Note 7

commitments and contingencies

License Agreements

Commercial Products

In May 2006, the Company entered into an agreement with DSP for an exclusive, sub-licensable license and rights to certain intellectual property and proprietary information (the “DSP Agreement”) relating to L-threo-3,4-dihydroxyphenylserine (“L-DOPS” or “droxidopa”) including, but not limited to all information, formulations, materials, data, drawings, sketches, designs, testing and test results, records and regulatory documentation. Pursuant to the DSP Agreement, DSP reserved rights to market droxidopa in Japan, Korea, China and Taiwan that precludes the Company’s commercialization of droxidopa in those markets. As consideration for these rights, the Company paid DSP $100,000 and issued 63,131 shares of its common stock, with a value of approximately $4.35 per share, or $274,621. As additional consideration, the Company agreed to pay DSP and/or its designees (1) royalties on the sales should any compound be approved for commercial sale, and (2) milestone payments, payable upon achievement of milestones as defined in the DSP Agreement. The potential royalty payment under the license agreement is a mid-single-digit percentage of net sales of the commercialized products licensed under the DSP Agreement. All obligations of the Company to pay royalties under the DSP Agreement expire (i) with respect to North America, which is defined to include the United States, Canada and Mexico, eight years after the First Commercial Sale, as defined in the DSP Agreement, in the United States, and (ii) with respect to the remainder of the territory, eleven years after the First Commercial Sale in either the United Kingdom, France, Italy, Germany or Spain. Based on the terms of the DSP agreement, the granting of orphan drug designation for droxidopa triggered a milestone payment in February 2007 to DSP of $250,000. In February 2008, the Company made a milestone payment under the DSP Agreement of $500,000 related to patient dosing in a Phase III study. In December 2011, the Company made a milestone payment under the DSP Agreement of $750,000 related to submission of an NDA to the FDA. In February 2014, the Company made a milestone payment under the DSP agreement of $1.5 million upon approval of Northera by the FDA and capitalized that amount as an intangible asset. The Company plans to amortize this intangible asset, on a straight-line basis, into the cost of revenues during the period from market launch of Northera in the United States until the expiration of orphan drug market exclusivity, or February 2021, as this is as the period over which the asset is expected to contribute directly or indirectly to future cash flows.

There is a remaining potential future milestone payment as of March 31, 2014, subject to the Company’s right to terminate the DSP Agreement, totaling $1.0 million related to the achievement of a certain sales volume. The DSP Agreement has no fixed term and upon expiration of the relevant royalty term, all of the licenses and rights granted to the Company in the applicable territory under the DSP Agreement shall become irrevocable, perpetual, fully-paid, and royalty-free. Prior to that, the DSP Agreement provides for termination (i) upon material breach by either party if such breach remains uncured for a period of sixty days from the date the breaching party was notified of such breach, (ii) for bankruptcy by either party upon thirty days written notice and (iii) for convenience by the Company upon sixty days written notice. The Company and DSP also initiated, and the Company agreed to fund, activities focused on modifying the manufacturing capabilities of DSP in order to expand capacity and comply with regulations and requirements of the FDA. Final expenses for this work were recognized in the second quarter of 2012 resulting in the Company recording cumulative expense of approximately $3.1 million.

In conjunction with and as consideration for activities related to the execution of the DSP Agreement, the Company entered into a Finder’s Agreement with Paramount BioCapital, Inc. (“Paramount”). In May 2006, pursuant to the Finder’s Agreement, the Company issued warrants for the purchase of 250,000 shares of its common stock at an exercise price of $4.31 per share. The exercise of these warrants was conditioned on an event that occurred in January 2007 and, accordingly, the Company recorded a charge for the fair value of the warrants at January 2007 of $433,750. The Company utilized the Black-Scholes-Merton valuation model for estimating the fair value of the warrants as of the date the condition for exercise occurred, based on a risk-free interest rate of 4.79%, an expected life of three years, an expected dividend yield of 0%, an expected volatility of 66.01% and no estimated forfeitures. Such warrants remained unexercised and expired in May 2013. As additional consideration, the Company agreed to (1) make future milestone payments to Paramount, upon achievement of milestones as defined in the Finder’s Agreement, (2) pay royalties on sales should any licensed compound become available for commercial sale, and (3) compensate a stated third-party consultant for services rendered in the evaluation of the transaction with DSP. The Company has remaining potential future milestone payments under the Finder’s Agreement of $150,000.

Products in Development

In March 2004, the Company entered into a license agreement with Dr. M. Gopal Nair, Ph.D., of the University of South Alabama College of Medicine, for the rights to use, produce, distribute and market products derived from an invention by Dr. Nair, claimed in US Patent # 5,912,251, entitled “metabolically inert anti-inflammatory and antitumor antifolates”, designated by the Company as CH-1504 and related compounds. The license provides the Company exclusive rights, excluding India, for CH-1504 and related compounds. The Company made an upfront payment in May 2004 of $150,000 and milestone payments as required by the agreement of $100,000 each in March 2006 and 2005. In April 2007, the Company issued 26,643 shares of its common stock, subject to trading restrictions, at a value of approximately $5.63 per share, in settlement of the $150,000 annual milestone payment liability. In March 2008, the Company made a milestone payment of $100,000 related to patient dosing in a Phase II study as required by the agreement. In April 2008, the Company issued 30,612 shares of its common stock, subject to trading restrictions, at a value of approximately $4.90 per share, in settlement of the 2008 anniversary milestone payment. In April 2009, the Company made the 2009 anniversary milestone payment of $150,000. In September 2010, the Company made a milestone payment of $100,000 related to patient dosing in a Phase II study as required by the agreement. The Company is obligated to pay royalties under the agreement until the later of the expiration of the applicable patent or the applicable last date of market exclusivity after the first commercial sale, on a country-by-country basis. The potential royalty payment under the license agreement is a mid-single-digit percentage of net sales of the commercialized products licensed under the agreement and there are no minimum royalties required under the agreement. The Company is also obligated to make future potential milestone payments based on the achievement of specific development and regulatory approval milestones. Although the Company has no current development activity ongoing for this portfolio of compounds, approximately $1.5 million of payments might become due if specific clinical or regulatory milestones are achieved at a future date, subject to the Company’s right to terminate the license agreement. In addition, should the Company enter into an out-licensing agreement, such payments could be offset by revenue received from the sub-licensee. The agreement remains in effect until the date of the last to expire claim in the patent rights, if not terminated earlier. Currently, the date of the last to expire claim in the patent rights under this agreement is January 17, 2018, without consideration of the potential for patent term extension or the granting of additional patents. The agreement also provides for termination (i) upon material breach, including nonpayment by the Company of any monies due, if such breach remains uncured for a period of sixty days, (ii) for bankruptcy of the Company and (iii) for convenience by the Company upon thirty days’ written notice.

Contract Research and Manufacturing Purchase Obligations

The Company often contracts with third parties to facilitate, coordinate and perform agreed upon research and development and manufacturing activities. These contracts typically call for the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. The Company currently intends to continue its research and manufacturing activities for contracts existing as of March 31, 2014.

In November 2011, the Company contracted with a third party for the manufacture of commercial quantities of Northera, prior to the date of marketing approval and might perform similar activities for other of its product candidates in the future. The scale-up and commercial production of pre-launch inventories involves the risk that such products may not be approved for marketing by the appropriate regulatory agencies on a timely basis, or ever. Until final approval to market any of the Company’s product candidates is received from the appropriate regulatory agencies, such costs are expensed to research and development.

In addition, in October 2011, the Company committed to the purchase of active pharmaceutical ingredient from the manufacturer, to be used in the production of commercial inventory of Northera. A small initial shipment of this material was delivered in the first quarter of 2012. In April 2014, the Company completed the purchase of the remaining material under this agreement, despite having received a written waiver releasing the Company from that purchase obligation in October 2012. (See Note 9). No such costs were incurred in 2013.

Legal Proceedings

Following the receipt of the CRL from the FDA regarding the NDA for Northera™ (droxidopa) in March 2012 and the subsequent decline of the price of the Company’s common stock, two purported class action lawsuits were filed on April 4, 2012 and another purported class action lawsuit was filed on May 1, 2012 in the U.S. District Court for the Western District of North Carolina against the Company and certain of its executive officers.

The complaints generally allege that, during differing class periods, all of the defendants violated Sections 10(b) of the Exchange Act and Rule 10b-5 and the individual defendants violated Section 20(a) of the Exchange Act in making various statements related to the Company’s development of Northera for the treatment of symptomatic neurogenic OH and the likelihood of FDA approval. The complaints seek unspecified damages, interest, attorneys’ fees, and other costs. Following consolidation of the three lawsuits and the appointment of a lead plaintiff, a consolidated complaint was filed on October 5, 2012, on behalf of purchasers of the Company’s common stock from November 3, 2008 through March 28, 2012. On November 16, 2012, the Company and the other defendants moved to dismiss the complaint. On October 10, 2013, the court granted the motion to dismiss with prejudice and entered judgment in favor of the defendants. Plaintiff filed a notice of appeal and briefing on the appeal has been completed. The Company and its officers intend to vigorously defend against any appeal but are unable to predict the outcome or reasonably estimate a range of possible loss at this time.

On May 2, 2012, a purported shareholder derivative lawsuit was filed in the Delaware Court of Chancery against the members of the Company’s board of directors as of the date of the lawsuit. The complaint generally alleges that, from at least June 2011 through February 2012, the defendants breached their fiduciary duties and otherwise caused harm to the Company in connection with various statements related to the development of Northera for the treatment of Neurogenic OH and the likelihood of FDA approval. The complaint seeks unspecified damages, attorneys’ fees and other costs. On June 25, 2012, the Court of Chancery entered an Order staying the action until the U.S. District Court for the Western District of North Carolina ruled upon the motion to dismiss that the Company and its officers filed in November 2012 in response to the consolidated complaint in the class action. Following the dismissal of the class action and the filing of the notice of appeal, plaintiff sought to proceed with the case and the parties entered into a scheduling stipulation, subsequently approved by the Court, for the briefing of defendants’ motions to stay the action or dismiss the complaint. The motion to stay was filed on February 14, 2014 and the motion to dismiss was filed February 28, 2014.

Retention Bonus Plans

In April 2013, at the direction of its Board of Directors, the Company implemented an Executive Retention Bonus Plan and an Employee Retention Bonus Plan. Under their respective plans, executives and employees employed by the Company as of April 23, 2013, were eligible to receive a bonus payment should the Company obtain approval from the FDA to market Northera in the U.S. In addition, members of the Company’s Board of Directors were also eligible to receive a bonus payment upon FDA approval of Northera. As the approval was obtained in February 2014, the Company became obligated to make bonus payments of approximately $1.3 million in the aggregate to qualifying board members, executives and employees. Such amount was paid and recorded in the first quarter of 2014.

In addition, board members, executives and employees are eligible to receive a bonus payment should the Company enter into a transaction that results in (i) the sale, lease, exchange or other transfer of substantially all of the assets of the Company; (ii) any person not a shareholder on the date of grant becoming the beneficial owner, directly or indirectly, of 50% or more of the combined voting power of the Company’s outstanding securities other than through a traditional financing transaction; or, (iii) a merger or consolidation to which the Company is a party occurring that results in the shareholders of the Company having beneficial ownership of less than 50% of the combined voting power of the surviving company’s outstanding securities immediately following such a transaction, collectively, a “sale event”. Should such a transaction occur, the Company would be obligated to make bonus payments of approximately $1.3 million in the aggregate to qualifying directors, executives and employees calculated based on headcount as of March 31, 2014. As these bonus payments are conditioned on an event that has yet to occur, no expense will be recorded by the Company unless and until the condition for payment has been met. In order to be qualify for payment of the bonus, the eligible directors, executives and employees must be engaged or employed by the Company on the date such condition for payment is met.

Incentive Bonus Plan

As a component of the cost savings initiative announced in June 2012 and further confirmed during the restructuring announced in July 2012, the Company had suspended its incentive bonus programs for 2012 and 2013. At January 1, 2014, this program has been reestablished and the Company has begun to accrue the targeted amounts for the year ended December 31, 2014. During the quarter ended March 31, 2014, the Company had accrued approximately $0.2 million under the program. If a sale event should occur, as defined above, no payments would be made under the 2014 Incentive Bonus Plan.

Other Contractual Obligations

As it had done during 2011 and early 2012, the Company plans to contract with various third parties to facilitate, coordinate and perform agreed upon commercialization support activities in anticipation of the commercial launch of Northera in the second half of 2014, at the earliest. Typically, these contracts will require the payment of fees for services at the initiation of the contract and/or upon the achievement of certain milestones. In the event that the Company prepays fees for future milestones, it would record the prepayment as a prepaid asset and amortize the asset into sales and marketing or medical affairs expense over the period of time the contracted services were to be performed. Most fees would be incurred throughout the contract period and would be expensed based on the percentage of completion at a particular report date.

Business activities to be performed under these contracts include, but are not limited to, contract sales staffing, sales force recruiting, sales operations support and planning, market research, marketing and advertising planning and development, medical information, employee training, regulatory compliance, safety, sales territory mapping, publication planning, messaging and website development, public relations and information technology support and planning. As of March 31, 2014, the Company had begun to work with selected vendors on scope and gap analyses to support the development of contractual agreements and had only executed a few contracts, primarily for consulting services related to commercialization planning and support.