15. Executive Officer Agreements

On December 28, 2012, the Company’s Board of Directors appointed current director Dr. Harlan F. Weisman, as the Company’s new Chairman and Chief Executive Officer. On January 7, 2013, the Company entered into an employment agreement with Dr. Weisman, pursuant to which the Company granted Dr. Weisman an option to purchase 1,686,590 shares of common stock at an exercise price of $5.57 per share. One-third of the shares underlying the option will vest on December 28, 2013 and each annual anniversary thereafter, subject to Dr. Weisman’s continued employment with the Company.

On December 28, 2012, the Company’s Executive Chairman, Dr. Glenn L. Cooper, resigned his position as Executive Chairman and as a director of the Company, effective immediately and the Company entered into a separation and release agreement and a one-year consulting agreement with Dr. Cooper, pursuant to which Dr. Cooper will be paid $25,000 per month for 12 months as well as his COBRA premiums for 12 months. The Company also will pay him $30,000 in severance. Dr. Cooper’s current options will continue to vest during the term of his consulting agreement and, in addition, all options that have not vested as of December 31, 2013 will automatically vest on that day if he remains in his consulting capacity through that date. On December 28, 2012, the Company also granted Dr. Cooper an option to purchase 25,000 shares of common stock at an exercise price of $4.75 per share. The options will vest on December 28, 2013 if he remains a consultant through that date. Upon the execution of the separation and release and consulting agreements, the employment agreement between the Company and Dr. Cooper dated April 1, 2011 was terminated.

The Company assessed under Accounting Standards Codification 718 the substance of Dr. Cooper’s consulting agreement and concluded that the agreement would be accounted for as a severance arrangement as the agreement does not provide any specific deliverables, projects or contain a minimum work requirement. As a result, all related compensation cost has been recognized immediately on December 28, 2012. The modification of Dr. Cooper’s existing stock options to allow for continued vesting through December 31, 2013, resulted in incremental cost and charge to operations of approximately $470,000 and the grant-date fair value of Dr. Cooper’s option to purchase 25,000 shares of common stock resulted in a charge to operations of $63,000. In addition, the Company recognized of a liability and related charge to operations of $354,000 related to Dr. Cooper’s cash severance, consulting agreement cash compensation and COBRA premiums.

In addition, on December 28, 2012, Dr. Bobby W. Sandage, Jr. became President of the Company and he remains a member of the Board of Directors. Dr. Sandage’s change in status from Chief Executive Officer and President to President entitles him to terminate his employment agreement for good reason, in which case the Company would be obligated to pay Dr. Sandage his salary for 12 months. In addition, under the terms of his employment agreement, any options that will vest on the next anniversary date of their respective grant date would automatically vest. Effective December 28, 2012, the Company entered into an amendment to Dr. Sandage’s employment agreement pursuant to which he will retain until June 28, 2013, the right to terminate his employment for good reason, be paid his severance allowance equal to his salary for 12 months and have any unvested options vest in full. Also, the amended employment agreement provides that in the event Dr. Sandage terminates his employment for good reason, he will have two years from such termination to exercise his options. In addition, if Dr. Sandage terminates his employment, the Company will be required to pay his COBRA premiums for 12 months after his termination. Also on December 28, 2012 the Board of Directors approved the payment to Dr. Sandage of his 2012 performance bonus of $200,000 as well as a retention bonus of $100,000 payable on December 31, 2013, if he remains employed through that date.

The change to Dr. Sandage’s existing stock options that provides for full vesting of all unvested options in the event he terminates employment prior to June 28, 2013 as well as the extension of time to exercise his options after termination of employment constitutes a modification for accounting purposes. The Company assessed the probability that Dr. Sandage’s existing unvested options would vest under their original terms and concluded that it was probable that his unvested options would vest under their original terms. Since Dr. Sandage can choose to terminate his employment as of December 28, 2012 and have all options vest as a result, the Company determined that Dr. Sandage has no future service requirement or requisite service period for the stock options. As a result, all stock-based compensation cost was recognized immediately on December 28, 2012 and the Company recorded a charge to operations of approximately $135,000 representing the remaining unrecognized expense of the original fair value of the options. Further, since the Company determined it was not probable that Dr. Sandage would terminate his employment for “good reason”, the Company did not recognize any liability as of December 31, 2012 related to Dr. Sandage’s cash severance and COBRA premiums. If Dr. Sandage terminates his employment prior to June 28, 2013, the Company will recognize at that time a liability for his cash severance and COBRA premiums estimated at approximately $435,000. At December 31, 2012, the Company recognized a liability and charge to operations of $200,000 for Dr. Sandage’s 2012 performance bonus. Finally, during 2013 the Company will ratably accrue Dr. Sandage’s 2013 retention bonus, provided he remains employed with the Company. The Company can provide no assurance that Dr. Sandage will not exercise his right to terminate his employment agreement for good reason prior to June 28, 2013.