Leases

6 Months Ended

Jun. 30, 2019

As discussed in Note 1, we adopted ASC 842 as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under ASC 840.

We determine if an arrangement contains a lease at the inception of the arrangement. We include operating leases in operating lease right-of-use assets, operating lease liabilities, current portion, and operating lease liabilities, less current portion in our Condensed Consolidated Balance Sheets as of June 30, 2019. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We recognize operating lease right-of-use assets and liabilities at the lease commencement date based on the present value of lease payments over the expected lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date. However, in determining the present value of our lease payments for leases in effect when we adopted ASC 842, we used our incremental borrowing rate as of January 1, 2019. We have elected to recognize lease incentives, such as tenant improvement allowances, at the lease commencement date as a reduction of the right-of-use asset and lease liability until paid to us by the lessor to the extent that the lease provides a specified fixed or maximum level of reimbursement and we are reasonably certain to incur reimbursable costs at least equaling such amounts. For leases in effect as of January 1, 2019, we recognized our lease incentives as part of our transition adjustment. Our expected lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise any such options. We recognize lease expense on a straight-line basis over the expected lease term.

For our facilities leases, we have elected a practical expedient provided by ASC 842 to account for the lease and non-lease components, such as common area maintenance charges, as a single lease component.

In August 2017, we entered into a Lease Agreement (the Mission Bay Lease) with ARE-San Francisco No. 19, LLC (ARE) and terminated our sublease with Pfizer, Inc., effectively extending our lease term from 2020 to 2030 for our 137,046 square foot corporate office and R&D facility located at 455 Mission Bay Boulevard, San Francisco, California (the Mission Bay Facility). The term of the Mission Bay Lease commenced on September 1, 2017, and will expire on January 31, 2030, subject to our right to extend the term of the lease for two consecutive five-year periods, which we have excluded from our determination of the lease term. The monthly base rent for the Mission Bay Facility will escalate over the term of the lease at various intervals. During the term of the Mission Bay Lease, we are responsible for paying our share of operating expenses specified in the lease, including utilities, common area maintenance, insurance and taxes. The Mission Bay Lease also obligates us to rent from ARE a total of an additional approximately 15,000 square feet of space at the Mission Bay Facility. During the six months ended June 30, 2019, ARE delivered 2,690 square feet of space, and therefore we recognized a right-of-use asset and lease liability of $1.3 million for this space. The Mission Bay Lease includes various covenants, indemnities, defaults, termination rights, security deposits and other provisions customary for lease transactions of this nature.

In May 2018, we entered into a Lease Agreement (the Third Street Lease) with Kilroy Realty Finance Partnership, L.P. to lease 135,936 square feet of space located at 360 Third Street, San Francisco, California (the Third Street Facility) from June 2018 to January 31, 2030, subject to our right to extend the term for a consecutive five-year period, which we have excluded from

our determination of the lease term. An initial 1,726 square feet was delivered in June 2018, and a total of 67,105 square feet for two additional spaces was delivered in December 2018. The remaining space will be delivered in phases during 2019. The Third Street Lease will provide us additional facilities to support increased personnel for our San Francisco-based R&D activities. Our fixed monthly base rent on an industrial gross lease basis includes certain expenses and property taxes paid directly by the landlord and will escalate each year over the term at specified intervals. We have a one-time right of first offer with respect to certain additional rental space at the Third Street Facility. The Third Street Lease includes various covenants, indemnities, defaults, termination rights, security deposits and other provisions customary for lease transactions of this nature.

The components of lease costs, which were included in operating expenses in our Condensed Consolidated Statements of Operations, were as follows (in thousands):



	Three months ended June 30,				Six months ended June 30,
	2019		2018		2019		2018
Operating lease cost	$	2,957	$	1,886	$	5,914	$	3,724
Variable lease cost	1,781		1,182		3,054		2,275
Total lease costs	$	4,738	$	3,068	$	8,968	$	5,999

Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 30, 2019 was $3.1 million, which we included in net cash provided by (used in) operating activities in our Condensed Consolidated Statement of Cash Flows.

As of June 30, 2019, the maturities of our operating lease liabilities were as follows (in thousands):



Year ended December 31,
2019 (Six months ended)	$	4,417
2020	9,690
2021	12,671
2022	13,087
2023	13,515
2024	13,956
2025 and thereafter	78,233
Total lease payments	145,569
Less: portion representing interest	(43,021		)
Less: lease incentives	(3,977		)
Operating lease liabilities	98,571
Less: current portion	(3,749		)
Operating lease liabilities, less current portion	$	94,822

As of June 30, 2019, the weighted-average remaining lease term is 10.6 years and the weighted-average discount rate used to determine the operating lease liability was 6.5%.