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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, 2023

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: 001-37977
 
———————
AVADEL PHARMACEUTICALS PLC
(Exact name of registrant as specified in its charter)
———————
 
Ireland98-1341933
(State or Other Jurisdiction of Incorporation)(I.R.S. Employer Identification No.)
 
10 Earlsfort Terrace
Dublin 2 D02 T380
Ireland
(Address of Principal Executive Office and Zip Code)
 
+353-1-901-5201
(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 every Interactive Data File required to be submitted 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 ¨
Non-accelerated filerþSmaller reporting companyþ
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 6, 2023, 89,805,653 ordinary shares, nominal value $0.01 each, of the Company were outstanding.





TABLE OF CONTENTS
 
NOTE REGARDING TRADEMARKS

We own various trademark registrations and applications, and unregistered trademarks, including AVADELTM, LUMRYZTM, MICROPUMPTM, LIQUITIMETM, and MEDUSATM. 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, LinkedIn or our Twitter account (@AvadelPharma) to distribute material information. Our financial and other material information is routinely posted to and accessible on the Investors section of our website, available at www.avadel.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, our LinkedIn posts 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, (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 ability to successfully commercialize LUMRYZ (sodium oxybate) in the United States (“U.S.”) for the treatment of cataplexy or excessive daytime sleepiness (“EDS”) in adults with narcolepsy;
Our plans with respect to our commercial infrastructure and marketing, market access and commercial activities;
Our ability to maintain and receive additional regulatory approvals for LUMRYZ in any other jurisdictions outside the U.S., and any related restrictions, limitations, and/or warnings in the label of LUMRYZ;
Our expectations regarding the rate and degree of market acceptance for LUMRYZ;
Our ability to enter into strategic partnerships for the commercialization, manufacturing and distribution of LUMRYZ in the U.S.;
Our reliance on a single product, LUMRYZ;
Our dependence on a limited number of suppliers for the manufacturing of LUMRYZ and certain raw materials used in LUMRYZ and any failure of such suppliers to deliver sufficient quantities of these raw materials, which could have a material adverse effect on our business, including commercialization of LUMRYZ in the U.S.;
Our ability to finance our operations on acceptable terms, either through the raising of capital, the incurrence of convertible or other indebtedness, issuance of equity, royalty-based financings, or through strategic financing or commercialization partnerships;
Our expectations regarding the pricing and reimbursement of, and the extent to which patient financial assistance programs are utilized for, LUMRYZ;
Our expectations about the potential market size and market participation for LUMRYZ;
Our expectations regarding litigation related to LUMRYZ;
Our expectations regarding our cash runway to support the commercialization of LUMRYZ in the U.S.;
The potential impacts of COVID-19, inflation and rising interest rates on our business and future operating results;
Our ability to hire and retain key members of our leadership team and other personnel; and
Competition existing today or that may 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 29, 2023 and the risk factors and cautionary statements described in our subsequent filings 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.
- 3 -


PART I – FINANCIAL INFORMATION 
ITEM 1.      FINANCIAL STATEMENTS 
AVADEL PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(In thousands, except per share data)
(Unaudited)

Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Net product revenue$7,014 $ $8,510 $ 
Cost of products sold117  153  
Gross profit6,897  8,357  
Operating expenses:    
Research and development expenses2,849 2,933 10,902 14,465 
Selling, general and administrative expenses39,158 14,096 110,404 57,535 
Restructuring (income) expense (69) 3,523 
Total operating expense 42,007 16,960 121,306 75,523 
Operating loss(35,110)(16,960)(112,949)(75,523)
Investment and other income, net903 448 1,719 536 
Interest expense(1,978)(3,564)(7,532)(9,087)
Loss on extinguishment of debt  (13,129) 
Loss before income taxes(36,185)(20,076)(131,891)(84,074)
Income tax provision (benefit)89 70 (401)25,940 
Net loss$(36,274)$(20,146)$(131,490)$(110,014)
Net loss per share – basic$(0.41)$(0.33)$(1.71)$(1.85)
Net loss per share – diluted(0.41)(0.33)(1.71)(1.85)
Weighted average number of shares outstanding - basic89,380 60,201 76,931 59,359 
Weighted average number of shares outstanding - diluted89,380 60,201 76,931 59,359 
 
See accompanying notes to unaudited condensed consolidated financial statements.
- 4 -


AVADEL PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Net loss$(36,274)$(20,146)$(131,490)$(110,014)
Other comprehensive (loss) income, net of tax:    
Foreign currency translation loss(303)(647)(120)(1,489)
Net other comprehensive income (loss), net of income tax expense of $0, $0, $0 and $0, respectively
295 (934)511 (2,480)
Total other comprehensive (loss) income, net of tax(8)(1,581)391 (3,969)
Total comprehensive loss$(36,282)$(21,727)$(131,099)$(113,983)
 
See accompanying notes to unaudited condensed consolidated financial statements.
- 5 -


AVADEL PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

September 30, 2023December 31, 2022
(Unaudited)
ASSETS  
Current assets:  
Cash and cash equivalents$51,811 $73,981 
Marketable securities101,368 22,518 
Accounts receivable, net6,239  
Inventories5,286  
Research and development tax credit receivable1,199 2,248 
Prepaid expenses and other current assets6,352 2,096 
Total current assets172,255 100,843 
Property and equipment, net648 839 
Operating lease right-of-use assets2,804 1,713 
Goodwill16,836 16,836 
Research and development tax credit receivable409 1,232 
Other non-current assets10,148 11,322 
Total assets$203,100 $132,785 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)  
Current liabilities:  
Current portion of long-term debt$21,187 $37,668 
Current portion of operating lease liability916 960 
Accounts payable13,263 7,890 
Accrued expenses17,957 7,334 
Other current liabilities731 1,941 
Total current liabilities54,054 55,793 
Long-term debt 91,614 
Long-term operating lease liability1,928 780 
Royalty financing obligation31,151  
Other non-current liabilities5,818 5,743 
Total liabilities92,951 153,930 
Shareholders’ equity (deficit):  
Preferred shares, nominal value of $0.01 per share; 50,000 shares authorized; 5,194 issued and outstanding at September 30, 2023 and 488 issued and outstanding at December 31, 2022
52 5 
Ordinary shares, nominal value of $0.01 per share; 500,000 shares authorized; 89,398 issued and outstanding at September 30, 2023 and 62,878 issued and outstanding at December 31, 2022
893 628 
Additional paid-in capital851,865 589,783 
Accumulated deficit(716,710)(585,220)
Accumulated other comprehensive loss(25,951)(26,341)
Total shareholders’ equity (deficit)110,149 (21,145)
Total liabilities and shareholders’ equity (deficit)$203,100 $132,785 
 See accompanying notes to unaudited condensed consolidated financial statements.
- 6 -


AVADEL PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands)
(Unaudited)
Ordinary sharesPreferred sharesAdditionalAccumulatedAccumulated
other
comprehensive
Total
shareholders’
SharesAmountSharesAmountpaid-in capitaldeficitlossequity (deficit)
Balance, December 31, 2022
62,878 $628 488 $5 $589,783 $(585,220)$(26,341)$(21,145)
Net loss— — — — — (30,784)— (30,784)
Other comprehensive income— — — — — — 315 315 
Issuance of common stock under at-the-market offering program, net of issuance costs1,564 16 — — 11,897 — — 11,913 
Amortization of deferred issuance costs— — — — (16)— — (16)
Vesting of restricted shares22 — — — — — — — 
Employee share purchase plan share issuance14 — — — 29 — — 29 
Share-based compensation expense— — — — 1,522 — — 1,522 
Balance, March 31, 2023
64,478 $644 488 $5 $603,215 $(616,004)$(26,026)$(38,166)
Net loss— — — — — (64,432)— (64,432)
Other comprehensive income— — — — — — 83 83 
April 2023 public offering, net of issuance costs12,205 122 4,706 47 133,982 — — 134,151 
Mandatory Exchange of April 2027 Notes, net of issuance costs12,347 123 — — 102,039 — — 102,162 
Exercise of stock options291 4 — — 1,746 — — 1,750 
Share-based compensation expense— — — — 7,644 — — 7,644 
Balance, June 30, 2023
89,321 $893 5,194 $52 $848,626 $(680,436)$(25,943)$143,192 
Net loss— — — — — (36,274)— (36,274)
Other comprehensive loss— — — — — — (8)(8)
Mandatory Exchange of April 2027 Notes, net of issuance costs— — — — (350)— — (350)
Exercise of stock options44  — — 261 — — 261 
Employee share purchase plan share issuance33 — — — 201 — — 201 
Share-based compensation expense— — — — 3,127 — — 3,127 
Balance, September 30, 2023
89,398 $893 5,194 $52 $851,865 $(716,710)$(25,951)$110,149 







- 7 -


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

Ordinary sharesPreferred sharesAdditional paid-inAccumulatedAccumulated
other
comprehensive
Total
shareholders’
SharesAmountSharesAmountcapitaldeficitlossequity (deficit)
Balance, December 31, 2021
58,620 $586 488 $5 $549,349 $(447,756)$(23,940)$78,244 
Net loss— — — — — (26,424)— (26,424)
Other comprehensive loss— — — — — — (1,102)(1,102)
Exercise of stock options275 3 — — 1,903 — — 1,906 
Vesting of restricted shares119 1 — — (1)— —  
Employee share purchase plan share issuance18 — — — 103 — — 103 
Share-based compensation expense— — — — 2,505 — — 2,505 
Balance, March 31, 2022
59,032 $590 488 $5 $553,859 $(474,180)$(25,042)$55,232 
Net loss— — — — — (63,444)— (63,444)
Other comprehensive loss— — — — — — (1,286)(1,286)
Vesting of restricted shares6 — — — — — — — 
Change in fair value of October 2023 Notes conversion feature— — — — 5,508 — — 5,508 
Share-based compensation expense— — — — 658 — — 658 
Balance, June 30, 2022
59,038 $590 488 $5 $560,025 $(537,624)$(26,328)$(3,332)
Net loss— — — — — (20,146)— (20,146)
Other comprehensive loss— — — — — — (1,581)(1,581)
Exercise of stock options14 — — — 64 — — 64 
Vesting of restricted shares8 — — — — — — — 
Issuance of common stock under at-the-market offering program, net of issuance costs1,768 17 — — 10,515 — — 10,532 
Amortization of deferred issuance costs— — — — (19)— — (19)
Employee share purchase plan share issuance57 1 — — 118 — — 119 
Share-based compensation expense— — — — 1,923 — — 1,923 
Balance, September 30, 2022
60,885 $608 488 $5 $572,626 $(557,770)$(27,909)$(12,440)

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AVADEL PHARMACEUTICALS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
(Unaudited)
Nine Months Ended September 30,
 20232022
Cash flows from operating activities: 
Net loss$(131,490)$(110,014)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation and amortization1,784 907 
Amortization of debt discount and debt issuance costs2,796 4,147 
Changes in deferred taxes 25,916 
Share-based compensation expense12,293 5,086 
Loss on extinguishment of debt13,129  
Other adjustments(349)1,506 
Net changes in assets and liabilities  
Accounts receivable(6,239) 
Inventories(5,286) 
Prepaid expenses and other current assets(4,277)27,948 
Research and development tax credit receivable1,918 27 
Accounts payable & other current liabilities3,837 (11,629)
Accrued expenses10,621 4,277 
Other assets and liabilities781 (3,109)
Net cash used in operating activities(100,482)(54,938)
Cash flows from investing activities:  
Purchases of property and equipment (716)
Proceeds from sales of marketable securities125,498 59,873 
Purchases of marketable securities(203,519)(2,334)
Net cash (used in) provided by investing activities(78,021)56,823 
Cash flows from financing activities:  
Proceeds from April 2023 public offering, net of issuance costs134,149  
Payments for February 2023 Notes(17,500) 
Payments for debt issuance costs(4,357)(4,803)
Proceeds from royalty purchase agreement30,000  
Proceeds from issuance of shares off the at-the-market offering program11,913 10,532 
Proceeds from stock option exercises and employee share purchase plan2,241 2,192 
Net cash provided by financing activities156,446 7,921 
Effect of foreign currency exchange rate changes on cash and cash equivalents(113)201 
Net change in cash and cash equivalents(22,170)10,007 
Cash and cash equivalents at January 1,73,981 50,708 
Cash and cash equivalents at September 30,
$51,811 $60,715 
Supplemental disclosures of cash flow information:
     Interest paid$4,520 $9,660 
     Income taxes refund$ $(32,323)

See accompanying notes to unaudited condensed consolidated financial statements.
- 9 -


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 a biopharmaceutical company. The Company is registered as an Irish public limited company. The Company’s headquarters are in Dublin, Ireland with operations in Dublin, Ireland and St. Louis, Missouri, United States (“U.S.”).

LUMRYZ, formally known as FT218, is an extended-release formulation of sodium oxybate indicated to be taken once at bedtime for the treatment of cataplexy or excessive daytime sleepiness (“EDS”) in adults with narcolepsy. LUMRYZ was approved by the U.S. Food and Drug Administration (“FDA”) on May 1, 2023. The FDA also granted Orphan Drug Exclusivity (“ODE”) to LUMRYZ for a period of seven years until May 1, 2030. In June 2023, the Company commercially launched LUMRYZ in the U.S.

In approving LUMRYZ, the FDA approved a risk evaluation and mitigation strategy (“REMS”) for LUMRYZ to help ensure that the benefits of the drug in the treatment of cataplexy and EDS in narcolepsy outweigh the risks of serious adverse outcomes resulting from inappropriate prescribing, misuse, abuse, and diversion of the drug. Under this REMS, healthcare providers, pharmacies, practitioners, or health care settings that dispense the drug must be specially certified and the drug must be dispensed to patients with documentation of safe use conditions.

As of the date of this Quarterly Report, the Company’s only commercialized product is LUMRYZ. The Company continues to evaluate opportunities to expand its product portfolio.

Liquidity. The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

On March 29, 2023, the Company and Avadel CNS Pharmaceuticals, LLC, an indirect wholly-owned subsidiary of the Company (“Avadel CNS”) entered into a royalty purchase agreement (“RPA”) with RTW Investments, L.P. (“RTW”) that could provide the Company up to $75,000 of royalty financing in two tranches. The first tranche of $30,000 became available upon satisfaction of certain conditions which included the Company’s first shipment of LUMRYZ. The second tranche is available to use, at the Company’s election, if it achieves quarterly net revenue of $25,000 by the quarter ending June 30, 2024. The second tranche expires if the Company does not elect to use it by August 31, 2024. On August 1, 2023, the Company received the first tranche of $30,000.

At March 31, 2023, the Company had outstanding $117,375 aggregate principal amount of its 4.50% exchangeable senior notes due October 2023 (the “October 2023 Notes”). Over the course of April 3 and April 4, 2023, Avadel Finance Cayman Limited, a Cayman Islands exempted company and an indirect wholly-owned subsidiary of the Company (the “Issuer”), completed an exchange of $96,188 of its $117,375 October 2023 Notes for $106,268 of a new series 6.0% exchangeable notes due April 2027 (the “April 2027 Notes”) (the “2023 Exchange Transaction”). The Issuer settled, with a combination of cash and American Depositary Shares (“ADSs”), the remaining $21,187 aggregate principal amount of the October 2023 Notes in October 2023. The aggregate amount of cash and ADSs delivered to holders for the October 2023 Notes and accrued and unpaid interest was $21,641 and 408 ADSs, respectively.

On April 3, 2023, the Company completed the sale of 12,205 ordinary shares, nominal value $0.01 per share (“Ordinary Shares”) in the form of ADSs and 4,706 Series B Non-Voting Convertible Preferred Shares (“Series B Preferred Shares”) in an underwritten public offering. The Company received proceeds, net of underwriter fees and issuance costs of $134,151.

On May 31, 2023 and in accordance with the terms of the Indenture of the April 2027 Notes (the “Indenture”), dated as of April 3, 2023, the Issuer exercised its option to exchange (the “Mandatory Exchange”) $106,268 of aggregate principal amount of the April 2027 Notes, which represents all of the April 2027 Notes outstanding under the Indenture. The Mandatory Exchange consideration per one thousand dollars of principal April 2027 Notes exchanged consisted of 116.1846 of the Company’s ADSs, representing a corresponding number of the Company’s ordinary shares, nominal value $0.01 per share, plus accrued and unpaid interest thereon. The aggregate amount of ADSs and cash in respect of accrued and unpaid interest delivered to holders of Notes in the Mandatory Exchange was 12,347 ADSs and $1,470, respectively. The Mandatory Exchange closed on June 26, 2023.

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At-the-Market Offering Program

On February 5, 2020, the Company entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) with respect to an at-the-market offering program (“ATM Program”) under which the Company may offer and sell its ADSs (such ADSs sold under the ATM Program, “ATM ADSs”) through Jefferies as its sales agent. The Company agreed to pay Jefferies a commission up to 3.0% of the aggregate gross sales proceeds of such ATM ADSs. The initial aggregate offering price of the ATM Program was up to $50,000 of ADSs pursuant to its prospectus, dated February 14, 2020, included with the Company’s Registration Statement on Form S-3 (File No. 333-236258) (the “2020 Prospectus”). In August 2022, the Company filed an additional prospectus, dated September 12, 2022, included with the Company’s new Registration Statement on Form S-3 (File No. 333-267198) (the “2022 Prospectus”), in order to allocate up to $100,000 in additional ADSs to the ATM Program. The 2020 Shelf Registration expired on February 14, 2023.

Pursuant to the Sales Agreement, the Company issued and sold 1,564 ADSs during the nine months ended September 30, 2023, resulting in net proceeds to the Company of approximately $11,913. The Company may offer and sell up to an additional $96,064 of ADSs under the ATM Program that remain available for sale pursuant to the 2022 Prospectus.

Basis of Presentation. The unaudited condensed consolidated balance sheet as of September 30, 2023, which is derived from the prior year 2022 audited consolidated financial statements, and the interim unaudited condensed consolidated financial statements presented herein, have been prepared in accordance with 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 2022 Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 29, 2023.

Reclassifications

Certain reclassifications are made to prior year amounts whenever necessary to conform with the current year presentation. Certain reclassifications have been made to balances within the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and Note 9: Other Assets and Liabilities for the year ended December 31, 2022 to condense line items of the same nature into a single line.

We identified additional significant accounting policies as described below.

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

Product Sales

The Company sells LUMRYZ to specialty pharmacies and considers those specialty pharmacies to be its customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the product, which occurs typically upon receipt by the customer. The Company’s gross product sales are subject to a variety of price adjustments to arrive at reported net product revenue. These adjustments include estimates of payment discounts, specialty pharmacy fees, patient financial assistance programs, rebates and product returns and are estimated based on contractual arrangements, historical trends, expected utilization of such products and other judgments and analysis.
- 11 -




Reserves for Variable Consideration

Revenues from product sales are recorded at the estimated net selling price, which includes reserves for estimated variable consideration to reduce gross product sales to net product revenue resulting from payment discounts, specialty pharmacy fees, patient financial assistance programs, rebates and product returns. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable if the amount is payable to the customer. The reserves are classified as a liability if the amount is payable to a party other than a customer. Where appropriate, these estimated reserves take into consideration relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, historical trends, current and expected patient demand and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates to reduce gross selling price to net selling price. The actual net selling price ultimately may differ from our estimates.

Inventories. Inventories consist of raw materials, work in process and finished products, which are stated at lower of cost or net realizable value, using the first-in, first- out (“FIFO”) method. Raw materials used in the production of pre-clinical and clinical products are expensed as research and development (“R&D”) costs. The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow-moving on a case by case basis.

The Company capitalizes inventory costs associated with products when future commercialization is considered probable and the future economic benefit is expected to be realized, which is typically when regulatory approval is obtained for a drug candidate. As such, the Company began capitalizing costs related to inventory in May 2023 upon FDA approval of LUMRYZ. Manufacturing costs associated with inventory purchased or produced prior to FDA approval were recorded as research and development expense in prior periods. Accordingly, cost of products sold in the near term will likely be lower than in later periods given the sales of pre-approval inventory will carry little to no manufacturing costs given such costs were previously expensed to research and development expense.

The unaudited condensed consolidated financial statements include the accounts of the Company and subsidiaries and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the dates and periods presented. All intercompany accounts and transactions have been eliminated. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period.

NOTE 2: Revenue Recognition

The Company’s source of net product revenue during the three and nine months ended September 30, 2023 consists solely of sales of LUMRYZ.

For the three and nine months ended September 30, 2023, three customers accounted for 100% of sales. The following table presents a summary of the percentage of total sales to customers:
Three and Nine Months Ended September 30,
Sales by Customer:2023
Accredo38 %
Caremark41 %
Optum21 %

The Company had no net product revenue during the three and nine months ended September 30, 2022. 
NOTE 3: Fair Value Measurement

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

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

Income approach, which is based on the present value of a future stream of net cash flows.

Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

As a basis for considering the assumptions used in these techniques, the standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:  

Level 1 - Quoted prices for identical assets or liabilities in active markets.

Level 2 - Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3 - Unobservable inputs that reflect estimates and assumptions.

The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying unaudited condensed consolidated balance sheets:

As of September 30, 2023As of December 31, 2022
Fair Value Measurements:Level 1Level 2Level 3Level 1Level 2Level 3
Marketable securities (see Note 4)
Mutual and money market funds$14,288 $ $ $22,518 $ $ 
Government securities - U.S.87,080      
Total assets$101,368 $ $ $22,518 $ $ 

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. During the periods ended September 30, 2023 and December 31, 2022, respectively, there were no transfers in and out of Level 3. During the three and nine months ended September 30, 2023 and 2022, respectively, the Company did not recognize any allowances for credit losses.

Some of the Company’s financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, are reflected in the balance sheet at carrying value, which approximates fair value due to their short-term nature.

Debt

October 2023 Notes

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The Company estimates the fair value of its $21,187 aggregate principal amount of its October 2023 Notes based on interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities or recent trading prices obtained from brokers (a Level 2 input). The estimated fair value of the October 2023 Notes at September 30, 2023 was $21,187. The remaining $21,187 aggregate principal amount of the October 2023 Notes matured on October 2, 2023 and were fully settled in October 2023. See Note 6: Long-Term Debt for additional information regarding the Company’s debt obligations.

Royalty Financing Obligation

As of September 30, 2023, the carrying value of the royalty financing obligation under the RPA approximated its fair value and was measured using the estimates of forecasted net product revenue based on current contractual and statutory requirements, specific known market events and trends, industry data, historical trends, current and expected patient demand and forecasted customer buying and payment patterns (Level 3 inputs). See Note 7: Royalty Financing Obligation for additional information regarding the Company’s royalty financing obligation.

NOTE 4: Marketable Securities 

The Company has investments in available-for-sale debt securities which are recorded at fair market value. The change in the fair value of available-for-sale debt investments is recorded as accumulated other comprehensive loss in shareholders’ equity (deficit), net of income tax effects. As of September 30, 2023, the Company considered any decreases in fair value on its marketable securities to be driven by factors other than credit risk, including market risk.

The following tables show the Company’s available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of September 30, 2023 and December 31, 2022, respectively:

September 30, 2023
Marketable Securities:Adjusted CostUnrealized GainsUnrealized LossesFair Value
Mutual and money market funds$16,497 $ $(2,209)$14,288 
Government securities - U.S.86,250 830  87,080 
Total$102,747 $830 $(2,209)$101,368 
December 31, 2022
Marketable Securities:Adjusted CostUnrealized GainsUnrealized LossesFair Value
Mutual and money market funds$24,407 $ $(1,889)$22,518 
Total$24,407 $ $(1,889)$22,518 

The Company determines realized gains or losses on the sale of marketable securities on a specific identification method. The Company reflects these gains and losses as a component of investment and other income, net in the accompanying unaudited condensed consolidated statements of loss.

The Company recognized gross realized gains of $268 and $64 for the three months ended September 30, 2023 and 2022, respectively. These realized gains were offset by gross realized losses of $283 and $61 for the three months ended September 30, 2023 and 2022, respectively. We recognized gross realized gains of $269 and $372 for the nine months ended September 30, 2023 and 2022, respectively. These realized gains were offset by gross realized losses of $344 and $1,092 for the nine months ended September 30, 2023 and 2022, respectively.

The following table summarizes the estimated fair value of the Company’s investments in marketable debt securities, accounted for as available-for-sale debt securities and classified by the contractual maturity date of the securities as of September 30, 2023:

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Maturities
Marketable Debt Securities:Less than 1 Year1-5 Years5-10 YearsGreater than 10 YearsTotal
Government securities - U.S.$87,080 $ $ $ $87,080 
Total$87,080 $ $ $ $87,080 

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

The Company does not intend to sell the investments and it is not more likely than not that it will be required to sell the investments before recovery of their amortized cost bases.

NOTE 5: Inventories

The principal categories of inventories at September 30, 2023 were comprised of the following:

Inventory:
September 30, 2023
Raw materials and supplies$2,591 
Work in process299
Finished goods2,396 
Total$5,286 

The Company had no capitalized inventories at December 31, 2022. The Company capitalizes inventory costs associated with products when future commercialization is considered probable and the future economic benefit is expected to be realized, which is typically when regulatory approval is obtained for a drug candidate. As such, the Company began capitalizing costs related to inventory in May 2023 upon FDA approval of LUMRYZ. Manufacturing costs associated with inventory purchased or produced prior to FDA approval were recorded as research and development expense in prior periods.
NOTE 6: Long-Term Debt

Long-term debt is summarized as follows:
Exchangeable Senior Notes:September 30, 2023December 31, 2022
Principal amount of 4.50% exchangeable senior notes due October 2023
$21,187 $117,375 
Principal amount of 4.50% exchangeable senior notes due February 2023
 17,500 
Less: unamortized debt discount and issuance costs, net  (5,593)
Net carrying amount of debt21,187 129,282 
Less: current maturities, net of $0 and $1,019 unamortized debt discount and issuance costs, respectively
(21,187)(37,668)
     Long-term debt$ $91,614 

For the three months ended September 30, 2023 and 2022, the total interest expense for exchangeable senior notes was $574 and $3,564, respectively, with coupon interest expense of $238 and $1,646 for each period, respectively, and the amortization of debt issuance costs and debt discount, totaling $336 and $1,918 for each period, respectively.

For the nine months ended September 30, 2023 and 2022, the total interest expense for exchangeable senior notes was $6,128 and $9,087, respectively, with coupon interest expense of $3,332 and $4,852 for each period, respectively, and the amortization of debt issuance costs and debt discount of $2,796 and $4,147 for each period, respectively.

February 2023 Notes

On February 16, 2018, the Issuer issued $125,000 aggregate principal amount of its 4.50% exchangeable senior notes due February 2023 (the “February 2023 Notes”) in a private placement (the “Offering”) to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the Offering, the Issuer granted the initial purchasers of the February
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2023 Notes a 30-day option to purchase up to an additional $18,750 aggregate principal amount of the February 2023 Notes, which was fully exercised on February 16, 2018. Net proceeds received by the Company, after issuance costs and discounts, were approximately $137,560. The February 2023 Notes were the Company’s senior unsecured obligations and ranked equally in right of payment with all of the Company’s existing and future senior unsecured indebtedness and effectively junior to any of the Company’s existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness.

October 2023 Notes

On April 5, 2022, the Issuer completed the exchange of $117,375 of its February 2023 Notes for a new series of its October 2023 Notes (the “2022 Exchange Transaction”). The remaining $26,375 aggregate principal amount of the February 2023 Notes were not exchanged and maintained a maturity date of February 1, 2023. On November 4, 2022, the Company repurchased $8,875 of its February 2023 Notes and on the maturity date of February 1, 2023, the Company repaid, with cash on hand, the remaining $17,500 aggregate principal amount of its February 2023 Notes.

The Company accounted for the October 2023 Notes as a modification to the February 2023 Notes. The Company paid $4,804 in fees to note holders of the October 2023 Notes that are amortized over the remaining term of the October 2023 Notes. The Company paid approximately $5,450 in fees to third parties that were expensed as part of the completed 2022 Exchange Transaction. Additionally, the fair value of the unseparated, embedded conversion feature increased by $5,508, which reduced the carrying amount of the convertible debt instrument as an unamortized debt discount, with a corresponding increase in additional paid-in capital. The $5,508 is amortized over the remaining term of the October 2023 Notes as a component of interest expense.

The October 2023 Notes were exchangeable at the option of the holders at an initial exchange rate of 92.6956 ADSs per $1 principal amount of October 2023 Notes, which was equivalent to an initial exchange price of approximately $10.79 per ADS. Such an initial exchange price represented a premium of approximately 20% to the $8.99 per ADS closing price on The Nasdaq Global Market on February 13, 2018. Upon the exchange of the October 2023 Notes, the Issuer paid a combination of cash and ADSs at the Issuer’s election.

The Company had the option to redeem for cash all of the October 2023 Notes if the last reported sale price (as defined by the indenture) of the ADSs was at least 130% of the Exchange Price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending on, and including, the trading day immediately preceding the date on which the Company provided notice to redeem the October 2023 Notes.

Over the course of April 3 and April 4, 2023, the Issuer completed an exchange of $96,188 of its $117,375 October 2023 Notes for $106,268 of new April 2027 Notes. The remaining $21,187 aggregate principal amount of the October 2023 Notes matured on October 2, 2023. The Issuer settled, with a combination of cash and ADSs, the remaining $21,187 aggregate principal amount of the October 2023 Notes in October 2023. The aggregate amount of cash and ADSs delivered to holders for the October 2023 Notes and accrued and unpaid interest was $21,641 and 408 ADSs, respectively.

April 2027 Notes

The Company accounted for the exchange of the October 2023 Notes for the April 2027 Notes as an extinguishment of $96,188 of its October 2023 Notes. The Company recorded a loss on the extinguishment of $13,129 as a result of the exchange.

On June 26, 2023 and in accordance with the terms of the Indenture the Company completed the Mandatory Exchange of $106,268 of aggregate principal amount of the April 2027 Notes, which represents all of the April 2027 Notes outstanding under the Indenture. The Mandatory Exchange consideration per one thousand dollars of principal Notes exchanged consisted of 116.1846 of ADSs representing a corresponding number of the Company’s ordinary shares, nominal value $0.01 per share, plus accrued and unpaid interest thereon. The aggregate amount of ADSs and cash in respect of accrued and unpaid interest delivered to holders of Notes in the Mandatory Exchange was 12,347 ADSs and $1,470, respectively.

NOTE 7: Royalty Financing Obligation

On March 29, 2023, the Company and Avadel CNS entered into the RPA with RTW that could provide the Company up to $75,000 of royalty financing in two tranches. The first tranche of $30,000 became available upon satisfaction of certain conditions which included the Company’s first shipment of LUMRYZ. The second tranche is available to use, at the Company’s election, if it achieves quarterly net revenue of $25,000 by the quarter ending June 30, 2024. The second tranche expires if the Company does not elect to use it by August 31, 2024.

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On August 1, 2023, the Company received the first tranche of $30,000. As a result of receiving the first tranche, the Company is required to make quarterly royalty payments calculated as 3.75% of worldwide net product revenue of LUMRYZ, up to a total payback of $75,000.

The RPA is recorded as a royalty financing obligation on the unaudited condensed consolidated balance sheet based on the Company’s evaluation of the terms of the RPA. The accounts receivable and inventory balances of LUMRYZ are pledged as collateral for the RPA. There are no subjective acceleration clauses or provisions, and there are no covenants in violation or other clauses that would cause the full amount of the royalty financing obligation to be callable. As such, the RPA is recorded as a long-term obligation on the unaudited condensed consolidated balance sheet.

The Company imputes interest using the effective interest method and records interest expense based on the unamortized royalty financing obligation. The Company’s estimate of the interest rate under the RPA is based primarily on forecasted net revenue and the calculated amounts and timing of net royalty payments to reach the total payback of $75,000. As of September 30, 2023 the effective interest rate is estimated as 28.1%. The Company will account for changes in the imputed interest rate resulting from changes in forecasted net product revenue using the prospective method.

The following table shows the activity within the royalty financing obligation account for the period ended September 30, 2023.

Royalty Financing Obligation:September 30, 2023
Royalty financing obligation – beginning balance$ 
Receipt of the first tranche of the royalty financing obligation30,000 
Accretion of imputed interest expense on royalty financing obligation1,404 
Royalty financing obligation – ending balance31,404 
Less: royalty payable to RTW classified within accrued expenses253 
Royalty financing obligation, non-current$31,151 

The accretion of imputed interest expense is reflected as interest expense in the unaudited condensed consolidated statements of loss.

NOTE 8: Income Taxes

The income tax provision was $89 for the three months ended September 30, 2023, resulting in an effective tax rate of (0.2)%. The income tax provision was $70 for the three months ended September 30, 2022 resulting in an effective tax rate of (0.3)%.

The income tax benefit was $401 for the nine months ended September 30, 2023, resulting in an effective tax rate of 0.3%. The income tax provision was $25,940 for the nine months ended September 30, 2022 resulting in an effective tax rate of (30.9)%. The change in the effective income tax rate for the nine months ended September 30, 2023, as compared to the prior period in 2022, is primarily driven by the valuation allowances recorded against net deferred tax assets established in the second quarter of 2022.

The Company's cumulative loss position was significant negative evidence in assessing the need for a valuation allowance on its deferred tax assets. Given the weight of objectively verifiable historical losses from operations, the Company recorded a full valuation allowance on its deferred tax assets. The Company will be able to reverse the valuation allowance when it has shown its ability to generate taxable income on a consistent basis in future periods. The valuation allowance does not have an impact on the Company's ability to utilize any net operating losses or other tax attributes to offset cash taxes payable as these items are still eligible to be used.

NOTE 9: Other Assets and Liabilities 

Various other assets and liabilities are summarized as follows:

Prepaid Expenses and Other Current Assets:September 30, 2023December 31, 2022
Prepaid and other expenses$5,504 $1,523 
Other779 504 
Income tax receivable 69 69 
Total  
$6,352 $2,096 

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Other Non-Current Assets:September 30, 2023December 31, 2022
Right of use assets at contract manufacturing organizations, net $9,804 $10,686 
Other344 636 
Total  
$10,148 $11,322 

Accrued Expenses:September 30, 2023December 31, 2022
Accrued professional fees$10,092 $4,040 
Accrued compensation6,068 1,613 
Reserves for variable consideration1,347  
Royalty payable to RTW253  
Accrued outsource contract costs197 1,208 
Accrued restructuring  473 
Total  
$17,957 $7,334 

Other Current Liabilities:September 30, 2023December 31, 2022
Accrued interest$462 $1,649 
Other269 292 
Total  
$731 $1,941 

Other Non-Current Liabilities:September 30, 2023December 31, 2022
Tax liabilities$5,508 $5,246 
Other310 497 
Total  
$5,818 $5,743 

NOTE 10: Net Loss Per Share 

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during each period. Diluted net loss per share is calculated by dividing net loss - diluted by the diluted number of shares outstanding during each period. Except where the result would be anti-dilutive to net loss, diluted net loss per share would be calculated assuming the impact of the conversion of the February 2023 Notes and the October 2023 Notes ( the “2023 Notes”), the conversion of the Company’s preferred shares, the exercise of outstanding equity compensation awards, and ordinary shares expected to be issued under the Company’s Employee Share Purchase Plan (“ESPP”).

The Company has a choice to settle the conversion obligations under the 2023 Notes in cash, shares or any combination of the two. The Company utilizes the if-converted method to reflect the impact of the conversion of the 2023 Notes, unless the result is anti-dilutive. This method assumes the conversion of the 2023 Notes into shares of the Company’s ordinary shares and reflects the elimination of the interest expense related to the 2023 Notes.

The dilutive effect of the stock options, restricted stock units, preferred shares and ordinary shares expected to be issued under the Company’s ESPP has been calculated using the treasury stock method.

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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,
Net Loss Per Share:2023202220232022
Net loss$(36,274)$(20,146)$(131,490)$(110,014)
Weighted average shares: 
Basic shares89,380 60,201 76,931 59,359 
Effect of dilutive securities—employee and director equity awards outstanding, preferred shares and 2023 Notes    
Diluted shares89,380 60,201 76,931 59,359 
Net loss per share - basic$(0.41)$(0.33)$(1.71)$(1.85)
Net loss per share - diluted  
$(0.41)$(0.33)$(1.71)$(1.85)

Potential ordinary shares of 2,509 and 18,722 were excluded from the calculation of weighted average shares for the three months ended September 30, 2023 and 2022, respectively, and potential ordinary shares of 5,336 and 18,925 were excluded from the calculation of weighted average shares for the nine months ended September 30, 2023 and 2022 because their effect was considered to be anti-dilutive. For the three and nine months ended September 30, 2023 and 2022, the effects of dilutive securities were entirely excluded from the calculation of net loss per share as a net loss was reported in these periods. 

NOTE 11: Comprehensive Loss 

The following table shows the components of accumulated other comprehensive loss for the three and nine months ended September 30, 2023 and 2022, respectively, net of tax effects: 

Three Months Ended September 30,Nine Months Ended September 30,
Accumulated Other Comprehensive Loss:2023202220232022
Foreign currency translation adjustment:  
Beginning balance$(24,269)$(24,697)$(24,452)$(23,855)
Net other comprehensive loss(303)(647)(120)(1,489)
Balance at September 30,
$(24,572)$(25,344)$(24,572)$(25,344)
Unrealized loss on marketable debt securities, net  
Beginning balance$(1,674)$(1,631)$(1,890)$(85)
Net other comprehensive income (loss), net of income tax expense of $0, $0, $0 and $0, respectively
295 (934)511 (2,480)
Balance at September 30,$(1,379)$(2,565)$(1,379)$(2,565)
Accumulated other comprehensive loss at September 30,
$(25,951)$(27,909)$(25,951)$(27,909)

The effect on the Company’s unaudited condensed consolidated financial statements of amounts reclassified out of accumulated other comprehensive loss was immaterial for all periods presented.

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NOTE 12: 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, 2023 and December 31, 2022, there were no contingent liabilities with respect to any litigation, arbitration or administrative or other proceeding that are reasonably likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.  

First Jazz Complaint

On May 12, 2021, Jazz Pharmaceuticals, Inc. (“Jazz”) filed a formal complaint (the “First Complaint”) initiating a lawsuit in the United States District Court for the District of Delaware (the “Court”) against Avadel Pharmaceuticals plc, Avadel US Holdings, Inc., Avadel Management Corporation, Avadel Legacy Pharmaceuticals, LLC, Avadel Specialty Pharmaceuticals, LLC, and Avadel CNS Pharmaceuticals, LLC (collectively, the “Avadel Parties”). In the First Complaint, Jazz alleges the sodium oxybate product (“Proposed Product”) described in the NDA owned by Avadel CNS Pharmaceuticals, LLC (“Avadel CNS”) will infringe at least one claim of U.S. Patent No. 8731963, 10758488, 10813885, 10959956 and/or 10966931 (collectively, the “patents-in-suit”). The First Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.

On June 3, 2021, the Avadel Parties timely filed their Answer and Counterclaims (the “Avadel Answer”) with the Court in response to the First Complaint. The Avadel Answer generally denies the allegations set forth in the First Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patents-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of each patent-in-suit, and ii) a declaratory judgment of invalidity of each patent-in-suit.

On June 18, 2021, Jazz filed its Answer (“Jazz Answer”) with the Court in response to the Avadel Answer. The Jazz Answer generally denies the allegations set forth in the Avadel Answer and sets forth a single affirmative defense asserting that Avadel has failed to state a claim for which relief can be granted.

On June 21, 2021, the Court issued an oral order requiring the parties to i) confer regarding proposed dates to be included in the Court’s scheduling order for the case, and ii) submit a proposed order, including a proposal for the length and timing of trial, to the Court by no later than July 21, 2021.

On July 30, 2021, the Court issued a scheduling order establishing timing for litigation events including i) a claim construction hearing date of August 2, 2022, and ii) a trial date of October 30, 2023.

On October 18, 2021, consistent with the scheduling order, Jazz filed a status update with the Court indicating that Jazz did not intend to file a preliminary injunction with the Court at this time. Jazz further indicated that it would provide the Court with an update regarding whether preliminary injunction proceedings may be necessary after receiving further information regarding the FDA’s action on Avadel CNS’s NDA.

On January 4, 2022, the Court entered an agreed order dismissing this case with respect to Avadel Pharmaceuticals plc, Avadel US Holdings, Inc., Avadel Specialty Pharmaceuticals, LLC, Avadel Legacy Pharmaceuticals, LLC, and Avadel Management Corporation. A corresponding order was entered in the two below cases on the same day.

On February 25, 2022, Jazz filed an amended Answer to the Avadel Parties’ Counterclaims (“the Jazz First Amended Answer”). The Jazz First Amended Answer is substantially similar to the Jazz Answer except insofar as it adds an affirmative defense for judicial estoppel and unclean hands. Corresponding amended answers were filed in the two below cases on the same day.

On June 23, 2022, Avadel CNS filed a Renewed Motion for Judgment on the Pleadings, with respect to its counterclaim against Jazz seeking to have U.S. Patent No. 8731963 (the “REMS Patent”) delisted from the Orange Book and seeking to have the motion resolved concurrent with the parties’ Markman hearing on August 31, 2022. On July 7, 2022, Jazz filed a response styled as Objections to Avadel CNS’ Motion for Judgment on the Pleadings. On July 14, 2022, Avadel CNS replied to Jazz’s
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response, and on July 21, 2022, Avadel CNS requested oral argument on its delisting motion simultaneous with the Markman hearing. On August 24, 2022, the Court ordered Jazz to respond substantively to Avadel CNS’ motion, which Jazz did on August 26, 2022. Avadel CNS filed its reply on August 28, 2022.

On August 23, 2022, the Markman hearing was postponed. On September 7, 2022, the case was reassigned to a new judge, and the Markman hearing was held on October 25, 2022. At the Markman hearing, Avadel CNS reiterated its request for an expedited hearing on the Renewed Motion for Judgment on the Pleadings for the delisting of the REMS Patent. On October 28, 2022, the Court granted Avadel CNS’ request and scheduled the hearing for November 15, 2022.

The Court held the Markman hearing on November 15, 2022 and issued a claim construction ruling on November 18, 2022. Also on November 18, 2022 the Court granted Avadel’s Renewed Motion for Judgment on the Pleadings and ordered Jazz to request delisting of the REMS Patent from the Orange Book. On November 22, 2022, Jazz appealed that decision and on December 14, 2022, the Federal Circuit issued a stay of the delisting order until further notice. Oral argument was held February 14, 2023. On February 24, 2023, the United States Court of Appeals for the Federal Court affirmed the previous ruling from the Court, ordering the delisting of the REMS Patent from the Orange Book, which has since occurred. On March 7, 2023, in response to a joint stipulation filed by the parties, the Court issued an order dismissing Jazz’s infringement claims against the Avadel Parties relating to the REMS Patent as well as Avadel Parties’ noninfringement and invalidity counterclaims relating to the REMS Patent.

On March 15, 2023, the parties submitted a Stipulation and Proposed Order Modifying the Case Schedule to accommodate additional claim construction proceedings. That stipulation remains pending before the Court. On April 26, 2023, the parties filed their Supplemental Joint Claim Construction Brief.

On July 3, 2023, the Court issued a modified scheduling order establishing a new trial date of February 26, 2024.

On July 21, 2023, in response to a Court order, the parties submitted a Stipulation and Proposed Order Modifying the Case Schedule with an updated proposed schedule to accommodate additional claim construction proceedings. On August 4, 2023, the Court entered a modified version of the parties’ proposed schedule, which was revised on August 28, 2023. The parties’ Second Supplemental Joint Claim Construction Brief was filed on October 10, 2023, and a Markman hearing regarding the disputed terms occurred on November 1, 2023.

On August 15, 2023, Avadel renewed its request to consolidate this litigation with the litigation described in the Avadel Complaint below.

Second Jazz Complaint

On August 4, 2021, Jazz filed another formal complaint (the “Second Complaint”) initiating a lawsuit in the Court against the Avadel Parties. In the Second Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS will infringe at least one claim of U.S. Patent No. 11077079. The Second Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.

On September 9, 2021, the Avadel Parties timely filed their Answer and Counterclaims (the “Second Avadel Answer”) with the Court in response to the Second Complaint. The Second Avadel Answer generally denies the allegations set forth in the Second Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of the patent-in-suit, and ii) a declaratory judgment of invalidity of the patent-in-suit.

On October 22, 2021, the Court issued an oral order stating that this case should proceed on the same schedule as the case filed on May 12, 2021.

On September 7, 2022, the case was reassigned to a new judge.

Third Jazz Complaint

On November 10, 2021, Jazz filed another formal complaint (the “Third Complaint”) initiating a lawsuit in the Court against the Avadel Parties. In the Third Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS will infringe at least one claim of U.S. Patent No. 11147782. The Third Complaint further includes typical relief requests such
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as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses. This case will proceed on the same schedule as the cases associated with the First and Second Complaints above.

On December 21, 2021, the Court entered a revised schedule for the First, Second and Third Complaints, setting a new claim construction date of August 31, 2022.

On January 7, 2022, Avadel CNS timely filed its Answer and Counterclaims (the “Third Avadel Answer”) with the Court in response to the Third Complaint. The Third Avadel Answer generally denies the allegations set forth in the Third Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims seeking i) a declaratory judgment of non-infringement of the patent-in-suit, and ii) a declaratory judgment of invalidity/unenforceability of the patent-in-suit.

On September 7, 2022, the case was reassigned to a new judge.

Fourth Jazz Complaint

On July 15, 2022, Jazz filed another formal complaint (the “Fourth Complaint”) initiating a lawsuit in the Court against Avadel CNS. In the Fourth Complaint, Jazz alleges the Proposed Product described in the NDA owned by Avadel CNS will infringe at least one claim of the REMS Patent, which was asserted in the First Complaint. The FDA required Avadel CNS to file a Paragraph IV certification against the REMS Patent, which Avadel CNS did under protest, consistent with its Renewed Motion for Judgment on the Pleadings for the delisting of the REMS Patent from the Orange Book, which was later ordered to be delisted in the above First Jazz Complaint action. Avadel CNS provided the required notice of its Paragraph IV certification to Jazz, and Jazz reasserted the REMS Patent in a separate action following receipt of that notice. The Fourth Complaint further includes typical relief requests such as preliminary and permanent injunctive relief, monetary damages and attorneys’ fees, costs and expenses.

On September 7, 2022, the case was reassigned to a new judge.

On September 21, 2022, Jazz served the Fourth Complaint. On October 21, 2022, Avadel CNS timely filed its Answer and Counterclaims (the “Fourth Avadel Answer”) with the Court in response to the Fourth Complaint. The Fourth Avadel Answer generally denies the allegations set forth in the Fourth Complaint, includes numerous affirmative defenses (including, but not limited to, non-infringement and invalidity of the patent-in-suit), and asserts a number of counterclaims for i) a declaratory judgment of non-infringement of the patent-in-suit, ii) a declaratory judgment of invalidity/unenforceability of the patent-in-suit, iii) delisting of the patent-in-suit from the Orange Book; iv) monopolization under the Sherman Antitrust Act of 1890 (the “Sherman Act”); and v) attempted monopolization under the Sherman Act.

On December 9, 2022, Jazz filed a Motion to Dismiss Avadel’s Antitrust Counterclaims. Avadel filed its opposition brief on December 27, 2022, and Jazz filed its reply brief on January 6, 2022. On January 11, 2023, Avadel filed a request for oral argument on the motion, which is still pending.

On March 6, 2023, the parties filed a stipulation of dismissal, dismissing Jazz’s claims with respect to the REMS Patent and Avadel CNS’s related non-infringement and invalidity counterclaims. The Court entered that stipulation on March 7, 2023.

On May 19, 2023, the Court issued a scheduling order establishing timing for litigation events including i) completion of fact discovery by March 14, 2024, and ii) a deadline for case dispositive motions of September 20, 2024.

On June 29, 2023, Jazz filed a Motion to Stay the case, pending resolution of its Motion to Dismiss. Briefing on that Motion to Stay closed on August 10, 2023.

Avadel Complaint

On April 14, 2022, Avadel CNS and Avadel Pharmaceuticals plc (collectively the “Avadel Plaintiffs”) filed a formal complaint (the “Avadel Complaint”) initiating a lawsuit in the Court against Jazz and Jazz Pharmaceuticals Ireland Ltd. (collectively, the “Jazz Parties”). In the Avadel Complaint, the Avadel Plaintiffs allege that the Jazz Parties breached certain confidential disclosure agreements and misappropriated certain of the Avadel Plaintiffs’ trade secrets. The Avadel Complaint further includes typical relief requests such as injunctive relief, monetary damages and attorneys’ fees, costs and expenses, as well as seeking correction of inventorship of certain Jazz patents, for which the Jazz Parties claim ownership, to include former Avadel Plaintiffs’ scientists.

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On June 2, 2022, Jazz answered the Avadel Complaint. The Answer generally denies the allegations set forth in the Avadel Complaint and includes various affirmative defenses.

On July 8, 2022, Jazz filed a Motion for Judgment on the Pleadings seeking to have all Counts dismissed for failure to state a claim upon which relief can be granted. The Avadel Plaintiffs’ response to that Motion was filed with the Court on July 29, 2022. Jazz’s reply was filed with the Court on August 5, 2022. On February 2, 2023, the Court held a hearing on Jazz’s Motion for Judgment on the Pleadings.

On September 7, 2022, the case was reassigned to a new judge.

On February 2, 2023, the Court held a hearing on Jazz’s Motion for Judgment on the Pleadings.

On July 18, 2023, the Court denied Jazz’s Motion for Judgment on the Pleadings.

On August 15, 2023, the parties submitted competing proposed scheduling orders, and Avadel requested consolidation with the above First Jazz Complaint litigation. That request for consolidation was denied on November 3, 2023.

Jazz’s Administrative Procedure Act Complaint

On June 22, 2023, Jazz filed an Administrative Procedure Act suit against the FDA, the U.S. Department of Health and Human Services, the Secretary of Health and Human Services and the Commissioner of Food and Drugs (the “Federal Defendants”) in the United States District Court for the District of Columbia (the “DC Court”) related to the NDA for LUMRYZ. This suit alleges that the FDA’s approval of LUMRYZ was an unlawful agency action and asks the DC Court to set aside FDA’s approval of LUMRYZ. On June 28, 2023, the DC Court granted Avadel CNS’s unopposed motion to intervene in the case to defend the FDA’s decision. On August 14, 2023, the Court entered a scheduling order establishing timing for litigation events including early summary judgment briefing closing December 22, 2023. On September 22, 2023, Jazz filed its Motion for Summary Judgment. On October 20, 2023, FDA and Avadel filed their Cross Motions for Summary Judgment.

Material Commitments

Other than commitments disclosed in Note 11: Contingent Liabilities and Commitments to the Company's consolidated financial statements included in the 2022 Annual Report on Form 10-K, there were no other material commitments outside of the normal course of business.

Guarantees

The fair values of the Company’s guarantee to Deerfield Capital L.P. (“Deerfield”) and the guarantee received by the Company from Armistice Capital Master Fund, Ltd. largely offset and when combined are not material.

Deerfield Guarantee

In connection with the Company’s February 2018 divestiture of its pediatric assets, including four pediatric commercial stage assets – Karbinal™ ER, Cefaclor, Flexichamber™ and AcipHex® Sprinkle™ (“FSC products”), to Cerecor, Inc. (“Cerecor”), the Company guaranteed to Deerfield a quarterly royalty payment of 15% on net sales of the FSC products through February 6, 2026 (“FSC Product Royalties”), in an aggregate amount of up to approximately $10,300. Given the Company’s explicit guarantee to Deerfield, the Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee liability was $570 at September 30, 2023. This liability is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield.

Armistice Guarantee

In connection with the Company’s February 2018 divestiture of the pediatric assets, Armistice Capital Master Fund, Ltd., the majority shareholder of Cerecor, guaranteed to the Company the FSC Product Royalties. The Company recorded the guarantee in accordance with ASC 460. The balance of this guarantee asset was $564 at September 30, 2023. This asset is being amortized proportionately based on undiscounted cash outflows through the remainder of the contract with Deerfield noted above.

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NOTE 13: Subsequent Events

The Issuer settled, with a combination of cash and ADSs, the remaining $21,187 aggregate principal amount of the October 2023 Notes in October 2023. The aggregate amount of cash and ADSs delivered to holders for the October 2023 Notes and accrued and unpaid interest was $21,641 and 408 ADSs, respectively.






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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 unaudited 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 Note Regarding Forward-Looking Statements” set forth immediately following the Table of Contents of this Quarterly Report on Form 10-Q for further information on the forward looking statements herein. In addition, you should read the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2023 and Part II, Item 1A in this Quarterly Report on Form 10-Q for a discussion of additional 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 

General Overview

Avadel Pharmaceuticals plc (Nasdaq: AVDL) (“Avadel,” the “Company,” “we,” “our,” or “us”) is a biopharmaceutical company. LUMRYZ, formerly known as FT218, is an extended-release formulation of sodium oxybate indicated to be taken once at bedtime for the treatment of cataplexy or excessive daytime sleepiness (“EDS”) in adults with narcolepsy.

As of the date of this Quarterly Report, LUMRYZ is the only commercialized product in our portfolio. We continue to evaluate opportunities to expand our product portfolio.

LUMRYZ

LUMRYZ was approved by the United States (“U.S.”) Food and Drug Administration (“FDA”) in May 2023 for the treatment of cataplexy or EDS in adults with narcolepsy. In approving LUMRYZ, the FDA approved a risk evaluation and mitigation strategy (“REMS”) for LUMRYZ to help ensure that the benefits of the drug in the treatment of cataplexy and EDS in narcolepsy outweigh the risks of serious adverse outcomes resulting from inappropriate prescribing, misuse, abuse, and diversion of the drug. Under this REMS, healthcare providers must be specially certified, pharmacies, practitioners, or health care settings that dispense the drug must be specially certified and the drug must be dispensed to patients with documentation of safe use conditions. Additionally, with its approval, the FDA also granted seven years of orphan drug exclusivity to LUMRYZ for the treatment of cataplexy or EDS in adults with narcolepsy due to a finding of clinical superiority of LUMRYZ relative to currently marketed oxybate treatments. In particular, FDA found that LUMRYZ makes a major contribution to patient care over currently marketed, twice-nightly oxybate treatments by providing a once-nightly dosing regimen that avoids nocturnal arousal to take a second dose. The orphan exclusivity will continue until May 1, 2030. In June 2023 we announced the U.S. commercial launch of LUMRYZ for the treatment of cataplexy or EDS in adults living with narcolepsy.

Fifteen LUMRYZ-related U.S. patents have been issued having expiration dates spanning from mid-2037 to early-2042, and there are additional patent applications currently in development and/or pending at the U.S. Patent and Trademark Office (“USPTO”), as well as foreign patent offices.

With respect to clinical data generated for LUMRYZ, we conducted a Phase 3 clinical trial of LUMRYZ (the “REST-ON trial”), which was a randomized, double-blind, placebo-controlled study that enrolled 212 patients who received at least one dose of LUMRYZ or placebo, and was conducted in clinical sites in the U.S., Canada, Western Europe and Australia. The last patient’s last visit was completed at the end of the first quarter of 2020, and positive top line data from the REST-ON trial was announced on April 27, 2020.

Additionally, our open-label extension (“OLE”)/switch study of LUMRYZ as a potential treatment for cataplexy or EDS in patients with narcolepsy (“RESTORE”) is examining the long-term safety and maintenance of efficacy of LUMRYZ in patients with narcolepsy who participated in the REST-ON study, as well as dosing and preference data for patients switching from twice-nightly sodium oxybate to once-at-bedtime LUMRYZ, regardless of whether they participated in REST-ON. In May
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2021, inclusion criteria were expanded to allow for oxybate naïve patients to enter the study. An interim safety analysis from the ongoing RESTORE study showed that LUMRYZ has generally been well-tolerated, with some patients receiving therapy for more than 18 months. In addition, interim data from RESTORE were presented demonstrating that a high proportion of patients switching from twice-nightly sodium oxybate formulations had difficulty in taking the second dose, with a high proportion (92.5%) stating a preference for the once-at-bedtime dosing regimen and that most participants switching from twice-nightly sodium oxybate formulations had a stable dose equal to their starting dose. Subsequent interim data showed a preference (94.0%) for the once-nightly dosing regimen.

A discrete choice experiment (“DCE”) showed that once-at-bedtime dosing, when compared to twice-nightly dosing, was the most important attribute driving both patient and clinician preference for overall oxybate product choice, as well as patient quality of life and reduction of patient anxiety/stress; dosing frequency (twice-nightly versus once-at-bedtime) was also viewed as a more important attribute as compared to other attributes assessed, including sodium content. Accompanying the DCE was a background survey for both patients and clinicians, which showed that dosing frequency was noted as a significant stressor by both patients and clinicians.

Additional peer-reviewed publications have included data on improvement on DNS, the first DCE and a Plain Language Summary reviewing sodium oxybate and cardiovascular health, which did not identify a signal of cardiovascular disease in the twenty years that sodium oxybate has been available. At the annual SLEEP Congress in June 2022, nine posters were presented, including five post-hoc analyses from REST-ON which support the following:

A low number-needed-to-treat to achieve effectiveness across all three evaluated doses, as well as effect sizes, showing a moderate-to-high effect for improving maintenance of wakefulness test, the Epworth Sleepiness Scare (“ESS”), and number of cataplexy attacks;

Confirmation via various statistical methods to handle missing data that LUMRYZ improved cataplexy and EDS symptoms versus placebo;

Confirmation of benefit for NT1 and NT2 for disturbed nocturnal sleep (“DNS”) and ESS;

Confirmation of benefit for subgroups taking stimulants and those without stimulants for DNS and ESS; and

Early efficacy (Week 1 and Week 2) for ESS, refreshing nature of sleep and quality of sleep.

At the 2023 SLEEP meeting, additional LUMRYZ data, including post-hoc analyses from the pivotal trial, interim data from the open-label study and real-world evidence regarding sodium oxybate utilization and co-morbidities was presented.

A second DCE among clinicians was published in May 2023, showing the dosing regimen was the most important driver of choice, with once-nightly preferred. Post-hoc analyses of NT1 and NT2 were also published, demonstrating consistent improvements regardless of narcolepsy type.

We believe LUMRYZ has the potential to demonstrate improved dosing compliance, safety and patient satisfaction over the other standards of care for cataplexy or EDS in patients with narcolepsy.

Key Business Trends and Highlights 

In operating our business and monitoring our performance, we consider a number of performance measures, as well as trends affecting our industry as a whole, which include the following: 

Healthcare and Regulatory Reform: Various health care reform laws in the U.S. may impact our ability to successfully commercialize our products and technologies. The success of our commercialization efforts may depend on the extent to which the government health administration authorities, the health insurance funds in the E.U. Member States, private health insurers and other third-party payers in the U.S. will reimburse consumers for the cost of healthcare products and services.

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Competition and Technological Change: Competition in the pharmaceutical and biotechnology industry continues to be intense and is expected to increase. We compete with academic laboratories, research institutions, universities, joint ventures, and other pharmaceutical and biotechnology companies, including other companies developing niche branded or generic specialty pharmaceutical products or drug delivery platforms. Furthermore, major technological changes can happen quickly in the pharmaceutical and biotechnology industries. Such rapid technological change, or the development by our competitors of technologically improved or differentiated products, could render our products, product candidates, or drug delivery platforms obsolete or noncompetitive.

Pricing Environment for Pharmaceuticals: The pricing environment continues to be in the political spotlight in the U.S. As a result, the need to obtain and maintain appropriate pricing for pharmaceutical products may become more challenging due to, among other things, the attention being paid to healthcare cost containment and other austerity measures in the U.S. and worldwide.

Generics Playing a Larger Role in Healthcare: Generic pharmaceutical products will continue to play a large role in the U.S. healthcare system. LUMRYZ may face competition from manufacturers of generic twice-nightly sodium oxybate formulations. In January 2023, Hikma Pharmaceuticals plc, announced that it launched an authorized generic version of Jazz Pharmaceuticals plc’s (“Jazz”) Xyrem (sodium oxybate). In July 2023, Amneal Pharmaceuticals, Inc. announced that it launched an authorized generic version of Jazz’s Xyrem (sodium oxybate).

Access to and Cost of Capital: We have a recent history of generating losses from operations and expect to continue generating losses until we are able to generate revenues sufficient to generate positive cash flow from the commercialization of LUMRYZ. Similar to other businesses in our industry and at our stage of development, we will continue to rely on external sources of capital to fund our business. The process of raising capital and the associated cost of such capital for a company of our financial profile can be difficult and potentially expensive. If the need were to arise to raise additional capital, access to that capital may be difficult, expensive and/or dilutive and, as a result, could create liquidity challenges for us.

Continuing Net Loss from Operations: LUMRYZ is the only commercialized product in our portfolio, and we will incur substantial expenses to continue our commercial launch of LUMRYZ.

Impact of COVID-19

We continue to actively monitor the impact of COVID-19. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition. Despite vaccination efforts, future developments and impact on our operations remain uncertain and cannot be predicted with confidence, including the duration of the COVID-19 pandemic, new variants of the virus, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or we, may direct, which may result in extending continued business disruptions.

Financial Highlights

Highlights of our consolidated results for the three and nine months ended September 30, 2023 are as follows: 

Net product revenue was $7,014 and $8,510 during the three and nine months ended September 30, 2023. LUMRYZ was approved by the FDA on May 1, 2023 and we began shipping product to our customers in June 2023.

Operating loss was $35,110 and $112,949 for the three and nine months ended September 30, 2023, respectively, compared to operating loss of $16,960 and $75,523 for the three and nine months ended September 30, 2022, respectively. Selling, general and administrative expenses increased $25,062 and $52,869 during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, driven by increased headcount and costs associated with the commercial launch of LUMRYZ and higher legal fees. Research and development expenses decreased $3,563 during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily driven by lower active pharmaceutical ingredients (“API”) expenses of $3,600. We began capitalizing API purchases to inventory in May 2023 upon FDA approval of LUMRYZ and prior to FDA approval API purchases were recorded as research and development expense.

Net loss was $36,274 and $131,490 for the three and nine months ended September 30, 2023, respectively, compared to net loss of $20,146 and $110,014 in the same periods last year, respectively.
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Diluted net loss per share was $0.41 and $1.71 for the three and nine months ended September 30, 2023, respectively, compared to diluted net loss per share of $0.33 and $1.85 in the same period last year, respectively.

Cash, cash equivalents and marketable securities increased $56,680 to $153,179 at September 30, 2023, from $96,499 at December 31, 2022. The increase in cash during the nine months ended September 30, 2023 was driven primarily by net proceeds of $134,149 received in exchange for issuing 12,205 ordinary shares and 4,706 Series B Preferred Shares in the April 3, 2023 public offering, proceeds of $30,000 received for the first tranche of the royalty purchase agreement, net proceeds of $11,913 from the sale of ADSs through the ATM Program and $2,241 of proceeds from stock option exercises and employee share purchase plan issuances, offset by cash used in operating activities of $100,482, payments for the February 2023 Notes of $17,500 and debt issuance costs of $4,357.

Critical Accounting Estimates 

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could be significantly different from these estimates. 

Our significant accounting policies are described in Note 1 of the audited consolidated financial statements included in our Annual Report Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). We identified additional significant accounting policies as described in Note 1 of our unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. We have identified the following to be a critical accounting estimate because it had a material impact, or it has the potential to have a material impact, on our consolidated financial statements and because it requires us to make significant judgments, assumptions or estimates.

Revenue. We sell products to specialty pharmacies and consider those specialty pharmacies to be our customers. Under ASC 606, revenue from product sales is recognized when the customer obtains control of the product, which occurs typically upon receipt by the customer. Our gross product sales are subject to a variety of price adjustments to arrive at reported net product revenue. These adjustments include estimates of payment discounts, specialty pharmacy fees, patient financial assistance programs, rebates and product returns and are estimated based on contractual arrangements, historical trends, expected utilization of such products and other judgments and analysis.

Product Sales

Revenue from product sales are recognized when the customer obtains control of our product and our performance obligations are met, which occurs typically upon receipt of delivery to the customer. As is customary in the pharmaceutical industry, our gross product sales are subject to a variety of price adjustments in arriving at reported net product revenue. These adjustments include estimates of payment discounts, specialty pharmacy fees, patient financial assistance programs, rebates and product returns and are estimated based on contractual arrangements, historical trends, expected utilization of such products and other judgments and analysis.

Reserves for Variable Consideration

Revenues from product sales are recorded at the estimated net selling price, which includes reserves for estimated variable consideration to reduce gross product sales to net product revenue resulting from payment discounts, specialty pharmacy fees, patient financial assistance programs, rebates and product returns. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable if the amount is payable to the customer. The reserves are classified as a liability if the amount is payable to a party other than a customer. Where appropriate, these estimated reserves take into consideration relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, historical trends, current and expected patient demand and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates to reduce gross selling price to net selling price. The actual net selling price ultimately may differ from our estimates.

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Payment Discounts and Specialty Pharmacy Fees

Payment discounts and specialty pharmacy fees represent the estimated obligations resulting from contractual commitments with our customers. We offer customers discounts off of list price and fees for the distribution of our products. Reserves for these discounts and fees are established in the same period that the related revenue is recognized, resulting in a reduction of gross product sales and accounts receivable.

Patient Assistance Programs

We offer certain patient assistance programs. We have multiple programs to assist patients, including patient financial assistance programs. We estimate a reserve for these patient financial assistance programs primarily based on expected utilization by patients. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of gross product sales.

Rebates

Rebates represent the estimated obligations resulting from agreements with payors. We estimate a reserve for rebates based on contractual rates and estimates regarding our expectations of future utilization rates. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of gross product sales.

Product Returns

We maintain a returns policy that offers customers a right to return product within a defined period before and after the expiration date of that product. We record the estimate of product returns as a reduction of gross product sales in the period the related product revenue was recognized.

Except as set forth above, there have been no material changes in our critical accounting estimates from those disclosed in the “Critical Accounting Estimates” section of the Management’s Discussion & Analysis in our 2022 Form 10-K filed with the SEC on March 29, 2023.

Results of Operations 

The following is a summary of our financial results (in thousands, except per share amounts) for the three months ended September 30, 2023 and 2022, respectively:

 Three Months Ended September 30,Change
 2023 vs. 2022
Comparative Statements of Loss20232022$%
Net product revenue$7,014 $— $7,014 n/a
Cost of products sold117 — 117 n/a
Gross profit6,897 — 6,897 
Operating expenses:  
Research and development expenses2,849 2,933 (84)(2.9)%
Selling, general and administrative expenses39,158 14,096 25,062 177.8 %
Restructuring income— (69)69 (100.0)%
Total operating expense 42,007 16,960 25,047 147.7 %
Operating loss(35,110)(16,960)(18,150)(107.0)%
Investment and other income, net903 448 455 101.6 %
Interest expense(1,978)(3,564)1,586 44.5 %
Loss on extinguishment of debt— — — n/a
Loss before income taxes(36,185)(20,076)(16,109)(80.2)%
Income tax provision
89 70 19 (27.1)%
Net loss$(36,274)$(20,146)$(16,128)(80.1)%
Net loss per share - diluted$(0.41)$(0.33)$(0.08)(24.2)%
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The following is a summary of our financial results (in thousands, except per share amounts) for the nine months ended September 30, 2023 and 2022, respectively: