Leases

12 Months Ended

Dec. 31, 2019

At the inception of a contractual arrangement, we determine whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. For operating leases with an initial term greater than 12 months, we recognize operating lease ROU assets and operating lease liabilities based on the present value of lease payments over the lease term at the commencement date. Operating lease ROU assets are comprised of the lease liability plus any lease payments made and excludes lease incentives. Lease terms include options to renew or terminate the lease when we are reasonably certain that the renewal option will be exercised or when it is reasonably certain that the termination option will not be exercised. For our operating leases, we generally cannot determine the interest rate implicit in the lease, in which case we use our incremental borrowing rate as the discount rate for the lease. We estimate our incremental borrowing rate for our operating leases based on what we would normally pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Leases with a lease term of 12 months or less are not recorded on the balance sheet. Instead, we recognize lease expense for these leases on a straight-line basis over the lease term. Our lease agreements do not contain any material variable lease payments, residual value guarantees or restrictive covenants. Certain leases require us to pay taxes, insurance, utilities, and maintenance costs for the building, which do not represent lease components. We elected to not separate lease and non-lease components.

In July 2015, we entered into an operating lease agreement (the "Prior Lease") for approximately 59,248 square feet of office and laboratory facility space located at 10614 Science Center Drive, San Diego, California 92121. The lease term was 96 months from the lease commencement date, and we moved our headquarters into this facility in May 2016. In conjunction with the lease, we received $1.4 million of lease incentives and $8.2 million of tenant improvement allowance, which was to be used for non-structural leasehold improvements. The lease incentives and tenant improvement allowance were included within deferred rent. Our deferred rent balance as of December 31, 2018 was $8.0 million. The Prior Lease agreement was with ARE SD Region No. 44 LLC (“Landlord”).

On February 19, 2019, we entered into an agreement, the (“Space Swap Agreement"), with Nitto Biopharma, Inc. ("Nitto"), pursuant to which we agreed, contingent upon the execution of a new lease agreement (the "February Lease") for Nitto's space with Landlord and the termination of the Prior Lease, to, among other things, (i) swap buildings with Nitto, and (ii) sell, convey and transfer all right, title and interest in certain furniture, fixtures and equipment to Nitto, as set forth in the Space Swap Agreement. Under the Space Swap Agreement, we paid Nitto (a) a relocation assistance payment in the amount of $0.1 million; (b) $0.2 million representing the difference between the security deposits under the Prior Lease and Nitto’s prior lease, and (c) $1.3 million as reimbursement for the six monthly installments of base monthly rent due pursuant to the new lease between Nitto and Landlord, subject to certain adjustments, which reimbursements are to be paid as rent comes due for Nitto under its new lease.

On February 25, 2019, we and Landlord entered into a second amendment (the “Prior Lease Amendment”) to the Prior Lease. Under the terms of the Prior Lease Amendment, the expiration date of the Prior Lease was accelerated from April 30, 2024 to March 31, 2019 and the Prior Lease terminated on April 1, 2019. The Prior Lease Amendment eliminated all further cash payments due under the Prior Lease, including aggregate base rent over its remaining term of approximately $14.4 million.

On February 25, 2019, we entered into the February Lease with Landlord, for the lease of approximately 24,562 square feet of rentable area of the building located at 10628 Science Center Drive, San Diego, California, 92121 (the "Premises"), which Premises were previously occupied by Nitto. The commencement date of the February Lease was April 1, 2019 (the “Commencement Date”). The Premises served as our new principal executive offices and as a laboratory for research and development, manufacturing and other related uses. The term of the February Lease (“Initial Term”) was 51 months, ending June 30, 2023. The aggregate base rent due over the Initial Term was approximately $4.8 million. We were also responsible for the payment of additional rent to cover our share of the annual operating expenses, the annual tax expenses and the annual utilities costs related to the February Lease. The base rent payments due were: $0.6 million in 2019, $1.2 million in 2020, $1.2 million in 2021, $1.2 million in 2022, and $0.6 million in 2023.

The execution of the February Lease and Prior Lease Amendment resulted in a modification which was not accounted for as a separate contract. Rather, we accounted for the two contracts with Landlord in combination as they were entered into at the same time and negotiated as a package to achieve the same commercial objective. The leasehold improvements under the Prior Lease were accounted for as non-cash consideration of $5.6 million paid by us upon termination of the Prior Lease to the Landlord. We accounted for a $1.3 million portion of the reduction in the lease liability for the Prior Lease as a non-cash gain in the statement of operations due to the reduction in lease term and leased space with Landlord and a $0.9 million portion of the reduction of the lease liability as a deferred credit that is amortized as a reduction to rent expense over the term of the Lease. The $1.6 million obligation to reimburse Nitto for six monthly installments of base rent of the Prior Lease and certain other costs were accounted for as cost of terminating the Prior Lease in the statement of operations. The net impact of the modification was a $0.4 million charge in the statement of operations. Our payment obligations to Nitto under the Space Swap Agreement were fully satisfied as of September 2019 and no assets or liabilities remained with respect to the Prior Lease as of December 31, 2019. The commencement date of the February Lease did not occur until April 1, 2019 and therefore, as of March 31, 2019, the lease liability for the February Lease was zero. On April 1, 2019, we recorded a $3.8 million lease liability for the February Lease, which was calculated as the present value of future lease payments to be made under the February Lease. A $2.9 million ROU asset was also recorded on April 1, 2019, which represents the difference between the lease liability and the $0.9 million deferred credit for the reduction of the lease liability under the Prior Lease.

On June 19, 2019, we entered into a lease agreement (the “New Lease”) with Landlord for the lease of approximately 8,727 square feet of rentable area of the building located at 10628 Science Center Drive, Suite 225, San Diego, California 92121 (the “New Premises”). The commencement date of the New Lease was July 1, 2019 (the “New Commencement Date”). We are using the New Premises as our new principal executive offices and as a laboratory for research and development and other related uses. The term of the New Lease (the “New Initial Term”) is two years, six months, ending December 31, 2021. The base rent payments due for the New Premises are: $0.1 million in 2019, $0.4 million in 2020 and $0.4 million in 2021, net of certain rent abatement terms. We will also be responsible for the payment of additional rent to cover our share of the annual operating expenses of the building, the annual tax expenses of the building and the annual utilities cost of the building.

On June 19, 2019, we entered into a first amendment to the February Lease with Landlord (the “February Lease Amendment”). Under the terms of the February Lease Amendment, the expiration date of the February Lease was accelerated from June 30, 2023 to June 30, 2019 and the February Lease terminated upon the Commencement Date of the New Lease. The February Lease Amendment eliminated all further rents due under the February Lease, including aggregate base rent over its remaining term of approximately $4.8 million.

The execution of the New Lease and February Lease Amendment resulted in a modification which was not accounted for as a separate contract. Rather, we accounted for the two contracts with Landlord in combination as they were entered into at the same time and negotiated as a package to achieve the same commercial objective. We accounted for a $0.5 million portion of the reduction in the lease liability for the February Lease as a non-cash gain in the statement of operations due to the reduction in lease term and leased space with Landlord and a $0.2 million portion of the reduction of the lease liability as a deferred credit that is amortized as a reduction to rent expense over the term of the New Lease. No other assets or liabilities remained with respect to the February Lease as of December 31, 2019. The commencement date of the New Lease did not occur until July 1, 2019 and therefore, as of June 30, 2019, the lease liability for the New Lease was zero. On July 1, 2019, we recorded a $0.8 million lease liability for the New Lease, which was calculated as the present value of future lease payments to be made under the New Lease. A $0.6 million ROU asset was also recorded on July 1, 2019, which represents the difference between the lease liability and the remaining $0.2 million deferred credit for the reduction of the lease liability under the February Lease.

The table below summarizes our lease liabilities and corresponding ROU assets as of December 31, 2019 (in thousands):



Assets
Operating	$	464
Financing	466
Total ROU assets	$	930

Liabilities
Current:
Operating	$	361
Financing	277
Long-term:
Operating	417
Financing	56
Total lease liabilities	$	1,111

Rent expense for the years ended December 31, 2019 and 2018 was $0.7 million and $1.3 million, respectively.

The table below summarizes our lease costs from our statement of operations and cash payments from our statement of cash flows during the year ended December 31, 2019 (in thousands):



	Year ended December 31, 2019
Lease cost:
Operating lease cost	$	715
Finance lease cost:
Amortization of right-of-use assets	182
Interest expense on lease liabilities	5
Total lease cost	$	902

Cash payment information:
Operating cash used for operating leases	$	756
Operating cash used for finance leases	24
Financing cash used for finance leases	263
Total cash paid for amounts included in the measurement of lease liabilities	$	1,043

The table below summarizes other non-cash information under our operating and financing lease obligations as of December 31, 2019 (in thousands, except years and rates):



Supplemental non-cash information:
Operating lease liabilities arising from obtaining right-of-use assets	$	778

Weighted-average remaining lease term (years) - operating leases	2.0
Weighted-average remaining lease term (years) - finance leases	1.2
Weighted-average discount rate - operating leases	10.9		%
Weighted-average discount rate - finance leases	4.9		%

Our future lease payments under operating and finance leases at December 31, 2019 are as follows (in thousands):



	Operating Leases			Finance Leases
2020	429			287
2021	442			57
Total lease payments	$	871		$	344
Less: amount representing interest	(93		)	(11		)
Present value of obligations under leases	778			333
Less: current portion	(361		)	(277		)
Long-term lease obligations	$	417		$	56

As of December 31, 2018, prior to the adoption of the new leases standard, aggregate future annual minimum lease payments for the Company’s operating lease were as follows: $2.7 million in 2019 and 2020, $2.8 million in 2021, $2.9 million in 2022, $3.0 million in 2023 and $1.0 million thereafter.

Leases

The table below summarizes our lease liabilities and corresponding ROU assets as of December 31, 2019 (in thousands):



Assets
Operating	$	464
Financing	466
Total ROU assets	$	930

Liabilities
Current:
Operating	$	361
Financing	277
Long-term:
Operating	417
Financing	56
Total lease liabilities	$	1,111

Rent expense for the years ended December 31, 2019 and 2018 was $0.7 million and $1.3 million, respectively.

The table below summarizes our lease costs from our statement of operations and cash payments from our statement of cash flows during the year ended December 31, 2019 (in thousands):



	Year ended December 31, 2019
Lease cost:
Operating lease cost	$	715
Finance lease cost:
Amortization of right-of-use assets	182
Interest expense on lease liabilities	5
Total lease cost	$	902

Cash payment information:
Operating cash used for operating leases	$	756
Operating cash used for finance leases	24
Financing cash used for finance leases	263
Total cash paid for amounts included in the measurement of lease liabilities	$	1,043

The table below summarizes other non-cash information under our operating and financing lease obligations as of December 31, 2019 (in thousands, except years and rates):



Supplemental non-cash information:
Operating lease liabilities arising from obtaining right-of-use assets	$	778

Weighted-average remaining lease term (years) - operating leases	2.0
Weighted-average remaining lease term (years) - finance leases	1.2
Weighted-average discount rate - operating leases	10.9		%
Weighted-average discount rate - finance leases	4.9		%

Our future lease payments under operating and finance leases at December 31, 2019 are as follows (in thousands):



	Operating Leases			Finance Leases
2020	429			287
2021	442			57
Total lease payments	$	871		$	344
Less: amount representing interest	(93		)	(11		)
Present value of obligations under leases	778			333
Less: current portion	(361		)	(277		)
Long-term lease obligations	$	417		$	56