NEMUS BIOSCIENCE, INC., 10-Q filed on 8/12/2016
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2016
Aug. 12, 2016
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
Nemus Bioscience, Inc. 
 
Entity Central Index Key
0001516551 
 
Trading Symbol
nmus 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
19,913,163 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2016 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q2 
 
CONSOLIDATED BALANCE SHEETS (USD $)
Jun. 30, 2016
Dec. 31, 2015
Current assets
 
 
Cash and cash equivalents
$ 831,658 
$ 3,221,209 
Restricted cash
37,500 
37,500 
Prepaid expenses
122,543 
158,946 
Other current assets
28,626 
36,126 
Total current assets
1,020,327 
3,453,781 
Property and equipment, net
16,896 
13,383 
Other assets
 
 
Deposits and other assets
43,884 
43,884 
Total other assets
43,884 
43,884 
Total assets
1,081,107 
3,511,048 
Current liabilities
 
 
Accounts payable
183,216 
125,357 
Accrued payroll and related expenses
34,584 
46,268 
Accrued license and patent reimbursement fees
 
97,500 
Accrued expenses
166,740 
228,645 
Provision for conversion of Series B preferred stock
105,660 
84,090 
Income taxes payable
800 
 
Total current liabilities
491,000 
581,860 
Noncurrent liabilities
 
 
Deferred rent
3,256 
3,233 
Series B warrants
842,325 
2,454,959 
Total noncurrent liabilities
845,581 
2,458,192 
Total liabilities
1,336,581 
3,040,052 
Commitments and contingencies (Note 3)
   
   
Redeemable Convertible Series B Preferred Stock, $0.001 par value, 20 million shares authorized; 4,492 issued and outstanding as of June 30, 2016 and 4,500 issued and outstanding as of December 31, 2015, net of $493,770 of issuance costs; $4.5 million liquidation preference as of June 30, 2016
1,359,899 
1,363,200 
Stockholders' deficit
 
 
Common stock, $0.001 par value; 236 million shares authorized; 19,913,163 issued and outstanding as of June 30, 2016 and 19,903,163 issued and outstanding as of December 31, 2015
19,913 
19,903 
Additional paid-in-capital
6,453,737 
6,086,987 
Warrants
781,811 
759,386 
Accumulated deficit
(8,870,834)
(7,758,480)
Total stockholders' deficit
(1,615,373)
(892,204)
Total liabilities and stockholders' deficit
$ 1,081,107 
$ 3,511,048 
CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)
Jun. 30, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Redeemable Convertible Series B Preferred Stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Redeemable Convertible Series B Preferred Stock, shares authorized
20,000,000 
20,000,000 
Redeemable Convertible Series B Preferred Stock, shares issued
4,492 
4,500 
Redeemable Convertible Series B Preferred Stock, shares outstanding
4,492 
4,500 
Redeemable Convertible Series B Preferred Stock, issuance costs
$ 493,770 
$ 493,770 
Redeemable Convertible Series B Preferred Stock, liquidation preference value
$ 4,500,000 
 
Common stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
236,000,000 
236,000,000 
Common stock, shares issued
19,913,163 
19,903,163 
Common stock, shares outstanding
19,913,163 
19,903,163 
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Operating expenses
 
 
 
 
Research and development
$ 459,957 
$ 43,374 
$ 595,316 
$ 80,574 
General and administrative
1,022,078 
1,313,170 
2,107,058 
2,185,795 
Total operating expenses
1,482,035 
1,356,544 
2,702,374 
2,266,369 
Operating loss
(1,482,035)
(1,356,544)
(2,702,374)
(2,266,369)
Other expense (income)
 
 
 
 
Change in fair value of warrant liability
(2,024,114)
 
(1,612,634)
 
Income (Loss) before income taxes
573,493 
(2,056,544)
(1,111,554)
(2,966,369)
Provision for income taxes
400 
416 
800 
816 
Net income (loss)
$ 573,093 
$ (2,056,960)
$ (1,112,354)
$ (2,967,185)
Basic earnings per common share (in dollars per share)
$ 0.03 
$ (0.13)
$ (0.06)
$ (0.18)
Diluted earnings per common share (in dollars per share)
$ 0.03 
$ (0.13)
$ (0.06)
$ (0.18)
Weighted average shares of common stock outstanding
 
 
 
 
Basic (in shares)
19,913,163 
16,265,663 
19,909,042 
16,248,597 
Diluted (in shares)
20,135,645 
16,265,663 
19,909,042 
16,248,597 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $)
6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Cash flows from operating activities:
 
 
Net loss
$ (1,112,354)
$ (2,967,185)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
7,603 
4,626 
Stock-based compensation expense
363,216 
259,699 
Amortization of warrants and stock issued for services
51,539 1 2
459,316 1 2
Change in fair value of warrant liabilities
(1,612,634)
 
Changes in assets and liabilities:
 
 
Prepaid expenses
7,289 1
29,728 1
Other current assets
7,500 
4,470 
Accounts payable
57,859 2
(113,601)2
Accrued payroll and related expenses
(11,684)
82,393 
Accrued license and patent reimbursement fees
(97,500)
 
Stock subscription liability
 
288,000 
Accrued expenses and other liabilities
(61,083)
(66,879)
Net cash used in operating activities
(2,378,435)
(1,319,433)
Cash flows from investing activities:
 
 
Purchases of property and equipment
(11,116)
 
Net cash used in investing activities
(11,116)
 
Cash flows from financing activities:
 
 
Proceeds from common stock issuance, net of $3,920 issuance costs
 
713,369 
Proceeds from Series A preferred stock issuance
 
1,000,000 
Net cash provided by financing activities
 
1,713,369 
Net increase (decrease) in cash and cash equivalents
(2,389,551)
393,936 
Cash and cash equivalents, beginning of period
3,221,209 
207,330 
Cash and cash equivalents, end of period
831,658 
601,266 
Cash paid during the period for:
 
 
Interest
   
   
Income taxes
 
$ 816 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Parentheticals) (USD $)
6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Statement of Cash Flows [Abstract]
 
 
Common stock issuance costs
 
$ 3,920 
Value of warrants issued to purchase shares of common stock for consulting services
22,425 
328,650 
Value of common stock issued for consulting services
 
168,000 
Value of warrants issued in exchange for extinguishment of trade accounts payable
 
$ 10,000 
Nature of Operations, Business Activities and Summary of Significant Accounting Policies
Nature of Operations, Business Activities and Summary of Significant Accounting Policies

1. Nature of Operations, Business Activities and Summary of Significant Accounting Policies

 

Nature of Operations and Basis of Presentation

 

Nemus Bioscience, Inc. is a biopharmaceutical company that plans to develop and commercialize therapeutics from cannabinoids through a partnership with the University of Mississippi. The University of Mississippi ("UM") is federally permitted and licensed to cultivate cannabis for research and commercial purposes. Unless otherwise specified, references in these Notes to the Unaudited Consolidated Financial Statements to the "Company," "we" or "our" refer to Nemus Bioscience, Inc., a Nevada corporation formerly known as Load Guard Logistics, Inc. ("LGL"), together with its wholly-owned subsidiary, Nemus, a California corporation ("Nemus"). Nemus became the wholly owned subsidiary of Nemus Bioscience, Inc. through the Merger (as defined below).

 

Nemus Bioscience, Inc. (formerly LGL) was incorporated in Nevada on March 16, 2011. Nemus was incorporated in California on July 17, 2012. Our headquarters are located in Costa Mesa, California.

 

As of June 30, 2016, the Company has devoted substantially all of its efforts to securing product licenses, raising capital, and building infrastructure, and has not realized revenue from its planned principal operations.

 

Business Activities

 

On October 31, 2014, pursuant to an Agreement and Plan of Merger, dated October 17, 2014 (the "Merger Agreement"), LGL, Nemus Acquisition Corp. ("Acquisition Sub"), Nemus Bioscience, Inc. ("Name Change Merger Sub"), and Nemus Acquisition Sub merged with and into Nemus and Nemus survived as a wholly-owned subsidiary of LGL (the "Merger"). Immediately after the Merger, LGL changed its name to "Nemus Bioscience, Inc." by merging with Name Change Merger Sub. At the closing of the Merger and pursuant to the Merger Agreement, Nemus issued an aggregate of 3,120,000 shares of its common stock to the former stockholders of LGL in exchange for all of the outstanding shares of LGL's capital stock, which when combined with the 12,880,000 shares of Nemus common stock outstanding, amounted to 16,000,000 total shares outstanding upon completion of the merger.

 

The Merger is being accounted for as a reverse-merger and recapitalization. Nemus is the acquirer for financial reporting purposes and LGL is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical consolidated financial statements prior to the Merger will be those of Nemus and will be recorded at the historical cost basis of Nemus, and the consolidated financial statements after completion of the Merger will include the assets and liabilities of LGL and Nemus, the historical operations of Nemus and the operations of the Nemus from and after the closing date of the Merger.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

 

Liquidity and Going Concern

 

The Company has incurred operating losses and negative cash flows from operations since our inception. As of June 30, 2016, we had cash and cash equivalents of $831,658. The Company anticipates that it will continue to incur net losses into the foreseeable future as it continues to advance and develop a number of potential drug candidates into preclinical development activities and expands its corporate infrastructure which includes the costs associated with being a public company. Without additional funding, management believes that the Company will not have sufficient funds to meet its obligations within one year after the date the consolidated financial statements are issued. These conditions give rise to substantial doubt as to the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company is unable to secure adequate additional funding, the Company may be forced to make a reduction in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and does not believe it is exposed to any significant credit risk.

 

Restricted Cash

 

         A deposit of $37,500 as of June 30, 2016 and December 31, 2015 was restricted from withdrawal and held by a bank in the form of a certificate of deposit. This certificate serves as collateral for payment of the Company's credit cards.

 

Fair Value Measurements

 

Certain assets and liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, is used to measure fair value:

 

Level 1:

Valuations for assets and liabilities traded in active markets from readily available pricing sources such as quoted prices in active markets for identical assets or liabilities.

Level 2:

Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or

Level 3:

Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

The carrying values of our financial instruments, including, cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses approximate their fair value due to the short maturities of these financial instruments. The Series B warrant liability and the conversion liability for the Series B preferred stock were valued utilizing Level 3 inputs primarily from a third party independent appraisal conducted as of June 30, 2016.

 

Property and Equipment, Net

 

As of June 30, 2016, property and equipment, net, was $16,896, consisting primarily of computers and equipment. The Company had $13,383 of property and equipment, net, as of December 31, 2015. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line method based on the estimated useful life of the related assets currently ranging from two to three years. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.

 

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

 

The costs incurred for the rights to use licensed technologies in the research and development process, including licensing fees and milestone payments, will be charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired rights, and are capitalized in situations where there is an identified alternative future use. No cost associated with the use of licensed technologies has been capitalized to date.

 

Income Taxes

 

The Company accounts for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, and net operating loss carry forwards (the "NOLs") and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Any interest or penalties would be recorded in the Company's statement of operations in the period incurred.

 

The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. As a result there are no income tax benefits reflected in the statement of operations to offset pre-tax losses.

 

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.

 

Revenue Recognition

 

The Company has not begun planned principal operations and has not generated any revenue since inception.

 

Research and Development Expenses

 

Research and development ("R&D") costs are expensed when incurred. These costs may consist of external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants; license fees; employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drug development activities; and facilities expense, depreciation and other allocated expenses; and equipment and laboratory supplies.

 

Stock-Based Compensation Expenses

 

Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options and warrants using the following assumptions:

 

· Exercise price - We determined the exercise price based on valuations using the best information available to management at the time of the valuations.

 

 

· Volatility - We estimate the stock price volatility based on industry peers who are also in the early development stage given the limited market data available in the public arena.

 

 

·

Expected term - The expected term is based on a simplified method which defines the life as the average of the contractual term of the options and warrants and the weighted-average vesting period for all open awards.

 

 

· Risk-free rate - The risk-free interest rate for the expected term of the option or warrant is based on the average market rate on U.S. treasury securities in effect during the period in which the awards were granted.

 

 

· Dividends – The dividend yield assumption is based on our history and expectation of paying no dividends.

 

Stock-Based Compensation for Non-Employees

 

The Company accounts for warrants and options issued to non-employees under ASC 505-50, Equity – Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee awards are periodically re-measured over the vesting terms and at each quarter end.

 

Segment Information

 

The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 280, "Segment Reporting" establishes standards for reporting information about reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group ("CODM"), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profits based on product lines and routes to market. Based on the early development stage of our operation, we operate in a single reportable segment.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the consolidated financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), net of their related tax effect, arrived at a comprehensive income (loss). For the three and six months ended June 30, 2016, the comprehensive income (loss) was equal to the net income (loss).

 

Earnings per share

 

The Company applies FASB ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings or loss per share would include the dilutive effect of awards granted to employees under stock-based compensation plans, if any. No dilutive effect was calculated for the three and six months ended June 30, 2015 as the effect would be anti-dilutive. For the three months ended June 30, 2016 the dilutive effects of common stock options and restricted stock awards were included in the calculation of the weighted-average number of common shares outstanding by applying the treasury stock method to the assumed exercise of outstanding stock options. For the six months ended June 30, 2016, no dilutive effect was calculated as the effect would be anti-dilutive.

 

We computed earnings per common share for each period as follows:

 

 

 

Three Months

 

 

Three Months

 

 

Six Months

 

 

Six Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 573,093

 

 

$ (2,056,960 )

 

$ (1,112,354 )

 

$ (2,967,185 )

Weighted average shares of common stock outstanding - basic

 

 

19,913,163

 

 

 

16,265,663

 

 

 

19,909,042

 

 

 

16,248,597

 

Dilutive effect of common stock options and restricted stock awards

 

 

222,482

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average shares of common stock outstanding - diluted

 

 

20,135,645

 

 

 

16,265,663

 

 

 

19,909,042

 

 

 

16,248,597

 

Basic earnings per share

 

$ 0.03

 

 

$ (0.13 )

 

$ (0.06 )

 

$ (0.18 )

Diluted earnings per share

 

$ 0.03

 

 

$ (0.13 )

 

$ (0.06 )

 

$ (0.18 )

 

Recent accounting pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02 "Leases" (Topic 842) intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets – referred to as "lessees"- to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Earlier adoption is permitted for any annual or interim period for which consolidated financial statements have not yet been issued. The Company is currently evaluating the potential impact that adoption may have on its consolidated financial statements.

University of Mississippi ("UM") Agreements
University of Mississippi ("UM") Agreements

2. University of Mississippi ("UM") Agreements

 

In July 2013, the Company entered into a Memorandum of Understanding (MOU) with UM to engage in joint research of extracting, manipulating, and studying cannabis in certain forms to develop intellectual property (IP) with the intention to create and commercialize therapeutic medicines. Nemus will own all IP developed solely by its employees and will jointly own all IP developed jointly between Nemus and UM employees. The term of the MOU agreement is five years and the parties agree to negotiate separate research agreements upon the identification of patentable technologies as well as any deemed to be a trade secret. The agreement may be terminated by either party with three months written notice to the other party.

 

UM 5050 pro-drug agreements:

 

On September 29, 2014, the Company executed three license agreements with UM pursuant to which UM granted us exclusive, perpetual, worldwide licenses, including the right to sublicense, to intellectual property related to UM 5050, a pro-drug formulation of tetrahydrocannabinol, or THC for products administered through each of ocular, oral or rectal delivery. The license agreement for the field of oral delivery also includes rights to UM 1250, a bio-adhesive hot melt extruded film for topical and mucosal adhesion application and drug delivery. The license agreements contain certain milestone and royalty payments, as defined therein. The aggregate milestone payments under the license agreements if the milestones are achieved is $2.1 million. These licenses also require the Company to reimburse UM for patent costs incurred related to these products under license. The agreements will terminate upon expiration of the patents, breach or default of the license agreements, or upon 60 days written notice by the Company to UM.

  

On October 15, 2014, we signed a renewable option agreement for the rights to explore other routes of delivery of UM5050 not yet agreed upon and/or in combination with other cannabinoids or other compatible compounds. There was a one-time up-front option payment of $10,000 for a six-month option period that has subsequently been renewed under the same financial terms and conditions. The most recent renewal occurred for the six month period beginning April 1, 2016 under the same financial terms and conditions.
 

UM 8930 pro-drug agreements:

 

On December 14, 2015, the Company executed two license agreements with UM pursuant to which UM granted us exclusive, perpetual, worldwide licenses, including the right to sublicense, to intellectual property related to UM 8930, a pro-drug formulation of cannabidiol ("CBD") for products administered through each of ocular or rectal delivery. The license agreements contain certain milestone and royalty payments, as defined therein. There is a one-time upfront payment of $65,000 per license agreement, payable in four equal monthly installments that started on December 15, 2015. There is an annual fee of $25,000 per license agreement, payable on the anniversary of each effective date. The aggregate milestone payments under the license agreements if the milestones are achieved is $1.4 million. These licenses also require the Company to reimburse UM for patent costs incurred related to these products under license. These license agreements will terminate upon expiration of the patents, breach or default of the license agreements, or upon 60 days written notice by the Company to UM.

 

On December 14, 2015, we signed a renewable option agreement for the rights to explore other routes of delivery of UM8930 not yet agreed upon and/or in combination with other cannabinoids or other compatible compounds. There was a one-time up-front option payment of $10,000 for an option period ending March 31, 2016. This option was subsequently renewed for a six month period ending September 30, 2016, under the same financial terms and conditions.

 

Other pro-drugs and potential formulations:

 

On December 19, 2015, the Company entered into a research agreement with UM to advance specialized cannabinoid derivatives of cannabidiol for the treatment of chemo-therapy induced peripheral neuropathy (CIPN). The fee payable to UM is based on the achievement of certain milestones in the project. The Company recognized $27,804 and $46,340 as research and development expense for the three and six months ended June 30, 2016 for work completed under this contract. The agreement also grants an exclusive option to license the technology from the University within 180 days from the commencement of the agreement. However, the studies have been extended through the end of the year to better understand the pharmacokinetics of the CBD derivative relative to different routes of administration. Either party may terminate the agreement with 30 days' written notice.

 

On April 11, 2016, the Company entered into a research agreement with UM that examines the efficacy of cannabinoids at the genetic level of pathological organisms such as MRSA. The fee payable is based on the achievement of certain milestones in the project. The Company recognized $52,380 of research and development expense for the three and six months ended June 30, 2016 for work completed under this contract. Testing is scheduled for completion in the third quarter of 2016.
Commitments and Contingencies
Commitments and Contingencies

3. Commitments and Contingencies

 

Lease Commitments

 

On September 1, 2014, the Company signed an operating lease for laboratory and office space at the Innovation Hub, Insight Park located on the University of Mississippi campus. The lease term commenced on October 1, 2014 and expires on December 31, 2017. There are annual escalating rent provisions and two months of free rent in the agreement. The total cash payments over the life of the lease are divided by the total number of months in the lease period and the average rent will be charged to expense each month during the lease period. The monthly amount charged to rent expense is $9,267.

 

In October 2014, we signed a lease agreement for our corporate office headquarters that consists of approximately 4,087 square feet located at 650 Town Center Drive, Suite 1770, Costa Mesa, CA 92626. The lease expires on October 31, 2016 and our monthly rent is $5,373, payable in equal monthly installments with annual escalations.

 

In November 2015, the Company entered into an operating lease for its office and lab furnishings both in Costa Mesa and the Innovation Hub laboratory. The lease expires on November 3, 2017 and the monthly lease payments are $7,559.

 

Total net rent expense related to our operating leases for the three months ended June 30, 2016 and 2015, was $81,203 and $56,692, respectively. For the six months ended June 30, 2016 and 2015, total net rent expense from operating leases was $160,974 and $114,251 respectively.

 

Future minimum payments under the non-cancelable portion of our operating leases as of June 30, 2016 are as follows:

 

 

 

 

 

2016

 

$ 123,260

 

2017

 

 

161,962

 

2018

 

 

-

 

2019

 

 

-

 

2020

 

 

-

 

Thereafter

 

 

-

 

Total

 

$ 285,222

 

 

Legal Matters

 

General Litigation and Disputes

 

On August 3, 2016, John B. Hollister filed to dismiss his complaint against the Company and its Executive Chairman, and the Company and its Executive Chairman filed to dismiss their complaint against Hollister filed on January 25, 2016 containing claims against him for defamation, false light, unfair competition, breach of contract, breach of fiduciary duty and fraud.

 

Hollister's employment as the Company's Chief Executive Officer was terminated by the Company on August 24, 2015 for good and lawful reasons by the Company's Board of Directors as the Company decided to go in a different direction. As stated in the Company's December 28, 2015 Form 8-K, the Company maintains that Hollister's complaint and subsequent pleadings were grossly inaccurate and his claims were entirely without merit alleging various causes of action arising out of his termination, including a breach of contract claim.

 

Neither the Company nor its Executive Chairman made any payment to Hollister to resolve the lawsuit or otherwise.

 

According to the Orange County Superior Court's online case records posted on August 11, 2016, the court entered the order for dismissal of the entire action with prejudice effective as of the August 3, 2016 filing date. 

 

Government Proceedings

 

Like other companies in the pharmaceutical industry, we are subject to extensive regulation by national, state and local government agencies in the United States. As a result, interaction with government agencies occurs in the normal course of our operations. It is possible that criminal charges and substantial fines and/or civil penalties or damages could result from any government investigation or proceeding. As of June 30, 2016, the Company had no current proceedings or inquiries.

 

Change in Control Severance Plan

 

In February 2015, we adopted a change in control severance plan, in which our named executive officers participate, that provides for the payment of severance benefits if the executive's service is terminated within twelve months following a change in control, either due to a termination without cause or upon a resignation for good reason (as each term is defined in the plan).

 

In either such event, and provided the executive timely executes and does not revoke a general release of claims against the Company, he or she will be entitled to receive: (i) a lump sum cash payment equal to at least six months of the executive's monthly compensation, plus an additional month for each full year of service over six years, (ii) Company-paid premiums for continued health insurance for a period equal to length of the cash severance period or, if earlier, when executive becomes covered under a subsequent employer's healthcare plan, and (iii) full vesting of all then-outstanding unvested stock options and restricted stock awards.

 

Contract Manufacturing Organization ("CMO") Agreement

 

On February 5, 2016, the Company entered into a letter agreement ("Agreement") with a third party contract manufacturing organization ("CMO") pursuant to which the CMO is to provide services to Nemus for process development and analytical method development and qualification for Nemus' prodrug of tetrahydrocannabinol, or THC, as well as for sample production and a stability study.

 

Pursuant to the terms of the Agreement, Nemus will pay an estimated $154,000 to $183,000 in fees and expenses for the initial evaluation and development of a process for the production of Nemus' pro-drug of THC to ensure reproducibility, quality and safety and an estimated $142,900 for analytical method development and qualification.  The Company recognized $36,600 and $206,348 respectively as research and development expense towards these fees for the three and six months ended June 30, 2016. After the initial evaluation and development, Nemus has agreed to pay additional fees and expenses for sample production of Nemus' pro-drug of THC and a stability study, as well as possible extensions to or modifications of the aforementioned projects.

 

Nemus may at any time cancel or delay any project under the Agreement prior to the scheduled start date. Nemus must reimburse the CMO for costs incurred prior to and including the date of cancellation plus any reasonable and foreseeable costs associated with stopping work on any project, including the CMO's loss of revenue incurred as the result of reserving production facilities for Nemus' exclusive use. Nemus may terminate the Agreement in whole or in part at any time upon 30 days' written notice.

Stockholders' Deficit and Redeemable Convertible Series B Preferred Stock
Stockholders' Deficit and Redeemable Convertible Series B Preferred Stock

4. Stockholders' Deficit and Redeemable Convertible Series B Preferred Stock

 

Common Stock

 

In June 2014, the Company sold 1,800,000 shares of common stock with no par value and warrants for a purchase price of $900,000 (the "June 2014 Stock Purchase Agreement") to a group of private investors. See additional discussion on warrants below.

  

In August 2014, the Company sold 2,200,000 shares of common stock with no par value and warrants for a purchase price of $1,100,000 to a group of private investors. See additional discussion on warrants below.

 

In October 2014, the Company issued 1,110,000 shares of common stock with no par value to eighteen individual investors that had participated in a prior entity founded by Nemus' then current president. Such entity has been insolvent and not operating since the inception date of Nemus. The issuance of these shares was in exchange for the signing of a release of claims against the Company, its President, and the former entity. The Company recorded a general and administrative expense of $466,200 in the fourth quarter of 2014 to reflect the fair market value of the common stock issued in exchange for the release of claims. The fair market value of the common stock issued was determined via an independent third-party valuation conducted as of October 31, 2014.

 

In January 2015, the Company sold 241,663 shares of common stock with par value of $0.001 for a purchase price of $724,989 to a group of private investors.

 

In March 2015, the Company issued 24,000 shares of common stock with par value of $0.001 to a third party in exchange for services to be performed related to raising additional capital. The Company recorded a prepaid expense of $168,000 in the first quarter of 2015 to reflect the fair market value of the common stock issued and is amortizing this expense over the contract service period which is one year. The fair market value was determined utilizing the Company's closing stock price as of the commencement date of the contract service period. For three months ended March 31, 2016, the Company amortized $12,194 to general and administrative expense which represented the completion of this agreement.

 

In August 2015, in conjunction with the Series B Preferred Stock sale (discussed below), the Company raised $5.0 million at $1,000 per share resulting in the automatic conversion of the Series A Preferred Stock to common stock. This resulted in the conversion of 580,000 shares of Series A Preferred Stock at $2.50 per share to the equivalent of 1,812,500 shares of common stock.

 

In December 2015, a Series B Preferred Stockholder converted 500 shares of their preferred stock to common stock as allowed under the Series B Stock Agreement (discussed below), resulting in the issuance of 625,000 shares of common stock at an effective price of $0.80 per share.

 

In March 2016, another Series B Preferred Stockholder converted 8 shares of their preferred stock to common stock, resulting in the issuance of 10,000 shares of common stock at an effective price of $0.80 per share.

 

Preferred Stock

 

The Company has authorized 20,000,000 shares of preferred stock with a par value of $0.001 per share.

 

Series A Preferred Stock: In April 2015, the Company sold 250,000 shares of Series A preferred stock with par value of $0.001 and 50,000 warrants to purchase the Company's common stock for an aggregate purchase price of $625,000, or $2.50 per share to a group of private investors. The shares of preferred stock automatically convert to shares of common stock either at (i) a subsequent equity financing of at least $1,000,000 or (ii) October 1, 2015, whichever is earlier. The warrants are exercisable at a price of $5.00 per share and expire five years from the issuance date. In May 2015, the Company sold 150,000 shares and 30,000 warrants and in July 2015, the Company sold 180,000 shares and 36,000 warrants under the same terms and conditions.

 

The Series A preferred stock issued also has a "down-round" protection feature provided to the investors if the Company subsequently issues or sells any shares in a round of equity financing of at least $1,000,000 prior to October 1, 2015 in which the shares of common stock to be acquired are at a price less than $2.50 per share. The Company is required to issue additional shares of common stock to the investors in an amount such that the subscription price paid, when divided by the total number of shares issued will result in an actual price paid per share of common stock equal to such lower price. This conversion occurred as discussed above in conjunction with the Series B Preferred Stock financing totaling $5.0 million and resulted in the conversion of 580,000 shares of Series A Preferred Stock at to 1,812,500 shares of common stock.

  

Redeemable Convertible Series B Preferred Stock: In August 2015, the Company sold 5,000 shares of Series B Convertible Preferred Stock and warrants to purchase 6,250,000 shares of the Company's common stock for an aggregate purchase price of $1,000 per share resulting in gross proceeds of $5.0 million. Each share of preferred stock is convertible into 1,250 shares of common stock which results in an effective conversion price of $0.80 per common share and can be converted by the holder at any time. The Series B preferred stock issued also has a "down-round" protection feature provided to the investors if the Company subsequently issues or sell any shares of common stock, stock options, or convertible securities at a price less than the conversion price of $0.80 per common share. The conversion price is automatically adjusted down to the price of the instrument being issued. See additional discussion in Note 5 below. The Series B shares have liquidation preference over other preferred shares and common stock and have voting rights equal to the number of common shares into which each holder's preferred stock is convertible as of the record date. The preferred stock has no dividend rights. If dividends are declared on the common stock, the holders of the preferred stock shall be entitled to participate in such dividends on an as-if converted basis. The warrants are exercisable at a price of $1.15 per share and expire five years from the issuance date. See additional discussion regarding these warrants in Note 6 below.

 

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, Series B preferred stockholders receive an amount per share equal to the conversion price of $0.80, subject to down-round adjustment, multiplied by the as-if converted share amount of 5,615,000 common shares, totaling $4.5 million. If upon the liquidation, the assets are insufficient to permit payments to the Series B holders, all assets legally available will be distributed in a pro rata basis among the Series B holders in proportion to the full amounts they would otherwise be entitled to receive. Any remaining assets are distributed pro rata among the common stockholders.

 

Subject to certain trigger events occurring, the Series B preferred stock holders have the right to force the Company to redeem the shares of preferred stock at a price per preferred share equal to the greater of (A) 115% of the conversion amount and (B) the product of (1) the conversion rate in effect at such time and (2) the greatest closing sale price of the Common Stock during the period beginning on the date immediately preceding such triggering event and ending on the date such holder delivers the notice of redemption. Such triggering events include:

 

- Failure of the Series B Registration Statement to be declared effective by the SEC on or prior to the date that is ninety days after the Effectiveness Deadline;

 

 

- Suspension of the Company's common stock from trading for a period of (2) consecutive trading days;

 

 

- Failure of the Company to deliver all the shares of the common stock or make the appropriate cash payments in a timely manner upon conversion of the Series B Preferred;

 

 

- Any default of indebtedness;

 

 

- Any filing of voluntary or involuntary bankruptcy by the Company;

 

 

- A final judgment in excess of $100,000 rendered against the Company;

 

 

- Breach of representations and warranties in the Stock Purchase Agreement;

 

 

- Failure to comply with the Series B Certificate of Designation or Rule 144 requirements.

 

As certain of these triggering events are considered to be outside the control of the Company, the Series B preferred stock is considered to be contingently redeemable convertible and as a result, has been classified as mezzanine equity in the Company's balance sheet.

  

In December 2015, a Series B Preferred Stock holder converted 500 shares of their preferred stock to common stock at the conversion rate of 1,250:1 resulting in the issuance of 625,000 shares of common stock In March 2016, another Series B Preferred Stockholder converted 8 shares of their preferred stock to common stock at the same ratio resulting in the issuance of 10,000 shares of common stock. As a result of these conversions, the liquidation preference for the Series B Preferred Stock has been reduced to $4.5 million at both June 30, 2016 and December 31, 2015.

 

Warrants

 

On July 17, 2012, the Company issued warrants to purchase up to 3,000,000 shares of our common stock to its founders and two advisors in consideration for services provided in the start-up of operations. The warrants are exercisable at a price of $1.00 per share and expire on June 20, 2023. The Company valued these warrants utilizing the Black-Scholes valuation model and they were determined to be of nominal value given the start-up nature of the Company's operations at the time of grant.

 

In conjunction with the June 2014 Stock Purchase Agreement, the Company issued warrants to purchase up to 450,000 shares of common stock to a group of private investors. The warrants are exercisable at a price of $1.00 per share and expire on June 12, 2020. The Company valued these warrants at $85,500. This amount was recorded as warrants and was reclassified from the total consideration received for both the common stock and warrants purchased.

 

In August 2014 as part of the June 2014 Stock Purchase Agreement, the Company issued warrants to purchase up to 550,000 shares of common stock with an exercise price of $1.00 per share that expire in August 2020. The Company valued these warrants at $104,500. This amount was recorded as warrants and was reclassified from the total consideration received for both the common stock and warrants purchased.

 

In March 2015, the Company entered into an agreement with a financial advisory and public relations consulting firm which included the issuance of warrants to purchase up to 90,000 shares of common stock with an exercise price of $2.50 per share with a term of five years and vest quarterly over one year. These warrants were in exchange for services performed beginning in the first quarter and were subsequently issued in April 2015. The Company estimated the vested warrant value to be $85,950 utilizing the Black Scholes option pricing model and amortized $5,145 for services provided for the six months ended June 30, 2016 and $46,810 for the six months ended June 30, 2015.

 

In April 2015, the Company entered into an agreement with one of its investors to provide advisory services on all matters including financing. In conjunction with this agreement, the Company issued warrants that vest immediately to purchase 100,000 shares of common stock with an exercise price of $5.00 per share with a term of ten years. The Company estimated the warrant value to be $326,000 utilizing the Black Scholes option pricing model and recorded this amount to general and administrative expense for the quarter due to the immediate vesting.

 

In April 2015, the Company issued to a former service provider in exchange for payment of its outstanding invoice warrants that vest immediately to purchase 6,000 shares of common stock with an exercise price of $2.50 per share. The Company estimated the warrant value to be $10,000 which represented the value of the trade debt extinguished.

 

In April 2015, the Company issued 50,000 warrants to purchase the Company's common stock in conjunction with its Series A Preferred Stock financing. The warrants are exercisable at a price of $5.00 per share and expire five years from the issuance date. In May 2015, the Company issued 30,000 warrants and in July 2015, 36,000 warrants under the same terms and conditions.

  

In June 2015, the Company issued to a service provider in exchange for consulting services warrants that vest immediately to purchase 10,000 shares of common stock with an exercise price of $5.00 per share with a term of five years. The Company estimated the warrant value to be $14,700 utilizing the Black Scholes option pricing model.

 

In August 2015, the Company issued 6,250,000 warrants to purchase common stock in conjunction with its Series B Preferred Stock financing. See further discussion in Note 6 below.

 

In August 2015, the Company issued 187,500 warrants to purchase common stock to its investment banker in exchange for services rendered in conjunction with the Series B Preferred Stock financing. The warrants vest immediately and have an exercise price of $1.15 per share. The Company estimated the value of the warrants to be $86,250 utilizing the Black Scholes option pricing model and recorded this amount to offering costs.

 

In November 2015, the Company entered into an agreement with a financial advisory and public relations consulting firm which included the issuance of warrants to purchase up to 120,000 shares of common stock with an exercise price of $1.15 per share with a term of five years. These warrants are in exchange for services to be performed from November 25, 2015 to May 25, 2016 and 60,000 shares vest immediately with the remainder in one quarter. The Company estimated the warrant value of vested warrants to be $42,000 utilizing the Black Scholes option pricing model and amortized $7,800 during the fiscal year ended December 31, 2015 and $34,200 in the six months ended June 30, 2016.

 

The Company's board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of the warrants, including:

 

· Contemporaneous valuation prepared by an independent third-party valuation specialist effective as of April 1, 2015, August 20, 2015, December 31, 2015, March 31, 2016, and June 30, 2016,

 

 

· Its results of operations, financial position and the status of research and development efforts and achievement of enterprise milestones,

 

 

· The composition of, and changes to, the Company's management team and board of directors,

 

 

· The lack of liquidity of its common stock as a newly public company,

 

 

· The Company's stage of development, business strategy and the material risks related to its business and industry,

 

 

· The valuation of publicly-traded companies in the biotechnology sectors,

 

 

· External market conditions affecting the biotechnology industry sectors,

 

 

· The likelihood of achieving a liquidity event for the holders of its common stock, such as an initial public offering, or IPO, or a sale of the Company, given prevailing market conditions, and

 

 

· The state of the IPO market for similarly situated biotechnology companies,

 

 

· Discussions held with bankers, potential investors, and preliminary term sheets received as part of management's capital raise efforts.

 

There are significant judgments and estimates inherent in the determination of the fair value of the Company's warrants. These judgments and estimates included the assumptions regarding its future operating performance, the time to completing an IPO or other liquidity event and the determination of the appropriate valuation methods. If the Company had made different assumptions, its warrant valuation could have been significantly different.

  

Stock Option Plans: 2014 Omnibus Incentive Plan

 

The 2014 Omnibus Incentive Plan (the "2014 Plan") was adopted to provide a means by which officers, non-employee directors, and employees of and consultants to the Company and its affiliates could be given an opportunity to acquire an equity interest in the Company. All officers, non-employee directors, and employees of and consultants to the Company are eligible to participate in the 2014 Plan.

 

On October 31, 2014, after the closing of the Merger, our Board of Directors approved the 2014 Plan. The 2014 Plan reserved 3,200,000 shares for future grants. As of June 30, 2016, options (net of canceled or expired options) covering an aggregate of 1,180,000 shares of the Company's common stock had been granted under the 2014 Plan, and the Company had 1,180,000 options outstanding and 820,000 shares available for future grants under the 2014 Plan.

 

Options granted under the 2014 Plan expire no later than 10 years from the date of grant. Options granted under the 2014 Plan may be either incentive or non-qualified stock options. For incentive and non-qualified stock option grants, the option price shall be at least 100% of the fair value on the date of grants, as determined by the Company's Board of Directors. If at any time the Company grants an option, and the optionee directly or by attribution owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price shall be at least 110% of the fair value and shall not be exercisable more than five years after the date of grant.

 

Options granted under the 2014 Plan may be immediately exercisable if permitted in the specific grant approved by the Board of Directors and, if exercised early may be subject to repurchase provisions. The shares acquired generally vest over a period of five years from the date of grant. The Company granted options to purchase 1,180,000 shares net of cancellations through June 30, 2016, under the 2014 Plan.

 

The following is a summary of activity under the 2014 Plan as of June 30, 2016:

 

 

 

Shares
Available

for Grant of

 

 

Options Outstanding

 

 

Weighted
Average

 

 

 

Options &
Shares

 

 

Number of

Shares

 

 

Price per

Share

 

 

Exercise

Price

 

 

 

 

 

 

Balance at December 31, 2015

 

 

2,020,000

 

 

 

1,180,000

 

 

$

0.42-$3.00

 

 

$ 0.63

 

Options granted

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

Options exercised

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

Options cancelled

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

Subtotal

 

 

2,020,000

 

 

 

1,180,000

 

 

$

0.42-$3.00

 

 

$ 0.63

 

Shares used for restricted stock awards (see discussion below)

 

 

(1,200,000 )

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

 

 

820,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The weighted average remaining contractual life in years of the options outstanding as of June 30, 2016 was 8.43 years.

 

Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company's stock exceeded the exercise price of the stock options at June 30, 2016 for those stock options for which the quoted market price was in excess of the exercise price ("in-the-money options"). As of June 30, 2016, the aggregate intrinsic value of options outstanding was $73,500. As of June 30, 2016, 226,000 options to purchase shares of common stock were exercisable.

  

Restricted Stock Awards

 

Restricted stock awards ("RSAs") are granted to our board of directors and members of senior management and are issued pursuant to the Company's 2014 Omnibus Incentive Plan. On October 20, 2015, a total of 1,200,000 RSAs were granted to members of the Company's senior management and board of directors with a fair market value of approximately $900,000. These RSAs vest from one to three years from the grant date as services are rendered to the Company. For the three and six months ended June 30, 2016, the Company recorded $93,750 and $187,500 respectively in stock-based compensation expense related to these awards. (See discussion below).

 

Stock Based Compensation Expense

 

The Company recognizes stock-based compensation expense based on the fair value of that portion of stock options that are ultimately expected to vest during the period. Stock-based compensation expense recognized in the consolidated statements of operations includes compensation expense for stock-based awards based on the estimated grant date fair value over the requisite service period. For the three and six months ended June 30, 2016, the Company recognized stock-based compensation expense of $181,608 and $363,216 (including compensation expense for RSAs discussed above) which was recorded as a general and administrative expense in the consolidated statements of operations. For the three and six months ended June 30, 2015, stock-based compensation expense was $123,351 and $259,699, respectively.

 

The total amount of unrecognized compensation cost related to non-vested stock options was $1,213,571 as of June 30, 2016. This amount will be recognized over a weighted average period of 3.39 years.

 

Valuation Assumptions

 

The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's common stock for similar terms. The expected term was estimated using the simplified method as permitted under SAB No. 110, since the Company has no recent exercise or forfeiture history that is representative of options granted during the year. The expected term represents the estimated period of time that stock options are expected to be outstanding, which is less than the contractual term which is generally ten years. The risk-free interest rate is based on the U.S. Treasury yield. The expected dividend yield is zero, as the Company does not anticipate paying dividends in the near future. There were no options granted in the six months ended June 30, 2016; the assumptions for options granted in the six months ended June 30, 2015 are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Dividend yield

 

NA

 

 

0.00 %

Volatility factor

 

NA

 

 

75.00 %

Risk-free interest rate

 

NA

 

 

1.85 %

Expected term (years)

 

NA

 

 

6.5

 

Weighted-average fair value of options granted during the periods

 

NA

 

$ 2.13

 

Provision for Conversion of Preferred Stock
Provision for Conversion of Preferred Stock

5. Provision for Conversion of Preferred Stock

 

Series A Preferred Stock Conversion Liability

 

In connection with the Series A preferred stock financing, the Company recorded a liability related to down-round protection provided to the stockholders in the event that the Company does another offering of common stock greater than $1,000,000 at a price below $2.50 per share. The down-round provision expires at the closing of a subsequent financing round or October 1, 2015 whichever is earlier. With the assistance of a third-party valuation specialist, the Company valued the conversion liability pursuant to the accounting guidance of ASC 820-10, Fair Value Measurements, as of the closing date of the first round of financing which was April 1, 2015.

 

As of June 30, 2015, the Company re-evaluated the likelihood and valuation of a potential down-round given that management has been actively pursuing capital raising efforts. In the absence of any definitive agreement, the Company calculated the fair value of the conversion feature to be $700,000 by determining the highest probability of a per share price in the next anticipated round of financing, after considering all discussions with bankers, potential investors, and preliminary term sheets. This amount was booked as a current liability as of June 30, 2015 and was charged as a non-operating expense for the period.

 

In July 2015, the Company increased its down-round provision by $286,000 based on the closing of an additional round of 180,000 Series A shares by determining the highest probability of a per share price in the next anticipated round of financing, after considering all discussions with bankers, potential investors, and preliminary term sheets. This amount was charged to non-operating expense for the three months ended September 30, 2015.

 

As of August 21, 2015, upon the closing of the Series B Preferred Stock sale with proceeds totaling $5.0 million, the Company issued 1,232,000 additional shares of common stock at $0.80 per share thereby eliminating this liability of $986,000 and offsetting it to Additional Paid-in-Capital. This amount was calculated by determining the difference in per share pricing between the Series A Preferred Stock financing of $2.50 per share and the Series B Preferred Stock Financing of $0.80 per share multiplied by the 580,000 total shares included in the Series A offering.

 

Series B Preferred Stock Conversion Liability

 

As of August 20, 2015, in connection with the Series B preferred stock financing, the Company recorded a liability related to down-round protection provided to the stockholders in the event that the Company does another sale or issuance of common stock, stock options or convertible securities where the share price is below $0.80 per share. With the assistance of a third-party valuation specialist, the Company valued the conversion liability pursuant to the accounting guidance of ASC 820-10, Fair Value Measurements, as of the closing date of the financing. The Company also performed a review of the conversion liability in conjunction with ASC 815, Derivatives and Hedging/Contracts in Entity's Own Equity, and determined that the liability requires bifurcation and re-measurement to fair market value at the end of each reporting period. The value of this embedded derivative was determined utilizing a with and without method by valuing the preferred stock with and without the down round protection.

 

As of June 30, 2016, the Company engaged a third-party valuation specialist to re-measure the conversion liability to fair market value as of that date utilizing the same methodology previously performed. The derivative which was classified as a current liability was adjusted to $105,660 as of June 30, 2016. The change in fair market value was recorded as non-operating income of $31,414 for the three months ended June 30, 2016 and $21,814 as non-operating expense for the six months ended June 30, 2016.
Series B Warrants
Series B Warrants

6. Series B Warrants

 

In conjunction with the Series B Preferred Stock financing, the Company issued 6,437,500 common stock warrants that are exercisable at a price of $1.15 per share and expire five years from the issuance date. The warrants were initially valued at $2,935,800 utilizing the Black-Scholes pricing model. The warrants are exercisable in cash or through a cashless exercise provision. The Series B warrants also have a "down-round" protection feature provided to the investors if the Company subsequently issues or sells any shares of common stock, stock options, or convertible securities at a price less than the exercise price of $1.15 per each warrant. The conversion price is automatically adjusted down to the price of the instrument being issued. The Company reviewed the classification of the warrants as liabilities or equity under the guidance of ASC 480-10, Distinguishing Liabilities from Equity, and concluded that the Series B warrants should be classified as a liability. The Company then applied the fair value allocation methodology for allocating the proceeds of $5.0 million received from the Series B financing between the conversion liability and the warrants with the residual amount being allocated to the Preferred Stock. The Company performed the same valuation as of March 31, 2016 utilizing an expected term of 4.39 years as a result of the passage of time, which resulted in the warrant value of $2,866,439. The change in fair market value at the re-measurement date of March 31, 2016 was recorded as non-operating expense totaling $411,480. The Company also performed the same valuation as of June 30, 2016 utilizing the Black-Scholes pricing model and the following assumptions:

 

 

 

Six Months

 Ended June 30,

 

 

 

2016

 

 

2015

 

Dividend yield

 

 

0.00 %

 

NA

 

Volatility factor

 

 

70.00 %

 

NA

 

Risk-free interest rate

 

1.11 – 1.29

%

 

NA

 

Expected term (years)

 

4.14 – 4.15

 

 

NA

 

Weighted-average fair value of warrants

 

$ 0.13

 

 

NA

 

 

This resulted in a warrant value of $842,325 as of June 30, 2016. The change in fair market value at the re-measurement date was recorded as non-operating income totaling $2,024,114 for the three months ended June 30, 2016. and non-operating income totaling $1,612,634 for the six months ended June 30, 2016.
Income Taxes
Income Taxes

7. Income Taxes

 

The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Due to the substantial doubt related to the Company's ability to utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at June 30, 2016. As a result of this valuation allowance there are no income tax benefits reflected in the accompanying statement of operations to offset pre-tax losses.

 

The Company has no uncertain tax positions as of June 30, 2016.
Subsequent Events
Subsequent Events

8. Subsequent Events

 

Legal Settlement

 

On August 3, 2016, John B. Hollister filed to dismiss his complaint against the Company and its Executive Chairman, and the Company and its Executive Chairman filed to dismiss their complaint against Hollister filed on January 25, 2016 containing claims against him for defamation, false light, unfair competition, breach of contract, breach of fiduciary duty and fraud.

 

Hollister's employment as the Company's Chief Executive Officer was terminated by the Company on August 24, 2015 for good and lawful reasons by the Company's Board of Directors as the Company decided to go in a different direction. As stated in the Company's December 28, 2015 Form 8-K, the Company maintains that Hollister's complaint and subsequent pleadings were grossly inaccurate and his claims were entirely without merit alleging various causes of action arising out of his termination, including a breach of contract claim.

 

Neither the Company nor its Executive Chairman made any payment to Hollister to resolve the lawsuit or otherwise.

 

 According to the Orange County Superior Court's online case records posted on August 11, 2016, the court entered the order for dismissal of the entire action with prejudice effective as of the August 3, 2016 filing date.

Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Policies)

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

Liquidity and Going Concern

 

The Company has incurred operating losses and negative cash flows from operations since our inception. As of June 30, 2016, we had cash and cash equivalents of $831,658. The Company anticipates that it will continue to incur net losses into the foreseeable future as it continues to advance and develop a number of potential drug candidates into preclinical development activities and expands its corporate infrastructure which includes the costs associated with being a public company. Without additional funding, management believes that the Company will not have sufficient funds to meet its obligations within one year after the date the consolidated financial statements are issued. These conditions give rise to substantial doubt as to the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company is unable to secure adequate additional funding, the Company may be forced to make a reduction in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs.

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and does not believe it is exposed to any significant credit risk.

Restricted Cash

 

         A deposit of $37,500 as of June 30, 2016 and December 31, 2015 was restricted from withdrawal and held by a bank in the form of a certificate of deposit. This certificate serves as collateral for payment of the Company's credit cards.

Fair Value Measurements

 

Certain assets and liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, is used to measure fair value:

 

Level 1:

Valuations for assets and liabilities traded in active markets from readily available pricing sources such as quoted prices in active markets for identical assets or liabilities.

Level 2:

Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or

Level 3:

Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

The carrying values of our financial instruments, including, cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses approximate their fair value due to the short maturities of these financial instruments. The Series B warrant liability and the conversion liability for the Series B preferred stock were valued utilizing Level 3 inputs primarily from a third party independent appraisal conducted as of June 30, 2016.

Property and Equipment, Net

 

As of June 30, 2016, property and equipment, net, was $16,896, consisting primarily of computers and equipment. The Company had $13,383 of property and equipment, net, as of December 31, 2015. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line method based on the estimated useful life of the related assets currently ranging from two to three years. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.

 

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.

 

The costs incurred for the rights to use licensed technologies in the research and development process, including licensing fees and milestone payments, will be charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired rights, and are capitalized in situations where there is an identified alternative future use. No cost associated with the use of licensed technologies has been capitalized to date.

Income Taxes

 

The Company accounts for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, and net operating loss carry forwards (the "NOLs") and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Any interest or penalties would be recorded in the Company's statement of operations in the period incurred.

 

The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. As a result there are no income tax benefits reflected in the statement of operations to offset pre-tax losses.

 

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.

Revenue Recognition

 

The Company has not begun planned principal operations and has not generated any revenue since inception.

Research and Development Expenses

 

Research and development ("R&D") costs are expensed when incurred. These costs may consist of external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants; license fees; employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drug development activities; and facilities expense, depreciation and other allocated expenses; and equipment and laboratory supplies.

Stock-Based Compensation Expenses

 

Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options and warrants using the following assumptions:

 

· Exercise price - We determined the exercise price based on valuations using the best information available to management at the time of the valuations.

 

 

· Volatility - We estimate the stock price volatility based on industry peers who are also in the early development stage given the limited market data available in the public arena.

 

 

·

Expected term - The expected term is based on a simplified method which defines the life as the average of the contractual term of the options and warrants and the weighted-average vesting period for all open awards.

 

 

· Risk-free rate - The risk-free interest rate for the expected term of the option or warrant is based on the average market rate on U.S. treasury securities in effect during the period in which the awards were granted.

 

 

· Dividends – The dividend yield assumption is based on our history and expectation of paying no dividends.

Stock-Based Compensation for Non-Employees

 

The Company accounts for warrants and options issued to non-employees under ASC 505-50, Equity – Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee awards are periodically re-measured over the vesting terms and at each quarter end.

Segment Information

 

The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 280, "Segment Reporting" establishes standards for reporting information about reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group ("CODM"), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profits based on product lines and routes to market. Based on the early development stage of our operation, we operate in a single reportable segment.

Comprehensive Income (Loss)

 

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the consolidated financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), net of their related tax effect, arrived at a comprehensive income (loss). For the three and six months ended June 30, 2016, the comprehensive income (loss) was equal to the net income (loss).

Earnings per share

 

The Company applies FASB ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings or loss per share would include the dilutive effect of awards granted to employees under stock-based compensation plans, if any. No dilutive effect was calculated for the three and six months ended June 30, 2015 as the effect would be anti-dilutive. For the three months ended June 30, 2016 the dilutive effects of common stock options and restricted stock awards were included in the calculation of the weighted-average number of common shares outstanding by applying the treasury stock method to the assumed exercise of outstanding stock options. For the six months ended June 30, 2016, no dilutive effect was calculated as the effect would be anti-dilutive.

 

We computed earnings per common share for each period as follows:

 

 

 

Three Months

 

 

Three Months

 

 

Six Months

 

 

Six Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 573,093

 

 

$ (2,056,960 )

 

$ (1,112,354 )

 

$ (2,967,185 )

Weighted average shares of common stock outstanding - basic

 

 

19,913,163

 

 

 

16,265,663

 

 

 

19,909,042

 

 

 

16,248,597

 

Dilutive effect of common stock options and restricted stock awards

 

 

222,482

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average shares of common stock outstanding - diluted

 

 

20,135,645

 

 

 

16,265,663

 

 

 

19,909,042

 

 

 

16,248,597

 

Basic earnings per share

 

$ 0.03

 

 

$ (0.13 )

 

$ (0.06 )

 

$ (0.18 )

Diluted earnings per share

 

$ 0.03

 

 

$ (0.13 )

 

$ (0.06 )

 

$ (0.18 )
 

Recent accounting pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02 "Leases" (Topic 842) intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets – referred to as "lessees"- to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Earlier adoption is permitted for any annual or interim period for which consolidated financial statements have not yet been issued. The Company is currently evaluating the potential impact that adoption may have on its consolidated financial statements.
Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Tables)
Schedule of earnings per common share

 

 

Three Months

 

 

Three Months

 

 

Six Months

 

 

Six Months

 

 

 

Ended

 

 

Ended

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 573,093

 

 

$ (2,056,960 )

 

$ (1,112,354 )

 

$ (2,967,185 )

Weighted average shares of common stock outstanding - basic

 

 

19,913,163

 

 

 

16,265,663

 

 

 

19,909,042

 

 

 

16,248,597

 

Dilutive effect of common stock options and restricted stock awards

 

 

222,482

 

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average shares of common stock outstanding - diluted

 

 

20,135,645

 

 

 

16,265,663

 

 

 

19,909,042

 

 

 

16,248,597

 

Basic earnings per share

 

$ 0.03

 

 

$ (0.13 )

 

$ (0.06 )

 

$ (0.18 )

Diluted earnings per share

 

$ 0.03

 

 

$ (0.13 )

 

$ (0.06 )

 

$ (0.18 )
Commitments and Contingencies (Tables)
Schedule of future minimum payments under non-cancelable operating leases

 

 

 

 

2016

 

$ 123,260

 

2017

 

 

161,962

 

2018

 

 

-

 

2019

 

 

-

 

2020

 

 

-

 

Thereafter

 

 

-

 

Total

 

$ 285,222

 

Stockholders'Deficit and Preferred Stock Subject to Redemption (Tables)

 

 

Shares
Available

for Grant of

 

 

Options Outstanding

 

 

Weighted
Average

 

 

 

Options &
Shares

 

 

Number of

Shares

 

 

Price per

Share

 

 

Exercise

Price

 

 

 

 

 

 

Balance at December 31, 2015

 

 

2,020,000

 

 

 

1,180,000

 

 

$

0.42-$3.00

 

 

$ 0.63

 

Options granted

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

Options exercised

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

Options cancelled

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

Subtotal

 

 

2,020,000

 

 

 

1,180,000

 

 

$

0.42-$3.00

 

 

$ 0.63

 

Shares used for restricted stock awards (see discussion below)

 

 

(1,200,000 )

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

 

 

820,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Dividend yield

 

NA

 

 

0.00 %

Volatility factor

 

NA

 

 

75.00 %

Risk-free interest rate

 

NA

 

 

1.85 %

Expected term (years)

 

NA

 

 

6.5

 

Weighted-average fair value of options granted during the periods

 

NA

 

$ 2.13

 

Series B Warrants (Tables)
Schedule of Series B Warrants

 

 

Six Months

 Ended June 30,

 

 

 

2016

 

 

2015

 

Dividend yield

 

 

0.00 %

 

NA

 

Volatility factor

 

 

70.00 %

 

NA

 

Risk-free interest rate

 

1.11 – 1.29

%

 

NA

 

Expected term (years)

 

4.14 – 4.15

 

 

NA

 

Weighted-average fair value of warrants

 

$ 0.13

 

 

NA

 
Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Details) (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Accounting Policies [Abstract]
 
 
 
 
Net income (loss)
$ 573,093 
$ (2,056,960)
$ (1,112,354)
$ (2,967,185)
Weighted average shares of common stock outstanding - basic
19,913,163 
16,265,663 
19,909,042 
16,248,597 
Dilutive effect of common stock options and restricted stock awards
222,482 
 
 
 
Weighted average shares of common stock outstanding - diluted
20,135,645 
16,265,663 
19,909,042 
16,248,597 
Basic earnings per share (in dollars per share)
$ 0.03 
$ (0.13)
$ (0.06)
$ (0.18)
Diluted earnings per share (in dollars per share)
$ 0.03 
$ (0.13)
$ (0.06)
$ (0.18)
Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Detail Textuals) (USD $)
6 Months Ended 1 Months Ended
Jun. 30, 2016
Segment
Dec. 31, 2015
Jun. 30, 2015
Dec. 31, 2014
Oct. 31, 2014
Nemus Acquisition Corp
Nature of Operations, Business Activities and Summary of Significant Accounting Policies [Line Items]
 
 
 
 
 
Reverse merger common stock issuance with par value (in shares)
 
 
 
 
3,120,000 
Number of shares exchanged
 
 
 
 
12,880,000 
Common stock outstanding
19,913,163 
19,903,163 
 
 
16,000,000 
Cash and cash equivalents
$ 831,658 
$ 3,221,209 
$ 601,266 
$ 207,330 
 
Restricted cash
37,500 
37,500 
 
 
 
Property and equipment, net
$ 16,896 
$ 13,383 
 
 
 
Property, plant and equipment, depreciation methods
straight-line method 
 
 
 
 
Property plant and equipment estimated useful life
Two to three years 
 
 
 
 
Number of reportable segment
 
 
 
 
University of Mississippi ("UM") Agreements (Detail Textuals) (USD $)
3 Months Ended 6 Months Ended 1 Months Ended 0 Months Ended 3 Months Ended 6 Months Ended 3 Months Ended 6 Months Ended 0 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Jul. 31, 2013
University of Mississippi ("UM") Agreements
University of Mississippi
Intellectual Property
Sep. 29, 2014
UM 5050 pro-drug agreements
University of Mississippi
Intellectual Property
License_agreement
Oct. 15, 2014
UM 5050 pro-drug agreements
University of Mississippi
Intellectual Property
October 2014
Jun. 30, 2016
Other pro-drugs and potential formulations
University of Mississippi
Intellectual Property
December 2015
Jun. 30, 2016
Other pro-drugs and potential formulations
University of Mississippi
Intellectual Property
December 2015
Jun. 30, 2016
Other pro-drugs and potential formulations
University of Mississippi
Intellectual Property
April 2016
Jun. 30, 2016
Other pro-drugs and potential formulations
University of Mississippi
Intellectual Property
April 2016
Dec. 14, 2015
UM 8930 pro-drug agreements
University of Mississippi
Intellectual Property
License_agreement
Dec. 14, 2015
UM 8930 pro-drug agreements
University of Mississippi
Intellectual Property
December 2015
University Of Mississippi Agreements [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
Term of memorandum of understanding agreement
 
 
 
 
5 years 
 
 
 
 
 
 
 
 
Number of license agreements
 
 
 
 
 
 
 
 
 
 
 
Notice period for termination
 
 
 
 
3 months 
60 days 
 
 
30 days 
 
 
60 days 
 
Research and development expense
$ 459,957 
$ 43,374 
$ 595,316 
$ 80,574 
 
 
 
$ 27,804 
$ 46,340 
$ 52,380 
$ 52,380 
 
 
One time up front payment
 
 
 
 
 
 
10,000 
 
 
 
 
65,000 
10,000 
Annual fees for license agreement
 
 
 
 
 
 
 
 
 
 
 
25,000 
 
Aggregate milestone payments if milestones achieved
 
 
 
 
 
$ 2,100,000 
 
 
 
 
 
$ 1,400,000 
 
Commitments and Contingencies - Summary of Future minimum payments (Details) (USD $)
Jun. 30, 2016
Commitments and Contingencies Disclosure [Abstract]
 
2016
$ 123,260 
2017
161,962 
2018
   
2019
   
2020
   
Thereafter
   
Total
$ 285,222 
Commitments and Contingencies (Detail Textuals) (USD $)
1 Months Ended 3 Months Ended 6 Months Ended 1 Months Ended 0 Months Ended 3 Months Ended 6 Months Ended 0 Months Ended
Nov. 30, 2015
Sep. 30, 2014
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Oct. 31, 2014
Lease agreement
sqft
Feb. 5, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Jun. 30, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Jun. 30, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Feb. 5, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Minimum
Feb. 5, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Maximum
Operating Leased Assets [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
Area of corporate office headquarters
 
 
 
 
 
 
4,087 
 
 
 
 
 
Rent expense
$ 7,559 
$ 9,267 
$ 81,203 
$ 56,692 
$ 160,974 
$ 114,251 
$ 5,373 
 
 
 
 
 
Research and development expense
 
 
459,957 
43,374 
595,316 
80,574 
 
 
36,600 
206,348 
 
 
Fees and expenses for the initial evaluation and development
 
 
 
 
 
 
 
 
 
 
154,000 
183,000 
Estimated analytical method development and qualification
 
 
 
 
 
 
 
$ 142,900 
 
 
 
 
Stockholders' Deficit and Preferred Stock Subject to Redemption - Summary of option activity under 2014 Plan (Details) (Omnibus Incentive Plan 2014, USD $)
6 Months Ended 6 Months Ended
Jun. 30, 2016
Stock Option
Jun. 30, 2016
Stock Option
Minimum
Dec. 31, 2015
Stock Option
Minimum
Jun. 30, 2016
Stock Option
Maximum
Dec. 31, 2015
Stock Option
Maximum
Jun. 30, 2016
Restricted stock awards
Shares Available For Grant Of Options
 
 
 
 
 
 
Balance at December 31, 2015
2,020,000 
 
 
 
 
 
Options granted
   
 
 
 
 
 
Options exercised
   
 
 
 
 
 
Options cancelled
   
 
 
 
 
 
Subtotal
2,020,000 
 
 
 
 
 
Shares used for restricted stock awards (see discussion below)
 
 
 
 
 
$ (1,200,000)
Balance at June 30, 2016
820,000 
 
 
 
 
 
Number of Shares
 
 
 
 
 
 
Balance at the beginning
1,180,000 
 
 
 
 
 
Options granted
   
 
 
 
 
 
Options exercised
   
 
 
 
 
 
Options cancelled
   
 
 
 
 
 
Balance at the ending
1,180,000 
 
 
 
 
 
Price Per Share
 
 
 
 
 
 
Balance at the beginning
 
$ 0.42 
$ 0.42 
$ 3.00 
$ 3.00 
 
Options granted
   
 
 
 
 
 
Options cancelled
   
 
 
 
 
 
Balance at the ending
 
$ 0.42 
$ 0.42 
$ 3.00 
$ 3.00 
 
Weighted Average Exercise Price
 
 
 
 
 
 
Balance at the beginning
$ 0.63 
 
 
 
 
 
Options granted
   
 
 
 
 
 
Options cancelled
   
 
 
 
 
 
Balance at the ending
$ 0.63 
 
 
 
 
 
Stockholders' Deficit and Preferred Stock Subject to Redemption - Summary of weighted average assumptions for employee option (Details 1) (Stock Option, USD $)
6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Stock Option
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
Dividend yield
   
0.00% 
Volatility factor
   
75.00% 
Risk-free interest rate
   
1.85% 
Expected term (years)
 
6 years 5 months 
Weighted-average fair value of options granted during the periods
    
$ 2.13 
Stockholders' Deficit and Preferred Stock Subject to Redemption (Detail Textuals) (USD $)
1 Months Ended 3 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended 1 Months Ended 6 Months Ended 12 Months Ended 1 Months Ended 6 Months Ended 1 Months Ended
Apr. 30, 2015
Mar. 31, 2015
Jan. 31, 2015
Oct. 31, 2014
Investor
Jun. 30, 2016
Mar. 31, 2016
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Jun. 30, 2016
Jun. 30, 2015
Dec. 31, 2015
Aug. 21, 2015
Series A preferred stock
Aug. 31, 2015
Series A preferred stock
Jul. 31, 2015
Series A preferred stock
May 31, 2015
Series A preferred stock
Apr. 30, 2015
Series A preferred stock
Jun. 30, 2016
Series A preferred stock
Mar. 31, 2016
Series B Preferred Stock
Dec. 31, 2015
Series B Preferred Stock
Aug. 21, 2015
Series B Preferred Stock
Aug. 31, 2015
Series B Preferred Stock
Jun. 30, 2016
Series B Preferred Stock
Apr. 30, 2015
General and administrative expense
Nov. 30, 2015
Warrants
Aug. 31, 2015
Warrants
Jul. 31, 2015
Warrants
Jun. 30, 2015
Warrants
May 31, 2015
Warrants
Apr. 30, 2015
Warrants
Mar. 31, 2015
Warrants
Jun. 30, 2016
Warrants
Dec. 31, 2015
Warrants
Aug. 31, 2014
Warrants
Jul. 17, 2012
Warrants
Adviser
Apr. 30, 2015
Warrants
Series A preferred stock
Aug. 31, 2014
Warrants
June 2014 Stock Purchase Agreement
Jun. 30, 2016
Warrants
June 2014 Stock Purchase Agreement
Jun. 30, 2014
Warrants
June 2014 Stock Purchase Agreement
Aug. 31, 2015
Common Stock
Equity [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares called by warrants
100,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
120,000 
6,250,000 
 
10,000 
90,000 
6,000 
90,000 
 
 
2,200,000 
3,000,000 
50,000 
450,000 
550,000 
1,800,000 
 
Warrant exercise price (in dollars per share)
$ 5.00 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 1.15 
$ 1.15 
 
$ 5.00 
$ 2.50 
$ 2.50 
$ 2.50 
 
 
 
$ 1.00 
$ 5.00 
$ 1.00 
$ 1.00 
 
 
Term of warrant
10 years 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5 years 
5 years 
 
5 years 
 
 
5 years 
 
 
 
 
5 years 
 
 
 
 
Number of advisors
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Value of common stock called by warrants
 
 
 
 
$ 85,950 
 
 
 
 
$ 85,950 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 326,000 
$ 42,000 
$ 86,250 
 
$ 14,700 
 
$ 10,000 
 
 
 
$ 1,100,000 
 
 
 
 
$ 900,000 
 
Amortization of warrant service cost
 
 
 
 
 
 
 
 
 
5,145 
46,810 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34,200 
7,800 
 
 
 
 
 
 
 
Number of shares issued for services
 
 
 
1,110,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized general and administrative expense
 
 
 
 
 
12,194 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair market value of common stock issued recorded as prepaid expense
 
 
 
 
 
 
 
168,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of preferred stock and warrants sold
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares issued to group of private investors
 
24,000 
241,663 
 
 
 
 
 
 
 
 
 
 
 
180,000 
150,000 
250,000 
 
 
 
 
 
 
 
 
187,500 
36,000 
 
30,000 
50,000 
 
 
 
 
 
 
 
 
 
 
Value of shares issued to group of private investors
 
 
724,989 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value of common stock issued (in dollars per share)
 
$ 0.001 
$ 0.001 
 
$ 0.001 
 
 
$ 0.001 
 
$ 0.001 
 
$ 0.001 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Value of warrants issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,000 
 
 
 
625,000 
 
 
 
 
 
 
85,500 
104,500 
 
 
Number of individual investor
 
 
 
18 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expense
 
 
 
 
1,022,078 
 
1,313,170 
872,625 
466,200 
2,107,058 
2,185,795 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares vested
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
60,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, shares authorized
 
 
 
 
20,000,000 
 
 
 
 
20,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, par value (in dollars per share)
 
 
 
 
$ 0.001 
 
 
 
 
$ 0.001 
 
 
 
 
 
 
$ 0.001 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimum equity financing under down-round protection feature
 
 
 
 
 
 
 
 
 
 
 
 
 
 
286,000 
 
1,000,000 
1,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,000,000 
 
 
 
 
 
 
 
 
Maximum common stock issuance price per share (in dollars per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 2.50 
$ 2.50 
 
 
 
$ 1,000 
 
 
 
 
 
 
 
 
 
$ 2.50 
 
 
 
 
 
 
 
 
Conversion price
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 2.50 
 
 
 
 
$ 0.80 
$ 0.80 
$ 2.50 
$ 0.80 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.80 
Number of shares converted
 
 
 
 
 
 
 
 
 
 
 
 
580,000 
580,000 
 
 
 
 
500 
 
5,615,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,250 
Number of shares issued in conversion
 
 
 
 
 
 
 
 
 
 
 
 
 
1,812,500 
 
 
 
 
10,000 
625,000 
 
1,812,500 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds received from the Series B financing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5,000,000 
5,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share price (in dollars per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 1,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, redemption terms
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A) 115% of the conversion amount and (B) the product of (1) the conversion rate in effect at such time and (2) the greatest closing sale price of the Common Stock during the period beginning on the date immediately preceding such triggering event and ending on the date such holder delivers the notice of redemption. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, conversion rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,250:1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liquidation preference value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 4,500,000 
 
$ 4,500,000 
$ 4,500,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Deficit and Preferred Stock Subject to Redemption (Detail Textuals 1) (USD $)
3 Months Ended 6 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended 1 Months Ended 3 Months Ended 6 Months Ended 1 Months Ended
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
General and administrative expense
Jun. 30, 2016
General and administrative expense
Jun. 30, 2016
Stock Option
Jun. 30, 2015
Stock Option
Jun. 30, 2016
Omnibus Incentive Plan 2014
Stock Option
Dec. 31, 2015
Omnibus Incentive Plan 2014
Stock Option
Jun. 30, 2016
Omnibus Incentive Plan 2014
Restricted stock awards
Oct. 20, 2015
Omnibus Incentive Plan 2014
Restricted stock awards
Senior management and board of directors
Jun. 30, 2016
Omnibus Incentive Plan 2014
Restricted stock awards
Senior management and board of directors
Jun. 30, 2016
Omnibus Incentive Plan 2014
Restricted stock awards
Senior management and board of directors
Oct. 20, 2015
Omnibus Incentive Plan 2014
Restricted stock awards
Minimum
Senior management and board of directors
Oct. 20, 2015
Omnibus Incentive Plan 2014
Restricted stock awards
Maximum
Senior management and board of directors
Equity [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares reserved for future grants
 
 
 
 
 
 
 
3,200,000 
 
 
 
 
 
 
 
Aggregate number of shares granted
 
 
 
 
 
 
 
1,180,000 
 
 
 
 
 
 
 
Number of shares available for future grant
 
 
 
 
 
 
 
820,000 
 
 
 
 
 
 
 
Expiry period of options granted
 
 
 
 
 
 
 
10 years 
 
 
 
 
 
 
 
Percentage of option price at least of fair value on date of grants
 
 
 
 
 
 
 
100.00% 
 
 
 
 
 
 
 
Voting percentage of common stock
 
 
 
 
 
 
 
10.00% 
 
 
 
 
 
 
 
Percentage of fair value option price at date of grants
 
 
 
 
 
 
 
110.00% 
 
 
 
 
 
 
 
Maximum exercisable period of fair value of option
 
 
 
 
 
 
 
5 years 
 
 
 
 
 
 
 
Vested period of shares
 
 
 
 
 
 
 
5 years 
 
 
 
 
 
1 year 
3 years 
Remaining contractual life of options outstanding
 
 
 
 
 
 
 
8 years 5 months 5 days 
 
 
 
 
 
 
 
Aggregate intrinsic value of options outstanding
 
 
 
 
 
 
 
$ 73,500 
 
 
 
 
 
 
 
Number of restricted stock awards granted
 
 
 
 
 
 
 
 
 
1,200,000 
1,200,000 
 
 
 
 
Recognized stock-based compensation expense
123,351 
 
259,699 
181,608 
363,216 
 
 
 
 
 
 
93,750 
187,500 
 
 
Total amount of unrecognized compensation cost related to non-vested stock options
 
1,213,571 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized period of non-vested stock options
 
3 years 4 months 21 days 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend yield
 
 
 
 
 
   
0.00% 
 
 
 
 
 
 
 
 
Options outstanding
 
 
 
 
 
 
 
1,180,000 
1,180,000 
 
 
 
 
 
 
Options to purchase shares of common stock, exercisable
 
 
 
 
 
 
 
226,000 
 
 
 
 
 
 
 
Fair market value of shares granted
 
 
 
 
 
 
 
 
 
 
$ 900,000 
 
 
 
 
Provision for Conversion of Preferred Stock (Detail Textuals) (USD $)
1 Months Ended 3 Months Ended 6 Months Ended 1 Months Ended 3 Months Ended 6 Months Ended
Jun. 30, 2016
Dec. 31, 2015
Aug. 21, 2015
Series A preferred stock
Aug. 31, 2015
Series A preferred stock
Jul. 31, 2015
Series A preferred stock
Apr. 30, 2015
Series A preferred stock
Jun. 30, 2015
Series A preferred stock
Jun. 30, 2016
Series A preferred stock
Jun. 30, 2015
Series A preferred stock
Mar. 31, 2016
Series B Preferred Stock
Dec. 31, 2015
Series B Preferred Stock
Aug. 21, 2015
Series B Preferred Stock
Aug. 31, 2015
Series B Preferred Stock
Jun. 30, 2016
Series B Preferred Stock
Jun. 30, 2016
Series B Preferred Stock
Conversion of Stock [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimum equity financing under down-round protection feature
 
 
 
 
$ 286,000 
$ 1,000,000 
 
$ 1,000,000 
 
 
 
 
 
 
 
Maximum common stock issuance price per share (in dollars per share)
 
 
 
 
 
$ 2.50 
 
$ 2.50 
 
 
 
 
$ 1,000 
 
 
Fair value of the conversion feature
105,660 
84,090 
 
 
 
 
700,000 
 
700,000 
 
 
 
 
 
 
Proceeds received from the Series B financing
 
 
 
 
 
 
 
 
 
 
 
5,000,000 
5,000,000 
 
 
Number of additional shares issued
 
 
 
 
180,000 
 
 
 
 
 
 
1,232,000 
 
 
 
Shares issued, price per share (in dollars per share)
 
 
$ 2.50 
 
 
 
 
 
 
 
 
$ 0.80 
 
 
 
Change in fair value of conversion rights of preferred stock
 
 
 
 
 
 
$ 700,000 
 
$ 700,000 
 
 
$ 986,000 
 
$ (31,414)
$ 21,814 
Number of shares converted
 
 
580,000 
580,000 
 
 
 
 
 
500 
 
5,615,000 
 
 
Conversion price
 
 
 
$ 2.50 
 
 
 
 
 
$ 0.80 
$ 0.80 
$ 2.50 
$ 0.80 
 
 
Series B Warrants (Details) (Series B Warrants, USD $)
6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Class of Warrant or Right [Line Items]
 
 
Dividend yield
0.00% 
   
Volatility factor
70.00% 
   
Weighted-average fair value of warrants granted during the periods
$ 0.13 
    
Minimum
 
 
Class of Warrant or Right [Line Items]
 
 
Risk-free interest rate
1.11% 
 
Expected term (years)
4 years 1 month 21 days 
 
Maximum
 
 
Class of Warrant or Right [Line Items]
 
 
Risk-free interest rate
1.29% 
 
Expected term (years)
4 years 1 month 24 days 
 
Series B Warrants (Detail Textuals) (USD $)
1 Months Ended 3 Months Ended 6 Months Ended 1 Months Ended 6 Months Ended
Apr. 30, 2015
Jun. 30, 2016
Jun. 30, 2016
Dec. 31, 2015
Mar. 31, 2016
Series B Warrants
Jun. 30, 2016
Series B Warrants
Class of Warrant or Right [Line Items]
 
 
 
 
 
 
Number of warrants issued
 
 
 
 
 
6,437,500 
Warrant exercise price (in dollars per share)
$ 5.00 
 
 
 
 
$ 1.15 
Warrants
 
$ 781,811 
$ 781,811 
$ 759,386 
 
$ 2,935,800 
Proceeds received from the Series B financing
 
 
 
 
 
5,000,000 
Series B warrants
 
842,325 
842,325 
2,454,959 
2,866,439 
 
Term of warrant
10 years 
 
 
 
4 years 4 months 21 days 
 
Change in fair market value at the re-measurement date recorded as non-operating expense
 
$ (2,024,114)
$ (1,612,634)
 
$ 411,480 
 
Warrants, expiration period
 
 
 
 
 
5 years