NOTE 10— LEASES

The Company enters into operating leases primarily for real estate, office equipment, and fleet vehicles. Lease terms generally range from one to five years, and often include options to renew for one year. On January 1, 2019, the Company adopted Accounting Standards Topic No. 842, using the modified-retrospective approach and as a result recognized a right-of-use asset of approximately $0.8 million as adjusted for deferred rent at the date of adoption of $0.2 million, and a lease liability of approximately $1.0 million. No cumulative-effect adjustment to retained earnings was required upon adoption. Right-of-use assets are recorded in Prepaid and other assets and lease liabilities are included in Accrued liabilities or Other liabilities depending on whether they are current or noncurrent. Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate (“IBR”) to determine the present value of the lease payments and on the date of adoption, the Company determined its IBR to be 12.78%. This rate was based on the Company’s financing of the SWK Loan which is a collateralized loan, and was based on prevailing market rates during the fourth quarter of 2018.

In 2020, the Company entered into two real property leases in Foothill Ranch, California and Corona, California.  The Foothill Ranch lease is a 11,936 square foot lease and will be used as the Company’s headquarters upon commencement on July 1, 2020. The Corona lease is for an 11,032 square foot facility for the Company’s manufacturing operations.  The Corona lease commenced in June 2020 and as a result the Company recorded an right of use asset and offsetting liability in the amount of $0.6 million.  Because the rate in each of the new leases is not readily determinable, the Company used the IBR of 12.25% to measure the present value of the lease liabilities. The IBR was based on the Company’s SWK Term Loan as amended, which the Company believes is indicative of prevailing market rates.

Information related to the Company’s right-of-use assets and related liabilities were as follows (in thousands):

The Company allocates lease cost amongst lease and non-lease components. The Company excludes short-term leases (those with lease terms of less than one year at inception) from the measurement of lease liabilities or right-of-use assets.

Maturities of lease liabilities as of June 30, 2020 for leases that have commenced were as follows (in thousands):

As of June 30, 2020, right-of-use assets were $0.6 million and lease liabilities were $0.6 million. The Company expects to recognize an additional right of use asset and lease liability of $1.3 million relating to its Foothill Ranch lease upon commencement on July 1, 2020.

Future minimum rental commitments under lease agreements, as of June 30, 2020, with non-cancelable terms greater than one year for each of the years ending December 31 are as follows (in thousands):