Annual report pursuant to Section 13 and 15(d)

Commitments and Contingencies

v3.10.0.1
Commitments and Contingencies
12 Months Ended
Dec. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES

11 — 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 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, 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, of which $0 had been paid.

 

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 $3.4 million (€2,952,355 at the Euro/US Dollar exchange rate of 1.1444 as of December 31, 2018). On November 21, 2018, the Company made the prepayment under the agreement, at a cost of $505,961, 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 1.1444 as of December 31, 2018):

 

Milestone Event   Percent Fee     Amount  
Five of five national regulatory submissions Done     10 %   $ 338,609  
First patient randomized     10 %   $ 338,609  
30% of patients randomized     10 %   $ 338,609  
50% of clinical sites initiated     5 %   $ 169,305  
60% of patients randomized     10 %   $ 338,609  
100% of clinical sites initiated     10 %   $ 338,609  
50% of CRF pages monitored     5 %   $ 169,305  
100% of patients randomized     10 %   $ 338,609  
90% of CRF pages monitored     5 %   $ 169,305  
Database is locked     5 %   $ 169,305  
PE analysis     5 %   $ 169,305  

 

Service Agreement 1 also estimates approximately $2.5 million (€2,172,000) in passthrough 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.

 

Lease Commitments

 

On December 31, 2014, the Company signed a lease agreement for office at 414 East Water Street, Charlottesville, VA 22902. The lease required monthly payments of $2,250 and terminated on January 31, 2017. As of the date of these statements, the lease had terminated and the full security deposit of $2,250 has been returned to the Company. Rent expense under this operating lease agreement was approximately $0 and $2,130 for the years ended December 31, 2018 and 2017, respectively.

 

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 this operating lease agreement was approximately $3,900 and $750 for the years ended December 31, 2018 and 2017, respectively.

 

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. At December 31, 2018, the Company had paid security deposit of $1,100 and $3,455 in fees under this agreement.

 

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. At the time the agreement was executed, the first use fee for the month of January 2019 of $1,150, a security deposit of $1,150, and a setup fee of $200 became due and payable.

 

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

 

On October 1, 2018 the Company entered into a Consulting Agreement and attached Statement of Work with LWY Consulting, Inc., doing business as Panacea Clinical Research (“Panacea”) for clinical and regulatory consulting services. Under the terms of this agreement, the Company has the option of paying up to twenty-five percent (25%) billed work time in the form of options to be issued on the last day of each quarter during which the work was billed. At December 31, 2018, the Company had not paid any compensation to Panacea in the form of options.

 

On November 26, 2018, the Company entered into a Consulting Agreement with Bespoke Growth Partners, Inc. (“Bespoke”) for advice and consulting on the Company’s business planning, corporate communications, investor relations, and market strategies. The term of the agreement is one year, but may be terminated by the Company at any time for any reason with 30 days notice. Under the terms of this agreement and in compensation for its services, the Company issued 100,000 shares of common stock to Bespoke effective November 26, 2018 at a cost of $1.66 per share (the market price on the day of issue) or $166,000 in total. Unless the agreement has been terminated, the Company will be required to issue 50,000 shares of common stock to Bespoke on each of March 1, June 1, and September 1, 2019.

 

On December 15, 2018, the Company executed an Engagement Letter with Lyons Capital, LLC (“Lyons”) for making professional introductions. The engagement has a term of one year, but may be terminated at any time and for any reason by the Company immediately with written notice. Under the terms of the letter and in compensation for its services, the Company issued Lyons 18,750 shares common stock effective December 15, 2018 at a cost of $3.46 per share (the market price on day of issue) or $64,875 in total. Unless the engagement has been terminated, the Company will be required to issue 18,750 shares common stock to Lyons on each of March 15, June 15, and September 15, 2019.

 

Employment Agreements

 

On July 25, 2017, employment agreements to be entered into by the Company and the CEO, COO/CFO, and Chief Development Officer upon consummation of the IPO 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. Following the consummation of the IPO on July 31, 2018, the CEO and COO/CFO executed their respective employment agreements. The Chief Development Officer executed an employment agreement on September 6, 2018.

 

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 year ended December 31, 2018, no grant funding that would result in a payment to the Plan Participants had been obtained.

 

Litigation

 

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 December 31, 2018 and 2017, the Company did not have any pending legal actions.