Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

Commitments and Contingencies
6 Months Ended
Jun. 30, 2018
Commitments and Contingencies Disclosure [Abstract]  



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 ourselves. In addition, the Company is required to pay to UVA LVG 15% of any non-royalty 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, 2018, 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.


At June 30, 2018, the Company had accrued $60,000 in minimum royalties, of which $40,000 were due, and $38,246 for patent reimbursements under the terms of this license, included in accounts payable and accrued liabilities.


Lease Commitments


On December 31, 2014, the Company signed a lease agreement for office at 414 East Water Street, Charlottesville, VA 22902. The lease requires monthly payments of $2,250 and terminated on January 31, 2017.


On August 16, 2017, the Company entered into a sublease with Inspyr Therapeutics, Inc. for two furnished offices located at 1180 Seminole Trail, Suite 495, Charlottesville, Virginia 22901. Pursuant to the sublease, the Company has agreed to pay rent in the amount of $300 per month while it is a private company with the rent increasing to $1,300 per month beginning on the first day of the month after it is a public company. Either party may terminate the sublease upon written notice to the other party specifying the date of termination as long as such date of termination is not earlier than the last day of the month following the month in which such notice is given.


Rent expense under these operating lease agreements was approximately $3,900 and $750 for the six months ended June 30, 2018 and 2017, respectively.


Performance Bonus Plan


On February 17, 2015, the Company adopted the PBP to provide incentive for Company personnel, which was then 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 quarter ending June 30, 2018 of approximately $1.5 million. These shares are restricted from sale until March 21, 2021 except in the event that either officer is terminated without prior cause. Additionally, the compensation plan for company directors was amended so that the Chairman of the Board will receive a cash stipend of $49,000 per year.


Consulting Agreements


On April 25, 2016, the Company entered into a Consulting Agreement with a consultant, who now serves as Chief Operating Officer and Chief Financial Officer, at a compensation rate of $2,000 per month. This amount was raised to $2,200 per month on June 1, 2017 and to $3,200 per month December 31, 2017. For the six months ended June 30, 2018 and 2017, total fees charged by this consultant were $19,200 and $12,200, respectively.


On October 27, 2016, the Company entered into a Consulting Agreement to provide implementation of the Company’s investor relations program through September 30, 2018. The consultant will receive equity, which will be in the form of restricted common stock at the completion of an IPO in an amount equal to 4.8% of the common stock outstanding immediately prior to the IPO. Shares shall vest on completion of the IPO. In addition, immediately following an Offering, the Company shall issue the consultant 5-year warrants to purchase such number of shares of common equity of the Company equal to 4.9% of the then total fully diluted outstanding shares with an exercise price equal to the price of the shares issued in the Offering.


Adoption of Compensation Plan for Officers & Execution of Employment Agreements


Effective July 1, 2017, the board of directors approved a plan for the annual compensation of the Company’s executive officers, to commence on the completion of the IPO, as follows:













CEO   $ 350,000       30 %     57,474 (4)
COO/CFO(1)   $ 143,000       20 %     30,132 (4)
Chief Development Officer(2)   $ 260,000       20 %     34,596 (5)


1 Annual salary is for 50% of full time, on a full-time equivalent basis of $286,000 annually.


2 Annual salary is for 70% of full time, on a full-time equivalent basis of $371,000 annually.


3 As a percentage of Annual Salary. The target annual bonus will be awarded for meeting performance goals set by the board of directors, with the potential for an additional award not to exceed a third of the target annual bonus for exemplary performance awarded at the discretion of the board of directors.


4 Options issued July 1, 2017. Options are to purchase shares of common stock at a price of $5.70 per share, the options vesting over three years and with a term of ten years, the first 1/6th vesting only after 6 months, then 1/36th vesting each month for the remaining 30 months.


5 34,596 Options issued July 25, 2017. Options are to purchase shares of common stock at a price of $5.70 per share and have a term of ten years. These options vest over three years, the first 1/6th vesting only after 6 months, then 1/36th vesting each month for the remaining 30 months.


On July 25, 2017, these terms were memorialized in forms of employment agreements to be entered into by the Company and the executive officers referred to above upon consummation of the IPO for terms of five, three, and three years, respectively, with customary terms of severance. Following the consummation of the IPO on July 31, 2018, the CEO and COO/CFO executed their respective employment agreements. On September 6, 2018 the Company and the Chief Development Officer executed an amended employment agreement (see Note 11).


Adoption of 2017 Equity Incentive Plan


On October 9, 2017, the Company adopted the Adial Pharmaceuticals, Inc. 2017 Equity Incentive Plan (the “2017 equity incentive plan”); however, the plan would not become effective until the business day prior to the public trading of our common stock. Initially, the aggregate number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2017 equity incentive plan is 1,750,000 shares. The executive officers referred to above would be eligible to participate in that plan, once adopted. No compensation was earned or accrued under this plan in the six months ended June 30, 2018 and 2017.


On August 16, 2018, the Company filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-8 registering 1,750,000 shares available for issuance under the 2017 equity incentive plan.


Adoption of the Grant Incentive Plan


On April 1, 2018, the board of directors approved a Grant Incentive Plan to provide incentive for Bankole A. Johnson and Tomasz H. Zastawny, working together (together, the “Plan Participants”), to secure grant funding for the Company. Under the Grant Incentive Plan, the Company will make a yearly payment to the Plan Participants, 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.


CRO Option


As part of the termination of the CRO Contracts, the Company issued the CRO an option to invest $100,000 in the Company’s next financing of $3,000,000 on terms equal to those received by investors but at a 15% discount to the lowest price paid by such investors. In the event the Company is acquired prior to such a financing, the CRO also has the option to purchase 13,099 shares of common stock at a price of $7.63 per share (i.e. $100,000 total purchase price). This option expired on March 14, 2021 or upon completion of the Company’s financing. On July 31, 2018, this option expired, unexercised (see Note 11).


Other Agreements


During year ended December 31, 2017, the Company entered into various consulting and service agreements with various personnel and third parties in exchange for cash and future equity interests, contingent on the Company completing its contemplated initial public offering (see Note 2, Basic and Diluted Earnings (Loss) per Share).




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 June 30, 2018 and 2017, the Company did not have any pending legal actions.