Leases

12 Months Ended

Dec. 31, 2020

As of December 31, 2020, the Company had operating leases for its research and development and manufacturing facilities, corporate headquarters and offices and certain equipment, as well as embedded leases related to multiple manufacturing supply agreements with CMOs and CDMOs to manufacture the Company’s COVID-19 vaccine candidate, NVX-CoV2373.

The CMO and CDMO manufacturing supply agreements were entered into during 2020 and include the use of identified manufacturing facilities, contain fixed or minimum commitments and include variable costs related to production and material costs in excess of the fixed or minimum commitment specified in the agreements. The Company evaluated the agreements at inception and determined that certain of these arrangements contain an embedded lease under ASC 842 as it has the exclusive use of, and control over, a portion of the manufacturing facility and equipment of the supplier during the contractual term of the arrangement. The Company classified the CMO and CDMO arrangements as operating and finance leases based on the terms of the agreement. The Company recognized lease expense related to fixed payments for its short-term operating leases on a straight-line basis over the lease term and lease expense related to variable payments as incurred based on performance or usage in accordance with the contractual agreements. The Company recognized lease liabilities and ROU assets of $245.9 million for its finance leases and long-term operating leases. The Company’s weighted average Incremental Borrowing Rate for its lease obligations was 6.4%. The Company expensed the ROU assets since they relate to research and development activities for the development of NVX-CoV2373 for which the Company does not have an alternative future use. The Company used significant judgment and estimates, including the estimated value of the underlying leased asset and financial profile of comparable companies to analyze the credit spread as on the date of the lease inception.

During 2020, the Company entered into various facility lease agreements, including a lease for the premises located at 700 Quince Orchard Road, Gaithersburg, Maryland ("700QO") that is expected to commence in 2021. The lease is for approximately 170,000 square feet of space that the Company intends to use for manufacturing, research and development and offices. The term of the lease is approximately 15 years with options to extend the lease. The lease provides for an annual base rent of $5.8 million that is subject to future rent increases, and obligates the Company to pay building operating costs. The Company anticipates that it will incur substantial tenant improvement costs, net of a landlord contribution of $30.6 million, in 2021 to bring the building to the condition, necessary for its intended use. The Company is planning to occupy the premises in phases expected to start in the second half of 2021. Since the commencement date isn’t until 2021, the lease amounts were not included as an ROU asset and lease liability as of December 31, 2020.

At December 31, 2020, the facility leases, excluding the 700QO lease, have expirations that range from approximately three to six years, some of which include options to extend the leases or terminate the leases early. Options to extend the leases or terminate the leases early are only included in the lease term when it is reasonably certain that the option will be exercised. The facility leases contain provisions for future rent increases, and obligate the Company to pay building operating costs. The Company records operating lease expense for each of its operating leases on a straight-line basis from lease commencement date through the end of the lease term.

Supplemental balance sheet information related to leases as of December 31, 2020 was as follows (in thousands, except weighted-average remaining lease term and discount rate):


Lease Assets and Liabilities	Classification	Amount
Assets:
ROU assets, operating, net	Other non-current assets	$	7,794

Liabilities:
Current portion of operating lease liabilities	Other current liabilities	$	3,782
Current portion of finance lease liabilities	Current portion of finance lease liabilities	105,862
Total current lease liabilities		$	109,644

Non-current portion of operating lease liabilities	Other non-current liabilities	$	10,122
Non-current portion of finance lease liabilities	Non-current finance lease liabilities	40,083
Total non-current lease liabilities		$	50,205

Weighted-average remaining lease term (years):
Operating leases		4.5
Finance leases		4.7

Weighted-average discount rate:
Operating leases		13.8		%
Finance leases		6.4		%

Lease expense for the operating and short-term leases for the year ended December 31 was as follows (in thousands):


	2020
Operating lease expense	$	2,462
Short-term lease expense	66,805
Finance lease expense:
ROU assets expensed	242,009
Interest expense	3,097
Total finance lease expense	$	245,106

Supplemental cash flow information related to leases for the year ended December 31, 2020 was as follows (in thousands):


	Amount
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	63,634
Operating cash flows used in finance leases	3,097
Financing cash flows used in finance leases	96,065

ROU assets obtained in exchange for operating lease obligations	$	5,590
ROU assets obtained in exchange for finance lease obligations	242,009

As of December 31, 2020, maturities of lease liabilities were as follows (in thousands):


Year	Amount
2021	$	118,017
2022	44,692
2023	3,385
2024	2,393
2025	2,369
Thereafter	2,079
Total minimum lease payments	172,935
Less: imputed interest	(13,086)
Total lease liabilities	$	159,849