Contingent Consideration Payable

9 Months Ended

Sep. 30, 2020

Contingent consideration payable and related activity are reported at fair value and consist of the following at September 30, 2020 and December 31, 2019:


			Activity during the nine months ended September 30, 2020
					Changes in Fair Value of Contingent Consideration Payable
Contingent Consideration Payable:	Balance, December 31, 2019		Payments		Operating Expense		Other Expense		Disposition of the Hospital Products		Balance, September 30, 2020

Acquisition-related contingent consideration:
Earn-out payments - Éclat Pharmaceuticals (a) (d)	$	15,472	$	(5,323)	$	3,327	$	—	(13,476)		$	—
Financing-related:
Royalty agreement - Deerfield (b) (d)	1,251		(587)		—		272		(936)		—
Royalty agreement - Broadfin (c) (d)	604		(279)		—		163		(488)		—
Total contingent consideration payable	17,327		$	(6,189)	$	3,327	$	435	$	(14,900)	—
Less: current portion	(5,554)										—
Long-term contingent consideration payable	$	11,773									$	—

Long-term related party payable and related activity are reported at fair value and consist of the following at September 30, 2020 and June 30, 2020:


			Activity during the three months ended September 30, 2020
					Changes in Fair Value of Contingent Consideration Payable
Contingent Consideration Payable:	Balance, June 30, 2020		Payments		Operating Expense		Other Expense		Balance, September 30, 2020

Acquisition-related contingent consideration:
Earn-out payments - Éclat Pharmaceuticals (a) (d)	$	1,656	$	(1,587)	$	(69)	$	—	$	—
Financing-related:
Royalty agreement - Deerfield (b) (d)	175		(175)		—		—		—
Royalty agreement - Broadfin (c) (d)	83		(83)		—		—		—
Total contingent consideration payable	1,914		$	(1,845)	$	(69)	$	—	—
Less: current portion	—								—
Long-term contingent consideration payable	$	1,914							$	—

(a) In March 2012, the Company acquired all of the membership interests of Éclat from Breaking Stick Holdings, L.L.C. (“Breaking Stick”, formerly Éclat Holdings), an affiliate of Deerfield. Breaking Stick is majority owned by Deerfield, with a minority interest owned by the Company’s former CEO, and certain other current and former employees. As part of the consideration, the Company committed to provide quarterly earn-out payments equal to 20% of any gross profit generated by certain Éclat products. These payments will continue in perpetuity, to the extent gross profit of the related products also continue in perpetuity. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay,

perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.

(b)As part of a February 2013 debt financing transaction conducted with Deerfield, the Company received cash of $2,600 in exchange for entering into a royalty agreement whereby the Company is obligated to pay quarterly a 1.75% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with such debt financing transaction, the Company granted Deerfield a security interest in the product registration rights of the Éclat products. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Deerfield MIPA (with respect to certain sections thereof) and the Royalty Agreement were assigned to the Exela Buyer. Pursuant to the Purchase Agreement, the Exela Buyer assumed and will pay, perform, satisfy and discharge the liabilities and obligations of Avadel Legacy and the Company under the Deerfield Royalty Agreement.

(c)As part of a December 2013 debt financing transaction conducted with Broadfin Healthcare Master Fund, a former related party and shareholder, the Company received cash of $2,200 in exchange for entering into a royalty agreement whereby the Company is obligated to pay quarterly a 0.834% royalty on the net sales of certain Éclat products until December 31, 2024. In connection with the disposition of the Hospital Products on June 30, 2020 as discussed in Note 4: Disposition of the Hospital Products, the Broadfin Royalty Agreement was assigned to the Exela Buyer and the Exela Buyer assumed and shall pay, perform, satisfy and discharge the liabilities and obligations of the Company under the Broadfin Royalty Agreement.

(d)Deerfield and Broadfin Healthcare Master Trust disposed of their 2023 Notes and ordinary shares in the Company during the six months ended June 30, 2020 and are no longer considered related parties.

Before the sale of the Hospital Products on June 30, 2020, the fair value of each contingent consideration payable listed in (a), (b) and (c) above was estimated using a discounted cash flow model based on estimated and projected annual net revenues or gross profit, as appropriate, of each of the specified Éclat products using an appropriate risk-adjusted discount rate of 14%. These fair value measurements are based on significant inputs not observable in the market and thus represent a Level 3 measurement as defined in ASC 820. Subsequent changes in the fair value of the acquisition-related contingent consideration payables, resulting primarily from management’s revision of key assumptions, will be recorded in the unaudited condensed consolidated statements of (loss) income in the line items entitled “Changes in fair value of contingent consideration” for items noted in (b) above and in “Other expense - changes in fair value of contingent consideration payable” for items (b) and (c) above. See Note 1: Summary of Significant Accounting Policies under the caption Acquisition-related Contingent Consideration and Financing-related Royalty Agreements in Part II, Item 8 of the Company’s 2019 Annual Report on Form 10-K for more information on key assumptions used to determine the fair value of these liabilities.

Prior to June 30, 2020, the Company chose to make a fair value election pursuant to ASC 825, “Financial Instruments” for its royalty agreements detailed in items (b) and (c) above. These financing-related liabilities are recorded at fair market value on the unaudited condensed consolidated balance sheets and the periodic change in fair market value is recorded as a component of “Other expense – change in fair value of contingent consideration payable” on the unaudited condensed consolidated statements of (loss) income.

The following table summarizes changes to the contingent consideration payables, a recurring Level 3 measurement, for the nine-month periods ended September 30, 2020 and 2019, respectively:


Contingent Consideration Payable Rollforward:	Balance

Balance, December 31, 2018	$	28,840
Payments of contingent consideration	(10,014)
Fair value adjustments (1)	2,880
Balance, September 30, 2019	$	21,706

Balance, December 31, 2019	$	17,327
Payments of contingent consideration	(6,189)
Fair value adjustments (1)	3,762
Disposition of the Hospital Products	(14,900)
Balance, September 30, 2020	$	—

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