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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, 2020

OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-28508
 
———————
AVADEL PHARMACEUTICALS PLC
(Exact name of registrant as specified in its charter)
———————
 
Ireland000-2850898-1341933
(State or Other Jurisdiction of Incorporation)(Commission File Number)(I.R.S. Employer Identification No.)
 
10 Earlsfort Terrace
Dublin 2, Ireland
D02 T380
(Address of Principal Executive Office and Zip Code)
 
+011-1-485-1200
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report) 
———————
Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
American Depositary Shares* AVDL The Nasdaq Global Market
Ordinary Shares, nominal value $0.01 per share**
N/A
*American Depositary Shares may be evidenced by American Depositary Receipts. Each American Depositary Share represents one (1) Ordinary Share.
 
** Not for trading, but only in connection with the listing of American Depositary Shares on The Nasdaq Global Market.




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
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 5, 2020, 58,272,734 ordinary shares, nominal value $0.01 each, of the Company were outstanding.





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We own various trademark registrations and applications, and unregistered trademarks, including Avadel and MicroPump.  All other trade names, trademarks and service marks of other companies appearing in this Quarterly Report are the property of their respective holders. Solely for convenience, the trademarks and trade names in this Quarterly Report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend to use or display other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

From time to time, we may use our website or our Twitter account (@AvadelPharma) to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available at www.avadelpharmaceuticals.com. Investors are encouraged to review the Investors section of our website because we may post material information on that site that is not otherwise disseminated by us. Information that is contained in and can be accessed through our website or our Twitter posts are not incorporated into, and does not form a part of, this Quarterly Report.

- 2 -


Cautionary Disclosure 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, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but are not always, made through the use of words or phrases such as “may,” “will,” “could,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions, or the negative of these terms, or similar expressions. Accordingly, these statements involve estimates, assumptions, risks and uncertainties which could cause actual results to differ materially from those expressed in them.

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

Our reliance on a single product candidate, FT218, and our ability to obtain regulatory approval of and successfully commercialize FT218, including any delays in submission or approval related to COVID-19;
Any further restructuring actions that may be required and our ability to obtain any required consents (including any consents required pursuant to the Indenture governing our exchange notes due 2023, or the 2023 Notes);
Our ability to continue to service the 2023 Notes, including making the ongoing interest payments on the 2023 Notes, settling exchanges of the 2023 Notes in cash or completing any required repurchases of the 2023 Notes;
The ability of our product candidates, if approved, to gain market acceptance;
Our ability to enter into strategic partnerships for the development, commercialization, manufacturing and distribution of our product candidates;
Our dependence on a limited number of suppliers for the manufacturing of our products and certain raw materials in our products and any failure of such suppliers to deliver sufficient quantities of these raw materials, which could have a material adverse effect on our business;
Our ability to finance our operations on acceptable terms, either through the raising of capital, the incurrence of convertible or other indebtedness or through strategic financing or commercialization partnerships;
Our expectations about the potential market sizes and market participation potential for our approved or proposed products;
The potential impact of COVID-19 on our business and future operating results;
Our ability to retain members of our management team and our employees; and
Competition existing today or that will likely arise in the future.

These forward-looking statements are neither promises nor guarantees of future performance due to a variety of risks and uncertainties and other factors more fully discussed in the “Risk Factors” section in Part I, Item 1A of the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2020 and the risk factors and cautionary statements described in other documents that we file from time to time with the SEC. Given these uncertainties, readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to revise any forward-looking statements to reflect events or developments occurring after the date of this quarterly report, even if new information becomes available in the future.

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PART I – FINANCIAL INFORMATION 
ITEM 1.  FINANCIAL STATEMENTS 
AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Product sales$ $14,229 $22,334 $48,220 
Operating expenses:    
Cost of products 2,823 5,742 9,711 
Research and development expenses5,569 7,539 15,156 25,160 
Selling, general and administrative expenses8,423 5,316 23,431 22,520 
Intangible asset amortization 205 406 610 
Changes in fair value of contingent consideration(69)627 3,327 2,384 
Gain on sale of Hospital Products  (45,760) 
Restructuring (income) costs(226)1,866 (43)4,600 
Total operating expense13,697 18,376 2,259 64,985 
Operating (loss) income(13,697)(4,147)20,075 (16,765)
Investment and other income (expense), net213 781 (906)2,548 
Interest expense(3,259)(3,125)(9,686)(9,293)
Loss on deconsolidation of subsidiary   (2,840)
Other expense - changes in fair value of contingent consideration payable (139)(435)(496)
(Loss) income before income taxes(16,743)(6,630)9,048 (26,846)
Income tax (benefit) provision (5,040)2,234 (9,258)3,641 
Net (loss) income$(11,703)$(8,864)$18,306 $(30,487)
Net (loss) income per share - basic$(0.20)$(0.24)$0.36 $(0.82)
Net (loss) income per share - diluted(0.20)(0.24)0.35 (0.82)
Weighted average number of shares outstanding - basic58,213 37,436 51,206 37,382 
Weighted average number of shares outstanding - diluted58,213 37,436 52,849 37,382 
 
See accompanying notes to unaudited condensed consolidated financial statements.
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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Net (loss) income$(11,703)$(8,864)$18,306 $(30,487)
Other comprehensive (loss) income, net of tax:    
Foreign currency translation gain (loss)534 (210)539 (309)
Net other comprehensive income, net of $(1), $(5), $(131) and $(46) tax, respectively
66 86 349 753 
Total other comprehensive income (loss), net of tax600 (124)888 444 
Total comprehensive (loss) income$(11,103)$(8,988)$19,194 $(30,043)
 
See accompanying notes to unaudited condensed consolidated financial statements.
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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, 2020December 31, 2019
(unaudited)
ASSETS  
Current assets:  
Cash and cash equivalents$83,109 $9,774 
Marketable securities148,467 54,384 
Accounts receivable 8,281 
Inventories 3,570 
Research and development tax credit receivable3,058 2,107 
Prepaid expenses and other current assets47,054 4,264 
Total current assets281,688 82,380 
Property and equipment, net373 544 
Operating lease right-of-use assets2,866 3,612 
Goodwill16,836 18,491 
Intangible assets, net 813 
Research and development tax credit receivable3,608 6,322 
Other non-current assets22,264 39,274 
Total assets$327,635 $151,436 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)  
Current liabilities:  
Current portion of long-term contingent consideration payable$ $5,554 
Current portion of operating lease liability520 645 
Accounts payable2,660 6,100 
Accrued expenses16,398 19,810 
  Other current liabilities3,431 3,875 
Total current liabilities23,009 35,984 
Long-term debt126,520 121,686 
Long-term contingent consideration payable, less current portion 11,773 
Long-term operating lease liability1,968 2,319 
Other non-current liabilities4,938 8,873 
Total liabilities156,435 180,635 
Shareholders’ equity (deficit):  
Preferred shares, nominal value of $0.01 per share; 50,000 shares authorized; 488 issued and outstanding at September 30, 2020 and none issued and outstanding at December 31, 2019, respectively
5  
Ordinary shares, nominal value of $0.01 per share; 500,000 shares authorized; 58,243 issued and outstanding at September 30, 2020 and 42,927 issued and 37,520 outstanding at December 31, 2019
582 429 
Treasury shares, at cost, 0 and 5,407 shares held at September 30, 2020 and December 31, 2019, respectively
 (49,998)
Additional paid-in capital565,440 434,391 
Accumulated deficit(372,909)(391,215)
Accumulated other comprehensive loss(21,918)(22,806)
Total shareholders’ equity (deficit)171,200 (29,199)
Total liabilities and shareholders’ equity (deficit)$327,635 $151,436 
 See accompanying notes to unaudited condensed consolidated financial statements.
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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands) 
(Unaudited)

Nine Months Ended September 30, 2020
 Ordinary sharesPreferred sharesAdditionalAccumulatedAccumulated
other
comprehensive
Treasury sharesTotal
shareholders’
 SharesAmountSharesAmountpaid-in capitaldeficitlossSharesAmount equity (deficit)
Balance, December 31, 201942,927 $429  $ $434,391 $(391,215)$(22,806)5,407 $(49,998)$(29,199)
Net loss— — — — — (865)— — — (865)
Other comprehensive loss— — — — — — (821)— — (821)
Exercise of stock options146 2 — — 1,387 — — — — 1,389 
February 2020 private placement8,680 87 488 5 60,641 — — — — 60,733 
Vesting of restricted shares19 — — — — — — — —  
Employee share purchase plan share issuance40 — — — 88 — — — — 88 
Stock-based compensation expense— — — — 742 — — — — 742 
Balance, March 31, 202051,812 $518 488 $5 $497,249 $(392,080)$(23,627)5,407 $(49,998)$32,067 
Net income— — — — — 30,874 — — — 30,874 
Other comprehensive income— — — — — — 1,109 — — 1,109 
Exercise of stock options95 1 — — 392 — — — — 393 
February 2020 private placement— — — — (94)— — — — (94)
May 2020 public offering11,630 116 — — 116,858 — — — — 116,974 
Employee share purchase plan share issuance— — — — 33 — — — — 33 
Stock-based compensation expense— — — — 769 — — — — 769 
Balance, June 30, 202063,537 $635 488 $5 $615,207 $(361,206)$(22,518)5,407 $(49,998)$182,125 
Net loss— — — — — (11,703)— — — (11,703)
Other comprehensive income— — — — — — 600 — — 600 
Exercise of stock options22 — — — 47 — — — — 47 
February 2020 private placement— — — — (69)— — — — (69)
May 2020 public offering— — — — (50)— — — — (50)
Vesting of restricted shares82 1 — — (1)— — — —  
Employee share purchase plan share issuance9 — — — 56 — — — — 56 
Stock-based compensation expense— — — — 194 — — — — 194 
Retirement of treasury shares(5,407)(54)— — (49,944)— — (5,407)49,998 — 
Balance, September 30, 202058,243 $582 488 $5 $565,440 $(372,909)$(21,918) $ $171,200 


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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
(In thousands) 
(Unaudited)

Nine Months Ended September 30, 2019

 Ordinary sharesAdditionalAccumulatedAccumulated
other
comprehensive
Treasury sharesTotal
shareholders’
 SharesAmountpaid-in capitaldeficit(loss) incomeSharesAmount(deficit) equity
Balance, December 31, 201842,720 $427 $433,756 $(357,989)$(23,416)5,407 $(49,998)$2,780 
Net loss— — — (13,018)— — — (13,018)
Other comprehensive income— — — — 213 — — 213 
Vesting of restricted shares1 — — — — — —  
Employee share purchase plan share issuance42 — 92 — — — — 92 
Stock-based compensation expense— — 351 — — — — 351 
Balance, March 31, 201942,763 $427 $434,199 $(371,007)$(23,203)5,407 $(49,998)$(9,582)
Net loss— — — (8,605)— — — (8,605)
Other comprehensive income— — — — 355 — — 355 
Stock-based compensation expense— — 55 — — — — 55 
Balance, June 30, 201942,763 $427 $434,254 $(379,612)$(22,848)5,407 $(49,998)$(17,777)
Net loss— — — (8,864)— — — (8,864)
Other comprehensive loss— — — — (124)— — (124)
Stock-based compensation expense— — (229)— — — — (229)
Vesting of restricted shares82 1 (1)— — — — — 
Employee share purchase plan share issuance12 — 31 — — — — 31 
Balance, September 30, 201942,857 $428 $434,055 $(388,476)$(22,972)5,407 $(49,998)$(26,963)





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AVADEL PHARMACEUTICALS PLC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
(Unaudited)
Nine Months Ended September 30,
 20202019
Cash flows from operating activities:  
Net income (loss)$18,306 $(30,487)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation and amortization1,297 1,690 
Loss on disposal of property and equipment 478 
Remeasurement of acquisition-related contingent consideration3,327 2,384 
Remeasurement of financing-related contingent consideration435 496 
Amortization of debt discount and debt issuance costs4,835 4,424 
Change in deferred tax and income tax deferred charge(4,582)1,333 
Stock-based compensation expense1,705 177 
Gain on the disposition of the hospital products(45,760) 
Loss on deconsolidation of subsidiary 1,750 
Other adjustments306 (667)
Net changes in assets and liabilities  
Accounts receivable8,281 2,026 
Inventories(1,352)2,465 
Prepaid expenses and other current assets1,759 (1,859)
Research and development tax credit receivable2,036 (749)
Accounts payable & other current liabilities(4,051)259 
Accrued expenses(6,625)(2,379)
Earn-out payments for contingent consideration in excess of acquisition-date fair value(5,323)(8,640)
Royalty payments for contingent consideration payable in excess of original fair value(866)(1,374)
Other assets and liabilities(3,337)(1,399)
Net cash used in operating activities(29,609)(30,072)
Cash flows from investing activities:  
Purchases of property and equipment(33)(29)
Proceeds from the disposal of property and equipment 154 
Proceeds from the disposition of the hospital products17,250  
Proceeds from sales of marketable securities30,075 57,242 
Purchases of marketable securities(124,254)(23,814)
Net cash (used in) provided by investing activities(76,962)33,553 
Cash flows from financing activities:  
Proceeds from the February 2020 private placement60,570  
Proceeds from the May 2020 public offering116,924  
Proceeds from stock option exercises and ESPP2,006 123 
Other financing activities, net (109)
Net cash provided by financing activities179,500 14 
Effect of foreign currency exchange rate changes on cash and cash equivalents406 47 
Net change in cash and cash equivalents73,335 3,542 
Cash and cash equivalents at January 1,9,774 9,325 
Cash and cash equivalents at September 30,$83,109 $12,867 
Supplemental disclosures of cash flow information:
     Interest paid$6,469 $6,469 
     Income taxes (refund) paid, net$(1,788)$140 
See accompanying notes to unaudited 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 (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is an emerging biopharmaceutical company. Our lead product candidate, FT218, is an investigational once-nightly formulation of sodium oxybate for the treatment of excessive daytime sleepiness (“EDS”) and cataplexy in narcolepsy patients. FT218 uses our Micropump controlled release drug-delivery technology.

We are primarily focused on the development and potential United States (“U.S.”) Food and Drug Administration (“FDA”) approval of FT218. Outside of our lead product candidate, we continue to evaluate opportunities to expand our product portfolio.

We were 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, U.S.

FT218 (Micropump sodium oxybate)

FT218 is a once-nightly formulation of sodium oxybate that uses our Micropump controlled release drug-delivery technology for the treatment of EDS and cataplexy in patients suffering from narcolepsy. Sodium oxybate is the sodium salt of gamma hydroxybutyrate, an endogenous compound and metabolite of the neurotransmitter gamma-aminobutyric acid. Sodium oxybate is approved in Europe and the U.S. as a twice-nightly formulation indicated for the treatment of EDS and cataplexy in patients with narcolepsy. In December 2019, we completed patient enrollment of our Phase 3 REST-ON clinical trial of FT218 to assess the safety and efficacy of a once-nightly formulation of FT218 for the treatment of EDS and cataplexy in patients suffering from narcolepsy and on April 27, 2020, we announced topline results from our Phase 3 REST-ON clinical trial of FT218. On July 13, 2020, we announced the dosing of the first patient of our open-label extension/switch study of FT218 as a potential treatment for EDS and cataplexy in patients with narcolepsy.

Previously Approved FDA Products

On June 30, 2020 (“Closing Date”), we announced the sale of our portfolio of sterile injectable drugs used in the hospital setting (the “Hospital Products”), including our three commercial products, Akovaz, Bloxiverz and Vazculep, as well as Nouress, which is approved by the FDA to Exela Sterile Medicines LLC (“Exela Buyer”) (the “Transaction”) pursuant to an asset purchase agreement between Avadel U.S. Holdings Inc., Avadel Legacy Pharmaceuticals, LLC, Exela Holdings, Inc. and the Exela Buyer (“Purchase Agreement”). Pursuant to the Purchase Agreement, Exela Buyer paid us $14,500 on the Closing Date and will pay an additional $27,500 in ten equal monthly installments which began in September 2020 for total aggregate consideration of $42,000. The following four FDA approved products were included in the sale of the hospital products:

Bloxiverz (neostigmine methylsulfate injection) - Bloxiverz was approved by the FDA in May 2013 and was launched in July 2013. Bloxiverz is a drug used intravenously in the operating room to reverse the effects of non-depolarizing neuromuscular blocking agents after surgery. Bloxiverz was the first FDA-approved version of neostigmine methylsulfate. Today, neostigmine is one of the two most frequently used products for the reversal of the effects of other agents used for neuromuscular blocks.

Vazculep (phenylephrine hydrochloride injection) - Vazculep was approved by the FDA in June 2014 and was launched in October 2014. Vazculep is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.

Akovaz (ephedrine sulfate injection) - Akovaz, was approved by the FDA in April 2016 and was launched in August 2016. Akovaz was the first FDA approved formulation of ephedrine sulfate, an alpha- and beta- adrenergic agonist and a norepinephrine-releasing agent that is indicated for the treatment of clinically important hypotension occurring in the setting of anesthesia.

Nouress (cysteine hydrochloride injection) - Nouress was approved by the FDA in December 2019. Nouress is a sterile injectable product for use in the hospital setting, and two issued U.S. patents currently cover that product. Several additional patent applications for Nouress are pending with the U.S. Patent and Trademark Office (“USPTO”).
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Basis of Presentation. The unaudited condensed consolidated balance sheet as of September 30, 2020, which is derived from the prior year 2019 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by U.S. GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on March 16, 2020.
The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries, and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. 
On February 6, 2019, our indirect wholly-owned subsidiary, Avadel Specialty Pharmaceuticals, LLC (“Specialty Pharma”), filed a voluntary petition for reorganization under Chapter 11 of the U.S. Code (the “Bankruptcy Code”). in the U.S. District Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), Case No. 19-10248. Specialty Pharma is operating and managing its business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and order of the Bankruptcy Court. As a result of Specialty Pharma’s voluntary bankruptcy filing on February 6, 2019, we no longer controlled the operations of Specialty Pharma; therefore, we deconsolidated Specialty Pharma effective with the bankruptcy filing and the Company recorded its investment in Specialty Pharma under the cost method. See Note 3: Subsidiary Bankruptcy and Deconsolidation. Our results of operations for the period January 1, 2019 through February 6, 2019 include the results of Specialty Pharma prior to its February 6, 2019 voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Reclassifications

Certain reclassifications are made to prior year amounts whenever necessary to conform with the current year presentation.  In Note 9: Goodwill and Intangible Assets, we presented the December 31, 2019 amortizable intangible assets - Acquired developed technology - Vazculep amount as total accumulated depreciation in this Form 10-Q as compared to showing year-to-date amortization in the Company’s 2019 Annual Report on Form 10-K filed with the SEC on March 16, 2020.

Revenue. Prior to June 30, 2020, we generated revenue primarily from the sale of pharmaceutical products to customers, which we refer to as the Hospital Products. On June 30, 2020, we sold the Hospital Products. See Note 4: Disposition of the Hospital Products.

Product Sales

Prior to June 30, 2020, we sold products primarily through wholesalers and considered these wholesalers to be our customers. Revenue from product sales was recognized when the customer obtained control of our product and our performance obligations were met, which occurred typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales were subject to a variety of price adjustments in arriving at reported net product sales. These adjustments included 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.

For a complete discussion of the accounting for net product revenue, see Note 5: Revenue Recognition.

Accounts Receivable. Prior to the sale of the Hospital Products on June 30, 2020, accounts receivable are stated at amounts invoiced and certain other gross to net variable consideration deductions. An allowance for credit losses is established based on expected losses. Expected losses are estimated by reviewing individual accounts, considering aging, financial condition of the debtor, payment history, current and forecast economic conditions and other relevant factors. A majority of our accounts receivable are due from four significant customers. As of September 30, 2020, we have collected all of the accounts receivable outstanding as of June 30, 2020.

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NOTE 2: Newly Issued Accounting Standards
Recent Accounting Guidance Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. The FASB’s amendments primarily impact ASC 740, Income Taxes, and may impact both interim and annual reporting periods. ASU 2019-12 will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the impact of adopting ASU 2019-12.

NOTE 3: Subsidiary Bankruptcy and Deconsolidation

Bankruptcy Filing and Deconsolidation

As a result of Specialty Pharma’s bankruptcy filing on February 6, 2019, Avadel has ceded authority for managing the business to the Bankruptcy Court, and Avadel management cannot carry on Specialty Pharma’s activities in the ordinary course of business without Bankruptcy Court approval. Avadel manages the day-to-day operations of Specialty Pharma but does not have discretion to make significant capital or operating budgetary changes or decisions and purchase or sell significant assets, as Specialty Pharma’s material decisions are subject to review by the Bankruptcy Court. For these reasons, we concluded that Avadel has lost control of Specialty Pharma, and no longer has significant influence over Specialty Pharma during the pendency of the bankruptcy. Therefore, we deconsolidated Specialty Pharma effective with the filing of the Chapter 11 bankruptcy in February 2019.

In order to deconsolidate Specialty Pharma, the carrying values of the assets and certain liabilities of Specialty Pharma were removed from our unaudited condensed consolidated balance sheet as of February 5, 2019, and we recorded our investment in Specialty Pharma at its estimated fair value of $0. As the estimated fair value of our investment in Specialty Pharma was lower than its net book value immediately prior to the deconsolidation, we recorded a non-cash charge of approximately $2,840 for the nine months ended September 30, 2019 associated with the deconsolidation of Specialty Pharma. Subsequent to the deconsolidation of Specialty Pharma, we are accounting for our investment in Specialty Pharma using the cost method of accounting because Avadel does not exercise significant influence over the operations of Specialty Pharma due to the Chapter 11 filing.

On April 26, 2019, Specialty Pharma sold its intangible assets and remaining inventory to an unaffiliated third party in exchange for aggregate cash proceeds of approximately $250, pursuant to an order approving such sale which was issued by the Bankruptcy Court on April 15, 2019. As a result of such sale, Specialty Pharma has completed its divestment of the assets of the Noctiva business.

On July 2, 2019, Specialty Pharma was made aware of a $50,695 claim made by the Internal Revenue Service (IRS) as part of the bankruptcy claims process against Specialty Pharma. On October 2, 2019 the IRS amended the original claim filed in July, reducing the claim to $9,302. Specialty Pharma files its U.S. federal tax return as a member of the Company’s consolidated U.S. tax group. As such, the IRS claim was filed against Specialty Pharma in the bankruptcy proceedings due to IRS tax law requirements for joint and several liability of all members in a consolidated U.S. tax group. On November 19, 2019, Specialty Pharma and the IRS resolved their dispute, subject to the Bankruptcy Court’s approval of Specialty Pharma's Chapter 11 plan, and without prejudice to the claims, rights and defenses of the IRS and other Avadel entities outside of the bankruptcy case.  The resolution provided for allowance of the IRS claim as a priority claim but for the IRS to receive a distribution of 50% of the proceeds, but in no event less than $125 from Specialty Pharma following confirmation of its disclosure statement and Chapter 11 plan of liquidation.

On July 24, 2020, Specialty Pharma sought bankruptcy court approval of a settlement agreement by and between it, Avadel US Holdings, Inc. and Serenity Pharmaceuticals, LLC (“Serenity”) (the “Serenity Settlement Agreement”).  Before the commencement of Specialty Pharma's bankruptcy case, Serenity asserted claims against Specialty Pharma and Avadel US Holdings collectively in an amount no less than $50,000, and after the commencement of the bankruptcy case, Serenity asserted a $3,096 claim against Specialty Pharma and voted to reject its Chapter 11 plan of liquidation.  The Serenity Settlement Agreement provides for a global resolution of these disputes by way of an $800 payment from Avadel US Holdings to Serenity, a mutual exchange of general releases, and the withdrawal of Serenity's claim and vote in Specialty Pharma's bankruptcy case.  The Serenity Settlement Agreement was approved by order of the Bankruptcy Court on August 12, 2020.
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At a hearing conducted on October 6, 2020, the Bankruptcy Court granted final approval of Specialty Pharma’s disclosure statement and confirmed its Chapter 11 plan of liquidation. Pursuant to the plan, the appointment of a Plan Administrator was also approved. The Plan Administrator will be responsible for making distributions to creditors, managing the final windup and dissolution of Specialty Pharma, and taking other steps in accordance with the plan of liquidation. The plan of liquidation became effective on October 20, 2020.

Debtor in Possession (“DIP”) Financing – Related Party Relationship

In connection with the bankruptcy filing, Specialty Pharma entered into a Debtor in Possession Credit and Security Agreement with Avadel US Holdings (“DIP Credit Agreement”) dated as of February 8, 2019, in an aggregate amount of up to $2,700, of which the funds are to be used by Specialty Pharma solely to fund operations through February 6, 2020. As of September 30, 2020, the Company had funded $407 under the DIP Credit Agreement. As the Company has assessed that it is unlikely that Specialty Pharma will pay back the loan to Avadel, the $407 was recorded as part of the loss on deconsolidation of subsidiary within the unaudited condensed consolidated statements of (loss) income for the nine months ended September 30, 2019.

NOTE 4: Disposition of the Hospital Products

On the Closing Date, we announced the sale of our Hospital Products, to the Exela Buyer pursuant to the Purchase Agreement.

Pursuant to the Purchase Agreement, the Exela Buyer paid $14,500 on the Closing Date and will pay an additional $27,500 in ten equal monthly installments beginning 90 days following the Closing Date for total aggregate consideration of $42,000. During the three months ended September 30, 2020, we collected the first installment payment of $2,750. In connection with the sale of the Hospital Products, the parties also agreed to cause the dismissal of the pending civil litigation related to Nouress in the District Court for the District of Delaware.
 
We were party to a Membership Interest Purchase Agreement, dated March 13, 2012, by and among us, Avadel Legacy, Breaking Stick Holdings, LLC, Deerfield Private Design International II, L.P. (“Deerfield International”), Deerfield Private Design Fund II, L.P. (“Deerfield Fund”) and Horizon Santé FLML, Sarl (“Horizon”) (the “Deerfield MIPA”) and a Royalty Agreement, dated February 4, 2013, by and among us, Avadel Legacy, the Deerfield Fund and Horizon (the “Deerfield Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Deerfield Royalty Agreement for obligations that arise after the Closing date.
 
We were also party to a Royalty Agreement, dated December 3, 2013, by and between us, Avadel Legacy and Broadfin Healthcare Master Fund, Ltd. (the “Broadfin Royalty Agreement”). In connection with the closing of the sale of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy under the Broadfin Royalty Agreement for obligations that arise after the Closing Date.

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We recorded a net gain on the sale of the Hospital Products of $45,760 during the nine months ended September 30, 2020 which has been recorded on the unaudited condensed consolidated statement of income (loss). The $45,760 gain represents the aggregate consideration of $42,000, transaction fees of $2,928, plus the assets and liabilities either transferred to the Exela Buyer or eliminated by us due to the sale of the Hospital Products, which are listed below.

September 30, 2020
Prepaid expenses and other current assets$(134)
Inventories(4,922)
Goodwill(1,654)
Intangible assets, net(407)
Other non-current assets(1,095)
Total long-term contingent consideration payable14,900 
Net liabilities disposed of6,688 
Aggregate consideration42,000 
Less transaction fees(2,928)
Net gain on the sale of the Hospital Products$45,760 

We evaluated various qualitative and quantitative factors related to the disposition of the Hospital Products and determined that it did not meet the criteria for presentation as a discontinued operation.

The unaudited pro forma condensed combined financial statements included below are being provided for information purposes only and are not necessarily indicative of the results of operations or financial position that would have resulted if the Transaction had actually occurred on the date indicated. The pro forma adjustments are based on available information and assumptions that the Company believes are attributable to the sale.

Unaudited Pro Forma Condensed Combined Balance Sheets
As of December 31, 2019
 As ReportedPro Forma AdjustmentsNotesPro Forma
ASSETS
Cash and cash equivalents$9,774 $12,935 (a)$22,709 
Inventories3,570 (3,570)(b) 
Prepaid expenses and other current assets4,264 27,500 (c)31,764 
Goodwill18,491 (1,654)(d)16,837 
Intangible assets, net813 (813)(e) 
Other non-current assets39,274 (9,702)(f)29,572 
Total assets$151,436 $24,696 $176,132 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current portion of long-term contingent consideration payable$5,554 $(5,054)(g)$500 
Accrued expenses19,810 2,800 (h)22,610 
Long-term contingent consideration payable, less current portion11,773 (11,773)(g) 
Total liabilities180,635 (14,027)166,608 
Shareholders’ equity (deficit):
Accumulated deficit(391,215)38,723 (i)(352,492)
Total shareholders’ (deficit) equity(29,199)38,723 9,524 
Total liabilities and shareholders’ equity (deficit)$151,436 $24,696 $176,132 

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Adjustments to the pro forma unaudited condensed combined balance sheet

(a) This adjustment represents the receipt of $14,500 cash consideration from the Exela Buyer at the closing of the Transaction less $1,565 placed into escrow for the estimated earn outs and royalties payable to Breaking Stick Holdings L.L.C., Horizon Santé FLML, Sarl, Deerfield Private Design Fund II, L.P., all affiliates of Deerfield Capital L.P. ("Deerfield") and Broadfin Healthcare Master Fund ("Broadfin") for the current quarter ended.

(b) This adjustment reflects the elimination of Inventories that were purchased as part of the Transaction.

(c) This adjustment reflects the Transaction consideration in the form of ten monthly installment payments of $2,750 (totaling $27,500) beginning 90 days from the Closing date.

(d) This adjustment reflects the elimination of $1,654 of Goodwill based on the relative fair value of the Hospital Products as a portion of the overall value of the Company.

(e) This adjustment reflects the elimination of the unamortized balance of the Intangible asset on acquired developed technology for Vazculep.

(f) This adjustment reflects the elimination of $1,228 of other long-term assets and $8,474 of deferred tax assets at December 31, 2019. The eliminated deferred tax assets are tax attributes of the Hospital Products.

(g) This adjustment reflects the elimination of short and long term related party payables, less the expected amounts due to Deerfield and Broadfin after taking into consideration the escrow discussed in Note (a). As part of the Transaction, the buyer agreed to assume the quarterly earn-out and royalty payments for periods after the close of the Transaction. The Company will no longer be responsible for these payments.

(h) This adjustment reflects the estimated transaction fees payable related to the Transaction.

(i) This adjustment reflects the estimated gain of $38,723 arising from the Transaction for the year ended December 31, 2019. This estimated gain has not been reflected in the pro forma unaudited condensed combined statements of loss as it is considered to be nonrecurring in nature. No adjustment has been made to the sale proceeds to give effect to any potential post-closing adjustments under the terms of the Purchase Agreement.


Unaudited Pro Forma Condensed Combined Statement of Income (Loss)
Nine Months Ended September 30, 2020
 As ReportedPro Forma AdjustmentsNotesPro Forma
Product sales$22,334 $(22,175)(j)$159 
Total operating expense2,259 (8,489)(k)(6,230)
Operating income20,075 (13,686)6,389 
Income (loss) before income taxes$9,048 $(13,251)(l)$(4,203)


Unaudited Pro Forma Condensed Combined Statement of Loss
Nine Months Ended September 30, 2019
 As ReportedPro Forma AdjustmentsNotesPro Forma
Product sales$48,220 $(48,007)(j)$213 
Total operating expense64,985 (14,398)(m)50,587 
Operating loss(16,765)(33,609)(50,374)
Loss before income taxes$(26,846)$(33,113)(n)$(59,959)

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Adjustments to the pro forma unaudited condensed combined statements of income (loss)

(j) This adjustment reflects Product sales attributable to the Hospital Products.

(k) This adjustment reflects the following estimated expenses attributable to the Hospital Products:

Cost of products of $3,540.
Research and Development expenses of $407.
Selling, general and administrative expenses of $809.
Intangible asset amortization on acquired development technology for Vazculep of $406.
Changes in fair value of related party contingent consideration of $3,327. The Company will no longer be responsible for these payments.

(l) This amount reflects the adjustments noted in (j) and (k) above, as well as estimated Changes in fair value of related party payable of $435 attributable to the Hospital Products. The Company will no longer be responsible for these payments.

(m) This adjustment reflects the following estimated expenses attributable to the Hospital Products:

Cost of products of $8,972.
Research and Development expenses of $1,604.
Selling, general and administrative expenses of $