Leases

9 Months Ended

Sep. 30, 2019

The Company leases facilities in Ann Arbor, Michigan and Cambridge, Massachusetts. The Cambridge facility includes clean rooms, laboratories for MACI and Epicel manufacturing and office space. The Company also leases offsite warehouse space, vehicles and computer equipment.

The Company adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods. As a result of adoption, no cumulative adjustment to retained earnings occurred. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. Certain of the Company’s lease agreements include lease payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Upon adoption all operating lease commitments with a lease term greater than 12 months that were previously assessed under previous lease guidance, were recognized as right to use assets and liabilities, on a discounted basis on the balance sheet. Leases with an initial term of 12 months or less are not recorded on the balance sheet and for the nine months ended September 30, 2019, lease expense of less than $0.1 million was recorded related to short-term leases for both the three and nine months ended September 30, 2019.

Adoption of ASU 2016-02 resulted in the recording of additional right-of-use assets and lease liabilities of approximately $25.6 million and $27.8 million, respectively, as of January 1, 2019. There was an immaterial impact on the Company's consolidated net earnings and cash flows upon adoption. The contribution toward the cost of tenant improvements is recorded as a reduction of the operating lease assets and reclassed from deferred rent to lease operating assets. For the three and nine months ended September 30, 2019, the Company recognized $1.4 million and $4.0 million of operating lease expense and less than $0.1 million of financing lease expense, respectively. For the three and nine months ending September 30, 2018 (as reported under the prior leasing guidance) the Company recognized $1.3 million and $3.9 million of operating lease expense and less than $0.1 million of financing lease expense, respectively. The Company's leases contain non-lease components and activities that do not transfer a good or service to the Company. The Company elected not to combine lease and non-lease components and therefore non-lease costs were not included in the net lease assets or lease liabilities.

Total leased assets and liabilities as reassessed under the updated guidance and classified on the balance sheet, as of September 30, 2019 are as follows:



(In thousands)	Classification	September 30, 2019
Assets
Operating	Right-of-use assets	$	25,619
Finance	Property and equipment, net	157
		$	25,776
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	2,836
Finance	Other liabilities	35
		$	2,871
Non-current
Operating	Operating lease liabilities	$	25,311
Finance	Other long-term liabilities	114
		$	25,425

Cash paid for amounts included in the measurement of the Company's operating lease liabilities was $3.6 million for the nine months ended September 30, 2019.

Maturity of lease liabilities as of September 30, 2019 are as follows:



(In thousands)	Operating Leases			Finance Leases			Total
2019	$	1,324		$	—		$	1,324
2020	5,336			41			5,377
2021	5,255			41			5,296
2022	5,309			41			5,350
2023	5,292			41			5,333
2024	5,302			—			5,302
Thereafter	11,269			—			11,269
Total lease payments	39,087			164			39,251
Less: Interest	(10,940		)	(15		)	(10,955		)
Present value of lease liabilities	$	28,147		$	149		$	28,296

An explicit rate is not provided for some of the Company's leases, therefore the Company uses a mix of incremental borrowing rate based on the information available at commencement date, as well as implicit and explicit rates in determining the present value of lease payments.

The Company has options to renew lease terms for facilities and other assets. The exercise of lease renewal options is generally at the Company's sole discretion. The Company evaluates renewal and termination options at the lease commencement date to determine if it is reasonably certain to exercise the option on the basis of economic factors. For certain leases, the Company's exercise of the renewal option was determined to be probable and the renewal period was accordingly included in the lease term and related calculations. Lease terms and discount rates as of September 30, 2019 are as follows:



	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	7.07
Finance leases	3.75
Weighted average discount rate
Operating leases	9.46	%
Finance leases	5.00	%

Future minimum payments related to operating and capital leases, as reflected under the prior guidance, for the fiscal year ended December 31, 2018, are as follows with no changes from prior disclosure:



(In thousands)	Total		2019		2020		2021		2022		2023		More than 5 years
Operating leases	$	15,386	$	4,879	$	4,719	$	4,754	$	966	$	68	$	—
Capital leases	205		41		41		41		41		41		—
Total	$	15,591	$	4,920	$	4,760	$	4,795	$	1,007	$	109	$	—

Leases

Total leased assets and liabilities as reassessed under the updated guidance and classified on the balance sheet, as of September 30, 2019 are as follows:



(In thousands)	Classification	September 30, 2019
Assets
Operating	Right-of-use assets	$	25,619
Finance	Property and equipment, net	157
		$	25,776
Liabilities
Current
Operating	Current portion of operating lease liabilities	$	2,836
Finance	Other liabilities	35
		$	2,871
Non-current
Operating	Operating lease liabilities	$	25,311
Finance	Other long-term liabilities	114
		$	25,425

Cash paid for amounts included in the measurement of the Company's operating lease liabilities was $3.6 million for the nine months ended September 30, 2019.

Maturity of lease liabilities as of September 30, 2019 are as follows:



(In thousands)	Operating Leases			Finance Leases			Total
2019	$	1,324		$	—		$	1,324
2020	5,336			41			5,377
2021	5,255			41			5,296
2022	5,309			41			5,350
2023	5,292			41			5,333
2024	5,302			—			5,302
Thereafter	11,269			—			11,269
Total lease payments	39,087			164			39,251
Less: Interest	(10,940		)	(15		)	(10,955		)
Present value of lease liabilities	$	28,147		$	149		$	28,296



	September 30, 2019
Weighted average remaining lease term (years)
Operating leases	7.07
Finance leases	3.75
Weighted average discount rate
Operating leases	9.46	%
Finance leases	5.00	%



(In thousands)	Total		2019		2020		2021		2022		2023		More than 5 years
Operating leases	$	15,386	$	4,879	$	4,719	$	4,754	$	966	$	68	$	—
Capital leases	205		41		41		41		41		41		—
Total	$	15,591	$	4,920	$	4,760	$	4,795	$	1,007	$	109	$	—