SOLESENCE, INC. Leases Disclosure

 

(6)	Lease Commitments

 

The Company’s operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company’s leases include one or more options to renew or terminate the lease at the Company’s discretion. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in our lease term. During the first calendar year of our newly leased building, we have subleased a portion of the unused floorspace on a temporary basis. This sublease may convert to a month-to-month lease upon expiration.

 

As of December 31, 2023, the right-of-use (ROU) asset had a balance of $7,907 which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $1,297 and $9,152, respectively. These amounts are included in the “Current portion of operating lease obligations” and “Long-term portion of operating lease obligations” line items of these consolidated financial statements. As of December 31, 2022, the ROU asset had a balance of $8,978 which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $0 and $9,823, respectively.  The $0 in current lease liability stems from expected payments from the lessor of the Bolingbrook facility reimbursing the Company for tenant improvement allowances in the amount of $1,957 over the subsequent twelve months. As a result, the total lease liability was reduced by the expected payment, and the net effect of reimbursements received, and cash paid for leases in 2023 results in net lease payments of $97. The discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.

 

The office leases contain variable lease payments which consist primarily of taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor. The Company has elected to utilize the available practical expedient to combine lease and non-lease components for building leases.

 

Quantitative information regarding the Company’s leases is as follows:

 

		Twelve Months Ended December 31, 2023				Twelve Months Ended December 31, 2022
Components of lease cost
Finance lease cost components:
Amortization of finance lease assets		$	—			$	33
Interest on finance lease liabilities			—				4
Total finance lease costs			—				37
Operating lease cost components:
Operating lease cost			1,881				2,068
Variable lease cost			581				536
Short-term lease cost			112				138
Sub-lease income			(786	)			(689	)
Total operating lease costs			1,788				2,053
Total lease cost		$	1,788			$	2,090

 

Supplemental cash flow information related to leases is as follows for the years ended December 31, 2023 and 2022:

 

		2023				2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases		$	172			$	1,433
Lease liabilities arising from obtaining right-of-use assets		$	182			$	12
Early termination of operating lease			—				73
Reduction in right of use asset due to remeasurement			—				(1,793	)
Reduction in lease liability due to remeasurement			—				(1,898	)
Weighted-average remaining lease term-operating leases (in years)			7.9				9.6
Weighted-average discount rate-operating leases			7.1	%			7.6	%

  

The future maturities of the Company’s operating leases as of December 31, 2023 are as follows:

 

2024			$	1,968
2025				1,483
2026				1,481
2027				1,520
2028				1,549
Thereafter				5,613
Total payments			$	13,614
Less amounts representing interest				(3,165	)
Total minimum payments required			$	10,449

 

Nanophase Technologies subleases a portion of a leased industrial building that is used primarily for the storage of furniture, equipment and displays used for retail sales. The arrangement is not with a related party.

 

Payments received by the Company for this sublease are comprised of two components, which include base rent and Common Area Maintenance (CAM) charges. While the base rent is fixed, the CAM charges are indexed directly to the Master Lease and are expected to be adjusted periodically as actual costs are incurred. However, the executed sublease agreement specifically itemizes these costs with a provision that informs the sublessee that the CAM charges will be adjusted (up or down) based on actual amounts once this information becomes known. As such, the nature of the charges is more closely representative of a fixed payment (an “in-substance fixed” charge) with the adjustments occurring simply to “true up” the listed CAM charges once actual charges from the head lessor become known. As sublessor, Nanophase Technologies has elected the practical expedient to not separate lease and nonlease components in disclosing future undiscounted cashflows and treats the combined components as a single lease component.

 

The sublease arrangement automatically renews following expiration of the initial term on May 31, 2025, with a one-year notice required to terminate the lease. As of the issuance of these financial statements the sublessee has not yet provided notice of their intent to renew or terminate said arrangement.

 

The future undiscounted lease payments associated with this arrangement are provided below, and only include the period for which enforceable rights and obligations exist as of the date of financial statement issuance.

 

Months
		For the Year
Months		2024				2025
January - May		$	124,015			$	128,640
June - December			173,621				—
Total		$	297,636			$	128,640