| Finance Lease Obligation |
13. Finance Lease Obligation
Sublease
As discussed above, until November 1, 2021, iBio CDMO leased 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 These temporary agreements were superseded by the Sublease Agreement, dated January 13, 2016, between iBio CDMO and the Second Eastern Affiliate.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 Sublease was terminated on November 1, 2021 when iBio CDMO acquired the Facility and became the tenant under the ground lease for the property upon which the Facility is located. iBio will account for the transactions from November 1, 2021 in its second quarter financial statements.
Prior terms of the Sublease which determined the accounting through the first quarter of 2021 include:
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The 34-year term of the Sublease was to expire in 2050 but could have been extended by iBio CDMO for a ten-year period, so long as iBio CDMO was not in default under the Sublease. Under the Sublease, iBio CDMO was 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 was 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 was 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 would have increased by any increase in the base rent under the ground lease as a result of such adjustments. iBio CDMO was 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 $49,000 and $42,000 for the three months ended September 30, 2021 and 2020, respectively.
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In addition to the base rent, iBio CDMO was 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 were less than $5,000,000, or for any calendar year period from and after January 1, 2020, its applicable gross sales were less than $10,000,000, then iBio CDMO was required to pay the amount that would have been payable if it had achieved such minimum gross sales and would pay no less than the applicable percentage for the minimum gross sales for each subsequent calendar year. As the Company accounts for leases under ASC 842, the minimum percentage rent is included in the finance lease obligation.
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Accrued expenses at September 30, 2021 and June 30, 2021 due to the Second Eastern Affiliate amounted to $840,000 and $847,000, respectively. General and administrative expenses related to Second Eastern Affiliate, including rent related to the increases in CPI and real estate taxes, were approximately $189,000 and $185,000 for the three months ended September 30, 2021 and 2020, respectively. Interest expense related to the Second Eastern Affiliate was approximately $608,000 and $614,000 for the three months ended September 30, 2021 and 2020, respectively.
Mobile Office Trailer
Commencing April 1, 2021, the Company is leasing a mobile office trailer at a monthly rental of $3,819 through March 1, 2024.
The following tables present the components of lease expense and supplemental balance sheet information related to the finance lease obligation (in thousands).
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Three Months Ended |
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Three Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
Finance lease cost: |
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Amortization of right-of-use assets |
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$ |
416 |
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$ |
415 |
Interest on lease liabilities |
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609 |
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614 |
CPI lease cost |
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49 |
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42 |
Total lease cost |
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$ |
1,074 |
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$ |
1,071 |
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Other information: |
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Cash paid for amounts included in the measurement lease liabilities: |
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Operating cash flows from finance lease - CPI rent |
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$ |
49 |
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$ |
42 |
Financing cash flows from finance lease obligations |
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$ |
88 |
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$ |
73 |
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September 30, |
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June 30, |
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2021 |
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2021 |
Finance lease right-of-use assets |
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$ |
25,695 |
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$ |
26,111 |
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Finance lease obligation - current portion |
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$ |
374 |
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$ |
367 |
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Finance lease obligation - non-current portion |
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$ |
31,660 |
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$ |
31,755 |
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Weighted average remaining lease term - finance lease |
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28.33 |
years |
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28.58 |
years |
Weighted average discount rate - finance lease obligation |
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7.606 |
% |
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7.606 |
% |
Future minimum payments under the finance lease obligation are due as follows (in thousands):
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Fiscal period ending on September 30: |
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Principal |
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Interest |
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Total |
2022 |
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$ |
374 |
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$ |
2,426 |
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$ |
2,800 |
2023 |
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395 |
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2,397 |
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2,792 |
2024 |
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407 |
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2,366 |
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2,773 |
2025 |
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414 |
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2,336 |
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2,750 |
2026 |
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447 |
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2,303 |
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2,750 |
Thereafter |
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29,997 |
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34,628 |
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64,625 |
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Total minimum lease payments |
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32,034 |
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$ |
46,456 |
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$ |
78,490 |
Less: current portion |
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(374) |
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Long-term portion of minimum lease obligations |
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$ |
31,660 |
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