Leases

6 Months Ended

Jun. 30, 2019

8.	LEASES

Adoption of ASC Topic 842, "Leases"

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 840. The Company's portfolio of leases contains both finance and operating leases that relate primarily to real estate agreements and office equipment agreements. Substantially all of the value of the Company's lease portfolio relates to a real estate sub-lease agreement that was entered into in July 2016.

Practical Expedients and Elections

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, the Company's assessment on whether a contract is or contains a lease, and its initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease components on the office equipment leases and elected the short-term lease recognition exemption for all leases that qualify.

Discount Rate

To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the "incremental borrowing rate" or "IBR").

Operating leases

Property leases

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the 5/1 ARM rate and applied a premium factor based on the Company's present financial position and emerging growth status, the Company determined that 6.14% was an appropriate incremental borrowing rate to apply to its real-estate operating lease.

The Company entered into a new property lease with effect from April 30, 2019 and determined an appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the average of the 5/1 ARM rate including an applied a premium factor based on the Company's present financial position, and the Company's current borrowing rate provided by third party lenders, the Company determined that 9.78% was an appropriate incremental borrowing rate to apply to its real-estate operating lease.

Office equipment leases

The Company determined the appropriate IBR by calculating the rate implicit in the agreement based on the cost of the equipment, if purchased outright, the expected residual value and the term of the lease installments. The interest rate implicit in these agreements ranged from 23% to 50%. The weighted average discount rates for the office equipment operating leases was 43.1%.

Finance Leases

Laboratory equipment leases

The Company has financed several items of laboratory equipment through vendor financing. The appropriate IBR was calculated by using the rates implicit in the agreements based on the cost of the equipment, the finance lease term and the regular installments due.

The weighted average discount rates for operating and finance leases are as follows:

Operating leases			9.0	%
Finance leases			8.8	%

Right of use assets

Right of use assets are included in the unaudited condensed consolidated Balance Sheet are as follows:

	June 30, 2019

Non-current assets
Right of use assets, operating leases, net of amortization	$	605,612
Right of use assets, finance leases, net of depreciation – included in plant and equipment	$	649,609

The Company acquired laboratory equipment on January 24, 2019 for a purchase consideration of $613,958 and a two year maintenance contract associated with the equipment of $50,341 in terms of a deferred purchase arrangement. The total amount funded by the vendor was $655,133 repayable in twenty-four equal monthly installments of $29,965.

Total Lease Cost

Individual components of the total lease cost incurred by the Company is as follows:

	Six months ended June 30, 2019

Operating lease expense	$	94,040

Finance lease expense
Depreciation of capitalized finance lease assets		56,309
Interest expense on finance lease liabilities		26,129

Total lease cost	$	176,478

Depreciation of assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease.

Maturity of Leases

Finance lease liability

The amount of future minimum lease payments under finance leases are as follows:

	Amount

Remainder of 2019	$	355,999
2020		378,827
2021		29,965
Total undiscounted minimum future lease payments		764,791
Imputed interest		(65,482	)

Total finance lease liability	$	699,309

Disclosed as:
Current portion	$	493,052
Non-current portion		206,257
	$	699,309

Operating lease liability

The amount of future minimum lease payments under operating leases are as follows:

	Amount

Remainder of 2019	$	124,317
2020		242,166
2021		247,264
2022		83,231
Total undiscounted minimum future lease payments		696,978
Imputed interest		(90,177	)

Total operating lease liability	$	606,801

Disclosed as:
Current portion	$	187,422
Non-current portion		419,379
	$	606,801

Icagen, Inc. 10-Q