investing activities | (69,721) | | | 38,723 | | | | | (108,444) | | | (280.1) | % | | | | |
| Financing activities | 179,683 | | | (27) | | | | | 179,710 | | | 665,592.6 | % | | | | |
Operating Activities
Net cash used in operating activities of $48,734 for the year ended December 31, 2020 increased from net cash used in operating activities of $38,325 in the prior year. This increase in cash used in operating activities is due to the decrease in accounts payable and accrued expenses of $21,012, partially offset by lower earn-out and royalty payments of $6,547 related to our contingent consideration liabilities due to the sale of the Hospital Products and increased cash provided by accounts receivable of $5,810 due to the collection of all outstanding accounts receivable balances during the year ended December 31, 2020.
Investing Activities
Cash used in investing activities was $69,721 for the year ended December 31, 2020 compared to cash provided by investing activities of $38,723 in the same prior year period. In 2020, we had net purchases of marketable securities of $95,123, partially offset by proceeds of $25,500 received from the sale of the Hospital Products. In 2019, we had net proceeds of $38,598 for the sale of marketable securities
Financing Activities
Cash provided by financing activities was $179,683 for the year ended December 31, 2020 compared to cash used in financing activities of $27 for the same prior year period. Cash provided by financing activities for the year ended December 31, 2020 was driven by the May public offering that resulted in net proceeds of $116,924, the February private placement that resulted in net proceeds of $60,570, and proceeds from the issuance of ordinary shares of $2,189.
Liquidity and Risk Management
The adequacy of our cash resources depends on the outcome of certain business conditions including the cost of our FT218 clinical development plan, our cost structure, and other factors set forth in “Risk Factors” within Part I, Item 1A of this Annual Report on Form 10-K. To complete the FT218 clinical development plan we will need to commit substantial resources, which could result in future losses or otherwise limit our opportunities or affect our ability to operate our business. Our assumptions concerning the outcome of certain business conditions may prove to be wrong or other factors may adversely affect our business, and as a result we could exhaust or significantly decrease our available cash and marketable securities balances which could, among other things, force us to raise additional funds and/or force us to reduce our expenses, either of which could have a material adverse effect on our business. Additionally, we are unable to estimate the near or long term impact that COVID-19, which may have a material adverse impact on our business.
In February 2020, we announced that we had entered into a definitive agreement for the sale of our ADSs and Series A Non-Voting Convertible Preferred Shares (“Series A Preferred”) in a private placement to a group of institutional accredited investors. The private placement resulted in gross proceeds of approximately $65,000 before deducting placement agent and other offering expenses, which resulted in net proceeds of $60,570.
Also, in February 2020, we filed a shelf registration statement on Form S-3 (the “2020 Shelf Registration Statement”) that allows issuance and sale by us, from time to time, of :
•up to $250,000 in aggregate of ordinary shares, nominal value US$0.01 per share, each of which may be represented by ADSs, preferred shares, nominal value US$0.01 per share, debt securities, warrants to purchase ordinary shares, ADSs, preferred shares and/or debt securities, and/or units consisting of ordinary shares, ADSs, preferred shares, one or more debt securities or warrants in one or more series, in any combination, pursuant to the terms of the 2020 Shelf
Registration Statement, the base prospectus contained in the 2020 Shelf Registration Statement (the “Base Prospectus”), and any amendments or supplements thereto (together, the “Securities”); including
•up to $50,000 of ADSs that may be issued and sold from time to time pursuant to the terms of an Open Market Sale AgreementSM, entered into with Jefferies LLC on February 4, 2020, the 2020 Shelf Registration Statement, the Base Prospectus and the incentives createdterms of the sales agreement prospectus contained in the 2020 Shelf Registration Statement.
On April 28, 2020, we announced the pricing of an underwritten public offering of 11,630 ordinary shares, in the form of ADSs at a price to the public of $10.75 per ADS. Each ADS represents the right to receive one ordinary share. All of the ADSs were being offered by Avadel. The gross proceeds to us from the compensation awards that it administers, on our risk profile. In addition, we review all our compensation policiesoffering were approximately $125,000, before deducting underwriting discounts and procedures, including the incentives that they createcommissions and factors thatestimated offering expenses, which resulted in net proceeds of $116,924.
If available to us, raising additional capital may reduce the likelihood of excessive risk-taking, to determine whether they present a significant risk to us. The Compensation Committee concluded that our compensation programs are designed with theappropriate balance of risk and reward in relationbe accomplished through one or more public or private debt or equity financings, collaborations or partnering arrangements. Any equity financing would be dilutive to our overallshareholders.
Cash, cash equivalent and marketable security balances as of December 31, 2020 and unused financing sources are expected to provide the Company with the flexibility to meet its liquidity needs in 2021, including its operating requirements related to the development of FT218.
Other Matters
Litigation
We are subject to potential liabilities generally incidental to our business strategyarising 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 balanceordinary course of compensation elements discourages excessive risk-taking. The Compensation Committee, therefore, determinedbusiness. We accrue for potential liabilities when it is probable that the risks arising from our compensation policiesfuture costs (including legal fees and practices for employeesexpenses) will be incurred and such costs can be reasonably estimated. At December 31, 2020 and December 31, 2019, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are not reasonably likely to have a material adverse effect on us.our consolidated financial position, results of operations, cash flows or liquidity.
Material Commitments
At December 31, 2020, we have one commitment with a contract manufacturer related to facility upgrades and the purchase and validation of equipment to be used in the manufacture of FT218. The Compensation Committee willtotal cost of this commitment is estimated to be approximately $4,000 and is expected to be started and completed during the year ending December 31, 2021.
The Company also has a commitment with a contract manufacturer related to the construction and preparation of a production suite at the contract manufacturer’s facility, which is substantially complete at December 31, 2020. Subsequent to the initial build and preparation of the production suite, this commitment also includes annual fees which would commence at the start of production of validation batches and continue thereafter for five years.
We and our subsidiaries lease office facilities under non-cancellable operating leases expiring at various dates. See Note 11: Leases.
Aggregate Contractual Obligations
The following table presents our contractual obligations at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due by Period |
| Contractual Obligations: | | Total | | Less than
1 Year | | 1 to 3
Years | | 3 to 5
Years | | More than
5 Years |
| | | | | | | | | | |
| Long-term debt and interest | | $ | 159,922 | | | $ | 6,469 | | | $ | 153,453 | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| Purchase commitments | | 4,000 | | | 4,000 | | | — | | | — | | | — | |
| Operating leases | | 2,590 | | | 578 | | | 1,192 | | | 820 | | | — | |
| Total contractual cash obligations | | $ | 166,512 | | | $ | 11,047 | | | $ | 154,645 | | | $ | 820 | | | $ | — | |
See Note 12: Long-Term Debtto consider compensation risk implications while deliberating the design of our executive compensation programs. In its discussions, the Compensation Committee considered the attributes of our programs, including:Appropriate pay philosophyconsolidated financial statements contained in light of our business model;
BalanceItem 8 – Financial Statements for obligations with respect to the mixrespective items within the above table.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined under SEC rules.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are subject to interest rate risk as a result of our portfolio of marketable securities. The primary objectives of our investment policy are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and competitive yield. Although our investments are subject to market risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or certain types of investment. Our investment policy allows us to maintain a portfolio of cash equivalents and equity compensation,marketable securities in a variety of instruments, including U.S. federal government and measuresfederal agency securities, European Government bonds, corporate bonds or commercial paper issued by U.S. or European corporations, money market instruments, certain qualifying money market mutual funds, certain repurchase agreements, tax-exempt obligations of performancestates, agencies, and municipalities in the U.S and Europe, and equities.
Foreign Exchange Risk
We are exposed to foreign currency exchange risk as the functional currency financial statements of a non-U.S. subsidiary is translated to U.S. dollars. The assets and liabilities of this non-U.S. subsidiary having a functional currency other than the U.S. dollar is translated into U.S. dollars at the exchange rate prevailing at the balance sheet date, and at the average exchange rate for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a component of accumulated other comprehensive loss in shareholders’ equity. The reported results of this non-U.S. subsidiary will be influenced by their translation into U.S. dollars by currency movements against both annual and multi-year standards;
Short and long-term incentives linkedthe U.S. dollar. Our primary currency translation exposure is related to stock price performance;
Performance goals are set at levelsone subsidiary that are sufficiently highhas functional currencies denominated in euro. A 10% strengthening/weakening in the rates used to encourage strong performance and supporttranslate the resulting compensation expense, but within reasonably attainable parameters to discourage pursuitresults of excessively risky business strategies;
Long-term incentives generallyour non-U.S. subsidiaries that have multi-year vesting to ensure a long-term focus and appropriate balance against short-term goals;
Independent Compensation Committee oversight, with Compensation Committee discretion to reduce incentives based on subjective evaluation of individual performance; and
Anti hedging/pledging policies.
Equity Compensation Plan Information
The table below presents informationfunctional currencies denominated in euro as of December 31, 2017, with respect to our ordinary shares issuable under our equity compensation plans:
| Plan category | | Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights | | | Weighted-average
exercise price of
outstanding options,
warrants and rights | | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) | |
| | | (a) | | | (b) | | | (c) | |
| Equity compensation plans approved by security holders | | | 6,754,000 | (1) | | | 12.16 | (2) | | | 2,293,147 | (3) |
| Equity compensation plans not approved by security holders | | | 0 | | | | 0 | | | | 0 | |
| Total | | | 6,754,000 | (1) | | | 12.16 | (2) | | | 2,293,147 | (3) |
| (1) | Includes 819,000 ordinary shares that have previously been granted as free share awards but are pending issuance upon vesting date; the beneficiary is not required to pay any exercise price upon issuance of such 819,000 shares. The remaining 5,935,000 ordinary shares are issuable pursuant to the exercise of outstanding options and warrants upon payment of the weighted-average exercise price shown in column (b) of this table. |
| (2) | The weighted-average exercise price shown in column (b) applies to 5,935,000 ordinary shares issuable pursuant to the exercise of outstanding options and warrants included in the total number shown in column (a) of this table. As to the 819,000 shares attributable to free share awards included in the total number shown in column (a) of this table, the beneficiary is not required to pay any exercise price upon issuance of such shares. |
| (3) | Represents the aggregate number of shares issuable pursuant to stock options, free share awards or non-employee director warrants that have not been granted under the authorizations approved by shareholders at our 2017 Annual General Meeting of Shareholders. |
2017 Omnibus Incentive Compensation Plan
The following description2020 would have had an immaterial impact on net income for the year ended December 31, 2020.
Transactional exposure arises where transactions occur in currencies other than the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the 2017 Omnibus Incentive Compensation Plan (the “2017 Omnibus Plan”transaction. The resulting monetary assets and liabilities are translated into the appropriate functional currency at exchange rates prevailing at the balance sheet date and the resulting gains and losses are reported in investment and other (expense) income, net in the consolidated statements of income (loss). As of December 31, 2020, our primary exposure is to transaction risk related to euro net monetary assets and liabilities held by subsidiaries with a U.S. dollar functional currency. Realized and unrealized foreign exchange gains resulting from transactional exposure were immaterial for the year ended December 31, 2020.
Item 8. Financial Statements and Supplementary Data.
AVADEL PHARMACEUTICALS PLC
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Revenues: | | | | | | |
| Product sales | | $ | 22,334 | | | $ | 59,215 | | | $ | 101,423 | |
| License revenue | | 0 | | | 0 | | | 1,846 | |
| Total revenues | | 22,334 | | | 59,215 | | | 103,269 | |
| Operating expenses: | | | | | | |
| Cost of products | | 5,742 | | | 12,125 | | | 17,516 | |
| Research and development expenses | | 20,442 | | | 32,917 | | | 39,329 | |
| Selling, general and administrative expenses | | 32,405 | | | 30,183 | | | 100,359 | |
| Intangible asset amortization | | 406 | | | 816 | | | 6,619 | |
| Changes in fair value of contingent consideration | | 3,327 | | | 845 | | | (22,731) | |
| Gain on sale of Hospital Products | | (45,760) | | | 0 | | | 0 | |
| Impairment of intangible asset | | 0 | | | 0 | | | 66,087 | |
| Restructuring (income) costs | | (43) | | | 6,441 | | | 1,016 | |
| Total operating expenses | | 16,519 | | | 83,327 | | | 208,195 | |
| Operating income (loss) | | 5,815 | | | (24,112) | | | (104,926) | |
| Investment and other (expense) income, net | | (832) | | | 1,069 | | | 452 | |
| Interest expense | | (12,994) | | | (12,483) | | | (10,622) | |
| Gain from release of certain liabilities | | 3,364 | | | 0 | | | 0 | |
| Loss on deconsolidation of subsidiary | | 0 | | | (2,678) | | | 0 | |
| Other (expense) income - changes in fair value of contingent consideration payable | | (435) | | | (378) | | | 1,899 | |
| Loss before income taxes | | (5,082) | | | (38,582) | | | (113,197) | |
| Income tax benefit | | (12,110) | | | (5,356) | | | (17,893) | |
| | | | | | |
| | | | | | |
| Net income (loss) | | $ | 7,028 | | | $ | (33,226) | | | $ | (95,304) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) per share - basic | | $ | 0.13 | | | $ | (0.89) | | | $ | (2.55) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) per share - diluted | | $ | 0.13 | | | $ | (0.89) | | | $ | (2.55) | |
| | | | | | |
| Weighted average number of shares outstanding - basic | | 52,996 | | | 37,403 | | | 37,325 | |
| Weighted average number of shares outstanding - diluted | | 54,941 | | | 37,403 | | | 37,325 | |
See accompanying notes to consolidated financial statements.
AVADEL PHARMACEUTICALS PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Net income (loss) | | $ | 7,028 | | | $ | (33,226) | | | $ | (95,304) | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Foreign currency translation gain (loss) | | 1,111 | | | (117) | | | (419) | |
| Net other comprehensive income, net of $(202), $(43), $(18) tax, respectively | | 644 | | | 727 | | | 269 | |
| Total other comprehensive income (loss), net of tax | | 1,755 | | | 610 | | | (150) | |
| Total comprehensive income (loss) | | $ | 8,783 | | | $ | (32,616) | | | $ | (95,454) | |
See accompanying notes to consolidated financial statements.
AVADEL PHARMACEUTICALS PLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2020 | | 2019 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 71,722 | | | $ | 9,774 | |
| Marketable securities | | 149,680 | | | 54,384 | |
| Accounts receivable | | 0 | | | 8,281 | |
| Inventories, net | | 0 | | | 3,570 | |
| Research and development tax credit receivable | | 3,326 | | | 2,107 | |
| Prepaid expenses and other current assets | | 38,726 | | | 4,264 | |
| Total current assets | | 263,454 | | | 82,380 | |
| Property and equipment, net | | 359 | | | 544 | |
| Operating lease right-of-use assets | | 2,604 | | | 3,612 | |
| Goodwill | | 16,836 | | | 18,491 | |
| Intangible assets, net | | 0 | | | 813 | |
| Research and development tax credit receivable | | 3,445 | | | 6,322 | |
| Other non-current assets | | 24,939 | | | 39,274 | |
| Total assets | | $ | 311,637 | | | $ | 151,436 | |
| | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | | |
| Current liabilities: | | | | |
| | | | |
| Current portion of long-term contingent consideration payable | | $ | 0 | | | $ | 5,554 | |
| Current portion of operating lease liability | | 474 | | | 645 | |
| Accounts payable | | 2,934 | | | 6,100 | |
| Accrued expenses | | 6,501 | | | 19,810 | |
| | | | |
| Other current liabilities | | 5,200 | | | 3,875 | |
| Total current liabilities | | 15,109 | | | 35,984 | |
| Long-term debt | | 128,210 | | | 121,686 | |
| Long-term contingent consideration payable, less current portion | | 0 | | | 11,773 | |
| Long-term operating lease liability | | 1,840 | | | 2,319 | |
| Other non-current liabilities | | 4,212 | | | 8,873 | |
| Total liabilities | | 149,371 | | | 180,635 | |
| | | | |
| Shareholders’ equity (deficit): | | | | |
| Preferred shares, nominal value of $0.01 per share; 50,000 shares authorized; 488 issued and outstanding at December 31, 2020 and 0 issued and outstanding at December 31, 2019 | | 5 | | | 0 | |
| Ordinary shares, nominal value of $0.01 per share; 500,000 shares authorized; 58,396 issued and outstanding at December 31, 2020, and 42,927 issued and 37,520 outstanding at December 31, 2019 | | 583 | | | 429 | |
| Treasury shares, at cost, 0 and 5,407 shares held at December 31, 2020 and December 31, 2019, respectively | | 0 | | | (49,998) | |
| Additional paid-in capital | | 566,916 | | | 434,391 | |
| Accumulated deficit | | (384,187) | | | (391,215) | |
| Accumulated other comprehensive loss | | (21,051) | | | (22,806) | |
| Total shareholders’ equity (deficit) | | 162,266 | | | (29,199) | |
| Total liabilities and shareholders’ equity (deficit) | | $ | 311,637 | | | $ | 151,436 | |
See accompanying notes to consolidated financial statements.
AVADEL PHARMACEUTICALS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Ordinary shares | | Preferred shares | | Additional | | Accumulated | | Accumulated
other
comprehensive | | Treasury Shares | | Total
shareholders’ |
| | | Shares | | Amount | | Shares | | Amount | | paid-in capital | | deficit | | loss | | Shares | | Amount | | equity (deficit) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2017 | | 41,463 | | | $ | 414 | | | 0 | | | $ | 0 | | | $ | 393,478 | | | $ | (262,685) | | | $ | (23,266) | | | 2,117 | | | $ | (22,361) | | | $ | 85,580 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (95,304) | | | — | | | — | | | — | | | (95,304) | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | (150) | | | — | | | — | | | (150) | |
| Exercise of stock options | | 82 | | | 1 | | | — | | | — | | | 534 | | | — | | | — | | | — | | | — | | | 535 | |
| Exercise of warrants | | 603 | | | 6 | | | — | | | — | | | 2,905 | | | — | | | — | | | — | | | — | | | 2,911 | |
| Expiration of warrants | | — | | | — | | | — | | | — | | | 2,167 | | | — | | | — | | | — | | | — | | | 2,167 | |
| Vesting of restricted shares | | 547 | | | 6 | | | — | | | — | | | (6) | | | — | | | — | | | — | | | — | | | 0 | |
| Employee share purchase plan share issuance | | 25 | | | — | | | — | | | — | | | 127 | | | — | | | — | | | — | | | — | | | 127 | |
| Share-based compensation expense | | — | | | — | | | — | | | — | | | 7,852 | | | — | | | — | | | — | | | — | | | 7,852 | |
| Equity component of 2023 Notes | | — | | | — | | | — | | | — | | | 26,699 | | | — | | | — | | | — | | | — | | | 26,699 | |
| Share repurchases | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,290 | | | (27,637) | | | (27,637) | |
| Balance, December 31, 2018 | | 42,720 | | | 427 | | | 0 | | | 0 | | | 433,756 | | | (357,989) | | | (23,416) | | | 5,407 | | | (49,998) | | | 2,780 | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (33,226) | | | — | | | — | | | — | | | (33,226) | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 610 | | | — | | | — | | | 610 | |
| Vesting of restricted shares | | 153 | | | 2 | | | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | 0 | |
| Employee share purchase plan share issuance | | 54 | | | — | | | — | | | — | | | 118 | | | — | | | — | | | — | | | — | | | 118 | |
| Share-based compensation expense | | — | | | — | | | — | | | — | | | 519 | | | — | | | — | | | — | | | — | | | 519 | |
| Balance, December 31, 2019 | | 42,927 | | | $ | 429 | | | $ | 0 | | | $ | 0 | | | $ | 434,391 | | | $ | (391,215) | | | $ | (22,806) | | | 5,407 | | | $ | (49,998) | | | $ | (29,199) | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 7,028 | | | — | | | — | | | — | | | 7,028 | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 1,755 | | | — | | | — | | | 1,755 | |
| Exercise of stock options | | 403 | | | 4 | | | — | | | — | | | 2,041 | | | — | | | — | | | — | | | — | | | 2,045 | |
| February 2020 private placement | | 8,680 | | | 87 | | | 488 | | | 5 | | | 60,478 | | | — | | | — | | | — | | | — | | | 60,570 | |
| May 2020 public offering | | 11,630 | | | 116 | | | — | | | — | | | 116,808 | | | — | | | — | | | — | | | — | | | 116,924 | |
| Vesting of restricted shares | | 114 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | | | — | | | 0 | |
| Employee share purchase plan share issuance | | 49 | | | — | | | — | | | — | | | 144 | | | — | | | — | | | — | | | — | | | 144 | |
| Share-based compensation expense | | — | | | — | | | — | | | — | | | 2,999 | | | — | | | — | | | — | | | — | | | 2,999 | |
| Retirement of treasury shares | | (5,407) | | | (54) | | | — | | | — | | | (49,944) | | | — | | | — | | | (5,407) | | | 49,998 | | | 0 | |
| Balance, December 31, 2020 | | 58,396 | | | $ | 583 | | | 488 | | | $ | 5 | | | $ | 566,916 | | | $ | (384,187) | | | $ | (21,051) | | | 0 | | | $ | 0 | | | $ | 162,266 | |
See accompanying notes to consolidated financial statements.
AVADEL PHARMACEUTICALS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income (loss) | | $ | 7,028 | | | $ | (33,226) | | | $ | (95,304) | |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | |
| Depreciation and amortization | | 1,690 | | | 2,486 | | | 7,430 | |
| Impairment of intangible asset | | 0 | | | 0 | | | 66,087 | |
| Remeasurement of acquisition-related contingent consideration | | 3,327 | | | 845 | | | (22,731) | |
| Remeasurement of financing-related contingent consideration | | 435 | | | 378 | | | (1,899) | |
| Amortization of debt discount and debt issuance costs | | 6,524 | | | 5,995 | | | 4,830 | |
| Changes in deferred tax | | (7,431) | | | (6,334) | | | (19,152) | |
| Share-based compensation expense | | 2,999 | | | 519 | | | 7,852 | |
| Gain on the disposition of the Hospital Products | | (45,760) | | | 0 | | | 0 | |
| Loss on deconsolidation of subsidiary | | 0 | | | 1,750 | | | 0 | |
| Gain from the release of certain liabilities | | (3,364) | | | 0 | | | 0 | |
| Other adjustments | | 142 | | | (254) | | | 4,188 | |
| Net changes in assets and liabilities | | | | | | |
| Accounts receivable | | 8,281 | | | 2,471 | | | 3,452 | |
| Inventories, net | | (1,352) | | | 1,155 | | | 711 | |
| Prepaid expenses and other current assets | | 1,863 | | | (1,187) | | | 3,577 | |
| Research and development tax credit receivable | | 2,213 | | | (1,014) | | | (2,545) | |
| Accounts payable & other current liabilities | | (2,788) | | | 4,641 | | | (2,032) | |
| Deferred revenue | | 0 | | | (114) | | | (1,892) | |
| Accrued expenses | | (13,226) | | | 357 | | | (10,640) | |
| | | | | | |
| Earn-out payments for contingent consideration in excess of acquisition-date fair value | | (5,323) | | | (10,988) | | | (19,468) | |
| Royalty payments for contingent consideration payable in excess of original fair value | | (866) | | | (1,748) | | | (2,838) | |
| Other assets and liabilities | | (3,126) | | | (4,057) | | | (2,342) | |
| Net cash used in operating activities | | (48,734) | | | (38,325) | | | (82,716) | |
| | | | | | |
| Cash flows from investing activities: | | | | | | |
| Purchases of property and equipment | | (98) | | | (29) | | | (178) | |
| Proceeds from disposal of property and equipment | | 0 | | | 154 | | | 0 | |
| Proceeds from the disposition of the Hospital Products | | 25,500 | | | 0 | | | 0 | |
| Purchase of intangible assets | | 0 | | | 0 | | | (20,000) | |
| Proceeds from sales of marketable securities | | 36,284 | | | 63,246 | | | 359,507 | |
| Purchases of marketable securities | | (131,407) | | | (24,648) | | | (376,310) | |
| Net cash (used in) provided by investing activities | | (69,721) | | | 38,723 | | | (36,981) | |
| | | | | | |
| Cash flows from financing activities: | | | | | | |
| Proceeds from debt issuance | | 0 | | | 0 | | | 143,750 | |
| Payments for debt issuance costs | | 0 | | | 0 | | | (6,190) | |
| | | | | | |
| Exercise of warrants | | 0 | | | 0 | | | 2,911 | |
| Proceeds from the February 2020 private placement | | 60,570 | | | 0 | | | 0 | |
| Proceeds from the May 2020 public offering | | 116,924 | | | 0 | | | 0 | |
| Proceeds from issuance of ordinary shares | | 2,189 | | | 118 | | | 577 | |
| Share repurchases | | 0 | | | 0 | | | (27,637) | |
| Other financing activities, net | | 0 | | | (145) | | | (752) | |
| Net cash provided by (used in) financing activities | | 179,683 | | | (27) | | | 112,659 | |
| Effect of foreign currency exchange rate changes on cash and cash equivalents | | 720 | | | 78 | | | (201) | |
| Net change in cash and cash equivalents | | 61,948 | | | 449 | | | (7,239) | |
| Cash and cash equivalents at January 1 | | 9,774 | | | 9,325 | | | 16,564 | |
| Cash and cash equivalents at December 31 | | $ | 71,722 | | | $ | 9,774 | | | $ | 9,325 | |
| | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | |
| Income taxes (refund) paid, net | | $ | (1,701) | | | $ | 140 | | | $ | 776 | |
| Interest paid | | 6,469 | | | 6,469 | | | 3,359 | |
See accompanying notes to consolidated financial statements.
AVADEL PHARMACEUTICALS PLC
NOTES TO THE 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 summary, doesbiopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly, extended-release formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in adults with narcolepsy. We are 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 and cataplexy in adults with narcolepsy.The NDA for FT218 was accepted by the FDA in February 2021 and assigned a Prescription Drug User Fee Act (“PDUFA”) target action date of October 15, 2021.
Outside of our lead product candidate, we continue to evaluate opportunities to expand our product portfolio. As of December 31, 2020, we do not purporthave any approved and commercialized products in our portfolio.
We are registered as an Irish public limited company. Our headquarters are in Dublin, Ireland and we have operations in St. Louis, Missouri, U.S.
FT218
FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug-delivery technology for the treatment of EDS and cataplexy in adults suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in the U.S. for the treatment of EDS and cataplexy in patients with narcolepsy and is approved in Europe for the treatment of cataplexy in patients with narcolepsy. Since 2002, sodium oxybate has only been available as a formulation that must be taken twice nightly, first at bedtime, and then again 2.5 to 4 hours later.
On December 16, 2020, we announced the submission of our NDA to the FDA for FT218. On February 26, 2021, the FDA notified us of formal acceptance of the NDA with an assigned PDUFA target action date of October 15, 2021.
The REST-ON trial was a randomized, double-blind, placebo-controlled study that enrolled 212 patients and was conducted in clinical sites in the U.S., Canada, Western Europe and Australia. The last patient, last visit was completed at the end of the first quarter of 2020 and positive top line data from the REST-ON trial was announced on April 27, 2020. Patients who received 9 g of once-nightly FT218, the highest dose administered in the trial, demonstrated a statistically significant and clinically meaningful improvement compared to placebo across the three co-primary endpoints of the trial: maintenance of wakefulness test, or MWT, clinical global impression-improvement, or CGI-I, and mean weekly cataplexy attacks. The lower doses assessed, 6 g and 7.5 g also demonstrated a statistically significant and clinically meaningful improvement on all three co-primary endpoints compared to placebo. We observed the 9 g dose of once-nightly FT218 to be generally well tolerated. Adverse reactions commonly associated with sodium oxybate were observed in a complete descriptionsmall number of patients (nausea 1.3%, vomiting 5.2%, decreased appetite 2.6%, dizziness 5.2%, somnolence 3.9%, tremor 1.3% and enuresis 9%), and 3.9% of the 2017 Omnibus Planpatients who received 9 g of FT218 discontinued the trial due to adverse reactions.
In January 2018, the FDA granted FT218 Orphan Drug Designation, which makes the drug eligible for certain development and commercial incentives, including potential U.S. market exclusivity for up to seven years. Additionally, several FT218-related U.S. patents have been issued, and there are additional patent applications currently in development and/or pending at the U.S. Patent and Trademark Office (“USPTO”), as well as foreign patent offices.
In July 2020, we announced that the first patient was dosed initiating an open-label extension (“OLE”)/switch study of FT218 as a potential treatment for EDS and cataplexy in patients with narcolepsy. The OLE/switch study is qualifiedexamining the long-term safety and maintenance of efficacy of FT218 in its entiretypatients with narcolepsy who participated in the REST-ON study, as well as dosing and preference data for patients switching from twice-nightly sodium oxybate to once-nightly FT218 regardless if they participated in REST-ON or not. We anticipate that the study will enroll up to 250 patients, many of which will be enrolled in North American clinical trial sites that participated in the REST-ON study.
Previously Approved FDA Products
On June 30, 2020 (the “Closing Date”), Avadel Legacy Pharmaceuticals, LLC (the “Avadel Seller”) announced the sale of the portfolio of sterile injectable drugs used in the hospital setting (the “Hospital Products”), which included our three commercial products, Akovaz, Bloxiverz and Vazculep, as well as Nouress, which was approved by the full textU.S. FDA to Exela Sterile Medicines LLC (“Exela Buyer”) pursuant to an asset purchase agreement by and among the Avadel Seller, Avadel US Holdings, Inc., the Exela Buyer and Exela Holdings, Inc. This sale included the following FDA approved products:
•Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery.
•Vazculep (phenylephrine hydrochloride injection) - Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
•Akovaz (ephedrine sulfate injection) - Akovaz was the first FDA approved formulation of ephedrine sulfate, an alpha- and beta- adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
•Nouress (cysteine hydrochloride injection)- Nouress is a sterile injectable product for use in the hospital setting to provide parenteral nutrition to neonates.
See Note 4: Disposition of the 2017 Omnibus Plan,Hospital Products.
Basis of Presentation. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the complete text of which was set forth as Annex A toU.S. (U.S. GAAP). The consolidated financial statements include the Company's Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 1, 2017.General
The 2017 Omnibus Plan covers the grant of awards to Avadel’s employees (including officers), non-employee consultants and non-employee directors and those of Avadel’s affiliates, except that incentive stock options may only be granted to employees (including officers)accounts of the Company and all subsidiaries. All intercompany accounts and transactions have been eliminated.
Our results of operations for the period January 1, 2019 through February 6, 2019 and for year ended December 31, 2018 include the results of Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”) prior to its subsidiaries. Under the termsFebruary 6, 2019 voluntary petition for reorganization under Chapter 11 of the 2017 Omnibus Plan,U.S. Bankruptcy Code. See Note 3: Subsidiary Bankruptcy and Deconsolidation.
Our results of operations for the period January 1, 2018 through February 16, 2018 include the results of FSC Therapeutics and FSC Laboratories, Inc., (collectively “FSC”), prior to its February 16, 2018 disposition date. See Note 18: Divestiture of the Pediatric Assets, for additional information.
Reclassifications
Certain reclassifications are made to prior year amounts whenever necessary to conform with the current year presentation. Certain adjustments have been made to the Consolidated Statements of Cash Flows for the fiscal year ended December 31, 2020 and balances within Note 16: Other Assets and Liabilities for the year ended December 31, 2019 to condense line items of the same nature into a single line. This change does not affect previously reported net cash flows used in operating activities in the Consolidated Statements of Cash Flows. We made certain reclassifications within Note 10: Goodwill and Intangible Assets, to the gross value and total accumulated amortization balances of the Vazculep intangible asset as of December 31, 2019. We made certain adjustments to Note 24: Company Operations by Product, Customer, and Geographic Area to include comparable information for customers that became significant for the year ended December 31, 2020.
Revenue. Prior to June 30, 2020, revenue included sales of pharmaceutical products, licensing fees, and, if any, milestone payments for research and development (“R&D”) achievements.
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective transition method applied to all open contracts as at December 31, 2017. The adoption of the new standard did not have a material effect on the overall timing or amount of revenue recognized when compared to prior accounting standards. See Note 5: Revenue Recognition.
ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under ASC 606, an
aggregateentity recognizes revenue when the performance obligations to the customer have been satisfied through the transfer of
4,000,000 ordinary shares, par value $0.01 per share, will be authorizedcontrol of the goods or services. To determine the appropriate revenue recognition for
delivery in settlement of awards (including incentive stock options).We expectarrangements that the Compensation CommitteeCompany believes are within the scope of ASC 606,
we perform the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts only when the Company and its customer’s rights and obligations under the contract can be determined, the contract has commercial substance, and it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. For contracts that are determined to be within the scope of ASC 606, the Company identifies the promised goods or services in the contract to determine if they are separate performance obligations or if they should be bundled with other goods and services into a single performance obligation. The Company then recognizes as revenue the amount of the Boardtransaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Sales
Prior to June 30, 2020, we sold products primarily through wholesalers and considered these wholesalers to be our customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of
Directors (the “Committee”) will administerour product, which occurs typically upon receipt by the
2017 Omnibus Plan. The Committee may delegate any or all of its administrative authority to our Chief Executive Officer or to a Management Committee except with respect to awards to executive officers whocustomer. Our gross product sales are subject to
Section 16a variety of
the Exchange Act orprice adjustments in arriving at reported net product sales. These adjustments include estimates of product returns, chargebacks, payment discounts, rebates, and other sales allowances and are
covered employees subject to the deduction limits under Section 162(m)estimated based on analysis of
the Internal Revenue Code of 1986, as amended (the “Code”). In addition, the full Board of Directors must serve as the Committee with respect to any awards to our non-employee directors, and non-employee directors may not be granted awards that taken together with any cash fees paid to such non-employee director during any calendar year exceeds $675,000 (calculating the value of the award for financial accounting purposes) (up to twice that limit for a non-executive chair of the Board of Directors or, in extraordinary circumstances, for other non-employee directors).The ordinary shares delivered to settle awards made under the 2017 Omnibus Plan may be authorized and unissued shares or treasury shares. If any shares subject to any award granted under the 2017 Omnibus Plan (other than a substitute award) is forfeited or otherwise terminated without delivery of such shares, the shares subject to such awards will again be available for issuance under the 2017 Omnibus Plan. However, any shares that are withheld or applied as payment for shares issued upon exercise of an award orhistorical data for the withholdingproduct or paymentcomparable products, future expectations for such products and other judgments and analysis.
License and Milestone Revenue
From time to time we may enter into out-licensing agreements which are within the scope of
taxes due upon exercise of the award will continueASC 606 under which it licenses to
be treated as having been delivered under the 2017 Omnibus Plan and will not again be available for grant under the 2017 Omnibus Plan. Also, upon settlement of a stock appreciation right, the number of shares underlying the portion of the stock appreciation right that is exercised shall be treated as having been delivered under the 2017 Omnibus Plan and will not again be available for grant under the 2017 Omnibus Plan.If a dividend or other distribution (whether in cash, ordinary shares or other property), recapitalization, forward or reverse stock split, subdivision, consolidation or reduction of capital, reorganization, merger, consolidation, scheme of arrangement, split-up, spin-off or combination involving us or repurchase or exchange of our shares or other securities, or otherthird parties certain rights to purchase shares of our securitiesits products or other similar transaction or event affects our ordinary shares such that the Committee determines that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits (or potential benefits) provided to grantees under the 2017 Omnibus Plan, the Committee will make an equitable change or adjustment as it deems appropriate in the number and kind of securities subject to awards (whether or not then outstanding) and the related exercise price relating to an award.
intellectual property. The maximum number of ordinary shares that are subject to awards granted to any individual in a single calendar year may not exceed 1,500,000 shares (twice that limit for awards that are granted to an eligible person in the calendar year in which the eligible person first commences employment or service) (based on the highest level of performance resulting in the maximum payout). In addition, the maximum value of all awards to be settled in cash or property other than our ordinary shares that may be granted to any individual in a single calendar year may not exceed $5,000,000 million (twice that limit for awards that are granted to an eligible person in the calendar year in which the eligible person first commences employment or service) (based on the highest level of performance resulting in the maximum payout). These limitations apply to the calendar year in which the awards are granted and not the year in which such awards settle. Such annual limitations apply to dividend equivalents only if such dividend equivalents are granted separately from and not as a feature of another award.
Types of Awards
The 2017 Omnibus Plan permits the granting of any or all of the following types of awards to all grantees:
stock options, including incentive stock options, or ISOs;
stock appreciation rights, or SARs;
restricted stock;
deferred stock and restricted stock units;
performance units and performance shares;
dividend equivalents;
bonus shares;
other stock-based awards; and
cash incentive awards.
Generally, awards under the 2017 Omnibus Plan are granted for no consideration other than prior and future services, provided that the nominal value of any newly issued shares the subject of such grant is fully paid. Awards granted under the 2017 Omnibus Plan may, in the discretion of the Committee, be granted alone or in addition to, in tandem with or in substitution for, any other award under the 2017 Omnibus Plan or other plan of ours; provided, however, that if an SAR is granted in tandem with an ISO, the SAR and ISO must have the same grant date and term and the exercise price of the SAR may not be less than the exercise price of the ISO. The material terms of each award will be set forth in a written award agreement between the grantee and us.
Vesting conditions for any award (other than awards excluded from the minimum vesting requirement as set forth herein) that relate exclusivelythese arrangements typically include payment to the passageus of time and continued employment or other service shall not be less than 36 months, with no more than thirty-three and one-third percent (33-1/3%) of the award vesting every 12 months from the date of the award, with no such award or any portion thereof eligible to vest earlier than 12 months from the date of grant of the Award. If the vesting condition for any award relates to the attainment of specified performance goals, such award shall vest over a performance period of not less than one (1) year. Notwithstanding the foregoing, awards that result in the issuance of an aggregate of up to 5% of the ordinary shares available under the 2017 Omnibus Plan may be granted without regard to such minimum vesting requirements.
Stock Options and SARs
The Committee is authorized to grant SARs and stock options (including ISOs except that an ISO may only be granted to an employee of ours or one of our subsidiary corporations). A stock option allows a grantee to purchase a specified number of our ordinary shares at a predetermined price per share (the “exercise price”) during a fixed period measured from the date of grant. An SAR entitles the grantee to receive the excess of the fair market value of a specified number of shares on the date of exercise over a predetermined exercise price per share. The exercise price of an option or an SAR will be determined by the Committee and set forth in the award agreement but the exercise price may not be less than the fair market value of an ordinary share on the grant date (110 percent of the fair market value in case of certain incentive stock options). The term of each option or SAR is determined by the Committee and set forth in the award agreement, except that the term may not exceed 10 years (5 years in case of certain incentive stock options). Options may be exercised by payment of the purchase price through one or more of the following means: paymentfollowing: non-refundable, upfront license fees; development, regulatory, and commercial milestone payments; and sales-based royalty payments. Each of these payments results in cash (including personal checklicense revenue.
For a complete discussion of the accounting for net product revenue and license revenues, see Note 5: Revenue Recognition.
Research and Development (“R&D”). R&D expenses consist primarily of costs related to clinical studies and outside services, personnel expenses, and other R&D expenses. Clinical studies and outside services costs relate primarily to services performed by clinical research organizations and related clinical or wire transfer),development manufacturing costs, materials and supplies, filing fees, regulatory support, and other third-party fees. Personnel expenses relate primarily to salaries, benefits and share-based compensation. Other R&D expenses primarily include overhead allocations consisting of various support and facilities-related costs. R&D expenditures are charged to operations as incurred. Raw materials used in the production of pre-clinical and clinical products are expensed as R&D costs.
We recognize R&D tax credits received from the French and Irish government for spending on innovative R&D as an offset of R&D expenses.
Advertising Expenses. We expense the costs of advertising as incurred. Advertising expenses were $312, $372 and $17,562 for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease in advertising for the years ended December 31, 2020 and 2019 is due to Specialty Pharma’s bankruptcy and deconsolidation. See Note 3: Subsidiary Bankruptcy and Deconsolidation.
Share-based Compensation. We account for share-based compensation based on the estimated grant-date fair value. The fair value of stock options and warrants is estimated using Black-Scholes option-pricing valuation models (“Black-Scholes model”). As required by the Black-Sholes model, estimates are made of the underlying volatility of AVDL stock, a risk-free rate and an expected term of the option or warrant. We estimated the expected term using a simplified method, as we do not have enough historical exercise data for a majority of such options and warrants upon which to estimate an expected term. We recognize compensation cost, net of an estimated forfeiture rate, using the accelerated method over the requisite service period of the award.
Income Taxes. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the approvalrelated tax authority.
We recognize interest and penalties related to unrecognized tax benefits in the income tax expense line in the accompanying consolidated statements of income (loss). Accrued interest and penalties are included on the Committee, by delivering ordinary shares previously owned byrelated tax liability line in the grantee, by deliveryconsolidated balance sheets.
Cash and Cash Equivalents. Cash and cash equivalents consist of ordinary shares acquiredcash on hand, cash on deposit and fixed term deposits which are highly liquid investments with original maturities of less than three months.
Marketable Securities. The Company’s marketable securities are considered to be available for sale and are carried at fair value, with unrealized gains and losses, net of taxes, reported as a component of accumulated other comprehensive (loss) income (“AOCI”) in shareholders’ equity, with the exception of unrealized gains and losses on equity instruments and unrealized losses believed to be other-than-temporary, if any, which are reported in earnings in the current period. The cost of securities sold is based upon the exercise of such option or by delivering restricted shares. The Committee may also permit a granteespecific identification method.
Accounts Receivable. Prior to pay the exercise price of an option through the sale of shares acquired upon exercisethe Hospital Products on June 30, 2020, accounts receivable were stated at amounts invoiced net of allowances for credit losses and certain other gross to net variable consideration deductions. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, payment history, current and forecast economic conditions and other relevant factors. A majority of our accounts receivable were due from four significant customers.
Inventories. Prior to the sale of the Hospital Products on June 30, 2020, inventories consisted of raw materials and finished products, which were stated at lower of cost or net realizable value, using the first-in, first-out (“FIFO”) method. The Company established reserves for inventory estimated to be obsolete, unmarketable or slow-moving on a case by case basis.
Property and Equipment. Property and equipment is stated at historical cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives:
| | | | | |
| |
| Software, office and computer equipment | 3 years |
| Leasehold improvements, furniture, fixtures and fittings | 5-10 years |
Goodwill. Goodwill represents the excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed. We have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of pharmaceutical products. We test goodwill for impairment annually and when events or changes in circumstances indicate that the carrying value may not be recoverable. We performed our required impairment test of goodwill and have determined that no impairment of goodwill existed at December 31, 2020 and 2019.
Long-Lived Assets. Long-lived assets include fixed assets and intangible assets. Prior to the sale of the Hospital Products on June 30, 2020, intangible assets consisted primarily of purchased licenses and intangible assets recognized as part of the Éclat Pharmaceuticals acquisition. Acquired in-process research and development (“IPR&D”) had an indefinite life and was not amortized until completion and development of the project, at which time the IPR&D became an amortizable asset, for which amortization of such intangible assets was computed using the straight-line method over the estimated useful life of the assets.
Long-lived assets are reviewed for impairment whenever conditions indicate that the carrying value of the assets may not be fully recoverable. Such impairment tests are based on a comparison of the pretax undiscounted cash flows expected to be generated by the asset to the recorded value of the asset or other market-based value approaches. If impairment is indicated, the asset value is written down to its market value if readily determinable or its estimated fair value based on discounted cash flows. Any significant changes in business or market conditions that vary from current expectations could have an impact on the fair value of these assets and any potential associated impairment. During the fourth quarter of 2018, we recorded a $66,087 impairment charge to the entire acquired developed technology related to Noctiva. We determined that 0 impairment existed
at December 31, 2019. On June 30, 2020, we transferred our remaining intangible asset to the Exela Buyer as part of the disposition of the Hospital Products. We determined that 0 impairment existed at December 31, 2020 on our remaining long-lived assets.
Lease Obligations. On January 1, 2019, the Company adopted ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases”. The Company adopted ASU 2016-02 using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. Upon adoption, we recognized total ROU assets of $5,046, with corresponding lease liabilities of $5,131 on the consolidated balance sheets. The adoption did not impact our beginning retained earnings, or our prior year consolidated statements of income (loss) and statements of cash flows.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for any leases that existed prior to January 1, 2019. The Company also elected to combine our lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income (loss) on a straight-line basis over the lease term.
Under ASU 2016-02, the Company determines if a contract is a lease at the inception of the arrangement. Right-of-use assets and operating lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and will include these options in the lease term when they are reasonably certain of being exercised. The Company’s lease contracts do not provide a readily determinable implicit rate. The Company’s estimated incremental borrowing rate is based on information available at the inception of the lease. Our lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are expensed as incurred on the consolidated statements of income (loss).
Acquisition-related Contingent Consideration. Prior to the sale of the Hospital Products on June 30, 2020, the acquisition-related contingent consideration payables arising from the acquisition of Éclat Pharmaceuticals (i.e., our hospital products) and FSC (our pediatrics products), which was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018, were accounted for at fair value (see Note 13: Contingent Consideration Payable and Note 18: Divestiture of the Pediatric Assets). The fair value of the warrants issued in connection with the Éclat acquisition were estimated using a Black-Scholes model. A portion of these warrants were exercised on February 23, 2018 and the remaining warrants expired on March 12, 2018. See Note 13: Contingent Consideration Payable. The fair value of acquisition-related contingent consideration payable is estimated using a discounted cash flow model based on the long-term sales or gross profit forecasts of the specified hospital or pediatric products using an appropriate discount rate. There are a number of estimates used when determining the fair value of these earn-out payments. These estimates include, but are not limited to, the long-term pricing environment, market size, market share the related products are forecast to achieve, the cost of goods related to such products and an appropriate discount rate to use when present valuing the related cash flows. These estimates can and often do change based on changes in current market conditions, competition, management judgment and other factors. Changes to these estimates can have and have had a material impact on our consolidated statements of income (loss) and balance sheets. Changes in fair value of these liabilities are recorded in the consolidated statements of income (loss) within operating expenses as changes in fair value of contingent consideration.
Financing-related Royalty Agreements. We were previously a party to two royalty agreements in connection with certain financing arrangements. We elected the fair value option for the measurement of the financing-related contingent consideration payable associated with the royalty agreements with certain Deerfield and Broadfin entities (the “Deerfield and Broadfin Royalty Agreements”) (see Note 13: Contingent Consideration Payable). Prior to the sale of the Hospital Products on June 30, 2020, the fair value of financing-related royalty agreements was estimated using the same components used to determine the fair value of the acquisition-related contingent consideration noted above, with the exception of cost of products sold. Changes to these components can also have a material impact on our consolidated statements of income (loss) and balance sheets. Changes in the fair value of this liability are recorded in the consolidated statements of income (loss) as other (expense) income - changes in fair value of contingent consideration payable. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield and Broadfin Royalty Agreements were assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of the Company under the Deerfield and Broadfin Royalty Agreements.
Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including marketable securities and contingent liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the periods presented. These estimates and assumptions are based on the best information available to management at the balance sheet dates and depending on the nature of the estimate can require significant judgments. Changes to these estimates and judgments can have and have had a material impact on our consolidated statements of income (loss) and balance sheets. Actual results could differ from those estimates under different assumptions or conditions.
NOTE 2: Newly Issued Accounting Standards
Recently Adopted Accounting Guidance
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820):Disclosure Framework— Changes to the Disclosure Requirement for Fair Value Measurement” which amends certain disclosure requirements over Level 1, Level 2 and Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We adopted ASU 2018-13 in the first quarter of 2020.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).” This standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will be effective for the Company for fiscal years beginning on or after January 1, 2020, including interim periods within those annual reporting periods and early adoption is permitted. We adopted the provisions of ASU 2016-13 in the first quarter of 2020. Adoption of the new standard did not have any impact on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The FASB’s amendments primarily impact ASC 740, Income Taxes, and may impact both interim and annual reporting periods. ASU 2019-12 will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the impact of adopting ASU 2019-12; however, the impact is expected to be immaterial to our consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40), to reduce the complexity associated with applying U.S. GAAP principles for certain financial instruments with characteristics of liabilities and equity. The amendments in this ASU reduce the number of accounting models for convertible instruments and expand the existing disclosure requirements over earnings per share as it relates to convertible instruments. This ASU will be effective for our fiscal year beginning January 1, 2022 and interim periods therein. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The amendments may be adopted through either a broker-dealermodified retrospective method, or a fully retrospective method. We are currently evaluating the impact of adopting ASU 2020-06.
NOTE 3: Subsidiary Bankruptcy and Deconsolidation
Bankruptcy Filing and Deconsolidation
As a result of Specialty Pharma’s bankruptcy filing on February 6, 2019, Avadel ceded authority for managing the business to whom the granteeBankruptcy Court, and Avadel management could not carry on Specialty Pharma’s activities in the ordinary course of business without Bankruptcy Court approval. Prior to Bankruptcy Court approval, Avadel managed the day-to-day operations of Specialty Pharma but did not have discretion to make significant capital or operating budgetary changes or decisions and purchase or sell significant assets, as Specialty Pharma’s material decisions were subject to review by the Bankruptcy Court. For these reasons, we concluded that Avadel had lost control of Specialty Pharma, and no longer had significant influence over Specialty Pharma during the pendency of the bankruptcy. Therefore, we deconsolidated Specialty Pharma effective with the filing of the Chapter 11 bankruptcy in February 2019.
In order to deconsolidate Specialty Pharma, the carrying values of the assets and certain liabilities of Specialty Pharma were removed from our unaudited condensed consolidated balance sheet as of February 5, 2019, and we recorded our investment in Specialty Pharma at its estimated fair value of $0. As the estimated fair value of our investment in Specialty Pharma was lower than its net book value immediately prior to the deconsolidation, we recorded a non-cash charge of approximately $2,678 for the year ended December 31, 2019 associated with the deconsolidation of Specialty Pharma. Subsequent to the deconsolidation of Specialty Pharma, we are accounting for our investment in Specialty Pharma using the cost method of accounting because Avadel does not exercise significant influence over the operations of Specialty Pharma due to the Chapter 11 filing.
On April 26, 2019, Specialty Pharma sold its intangible assets and remaining inventory to an unaffiliated third party in exchange for aggregate cash proceeds of approximately $250, pursuant to an order approving such sale which was issued by the Bankruptcy Court on April 15, 2019. As a result of such sale, Specialty Pharma has delivered irrevocable instructionscompleted its divestment of the assets of the Noctiva business.
On July 2, 2019, Specialty Pharma was made aware of a $50,695 claim made by the Internal Revenue Service (“IRS”) as part of the bankruptcy claims process against Specialty Pharma. On October 2, 2019 the IRS amended the original claim filed in July, reducing the claim to deliver sales$9,302. Specialty Pharma filed its U.S. federal tax return as a member of the Company’s consolidated U.S. tax group. As such, the IRS claim was filed against Specialty Pharma in the bankruptcy proceedings due to IRS tax law requirements for joint and several liability of all members in a consolidated U.S. tax group. On November 19, 2019, Specialty Pharma and the IRS resolved their dispute, subject to the Bankruptcy Court’s approval of Specialty Pharma's Chapter 11 plan, and without prejudice to the claims, rights and defenses of the IRS and other Avadel entities outside of the bankruptcy case. The resolution provided for allowance of the IRS claim as a priority claim but for the IRS to receive a distribution of 50% of the proceeds, sufficientbut in no event less than $125 from Specialty Pharma following confirmation of its disclosure statement and Chapter 11 plan of liquidation.
On July 24, 2020, Specialty Pharma sought bankruptcy court approval of a settlement agreement by and between it, Avadel US Holdings, Inc. and Serenity Pharmaceuticals, LLC (“Serenity”) (the “Serenity Settlement Agreement”). Before the commencement of Specialty Pharma's bankruptcy case, Serenity asserted claims against Specialty Pharma and Avadel US Holdings collectively in an amount no less than $50,000, and after the commencement of the bankruptcy case, Serenity asserted a $3,096 claim against Specialty Pharma and voted to reject its Chapter 11 plan of liquidation. The Serenity Settlement Agreement provides for a global resolution of these disputes by way of an $800 payment from Avadel US Holdings to Serenity, a mutual exchange of general releases, and the withdrawal of Serenity's claim and vote in Specialty Pharma's bankruptcy case. The Serenity Settlement Agreement was approved by order of the Bankruptcy Court on August 12, 2020.
At a hearing conducted on October 6, 2020, the Bankruptcy Court granted final approval of Specialty Pharma’s disclosure statement and confirmed its Chapter 11 plan of liquidation. Pursuant to the plan, the appointment of a Plan Administrator was also approved. The Plan Administrator will be responsible for making distributions to creditors, managing the final windup and dissolution of Specialty Pharma, and taking other steps in accordance with the plan of liquidation. The plan of liquidation became effective on October 21, 2020. Subsequent to the finalization of the bankruptcy, we recognized a non-cash gain of $3,364 from the release of certain liabilities that had been retained following the deconsolidation of Specialty Pharma. This gain is including in "Gain from release of certain liabilities" within non-operating income (loss) for the year ended December 31, 2020.
Debtor in Possession (“DIP”) Financing – Related Party Relationship
In connection with the bankruptcy filing, Specialty Pharma entered into a Debtor in Possession Credit and Security Agreement with Avadel US Holdings (“DIP Credit Agreement”) dated as of February 8, 2019, in an aggregate amount of up to $2,700, of which the funds are to be used by Specialty Pharma solely to fund operations through February 6, 2020. During the year ended December 31, 2019, the Company funded $407 under the DIP Credit Agreement. As the Company assessed that it is unlikely that Specialty Pharma will pay back the loan to Avadel, the $407 was recorded as part of the loss on deconsolidation of subsidiary within the consolidated statements of income (loss) during the year ended December 31, 2019. NaN amounts were funded under the DIP Credit Agreement during the year ended December 31, 2020. We do not expect any additional further liabilities from the DIP Credit Agreement.
NOTE 4: Disposition of the Hospital Products
On June 30, 2020 (the “Closing date”), we announced the sale of our Hospital Products to the Exela Buyer pursuant to the Purchase Agreement (the “Transaction”).
Pursuant to the Purchase Agreement, the Exela Buyer agreed to pay a total aggregate consideration amount of $42,000, of which $14,500 was paid on the purchase priceClosing Date and an additional $27,500 is to us.Restricted Shares
be paid in ten equal monthly installments. During the year ended December 31, 2020, we collected four installment payments, totaling $11,000. Subsequent to the year ended December 31, 2020 but prior to the filing of this Annual Report, we collected an additional $5,500 in installment payments. In connection with the sale of the Hospital Products, the parties also agreed to cause the dismissal of the pending civil litigation related to Nouress in the District Court for the District of Delaware.
We were party to a Membership Interest Purchase Agreement, dated March 13, 2012, by and among us, Avadel Legacy, Breaking Stick Holdings, LLC, Deerfield Private Design International II, L.P. (“Deerfield International”), Deerfield Private Design Fund II, L.P. (“Deerfield Fund”) and Horizon Santé FLML, Sarl (“Horizon”) (the “Deerfield MIPA”) and a Royalty Agreement, dated February 4, 2013, by and among us, Avadel Legacy, the Deerfield Fund and Horizon (the “Deerfield Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Deerfield Royalty Agreement for obligations that arise after the Closing date.
We were also party to a Royalty Agreement, dated December 3, 2013, by and between us, Avadel Legacy and Broadfin Healthcare Master Fund, Ltd. (the “Broadfin Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Broadfin Royalty Agreement for obligations that arise after the Closing Date.
We recorded a net gain on the sale of the Hospital Products of $45,760 during the year ended December 31, 2020 which has been recorded on the consolidated statement of income (loss). The Committee may award restricted shares consisting$45,760 gain represents the aggregate consideration of ordinary shares$42,000, less transaction fees of $2,928, plus the assets and liabilities either transferred to the Exela Buyer or eliminated by us due to the sale of the Hospital Products, which remainare listed below.
| | | | | | | | |
| | December 31, 2020 |
| Prepaid expenses and other current assets | | $ | (134) | |
| Inventories | | (4,922) | |
| Goodwill | | (1,654) | |
| Intangible assets, net | | (407) | |
| Other non-current assets | | (1,095) | |
| Total long-term contingent consideration payable | | 14,900 | |
| Net liabilities disposed of | | 6,688 | |
| Aggregate consideration | | 42,000 | |
| Less transaction fees | | (2,928) | |
| Net gain on the sale of the Hospital Products | | $ | 45,760 | |
Subsequent to the disposition of the Hospital Products, the Company entered into a separate and distinct agreement with the Exela Buyer, whereby the Exela Buyer assumed all future returns of the Hospital Products in exchange for cash consideration paid by the Company. The Company recorded a $518 gain from this transaction, which is recorded in “Selling, general and administrative expenses” for the year ended December 31, 2020.
We evaluated various qualitative and quantitative factors related to the disposition of the Hospital Products and determined that it did not meet the criteria for presentation as a discontinued operation.
The unaudited pro forma condensed combined financial statements included below are being provided for information purposes only and are not necessarily indicative of the results of operations or financial position that would have resulted if the Transaction had actually occurred on the date indicated. The pro forma adjustments are based on available information and assumptions that the Company believes are attributable to the sale.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Unaudited Pro Forma Condensed Combined Balance Sheet |
| | As of December 31, 2019 |
| | | As Reported | | Pro Forma Adjustments | | Notes | | Pro Forma |
| | | | | | | | |
| ASSETS | | | | | | | | |
| | | | | | | | |
| Cash and cash equivalents | | $ | 9,774 | | | $ | 12,935 | | | (a) | | $ | 22,709 | |
| | | | | | | | |
| | | | | | | | |
| Inventories | | 3,570 | | | (3,570) | | | (b) | | 0 | |
| | | | | | | | |
| Prepaid expenses and other current assets | | 4,264 | | | 27,500 | | | (c) | | 31,764 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Goodwill | | 18,491 | | | (1,654) | | | (d) | | 16,837 | |
| Intangible assets, net | | 813 | | | (813) | | | (e) | | 0 | |
| | | | | | | | |
| Other non-current assets | | 39,274 | | | (9,702) | | | (f) | | 29,572 | |
| Total assets | | $ | 151,436 | | | $ | 24,696 | | | | | $ | 176,132 | |
| | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | |
| Current portion of long-term contingent consideration payable | | $ | 5,554 | | | $ | (5,054) | | | (g) | | $ | 500 | |
| | | | | | | | |
| | | | | | | | |
| Accrued expenses | | 19,810 | | | 2,800 | | | (h) | | 22,610 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Long-term contingent consideration payable, less current portion | | 11,773 | | | (11,773) | | | (g) | | 0 | |
| | | | | | | | |
| | | | | | | | |
| Total liabilities | | 180,635 | | | (14,027) | | | | | 166,608 | |
| | | | | | | | |
| Shareholders’ equity (deficit): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Accumulated deficit | | (391,215) | | | 38,723 | | | (i) | | (352,492) | |
| | | | | | | | |
| Total shareholders’ (deficit) equity | | (29,199) | | | 38,723 | | | | | 9,524 | |
| Total liabilities and shareholders’ equity (deficit) | | $ | 151,436 | | | $ | 24,696 | | | | | $ | 176,132 | |
Adjustments to the pro forma unaudited condensed combined balance sheet
(a) This adjustment represents the receipt of $14,500 cash consideration from the Exela Buyer at the closing of the Transaction less $1,565 placed into escrow for the estimated earn outs and royalties payable to Breaking Stick Holdings L.L.C., Horizon Santé FLML, Sarl, Deerfield Private Design Fund II, L.P., all affiliates of Deerfield Capital L.P. ("Deerfield") and Broadfin Healthcare Master Fund ("Broadfin") for the current year ended.
(b) This adjustment reflects the elimination of Inventories that were purchased as part of the Transaction.
(c) This adjustment reflects the Transaction consideration in the form of ten monthly installment payments of $2,750 (totaling $27,500) beginning 90 days from the Closing date.
(d) This adjustment reflects the elimination of $1,654 of Goodwill based on the relative fair value of the Hospital Products as a portion of the overall value of the Company.
(e) This adjustment reflects the elimination of the unamortized balance of the Intangible asset on acquired developed technology for Vazculep.
(f) This adjustment reflects the elimination of $1,228 of other long-term assets and $8,474 of deferred tax assets at December 31, 2019. The eliminated deferred tax assets are tax attributes of the Hospital Products.
(g) This adjustment reflects the elimination of short and long term related party payables, less the expected amounts due to Deerfield and Broadfin after taking into consideration the escrow discussed in Note (a). As part of the Transaction, the buyer
agreed to assume the quarterly earn-out and royalty payments for periods after the close of the Transaction. The Company will no longer be responsible for these payments.
(h) This adjustment reflects the estimated transaction fees payable related to the Transaction.
(i) This adjustment reflects the estimated gain of $38,723 arising from the Transaction for the year ended December 31, 2019. This estimated gain has not been reflected in the pro forma unaudited condensed combined statements of loss as it is considered to be nonrecurring in nature. No adjustment has been made to the sale proceeds to give effect to any potential post-closing adjustments under the terms of the Purchase Agreement.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Unaudited Pro Forma Condensed Combined Statement of Income (Loss) |
| | Year Ended December 31, 2020 |
| | | As Reported | | Pro Forma Adjustments | | Notes | | Pro Forma |
| | | | | | | | |
| | | | | | | | |
| Product sales | | $ | 22,334 | | | $ | (22,175) | | | (j) | | $ | 159 | |
| Total operating expense | | 16,519 | | | (8,392) | | | (k) | | 8,127 | |
| Operating income (loss) | | 5,815 | | | (13,783) | | | | | (7,968) | |
| Loss before income taxes | | $ | (5,082) | | | $ | (13,348) | | | (l) | | $ | (18,430) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Unaudited Pro Forma Condensed Combined Statement of Income (Loss) |
| | Year Ended December 31, 2019 |
| | | As Reported | | Pro Forma Adjustments | | Notes | | Pro Forma |
| | | | | | | | |
| | | | | | | | |
| Product sales | | $ | 59,215 | | | $ | (59,273) | | | (j) | | $ | (58) | |
| Total operating expense | | 83,327 | | | (16,092) | | | (m) | | 67,235 | |
| Operating income (loss) | | (24,112) | | | (43,181) | | | | | (67,293) | |
| Loss before income taxes | | $ | (38,582) | | | $ | (42,803) | | | (n) | | $ | (81,385) | |
Adjustments to the pro forma unaudited condensed combined statements of income (loss)
(j) This adjustment reflects Product sales attributable to the Hospital Products.
(k) This adjustment reflects the following estimated expenses attributable to the Hospital Products:
•Cost of products of $3,540.
•R&D expenses of $322.
•Selling, general and administrative expenses of $797.
•Intangible asset amortization on acquired development technology for Vazculep of $406.
•Changes in fair value of related party contingent consideration of $3,327. The Company will no longer be responsible for these payments.
(l) This amount reflects the adjustments noted in (j) and (k) above, as well as estimated Changes in fair value of related party payable of $435 attributable to the Hospital Products. The Company will no longer be responsible for these payments.
(m) This adjustment reflects the following estimated expenses attributable to the Hospital Products:
•Cost of products of $11,368.
•R&D expenses of $1,960.
•Selling, general and administrative expenses of $1,102.
•Intangible asset amortization on acquired development technology for Vazculep of $816.
•Changes in fair value of related party contingent consideration of $845. The Company will no longer be responsible for these payments.
(n) This amount reflects the adjustments noted in (j) and (m) above, as well as the reversal of estimated Changes in fair value of related party payable of $378 attributable to the Hospital Products. The Company will no longer be responsible for these payments.
NOTE 5: Revenue Recognition
Prior to June 30, 2020, the Company generated revenue primarily from the sale of pharmaceutical products to customers. On June 30, 2020, the Company sold the Hospital Products. See Note 4: Disposition of the Hospital Products.
Product Sales and Services
Prior to June 30, 2020, we sold products primarily through wholesalers and considered these wholesalers to be our customers. Revenue from product sales was recognized when the customer obtained control of our product and our performance obligations were met, which occurred typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales were subject to a riskvariety of forfeitureprice adjustments in arriving at reported net product sales. These adjustments included estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and were estimated when the product is delivered based on analysis of historical data for the product or comparable products, as well as future expectations for such products.
Reserves to reduce Gross Revenues to Net Revenues
Revenues from product sales were recorded at the net selling price, which included estimated reserves to reduce gross product sales to net product sales resulting from product returns, chargebacks, payment discounts, rebates, and other sales allowances that are offered within contracts between the Company and its customers and end users. These reserves were based on the amounts earned or to be claimed on the related sales and were classified as reductions of accounts receivable if the amount is payable to the customer, except in the case of the estimated reserve for future expired product returns, which are classified as a liability. The reserves are classified as a liability if the amount is payable to a party other than a customer. Where appropriate, these estimated reserves take into consideration relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates to reduce gross selling price to net selling price to which it expects to be entitled based on the terms of its contracts. The actual selling price ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company adjusts these estimates, which would affect earnings in the period such variances become known.
Product Returns
Consistent with industry practice, the Company maintains a returns policy that generally offers customers a right of return for product that has been purchased from the Company. The Company estimated the amount of product returns and records this estimate as a reduction of revenue in the period the related product revenue is recognized. The Company estimated product return liabilities based on analysis of historical data for the product or comparable products, as well as future expectations for such products and other judgments and analysis.
Chargebacks, Discounts and Rebates
Chargebacks, discounts and rebates represent the estimated obligations resulting from contractual commitments to sell products to its customers or end users at prices lower than the list prices charged to our wholesale customers. Customers charge the Company for the difference between the gross selling price they pay for the product and the ultimate contractual price agreed to between the Company and these end users. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargebacks, discounts and rebates are estimated at the time of sale to the customer.
Revenue from licensing arrangements
The terms of the Company’s licensing agreements may contain multiple performance obligations, including certain R&D activities. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments. Each of these payments are recorded as license revenues. The Company did not have any license revenue during the years ended December 31, 2020 and 2019. License revenue during the year ended December 31, 2018 was $1,846.
License of Intellectual Property
If the license to the Company’s intellectual property is determined to be disposeddistinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the
license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of by grantees until certain restrictions establishedthe combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Disaggregation of revenue
The Company’s primary source of revenue was from the sale of pharmaceutical products, which are equally affected by the Committee lapse. same economic factors as it relates to the nature, amount, timing, and uncertainty of revenue and cash flows. For further detail about the Company’s revenues by product, see Note 24: Company Operations by Product, Customer and Geography.
Contract Balances
The vesting conditionsCompany does not recognize revenue in advance of invoicing its customers and therefore has no related contract assets.
A receivable is recognized in the period the Company sells its products and when the Company’s right to consideration is unconditional.
There were 0 material deferred contract costs at December 31, 2020 and 2019.
Transaction Price Allocated to the Remaining Performance Obligation
For product sales, the Company generally satisfies its performance obligations within the same period the product is delivered. Product sales recognized in 2020 from performance obligations satisfied (or partially satisfied) in previous periods were immaterial.
For certain licenses of intellectual property, specifically those with performance obligations satisfied over time, the Company allocates a portion of the transaction price to that performance obligation and recognizes revenue using an appropriate measure of progress towards development of the product. In December 2018, we reached an agreement to exit a contract and our remaining performance obligations and recognized the remaining $1,600 of deferred revenue, which represented the unsatisfied performance obligations associated with a license agreement. At December 31, 2020 and 2019, the deferred revenue balance related to this obligation is $0.
The Company has elected certain of the practical expedients from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. Accordingly, the Company applies the practical expedient in ASC 606 to its stand-alone contracts and does not disclose information about variable consideration from remaining performance obligations for which we recognize revenue.
NOTE 6: Fair Value Measurements
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement.
ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as a market-based measurement that should be determined based on the assumptions that marketplace participants would use in pricing an asset or liability. When estimating fair value, depending on the nature and complexity of the asset or liability, we may generally use one or each of the following techniques:
•Income approach, which is based on the present value of a future stream of net cash flows.
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
As a basis for considering the assumptions used in these techniques, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
•Level 1 - Quoted prices for identical assets or liabilities in active markets.
•Level 2 - Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
•Level 3 - Unobservable inputs that reflect estimates and assumptions.
The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 | | As of December 31, 2019 |
| Fair Value Measurements: | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | |
Marketable securities (see Note 7) | | | | | | | | | | | | |
| Equity securities | | $ | — | | | $ | — | | | $ | — | | | $ | 4,404 | | | $ | — | | | $ | — | |
| Money market and mutual funds | | 104,672 | | | — | | | — | | | 38,799 | | | — | | | — | |
| Corporate bonds | | — | | | 22,155 | | | — | | | — | | | 4,098 | | | — | |
| Government securities - U.S. | | — | | | 18,999 | | | — | | | — | | | 5,446 | | | — | |
| | | | | | | | | | | | |
| Other fixed-income securities | | — | | | 3,854 | | | — | | | — | | | 1,637 | | | — | |
| Total assets | | $ | 104,672 | | | $ | 45,008 | | | $ | — | | | $ | 43,203 | | | $ | 11,181 | | | $ | — | |
| | | | | | | | | | | | |
Contingent consideration payable (see Note 13) | | — | | | — | | | — | | | — | | | — | | | 17,327 | |
| Total liabilities | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 17,327 | |
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the fiscal year ended December 31, 2020, there were no transfers in and out of Level 1, 2, or 3. During the twelve months ended December 31, 2020, 2019 and 2018, we did not recognize any other-than-temporary impairment loss.
Some of the Company’s financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.
Debt
We estimate the fair value of our $143,750 aggregate principal amount of 4.50% exchangeable senior notes due 2023 (the “2023 Notes”), a Level 2 input, based on interest rates that would be service-based (i.e.currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities or recent trading prices obtained from brokers. The estimated fair value of the 2023 Notes at December 31, 2020 is $128,210, which is the same as book value.
See Note 12: Long-Term Debt for additional information regarding our debt obligations.
NOTE 7:Marketable Securities
The Company has investments in equity and available-for-sale debt securities which are recorded at fair market value. The change in the fair value of equity investments is recognized in our consolidated statements of income (loss) and the change in the fair value of available-for-sale debt investments is recorded as other comprehensive income (loss) in shareholders’ equity (deficit), requiring continuous servicenet of income tax effects. As of December 31, 2020, we considered any decreases in fair value on our marketable securities to be driven by factors other than credit risk, including market risk.
The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of December 31, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| Marketable Securities: | | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
| | | | | | | | |
| Money market and mutual funds | | $ | 103,404 | | | $ | 1,288 | | | $ | (20) | | | $ | 104,672 | |
| Corporate bonds | | 21,811 | | | 350 | | | (6) | | | 22,155 | |
| Government securities - U.S. | | 18,849 | | | 155 | | | (5) | | | 18,999 | |
| | | | | | | | |
| Other fixed-income securities | | 3,839 | | | 22 | | | (7) | | | 3,854 | |
| | | | | | | | |
| | | | | | | | |
| Total | | $ | 147,903 | | | $ | 1,815 | | | $ | (38) | | | $ | 149,680 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 |
| Marketable Securities: | | Adjusted Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
| Equity securities | | $ | 4,234 | | | $ | 170 | | | $ | 0 | | | $ | 4,404 | |
| Money market and mutual funds | | 38,028 | | | 771 | | | 0 | | | 38,799 | |
| Corporate bonds | | 4,021 | | | 77 | | | 0 | | | 4,098 | |
| Government securities - U.S. | | 5,341 | | | 110 | | | (5) | | | 5,446 | |
| | | | | | | | |
| Other fixed-income securities | | 1,614 | | | 23 | | | 0 | | | 1,637 | |
| | | | | | | | |
| Total | | $ | 53,238 | | | $ | 1,151 | | | $ | (5) | | | $ | 54,384 | |
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We reflect these gains and losses as a component of investment and other income in the accompanying consolidated statements of income (loss).
We recognized gross realized gains of $474, $483, and $317 for the twelve months ended December 31, 2020, 2019, and 2018, respectively. These realized gains were offset by realized losses of $912, $151, and $565 for the twelve-months ended December 31, 2020, 2019, and 2018, respectively.
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 December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturities |
| Marketable Debt Securities: | | Less than 1 Year | | 1-5 Years | | 5-10 Years | | Greater than 10 Years | | Total |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Corporate bonds | | $ | 6,054 | | | $ | 14,468 | | | $ | 1,633 | | | $ | 0 | | | $ | 22,155 | |
| Government securities - U.S. | | 0 | | | 13,827 | | | 2,038 | | | 3,134 | | | 18,999 | |
| | | | | | | | | | |
| Other fixed-income securities | | 1,017 | | | 2,837 | | | 0 | | | 0 | | | 3,854 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total | | $ | 7,071 | | | $ | 31,132 | | | $ | 3,671 | | | $ | 3,134 | | | $ | 45,008 | |
We have classified our 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 our investment portfolio.
Total gross unrealized losses of our available-for-sale debt securities at December 31, 2020 were immaterial. The unrealized losses are driven by factors other than credit risk and have been in a specified period)unrealized loss position for less than one year. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases.
NOTE 8:Inventories
The principal categories of inventories, net of reserves of $0 and $914 at December 31, 2020 and 2019, respectively, are comprised of the following:
| | | | | | | | | | | | | | |
| Inventory: | | 2020 | | 2019 |
| | | | |
| Finished goods | | $ | 0 | | | $ | 3,020 | |
| Raw materials | | 0�� | | | 550 | |
| Total | | $ | 0 | | | $ | 3,570 | |
The decrease in inventory at December 31, 2020 is a result of the June 30, 2020 disposition of the Hospital Products. See Note 4: Disposition of the Hospital Products.
NOTE 9:Property and Equipment, net
The principal categories of property and equipment, net at December 31, 2020 and 2019, respectively, are as follows:
| | | | | | | | | | | | | | |
| Property and Equipment, net: | | 2020 | | 2019 |
| | | | |
| | | | |
| Software, office and computer equipment | | $ | 1,443 | | | $ | 1,258 | |
| Furniture, fixtures and fittings | | 300 | | | 300 | |
| Less - accumulated depreciation | | (1,384) | | | (1,014) | |
| Total | | $ | 359 | | | $ | 544 | |
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $287, $459 and $811, respectively.
NOTE 10:Goodwill and Intangible Assets
The Company’s amortizable and unamortizable intangible assets at December 31, 2020 and 2019, respectively, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 |
| Goodwill and Intangible Assets: | | Gross
Value | | Accumulated
Amortization | | Net Carrying Amount | | Gross
Value | | Accumulated
Amortization | | Net Carrying Amount |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Acquired developed technology - Vazculep (1) | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 12,061 | | | $ | (11,248) | | | $ | 813 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Unamortizable intangible assets - Goodwill (2) | | $ | 16,836 | | | $ | 0 | | | $ | 16,836 | | | $ | 18,491 | | | $ | 0 | | | $ | 18,491 | |
| | | | | | | | | | | | |
(1) This intangible asset was assumed by the Exela Buyer as part of the disposition of the Hospital Products on June 30, 2020. See Note 4: Disposition of the Hospital Products.
(2) In connection with the disposition of the Hospital Products (see Note 4: Disposition of the Hospital Products), the Company allocated goodwill of $1,655 on a relative fair value basis to the Hospital Products and included this amount in the net gain on the disposition of the Hospital Products on the consolidated statement of income (loss) during the year ended December 31, 2020.
The Company recorded amortization expense related to amortizable intangible assets of $406, $816 and $6,619 for the years ended December 31, 2020, 2019 and 2018, respectively.
NaN impairment loss related to goodwill or performance-based (i.e.intangible assets was recognized during the years ended December 31, 2020 or 2019.
NOTE 11: Leases
On January 1, 2019, the Company adopted ASU 2016-02, “Leases”, requiring achievementusing the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. At December 31, 2020, the balances of the operating lease right-of-use asset and total operating lease liability were $2,604 and $2,314, respectively, of which $474 of the operating lease liability is classified as a current liability.
All of the Company’s office spaces are leased. The Company also leases a production suite. All leased facilities are classified as operating leases with remaining lease terms between one and five years. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and will include these options in the lease term when they are reasonably certain specified performance objectives) or both. A grantee receiving restricted shares will haveof being exercised. For all of the rightsCompany’s leases, lease and non-lease components are accounted for as a single lease component, as all non-lease components are immaterial.
The components of lease costs, which are included in selling, general and administrative expenses in the consolidated statements of income (loss) of years ended December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | |
| Lease cost: | | | | 2020 | | 2019 |
| | | | | | |
Operating lease costs (1) | | | | $ | 1,133 | | | $ | 1,515 | |
| | | | | | |
| | | | | | |
Sublease income (2) | | | | (336) | | | (276) | |
| Total lease cost | | | | $ | 797 | | | $ | 1,239 | |
(1) Variable lease costs were immaterial for the years ended December 31, 2020 and 2019.
(2) Represents sublease income received for various office leases.
During the years ended December 31, 2020 and 2019, the Company reduced its operating lease liabilities by $769 and $1,480 for cash paid. During the year ended December 31, 2020, there were no new operating or finance leases entered into. As of December 31, 2020, the Company is aware of one additional potential embedded lease that has not yet commenced and will not commence until certain conditions are met. If these conditions are met and the start date is determined, annual fees would commence and at that time an operating lease right-of-use asset and corresponding operating lease liability will be recorded.
As of December 31, 2020, our operating leases have a shareholder, includingweighted-average remaining lease term of 4.3 years and a weighted-average discount rate of 5.3%. Avadel’s lease contracts do not provide a readily determinable implicit rate. Avadel’s estimated incremental borrowing rate is based on information available at the inception of the lease.
Maturities of the Company’s operating lease liabilities were as follows:
| | | | | | | | |
| Maturities: | | Operating Leases |
| | |
| 2021 | | $ | 578 | |
| 2022 | | 590 | |
| 2023 | | 602 | |
| 2024 | | 614 | |
| 2025 | | 206 | |
| Thereafter | | 0 | |
| Total lease payments | | 2,590 | |
| Less: interest | | 276 | |
| Present value of lease liabilities | | $ | 2,314 | |
NOTE 12:Long-Term Debt
Long-term debt is summarized as follows:
| | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| Principal amount of 4.50% exchangeable senior notes due 2023 | | $ | 143,750 | | | $ | 143,750 | |
| Less: unamortized debt discount and issuance costs, net | | (15,540) | | | (22,064) | |
| Net carrying amount of liability component | | 128,210 | | | 121,686 | |
| Less: current maturities | | 0 | | | 0 | |
| Long-term debt | | $ | 128,210 | | | $ | 121,686 | |
| | | | |
| Equity component: | | | | |
| Equity component of exchangeable notes, net of issuance costs | | $ | (26,699) | | | $ | (26,699) | |
2023 Notes
On February 16, 2018, Avadel Finance Cayman Limited, a Cayman Islands exempted company (the “Issuer”) and an indirect wholly-owned subsidiary of the Company, issued $125,000 aggregate principal amount of 4.50% exchangeable senior notes due 2023 (the “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 2023 Notes a 30-day option to purchase up to an additional $18,750 aggregate principal amount of the 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 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.
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, which is equivalent to an initial exchange price of approximately $10.79 per ADS. Such initial exchange price represents a premium of approximately 20% to the $8.99 per ADS closing price on The Nasdaq Global Market on February 13, 2018. 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. Holders of the 2023 Notes may convert their 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 2023 Notes may surrender all or any portion of its 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 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 2023 Notes has the right to voterequire the sharesCompany to repurchase the 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 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 2023 Notes may surrender all or any portion of its 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 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 2023 Notes may surrender all or any portion of its 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 2023 Notes are not otherwise exchangeable at such time. After that time, the right to receive any dividends (generally subject to reinvestment into additional restricted shares), except as otherwise providedexchange shall expire, unless the Company defaults in the award agreement. Upon terminationpayment of the grantee’s affiliationredemption price, in which case a holder of the 2023 Notes may exchange its 2023 Notes until the redemption price has been paid or duly provided for.
We 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. We determined that this exception applies due, in part, to our ability to settle the 2023 Notes in cash, ADSs or a combination of cash and ADSs, at our option. We have therefore applied the guidance provided by ASC 470-20, Debt with
us duringConversion and Other Options which requires that the
restriction period (or, if applicable, upon2023 Notes be separated into debt and equity components at issuance and a value be assigned to each. The carrying amount of the
failure to satisfyliability component was calculated by measuring the
specified performance objectives during the restriction period), the restricted shares will be forfeited as provided in the award agreement.Restricted Stock Units and Deferred Stock
The Committee may also grant restricted stock unit awards and/or deferred stock awards. A deferred stock award is the grantfair value of a right to receivesimilar liability that does not have an associated convertible feature. The allocation was performed in a specified number ofmanner that reflected our ordinary shares at the end of specified deferral periods or upon the occurrence of a specified event, which satisfies the requirements of Section 409Anon-convertible debt borrowing rate for similar debt. The equity component of the Internal Revenue Code. A restricted stock unit award is2023 Notes was recognized as a debt discount and represents the grant of a right to receive a specified number of our ordinary shares (ordifference between the cash value thereof) upon lapse of a specified forfeiture condition (such as completion of a specified period of service or achievement of certain specified performance objectives). If the service condition and/or specified performance objectives are not satisfied during the restriction period, the award will lapse withoutproceeds from the issuance of the 2023 Notes and the fair value of the liability of the 2023 Notes on its issuance date. The excess of the principal amount of the liability component over its carrying amount (the “Debt Discount”) is amortized to interest expense using the effective interest method over the term of the 2023 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
NOTE 13:Contingent Consideration Payable
Contingent consideration payable and related activity are reported at fair value and consist of the following at December 31, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Activity during the Twelve Months Ended December 31, 2020 | | |
| | | | | | | Changes in Fair Value of
Contingent Consideration Payable | | | | |
| | Balance,
December 31, 2019 | | Payments | | Operating Expense | | Other
Expense | | Disposition of the Hospital Products | | Balance,
December 31, 2020 |
| | | | | | | | | | | | |
| Acquisition-related contingent consideration: | | | | | | | | | | | | |
Earn-out payments - Éclat Pharmaceuticals (a) (d) | | $ | 15,472 | | | $ | (5,323) | | | $ | 3,327 | | | $ | 0 | | | $ | (13,476) | | | $ | 0 | |
| Financing-related: | | | | | | | | | | | | |
Royalty agreement - Deerfield (b) (d) | | 1,251 | | | (587) | | | 0 | | | 272 | | | (936) | | | 0 | |
Royalty agreement - Broadfin (c) (d) | | 604 | | | (279) | | | 0 | | | 163 | | | (488) | | | 0 | |
| Total contingent consideration payable | | 17,327 | | | $ | (6,189) | | | $ | 3,327 | | | $ | 435 | | | $ | (14,900) | | | 0 | |
| Less: current portion | | (5,554) | | | | | | | | | | | 0 | |
| Total long-term contingent consideration payable | | $ | 11,773 | | | | | | | | | | | $ | 0 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(a) In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by the Company’s former CEO, and certain other current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.
(b)As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 1.75% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Éclat Pharmaceuticals products. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.
(c)As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a former related party and shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of the Company under the Broadfin Royalty Agreement.
(d)Deerfield and Broadfin Healthcare Master Trust disposed of their 2023 Notes and ordinary shares underlying such award (orin the Company during the year ended December 31, 2020 and are no longer considered related parties.
Prior to the sale of the Hospital Products on June 30, 2020, the fair value of each contingent consideration payable listed in (a), (b) and (c) above was estimated using a discounted cash flow model based on estimated and projected annual net revenues or gross profit, as appropriate, of each of the specified Éclat products using an appropriate risk-adjusted discount rate of 14%. These fair value thereof).Restricted stock unitsmeasurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related contingent consideration payables, resulting primarily from management’s revision of key assumptions, will be recorded in the consolidated statements of income (loss) in the line items entitled “Changes in fair value of contingent consideration” for items noted in (b) above and in “Other (expense) income - changes in fair value of contingent consideration payable” for items (b) and (c) above. See
Note 1: Summary of Significant Accounting Policies under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements for more information on key assumptions used to determine the fair value of these liabilities. Prior to June 30, 2020, the Company chose to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (b) and (c) above. These financing-related liabilities were 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 – change in fair value of contingent consideration payable” on the consolidated statements of income (loss).
The following table summarizes changes to the contingent consideration payables, a recurring Level 3 measurement, for the twelve-month periods ended December 31, 2020, 2019 and 2018:
| | | | | | | | |
| Contingent Consideration Payable: | | Balance |
| | |
| Balance at December 31, 2017 | | $ | 98,925 | |
| Payments of related party payable | | (22,951) | |
Fair value adjustments (1) | | (24,630) | |
| Expiration of warrants | | (2,167) | |
| Disposition of the pediatrics assets | | (20,337) | |
| Balance at December 31, 2018 | | 28,840 | |
| Payments of related party payable | | (12,736) | |
Fair value adjustments (1) | | 1,223 | |
| Balance at December 31, 2019 | | 17,327 | |
| Payments of contingent consideration payable | | (6,189) | |
Fair value adjustments (1) | | 3,762 | |
| Disposition of the Hospital Products | | (14,900) | |
| Balance at December 31, 2020 | | $ | 0 | |
(1) Fair value adjustments are reported as changes in fair value of contingent consideration and other expense - changes in fair value of contingent consideration payable in the consolidated statements of income (loss).
NOTE 14:Income Taxes
The components of (loss) income before income taxes for the years ended twelve months ended December 31, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (Loss) Income Before Income Taxes: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Ireland | | $ | (27,205) | | | $ | (50,134) | | | $ | (42,604) | |
| U.S. | | 22,335 | | | 10,401 | | | (70,340) | |
| France | | (212) | | | 1,151 | | | (253) | |
| Total loss before income taxes | | $ | (5,082) | | | $ | (38,582) | | | $ | (113,197) | |
The income tax (benefit) provision consists of the following for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| Income Tax (Benefit) Provision: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Current: | | | | | | |
| U.S. - Federal | | $ | (12,810) | | | $ | 0 | | | $ | 0 | |
| U.S. - State | | 20 | | | 97 | | | 330 | |
| | | | | | |
| Total current | | (12,790) | | | 97 | | | 330 | |
| | | | | | |
| Deferred: | | | | | | |
| Ireland | | 0 | | | (1,256) | | | 0 | |
| U.S. - Federal | | 680 | | | (4,093) | | | (19,503) | |
| U.S. - State | | 0 | | | (104) | | | 1,280 | |
| | | | | | |
| Total deferred | | 680 | | | (5,453) | | | (18,223) | |
| | | | | | |
| Income tax benefit | | $ | (12,110) | | | $ | (5,356) | | | $ | (17,893) | |
The reconciliation between income taxes at the statutory rate and the Company’s benefit for income taxes is as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation to Effective Income Tax Rate: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Statutory tax rate | | 12.5 | % | | 12.5 | % | | 12.5 | % |
| Differences in international tax rates | | (34.5) | % | | 3.2 | % | | 8.0 | % |
| Nondeductible changes in fair value of contingent consideration | | (19.4) | % | | (0.3) | % | | 4.0 | % |
| Intercompany asset transfer | | 0 | % | | 21.2 | % | | 0 | % |
| Change in valuation allowances | | (83.3) | % | | (19.1) | % | | (5.3) | % |
| Nondeductible stock-based compensation | | (20.9) | % | | (2.7) | % | | (1.3) | % |
| Hospital Products sale | | 183.5 | % | | 0 | % | | 0 | % |
| Unrealized tax benefits | | 5.4 | % | | 0.7 | % | | (1.3) | % |
| State and local taxes (net of federal) | | (0.4) | % | | 0 | % | | (0.3) | % |
| Change in U.S. tax law | | 179.5 | % | | 0 | % | | (0.2) | % |
| Nondeductible interest expense | | (34.0) | % | | (2.5) | % | | (1.1) | % |
| Orphan drug and R&D tax credit | | 55.0 | % | | 0 | % | | 0 | % |
| Other | | (5.1) | % | | 0.9 | % | | 0.7 | % |
| Effective income tax rate | | 238.3 | % | | 13.9 | % | | 15.7 | % |
| | | | | | |
| Income tax benefit - at statutory tax rate | | $ | (636) | | | $ | (4,823) | | | $ | (14,149) | |
| Differences in international tax rates | | 1,755 | | | (1,218) | | | (9,039) | |
| Nondeductible changes in fair value of contingent consideration | | 988 | | | 121 | | | (4,559) | |
| Intercompany asset transfer | | 0 | | | (8,190) | | | 0 | |
| Change in valuation allowances | | 4,231 | | | 7,379 | | | 5,998 | |
| Nondeductible stock-based compensation | | 1,060 | | | 1,039 | | | 1,499 | |
| Hospital Products sale | | (9,328) | | | 0 | | | 0 | |
| Unrecognized tax benefits | | (274) | | | (261) | | | 1,440 | |
| State and local taxes (net of federal) | | 20 | | | (7) | | | 299 | |
| Change in U.S. tax law | | (9,124) | | | 0 | | | 274 | |
| Nondeductible interest expense | | 1,728 | | | 982 | | | 1,269 | |
| Orphan drug and R&D tax credit | | (2,793) | | | 0 | | | 0 | |
| Other | | 263 | | | (378) | | | (925) | |
| Income tax benefit - at effective income tax rate | | $ | (12,110) | | | $ | (5,356) | | | $ | (17,893) | |
| | | | | | |
| | | | | | |
| | | | | | |
In 2020, the income tax benefit increased by $6,754 when compared to the same period in 2019. The increase in the income tax benefit in 2020 was primarily driven by the tax benefits from the sale of our hospital products and passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) in the U.S. The Company recorded additional tax benefit in 2020 from the Orphan Drug and R&D tax credit in the U.S. Tax benefit from the intercompany asset transfer recorded in 2019 did not recur, resulting in a partial offset of tax benefits described above.
In 2019, the income tax benefit decreased by $12,537 when compared to the same period in 2018. The decrease in the income tax benefit in 2019 was primarily driven by the impairment of the Noctiva intangible asset in 2018, which did not recur in 2019. In addition to the non-recurring impairment, an increase in the valuation allowance in 2019, when compared to the same period in 2018 also contributed to the decrease in tax benefit recorded in 2019. As a part of a corporate reorganization, the Company entered into an internal sale transaction in December 2019. The internal sale transaction included transfer of intangible assets from an Irish entity to a U.S. entity. The internal sale transaction resulted in a decrease of $5,536 to Irish deferred stock awards carry no voting or other rightstax asset with corresponding decrease of $5,536 to valuation allowance, an increase of $8,190 to U.S. deferred tax asset associated with stock ownership. amortization of intangible assets, and a $8,190 deferred tax benefit.
Unrecognized Tax Benefits
The award agreement will provide whether grantees may receive dividend equivalents with respectCompany or one of its subsidiaries files income tax returns in Ireland, France, U.S. and various states. The Company is no longer subject to restricted stock units orIrish, French, U.S. Federal, and state and local examinations for years before 2016. During 2020, the Company completed the 2015 through 2017 U.S. Federal Tax Audit. Completion of the audit resulted in an assessment of $1,937 for the 2015 through 2017 U.S. Federal Tax Returns compared to the IRS Claims of $50,695 made on July 2, 2019 and the updated IRS Claims of $9,302 on October 2, 2019 made as part of the Specialty Pharma bankruptcy proceedings, which at this time does not include interest and penalties. The Company settled the $1,937 assessment. The French tax authority completed an examination of the Company's French tax returns for 2017 and 2018 during 2020, noting no change.
The following table summarizes the activity related to the Company’s unrecognized tax benefits for the twelve months ended
December 31:
| | | | | | | | | | | | | | | | | | | | |
| Unrecognized Tax Benefit Activity | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Balance at January 1: | | $ | 6,465 | | | $ | 5,315 | | | $ | 3,954 | |
| Additions based on tax positions related to the current year | | 0 | | | 0 | | | 1,087 | |
| Increases for tax positions of prior years | | 0 | | | 2,416 | | | 274 | |
| Statute of limitations expiration | | 0 | | | (1,266) | | | 0 | |
| Settlements | | (3,322) | | | 0 | | | 0 | |
| Balance at December 31: | | $ | 3,143 | | | $ | 6,465 | | | $ | 5,315 | |
The Company expects that within the next twelve months the unrecognized tax benefits could decrease by an immaterial amount and the interest could increase by an immaterial amount.
At December 31, 2020, 2019 and 2018, there are $2,483, $3,806 and $4,597 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $203, $555 and $725 in interest and penalties. The Company had approximately $1,475 and $1,612 for the payment of interest and penalties accrued at December 31, 2020 and 2019, respectively.
Deferred Tax Assets (Liabilities)
Deferred income tax provisions reflect the effect of temporary differences between consolidated financial statement and tax reporting of income and expense items. The net deferred stock,tax assets (liabilities) at December 31, 2020 and if so, whether such dividend equivalents are distributed when credited or deemed to be reinvested2019 resulted from the following temporary differences:
| | | | | | | | | | | | | | |
| Net Deferred Tax Assets and Liabilities: | | 2020 | | 2019 |
| | | | |
| Deferred tax assets: | | | | |
| Net operating loss carryforwards | | $ | 31,302 | | | $ | 30,275 | |
| Amortization | | 3,701 | | | 11,602 | |
| Stock based compensation | | 2,626 | | | 3,577 | |
| Accounts receivable | | 0 | | | 53 | |
| Fair value contingent consideration | | 0 | | | 264 | |
| Orphan drug and R&D tax credit | | 2,793 | | | 0 | |
| Other | | 423 | | | 901 | |
| Gross deferred tax assets | | 40,845 | | | 46,672 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Amortization | | 0 | | | (172) | |
| Prepaid expenses | | (75) | | | (35) | |
| Other | | (890) | | | 0 | |
| Gross deferred tax liabilities | | (965) | | | (207) | |
| | | | |
| Less: valuation allowances | | (21,624) | | | (17,038) | |
| | | | |
| Net deferred tax assets | | $ | 18,256 | | | $ | 29,427 | |
At December 31, 2020, the Company had $118,070 of net operating losses in
additional sharesIreland that do not have an expiration date and $46,003 of
restricted stock units or deferred stock.Performance Units
The Committee may grant performance units, which entitle a grantee to cash or shares conditioned upon the fulfillment of certain performance conditions and other restrictions as specified by the Committee and reflectednet operating losses in the award agreement.U.S. Of the $46,003 of net operating losses in the U.S., $10,365 were acquired due to the acquisition of FSC and $35,638 are due to the losses at US Holdings. The initial valueportion due to the acquisition of FSC will expire in 2034 through 2035. The Company also has $2,793 of U.S. tax credits available to reduce future income tax payable that have no expiration date. A valuation allowance is recorded if, based on the weight of available evidence, it is more likely than not that a deferred tax asset will not be realized. This assessment is based on an evaluation of the level of historical taxable income and projections for future taxable income. For the year ended December 31, 2020, the Company recorded $4,171 of valuation allowances related to Irish net operating losses and $60 of valuation allowances related French net operating losses. The U.S. net operating losses are subject to an annual limitation as a result of the FSC acquisition under Internal Revenue Code Section 382 and will not be fully utilized before they expire.
We recorded a valuation allowance against all of our net operating losses in Ireland and France as of December 31, 2020, and all of our net operating losses in Ireland as of December 31, 2019. We intend to continue maintaining a full valuation allowance on the Irish net operating losses until there is sufficient evidence to support the reversal of all or some portion of these allowances. In 2019, the Company removed $3,259 of French net operating losses and the corresponding valuation allowance as a result of the 2019 restructuring activities in France. See Note 19: Restructuring Costs.
While the Company believes it is more likely than not that it will be able to realize the deferred tax assets in the U.S., the Company continues to monitor any unfavorable changes that could ultimately impact our assessment of the realizability of our U.S. deferred tax assets. If the Company experiences an ownership change under Internal Revenue Code Section 382, the U.S. net operating losses could also be limited in their utilization.
At December 31, 2020, the Company has unremitted earnings of $3,725 outside of Ireland as measured on a U.S. GAAP basis. Whereas the measure of earnings for purposes of taxation of a
performance unit will be determined by the Committee at the time of grant. The Committee will determine the terms and conditions of such awards, including performance and other restrictions placed on these awards, which will be reflected in the award agreement.Performance Shares
The Committee may grant performance shares, which entitle a grantee to a certain number of ordinary shares, conditioned upon the fulfillment of certain performance conditions and other restrictions as specified by the Committee and reflected in the award agreement. The Committee will determine the terms and conditions of such awards, including performance and other restrictions placed on these awards, which will be reflected in the award agreement.
Bonus Shares
The Committee may grant fully vested ordinary shares as bonus shares or ordinary shares subject to such terms and conditions as are specified in the award agreement.
Dividend Equivalents
The Committee is authorized to grant dividend equivalents which provide a grantee the right to receive payment equal to the dividends paid on a specified number of our ordinary shares. Dividend equivalentsdistribution may be paid directly to grantees or may be deferreddifferent for later delivery under the 2017 Omnibus Plan. If deferred such dividend equivalents may be credited with interest or may be deemedtax purposes, these earnings, which are considered to be invested indefinitely, would become subject to income tax if they were remitted as dividends or if we were to sell our stock in our ordinary shares or in other property. No dividend equivalents may be granted in conjunction withthe subsidiaries, net of any grantprior income taxes paid. It is not practicable to estimate the amount of stock options or SARs.
Cash Incentive Awards
deferred tax liability on such earnings, if any.
R&D Tax Credits Receivable
The
Committee may grant cash incentive awardsFrench and Irish governments provide tax credits to
any eligible person in such amounts and upon such terms, including the achievement of specific performance goals during the applicable performance period, as the Committee may determine. An eligible person may have more than one cash incentive award outstanding at any time. For instance, the Committee may grant an eligible employee one cash incentive award with a calendar year performance periodcompanies for spending on innovative R&D. These credits are recorded as an
annual incentive bonusoffset of R&D expenses and
a separate cash incentive award with a multi-year performance period as a long-term cash incentive bonus.The Committee shall establish performance goals applicable to each cash incentive awardare credited against income taxes payable in its discretion and the amount that will be paid to the grantee pursuant to such cash incentive awardyears after being incurred or, if the applicable performance goals for the performance periodnot so utilized, are met. If an eligible person earns the right to receive a payment with respect to a cash incentive award, such payment will be maderecoverable in cash in accordance with the terms of the award agreement. If the award agreement does not specify a payment date with respect to a cash incentive award, payment of the cash incentive award will be made no later than the 15th day of the third month following the end of the taxable year of the grantee or our fiscal year during which the performance period ends.
Other Stock-Based Awards
In order to enable us to respond to material developments in the area of taxes and other legislation and regulations and interpretations thereof, and to trends in executive compensation practices, the 2017 Omnibus Plan authorizes the Committee to grant awards that are valued in whole or in part by reference to or otherwise based on our securities. The Committee determines the terms and conditions of such awards, including consideration paid for awards granted as share purchase rights and whether awards are paid in shares or cash.
Performance-Based Awards
The Committee may require satisfaction of pre-established performance goals, consisting of one or more business criteria and a targeted performance level with respect to such criteria, as a condition of awards being granted or becoming exercisable or payable under the 2017 Omnibus Plan, or as a condition to accelerating the timing of such events. The Committee has the discretion to adjust the determinations of the degree of attainment of the pre-established performance goals.
The 2017 Omnibus Plan permits the grant of awards that are intended to constitute qualified performance-based compensation that is exempt from the $1 million deduction limit under Section 162(m) of the Code. Those types of awards may be based on the following performance criteria: the attainment by an ordinary share of a specified fair market value forafter a specified period of time, or withinwhich may differ depending on the tax credit regime. As of December 31, 2020, our net research tax credit receivable amounts to $6,771 and represents a specified periodFrench gross research tax credit of time; earnings per share; earnings per share$6,396 and an Irish gross research tax credit of $375. As of December 31, 2019, our net Research tax credit receivable amounts to $8,429 and represents a French gross research tax credit of $7,608 and an Irish gross research tax credit of $821.
In 2020, the Company recorded $2,793 for the U.S. Orphan Drug Tax Credit and the U.S. Research & Development Tax Credit. These credits are recorded as an income tax benefit in the year and are currently recorded as deferred tax assets because the credits are not recoverable in cash.
2020 CARES Act
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes significant business tax provisions. In particular, the CARES Act modified the rules associated with net operating losses (“NOLs”). Under the temporary provisions of the CARES Act, NOL carryforwards and carrybacks may offset 100% of taxable income for taxable years beginning before 2021. In addition, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund. During the twelve months ended December 31, 2020, the income tax benefit includes a discrete tax benefit of $9,124 as a result of our ability under the CARES Act to carry back NOLs incurred to periods when the statutory U.S. Federal tax rate was 35% versus our current U.S. Federal tax rate of 21%. During the twelve months ended December 31, 2020, the Company received $3,351 in cash tax refunds from continuing operations; total shareholder return; returncarryback claims related to the CARES Act from the carryback of 2018 tax losses. The Company filed refund claims for $18,753 associated with the carryback of 2019 tax losses and estimates it will file refund claims associated with the carryback of 2020 tax losses.
2017 Tax Cuts and Jobs Act
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on assets; return on equity; return on capital; earnings before or after taxes, interest, depreciation, and/or amortization; return on investment; interest expense; cash flow; cash flow from operations; revenues; sales; costs; assets; debt; expenses; inventory turnover; economic value added; costthe deductibility of capital; operating margin; gross margin; net income before or after taxes; operating earnings either before or after interest expense and either beforeexecutive compensation; creation of the base erosion anti-abuse tax (“BEAT”) and a new minimum tax. As a result of the Tax Act being signed into law, we recognized a provisional charge of $274 in 2018 related to the re-measurement of its U.S. net deferred tax assets and certain unrecognized tax benefits at the lower enacted corporate tax rates. A majority of the provisions in the Tax Act were effective January 1, 2018.
NOTE 15:Post-Retirement Benefit Plans
Retirement Indemnity Obligation – France
French law requires the Company to provide for the payment of a lump sum retirement indemnity to French employees based upon years of service and compensation at retirement. The retirement indemnity has been actuarially calculated on the assumption of voluntary retirement at a government-defined retirement age. Benefits do not vest prior to retirement. Any actuarial gains or after incentiveslosses are recognized in the Company’s consolidated statements of income (loss) in the periods in which they occur.
During the second quarter of 2019, the Company initiated a plan to substantially reduce all of its workforce at its Vénissieux, France site (“2019 French Restructuring”). As a result of this decision, the Company reversed the French retirement indemnity obligation and recorded a curtailment gain of $1,000 during the year ended December 31, 2019. At December 31, 2020, there are no future expected retirement indemnity benefits to be paid. See Note 19: Restructuring Costs.
NOTE 16:Other Assets and Liabilities
Various other assets and liabilities are summarized for the years ended December 31, as follows:
| | | | | | | | | | | | | | |
| Prepaid Expenses and Other Current Assets: | | 2020 | | 2019 |
| | | | |
| Valued-added tax recoverable | | $ | 341 | | | $ | 1,051 | |
| Prepaid and other expenses | | 1,018 | | | 2,116 | |
| Guarantee from Armistice | | 318 | | | 454 | |
Income tax receivable (see Note 14) | | 18,615 | | | 536 | |
Receivable from Exela (see Note 4) | | 16,500 | | | 0 | |
| Short-term deposit | | 1,477 | | | 0 | |
| Other | | 457 | | | 107 | |
| Total | | $ | 38,726 | | | $ | 4,264 | |
| | | | | | | | | | | | | | |
| Other Non-Current Assets: | | 2020 | | 2019 |
| | | | |
| Deferred tax assets | | $ | 18,256 | | | $ | 29,427 | |
| Long-term deposits | | 0 | | | 1,477 | |
| Guarantee from Armistice | | 1,050 | | | 1,367 | |
| Right of use assets at contract manufacturing organizations | | 5,201 | | | 6,428 | |
| Other | | 432 | | | 575 | |
Total | | $ | 24,939 | | | $ | 39,274 | |
| | | | | | | | | | | | | | |
| Accrued Expenses: | | 2020 | | 2019 |
| | | | |
| Accrued compensation | | $ | 1,697 | | | $ | 3,944 | |
| | | | |
Accrued restructuring (see Note 19) | | 520 | | | 2,949 | |
| Customer allowances | | 1,030 | | | 6,470 | |
| Accrued outsourced contract costs | | 473 | | | 2,833 | |
| | | | |
| Other | | 2,781 | | | 3,614 | |
| Total | | $ | 6,501 | | | $ | 19,810 | |
| | | | | | | | | | | | | | |
| Other Current Liabilities: | | 2020 | | 2019 |
| | | | |
| Accrued interest | | $ | 2,695 | | | $ | 2,695 | |
| Due to Exela | | 2,026 | | | 0 | |
| Guarantee to Deerfield | | 319 | | | 455 | |
| Other | | 160 | | | 725 | |
| Total | | $ | 5,200 | | | $ | 3,875 | |
| | | | | | | | | | | | | | |
| Other Non-Current Liabilities: | | 2020 | | 2019 |
| | | | |
| | | | |
| Customer allowances | | $ | 0 | | | $ | 981 | |
| Unrecognized tax benefits | | 3,143 | | | 6,465 | |
| Guarantee to Deerfield | | 1,053 | | | 1,372 | |
| Other | | 16 | | | 55 | |
| Total | | $ | 4,212 | | | $ | 8,873 | |
NOTE 17:Contingent Liabilities and Commitments
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 December 31, 2020, 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.
Subsidiary Bankruptcy and Deconsolidation
There is currently no pending or threatened litigation or disputes to which Specialty Pharma is or would be a party. All prior litigation and disputes involving Specialty Pharma have been dismissed or resolved. See Note 3: Subsidiary Bankruptcy and Deconsolidation.
Material Commitments
At December 31, 2020, we have one commitment with a contract manufacturer related to facility upgrades and the purchase and validation of equipment to be used in the manufacture of FT218. The total cost of this commitment is estimated to be approximately $4,000 and is expected to be started and completed during the year ending December 31, 2021.
The Company also has a commitment with a contract manufacturer related to the construction and preparation of a production suite at the contract manufacturer’s facility, which is substantially complete at December 31, 2020. Subsequent to the initial build and preparation of the production suite, this commitment also includes annual fees which would commence at the start of production of validation batches and continue thereafter for five years.
NOTE 18: Divestiture of the Pediatric Assets
On February 12, 2018, the Company, together with its subsidiaries Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC (“FSC Therapeutics”), and Avadel US Holdings, Inc. (“Holdings”), as the “Sellers,” entered into an asset impairments; attainmentpurchase agreement (the “Purchase Agreement”) with Cerecor, Inc. (“Cerecor”). The transaction closed on February 16, 2018 wherein Cerecor purchased from the Sellers four pediatric commercial stage assets – Karbinal™ ER, Cefaclor, Flexichamber™ and AcipHex® Sprinkle™, together with certain associated business assets – which were held by FSC. The Company acquired FSC in February 2016 from Deerfield and certain of cost reduction goals; revenue per customer; customer turnover rate; asset impairments; financing costs; capital expenditures; working capital; strategic business criteria, consistingits affiliates. Pursuant to the Purchase Agreement, Cerecor assumed the Company’s remaining payment obligations to Deerfield under the Membership Interest Purchase Agreement, dated as of one or more objectivesFebruary 5, 2016, between Holdings, Flamel Technologies SA (the predecessor of the Company) and Deerfield and certain of its affiliates, which payment obligations consisted of the following (collectively, the “Assumed Obligations”): (i) a quarterly payment of $263 beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the FSC products through February 5, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. Cerecor also assumed certain contracts and other obligations related to the acquired assets, and in that connection Holdings agreed to pay Cerecor certain make-whole payments associated with obligations Cerecor is assuming related to a certain supply contract related to Karbinal™ ER.
In conjunction with the divestiture, the Company also entered into the following arrangements:
License and Development Agreement
Flamel Ireland Limited, an Irish private limited company operating under the trade name of Avadel Ireland and a wholly-owned subsidiary of the Company, and Cerecor entered into a license and development agreement (the “License and Development Agreement”) pursuant to which, among other things:
•Avadel Ireland will provide Cerecor with four product formulations utilizing Avadel Ireland’s LiquiTime™ technology, and will complete pilot bioequivalence studies for such product formulations within 18 months;
•Cerecor will reimburse Avadel Ireland for development costs of the four LiquiTime™ products in excess of $1,000 in the aggregate;
•Upon transfer of the four product formulations, Cerecor will assume all remaining development costs and responsibilities for the product development, clinical studies, NDA applications and associated filing fees; and
•Upon regulatory approval and commercial launch of any LiquiTime™ products, Cerecor will pay Avadel Ireland quarterly royalties based on meeting specified revenue, market penetration, geographic business expansion goals, objectively identified project milestones, production volume levels, cost targets,a percentage of net sales of any such products in the mid-single digit range.
Effective October 25, 2019, Cerecor and goals relatingAvadel Ireland agreed to acquisitions or divestitures; customer satisfaction, aggregate product priceterminate the License and other product price measures; safety record; service reliability; debt rating;Development Agreement.
Deerfield Guarantee
The Company and achievementHoldings provided their guarantee (the “Deerfield Guarantee”) in favor of businessDeerfield. Under the Deerfield Guarantee, the Company and operational goals, such as market share, new products, and/or business development.Holdings guaranteed to Deerfield the payment by Cerecor of the Assumed Obligations under the Membership Interest Purchase Agreement between the Company and Deerfield dated February 5, 2016. The Committee will certify in writing if the applicable performance conditions are achieved beforeAssumed Obligations include (i) a quarterly payment of the award. For awards intended$263 beginning in July 2018 and ending in October 2020, amounting to comply with the performance-based exception under Section 162(m)an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the Code,FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. In addition, under the Committee shall setDeerfield Guarantee, the performance measures withinCompany and Holdings guaranteed that Deerfield would receive certain minimum annual FSC Product Royalties through February 6, 2026 (the “Minimum Royalties”). Given the time period prescribed by Section 162(m)Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. A valuation was performed, which was based largely on an analysis of the Codepotential timing of each possible cash outflow described above and no later than 90 days after the commencementlikelihood of Cerecor’s default on such payments assuming an S&P credit rating of CCC+. The result of this valuation identified a guarantee liability of $6,643. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the period of servicecontract with Deerfield.
On October 10, 2019, Cerecor entered into a purchase and sale agreement with Aytu BioScience, Inc (“Buyer”) pursuant to which the
awards intendedBuyer will purchase certain assets from Cerecor and assume certain of Cerecor’s liabilities, including all of Cerecor’s liabilities assumed as part of the Purchase Agreement noted above. As part of this transaction, on November 1, 2019, Armistice has agreed to
complydeposit $15,000 in an escrow account governed by an escrow agreement between Armistice and Deerfield having the purpose of securing the $15,000 balloon payment due January 2021 as part of the Membership Interest Purchase Agreement. As part of the Cerecor transaction with the
performance-based exception relate (butbuyer, Deerfield contractually acknowledges and agrees that it will seek payment from the escrow funds before requesting payment from the Company pursuant to the Deerfield Guarantee discussed above. Due to the change in
no event after 25 percentcircumstances, a new valuation was performed based on an analysis of the
periodpossible timing of
servicethe updated possible cash flow which excludes the $15,000 that Armistice has
elapsed).deposited in an escrow account. The updated valuation identified an updated guarantee liability of $1,827 at December 31, 2019, which is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield. The balance of this guarantee liability was $1,372 at December 31, 2020. Awards generally may be settled
Armistice Guarantee
Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to Holdings the payment by Cerecor of the Assumed Obligations, including the Minimum Royalties. A valuation of the guarantee asset was performed in accordance with ASC 460 “Guarantees” and a guarantee asset of $6,620 was recorded. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield noted above.
As discussed above, based on the purchase and asset sale between Cerecor and the Buyer, an updated valuation was performed and identified an updated guarantee asset of $1,821 at December 31, 2019. The balance of this guarantee asset was $1,368 at December 31, 2020.
The fair values of the Avadel guarantee to Deerfield and the guarantee received by Avadel from Armistice largely offset and when combined are not material.
Based on management’s review of ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, the disposition of our pediatric assets and related liabilities did not qualify for discontinued operations reporting. Our results of operations for the year ended December 31, 2018 includes the results of FSC, prior to its February 16, 2018 disposition date.
The net impact of this transaction was not material to the consolidated statements of income (loss).
NOTE 19: Restructuring Costs
2019 French Restructuring
During the second quarter of 2019, the Company initiated a plan to substantially reduce all of its workforce at its Vénissieux, France site (“2019 French Restructuring”). This reduction was part of an effort to align the Company’s cost structure with our ongoing and future planned projects. The reduction in workforce was completed during the year ended December 31, 2020. Restructuring charges associated with this plan of $172 and $4,855 of were recognized during the years ended December 31, 2020 and 2019, respectively. Included in the 2019 French Restructuring charges of $4,855 were charges for employee severance, benefits and other costs of $4,339, charges related to fixed asset impairment of $629, charges related to the early termination penalty related to the office and copier lease terminations of $887, partially offset by a benefit of $1,000 related to the reversal of the French retirement indemnity obligation. The following table sets forth activities for the Company’s cost reduction plan obligations for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | |
| 2019 French Restructuring Obligation: | | 2020 | | 2019 | | |
| | | | | | |
| Balance of restructuring accrual at January 1, | | $ | 1,922 | | | $ | 0 | | | |
| Charges for employee severance, benefits and other costs | | 172 | | | 4,339 | | | |
| Payments | | (1,813) | | | (2,441) | | | |
| Foreign currency impact | | (33) | | | 24 | | | |
| Balance of restructuring accrual at December 31, | | $ | 248 | | | $ | 1,922 | | | |
The 2019 French Restructuring liability of $248 is included in the consolidated balance sheet in accrued expenses at December 31, 2020.
2019 Corporate Restructuring
During the first quarter of 2019, the Company announced a plan to reduce its Corporate workforce by more than 50% (the “2019 Corporate Restructuring”). The reduction in workforce is primarily a result of the exit of Noctiva during the first quarter of 2019 (see Note 3: Subsidiary Bankruptcy and Deconsolidation), as well as an effort to better align the Company’s remaining cost structure at our U.S. and Ireland locations with our ongoing and future planned projects. The reduction in workforce was completed during the year ended December 31, 2020. Restructuring income associated with this plan for the year ended December 31, 2020 was $215, which included a benefit of $421 related to share based compensation forfeitures. Restructuring charges associated with this plan of $1,755 were recognized during the year ended December 31, 2019. Included in the 2019 Corporate Restructuring charges of $1,755 for the year ended December 31, 2019 were charges for employee severance, benefit and other costs of $3,406, charges related to the early termination penalty related to the office lease termination of $288, the write-off of $125 of property, plant and equipment, net, partially offset by a benefit of $2,064 related to share based compensation forfeitures related to the employees affected by the global reduction in workforce.
The following table sets forth activities for the Company’s cost reduction plan obligations for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | |
| 2019 Corporate Restructuring Obligation: | | 2020 | | 2019 | | |
| | | | | | |
| Balance of restructuring accrual at January 1, | | $ | 1,080 | | | $ | 0 | | | |
| Charges for employee severance, benefits and other costs | | 206 | | | 3,406 | | | |
| Payments | | (1,014) | | | (2,326) | | | |
| | | | | | |
| Balance of restructuring accrual at December 31, | | $ | 272 | | | $ | 1,080 | | | |
The 2019 Corporate Restructuring liability of $272 is included in the consolidated balance sheet in accrued expenses at December 31, 2020.
NOTE 20: Equity Instruments and Transactions
Capital Shares
We have 500,000 shares of authorized ordinary shares
other awards or other property, in the discretionwith a nominal value of
the Committee.Change$0.01 per ordinary share. As of Control
If there is a merger or consolidation of us with or into another corporation or a sale of substantially all of ourDecember 31, 2020, we had 58,396 ordinary shares (a “Corporate Transaction”) that resultsissued and outstanding, respectively. The Board of Directors is authorized to issue preferred shares in a change in control (as defined in the 2017 Omnibus Plan), and the outstanding awards are not assumed by surviving company (or its parent company) or replaced with economically equivalent awards granted by the surviving company (or its parent company), the Committee will cancel any outstanding awards that are not vested and nonforfeitable as of the consummation of such Corporate Transaction (unless the Committee accelerates the vesting of any such awards)series, and with respect to any vestedeach series, to fix its designation, relative rights (including voting, dividend, conversion, sinking fund, and nonforfeitable awards, the Committee may either (i) allow all grantees to exercise optionsredemption rights), preferences (including dividends and SARs within a reasonable period prior to the consummationliquidation) and limitations. We have 50,000 shares of the Corporate Transaction and cancel any outstanding options or SARs that remain unexercised upon consummation of the Corporate Transaction, or (ii) cancel any or all of such outstanding awards (including options and SARs) in exchange for a payment (in cash, or in securities or other property) in an amount equal to the amount that the grantee would have received (net of the exercise price with respect to any options or SARs) if the vested awards were settled or distributed or such vested options and SARs were exercised immediately prior to the consummation of the Corporate Transaction. If an exercise price of the option or SAR exceeds the fair marketauthorized preferred shares, $0.01 nominal value, of ourwhich 488 are currently issued and outstanding as of December 31, 2020.
Shelf Registration Statement on Form S-3
In February 2020, we filed with the SEC a new shelf registration statement on Form S-3 (the 2020 Shelf Registration Statement) (File No. 333-236258) that allows issuance and sale by us, from time to time, of:
a.up to $250,000 in aggregate of ordinary shares, and the option or SAR is not assumed or replaced by the surviving company (or its parent company)nominal value US$0.01 per share (the “Ordinary Shares”), such options and SARs will be cancelled without any payment to the grantee. If any other award is not vested immediately prior to the consummationeach of the Corporate Transaction, such award will be cancelled without any payment to the grantee.Amendment to and Termination of the 2017 Omnibus Plan
The 2017 Omnibus Planwhich may be amended, altered, suspended, discontinued represented by American Depositary Shares (“ADSs”), preferred shares, nominal value US$0.01 per share (the “Preferred Shares”), debt securities (the “Debt Securities”), warrants to purchase Ordinary Shares, ADSs, Preferred Shares and/or terminated by our BoardDebt Securities (the “Warrants”), and/or units consisting of Directors without further shareholder approval, unless such approval of an amendmentOrdinary Shares, ADSs, Preferred Shares, one or alteration is required by lawmore Debt Securities or regulationWarrants in one or under the rules of any stock exchange or automated quotation system on which the ordinary shares are then listed or quoted. Thus, shareholder approval will not necessarily be required for amendments which might increase the cost of the 2017 Omnibus Plan. Shareholder approval will not be deemed to be required under laws or regulations that condition favorable treatment of grantees on such approval, although our Board of Directors may, in its discretion, seek shareholder approvalmore series, in any circumstance in which it deems such approval advisable.
In addition, subjectcombination, pursuant to the terms of the 2017 Omnibus Plan, no amendment2020 Shelf Registration Statement, the base prospectus contained in the 2020 Shelf Registration Statement (the “Base Prospectus”), and any amendments or terminationsupplements thereto (together, the “Securities”); including
b.up to $50,000 of ADSs that may be issued and sold from time to time pursuant to the terms of an Open Market Sale AgreementSM, entered into with Jefferies LLC on February 4, 2020 (the “Sales Agreement”), the 2020 Shelf Registration Statement, the Base Prospectus and the terms of the 2017 Omnibus Plan may materiallysales agreement prospectus contained in the 2020 Shelf Registration Statement.
The transactions costs associated with the 2020 Shelf Registration Statement totaled $428 of which $214 was charged against additional paid-in capital during the twelve months ended December 31, 2020 as a result of the May 2020 Public Offering, discussed below. The remaining costs of $214 are recorded as a prepaid asset at December 31, 2020.
February 2020 Private Placement
On February 21, 2020, we announced that we entered into a definitive agreement for the sale of our ADSs and adversely affectSeries A Non-Voting Convertible Preferred Shares (“Series A Preferred”) in a private placement to a group of institutional accredited investors. The private placement resulted in gross proceeds of approximately $65,000 before deducting placement agent and other offering expenses, which resulted in net proceeds of $60,570.
Pursuant to the terms of the private placement, we issued 8,680 ADSs and 488 shares of Series A Preferred at a price of $7.09 per share, priced at-the-market under Nasdaq rules. Each share of non-voting Series A Preferred is convertible into one ADS, provided that conversion will be prohibited if, as a result, the holder and its affiliates would own more than 9.99% of the total number of Avadel ADSs outstanding. The closing of the private placement occurred on February 25, 2020.
Issuance costs of $4,430 have been recorded as a reduction of additional paid-in capital.
May 2020 Public Offering
In connection with the shelf registration statement described above, on April 28, 2020, we announced the pricing of an underwritten public offering of 11,630 Ordinary Shares, in the form of ADSs at a price to the public of $10.75 per ADS. Each ADS represents the right to receive one Ordinary Share. All of the ADSs were offered by us and the gross proceeds to us from the offering were approximately $125,000, before deducting underwriting discounts and commissions and offering expenses, which resulted in net proceeds of $116,924. The offering closed on May 1, 2020.
Retirement of Treasury Shares
In August 2020, the Company retired all of our 5,407 treasury shares, or $49,998 previously repurchased ordinary shares. As a grantee under anyresult, we reduced additional paid-in capital by $49,944 and ordinary shares by $54 during the twelve months ended December 31, 2020. The portion allocated to additional paid-in capital is determined pro rata by applying a percentage, determined by dividing the number of shares to be retired by the number of shares issued and outstanding as of the retirement date, to the balance of additional paid-in capital as of the retirement date. Based on this calculation, the entirety of the excess of repurchase price over par of $49,944 was allocated to additional paid-in capital.
NOTE 21: Share-Based Compensation
Compensation expense included in the Company’s consolidated statements of income (loss) for all share-based compensation arrangements was as follows for the periods ended December 31, 2020, 2019 and 2018, respectively:
| | | | | | | | | | | | | | | | | | | | |
| Share-based Compensation Expense: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | |
| Research and development | | $ | 139 | | | $ | 429 | | | $ | 880 | |
| Selling, general and administrative | | 3,281 | | | 2,154 | | | 6,972 | |
| Restructuring costs | | (421) | | | (2,064) | | | 0 | |
| Total share-based compensation expense | | $ | 2,999 | | | $ | 519 | | | $ | 7,852 | |
As of December 31, 2020, the Company expects $12,322 of unrecognized expense related to granted, but non-vested share-based compensation arrangements to be incurred in future periods. This expense is expected to be recognized over a weighted average period of 3.4 years.
The excess tax benefit related to share-based compensation recorded by the Company was not material for the years ended December 31, 2020, 2019 and 2018.
Upon exercise of stock options, or upon the issuance of restricted share awards or performance share unit awards, the Company issues new shares.
At December 31, 2020, there were 4,122,315 shares authorized for stock option grants, restricted share award grants, and performance share unit award grants in subsequent periods.
Determining the Fair Value of Stock Options
The Company measures the total fair value of stock options on the grant date using the Black-Scholes option-pricing model and recognizes each grant’s fair value as compensation expense over the period that the option vests. Options are granted
underto employees of the
2017 Omnibus Plan.Unless earlier terminated byCompany and become exercisable ratably over four years following the grant date and expire ten years after the grant date. The Company issues stock options to our Board of Directors as compensation for services rendered and generally become exercisable ratably over three years following the 2017 Omnibus Plan will terminate when no ordinary shares remain reservedgrant date, and availableexpire ten years after the grant date.
The weighted-average assumptions under the Black-Scholes option-pricing model for issuancestock option grants as of December 31, 2020, 2019 and 2018, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Stock Option Assumptions: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Stock option grants: | | | | | | |
| Expected term (years) | | 6.08 | | 6.25 | | 6.25 |
| Expected volatility | | 75.76 | % | | 56.48 | % | | 56.59 | % |
| Risk-free interest rate | | 0.72 | % | | 2.52 | % | | 2.68 | % |
| Expected dividend yield | | 0 | | | 0 | | | 0 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Expected term: The expected term of the options represents the period of time between the grant date and the time the options are either exercised or if earlier,forfeited, including an estimate of future forfeitures for outstanding options. Given the limited historical data, 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 for a period approximating the expected term.
Risk-free interest rate: The risk-free interest rate is based on the tenth anniversary afterU.S. Treasury yield curve in effect at the adoptiontime of grant and a maturity that approximates the expected term.
Expected dividend yield: We have not distributed any dividends since our inception and have no plan to distribute dividends in the foreseeable future.
Stock Options
A summary of the 2017 Omnibus Plan by our Boardcombined stock option activity and other data for the Company’s stock option plans for the year ended December 31, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Option Activity and Other Data: | | Number of Stock
Options | | Weighted Average
Exercise Price per Share | | Weighted Average
Remaining
Contractual Life | | Aggregate
Intrinsic Value |
| | | | | | | | |
| Stock options outstanding, January 1, 2020 | | 5,121 | | | $ | 7.51 | | | | | |
| Granted | | 2,551 | | | 6.90 | | | | | |
| Exercised | | (403) | | | 5.08 | | | | | |
| Forfeited | | (566) | | | 3.24 | | | | | |
| Expired | | (805) | | | 13.37 | | | | | |
| Stock options outstanding, December 31, 2020 | | 5,898 | | | $ | 7.02 | | | 7.96 years | | $ | 7,115 | |
| Stock options exercisable, December 31, 2020 | | 2,172 | | | $ | 9.48 | | | 5.58 years | | $ | 1,841 | |
The aggregate intrinsic value of
Directors.No Repricing
Notwithstanding any other provisionoptions exercisable at December 31, 2020, 2019 and 2018 was $1,841, $572, and $0, respectively.
The weighted average grant date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $4.63, $1.24 and $3.60 per share, respectively.
Warrants
A summary of the 2017 Omnibus Plan, no Option or SAR may be amendedcombined warrant activity and other data for the year ended December 31, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrant Activity and Other Data: | | Number of
Warrants | | Weighted Average Exercise Price per Share | | Weighted Average Remaining
Contractual Life | | Aggregate Intrinsic
Value |
| | | | | | | | |
| Warrants outstanding, January 1, 2020 | | 291 | | | $ | 13.59 | | | | | |
| Granted | | 0 | | | 0 | | | | | |
| Exercised | | 0 | | | 0 | | | | | |
| Forfeited | | 0 | | | 0 | | | | | |
| Expired | | (291) | | | 13.59 | | | | | |
| Warrants outstanding, December 31, 2020 | | 0 | | | $ | 0 | | | 0.00 years | | $ | 0 | |
| Warrants exercisable, December 31, 2020 | | 0 | | | $ | 0 | | | 0.00 years | | $ | 0 | |
All outstanding warrants expired in August 2020. Each of the above warrants was convertible into 1 ordinary share. There was 0 aggregate intrinsic value of warrants exercised during the years ended December 31, 2020, 2019 and 2018.
There were 0 warrants granted during the years ended December 31, 2020, 2019 and 2018.
Restricted Share Awards
Restricted share awards represent Company shares issued free of charge to
reduce the exercise or grant price nor cancelled in exchange for other Options or SARs with a lower exercise or grant price or ordinary shares or cash, without shareholder approval.Miscellaneous
Each Participant in the 2017 Omnibus Plan may be bound by and subject to non-competition, confidentially and invention ownership agreements. They also remain subject to the trading window policies adopted byemployees of the Company from time to time with respect toas compensation for services rendered. The Company measures the exercisetotal fair value of Options, Stock Appreciation Rights orrestricted share awards on the sale of shares of Company Stock acquired pursuant togrant date using the 2017 Omnibus Plan. A grantee shall forfeit any and all rights under an Award upon notice of termination by the Company for “Cause”, as such term is defined in the 2017 Omnibus Plan or an employment agreement, if applicable. Award agreements shall contain such other terms and conditions as the Committee may determine in its sole discretion (to the extent not inconsistent with the 2017 Omnibus Plan).
U.S. Federal Income Tax Consequences
The grant of an option or SAR will create no tax consequences for the participant or usCompany’s stock price at the time of the grant. A participant will have no taxable income upon exercise of an incentive stock option except thatRestricted share awards granted during and after 2017 vest over a participant must recognize income equal to the fair market value of the ordinary shares acquired minus the exercise price for alternative minimum tax purposes. Upon exercise of an option (other than an incentive stock option) or a SAR, a participant generally must recognize ordinary income equal to the fair market value of the ordinary shares acquired minus the exercise or grant price. Upon a disposition of shares acquired by exercise of an incentive stock optionthree-year period; two-thirds (2/3) vesting on or before the earlier of the second anniversary of the grant of such incentive stock option ordate and the firstremaining one-third (1/3) vesting on the third anniversary of the exercisegrant date. In 2018, the Company issued restricted share awards to our Board of Directors vesting over a three-year period; one-third (1/3) vesting on each of the three anniversaries of the grant date. Compensation expense for such option,awards granted during and after 2017 is recognized over the participant generally must recognize ordinary income equal toapplicable vesting period.
A summary of the lesserCompany’s restricted share awards as of (1)December 31, 2020, and changes during the year then ended, is reflected in the table below.
| | | | | | | | | | | | | | |
| Restricted Share Activity and Other Data: | | Number of Restricted Share Awards | | Weighted Average Grant Date
Fair Value |
| | | | |
| Non-vested restricted share awards outstanding, January 1, 2020 | | 347 | | | $ | 4.73 | |
| Granted | | 186 | | | 7.69 | |
| Vested | | (115) | | | 6.01 | |
| Forfeited | | (71) | | | 4.83 | |
| Non-vested restricted share awards outstanding, December 31, 2020 | | 347 | | | $ | 5.87 | |
The weighted average grant date fair market value of restricted share awards granted during the years ended December 31, 2020, 2019 and 2018 was $7.69, $2.47 and $5.87, respectively.
Performance Share Units Awards
Performance share units awards (“PSUs”) represent Company shares
at the dateissued free of
exercise minus the exercise price or (2) the amount realized upon the dispositioncharge to employees of the
incentive stock option shares minusCompany as compensation for achieving various results. The Company measures the
exercise price. Otherwise, a participant’s disposition of shares acquired upon the exercise of an option (including an incentive stock option for which the incentive stock option holding periods are met) generally will result in only capital gain or loss. Other awards under the 2017 Omnibus Plan, including restricted stock and restricted stock units will generally result in ordinary income to the participant equal to the cash or thetotal fair
market value of
performance share unit awards on the
ordinary shares or other property (minusgrant date using the
amount, if any, paid by the participant for shares or other property) at the time such cash, ordinary shares or other property is received by the participant or the time that the substantial risk of forfeiture of such ordinary shares or other property lapses.We are generally entitled to claim a tax deduction with respect to an award granted under the Plan when the participant recognizes ordinary income with respect to the award in an amount equal to the ordinary income that is recognized by the participant. We are not entitled to claim any tax deduction for any amount recognized by a participant as capital gains.
We are permitted to withhold from any award granted under the 2017 Omnibus Plan any required withholding taxes. Payment of withholding taxes may be made through one or more of the following means: payment in cash (including personal check or wire transfer), or, with the approval of the Committee, by delivering ordinary shares previously owned by the grantee or by delivery of ordinary shares acquired or to be acquired under the award.
Section 83(b) of the Code
A participant may elect under Section 83(b) of the Code to be taxedCompany’s stock price at the time of the grant. In 2020, the Company granted performance share awards, of which 50% vest upon the achievement of certain regulatory milestones related to FT218 and the other 50% vest one year following achievement of those milestones. The Company has not yet recognized any PSU-related stock-based compensation expense as the regulatory milestones have not yet been met; however, in the event the performance conditions are met before a certain date, approximately 150% of the outstanding shares, or $2,734 of compensation expense will be recognized by the Company for the PSUs outstanding as of December 31, 2020.
A summary of the Company’s performance share units awards as of December 31, 2020, and changes during the year then ended, is reflected in the table below.
| | | | | | | | | | | | | | |
| Performance Unit Share Activity and Other Data | | Number of Performance Share Awards | | Weighted Average Grant Date
Fair Value |
| | | | |
| Non-vested performance share awards outstanding, January 1, 2020 | | 0 | | | $ | 0 | |
| Granted | | 257 | | | 7.09 | |
| Vested | | 0 | | | 0 | |
| Forfeited | | 0 | | | 0 | |
| Non-vested performance share awards outstanding, December 31, 2020 | | 257 | | | $ | 7.09 | |
The weighted average grant
of restricted stock or other restricted property on thedate fair
market value of
performance share awards granted during the
ordinary shares or other property at that time rather than to be taxed when the risk of forfeiture lapses on the value of the property at that time, and we would have a deduction available at the same time and in the same amount as the participant recognizes income. If a participant files an election under Section 83(b) of the Code and the participant subsequently forfeits the restricted shares or other restricted property, he or she would not be entitled to any tax deduction, including as a capital loss, for the value of the ordinary shares or property on which he or she previously paid tax. Except as discussed below, we generally will be entitled to a tax deduction at the time and equal to the amount recognized as ordinary income by the participant in connection with an option, stock appreciation right, or other award, but will be entitled to no tax deduction relating to amounts that represent a capital gain to a participant. Thus, we will not be entitled to any tax deduction with respect to an incentive stock option if the participant holds the shares for the incentive stock option holding periods.Section 162(m) of the Code
Section 162(m) of the Code limits the amount of compensation we may deduct with respect to our Chief Executive Officer and each of the other three highest paid named executive officers (other than a chief financial officer) to $1 millionyear ended December 31, 2020 was $7.09 per year. This deduction limit generally applies to companies that have any class of equity securities that is publicly held. This limitation does not apply, however, to performance-based compensation that satisfies certain requirements, including approval of the material terms of the plan by the company’s shareholders.
Section 409A of the Code
Some restricted stock units and other awards subject to deferral features may be subject to Section 409A of the Code, which regulates deferred compensation arrangements. In such cases, the timing of the settlement of the award would have to meet certain restrictions in order for the participant not to be subject to accelerated tax and a tax penalty at the time of vesting rather than at the time of settlement. One significant restriction would be a requirement that the timing of the settlement not be controlled by the participant’s exercise of discretion. If the participant is subject to accelerated tax at the time of vesting (instead of the time of settlement), our deduction would also be accelerated. If we grant awards under the 2017 Omnibus Plan that constitute deferred compensation within the meaning of Section 409A of the Code, such awards will generally be structured to comply with the applicable requirements imposed under Section 409A.
2017 Employee
StockShare Purchase Plan
The principal features
In 2017, the Board of Directors approved of the Avadel Pharmaceuticals plc 2017 Avadel Employee Share Purchase Plan
(hereafter, the “2017 (“ESPP”)
are summarized below. The summary is qualified in its entirety by reference to the full text of the 2017 ESPP, a copy of which was set forth as Annex B to the Company's Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 1, 2017. Definitions in this summary of the 2017 ESPP are applicable only within this section.The Company believes that the 2017 ESPP is appropriate and will offer employees an opportunity to purchase ordinary shares or ADSs directly from us at a discounted price which will help further align their interests with those of our shareholders. The 2017 ESPP will broaden employee access to our ordinary shares or ADSs by offering employees the opportunity to purchase such securities through convenient payroll deductions.
Administration
The ESPP will be administered by the Compensation Committee of the Board (the “Committee”), which may delegate its duties and powers in whole or in part as it determines appropriate. The Committee is authorized to interpret the ESPP, to establish, amend and rescind any rules and regulations relating to it and to make any other determinations that it deems necessary or desirable for the administration of the ESPP.
Eligibility; Election to Participate
Any individual who is an employee of the Company or of a subsidiary of the Company that is selected to participate in the ESPP by the Committee in its sole discretion is eligible to participate in the ESPP, unless such employee is specifically excluded from participation by the Committee (either individually or by reference to a group or category of employees). Without limiting the generality of the foregoing, the Committee may exclude from participation:
employees whose customary employment is 20 hours or less per week within the meaning of section 423(b)(4)(B) of the Code;
employees whose customary employment is for not more than 5 months in any calendar year within the meaning of section 423(b)(4)(C) of the Code;
employees who have been employed less than two (2) years within the meaning of Section 423(b)(4)(A) of the Code; and
employees who are highly compensated employees within the meaning of section 414(q) of the Code.
The Committee will set forth procedures pursuant to which eligible employees may elect to participate in a given offering period under the ESPP (which may be on different terms for different eligible employees or subgroups thereof). An “offering period” is a period of time established by the Committee from time to time not to exceed 27 months.
As of April 27, 2018, approximately 150 employees would be eligible to participate in the ESPP.
Shares Subject to the ESPP
The total number of Company ordinary shares, nominal value $0.01 per share, or ADSs representing such ordinary shares (collectively, “Shares”) which may be issued under the ESPP is 1,000,000. The Shares may consist, in whole or in part, of unissued Shares or previously issued Shares. The Committee shall determine whether any participation under the ESPP shall be with respect to ordinary shares or ADSs.
Grant of Option on Enrollment; Purchase Price
With respect to an offering period, each eligible employee who elects to participate in the ESPP (a “participant”) will be granted an option to subscribe for or purchase, as of the last date of the offering period (the “purchase date”), a number of Shares equal to the lesser of:
the maximum number of Shares that a participant may purchase on any given purchase date (as determined by the Committee, which, in the absence of any contrary determination, shall be 3,000 Shares); or
the number determined by dividing the amount accumulated in an account to which payroll deductions of a participant, or other payments made by a participant to the extent provided by the Committee, are credited (the “payroll deduction account”) during an offering period by the purchase price per Share (the “purchase price”).
1,000. The purchase price at which a Share will be issued or sold for a given offering period will be established by the Compensation Committee of the Board (“Committee”) (and may differ among participants, as determined by the Committee in its sole discretion) but will in no event be less than 85% of the lesser of:
(a) the fair market value of a Share on the offering date; or
(b) the fair market value of a Share on the purchase date.
Notwithstanding During the foregoing, no eligible employee may be granted an option to purchase Shares under the ESPP if, immediately after the grant of the option, such employee (and/or any other person whose Shares would be attributed to the employee) would immediately thereafter be deemed to own Shares possessing 5% or more of the total combined voting power or value of all classes of shares of the Company or any parent or subsidiary corporation within the meaning of section 423(b)(3) of the Code. For this purpose, the rules of section 424(d) of the Code will apply in determining Share ownership of an individual, and Shares which the employee may purchase under outstanding options will be treated as Shares owned by the employee. All eligible employees granted options under the ESPP shall have the same rights and privileges as required by Section 423(b)(5) of the Code.
In addition, no eligible employee may be granted an option to purchase Shares under the ESPP which permits the employee to purchase Shares under the ESPP and all similar plans of the Company or any parent or subsidiary at a rate which exceeds $25,000 of the fair market value of Shares (determined at the grant date of the option) for any calendar year in which the option is outstanding.
Payment of Purchase Price; Changes in Payroll Deductions; Issuance of Shares
Payroll deductions (to the extent permitted by applicable local law) will be made on each day that a participant is paid during an offering period. The deductions will be made at the participant’s election as a percentage of the participant’s compensation in 1% increments, from 1% up to such maximum percentage of the participant’s compensation (or maximum dollar amount) as is permitted by the Committee from time to time with respect to that offering period. The maximum percentage or dollar amount may differ among certain participants. In the absence of any contrary determination by the Committee, the maximum percentage of the participant’s compensation that may be contributed to the payroll deduction account for an offering period shall be fifteen percent (15%). For a given offering period, payroll deductions will commence on the offering date and will end on the related purchase date, unless sooner altered or terminated as provided in the ESPP. A participant’s “compensation” will be defined from time to time by the Committee in its sole discretion with respect to any option or offering period and may be defined differently for different participants for purposes of the ESPP. Except as otherwise defined by the Committee, “compensation” will (1) include a participant’s base salary or wages, in each case prior to reductions for pre-tax contributions made to a plan or salary reduction contributions to a plan excludable from income under sections 125 or 402(g) of the Code, and (2) exclude commissions, overtime, shift pay, severance pay, bonuses, retirement income, change in control payments, contingent payments, income derived from share options, share appreciation rights and other equity-based compensation and other forms of special remuneration.
Unless otherwise determined by the Committee, a participant may not change the rate of payroll deductions once an offering period has commenced. The Committee will specify procedures by which a participant may increase or decrease the rate of payroll deductions for subsequent offering periods.
All payroll deductions made with respect to a participant will be credited to the participant’s payroll deduction account and will be deposited with the general funds of the Company. To the extent permitted by applicable local law, no interest will accrue on the amounts credited to that payroll deduction account. All payroll deductions received or held by the Company may be used by it for any corporate purpose, and the Company will not be obligated to segregate these payroll deductions, to the extent permitted by applicable local law. Except to the extent provided by the Committee, a participant may not make any separate cash payments into the participant’s payroll deduction account, and payment for Shares purchased under the ESPP may not be made in any form other than by payroll deduction.
On each purchase date, the Company will apply all funds then in the participant’s payroll deduction account to purchase Shares pursuant to the option granted on the offering date for that offering period. In the event that the number of Shares to be purchased by all participants in any offering period exceeds the number of Shares then available for issuance under the ESPP, the Company will make a pro rata allocation of the remaining Shares in as uniform a manner as practicable and as the Committee, in its sole discretion, determines to be equitable, and all funds not used to purchase Shares on the purchase date will be returned, without interest (to the extent permitted by applicable local law), to the participants.
As soon as practicable following the end of each offering period, the number of Shares purchased by each participant will be deposited into an account established in the participant’s name. Unless otherwise permitted by the Committee in its sole discretion, dividends (if any) that may be declared on the Shares held in that account will be reinvested in whole or fractional Shares.
Withdrawal; Termination of Employment
Each participant may withdraw from participation in respect of an offering period under terms and conditions established by the Committee in its sole discretion. Upon a participant’s withdrawal from participation in respect of any offering period, all accumulated payroll deductions in the participant’s payroll deduction account will be returned, without interest (to the extent permitted by applicable local law), to that participant, and that participant will not be entitled to purchase any Shares on the purchase date or thereafter with respect to the offering period in effect at the time of withdrawal. The participant will be permitted to participate in subsequent offering periods pursuant to terms and conditions established by the Committee in its sole discretion. A participant will be deemed to have withdrawn from the ESPP as of the date of any hardship withdrawal from any cash or deferred arrangement within the meaning of Section 401(k) of the Code.
A participant will cease to participate in the ESPP upon the participant’s termination of employment from the Company or any participating subsidiary for any reason. All payroll deductions credited to the former participant’s payroll deduction account as of the date of termination will be:
in the event termination is due to a transfer to a non-participating subsidiary of the Company, applied to the purchase of Shares on the next purchase date; or
in the event termination is due to any other reason, returned, without interest (to the extent permitted by applicable local law), to the former participant or to the former participant’s designated beneficiary, as the case may be, and the former participant or beneficiary will have no future rights in any unexercised options under the ESPP, unless the participant again becomes an eligible employee.
The Committee will determine the extent to which any leave of absence will impact the participant’s participation in the ESPP.
Adjustments Upon Certain Events
Generally. In the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, amalgamation, spin-off or combination transaction or repurchase or exchange of Shares or other corporate exchange, or any distribution to shareholders of Shares other than regular cash dividends or any transaction similar to the foregoing, the Committee in its sole discretion and without liability to any person will make such substitution or adjustment, if any, as it deems to be equitable, as to:
the number or kind of shares or other securities or property issued or reserved for issuance pursuant to the ESPP;
the number or kind of shares or other securities subject to outstanding options;
the purchase price; and/or
any other affected terms of these options.
Change in Control. In the event of a change in control (as defined in the ESPP), the Committee in its sole discretion and without liability to any person may terminate the then current offering period and take other actions, if any, as it deems necessary or desirable with respect to any option as of the date of the consummation of the change in control. For purposes of the ESPP, a “change of control” would be deemed to occur upon any of the same events that constitute a “change of control” under the Company’s 2017 Omnibus Incentive Compensation Plan described in this Form 10-K/A.
Restrictions on Transfer
Options granted under the ESPP will not be transferable or assignable by the participant other than by will or by the laws of descent and distribution.
Amendment or Termination
The ESPP will continue until the earliest to occur of the following:
termination of the ESPP by the Board;
issuance of all of the Shares reserved for issuance under the ESPP; or
June 27, 2027.
The Board may amend, alter or discontinue the ESPP, but no amendment, alteration or discontinuation will be made which:
without the approval of the shareholders of the Company, would increase the total number of Shares reserved for the purposes of the ESPP; or
without the consent of a participant, would materially adversely affect the rights of a participant under any option granted to the participant under the ESPP.
The Committee may amend the ESPP, however, in such manner and terminate any offering period (in whole or in part) as it deems necessary to permit the granting of options to meet the requirements of the Code or other applicable laws.
New Plan Benefits
All awards to eligible employees under the ESPP are made at the discretion of the Committee and its delegates. Therefore, the benefits and amounts that will be received or allocated under the plan are not determinable at this time. Please refer to the description of grants made to named executive officers in the last fiscal year described in the “Grants of Plan-Based Awards for Fiscal 2016” table.
Tax Withholding
The Company has the right to withhold from a participant such withholding taxes as may be required by federal, state, local or other law, or to otherwise require the participant to pay such withholding taxes. Unless the Committee specifies otherwise, a participant may elect to pay a portion or all of such withholding taxes by:
delivery of Shares, provided that such Shares have been held by the participant for no less than 6 months (or such other period as established from time to time by the Committee if required to avoid adverse accounting under any generally accepted accounting principles); or
having Shares equal to the minimum statutory withholding rate withheld by the Company from any Shares that otherwise would have been received by the participant (or such other amount as is permitted without adverse accounting).
Choice of Law
The ESPP shall be governed by the laws of the State of Delaware.
Federal Income Tax Information
The following summary briefly describes U.S. federal income tax consequences of rights under the ESPP. The summary, however, is not a detailed or complete description of all U.S. federal tax laws or regulations that may apply and does not address any local, state or other country laws. Therefore, no one should rely on this summary for individual tax compliance, planning or decisions. Participants in the ESPP should consult their own professional tax advisors concerning tax aspects of rights under the ESPP.
Generally
For eligible employees of U.S. subsidiaries, the ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Code. All payroll deductions elected by a participant under the Plan are made on an after-tax basis. No taxable income will be recognized by a participant, and no deductions will be allowable to the Company, upon either the grant or the exercise of the option granted under the ESPP. Taxable income will not be recognized until there is a sale or other disposition of the Shares acquired under the ESPP or in the event the participant should die while still owning the purchased Shares.
If the participant sells or otherwise disposes of the purchased Shares within two years after the first day of the relevant purchase period or one year after the purchase date, the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the fair market value of the Shares on the purchase date exceeded the purchase price of those Shares. If the participant sells or otherwise disposes of the purchased Shares more than two years after the first day of the relevant purchase period and more than one year after the purchase date, then the participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (i) the amount by which the fair market value of the Shares on the sale or disposition date exceeded the purchase price paid for those Shares or (ii) 15% of the fair market value of the Shares on the first day of the purchase period. Any additional gain upon the disposition will be taxed as a long-term capital gain.
If the participant owns Shares acquired under Plan at the time of death, the lesser of (i) the amount by which the fair market value of the Shares on the date of death exceeds the purchase price or (ii) 15% of the fair market value of the Shares on the first day of the purchase period will constitute ordinary income in the year of death.
If the purchased Shares are sold or otherwise disposed of within two years after the first day of the relevant purchase period or one year after the purchase date, the Company will be entitled to a tax deduction in the year of such sale or disposition equal to the amount of ordinary income recognized by the participant as a result of such sale or disposition. In all other cases, no deduction will be allowed.
Code Section 409A
Section 409A of the Code generally provides rules that must be followed with respect to covered deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) upon the service provider who is entitled to receive the deferred compensation. Purchase rights that may be granted under the ESPP should not constitute “deferred compensation” within the meaning of and subject to section 409A. While the Committee intends to administer and operate the ESPP in a manner that will avoid the imposition of additional taxation under section 409A upon a participant, the Company cannot provide any assurance that additional taxation under section 409A will be avoided in all cases. In the event the Company is required to delay delivery of Shares or any other payment under the ESPP in order to avoid the imposition of an additional tax under section 409A, the Company will deliver such Shares (or make such payment) on the first day that would not result in the participant incurring any tax liability under section 409A.
Pay Ratio Disclosure
Under Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, the Company is required to provide the ratio of the annual total compensation of Mr. Anderson, who has served as the Company’s Chief Executive Officer since March 2012, to the annual total compensation of the median employee of the Company (the “Pay Ratio Disclosure”).
For fiscal year 2017, the median annual total compensation of all employees of the Company and its consolidated subsidiaries (other than the Chief Executive Officer) was $91,470. Mr. Anderson’s annual total compensation for fiscal year 2017 for purposes of the Pay Ratio Disclosure was $1,861,421. Based on this information, for fiscal year 2017, the ratio of the compensation of the Chief Executive Officer to the median annual total compensation of all other employees was estimated to be 20 to 1.
To identify, and to determine the annual total compensation of, the median employee, we used the following methodology:
| · | We collected the payroll data of all employees globally, whether employed on a full-time, part-time, temporary or seasonal basis as of December 31, 2017. |
| · | We annualized the compensation of all permanent full-time and part-time employees who were hired by the Company and its consolidated subsidiaries between January 1, 2017 and December 31, 2017. We applied an exchange rate as of December 31, 2017, to convert all international currencies into U.S. dollars. |
| · | We then identified our median employee from our employee population based on this compensation measure. |
The median employee’s annual total compensation represents the amount of such employee’s compensation for fiscal year 2017 that would have been reported in the Summary Compensation Table in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K if the employee was a Named Executive Officer, and the annual total compensation of the Chief Executive Officer represents the amount reported in the “Total” column of our 2017 Summary Compensation Table on page 14 of this Form 10-K/A.
Using this methodology, we determined that the median employee was a non-exempt, full-time employee located the United States with an annual total compensation of $91,470 for fiscal year 2017, calculated in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, which includes base pay, overtime pay and the Company’s matching contribution to that employee’s 401(k) plan.
The Pay Ratio Disclosure presented above is a reasonable estimate. Because the SEC rules for identifying the median employee and calculating the pay ratio allow companies to use different methodologies, exemptions, estimates and assumptions, the Pay Ratio Disclosure may not be comparable to the pay ratio reported by other companies.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Beneficial Ownership Table
The following table sets forth certain information regarding the beneficial ownership of our issued and outstanding ordinary shares by (i) each person who is known by the Company to own beneficially more than five percent of the outstanding ordinary shares, (ii) each Named Executive Officer of the Company, (iii) each director and director nominee of the Company and (iv) all directors and executive officers as a group. Except as otherwise indicated in the footnotes below, such information is provided as of April 27, 2018. According to SEC rules, a person is the “beneficial owner” of securities if he, she or it has or shares the power to vote them or to direct their investment or has the right to acquire beneficial ownership of such securities within 60 days through the exercise of an option, warrant or right, the conversion of a security or otherwise.
| Name and Address of Beneficial Owners(1) | | Amount of
Beneficial
Ownership(2) | | | Percentage
of Class(2) | |
| | | | | | | |
| >5% Shareholders: | | | | | | | | |
Brandes Investment Partners, L.P.(3) 11988 El Camino Real, Suite 600
San Diego, CA 92130 | | | 4,808,493 | | | | 13.09 | % |
Deerfield Mgmt, L.P.(4) 780 Third Avenue New York, New York 10017 | | | 4,558,256 | | | | 12.40 | % |
Broadfin Capital, LLC(5) 300 Park Avenue, 25th Floor New York, New York 10022 | | | 2,591,721 | | | | 7.05 | % |
Perceptive Advisors LLC(6)
51 Astor Place
New York, NY 10003 | | | 2,391,841 | | | | 6.51 | % |
| Directors, Director Nominees and Named Executive Officers: | | | | | | | | |
| Craig R. Stapleton(7) | | | 838,311 | | | | 2.26 | % |
| Michael S. Anderson(8) | | | 760,250 | | | | 2.03 | % |
| Francis J.T. Fildes(9) | | | 150,494 | | | | * | |
| Christophe Navarre(10) | | | 154,052 | | | | * | |
| Peter Thornton | | | 5,155 | | | | * | |
| Benoit (Ben) C. Van Assche(11) | | | 154,052 | | | | * | |
| Gregory J. Divis(12) | | | 48,100 | | | | * | |
| Michael F. Kanan(13) | | | 75,000 | | | | * | |
| David Monteith(14) | | | 63,750 | | | | * | |
| Phillandas T. Thompson(15) | | | 261,250 | | | | * | |
| All directors and executive officers as a group (12 persons)(16) | | | 2,645,114 | | | | 7.21 | % |
* Represents beneficial ownership of less than 1% of our outstanding ordinary shares.
| (1) | Except as stated in the table above or the footnotes below, the address of the named person is c/o Avadel Pharmaceuticals plc, Block 10-1, Blanchardstown Corporate Park, Ballycoolin, Dublin 15, Ireland. |
| (2) | Unless otherwise stated in the footnotes to this table, we believe that each of the shareholders named in this table has sole voting and dispositive power with respect to the ordinary shares indicated as beneficially owned. Ownership percentages are based on 36,745,376 ordinary shares outstanding on April 27, 2018. The number of shares beneficially owned includes ordinary shares issuable pursuant to the exercise of stock options or warrants that are exercisable and “free shares,” if any, that will vest within 60 days of April 27, 2018. Ordinary shares issuable pursuant to the exercise of stock options or warrants that are exercisable and “free shares,” if any, that will vest within 60 days of April 27, 2018 are deemed to be outstanding and beneficially owned by the person to whom such shares are issuable for the purpose of computing the percentage ownership of that person, but they are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. |
| (3) | The information in the table and in this footnote is based on a Schedule 13G/A filed with the SEC on April 9, 2018 by Brandes Investment Partners, L.P., CO-GP, LLC, Brandes Worldwide Holdings, L.P., and Glenn Carlson, each of whom shares voting power with respect to an aggregate of 4,297,456 of the Company’s ordinary shares and dispositive power with respect to an aggregate of 4,808,493 of the Company’s ordinary shares. CO-GP, LLC, Brandes Worldwide Holdings, L.P., and Glenn Carlson each disclaims beneficial ownership of such ordinary shares except to the extent of their pecuniary interest therein. |
| (4) | The information in the table and in this footnote is based, in part, on a Schedule 13G/A filed with the SEC on February 14, 2018 by Deerfield Mgmt, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Management Company, L.P., Breaking Stick Holdings, LLC and James E. Flynn. According to the Schedule 13G/A, Deerfield Mgmt, L.P., Deerfield Management Company, L.P. and James E. Flynn share voting and dispositive power with respect to (i) an aggregate of 7,255,494 ordinary shares, consisting of (A) 1,066,299 ordinary shares held by Deerfield Special Situations Fund, L.P., of which Deerfield Mgmt, L.P. is general partner, (B) 1,346,365 ordinary shares held by Deerfield Private Design Fund II, L.P., of which Deerfield Mgmt, L.P. is general partner, and (C) 1,542,830 ordinary shares held by Deerfield Private Design International II, L.P., of which Deerfield Mgmt, L.P. is general partner, and (ii) warrants to purchase ADSs representing 3,300,000 ordinary shares held by Breaking Stick Holdings, LLC, the manager of which is Deerfield Management Company, L.P. and of which Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. are members. On February 23, 2018, Breaking Stick Holdings, LLC exercised in full warrants to purchase ADSs representing 2,200,000 ordinary shares for which the Company settled these warrants for a combination of cash and the issuance of approximately 602,762 ADSs representing 602,762 ordinary shares. On March 12, 2018, the remaining 1,100,000 warrants expired worthless. As a result, none of Deerfield Mgmt, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., Deerfield Management Company, L.P., Breaking Stick Holdings, LLC or James E. Flynn has voting and dispositive power with respect to any warrants of the Company.
|
| (5) | The information in the table and in this footnote is based on a Schedule 13G/A filed with the SEC on February 13, 2018 by Broadfin Capital, LLC, Broadfin Healthcare Master Fund, Ltd. and Kevin Kotler, each of whom share voting and dispositive power with respect to an aggregate of 2,591,721 of the Company’s ordinary shares. Broadfin Capital, LLC and Kevin Kotler each disclaims beneficial ownership of such ordinary shares except to the extent of their pecuniary interest therein. |
| (6) | The information in the table and in this footnote is based on a Schedule 13G/A filed with the SEC on February 14, 2018 by Perceptive Advisors LLC, Perceptive Life Sciences Master Fund, Ltd. and Joseph Edelman, each of whom shares voting and dispositive power with respect to an aggregate of 2,391,841 of the Company’s ordinary shares. |
| (7) | Includes warrants to purchase ADSs with respect to 334,898 ordinary shares. |
| (8) | Includes options to purchase ADSs with respect to 655,500 ordinary shares. |
| (9) | Includes warrants to purchase ADSs with respect to 135,494 ordinary shares. |
| (10) | Represents warrants to purchase ADSs with respect to 154,052 ordinary shares. |
| (11) | Represents warrants to purchase ADSs with respect to 154,052 ordinary shares. |
| (12) | Includes options to purchase ADSs with respect to 37,500 ordinary shares. |
| (13) | Represents options to purchase ADSs with respect to 75,000 ordinary shares. |
| (14) | Represents options to purchase ADSs with respect to 63,750 ordinary shares. |
| (15) | Includes options to purchase ADSs with respect to 246,250 ordinary shares. |
| (16) | Includes warrants and options to purchase ADSs with respect to 1,979,996 ordinary shares. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Policies and Procedures for Related Person Transactions
The Audit Committee reviews all related party transactions and similar matters to the extent required by listing standards. The Nominating and Corporate Governance Committee further assists to ensure that all such related party transactions are thoroughly reviewed on a regular basis so that such transactions are and remain at arms’ length terms, thus promoting long term shareholder value.
For purposes of related person transactions as managed by our Audit and Nominating and Corporate Governance Committees, a “related person transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which we (or any of our subsidiaries) were, are or will be a participant, and the amount involved exceeds $120,000 and in which any related person had, has or will have a direct or indirect interest. For purposes of determining whether a transaction is a related person transaction, the Committees rely upon Item 404 of Regulation S-K, promulgated under the Securities Exchange Act of 1934, as amended.
A “related person” is defined as:
Any person who is, or at any time since the beginning of our last fiscal year was, one of our directors or executive officers or a nominee to become one of our directors;
Any person who is known to be the beneficial owner of more than five percent of any class of our voting securities;
Any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of the director, executive officer, nominee or more than five percent beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than five percent beneficial owner; and
Any firm, corporation, or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a ten percent or greater beneficial ownership interest.
Related Party Transactions
Since January 1, 2017, there have been no transactions that would require disclosure by the Company under Item 404 of SEC Regulation S-K except as follows. In connection with our acquisition of Éclat Pharmaceuticals in March 2012, we are required to pay contingent consideration to the seller, Breaking Stick Holdings LLC, in the amount of 20% of gross profit generated by certain Éclat products. Michael S. Anderson, our Chief Executive Officer, has a 20% beneficial interest in Breaking Stick Holdings LLC, but does not have the ability to control this entity by virtue of his minority interest. During 2017, we made payments to Breaking Stick Holdings LLC pursuant to this requirement in the aggregate amount of approximately $31,600,000.
| Item 14. | Principal Accountant Fees and Services. |
Audit Fees
Background
In 2017, the Audit Committee approved the engagement of Deloitte & Touche LLP to serve as the Company’s independent registered public accounting firm for the fiscal year 2017, for purposes of our financial statements for filing under U.S. securities law for the year ending December 31, 2017. At the 2017 Annual General Meeting of Shareholders, the shareholders voted to ratify the selection of Deloitte & Touche LLP as the Company’s independent registered accounting firm for the fiscal year 2017.
For its fiscal year ended December 31, 2015, the Company’s independent registered public accounting firm for purposes of its financial statements for filing purposes under U.S. securities law was initially PricewaterhouseCoopers Audit (“PwC-France”). On April 15, 2016, PwC-France, informed us that PwC-France declined to stand for reappointment as the Company’s independent registered public accounting firm for SEC reporting purposes. Also, on April 15, 2016, we engaged PricewaterhouseCoopers LLP (“PwC-U.S.”) as the Company’s independent registered public accounting firm for SEC reporting purposes for the fiscal year ending December 31, 2016. On June 14, 2016, we dismissed PwC-U.S. as the Company’s independent registered public accounting firm for SEC reporting purposes. Also, on June 14, 2016, we engaged Deloitte & Touche LLP (“Deloitte”) as the Company’s independent registered public accounting firm for SEC reporting purposes for the fiscal year ending December 31, 2016. For certain additional disclosures relating to changes in the Company’s independent registered public accounting firm for purposes of its financial statements for filing purposes under U.S. securities law, please see the information set forth below under the caption “Changes in Independent Registered Public Accounting Firms for SEC Reporting Purposes.” It is not expected that any representatives of Deloitte, PwC-France or PwC-US will be present at the 2018 Annual General Meeting of Shareholders and, accordingly, no such representatives will have the opportunity to make a statement at the 2018 Annual General Meeting of Shareholders, if they desire to do so, nor, therefore, will any representative of Deloitte, PwC-France or PwC-US be available at the 2018 Annual General Meeting of Shareholders to respond to appropriate questions.
Pursuant to its charter, the Audit Committee of our Board or (as applicable) approved in advance each professional service performed by Deloitte during fiscal year 2017 and considered the possible effect of the provision of such service on the auditors’ independence. Information relating to fees paid to Deloitte is set forth in the table below.
Under the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder, the Audit Committee is solely responsible for the selection, appointment, compensation and oversight of the work of our independent registered public accounting firm. Although submission of the appointment of an independent registered public accounting firm to shareholders for ratification is not required by law, the Board considers the appointment of our independent registered public accounting firm to be an important matter of shareholder concern and is submitting the appointment of Deloitte for ratification by our shareholders, as a matter of good corporate practice.
Independent Registered Public Accounting Firm Fees
The following table summarizes the aggregate fees of our independent registered public accounting firms, billed to us for the fiscal years ended December 31, 20172020 and December 31, 2016 for audit2019, the Company issued 49 and other services:
| | | Fiscal Year Ended
December 31, | |
| | | 2017 | | | 2016 | |
| | | | | | | |
| Audit Fees | | $ | 1,510,000 | | | $ | 1,980,100 | |
| Audit-related Fees | | | - | | | | | |
| Tax Fees | | | - | | | | | |
| All Other Fees | | | - | | | | | |
| Total Fees | | $ | 1,510,000 | | | $ | 1,980,100 | |
Audit Fees. Audit fees include professional services rendered by public accounting firms for the audit of our annual financial statements in 2017 and 2016, including the reviews of the financial statements included in our quarterly reports on Form 10-Q. This category also includes fees for assistance with complex accounting and transactions, fees for audits provided in connection with statutory filings or services that generally only the principal auditor can reasonably provide54 ordinary shares to a client, and consents and assistance with and review of documents filed with the SEC, including services related to our 2017 public offerings of our common stock.
Audit-Related Fees. Audit-related fees consist of amounts for assurance and related services that are reasonablyemployees, respectively. Expense related to the performance of the audit or review of our financial statements that are not reported under “Audit Fees.”
Tax Fees. Tax fees include original and amended tax returns, studies supporting tax return amounts as may be required by Internal Revenue Service regulations, claims for refunds, assistance with tax audits and other work directly affecting or supporting the payment of taxes, planning, research and advice supporting our efforts to maximize the tax efficiency of our operations for fiscal years 2017 and 2016.
All Other Fees. All other fees are fees for products or services other than those in the above three categories.
Pre-Approval Policy
The Audit Committee has adopted a policyESPP for the provision of audit services and permitted non-audit services by our independent registered public accounting firm. Our Chief Financial Officer has primary responsibility to the Audit Committee for administration and enforcement of this policy and for reporting non-compliance. Under the policy, our Audit Committee receives a presentation of an annual budget and plan for audit services and for any proposed audit-related, tax or other non-audit services to be performed by the independent registered public accounting firm.
Changes in Independent Registered Public Accounting Firms for SEC Reporting Purposes
Background
The following disclosures pertain to changes in independent registered public accounting firms for SEC reporting purposes which took place during 2016 with respect to our predecessor Flamel Technologies S.A., a Frenchsociété anonyme (“Flamel”). Avadel is the successor to Flamel as the result of the merger of Flamel with and into Avadel which was completed at 11:59:59 p.m., Central Europe Time, on December 31, 2016 (the “Merger”). Immediately prior to the Merger, Avadel was a wholly owned subsidiary of Flamel. As a result of the Merger, (i) Flamel ceased to exist as a separate entity and Avadel continued as the surviving entity and assumed all of the assets and liabilities of Flamel as of the time the Merger was consummated; (ii) each of Flamel’s outstanding ordinary shares was cancelled and exchanged for one (1) newly issued Avadel ordinary share and (iii) each outstanding ADS representing a Flamel ordinary share was cancelled and exchanged one (1) ADS representing one (1) Avadel ordinary share. Thus, the Merger changed the jurisdiction of our incorporation from France to Ireland, and an ordinary share of Avadel held (either directly or represented by an ADS) immediately after the Merger continued to represent the same proportional equity interest owned by the holder of a share of Flamel immediately prior to the Merger. For SEC reporting purposes, Avadel is the successor issuer to Flamel. Therefore, unless the context otherwise requires, for purposes of the following disclosures the “Company,” and the pronouns “we,” “us” and similar terms, refer to Flamel when describing events occurring or circumstances existing prior to the completion of the “Merger.”
Declination of PricewaterhouseCoopers Audit and Engagement of PricewaterhouseCoopers LLP
On April 15, 2016, PricewaterhouseCoopers Audit (“PwC-France”), informed us that PwC-France declined to stand for reappointment as the Company’s independent registered public accounting firm for SEC reporting purposes. Also, on April 15, 2016, we engaged PricewaterhouseCoopers LLP (“PwC-U.S.”) as the Company’s independent registered public accounting firm for SEC reporting purposes for the fiscal year ending December 31, 2016.
During the fiscal yearyears ended December 31, 20152020, 2019 and 2018 was immaterial.
NOTE 22:Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by the subsequent period priorweighted average number of shares outstanding during each period. Diluted net income (loss) per share is calculated by dividing net income (loss) - diluted by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to April 15, 2016 (the date on which PwC-France declinednet income (loss), diluted net income (loss) per share would be calculated assuming the impact of the conversion of the 2023 Notes, the
conversion of our preferred shares, the exercise of outstanding equity compensation awards, and ordinary shares expected to stand for reappointment), there were no disagreements with PwC-France onbe issued under our ESPP.
We have a choice to settle the conversion obligation under the 2023 Notes in cash, shares or any mattercombination of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolvedthe two. We utilize the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2023 Notes into shares of our ordinary shares and reflects the elimination of the interest expense related to the satisfaction of PwC-France, would have caused such firm to make reference to the subject matter2023 Notes.
The dilutive effect of the disagreementswarrants, stock options, restricted stock units, preferred shares and ordinary shares expected to be issued under or ESPP has been calculated using the treasury stock method. The dilutive effect of the 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 income (loss) per share, together with the related shares outstanding in
its reports on our financial statementsthousands for
any applicable period.During the fiscal yearyears ended December 31, 20152020, 2019 and 2018, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| Net Income (Loss) Per Share: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) | | $ | 7,028 | | | $ | (33,226) | | | $ | (95,304) | |
| | | | | | |
| Weighted average shares: | | | | | | |
| Basic shares | | 52,996 | | | 37,403 | | | 37,325 | |
| Effect of dilutive securities—employee and director equity awards outstanding | | 1,945 | | | 0 | | | 0 | |
| Diluted shares | | 54,941 | | | 37,403 | | | 37,325 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) per share - basic | | $ | 0.13 | | | $ | (0.89) | | | $ | (2.55) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income (loss) per share - diluted | | $ | 0.13 | | | $ | (0.89) | | | $ | (2.55) | |
Potential ordinary shares of 14,915, 16,740, and 17,529 were excluded from the subsequent period priorcalculation of weighted average shares for the years ended December 31, 2020, 2019 and 2018, respectively, because either their effect was considered to April 15, 2016 (the date onbe anti-dilutive or they were related to shares from PSUs for which PwC-France declined to stand for reappointment), therethe contingent vesting condition had not been achieved. For the years ended December 31, 2019 and 2018, the effects of dilutive securities were no reportable events (as definedentirely excluded from the calculation of net income (loss) per share as a net loss was reported in Item 304(a)(1)(v)these periods.
NOTE 23:Comprehensive Loss
The following table shows the components of Regulation S-K), except as follows. In Item 9A of Company’s annual report on Form 10-Kaccumulated other comprehensive loss for the year ended December 31, 2015net of immaterial tax effects:
| | | | | | | | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Foreign currency translation adjustment: | | | | | | |
| Beginning balance | | $ | (23,738) | | | $ | (23,621) | | | $ | (23,202) | |
| Net other comprehensive income (loss) | | 1,111 | | | (117) | | | (419) | |
| Balance at December 31, | | $ | (22,627) | | | $ | (23,738) | | | $ | (23,621) | |
| | | | | | |
| Unrealized gain (loss) on marketable securities, net | | | | | | |
| Beginning balance | | $ | 932 | | | $ | 205 | | | $ | (64) | |
| Net other comprehensive income, net of $(202), $(43), $(18), tax, respectively | | 644 | | | 727 | | | 269 | |
| Balance at December 31, | | $ | 1,576 | | | $ | 932 | | | $ | 205 | |
| Accumulated other comprehensive loss at December 31, | | $ | (21,051) | | | $ | (22,806) | | | $ | (23,416) | |
NOTE 24:Company Operations by Product, Customer and Geographic Area
We have determined that we operate in 1 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 reviews profit and loss information on a consolidated basis to assess performance and make overall operating decisions as filedwell as resource allocations. All products are included in 1 segment because the Company’s products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.
The following table presents a summary of total revenues by these products for the twelve months ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | |
| Revenue by Product: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| Bloxiverz | | $ | 2,201 | | | $ | 7,479 | | | $ | 20,850 | |
| Vazculep | | 10,429 | | | 33,152 | | | 42,916 | |
| Akovaz | | 9,545 | | | 18,642 | | | 33,759 | |
| Other | | 159 | | | (58) | | | 3,898 | |
| Product sales | | 22,334 | | | 59,215 | | | 101,423 | |
| License revenue | | 0 | | | 0 | | | 1,846 | |
| Total revenues | | $ | 22,334 | | | $ | 59,215 | | | $ | 103,269 | |
Concentration of credit risk with respect to accounts receivable is limited due to the high credit quality comprising a significant portion of the Company’s customers. Management periodically monitors the creditworthiness of our customers and believes that we have adequately provided for any exposure to potential credit loss.
The following table presents a summary of total revenues by significant customer for the twelve months ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | |
| Revenue by Significant Customer: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| McKesson Corporation | | $ | 5,758 | | | $ | 14,900 | | | $ | 26,794 | |
| Cardinal Health | | 5,155 | | | 15,088 | | | 25,413 | |
| AmerisourceBergen | | 3,155 | | | 12,059 | | | 18,620 | |
| QuVa Pharma | | 3,117 | | | 3,252 | | | 2,788 | |
| Others | | 5,149 | | | 13,916 | | | 27,808 | |
| Product sales | | 22,334 | | | 59,215 | | | 101,423 | |
| License revenue | | 0 | | | 0 | | | 1,846 | |
| Total revenues | | $ | 22,334 | | | $ | 59,215 | | | $ | 103,269 | |
The following table summarizes revenues by geographic region for the twelve months ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | |
| Revenue by Geographic Region: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| U.S. | | $ | 22,334 | | | $ | 59,215 | | | $ | 101,423 | |
| | | | | | |
| Ireland | | 0 | | | 0 | | | 1,846 | |
| Total revenues | | $ | 22,334 | | | $ | 59,215 | | | $ | 103,269 | |
Currently, we are working with contract manufacturing organizations for the manufacture of FT218. Additionally, we purchase raw materials used in FT218 from a limited number of suppliers, including a single supplier for certain key ingredients.
Non-monetary long-lived assets primarily consist of property and equipment, goodwill, intangible assets and operating right-of use-assets. The following table summarizes non-monetary long-lived assets by geographic region as of December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | |
| Long-lived Assets by Geographic Region: | | 2020 | | 2019 | | 2018 |
| | | | | | |
| U.S. | | $ | 20,424 | | | $ | 22,254 | | | $ | 27,761 | |
| France | | 11 | | | 196 | | | 1,365 | |
| Ireland | | 6,047 | | | 7,244 | | | 6,028 | |
| Total | | $ | 26,482 | | | $ | 29,694 | | | $ | 35,154 | |
NOTE 25:Related Party Transactions
As noted in Note 4: Disposition of the Hospital Products, we were party to a Membership Interest Purchase Agreement by and among us, Avadel Legacy, Breaking Stick Holdings, LLC, Deerfield Private Design International II, L.P. (“Deerfield International”), Deerfield Private Design Fund II, L.P. (“Deerfield Fund”) and Horizon Santé FLML, Sarl (“Horizon”) (the “Deerfield MIPA”) and a Royalty Agreement by and among us, Avadel Legacy, the Deerfield Fund and Horizon (the “Deerfield Royalty Agreement”). In connection with the SECclosing of the sale of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Deerfield Royalty Agreement for obligations that arise after the Closing date.
We were also party to a Royalty Agreement by and between us, Avadel Legacy and Broadfin Healthcare Master Fund, Ltd. (the “Broadfin Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Broadfin Royalty Agreement for obligations that arise after the Closing Date.
Under the terms of the February 5, 2016 acquisition of FSC, which was completed on MarchFebruary 8, 2016, the Company was to pay $1,050 annually for five years with a final payment in January 2021 of $15,000 for a total of $20,250 to Deerfield for all of the equity interests in FSC. The Company would also pay Deerfield a 15% royalty per annum on net sales of the current FSC products, up to $12,500 for a period not exceeding ten years. These obligations were assumed by Cerecor in connection with the divestiture of the Company’s pediatric products on February 16, 2018, as noted in Note 18: Divestiture of the Pediatric Assets.
Deerfield and Broadfin disposed of their 2023 Notes and ordinary shares in the Company during the year ended December 31, 2020 and are no longer considered related parties.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Avadel Pharmaceuticals plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Avadel Pharmaceuticals plc (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15 2016 (the “2015 Form 10-K”(collectively referred to as the "financial statements"), management. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company reportedas of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Presentation of the Gain on Sale of Hospital Products - Refer to Note 4 to the financial statements
Critical Audit Matter Description
On June 30, 2020, the Company announced the sale of its sterile injectable drugs used in the hospital setting (the “Hospital Products”), including its three commercial products, Akovaz, Bloxiverz, and Vazculep, as well as Nouress, which is approved by the FDA to Exela Sterile Medicines LLC (the “Exela Buyer”) pursuant to an asset purchase agreement between Avadel U.S. Holdings, Inc, Avadel Legacy Pharmaceuticals, LLC, Exela Holdings Inc., and the Exela Buyer.
We identified the presentation and disclosure of the sale of the Hospital Products as a critical audit matter due to the significant amount of judgement by management when evaluating the quantitative and qualitative factors to determine whether the criteria for presentation and disclosure as a discontinued operation had been met. This required a high degree of auditor judgement, an increased extent of effort, and the use of professionals with specialized skill and knowledge to assist in performing audit procedures to evaluate management’s presentation and disclosure of the gain on sale of the Hospital Products.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the gain on sale of the Hospital Products included the following, among others:
•We tested the effectiveness of controls over management’s review of the transaction, including their evaluation of whether the sale met the criteria for discontinued operations.
•With the assistance of professionals with specialized skill and knowledge, we evaluated management’s assessment of the discontinued operations criteria, including the quantitative and qualitative factors surrounding the qualification for discontinued operations treatment.
•We evaluated the accuracy and completeness of management’s disclosure for the disposition of the Hospital Products.
/s/ Deloitte and Touche LLP
St. Louis, Missouri
March 9, 2021
We have served as the Company's auditor since 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Avadel Pharmaceuticals plc
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Avadel Pharmaceuticals plc (the “Company”) as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 9, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte and Touche LLP
St. Louis, Missouri
March 9, 2021
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 15d -15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (the “SEC”). Based on that evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of December 31, 2015. The 2015 Form 10-K statedfinancial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concludedcontrols may become inadequate because of changes in conditions, or that the Company did not maintain effectivedegree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, based on2020. In making this assessment, the Company’s management used the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Such conclusion wasCommission. Based on this assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective based on material weaknessesthose criteria.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting
as of(as defined by Rule 13a-15(f)) that occurred during the year ended December 31,
2015 which are described as follows: (a) lack of sufficient personnel; (b) ineffective controls over segregation of duties and restricted access for processes, including an assessment of incompatible management responsibilities relating to (i) the review, approval and documentation related to journal entries in the U.S.; (ii) the review, approval, and ongoing maintenance of third party vendor contracts and vendor payments; (iii) the cash payment process in the U.S.; and (iv) the U.S. payroll process; (c) lack of effective controls over the review and approval of product prices, the review and accounting for rebate arrangements under customer contracts and the use of service providers in the revenue process; (d) lack of effective controls related to quarterly and year-end income tax accounting; (e) lack of effective controls over certain information technology used in the preparation of the financial statements; (f) lack of effective controls over the financial close process; and (g) lack of an internal audit function sufficient to monitor control activities. More detailed descriptions of these material weaknesses were set forth in Item 9A of the 2015 Form 10-K.The audit report of PwC-France included in the 2015 Form 10-K with respect to2020 that have materially affected the Company’s internal control over financial reporting opined that the Company did not maintain effective internal control over financial reporting as of December 31, 2015; however, the audit report of PwC-France included in the 2015 Form 10-K with respectreporting. We continue to work from home due to the Company’s financial statementsCOVID-19 pandemic and financial statement schedule expressed an unqualified opinionwill continue to monitor the impact on such consolidated financial statements and financial statement schedule.
The material weaknesses identified by management and described in the 2015 Form 10-K were discussed by the Company’s management and the Audit Committee with PwC-France. The Audit Committee authorized PwC-France to respond fully to the inquiries of the successor independent registered public accounting firm concerning all matters related to any audit work performed by PwC-France, including the material weaknesses referred to above.
During the fiscal year ended December 31, 2015 and the subsequent period prior to April 15, 2016 (the date of engagement of PwC-U.S.), neither the Company nor anyone on its behalf consulted PwC-U.S. regarding (i) the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and either a written report was provided to the Company or oral advice was provided that PwC-U.S. concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(v) of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
Dismissal of PricewaterhouseCoopers LLP and Engagement of Deloitte & Touche LLP
On June 14, 2016, we dismissed PwC-U.S. as the Company’s independent registered public accounting firm for SEC reporting purposes. The decision to dismiss PwC-U.S. as the Company’s independent registered public accounting firm was approved by both the Company’s Audit Committee and the Company’s Board of Directors. Also, on June 14, 2016, we engaged Deloitte & Touche LLP (“Deloitte”) as the Company’s independent registered public accounting firm for SEC reporting purposes for the fiscal year ending December 31, 2016.
Because PwC-U.S. had been engaged as the Company’s independent registered public accounting firm on April 15, 2016, such firm did not issue a report on the financial statements of the Company for any fiscal year prior to such date. During the period since April 15, 2016 (the date on which PwC-U.S. was engaged as the Company’s independent registered public accounting firm) through June 14, 2016 (the date of dismissal of PwC-U.S.), there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K), except as follows. In Part I, Item 4 of the Company’s quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2016, as filed with the SEC on May 10, 2016 (the “First Quarter 2016 Form 10-Q”), management of the Company reported on its evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2016, the end of the period covered by the First Quarter 2016 Form 10-Q. The First Quarter 2016 Form 10-Q stated that, based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2016, the Company’s disclosure controls and procedures were not effective because the material weaknesses in the Company’s internal control over financial reporting described above under the caption“– Changes in Independent Registered Public Accounting Firms for SEC Reporting Purposes – Declination of PricewaterhouseCoopers Audit and Engagement of PricewaterhouseCoopers LLP” continued to exist as of March 31, 2016. More detailed descriptions of these material weaknesses were set forth in Item 9A of the 2015 Form 10-K.
During the fiscal year ended December 31, 2015 and the subsequent period prior to June 14, 2016 (the date of dismissal of PwC-U.S.), there were no disagreements with PwC-U.S. on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC-U.S., would have caused such firm to make reference to the subject matter of the disagreements in its reports on our financial statements for any applicable period.
The material weaknesses identified by management and described in the 2015 Form 10-K and referenced in the First Quarter Form 2016 10-Q were discussed by the Company’s management and the Audit Committee with PwC-U.S. The Audit Committee authorized PwC-U.S. to respond fully to the inquiries of the successor independent registered public accounting firm concerning all matters related to any audit work performed by PwC-U.S., including the material weaknesses referred to above.
During the fiscal year ended December 31, 2015 and the interim period of 2016 prior to June 14, 2016 (the date of engagement of Deloitte), neither the Company nor anyone on its behalf consulted Deloitte regarding (i) the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and either a written report was provided to the Company or oral advice was provided that Deloitte concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(v) of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
Remediation of Previously Reported Material Weaknesses
As described above, the Company previously reported material weaknesses in its 2015 Form 10-K. As more fully described in our annual report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on March 16, 2018, we identified and implemented additional processes, procedures and controls to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures. We regularly reviewed our progress toward remediating the previously reported material weaknesses with our audit committee during 2016 and 2017. Leading this remediation process was our Senior Vice President and Chief Financial Officer and our Chief Accounting Officer. Assisting management with the remediation process was a nationally recognized consulting firm who, under the direction of management, created and enhanced controls documentation, assisted management in the implementation of improvements or changes to the existing internal control structure and tested such processes, procedures and controls to support management’s conclusions surrounding the design and operating effectiveness of management��sour internal controls over financial reporting. Ascontrols.
Item 9B. Other Information.
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we intend to file our definitive proxy statement for our 2021 annual general meeting of shareholders pursuant to Regulation 14A of the Securities Exchange Act of 1934 (our “Definitive 2021 Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in our Definitive 2021 Proxy Statement is incorporated herein by reference.
Item 10. Directors, Executive Officers and Corporate Governance.
Information regarding Directors, Executive Officers and Corporate Governance is hereby incorporated by reference to our Definitive 2021 Proxy Statement, which we intend to file with the SEC within 120 days after December 31, 2017, management evaluated2020.
Item 11. Executive Compensation.
Information regarding Executive Compensation is hereby incorporated by reference to our Definitive 2021 Proxy Statement, which we intend to file with the
design and operational effectiveness of all our remediation activities and concluded that we have sufficient evidence that the processes and controls relating to all areas where we previously reported material weaknesses have been adequately designed and were operating effectively. As a result, management has concluded that all previously reported material weaknesses have been remediated as ofSEC within 120 days after December 31,
2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is hereby incorporated by reference to our Definitive 2021 Proxy Statement, which we intend to file with the SEC within 120 days after December 31, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding Certain Relationships and Related Transactions, and Director Independence is hereby incorporated by reference to our Definitive 2021 Proxy Statement, which we intend to file with the SEC within 120 days after December 31, 2020.
Item 14. Principal Accountant Fees and Services.
Information regarding Principal Accountant Fees and Services is hereby incorporated by reference to our Definitive 2021 Proxy Statement, which we intend to file with the SEC within 120 days after December 31, 2020.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
| (a) | Documents filed as part of this report: |
Item 15. Exhibits and Financial Statement Schedules
(a)Documents filed as part of this report:
1. Financial Statements
See Item 8 - Financial Statements and Supplementary Data of Part II of
the Company’ Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018. | 2. | Financial Statement Schedules |
this Report.
2. Financial Statement Schedules
See below for Schedule II: Valuation and Qualifying Accounts. All other schedules are omitted as they are not applicable, not required or the information is included in the consolidated financial statements or related notes to the consolidated financial statements.
Valuation and Qualifying Accounts
(In thousands)
Deferred Tax Asset Valuation
Allowance: | | Balance,
Beginning of Period | | | Additions
(a) | | | Deductions
(b) | | | Other Changes
(c) | | | Balance,
End of Period | |
| 2017 | | $ | 7,599 | | | $ | 391 | | | $ | (664 | ) | | $ | 8,028 | | | $ | 15,354 | |
| 2016 | | $ | 45,516 | | | $ | 6,873 | | | $ | (42,417 | ) | | $ | (2,373 | ) | | $ | 7,599 | |
| 2015 | | | 57,980 | | | | 4,312 | | | | (11,737 | ) | | | (5,039 | ) | | | 45,516 | |
| a. | Additions to the deferred tax asset valuation allowance relate to movements on certain French, Irish and U.S. deferred tax assets where we continue to maintain a valuation allowance until sufficient positive evidence exists to support reversal. |
| b. | Deductions to the deferred tax asset valuation allowance include movements relating to utilization and removal of net operating losses and tax credit carryforwards, release in valuation allowance and other movements including adjustments following finalization of tax returns. |
| c. | Other changes to the deferred tax asset valuation allowance including currency translation adjustments recorded directly in equity and account method changes. |
| 3. | Exhibits required by Item 601 of Regulation S-K |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred Tax Asset Valuation Allowance: | | Balance,
Beginning of Period | | Additions
(a) | | Deductions
(b) | | Other Changes
(c) | | Balance,
End of Period |
| | | | | | | | | | |
| 2020 | | $ | 17,037 | | | $ | 2,805 | | | $ | 0 | | | $ | 1,782 | | | $ | 21,624 | |
| 2019 | | $ | 21,199 | | | $ | 6,496 | | | $ | (4,762) | | | $ | (5,896) | | | $ | 17,037 | |
| 2018 | | $ | 15,354 | | | $ | 6,089 | | | $ | (75) | | | $ | (169) | | | $ | 21,199 | |
| | | | | | | | | | |
a.Additions to the deferred tax asset valuation allowance relate to movements on certain French, Irish and U.S. deferred tax assets where we continue to maintain a valuation allowance until sufficient positive evidence exists to support reversal.
b.Deductions to the deferred tax asset valuation allowance include movements relating to utilization of net operating losses and tax credit carryforwards, release in valuation allowance and other movements including adjustments following finalization of tax returns.
c.Other changes to the deferred tax asset valuation allowance including currency translation adjustments recorded directly in equity, account method changes and the impact of corporate restructuring.
3. Exhibits required by Item 601 of Regulation S-K
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
| | | | | | | | |
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10.2*4.2 | | Indenture, dated as of February 16, 2018, by and between Avadel Finance Cayman Limited, Avadel Pharmaceuticals plc, and The Bank of New York Mellon, as Trustee (including an as exhibit the Form of 4.50% Exchangeable Senior Note Agreement among Flamel Technologies S.A., Flamel U.S. Holdings, Inc. and Éclat Holdings, LLC dated March 13, 2012due 2023) (incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 6-K,8-K, filed on March 21, 2012)February 16, 2018) |
| | |
10.34.3 | | Registration Rights Agreement between Flamel Technologies S.A.First Supplemental Indenture, dated as of February 6, 2019, by and Éclat Holdings, LLC dated March 13, 2012among Avadel Finance Cayman Limited, Avadel Pharmaceuticals plc, and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.54.1 to the registrant’s current report on Form 6-K,8-K, filed on March 21, 2012)February 7, 2019) |
| | |
10.44.4 | | Facility Agreement among Flamel US Holdings, Inc., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. dated December 31, 2012Description of Securities (incorporated by reference to Exhibit 4.74.6 to the registrant’sregistrants annual report on Form 20-F for the year ended December 31, 2012,10-K, filed on April 30, 2013)March 16, 2020) |
| | |
10.5*10.1* | | Royalty Agreement among Éclat Pharmaceuticals LLC, Horizon Santé FLML, Sarl and Deerfield Private Design Fund II, L.P. dated December 31, 2012 (incorporated by reference to Exhibit 4.8 to the registrant’s annual report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013) |
| | |
10.6* | | Security Agreement between Éclat Pharmaceuticals, LLC and Deerfield Private Design Fund II, L.P. and Horizon Santé FLML, Sarl dated February 4, 2013 (incorporated by reference to Exhibit 4.9 to the registrant’s annual report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013) |
| | |
10.7 | | Broadfin Facility Agreement effective as of December 3, 2013 (incorporated by reference to Exhibit 4.9 to the registrant’s annual report on Form 20-F for the year ended December 31, 2013, filed on April 30, 2014) |
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10.8* | | Broadfin Royalty Agreement dated as of December 3, 2013 (incorporated by reference to Exhibit 4.10 to the registrant’s annual report on Form 20-F for the year ended December 31, 2013, filed on April 30, 2014) |
| | |
10.9 | | Asset Purchase Agreement by and among Flamel Technologies S.A. and Recipharm Pessac dated November 26, 2014 (incorporated by reference to Exhibit 4.11 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
| | |
10.10 | | Master Agreement on Supply of Services and Products by and between Avadel Technologies S.A. and Recipharm Pessac dated December 1, 2014 (incorporated by reference to Exhibit 4.12 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
| | |
10.11 | | Service Agreement by and between Flamel Technologies S.A. and Recipharm Pessac dated December 1, 2014 (incorporated by reference to Exhibit 4.13 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
| | |
10.12 | | Supply Agreement by and between Flamel Technologies S.A. and Recipharm Pessac dated December 1, 2014 (incorporated by reference to Exhibit 4.14 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
10.13* | | Membership Interest Purchase Agreement by and among Éclat Holdings LLC, Éclat Pharmaceuticals LLC, Flamel Technologies S.A. and Flamel US Holdings Inc. dated March 13, 2012 (incorporated by reference to Exhibit 4.15 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
| | |
10.14* | | Exclusive License Agreement by and between Perrigo Pharma International DAC (f/k/a Elan Pharma International LimitedLimited) and Flamel Ireland Limited dated September 30, 2015, (incorporatedas amended by referencethe First Amendment to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the year endedExclusive License Agreement dated December 31, 2015, filed on March 15, 2016)21, 2018 (filed herewith) |
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10.1510.2 | | |
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10.16 | | Office Lease Agreement by and between Grove II LLC and Eclat Pharmaceuticals LLC dated October 5, 2015, (incorporated by reference to Exhibit 10.16 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016)as amended (filed herewith) |
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10.1710.3‡ | | Lease Agreement by and between Channor Limited, Blanchardstown Corporate Park Management Limited, Flamel Ireland Limited, and Flamel Technologies S.A. dated July 3, 2015 (incorporated by reference to Exhibit 10.17 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.18‡ | | Employment Agreement by and between Flamel Technologies S.A. and Sandra Hatten dated July 8, 2015 (incorporated by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.19‡ | | Employment Agreement by and between Flamel Technologies S.A. and Phillandas T. Thompson dated July 7, 2015 (incorporated by reference to Exhibit 10.19 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.20 | | Membership Interest Purchase Agreement dated as of February 5, 2016 by and among James Flynn, Peter Steelman, Deerfield CSF, LLC, FSC Holding Company, LLC, FSC Therapeutics, LLC, FSC Laboratories, Inc., Flamel Technologies SA, and Flamel US Holdings, Inc. (incorporated by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.21‡ | | Rules Governing the Free Share Plan - December 2014 (incorporated by reference to Exhibit 10.21 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.22‡ | | Rules Governing the Free Share Plan - December 2014 (incorporated by reference to Exhibit 10.22 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.23‡ | | June 2015 Stock Warrant Rules (incorporated by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.24‡ | | Subscription Form of Stock Warrant (incorporated by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
| | |
10.25‡ | | |
| | |
10.26‡10.4‡ | | |
10.27 | | Common Draft Terms of Cross-Border Merger dated as of June 29, 2016 between Flamel Technologies S.A. and Avadel Pharmaceuticals Limited (subsequently renamed Avadel Pharmaceuticals plc) (incorporated by reference to Exhibit 2.1 to the registrant’s current report on Form 8-K, filed on July 1, 2016) |
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10.28‡10.5‡ | | |
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10.29‡10.6‡ | | |
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10.30‡10.7‡ | | |
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10.3110.8‡ | | |
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10.32‡10.9‡ | | |
| | |
10.33‡ | | Employment Agreement by andas of June 3, 2019 between Avadel Management Corporation and Michael S. Anderson dated August 15, 2017Gregory J. Divis (incorporated by reference to Exhibit 10.1 to the registrant's Quarterly Reportregistrant’s current report on Form 10-Q for the quarter ended September 30, 2017,8-K, filed on November 9, 2017)June 5, 2019) |
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10.34‡10.10‡ | | |
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10.35‡10.11 | | Employment Agreement by and between Avadel Management Corporation and Sandra Hatten dated August 15, 2017 (incorporated by reference to Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
| | |
10.36‡ | | Employment Agreement by and between Avadel Management Corporation and Michael F. Kanan dated September 5, 2017 (incorporated by reference to Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
| | |
10.37‡ | | Employment Agreement by and between Avadel Management Corporation and Phillandas T. Thompson dated August 15, 2017 (incorporated by reference to Exhibit 10.5 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.38* | | Exclusive Right of Negotiation Agreement by and between Avadel Specialty Pharmaceuticals, LLC and Serenity Pharmaceuticals, LLC dated as of August 11, 2017 (incorporated by reference to Exhibit 10.6 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
| | |
10.39* | | Exclusive License and Assignments Agreement by and between Avadel Specialty Pharmaceuticals, LLC and Serenity Pharmaceuticals, LLC dated as of September 1, 2017 (incorporated by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2017, filed on November 17, 2017) |
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10.40* | | Manufacturing Agreement by and between Renaissance Lakewood, LLC (formerly DPT Lakewood, LLC) and Serenity Pharmaceuticals, LLC dated as of July 14, 2014 (incorporated by reference to Exhibit 10.8A to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
10.41 | | Renaissance Agreements Assignment and Assumption Agreement by and between Avadel Specialty Pharmaceuticals, LLC and Serenity Pharmaceuticals, LLC dated as of September 1, 2017 (incorporated by reference to Exhibit 10.8B to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
| | |
10.42 | | Master Manufacturing Services Agreement by and between Patheon UK Limited and Éclat Pharmaceuticals L.L.C. dated as of November 8, 2012 (incorporated by reference to Exhibit 10.9 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.43*10.12* | | Asset Purchase Agreement by and among Cerecor, Inc. and Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC, Avadel US Holdings, Inc. and Avadel Pharmaceuticals plc dated as of February 12, 2018 (incorporated by reference to Exhibit 10.43 to the registrant'sregistrant’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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10.44*10.13* | | License and Development Agreement by and between Cerecor, Inc. and Flamel Ireland Limited operating under the trade name of Avadel Ireland dated as of February 16, 2018 (filed herewith)
|
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10.45* | | |
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10.46*10.14* | | |
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14.110.15#
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14.210.16 | | |
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| 10.17*# | | |
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| 10.18‡ | | |
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| 10.19‡ | | |
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| 14.1 | | |
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| 14.2 | | |
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| 21.1 | | |
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| 23.1 | | Consent of PricewaterhouseCoopers Audit (incorporated by reference to Exhibit 23.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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23.2 | | |
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| 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (incorporated by reference to Exhibit 31.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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31.2 | | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (incorporated by reference to Exhibit 31.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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31.3 | | |
31.431.2 | | |
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| 32.1 | | |
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| 32.2 | | |
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101101.INS | | Interactive Data Files (2)XBRL Instant Document |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | | | | | | |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
*Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of the agreement, including the redacted portions, has been filed separately with the Securities and Exchange Commission.
# The representations and warranties contained in this agreement were made only for purposes of the transactions contemplated by the agreement as of specific dates and may have been qualified by certain disclosures between the parties and a contractual standard of materiality different from those generally applicable under securities laws, among other limitations. The representations and warranties were made for purposes of allocating contractual risk between the parties to the agreement and should not be relied upon as a disclosure of factual information relating to the Company, the Investors or the transaction described in the Current Report on Form 8-K.
‡Management contract or compensatory plan or arrangement filed pursuant to Item 15(b) of Form 10-K. (1) This certification accompanies the
Original Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the
Original Form
10-K,10-K), irrespective of any general incorporation language contained in such filing.
(2) Previously filed or furnished, as applicable, as an exhibit to the Original Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | AVADEL PHARMACEUTICALS PLC | | | | | | |
| | Avadel Pharmaceuticals plc |
Dated: April 30, 2018 | By: | /s/ Michael S. Anderson |
| Dated: March 9, 2021 | By: | Name: Michael S. Anderson/s/ Gregory J. Divis |
| | Name: Gregory J. Divis |
| | Title: Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of Geoffrey M. Glass, Eric J. Ende, Mark A. McCamish, MD, Ph.D., Linda S. Palczuk, and Peter Thornton, by their respective signatures below, irrevocably constitutes and appoints Gregory J. Divis and Thomas S. McHugh, and each of them individually acting alone without the other, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Signature | | Title | | Date | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
/s/ Michael S. AndersonGregory J. Divis | | Director, Chief Executive Office (PrincipalOfficer and Principal Executive Officer) and DirectorOfficer | | April 30, 2018March 9, 2021 |
Michael S. AndersonGregory J. Divis | | | | |
| | | | |
/s/ Michael F. KananThomas S. McHugh | | Chief Financial Officer (Principaland Principal Financial Officer)and Accounting Officer | | April 30, 2018March 9, 2021 |
Michael F. KananThomas S. McHugh | | | | |
| | | | |
/s/ David P. GuskyGeoffrey M. Glass | | Corporate Controller (Principal Accounting Officer) | | April 30, 2018 |
David P. Gusky | | | | |
| | | | |
* | | Non-Executive Chairman of the Board and Director | | April 30, 2018March 9, 2021 |
Craig R. StapletonGeoffrey M. Glass | | | | |
| | | | |
*/s/ Dr. Eric J. Ende | | Director | | April 30, 2018March 9, 2021 |
Peter ThorntonDr. Eric J. Ende | | | | |
| | | | |
*/s/ Mark A. McCamish, MD, Ph.D. | | Director | | April 30, 2018March 9, 2021 |
Francis J.T. FildesMark A. McCamish, MD, Ph.D. | | | | |
| | | | |
*/s/ Linda S. Palczuk | | Director | | April 30, 2018March 9, 2021 |
Benoit Van AsscheLinda S. Palczuk | | | | |
| | | | |
*/s/ Peter Thornton | | Director | | April 30, 2018March 9, 2021 |
Christophe NavarrePeter Thornton | | | | |
* By: | /s/ Michael S. Anderson | |
| Michael S. Anderson as | |
| Attorney-in-Fact | |
-107-
EXHIBIT INDEX
Exhibit Number | | Exhibit Description |
| | |
3.1 | | Constitution (containing the Memorandum and Articles of Association) of Avadel Pharmaceuticals plc (incorporated by reference to Appendix 15 of Exhibit 2.1 to the registrant’s current report on Form 8-K, filed on July 1, 2016) |
| | |
4.1 | | Guaranty dated January 1, 2017 by Avadel Pharmaceuticals plc in favor of Breaking Stick Holdings, LLC (f/k/a Éclat Holdings, LLC) with respect to obligations under the Note Agreement filed as Exhibit 4.1 (incorporated by reference to Exhibit 4.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 28, 2017) |
| | |
4.2 | | Warrant to purchase 1,100,000 American Depositary Shares, each representing one ordinary share of Avadel Pharmaceuticals plc (incorporated by reference to Exhibit 4.1 to the registrant’s Post-Effective Amendment No. 2 to Form F-3 registration statement (No. 333-183961) on Form S-3, filed on January 6, 2017) |
| | |
4.3 | | Warrant to purchase 2,200,000 American Depositary Shares, each representing one ordinary share of Avadel Pharmaceuticals plc (incorporated by reference to Exhibit 4.2 to the registrant’s Post-Effective Amendment No. 2 to Form F-3 registration statement (No. 333-183961) on Form S-3, filed on January 6, 2017) |
| | |
10.1 | | Deposit Agreement dated as of January 3, 2017 among Avadel Pharmaceuticals plc, The Bank of New York, as Depositary, and holders from time to time of American Depositary Shares issued thereunder (including as an exhibit the form of American Depositary Receipt) (incorporated by reference to Exhibit 1.1 to the registrant’s current report on Form 8-K12B, filed on January 4, 2017 and amended January 6, 2017) |
| | |
10.2* | | Note Agreement among Flamel Technologies S.A., Flamel U.S. Holdings, Inc. and Éclat Holdings, LLC dated March 13, 2012 (incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 6-K, filed on March 21, 2012) |
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10.3 | | Registration Rights Agreement between Flamel Technologies S.A. and Éclat Holdings, LLC dated March 13, 2012 (incorporated by reference to Exhibit 4.5 to the registrant’s current report on Form 6-K, filed on March 21, 2012) |
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10.4 | | Facility Agreement among Flamel US Holdings, Inc., Deerfield Private Design Fund II, L.P. and Deerfield Private Design International II, L.P. dated December 31, 2012 (incorporated by reference to Exhibit 4.7 to the registrant’s annual report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013) |
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10.5* | | Royalty Agreement among Éclat Pharmaceuticals LLC, Horizon Santé FLML, Sarl and Deerfield Private Design Fund II, L.P. dated December 31, 2012 (incorporated by reference to Exhibit 4.8 to the registrant’s annual report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013) |
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10.6* | | Security Agreement between Éclat Pharmaceuticals, LLC and Deerfield Private Design Fund II, L.P. and Horizon Santé FLML, Sarl dated February 4, 2013 (incorporated by reference to Exhibit 4.9 to the registrant’s annual report on Form 20-F for the year ended December 31, 2012, filed on April 30, 2013) |
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10.7 | | Broadfin Facility Agreement effective as of December 3, 2013 (incorporated by reference to Exhibit 4.9 to the registrant’s annual report on Form 20-F for the year ended December 31, 2013, filed on April 30, 2014) |
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10.8* | | Broadfin Royalty Agreement dated as of December 3, 2013 (incorporated by reference to Exhibit 4.10 to the registrant’s annual report on Form 20-F for the year ended December 31, 2013, filed on April 30, 2014) |
10.9 | | Asset Purchase Agreement by and among Flamel Technologies S.A. and Recipharm Pessac dated November 26, 2014 (incorporated by reference to Exhibit 4.11 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
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10.10 | | Master Agreement on Supply of Services and Products by and between Avadel Technologies S.A. and Recipharm Pessac dated December 1, 2014 (incorporated by reference to Exhibit 4.12 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
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10.11 | | Service Agreement by and between Flamel Technologies S.A. and Recipharm Pessac dated December 1, 2014 (incorporated by reference to Exhibit 4.13 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
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10.12 | | Supply Agreement by and between Flamel Technologies S.A. and Recipharm Pessac dated December 1, 2014 (incorporated by reference to Exhibit 4.14 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
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10.13* | | Membership Interest Purchase Agreement by and among Éclat Holdings LLC, Éclat Pharmaceuticals LLC, Flamel Technologies S.A. and Flamel US Holdings Inc. dated March 13, 2012 (incorporated by reference to Exhibit 4.15 to the registrant’s annual report on Form 20-F for the year ended December 31, 2014, filed on April 30, 2015) |
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10.14* | | Exclusive License Agreement by and between Elan Pharma International Limited and Flamel Ireland Limited dated September 30, 2015 (incorporated by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.15 | | Lease Agreement by and between Nine East, LLC and Eclat Pharmaceuticals LLC dated July 23, 2013 (incorporated by reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.16 | | Lease Agreement by and between Grove II LLC and Eclat Pharmaceuticals LLC dated October 5, 2015 (incorporated by reference to Exhibit 10.16 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.17 | | Lease Agreement by and between Channor Limited, Blanchardstown Corporate Park Management Limited, Flamel Ireland Limited, and Flamel Technologies S.A. dated July 3, 2015 (incorporated by reference to Exhibit 10.17 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.18‡ | | Employment Agreement by and between Flamel Technologies S.A. and Sandra Hatten dated July 8, 2015 (incorporated by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.19‡ | | Employment Agreement by and between Flamel Technologies S.A. and Phillandas T. Thompson dated July 7, 2015 (incorporated by reference to Exhibit 10.19 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.20 | | Membership Interest Purchase Agreement dated as of February 5, 2016 by and among James Flynn, Peter Steelman, Deerfield CSF, LLC, FSC Holding Company, LLC, FSC Therapeutics, LLC, FSC Laboratories, Inc., Flamel Technologies SA, and Flamel US Holdings, Inc. (incorporated by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.21‡ | | Rules Governing the Free Share Plan - December 2014 (incorporated by reference to Exhibit 10.21 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.22‡ | | Rules Governing the Free Share Plan - December 2014 (incorporated by reference to Exhibit 10.22 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
10.23‡ | | June 2015 Stock Warrant Rules (incorporated by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.24‡ | | Subscription Form of Stock Warrant (incorporated by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.25‡ | | December 2015 Stock Option Rules (incorporated by reference to Exhibit 10.25 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.26‡ | | Form of Stock Option Grant Letter (incorporated by reference to Exhibit 10.26 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 15, 2016) |
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10.27 | | Common Draft Terms of Cross-Border Merger dated as of June 29, 2016 between Flamel Technologies S.A. and Avadel Pharmaceuticals Limited (subsequently renamed Avadel Pharmaceuticals plc) (incorporated by reference to Exhibit 2.1 to the registrant’s current report on Form 8-K, filed on July 1, 2016) |
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10.28‡ | | Rules Governing the Free Share Plan - August 2016 (incorporated by reference to Exhibit 99.1 to the registrant’s Registration Statement (No. 333-213154) on Form S-8, filed on August 16, 2016) |
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10.29‡ | | August 2016 Stock Option Rules (incorporated by reference to Exhibit 99.2 to the registrant’s Registration Statement (No. 333-213154) on Form S-8, filed on August 16, 2016) |
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10.30‡ | | August 2016 Stock Warrant Rules (incorporated by reference to Exhibit 99.3 to the registrant’s Registration Statement (No. 333-213154) on Form S-8, filed on August 16, 2016) |
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10.31‡ | | Form of stock option grant letter for 2016 Stock Option Rules (incorporated by reference to Exhibit 10.31 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 28, 2017) |
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10.32‡ | | Employment Agreement by and between Avadel Pharmaceuticals plc and Gregory J. Divis, dated January 4, 2017 (incorporated by reference to Exhibit 10.32 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 28, 2017) |
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10.33‡ | | Employment Agreement by and between Avadel Management Corporation and Michael S. Anderson dated August 15, 2017 (incorporated by reference to Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.34‡ | | Employment Agreement by and between Avadel Management Corporation and Gregory J. Divis dated September 5, 2017 (incorporated by reference to Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.35‡ | | Employment Agreement by and between Avadel Management Corporation and Sandra Hatten dated August 15, 2017 (incorporated by reference to Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.36‡ | | Employment Agreement by and between Avadel Management Corporation and Michael F. Kanan dated September 5, 2017 (incorporated by reference to Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.37‡ | | Employment Agreement by and between Avadel Management Corporation and Phillandas T. Thompson dated August 15, 2017 (incorporated by reference to Exhibit 10.5 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
10.38* | | Exclusive Right of Negotiation Agreement by and between Avadel Specialty Pharmaceuticals, LLC and Serenity Pharmaceuticals, LLC dated as of August 11, 2017 (incorporated by reference to Exhibit 10.6 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.39* | | Exclusive License and Assignments Agreement by and between Avadel Specialty Pharmaceuticals, LLC and Serenity Pharmaceuticals, LLC dated as of September 1, 2017 (incorporated by reference to Exhibit 10.7 to the registrant's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2017, filed on November 17, 2017) |
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10.40* | | Manufacturing Agreement by and between Renaissance Lakewood, LLC (formerly DPT Lakewood, LLC) and Serenity Pharmaceuticals, LLC dated as of July 14, 2014 (incorporated by reference to Exhibit 10.8A to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.41 | | Renaissance Agreements Assignment and Assumption Agreement by and between Avadel Specialty Pharmaceuticals, LLC and Serenity Pharmaceuticals, LLC dated as of September 1, 2017 (incorporated by reference to Exhibit 10.8B to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.42 | | Master Manufacturing Services Agreement by and between Patheon UK Limited and Éclat Pharmaceuticals L.L.C. dated as of November 8, 2012 (incorporated by reference to Exhibit 10.9 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017) |
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10.43* | | Asset Purchase Agreement by and among Cerecor, Inc. and Avadel Pharmaceuticals (USA), Inc., Avadel Pediatrics, Inc., FSC Therapeutics, LLC, Avadel US Holdings, Inc. and Avadel Pharmaceuticals plc dated as of February 12, 2018 (incorporated by reference to Exhibit 10.43 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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10.44* | | License and Development Agreement by and between Cerecor, Inc. and Flamel Ireland Limited operating under the trade name of Avadel Ireland dated as of February 16, 2018 (filed herewith) |
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10.45* | | Guarantee by Avadel US Holdings, Inc. and Avadel Pharmaceuticals plc in favor of Deerfield CSF, LLC, Peter Steelman and James Flynn dated as of February 16, 2018 (incorporated by reference to Exhibit 10.45 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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10.46* | | Guarantee by Armistice Capital Master Fund, Ltd. in favor of Avadel US Holdings, Inc. dated as of February 16, 2018 (incorporated by reference to Exhibit 10.46 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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14.1 | | Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the registrant’s current report on Form 8-K, filed on March 7, 2017) |
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14.2 | | Financial Integrity Policy (incorporated by reference to Exhibit 14.2 to the registrant’s current report on Form 8-K, filed on March 7, 2017) |
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21.1 | | List of Subsidiaries (incorporated by reference to Exhibit 21.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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23.1 | | Consent of PricewaterhouseCoopers Audit (incorporated by reference to Exhibit 23.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
23.2 | | Consent of Deloitte & Touche, LLP (incorporated by reference to Exhibit 23.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (incorporated by reference to Exhibit 31.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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31.2 | | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (incorporated by reference to Exhibit 31.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) |
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31.3 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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31.4 | | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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32.1 | | Certification of the Chief Executive Officer pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (incorporated by reference to Exhibit 32.1 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) (1) |
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32.2 | | Certification of the Principal Financial Officer pursuant to USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (incorporated by reference to Exhibit 32.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, filed on March 16, 2018) (1) |
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101 | | Interactive Data Files (2) |
*Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of the agreement, including the redacted portions, has been filed separately with the Securities and Exchange Commission.
‡Management contract or compensatory plan or arrangement filed pursuant to Item 15(b) of Form 10-K.
(1) This certification accompanies the Original Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Original Form 10-K, irrespective of any general incorporation language contained in such filing.
(2) Previously filed or furnished, as applicable, as an exhibit to the Original Form 10-K.