14. Accrued Expenses and Other Short Term Liabilities

Short‑term accrued expenses at December 31, 2017 and 2016 include the following (in thousands):



	December 31,		December 31,
	2017		2016
Commission payable	$	2,395	$	2,395
Compensation and benefits		758		954
Severance		1,122		1,744
Royalty arrangements		—		2,502
Other		4,302		4,555
Total Accrued Expenses	$	8,577	$	12,150

Commission Payable

During 2015, the Company raised $873,000 in gross proceeds, $833,000 net of $40,000 in transaction costs, through the issuance of 75,875 Class E redeemable convertible units. At December 31, 2017 and 2016, $40,000 remains in accrued liabilities relating to commissions to third parties for Class E redeemable convertible raises during 2015.

During 2014, the Company raised $39.5 million in gross proceeds, $36.4 million net of $3.1 million in transaction costs, through the issuance of 3,438,984 Class E redeemable convertible units. Of the $3.1 million in transaction costs, $2.4 million remains in accrued liabilities at December 31, 2017 and 2016 relating to commissions to third parties for Class E redeemable convertible raises during 2014.

Severance

Severance balances represent contractual compensation to be paid to former employees, a significant portion of which relates to the separation agreement with Dr. Samuel D. Waksal. Effective as of February 8, 2016, Dr. Samuel D. Waksal resigned from all positions with the Company and is no longer employed by the Company in any capacity. At December 31, 2017, accrued severance payable to Dr. Samuel D. Waksal totaled $1.2 million, of which $1.0 million is recorded as accrued expense and $0.2 million is recorded as other long‑term liabilities. At December 31, 2016, accrued severance payable to Dr. Samuel D. Waksal totaled $2.2 million, of which $1.0 is recorded as accrued expense and $1.2 million is recorded as other long-term liabilities. The separation agreement with Dr. Samuel D. Waksal contains certain supplement conditional payments, none of which have been met at December 31, 2017. The Company has not recorded any expense related to these conditional payments at December 31, 2017 and will continue to evaluate the probability of these conditional payments.

Separation Agreement with Dr. Samuel D. Waksal

Dr. Samuel D. Waksal founded the Company in October 2010 and, until August 2014, was the chairman of the Company’s board of directors and the Company’s Chief Executive Officer. In August 2014, he stepped down as the Company’s Chief Executive Officer and became the Company’s Chief of Innovation, Science and Strategy.

In connection with his resignation on February 8, 2016, the Company entered into a separation agreement with Dr. Samuel D. Waksal terminating his employment with the Company and providing that he shall perform no further paid or unpaid services for the Company whether as employee, consultant, contractor or any other service provider. The principal provisions of the separation agreement are summarized below.

Severance and Other Payments

The Company agreed to make a series of payments (all subject to withholding taxes) to Dr. Samuel D. Waksal, some of which are contingent, structured as follows:

a $3.0 million severance payment, of which $0.9 million and $1.0 million was paid during 2016 and 2017, with the remaining $1.1 million payable during 2018 and 2019. Severance expense totaling $3.1 million, including the cost of Company‑paid medical benefits, was recorded during the first quarter of 2016 as these payments are probable and estimable;

supplemental conditional payments of up to $6.75 million in the aggregate that are payable in 2017 ($2.25 million), 2018 ($2.25 million) and 2019 ($2.25 million) if specified benchmarks related to the valuation of the Company implied by the public offering price in the IPO, the net proceeds to the Company from the IPO and the Company’s equity market capitalization on specified dates are achieved and subject to the Company having cash and cash equivalents less payables of $50 million or more on the dates when the Company makes those payments. The supplemental conditional payments that were payable in 2017 and 2018 were not earned and will therefore not be paid. The remaining conditional payment in 2019, although estimable, is not probable at December 31, 2017 as the Company is not able to determine if or when the benchmark related to the valuation of the Company will be achieved. The Company has not recorded any expense related to these conditional payments at December 31, 2017 and will continue to evaluate the probability of these conditional payments;

an amount equal to five percent (up to a maximum of $15 million) of any cash received by the Company or guaranteed cash payments (as defined below) payable to the Company pursuant to the first three business development programs that the Company enters into on or before February 8, 2019 to research, develop, market or commercialize the Company’s ROCK2 program or the Company’s immuno‑oncology program. For purposes of the separation agreement, ROCK2 program is defined to mean pathways involving ROCK2 or other pathways effecting inflammation, fibrosis, cancer or neurodegenerative diseases; immunooncology program is defined to mean antibodies or small molecules involved in inducing the immune system to make an anti‑tumor response; and guaranteed cash payments is defined to mean payments to the Company of cash contractually provided for pursuant to an agreement entered into by the Company with respect to a business development program, which payments are not subject to the Company’s meeting any milestones or thresholds. If the aggregate cash and guaranteed cash payments received by the Company pursuant to any business development program exceed $800 million before the completion of the IPO, the equity market capitalization requirements that must be met for Dr. Samuel D. Waksal to earn the supplemental payments of up to $6.75 million described above shall be deemed fulfilled, regardless of the Company’s equity market capitalization at the applicable time. These conditional payments are not estimable or probable at December 31, 2017 as the Company is not able to determine if or when the Company will enter into these business development programs. The Company has not recorded any expense related to these conditional payments at December 31, 2017 and will continue to evaluate the probability of these conditional payments.

LTIP EAR Unit Award

In December 2014, Dr. Samuel D. Waksal received an award of EAR units under the 2014 LTIP with a base price of $6.00 per EAR unit (see description under “Executive Compensation” for the terms of our EAR units). The number of EAR units granted to Dr. Samuel D. Waksal was adjusted to equal 0.75% of our common stock determined on the first trading date following the date of the IPO. Based on the adjustments, the number of shares underlying Dr. Samuel D. Waksal’s LTIP award is 1,783,618. The separation agreement provides that:

by virtue of his separation from the Company, Dr. Samuel D. Waksal acknowledges that he is no longer entitled to vesting at December 16, 2024 date but is eligible to vest based on a change in control or stock price increase, as described herein below;

the service component included in the vesting condition related to the occurrence of a change of control after an initial public offering but before December 16, 2024 is now satisfied;

the service component included in the vesting condition related to the occurrence of a 333% increase in the fair market value of each EAR unit from the $6.00 grant price per unit before December 16, 2024 is now satisfied; and

Dr. Samuel D. Waksal’s EAR units shall not be subject to forfeiture, termination or recapture payment for violation of the restrictive covenants contained in the 2014 LTIP.

The compensation expense for this award was recognized upon consummation of the Company’s IPO on August 1, 2016 and was recorded as additional paid in capital. No compensation expense had been recorded prior to this date. The Company utilized a Monte-Carlo simulation to determine the fair value of the award granted under the LTIP of $11.6 million, which was recorded during the third quarter of 2016 as this award is not forfeitable.

Lock‑up Agreement

Dr. Samuel D. Waksal has agreed to enter into a 180‑day lock‑up agreement in connection with the IPO. If requested by the managing underwriters in any subsequent offering at the time of which Dr. Samuel D. Waksal owns five percent or more the Company’s common stock, he will enter into a lock‑up agreement for a period not to exceed 90 days and in the form customarily requested by the managing underwriters for that offering (subject to mutually agreed exceptions), so long as other equityholders enter into substantially similar lock‑up agreements. If any of our equityholders that signs a lock‑up agreement is released from its provisions by the managing underwriters, Dr. Samuel D. Waksal will also be released from his lock‑up agreement.

Covenants

The separation agreement contains customary non‑solicitation, non‑competition and non‑disparagement provisions that continue in effect until February 8, 2019. In addition, Dr. Samuel D. Waksal agrees to make himself available, at the Company’s expense, to assist the Company in protecting its ownership of intellectual property and in accessing his knowledge of scientific and/or research and development efforts undertaken during his employment with the Company.

Releases

The separation agreement provides for mutual releases by the parties and related persons of all claims arising out of Dr. Samuel D. Waksal’s relationship with the Company as employee, founder, investor, member, owner, member or Chairman of the Board, Chief Executive Officer, or officer.

Royalty Arrangements

The Company has contracts with third parties, which require the Company to make royalty payments based on the sales revenue of the products specified in the contract. The Company records royalty expense as the associated sales are recognized, and classifies such amounts as selling, general and administrative expenses in the accompanying consolidated statements of operations. Royalty payable was $0.1 million and $2.5 million at December 31, 2017 and 2016, respectively. These royalties are generally paid quarterly. Royalty expense was $0.1 million, $1.2 million and $2.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. Approximately $2.2 million of the royalty payable at December 31, 2016 is the prepaid royalty that was refunded to the Company’s commercial partner (Note 6).