10-Q 1 flml2016q3.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, 2016
 
———————
FLAMEL TECHNOLOGIES S.A.
(Exact name of registrant as specified in its charter)
———————
 
Republic of France
000-28508
98-0639540
(State or Other Jurisdiction
(Commission
(I.R.S. Employer
of Incorporation)
File Number)
Identification No.)
 
Parc Club du Moulin à Vent
33, avenue du Docteur Georges Levy
69200, Vénissieux France
(Address of Principal Executive Office and Zip Code)
 
+33 472 78 34 34
(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer   o
Smaller Reporting Company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
The number of shares of the registrant’s common stock outstanding at November 7, 2016 was 41,241,254.






TABLE OF CONTENTS
 



- 2 -



Forward-Looking Statements
 
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). The words “will,” “may,” “believe,” “expect,” “anticipate,” “estimate,” “project” and similar expressions, and the negatives thereof, identify forward-looking statements, each of which speaks only as of the date the statement is made. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements.
 
Although we believe that our forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business and operations, our business is subject to significant risks and there can be no assurance that actual results of our research, development and commercialization activities and our results of operations will not differ materially from our expectations.
 
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (SEC), including our annual report on Form 10-K for the year ended December 31, 2015, in particular under the captions “Forward-Looking Statements” and “Risk Factors.”
 
All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included or referenced in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.
 


- 3 -



PART I – FINANCIAL INFORMATION 
ITEM 1.  FINANCIAL STATEMENTS 

FLAMEL TECHNOLOGIES S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenues:
 

 
 

 
 

 
 

Product sales and services
$
31,340

 
$
47,313

 
$
104,858

 
$
128,441

License and research revenue
747

 

 
2,303

 

Total
32,087

 
47,313

 
107,161

 
128,441

Operating expenses:
 

 
 

 
 

 
 

Cost of products and services sold
2,844

 
2,087

 
10,657

 
8,473

Research and development expenses
8,143

 
7,221

 
21,135

 
20,447

Selling, general and administrative expenses
12,740

 
4,568

 
33,491

 
14,904

Intangible asset amortization
3,702


3,141


10,918


9,423

Changes in fair value of related party contingent consideration
20,848

 
44,782

 
52,989

 
82,036

Total
48,277

 
61,799

 
129,190

 
135,283

Operating loss
(16,190
)
 
(14,486
)
 
(22,029
)
 
(6,842
)
Investment income, net
490

 
197

 
1,080

 
1,171

Interest expense, net
(264
)
 

 
(702
)
 

Other expense - changes in fair value of related party payable
(1,828
)
 
(6,644
)
 
(6,135
)
 
(9,629
)
Foreign exchange gain (loss)
1,249

 
160

 
(12
)
 
8,096

Loss before income taxes
(16,543
)
 
(20,773
)
 
(27,798
)
 
(7,204
)
Income tax provision
3,451

 
7,302

 
18,212

 
24,516

Net loss
$
(19,994
)
 
$
(28,075
)
 
$
(46,010
)
 
$
(31,720
)
 
 
 
 
 
 
 
 
Net loss per share - basic
$
(0.48
)
 
$
(0.69
)
 
$
(1.12
)
 
$
(0.79
)
Net loss per share - diluted
$
(0.48
)
 
$
(0.69
)
 
$
(1.12
)
 
$
(0.79
)
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - basic
41,241

 
40,625

 
41,241

 
40,397

Weighted average number of shares outstanding - diluted
41,241

 
40,625

 
41,241

 
40,397

 
See accompanying notes to condensed consolidated financial statements.

- 4 -



FLAMEL TECHNOLOGIES S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net loss
$
(19,994
)
 
$
(28,075
)
 
$
(46,010
)
 
$
(31,720
)
Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Foreign currency translation gain (loss)
1,567

 
102

 
3,927

 
(11,285
)
Net other comprehensive (loss) income, net of $152, ($9), ($49), ($9) tax, respectively
(2,405
)
 
(365
)
 
(958
)
 
(365
)
Total other comprehensive income (loss), net of tax
(838
)
 
(263
)
 
2,969

 
(11,650
)
Total comprehensive loss
$
(20,832
)
 
$
(28,338
)
 
$
(43,041
)
 
$
(43,370
)
 
See accompanying notes to condensed consolidated financial statements.

- 5 -



FLAMEL TECHNOLOGIES S.A.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
September 30, 2016
 
December 31, 2015
 
 
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
18,780

 
$
65,064

Marketable securities
130,887

 
79,738

Accounts receivable
15,395

 
7,487

Inventories
3,909

 
3,666

Research and development tax credit receivable

 
2,382

Prepaid expenses and other current assets
8,883

 
8,064

Total current assets
177,854

 
166,401

Property and equipment, net
3,186

 
2,616

Goodwill
19,134

 
18,491

Intangible assets, net
25,508

 
15,825

Research and development tax credit receivable
4,240

 

Income tax deferred charge
11,243

 
11,581

Other
6,820

 
167

Total assets
$
247,985

 
$
215,081

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
286

 
$
434

Current portion of long-term related party payable
33,359

 
25,204

Accounts payable
8,966

 
5,048

Deferred revenue
3,115

 
5,121

Accrued expenses
13,032

 
9,308

  Other
427

 
133

Total current liabilities
59,185

 
45,248

Long-term debt, less current portion
734

 
684

Long-term related party payable, less current portion
146,926

 
97,489

Other
4,307

 
2,526

Total liabilities
211,152

 
145,947

 
 
 
 
Shareholders' equity:
 

 
 

Ordinary shares, nominal value of 0.122 euro per share; 53,178 shares authorized;  41,241 issued and outstanding at September 30, 2016 and December 31, 2015
6,331

 
6,331

Additional paid-in capital
374,724

 
363,984

Accumulated deficit
(324,534
)
 
(278,524
)
Accumulated other comprehensive loss
(19,688
)
 
(22,657
)
Total shareholders' equity
36,833

 
69,134

Total liabilities and shareholders' equity
$
247,985

 
$
215,081

 See accompanying notes to condensed consolidated financial statements.

- 6 -



FLAMEL TECHNOLOGIES S.A.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 

 
 

Net loss
$
(46,010
)
 
$
(31,720
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
11,555

 
9,800

Loss on disposal of property and equipment
110

 

Loss on sale of marketable securities
666

 
443

Foreign exchange loss (gain)
12

 
(7,475
)
Grants recognized in research and development expenses
(70
)
 
(1,086
)
Remeasurement of related party acquisition-related contingent consideration
52,989

 
82,036

Remeasurement of related party financing-related contingent consideration
6,135

 
9,629

Change in deferred tax and income tax deferred charge
(5,680
)
 
(745
)
Stock-based compensation expense
10,541

 
5,574

Increase (decrease) in cash from:
 

 
 

Accounts receivable
(7,594
)
 
(1,363
)
Inventories
2,080

 
1,757

Prepaid expenses and other current assets
671

 
(4,005
)
Research and development tax credit receivable
(1,794
)
 
2,469

Accounts payable & other current liabilities
1,291

 
2,387

Deferred revenue
(2,198
)
 
(1,318
)
Accrued expenses
2,700

 
(1,048
)
Accrued income taxes

 
(7,584
)
Earn-out payments for related party contingent consideration in excess of acquisition-date fair value
(14,486
)
 

Royalty payments for related party payable in excess of original fair value
(1,790
)
 

Other long-term assets and liabilities
2,032

 
144

Net cash provided by operating activities
11,160

 
57,895

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(1,000
)
 
(1,077
)
Acquisitions of businesses
628

 

Proceeds from sales of marketable securities
46,483

 
37,007

Purchase of marketable securities
(96,199
)
 
(59,058
)
Net cash used in investing activities
(50,088
)
 
(23,128
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Earn-out payments for related party contingent consideration
(6,834
)
 
(15,497
)
Royalty payments for related party payable
(1,117
)
 
(2,158
)
Repayment of debt

 
(4,904
)
Reimbursement of conditional grants
(61
)
 
(681
)
Cash proceeds from issuance of ordinary shares and warrants

 
6,990

Net cash used in financing activities
(8,012
)
 
(16,250
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
656

 
(2,236
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(46,284
)
 
16,281

Cash and cash equivalents at January 1
65,064

 
39,760

Cash and cash equivalents at September 30
$
18,780

 
$
56,041

 

See accompanying notes to condensed consolidated financial statements.

- 7 -



FLAMEL TECHNOLOGIES S.A.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data) 
NOTE 1 : Summary of Significant Accounting Policies
 
Nature of Operations. Flamel Technologies S.A. (“Flamel,” the “Company,” “we” or “us”) is organized as a Société Anonyme, a form of corporation under the laws of The Republic of France. The Company was founded in 1990. Flamel is a specialty pharmaceutical company utilizing core competencies in drug delivery and formulation development to create safer and more efficacious pharmaceutical products to address unmet medical needs and/or reduce overall healthcare costs. The Company has a business model consisting of:
 
an Unapproved Marketed Drugs (“UMDs”) business with three approved products in the United States: Bloxiverz® (neostigmine methylsulfate injection), Vazculep® (phenylephrine hydrochloride injection) and Akovaz® (ephedrine sulphate injection). On May 2, 2016, the company announced that the U.S. Food and Drug Administration (FDA) had approved the Company’s New Drug Application (NDA) for Akovaz™ (ephedrine sulfate), a drug administered parenterally as a pressor agent to address clinically important hypotension in surgical settings. The NDA, which is the first to receive approval from the FDA for ephedrine sulfate, was approved on April 29, 2016. We began marketing Akovaz in a strength of 50mg/mL in the third quarter of 2016. We are also currently studying a fourth unapproved drug for possible submission for review by the FDA in early 2017. The UMD business was obtained through the acquisition of Éclat Pharmaceuticals, LLC ("Éclat"), on March 13, 2012;
a branded pediatric specialty pharmaceutical business with three FDA approved products and one FDA approved medical device, acquired through the acquisition of FSC Holdings, LLC (“FSC”) on February 5, 2016; and
a technology business, focusing on the development of products utilizing Flamel’s proprietary drug delivery platforms. The products that are based on Flamel’s proprietary drug delivery platforms target high-value solid and liquid oral and alternative dosage forms using 505(b)(2) and Biosimilar pathways where the Company is able to develop strong intellectual property positions and deliver meaningful patient benefits.
Flamel is headquartered in Lyon, France and has operations in St. Louis, Missouri, United States, and Dublin, Ireland.

Proposed Reincorporation as an Irish Public Limited Company (plc).  At our shareholders meeting on August 10, 2016, our shareholders approved resolutions to change our jurisdiction of incorporation from France to Ireland.  Based on such approval, we intend to give effect to this reincorporation on December 31, 2016 by merging with and into our wholly owned Irish corporate subsidiary, Avadel Pharmaceuticals Limited (the “Merger”).  Prior to completing the Merger, Avadel Pharmaceuticals Limited will re-register as an Irish public limited company, or plc, and at the time of the Merger and thereafter our shareholders (and holders of our American Depositary Shares (ADSs)) will own shares (or ADSs, as applicable) in a company known as Avadel Pharmaceuticals plc.  Our definitive proxy statement filed with the Securities and Exchange Commission on July 5, 2016 contains additional information about the proposed reincorporation.
 
Basis of Presentation. The Condensed Consolidated Balance Sheet as of December 31, 2015, which is primarily derived from the prior year 2015 audited consolidated financial statements, and the interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an annual report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2016.
 
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.
 
Foreign Currency Translation. The reporting currency of the Company and its wholly-owned subsidiaries is the U.S. dollar. Each of the Company's non-U.S. subsidiaries and the parent entity uses local currency as their functional currency. Subsidiaries and entities that do not use the U.S. dollar as their functional currency translate 1) profit and loss accounts at the weighted average exchange rates during the reporting period, 2) assets and liabilities at period end exchange rates and 3) shareholders' equity accounts

- 8 -



at historical rates. Resulting translation gains and losses are included as a separate component of shareholders' equity in Accumulated Other Comprehensive Loss. Assets and liabilities, excluding available-for-sale marketable securities, denominated in a currency other than the subsidiary's functional currency are translated to the subsidiary's functional currency at period end exchange rates with resulting gains and losses recognized in the condensed consolidated statements of loss. Available-for-sale marketable securities denominated in a currency other than the subsidiary's functional currency are translated to the subsidiary's functional currency at period end exchange rates with resulting gains and losses recognized in the condensed consolidated statements of other comprehensive loss.

Reclassifications and Immaterial Corrections of Prior Period Amounts. The accompanying condensed consolidated financial statements for prior periods contain certain reclassifications to conform to the presentation used in 2016. Additionally, the Company has identified certain immaterial errors related to prior reporting periods. The Company has assessed the impact of the errors on its prior period financial statements included in our December 31, 2015 Annual Report on Form 10-K and concluded that the errors were not material to those financial statements. Although the effect of the errors was not material to any previously issued financial statements, the cumulative effect of correcting the errors would have been material for the period ended September 30, 2016. Consequently, the Company has presented the effects of these errors and reclassifications on its prior period financial statements in the tables below.  In future filings the financial statements for comparative periods affected by these errors and reclassifications will be revised.
 
The impact of the above errors and reclassifications on previously presented line items for each comparative period presented is as follows: 
 
 
Three Months Ended September 30, 2015
 
 
 
 
Correction of Immaterial Errors
 
 
Consolidated Statement of Loss:
 
As filed
 
(a)
 
(b)
 
(d)
 
(i)
 
As revised
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales and services
 
$
47,320

 
$

 
$

 
$
(1,200
)
 
$
1,193

 
$
47,313

Total revenue
 
47,320

 

 

 
(1,200
)
 
1,193

 
47,313

Operating income (loss)
 
(14,479
)
 

 

 
(1,200
)
 
1,193

 
(14,486
)
Income (loss) before income taxes
 
(20,766
)
 

 

 
(1,200
)
 
1,193

 
(20,773
)
Income tax provision
 
8,919

 
(863
)
 
(751
)
 
(420
)
 
417

 
7,302

Net loss
 
(29,685
)
 
863

 
751

 
(780
)
 
776

 
(28,075
)
Net loss per share - basic
 
$
(0.73
)
 
$
0.02

 
$
0.02

 
$
(0.02
)
 
$
0.02

 
$
(0.69
)
Net loss per share - diluted
 
$
(0.73
)
 
$
0.02

 
$
0.02

 
$
(0.02
)
 
$
0.02

 
$
(0.69
)
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
Correction of Immaterial Errors
 
 
Consolidated Statement of Loss:
 
As filed
 
(a)
 
(b)
 
(c)
 
(d)
 
As revised
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales and services
 
$
129,841

 
$

 
$

 
$
(200
)
 
$
(1,200
)
 
$
128,441

Total revenue
 
129,841

 

 

 
(200
)
 
(1,200
)
 
128,441

Operating income (loss)
 
(5,442
)
 

 

 
(200
)
 
(1,200
)
 
(6,842
)
Income (loss) before income taxes
 
(5,804
)
 

 

 
(200
)
 
(1,200
)
 
(7,204
)
Income tax provision
 
29,634

 
(2,021
)
 
(2,607
)
 
(70
)
 
(420
)
 
24,516

Net loss
 
(35,438
)
 
2,021

 
2,607

 
(130
)
 
(780
)
 
(31,720
)
Net loss per share - basic
 
$
(0.88
)
 
$
0.05

 
$
0.06

 
$

 
$
(0.02
)
 
$
(0.79
)
Net loss per share - diluted
 
$
(0.88
)
 
$
0.05

 
$
0.06

 
$

 
$
(0.02
)
 
$
(0.79
)
 

- 9 -



 
 
December 31, 2015
 
 
 
 
Correction of Immaterial Errors
 
Reclassifications
 
 
Consolidated Balance Sheet:
 
As filed
 
(a)
 
(e)
 
(f)
 
(g)
 
(h)
 
As revised
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 
$
6,978

 
$

 
$

 
$

 
$
509

 
$

 
$
7,487

Inventories
 
4,155

 

 
(489
)
 

 

 

 
3,666

Prepaid expenses and other current assets
 
7,989

 

 

 

 

 
75

 
8,064

Total current assets
 
166,306

 

 
(489
)
 

 
509

 
75

 
166,401

Other
 
158

 

 

 

 

 
9

 
167

Total assets
 
214,977

 

 
(489
)
 

 
509

 
84

 
215,081

Current portion of long-term related party payable
 
28,614

 

 

 
(3,410
)
 

 

 
25,204

Accounts payable
 
10,565

 

 

 

 
(5,517
)
 

 
5,048

Accrued expenses
 
3,598

 

 

 

 
5,710

 

 
9,308

Income taxes
 
323

 
(227
)
 
(171
)
 

 

 
75

 

Total current liabilities
 
48,788

 
(227
)
 
(171
)
 
(3,410
)
 
193

 
75

 
45,248

Long-term related party payable, less current portion
 
94,079

 

 

 
3,410

 

 

 
97,489

Deferred taxes
 
1,351

 
(1,360
)
 

 

 

 
9

 

Other
 
2,210

 

 

 

 
316

 

 
2,526

Total liabilities
 
147,112

 
(1,587
)
 
(171
)
 

 
509

 
84

 
145,947

Accumulated deficit
 
(279,793
)
 
1,587

 
(318
)
 

 

 

 
(278,524
)
Total shareholders' equity
 
67,865

 
1,587

 
(318
)
 

 

 

 
69,134

Total liabilities and shareholders' equity
 
214,977

 

 
(489
)
 

 
509

 
84

 
215,081


(a)
Reflects the cumulative 2015 correction of $1,587 of income tax benefits related to the deductibility of the U.S. Internal Revenue Code Section 483 imputed interest on contingent consideration liabilities which should have been recorded in prior periods ($866, $292, $863 and ($434) in the first, second, third and fourth quarters of 2015, respectively).
(b)
Reflects the correction of $2,607 of income tax benefits from stock-based compensation and certain other items which were originally recorded in the fourth quarter of 2015 but should have been recorded in prior periods ($360 in 2012, $333 in 2013, $(693) in 2014, and $830, $1,026 and $751 in the first, second and third quarters of 2015, respectively). As these items were originally corrected in the fourth quarter of 2015, no adjustment was required to correct the consolidated balance sheet at December 31, 2015.
(c)
Reflects the correction of a $200 overstatement of revenue in the first quarter of 2015 resulting from errors in certain estimates of ending inventory amounts at our wholesalers which were originally corrected in the first quarter of 2015 but should have been recorded in the fourth quarter of 2014. As this item was originally corrected in the first quarter of 2015, no adjustment was required to correct the consolidated balance sheet at December 31, 2015.
(d)
Reflects the correction of a $1,200 understatement in the third quarter of 2015 of the gross to net revenue reserves with respect to the Company’s customer rebate calculations. As this item was originally corrected in the fourth quarter of 2015, no adjustment was required to correct the consolidated balance sheet at December 31, 2015.
(e)
Reflects the correction of a $489 error in the Company’s inventory obsolescence reserve accrual and expense which was originally recorded in the first quarter of 2016 but should have been recorded in the fourth quarter of 2015.
(f)
Reflects the correction of a balance sheet classification error which overstated the current portion of the long-term related party payable by $3,410.
(g)
Reflects revisions to the presentation of certain gross to net revenue reserves which were previously included in accounts payable and are now included in accrued expenses.
(h)
Reflects balance sheet reclassifications required to properly net the accrued income tax and deferred income tax amounts within the balance sheet as a result of the adjustments made in items (a) through (g) above.

- 10 -



(i)
Reflects the correction of a $1,193 understatement in the second quarter of 2015 of the gross to net revenue reserves with respect to estimates for product returns as a result of improper reconciliation to revenue data communicated by service providers. As this item was originally corrected in the third quarter of 2015, no adjustment was required to correct the consolidated balance sheet at December 31, 2015.

In addition to the specific amounts identified within the tables above, the Company also changed the names of the previously-reported “Interest expense – changes in fair value of related party financing related contingent consideration” line on the condensed consolidated statement of income (loss) to “Other expense – changes in fair value of related party payable”, and the previously-reported “Long-term related party contingent consideration payable” line on the condensed consolidated balance sheet to “Long-term related party payable” to better reflect the underlying nature of certain royalty agreements in prior periods.
 
While the balance sheet revisions and reclassifications noted in the tables above impact their corresponding captions within the cash flows provided by (used in) operating activities section of the Company’s consolidated statements of cash flows in each period of 2015, there was no impact to the total net cash provided by (used in) operating activities in any of these periods.
 
Revenue. Revenue includes sales of pharmaceutical products, amortization of licensing fees, and if any, milestone payments for R&D achievements.
 
Product Sales and Services
 
Revenue is generally realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured. The Company records revenue from product sales when title and risk of ownership have been transferred to the customer, which is typically upon delivery to the customer and when the selling price is determinable. As is customary in the pharmaceutical industry, the Company’s gross product sales are subject to a variety of deductions in arriving at reported net product sales. These adjustments include estimates for product returns, chargebacks, payment discounts, rebates, and other sales allowances and are estimated based on analysis of historical data for the product or comparable products, as well as future expectations for such products.
 
For generic products and branded products sold in mature markets where the ultimate net selling price to customer is estimable, the Company recognizes revenues upon shipment to the wholesaler. For new product launches the Company recognizes revenue once sufficient data is available to determine product acceptance in the marketplace such that product returns may be estimated based on historical data and there is evidence of reorders and consideration is made of wholesaler inventory levels. As part of the third quarter 2016 launch of Akovaz, the Company determined that sufficient data was available to determine the ultimate net selling price to the customer and therefore recognized revenue upon shipment to its wholesaler customers.
 
Prior to the second quarter 2016, the Company did not have sufficient historical data to estimate certain revenue deductions. As such, it could not accurately estimate the ultimate net selling price of its Éclat portfolio of products and as a result delayed revenue recognition until the wholesaler sold the product through to its customers. 

During the second quarter of 2016, the Company determined that it has sufficient evidence, history, data and internal controls to estimate the ultimate selling price of its products upon shipment from its warehouse to its customers, the wholesalers.  Accordingly, it discontinued the sell through revenue approach and now recognizes revenue once the product is shipped from its warehouse. As a result of this change in accounting estimate, the Company recognized $5,981 in additional revenue, or $0.05 in additional diluted net earnings (loss) per share, for the nine months ended September 30, 2016 that previously would have been deferred until sold by the wholesalers to the hospitals. 
 
License and Research Revenue
 
The Company’s license and research revenues consist of fees and milestone payments. Non-refundable fees where we have continuing performance obligations are deferred and are recognized ratably over our projected performance period. We recognize milestone payments, which are typically related to regulatory, commercial or other achievements by us or our licensees and distributors, as revenues when the milestone is accomplished and collection is reasonably assured. As of September 30, 2016, the Company has not recognized any revenue from milestone payments.

- 11 -



NOTE 2 : Newly Issued Accounting Pronouncements
 
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows under Topic 230. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers” which supersedes the most current revenue recognition requirements. This ASU requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. Through May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients,” which provide supplemental adoption guidance and clarification to ASU 2014-09, respectively. These ASUs will be effective for annual and interim periods beginning after December 15, 2017 with early adoption for annual and interim periods beginning after December 15, 2016 permitted and should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company is currently evaluating this pronouncement to determine the impact of its adoption on its condensed consolidated financial statements.
 
In March 2016, the FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting” which amends Accounting Standards Codification (“ASC”) Topic 718 “Compensation – Stock Compensation”. This update simplifies several aspects of accounting for share-based payment awards to employees, including the accounting for income taxes, classification of awards as either equity or liabilities and classification in the statement of cash flows. The standard is effective for annual reporting periods beginning after December 15, 2016. The Company does not believe this standard will materially impact its condensed consolidated financial statements.
 
In February 2016, the FASB issued ASU 2016-02 “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect of this update on its condensed consolidated financial statements.
 
In September 2015, the FASB issued ASU 2015-16 “Business Combinations” which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016, with the option to early adopt for financial statements that have not been issued. The Company early adopted the provisions of ASU 2015-16 for the year ended December 31, 2015 on a prospective basis.
 
In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory" which requires an entity to measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. The new standard is to be applied prospectively and early adoption is permitted. The Company does not expect ASU 2015-11 to have a material impact on its condensed consolidated financial statements.
NOTE 3 : Marketable Securities
 
The Company has investments in available-for-sale marketable equity securities which are recorded at fair market value and measured using quoted prices in their respective active market, thus representing a level 1 fair value measurement as defined in ASC 820. Unrealized gains and losses are recorded as other comprehensive income (loss) in shareholders’ equity, net of income tax effects.
 

- 12 -



The value at cost, gross unrealized holding gains or losses, and fair value of the Company’s available-for-sale marketable securities are summarized below as of: 
 
 
September 30, 2016
 
December 31, 2015
Marketable Securities:
 
 
 
 
 
 
 
Value at cost
 
$
131,147

 
$
81,395

Gross unrealized holding gains
 
805

 
15

Gross unrealized holding losses
 
(1,065
)
 
(1,672
)
Fair value
 
$
130,887

 
$
79,738

NOTE 4 : Inventories
 
The principal categories of inventories at September 30, 2016 and December 31, 2015 are as follows:   
 
 
September 30, 2016
 
December 31, 2015
Inventory:
 
 
 
 
 
 
 
Finished goods
 
$
2,410

 
$
2,545

Raw materials
 
1,499

 
1,121

Total  
 
$
3,909

 
$
3,666

NOTE 5 : Acquisitions
 
On February 5, 2016, the Company completed its acquisition of FSC, previously a Charlotte, North Carolina-based specialty pharmaceutical company dedicated to providing innovative solutions to unmet medical needs for pediatric patients, from Deerfield CSF, LLC, a Deerfield Management company (“Deerfield”), a related party.
 
This acquisition has been accounted for using the acquisition method of accounting and, accordingly, its results are included in the Company's condensed consolidated financial statements from the date of acquisition. Total consideration to acquire FSC is estimated to be $22,228, and was funded with a combination of the following, partially offset by $467 as a result of a net working capital settlement from the seller:
 
$15,000 long-term liability to Deerfield. Under the terms of the acquisition agreement, the Company will pay $1,050 annually for five years with a final payment in January 2021 of $15,000.
$7,695 contingent consideration to Deerfield. Under the terms of the acquisition agreement, the Company shall pay quarterly a 15% royalty on the net sales of certain FSC products, up to $12,500 for a period not exceeding ten years.
The present value of these items is reported in related party payable within the Company’s condensed consolidated balance sheet, and is further disclosed at Note 7 – Long-Term Related Party Payable.
 

- 13 -



The Company determined a preliminary purchase price allocation as noted in the following table. This preliminary allocation could change as the Company completes its final accounting for the acquisition, which may include adjustments to the items noted below. The preliminary fair values assigned to the acquired assets and liabilities have been recognized as follows: 
 
 
2016
Assigned Fair Value:
 
Preliminary
 
 
 
Accounts receivable    
 
$
825

Inventories    
 
2,315

Prepaid expenses and other current assets    
 
1,712

Goodwill    
 
643

Intangible assets:    
 
 

Acquired product marketing rights    
 
16,200

Acquired developed technology    
 
4,400

Other assets    
 
277

Accounts payable and other current liabilities    
 
(4,144
)
Total      
 
$
22,228

 
Goodwill resulting from the acquisition is largely attributable to the existing workforce of FSC, and is not expected to be deductible for tax purposes. Transaction expenses were not material for the three and nine month periods ended September 30, 2016. The useful lives on FSC acquired intangible assets range from seven to ten years.
 
After its acquisition on February 5, 2016, FSC contributed $389 and $3,026 to the Company's net sales for the three and nine month periods ended September 30, 2016, respectively. FSC incurred a loss of $4,508 and $8,997 for the three and nine month periods ended September 30, 2016, respectively.
 
Had the FSC acquisition been completed as of the beginning of 2015, the Company's unaudited pro forma net sales and net loss for the nine months ended September 30, 2016 and 2015 would have been as follows: 
 
 
Nine Months Ended
Pro Forma Net Revenue and Losses
 
September 30, 2016
 
September 30, 2015
 
 
 
 
 
Net revenues
 
$
107,636

 
$
132,318

Net loss
 
(47,024
)
 
(40,724
)
NOTE 6 : Goodwill and Intangible Assets
 
The Company's amortizable and unamortizable intangible assets at September 30, 2016 and December 31, 2015 are as follows: 
 
September 30, 2016
 
December 31, 2015
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Value
 
Accumulated
Amortization
 
Net Carrying
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Acquired developed technology - Bloxiverz
$
35,248

 
$
(32,311
)
 
$
2,937

 
$
35,248

 
$
(23,498
)
 
$
11,750

Acquired developed technology - Vazculep
12,061

 
(8,597
)
 
3,464

 
12,061

 
(7,986
)
 
4,075

Acquired developed technology - Flexichamber
4,400

 
(293
)
 
4,107

 

 

 

Acquired product marketing rights
16,200

 
(1,200
)
 
15,000

 

 

 

Total amortizable intangible assets
$
67,909

 
$
(42,401
)
 
$
25,508

 
$
47,309

 
$
(31,484
)
 
$
15,825

 
 
 
 
 
 
 
 
 
 
 
 
Unamortizable intangible assets:
 

 
 

 
 

 
 

 
 

 
 

Goodwill
$
19,134

 
$

 
$
19,134

 
$
18,491

 
$

 
$
18,491

Total unamortizable intangible assets
$
19,134


$


$
19,134


$
18,491


$


$
18,491

 

- 14 -



The Company recorded amortization expense related to amortizable intangible assets of $3,702 and $3,141 for the three months ended September 30, 2016 and 2015, respectively. The Company recorded amortization expense related to amortizable intangible assets of $10,918 and $9,423 for the nine months ended September 30, 2016 and 2015, respectively. Accumulated amortization in the above tables includes an impairment charge of $7,171 which was recognized during the year ended December 31, 2012 relative to the “Acquired developed technology – Vazculep” intangible asset.
 
Amortizable intangible assets are amortized over their estimated useful lives, which range from three to ten years. Estimated amortization of intangible assets for the next five years is as follows: 
Years ending December 31,
 
Estimated
Amortization
Expense
 
 
 
2016
 
$
14,616

2017
 
3,056

2018
 
3,056

2019
 
3,056

2020
 
3,056

Total
 
$
26,840

 
The change in net goodwill during the nine months ended September 30, 2016 is as follows: 
Goodwill:
 
 

 
 
 
Balance, December 31, 2015
 
$
18,491

Impact of FSC acquisition
 
643

Balance, September 30, 2016
 
$
19,134

NOTE 7 : Long-Term Related Party Payable
 
Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2016 and June 30, 2016:
 
 
 
Activity during the Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Changes in Fair Value of
Related Party Payable
 
 
 
Balance,
June 30, 2016
 
Additions
 
Payments to
Related Parties
 
Operating
Expense
 
Other
Expense
 
Balance,
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration:
 

 
 

 
 

 
 

 
 

 
 

Warrants - Éclat Pharmaceuticals (a)
$
15,462

 
$

 
$

 
$
2,058

 
$

 
$
17,520

Earn-out payments - Éclat Pharmaceuticals (b)
114,614

 

 
(6,719
)
 
19,720

 

 
127,615

Royalty agreement - FSC (c)
6,505

 

 
(261
)
 
(930
)
 

 
5,314

Financing-related:
 

 
 

 
 

 
 

 
 

 
 
Royalty agreement - Deerfield (d)
9,440

 

 
(630
)
 

 
1,237

 
10,047

Royalty agreement - Broadfin (e)
4,500

 

 
(301
)
 

 
590

 
4,789

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

 

 

 

 

 
15,000

Total related party payable
165,521

 
$

 
$
(7,911
)
 
$
20,848

 
$
1,827

 
180,285

Less: Current portion
(29,500
)
 
 

 
 

 
 

 
 

 
(33,359
)
Total long-term related party payable
$
136,021

 
 

 
 

 
 

 
 

 
$
146,926


 

- 15 -



Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2016 and December 31, 2015:
 
 
 
Activity during the Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Changes in Fair Value of
Related Party Payable
 
 
 
Balance,
December 31, 2015
 
Additions
 
Payments to
Related Parties
 
Operating
Expense
 
Other
Expense
 
Balance,
September 30, 2016
Acquisition-related contingent consideration:
 

 
 

 
 

 
 

 
 

 
 

Warrants - Éclat Pharmaceuticals (a)
$
20,617

 
$

 
$

 
$
(3,097
)
 
$

 
$
17,520

Earn-out payments - Éclat Pharmaceuticals (b)
90,468

 

 
(20,934
)
 
58,081

 

 
127,615

Royalty agreement - FSC (c)

 
7,695

 
(386
)
 
(1,995
)
 

 
5,314

Financing-related:
 

 
 

 
 

 
 

 
 

 


Royalty agreement - Deerfield (d)
7,862

 

 
(1,968
)
 

 
4,153

 
10,047

Royalty agreement - Broadfin (e)
3,746

 

 
(939
)
 

 
1,982

 
4,789

Long-term liability - FSC (f)

 
15,000

 

 

 

 
15,000

Total related party payable
122,693

 
$
22,695

 
$
(24,227
)
 
$
52,989

 
$
6,135

 
180,285

Less: Current portion
(25,204
)
 
 

 
 

 
 

 
 

 
(33,359
)
Total long-term related party payable
$
97,489

 
 

 
 

 
 

 
 

 
$
146,926

 
(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 Flamel. One warrant is exercisable for 2,200 shares at an exercise price of $7.44 per share, and the other warrant is exercisable for 1,100 shares at an exercise price of $11.00 per share.
The fair value of the warrants is estimated on a quarterly basis using a Black-Scholes option pricing model with the following assumptions as of September 30: 
 Assumptions for the Warrant Valuation
 
September 30, 2016
 
September 30, 2015
 
 
 
 
 
Stock price
 
$
12.40

 
$
16.31

Weighted average exercise price per share
 
8.63

 
8.63

Expected term (years)
 
1.5

 
2.5

Expected volatility
 
58.40
%
 
64.87
%
Risk-free interest rate
 
0.68
%
 
0.78
%
Expected dividend yield
 

 

 
These Black-Scholes fair value measurements are based on significant inputs not observable in the market and thus represent a level 3 measurement as defined in ASC 820. The fair value of the warrant consideration is most sensitive to movement in the Company’s share price and expected volatility at the balance sheet date.
 
Expected term: The expected term represents the remaining life of the warrants at the balance sheet date.
 
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.
 
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 September 30, 2016, it was uncertain as to whether the Company would ultimately fulfill its obligation under these warrants using Company shares or cash. Accordingly, pursuant to the guidance of ASC 480, the Company determined that these warrants should be classified as a long-term liability. This classification as a long-term liability was further supported by the Company’s determination, pursuant to the guidance of ASC

- 16 -



815-40-15-7(i), that these warrants could also not be considered as being indexed to the Company’s own stock, on the basis that the exercise price for the warrants is determined in U.S. dollars, although the functional currency of the Company at the closing date of the Éclat acquisition was the Euro. 

(b)
In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by Mr. Michael Anderson, the Company’s CEO, and certain other current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity.
(c)
In February 2016, the Company acquired all of the membership interests of FSC from Deerfield. The consideration for this transaction in part included a commitment to pay quarterly a 15% royalty on the net sales of certain FSC products, up to $12,500 for a period not exceeding ten years.
(d)
As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company shall pay quarterly a 1.75% royalty on the net sales of certain Éclat products until December 31, 2024.
(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.
At September 30, 2016, the fair value of each related party payable listed in (b) through (e) above was estimated using a discounted cash flow model based on probability-adjusted annual net revenues or gross profit, as appropriate, of each of the specified Éclat and FSC products using an appropriate risk-adjusted discount rate ranging from 15% to 32%. 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 contingent consideration payable, resulting primarily from management’s revision of key assumptions, will be recorded in the ‘Changes in fair value of related party contingent consideration’ line within the Company’s condensed consolidated statements of loss.
 
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 loss.

NOTE 8 : Income Taxes
 
The components of income (loss) before income taxes are as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
United States
$
(6,814
)
 
$
(9,581
)
 
$
4,948

 
$
11,192

France
(6,244
)
 
(5,568
)
 
(15,333
)
 
3,545

Ireland
(3,485
)
 
(5,624
)
 
(17,413
)
 
(21,941
)
Total loss before income taxes
$
(16,543
)
 
$
(20,773
)
 
$
(27,798
)
 
$
(7,204
)
 


- 17 -



The items accounting for the difference between the income tax provision computed at the French statutory rate and the Company's effective tax rate are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Statutory tax rate  
33.3
 %

33.3
 %

33.3
 %

33.3
 %
International tax rates differential
(3.6
)%

(4.8
)%

(13.3
)%

(66.0
)%
Valuation allowance on net operating losses
(2.0
)%

10.2
 %

(15.3
)%

24.8
 %
Nondeductible contingent consideration
(38.9
)%

(67.9
)%

(62.0
)%

(367.0
)%
Nondeductible stock-based compensation
(4.8
)%

1.7
 %

(4.4
)%

54.6
 %
Deferred charge from IP transfer
(1.5
)%

(2.7
)%

(2.7
)%

(8.8
)%
State and local income taxes
(1.7
)%

(1.3
)%

(2.7
)%

(7.1
)%
Other
(1.7
)%

(3.7
)%

1.6
 %

(4.1
)%
Effective income tax rate
(20.9
)%

(35.2
)%

(65.5
)%

(340.3
)%
 
 
 
 
 
 
 
 
Income tax benefit - at statutory tax rate
$
(5,509
)
 
$
(6,917
)
 
$
(9,257
)
 
$
(2,399
)
International tax rates differential
591

 
1,006

 
3,706

 
4,754

Valuation allowance on net operating losses
339

 
(2,116
)
 
4,252

 
(1,784
)
Nondeductible contingent consideration
6,436

 
14,109

 
17,236

 
26,438

Nondeductible stock-based compensation
788

 
(357
)
 
1,222

 
(3,936
)
Deferred charge from IP transfer
246

 
568

 
739

 
637

State and local income taxes
280

 
260

 
757

 
515

Other
280

 
749

 
(443
)
 
291

Income tax provision - at effective income tax rate
$
3,451

 
$
7,302

 
$
18,212

 
$
24,516

 
The income tax provision for the three months ended September 30, 2016 and 2015 was $3,451 and $7,302, respectively. The decrease in the income tax provision for the three months ended September 30, 2016 is primarily the result of a decrease in the amount of nondeductible contingent consideration when compared to the same period in 2015. The decrease in the income tax provision for the three months ended September 30, 2016 would have been larger, but release of $3,360 in valuation allowances recorded in the same period in 2015 did not repeat in 2016.
 
The income tax provision for the nine months ended September 30, 2016 and 2015 was $18,212 and $24,516. The decrease in the income tax provision for the nine months ended September 30, 2016 is primarily the result of a decrease in the amount of nondeductible contingent consideration and decreases in the amount of pre-tax income recorded in the United States and France, when compared to the same period in 2015. These benefits were partially offset by an increase of $3,343 in valuation allowances recorded against net operating losses during the nine months ended September 30, 2016.
NOTE 9 : Other Assets and Liabilities
 
Various other assets and liabilities are summarized as follows:
 
 
September 30, 2016
 
December 31, 2015
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
 
 
Valued-added tax recoverable
 
$
305

 
$
1,099

Prepaid expenses
 
4,456

 
2,921

Advance to suppliers and other current assets
 
1,603

 
518

Income tax receivable
 
2,519

 
3,526

Total  
 
$
8,883

 
$
8,064

 

- 18 -



 
 
September 30, 2016
 
December 31, 2015
Other Non-Current Assets:
 
 
 
 
 
 
 
Deferred tax assets
 
$
6,715

 
$

Other
 
105

 
167

Total  
 
$
6,820

 
$
167

 
 
 
September 30, 2016
 
December 31, 2015
Accrued Expenses:
 
 
 
 
 
 
 
Compensation
 
$
2,797

 
$
1,888

Social charges
 
1,556

 
1,710

Customer allowances
 
8,094

 
5,710

Other
 
585

 

Total  
 
$
13,032

 
$
9,308

 
 
 
September 30, 2016
 
December 31, 2015
Other Current Liabilities:
 
 
 
 
 
 
 
Valued-added tax payable
 
$
91

 
$

Other
 
336

 
133

Total  
 
$
427

 
$
133

 
 
 
September 30, 2016
 
December 31, 2015
Other Non-Current Liabilities:
 
 
 
 
 
 
 
Provision for retirement indemnity
 
$
2,324

 
$
2,170

Customer allowances
 
1,556

 

Other
 
427

 
356

Total  
 
$
4,307

 
$
2,526

NOTE 10 : Net Loss Per Share
 
Basic net loss per share is calculated using the weighted average number of shares outstanding during each period. The diluted net loss per share calculation includes the impact of dilutive equity compensation awards and contingent consideration warrants.
 

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A reconciliation of basic and diluted net loss per share, together with the related shares outstanding in thousands is as follows:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Loss Per Share
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Net loss  
 
$
(19,994
)
 
$
(28,075
)
 
$
(46,010
)
 
$
(31,720
)
 
 
 
 
 
 
 
 
 
Weighted average shares:
 
 

 
 

 
 

 
 

Basic shares
 
41,241

 
40,625

 
41,241

 
40,397

Effect of dilutive securities—options and warrants outstanding
 

 

 

 

Diluted shares
 
41,241

 
40,625

 
41,241

 
40,397

 
 
 
 
 
 
 
 
 
Net loss per share - basic
 
$
(0.48
)

$
(0.69
)

$
(1.12
)

$
(0.79
)
Net loss per share - diluted  
 
$
(0.48
)

$
(0.69
)

$
(1.12
)

$
(0.79
)
 
Potential common shares of 6,860 and 6,088 were excluded from the calculation of weighted average shares for the three and nine months ended September 30, 2016 and 2015, respectively, because their effect was considered to be anti-dilutive.
NOTE 11 : Comprehensive Income (Loss)
 
The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 30, 2016 and 2015, net of tax effects: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Accumulated Other Comprehensive Loss
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment:
 
 

 
 

 
 

 
 

Beginning balance
 
$
(19,952
)
 
$
(18,612
)
 
$
(22,312
)
 
$
(7,225
)
Net other comprehensive (loss) income
 
1,567

 
102

 
3,927

 
(11,285
)
Balance at September 30
 
$
(18,385
)
 
$
(18,510
)
 
$
(18,385
)
 
$
(18,510
)
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities, net
 
 

 
 

 
 

 
 

Beginning balance
 
$
1,102

 
$
(198
)
 
$
(345
)
 
$
(198
)
Net other comprehensive (loss) income, net of $152, ($9), ($49), ($9) tax, respectively
 
(2,405
)
 
(365
)
 
(958
)
 
(365
)
Balance at September 30
 
$
(1,303
)
 
$
(563
)
 
$
(1,303
)
 
$
(563
)
Accumulated other comprehensive loss at September 30
 
$
(19,688
)
 
$
(19,073
)
 
$
(19,688
)
 
$
(19,073
)
 
The effect on the Company’s condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive loss was immaterial for all periods presented.

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NOTE 12 : 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, 2016: 
 
 
Nine Months Ended September 30, 2016
Shareholders' Equity
 
 
 
 
Shareholders' equity - January 1  
 
$
69,134

Net loss
 
(46,010
)
Other comprehensive income  
 
2,969

Subscription of warrants
 
199

Stock-based compensation expense  
 
10,541

Shareholders' equity - September 30  
 
$
36,833

 
NOTE 13 : Company Operations by Product
 
The Company has determined that it operates in one segment, the development and commercialization of pharmaceutical products, including controlled-release therapeutic products based on its proprietary polymer based technology. The Company's Chief Operating Decision Maker is the CEO. The CEO and the Board review profit and loss information on a consolidated basis to assess performance and make overall operating decisions as well as resource allocations. All products are included in one segment because the majority of our products have similar economic and other characteristics, including the nature of the products and production processes, type of customers, distribution methods and regulatory environment.
 
The following table presents a summary of total revenues by these products: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Revenues
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Bloxiverz
 
$
15,591

 
$
41,243

 
$
65,958

 
$
114,074

Vazculep
 
9,340

 
5,605

 
29,167

 
12,757

Akovaz
 
5,568

 

 
5,568

 

Other
 
841

 
465

 
4,165

 
1,610

Total product sales and services
 
31,340

 
47,313

 
104,858

 
128,441

License and research revenue
 
747

 

 
2,303

 

Total revenues
 
$
32,087

 
$
47,313

 
$
107,161

 
$
128,441

NOTE 14 : Commitments and Contingencies
 
Litigation
 
The Company is subject to potential liabilities generally incidental to its business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated. At September 30, 2016 and December 31, 2015, there were no contingent liabilities with respect to any threat of litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, cash flows or liquidity.
 

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Material Commitments
 
Other than commitments to Recipharm and for operating leases as disclosed in Note 12 - Contingent Liabilities and Commitments to the Company's consolidated financial statements included in Part II, Item 8 of the Company’s 2015 Annual Report, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt and post-retirement benefit plan obligations which are disclosed in Note 7 - Long-Term Debt and Note 10 – Post-Retirement Benefit Plans, respectively, to the Company's consolidated financial statements included in Part II, Item 8 of the Company’s 2015 Annual Report and long-term contingent consideration payable as disclosed in Note 7 – Long-Term Related Party Payable, to the Company's condensed consolidated financial statements included in Part I, Item 1 of this report.
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
Management's Discussion and Analysis 
(In thousands, except per share data)
(Unaudited)
 
You should read the discussion and analysis of our financial condition and results of operations set forth in this Item 2 together with our condensed consolidated financial statements and the related notes appearing elsewhere in this quarterly report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this quarterly report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties, and reference is made to the “Cautionary Disclosure Regarding Forward-Looking Statements” set forth immediately following the Table of Content of the Company’s 2015 Annual Report on Form 10-K filed with the SEC on March 15, 2016 (the “2015 Annual Report”) for further information on the forward looking statements herein. In addition, you should read the “Risk Factors” section in Part I, Item 1A of the 2015 Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this quarterly report.
Overview
 
We are a specialty pharmaceutical company utilizing core competencies in drug delivery and formulation to develop safer and more efficacious pharmaceutical products to address unmet medical needs and/or reduce overall healthcare costs. Flamel’s business model allows the Company to select, develop, seek approval for, and commercialize niche branded and generic products, initially targeted for the U.S. market. The Company is currently able to self-fund the development of most product development opportunities. Flamel has a business model consisting of:
 
an Unapproved Marketed Drugs (“UMDs”) business with three approved products in the United States: Bloxiverz® (neostigmine methylsulfate injection), Vazculep® (phenylephrine hydrochloride injection) and Akovaz® (ephedrine sulphate injection). On May 2, 2016, the company announced that the U.S. Food and Drug Administration (FDA) had approved the Company’s New Drug Application (NDA) for Akovaz™ (ephedrine sulfate), a drug administered parenterally as a pressor agent to address clinically important hypotension in surgical settings. The NDA, which is the first to receive approval from the FDA for ephedrine sulfate, was approved on April 29, 2016. We began marketing Akovaz in a strength of 50mg/mL in the third quarter of 2016. We are also currently studying a fourth unapproved drug for possible submission for review by the FDA in early 2017. The UMD business was obtained through the acquisition of Éclat on March 13, 2012;
a branded pediatric specialty pharmaceutical business, with three FDA approved products and one FDA approved medical device, acquired through the acquisition of FSC on February 5, 2016; and
a technology business, focusing on the development of products utilizing Flamel’s proprietary drug delivery platforms. The products that are based on Flamel’s proprietary drug delivery platforms target high-value solid and liquid oral and alternative dosage forms using 505(b)(2) and Biosimilar pathways where the Company is able to develop strong intellectual property positions and deliver meaningful patient benefits.
 
Strategy
 
The Company's business strategy is designed to drive overall sales and earnings growth while maintaining a return on invested capital at an appropriate premium above the Company's cost of capital. Our key areas of focus address the most significant opportunities and challenges facing the Company, including:
 

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Unapproved Marketed Drug Development: The Company derives a majority of its sales and cash flow from its UMD products. During the three and nine months ended September 30, 2016 the Company generated $30,499 and $100,693 of sales from the UMD products compared to $46,848 and $126,831 in the same period of 2015, respectively.
The first UMD product, Bloxiverz, which had sales of $15,591 and $65,958 for the three and nine months ended September 30, 2016, respectively, was approved by the FDA on May 31, 2013, and is currently being marketed in the U.S.
 
The second UMD product, Vazculep, which had sales of $9,340 and $29,167 for the three and nine months ended September 30, 2016, respectively, was approved by the FDA on September 27, 2014 and launched in October 2014 in the U.S.
 
The third UMD product, Akovaz, which had sales of $5,568 for the three and nine months ended September 30, 2016, respectively, was approved by the FDA April 29, 2016. The Company began marketing this product in August 2016.

Each of the above products is currently sold in the United States by Flamel’s subsidiary Éclat. These products were derived from the acquisition of Éclat, which has focused on pursuing FDA approvals through the 505(b)(2) regulatory pathway. Through our acquisition of Éclat we obtained marketing and licensing knowledge of the commercial and regulatory process in the U.S. and E.U. We believe this knowledge has enhanced our ability to identify product candidates for development, leverage new opportunities for the application of our drug delivery platforms, and license and market products in the U.S and E.U. The revenues from these UMD products generate cash flow which we use to fund our second strategy, the development and commercialization of our drug delivery products.
 
Development and Commercialization of the Company’s Drug Delivery Pipeline Products: In addition to the UMD strategy, the Company is continuing to advance the commercialization of its innovative drug delivery platforms. We have now enhanced our ability to identify new product candidates and to pursue commercial opportunities associated with our drug delivery platforms. The Company’s drug delivery platforms allow the creation of competitive and differentiated drug product profiles (e.g., with improved pharmacokinetics, efficacy and/or safety). Flamel owns and develops drug delivery platforms that address key formulation challenges, leading to 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) and can be applied to a broad range of drugs (novel, already-marketed, or off-patent). These product development opportunities allow us to protect our products through patent protection and product differentiation. As a result of developing its own drug delivery platforms the Company’s business is now less dependent on the development activities performed by partners, and relies more on the development of its own, self-funded, products. Our proprietary drug delivery platforms include:
Micropump® is a microparticulate system that allows the development and marketing of modified and/or controlled release solid oral dosage formulations of drugs (Micropump®-carvedilol and Micropump®-aspirin formulations have been approved in the U.S. and in the E.U., respectively).
 
LiquiTime® allows development of modified/controlled release oral products in a liquid suspension formulation particularly suited to children or patients having issues swallowing tablets or capsules.
 
Trigger Lock allows development of abuse-deterrent modified/controlled release formulations of narcotic/opioid analgesics and other drugs susceptible to abuse.
 
Medusa allows the development of extended/modified release of injectable dosage formulations of drugs (e.g., peptides, polypeptides, proteins, and small molecules).
 
Several products formulated using our proprietary drug delivery platforms are currently under various stages of development for possible marketing either by the Company and/or by partners via licensing/distribution agreements. In particular, the Company has started a Phase III trial, titled “A Double-blind, Randomized, Placebo Controlled, Two Arm Multi-center Study to Assess the Efficacy and Safety of a Once Nightly Formulation of Sodium Oxybate for Extended-Release Oral Suspension (FT218) for the Treatment of Excessive Daytime Sleepiness and Cataplexy in Subjects with Narcolepsy,” On October 6, 2016 the Company announced that its Irish subsidiary, Flamel Ireland Holdings, has reached agreement with the U.S. Food and Drug Administration (FDA) for the design and planned analysis of the noted Phase III clinical trial of FT218, a once nightly formulation of sodium oxybate utilizing the Company’s proprietary drug delivery platform, Micropump®.  The agreement was reached through the

- 23 -



Special Protocol Assessment (SPA) process. A SPA is an acknowledgment by FDA that the design and planned analysis of the Company’s pivotal clinical trial of FT218 adequately addresses the objectives necessary to support a regulatory submission.
 
The key elements of our pipeline strategy include:
 
Continuing to build commercially successful products utilizing Micropump;
 
Identifying opportunities and optimizing time-to-market for our (not yet approved) drug delivery platforms, i.e., LiquiTime, Trigger Lock and Medusa;
 
Maximizing the technical potential of our existing drug delivery platforms for developing new and proprietary products; and
 
Developing and validating improved and complementary drug delivery platforms related to our current drug delivery capabilities.
 
Inorganic growth through Acquisitions and/or Partnerships: The Company maintains a strong balance sheet with substantial liquidity and no long term debt. As part of its overall enterprise strategy, the Company expects to explore and pursue appropriate inorganic growth opportunities that complement its drug delivery platforms or acquire proprietary products that enhance profitability and cash flow. This was evidenced in early 2016 with the acquisition of FSC, a specialty pharmaceutical company dedicated to providing innovative solutions to unmet medical needs for pediatric patients. Additionally, the Company will leverage the capabilities of its existing and future proprietary products and/or drug delivery platforms with pharmaceutical and biotechnology partnerships or licensing transactions. In 2015, the Company completed a licensing transaction for its LiquiTime technology-based OTC products which was licensed to Elan Pharma International Limited.
Key Business Trends and Highlights