Leases

The Company has an operating lease for an office, manufacturing and research building, located at 405 Eagleview Boulevard, Exton, Pennsylvania, which consists of approximately 86,500 square feet of space.

The Company entered into this operating lease in April 2011. The lease agreement has a remaining lease term of 3 years, 9 months, and expires in March 2023. The lease also contains an additional five year option for the Company to extend the lease at a fair market value rate, which the Company expects to exercise. The lease term, is the period of the lease not cancellable by the Company, together with periods covered by: (i) renewal options the Company is reasonable certain to exercise, (ii) termination options the Company is reasonable certain not to exercise and (iii) renewal or termination options that are controlled by the lessor.

The Company has elected the practical expedient not to separate lease components from non-lease components for all its underlying assets. If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as the discount rate. The Company uses its best judgment when determining the incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term to the lease payments in a similar currency.

The operating lease cost for the three and six months ended June 30, 2019 was approximately $0.4 million and $0.7 million, respectively. For the three and six months ended June 30, 2019, approximately $0.3 million and $0.6 million, respectively was charged to selling, general and administrative expenses and approximately $0.1 million for each of the periods was charged to research and development expenses, with a remaining lease term of 8 years, 9 months, inclusive of the 5 year renewal option the Company expects to exercise.

Cash payments made in the six months ended June 30, 2019 under the operating lease was approximately $0.7 million.

The rate implicit in the leases was not readily determinable, and the Company computed its incremental borrowing rate using the following methodology:

1.) Development of an estimate of the term structure of the USD senior unsecured cost of debt for the Company as of the analysis date, which entailed the selection of a benchmark yield curve that approximates the credit risk of the Company on a senior unsecured basis. The B- benchmark yield curve was selected as the curve corresponding to the lowest available credit rating.

2.) Development of estimates of yield curves as of the analysis date for debt seniorities ranging from senior secured to senior unsecured cost of debt for the Company utilizing a recovery rates model that estimates yields based on expected recoveries on defaulted debt instruments across the Company’s capital structure.

Based upon the methods used above, the Company’s incremental borrowing rate was determined to be 25.49%, for its office lease, which is the only lease the Company has converting to the new standard.

Note 5. Leases (continued)

The following table provides a breakdown of our lease balances within our condensed consolidated balance sheet as of June 30, 2019:



Right of use asset - operating lease	$	4,421

Lease liabilities - current - operating lease	186

Lease liabilities - long term - operating lease	5,057

Total lease liabilities - operating lease	$	5,243

Other information related to our lease is as follows:



	June 30,
	2019

Remaining lease term- operating lease, in years	8.75 years

Discount rate - operating lease	25.49	%

Future minimum lease payments under our non-cancellable operating lease as of June 30, 2019 were as follows:



Year ending December 31,	2019	$	735
	2020	1,471
	2021	1,471
	2022	1,471
	2023	1,471
	2024 and thereafter	6,248

	Total	12,867

	Less: imputed interest	(7,624		)

	Current and long-term operating lease liability	$	5,243

Note 5. Leases (continued)

Future minimum lease payments under non-cancellable operating leases prior to adoption of ASC 842, Leases, as of December 31, 2018 were as follows:



Year ending December 31,	2019	$	1,416
	2020	1,471
	2021	1,471
	2022	1,471
	2023	368

	Total	6,197