Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases.” This update requires lessees to recognize on their balance sheet a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. As January 1, 2019, adoption of the new guidance resulted in the initial recognition of operating lease right-of-use assets of $5,046 and operating lease liabilities of $5,131. At March 31, 2019, the balances of the operating lease right-of-use asset and total operating lease liability are $5,802 and $4,871, respectively, of which $982 of the operating lease liability is current.

The Company leases certain facilities for office and manufacturing purposes, comprising approximately 99% of the total lease population. All leased facilities are classified as operating leases with remaining lease terms between one and seven years. The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and will include these options in the lease term when they are reasonably certain of being exercised. For all of the Company’s leases, lease and non-lease components are accounted for as a single lease component, as all non-lease components are immaterial to break out separately.

The components of lease costs, which is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of loss for the period ended March 31 were as follows ($ in thousands):



Lease cost:	2019

Operating lease costs ⁽¹⁾	$	345
Sublease income ⁽²⁾	44
Total lease cost	$	301

⁽¹⁾Variable lease costs were immaterial for the three months ended March 31, 2019.

⁽²⁾ Represents sublease income received for the vacated office facility in Charlotte, North Carolina, which was acquired with the FSC acquisition in February 2016. The lease and sublease agreements terminate in December 2020.

During the three months ended March 31, 2019, the Company reduced its operating lease liabilities by $310 for cash paid. In addition, new operating leases commenced resulting in the recognition of operating lease right-of-use assets and liabilities of $1,000 and $0, respectively, as the entire lease payment was paid on March 31, 2019. As of March 31, 2019, the Company is aware of one additional embedded lease that has not yet commenced and will not commence until the time of FDA approval of the product (if approved). Once FDA approval is given and the start date is determined, annual production suite fees of approximately $3,000 to $4,000 would commence and at that time, and an operating lease right-of-use asset and corresponding operating lease liability will be recorded.

As of March 31, 2019, our operating leases have a weighted-average remaining lease term of 5.2 years and a weighted-average discount rate of 5.3%. Nearly all of Avadel’s lease contracts do not provide a readily determinable implicit rate. For these contracts, Avadel’s estimated incremental borrowing rate is based on information available at the inception of the lease.

Maturities of the Company’s operating lease liabilities were as follows ($ in thousands):



Maturities:	Operating Leases

Remaining nine months of 2019	$	920
2020	1,225
2021	1,004
2022	764
2023	693
Thereafter	942
Total lease payments	5,548
Less: interest	677
Present value of lease liabilities	$	4,871