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Commitments and Contingencies | 9 Months Ended
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Sep. 30, 2023
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Commitments and Contingencies Operating Leases Our headquarters are located in Redwood City, California, where we occupy approximately 77,300 square feet of office and laboratory space in multiple buildings within the same business park operated by Metropolitan Life Insurance Company ("MetLife"). Our lease agreement with MetLife ("RWC Lease") includes approximately 28,200 square feet of space located at 200 and 220 Penobscot Drive, Redwood City, California (the “200/220 Penobscot Space”) and approximately 37,900 square feet of space located at 400 Penobscot Drive, Redwood City, California (the “400 Penobscot Space”) (the 200/220 Penobscot Space and the 400 Penobscot Space are collectively referred to as the “Penobscot Space”), and approximately 11,200 square feet of space located at 501 Chesapeake Drive, Redwood City, California (the “501 Chesapeake Space”). We entered into the initial lease with MetLife for our facilities in Redwood City in 2004 and the RWC Lease has been amended multiple times since then to adjust the leased space and terms of the Lease. In February 2019, we entered into an Eighth Amendment to the Lease (the “Eighth Amendment”) with MetLife with respect to the Penobscot Space and the 501 Chesapeake Space to extend the term of the Lease for additional periods. Pursuant to the Eighth Amendment, the term of the lease of the Penobscot Space has been extended through May 2027. The lease term for the 501 Chesapeake Space has been extended to May 2029. We have one (1) option to extend the term of the lease for the Penobscot Space for five (5) years, and one (1) separate option to extend the term of the lease for the 501 Chesapeake Space for five (5) years. Pursuant to the terms of the RWC Lease, we exercised our right to deliver a letter of credit in lieu of a security deposit. The letter of credit is collateralized by deposit balances held by the bank in the amount of $1.1 million as of September 30, 2023 and December 31, 2022, and are recorded as non-current restricted cash on the unaudited condensed consolidated balance sheets. In January 2021, we entered into a lease agreement with ARE-San Francisco No. 63, LLC ("ARE") to lease a portion of a facility consisting of approximately 36,593 rentable square feet in San Carlos, California to serve as additional office and research and development laboratory space (the "San Carlos Space"). The lease has a 10-year term from the lease commencement date of November 30, 2021 with one option to extend the term for an additional period of 5 years. In July 2023, we announced our plan to consolidate operations from our San Carlos facility to our headquarters in Redwood City. On September 1, 2023, the Company entered into an Assignment and Assumption of Lease (the “Assignment Agreement”) with Vaxcyte, Inc. (“Vaxcyte”), pursuant to which the Company agreed to assign to Vaxcyte, and Vaxcyte agreed to assume from the Company, all of the Company’s right, title and interest in, under and to the San Carlos Space and the Lease Agreement, dated as of January 29, 2021. On September 6, 2023, the Company, Vaxcyte and ARE entered into a Consent to Assignment and First Amendment (the “Consent”) pursuant to which ARE consented to the Assignment Agreement and the assignment by the Company and the assumption by Vaxcyte of the Company’s interest as tenant in the lease and agreed to release the Company from all of its obligations under the lease that accrue from and after the assignment, and following the assignment, to return the Company's security deposit of approximately $0.5 million provided to ARE in the form of a letter of credit. Under the Assignment Agreement, the Company will prepay to ARE (i) the base rent, as defined in the lease agreement, with respect to the three-month period commencing on the date of the assignment and (ii) certain amounts payable to ARE in connection with tenant improvements completed by ARE pursuant to the lease, which a mounted to $3.1 million. In connection with the Consent, ARE agreed that neither the Company nor Vaxcyte will be required to remove any existing alterations or improvements to the San Carlos Space. The effective date of the assignment was October 1, 2023, which under the terms of the Assignment Agreement was the earlier of (i) the date Vaxcyte occupies the San Carlos Space for the operation of business or (ii) the date the Company vacated and decommissioned the San Carlos Space and certain other customary conditions were satisfied. We have provided ARE with a $0.5 million security deposit in the form of a letter of credit which we expected to be released in the fourth quarter of 2023 following the effectiveness of the lease assignment in October 1, 2023 and which is recorded as current restricted cash on the condensed consolidated balance sheet. As a result of the Assignment Agreement, the Company remeasured the lease obligation for the San Carlos Space as $3.1 million, or the present value of the remaining lease payments, which consist of the remaining rent through the effectiveness of the lease assignment and certain amounts payable to ARE pursuant to the Assignment Agreement, and wrote off the remaining lease liability of $19.6 million and the corresponding right of use asset balance. Simultaneously, the Company determined that indicators of impairment existed because the lease assignment will impact the utilization of the related right of use assets and leasehold improvements in the San Carlos Space, and therefore performed a recoverability test by estimating future undiscounted net cash flows expected to be generated from the use of these assets. As there were no substantial future cash inflows associated with these assets, the carrying values of these assets were deemed unrecoverable. As a result, the Company recognized a non-cash impairment charge of $7.7 million, of which $4.7 million is related to leasehold improvements and $3.0 million for the right of use assets, presented within the asset impairment and other charges line item in the condensed consolidated statements of operations, for the three and nine months ended September 30, 2023. The tables below tables below show the balance of right-of-use assets and lease obligations as of January 1, 2023 and the balance as of September 30, 2023, including the changes during the period (in thousands):
|  | Right-of-use Assets - Operating Lease, net
Right-of-use assets - Operating leases, net, at January 1, 2023 |  | $ | 39,263 |
Amortization of right-of-use assets |  | (3,647) |
Additions |  | 898 |
Remeasurement due to lease modification |  | (19,622) |
Impairment |  | (2,997) |
Right-of-use assets - Operating leases, net, at September 30, 2023 |  | $ | 13,895 |
|  | Lease Obligations - Operating Leases
Lease obligations - Operating leases, net, at January 1, 2023 |  | $ | 43,638 |
Lease payments |  | (5,668) |
Interest accretion |  | 1,631 |
Remeasurement due to lease modification |  | (19,622) |
Lease obligations - Operating leases, net, at September 30, 2023 |  | $ | 19,979 |
We are required to restore certain areas of the Redwood City facility that we are renting to its original form. We are expensing the asset retirement obligation over the term of the Redwood City lease. We review the estimated obligation each reporting period and make adjustments if our estimates change. We recorded asset retirement obligations of $0.3 million and $0.5 million as of September 30, 2023 and December 31, 2022, respectively, which are included in other liabilities on the unaudited condensed consolidated balance sheets. Accretion expense related to our asset retirement obligations was nominal in the three and nine months ended September 30, 2023 and 2022. Lease and other information Lease costs, amounts included in measurement of lease obligations and other information related to non-cancellable operating leases and finance leases were as follows (in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Finance lease costs | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 18 |
Operating lease costs | 1,618 |  |  | 1,831 |  |  | 5,278 |  |  | 5,491 |
Short-term lease costs (1) | — |  |  | — |  |  | — |  |  | 40 |
Total lease costs (2) | $ | 1,618 |  |  | $ | 1,831 |  |  | $ | 5,278 |  |  | $ | 5,549 |
(1) Short-term lease costs on leases with terms of over one month and less than one year. (2) The Company had no variable lease costs.
Other information: | Operating Leases
Weighted-average remaining lease term (in years) | 3.4 years
Weighted-average discount rate | 6.7 | %
| Nine Months Ended September 30,
Cash paid (in thousands): | 2023 |  | 2022
Operating cash flows from operating leases | $ | 5,668 |  |  | $ | 4,658 |
As of September 30, 2023, our maturity analysis of annual undiscounted cash flows of the non-cancellable operating leases were as follows (in thousands):
Years Ending December 31, |  | Operating Leases
2023 (remaining 3 months) |  | $ | 4,229 |
2024 |  | 4,727 |
2025 |  | 4,868 |
2026 |  | 5,014 |
2027 |  | 2,533 |
Thereafter |  | 1,078 |
Total minimum lease payments |  | 22,449 |
Less: imputed interest |  | 2,470 |
Lease obligations |  | $ | 19,979 |
Reconciliation of operating lease liabilities as shown within the unaudited condensed consolidated balance sheets:
Current portion of lease obligations - Operating leases |  | $ | 6,764 |
Long-term lease obligations - Operating leases |  | 13,215 |
Total operating lease liabilities |  | $ | 19,979 |
Other Commitments We enter into supply and service arrangements in the normal course of business. Supply arrangements are primarily for fixed-price manufacture and supply. Service agreements are primarily for the development of manufacturing processes and certain studies. Commitments under service agreements are subject to cancellation at our discretion which may require payment of certain cancellation fees. The timing of completion of service arrangements is subject to variability in estimates of the time required to complete the work. The following table provides quantitative data regarding our other commitments. Future minimum payments reflect amounts that we expect to pay including potential obligations under services agreements subject to risk of cancellation by us (in thousands):
| Payments Due by Period
| Total |  | 2023 (Remaining 3 Months) |  | 2024 and Thereafter
Facility maintenance agreement | $ | 1,084 |  |  | $ | 1,039 |  |  | $ | 45 |
Credit Facility In June 30, 2017, we entered into a credit facility (the “Credit Facility”) with Western Alliance Bank consisting of term loans (“Term Debt”) up to $10.0 million, and advances (“Advances”) under a revolving line of credit ("Revolving Line of Credit") up to $5.0 million with an accounts receivable borrowing base of 80% of eligible accounts receivable. The right to take draws on the Term Debt expired on December 31, 2022. In March 2023, we terminated the Credit Facility with Western Alliance Bank. Legal Proceedings We may be involved in legal actions in the ordinary course of business, including inquiries and proceedings concerning business practices and intellectual property infringement, employee relations and other claims. We will recognize a loss contingency in the unaudited condensed consolidated financial statements when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. We will disclose any loss contingencies that do not meet both conditions if there is a reasonable possibility that a material loss may have been incurred. Gain contingencies are not recorded until they are realized. Indemnifications We are required to recognize a liability for the fair value of any obligations we assume upon the issuance of a guarantee. We have certain agreements with licensors, licensees and collaborators that contain indemnification provisions. In such provisions, we typically agree to indemnify the licensor, licensee and collaborator against certain types of third party claims. The maximum amount of the indemnifications is not limited. We accrue for known indemnification issues when a loss is probable and can be reasonably estimated. There were no accruals for expenses related to indemnification issues for any periods presented.

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