AKAO 2017 Annual Report

125 Future minimum lease payments under the operating leases as of December 31, 2017 are as follows (in thousands): Year Ending December 31, Amounts 2018................................................................................................................................................ $ 4,028 2019................................................................................................................................................ 6,201 2020................................................................................................................................................ 6,418 2021................................................................................................................................................ 6,645 2022................................................................................................................................................ 6,877 Thereafter....................................................................................................................................... 38,780 Total minimum lease payments ..................................................................................................... $ 68,949 The Company recognizes rent expense on a straight-line basis over the non-cancelable lease period. Rent expense was $3.0 million, $0.6 million and $0.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Commercial Validation and Manufacturing Agreement In March 2017, the Company entered into a commercial validation and manufacturing agreement (the “Commercial Manufacturing Agreement”) with Hovione Limited (“Hovione”). Under the Commercial Manufacturing Agreement, Hovione has agreed to complete the validation program to validate and scale up the Company’s technology to manufacture the active pharmaceutical ingredient for plazomicin (the “Product”) and supply the Product to the Company. The Commercial Manufacturing Agreement has an initial term of seven years after the first delivery of the Product. Pursuant to the Commercial Manufacturing Agreement, if plazomicin is approved by the FDA, we have minimum quantity and minimum annual purchase commitments from Hovione depending on our requirements and the period of time following approval by the FDA. For the first three years following approval of plazomicin by the FDA, the Company is required to purchase at least 80% of its required quantity from Hovione. Following the initial three years after FDA approval, the Company is required to purchase between 40% and 66% of its required quantity from Hovione, depending on the amounts required during any such fiscal year. Contingent upon FDA’s approval of plazomicin, the Company has minimum annual purchase commitments from Hovione, beginning in 2020 through 2024. In connection with the Commercial Manufacturing Agreement, the Company executed certain work plans to carry out the validation and commercial manufacturing of plazomicin (the “Work Plans”). The Work Plans obligated the Company to make an aggregate amount of approximately $6.2 million in nonrefundable advance payments, of which $1.5 million was for the reservation of facilities and resources, plus procurement of long lead raw materials, paid in full under a separate agreement executed in July 2015. Such advance payments are initially capitalized as prepaid and other current assets and will be recognized as research and development expenses as goods are delivered and/or services are performed. The Company assesses such prepaid and other current assets for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable or may not provide future economic benefits. Further, the Work Plans include certain terms that require the Company to compensate Hovione if it chooses to cancel the Work Plans (“Cancellation Clause”). As of December 31, 2017, $9.5 million is committed under the Cancellation Clause and the total aggregate amount of potential commitments, if all the services are rendered by Hovione, is approximately $23.7 million. As of December 31, 2017 and 2016, the Company has recorded approximately $4.3 million and $0.7 million, respectively as prepaid and other current assets and, during the years ended December 31, 2017, 2016 and 2015, has recognized $3.3 million, $1.2 million and zero, respectively, as research and development expenses, related to the Work Plans. Guarantees and Indemnifications As permitted under Delaware law and in accordance with the Company’s bylaws, the Company is required to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its directors and officers. The Company believes the fair value of the indemnification rights and agreements is minimal. Accordingly, the