Leases

9 Months Ended

Sep. 30, 2019

The Company determines if an arrangement is a lease at its inception. Some leases include options to terminate prior to the end of the lease term, or to extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

The Company has lease arrangements that contain lease components (e.g., minimum rent payments) and non-lease components (e.g., maintenance, labor charges, etc.). It accounts for both of these components as a single lease component. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating leases are included in Lease assets, Accrued expenses and other current liabilities, and Lease liabilities, long term on the condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Operating lease assets and lease liabilities are recognized at the commencement date based on the present value of the future minimum lease payments over the lease term. The Company calculates the present value of future payments by using an estimated incremental borrowing rate which approximates the rate at which the Company would borrow, on a secured basis and over a similar term. This rate is estimated based on information available at commencement date of the lease, and may differ for individual leases or for portfolios of leased assets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Lease expense for operating leases is recognized as an operating cost.

The Company has operating leases for its current headquarters office and lab space at 1550 East Gude Drive in Rockville, MD and for its fleet vehicles. The Company’s existing leases for its current headquarters office and lab space run through April 2020. With respect to the fleet vehicle leases, given the volume of individual leases involved in the overall arrangement, the Company applies a portfolio approach to effectively account for the operating lease assets and liabilities.

New Headquarters Lease

The Company entered into a new lease agreement, effective January 31, 2019, with Advent Key West, LLC (Landlord), for its new headquarters in Rockville, MD (Premises). The term of the new headquarters lease commenced on February 1, 2019 (the Commencement Date) and will continue until April 30, 2034, unless earlier terminated in accordance with the terms of the lease. The lease includes options to extend the lease for up to 10 years. Fixed rent with respect to the Premises began on the Commencement Date; however, the Landlord agreed to a rent abatement from the Commencement Date through April 30, 2020. The initial fixed rental rate is approximately $195,000 per month for the first 12 months, and will automatically increase by 2% on each anniversary of the Commencement Date. Under the terms of the Lease, the Company provided a security deposit of approximately $195,000, and will be required to pay all utility charges for the Premises in addition to its pro rata share of any operating expenses and real estate taxes. The Company will occupy the Premises upon completion of the build-out of the Premises.

The lease also provides for a tenant improvement allowance of approximately $10.2 million, in aggregate. Any unspent tenant improvement allowance as of January 31, 2020 will be forfeited. The full amount of the tenant improvement allowance was initially recorded in Prepaid expenses and other current assets on the condensed consolidated balance sheets.

Lease assets, lease-related assets and lease liabilities are as follows, in thousands of dollars:



		September 30, 2019
		(unaudited)
Assets	Balance Sheet Classification
Operating leases	Lease assets	$	18,780
Tenant receivable	Prepaid expenses and other current assets	4,096
Total lease and lease-related assets		$	22,876

Liabilities
Current
Operating leases	Accrued expenses and other current liabilities	$	3,145
Noncurrent
Operating leases	Lease liabilities, long term	27,256
Total lease liabilities		$	30,401

Operating lease costs for the three and nine months ended September 30, 2019 are as follows, in thousands of dollars:



	Three Months ended September 30,		Nine Months ended September 30,
	2019
	(unaudited)
Fixed lease cost	$	1,498	$	3,517
Variable lease cost	484		1,467
Total operating leases cost	$	1,982	$	4,984

Supplemental cash flow information related to leases is as follows, in thousands of dollars:



	Nine Months ended September 30,
	2019		2018
	(unaudited)
Cash paid for operating leases	$	4,048	$	4,017
Lease assets obtained for new operating leases	$	31,856	$	—

Weighted average lease term and weighted average discount rate for operating leases as of September 30, 2019 are as follows, unaudited:



Weighted-average remaining lease term (years)	13.45
Weighted-average discount rate	4.34	%

Future minimum lease payments under noncancellable operating leases as of September 30, 2019 are as follows, in thousands of dollars, unaudited:



Year ending December 31:
2019 (remaining)	$	784
2020	3,089
2021	2,735
2022	2,550
2023	2,537
Thereafter	29,371
Total future minimum lease payments	$	41,066
Less: Imputed interest ⁽¹⁾	(10,665		)
Present value of lease liabilities	$	30,401

________________________________________________________________

⁽¹⁾ Calculated using the interest rate for each lease.

Disclosure Related to Periods Prior to Adoption of the New Lease Standard

Rent expense for the leased facilities and leased vehicles for the years ended December 31, 2018, 2017 and 2016 was approximately $3.6 million, $2.7 million and $2.7 million, respectively.

Future minimum lease payments under noncancelable operating leases as of December 31, 2018 were as follows, in thousands of dollars:



Year ending December 31:
2019	$	3,400
2020	2,287
Thereafter	1,840
Total	$	7,527