Commitments and Contingencies

Operating Leases

Our headquarters are located in Redwood City, California, where we occupy 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 multiple times since then to adjust space and amend the terms of the lease, with the latest amendment (“Seventh Amendment”) in October 2016 which extended the lease term to January 2022 and waived our existing asset retirement obligation for one of our buildings. 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. 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, 2017 and 2016, we have an unamortized lease incentive obligation of $0.9 million and $1.3 million, respectively, of which the non-current portion of $0.5 million and $0.9 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 $3.2 million in 2017, $2.9 million in 2016 and $2.9 million in 2015, partially offset by sublease income of $1.4 million in 2017, $1.2 million in 2016 and $0.6 million in 2015.

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. Since the Seventh Amendment waived our existing asset retirement obligation for one of our buildings, we recorded a $0.2 million decrease in our asset retirement obligation and a $0.2 million gain on extinguishment in asset retirement obligation in our consolidated statement of operations as sales, general and administrative expenses. As of December 31, 2017 and 2016, we have assets retirement obligations of $0.2 million and $0.4 million, respectively, 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 $0.7 million as of December 31, 2017 and 2016. These deposits are recorded as restricted cash on the consolidated balance sheets.

Capital Leases

In December 2016, we entered into a three-year financing lease agreement with a third party supplier for the purchase of laboratory equipment that was partially financed through a capital 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 is three years from the effective date. This financing agreement was accounted for as a capital lease due to the bargain purchase option at the end of the lease.

In April 2017, we entered into a three-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 is three years. This financing agreement was accounted for as a capital lease due to the bargain purchase option at the end of the lease.

Leases

Future minimum payments under non-cancellable capital and operating leases at December 31, 2017 are as follows (in thousands):



Years ending December 31,	Capital Leases			Operating Leases
2018	$	252		$	3,185
2019	252			3,280
2020	60			712
2021	—			490
2022	—			41
Total minimum lease payments ⁽¹⁾	564			$	7,708
Less: amount representing interest	(32		)
Present value of capital lease obligations	532
Less: current portion	(230		)
Long-term portion of capital leases	$	302


⁽¹⁾	Minimum payments have not been reduced by future minimum sublease rentals of $1.2 million to be received under non-cancellable subleases.

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):



Other Commitment Agreement Type	Agreement Date		Future Minimum Payment
Manufacture and supply agreement with expected future payment date of December 2022	April 2016	$	1,693
Service agreement for the development of manufacturing process	April 2017		1,082
Service agreement for stability study	July 2017		398
Service agreement for clinical trial	December 2017		294
Total other commitments		$	3,467

Credit Facility

Effective June 30, 2017, we entered into a credit facility (the “Credit Facility”) consisting of term loans (“Term Debt”) totaling up to $10.0 million, and advances (“Advances”) under a revolving line of credit (“Revolving Line of Credit”) totaling up to $5.0 million with an accounts receivable borrowing base of 80% of eligible accounts receivable. At December 31, 2017, we have not drawn from the Credit Facility. We may draw on the Term Debt at any time prior to June 30, 2018, subject to customary conditions for funding including, among others that no event of default exists. We may draw on the Revolving Line of Credit at any time prior to the maturity date. On July 1, 2021, any loans for Term Debt mature and the Revolving Line of Credit terminate. Term Debt bears interest through maturity at a variable rate based on the London Interbank Offered Rate 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%.

The Credit Facility allows for interest-only payments on Term Debt through August 1, 2019. 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:



	Term Debt	Revolving Line of Credit
Through and including the first anniversary of the funding date of the first Term Debt drawn	2.0%
After the first anniversary of the funding date of the first Term Debt drawn and before the maturity date	1.0%
On the earliest to occur of the maturity date, the acceleration of Term Debt drawn or prepayment of Term Debt drawn	5.5%
Through and including the first anniversary of the closing date		3.0%
After the first anniversary of the closing date through and including the second anniversary of the closing date		2.0%
After the second anniversary of the closing date through and including the third anniversary of the closing date		1.0%

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 restrictions which require us to comply with certain financial covenants including achieving consolidated product revenues levels at minimum levels as set forth in the Credit Facility through December 2018 and on and after January 2019, in each case unless we maintain certain minimum cash levels with the lender in an amount equal to or greater than six times the sum of the average six-month trailing operating cash flow net outlay plus the average monthly principal due and payable in the immediately succeeding three-month period. The Credit Facility places various restrictions on the Company’s transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens and selling assets and permitted assets to be held at foreign subsidiaries above specified caps, in each case subject to certain exceptions. 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, 2017, we were in compliance with the covenants for the Credit Facility.

Legal Proceedings

We are not currently a party to any material pending litigation or other material legal proceedings.

In February 2018, we and EnzymeWorks, Inc. (U.S.), Suzhou Hanmei Biotechnology Co. Ltd, d/b/a EnzymeWorks, Inc. (China) (collectively, “EnzymeWorks”), Junhua Tao, and Andrew Tao reached a settlement concerning the lawsuit filed by us in February 2016 against EnzymeWorks, Junhua Tao, and Andrew Tao in the United States District Court for the Northern District of California. The parties have entered into a settlement agreement, the terms of which are confidential. The parties have also stipulated to a judgment of patent infringement of all asserted patents against EnzymeWorks, and a permanent injunction barring any future infringement. The remaining claims against EnzymeWorks, and all claims against Junhua Tao, and Andrew Tao including trade secret misappropriation, breach of contract and voidable transfer have been dismissed with prejudice.

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.