COMMITMENTS AND CONTINGENCIES

6 Months Ended

Mar. 31, 2023

Commitments and contingencies

COMMITMENTS AND CONTINGENCIES

F. COMMITMENTS AND CONTINGENCIES

Clinical Research Agreement 

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 $35.6 million for Ergomed’s services. This amount is net of Ergomed’s discount of approximately $11.8 million. During the six months ended March 31, 2023 and 2022, the Company recorded, net of Ergomed’s discount, approximately $0.1 million and $0.4 million, respectively, as research and development expense related to Ergomed’s services. During the three months ended March 31, 2023 and 2022, the Company recorded, net of Ergomed’s discount, approximately $0.0 million and $0.2 million, respectively, as research and development expense related to Ergomed’s services.

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.  

On March 31, 2023 and September 30, 2022, the net book value of the finance lease right of use asset is approximately $10.0 million and $10.9 million, respectively and the balance of the finance lease liability is approximately $12.5 million and $13.3 million, respectively, of which approximately $1.6 million is current in each quarter.  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 the straight-line method over the underlying lease terms.  Total cash paid related to finance leases during the six months ended March 31, 2023 and 2022 was approximately $1.3 million for both periods, respectively, of which approximately $0.6 million was for interest in each six-month period. As of March 31, 2023, the weighted average discount rate of the Company’s finance leases is 8.45% and the weighted average time to maturity is 5.6 years.

In August 2020, the Company entered into an amendment to the San Tomas lease 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 project was finished and the improvements were placed in service in October 2021. Total cost was $11.1 million, of which the landlord agreed to finance $2.4 million. The landlord financing is being repaid through increased lease payments which started in March 2021 and extend over the remaining lease term.  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 a 8.45% implicit interest rate.  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, were deemed to be placed in service in October 2021 and are being amortized over the remaining lease term. 

On January 11, 2023, the Company was required to deposit approximately $2.3 million to its landlord, equivalent to one year’s rent, for falling below the stipulated cash threshold in accordance with the San Tomas lease. The amount will be included as an asset on the balance sheet until the Company meets the minimum cash balance required and the deposit is returned.

Approximate future minimum lease payments under finance leases as of March 31, 2023 are as follows:

Six months ending September 30, 2023	$	1,291,000
Year ending September 30,
2024		2,655,000
2025		2,741,000
2026		2,832,000
2027		2,923,000
2028		3,015,000
Thereafter		252,000
Total future minimum lease obligation		15,709,000
Less imputed interest on finance lease obligations		(3,189,000	)
Net present value of finance lease obligations	$	12,520,000

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. As of March 31, 2023 and September 30, 2022, the net book value of the operating lease right of use assets is approximately $1.8 million and $1.9 million, respectively.  As of March 31, 2023 and September 30, 2022, the balance of the operating lease liabilities is approximately $1.9 million and $2.0 million, respectively, of which approximately $0.2 million, is current as of each reporting date.  The Company incurred lease expense for operating leases of approximately $0.1 million and $0.2 million for the six months ended March 31, 2023 and 2022, respectively. Total cash paid related to operating leases during the six months ended March 31, 2023 and 2022 was approximately $0.2 and $0.1 million, respectively. The weighted average discount rate of the Company’s operating leases is 10.2% and the weighted average time to maturity is 8.14 years.

As of March 31, 2023, future minimum lease payments on operating leases are as follows:

Six months ending September 30, 2023	$	176,000
Year ending September 30,
2024		357,000
2025		366,000
2026		287,000
2027		277,000
2028		285,000
Thereafter		1,040,000
Total future minimum lease obligation		2,788,000
Less imputed interest on operating lease obligation		(849,000	)
Net present value of operating lease obligation	$	1,939,000