Leases

6 Months Ended

Jun. 28, 2019

In May 2017, we entered into a Lease Agreement (the Lease) for our corporate headquarters located at 1851, 1801 and 1751 Harbor Bay Parkway, Alameda, California (the Premises). The Lease was subsequently amended in October 2017, June 2018 and April 2019, resulting in the addition of the building located at 1601 Harbor Bay Parkway and increasing the leased space to an aggregate of 169,606 square feet. We have made certain tenant improvements to the space leased on the Premises, for which we received $8.2 million in reimbursements in January 2019. The Lease’s initial term is through January 31, 2028. Rent payments began February 1, 2018, following the conclusion of a partial twelve-month rent abatement period. We have two five-year options to extend the Lease and a one-time option to terminate the Lease without cause on the last day of the 8^th year of the initial term; none of these optional periods have been considered in the determination of the right-of-use asset or the lease liability for the Lease as we did not consider it probable that we would exercise any such options. The Lease further provides that we are obligated to pay the landlord certain variable costs, including taxes and operating expenses.

The April 2019 amendment to the Lease (the Lease Amendment) provides, among other things, for the (i) expansion of the Premises by 37,544 square feet of office facilities located at 1601 Harbor Bay Parkway, Alameda, California (the 1601 Expansion Space) and (ii) surrender of 2,703 square feet of office facilities located at 1751 Harbor Bay Parkway, Alameda, California (the 1751 Space). The term for the 1601 Expansion Space will run coterminous with the term of the Lease for the existing space. We have been provided an allowance of $1.7 million for tenant improvements to the 1601 Expansion Space. We surrendered the 1751 Space in April 2019, and as of June 30, 2019, we have taken possession of a portion of the 1601 Expansion Space, and accordingly we have adjusted our right-of-use asset and lease liability, and have begun to recognize lease costs for that portion of the Lease. We expect to take possession of the remaining portion of the 1601 Expansion Space in September 2019, and therefore we have not yet recorded a right-of-use asset or lease liability for that portion of the Lease as of June 30, 2019.

The monthly base rent for the Premises, other than the 1601 Expansion Space, is $224,505 through January 31, 2020, increasing throughout the remainder of the term to $283,933 at the end of the term. The monthly base rent for the 1601 Expansion Space, which is expected to start on December 1, 2019, will be $71,334 through November 30, 2020, increasing throughout the remainder of the term to $90,481 at the end of the term. In addition, we are required to pay the landlord for certain operating expenses and taxes they incur related to the Premises.

The balance sheet classification of our lease liabilities were as follows (in thousands):



	June 30, 2019		December 31, 2018
Operating lease liabilities:
Current portion included in Other current liabilities	$	2,696	$	2,738
Long-term portion of lease liabilities	22,487		12,099
Total operating lease liabilities	25,183		14,837
Financing lease liabilities:
Current portion included in Other current liabilities	50		49
Long-term portion of lease liabilities	56		79
Total financing lease liabilities	106		128
Total lease liabilities	$	25,289	$	14,965

The components of lease costs, which were included in Selling, general and administrative expenses in our Condensed Consolidated Statements of Income, were as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Operating lease cost	$	660	$	952	$	1,100	$	1,973
Variable lease cost	131		531		380		1,003
Total lease costs	$	791	$	1,483	$	1,480	$	2,976

Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2019 was $1.4 million and was included in Net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows.

As of June 30, 2019, the maturities of our operating lease liabilities were as follows (in thousands):



Remainder of 2019	$	1,415
Years ending December 31,
2020	3,339
2021	3,436
2022	3,548
2023	3,646
Thereafter	16,066
Total lease payments	31,450
Less:
Present value adjustment	(5,106		)
Tenant improvement reimbursements⁽¹⁾	(1,161		)
Operating lease liabilities	$	25,183

____________________

(1) Represents anticipated tenant improvement reimbursements applicable to the portion of the 1601 Expansion Space we have taken possession of as of June 30, 2019.

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, we use our incremental borrowing rate. The weighted average discount rate used to determine the operating lease liability was 4.20%. As of June 30, 2019, the weighted average remaining lease term is 8.6 years.

LEASES

The balance sheet classification of our lease liabilities were as follows (in thousands):



	June 30, 2019		December 31, 2018
Operating lease liabilities:
Current portion included in Other current liabilities	$	2,696	$	2,738
Long-term portion of lease liabilities	22,487		12,099
Total operating lease liabilities	25,183		14,837
Financing lease liabilities:
Current portion included in Other current liabilities	50		49
Long-term portion of lease liabilities	56		79
Total financing lease liabilities	106		128
Total lease liabilities	$	25,289	$	14,965

The components of lease costs, which were included in Selling, general and administrative expenses in our Condensed Consolidated Statements of Income, were as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Operating lease cost	$	660	$	952	$	1,100	$	1,973
Variable lease cost	131		531		380		1,003
Total lease costs	$	791	$	1,483	$	1,480	$	2,976

As of June 30, 2019, the maturities of our operating lease liabilities were as follows (in thousands):



Remainder of 2019	$	1,415
Years ending December 31,
2020	3,339
2021	3,436
2022	3,548
2023	3,646
Thereafter	16,066
Total lease payments	31,450
Less:
Present value adjustment	(5,106		)
Tenant improvement reimbursements⁽¹⁾	(1,161		)
Operating lease liabilities	$	25,183

____________________

(1) Represents anticipated tenant improvement reimbursements applicable to the portion of the 1601 Expansion Space we have taken possession of as of June 30, 2019.