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COMMITMENTS AND CONTINGENCIES | 9 Months Ended
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Jun. 30, 2020
COMMITMENTS AND CONTINGENCIES |
F. COMMITMENTS AND CONTINGENCIES | F. COMMITMENTS AND CONTINGENCIES Clinical Research Agreements Under co-development and revenue sharing agreements with Ergomed, Ergomed agreed to contribute up to $12 million towards the Company’s Phase 3 Clinical Trial in the form of discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specific maximum amount. The Company accounted for the co-development and revenue sharing agreements in accordance with ASC 808 “Collaborative Arrangements”. The Company determined the payments to Ergomed are within the scope of ASC 730 “Research and Development.” Therefore, the Company records the discount on the clinical services as a credit to research and development expense on its Statements of Operations. Since the inception of the agreement with Ergomed, the Company has incurred research and development expenses of approximately $32.7 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $10.8 million. During the nine months ended June 30, 2020 and 2019, the Company recorded, net of Ergomed’s discount, approximately $1.3 million and $2.2 million, respectively, as research and development expense related to Ergomed’s services. Lease Agreements The Company determines whether a contract contains a lease at the inception of a contract by determining if the contract conveys the right to control the use of identified property, plant or equipment over a period of time in exchange for consideration. The Company leases certain real estate, machinery, equipment and office equipment for varying periods. Many of these leases include an option to either renew or terminate the lease. For purposes of calculating lease liabilities, these options are included in the lease term when it is reasonably certain that the Company will exercise such options. The incremental borrowing rate utilized to calculate the lease liabilities is based on the information available at commencement date, as most of the leases do not provide an implicit borrowing rate. Short-term leases, defined as leases with initial terms of 12 months or less, are not reflected on the balance sheet. Lease expense for such short-term leases is not material. For purposes of calculating lease liabilities, lease and non-lease components are combined. The Company leases a manufacturing facility near Baltimore, Maryland (the San Tomas lease). The building was remodeled in accordance with the Company’s specifications so that it can be used by the Company to manufacture Multikine for the Company’s Phase 3 clinical trial and sales of the drug if approved by the FDA. The lease is for a term of twenty years and requires annual base rent to escalate each year at 3%. The Company is required to pay all real estate and personal property taxes, insurance premiums, maintenance expenses, repair costs and utilities. The lease allows the Company, at its election, to extend the lease for two ten-year periods or to purchase the building at the end of the 20-year lease, which expires in October 2028. Upon adoption of ASC 842 on October 1, 2019, the Company recorded a finance lease right of use asset of approximately $15.5 million and a finance lease liability of approximately $13.5 million. As of June 30, 2020, the net book value of the finance lease right of use asset is approximately $14.2 million and the balance of the finance lease liability is approximately $12.9 million, of which approximately $0.9 million is current. These amounts include the San Tomas lease as well as several other smaller finance leases for office equipment. The finance right of use assets are being depreciated using a straight-line method over the underlying lease terms. Total cash paid related to finance leases during the nine months ended June 30, 2020 was approximately $1,414,000, of which approximately $873,000 was for interest. The weighted average discount rate of the Company’s finance leases is 8.8% and the weighted average time to maturity is 8.3 years. The Company was required to deposit the equivalent of one year of base rent in accordance with the lease. When the Company meets the minimum cash balance required by the lease, the deposit will be returned to the Company. The approximate $1.7 million deposit is included in non-current assets at June 30, 2020 and September 30, 2019. Approximate future minimum lease payments under finance leases as of June 30, 2020 are as follows:
Three months ending September 30, 2020 |  | $ | 473,000 |
Year ending September 30, |  |  |  |
2021 |  |  | 1,953,000 |
2022 |  |  | 2,014,000 |
2023 |  |  | 2,083,000 |
2024 |  |  | 2,148,000 |
2025 |  |  | 2,218,000 |
Thereafter |  |  | 7,322,000 |
Total future minimum lease obligation |  |  | 18,211,000 |
Less imputed interest on finance lease obligations |  |  | (5,316,000 | )
Net present value of lease finance lease obligations |  | $ | 12,895,000 |
Effective April 30, 2020, the Company terminated a month-to-month arrangement with a sub-lessee as the sub-leased space is needed to prepare the facility to produce Multikine for commercial purposes and before the Company’s Biologics License Application (BLA) can be submitted to the FDA. The sublease rental income for the nine and three months ended June 30, 2020 was approximately $39,000 and $2,000, respectively The sublease rental income for the nine and three months ended June 30, 2019 was approximately $55,000 and $18,000, respectively. The Company leases two facilities under 60-month operating leases – the lease for its research and development laboratory expires February 28, 2022 and the lease for its office headquarters expired on June 30, 2020. The office headquarter lease was renewed on July 1, 2020 and will expire on November 30, 2025. During the nine months ended June 30, 2020, the Company incurred approximately $80,000 in leasehold improvements costs for the research and development lab and is reasonably certain to renew the lease through February 28, 2027. The renewal period is included in the right of use asset and liability calculations. The operating leases include escalating rental payments. The Company is recognizing the related rent expense on a straight-line basis over the full 60-month terms of the leases. Upon adoption of ASC 842 on October 1, 2019, the Company recorded an operating lease right of use asset and an operating lease liability of approximately $1.0 million. As of June 30, 2020, the net book value of the operating lease right of use asset is approximately $1.2 million and the balance of the operating lease liability is approximately $1.3 million, of which approximately $0.1 million is current. The Company incurred lease expense under operating leases of approximately $202,000 and $67,000 for the nine and three months ended June 30, 2020, respectively. Total cash paid related to operating leases during the nine and three months ended June 30, 2020 was approximately $198,000 and $66,000, respectively. As of June 30, 2020, future minimum lease payments on operating leases are as follows:
Three months ending September 30, 2020 |  | $ | 40,000 |
Year ending September 30, |  |  |  |
2021 |  |  | 241,000 |
2022 |  |  | 264,000 |
2023 |  |  | 272,000 |
2024 |  |  | 280,000 |
2025 |  |  | 288,000 |
Thereafter |  |  | 286,000 |
Total future minimum lease obligation |  |  | 1,671,000 |
Less imputed interest on operating lease obligation |  |  | (409,000 | )
Net present value of operating lease obligation |  | $ | 1,262,000 |

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