Leases

6 Months Ended

Jun. 30, 2019

The Company determines if an arrangement is a lease at inception. For operating leases, amounts recorded in connection therewith are included in right-of-use assets and lease liabilities in the condensed consolidated balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represents the Company’s obligation to make lease payments arising from the leases and are recognized on the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases have not historically provided an implicit rate, the Company’s incremental borrowing rate based on information available at the commencement date is used in determining the present value of lease payments. However, the implicit rate is used when readily determinable. The operating lease right-of-use assets also include any lease payments made and excludes lease incentives. Options to extend the lease term or terminate the leases are incorporated into the determination of the lease term if it is reasonably certain that the Company will exercise such options based on assessment of economic factors, such as contractual terms, market rates and locations, and costs associated with negotiation of new leases or termination of leases. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

In addition, as a practical expedient, for all leases entered into or modified after the effective date of ASC 842, the Company, as the lessee, has made an accounting policy election, by class of underlying asset, to not separate nonlease components from lease components. The Company will account for each separate lease component and the nonlease components associated with that lease component as a single lease component.

The Company has operating leases for corporate offices in Waltham, MA, Wayne, PA and Parsippany, NJ and for research laboratories in Boston, MA. These leases have remaining lease terms of less than one year to six years, some of which include options to extend the leases for additional years, and of which includes the option to terminate the lease upon default by the Company. The options to extend and terminate the leases were not incorporated into the determination of the lease term as the exercise of such options was not reasonably certain at the lease commencement date based on assessment of economic factors.

In addition to the operating leases, the Supply Agreement with 3M is a multiple-element arrangement covering Phase 3 clinical materials and related services, potential commercial materials, and potential future royalty payments, as well as the construction of certain equipment, an isolator, to be used in the manufacture of the Phase 3 and potential commercial supplies of Product. The contractually stated cost of the isolator, as well as the costs of the other elements, represent the estimated standalone selling price and, therefore, no initial allocation was required to separate the cost of the isolator from the other elements. Under ASC 840, Leases, which was the standard under which the Company accounted for leases through December 31, 2018, the Company was considered the accounting owner of the isolator equipment during construction and costs were recognized to research and development expense as incurred through December 31, 2018, since the equipment was assessed to not have alternative future use to the Company. Upon transition to ASC 842 on January 1, 2019, the Company continues to control the isolator during construction and costs will be recognized to research and development expense as incurred, which is expected to be completed in 2020, since the equipment was again assessed to not have alternative future use to the Company and/or 3M.

On March 27, 2018 the Company announced organizational changes which included the closure of its Parsippany, NJ office, and on January 4, 2019, the Company ceased use of the office, triggering an impairment assessment. In connection with this assessment, the Company recorded an impairment loss of $0.3 million during the six months ended June 30, 2019.

The Company’s operating leases also include such costs as real estate taxes and common area maintenance charges. Such amounts have been recorded as variable lease costs within the condensed consolidated statement of operations. During the three and six months ended June 30, 2019, the components of lease expense were as follows (in thousands):



	Three months ended		Six months ended
	June 30, 2019		June 30, 2019
Operating lease cost	$	688,979	$	1,374,307
Variable lease cost	75,624		91,752
Total lease cost	$	764,603	$	1,466,059

As of June 30, 2019, the weighted average remaining lease term for the Company’s operating leases was 5.00 years.

As a discount rate was not directly observable for the operating leases, the discount rate used to calculate the net present value of future payments was the Company’s incremental borrowing rate calculated at transition based on the remaining lease term for each operating lease. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. In determining the incremental borrowing rate, the Company considered the following: (i) the Company’s public credit rating, (ii) observable debt yields of the Company, as well as other bonds in the market issued by other companies with similar credit ratings as the Company, and (iii) adjustments necessary for collateral, lease term and inflation or foreign currency. As of June 30, 2019, the weighted average discount rate for the Company’s operating leases was 6.12%.

The following table summarizes activity of the operating lease liabilities for the six months ended June 30, 2019 (in thousands):



	Lease Liability
Beginning balance at December 31, 2018	$	—
Transition adjustment recorded upon adoption	8,289
Payments during the period	(1,374		)
Effect of discounted cash flows during the period	234
Ending balance at June 30, 2019	$	7,149

Payments of operating lease liabilities as of June 30, 2019 are as follows (in thousands):



Year ending December 31,
2019	$	1,309
2020	2,136
2021	1,060
2022	1,038
2023	980
Thereafter	1,863
Total Lease payments	$	8,386
Less: effect of discounted cash flows during the period	(1,237		)
Total	$	7,149

As of June 30, 2019, the Company had no operating or finance leases that have not yet commenced. In addition, upon adoption, and as of June 30, 2019, the Company had no short-term leases.