Arcellx, Inc. Leases Disclosure

9. Leases

Operating Leases

In July 2022, the Company entered into an operating lease agreement for 57,902 square feet of office and laboratory space in Rockville, Maryland for a term of approximately 12.9 years. The lease contains annual rent escalation and rent abatement clauses as well as an allowance of approximately $12.1 million for tenant improvements. During the year ended December 31, 2023, the landlord and the Company agreed to convert $2.8 million of rent abatement to tenant improvement allowance and agreed to an additional tenant improvement allowance of $2.9 million. The changes were accounted for as lease modifications. The Rockville lease provides for optional two five-year extensions. The optional period is not included in the lease term used to determine the ROU asset or lease liability associated with this lease as the Company did not consider it reasonably certain it would exercise the option.

In May 2022, the Company entered into an operating lease agreement for 51,822 square feet of office and laboratory space in Redwood City, California for a term of approximately 11.7 years. The lease contains annual rent escalation and rent abatement clauses as well as an allowance of approximately $9.8 million for tenant improvements. The Redwood City lease provides for an optional five-year extension. The optional period is not included in the lease term used to determine the ROU asset or lease liability associated with this lease as the Company did not consider it reasonably certain it would exercise the option.

The Company also leases office and laboratory space in Gaithersburg, Maryland that has a term that expires in 2030 unless renewed. This operating lease agreement contains rent escalation, rent abatement clauses, tenant improvement allowances, and optional renewal clauses. On January 30, 2024, we entered into an Assignment of Lease with a third party sublessee, pursuant to which we agreed to transfer and assign to a sublessee all of our rights, title, and interest under the Gaithersburg, Maryland Lease. See Note 17 Subsequent Events.

All three operating leases include variable lease payments, which are primarily related to common area maintenance, taxes and utility charges. The Company also has short-term operating leases with a term of one year or less.

Finance Leases

Pursuant to a manufacturing services agreement with Lonza Houston, Inc. (Lonza) in connection with the development and manufacture of autologous drug product anito-cel (Lonza Agreement), the Company entered into a statement of work with Lonza (Lonza SOW) in February 2022, for the technology transfer and cGMP manufacturing of anito-cel and potentially other pipeline products. The Lonza SOW contains an embedded lease as the Company has exclusive use of, and control over, a portion of manufacturing facilities during the contractual term. The Lonza SOW also contains an agreement to purchase inventory that is accounted for separately. Lease commencement occurred during the three months ended September 30, 2022 when the applicable manufacturing facility and equipment became available for cGMP manufacturing under the Company's exclusive use and control. The arrangement provides the Company the ability to early terminate for any reason upon 12 months prior notification to Lonza. The Company did not consider it reasonably certain it would terminate the arrangement when determining the lease term. The arrangement expires in December 2024. Variable costs under this arrangement include materials, external testing, and other services.

The Company elected the practical expedient to combine the lease component and the non-lease components associated with the lease component as a single lease component, except as related to the non-lease component associated with purchase of inventory. The related ROU assets represent assets acquired for research and development activities with no alternative future use and therefore were immediately expensed in the accompanying consolidated statements of operations and comprehensive loss during the year ended December 31, 2022 in the amount of $63.3 million.

In September 2023, the Company signed Amendment 1 to the Lonza SOW entered into in February 2022. The Amendment 1 increased quantity of manufacturing slots from September 2023 through the end of the lease in December 2024, providing the Company additional exclusive use of and control over an additional portion of the manufacturing facilities during the term that was previously shared. The Company now has exclusive use of, and control over, the additional facility space and equipment through the remainder of the lease term.

This change under Amendment 1 was accounted for as a lease modification, and the Company remeasured the lease liabilities for the modified lease as of the Amendment effective date. The remeasurement of the lease liabilities included fixed consideration with an undiscounted value of approximately $51.7 million, or $48.5 million discounted using the expected payment timeline and the incremental borrowing rate of 10.8%, resulting in an increase of $15.9 million in lease liabilities. As the Company acquired ROU assets that represented assets acquired for research and development activities that did not have an alternative future use, the Company recorded the ROU assets as research and development expense immediately in the accompanying consolidated statements of operations and comprehensive loss during the year ended December 31, 2023 in the amount of $18.9 million.