Commitments and Contingencies

Operating Leases

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 ("Met-Life"). We entered into the initial lease with Met-Life for a portion of this space in 2004 and the lease has been amended multiple times since then to adjust space and amend the terms of the lease, with the latest amendment being in 2012. At September 30, 2016, the various terms for the spaces under the lease had expiration dates that range from January 2017 through January 2020. As described further below, in October 2016, we exercised an option to extend our lease of certain spaces through January 2022. In October 2015, we entered into an agreement to sublet a portion of our headquarters to a subtenant effective January 2016. This sublease expires in November 2019.

We incurred $3.6 million of capital improvement costs related to the facilities leased from Met-Life through December 31, 2012. During 2011 and 2012, we requested and received $3.1 million of reimbursements from the landlord from the tenant improvement and HVAC allowances for the completed construction. The reimbursements were recorded once cash was received and are amortized on a straight line basis over the term of the lease as a reduction in rent expense. The remaining lease incentive obligation was $1.4 million at September 30, 2016, and is reflected in other liabilities on the consolidated balance sheet. Rent expense for the Redwood City properties is recognized on a straight-line basis over the term of the lease.

We are required to restore certain 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 $0.4 million as of both September 30, 2016 and December 31, 2015, which are included in other liabilities on the consolidated balance sheets. Accretion expense related to our asset retirement obligations was nominal in the three and nine months ended September 30, 2016 and 2015.

Pursuant to the terms of the amended lease agreement, we exercised our right to deliver a letter of credit in lieu of a security deposit. The letters of credit are collateralized by deposit balances held by the bank in the amount of $0.7 million as of September 30, 2016 and December 31, 2015. These deposits are recorded as restricted cash on the consolidated balance sheets.

Rent expense was $0.9 million and $2.6 million during the three and nine months ended September 30, 2016, respectively, partially offset by sublease income of $0.3 million and $0.9 million, respectively. Rent expense was $0.9 million and $2.6 million during the three and nine months ended September 30, 2015, respectively, partially offset by sublease income of $0.2 million and $0.5 million, respectively.

Future minimum payments under noncancellable operating leases are as follows at September 30, 2016 (in thousands):



Years ending December 31,	Lease payments
2016 (3 months remaining)	$	710
2017	2,677
2018	2,736
2019	2,818
2020	236
Total	$	9,177

Minimum payments have not been reduced by future minimum sublease rentals of $2.1 million to be received under non-cancellable subleases at September 30, 2016.

A portion of our Redwood City facilities includes a lease of approximately 11,020 square feet of space located at 501 Chesapeake Drive, Redwood City, California. In September 2012, we entered into a Sixth Amendment to Lease under which we have two consecutive options to extend the term of the lease of this space for an additional period of five years per option. In October 2016, we entered into the Seventh Amendment to Lease pursuant to which we exercised the first of our options to extend the term of the lease for an additional five years, commencing on February 1, 2017 and expiring on January 31, 2022. The estimated rental expense, if recognized, would increase our costs and operating expenses in our consolidated statement of operations.

The estimated future minimum payments under this noncancellable operating lease obligation for the 501 Chesapeake Drive, Redwood City, California facilities at September 30, 2016 is as follows (in thousands):



Years ending December 31,	Lease payments
2016 (3 months remaining)	$	—
2017	400
2018	448
2019	462
2020	476
Thereafter	531
Total	$	2,317

Other Commitments

In April 2016, we entered into a new manufacture and supply agreement that resulted in an additional total commitment up to $1.8 million, with payment to be made in December 2022 or after.

In October 2016, we entered into a services agreement with a third party supplier for the development of a manufacturing process. The services agreement may result in an additional total commitment of up to $1.4 million. We may terminate the services agreement, at our discretion, with 60 days' notice to the supplier and shall be obligated to a reduced additional total commitment equal to the contractual amount due during this 60 day period for those stages of development (i) already in progress as of the date of the notice of termination and (ii) scheduled to have commenced within 60 days after the date of the notice of termination.

Legal Proceedings

On February 19, 2016, we filed a complaint against EnzymeWorks, Inc., a California corporation, EnzymeWorks, Inc., a Chinese corporation, and Junhua “Alex” Tao (collectively, the “Defendants”) in the United States District Court for the Northern District of California. On April 29, 2016, we filed a First Amended Complaint. The First Amended Complaint alleges that the Defendants have engaged in willful patent infringement, trade secret misappropriation, breach of contract, intentional interference with contractual relations, intentional interference with prospective economic relations and statutory and common law unfair competition. We have sought injunctive relief, monetary damages, treble damages, restitution, punitive damages and attorneys’ fees. On May 13, 2016, the Defendants filed a Partial Motion to Dismiss the claims for breach of contract, intentional interference with contractual relations, intentional interference with prospective economic relations, statutory unfair competition, and common law unfair competition in the First Amended Complaint. We opposed the Defendant’s Partial Motion to Dismiss. On August 11, 2016, the judge issued an order that denied the Defendants’ Partial Motion to Dismiss with respect to all five claims and in all relevant parts, and granted the motion with respect to certain underlying arguments. We are unable to determine when this litigation will be resolved or its ultimate outcome.

Other than our litigation against the Defendants, we are not currently a party to any material litigation or other material legal proceedings.

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.