Note 6: Commitments and Contingencies

Lease Obligations

Operating Leases

The Company leases a facility under a non-cancelable operating lease with an expiration date of April 2017, following lease amendments made during the third and fourth quarters of 2016. Future minimum lease payments totaling $69 are due during the period of January to April 2017. This leased facility will contain a portion of the Company’s research and development activities until April 2017. The Company has the option to extend the lease beyond April 2017 on a month-to-month basis.

Rent expense for operating leases totaled $525, $337 and $305 for the years ended December 31, 2016, 2015 and 2014, respectively.

Primary Facility Lease

In August 2015, the Company entered into a lease agreement for approximately 51,000 rentable square feet of facility space in Morrisville, North Carolina, commencing in April 2016. The initial term of the lease agreement extends through June 30, 2026. The Company has an option to extend the lease agreement by five years upon completion of the initial lease term. Current contractual base rent payments are $90 per month, subject to a three percent increase annually over the term of the lease agreement.

As a result of the nature of and the involvement in the renovations during the construction period of the leased space, the Company was the “deemed owner,” for accounting purposes only, of the construction project and was required to capitalize the fair value of the building as well as the construction costs incurred by either the landlord or the Company on its consolidated balance sheet pursuant to FASB ASC 840, Leases, and the accounting policy described in Note 1—Organization and Significant Accounting Policies. The Company determined that the facility was substantially complete as of December 31, 2016 because the Company began to utilize the facility for all intended purposes, including primary research, development and drug compound manufacturing operations, in addition to administrative and corporate headquarters activities. Following the determination that the facility was substantially complete, the Company assessed the facility for sale-leaseback criteria qualification, which could result in a de-recognition of the building asset and the related financing obligation. The Company concluded that the facility did not meet the sale-leaseback criteria due to the Company’s continuing involvement in the leased facility. As a result, the facility is being accounted for as an asset financing, with the building asset and related facility financing obligation remaining on the Company’s balance sheet. The building asset will be depreciated over a 25 year period and the facility financing obligation will be amortized so that the net carrying value of the building asset and the facility financing obligation are equivalent at the end of the initial term of the lease agreement. Monthly rental payments will be allocated between principal and interest expense associated with the facility financing obligation, as well as grounds rent expense of $8 per month.

The Company has recorded an asset related to the building and construction costs within property and equipment of $10,557 as of December 31, 2016, which includes capitalized interest expense totaling $441. The non-current facility lease obligation on the Company’s consolidated balance sheet is $7,998 as of December 31, 2016 and $0 as of December 31, 2015. During the year ended December 31, 2016, construction costs financed by the landlord totaled $8,157 and the Company made financing obligation principal payments to the landlord totaling $159.

Future minimum payments, including interest, required under the Company’s primary facility lease agreement, accounted for as an asset financing, as of December 31, 2016 are as follows:

2017	$	1,103
2018		1,135
2019		1,170
2020		1,205
2021		1,241
Thereafter		6,062
Total minimum lease payments	$	11,916

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. The Company is not subject to any current pending legal matters or claims.

The Company has entered into, and expects to continue to enter into, contracts in the normal course of business with various third parties who support its clinical trials, preclinical research studies and other services related to its development activities. The scope of the services under these agreements can generally be modified at any time, and the agreement can be terminated by either party after a period of notice and receipt of written notice. There have been no contract terminations as of December 31, 2016.

Indemnification

In the ordinary course of business, the Company has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.

The Company’s obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations vary.

It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. No material indemnification liabilities were identified or accrued in the accompanying financial statements.

Other

See Note 14—Subsequent Events for discussion of additional contractual commitments the Company entered into subsequent to December 31, 2016.