Subleases

9 Months Ended

Sep. 30, 2024

Subleases

Subleases

6. Subleases

In March 2024, the Company entered into a non-cancelable agreement (“March 2024 Sublease”) under which it subleased approximately 8,000 square feet of its South San Francisco office space to an unaffiliated company. The sublease period was for approximately two years expiring in April 2026, and the subtenant has no option to extend the sublease. Under the terms of the March 2024 Sublease, the Company is entitled to receive an initial monthly base rent of $38,000 with a 3% annual increase after the first year. The Company will recognize approximately $0.9 million in total sublease income on a straight-line basis over the two-year sublease term. Sublease income is recognized as a reduction to the Company’s facilities expense which is then allocated to selling, general and administrative expenses and R&D expenses in the condensed consolidated statements of operations.

As of September 30, 2024, the Company has subleased approximately 107,000 square feet of a total 162,000 square feet of its South San Francisco office and laboratory space under three separate subleases with unaffiliated companies. The Company’s sublease income from all three subleases is summarized below:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2024		2023		2024		2023
Sublease income	$	2,204	$	2,090	$	6,498	$	6,270

On November 1, 2024, the Company entered into an amendment to the March 2024 Sublease (“March 2024 Sublease Amendment”). The March 2024 Sublease Amendment included the following key terms: (i) an addition of approximately 11,000 square feet of laboratory space; and (ii) an extension of the sublease period by approximately three years ending on or around February 2029 with an option to extend the sublease through the master headlease expiration in May 2030. For the laboratory space addition, the Company is entitled to receive an initial monthly base rent of $16,250 with approximate 3% annual increases after the first year. Under the terms of the March 2024 Sublease Amendment, the Company is expected to recognize approximately $3.1 million in total sublease income on a straight-line basis over the March 2024 Sublease Amendment period.

Impairment of Long-Lived Assets

As of September 30, 2024, the Company had approximately 31,000 square feet of remaining vacant office and laboratory space in South San Francisco on the market for sublease primarily as a result of strategic actions taken in February 2023 (See “Note 8. Restructuring and Related Expenses” for more information). The Company evaluates the carrying value of its long-lived asset groups, which includes operating lease assets and leasehold improvements, for impairment when indicators exist that the carrying amounts of an asset may not be fully recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset or asset group are less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

The Company determined that the ceased occupancy and current sublease marketing of office and laboratory space were indicators of impairment. The Company operates within a single segment and identified three asset groups for the purposes of its long-lived impairment assessment which were comprised of (i) vivarium laboratory asset group; (ii) general laboratory asset group; and (iii) entity-wide asset group. The vacant office space, which the Company determined it may reoccupy in the future, was considered part of the entity-wide asset group.

The Company previously recognized an impairment charge of $3.0 million for the vivarium laboratory asset group and the general laboratory asset group during the six months ended June 30, 2024 based on the discounted cash flow method to estimate the fair values of the two asset groups which represented Level 3 non-recurring fair value measurements.

As of September 30, 2024, while the Company was negotiating the March 2024 Sublease Amendment, the Company proceeded to update the estimate fair value of the vivarium laboratory space based on the terms of the draft March 2024 Sublease Amendment which involved estimates including the expected sublease rental income of $0.6 million, an annual discount rate of 9.7%, and other variable lease-related expenses. As a result of the updated fair value estimate, the Company recognized a non-cash incremental impairment charge of $0.9 million related to the vivarium laboratory space for the three months ended September 30, 2024.

In addition, based on the Company’s updated impairment assessment (which reflected the facts derived from the March 2024 Sublease Amendment) as of September 30, 2024, the Company determined that the carrying value of the remaining vacant general laboratory space, consisting of approximately 11,000 square feet, continued to exceed the estimated undiscounted future cash flows. The Company proceeded to update the estimated fair value of the general laboratory space based on the Company’s current estimates and assumptions including, but not limited to, expected sublease rental income of $0.8 million, an annual discount rate of 9.7%, and other variable lease-related expenses expected to be incurred during the subtenant search period. As a result of updated fair value estimate, the Company recognized a non-cash incremental impairment charge of $0.7 million in connection to the vacant general laboratory space for the three months ended September 30, 2024.

In aggregate, the Company recognized non-cash impairment charges of $1.6 million and $4.5 million for the three and nine months ended September 30, 2024, respectively. The impairment charge is presented in the Company’s condensed consolidated statements of operations within “Impairment of long-lived assets”.

The Company’s estimates and assumptions used to determine the estimated fair values of the above two asset groups were subject to risks, uncertainties, and changes in circumstances that may result in adjustments and material changes to the estimated fair values in future periods.