By Tom Winnifrith | Sunday 28 May 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
AIM Listed fraud Eden Research (EDEN) has bneen shown to have committed FRAUD, has been panned by the FRC and is still under FRC investigation (whatever it says). But there coulde be an even bigger problem. In its AIM admission document Eden explained that an element of its terpene chemistry was licensed as set out below:
“The technology employed in creating Eden’s products comprises terpene chemistry delivered using Eden’s patented encapsulation system. The first generation encapsulation technology uses a simple yeast cell encapsulation system, which is owned by Eden. The second generation encapsulation technology, which Eden exclusively licensed from UMMS in October 2011, uses bio-polymers to block the pores in yeast cells to provide a greater degree of control over the release of the active substances.”
Interestingly in Note 14 Trade and Other Payables of the 2016 accounts Eden provides the following statement:
“Included in accruals is an amount of £570,462, being minimum royalties due to University of Massachusetts Medical School (“UMMS”) under the licence agreement Eden signed with UMMS in 2011. Eden is currently re-negotiating some of the terms of the licence with UMMS and, as such, the Company has taken the view that, whilst it is unlikely that the full accrued amount will be paid, it is prudent to accrue the full amount due, per the licence agreement.”
The terms of the licence were set out in Section 11.27 of the AIM admission document:
“An exclusive licence agreement dated 19 October 2011 made between the Company (1) and UMMS (2) (“UM Agreement”) pursuant to which UMMS granted the Company an exclusive worldwide royalty bearing licence in the patent rights to make, use and sell licence products in the field (the use of glucan particles for the delivery of terpenes in agricultural chemistry, animal health, household and beauty and hygiene applications including the delivery of terpenes as an active or coactive agent).
UMMS retained the right to use the patent rights for academic research (including sponsored research), teaching and non-commercial patient care without payment of compensation to the Company. In partial consideration of the rights granted to the Company under the UM Agreement, the Company paid UMMS a licence fee of US $200,000.
In terms of a royalty fee, the Company agreed to pay UMMS in respect of each royalty period a royalty of 2.5 per cent. on net sales made in each royalty period with a minimum royalty payment. This minimum payment is fixed at US$100,000 on the 2nd anniversary of the UM Agreement and rises by US$50,000 each subsequent year up to the 6th anniversary where the minimum payment will be $300,000.
On or after the 7th anniversary of the UM Agreement, UMMS may terminate the agreement upon sixty days’ written notice to the Company if actual annual royalties received by UMMS in the prior 12 months total in the aggregate less than US$300,000. However, the Company has the right to keep the agreement in full force and effect upon payment to UMMS of US$500,000 in cash or equity within 60 days of receipt of said termination notice.
The Company may terminate the UM Agreement for any reason upon 90 days’ prior written notice to UMMS.”
Eden management spin is that the liability may be settled below the contractual amount but what if UMMS decide to terminate the agreement because royalty payments would appear to have been below the contractually specified minimum payments – it fact it appears that Eden hasn’t being paying the minimum amounts no doubt due to shortage of cash in prior periods.
Given how material the contractual minimum payments are relative to total revenues surely investors deserve a more comprehensive explanation including how many of their existing sales are reliant on the UMMS technology.
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