10.   Finance Lease Obligation

As discussed above, iBio CDMO is leasing its facility in Bryan, Texas as well as certain equipment from the Second Eastern Affiliate under the 34-year Sublease. iBio CDMO began operations at the facility on December 22, 2015 pursuant to agreements between iBio CDMO and the Second Eastern Affiliate granting iBio CDMO temporary rights to access the facility. These temporary agreements were superseded by the Sublease Agreement, dated January 13, 2016, between iBio CDMO and the Second Eastern Affiliate. The 34‑year term of the Sublease may be extended by iBio CDMO for a ten-year period, so long as iBio CDMO is not in default under the Sublease. Under the Sublease, iBio CDMO is required to pay base rent at an annual rate of $2,100,000, paid in equal quarterly installments on the first day of each February, May, August and November. The base rent is subject to increase annually in accordance with increases in the Consumer Price Index (“CPI”). The base rent under the Second Eastern Affiliate’s ground lease for the property is subject to adjustment, based on an appraisal of the property, in 2030 and upon any extension of the ground lease. The base rent under the Sublease will be increased by any increase in the base rent under the ground lease as a result of such adjustments. iBio CDMO is also responsible for all costs and expenses in connection with the ownership, management, operation, replacement, maintenance and repair of the property under the Sublease. The Company incurred rent expense of $42,000 and $32,000 for the three months ended March 31, 2020 and 2019, respectively, and $109,000 and $98,000 for the nine months ended March 31, 2020 and 2019, respectively, related to the increases in the CPI.

In addition to the base rent, iBio CDMO is required to pay, for each calendar year during the term, a portion of the total gross sales for products manufactured or processed at the facility, equal to 7% of the first $5,000,000 of gross sales, 6% of gross sales between $5,000,001 and $25,000,000,  5% of gross sales between $25,000,001 and $50,000,000,  4% of gross sales between $50,000,001 and $100,000,000, and 3% of gross sales between $100,000,001 and $500,000,000. However, if for any calendar year period from January 1, 2018 through December 31, 2019, iBio CDMO’s applicable gross sales are less than $5,000,000, or for any calendar year period from and after January 1, 2020, its applicable gross sales are less than $10,000,000, then iBio CDMO is required to pay the amount that would have been payable if it had achieved such minimum gross sales and shall pay no less than the applicable percentage for the minimum gross sales for each subsequent calendar year. As the Company adopted ASC 842 effective July 1, 2019, the minimum percentage rent is included in the finance lease obligation. Percentage rent amounted to approximately $87,500 and $262,500 for the three and nine months ended March 31, 2019, respectively.

Accrued expenses at March 31, 2020 and June 30, 2019 due the Second Eastern Affiliate amounted to $840,000 and $699,000, respectively. General and administrative expenses related to the Second Eastern Affiliate, including rent related to the increases in CPI, percentage rent discussed above and real estate taxes, were approximately $180,000 and $265,000 for the three months ended March 31, 2020 and 2019, respectively, and $516,000 and $792,000 for the nine months ended March 31, 2020 and 2019, respectively. Interest expense related to the Second Eastern Affiliate was approximately $616,000 and $474,000 for the three months ended March 31, 2020 and 2019, respectively, and approximately $1,851,000 and $1,426,000 for the nine months ended March 31, 2020 and 2019, respectively. 

The following tables present the components of lease expense and supplemental balance sheet information related to the finance lease obligation (in thousands):

 

 

 

 

Future minimum payments under the capitalized lease obligation are due as follows (in thousands):