Leases

Office Lease

The Company leases office and laboratory space for its corporate headquarters, located at

301

–

351

Galveston Drive, Redwood City, California. In

June 2017,

the Company renegotiated the Lease with its Landlord, or the New Lease. The New Lease is effective from

February 1, 2018

through

January 31, 2024

and contains a renewal option for a

six

-year extension after the current expiration date. The Company does

not

expect that the renewal option will be exercised and has therefore excluded the option from the calculation of the right of use asset and lease liability. The initial monthly rent is approximately

$0.1

million with annual increases of

commencing on

February 1

, and the

first

two

months to be abated provided that the Company is

not

in default thereunder. The lease includes non-lease components (i.e. property management costs) that are paid separately from rent based on actual costs incurred and therefore were

not

included in the right-of-use asset and liability but are reflected as an expense in the period incurred. The New Lease provided for an initial tenant incentive allowance of approximately

$0.4

million with an expiration of the unused portion in

December 2019.

In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate based on the remaining lease term.

January 2, 2019,

the Company entered into an agreement to sublease approximately

47%

of its office and laboratory space effective

February 16, 2019

and expiring on

January 31, 2024,

or the Sublease. The initial monthly rent from the sublessee is approximately

$48,000

per month with annual increases of

commencing on

February 1

2019.

Under the Sublease agreement, the sublessee was granted early access to the facility on

January 2, 2019,

which is deemed the lease commencement date and rent was abated for

days until the effective date of the lease. The sublessee is obligated to pay its proportionate share of property management costs on a pass-through basis. The Company incurred a total of

$0.4

million in initial direct costs in entering the sublease of which approximately

$0.2

million is related to the tenant improvement allowance transferred to the sublessee. Initial direct costs are being amortized over the term of the sublease.

The transfer of the tenant improvement allowance to the sublessee resulted in a change in cash flows for the New Lease and was accounted for as a modification with changes in lease term and consideration. As a result, the Company remeasured the lease liability with the revised lease payments and recognized approximately

$24,000

as a decrease to the lease liability, with a corresponding adjustment to the right-of-use asset.

Contract Manufacturing Lease

December 12, 2012,

the Company entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug product with a contract manufacturing organization. The initial term of the agreement was through

December 31, 2017,

which term automatically renews in

two

-year increments unless earlier terminated by either party by giving

eighteen

months’ notice. Commencing in

2013,

the Company is required to make overhead fee payments each year of

$0.2

million, prorated based on aggregate revenues. The Company has determined that this fee is an in-substance fixed lease payment as it represents the minimum annual payment under the contract. The Company concluded that this agreement contains an embedded lease as the clean rooms have been built specifically for production of the Company’s product and their use is effectively controlled by the Company as it has priority over the space during the term of the agreement. The Company accounts for the agreement as an operating lease and has evaluated the non-cancelable term to be through the binding commitment date of

December 31, 2021.

The components of lease expense are presented in the following table (in thousands):

	Three months ended June 30 , 201 9			Six months ended June 30 , 201 9
Operating lease costs	$	340		$	680
Sublease income		(150	)		(296	)
Net lease costs	$	190		$	384

Other information related to the operating leases is presented in the following table (in thousands, except years and percentages):

	Three months ended June 30 , 201 9		Six months ended June 30 , 201 9
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	308	$	613
Supplemental non-cash disclosures of lease activities
Transfer of tenant improvement allowance to sublease	$	—	$	242
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	4,730

The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:

	June 30, 2019
Weighted-average remaining term – operating lease (in years)		4.39
Weighted-average discount rate – operating lease		11.72	%

Maturities of lease liabilities as of

June 30, 2019

are presented in the following table (in thousands):

Year:
2019 (remaining six months)	$	670
2020		1,468
2021		1,505
2022		1,345
2023		1,386
Thereafter		116
Total future minimum lease payments		6,490
Less imputed interest		(1,492	)
Total	$	4,998

Reported as:

Operating lease liabilities	$	759
Operating lease liabilities, net of current portion		4,239
Total lease liability	$	4,998

Future minimum sublease payments as of

June 30, 2019

are presented in the following table (in thousands):

Year:
2019 (remaining six months)	$	288
2020		593
2021		610
2022		629
2023		648
Thereafter		54
Total future minimum sublease payments	$	2,822

The rent receivable balance is reported in the balance sheet as follows (in thousands):

Reported as:

Prepaid expenses and other current assets	$	69
Other assets		394
Total rent receivable	$	463