Commitments and Contingencies
|12 Months Ended|
Dec. 31, 2019
|Commitments and Contingencies Disclosure [Abstract]|
|Commitments and Contingencies||Commitments and Contingencies
Our headquarters are located in Redwood City, California, where we occupy approximately 107,200 square feet of office and laboratory space in four buildings within the same business park of Metropolitan Life Insurance Company ("MetLife"). Our lease (“Lease”) with MetLife includes approximately 28,200 square feet of space located at 200 and 220 Penobscot Drive, Redwood City, California (the “Penobscot Space”), approximately 37,900 square feet of space located at 400 Penobscot Drive, Redwood City, California (the “Building 2 Space”), approximately 11,200 square feet of space located at 501 Chesapeake Drive, Redwood City, California (the “501 Chesapeake Space”), and approximately 29,900 square feet of space located at 101 Saginaw Drive, Redwood City, California (the “Saginaw Space”).
We entered into the initial lease with MetLife for a portion of this space in 2004 and the lease has been amended multiple times since then to adjust space and terms of the lease "(Lease"). In February 2019, we have entered into an Eighth Amendment to the Lease ( the “Eighth Amendment”) with MetLife with respect to the Penobscot Space, the Building 2 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 and the Building 2 Space has been extended through May 2027. The lease term for the 501 Chesapeake Space has been extended to May 2029. We have two consecutive options to extend the term of the lease for the Penobscot Space, the Building 2 Space and the 501 Chesapeake Space for an additional period of five years per option. Our lease on the Saginaw Space will expire on January 30, 2020. In October 2019, we entered into a sub-sublease with Minerva Surgical, Inc. with respect to the Saginaw Space for approximately 3,400 square feet from February 2020 for three months. Our sublease of approximately 26,500 square feet of the Saginaw Space to a subtenant will end on January 2020. Our sublease of approximately 13,000 square feet of the Penobscot Space to a different subtenant ended in November 2019.
We incurred $3.6 million of capital improvement costs related to the facilities leased from MetLife through December 31, 2012. During 2011 and 2012, we requested and received $3.1 million of reimbursements from the landlord for the tenant improvement and HVAC allowances for the completed construction. The reimbursements were recorded once cash was received. Prior to the adoption of ASC 842, we recorded the reimbursements as liabilities on the consolidated balance sheets and amortized the reimbursements on a straight line basis over the term of the lease as a reduction in rent expense. On adoption of ASC 842, lease incentive obligations were reclassified on the balance sheet as an operating lease right-of-use assets. Rent expense for the Redwood City properties is recognized on a straight-line basis over the term of the lease. At December 31, 2018, lease incentive obligations was $0.5 million.
We are required to restore certain areas of the Redwood City facilities that we are renting to their original form. We are expensing the asset retirement obligation over the terms of the respective leases. We review the estimated obligation each reporting period and make adjustments if our estimates change. We recorded asset retirement obligations of $0.2 million as of December 31, 2019 and 2018, which are included in other liabilities on the consolidated balance sheets. Accretion expense related to our asset retirement obligations was nominal in 2019 and 2018.
Pursuant to the terms of the lease agreement, 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 and $0.7 million as of December 31, 2019 and 2018, respectively, and are recorded as non-current restricted cash on the consolidated balance sheets.
In December 2016, we entered into a -year financing lease agreement with a third party supplier for the purchase of laboratory equipment that was partially financed through a finance lease of approximately $0.4 million. The lease became effective upon delivery of the equipment, which occurred in February 2017, and the term of the lease was years from the effective date. This financing agreement was accounted for as a finance lease due to bargain purchase options at the end of the lease.
In April 2017, we entered into a -year financing lease agreement with a third party supplier for the purchase of information technology equipment for approximately $0.3 million. The effective date of the lease was May 19, 2017 and the term of the lease was years.
Adoption of ASC 842
On January 1, 2019, we adopted ASC 842, using a modified retrospective approach and effective date method per adoption of ASU 2018-11. We completed the full analysis by January 2019 and we evaluated the ROU assets and lease obligations using the incremental borrowing rate (IBR) at December 31, 2018 because the implicit rate is not readily determinable in the lease agreement. Upon adoption of ASC 842, all existing leases were classified as either operating leases or finance leases. All existing leases that were classified as capital leases in accordance with Topic 840 were reclassified as finance leases. We recorded $26.6 million of ROU assets and $27.6 million of lease obligations for operating leases, and $0.5 million of ROU assets and $0.3 million of lease obligations for finance leases in the balance sheet in the first quarter of 2019.
The following table shows the reconciliation of ROU assets and lease obligations, with balances reflecting the adoption of ASC 842, related to both operating leases and finance leases and gives effect to the modified retrospective adoption and effective date method under the lease guidance on January 1, 2019 (in thousands):
Lease related costs under non-cancellable finance leases and operating leases under non-cancellable subleases were as follows (in thousands):
All short-term lease costs are related to leases with a lease term of one month or less.
Lease costs for the year ended December 31, 2019 as compared to years ended December 31, 2018 and 2017 reflected the effects of adopting the provisions of ASC 842 which provided a new basis of accounting for leases during fiscal year 2019. Operating lease costs were $3.2 million and $3.2 million for the years ended December 31, 2018 and 2017, respectively, partially offset by sublease income of $1.1 million and $1.4 million for the years ended December 31, 2018 and 2017 respectively. Finance lease payments were $0.3 million and $0.2 million for the years ended December 31, 2018 and 2017, respectively.
Other information related to non-cancellable finance leases and operating leases under non-cancellable subleases for the year ended December 31, 2019 were as follows (in thousands, except discount rate and lease term):
As of December 31, 2019, under ASC 842, our maturity analyses of annual undiscounted cash flows of the non-cancellable finance and operating leases are as follows (in thousands):
(1) Operating Lease minimum payments have not been reduced by future minimum sublease rentals of $0.1 million to be received under
In October 2019, we entered into a sub-sublease with Minerva Surgical, Inc. with respect to the Saginaw Space for the period beginning February 2020 for three months for a short-term lease commitment of $47 thousand.
As of December 31, 2018, under ASC 840, maturity analysis of annual undiscounted cash flows of the non-cancellable capital and operating leases as follows (in thousands):
(1) Minimum payments have not been reduced by future minimum sublease rentals of $0.9 million to be received under non-cancellable subleases.
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):
In June 30, 2017, we entered into a credit facility (the “Credit Facility”) 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. At December 31, 2019 and 2018, we have not drawn from the Credit Facility. We may draw on the Revolving Line of Credit at any time prior to the September 30, 2020 maturity date. On October 1, 2023, loans drawn under the Term Debt mature and the Revolving Line of Credit terminates. Loans made under the Term Debt bears interest through maturity at a variable rate based on the LIBOR plus 3.60%. Advances under the Revolving Line of Credit bear interest at a variable annual rate equal to the greater of (i) 1.00% above the prime rate and (ii) 5.00%.
Our obligations under the Credit Facility are secured by a lien on substantially all of our personal property other than our intellectual property. The Credit Facility includes a number of customary covenants and restrictive financial covenants including meeting minimum product revenues levels and maintaining certain minimum cash levels with the lender. The Credit Facility’s financial covenants restrict the ability of the Company to transfer collateral, incur additional indebtedness, engage in mergers or acquisitions, pay dividends or make other distributions, make investments, create liens, sell assets, or sell certain assets held at foreign subsidiaries. A failure to comply with these covenants could permit the lender to exercise remedies against us and the collateral securing the Credit Facility, including foreclosure of our properties securing the Credit Facilities and our cash. At December 31, 2019, we were in compliance with the covenants for the Credit Facility.
The Credit Facility allows for interest-only payments on the Term Debt through November 1, 2021. Monthly payments of principal and interest on the Term Debt are required following the applicable amortization date. We may elect to prepay in full the Term Debt and Advances under the Revolving Line of Credit at any time.
Prepayments of Term Debt and early termination of the Revolving Line of Credit are subject to prepayment and final payment fees are as follows:
We are not currently a party to any material pending litigation or other material legal proceedings.
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.
The entire disclosure for commitments and contingencies.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef