Commitments and Contingencies
|3 Months Ended|
Mar. 31, 2019
|Commitments and Contingencies Disclosure [Abstract]|
|COMMITMENTS AND CONTINGENCIES||
10 — COMMITMENTS AND CONTINGENCIES
License with University of Virginia Patent Foundation
In January 2011, the Company entered into an exclusive, worldwide license agreement with (the "UVA LVG") for rights to make, use or sell licensed products in the United States based upon the ten separate patents and patent applications made and held by UVA LVG.
As consideration for the rights granted in the UVA LVG License, the Company is obligated to pay UVA LVG yearly license fees and milestone payments, as well as a royalty based on net sales of products covered by the patent-related rights. More specifically, the Company paid UVA LVG a license issue fee and is obligated to pay UVA LVG (i) annual minimum royalties of $40,000 commencing in 2017; (ii) a $20,000 milestone payments upon dosing the first patient under a Phase 3 human clinical trial of a licensed product, $155,000 upon the earlier of the completion of a Phase 3 trial of a licensed product, partnering of a licensed product, or sale of the Company, $275,000 upon acceptance of an NDA by the FDA, and $1,000,000 upon approval for sale of AD04 in the U.S., Europe or Japan; as well as (iii) royalties equal to a 2% and 1% of net sales of licensed products in countries in which a valid patent exists or does not exist, respectively, with royalties paid quarterly. In the event of a sublicense to a third party, the Company is obligated to pay royalties to UVA LVG equal to a percentage of what the Company would have been required to pay to UVA LVG had it sold the products under sublicense itself. In addition, the Company is required to pay to UVA LVG 15% of any sublicensing income.
The license agreement may be terminated by UVA LVG upon sixty (60) days written notice if the Company breaches its obligations thereunder, including failing to make any milestone, the most immediate being initiating Phase 3 clinical trials by December 31, 2019, making required payments or the failure to exercise diligence to bring licensed products to market. In the event of a termination, the Company will be obligated to pay all amounts that accrued prior to such termination.
The term of the license continues until the expiration, abandonment or invalidation of all licensed patents and patent applications, and following any such expiration, abandonment or invalidation will continue in perpetuity on a royalty-free, fully-paid basis.
The Company executed an amendment, dated December 14, 2017, to the license agreement. This amendment changed the dates by which the Company, using commercially reasonable efforts, was to achieve the goals of submitting a New Drug Application to the FDA for a licensed product to December 31, 2024 (from December 31, 2023) and commencing commercialization of an FDA approved product by December 31, 2025 (from December 31, 2024). If the Company were to fail to use commercially reasonable effort and fail to meet either goal, the licensor would have the right to terminate the license.
The Company executed a further amendment to the license agreement, dated December 18, 2018, changing the date at which the Company must have initiated a Phase 3 trial to December 31, 2019.
At December 31, 2018, the Company had accrued $40,000 in minimum royalties due under this agreement, which were subsequently paid. At March 31, 2019, the Company had accrued $10,000 in minimum royalties.
Crown CRO Master Services Agreement & Service Order
On October 31, 2018, the Company entered into a master services agreement ("MSA") with Crown CRO Oy ("Crown) for contract clinical research and consulting services. The MSA has a term of five years, automatically renewed for two year periods, unless either party gives written notice of a decision not to renew the agreement three months prior to automatic renewal. The agreement can be terminated by the Company if, in the Company's reasonable opinion, clinical or non-clinical data support termination of the clinical research for safety reasons.
On November 16, 2018, the Company and Crown entered into Service Agreement 1 under the MSA for a 24 week, multi-centered, randomized, double-blind, placebo-controlled, parallel-group, Phase 3 clinical study of the Company's lead compound, AD04. The MSA or a service agreement under it may be terminated by the Company, without penalty, on fourteen days written notice.
Crown's Fee for completion of the trial under the Service Order is approximately $3.3 million (€2,952,355 at the Euro/US Dollar exchange rate of 1.1221 as of March 31, 2019). On November 21, 2018, the Company made the prepayment under the agreement, at a cost of $505,960, after exchange to US dollars at the rate then prevailing, capitalized as a prepaid expense. The remaining fees are to be paid as milestones are reached on the following schedule (converted to dollars at the Euro/US Dollar exchange rate of 1.1221 as of March 31, 2019). At March 31, 2019, none of these milestones had yet been reached.
Service Agreement 1 also estimates approximately $2.4 million (€2,172,000) in pass-through costs, mostly fees to clinical investigators and sites, which will be billed as incurred. In the event that the MSA or Service Order are terminated, the Crown's actual costs up the date of termination will be payable by the Company, but any unrealized milestones shall not be.
In the three months ended March 31, 2019, the Company recognized $126,290 in expenses associated with the Service Agreement 1, classified as R&D expense, leaving a $379,670 prepaid expense asset.
On January 1, 2019, the Company adopted, ASU 2016-02 which amends existing lease accounting guidance, and requires recognition of most lease arrangements on the balance sheet. (See Note 2.) The adoption of this standard would result in the Company recognizing a right-of-use asset representing its rights to use the underlying asset for the lease term with an offsetting lease liability for all leases with term greater than twelve months. At March 31, 2019, the Company was not party to any leases of term greater than 12 months, and therefore did not record any right-to-use assets as a result of adopting this guidance.
On October 9, 2018, the Company entered into a license and membership agreement with Jelly Works X Zero-Ten, LLC for membership in a coworking space and use of an office located at 307A Kamani Street, Honolulu, HI 96813. The Company agreed to pay a monthly fee of $1,152 for membership and use of these facilities, committing to do so for a term of one year. The agreement is not a lease and does not create a tenancy relationship. In the three months ended March 31, 2019, the Company rent expense associated with this agreement was approximately $3,455.
On December 19, 2018, the Company entered into an office service agreement with the University of Virginia Foundation for the use of an office and a workstation located at 1001 Research Park Boulevard, Suite 100, Charlottesville, VA 22911. The Company agreed to pay a fee of $1,150 per month for use of these facilities. The agreement does not create a lease interest or tenancy relationship, and is on a month-to-month basis. For the three months ended March 31, 2019, the Company rent expense associated with this agreement was approximately $3,450.
Performance Bonus Plan
On February 17, 2015, the Company adopted a performance bonus plan ("PBP") to provide incentive for Company personnel, which was modified on January 25, 2016 and April 15, 2017. Under the PBP, 5.25% of the first $14.7 million of a strategic transaction (one or more transactions that provide funds to the Company and/or its members that enable the commencement of the clinical development of AD04) will be set aside for Company's personnel with 1.25% of funds to be awarded to the Chairman of the Board and the remainder to be awarded at the CEO's discretion, with no more than 3.15% payout to the CEO of the Company. The maximum bonus amount to be paid out of the PBP was $771,750. The Company had the right to pay up to 65% of the amounts due under the PBP with equity of the Company, valued at a future investors round equity price, with the balance paid in cash in order to potentially pay taxes that may be due by the recipients due to the award under the PBP.
On April 1, 2018, the Company retired by mutual agreement with the participating directors and officers, Bankole Johnson, William Stilley, and Joseph Truluck, the PBP. In consideration of their agreement to retire the PBP, Mr. Stilley, Dr. Johnson, and Mr. Truluck were issued 197,673, 50,000, and 44,636 shares of common stock, respectively, and the Company incurred an associated charge to operations in the year ended December 31, 2018 of approximately $1.5 million.
Consulting Agreements – Related Party
On March 24, 2019, the Company entered into a Consulting Agreement with Dr. Bankole A. Johnson, who at the time of the agreement was serving as the Chairman of the Board of Directors, for his service as Chief Medical Officer of the Company. The Consulting agreement has a term of three years, unless terminated by mutual consent or by the Company for cause. Dr. Johnson resigned as Chairman of the Board of Directors at the time of execution of the consulting agreement. Under the terms of the consulting agreement, Dr. Johnson's annual fee of $375,000 per year is paid twice per month. On execution, Dr. Johnson also received a signing bonus of $250,000 and option to purchase 250,000 shares of common stock. Dr. Johnson's participation in the Grant Incentive Plan (see below) continues unaffected. The total expense to the company under this agreement in the three months ended March 31, 2019 was $267,191.
Other Consulting and Vendor Agreements
The Company has entered into a number of agreements and work orders for future consulting, clinical trial support, and testing services, with terms ranging between 12 and 30 months. These agreements, in aggregate, commit the Company to approximately $1.1 million in future payments and future issuance of 87,500 shares of common stock over their respective terms.
Following the consummation of the IPO on July 31, 2018, the CEO and COO/CFO executed their respective employment agreements for terms ranging from three to five years, salaries ranging from $325,000 per year to $143,000 per year (at a 50% time commitment), with customary terms of severance.
On March 11, 2019, in accord with resolution of the Board of Directors, the employment agreement of the CEO and COO/CFO were amended, raising their salaries to $400,000 per year and $150,000 per year (at a 50% time commitment), respectively.
Grant Incentive Plan
On April 1, 2018, the board of directors approved a Grant Incentive Plan to provide incentive for Bankole A. Johnson (together, the "Plan Participant"), to secure grant funding for the Company. Under the Grant Incentive Plan, the Company will make a yearly payment to the Plan Participant, based on the grant funding received by the Company in the preceding year from grants originated by the Plan Participants, in an amount equal to 10% of the first $1 million of grant funding received and 5% of grant funding received in the preceding year above $1 million. Amounts to be paid to the Plan Participants will be paid to each as follows: 50% in cash and 50% in stock no later than March 31, each year. During the three months ended March 31, 2019, no grant funding that would result in a payment to the Plan Participants had been obtained.
The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company's liquidity, financial condition and cash flows. At March 31, 2019, the Company did not have any pending legal actions.
The entire disclosure for commitments and contingencies.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef