Leases

9 Months Ended

Sep. 30, 2022

The Company leases office space and certain equipment under non-cancelable lease agreements.

In accordance with ASC 842, Leases, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease, if available, or otherwise at the Company’s incremental borrowing rate. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.

In calculating the right-of-use asset and lease liability, the Company elected, and has in practice, historically combined lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

Office Lease at Triangle Business Center, Durham, North Carolina

On January 18, 2021, the Company entered into a lease with an initial term expiring in 2032, as amended for 19,265 rentable square feet, located in Durham, North Carolina. This lease dated as of January 18, 2021, as amended (the “TBC Lease”), is by and between the Company and Copper II 2020, LLC (the “TBC Landlord”), pursuant to which the Company is leasing space serving as its corporate headquarters and small-scale manufacturing site (the “Premises”) located within the Triangle Business Center. The lease executed on January 18, 2021, as amended, was further amended on November 23, 2021 to expand the Premises by approximately 3,642 additional rentable square feet from 15,623 rentable square feet.

The Premises serves as the Company’s corporate headquarters and supports various cGMP activities, including research and development and small-scale manufacturing capabilities. These capabilities include the infrastructure necessary to support small-scale drug substance manufacturing and the ability to act as a primary, or secondary backup, component of a potential future commercial supply chain.

The TBC Lease commenced on January 18, 2021 (the “Lease Commencement Date”). Rent under the TBC Lease commenced in October 2021 (the “Rent Commencement Date”). The term of the TBC Lease expires on the last day of the one hundred twenty-third calendar month after the Rent Commencement Date. The TBC Lease provides the Company with one option to extend the term of the TBC Lease for a period of five years, which would commence upon the expiration of the original term of the TBC Lease, with base rent of a market rate determined according to the TBC Lease; however, the renewal period was not included in the calculation of the lease obligation as the Company determined it was not reasonably certain to exercise the renewal option.

The monthly base rent for the Premises is approximately $40 for months 1-10 and approximately $49 for months 11-12, per the second amendment to the primary lease. Beginning with month 13 and annually thereafter, the monthly base rent will be increased by 3%. Subject to certain terms, the TBC Lease provides that base rent will be abated for three months following the Rent Commencement Date. The Company is obligated to pay its pro-rata portion of taxes and operating expenses for the building as well as maintenance and insurance for the Premises, all as provided for in the TBC Lease.

The TBC Landlord has agreed to provide the Company with a tenant improvement allowance in an amount not to exceed $130 per rentable square foot, totaling approximately $2,450, per the primary lease, inclusive of the first amendment, and $115 per rentable square foot, totaling $419, per the second amendment to the TBC Lease. The tenant improvement allowance will be paid over four equal installments corresponding with work performed by the Company. Pursuant to the terms of the TBC Lease, the Company delivered to the TBC Landlord a letter of credit in the amount of $583, as amended, as collateral for the full performance by the Company of all of its obligations under the TBC Lease and for all losses and damages the TBC Landlord may suffer as a result of any default by the Company under the TBC Lease. Cash funds maintained in a separate deposit account at the Company’s financial institution to fully secure the letter of credit are presented as restricted cash in non-current assets on the accompanying condensed consolidated balance sheets.

Office Lease at Meeting Street, Charleston, South Carolina

On March 3, 2022 EPI Health entered into a sublease agreement with EPG (the “Meeting Street Lease”) for office space at 174 Meeting Street in Charleston, South Carolina for approximately 6,000 rentable square feet.

The term of the Meeting Street Lease was initially through September 30, 2024, and EPI Health had the right to terminate the Meeting Street Lease with prior notice. On August 31, 2022, EPI Health notified EPG of its termination of the sublease

effective February 28, 2023. The monthly base rent for the Meeting Street Lease is $20 for months 1-12, inclusive of taxes and operating expenses such as maintenance and insurance.

TBC Lease and Meeting Street Lease

Rent expense, including both short-term and variable lease components associated with the TBC Lease and the Meeting Street Lease, as applicable, was $140 and $425 for the three and nine months ended September 30, 2022, respectively. Rent expense was $100 and $356 for the three and nine months ended September 30, 2021, respectively.

The remaining lease term for the TBC Lease and the Meeting Street Lease are 9.42 years and 0.42 years, respectively, as of September 30, 2022. The weighted average discount rate for both leases was 8.35% as of September 30, 2022.

Future net minimum lease payments, net of amounts expected to be received related to the tenant improvement allowance, as of September 30, 2022 were as follows:


Maturity of Lease Liabilities	Operating Lease

2022	$	210
2023	229
2024	626
2025	645
2026	665
2027 and beyond	3,700
Total future undiscounted lease payments	$	6,075

Less: imputed interest	(2,020)
Total reported lease liability	$	4,055

The table above reflects payments for an operating lease with a remaining term of one year or more, but does not include obligations for short-term leases. In addition, the net cash outflows related to the 2022 and 2023 fiscal years presented above includes the expected timing of the remaining balance of the total tenant improvement allowance of $2,450 being funded by the TBC Landlord, which the Company reasonably expects to receive within the next twelve months. During the year ended December 31, 2021, the Company received $2,031 related to payments as part of the total TBC Landlord funded tenant improvement allowance.

Components of lease assets and liabilities as of September 30, 2022 were as follows:


	September 30, 2022

Assets

Right-of-use lease assets	$	1,794
Total lease assets	$	1,794

Liabilities
Operating lease liabilities, current portion	$	254
Operating lease liabilities, net of current portion	3,801
Total lease liabilities	$	4,055