Royalty Financing Obligation

3 Months Ended

Mar. 31, 2024

Debt Disclosure [Abstract]

Royalty Financing Obligation

Royalty Financing Obligation

On March 29, 2023, the Company and Avadel CNS Pharmaceuticals, LLC entered into the 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 now available to use, at the Company’s election, as the Company has achieved quarterly net revenue of $25,000 prior to 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. 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 sheets 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 sheets.

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 March 31, 2024 and December 31, 2023 the effective interest rate is estimated as 30.4%. 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:

Royalty Financing Obligation:	March 31, 2024		December 31, 2023
Royalty financing obligation – beginning balance	$	33,490	$	—
Receipt of the first tranche of the royalty financing obligation	—		30,000
Accretion of imputed interest expense on royalty financing obligation	2,592		3,743
Less: royalty payments made to RTW	(730)		(253)
Royalty financing obligation – ending balance	35,352		33,490
Less: royalty payable to RTW classified within accrued expenses	(1,019)		(730)
Royalty financing obligation, non-current	$	34,333	$	32,760

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