NEMUS BIOSCIENCE, INC., 10-Q filed on 11/14/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Nov. 14, 2017
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
 
30,970,663 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2017 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
CONSOLIDATED BALANCE SHEETS (USD $)
Sep. 30, 2017
Dec. 31, 2016
Current assets
 
 
Cash and cash equivalents
$ 41,978 
$ 64,820 
Restricted cash
4,428 
37,500 
Prepaid expenses
253,481 
170,155 
Other current assets
6,183 
7,014 
Total current assets
306,070 
279,489 
Property and equipment, net
2,645 
9,584 
Other assets
 
 
Deposits and other assets
34,290 
34,290 
Total other assets
34,290 
34,290 
Total assets
343,005 
323,363 
Current liabilities
 
 
Accounts payable
990,123 
274,650 
Accrued payroll and related expenses
445,498 
167,337 
Accrued license and patent reimbursement fees
80,893 
 
Accrued expenses
115,492 
98,700 
Provision for conversion of Series B preferred stock
24,428 
118,821 
Deferred rent
 
2,450 
Total current liabilities
1,656,434 
661,958 
Noncurrent liabilities
 
 
Series B warrants
791,813 
1,112,308 
Total noncurrent liabilities
791,813 
1,112,308 
Total liabilities
2,448,247 
1,774,266 
Commitments and contingencies (Note 3)
   
   
Stockholders' deficit
 
 
Common stock, $0.001 par value; 236 million shares authorized; 30,670,663 issued and outstanding as of September 30, 2017 and 21,563,163 issued and outstanding as of December 31, 2016
30,671 
21,563 
Additional paid-in-capital
9,159,372 
7,163,064 
Warrants
982,911 
837,711 
Accumulated deficit
(13,402,687)
(10,936,573)
Total stockholders' deficit
(3,229,733)
(2,914,235)
Total liabilities and stockholders' deficit
343,005 
323,363 
Redeemable Convertible Series B Preferred Stock
 
 
Noncurrent liabilities
 
 
Redeemable Convertible Preferred Stock, value
955,045 
1,169,663 
Series C preferred stock
 
 
Noncurrent liabilities
 
 
Redeemable Convertible Preferred Stock, value
 
293,669 
Series D Preferred Stock
 
 
Noncurrent liabilities
 
 
Redeemable Convertible Preferred Stock, value
$ 169,446 
 
CONSOLIDATED BALANCE SHEETS (Parentheticals) (USD $)
Sep. 30, 2017
Dec. 31, 2016
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
30,670,663 
21,563,163 
Common stock, shares outstanding
30,670,663 
21,563,163 
Redeemable Convertible Series B Preferred Stock
 
 
Preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
20,000,000 
20,000,000 
Preferred stock, shares issued
3,291,375 
4,031 
Preferred stock, shares outstanding
3,291,375 
4,031 
Issuance costs
$ 403,171 
 
Liquidation preference value
3,300,000 
 
Series C preferred stock
 
 
Preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
20,000,000 
20,000,000 
Preferred stock, shares issued
386 
Preferred stock, shares outstanding
386 
Series D preferred stock
 
 
Preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
20,000,000 
20,000,000 
Preferred stock, shares issued
200 
 
Preferred stock, shares outstanding
200 
 
Issuance costs
30,557 
 
Liquidation preference value
$ 200,000 
 
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Operating expenses
 
 
 
 
Research and development
$ 88,550 
$ 80,525 
$ 241,302 
$ 675,840 
General and administrative
673,080 
775,623 
2,631,408 
2,882,682 
Total operating expenses
761,630 
856,148 
2,872,710 
3,558,522 
Operating loss
(761,630)
(856,148)
(2,872,710)
(3,558,522)
Other expense (income)
 
 
 
 
Change in fair value of warrant liability
(281,497)
27,665 
(320,495)
(1,584,969)
Change in fair value of conversion rights of Series B preferred stock
61,058 
(88,532)
82,872 
Net Loss before income taxes
(480,133)
(944,871)
(2,463,683)
(2,056,425)
Provision for income taxes
 
400 
2,431 
1,200 
Net loss
(480,133)
(945,271)
(2,466,114)
(2,057,625)
Less: Preferred deemed dividend
 
 
711,000 
 
Net loss applicable to common shareholders
$ (480,133)
$ (945,271)
$ (3,177,114)
$ (2,057,625)
Basic earnings per common share (in dollars per share)
$ (0.02)
$ (0.05)
$ (0.12)
$ (0.10)
Diluted earnings per common share (in dollars per share)
$ (0.02)
$ (0.05)
$ (0.12)
$ (0.10)
Weighted average shares of common stock outstanding
 
 
 
 
Basic (in shares)
30,191,744 
19,913,163 
27,068,308 
19,910,426 
Diluted (in shares)
30,191,744 
19,913,163 
27,068,308 
19,910,426 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $)
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net loss
$ (2,466,114)
$ (2,057,625)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
6,801 
11,505 
Loss on disposal of fixed assets
138 
 
Stock-based compensation expense
456,507 
544,823 
Amortization of warrants and stock issued for services
20,000 1
51,539 1
Change in fair value of conversion rights of Series B preferred stock
(88,532)
82,872 
Change in fair value of warrant liabilities
(320,495)
(1,584,969)
Common stock issued for services
187,550 
 
Changes in assets and liabilities:
 
 
Restricted cash
33,072 
 
Prepaid expenses
(73,326)1
(119,361)1
Other current assets
831 
7,500 
Accounts payable
715,473 
262,016 
Accrued payroll and related expenses
278,161 
25,534 
Accrued license and patent reimbursement fees
80,893 
(17,500)
Accrued expenses and other liabilities
14,342 
(96,497)
Net cash used in operating activities
(1,154,699)
(2,890,163)
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 Series D preferred stock issuance, net of $183,343 issuance costs
1,131,857 
 
Net cash provided by financing activities
1,131,857 
 
Net (decrease) in cash and cash equivalents
(22,842)
(2,901,279)
Cash and cash equivalents, beginning of period
64,820 
3,221,209 
Cash and cash equivalents, end of period
41,978 
319,930 
Cash paid during the period for:
 
 
Interest
   
   
Income taxes
$ 1,631 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Parentheticals) (USD $)
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Value of warrants issued to purchase shares of common stock for consulting services
$ 30,000 
$ 22,245 
Preferred deemed dividend
711,000 
 
Series C preferred stock
 
 
Preferred deemed dividend
175,000 
 
Series D preferred stock
 
 
Series D preferred stock issuance costs
183,343 
 
Preferred deemed dividend
$ 536,000 
 
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 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 September 30, 2017, 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.

 

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. Such estimates and judgments are utilized for stock-based compensation expense and equity securities with embedded features as discussed below.

 

Liquidity and Going Concern

 

The Company has incurred operating losses and negative cash flows from operations since our inception. As of September 30, 2017, we had cash and cash equivalents of $41,978. In November 2017, the Company entered into a Series F Preferred Stock Financing (see Note 8) for gross proceeds totaling $2,000,000. The Company anticipates that it will continue to incur net losses into the foreseeable future in order to advance and develop a number of potential drug candidates into preclinical development activities and support 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 were 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’s continued existence is dependent on its ability to raise additional sufficient funding to cover operating expenses and to invest in operations and development activities. The Company plans to continue to pursue funding through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, the Company cannot provide any assurances 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 reduce spending, extend payment terms with suppliers, liquidate assets where possible, suspend or curtail planned programs or cease operations.

 

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 $4,428 as of September 30, 2017 and $37,500 as of December 31, 2016 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 liabilities, or other inputs that are observable or can be corroborated by observable market data.

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 recent third party independent appraisal.

 

Property and Equipment, Net

 

As of September 30, 2017, property and equipment, net, was $2,645, consisting primarily of computers and equipment. 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 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.

 

Convertible Instruments

 

We account for hybrid contracts that feature conversion options in accordance with generally accepted accounting principles in the United States. ASC 815, Derivatives and Hedging Activities (“ASC 815”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

 

We account for convertible instruments when we have determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”). Under ASC 470-20, we record, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. We account for convertible instruments (when we have determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract is allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

 

We also follow ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) in its evaluation of the accounting for a hybrid instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception (for example, a payable settled with a variable number of the issuer’s equity shares); (b) variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor's S&P 500 Index and settled with a variable number of the issuer’s equity shares); or (c) variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled). Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives, and are carried as a liability at fair value at each balance sheet date with a re-measurement reported in interest expense in the accompanying Consolidated Statements of Operations.

 

Warrants Issued in Connection with Financings

 

We generally account for warrants issued in connection with debt and equity financings as a component of equity, unless the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility that we may need to settle the warrants in cash. For warrants issued with a conditional obligation to issue a variable number of shares or the deemed possibility of a cash settlement, we record the fair value of the warrants as a liability at each balance sheet date and record changes in fair value in other (income) expense in the Consolidated Statements of Operations.

 

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 weighted 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 505-50, Equity - Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee awards is periodically re-measured over the vesting terms and at each quarter end.

 

Segment Information

 

FASB 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 income (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 nine months ended September 30, 2017 and 2016, the comprehensive income (loss) was equal to the net income (loss).

 

Earnings per share

 

The Company applies FASB ASC No. 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 shares of common stock outstanding. Diluted earnings or loss per share would include the dilutive effect of outstanding warrants and awards granted to employees under stock-based compensation plans. Potentially dilutive shares of the Company's common stock are excluded from the calculation of diluted loss per common share because their effect would be anti-dilutive for the periods presented. For the three and nine month periods ended September 30, 2017, 3,291.375 shares of Series B Preferred Stock convertible into 13,165,500 common shares at $0.25 per share, 200 shares of Series D Preferred Stock convertible into 800,000 common shares at $0.25 per share, warrants to purchase 11,649,500 common shares and stock options exercisable for 1,130,000 common shares outstanding at the end of the period are excluded from the calculation of diluted loss per common share. For the three and nine month periods ended September 30, 2016, 4,492 shares of Series B Preferred Stock convertible into 5,615,000 common shares at $0.80 per share, warrants to purchase 10,879,500 common shares and stock options exercisable for 1,142,500 common shares outstanding at the end of the period are excluded from the calculation of diluted loss per common share.

 

Recent accounting pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-9, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Adoption is permitted as early as the first quarter of 2017 and is required by the first quarter of 2018. Given that the Company has no revenues to date, we plan to adopt this pronouncement when initial revenue recognition occurs.

 

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 the adoption of ASU No. 2016-02 may have on its consolidated financial statements. The Company will adopt this ASU beginning on January 1, 2019 and will utilize the modified retrospective transition approach, as prescribed within this ASU.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 Statement of Cash Flows (Topic 230) that requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. For public companies, the guidance is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements and will adopt this ASU beginning on January 1, 2018.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

University of Mississippi Agreements
University of Mississippi Agreements

2. University of Mississippi 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. 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 $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 UM 5050 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 period from June 14, 2017 to December 14, 2017.

 

UM 8930 analogue 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, an analogue 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 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 a six-month option period that has subsequently been renewed under the same financial terms and conditions. The most recent renewal occurred for the period from June 14, 2017 to December 14, 2017.

 

UM 5070 license agreement:

 

On January 10, 2017, the Company entered into a license agreement with UM pursuant to which UM granted the Company an exclusive, perpetual license, including the right to sublicense, under intellectual property related to UM 5070, a platform of cannabinoid-based molecules to research, develop and commercialize products for the treatment of infectious diseases. The license agreement culminates roughly one year of screening and target molecule identification studies especially focused on therapy-resistant infectious organisms like methicillin-resistant Staphylococcus aureus (MRSA). The license agreement contains certain milestone and royalty payments, as defined therein. There was a one-time upfront payment of $65,000 paid in four equal monthly installments that started on February 1, 2017. There is an annual fee of $25,000 per license agreement, payable on the anniversary of each effective date. The aggregate milestone payment under the license agreements, if the milestones are achieved, is $0.7 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.

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 UM campus. The lease term commenced on October 1, 2014 and expires on December 31, 2017. There is 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 expired on October 31, 2016 and our monthly rent was $5,373, payable in equal monthly installments with annual escalations. There was no subsequent renewal upon expiration of this lease. The Company currently maintains its principal executive offices located in a shared office suite located at 600 Anton Blvd., Suite 1100, Costa Mesa, CA, 92626 under a month-to-month agreement.

 

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 September 30, 2017 and 2016, was $54,555 and $79,771, respectively. For the nine months ended September 30, 2017 and 2016, total net rent expense from operating leases was $168,863 and $240,746, respectively.

 

Future minimum payments under the non-cancelable portion of our operating leases as of September 30, 2017 are as follows:

 

Years ended December 31,

 

 

 

2017

 

$ 8,066

 

2018

 

 

-

 

2019

 

 

-

 

2020

 

 

-

 

2021

 

 

-

 

Thereafter

 

 

-

 

Total

 

$ 8,066

 

 

Related Party Matters

 

In June 2014, our subsidiary entered into an independent contractor agreement with K2C, Inc. (“K2C”), which is wholly owned by the Company’s Executive Chairman and Co-Founder, Mr. Cosmas N. Lykos, pursuant to which we pay K2C a monthly fee for services performed by Mr. Lykos for our company. The agreement expired on June 1, 2017 and was automatically renewed for one year pursuant to the terms of the agreement. The monthly fee under the agreement was $10,000 and increased to $20,000 effective April 1, 2017. For the nine months ended September 30, 2017 and 2016, total expense incurred under this agreement was $150,000 and $90,000 respectively. Total expense incurred under this agreement was $60,000 for the three months ended September 30, 2017 and $30,000 for the three months ended September 30, 2016. The Company had an outstanding balance of $150,000 due to K2C as of September 30, 2017. Under the agreement, Mr. Lykos is also eligible to participate in our health, death and disability insurance plans. In addition, Mr. Lykos is a participant in our change in control severance plan.

 

Legal Matters

 

General Litigation and Disputes

 

From time to time, in the normal course of our operations, we may be a party to litigation and other dispute matters and claims. . Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable outcome to any legal matter, if material, could have a materially adverse effect on our operations or our financial position, liquidity or results of operations. As of September 30, 2017, there were no pending or threatened lawsuits or claims that could reasonably be expected to have a material effect on the Company’s financial position or results of operations, but the Company has subsequently filed a petition commencing arbitration as described in Note 8. Subsequent Events – Pending Series E Preferred Stock Financing and Filing for Arbitration.

 

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 September 30, 2017, the Company had no 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' pro-drug 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 did not recognize any research and development expense towards these fees for the three and nine months ended September 30, 2017. The Company recognized $18,896 and $225,244, respectively, as research and development expense towards these fees for the three and nine months ended September 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 and Convertible Series C & D Preferred Stock
Stockholders' Deficit and Redeemable Convertible Series B and Convertible Series C & D Preferred Stock

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

 

Common Stock

 

In March 2016, a Series B Preferred stockholder converted 8 shares of its 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. In October 2016, as a result of the Series C Preferred Stock Agreement (discussed below), the conversion price of the Series B Preferred Stock was reset to $0.40. From October 2016 to December 31, 2016, Series B Stockholders converted 461 shares of its preferred stock to common stock, resulting in the issuance of 1,152,500 shares of common stock.

 

In October 2016, the Company entered into a technology license agreement with a third-party manufacturing company in order to biosynthetically manufacture cannabinoids. The terms of the agreement called for the issuance of 100,000 shares of common stock. The Company recorded $50,000 as research and development expense for the fourth quarter of 2016 to reflect the fair market value of the common stock issued. The fair market value was determined utilizing the Company's closing stock price as of the approval date of the license agreement by the Company’s Board of Directors.

 

In December 2016, a Series C Preferred stockholder converted 39 shares of its preferred stock to common stock as allowed under the Series C Preferred Stock Agreement, resulting in the issuance of 97,500 shares of common stock at an effective price of $0.40 per share. On December 29, 2016, as a result of the signing of the Series D Preferred Stock Agreement (discussed below), the conversion price of the Series B and Series C Preferred Stock was reset to $0.25. From the date of this reset to December 31, 2016, a Series C Stockholder converted 75 shares of its preferred stock to common stock, resulting in the issuance of 300,000 shares of common stock.

 

In March 2017, the Company issued 605,000 shares of common stock with par value of $0.001 to a third party in exchange for advisory services performed related to raising additional capital. The Company recorded $187,550 as general and administrative expense for the first quarter of 2017 to reflect the fair market value of the common stock issued. The fair market value was determined utilizing the Company's closing stock price as of the approval date of the advisory fee by the Company’s Board of Directors.

 

For the nine months ended September 30, 2017, a Series C Preferred stockholder converted 386 shares of its preferred stock to common stock as allowed under the Series C Preferred Stock Agreement, resulting in the issuance of 1,544,000 shares of common stock at an effective price of $0.25 per share. This represented the completion of converting all of the original Series C Preferred shares to common stock.

 

For the three and nine months ended September 30, 2017, the Series B Preferred stockholders converted 84 and 739.625 shares, respectively, of their preferred stock to common stock as allowed under the Series B Preferred Stock Agreement, resulting in the issuance of 336,000 and 2,958,500 shares of common stock at an effective price of $0.25 per share.

 

For the three and nine months ended September 30, 2017, the Series D Preferred stockholders converted 506 and 1,000 shares, respectively, of their preferred stock as allowed under the Series D Preferred Stock Agreement, resulting in the issuance of 2,024,000 and 4,000,000 shares of common stock at an effective price of $0.25 per share.

 

Preferred Stock

 

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

 

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 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. In October 2016, as a result of the Series C Preferred Stock Agreement (as discussed below), the conversion price of the Series B Preferred Stock was reset to $0.40. On December 29, 2016, as a result of the Series D Preferred Stock Agreement (as discussed below), the conversion price of the Series B Preferred Stock was reset to $0.25. The Series B Preferred Stock has 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. 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, subject to reset, and expire five years from the issuance date.

 

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 $0.25, subject to down-round adjustment, multiplied by the as-if converted share amount of 13,165,500 common shares, totaling $3.291 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 stockholders 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 Securities and Exchange Commission, or 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; and

·

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. As further described in Note 8, Series B Preferred Stock Amendment, we amended the terms of the Series B Preferred Stock to exclude certain financing transactions from triggering the redemption right described above.

 

In December 2015, a Series B Preferred stockholder converted 500 shares of its 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 its preferred stock to common stock at the same ratio resulting in the issuance of 10,000 shares of common stock. In October 2016, as a result of the Series C Preferred Stock Agreement (discussed below), the conversion price of the Series B Preferred Stock was reset to $0.40. From October 2016 to December 31, 2016, Series B Stockholders converted 461 shares of its preferred stock to common stock, at the conversion rate of 2,500:1 resulting in the issuance of 1,152,500 shares of common stock. On December 29, 2016, as a result of the Series D Preferred Stock Agreement (as discussed below), the conversion price of the Series B Preferred Stock was reset to $0.25. For the three and nine months ended September 30, 2017, Series B stockholders converted 84 and 739.625 shares, respectively, at a conversion rate of 4000:1 resulting in the issuance of 336,000 and 2,958,500 shares of common stock. As a result of these conversions, the liquidation preference for the Series B Preferred Stock has been reduced to $3.291 million as of September 30, 2017.

 

Convertible Series C Preferred Stock: In October 2016, the Company sold 500 shares of Series C convertible preferred stock with a purchase price of $1,000 per share for gross proceeds of $500,000 to a healthcare investment fund under the Series C Preferred Stock Agreement. Each share of Series C Preferred Stock is convertible into 2,500 shares of common stock which results in an effective conversion price of $0.40 per common share. This resulted in the reduction of the conversion price of the Series B Preferred Stock to $0.40 and a reduction in the exercise price of the Series B warrants to $0.40. On December 29, 2016, as a result of the Series D Preferred Stock Agreement (as discussed below), the conversion price of the Series C Preferred Stock was reset to $0.25. As part of the terms of the Series C Preferred Stock Agreement, the Company entered into a Registration Rights Agreement with the purchaser to file a registration statement to register for resale the shares of common stock underlying the preferred shares within 30 days following the closing of the agreement. Each Preferred Stock is convertible into common stock at any time at the election of the investor. The terms of the Series C Convertible Preferred Stock are as follows:

 

·

Dividends: Except for stock dividends or other distributions payable in shares of common stock, for which adjustments are to be made to the conversion price, as described below, the stockholder shall be entitled to receive dividends on preferred stock equal to (on an as-if-converted-to-common-stock basis) and in the same form as dividends actually paid on shares of the common stock. No other dividends shall be paid on the preferred stock.

·

Conversion: The preferred stock may be converted at any time, at the option of the holder, into shares of common stock at a conversion price of $0.25 per share (“Series C Conversion Price”). The Series C Conversion Price will be adjusted for customary structural changes such as stock splits or stock dividends. In the event that the Company enters into a merger, consolidation or transaction of a similar effect, the Series C stockholder shall be entitled to receive, upon conversion of the preferred stock, the number of shares of common stock of the successor or acquiring corporation of the Company, if it is the surviving corporation, and any additional consideration that would have been received by a holder of the number of shares of common stock into which the preferred stock is convertible immediately prior to such event.

 

·

Down-Round Protection: The Series C Conversion Price is also subject to “down-round” anti-dilution adjustment which means that if the Company sells common stock or common stock equivalents at a price below the Series C Conversion Price, the Series C Conversion Price will be reduced to an amount equal to the issuance price of such additional shares of common stock or common stock equivalents.

·

Voting Rights: Except as required by law, the Series C Preferred Stock does not have voting rights.

·

Most Favored Nation Provision: If there is a subsequent financing, the Series C stockholder may elect to exchange its Series C Preferred Stock for the security issued on a dollar for dollar basis.

 

·

Participation Rights: For a twelve month period from the date of the financing, the Series C investors will have the right to participate in subsequent financings up to fifty percent of such financing.

·

Liquidation Provision: In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the Series C Preferred stockholder receives an amount per share equal to the conversion price of $0.40, subject to down-round adjustment, multiplied by the as-if converted share amount of 1,250,000 common shares. If upon the liquidation, the assets are insufficient to permit payments to the Series C and Series D holders, all assets legally available will be distributed to the Series B Preferred stockholders and then any remaining amount is distributed on a pro rata basis among the Series C and Series D 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.

 

The Series C 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 because the Most Favored Nation provision is a redemption feature that is outside the control of the Company.

 

At the date of the financing, because the effective conversion rate of the preferred stock was less than the market value of the Company’s common stock, a beneficial conversion feature of $325,000 has been recorded as a discount to the preferred stock and an increase to additional paid in capital. Because the preferred stock is perpetual, in October 2016, the Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statement of operations.

 

In December 2016, the Series C Preferred stockholder converted 39 shares of its preferred stock to common stock as allowed under the Series C Preferred Stock Agreement, resulting in the issuance of 97,500 shares of common stock at an effective price of $0.40 per share. On December 29, 2016, as a result of the signing of the Series D Preferred Stock Agreement (as discussed below), the conversion price of the Series B and Series C Preferred Stock was reset to $0.25. From the date of this reset to December 31, 2016, a Series C Stockholder converted 75 shares of their preferred stock to common stock, resulting in the issuance of 300,000 shares of common stock. For the three months ended March 31, 2017, the Series C stockholder converted 386 shares at a conversion rate of 4000:1 resulting in the issuance of 1,544,000 shares of common stock. As a result, all Series C Preferred Stock has been converted to common stock and there is no liquidation preference outstanding as of September 30, 2017.

 

In addition, as a result of the Series D financing and the adjustment in the conversion price, a beneficial conversion feature of $175,000 has been recorded as a discount to the preferred stock and an increase to additional paid in capital. Because the preferred stock is perpetual, in January 2017, the Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statement of operations.

 

Convertible Series D Preferred Stock: In January 2017, the Company sold 1,200 shares of Series D convertible preferred stock with a purchase price of $1,000 per share for gross proceeds of $1,200,000 to a healthcare investment fund and other private investors under the Series D Preferred Stock Agreement. Each share of Series D Preferred Stock is convertible into 4,000 shares of common stock which results in an effective conversion price of $0.25 per common share. This resulted in the reduction of the conversion price of the Series B and Series C Preferred Stock to $0.25 and a reduction in the exercise price of the Series B warrants to $0.25. As part of the terms of the Series D Preferred Stock Agreement, the Company entered into a Registration Rights Agreement with the purchasers to file a registration statement to register for resale the shares of common stock underlying the preferred shares within 30 days following the closing of the agreement. Each Preferred Stock is convertible into common stock at any time at the election of the investor. The terms of the Series D Convertible Preferred Stock are identical to those of the Series C Convertible Preferred Stock agreement discussed above with the exception of the conversion price which is $0.25 per common share.

 

The Series D stock has liquidation preference over common stock. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, Series D Preferred stockholders receive an amount per share equal to the conversion price of $0.25, subject to down-round adjustment, multiplied by the as-if converted share amount of 800,000 common shares, totaling $0.2 million as of September 30, 2017.

 

The Company also considered the classification of the Series D Preferred Stock Agreement, the Series D 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 because the Most Favored Nation provision is a redemption feature that is outside the control of the Company.

 

At the date of the financing, because the effective conversion rate of the preferred stock was less than the market value of the Company’s common stock, a beneficial conversion feature of $536,000 has been recorded as a discount to the preferred stock and an increase to additional paid in capital. Because the preferred stock is perpetual, in January 2017, the Company fully amortized the discount related to the beneficial conversion feature on the deemed dividend in the consolidated statement of operations.

 

For the three and nine months ended September 30, 2017, the Series D stockholders converted 0 and 1,000 shares, respectively, at a conversion rate of 4000:1 and a conversion price of $0.25 per share resulting in the issuance of 2,024,000 and 4,000,000 shares of common stock.

 

 

Pending Series E Preferred Stock: On May 3, 2017, the Company entered into a securities purchase agreement to sell 1,000,000 shares of a new Series E Preferred Stock, par value $0.001 per share, at a purchase price of $20.00 for each preferred share for aggregate gross proceeds of $20,000,000 (the “Series E Preferred Stock Financing”). The purchaser did not provide funding to close the transaction on July 10, 2017 as required under the securities purchase agreement. In connection with the signing of the securities purchase agreement, an affiliate of the purchaser entered into a financial guarantee to the benefit of the Company that provides for payment of the purchase price in full within 90 days of exercise. The Company exercised this guarantee on July 12, 2017 and the guarantor failed to honor the guarantee. The Company has subsequently filed a petition commencing arbitration as described in Note 8. Subsequent Events – Pending Series E Preferred Stock Financing and Filing for Arbitration..

 

Warrants

 

Warrants vested and outstanding as of September 30, 2017 are summarized as follows:

 

Amount

Exercise

Term

Issued and

Source

Price

(Years)

Outstanding

Pre 2015 Common Stock Warrants

$

1.00

6-10

4,000,000

2015 Common Stock Warrants

$

1.15-$5.00

5-10

442,000

2015 Series B Financing (see Note 6)

Common Stock Warrants to Series B Stockholders

$

0.25

5

6,250,000

Placement Agent Warrants

$

0.25

5

187,500

2016 Common Stock Warrants to Service Providers

$

1.15

10

40,000

2016 Series C Placement Agent Warrants

$

0.40

5

125,000

2017 Series D Placement Agent Warrants

$

0.25

5

480,000

2017 Common Stock Warrants to Service Providers

$

0.41

5

125,000

Total warrants vested and outstanding as of September 30, 2017

11,649,500

 

2016 Warrants

 

In November 2016, 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 40,000 shares of common stock with an exercise price of $1.15 per share with a term of ten years. The Company estimated the warrant value to be $18,400 utilizing the Black-Scholes option pricing model and recorded this amount to general and administrative expense for the fourth quarter due to the immediate vesting.

 

In November 2016, the Company issued 125,000 warrants to purchase common stock to its investment banker in exchange for services rendered in conjunction with the Series C Preferred Stock financing. The warrants vest immediately and have an exercise price of $0.40 per share with a term of five years. The Company estimated the value of the warrants to be $37,500 utilizing the Black-Scholes option pricing model and recorded this amount to issuance costs.

 

2017 Warrants

 

In January 2017, the Company issued 480,000 warrants to purchase common stock to its investment banker in exchange for services rendered in conjunction with the Series D Preferred Stock financing. The warrants vest immediately and have an exercise price of $0.25 per share with a term of five years. The Company estimated the value of the warrants to be $115,200 utilizing the Black-Scholes option pricing model and recorded this amount to issuance costs.

 

In February 2017, 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 125,000 shares of common stock with an exercise price of $0.41 per share with a term of five years. The Company estimated the warrant value to be $30,000 utilizing the Black-Scholes option pricing model and recorded this amount to general and administrative expense for the quarter due to the immediate vesting.

   

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 as of March 31, 2016, June 30, 2016, September 30, 2016, December 31, 2016, March 31, 2017, and June 30, 2017;

·

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;

·

The state of the IPO market for similarly situated biotechnology companies; and

·

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 a 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 September 30, 2017, options (net of canceled or expired options) covering an aggregate of 1,130,000 shares of the Company's common stock had been granted under the 2014 Plan, and the Company had 1,130,000 options outstanding and 870,000 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 1,130,000 shares net of cancellations and expirations through September 30, 2017 under the 2014 Plan.

     

The following is a summary of activity under the 2014 Plan as of September 30, 2017:

    

Options Outstanding

Weighted

for Grant of

Average

Options &

Number of

Price per

Exercise

Shares

Shares

Share

Price

Balance at December 31, 2016

857,500

1,142,500

$

0.42-3.00

$

0.61

Options granted

-

-

$

-

$

-

Options exercised

-

-

$

-

$

-

Options cancelled

12,500

(12,500

)

$

1.15

$

1.15

Balance at September 30, 2017

870,000

1,130,000

$

0.42-3.00

$

0.60

Vested and Exercisable at September 30, 2017

452,000

$

0.42-3.00

$

0.60

 

The weighted-average remaining contractual term of options vested and exercisable at September 30, 2017 was approximately 7.14 years.

 

The 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 September 30, 2017 for those stock options for which the quoted market price was in excess of the exercise price ("in-the-money options"). As of September 30, 2017, the aggregate intrinsic value of options outstanding was $0. As of September 30, 2017, 452,000 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 nine months ended September 30, 2017 and 2016, the Company recorded $65,625 and $196,875 during each period, in stock-based compensation expense related to these awards, as discussed below. The total amount of unrecognized compensation cost related to non-vested RSAs was $284,375 as of September 30, 2017.

 

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 nine months ended September 30, 2017, the Company recognized stock-based compensation expense of $152,172 and $456,510 (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 nine months ended September 30, 2016, stock-based compensation expense was $181,608 and $544,823, respectively.

 

The total amount of unrecognized compensation cost related to non-vested stock options was $1,048,158 as of September 30, 2017. This amount will be recognized over a weighted average period of 2.15 years.

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

5. Provision for Conversion of Preferred Stock

 

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 would affect another sale or issuance of common stock, stock options or convertible securities with a price per share below $0.80. 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 derivative was valued at $75,488 and was booked as a current liability as of September 30, 2015. 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, 2017, 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 was classified as a current liability and was adjusted to $25,051 as of June 30, 2017. The Company assessed the fair market value as of September 30, 2017 and determined that no additional adjustment was necessary. The change in fair market value was recorded as non-operating income of $0 and $88,532, respectively, for the three and nine months ended September 30, 2017.For the quarter ended September 30, 2016, the Company also conducted a third-party valuation utilizing the same methodology. The change in fair market value was recorded as non-operating expense of $61,058 for the three months ended September 30, 2016 and $82,872 as non-operating expense for the nine months ended September 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 exercise price is automatically adjusted down to the price of the instrument being issued. In October 2016, as a result of the Series C Preferred Stock financing, the exercise price was adjusted to $0.40 and in December, 2016, as a result of the Series D Preferred Stock financing, the exercise price was adjusted to $0.25. 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 also performed the same valuation as of September 30, 2017 utilizing the Black-Scholes pricing model and the following assumptions:

 

Nine Months

Ended September 30,

2017

2016

Dividend yield

0.00

%

0.00

%

Volatility factor

70.00

%

70.00

%

Risk-free interest rate

1.58

%

1.11-1.29

%

Expected term (years)

3.15

4.14-4.15

Weighted-average fair value of warrants

$

0.17

$

0.13

 

This resulted in a warrant value of $791,813 as of September 30, 2017. The change in fair market value at the re-measurement date was recorded as non-operating income totaling $281,497 and $320,495 for the three and nine months ended September 30, 2017, respectively. The Company performed the same valuation as of September 30, 2016, utilizing the same methodology. This resulted in a warrant value of $869,990 as of September 30, 2016. The change in fair market value at the re-measurement date was recorded as non-operating expense totaling $27,665 for the three months ended September 30, 2016 and non-operating income totaling $1,584,969 for the nine months ended September 30, 2016.

Income Taxes
Income Taxes

7. Income Taxes

 

Under the FASB's accounting guidance related to income tax positions, among other things, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a fifty (50) % likelihood of being sustained. Additionally, the guidance provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

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 September 30, 2017. As a result of this valuation allowance there are no income tax benefits reflected in the accompanying consolidated statement of operations to offset pre-tax losses.

 

The Company has no uncertain tax positions as of September 30, 2017.

Subsequent Events
Subsequent Events

8. Subsequent Events

 

Pending Series E Preferred Stock Financing and Filing for Arbitration

 

On May 3, 2017, the Company entered into a securities purchase agreement with a purchaser to sell 1,000,000 shares of a new Series E Preferred Stock, par value $0.001 per share, at a purchase price of $20.00 for each preferred share for aggregate gross proceeds of $20,000,000. The securities purchase agreement provides for no conditions precedent to the close and that closing is not to occur later than July 10, 2017. The purchaser did not provide funding to close the transaction on July 10, 2017 as required under the securities purchase agreement and requested an extension of the closing date. In connection with the signing of the securities purchase agreement, an affiliate of the purchaser entered into a financial guarantee to the benefit of the Company that provided for payment of the purchase price in full within 90 days of exercise. The Company exercised this guarantee on July 12, 2017. The guarantor has failed to pay the $20,000,000 within 90 days of notice of the purchaser’s default, as required by the terms of the guaranty.

 

On November 8, 2017, the Company filed a petition commencing arbitration against the purchaser and guarantor as well as other related individuals. In the petition, the Company asserts, among other things, breach of contract against the purchaser for its failure to close its purchase of Series E Preferred Stock as required by the securities purchase agreement. The Company also asserts a breach of contract claim against the guarantor for its failure to honor its guarantee of the transaction. The petition was filed with Judicial Arbitration and Mediation Services, Inc., ENDISPUTE in Orange County, California, as required by the securities purchase agreement. The Company has engaged its legal counsel in the matter on a contingent-fee basis and intends to purse damages and remedies in connections with these agreements.

 

Series F Preferred Stock Financing

 

On November 1, 2017, the Company entered into a Securities Purchase Agreement to sell 2,000 shares of Series F Convertible Preferred Stock to certain accredited investors at a purchase price of $1,000 for each Preferred Share for aggregate gross proceeds of $2,000,000. The Company consummated the issuance and sale of the Preferred Shares on the same day. The Series F Preferred Shares are convertible into shares of the Company’s common stock at a conversion price of $0.15 per share and provide for anti-dilution protection, rights upon various transactions, certain redemption and liquidation preferences and adjustments for any dividends. The Company has agreed to register the underlying shares of Company common stock and as a result of the issuance of the Series F Preferred Shares, the conversion price of outstanding Series B and Series C Preferred Stock was reset to $0.15. The Company intends to use the proceeds of the Financing for general corporate purposes, including, without limitation, to pay down past due obligations and other working capital items.

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. Such estimates and judgments are utilized for stock-based compensation expense and equity securities with embedded features as discussed below.

Liquidity and Going Concern

 

The Company has incurred operating losses and negative cash flows from operations since our inception. As of September 30, 2017, we had cash and cash equivalents of $41,978. In November 2017, the Company entered into a Series F Preferred Stock Financing (see Note 8) for gross proceeds totaling $2,000,000. The Company anticipates that it will continue to incur net losses into the foreseeable future in order to advance and develop a number of potential drug candidates into preclinical development activities and support 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 were 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’s continued existence is dependent on its ability to raise additional sufficient funding to cover operating expenses and to invest in operations and development activities. The Company plans to continue to pursue funding through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, the Company cannot provide any assurances 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 reduce spending, extend payment terms with suppliers, liquidate assets where possible, suspend or curtail planned programs or cease operations.

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 $4,428 as of September 30, 2017 and $37,500 as of December 31, 2016 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 liabilities, or other inputs that are observable or can be corroborated by observable market data.

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 recent third party independent appraisal.

Property and Equipment, Net

 

As of September 30, 2017, property and equipment, net, was $2,645, consisting primarily of computers and equipment. 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 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.

Convertible Instruments

 

We account for hybrid contracts that feature conversion options in accordance with generally accepted accounting principles in the United States. ASC 815, Derivatives and Hedging Activities (“ASC 815”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

 

We account for convertible instruments when we have determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”). Under ASC 470-20, we record, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. We account for convertible instruments (when we have determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract is allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

 

We also follow ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) in its evaluation of the accounting for a hybrid instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception (for example, a payable settled with a variable number of the issuer’s equity shares); (b) variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor's S&P 500 Index and settled with a variable number of the issuer’s equity shares); or (c) variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled). Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives, and are carried as a liability at fair value at each balance sheet date with a re-measurement reported in interest expense in the accompanying Consolidated Statements of Operations.

Warrants Issued in Connection with Financings

 

We generally account for warrants issued in connection with debt and equity financings as a component of equity, unless the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility that we may need to settle the warrants in cash. For warrants issued with a conditional obligation to issue a variable number of shares or the deemed possibility of a cash settlement, we record the fair value of the warrants as a liability at each balance sheet date and record changes in fair value in other (income) expense in the Consolidated Statements of Operations.

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 weighted 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 505-50, Equity - Equity Based Payments to Non-Employees, using the Black-Scholes option-pricing model. The value of such non-employee awards is periodically re-measured over the vesting terms and at each quarter end.

Segment Information

 

FASB 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 income (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 nine months ended September 30, 2017 and 2016, the comprehensive income (loss) was equal to the net income (loss).

Earnings per share

 

The Company applies FASB ASC No. 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 shares of common stock outstanding. Diluted earnings or loss per share would include the dilutive effect of outstanding warrants and awards granted to employees under stock-based compensation plans. Potentially dilutive shares of the Company's common stock are excluded from the calculation of diluted loss per common share because their effect would be anti-dilutive for the periods presented. For the three and nine month periods ended September 30, 2017, 3,291.375 shares of Series B Preferred Stock convertible into 13,165,500 common shares at $0.25 per share, 200 shares of Series D Preferred Stock convertible into 800,000 common shares at $0.25 per share, warrants to purchase 11,649,500 common shares and stock options exercisable for 1,130,000 common shares outstanding at the end of the period are excluded from the calculation of diluted loss per common share. For the three and nine month periods ended September 30, 2016, 4,492 shares of Series B Preferred Stock convertible into 5,615,000 common shares at $0.80 per share, warrants to purchase 10,879,500 common shares and stock options exercisable for 1,142,500 common shares outstanding at the end of the period are excluded from the calculation of diluted loss per common share.

Recent accounting pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-9, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Adoption is permitted as early as the first quarter of 2017 and is required by the first quarter of 2018. Given that the Company has no revenues to date, we plan to adopt this pronouncement when initial revenue recognition occurs.

 

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 the adoption of ASU No. 2016-02 may have on its consolidated financial statements. The Company will adopt this ASU beginning on January 1, 2019 and will utilize the modified retrospective transition approach, as prescribed within this ASU.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15 Statement of Cash Flows (Topic 230) that requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. For public companies, the guidance is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements and will adopt this ASU beginning on January 1, 2018.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

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

Years ended December 31,

 

 

 

2017

 

$ 8,066

 

2018

 

 

-

 

2019

 

 

-

 

2020

 

 

-

 

2021

 

 

-

 

Thereafter

 

 

-

 

Total

 

$ 8,066

 

Stockholders' Deficit and Redeemable Convertible Series B and Convertible Series C & D Preferred Stock (Tables)

Amount

Exercise

Term

Issued and

Source

Price

(Years)

Outstanding

Pre 2015 Common Stock Warrants

$

1.00

6-10

4,000,000

2015 Common Stock Warrants

$

1.15-$5.00

5-10

442,000

2015 Series B Financing (see Note 6)

Common Stock Warrants to Series B Stockholders

$

0.25

5

6,250,000

Placement Agent Warrants

$

0.25

5

187,500

2016 Common Stock Warrants to Service Providers

$

1.15

10

40,000

2016 Series C Placement Agent Warrants

$

0.40

5

125,000

2017 Series D Placement Agent Warrants

$

0.25

5

480,000

2017 Common Stock Warrants to Service Providers

$

0.41

5

125,000

Total warrants vested and outstanding as of September 30, 2017

11,649,500

Options Outstanding

Weighted

for Grant of

Average

Options &

Number of

Price per

Exercise

Shares

Shares

Share

Price

Balance at December 31, 2016

857,500

1,142,500

$

0.42-3.00

$

0.61

Options granted

-

-

$

-

$

-

Options exercised

-

-

$

-

$

-

Options cancelled

12,500

(12,500

)

$

1.15

$

1.15

Balance at September 30, 2017

870,000

1,130,000

$

0.42-3.00

$

0.60

Vested and Exercisable at September 30, 2017

452,000

$

0.42-3.00

$

0.60

Series B Warrants (Tables)
Schedule of Series B Warrants

Nine Months

Ended September 30,

2017

2016

Dividend yield

0.00

%

0.00

%

Volatility factor

70.00

%

70.00

%

Risk-free interest rate

1.58

%

1.11-1.29

%

Expected term (years)

3.15

4.14-4.15

Weighted-average fair value of warrants

$

0.17

$

0.13

Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Detail Textuals) (USD $)
9 Months Ended 3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 0 Months Ended
Sep. 30, 2017
Segments
Dec. 31, 2016
Sep. 30, 2016
Dec. 31, 2015
Sep. 30, 2017
Warrants
Sep. 30, 2016
Warrants
Sep. 30, 2017
Warrants
Sep. 30, 2016
Warrants
Sep. 30, 2017
Stock Option
Sep. 30, 2016
Stock Option
Sep. 30, 2017
Stock Option
Sep. 30, 2016
Stock Option
Sep. 30, 2017
Series B Preferred Stock
Sep. 30, 2016
Series B Preferred Stock
Sep. 30, 2017
Series B Preferred Stock
Sep. 30, 2016
Series B Preferred Stock
Sep. 30, 2017
Series D Preferred Stock
Sep. 30, 2017
Series D Preferred Stock
Nov. 1, 2017
Series F preferred stock
Subsequent event
Securities purchase agreement
Nature of Operations, Business Activities and Summary of Significant Accounting Policies [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$ 41,978 
$ 64,820 
$ 319,930 
$ 3,221,209 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash
4,428 
37,500 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
2,645 
9,584 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross proceeds received
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 2,000,000 
Property, plant and equipment, depreciation methods
Straight-line method 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property plant and equipment estimated useful life
Two to three years 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of reportable segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive excluded from the calculation of diluted loss per common share
 
 
 
 
11,649,500 
10,879,500 
11,649,500 
10,879,500 
1,130,000 
1,142,500 
1,130,000 
1,142,500 
 
 
 
 
 
 
 
Number of preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
3,291,375 
4,492 
3,291,375 
4,492 
200 
200 
 
Number of shares issued upon conversion
 
 
 
 
 
 
 
 
 
 
 
 
13,165,500 
5,615,000 
13,165,500 
5,615,000 
800,000 
800,000 
 
Conversion of stock price per share
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.25 
$ 0.80 
$ 0.25 
$ 0.80 
$ 0.25 
$ 0.25 
 
University of Mississippi Agreements (Detail Textuals) (University of Mississippi, USD $)
1 Months Ended 0 Months Ended
Jul. 31, 2013
Sep. 29, 2014
UM 5050 pro-drug agreements
Intellectual Property
License_agreements
Oct. 15, 2014
UM 5050 pro-drug agreements
Intellectual Property
October 2014
Dec. 14, 2015
UM 8930 pro-drug agreements
Intellectual Property
License_agreements
Dec. 14, 2015
UM 8930 pro-drug agreements
Intellectual Property
December 2015
Feb. 1, 2017
UM 5070 license agreement
Intellectual Property
Jan. 10, 2017
UM 5070 license agreement
Intellectual Property
University Of Mississippi Agreements [Line Items]
 
 
 
 
 
 
 
Term of agreement
5 years 
 
 
 
 
 
 
Number of license agreements
 
 
 
 
 
Notice period for termination
 
60 days 
 
60 days 
 
 
60 days 
One time up front payment
 
 
$ 10,000 
 
$ 10,000 
 
$ 65,000 
Annual fees for license agreement
 
25,000 
 
25,000 
 
25,000 
 
Aggregate milestone payments if milestones achieved
 
$ 2,100,000 
 
$ 1,400,000 
 
$ 700,000 
 
Commitments and Contingencies - Summary of Future minimum payments (Details) (USD $)
Sep. 30, 2017
Commitments and Contingencies Disclosure [Abstract]
 
2017
$ 8,066 
2018
2019
2020
2021
Thereafter
Total
$ 8,066 
Commitments and Contingencies (Detail Textuals) (USD $)
0 Months Ended 1 Months Ended 3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 1 Months Ended 0 Months Ended 3 Months Ended 9 Months Ended 0 Months Ended
Apr. 1, 2017
Mar. 31, 2017
Nov. 30, 2015
Sep. 30, 2014
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Independent Contractor Agreements
Contract manufacturing organization ("CMO")
Sep. 30, 2016
Independent Contractor Agreements
Contract manufacturing organization ("CMO")
Sep. 30, 2017
Independent Contractor Agreements
Contract manufacturing organization ("CMO")
Sep. 30, 2016
Independent Contractor Agreements
Contract manufacturing organization ("CMO")
Oct. 31, 2014
Lease agreement
sqft
Feb. 5, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Sep. 30, 2016
Letter agreement ("Agreement")
Contract manufacturing organization ("CMO")
Sep. 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 
$ 54,555 
$ 79,771 
$ 168,863 
$ 240,746 
 
 
 
 
$ 5,373 
 
 
 
 
 
Fees and expenses for the initial evaluation and development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18,896 
225,244 
154,000 
183,000 
Estimated analytical method development and qualification
 
 
 
 
 
 
 
 
 
 
 
 
 
142,900 
 
 
 
 
Monthly fee
20,000 
10,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total expense incurred under agreement
 
 
 
 
 
 
 
 
60,000 
30,000 
150,000 
90,000 
 
 
 
 
 
 
Outstanding balance due to K2C
 
 
 
 
 
 
 
 
$ 150,000 
 
$ 150,000 
 
 
 
 
 
 
 
Stockholders' Deficit and Redeemable Convertible Series B and Convertible Series C & D Preferred Stock (Details) (USD $)
9 Months Ended
Sep. 30, 2017
Class of Warrant or Right [Line Items]
 
Warrants vested and outstanding
$ 11,649,500 
Pre 2015 Common Stock Warrants
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 1.00 
Warrants vested and outstanding
4,000,000 
Pre 2015 Common Stock Warrants |
Minimum
 
Class of Warrant or Right [Line Items]
 
Term of warrant
6 years 
Pre 2015 Common Stock Warrants |
Maximum
 
Class of Warrant or Right [Line Items]
 
Term of warrant
10 years 
2015 Common Stock Warrants
 
Class of Warrant or Right [Line Items]
 
Warrants vested and outstanding
442,000 
2015 Common Stock Warrants |
Minimum
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 1.15 
Term of warrant
5 years 
2015 Common Stock Warrants |
Maximum
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 5.00 
Term of warrant
10 years 
2015 series B financing Common Stock Warrants to Series B Stockholders
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 0.25 
Term of warrant
5 years 
Warrants vested and outstanding
6,250,000 
2015 Series B financing Placement Agent Warrants
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 0.25 
Term of warrant
5 years 
Warrants vested and outstanding
187,500 
2016 Common Stock Warrants to Service Providers
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 1.15 
Term of warrant
10 years 
Warrants vested and outstanding
40,000 
2016 Series C Placement Agent Warrants
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 0.40 
Term of warrant
5 years 
Warrants vested and outstanding
125,000 
2017 Series D Placement Agent Warrants
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 0.25 
Term of warrant
5 years 
Warrants vested and outstanding
480,000 
2017 Common Stock Warrants to Service Providers
 
Class of Warrant or Right [Line Items]
 
Warrant exercise price
$ 0.41 
Term of warrant
5 years 
Warrants vested and outstanding
$ 125,000 
Stockholders' Deficit and Redeemable Convertible Series B and Convertible Series C & D Preferred Stock - Summary of option activity under 2014 Plan (Details 1) (Stock Option, Omnibus Incentive Plan 2014, USD $)
9 Months Ended
Sep. 30, 2017
Oct. 31, 2014
Shares Available For Grant Of Options & Shares
 
 
Balance at the beginning
857,500 
 
Options granted
 
Options exercised
 
Options cancelled
12,500 
 
Balance at the ending
870,000 
 
Number of Shares
 
 
Balance at the beginning
1,142,500 
1,130,000 
Options granted
 
Options exercised
 
Options cancelled
(12,500)
 
Balance at the ending
1,130,000 
1,130,000 
Vested and exercisable
452,000 
 
Price Per Share
 
 
Options granted
$ 0.00 
 
Options exercised
$ 0.00 
 
Options cancelled
$ 1.15 
 
Weighted Average Exercise Price
 
 
Balance at the beginning
$ 0.61 
 
Options granted
$ 0.00 
 
Options exercised
$ 0.00 
 
Options cancelled
$ 1.15 
 
Balance at the ending
$ 0.60 
 
Vested and exercisable
$ 0.60 
 
Minimum
 
 
Price Per Share
 
 
Balance at the beginning
$ 0.42 
 
Balance at the ending
$ 0.42 
 
Vested and exercisable
$ 0.42 
 
Maximum
 
 
Price Per Share
 
 
Balance at the beginning
$ 3.00 
 
Balance at the ending
$ 3.00 
 
Vested and exercisable
$ 3.00 
 
Stockholders' Deficit and Redeemable Convertible Series B and Convertible Series C & D Preferred Stock (Detail Textuals) (USD $)
1 Months Ended 3 Months Ended 9 Months Ended 1 Months Ended 3 Months Ended 9 Months Ended 1 Months Ended 3 Months Ended 1 Months Ended 3 Months Ended 9 Months Ended 0 Months Ended 1 Months Ended 1 Months Ended
Mar. 31, 2017
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Dec. 31, 2016
Dec. 29, 2016
Series B Preferred Stock
Oct. 31, 2016
Series B Preferred Stock
Mar. 31, 2016
Series B Preferred Stock
Dec. 31, 2015
Series B Preferred Stock
Aug. 31, 2015
Series B Preferred Stock
Sep. 30, 2017
Series B Preferred Stock
Dec. 31, 2016
Series B Preferred Stock
Sep. 30, 2017
Series B Preferred Stock
Aug. 20, 2015
Series B Preferred Stock
Dec. 29, 2016
Series C preferred stock
Dec. 31, 2016
Series C preferred stock
Oct. 31, 2016
Series C preferred stock
Mar. 31, 2017
Series C preferred stock
Jan. 31, 2017
Series D preferred stock
Oct. 31, 2016
Series D preferred stock
Sep. 30, 2017
Series D preferred stock
Sep. 30, 2017
Series D preferred stock
Dec. 31, 2016
Series D preferred stock
Dec. 29, 2016
Series D preferred stock
May 3, 2017
Series E Preferred Stock
Securities purchase agreement
Oct. 31, 2016
Technology License Agreement
Feb. 28, 2017
Warrants
Nov. 30, 2016
Warrants
Aug. 31, 2015
Warrants
Nov. 30, 2016
Warrants
Series C preferred stock
Jan. 31, 2017
Warrants
Series D preferred stock
Aug. 31, 2015
Common Stock
Equity [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares called by warrants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
125,000 
40,000 
6,250,000 
125,000 
480,000 
 
Warrant exercise price (in dollars per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.40 
 
 
 
 
 
$ 0.25 
$ 0.25 
 
 
$ 0.41 
$ 1.15 
$ 1.15 
$ 0.40 
$ 0.25 
 
Term of warrant
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 years 
10 years 
5 years 
5 years 
 
 
Value of common stock called by warrants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 30,000 
$ 18,400 
 
$ 37,500 
$ 115,200 
 
Number of shares issued for services
605,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
100,000 
 
 
 
 
 
 
Research and development expense
 
88,550 
80,525 
241,302 
675,840 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50,000 
 
 
 
 
 
 
Number of preferred stock and warrants sold
 
 
 
 
 
 
 
 
 
 
5,000 
 
 
 
 
 
 
500 
 
1,200 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value of common stock issued (in dollars per share)
$ 0.001 
$ 0.001 
 
$ 0.001 
 
$ 0.001 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, shares authorized
 
20,000,000 
 
20,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares sold
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.001 
 
 
 
 
 
 
 
Conversion price
 
 
 
 
 
 
$ 0.25 
$ 0.40 
$ 0.80 
 
$ 0.25 
$ 0.25 
 
$ 0.25 
 
$ 0.25 
$ 0.40 
$ 0.40 
$ 0.25 
$ 0.25 
 
$ 0.25 
$ 0.25 
 
 
 
 
 
 
 
 
 
$ 0.80 
Number of shares converted
 
 
 
 
 
 
 
 
500 
13,165,500 
84 
461 
739,625 
 
75 
39 
 
386 
 
 
506 
1,000 
 
 
 
 
 
 
 
 
 
1,250 
Number of shares issued in conversion
 
 
 
 
 
 
 
 
10,000 
625,000 
 
336,000 
1,152,500 
2,958,500 
 
300,000 
97,500 
 
1,544,000 
 
 
2,024,000 
4,000,000 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of preferred stock and warrants
 
 
 
 
 
 
 
 
 
 
5,000,000 
 
 
 
 
 
 
500,000 
 
1,200,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock, conversion rate
 
 
 
 
 
 
 
 
 
1,250:1 
 
4,000:1 
2,500:1 
4,000:1 
 
 
 
 
4,000:1 
 
 
4,000:1 
4,000:1 
 
 
 
 
 
 
 
 
 
 
Beneficial conversion feature upon issuance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
325,000 
 
536,000 
175,000 
 
 
 
 
 
 
 
 
 
 
 
 
Liquidation preference value
 
 
 
 
 
 
 
 
 
 
3,291,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate purchase price
 
 
 
 
 
 
 
 
 
 
$ 1,000 
 
 
 
 
 
 
$ 1,000 
 
$ 1,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of conversion amount
 
 
 
 
 
 
 
 
 
 
115.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Value of final judgment rendered against company
 
 
 
 
 
 
 
 
 
 
100,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of common stock issued upon conversion of preferred stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,500 
 
4,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liquidation provision common stock equivalent shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,250,000 
 
800,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liquidation provision common stock equivalent value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
200,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued, price per share (in dollars per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,000,000 
 
 
 
 
 
 
 
Shares issued, price per share (in dollars per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.80 
 
 
 
 
 
 
 
 
 
 
$ 20.00 
 
 
 
 
 
 
 
Gross proceeds received
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 20,000,000 
 
 
 
 
 
 
 
Stockholders' Deficit and Redeemable Convertible Series B and Convertible Series C & D Preferred Stock (Detail Textuals 1) (USD $)
3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended 1 Months Ended
Sep. 30, 2017
Sep. 30, 2017
Sep. 30, 2017
General and administrative expense
Mar. 31, 2017
General and administrative expense
Sep. 30, 2016
General and administrative expense
Sep. 30, 2017
General and administrative expense
Sep. 30, 2016
General and administrative expense
Oct. 31, 2014
Omnibus Incentive Plan 2014
Stock Option
Sep. 30, 2017
Omnibus Incentive Plan 2014
Stock Option
Dec. 31, 2016
Omnibus Incentive Plan 2014
Stock Option
Sep. 30, 2017
Omnibus Incentive Plan 2014
Restricted stock awards
Sep. 30, 2017
Omnibus Incentive Plan 2014
Restricted stock awards
Oct. 20, 2015
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of shares available for future grant
 
 
 
 
 
 
 
870,000 
 
 
 
 
 
 
 
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 
Weighted average remaining contractual term of options vested and exercisable (in years)
 
 
 
 
 
 
 
 
7 years 1 month 21 days 
 
 
 
 
 
 
Recognized stock-based compensation expense
$ 181,608 
$ 544,823 
$ 152,172 
$ 187,550 
$ 181,608 
$ 456,510 
$ 544,823 
 
 
 
$ 65,625 
$ 196,875 
 
 
 
Total amount of unrecognized compensation cost related to non-vested stock options
1,048,158 
1,048,158 
 
 
 
 
 
 
 
 
284,375 
284,375 
 
 
 
Recognized period of non-vested stock options
 
2 years 1 month 24 days 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of restricted stock awards granted
 
 
 
 
 
 
 
 
 
 
 
 
1,200,000 
 
 
Options to purchase shares of common stock, exercisable
 
 
 
 
 
 
 
 
452,000 
 
 
 
 
 
 
Options outstanding
 
 
 
 
 
 
 
1,130,000 
1,130,000 
1,142,500 
 
 
 
 
 
Fair market value of shares granted
 
 
 
 
 
 
 
 
 
 
 
 
900,000 
 
 
Aggregate intrinsic value of options outstanding
 
 
 
 
 
 
 
 
$ 0 
 
 
 
 
 
 
Provision for Conversion of Preferred Stock (Detail Textuals) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Jun. 30, 2017
Dec. 31, 2016
Sep. 30, 2015
Aug. 20, 2015
Series B Preferred Stock
Conversion of Stock [Line Items]
 
 
 
 
 
 
 
 
Fair value of the conversion feature
$ 24,428 
 
$ 24,428 
 
$ 25,051 
$ 118,821 
$ 75,488 
 
Shares issued, price per share (in dollars per share)
 
 
 
 
 
 
 
$ 0.80 
Change in fair value of conversion rights of Series B preferred stock
$ 0 
$ (61,058)
$ 88,532 
$ (82,872)
 
 
 
 
Series B Warrants (Details) (Series B Warrants, USD $)
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Class of Warrant or Right [Line Items]
 
 
Dividend yield
0.00% 
0.00% 
Volatility factor
70.00% 
70.00% 
Risk-free interest rate
1.58% 
 
Expected term (years)
3 years 1 month 24 days 
 
Weighted-average fair value of warrants
$ 0.17 
$ 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 $)
3 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Dec. 31, 2016
Oct. 31, 2016
Series C preferred stock
Jan. 31, 2017
Series D preferred stock
Dec. 31, 2016
Series D preferred stock
Dec. 29, 2016
Series D preferred stock
Sep. 30, 2017
Series B Warrants
Class of Warrant or Right [Line Items]
 
 
 
 
 
 
 
 
 
 
Number of warrants issued
 
 
 
 
 
 
 
 
 
6,437,500 
Warrant exercise price (in dollars per share)
 
 
 
 
 
$ 0.40 
 
$ 0.25 
$ 0.25 
$ 1.15 
Warrants
$ 982,911 
 
$ 982,911 
 
$ 837,711 
 
 
 
 
$ 2,935,800 
Proceeds received from the Series B financing
 
 
 
 
 
500,000 
1,200,000 
 
 
 
Series B warrants
791,813 
869,990 
791,813 
869,990 
1,112,308 
 
 
 
 
 
Change in fair market value at the re-measurement date recorded as non-operating income
$ 281,497 
$ (27,665)
$ 320,495 
$ 1,584,969 
 
 
 
 
 
 
Warrants, expiration period
 
 
 
 
 
 
 
 
 
5 years 
Subsequent Events (Detail Textuals) (Securities purchase agreement, USD $)
0 Months Ended
May 3, 2017
Series E Preferred Stock
Nov. 1, 2017
Series F preferred stock
Subsequent event
Subsequent Event [Line Items]
 
 
Number of shares sold
1,000,000 
2,000 
Preferred stock, par value (in dollars per share)
$ 0.001 
 
Shares issued, price per share (in dollars per share)
$ 20.00 
 
Gross proceeds received
$ 20,000,000 
$ 2,000,000 
Amount of purchase price of each shares
 
1,000 
Aggregate gross proceeds failed to pay guarantor
$ 20,000,000 
 
Common stock at a conversion price per share (in dollars per share)
 
$ 0.15