10-Q 1 avdl2018q3.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
———————
FORM 10-Q
———————
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2018
 
———————
AVADEL PHARMACEUTICALS PLC
(Exact name of registrant as specified in its charter)
———————
 
Ireland
000-28508
98-1341933
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
 
Block 10-1, Blanchardstown Corporate Park
Ballycoolin
Dublin 15, Ireland
(Address of Principal Executive Office and Zip Code)
 
+353-1-485-1200
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report) 
———————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated
¨
Smaller reporting company
¨
(Do not check if a smaller reporting company)
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
At November 2, 2018, 37,012,014 ordinary shares, nominal value $0.01 each, of the Company were outstanding.






TABLE OF CONTENTS
 



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Cautionary Note Regarding Forward-Looking Statements
 
This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These include statements as to our future expectations, beliefs, plans, strategies, objectives, events, conditions, financial performance, prospects, or other events. In some cases, forward-looking statements can be identified by the use of words such as “will,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “project” and similar expressions, and the negatives thereof, identify forward-looking statements, each of which speaks only as of the date the statement is made.

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

(i) risks relating to our exchangeable senior notes including use of the net proceeds from the offering of the notes and other future events related to the notes;

(ii) risks relating to the divestiture of our former pediatric business including whether such divestiture will be accretive to our operating income and cash flow;

(iii) risks relating to our license agreement with Serenity Pharmaceuticals, LLC including that:

a potential competitive product, and patent litigation with the manufacturer of that product, could have a material adverse impact on our ability to successfully exploit any market opportunity for the drug desmopressin acetate (the “Drug”) which we are marketing under the brand name Noctiva™;
our internal analyses may overstate the market opportunity in the United States for 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; and
the need for management to focus attention on the development and commercialization of the Drug could cause our ongoing business operations to suffer; and

(iv) the other risks, uncertainties and contingencies described in this report on Form 10-Q and in our other filings with the U.S. Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2017, in particular disclosures therein that may be set forth under the captions “Forward-Looking Statements” and “Risk Factors,” including without limitation:

our dependence on a small number of products and customers for the majority of our revenues;
the possibility that our Bloxiverz®,Vazculep® and Akovaz® products, which are not patent protected, could continue to face substantial and increased competition resulting in a loss of market share and/or forcing us to further reduce the prices we charge for those products;
the possibility that we could fail to successfully complete the research and development for pipeline products we are evaluating for potential application to the FDA pursuant to our "unapproved-to-approved" strategy, or that competitors could complete the development of such products and apply for FDA approval of such products before us;
the possibility that we could experience failure or delay in completing the Phase III clinical trial for our FT-218 sodium oxybate product known as REST-ON);
the possibility that our products may not reach the commercial market or gain market acceptance; our need to invest substantial sums in research and development in order to remain competitive;
our dependence on certain single providers for development of several of our drug delivery platforms and products;
our dependence on a limited number of suppliers to manufacture our products and to deliver certain raw materials used in our products;
the possibility that our competitors may develop and market technologies or products that are more effective or safer than ours, or obtain regulatory approval and market such technologies or products before we do;
the challenges in protecting the intellectual property underlying our drug delivery platforms and other products; and
our dependence on key personnel to execute our business plan.

Forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by us and our management, are inherently uncertain. Accordingly, you should not place undue reliance on forward-looking statements, which

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speak only as of the date they are made, and are not guarantees of future performance. We do not undertake any obligation to publicly update or revise these forward-looking statements.


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PART I – FINANCIAL INFORMATION 
ITEM 1.  FINANCIAL STATEMENTS 
 
AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Revenues:
 
 

 
 

 
 
 
 
Product sales
 
$
19,826

 
$
39,147

 
$
82,103

 
$
138,009

License revenue
 

 
528

 
246

 
484

Total revenues
 
19,826

 
39,675

 
82,349

 
138,493

Operating expenses:
 
 

 
 

 
 

 
 

Cost of products
 
3,120

 
3,790

 
13,224

 
12,253

Research and development expenses
 
11,402

 
8,095

 
33,243

 
22,093

Selling, general and administrative expenses
 
24,829

 
11,563

 
77,159

 
35,804

Intangible asset amortization
 
1,620


564

 
4,996

 
1,692

Gain - changes in fair value of related party contingent consideration
 
(7,115
)
 
(9,906
)
 
(17,036
)
 
(30,107
)
Restructuring costs
 
65

 
(549
)
 
268

 
3,173

Total operating expenses
 
33,921

 
13,557

 
111,854

 
44,908

Operating (loss) income
 
(14,095
)
 
26,118

 
(29,505
)
 
93,585

Investment and other income, net
 
208

 
977

 
845

 
2,562

Interest expense
 
(3,000
)
 
(263
)
 
(7,577
)
 
(789
)
Other income - changes in fair value of related party payable
 
425

 
768

 
1,432

 
2,988

(Loss) income before income taxes
 
(16,462
)
 
27,600

 
(34,805
)
 
98,346

Income tax (benefit) provision
 
(691
)
 
5,921

 
(3,360
)
 
21,830

Net (loss) income
 
$
(15,771
)
 
$
21,679

 
$
(31,445
)
 
$
76,516

 
 
 
 
 
 
 
 
 
Net (loss) income per share - basic
 
$
(0.43
)
 
$
0.54

 
$
(0.84
)
 
$
1.87

Net (loss) income per share - diluted
 
(0.43
)
 
0.52

 
(0.84
)
 
1.81

 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - basic
 
36,904

 
40,061

 
37,410

 
40,839

Weighted average number of shares outstanding - diluted
 
36,904

 
41,339

 
37,410

 
42,194

 
See accompanying notes to condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(15,771
)
 
$
21,679

 
$
(31,445
)
 
$
76,516

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

 
 

Foreign currency translation (loss) gain
 
(60
)
 
(229
)
 
(293
)
 
18

Net other comprehensive income (loss), net of ($18), $92, ($88) and $0 tax, respectively
 
68

 
(512
)
 
(92
)
 
126

Total other comprehensive income (loss), net of tax
 
8

 
(741
)
 
(385
)
 
144

Total comprehensive (loss) income
 
$
(15,763
)
 
$
20,938

 
$
(31,830
)
 
$
76,660

 
See accompanying notes to condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
17,837

 
$
16,564

Marketable securities
 
107,425

 
77,511

Accounts receivable
 
9,725

 
14,785

Inventories
 
6,030

 
6,157

Prepaid expenses and other current assets
 
6,859

 
8,958

Total current assets
 
147,876

 
123,975

Property and equipment, net
 
2,288

 
3,001

Goodwill
 
18,491

 
18,491

Intangible assets, net
 
69,339

 
92,289

Research and development tax credit receivable
 
6,168

 
5,272

Other non-current assets
 
24,844

 
10,249

Total assets
 
$
269,006

 
$
253,277

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long-term debt
 
$
107

 
$
111

Current portion of long-term related party payable
 
10,979

 
25,007

Accounts payable
 
11,399

 
7,477

Deferred revenue
 
1,720

 
2,007

Accrued expenses
 
20,698

 
50,926

  Other current liabilities
 
2,116

 
1,011

Total current liabilities
 
47,019

 
86,539

Long-term debt, less current portion
 
114,382

 
156

Long-term related party payable, less current portion
 
27,713

 
73,918

Other non-current liabilities
 
14,150

 
7,084

Total liabilities
 
203,264

 
167,697

 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Preferred shares, $0.01 nominal value; 50,000 shares authorized at September 30, 2018 and December 31, 2017, respectively; none issued or outstanding at September 30, 2018 and December 31, 2017, respectively
 

 

Ordinary shares, nominal value of $0.01; 500,000 shares authorized; 42,420 issued and 37,012 outstanding at September 30, 2018 and 41,463 issued and 39,346 outstanding at December 31, 2017
 
424

 
414

Treasury shares, at cost, 5,408 and 2,117 shares held at September 30, 2018 and December 31, 2017, respectively
 
(49,998
)
 
(22,361
)
Additional paid-in capital
 
433,097

 
393,478

Accumulated deficit
 
(294,130
)
 
(262,685
)
Accumulated other comprehensive loss
 
(23,651
)
 
(23,266
)
Total shareholders’ equity
 
65,742

 
85,580

Total liabilities and shareholders’ equity
 
$
269,006

 
$
253,277

 See accompanying notes to condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
 
 
 
Cash flows from operating activities:
 
 

 
 

Net (loss) income
 
$
(31,445
)
 
$
76,516

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
5,625

 
2,664

Amortization of premiums on marketable securities
 
2,889

 
653

Remeasurement of related party acquisition-related contingent consideration
 
(17,036
)
 
(30,107
)
Remeasurement of related party financing-related contingent consideration
 
(1,432
)
 
(2,988
)
Amortization of debt discount and debt issuance costs
 
3,402

 

Change in deferred tax and income tax deferred charge
 
(4,675
)
 
322

Stock-based compensation expense
 
7,190

 
6,019

Other adjustments
 
117

 
(1,076
)
Net changes in assets and liabilities
 
 

 
 

Accounts receivable
 
5,059

 
(6,240
)
Inventories
 
(548
)
 
(2,612
)
Prepaid expenses and other current assets
 
2,194

 
1,924

Research and development tax credit receivable
 
(1,350
)
 
(1,576
)
Accounts payable & other current liabilities
 
4,312

 
804

Accrued expenses
 
(11,660
)
 
9,324

Accrued income taxes
 
(228
)
 
5,826

Earn-out payments for related party contingent consideration in excess of acquisition-date fair value
 
(16,254
)
 
(24,729
)
Royalty payments for related party payable in excess of original fair value
 
(2,362
)
 
(3,446
)
Other assets and liabilities
 
(1,988
)
 
(800
)
Net cash (used in) provided by operating activities
 
(58,190
)
 
30,478

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 
(167
)
 
(533
)
Purchase of intangible asset
 
(20,000
)
 
(52,139
)
Proceeds from sales of marketable securities
 
308,015

 
153,398

Purchases of marketable securities
 
(341,036
)
 
(115,893
)
Net cash used in investing activities
 
(53,188
)
 
(15,167
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Earn-out payments for related party contingent consideration
 
(645
)
 
(961
)
Proceeds from debt issuance
 
143,750

 

Payments for debt issuance costs
 
(6,190
)
 

Share repurchases
 
(27,637
)
 
(16,707
)
Proceeds from the issuance of ordinary shares and warrants
 
3,488

 
376

Other financing activities, net
 
(31
)
 

Net cash provided by (used in) financing activities
 
112,735

 
(17,292
)
 
 
 
 
 
Effect of foreign currency exchange rate changes on cash and cash equivalents
 
(84
)
 
215

 
 
 
 
 
Net change in cash and cash equivalents
 
1,273

 
(1,766
)
Cash and cash equivalents at January 1,
 
16,564

 
39,215

Cash and cash equivalents at September 30,
 
$
17,837

 
$
37,449

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
     Interest paid
 
$
3,359

 
$
525

     Income taxes paid
 
$
413

 
$
9,605

 
See accompanying notes to condensed consolidated financial statements.

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AVADEL PHARMACEUTICALS PLC
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data) 

NOTE 1: Summary of Significant Accounting Policies
Nature of Operations.  Avadel Pharmaceuticals plc (“Avadel,” the “Company,” “we,” “our,” or “us”) is a branded specialty pharmaceutical company focused on being a leading provider of innovative medicines for chronic urological, central nervous system, and sleep disorders. We are committed to growing our portfolio of product offerings across these therapeutic categories through acquisition and internal development. We also have a commercial portfolio of sterile injectables used in the hospital setting.
Our current portfolio of products and product candidates focuses on the urology, central nervous system (CNS), and hospital markets. Our current marketed products include:
Akovaz® (ephedrine sulfate injection, USP), an alpha- and beta-adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.
Bloxiverz® (neostigmine methylsulfate injection), a cholinesterase inhibitor, is indicated for the reversal of the effects of non-depolarizing neuromuscular blocking agents (NMBAs) after surgery.
Vazculep® (phenylephrine hydrochloride injection), an alpha-1 adrenergic receptor agonist indicated for the treatment of clinically important hypotension resulting primarily from vasodilation in the setting of anesthesia.
Noctiva™, a vasopressin analog indicated for the treatment of nocturia due to nocturnal polyuria in adults who awaken at least two times per night to void.
The Company was incorporated in Ireland on December 1, 2015 as a private limited company, and re-registered as an Irish public limited company on November 21, 2016. Our headquarters are in Dublin, Ireland and we have operations in St. Louis, Missouri, United States, and Lyon, France. For more information, please visit www.avadel.com.

The Company is an Irish public limited company, or plc, and is the successor to Flamel Technologies S.A., a French société anonyme (“Flamel”), as the result of the merger of Flamel with and into the Company which was completed at 11:59:59 p.m., Central Europe Time, on December 31, 2016 (the “Merger”) pursuant to the agreement between Flamel and Avadel entitled Common Draft Terms of Cross-Border Merger dated as of June 29, 2016 (the “Merger Agreement”). Immediately prior to the Merger, the Company was a wholly owned subsidiary of Flamel. As a result of the Merger Agreement:

Flamel ceased to exist as a separate entity and the Company continued as the surviving entity and assumed all of the assets and liabilities of Flamel.
our authorized share capital is $5,500 divided into 500,000 ordinary shares with a nominal value of $0.01 each and 50,000 preferred shares with a nominal value of $0.01 each.
all outstanding ordinary shares of Flamel, €0.122 nominal value per share, were canceled and exchanged on a one-for-one basis for newly issued ordinary shares of the Company, $0.01 nominal value per share.
our board of directors is authorized to issue preferred shares on a non-pre-emptive basis, for a maximum period of five years, at which point it may be renewed by shareholders. The board of directors has discretion to dictate terms attached to the preferred shares, including voting, dividend, conversion rights, and priority relative to other classes of shares with respect to dividends and upon a liquidation. 
all outstanding American Depositary Shares (ADSs) representing ordinary shares of Flamel were canceled and exchanged on a one-for-one basis for ADSs representing ordinary shares of the Company.
Thus, the Merger changed the jurisdiction of our incorporation from France to Ireland, and an ordinary share of the Company held (either directly or represented by an ADS) immediately after the Merger continued to represent the same proportional interest in our equity owned by the holder of a share of Flamel immediately prior to the Merger.

Prior to completion of the Merger, the Flamel ADSs were listed on the Nasdaq Global Market (“Nasdaq”) under the trading symbol “FLML”; and immediately after the Merger the Company’s ADSs were listed for and began trading on Nasdaq on January 3, 2017 under the trading symbol “AVDL.”

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Further details about the reincorporation, the Merger and the Merger Agreement are contained in our definitive proxy statement filed with the Securities and Exchange Commission on July 5, 2016.

Under Irish law, the Company can only pay dividends and repurchase shares out of distributable reserves, as discussed further in the Company’s proxy statement filed with the SEC as of July 5, 2016. Upon completion of the Merger, the Company did not have any distributable reserves. On February 15, 2017, the Company filed a petition with the High Court of Ireland seeking the court’s confirmation of a reduction of the Company’s share premium so that it can be treated as distributable reserves for the purposes of Irish law. On March 6, 2017, the High Court issued its order approving the reduction of the Company’s share premium by $317,254 which can be treated as distributable reserves. 

Basis of Presentation. The condensed consolidated balance sheet as of December 31, 2017, which is primarily derived from the prior year 2017 audited consolidated financial statements, and the interim condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an annual report on Form 10-K. Accordingly, the condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2017 Annual Report on Form 10-K filed with the SEC on March 16, 2018.
The condensed consolidated financial statements include the accounts of the Company and subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All material intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. 
Our results of operations for the period January 1, 2018 through February 16, 2018 and for the three and nine months ended September 30, 2017 include the results of FSC Therapeutics and FSC Laboratories, Inc., (collectively “FSC”), prior to its February 16, 2018 disposition date. See Note 12: Divestiture of the Pediatric Assets, for additional information. All intercompany accounts and transactions have been eliminated.
Revenue. Revenue includes sales of pharmaceutical products, licensing fees, and, if any, milestone payments for research and development (“R&D”) achievements. 
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” 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 3: Revenue Recognition for expanded disclosures related to this new pronouncement.

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 entity recognizes revenue when the performance obligations to the customer have been satisfied through the transfer of control of the goods or services. To determine the appropriate revenue recognition for arrangements that the Company believes are within the scope of ASC 606, we perform the following five steps: (i) Identify the contract(s) with a customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when (or as) the entity satisfies a performance obligation. The Company applies the five-step model to contracts only when the Company and its customer’s rights and obligations under the contract can be determined, the contract has commercial substance, and it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. For contracts that are determined to be within the scope of ASC 606, the Company identifies the promised goods or services in the contract to determine if they are separate performance obligations or if they should be bundled with other goods and services into a single performance obligation. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Sales and Services 

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

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License Revenue 

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

For a complete discussion of the accounting for net product revenue and license revenues, see Note 3: Revenue Recognition.

NOTE 2: Newly Issued Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.” The standard requires the service component of pension and other postretirement benefit expense to be presented in the same statement of income lines as other employee compensation costs, however, the other components will be presented outside of operating income. In addition, only the service cost component will be eligible for capitalization in assets. The Company adopted this standard and it had an immaterial impact on our condensed consolidated financial statements.

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

In February 2016, the FASB issued ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. In July 2018, the FASB issued ASU 2018-11 “Targeted Improvements”, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods, which the Company intends to elect. The Company has identified its population of lease agreements and is currently assessing other arrangements such as supply and service agreements for embedded leases. Although the Company is in process of determining the potential impact on its consolidated financial statements, it anticipates that the most significant change will be related to the Company recording additional assets and corresponding liabilities on the balance sheet for operating leases. The ultimate impact of the new standard will depend on the total amount of the Company's lease commitments as of the adoption date.

NOTE 3: Revenue Recognition

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

Periods prior to January 1, 2018

Product Sales and Services

Revenue is generally realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. The Company recorded revenue from product sales when title and risk of ownership transferred to the customer, which was typically upon delivery to the customer and when the selling price was determinable.


- 11 -



Licensing Revenues

From time to time, the Company enters into licensing agreements for the license of technology used for developing modified/controlled release of oral pharmaceutical products. Non-refundable fees where the Company had continuing performance obligations were deferred and recognized ratably over the projected performance period. Milestone payments, which were typically related to regulatory, commercial or other achievements by the Company or their licensees and distributors, were recognized as revenues when the milestone was accomplished and collection was reasonably assured.

Periods commencing January 1, 2018

Product Sales and Services

Effective January 1, 2018, the Company implemented ASC 606, Revenue From Contracts With Customers. The Company sells products primarily through wholesalers and considers these wholesalers to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the Company’s product and the Company’s performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of price deductions in arriving at reported net product sales. These adjustments include estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated when the product is delivered based on analysis of historical data for the product or comparable products, as well as future expectations for such products.

Reserves to reduce Gross Revenues to Net Revenues

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

Product Returns

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

Chargebacks, Discounts and Rebates

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

Revenue from licensing arrangements

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


- 12 -



License of Intellectual Property

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

Milestone Payments

At the inception of each arrangement which includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price, if any, using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price.

Disaggregation of revenue

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

Contract Balances

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

A receivable is recognized in the period the Company sells its products and when the Company’s right to consideration is unconditional. See the condensed consolidated balance sheets for the balance of accounts receivable at September 30, 2018.

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

There were no material deferred contract costs at September 30, 2018.

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 2018 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. At September 30, 2018, the Company had deferred revenue of $1,600 representing the unsatisfied performance obligations associated with a license agreement.

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


- 13 -



NOTE 4: Fair Value Measurement
The Company is required to measure certain assets and liabilities at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively when accounting for and reporting certain financial instruments, when measuring certain contingent consideration liabilities and in the initial recognition of net assets acquired in a business combination. Fair value is estimated by applying the hierarchy described below, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:  

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

Income approach, which is based on the present value of a future stream of net cash flows.
Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
As a basis for considering the assumptions used in these techniques, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:  
Level 1 - Quoted prices for identical assets or liabilities in active markets.
Level 2 - Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.
Level 3 - Unobservable inputs that reflect estimates and assumptions.
The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying condensed consolidated balance sheets:
 
 
As of September 30, 2018
 
As of December 31, 2017
Fair Value Measurements:
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities (see Note 5)
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
9,936

 
$

 
$

 
$
468

 
$

 
$

Money market funds
 
41,550

 

 

 
44,481

 

 

Corporate bonds
 

 
33,036

 

 

 
9,262

 

Government securities - U.S.
 

 
13,556

 

 

 
19,050

 

Other fixed-income securities
 

 
9,347

 

 

 
4,250

 

Total assets
 
$
51,486

 
$
55,939

 
$

 
$
44,949

 
$
32,562

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Related party payable (see Note 8)
 

 

 
38,692

 

 

 
98,925

Total liabilities
 
$

 
$

 
$
38,692

 
$

 
$

 
$
98,925

A review of fair value hierarchy classifications is conducted on a quarterly basis.  Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the periods ended September 30, 2018 and December 31, 2017, respectively, there were no transfers in and out of Level 1, 2, or 3. During the three and nine month periods ended September 30, 2018 and 2017, respectively, we did not recognize any other-than-temporary impairment loss.
Some of the Company’s financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.


- 14 -



Debt

We estimate the fair value of our $143,750 aggregate principal amount of 4.50% exchangeable senior notes due 2023 (the “2018 Notes”), a Level 2 input, based on interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities. The estimated fair value of the 2018 Notes at September 30, 2018 is $109,565 compared to a book value of $114,263.

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

See Note 9: Long-Term Debt for additional information regarding our debt obligations.

NOTE 5: Marketable Securities 
The Company has investments in available-for-sale marketable securities which are recorded at fair market value. Prior to January 1, 2018, unrealized gains and losses on all securities are recorded as other comprehensive income (loss) in shareholders’ equity, net of income tax effects.
On January 1, 2018, the Company adopted ASU 2016-01, which requires the change in the fair value of available-for-sale equity investments to be recognized in our condensed consolidated statements of income (loss) rather than as a component of our condensed consolidated statement of comprehensive income (loss). For the three and nine months ended September 30, 2018, the net unrealized gain (loss) on our available-for-sale equity investments, recorded as a component of investment income in the accompanying condensed consolidated statements of income (loss), was immaterial. For comparability purposes, the net unrealized loss on our available-for-sale equity investments was $878 for the three months ended September 30, 2017 and the net unrealized gain was immaterial for the nine months ended September 30, 2017. These amounts were recorded as other comprehensive income in shareholders’ equity, net of income tax effects for the three and nine months ended September 30, 2017.
The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of September 30, 2018 and December 31, 2017, respectively:
 
 
September 30, 2018
Marketable Securities:
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
Equity securities
 
$
10,068

 
$
77

 
$
(209
)
 
$
9,936

Money market funds
 
41,350

 
200

 

 
41,550

Corporate bonds
 
33,266

 
6

 
(236
)
 
33,036

Government securities - U.S.
 
13,756

 

 
(200
)
 
13,556

Other fixed-income securities
 
9,361

 
9

 
(23
)
 
9,347

Total
 
$
107,801

 
$
292

 
$
(668
)
 
$
107,425

 
 
December 31, 2017
Marketable Securities:
 
Adjusted Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
 
 
 
 
 
 
 
 
 
Equity securities
 
$
443

 
$
31

 
$
(6
)
 
$
468

Money market funds
 
44,525

 

 
(44
)
 
44,481

Corporate bonds
 
9,285

 
1

 
(24
)
 
9,262

Government securities - U.S.
 
19,080

 

 
(30
)
 
19,050

Other fixed-income securities
 
4,259

 

 
(9
)
 
4,250

Total
 
$
77,592


$
32


$
(113
)

$
77,511

 
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We reflect these gains and losses as a component of investment income in the accompanying condensed consolidated statements of income (loss).

- 15 -



We recognized gross realized gains of $143 and $2,978 for the three months ended September 30, 2018, and 2017, respectively. These realized gains were offset by realized losses of $22 and $2,432 for the three months ended September 30, 2018, and 2017, respectively.
We recognized gross realized gains of $378 and $4,228 for the nine months ended September 30, 2018, and 2017, respectively. These realized gains were offset by realized losses of $350 and $3,755 for the nine months ended September 30, 2018, and 2017, 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 September 30, 2018:
 
 
Maturities
Marketable Debt Securities:
 
Less than 1 Year
 
1-5 Years
 
5-10 Years
 
Greater than 10 Years
 
Total
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
19,017

 
$
13,820

 
$
199

 
$

 
$
33,036

Government securities - U.S.
 
831

 
12,224

 

 
501

 
13,556

Other fixed-income securities
 
51

 
9,296

 

 

 
9,347

Total
 
$
19,899

 
$
35,340

 
$
199

 
$
501

 
$
55,939

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

NOTE 6: Inventories 
The principal categories of inventories, net reserves of $2,838 and $1,039 at September 30, 2018 and December 31, 2017, respectively, are comprised of the following:
Inventory:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
Finished goods
 
$
4,783

 
$
4,774

Raw materials
 
1,247

 
1,383

Total  
 
$
6,030

 
$
6,157


NOTE 7: Goodwill and Intangible Assets 
The Company’s amortizable and unamortizable intangible assets at September 30, 2018 and December 31, 2017 are as follows: 
 
 
September 30, 2018
 
December 31, 2017
Goodwill and Intangible Assets:
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Acquired developed technology - Noctiva
 
$
73,111

 
$
(5,606
)
 
$
67,505

 
$
73,111

 
$
(1,401
)
 
$
71,710

Acquired developed technology - Vazculep
 
12,061

 
(10,227
)
 
1,834

 
12,061

 
(9,616
)
 
2,445

Acquired product marketing rights (1)
 

 

 

 
16,600

 
(2,132
)
 
14,468

Acquired developed technology (1)
 

 

 

 
4,300

 
(634
)
 
3,666

Total amortizable intangible assets
 
$
85,172

 
$
(15,833
)
 
$
69,339

 
$
106,072

 
$
(13,783
)
 
$
92,289

 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Goodwill
 
$
18,491

 
$

 
$
18,491

 
$
18,491

 
$

 
$
18,491

Total unamortizable intangible assets
 
$
18,491


$


$
18,491


$
18,491


$


$
18,491

 
(1) These intangible assets were assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018. See Note 12: Divestiture of the Pediatric Assets.

- 16 -



The Company recorded amortization expense related to amortizable intangible assets of $1,620 and $564 for the three months ended September 30, 2018 and 2017, respectively and $4,996 and $1,692 for the nine months ended September 30, 2018 and 2017, respectively.
Amortizable intangible assets are amortized over their estimated useful lives, which range from three to fifteen years. Estimated amortization of intangible assets for the next five years is as follows: 
Estimated Amortization Expense:
 
Amount
 
 
 
2018
 
$
6,619

2019
 
6,439

2020
 
6,439

2021
 
5,624

2022
 
5,624


NOTE 8: Long-Term Related Party Payable 
Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2018 and December 31, 2017:
 
 
 
Activity during the Nine Months Ended
September 30, 2018
 
 
 
 
 
 
 
Changes in Fair Value of Related Party Payable
 
 
 
 
 
 
Long-Term Related Party Payable:
Balance,
December 31, 2017
 
Payments to
Related Parties
 
Operating
(Gain) Expense
 
Other (Income)
Expense
 
Warrant Exercise
 
Disposal
 
Balance, September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration:
 

 
 

 
 

 
 

 
 
 
 
 
 

Warrants - Éclat Pharmaceuticals (a)
$
2,479

 
$

 
$
(312
)
 
$

 
$
(2,167
)
 
$

 
$

Earn-out payments - Éclat Pharmaceuticals (b)
67,744

 
(16,254
)
 
(16,966
)
 

 

 

 
34,524

Royalty agreement - FSC (c)
5,740

 
(645
)
 
242

 

 

 
(5,337
)
 

Financing-related:
 

 
 

 
 

 
 

 
 
 
 
 

Royalty agreement - Deerfield (d)
5,392

 
(1,600
)
 

 
(970
)
 

 

 
2,822

Royalty agreement - Broadfin (e)
2,570

 
(762
)
 

 
(462
)
 

 

 
1,346

Long-term liability - FSC (f)
15,000

 

 

 

 

 
(15,000
)
 

Total related party payable
98,925

 
$
(19,261
)
 
$
(17,036
)
 
$
(1,432
)
 
$
(2,167
)
 
$
(20,337
)
 
38,692

Less: Current portion
(25,007
)
 
 

 
 

 
 

 
 
 
 
 
(10,979
)
Total long-term related party payable
$
73,918

 
 

 
 

 
 

 
 
 
 
 
$
27,713


- 17 -



Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2018 and June 30, 2018:
 
 
 
Activity during the Three Months Ended September 30, 2018
 
 
 
 
 
 
 
Changes in Fair Value of Related Party Payable
 
 
Long-Term Related Party Payable:
Balance,
June 30, 2018
 
Payments to
Related Parties
 
Operating
Expense
 
Other
Expense
 
Balance, September 30, 2018
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration:
 

 
 

 
 

 
 

 
 

Earn-out payments - Éclat Pharmaceuticals (b)
$
46,780

 
$
(5,141
)
 
$
(7,115
)
 
$

 
$
34,524

Royalty agreement - FSC (c)

 

 

 

 

Financing-related:
 

 
 

 
 

 
 

 
 
Royalty agreement - Deerfield (d)
3,614

 
(504
)
 

 
(288
)
 
2,822

Royalty agreement - Broadfin (e)
1,723

 
(240
)
 

 
(137
)
 
1,346

Total related party payable
52,117

 
$
(5,885
)
 
$
(7,115
)
 
$
(425
)
 
38,692

Less: Current portion
(14,067
)
 
 

 
 

 
 

 
(10,979
)
Total long-term related party payable
$
38,050

 
 

 
 

 
 

 
$
27,713

 
(a)
As part of the consideration for the Company’s acquisition of Éclat on March 13, 2012, the Company issued two warrants to a related party with a six-year term which allow for the purchase of a combined total of 3,300 ordinary shares of Avadel. One warrant was exercisable for 2,200 shares at an exercise price of $7.44 per share, and the other warrant was exercisable for 1,100 shares at an exercise price of $11.00 per share. On February 23, 2018, the related party exercised in full the warrant to purchase 2,200 ordinary shares. These warrants were settled by delivering to the related party cash of $2,911 and approximately 603 ADS. On March 12, 2018, the remaining warrants to purchase 1,100 ordinary shares expired. 
The fair value of the warrants is estimated on a quarterly basis using a Black-Scholes option pricing model with the following assumptions at December 31, 2017: 
 Assumptions for the Warrant Valuation:
 
December 31, 2017
 
 
 
Stock price
 
$
8.20

Weighted average exercise price per share
 
8.63

Expected term (years)
 
0.25

Expected volatility
 
37.90
%
Risk-free interest rate
 
1.39
%
Expected dividend yield
 

 
These Black-Scholes fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. The fair value of the warrant consideration was most sensitive to movement in the Company’s share price and expected volatility at the balance sheet date.
 
Expected term: The expected term of the options or warrants represents the period of time between the grant date and the time the options or warrants are either exercised or forfeited, including an estimate of future forfeitures for outstanding options or warrants. Given the limited historical data and the grant of stock options and warrants to a limited population, the simplified method has been used to calculate the expected life. 
Expected volatility: The expected volatility is calculated based on an average of the historical volatility of the Company’s stock price for a period approximating the expected term. 
Risk-free interest rate: The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and a maturity that approximates the expected term. 

- 18 -



Expected dividend yield: The Company has not distributed any dividends since its inception and has no plan to distribute dividends in the foreseeable future. 
At the closing date of the 2012 Éclat acquisition and at December 31, 2017, it was uncertain whether the Company would ultimately fulfill its obligation under these warrants using ordinary shares or cash. Accordingly, pursuant to the guidance of ASC 480, the Company determined that these warrants should be classified as a liability. This classification as a liability was further supported by the Company’s determination, pursuant to the guidance of ASC 815-40-15-7(i), that these warrants could also not be considered as being indexed to the Company’s own ordinary shares, on the basis that the exercise price for the warrants is determined in U.S. dollars, although the functional currency of the Company at the closing date of the Éclat acquisition was the Euro.  
(b)
In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by the Company’s CEO, and certain other current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity.
(c)
In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part included a commitment to pay quarterly a 15% royalty on the net sales of certain FSC products, up to $12,500 for a period not exceeding ten years. This obligation was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018. See Note 12: Divestiture of the Pediatric Assets.
(d)
As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 1.75% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Eclat products.
(e)
As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a related party and current shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024.
(f)
In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part consists of payments totaling $1,050 annually for five years with a final payment in January 2021 of $15,000. Substantially all of FSC’s and its subsidiaries’ assets are pledged as collateral to Deerfield. This obligation was assumed by the buyer as part of the disposition of the pediatrics products on February 16, 2018. See Note 12: Divestiture of the Pediatric Assets.
At September 30, 2018, the fair value of each related party payable listed in (b), (d) and (e) above was estimated using a discounted cash flow model based on estimated and projected annual net revenues or gross profit, as appropriate, of each of the specified Éclat products using an appropriate risk-adjusted discount rate of 15%. These fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related related party payables, resulting primarily from management’s revision of key assumptions, will be recorded in the condensed consolidated statements of income (loss) in the line items entitled “Changes in fair value of related party contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of related party payable” for items (d) and (e) above. See Note 1: Summary of Significant Accounting Policies under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements in Part II, Item 8 of the Company’s 2017 Annual Report on Form 10-K for more information on key assumptions used to determine the fair value of these liabilities. 
The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (d) and (e) above. These financing-related liabilities are recorded at fair market value on the condensed consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – change in fair value of related party payable” on the condensed consolidated statements of income (loss).

- 19 -



The following table summarizes changes to the related party payables, a recurring Level 3 measurement, for the nine-month periods ended September 30, 2018 and 2017, respectively:
Related Party Payable Rollforward:
 
Balance
 
 
 
Balance, December 31, 2016
 
$
169,347

Payments of related party payable
 
(29,135
)
Fair value adjustments (1)
 
(33,095
)
Balance, September 30, 2017
 
$
107,117

 
 
 
Balance, December 31, 2017
 
$
98,925

Payments of related party payable
 
(19,261
)
Fair value adjustments (1)
 
(18,468
)
Warrant exercise
 
(2,167
)
Disposition of the pediatrics products 
 
(20,337
)
Balance, September 30, 2018
 
$
38,692

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

NOTE 9: Long-Term Debt
Long-Term debt is summarized as follows:
 
 
September 30, 2018
 
December 31, 2017
Principal amount of 4.50% exchangeable senior notes due 2023
 
$
143,750

 
$

Less: debt discount and issuance costs, net
 
(29,487
)
 

Net carrying amount of liability component
 
114,263

 

Other debt
 
226

 
267

     Subtotal
 
114,489

 
267

Less: current maturities
 
(107
)
 
(111
)
     Long-term debt
 
$
114,382

 
$
156

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

Issuance of Debt Securities

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 “2018 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 2018 Notes a 30-day option to purchase up to an additional $18,750 aggregate principal amount of the 2018 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 Company pays 4.50% cash interest per year on the principal amount of the 2018 Notes, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2018, to holders of record at the close of business on the preceding January 15 or July 15, respectively. Interest accrues on the principal amount of the 2018 Notes from and including the date the 2018 Notes were issued or from, and including, the last date in respect of which interest has been paid or provided for, as the case may be, to, but excluding, the next interest payment date. The 2018 Notes are general, unsecured obligations of the Issuer, and are fully and unconditionally guaranteed by the Company on a senior unsecured basis. There are no financial debt covenants associated with the 2018 Notes. 


- 20 -



The 2018 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 2018 Notes will be exchangeable at the option of the holders at an initial exchange rate of 92.6956 ADSs per $1 principal amount of 2018 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 2018 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 2018 Notes may convert their 2018 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 2018 Notes may surrender all or any portion of its 2018 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 2018 Notes, as determined following a request by a holder of the 2018 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 2018 Notes has the right to require the Company to repurchase the 2018 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 2018 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 2018 Notes may surrender all or any portion of its 2018 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 2018 Notes for redemption pursuant to Article 16 prior to the close of business on the business day immediately preceding August 1, 2022, then a holder of the 2018 Notes may surrender all or any portion of its 2018 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 2018 Notes are not otherwise exchangeable at such time. After that time, the right to exchange shall expire, unless the Company defaults in the payment of the redemption price, in which case a holder of the 2018 Notes may exchange its 2018 Notes until the redemption price has been paid or duly provided for.

The Company considered the guidance in ASC 815-15, Embedded Derivatives, to determine if this instrument contains an embedded feature that should be separately accounted for as a derivative. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional, as defined by ASC 815-40. The Company determined that this exception applies due, in part, to our ability to settle the 2018 Notes in cash, ADSs or a combination of cash and ADSs, at our option. The Company has therefore applied the guidance provided by ASC 470-20, Debt with Conversion and Other Options which requires that the 2018 Notes be separated into debt and equity components at issuance and a value be assigned to each. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected our non-convertible debt borrowing rate for similar debt. The equity component of the 2018 Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the 2018 Notes and the fair value of the liability of the 2018 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 2018 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.


- 21 -



In connection with the issuance of the 2018 Notes, we incurred approximately $6,190 of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees, and allocated these costs to the liability and equity components based on the allocation of the proceeds. Of the total $6,190 of debt issuance costs, $1,201 were allocated to the equity component and recorded as a reduction to additional paid-in capital and $4,989 were allocated to the liability component and recorded as a reduction to debt on our condensed consolidated balance sheets. The portion allocated to the liability component is amortized to interest expense using the effective interest method over the same five-year term as the related 2018 Notes.

Other Debt

French government agencies provide financing to French companies for R&D. At September 30, 2018 and December 31, 2017, the Company had one remaining outstanding loan of $226 and $267, respectively for one program. This loan does not bear interest and repayment is scheduled to occur through 2019. 

NOTE 10: Income Taxes
The components of income (loss) before income taxes are as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Income (Loss) Before Income Taxes:
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Ireland
 
$
(18,314
)
 
$
(5,340
)
 
$
(34,203
)
 
$
4,008

United States
 
1,773

 
29,627

 
(1,043
)
 
96,288

France
 
79

 
3,313

 
441

 
(1,950
)
Total income (loss) before income taxes
 
$
(16,462
)
 
$
27,600

 
$
(34,805
)
 
$
98,346

 
The items accounting for the difference between the income tax provision computed at the statutory rate and the Company’s effective tax rate are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Income Tax Rate Reconciliation:
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Statutory tax rate  
 
12.5
 %

12.5
 %
 
12.5
 %
 
12.5
 %
International tax rates differential
 
7.0
 %

24.9
 %
 
6.9
 %
 
20.5
 %
Change in valuation allowance
 
(18.3
)%

(1.6
)%
 
(14.9
)%
 
0.5
 %
Change in fair value of nondeductible contingent consideration
 
8.7
 %

(12.8
)%
 
9.9
 %
 
(10.9
)%
Nondeductible stock-based compensation
 
(3.5
)%

(0.4
)%
 
(2.6
)%
 
(0.3
)%
Unrecognized tax benefits
 
(3.5
)%

0.9
 %
 
(3.1
)%
 
0.8
 %
State and local income taxes, net of federal
 
0.1
 %

 %
 
0.2
 %
 
0.1
 %
Change in U.S. tax law
 
 %
 
 %
 
 %
 
 %
Other
 
1.2
 %

(2.1
)%
 
0.8
 %
 
(0.9
)%
Effective income tax rate
 
4.2
 %

21.4
 %
 
9.7
 %
 
22.3
 %
 
 
 
 
 
 
 
 
 
Income tax (benefit) provision - at statutory tax rate
 
$
(2,058
)
 
$
3,449

 
$
(4,351
)
 
$
12,294

International tax rates differential
 
(1,153
)
 
6,861

 
(2,394
)
 
20,120

Change in valuation allowance
 
3,007

 
(438
)
 
5,188

 
476

Change in fair value of nondeductible contingent consideration
 
(1,431
)
 
(3,521
)
 
(3,436
)
 
(10,751
)
Nondeductible stock-based compensation
 
578

 
(116
)
 
914

 
(265
)
Unrecognized tax benefits
 
578

 
262

 
1,086

 
771

State and local income taxes, net of federal
 
(13
)
 
(6
)
 
(70
)
 
69

Change in U.S. tax law
 

 

 

 

Other
 
(199
)
 
(570
)
 
(297
)
 
(884
)
Income tax (benefit) provision - at effective income tax rate
 
$
(691
)
 
$
5,921

 
$
(3,360
)
 
$
21,830

 

- 22 -



The income tax benefit and provision for the three months ended September 30, 2018 and 2017 was $691 and $5,921, respectively. The decrease in the income tax provision for the three months ended September 30, 2018 is primarily the result of a reduction in the amount of taxable income earned in the United States (“U.S.”) and Ireland and was partially offset by a decrease in the amount of nondeductible contingent consideration when compared to the same period in 2017. We have not made any additional measurement period adjustments related to U.S. federal tax reform legislation (the “Tax Act”) enacted on December 22, 2017 during the three months ended September 30, 2018. We are still evaluating the provisions of the Tax Act and its impact on our condensed consolidated financial statements.
The income tax benefit and provision for the nine months ended September 30, 2018 and 2017 was $3,360 and $21,830, respectively. The decrease in the income tax provision for the nine months ended September 30, 2018 is primarily the result of decreases in the amount of taxable income in the U.S. and Ireland, and was partially offset by a reduction in the amount of nondeductible contingent consideration when compared to the same period in 2017. We have not made any additional measurement period adjustments related to the Tax Act during the nine months ended September 30, 2018. We are still evaluating the provisions of the Tax Act and its impact on our condensed consolidated financial statements.

The U.S. government enacted the 2018 Tax Cuts & Jobs Act (TCJA) on December 22, 2017. The TCJA reduces the U.S. federal corporate statutory rate to 21% from the previous rate of 35% and has additional requirements that the Company continues to evaluate. The Company is applying the guidance in SAB 118 when accounting for the effects of the TCJA. The Company has not yet completed its accounting for all of the tax effects of the TCJA. The Company continues to consider certain portions of the TCJA and the application of ASC 740 and no adjustments have been made in the unaudited condensed consolidated financial statements.

NOTE 11: Other Assets and Liabilities 
Various other assets and liabilities are summarized as follows:
Prepaid Expenses and Other Current Assets:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
Valued-added tax recoverable
 
$
979

 
$
1,206

Prepaid and other expenses
 
4,416

 
7,106

Guarantee from Armistice (see Note 12)
 
512

 

Income tax receivable
 
478

 
518

Research and development tax credit receivable
 
265

 

Other
 
209

 
128

Total  
 
$
6,859

 
$
8,958

 
Other Non-Current Assets:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
Deferred tax assets
 
$
8,113

 
$
3,877

Long-term deposits
 
4,827

 
3,350

Guarantee from Armistice (see Note 12)
 
5,830

 

Right of use assets at contract manufacturing organizations
 
5,960

 
2,909

Other
 
114

 
113

Total  
 
$
24,844

 
$
10,249

 

- 23 -



Accrued Expenses
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
Accrued compensation
 
$
2,147

 
$
3,157

Accrued social charges
 
1,071

 
1,204

Accrued employee severance (see Note 13)
 
581

 
1,000

Customer allowances
 
5,583

 
10,613

Accrued Exclusive License and Assignment Agreement (ELAA) payment
 

 
20,000

Accrued contract research organization charges
 
1,880

 
156

Accrued contract manufacturing organization costs
 
2,578

 
2,327

Accrued contract sales organization and marketing costs
 
4,156

 
7,641

Other
 
2,702

 
4,828

Total  
 
$
20,698

 
$
50,926

 
Other Non-Current Liabilities:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
Provision for retirement indemnity
 
$
1,262

 
$
1,303

Customer allowances
 
1,596

 
1,636

Unrecognized tax benefits
 
4,720

 
3,954

Guarantee to Deerfield (see Note 12)
 
5,851

 

Other
 
721

 
191

Total  
 
$
14,150

 
$
7,084

12: Divestiture of the Pediatric Assets

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

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

License and Development Agreement

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

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

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

Upon transfer of the four product formulations, Cerecor will assume all remaining development costs and responsibilities for the product development, clinical studies, NDA applications and associated filing fees; and

- 24 -



Upon regulatory approval and commercial launch of any LiquiTime™ products, Cerecor will pay Avadel Ireland quarterly royalties based on a percentage of net sales of any such products in the mid-single digit range. 

Deerfield Guarantee

In connection with the closing under the Purchase Agreement, the Company and Holdings provided their guarantee (the “Deerfield Guarantee”) in favor of Deerfield. Under the Deerfield Guarantee, the Company and Holdings guaranteed to Deerfield the payment by Cerecor of the Assumed Obligations under the Membership Interest Purchase Agreement between the Company and Deerfield dated February 5, 2016. The Assumed Obligations include (i) a quarterly payment of $263 beginning in July 2018 and ending in October 2020, amounting to an aggregate payment obligation of $2,625; (ii) a payment in January 2021 of $15,263; and (iii) a quarterly royalty payment of 15% on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. In addition, under the Deerfield Guarantee, the Company and Holdings guaranteed that Deerfield would receive certain minimum annual FSC Product Royalties through February 6, 2026 (the “Minimum Royalties”). Given the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. A valuation was performed, which was based largely on an analysis of the potential timing of each possible cash outflow described above and the likelihood of Cerecor’s default on such payments assuming an S&P credit rating of CCC+. The result of this valuation identified a guarantee liability of $6,643. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield. At September 30, 2018, the carrying value of this liability was $6,364.

Armistice Guarantee

In connection with the closing under the Purchase Agreement, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to Holdings the payment by Cerecor of the Assumed Obligations, including the Minimum Royalties. A valuation of the guarantee asset was performed in accordance with ASC 460 and a guarantee asset of $6,620 was recorded. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield noted above. At September 30, 2018, the carrying value of this asset was $6,342.

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

Based on management’s review of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the disposition of our pediatric assets and related liabilities did not qualify for discontinued operations reporting. Our results of operations for the period January 1, 2018 through February 16, 2018 and for the three and nine months ended September 30, 2017 include the results of FSC, prior to its February 16, 2018 disposition date.

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


- 25 -



NOTE 13: Restructuring Costs
During the first quarter of 2017, the Company announced a plan to reduce our workforce at our Venissieux, France site by approximately 50%.  This reduction is an effort to align the Company’s cost structure with our ongoing and future planned projects. In July 2017, the Company completed negotiations with the works council for our French operations and received approval from the French Labor Commission (DIRECCTE) to implement the plan. The reduction is substantially complete at September 30, 2018. Restructuring charges of $65 and restructuring income of $549 were recognized during the three months ended September 30, 2018 and 2017, respectively and restructuring charges of $268 and $3,173 during the nine months ended September 30, 2018 and 2017, respectively. The restructuring income resulted from a retirement indemnity curtailment gain of $549 in the three months ended September 30, 2017 associated with the reduction of certain defined benefit retirement plan liabilities due to the reduction in force. The following table sets forth activities for the Company’s cost reduction plan obligations for the nine months ended September 30, 2018 and 2017:
Severance Obligation:
 
2018
 
2017
 
 
 
 
 
Balance of restructuring accrual at January 1,
 
$
1,000

 
$

Charges for employee severance, benefits and other
 
268

 
3,722

Payments
 
(668
)
 
(2,164
)
Foreign currency impact
 
(19
)
 
368

Balance of restructuring accrual at September 30,
 
$
581

 
$
1,926

The restructuring accrual at September 30, 2018 and 2017 is included in the condensed consolidated balance sheet in Accrued expenses.
NOTE 14: Net (Loss) Income Per Share 
Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of shares outstanding during each period. Diluted net (loss) income per share is calculated by dividing net (loss) income by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net (loss) income, diluted net (loss) income per share would be calculated assuming the impact of the conversion of the 2018 Notes, the exercise of outstanding equity compensation awards, ordinary shares expected to be issued under our employee stock purchase plan (“ESPP”) and the exercise of contingent consideration warrants, all which have been exercised or have expired during the first quarter of 2018. 
We have a choice to settle the conversion obligation under the 2018 Notes in cash, shares or any combination of the two. We utilize the if-converted method to reflect the impact of the conversion of the 2018 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2018 Notes into shares of our ordinary shares and reflects the elimination of the interest expense related to the 2018 Notes.
The dilutive effect of the warrants, stock options, RSU’s and ordinary shares expected to be issued under or ESPP has been calculated using the treasury stock method.
A reconciliation of basic and diluted net (loss) income per share, together with the related shares outstanding in thousands is as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Net (Loss) Income Per Share:
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(15,771
)
 
$
21,679

 
$
(31,445
)
 
$
76,516

 
 
 
 
 
 
 
 
 
Weighted average shares:
 
 

 
 

 
 
 
 
Basic shares
 
36,904

 
40,061

 
37,410

 
40,839

Effect of dilutive securities—options, RSU’s, ESPP shares and warrants outstanding
 

 
1,278

 

 
1,355

Diluted shares
 
36,904

 
41,339

 
37,410

 
42,194

 
 
 
 
 
 
 
 
 
Net (loss) income per share - basic
 
$
(0.43
)

$
0.54

 
$
(0.84
)
 
$
1.87

Net (loss) income per share - diluted  
 
$
(0.43
)

$
0.52

 
$
(0.84
)
 
$
1.81

 

- 26 -



Potential common shares of 18,742 and 5,008 were excluded from the calculation of weighted average shares for the three months ended September 30, 2018 and 2017, respectively, because their effect was considered to be anti-dilutive. Potential common shares of 16,647 and 5,086 were excluded from the calculation of weighted average shares for the nine months ended September 30, 2018 and 2017, respectively, because their effect was considered to be anti-dilutive. For the three and nine months ended September 30, 2018, the effects of dilutive securities were entirely excluded from the calculation of net (loss) income per share as a net loss was reported in this period. 

NOTE 15: Comprehensive Income (Loss) 
The following table shows the components of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017, respectively, net of tax effects: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Accumulated Other Comprehensive Income (Loss):
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment:
 
 

 
 

 
 
 
 
Beginning balance
 
$
(23,435
)
 
$
(23,089
)
 
$
(23,202
)
 
$
(23,336
)
Net other comprehensive income (loss)
 
(60
)
 
(229
)
 
(293
)
 
18

Balance at September 30,
 
$
(23,495
)
 
$
(23,318
)
 
$
(23,495
)
 
$
(23,318
)
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities, net
 
 

 
 

 
 
 
 
Beginning balance
 
$
(224
)
 
$
409

 
$
(64
)
 
$
(229
)
Net other comprehensive income (loss), net of ($18), $92, ($88) and $0 tax, respectively
 
68

 
(512
)
 
(92
)
 
126

Balance at September 30,
 
$
(156
)
 
$
(103
)
 
$
(156
)
 
$
(103
)
Accumulated other comprehensive loss at September 30,
 
$
(23,651
)
 
$
(23,421
)
 
$
(23,651
)
 
$
(23,421
)
 
The effect on the Company’s condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive income (loss) was immaterial for all periods presented.

NOTE 16: Shareholders’ Equity 
The following table presents a reconciliation of the Company’s beginning and ending balances in shareholders’ equity for the nine months ended September 30, 2018
Shareholders’ Equity:
 
2018
 
 
 
Shareholders’ equity - January 1,
 
$
85,580

Net loss
 
(31,445
)
Other comprehensive loss
 
(385
)
Exercise of stock options
 
535

Stock-based compensation expense  
 
7,190

Employee share purchase plan share issuance
 
127

Share repurchases
 
(27,637
)
Exercise of warrants (see