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 from Metropolitan Life Insurance Company (“MetLife”). We entered into the initial lease with Met-Life for a portion of this space in 2004 and the lease has been amended numerous times since then to adjust space and amend the terms of the lease, with the latest amendment being in October 2016. The various terms for the spaces under the lease have expiration dates that range from January 2020 through January 2022. Beginning in February 2014, we have subleased office space to different subtenants with separate options to extend the subleases and if all options to extend were exercised, these agreements would expire at various dates through November 2019.

We received certain lease incentives from MetLife in 2011 and 2012, which have been amortized on a straight line basis over the term of the lease as a reduction in rent expense. As of December 31, 2016 and 2015, we have an unamortized lease incentive obligation of $1.3 million and $1.7 million, respectively, of which the non-current portion of $0.9 million and $1.3 million, respectively, is included in lease incentive obligation on the consolidated balance sheets. Rent expense for the Redwood City properties is recognized on a straight-line basis over the term of the lease. Rent expense was $3.4 million in 2016, $3.4 million in 2015 and $3.4 million in 2014, partially offset by sublease income of $1.2 million in 2016, $0.6 million in 2015 and $0.4 million in 2014.

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 makes adjustments if our estimates change. As of December 31, 2016 and 2015, we have assets retirement obligations of $0.4 million, which is included in other liabilities on the consolidated balance sheets

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 $0.8 million as of December 31, 2016 and 2015. These deposits are recorded as restricted cash on the consolidated balance sheets.

Future minimum payments under non-cancellable operating leases are as follows at December 31, 2016 (in thousands):



	Lease Payments
Years ending December 31,
2017	$	3,077
2018	3,185
2019	3,280
2020	712
2021	490
Thereafter	41
Total minimum payments ⁽¹⁾	$	10,785


(1)	Minimum payments have not been reduced by future minimum sublease rentals of $1.8 million to be received under non-cancellable subleases.

Other Commitments

In April 2016, we entered into a new manufacture and supply agreement that resulted in a 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.

In December 2016, we entered into a financing lease agreement with a third party supplier for the purchase of laboratory equipment for approximately $0.5 million. The effective date of the lease is upon delivery of the equipment, which occurred in February 2017 and the term of the lease is three years. This financing agreement will be accounted for as a capital lease due to the bargain purchase option at the end of the lease.

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. The complaint alleges that the Defendants have engaged in willful patent infringement, trade secret misappropriation, breach of confidence, 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.