Leases

9 Months Ended

Sep. 30, 2019

Leases

Leases

11. Leases

In accordance with ASC Topic 842, Lease Accounting, the Company records lease assets and liabilities for lease arrangements exceeding a 12-month initial term. For operating leases, the Company records a beginning lease liability equal to the present value of minimum lease payments to be made over the lease term discounted using the Company’s incremental borrowing rate and a corresponding lease asset adjusted for incentives received and indirect costs. After lease commencement, the Company remeasures the operating liability at the present value of the remaining lease payments discounted using the original incremental borrowing rate and corresponding lease asset adjusted for incentives received, indirect costs and uneven lease payments. The Company records operating lease rent expense in the Statements of Operations on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, or short-term leases, are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term. The Company does not have any financing lease arrangements.

As of September 30, 2019, the Company had operating lease assets of $9,219 and operating lease liabilities of $10,362 primarily related to operating lease agreements for its corporate headquarters.

Adoption of ASC Topic 842, Lease Accounting

The Company adopted ASC Topic 842, as amended, on January 1, 2019, which supersedes the lease accounting requirements in ASC Topic 840, Leases (“legacy GAAP”) and most industry-specific guidance. The Company adopted ASC Topic 842 using the modified retrospective method. Under this method, the Company applied the new standard at the adoption date and recognized a cumulative-effect adjustment. Therefore, prior period financials were not retrospectively adjusted, and comparative period disclosures will continue to be presented in accordance with legacy GAAP. In addition, the Company utilized the package of practical expedients permitted within the transition guidance, which, among other things, allowed the Company to carryforward the historical lease classification.

Adoption of the new standard resulted in the Company initially recording operating lease assets of $9,957 and corresponding operating lease liabilities of $10,691 on its Condensed Consolidated Balance Sheet, primarily related to the operating lease agreement for its corporate headquarters. In addition, the Company identified an embedded operating lease arrangement that was accounted as a service contract in prior years, as accounting for operating leases and service contracts was similar under legacy GAAP and the accounting for the embedded lease did not result in a material impact to the financial statements. The Company has also implemented new accounting policies, processes and controls to identify and account for leases, including embedded leases, going forward.

Operating Lease Arrangements

In March 2018, the Company entered into an operating lease for its new corporate headquarters (the “Stoughton Lease”) pursuant to which the Company leases approximately 50,678 of rentable square feet of space, in Stoughton, Massachusetts. The Stoughton Lease commenced in August 2018 when the Company took possession of the space. After the initial four-month free rent period following possession of the space, the operating lease will continue for a term of 10 years. The Company has the right to extend the term of the Stoughton Lease for two additional five-year terms, provided that written notice is provided to the landlord no later than 12 months prior to the expiration of the then current Stoughton Lease term. The Company does not believe the exercise of the extension to be reasonably certain as of the balance sheet date and therefore did not include the extension as part of its recognized lease asset and lease liability. The annual base rent is $1,214, or $23.95 per rentable square foot, and will increase annually by 2.5% to 3.1% over the subsequent years.

The Company continues to lease 9,660 square feet of office and research space at its former corporate headquarters located in Canton, Massachusetts (the “Canton Lease”). The Canton Lease terminates in August 2020 and may be

extended for an additional five years at the Company’s election. In September 2019, the Company determined it had ceased use of the space and impaired the operating lease asset and adjusted the operating lease liability to the fair value of cost that will continue to be incurred under the Canton Lease. The impact to the consolidated financial statements was immaterial and the impairment expense was recognized as a component of selling, general and administrative expense in the Statement of Operations.

In January 2016, the Company entered a non-cancellable contract with the contract manufacturing organization (“CMO”) of Xtampza ER. The initial contract term continues through December 2020 and automatically renews for successive two-year terms unless either party gives written notice of termination two-years in advance. Xtampza ER production is currently conducted in an area of the manufacturing plant that is shared with other clients. Pursuant to the terms of the agreement, since 2016 the CMO has reserved 3,267 square feet of existing manufacturing space for a dedicated production suite for Xtampza ER, which is currently under construction. Upon adoption of ASC Topic 842, the Company determined that this arrangement has an embedded operating lease arrangement as the Company can direct the use of the dedicated space and obtain substantially all the economic benefits. The Company expects the lease term to continue at least through December 2026 and separated the agreement’s lease and non-lease components in determining the operating lease assets and liabilities. The Company determined its best estimate of stand-alone prices for each of the lease and nonlease components by considering observable information including gross margins expected to be recovered from the Company’s service provider and terms of similar lease contracts.

Short-Term Lease Arrangements

In December 2018, the Company began entering into 12-month, non-cancelable vehicle leases for its field-based employees. Each vehicle lease is executed separately and will expire at varying times with automatic renewal options that are cancelable at any time. The rent expense for these leases will therefore be recognized on a straight-line basis over the lease term.

Variable lease payments associated with non-lease components of these arrangements were immaterial and expensed as incurred.

	Three months ended September 30,		Nine months ended September 30,
	2019		2019
Lease Cost
Operating lease cost	$	452	$	1,157
Short-term lease cost		219		531
Total lease cost	$	671	$	1,688

	As of September 30,
Lease Term and Discount Rate:	2019
Weighted-average remaining lease term — operating leases (years)		9.7
Weighted-average discount rate — operating leases		6.1%

	Nine months ended September 30,
Other Information:	2019
Cash paid for amounts included in the measurement of operating leases liabilities	$	748
Leased assets obtained in exchange for new operating lease liabilities		—

Under ASC Topic 842, the Company’s aggregate future minimum lease payments for its operating leases, including embedded operating lease arrangements, as of September 30, 2019, are as follows:

2019	$	340
2020		1,334
2021		1,290
2022		1,328
2023		1,366
After 2023		8,263
Total minimum lease payments	$	13,921
Less: Present value discount		3,559
Present value of lease liabilities	$	10,362

Under legacy GAAP, the Company’s aggregate future minimum lease payments for its operating leases as of December 31, 2018 were as follows:

2019	$	1,032
2020		1,305
2021		1,261
2022		1,299
2023		1,337
After 2023		8,423
Total minimum lease payments	$	14,657