Note 7 – Commitments and Contingencies

Royalty on Coated Products 

On January 30, 2018, the Company entered into a license and supply agreement with a third party whereby it was granted a worldwide license to sell its products coated with an agent that is the intellectual property of the third party for providing a lubricious surface to the Company’s products (a “Coated Product” or “Coated Products”). The third party is entitled to a royalty in the amount of:

The above two tiers reset annually on January 1^st of each calendar year.

Minimum royalties shall be paid for each Coated Product sold by the Company as follows:

Additionally, the Company shall make one-time milestone payments as follows:

For the year ended December 31, 2018, the Company recorded $50 as general and administrative expense to accrue the one-time milestone payments in anticipation of the first commercial sale of a coated product in the next six months. As of December 31, 2018, the Company has recorded $13 as other current liabilities and $38 as long-term liabilities. After discussions with the vendor, previous shipments have been deemed for pilot use and not a commercial sale.

Royalties to the IIA

The Company has received grants from the Government of the State of Israel through the Israeli National Authority for Technical Innovation (the “IIA”) (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry (the “OCS”)) for the financing of a portion of its research and development expenditures pursuant to the Israeli law for Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (“Research Law”), and the regulations previously promulgated thereunder, as well as the IIA’s rules and benefit tracks which apply to companies receiving IIA funding (collectively, including the Research Law, the “IIA Regulations”). The Company has received funding from the IIA, which was received and recorded between the periods ending December 31, 2011 through 2016, in the aggregate amount of $1,332 and has a contingent obligation to the IIA in the amount of approximately $1,383 and $1,370 as of December 31, 2018 and 2017, respectively, which is generally repaid in the form of royalties ranging from 3% to 3.5% (which may be increased under certain circumstances) of revenues generated (in any fashion) from know-how developed using IIA grants, up to an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR. 

Repayment of the grants is contingent upon the successful completion of the Company’s R&D programs and generating sales. The Company has no obligation to repay these grants if the R&D program fails, is unsuccessful, or aborted, or if no sales are generated. The Company has recorded an immaterial expense and liability during the years ended December 31, 2018 and 2017 as sales occur.

Lease Agreements

On April 13, 2017, the Company entered into a lease for a facility in Fort Lauderdale, Florida, which the Company began occupying in October 2017. On December 20, 2017, the Company entered into an amended lease agreement upon remeasurement of the lease space. The facility currently consists of approximately 4,600 square feet, which will increase to approximately 6,500 square feet by the second year of the lease. The term runs for seven years and two months from September 2017. Annual base rent is amended to $159 per year, subject to annual increases of 2.75%, which is recognized on a straight-line basis.

On January 1, 2015, the Company entered into a five year lease agreement for its facilities in Israel through December 31, 2019. The annual lease fees are $82. The Company has an option to renew the lease agreement for three more years after the initial term period ends. The annual lease fees will increase by 4% beginning on the renewal option date.

For the years ended December 31, 2018 and 2017, the Company recorded rent expense of $526 and $211, respectively.

Certain vehicles are leased by the Company under agreements that expire at various dates through 2021.

Many of these leases provide for payment by the Company, as the lessee, of taxes, insurance premiums, costs of maintenance and other costs. At December 31, 2018, the Company had the following future minimum lease commitments:

Royalty Payment Rights on Royalty Payment Rights Certificates

The Company filed a Certificate of Designation of Preferences, Rights and Limitations (the “Certificate of Designation”), establishing the rights and preferences of the holders of the Series A Convertible Preferred Stock, including certain directors and officers of the Company (the “Royalty Payment Rights”). As set forth in the in the Certificate of Designation, the Royalty Payment Rights initially entitled the holders in aggregate, to a royalty in an amount of:

In addition, in connection with completion of the 2017 Private Placement, the Company issued the placement agent royalty payment rights certificates (the “Placement Agent Royalty Payment Rights Certificates”) which grants the placement agent, and its designees, the right to receive, in the aggregate, 10% of the amount of payments paid to the holders of the Series A Convertible Preferred Stock, or the holders of the Royalty Payment Rights Certificates (the “Royalty Payment Rights Certificates”), upon the conversion of the Series A Convertible Preferred Stock into shares of the Company’s common stock. The Placement Agent Royalty Payment Rights Certificates are on substantially similar terms as the Royalty Payment Rights of the Series A Convertible Preferred Stock.

The Royalty Payment Rights Certificate obligation and Placement Agent Royalty Payment Rights Certificate obligation (the “Contingent Royalty Obligation”) was recorded as a liability at fair value as “Contingent royalty obligation” in the consolidated balance sheets at December 31, 2018 and 2017 (see Contingent Royalty Obligation below). The fair value at inception was allocated to the royalty rights and the residual value was allocated to the preferred shares and recorded as equity.

The Company amended its Certificate of Designation to modify the Royalty Payment Rights when the Company consummated its Initial Public Offering (“IPO”) on February 16, 2018, at which time the Company converted the Series A Convertible Preferred Stock into shares of the Company’s common stock and issued the Royalty Payment Rights Certificates. Pursuant to the terms of the Royalty Payment Rights Certificates, if and when the Company generates sales of the current and potential future versions of the Pure-Vu System, including disposables, parts, and services, or if the Company receives any proceeds from the licensing of the current and potential future versions of the Pure-Vu System, then the Company will pay to the holders of the Royalty Payment Rights Certificates a royalty (the “Royalty Amount”) equal to, in the aggregate, in royalty payments in any calendar year for all products:

* Notwithstanding the foregoing, with respect to Net Sales based Royalty Amounts, (a) no Net Sales based Royalty Amount shall begin to accrue or become payable until the Company has first generated, in the aggregate, since its inception, Net Sales equal to $20,000 (the “Initial Net Sales Milestone”), and royalties shall only be computed on, and due with respect to, Net Sales generated in excess of the Initial Net Sales Milestone, and (b) the total Net Sales based Royalty Amount due and payable in any calendar year shall be subject to a royalty cap amount per calendar year of $30,000. “Net Sales” is defined in the Royalty Payment Rights Certificates. The Company has not reached the Initial Net Sales Milestone as of December 31, 2018.

** Notwithstanding the foregoing, with respect to Licensing Proceeds based Royalty Amounts, (a) no Licensing Proceeds based Royalty Amount shall begin to accrue or become payable until the Company has first generated, in the aggregate, since its inception, Licensing Proceeds equal to $3,500 (the “Initial Licensing Proceeds Milestone”), and royalties shall only be computed on, and due with respect to, Licensing Proceeds in excess of the Initial Licensing Proceeds Milestone and (b) the total Licensing Proceeds based Royalty Amount due and payable in any calendar year shall be subject to a royalty cap amount per calendar year of $30,000. “Licensing” Proceeds is defined in the Royalty Payment Rights Certificate. The Company has not reached the Initial Licensing Proceeds Milestone as of December 31, 2018.

The Royalty Amount will be payable up to the later of (i) the latest expiration date of the Company’s patents issued as of December 22, 2016, or (ii) the latest expiration date of any pending patents as of December 22, 2016 that have since been issued or may be issued in the future (which is currently November 2034). Following the expiration of all such patents, the holders of the Royalty Payment Rights Certificates and the holders of the Placement Agent Royalty Payment Rights Certificates will no longer be entitled to any further royalties for any period following the latest to occur of such patent expiration.

On February 16, 2018, the date of the closing of the IPO, (1) the amendment to the Certificate of Designation became effective, (2) all outstanding shares of Series A Convertible Preferred Stock were converted into shares of the Company’s common stock pursuant to a mandatory conversion, and (3) the Royalty Payment Rights Certificates were issued to the former holders of the Series A Convertible Preferred Stock.

Contingent Royalty Obligation

The Contingent Royalty Obligation was recorded as a long-term liability at fair value in the consolidated balance sheets at December 31, 2018 and 2017 in the amount of $1,953 and $1,662, respectively. For the years ended December 31, 2018 and 2017, the Company recorded a loss on change in fair value of Contingent Royalty Obligation in the amount of $291 and $236, respectively.

Employment Agreements

Employment Agreement with Mr. Moran

The Company entered into an employment agreement with Mr. Moran, which became effective on October 1, 2018. Under the terms of Mr. Moran’s employment agreement, he holds the position of Chief Executive Officer and receives a base salary of $475 annually. In addition, Mr. Moran is eligible to receive an annual bonus payment in an amount equal to up to sixty percent (60%) of his then-Base Salary if the Board determines that he has met the target objectives communicated to him. For the first twelve months of his employment (the period from October 1, 2018 through October 1, 2019), the payout range for the Performance Bonus shall be between fifty percent (50%) and two hundred percent (200%) of the Bonus Target if the Board determines the objectives have been achieved. Thereafter, subsequent payout parameters will be determined by the Board based upon parameters set by the Board and Mr. Moran for an overall Company executive bonus program using market data and analysis input from a third-party expert compensation firm.

In connection with his employment agreement, Mr. Moran was granted (i) an option, granted on November 8, 2018, to purchase 495,000 shares (the “Initial Option Grant”) of the Company’s common stock pursuant to the Company’s 2016 Equity Incentive Plan, at an exercise price of $3.78 per share (see Note 9 for recognition of stock options granted during 2018) and (ii) a restricted stock unit award granted on October 1, 2018 for 165,000 shares of common stock (the “Initial Restricted Stock Unit Award”). The Company valued the restricted stock award at its fair market value on the grant date for a total of $810 which vests in equal quarterly installments over four years, and common stock related to the restricted stock unit is issued in quarterly installments upon vesting. The Company recorded as general and administrative expense $152 in the consolidated statement of comprehensive loss for the restricted stock unit award for the year ended December 31, 2018. As agreed between Mr. Moran and the Board of Directors, the Initial Option Grant will vest in equal quarterly installments over three years commencing from October 1, 2018 and the restricted stock unit will vest in equal quarterly installments over four years commencing from October 1, 2018. Further, Mr. Moran was granted employment buy-out payments in the amount of $400 each on March 1, 2019, November 1, 2019, March 1, 2020 and November 1, 2020, which Mr. Moran will receive if actually employed by the Company on such dates. The employment buy-out payments are being accrued ratably for the amount earned from each payment date. During the year ended December 31, 2018, the Company recorded $240 related to the employment buy-out payments included in general and administrative expenses in the consolidated statement of comprehensive loss and in other current liabilities on the accompanying balance sheet as of December 31, 2018.

Amended and Restated Employment Agreement with Mr. Pomeranz

On September 24, 2018, the Company entered into an amended and restated employment agreement with Mark Pomeranz, pursuant to which Mr. Pomeranz transitioned from his previous role as President and Chief Executive Officer, into the role of President and Chief Operating Officer as of October 1, 2018. Under the terms of the amended and restated employment agreement, Mr. Pomeranz holds the position of President and Chief Operating Officer and receives a base salary of $385 annually. In addition, Mr. Pomeranz is eligible to receive (i) for the calendar year ending December 31, 2018, a bonus payment in an amount equal to up to thirty one and one quarter percent (31.25%) of his then base salary if the Board determines that he has met the target objectives communicated to him, with a payout range for the 2018 Bonus of between fifty percent (50%) and two hundred percent (200%) of the 2018 Bonus Target, and (ii) effective January 1, 2019 and thereafter an annual bonus payment in an amount equal to up to fifty percent (50%) of his base salary if the Board determines that he has met the target objectives communicated to him. Payout parameters for his bonus will be determined by the Board based upon parameters set by the Board and CEO for an overall Company executive bonus program using market data and analysis input from a third-party expert compensation firm.

Amended and Restated Employment Agreement with Mr. Taylor

On March 26, 2019, the Company entered into an amended and restated employment agreement with Andrew Taylor, the Company’s Chief Financial Officer.

Under the terms of the amended and restated employment agreement, Mr. Taylor holds the position of Chief Financial Officer, and receives a base salary of $310 annually. In addition, Mr. Taylor is eligible to receive an annual bonus payment, initially for the twelve-month period ending December 31, 2019, in an amount equal to up to thirty-five percent (35%) of his base salary if the Board determines that he has met the target objectives communicated to him. Payout parameters for his bonus will be determined by the Board based upon parameters set by the Board and CEO for an overall Company executive bonus program using market data and analysis input from a third-party expert compensation firm.

Other Commitments

The Company has a severance contingency for severance payments to its CEO, COO, and CFO in the aggregate of approximately $1,319, in the event that they are terminated without cause or leave due to good cause, as outlined in their employee agreements. Management estimates that the likelihood of payment is remote; therefore, no liability was reflected in these consolidated financial statements.

Other Contractual Commitments

At December 31, 2018, the Company had the following future minimum other contractual commitments: