Commitments and Contingencies

12 Months Ended

Dec. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

10.

Commitments and Contingencies

Leases

In March 2021, the Company executed a non-cancellable lease agreement for office and laboratory space in San Diego, California (“Second Floor Lease”). The Second Floor Lease and related monthly payments commenced in March 2022, and had an initial term of ten years with an option to extend the lease for an additional five-year term. The lease provides for initial monthly rental payments of approximately $0.2 million with rent escalation and the Company is also responsible for certain operating expenses and taxes throughout the lease term. In addition, the Company received $6.3 million of tenant improvements, all of which were deemed to be owned by the landlord. Under the relevant guidance, the Company recognized an operating lease right-of-use (ROU) asset and lease liability of $14.6 million each based on the present value of the future minimum lease payments over the lease term at the commencement date, using the Company’s assumed incremental borrowing rate, and amortizes the ROU asset and lease liability over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

In October 2021, the Company executed an amendment to the lease agreement to expand the leased premises (“First Floor Lease”). The amended lease extends the initial term of the original lease to 127.5 months following the commencement date of the expansion premises, with an option to extend the lease term for an additional five-year term. In September 2022, the Company took control of the expansion premises and the amended lease term commenced with an approximately 127.5-month term for the expansion premises and the original premises. The Company recognized ROU assets and lease liabilities of $14.0 million on the Company’s condensed balance sheet related to the expansion premises. The First Floor Lease provides for initial monthly rental payments for the expansion premises of an additional approximately $0.2 million with rent escalation and the Company is also responsible for certain operating expenses and taxes throughout the lease term. In addition, the Company received an additional $6.1 million of tenant improvements for the expansion premises, all of which was deemed to be owned by the landlord.

In connection with the PLI spinoff on December 31, 2020, the Company entered into a sublease agreement for approximately 40,000 square feet in the PLI facility. The sublease agreement was for one year with an option to renew for an additional year. The sublease agreement was extended for six months and expired on June 30, 2022 in accordance with its terms. No further payment obligations exist after the termination date.

Information related to the Company's operating lease is as follows (in thousands):


	Year Ended December 31,
	2022		2021		2020
Operating lease cost	$	2,304	$	—	$	—
Variable lease cost		464		—		—
Short-term lease cost		494		960		461
Total lease cost	$	3,262	$	960	$	461
Cash paid for amounts included in the measurement of lease liabilities	$	539	$	—	$	—

As of December 31, 2022 the weighted-average remaining lease term of the Company’s operating lease was 124 months and the weighted-average discount rate on the Company’s operating lease was 8.7%.

Future minimum lease payments and information related to the operating lease liability as of December 31, 2022 are as follows (in thousands):


2023	$	3,352
2024		4,058
2025		4,180
2026		4,305
2027		4,435
Thereafter		25,989
Total lease payments		46,319
Imputed interest		(16,781	)
Lease liability		29,538
Less current portion of lease liability		3,217
Lease liability, net of current portion	$	26,321

Litigation

From time to time, the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Regardless of outcome, legal proceedings or claims can have an adverse impact on the company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breech of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with officers and members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. At December 31, 2022, no claims exist under indemnification arrangements and accordingly, no amounts have been accrued in its consolidated financial statements as of December 31, 2022.

Prometheus Biosciences, Inc. 10-K