8. COMMITMENTS AND CONTINGENCIES Leases Operating lease right-of-use (ROU) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has commitments relating to operating leases recognized on a straight-line basis over the term of the lease for rental of two office spaces and various equipment from unrelated parties. Our California office lease was signed May 1, 2018, with a commencement date of July 1, 2018, expires on November 30, 2023 and has an option for a 5-year extension and escalating payments. In January 2020, the Company entered into a sixth amendment to our Texas office lease to extend the term of the lease until September 30, 2020. In addition, the Company has vehicle leases expiring at various times through January 2021, and an equipment lease expiring in December 2021. The adoption of ASC Topic 842 resulted in the Company recognizing right of use assets of $738 and a lease liability of $739, with the difference due the write-off of prior recorded deferred rent. The components of lease costs were as follows: Three months ended March 31, 2020 Operating lease costs $ 88 Short-term lease costs - Variable lease costs - $ 88 Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows: 2020 222 2021 184 2022 164 2023 169 Total lease payments 739 Less present value discount 139 Present value of lease liabilities $ 600 Weighted average remaining lease term 3.2 Weighted average discount rate 13 % Commitments On May 1, 2018 with an effective date of July 1, 2017 the Company entered into a Restated License Agreement (the Agreement) to its exclusive license agreement for the commercial development of the invention disclosed in UCSD Disclosure Docket No. SD2002-180 and titled Volume Independent Tear Film Osmometer (UCSD License Agreement #2003-03-0433), dated as of March 12, 2003, as amended by Amendment 1, dated as of June 9, 2003, Amendment 2, dated as of September 5, 2005, Amendment 3, dated as of July 7, 2006, Amendment 4, dated as of October 9, 2006, and Amendment 5, dated as of July 9, 2007, by and among the Company and The Regents of the University of California (collectively the Existing License) to amend certain terms related to royalties under the Agreement and treatment upon a change of control transaction. The Company is required to make royalty payments of anywhere from 3% to 4.25% based on quarterly net sales. Additionally, the Company is required to pay a royalty of 20% of any sublicense fees it receives. Should a change of control transaction occur during the term of the agreement the royalty rates would range anywhere from 3.5% to 4.75% based on quarterly net sales and the Company would have to make a milestone payment of $0.5 million. In addition, if the Company had not commenced commercial sales of the TearLab Discovery TM Platform on or before July 1, 2019, the Company would have been required to pay a milestone payment of 1.25% of cumulative net sales for the two-year period following the effective date of the amendment. The Company completed its first commercial sale of the TearLab Discovery TM Platform prior to the July 1, 2019 deadline. Effective October 1, 2006 the Company entered into a second patent license and royalty agreement with the University of California San Diego to obtain an exclusive license to make, use, sell, offer for sale, and import TearLab technology in development. Starting in 2009, the Company was required to make minimum royalty payments of $35 or 5.5% of gross sales per year, whichever is higher. However, if this new technology is combined with existing technology, the maximum royalty payable on the sale of the combined products would be 5.5% of gross sales per year. As the new technology is currently in development, there is no revenue and the minimum royalty payment of $35 is applicable. Future minimum royalty payments under this agreement as of March 31, 2020 are as follows: 2020 35 2021 35 2022 35 2023 35 2024 35 Thereafter 210 Total $ 385 On March 7, 2016, the Company, through its subsidiary, TearLab Research, Inc., entered into a supply and development agreement (Supply Agreement) with MiniFAB (Aust) Pty Ltd (MiniFAB). The agreement is an exclusive supply agreement through June 2021, for the purchase and delivery of individual osmolarity test cards with the freight costs borne by MiniFAB. The Company has the benefit of a lower purchase price and certain savings from freight costs will remain in place throughout the agreement. The Supply Agreement requires, in any given 6 calendar months, the Company must place aggregate purchase orders equal to at least 50% of the orders forecasted for that 6-month period at its onset. The Supply Agreement can be extended by either party for a term of five years with the option for the Company to buyout the exclusive supply provision during any extended term. This Supply Agreement replaces the August 2011 agreement between MiniFAB and the Company. On August 9, 2018 the Company entered into an addendum to the 2016 Manufacturing and Supply and Development Agreement with MiniFAB. The amendment fixes the price of the osmolarity test cards at their current price until the earlier of: the average monthly order volume of osmolarity cards on a rolling six month average falls below 20,000 cards; or the aggregate product volume in the calendar year commencing 12 months after the launch of the Discovery TM product is below 2.4 million cards; or the aggregate product volume in any calendar year after 24 months after the launch of the Discovery TM product is below 3.0 million cards at which point the Company and MiniFAB will renegotiate pricing. On August 9, 2018, the Company entered into a manufacturing, supply and development agreement (the MiniFAB Agreement) with MiniFAB. Pursuant to the terms of the MiniFAB Agreement, MiniFAB will manufacture and supply test cards for the Companys next generation platform, the TearLab Discovery System. The MiniFAB Agreement is exclusive through the first term of 10 years and automatically renews for an additional term of 5 years unless either party cancels. TearLab will pay for 65% of the capital expenditures (capex) under the MiniFAB Agreement as incurred and MiniFAB will pay for the remaining 35% of capex, which will be recoverable from TearLab through an amortized cost component in the price for the product charged to TearLab once the monthly card volumes reach 200,000 per month. The capex amounts are limited to an aggregate of $1.0 million Australian Dollar (AUD) for the initial development and production phase (Phase 1) and anticipated to be in the vicinity of $3.0 million AUD for further investment of production capacity (Phase 2). In addition, TearLab will be responsible for the payment or reimbursement of all non-recurrent expenditure and tooling, limited to $1.2 million AUD for Phase 1 and estimated at $2.0 million AUD for Phase 2. In December 2018, the Company made an initial capex investment of $317 thousand for a machine that was placed into fixed assets and is being amortized over a 15-year period. Through March 31, 2020 the Company had made additional investments of $33. The Company has a corresponding $132 of long-term third-party payable for capex to be amortized through the card cost component as of March 31, 2020. In the normal course of business, the Company enters into purchase obligations for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Companys liquidity. Contingencies We are not currently a party to any litigation, nor are we aware of any pending or threatened litigation against us, that we believe would materially affect our business, operating results, financial condition or cash flows. Our industry is characterized by frequent claims and litigation including securities litigation, claims regarding patent and other intellectual property rights and claims for product liability. As a result, in the future, we may be involved in various legal proceedings from time to time.