COMMITMENTS AND CONTINGENCIES

12 Months Ended

Sep. 30, 2022

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

10. COMMITMENTS AND CONTINGENCIES

Clinical Research Agreements

In April 2013, the Company entered into a co-development and revenue sharing agreement with Ergomed.  Under the agreement, Ergomed will contribute up to $10 million towards the Company’s Phase III clinical study in the form of offering discounted clinical services in exchange for a single digit percentage of milestone and royalty payments, up to a specific maximum amount.  In October 2015, the Company entered into a second co-development and revenue sharing agreement with Ergomed for an additional $2 million, for a total of $12 million.  The Company accounted for the co-development and revenue sharing agreement 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 Company entered into the co-development and revenue sharing agreement with Ergomed, it has incurred research and development expenses of approximately $35.5 million related to Ergomed’s services.  This amount is net of Ergomed’s discount of approximately $11.8 million. During the years ended September 30, 2022 and 2021, the Company recorded approximately $0.5 million and $1.6 million, respectively, as research and development expense related to Ergomed’s services. These amounts were net of Ergomed’s discount of approximately $0.1 million and $0.6 million during both the years ended September 30, 2022 and 2021.  

Lease Agreements

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.  The renewal options are not included in the calculation of the right of use asset and lease liability because exercise of those options is not reasonably certain.  

Upon adoption of ASC 842 on October 1, 2019, the Company recorded a finance lease right of use asset of approximately $16.5 million and a finance lease liability of approximately $13.5 million.  As of September 30, 2022 and 2021, respectively, the net book value of the finance lease right of use asset is approximately $10.9 million and $12.7 million and the balance of the finance lease liability is approximately $13.3 million and $13.8 million, of which approximately $1.6 million and $0.6 million is current.  These amounts include the San Tomas lease as well as several other smaller finance leases for office equipment.  During the years ended September 30, 2022 and 2021, the finance right of use assets are being depreciated using a straight-line method over the underlying lease terms and totaled approximately $1.8 million and $1.7 million, respectively. Total cash paid related to finance leases during the years ended September 30, 2022 and 2021 was approximately $0 and $2.5 million, respectively, of which approximately $1.2 million was for interest in both years. The weighted average discount rate of the Company’s finance leases is 8.45% and the weighted average time to maturity is 6.08 years.

In August 2020, the Company entered into an amendment to the San Tomas lease agreement under which the landlord agreed to allow the Company to substantially upgrade the manufacturing facility in preparation for the potential commercial production of Multikine. The upgrades were completed and the improvements were placed in service in October 2021.  The total cost of the upgrades was $11.1 million.  The landlord agreed to finance the final $2.4 million of the costs incurred which will be repaid through increased lease payments over the remaining lease term starting on March 1, 2021.  The repayment includes a base rent which escalates at 3% each year plus interest that accrues at 13.75% per year.  The Company remeasured the lease liability to account for the modified payments using an 8.45% incremental borrowing rate (IBR).  The rate was determined using a synthetic credit rating analysis prepared by an outside valuation specialist.  Additionally, this financing is considered to be a lease incentive from the landlord and has been included in the calculation of the lease liability as it is realized.  The entire $2.4 million was received from the landlord as of September 30, 2022. The leasehold improvements are recorded in property and equipment and are being amortized over the remaining lease term.

During June 2021, the Company determined that it used an incorrect discount rate to calculate the opening ROU asset and lease liability balances upon adoption of ASC 842. Management engaged an outside valuation specialist to perform a synthetic credit rating analysis which resulted in a revised rate to be used upon adoption of ASC 842 of 10.19% compared to the previously used rate of 8.80%. This change resulted in an immaterial difference to the September 30, 2020 financial statements, and was corrected in the quarterly period ended June 30, 2021 as an out of period adjustment.

The Company was required to deposit the equivalent of one year of base rent in accordance with the original lease.  Under the landlord’s $2.4 million financing arrangement, the Company was required to deposit an additional $0.2 million in March 2021. Because the Company met the minimum cash balance required by the lease, the full amount of the deposit was returned to the Company in January 2022. If the Company’s cash balance falls below the required balance, the Company will be required to re-deposit these funds with the landlord. The approximate $1.9 million deposit is included in non-current assets as of September 30, 2021.

Approximate future minimum lease payments under finance leases as of September 30, 2022 are as follows: 

Year ending September 30,
2023	$	2,576,000
2024		2,655,000
2025		2,741,000
2026		2,832,000
2027		2,923,000
Thereafter		3,267,000
Total future minimum lease obligations		16,994,000
Less imputed interest on finance lease obligations		(3,712,000	)
Net present value of finance lease obligations	$	13,282,000

The Company leases two facilities under operating leases.  The lease for the Company’s office headquarters will expire on November 30, 2025.  The lease for its research and development laboratory  was renewed in September 2021 for an additional ten years and will expire on February 29, 2032.   The renewal was considered a modification for accounting purposes and the right of use asset and liability were remeasured as of the date of the renewal.  This resulted in an increase of approximately $1.1 million to the operating lease right of use asset and liability. The operating leases include escalating rental payments. The Company is recognizing the related rent expense on a straight-line basis over the  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 September 30, 2022, the net book value of the operating lease right of use asset is approximately $1.9 million and the balance of the operating lease liability is approximately $2.0 million, of which approximately $0.2 million is current.  As of September 30, 2021, the net book value of the operating lease right of use asset is approximately $2.1 million and the balance of the operating lease liability is approximately $2.1 million, of which approximately $0.1 million is current.  During the years ended September 30, 2022 and 2021, the Company incurred lease expense under operating leases of approximately $0.4 million and $0.2 million, respectively. Total cash paid related to operating leases during the years ended September 30, 2022 and 2021 was approximately $0.3 million for each year.  The weighted average discount rate of the Company’s operating leases is 9.09% and the weighted average time to maturity is 8.83 years.

As of September 30, 2022, future minimum lease payments under operating leases are as follows:

Year ending September 30,
2023	$	348,000
2024		357,000
2025		366,000
2026		287,000
2027		277,000
Thereafter		1,325,000
Total future minimum lease obligations		2,960,000
Less imputed interest on operating lease obligation		(939,000	)
Net present value of operating lease obligation	$	2,021,000

Vendor Obligations

The Company has contingent obligations with vendors for work that will be completed in relation to the Phase 3 clinical trial.  The timing of these obligations cannot be determined at this time.  The Company estimates it will incur additional expenses of approximately $0.6 million for the remainder of the Phase 3 clinical trial and the filing of the clinical study report with the FDA.  This estimate is based only on the information currently available from the Clinical Research Organizations responsible for managing the Phase 3 clinical trial and does not include other related costs.