Annual report pursuant to Section 13 and 15(d)

Commitments And Contingencies

v3.19.1
Commitments And Contingencies
12 Months Ended
Dec. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies

Litigation
    
The Company is party in various contractual disputes, litigation, and potential claims arising in the ordinary course of business. The Company does not believe that the resolution of these matters will have a material adverse effect on our financial position or results of operations except as otherwise disclosed in this document. See Note 11 for further discussion of the Lachlan legal arbitration.

Purchase obligations
The Company has unconditional purchase obligations as a result of recent acquisitions that include agreements to purchase goods that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable at any time without penalty. The unconditional purchase obligations outstanding as of December 31, 2018 include the following:

Lachlan Pharmaceuticals Minimum Purchase and Minimum Royalties Obligations

As discussed in Note 4, in November 2017, the Company acquired TRx and its wholly-owned subsidiaries, including Zylera. The previous owners of TRx beneficially own more than 10% of our outstanding common stock. Zylera, which is now our wholly owned subsidiary, entered into an agreement with Lachlan Pharmaceuticals, an Irish company controlled by the previous owners of TRx (“Lachlan”), effective December 18, 2015. Pursuant to the Lachlan Agreement, Lachlan named Zylera as its exclusive distributor of Ulesfia in the United States and agreed to supply Ulesfia to Zylera exclusively for marketing and sale in the United States.

The Lachlan agreement requires Zylera to purchase a minimum of 20,000 units per year, or approximately $1.2 million worth of product, from Lachlan, unless and until there has been a “Market Change” involving a new successful competitive product. Zylera must pay Lachlan $58.84 per unit and handling fees that are equal to $3.66 per unit of fully packaged Ulesfia in 2018 and escalate at a rate of 10% annually. The Lachlan Agreement also requires that Zylera make certain cumulative net sales milestone payments and royalty payments to Lachlan with a $3.0 million annual minimum payment unless and until there has been a “Market Change” involving a new successful competitive product. The Company expects a successful competitive product will enter the market in early 2021 and therefore the future minimum purchase obligations and royalty payments are expected through 2020.

As of December 31, 2018, future minimum purchase obligations and future minimum royalty payments to Lachlan are as follows:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019*
 
2020*
 
2021
 
2022
 
Total*
 
 
 
 
 
 
 
 
 
 
 
Minimum Purchase Obligations
 
1,257,326
 
1,265,378
 
 
 
$2,522,704
Minimum Royalties
 
3,000,000
 
3,000,000
 
 
 
6,000,000
     Total
 
4,257,326
 
4,265,378
 
 
 
$8,522,704

*Per the TRx Purchase Agreement, the previous owners of TRx are required to indemnify the Company for 50% of post-acquisition Ulesfia losses, which include the future minimum purchase obligations and future minimum royalties disclosed above. Thus, the Company's future net payouts related to the Ulesfia product will be significantly reduced as a result of the indemnification.

Karbinal Royalty Make Whole Provision

As discussed in Note 4, on February 16, 2018, in connection with the acquisition of Avadel's pediatric products, the Company entered into a supply and distribution agreement with TRIS Pharma (the "Karbinal Agreement"). As part of this agreement, the Company has an annual minimum sales commitment, which is based on a commercial year that spans from August 1 through July 31, of 70,000 units through 2033. The Company is required to pay TRIS a royalty make whole payment of $30 for each unit under the 70,000 units annual minimum sales commitment through 2033. The annual payment is due in August of each year.

The Company paid $0.9 million to TRIS in August 2018 related to the make whole payment for the commercial year ended July 31, 2018. For the year ended December 31, 2018, the Company has accrued $0.7 million in accrued expenses and other current liabilities related to the Karbinal royalty make whole for the commercial year ending July 31, 2019. The post-acquisition make whole provision of $1.3 million has been recorded in cost of product sales for the year ended December 31, 2018. The future royalty make whole payments is unknown as the amount owed to TRIS is dependent on the number of units sold.

Office Lease

During the third quarter of 2018, the Company entered into a lease for the Company's new corporate headquarters in Rockville, Maryland. The Company obtained access to the building in September 2018 to perform leasehold improvements, which resulted in the lease commencement date for accounting purposes. The Company occupied the building in January 2019. The landlord provided a lease incentive related for leasehold improvements in the amount of $381,900, which the Company may requisition the landlord for payment on a monthly basis for the work incurred-to-date. As of December 31, 2018, the Company incurred leasehold improvements for the full amount of the incentive which the Company has recognized within other receivables. The Company recognized a corresponding lease incentive obligation within other long-term liabilities. The lease incentive obligation is reduced and recognized in income as a reduction to straight-line rental expense.

The annual base rent for the office space is $161,671, subject to annual 2.5% increases over the term of the lease. The lease provides for a rent abatement for a period of 12 months following the Company's date of occupancy. The lease has an initial term of 10 years from the date the Company makes its first annual fixed rent payment which is expected to occur in January 2020. The Company has the option to extend the lease two times, each for a period of five years, and may terminate the lease as of the sixth anniversary of the first annual fixed rent payment, upon the payment of a termination fee. As of the lease commencement date, it is not reasonably certain that the Company will exercise the renewal periods or early terminate the lease and therefore the end date of the lease for accounting purposes is January 31, 2030.

The Company analyzed the lease agreement and determined the lease classification is operating. The Company recognizes operating lease rent expense on a straight-line basis over the expected term of each lease. The Company recognized rent expense for this property of $41,749 in general and administrative expense on the statement of operations for the year ended December 31, 2018.

As of December 31, 2018, minimum operating lease obligations for the new office space are as follows:
 
 
 
 
 
Minimum Lease Payments
2019
 
$

2020
 
155,815

2021
 
169,510

2022
 
173,748

2023
 
178,092

Thereafter
 
1,183,290

Total
 
$
1,860,455