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LEASES

6 Months Ended

Jun. 30, 2023

(13) LEASES

The Company categorizes leases at their inception as either operating or financing leases. Leases include various office and warehouse facilities which have been categorized as operating leases while certain equipment is leased under financing leases.

During February 2023, the Company entered into a lease agreement for approximately 41,427 square feet of office space for the operations of ZMS in Englewood, CO. The lease commences on July 1, 2023 and runs through December 31, 2028. At the expiration of the lease term the Company has the option to renew the lease for one additional five year period. The Company is entitled to rent abatements for the first six months of the lease and tenant improvement allowances. Payments based on the initial rate of $24.75 per square foot begin in January 2024. The price per square foot increases by an additional $0.50 during each subsequent twelve-month period of the lease after the abatement period. The Company anticipates the recognition of a lease liability of $4.2 million related to the lease during the Company’s third quarter of 2023, which is excluded from the future minimum lease payments table below.

The Company’s operating leases do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring the lease liability. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease. The Company’s weighted average borrowing rate was determined to be 3.99% for its operating lease liabilities. The Company’s equipment lease agreements have a weighted average rate of 9.40% which was used to measure its finance lease liability. The weighted average remaining lease term was 4.55 years and 2.23 years for operating and finance leases, respectively, as of June 30, 2023.

As of June 30, 2023, the maturities of the Company’s future minimum lease payments were as follows (in thousands):


	Operating Lease Liability		Finance Lease Liability
July 1, 2023 through December 31, 2023	$	677	$	76
2024		3,571		116
2025		3,586		76
2026		3,362		15
2027		3,150		—
2028		1,064		—
Total undiscounted future minimum lease payments	$	15,410	$	283
Less: difference between undiscounted lease payments and discounted lease liabilities:		(1,469)		(29)
Total lease liabilities	$	13,941	$	254

The components of lease expenses were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Lease cost:
Operating lease cost:
Total operating lease expense	$	1,121	$	1,113	$	2,242	$	2,219
Finance lease cost:
Total amortization of leased assets		29		29		59		59
Interest on lease liabilities		7		9		14		19
Total net lease cost	$	1,157	$	1,151	$	2,315	$	2,297

For the three months ended June 30, 2023 and 2022, $0.1 million and $0.2 million, respectively, of operating lease costs were incurred at the Company’s manufacturing and warehouse facility and were included in cost of sales. For the three and six months ended June 30, 2023 and 2022, $1.0 million and $2.0 million, respectively, of operating lease costs were included in selling, general and administrative expenses on the condensed consolidated statement of income.