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Commitments and Contingencies
9 Months Ended
Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Disclosure
13. Commitments and Contingencies
Capitalized Leases
On January 1, 2013, the Company entered into capital lease arrangements with 65 Dan Road SPE, LLC, 85 Dan Road Associates, LLC, Dan Road Equity I, LLC and 275 Dan Road SPE, LLC for office and laboratory space in Canton, Massachusetts. 65 Dan Road SPE, LLC, 85 Dan Road Associates, LLC, Dan Road Equity I, LLC and 275 Dan Road SPE, LLC are related parties as the owners of these entities are also stockholders of the Company. The leases terminate on December 31, 2022 and each contains a renewal option for a five-year period with
the 
rental rate at the greater of (i) rent for the last year of the prior term, or (ii) the then fair market value. Notice of the exercise of this renewal option is due one year prior to the expiration of the initial term. Aggregate annual lease payments are approximately $4,308 with future rent increases of 10% effective January 1, 2022.
The Company records the capital lease asset within property and equipment and the liability is recorded within the capital lease obligations on the consolidated balance sheets.
As of September 30, 2019 and December 31, 2018, the Company owed an aggregate of $10,336 and $10,293, respectively, of accrued but unpaid lease obligations. These accrued but unpaid lease obligations are subordinated to the New Credit Agreement and will not be paid until the debt under the New Credit Agreement is paid off. The principal portion of rent in arrears on the capital leases totaled $6,042 and $5,265 as of September 30, 2019 and December 31, 2018, respectively, and is included in the long-term portion of capital lease obligations. The interest portion of rent in arrears totaled $3,650 and $4,174 as of September 30, 2019 and December 31, 2018, respectively, and is included in other liabilities on the consolidated balance sheets.
In addition to rent, the Company is responsible for payment of all operating costs and common area maintenance under the aforementioned leases. As of September 30, 2019 and December 31, 2018, the Company owed $644 and $854, respectively, of operating and common area maintenance costs which are included in other liabilities on the consolidated balance sheets.
Effective April 1, 2019, the Company agreed to accrue interest on the accrued but unpaid lease obligations at an interest rate equal to the rate charged in the New Credit Agreement (see Note 9). The accrued interest is also subordinated to the New Credit Agreement and, as such, is included in other liabilities on the consolidated balance sheet. Interest accrued as of September 30, 2019 totaled $478.
Future obligations under capital leases in the aggregate and for the next five years is as follows:
 
2019 (remaining three months)
  
$
1,180 
2020
   4,721 
2021
   4,721 
2022
   4,945 
2023
   
 
 
 
Thereafter
   9,692 
   
 
 
 
    25,259 
Less amount representing interest
   (7,494)
   
 
 
 
Present value of minimum lease payments
   17,765 
Less current maturities
   (2,872)
   
 
 
 
Long-term portion
  
$
14,893 
   
 
 
 
Operating Leases
The Company leases vehicles for certain employees and have fleet services agreements for service on these vehicles. The minimum lease term for each newly leased vehicle is one year with three consecutive
one-year
renewal terms.
In
March 2014, in conjunction with the acquisition of Dermagraft from Shire plc, the Company entered into a rental sublease agreement for certain operating and office space in California. The original sublease agreements called for escalating monthly rental payments and were set to expire
i
n January 2017. These sublease agreements were renegotiated in 2016 and subsequently extended through 2021.
 
I
n March 2019, the Company entered into an agreement to lease approximately 43,850 square feet of office and laboratory space in Norwood, Massachusetts. Pursuant to the lease agreement, the rent commencement date will be February 1, 2020. The initial lease term is ten years from the rent commencement date and includes an option for an early extension term of five years which is exercisable during the first two years after the rent commencement date. In addition to the early extension term, the lease provides the Company with an option to extend the lease term for a period of ten years, in addition to the five-year early extension term, if exercised, at rental rates equal to the then fair market value. Annual lease payments during the first year are $1,052 with increases of $44 each year during the initial
ten-year
lease term, an increase of $44 during the first year of the early extension term and $33 during year two through five of the early extension term. Upon execution of the agreement, the Company delivered a security deposit in the form of a letter of credit of $526 to the landlord. Following 36 months from the rent commencement date, the security deposit may be reduced by $263.
Operating lease expense
s
w
ere
$1,766 and $
1,218
 for the three months ended September 30, 2019 and 2018, respectively
,
and $4,993 and $
3,630
 for the nine months ended September 30, 2019 and 2018, respectively.
Future minimum lease payments due under noncancelable operating lease agreements as of September 30, 2019 are as follows:
 
2019 (remaining three months)
  
$
            1,218 
2020
   5,714 
2021
   5,053 
2022
   2,558 
2023
   1,180 
Thereafter
   8,123 
   
 
 
 
   $23,846 
   
 
 
 
Royalty Commitments
The Company entered into a license agreement with a university for certain patent rights related to the development, use, and production of one of its advanced wound care products. Under this agreement, the Company incurred a royalty based on a percentage of net product sales, for the use of these patents until the patents expired, which was in November 2006. Accrued royalties totaled $1,187 as of September 30, 2019 and December 31, 2018, and are classified as part of accrued expenses on the Company’s consolidated balance sheets. There was no royalty expense incurred during the three and nine months ended September 30, 2019 and 2018 related to this agreement.
In October 2017, the Company entered into a license agreement to resolve a patent infringement claim by a third party. Under the license agreement, the Company is required to pay royalties based on a percentage of net sales of the licensed product that occur, after December 31, 2016, through the expiration date of the underlying patent, subject to minimum royalty payment provisions. The Company recorded royalty expense of $991 and $506 during the three months ended September 30, 2019 and 2018, respectively, within selling, general and administrative expenses on the consolidated statement of operations. The Company recorded royalty expense of $2,695 and $1,207 during the nine months ended September 30, 2019 and 2018, respectively, within selling, general and administrative expenses on the consolidated statement of operations.
Legal Proceedings
In conducting its activities, the Company, from time to time, is subject to various claims and also has claims against others. In management’s opinion, the ultimate resolution of such claims would not have a material effect on the financial position of the Company. The Company accrues for these claims when amounts due are probable and estimable.
The Company accrued
$
542
 and 
$1,000 as of September 30, 2019 and December 31, 2018
, respectively, 
in relation to certain pending lawsuits.
The purchase price for NuTech Medical included $7,500 of future payments issued as deferred acquisition consideration. As of September 30, 2019, the Company has paid $2,500 in deferred acquisition consideration. The amount, if any, of the remaining $5,000 of deferred acquisition consideration plus accrued interest owed to the sellers of NuTech Medical is currently in dispute. As of September 30, 2019, the Company recorded $842 of accrued interest related to the deferred acquisition consideration which is recorded in accrued expenses and other current liabilities. The Company has asserted certain claims for indemnification that would offset in whole or in part its payment obligation and the sellers of NuTech Medical have filed a lawsuit alleging breach of contract and seeking specific performance of the alleged payment obligation and attorneys’ fees.