Leases

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Leases

Leases

The Company adopted ASC 842 on January 1, 2019 and applied a modified retrospective transition approach. The Company will continue to account for comparative reporting periods prior to that date under ASC 840.

Build-to-Suit Lease

In December 2013, the Company executed a lease for 97,624 square feet of office space in San Francisco, California (San Francisco office lease). The initial lease term was seven years with an option to renew for an additional three years, and the leased space represents two floors in a seven-floor building. The lease provided for a $6.4 million tenant improvement reimbursement allowance, which the Company utilized in 2014. In order for the facility to meet the Company’s operating specifications, both the landlord and the Company made structural changes as part of the improvement of the building, and as a result, the Company has concluded that it is the deemed partial owner of the building (for accounting purposes only) during the construction period. Accordingly, at lease inception, the Company recorded an asset of $22.3 million, representing its estimate of the fair market value of the leased space, and a corresponding lease financing obligation on the consolidated balance sheets.

Upon completion of construction, the Company evaluated the derecognition of the asset and liability as a sale-leaseback transaction. The Company concluded it did not meet the provisions needed for sale-leaseback accounting, and thus the lease was being accounted for as a financing obligation. Lease payments were allocated to (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset was being depreciated over the building’s estimated useful life of 30 years.

Land lease expense was $0.9 million for each of the years ended December 31, 2018 and 2017 and interest expense recorded related to the Company’s build-to-suit lease was $3.4 million and $3.5 million for the years ended December 31, 2018 and 2017, respectively.

Upon the adoption of ASC 842 as of January 1, 2019, the Company derecognized the build-to-suit asset and related lease financing obligation in their entirety, with the exception of the remaining net book value of lessee-owned tenant improvement assets, which will be depreciated over the remaining term of the lease. The Company classified the San Francisco office lease as an operating lease under ASC 842. The adoption effect of derecognizing the build-to-suit assets and lease financing obligation, and recognizing operating lease right-of-use assets and operating lease liabilities on the consolidated balances sheets was as follows (in thousands):

Balance Sheet Location	December 31, 2019		January 1, 2019		December 31, 2018
Property, plant and equipment, net	$	814	$	(26,676)	$	28,101
Other accrued liabilities	—		(552)		552
Build-to-suit lease financing obligation	—		(28,510)		28,510
Operating lease right-of-use assets	5,953		10,130		—
Operating lease liabilities	5,580		5,167		—
Operating lease liabilities, noncurrent	1,446		7,026		—
Accumulated deficit	135		135		—

Operating leases

The Company leases its office facilities under operating lease arrangements with varying expiration dates through 2029. Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Right-of-use assets also include adjustments related to prepaid or deferred lease payments and lease incentives. As most of the Company's leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The incremental borrowing rate is calculated based on hypothetical fully-secured borrowings to fund each respective lease over the lease term as of the lease commencement date, based on an assessment of the company's implied credit rating. As of December 31, 2019, total operating lease right-of-use assets and operating lease liabilities were $22.2 million and $25.3 million, respectively. The lease liabilities are classified with $9.1 million included in current liabilities and $16.2 million included in noncurrent liabilities on the consolidated balance sheets.

Options to extend or terminate a lease are included in the lease term when it is reasonably certain that the Company will exercise such options. As of December 31, 2019, the remaining lease term of the Company's operating leases ranges from less than one year to ten years.

The components of operating lease costs for the year ended December 31, 2019 were as follows (in thousands):


Operating lease costs	$	8,246
Sublease income	(3,933)
Total operating lease costs, net	$	4,313

The Company made cash payments of $9.1 million for operating lease liabilities during the year ended December 31, 2019, which is included within the operating activities section on the consolidated statements of cash flows.

As of December 31, 2019, the Company's operating leases had a weighted-average remaining lease term of 4.5 years and a weighted-average discount rate of 3.7%.

As of December 31, 2019, maturities of operating lease liabilities were as follows (in thousands):

2020	$	9,766
2021	4,967
2022	3,352
2023	3,081
2024	2,035
Thereafter	4,161
Total operating lease payments	27,362
Less: Imputed interest	(2,085)
Total operating lease liabilities	$	25,277

Rent expense from operating leases recorded under ASC 840 totaled $3.0 million and $2.1 million for the years ended December 31, 2018 and 2017, respectively. The Company also recognized sublease income of $3.6 million and $3.1 million for the years ended December 31, 2018 and 2017, respectively.

As of December 31, 2018, the future minimum lease payments under non-cancelable operating leases and the build-to suit lease arrangement, net of sublease income rental payments, were as follows (in thousands):

2019	$	4,115
2020	4,129
2021	2,645
2022	1,678
2023	1,483
Thereafter	3,770
Total minimum payments	17,820
Less: Amount representing interest and taxes	(7,564)
Total	$	10,256

Finance leases

The Company leases certain computer equipment under finance leases. Finance lease right-of-use assets had a carrying amount of $0.4 million as of December 31, 2019 and are included in property, plant and equipment, net on the consolidated balance sheets. Finance lease liabilities totaled $0.7 million as of December 31, 2019, with $0.4 million and $0.3 million included in other accrued liabilities and other noncurrent liabilities, respectively, on the consolidated balance sheets. The Company made cash payments of $0.3 million for finance lease liabilities during the year ended December 31, 2019, which is included within the financing activities section on the consolidated statements of cash flows.

Leases

Leases

The Company adopted ASC 842 on January 1, 2019 and applied a modified retrospective transition approach. The Company will continue to account for comparative reporting periods prior to that date under ASC 840.

Build-to-Suit Lease

In December 2013, the Company executed a lease for 97,624 square feet of office space in San Francisco, California (San Francisco office lease). The initial lease term was seven years with an option to renew for an additional three years, and the leased space represents two floors in a seven-floor building. The lease provided for a $6.4 million tenant improvement reimbursement allowance, which the Company utilized in 2014. In order for the facility to meet the Company’s operating specifications, both the landlord and the Company made structural changes as part of the improvement of the building, and as a result, the Company has concluded that it is the deemed partial owner of the building (for accounting purposes only) during the construction period. Accordingly, at lease inception, the Company recorded an asset of $22.3 million, representing its estimate of the fair market value of the leased space, and a corresponding lease financing obligation on the consolidated balance sheets.

Upon completion of construction, the Company evaluated the derecognition of the asset and liability as a sale-leaseback transaction. The Company concluded it did not meet the provisions needed for sale-leaseback accounting, and thus the lease was being accounted for as a financing obligation. Lease payments were allocated to (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset was being depreciated over the building’s estimated useful life of 30 years.

Land lease expense was $0.9 million for each of the years ended December 31, 2018 and 2017 and interest expense recorded related to the Company’s build-to-suit lease was $3.4 million and $3.5 million for the years ended December 31, 2018 and 2017, respectively.

Upon the adoption of ASC 842 as of January 1, 2019, the Company derecognized the build-to-suit asset and related lease financing obligation in their entirety, with the exception of the remaining net book value of lessee-owned tenant improvement assets, which will be depreciated over the remaining term of the lease. The Company classified the San Francisco office lease as an operating lease under ASC 842. The adoption effect of derecognizing the build-to-suit assets and lease financing obligation, and recognizing operating lease right-of-use assets and operating lease liabilities on the consolidated balances sheets was as follows (in thousands):

Balance Sheet Location	December 31, 2019		January 1, 2019		December 31, 2018
Property, plant and equipment, net	$	814	$	(26,676)	$	28,101
Other accrued liabilities	—		(552)		552
Build-to-suit lease financing obligation	—		(28,510)		28,510
Operating lease right-of-use assets	5,953		10,130		—
Operating lease liabilities	5,580		5,167		—
Operating lease liabilities, noncurrent	1,446		7,026		—
Accumulated deficit	135		135		—

Operating leases

The Company leases its office facilities under operating lease arrangements with varying expiration dates through 2029. Operating lease right-of-use assets and operating lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. Right-of-use assets also include adjustments related to prepaid or deferred lease payments and lease incentives. As most of the Company's leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The incremental borrowing rate is calculated based on hypothetical fully-secured borrowings to fund each respective lease over the lease term as of the lease commencement date, based on an assessment of the company's implied credit rating. As of December 31, 2019, total operating lease right-of-use assets and operating lease liabilities were $22.2 million and $25.3 million, respectively. The lease liabilities are classified with $9.1 million included in current liabilities and $16.2 million included in noncurrent liabilities on the consolidated balance sheets.

Options to extend or terminate a lease are included in the lease term when it is reasonably certain that the Company will exercise such options. As of December 31, 2019, the remaining lease term of the Company's operating leases ranges from less than one year to ten years.

The components of operating lease costs for the year ended December 31, 2019 were as follows (in thousands):


Operating lease costs	$	8,246
Sublease income	(3,933)
Total operating lease costs, net	$	4,313

The Company made cash payments of $9.1 million for operating lease liabilities during the year ended December 31, 2019, which is included within the operating activities section on the consolidated statements of cash flows.

As of December 31, 2019, the Company's operating leases had a weighted-average remaining lease term of 4.5 years and a weighted-average discount rate of 3.7%.

As of December 31, 2019, maturities of operating lease liabilities were as follows (in thousands):

2020	$	9,766
2021	4,967
2022	3,352
2023	3,081
2024	2,035
Thereafter	4,161
Total operating lease payments	27,362
Less: Imputed interest	(2,085)
Total operating lease liabilities	$	25,277

Rent expense from operating leases recorded under ASC 840 totaled $3.0 million and $2.1 million for the years ended December 31, 2018 and 2017, respectively. The Company also recognized sublease income of $3.6 million and $3.1 million for the years ended December 31, 2018 and 2017, respectively.

As of December 31, 2018, the future minimum lease payments under non-cancelable operating leases and the build-to suit lease arrangement, net of sublease income rental payments, were as follows (in thousands):

2019	$	4,115
2020	4,129
2021	2,645
2022	1,678
2023	1,483
Thereafter	3,770
Total minimum payments	17,820
Less: Amount representing interest and taxes	(7,564)
Total	$	10,256

Finance leases

The Company leases certain computer equipment under finance leases. Finance lease right-of-use assets had a carrying amount of $0.4 million as of December 31, 2019 and are included in property, plant and equipment, net on the consolidated balance sheets. Finance lease liabilities totaled $0.7 million as of December 31, 2019, with $0.4 million and $0.3 million included in other accrued liabilities and other noncurrent liabilities, respectively, on the consolidated balance sheets. The Company made cash payments of $0.3 million for finance lease liabilities during the year ended December 31, 2019, which is included within the financing activities section on the consolidated statements of cash flows.