(11) Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases.

The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred, if any. The Company’s leases have remaining lease terms of 4.25 years to 5.75 years. The Company has exercised the option to terminate the Ardsley lease with a termination date of June 22, 2022. 

Operating Leases

The Company leases certain office space, manufacturing and warehouse space under arrangements classified as leases under ASC 842. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Ardsley, New York

The Company was previously headquartered at a leased facility in Ardsley, New York with approximately 160,000 square feet of space. In September 2021, the Company sent the landlord notice of exercise of its early termination option under the lease, which was effective on June 22, 2022. In connection with the lease termination, the Company paid an early termination fee of approximately $4.7 million. Concurrent with the Ardsley lease termination, in June 2022, the Company relocated its corporate headquarters to a substantially smaller subleased office in Pearl River, New York, described below.

Pearl River, New York

In June 2022, the Company entered into a 6-year sublease for an aggregate of approximately 21,000 square feet of space in Pearl River, New York. The Company has no options to extend the term of the sublease. The Pearl River sublease provides for monthly payments of rent during the lease term. The base rent is currently $0 through December 31, 2022, with payments commencing on January 1, 2023 with a base rent of $0.3 million per year, subject to an annual 2.0% escalation factor in each subsequent year thereafter.

Chelsea, Massachusetts

The Company’s Civitas subsidiary leased a manufacturing facility in Chelsea, Massachusetts which it used to manufacture Inbrija through February 10, 2021. On February 10, 2021, the Company completed the sale of its Chelsea manufacturing operations to Catalent Pharma Solutions and assigned the lease of the Chelsea facility to a Catalent affiliate.

In 2018, the Company initiated a renovation and expansion of a building within the Chelsea manufacturing facility that increased the size of the facility to approximately 95,000 square feet. The project added a new size 7 spray dryer manufacturing production line for Inbrija and other ARCUS products that has greater capacity than the existing size 4 spray dryer manufacturing production line, and created additional warehousing space for manufactured product. All costs to renovate and expand the facility through the date of assignment to Catalent were borne by the Company. Since the February 10, 2021 sale of the manufacturing operations, Catalent has been responsible for finalizing the expansion, including obtaining needed regulatory approvals. However, given the potential importance of the expansion to the Company’s business, in December 2021 the Company agreed to fund $1.5 million of Catalent’s costs to complete the size 7 spray dryer expansion, which will be payable by the Company in four quarterly installments after the later of January 1, 2024 or FDA qualification and approval for use of the size 7 spray dryer.

Additional Facilities

In October 2016, the Company entered into a 10-year lease agreement with a term commencing January 1, 2017, for approximately 26,000 square feet of lab and office space in Waltham, MA. The lease provides for monthly rental payments over the lease term. The base rent under the lease is currently $1.2 million per year.

The Company’s leases have remaining lease terms of 4.25 years to 5.75 years, which reflects the exercise of the early termination of the Company’s Ardsley, NY lease as described above. The weighted-average remaining lease term for the Company’s operating leases was 4.6 years at September 30, 2022. The weighted-average discount rate was 7.89% at September 30, 2022.

ROU assets and lease liabilities related to the Company’s operating leases are as follows:

The Company has lease agreements that contain both lease and non-lease components. The Company accounts for lease components together with non-lease components (e.g., common-area maintenance). The components of lease costs were as follows:

Future minimum commitments under all non-cancelable operating leases are as follows:

Supplemental cash flow information related to the Company’s operating leases are as follows: