Leases

9 Months Ended

Sep. 30, 2022

10. Leases

The Company leases its office and laboratory facility in Boston, Massachusetts pursuant to a lease agreement entered into in December 2018 (the “2018 Lease”), which includes a lease incentive, fixed payment escalations, and a rent holiday. The 2018 Lease term commenced in May 2019, which was the point at which the Company obtained control of the leased premises, and expires in February 2028. Under the 2018 Lease, the Company is entitled to one option to extend the lease term for an additional five years. The option to extend the lease term was not included in the right-of-use asset and lease liability as it was not reasonably certain of being exercised. The Company classified the 2018 Lease as an operating lease under ASC 842, Leases. The initial annual base rent under the 2018 Lease is $2.3 million, with such base rent increasing annually during the initial term by 3% and with lease payments beginning in February 2020. Additionally, the 2018 Lease requires the Company to pay its portion of real estate taxes and costs related to the premises, including costs of operations, maintenance, repair, replacement, and management of the new leased premises. In connection with the 2018 Lease, the Company is required to maintain a letter of credit for the benefit of the landlord in an amount of approximately $1.3 million, based on a specified formula. The 2018 Lease included a landlord-provided tenant improvement allowance of up to $6.6 million to be applied to the costs of the construction of leasehold improvements. The Company determined that it owns the leasehold improvements related to the 2018 Lease and, as such, reflected the $6.6 million lease incentive as a reduction of the rental payments used to measure the operating lease liability, and, in turn, the operating lease right-of-use asset as of the lease commencement date in May 2019. Between the lease commencement date and December 31, 2019, the Company recorded increases of $6.6 million to the operating lease liability and to leasehold improvements as and when such leasehold improvements were paid for by the lessor.

The Company entered into an amendment in January 2021 to its 2018 Lease (the “Amended 2018 Lease”). Under the Amended 2018 Lease, the Company’s leased space expanded the 2018 leased premises to include an additional 37,500 square feet for a total of approximately 75,000 square feet and extended the term of the 2018 Lease for a new ten-year term. The term extension of existing square feet under the 2018 Lease is accounted for as a lease modification, which resulted in the remeasurement of the existing right-of-use asset and lease liability of $5.9 million and $13.1 million, respectively, to $11.5 million and $18.7 million, respectively, in January 2021, the effective date of the Amended 2018 Lease agreement, and is accounted for as an operating lease. The lease term of the additional leased premises commenced in April 2021, which was the point at which the Company obtained control of the leased premises. On commencement date the Company recorded a right-of-use asset and lease liability of $9.9 million, respectively, and

is accounted for as an operating lease. The Amended 2018 Lease included a landlord-provided tenant improvement allowance of up to $7.1 million to be applied to the costs of the construction of leasehold improvements. The Company determined that it owns the leasehold improvements related to the Amended 2018 Lease and, as such, reflected the $7.1 million lease incentive as a reduction of the rental payments used to measure the operating lease liability, and, in turn, the operating lease right-of-use asset as of the commencement date of the expansion premises in April 2021 (the “Expansion Premises Commencement Date”). Between the Expansion Premises Commencement Date and September 30, 2022, the Company recorded increases of $6.2 million to the operating lease liability and to leasehold improvements as and when such leasehold improvements were paid for by the landlord.

The components of the Company’s lease expense are as follows:



	Three Months Ended			Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2022
Operating lease cost	$	1,109	$	3,334
Variable lease cost	$	193	$	529

Supplemental disclosure of cash flow information related to leases was as follows:



	Three Months Ended		Nine Months Ended
(in thousands)	September 30, 2022		September 30, 2022
Cash paid for amounts included in the measurement of operating lease liabilities (operating cash flows)	$	807	$	2,406

The weighted-average remaining lease term and discount rate were as follows:

Because the interest rate implicit in the lease was not readily determinable, the borrowing rate was used to calculate the present value of the Amended 2018 Lease. In determining its incremental borrowing rate, the Company considered its credit quality and assessed interest rates available in the market for similar borrowings, adjusted for the impact of collateral over the term of the lease.

Future annual lease payments under the Amended 2018 Lease as of September 30, 2022 were as follows (in thousands):


Years Ending December 31,	Operating Leases
2022	$	807
2023		4,251
2024		5,611
2025		5,786
2026		5,959
Thereafter		34,419
Total future lease payments		56,833
Less: Imputed interest		(21,464)
Total lease liabilities	$	35,369

The following table presents lease assets and liabilities and their classification on the consolidated balance sheet (in thousands):


		September 30,		December 31,
Leases	Consolidated Balance Sheet Classification (unaudited)	2022		2021
Assets:
Operating lease assets	Operating lease right‑of‑use assets	$	19,558	$	20,341
Total lease assets		$	19,558	$	20,341
Liabilities:
Current:
Operating lease liabilities	Operating lease liabilities	$	785	$	671
Non‑current:
Operating lease liabilities	Operating lease liabilities, net of current portion		34,584		28,304
Total lease liabilities		$	35,369	$	28,975

September 30, 2022

December 31, 2021

Weighted‑average remaining lease term (in years) used for:

Operating leases

Weighted‑average discount rate used for:

Operating leases

Akouos, Inc. 10-Q