LEASES

9 Months Ended

Sep. 30, 2021

6.	LEASES

The Company leases corporate office space in Los Gatos, California. In August 2020, the Company and its landlord amended the lease for this office. This amendment extends the expiration date of the operating lease from January 2021 to January 2026 and increases the space from 3,396 square feet to 4,101 square feet. Under ASC 842, the lease amendment was treated as a separate lease for the new space and a modification of the lease for the original space. An additional right-of-use (“ROU”) asset and lease liability of approximately $681,000 were recorded at the time of the amendment. In January 2021 the additional space became available for use, and the Company recorded an additional ROU asset and corresponding liability of approximately $144,000. The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.5%. The lease contains escalating payments on the anniversary of the original commencement which are included in the measurement of the initial lease liability. Additional payments based on a change in the Company’s share of the operating expenses, including property taxes and insurance, are recorded as a period expense when incurred.

In March 2021, the Company began leasing 474 square feet of office space in Tempe, Arizona. The new lease is classified as an operating lease with an initial term of two years and an option to extend for an additional three years through February 2026. The lease also contains a performance standard for research collaboration with Arizona State University. The agreement requires a minimum value of collaborative research in each year of the lease. The lease is accounted for under ASC 842 and accordingly, the research payments are included in the ROU and lease liability at the commencement. In March 2021, the Company recorded an ROU and associated lease liability of approximately $238,000. The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.25% over five years, as the Company expects to lease the space through the three-year extension. The lease also contains escalating payments on the anniversary of the original commencement which are included in the measurement of the initial lease liability.

In October 2019, the Company entered into an agreement to lease a tool for use in the development of the Company’s technology. The lease is for five 5 years at $150,000 per month and commenced on August 1, 2021. A prepayment of $450,000 was made in the nine months ended September 30, 2020 which represents the final three monthly payments under the lease and was recorded as a long-term prepaid until the lease commencement. At commencement, the Company recorded an ROU asset of approximately $6.4 million and a corresponding lease liability of approximately $6.0 million. The lease was classified as a financing lease and accordingly, amortization is recorded as a research and development expense in the Company’s condensed statement of operations. Interest expense is also recorded and included in other income or expense in the Company’s condensed statement of operations. The lease liability is based on the present value of the minimum lease payments, discounted using the Company’s estimated incremental borrowing rate of 5.25% at the time of commencement. The lease payment of $150,000 per month includes approximately $30,000 in supplies and maintenance that is recorded as an operating expense and is not included in the valuation of the lease liability. The Company elected to exclude these costs from the asset and related lease liability valuation for this class of assets. These costs will be expensed as operating expenses in the period incurred.

Lease expense for operating leases consists of the lease payments recognized on a straight-line basis over the lease term. Expenses for financing leases consists of the amortization expenses recognized on a straight-line basis over the lease term and interest expense. The components of lease costs were as follows (in thousands):

Components of lease costs
	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Financing lease costs:
Amortization of ROU Assets	$	211	$	–	$	211	$	–
Interest on lease liabilities		52		–		52		–
Operating lease costs
Fixed lease costs		63		30		177		83
Variable lease costs		–		9		–		36
Short-term lease costs		10		11		32		28
Total operating lease costs	$	336	$	50	$	472	$	147

Future minimum payments under non-cancellable leases as of September 30, 2021 were as follows (in thousands):


For the Year Ended December 31,	Financing leases			Operating leases
Remaining 2021	$	597		$	60
2022		1,436			239
2023		1,436			271
2024		1,436			278
2025 & thereafter		1,914			305
Total future minimum lease payments		6,819			1,153
Less imputed interest		(743	)		(130	)
Total lease liability	$	6,076		$	1,023

The following table provides supplemental information and non-cash activity related to the Company’s operating and financing leases (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$	52	$	41	$	90	$	123
Cash paid for amounts included in the measurement of financing lease liabilities		–		–		–		–
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations	$	–	$	681	$	382	$	681
Right-of-use assets obtained in exchange for financing lease obligations	$	6,383	$	–	$	6,383	$	–

The weighted average remaining discount rate is 5.25% for the Company’s operating and financing leases. The weighted average remaining lease term is 4.4 years for operating leases and 4.8 years for financing leases.