Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

Commitments and Contingencies
9 Months Ended
Sep. 30, 2021
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 University of Virginia Patent Foundation, dba UVA Licensing and Ventures Group (“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 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, failure to make 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 Company is required to use commercially reasonable efforts to achieve the goals of submitting a New Drug Application to the FDA for a licensed product by December 31, 2024 and commencing commercialization of an FDA approved product by December 31, 2025. 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 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.


During the three and nine months ended September 30, 2021 and 2020, the Company recognized $10,000 and $30,000 minimum license royalty expenses under this agreement, respectively.


Clinical Research Organization (CRO)


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 six months prior to automatic renewal. The MSA or a service agreement under it may be terminated by the Company, without penalty, on fourteen days written notice for scientific, administrative, or financial reasons, or if the purpose of the study becomes obsolete. In the event that the MSA or Service Order are terminated, Crown’s actual costs up the date of termination will be payable by the Company, but any unrealized milestones would not be owed.


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 for fees, as amended, of $3,649,933 (€3,168,895 converted to dollars at the Euro/US Dollar exchange rate of 1.1518 as of September 30, 2021) milestone payments. Through the end of 2020, 60% of the fee, a total of €1,619,626 in milestones, had been paid. On March 24, 2021, 60% of patients had been enrolled and a milestone payment of $318,905 was made. Finally, on August 17, 2021, the Company acknowledged that 100% of patients had been enrolled and a payment of $317,042 was made on August 20, 2021.


At September 30, 2021, the remaining future milestone payments are shown in the table below, converted to dollars from euros at the exchange rate then prevailing.


Milestone Event   Percent
90% of case report form pages monitored     5 %   $ 155,457  
PE analysis     5 %   $ 155,457  
Database is locked     10 %   $ 310,915  


During the nine months ended September 30, 2021, the Company recognized $1,249,547 in direct expenses associated with the Service Agreement 1, classified as R&D expense, including amortization of milestone payments and change order fees immediately recognized as expenses. On December 31, 2020 there was accrued R&D expense of $53,065 related to such direct expenses under this agreement, and on September 30, 2021 the Company had an accrued expense liability of $575,572.


Service Agreement 1 also estimated approximately $2.5 million (€2.2 million) in pass-through costs, mostly fees to clinical investigators and sites, which are billed as incurred and the total contingent upon individual site rate and enrollment rates. Based on current enrollment rates and the various active clinical sites, the Company has increased its total estimated future site costs to a total of approximately $3.0 million, an estimate that could increase or decrease based on changes to individual site enrollment rates. During the three and nine months ended September 30, 2021, the Company recognized $366,452 and $1,918,604 in costs associated with fees to investigators and sites, respectively.


Lease Commitments – Purnovate lease


The Company has one operating lease which consists of office space with a remaining lease term of approximately five years.


Leases with an initial term of twelve months or less are not recorded on the balance sheet, and the Company does not separate lease and non-lease components of contracts. The Company’s lease agreement does not provide for determination of the interest rate implicit in the lease. Therefore, the Company used a benchmark approach to derive an appropriate incremental borrowing rate. The Company’s incremental borrowing rate is the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company benchmarked itself against other companies of similar credit ratings and comparable quality and derived an incremental borrowing rate, which was used to discount its lease liabilities. The Company used an estimated incremental borrowing rate of 9% on January 26, 2021 for its lease contract.


The Company’s lease agreement does not contain any material residual value guarantees or material restrictive covenants. In addition, the Company does not have any finance leases, any sublease arrangements, or any leases where the Company is considered the lessor.


The components of lease expense, which are included in general and administrative expense, based on the underlying use of the ROU asset, were as follows:


Components of total lease cost:   Three months
September 30,
    Nine months
September 30,
Operating lease expense   $ 22,231     $ 56,090  
Short-term lease expense    
Total lease cost   $ 22,231     $ 56,090  


Supplemental cash flow information related to leases are as follows:


Cash paid for amounts included in the measurement of lease liabilities:   Nine months
September 30,
Operating cash flows for operating leases   $ 45,146  
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets   $ 294,294  


Supplemental balance sheet information related to leases was as follows:


    As of
September 30,
Lease right of use assets   $ 258,594  
Total lease assets   $ 258,594  
Current liabilities:        
Lease liability - current portion   $ 47,819  
Noncurrent liabilities:        
Lease liability, net of current portion     220,249  
Total lease liability   $ 268,068  


The weighted-average remaining lease term of the Company’s operating leases and the weighted-average discount rates used to calculate the Company’s operating lease liabilities are as follows:


    As of
September 30,
Weighted average remaining lease term (in years) - operating leases     4.33  
Weighted average discount rate - operating leases     9.00 %


Future lease payments included in the measurement of lease liabilities on the condensed balance sheet as of September 30, 2021, for the following five fiscal years and thereafter were as follows:


Year ending December 31,   Operating Leases  
2021 (remaining)     22,573  
2022     70,202  
2023     72,687  
2024     75,231  
2025     77,864  
2026 and thereafter     6,508  
Total Minimum Lease Payments   $ 325,065  
Less effects of discounting     (56,997 )
Present value of future minimum lease payments   $ 268,068  


Lease Commitments – Related Party


On March 1, 2020, the Company entered into a sublease with Purnovate, LLC, a private company in which the Company’s CEO had a 28.7% equity interest, for the lease of three offices at 1180 Seminole Trail, Suite 495, Charlottesville, VA 22901. The lease had a term of two years, and the monthly rent was $1,400. During the nine months ended September 30, 2021, the rent expense associated with this lease was $1,400. On acquisition of Purnovate, the sublease was terminated and the Company assumed the obligations of Purnovate’s lease.


Consulting Agreements – Related Party


On March 24, 2019, the Company entered into a consulting agreement (the “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 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) and 2017 Equity Incentive Plan continue unaffected. The Company recognized $93,750 and $281,250 in compensation expense, respectively, in the both the three and nine months ended September 30, 2021 and 2020 as a result of this agreement.


On July 5, 2019, the Company entered into a Master Services Agreement (the “MSA”) and attached statement of work with Psychological Education Publishing Company (“PEPCO”) to administer a behavioral therapy program during the Company’s upcoming Phase 3 clinical trial. PEPCO is owned by a related party, Dr. Bankole Johnson. It is anticipated that the compensation to be paid to PEPCO for services under the MSA will total approximately $300,000, of which shares of the Company’s common stock having a value equal to twenty percent (20%) of this total can be issued to Dr. Johnson in lieu of cash payment.


As of September 30, 2021, the Company had recognized $181,495 in expenses, of which $108,056 were charged against cash advanced under the terms of the Amendment, leaving a net prepaid expense asset of $111,767 associated with this vendor agreement. On April 5, 2021, the Company entered into another Lock-Up Agreement Extension (the “Second Lock-Up Extension”), which amended the Lock-Up Extension and extended the term of Dr. Johnson’s Lock-Up from April 1, 2021 until such date as the Company shall have publicly released the data from its ONWARD™ Phase 3 pivotal trial of its lead drug candidate, AD04, in genetically identified subjects for the treatment of Alcohol Use Disorder. See Note 11 for a release of this lockup with respect to certain shares and warrants beneficially owned by Dr. Johnson.


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 $1.2 million in future cash.




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 September 30, 2021, the Company did not have any pending legal actions.