Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

v3.3.1.900
Commitments and Contingencies
12 Months Ended
Dec. 31, 2015
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

NOTE 6 — COMMITMENTS AND CONTINGENCIES

 

Master Services Agreement

 

On December 30, 2015, we entered into a Master Service Agreement with Covance, Inc. (“Covance”), with an effective date of December 29, 2015. Pursuant to the terms of the Master Service Agreement, Covance (or one or more of its affiliates) will provide Phase 1, 2, 3, and 4 clinical services for a clinical study or studies to us, and, at our request, assist us with the design of such studies, in accordance with the terms of separate individual project agreements to be entered into by the parties. The term of the agreement is for three years and will renew automatically for successive one year periods unless Covance is no longer providing services under the agreement or either party has terminated the agreement upon written notice. We may terminate the Master Service Agreement or any individual project agreement entered into under the Master Service Agreement prior to the applicable study’s completion at any time for any reason upon 30 days written notice to Covance, except when the reason for termination is the safety of subjects, in which case it may be terminated immediately. Covance may not terminate any individual project agreement without cause, except when the reason for the termination is the safety of subjects, in which case it may be terminated immediately. In the event of a termination of the Master Service Agreement, Covance will be entitled to full payment for (i) work performed on the applicable project upon through the date work on such project is concluded and (ii) reimbursement for all non-cancellable and non-refundable expenses and financial obligations which Covance (or an affiliate) has incurred or undertaken on our behalf.

 

Clinical Supply and Cooperation Agreement with Ricerche Sperimentali Montale (“Ricerche”) and Inalco SpA (“Inalco”)

 

Effective July 24, 2015, we entered into an amended Clinical Supply and Cooperation Agreement (the “Amended Supply Agreement”) with Ricerche and Inalco (collectively, “RSM”). The Amended Supply Agreement amends certain terms of the Clinical Supply and Cooperation Agreement, dated December 16, 2009, amended on September 25, 2010 (the “Existing Supply Agreement”).

 

Under the Existing Supply Agreement, RSM granted us an exclusive worldwide option in a specified field and territory to assignment of all right, title and interest to a purified Galacto-oligosaccharides product (“Improved GOS”), the composition of matter of the Improved GOS and any information relating to the Improved GOS, including certain specified technical information and other intellectual property rights (the “Improved GOS IP”). Pursuant to the amended terms, we could exercise the option by paying RSM $800,000 within ten days after the effective date of the Amended Supply Agreement. We exercised this option on July 30, 2015 and RSM transferred the Improved GOS IP to us. Under the terms of the Existing Supply Agreement, if a further option payment of $1 million due in the future is not made, we may be required to return the Improved GOS IP to RSM.

 

The Amended Supply Agreement also provides that we must pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first product owned or controlled by us using Improved GOS as its active pharmaceutical ingredient. In addition, we agreed to purchase 350 kilos of Improved GOS for the sum of $250 per kilo for clinical supply of Improved GOS instead of $2,000 per kilo as under the Existing Supply Agreement.

 

In consideration for RSM entering into the Amended Supply Agreement, we issued 100,000 shares of our common stock, par value $0.001 per share (the “RSM Shares”), to RSM on November 30, 2015. Fair value of these shares totaling $416,000 was recognized in stockholders’ equity in the balance sheet as of December 31, 2015. The stock purchase agreement includes a lock-up agreement by RSM in our favor pursuant to which RSM will not be able to sell the RSM Shares for a period ending on the earlier of (i) the public release by us of the final results of our Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of our Form 10-Q with the Securities and Exchange Commission for the fiscal quarter in which we receives the results of our Phase 2b/3 clinical trial of RP-G28.

 

Lease Agreement

 

We lease office space for our headquarters in California. Until September 30, 2015, we leased office and storage space pursuant to a two-year agreement which called for a minimum monthly rent of approximately $5,000 and an annual increase of 3%.

 

On July 9, 2015, we entered into a lease with Century Park, a California limited partnership, pursuant to which we are leasing approximately 2,780 square feet of office space in Los Angeles, California for our headquarters. The lease provides for a term of sixty-one (61) months, commencing on October 1, 2015. We paid no rent for the first month of the term and will pay base rent of $9,174 per month for months 2 through 13 of the term, with increasing base rent for each twelve month period thereafter under the term of the lease to a maximum of $10,325 per month for months 50 through 61. The base rent payments do not include our proportionate share of any operating expenses, including real estate taxes. We have the option to extend the term of the lease for one five-year term, provided that the rent would be subject to market adjustment at the beginning of the renewal term. We will recognize rent expense on a straight-line basis over the lease term.

 

Rent expense, recognized on a straight-line basis, was approximately $74,000 and $60,000 for the years ended December 31, 2015 and 2014, respectively, and is recorded in general and administrative expenses in the accompanying statements of operations.

 

The following table summarized our lease obligations at December 31, 2015:

 

    LEASE COMMITMENTS  
Years ended December 31,   Operating Lease  
2016   $ 110,638  
2017     113,958  
2018     117,376  
2019     120,898  
2020     103,254  
Total minimum lease payments   $ 566,124  

 

Employment Agreements

 

Michael D. Step

 

On December 2, 2014, Michael D. Step accepted an offer letter from us setting forth the terms of his employment as Chief Executive Officer. The offer letter provides that Mr. Step is entitled to an annual base salary of $360,000 and a total of three grants of options to purchase our common stock.

 

The first two options entitle Mr. Step to purchase 646,537 and 73,377 of our shares, respectively, for an exercise price of $5.86 per share. Each of these options was immediately exercisable in full as of the date of the grant, with 44/48ths of the total number of shares covered by each option subject to a right of repurchase by us upon termination of Mr. Step’s employment with us for any reason. This right of repurchase lapses over a period of 44 months, with 1/44th of the total number of shares subject to the right of repurchase lapsing on January 1, 2015 and on the first day of each month thereafter. In addition, the right of repurchase will lapse in its entirety upon a termination of the employment under certain circumstances.

 

The third option became exercisable upon the closing of our initial public offering on June 29, 2015. The option is for a total of 163,799 shares of our common stock, which, together with the shares subject to the first option, represent 7.5% of the shares of common stock deemed to be outstanding at June 29, 2015 on a fully-diluted basis, after giving effect to the number of shares subject to the third option. Seventy-five percent of the shares subject to the third option are subject to a right of repurchase by us upon termination of Mr. Step’s employment for any reason. This right of repurchase lapses with respect to 1/36th of the total number of shares subject to the right of repurchase on the first day of each month following the date on which the third option becomes exercisable. In addition, the right of repurchase will lapse in its entirety upon Mr. Step’s termination of employment under certain circumstances.

 

Additionally, under the terms of his Executive Severance and Change in Control Agreement, also effective on December 2, 2014, Mr. Step is entitled to receive certain payments in the event his employment is terminated under certain scenarios.

 

Andrew Ritter and Ira Ritter

 

On September 25, 2013, our board of directors approved the Executive Compensation Plan (the “Compensation Plan”) setting forth certain compensation to be paid to Andrew Ritter, our current President and former Chief Executive Officer, and Ira Ritter, our current Chief Strategic Officer (“CSO”), for their respective contributions to our company. Effective June 29, 2015, in connection with our initial public offering, Andrew Ritter and Ira Ritter accepted offer letters from us setting forth the terms of their employment as President and CSO, respectively, of the Company. The offer letters superseded the Compensation Plan.

 

Their respective offer letters provide that that Andrew Ritter is entitled to an annual base salary of $310,000 and Ira Ritter is entitled to an annual base salary of $295,000. In accordance with his offer letter, Andrew Ritter also became entitled to receive up to $180,000 payable over a three year period for tuition reimbursement. As of December 31, 2015, we paid an aggregate of $105,000 and have an accrual of $75,000 in tuition reimbursement for Andrew Ritter and recognized such amount in general and administrative expenses in the accompanying statements of operations for the year ended December 31, 2015.

 

Additionally, under the terms of their Executive Severance and Change in Control Agreements, also effective on June 29, 2015, each of Andrew Ritter and Ira Ritter is entitled to receive certain payments in the event their employment is terminated under certain scenarios.

 

Pursuant to their respective offer letters, Andrew Ritter and Ira Ritter each have the opportunity to earn an annual bonus based upon a percentage of their base salary and the achievement of specific performance as determined by the Company. The initial target bonus opportunities are 40% and 35% of the base salary for Andrew Ritter and Ira Ritter, respectively. The board of directors determined that the specific performance requirements were met for fiscal year 2015 and accordingly, Andrew Ritter received 40% of his base salary, or $124,000 and Ira Ritter received 35% of his base salary, or $103,250. These bonus payments are recognized in general and administrative expense in the accompanying statements of operations for the year ended December 31, 2015.

 

Pursuant to the Compensation Plan, as in effect prior to entering into their offer letters, Andrew Ritter and Ira Ritter had bonus opportunities to, upon the satisfaction of the events described below, each potentially receive the following cash payments and each potentially receive the following options to purchase up to 48,951 shares of our common stock (the “Executive Options”) pursuant to the 2008 Stock Plan:

 

  FDA Meeting Bonus Opportunities. Each executive was entitled to receive, and in April 2013 each executive received, a one-time cash bonus of $10,000 for a milestone associated with meeting with the FDA regarding RP-G28’s path to FDA approval. In addition, upon satisfaction of this milestone, the executives became entitled to 3,496 of the Executive Options. 2,360 shares of the Executive Options vested and became exercisable as of the grant date of September 25, 2013, with the balance of the 1,136 shares vesting ratably in 36 equal monthly installment beginning on September 30, 2013.
     
  Clinical Trial Funding Commitment Bonus Opportunities. Each executive was entitled to receive a one-time cash bonus of $75,000 upon our receipt of a commitment by a third party to fund a Phase 2 or later clinical trial; provided, however, that no such bonus would be paid at any time we had less than $2,000,000 in available cash. In addition, upon the satisfaction of this milestone, 35% of 10,489 shares of the Executive Options would vest and become exercisable, with the balance of the 10,489 shares vesting in 36 equal monthly installments beginning on the last day of the following month. The board of directors determined that this milestone was satisfied; accordingly, each executive received a bonus of $75,000 which has been recognized in general and administrative expenses in the accompanying statements of operations for the year ended December 31, 2015. In addition, 3,671 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 6,818 shares vesting ratably on a monthly basis beginning July 31, 2015.
     
  Fundraising Bonus Opportunities. Each executive was entitled to receive (i) a one-time cash bonus of $50,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012, and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $2,000,000 and (ii) a one-time cash bonus of $150,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012 and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $10,000,000 (which such bonus would be reduced by any cash bonus paid under subsection (i)); provided, however, that no bonus under subsection (i) or (ii) would be paid at any time we had less than $2,000,000 in available cash. In addition, upon the satisfaction of the milestone described in subsection (i), 35% of 6,993 shares of the Executive Options would vest and become exercisable, with the balance of the 6,993 shares vesting in 36 equal monthly installments beginning on the last day of the following month, and, upon satisfaction of the milestone described in subsection (ii), 35% of 13,986 shares of the Executive Options would vest and become exercisable, with the balance of the 13,986 shares vesting in 36 monthly installments beginning on the last day of the following month. The board of directors determined that this milestone as described in subsection (ii) above was satisfied upon the closing of our initial public offering on June 29, 2015 raising approximately $17.4 million, net of offering costs; accordingly, each executive received a bonus of $150,000 which has been recognized in general and administrative expenses in the accompanying statements of operations for the year ended December 31, 2015. In addition, 4,895 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 9,091 shares vesting ratably on a monthly basis beginning July 31, 2015.
     
  License Event Bonus Opportunities. Each executive was entitled to receive the following bonus payments in connection with the closing of an exclusive license of RP-G28 and/or any future product candidate developed by the Company from time to time during the term of the Compensation Plan by and/or any option to exclusively license such product candidate to a third party (referred to under the Compensation Plan as a “License Event”) with a minimum upfront payment to the Company of $2,000,000:

 

  o A graduated cash bonus equal to (i) 5% of the Initial Period License Payment (as defined in the Compensation Plan) up to $5,000,000; (ii) 4% of the Initial Period License Payment in excess of $5,000,000 up to $10,000,000; and (iii) 3% of the Initial Period License Payment in excess of $10,000,000. In addition, upon our receipt of an Initial Period License Payment of more than $2,000,000, 35% of 45,454 shares of their Executive Options will vest and become exercisable, with the balance of the 45,454 shares vesting in 36 monthly installments beginning on the last day of the following month.
     
  o A cash bonus equal to 3% of any Annual Excess Milestone Payments (as defined in the Compensation Plan); provided, however that no such bonus may be paid at any time the Company has less than $1,000,000 in available cash. In addition, upon our receipt of an Annual Excess Milestone Payment, 35% of 6,993 shares of their Executive Options will vest and become exercisable, with the balance of the 6,993 shares vesting in 36 monthly installments beginning on the last day of the following month.

 

As of December 31, 2015, 27,972 of the maximum 48,951 Executive Options potentially issuable to each executive had been issued to each executive subject to the vesting conditions described above.

 

Legal

 

The Company is not currently involved in any legal matters arising in the normal course of business. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation.