Contingent Liabilities and Commitments

Litigation

The Company is subject to potential liabilities generally incidental to our 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 December 31, 2018 and December 31, 2017, 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.

Some of the patents covering our Noctiva^TM product (the “Noctiva Patents”) are the subject of litigation initiated by Ferring Pharmaceuticals Inc. and two of its foreign affiliates, who manufacture a competing product known as Nocdurna. Nocdurna was approved by the FDA in June 2018 and commercially launched in the U.S. in November 2018. In this litigation (the “Ferring Litigation”), Ferring seeks to invalidate and disputes the inventorship of the Noctiva Patents, seeks damages for various alleged breaches of contractual and common law duties, and seeks damages for alleged infringement by Noctiva^TM of Ferring’s “Nocdurna” trademark. Avadel’s indirectly wholly owned subsidiary, Specialty Pharma and certain other parties including Serenity Pharmaceuticals, LLC (“Serentiy”) (the licensor of the Noctiva Patents) have been actively defending this litigation, and have made certain counterclaims against Ferring, including for infringement of the Noctiva Patents and a declaratory judgment of noninfringement with respect to Ferring’s “Nocdurna” trademark. The court has dismissed Ferring’s inventorship claim and its claims for alleged breaches of contractual and common law duties, although these dismissals may be appealed by Ferring. On February 15, 2019, Specialty Pharma and its co-defendants moved to stay the litigation pending completion of the bankruptcy proceeding of Specialty Pharma. Adverse outcomes from this litigation could have material adverse effects on the value of the Specialty Pharma’s license to Noctiva^TM.

On January 21, 2019, Serenity provided notice to Specialty Pharma of an alleged breach of the parties’ Noctiva license agreement. Serenity alleges principally that Specialty Pharma breached its contractual obligation to devote commercially reasonable efforts to the commercialization of Noctiva and seeks unspecified damages. On January 27, 2019, Specialty Pharma notified Serenity of a claim for $1.7 million in damages as a result of Serenity’s breach of its contractual obligation to pay the costs of the Ferring Litigation. Serenity’s notice to Specialty Pharma invoked the dispute resolution provisions of the Noctiva license agreement, which culminate in arbitration, but neither party has yet initiated an arbitration proceeding or filed suit. Adverse outcomes from this potential litigation could have material adverse effects on the financial position of Specialty Pharma.

On February 6, 2019, Specialty Pharma commenced a Chapter 11 bankruptcy case under the U.S. Bankruptcy Code to fulfill its strategic objective of divesting from the business of marketing and distributing Noctiva™. As a result of the commencement of the bankruptcy case, all pending litigation against Specialty Pharma is automatically stayed and will remain stayed during the pendency of the Chapter 11 case unless and until the bankruptcy court enters an order modifying or lifting the stay. The automatic stay of the bankruptcy code also precludes the commencement of any new litigation against Specialty Pharma unless the bankruptcy court orders otherwise. See Part I, Item 3 of this Annual Report on Form 10-K for more discussion.

Material Commitments

At December 31, 2018, the Company has various commitments to purchase finished product from customers. Commitments for these arrangements, at maximum quantities and at contractual prices over the remaining life of the contract, and excluding any waived commitments, are as follows for the years ended December 31:



Purchase Commitments:	Balance

2019	$	10,754
2020	5,948
2021	4,880
2022	4,880
2023	220
Thereafter	—
Total	$	26,682

The Company also has a commitment with a contract manufacturer related to the construction and preparation of a production suite at the contract manufacturer’s facility, which is substantially complete at December 31, 2018. Subsequent to the initial build and preparation of the production suite, this commitment also includes annual production suite fees of approximately $3,000 to $4,000 which would commence at the time of FDA approval of the product and continue thereafter for five years. These amounts are not included in the table above, as the start date has not been determined.

Included in the purchase commitments above, is approximately $15,308 of an obligation of Specialty Pharma, which on February 6, 2019, filed for Chapter 11 bankruptcy protection.

For the year ended December 31, 2018, the Company paid $9,965 related to the above purchase commitments.

The Company and our subsidiaries lease office facilities under noncancelable operating leases expiring at various dates. Rent expense, net of rental income, was $1,213, $1,146 and $970 in 2018, 2017, and 2016, respectively. Minimum rental commitments for non-cancelable leases in effect at December 31, 2018 are as follows:



Lease Commitment:	Balance

2019	$	1,191
2020	1,208
2021	1,008
2022	767
2023	695
Thereafter	967
Total	$	5,836

Other than the above commitments, there were no other material commitments outside of the normal course of business. Material commitments in the normal course of business include long-term debt, long-term related party payable, and post-retirement benefit plan obligations which are disclosed in Note 10: Long-Term Debt, Note 11: Long-Term Related Party Payable, and Note 13: Post-Retirement Benefit Plans, respectively.

Contractual Obligations

The following table presents contractual obligations of the Company at December 31, 2018:



	Payments Due by Period
Contractual Obligations:	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years

Long-term debt and interest	$	173,009	$	6,575	$	12,981	$	153,453	$	—
Long-term related party payable (undiscounted)	51,284		9,439		8,713		7,250		25,882
Purchase commitments	26,682		10,754		10,828		5,100		—
Operating leases	5,836		1,191		2,217		1,461		967
Total contractual cash obligations	$	256,811	$	27,959	$	34,739	$	167,264	$	26,849

Included in the purchase commitments total above, is approximately $15,308 of an obligation of Specialty Pharma, which on February 6, 2019, filed for Chapter 11 bankruptcy protection.