Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

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Commitments and Contingencies
12 Months Ended
Jul. 31, 2015
Commitments and Contingencies.  
Commitments and Contingencies

Note 11—Commitments and Contingencies

 

In the ordinary course of business, the Company may become a party to lawsuits involving various matters. The Company is unaware of any such lawsuits presently pending against it which individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.

 

On May 31, 2013, the Company entered into a 38-month lease agreement for office space to serve as our corporate headquarters in San Diego, California, commencing on July 1, 2013.  The initial base monthly rent is approximately $8,000, with scheduled annual increases of 3%.  Under the terms of the lease agreement, the Company received a tenant improvement allowance of approximately $60,000, which was classified as deferred rent and is being amortized on a straight-line basis over the term of the lease as a reduction to rent expense. Tenant improvements associated with the lease agreement are recorded as an addition to leasehold improvements and are being amortized over the shorter of the estimated useful life of the improvement or the remaining life of the lease. This lease has not been sublet or renegotiated.

 

Effective April 1, 2014, the Company entered into a short-term, 6-month sublease agreement for temporary office and laboratory space in Seattle, Washington to support its R&D operations. Effective July 1, 2014 the Company amended the sublease agreement to include additional lab benches and cubicle office space, which increased its rent obligations from $7,375 to $9,925 per month. Effective December 1, 2014, the Company entered into a second addendum sublease agreement to include 10 lab benches and additional office space, which increased its rent obligations from $9,925 to $12,450 per month. On April 1, 2015 the sublease was extended on the same terms, on a month-to-month basis.

 

Effective June 15, 2014, the Company entered into a 12-month lease agreement for 1,393 square feet of lab space in San Diego, California to further support its R&D operations. The base rent is approximately $2,300 per month. At expiration this lease was extended to December 31, 2015, with base rent at approximately $3,000 per month.

 

Effective April 15, 2015, the Company entered into a 12-month lease agreement for vivarium space for its R&D operations, with base rent at approximately $5,000 per month.

 

On December 31, 2014, the Company entered into a lease agreement for approximately 33,928 rentable square feet located at 5820 Nancy Ridge Drive, San Diego, California to serve as the Company’s new corporate headquarters and research and development laboratory. The lease term commences on or about October 16, 2015 and expires 120 months after commencement. The Company has an option to extend the lease for an additional 5 years, if notice is given within 12 months prior to the expiration of the lease term. The Company also has the right to terminate the lease after the expiration of the 84th month after the lease commencement so long as the Company delivers to the landlord a written notice of its election to exercise its termination right no less than 12 months in advance. The lease agreement provides for base rent at $2.65 per rentable square feet, subject to a 3% rate increase on each annual anniversary of the first day of the first full month during the term of the lease agreement. Upon commencement of the lease, 12 months of rent abatement is provided. The lease also provides for a tenant improvement (“TI”) fund of $6,107,040, which the landlord is solely responsible for and covers base building improvements. An additional TI allowance up to $508,920 is available to the Company, should we choose to use it, in the form of TI rent. The Company’s Corporate relocation is anticipated to be completed by November 2015 and as of October 9, 2015, we have not yet determined if any portion of the additional TI allowance is needed. In addition, the Company is required to share in certain operating expenses of the premises.In addition, the Company is required to share in certain operating expenses of the Premises. In December 2014, pursuant to the lease agreement, the Company delivered a security deposit of approximately $90,000.

 

Total rent expense for the years ended July 31, 2015, 2014 and 2013 was approximately $349,000, $141,000 and $128,000, respectively.

 

At July 31, 2015, future minimum lease payments under the non-cancelable operating leases are approximately as follows:

 

Year Ending July 31,

 

Operating Lease

 

2016

 

$

190,000 

 

2017

 

853,000 

 

2018

 

1,136,000 

 

2019

 

1,170,000 

 

2020

 

1,206,000 

 

Thereafter

 

6,944,000 

 

 

 

 

 

Total minimum payments

 

$

11,499,000 

 

 

 

 

 

 

 

On March 6, 2015, the Company entered into two research and development services agreements, one with Rev.1 Engineering Inc. (“Rev.1”) and the other with Merlin CSI, LLC (“Merlin”). Each company has been engaged to perform research, development, testing, and regulatory filing services related to an engineering project. The Company will own intellectual property related to any potential candidate device that is developed by either party in the performance of the services under these agreements. The estimated total cost of the Rev.1 agreement is $3,383,000. The Company paid an initial deposit to Rev.1 of $350,000 upon signing the agreement and Rev.1 will use this deposit to offset 10% of each monthly invoice under the agreement, reducing the outstanding deposit accordingly. If the Company exercises its right to terminate the Rev.1 agreement before the completion of the engineering projects, the Company will forfeit the outstanding deposit amount to Rev.1. The estimated total cost of the Merlin agreement is $1,525,000. The Company may be responsible for additional costs, including the costs of preapproved expenses incurred by Merlin. As of July 31, 2015, the Company has paid approximately $1.4 million related to these two research and development agreements.

 

The Company has entered employment agreements with the Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer and Chief Medical Officer of the Company.  Generally the terms of each agreement are such that if the Officer is terminated other than for cause, death or disability, or if the case of termination of employment with the Company is for good cause, the Officer shall be entitled to receive severance payments equal to either 6 or 12 months of his/her then-current annual base salary plus any accrued bonus and 6 or 12 months of benefits coverage.

 

On June 24, 2015, the Company and the Company’s former Chief Financial Officer (“CFO”) entered into a termination and separation agreement pursuant to which the Company agreed to pay severance of $309,833 (which included 30 days’ pay in lieu of notice under the respective, effective employment agreement), less applicable withholdings, in the form of salary continuation in accordance with the Company’s customary payroll practices and a pro rata bonus for 2015 equal to $35,100. The Company will also pay for 12 months of benefits coverage and the Company agreed to accelerate the vesting of 31,586 stock options as of the date of termination and to extend the exercise period for one year post-termination for all vested stock options. A release was signed in favor of the Company (subject to any statutory rights). At July 31, 2015, the Company has recorded a liability of approximately $354,000 in its balance sheet related to the former CFO’s separation package. In addition, the Company accounted for the stock option modification pursuant to ASC Topic 718. Based on a Black-Scholes Option Pricing Model (assuming a term of 1 year, no dividend yield, volatility of 74.61% and a risk free interest rate of .30%), the Company recorded at July 31, 2015 approximately $41,000 of additional stock-based compensation expense in its statement of operations related to the stock option modification. The additional stock-based compensation was categorized as general and administrative expense.