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13. LEASES

12 Months Ended

Dec. 31, 2021

13. LEASES

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a ROU asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement and presentation of expenses and cash flows from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. We adopted this guidance using the cumulative-effect adjustment method on January 1, 2019, meaning we did not restate prior periods. Current year financial information is presented under the guidance in Topic 842, while prior year information will continue to be presented under Topic 840. Adoption of the standard resulted in the recognition of an operating ROU asset of approximately $1.6 million, a lease liability of approximately $2.5 million, and a reduction in other short-term and long-term liabilities of $873,000. Adoption of the standard did not have a material impact on our Statement of Operations or Statement of Cash flows. Accounting for our finance leases remains substantially unchanged.

We lease our office space and certain equipment under finance and operating leases. Our leases have remaining lease terms of one to ten years. Our office lease agreement includes both lease and non-lease components, which are accounted for separately. Our finance leases contain options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless we are reasonably certain to exercise the purchase option.

In September 2021, we entered into an office lease with Redmond East Office Park LLC, a Washington limited liability company, pursuant to which we will lease approximately 16,681 square feet of space located in Redmond, Washington that we will use primarily for general office space and product testing. The lease provides for an initial term of 128 months that commenced November 1, 2021. Pursuant to the lease, annual base rent will be approximately $500,000 for the first year and is subject to annual increases of 3.0%. In addition to base rent, we will pay additional rent comprised of our proportionate share of any operating expenses, real estate taxes, and management fees. We have the option to extend the term for one ten-year renewal period, provided that the rent would be subject to market adjustment at the beginning of the renewal term. The total minimum lease payments related to this lease is $6.4 million.

In September 2021, we entered into a second office lease with Redmond East Office Park LLC, pursuant to which we will lease approximately 36,062 square feet of space located in Redmond, Washington that we will use primarily for general office and lab space. The lease provides for an initial term of 120 months with a target commencement date of July 1, 2022. Pursuant to the lease, annual base rent will be approximately $1.1 million for the first year and is subject to annual increases of 3.0%. In addition to base rent, we will pay additional rent comprised of our proportionate share of any operating expenses, real estate taxes, and management fees. We have the option to extend the term for one ten-year renewal period, provided that the rent would be subject to market adjustment at the beginning of the renewal term. The total minimum lease payments related to this forward-starting lease is $13.0 million. The lease liability associated with this forward-starting lease are excluded from the tables below.

In connection with the effectiveness of the second lease with Redmond East Office Park, we amended our current office lease to provide for early termination intended to coincide with our move into the new 36,062 square feet of space but, in any event, no later than October 31, 2022.

The components of lease expense were as follows:


		Year Ended December 31,
(in thousands)		2021		2020		2019
Operating lease expense	$	513	$	464	$	464

Finance lease expense:
Amortization of leased assets		30		26		15
Interest on lease liabilities		3		3		6
Total finance lease expense		33		29		21
Total lease expense	$	546	$	493	$	485

Supplemental cash flow information related to leases was as follows:


		Year Ended December 31,
(in thousands)		2021		2020		2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	762	$	656	$	642
Operating cash flows from finance leases		3		3		6
Financing cash flows from finance leases		28		29		20

Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	5,322	$	-	$	1,638

Supplemental balance sheet information related to leases was as follows:


		December 31,
(in thousands)		2021		2020
Operating leases
Operating lease right-of-use assets	$	5,577	$	946

Current portion of operating lease liability		849		676
Operating lease liability, net of current portion		4,983		774
Total operating lease liabilities	$	5,832	$	1,450

Finance leases
Property and equipment, at cost	$	112	$	112
Accumulated depreciation		(56)		(28)
Property and equipment, net	$	56	$	84

Current portion of finance lease obligations	$	21	$	31
Finance lease obligations, net of current portion		26		44
Total finance lease liabilities	$	47	$	75

Weighted Average Remaining Lease Term
Operating leases		9.5 years		2.3 years
Finance leases		1.2 years		2.0 years

Weighted Average Discount Rate
Operating leases		2.5%		6.0%
Finance leases		6.3%		6.3%

As of December 31, 2021, maturities of lease liabilities were as follows:

		Operating		Finance
(in thousands)		leases		leases
Years Ended December 31,
2022	$	899	$	28
2023		535		21
2024		551		-
2025		567		-
Thereafter		4,069		-
Total minimum lease payments		6,621		49
Less: amount representing interest		(789)		(2)
Present value of lease liabilities	$	5,832	$	47