NEMUS BIOSCIENCE, INC., 10-Q filed on 11/14/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Nov. 13, 2014
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
Nemus Bioscience, Inc. 
 
Entity Central Index Key
0001516551 
 
Trading Symbol
lglr 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
16,000,000 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2014 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
CONSOLIDATED BALANCE SHEET (USD $)
Sep. 30, 2014
Dec. 31, 2013
Current assets
 
 
Cash and cash equivalents
$ 1,025,023 
    
Prepaid expenses and other current assets
79,728 
   
Total current assets
1,104,751 
   
Property and equipment, net
12,045 
 
Other assets
 
 
Deposits and other assets
9,000 
 
Total other assets
9,000 
   
Total assets
1,125,796 
   
Current liabilities
 
 
Accounts payable
 
2,153 
Accrued expenses
349,508 
180,000 
Total current liabilities
349,508 
182,153 
Commitments and contingencies (Note 3)
   
   
Stockholders' equity (deficit)
 
 
Common stock, no par value; 100 million shares authorized; 11,770,000 issued and outstanding as of September 30, 2014 and 7,770,000 issued and outstanding as of December 31, 2013
1,800,980 
1,000 
Warrants issued and outstanding - 4,000,000 at September 30, 2014; and 3,000,000 at December 31, 2013
190,000 
 
Accumulated deficit
(1,214,692)
(183,153)
Total stockholders' equity (deficit)
776,288 
(182,153)
Total liabilities and stockholders' equity
$ 1,125,796 
    
CONSOLIDATED BALANCE SHEET (Parentheticals) (USD $)
Sep. 30, 2014
Dec. 31, 2013
Statement Of Financial Position [Abstract]
 
 
Common stock, no par value (in dollars per share)
   
   
Common stock, shares authorized
100,000,000 
100,000,000 
Common stock, shares issued
11,770,000 
7,770,000 
Common stock, shares outstanding
11,770,000 
7,770,000 
Warrants issued
4,000,000 
3,000,000 
Warrants outstanding
4,000,000 
3,000,000 
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Operating expenses
 
 
 
 
Research and development
$ 195,000 
 
$ 195,000 
 
General and administrative
662,613 
30,101 
835,634 
90,303 
Total operating expenses
857,613 
30,101 
1,030,634 
90,303 
Operating loss
(857,613)
(30,101)
(1,030,634)
(90,303)
Provision for income taxes
905 
 
905 
 
Net loss
$ (858,518)
$ (30,101)
$ (1,031,539)
$ (90,303)
Basic and diluted (loss) per common share (in dollars per share)
$ (0.08)
$ 0.00 
$ (0.12)
$ (0.01)
Shares used in computing basic and diluted (loss) per share (in shares)
10,502,609 
7,770,000 
8,805,766 
7,770,000 
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (USD $)
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities:
 
 
Net loss
$ (1,031,539)
$ (90,303)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
344 
 
Changes in assets and liabilities:
 
 
Prepaid expenses, deposits, and other assets
(88,728)
 
Accounts payable and accrued expenses
167,355 
90,303 
Net cash used in operating activities
(952,568)
   
Cash flows from investing activities:
 
 
Purchases of property and equipment
(12,389)
 
Net cash used in investing activities
(12,389)
   
Cash flows from financing activities:
 
 
Proceeds from common stock issuance, net of offering costs of $10,020
1,989,980 
 
Net cash provided by financing activities
1,989,980 
   
Net decrease in cash and cash equivalents
1,025,023 
   
Cash and cash equivalents, beginning of period
   
 
Cash and cash equivalents, end of period
1,025,023 
 
Cash paid during the period for:
 
 
Interest
 
303 
Income taxes
$ 905 
 
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Parentheticals) (USD $)
9 Months Ended
Sep. 30, 2014
Statement of Cash Flows [Abstract]
 
Offering costs on common stock issuance
$ 10,020 
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 partnership with the University of Mississippi. The University of Mississippi ("UM") is federally permitted and licensed to cultivate cannabis for research and commercial purposes. Unless otherwise specified, references in these Notes to the Unaudited Consolidated Financial Statements to the "Company," "we" or "our" refer to Nemus Bioscience, Inc., a Nevada corporation formerly known as Load Guard Logistics, Inc. ("LGL"), together with its wholly-owned subsidiary, Nemus, a California corporation ("Nemus"). Nemus became the wholly owned subsidiary of Nemus Bioscience, Inc. through the Merger (as defined below).
Nemus Bioscience, Inc. (formerly LGL) was incorporated in Nevada on March 16, 2011. Nemus was incorporated in California on July 17, 2012. Our headquarters are located in Costa Mesa, California.
As of September 30, 2014, 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. Accordingly, the Company is considered to be in the development stage.
The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the U.S., or GAAP.
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, that are necessary for a fair statement of financial position, results of operations and cash flows. These consolidated financial statements should be read in conjunction with the financial statements included in the Company's Form 8-K filed on November 3, 2014. Operating results for the interim periods are not expected to be indicative of operating results for the Company's 2014 fiscal year.
Business Activities
On October 31, 2014, pursuant to an Agreement and Plan of Merger, dated October 17, 2014 (the "Merger Agreement"), LGL, Nemus Acquisition Corp. ("Acquisition Sub"), Nemus Bioscience, Inc. ("Name Change Merger Sub"), and Nemus , Acquisition Sub merged with and into Nemus and Nemus survived as a wholly-owned subsidiary of LGL (the "Merger"). Immediately after the Merger, LGL changed its name to "Nemus Bioscience, Inc." by merging with Name Change Merger Sub.  Pursuant to the Merger Agreement, each share of Nemus was exchanged for 12,880,000 shares of LGL.  Upon consummation of the Merger, we had 16,000,000 shares of common stock, no shares of preferred stock, and warrants to purchase 4,000,000 shares of common stock issued and outstanding.
The Merger is being accounted for as a reverse-merger and recapitalization. Nemus is the acquirer for financial reporting purposes and LGL is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Merger will be those of Nemus and will be recorded at the historical cost basis of Nemus, and the consolidated financial statements after completion of the Merger will include the assets and liabilities of LGL and Nemus, the historical operations of Nemus and the operations of the Nemus from and after the closing date of the Merger.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("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 financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. 
Liquidity and Going Concern
The Company has incurred operating losses and negative cash flows from operations since our inception. As of September 30, 2014, we had cash and cash equivalents of $1,025,023. In August of 2014, we raised an additional $1,100,000 (see note 4) to be utilized to fund ongoing operations. The Company anticipates that it will continue to incur net losses into the foreseeable future as it continues to advance and develop a number of potential drug candidates into preclinical development activities and expands its corporate infrastructure which includes the costs associated with being a public company. Without additional funding, management believes that the Company will not have sufficient funds to meet its obligations beyond September 2015. These conditions give rise to substantial doubt as to the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company is unable to secure adequate additional funding, the Company may be forced to make a reduction in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and does not believe it is exposed to any significant credit risk.
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. We do not have financial assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.
Property and Equipment, Net
As of September 30, 2014, the Company had $12,045, of property and equipment, net, consisting primarily of computers for its employees. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line methods based on the estimated useful life of the related assets. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.
The costs incurred for the rights to use licensed technologies in the research and development process, including licensing fees and milestone payments, will be charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired rights, and are capitalized in situations where there is an identified alternative future use. No cost associated with the use of licensed technologies has been capitalized to date.
Income Taxes
The Company accounts for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, and net operating loss carry forwards (the "NOLs") and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Any interest or penalties would be recorded in the Company's statement of operations in the period incurred.
The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. As a result there are no income tax benefits reflected in the statement of operations to offset pre-tax losses.
The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.
Revenue Recognition
The Company is a development stage enterprise 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; employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drug development activities; and facilities expense, depreciation and other allocated expenses; and equipment and laboratory supplies.
Stock-Based Compensation Expenses
Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options and warrants using the following assumptions:
· Exercise price - We determined the exercise price based on valuations using the best information available to management at the time of the valuations.
· Volatility – We estimate the stock price volatility based on industry peers who are also in the early development stage given the limited market data available in the public arena.
· Expected term - The expected term is based on a simplified method which defines the life as the average of the contractual term of the options and warrants and the weighted-average vesting period for all open awards.
· Risk-free rate - The risk-free interest rate for the expected term of the option or warrant is based on the average market rate on U.S. treasury securities in effect during the quarter in which the awards were granted.
· Dividends – The dividend yield assumption is based on our history and expectation of paying no dividends.
There was no stock-based compensation for the nine month periods ended September 30, 2014 and 2013.
Segment Information
The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 280, "Segment Reporting" establishes standards for reporting information about reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group ("CODM"), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profits based on product lines and routes to market. Based on the early development stage of our operation, we operate in a single reportable segment.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive loss, net of their related tax effect, arrived at a comprehensive loss. For the nine month periods ended September 30, 2014 and 2013, the comprehensive loss was equal to the net loss.
Earnings per share
 
                The Company applies FASB ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings or loss per share would include the dilutive effect of awards granted to employees under stock-based compensation plans, if any. There were no dilutive awards outstanding at September 30, 2014.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-10 "Development Stage Entities" (Topic 915). The objective of the ASU is to improve financial reporting by reducing the cost and complexity of associated with the incremental reporting requirements for development stage entities. The ASU removes all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the inception-to-date information and certain other disclosures. The ASU also eliminates an exception provided to development stage entities in Topic 810 "Consolidation" for determining whether an entity is a variable interest entity on the basis of amount of investment equity at risk. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Earlier adoption is permitted for any annual or interim period for which financial statements have not yet been issued. Accordingly, the Company has elected to adopt these changes effective July 17, 2012.
In June 2014, the FASB issued ASU No. 2014-12 "Compensation – Stock Compensation" (Topic 718). The ASU provides guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendment requires a performance target that affects vesting and that could be achieved after requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that such performance condition would be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. Those amendments are effective for annual reporting periods beginning after December 15, 2015, and interim periods therein. The Company is currently evaluating the potential impact that adoption may have on its financial statements.
University of Mississippi ("UM") Agreements
University of Mississippi ("UM") Agreements
2. University of Mississippi ("UM") Agreements
In July 2013, the Company entered into a Memorandum of Understanding (MOU) with the 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 can be terminated by either party upon providing a three month written notice.
On May 15, 2014, the Company entered into an Option Agreement in which UM granted Nemus a three-month option for conducting due diligence to exclusively license a suppository dosage form containing Dronabinol Hemi succinate and other esters ("NPC 4718"). UM waived its normal option fee of $7,500 per month during the option period. Upon exercise of the option, the Company agreed to negotiate in good faith a license agreement, which is discussed below.
On July 1, 2014, the Company entered into three additional Option Agreements, pursuant to which UM granted Nemus three-month exclusive options for conducting due diligence on the following three cannabinoid extracts to exclusively license them for the purposes of obtaining FDA approval and commercializing the extracts:
1) UM 1490 – trans mucosal delivery of cannabinoids
2) UM 5070 – treatment for methicillin-resistant Staphylococcus aureus infections
3) UM 8790 – ocular delivery of cannabinoids
On August 12, 2014, Nemus provided the requisite written notice to UM and exercised its option to exclusively license UM's rights to UM 1490, UM 5070 and UM 8790. 
On September 29, 2014, the Company executed these three license agreements for UM 1490, UM 5070 and UM 8790, respectively, which contain certain milestone and royalty payments, as defined therein. There is a one-time upfront payment of $65,000 per license agreement, payable in four equal monthly installments starting on October 1, 2014. There is an annual fee of $25,000 per license agreement, payable on the anniversary of each effective date. These licenses also require the Company to reimburse UM for patent cost incurred related to these products under license and in the case of UM 8790 the Company is required to reimburse sunk patent expenses of approximately $70,000. 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
The Company leases temporary headquarters facilities under month-to-month operating lease agreements. There are no future minimum commitments in excess of one year for the operating lease in place as of September 30, 2014. Monthly rent expense under this lease is $2,259, commencing June 23, 2014. Rent expense for the nine months ended September 30, 2014 was $6,844 and for the nine month period ended September 30, 2013 was $0.
UM Lease Agreement
On September 1, 2014, the Company signed an operating lease for laboratory and office space at the Innovation Hub, Insight Park located on the University of Mississippi campus. The lease term commences on October 1, 2014 and expires on December 31, 2017. There are annual escalating rent provisions and two months of free rent in the agreement. The total cash payments over the life of the lease will be divided by the total number of months in the lease period and the average rent will charged to expense each month during the lease period. The monthly amount to be charged to rent expense will be approximately $9,000.
Independent Contractor Agreements
The Company has entered into independent contractor agreements with individuals that are operating in the capacity of our management team, or that are serving in an advisory role. These agreements were effective at various dates commencing July 17, 2012, and can be terminated upon 30 days' notice. Independent contractor expense for the nine months ended September 30, 2014 and 2013 was $353,000 and $90,000, respectively. Two of these contractors accounted for 15% and 11% respectively of our total expenditures for the nine months ended September 30, 2014 and one accounted for 100% of our total expenditures for the nine months ended September 30, 2013.
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. Currently Nemus is not party to any litigation, dispute matters or claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as the litigation and events related thereto unfold. 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.
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, 2014, the Company had no current proceedings or inquiries.
Equity
Equity
4. Equity
Common Stock
On July 17, 2012, the Company issued 7,770,000 common shares with no par value and warrants (see first paragraph under warrants below) to its founders and one board member in exchange for the services provided to establish Nemus, valued at approximately $1,000.
In June of 2014, the Company sold 1,800,000 shares of common stock with no par value and warrants for a purchase price of $900,000 (the "June 2014 Stock Purchase Agreement") to a group of private investors. See additional discussion on warrants below.
In August of 2014, the Company sold 2,200,000 shares of common stock with no par value and warrants for a purchase price of $1,100,000 to a group of private investors. See additional discussion on warrants below.
Warrants
On July 17, 2012, the Company issued warrants to purchase up to 3,000,000 shares of our common stock to its founders and two advisors in consideration for services provided in the start-up of operations. The warrants are exercisable at a price of $1.00 per share and expire on June 20, 2023. The Company valued these warrants utilizing the Black-Scholes valuation model and they were determined to be of nominal value given the start-up nature of the Company's operations at the time of grant.
In conjunction with the June 2014 Stock Purchase Agreement, the Company issued warrants to purchase up to 450,000 shares of common stock to a group of private investors. The warrants are exercisable at a price of $1.00 per share and expire on June 12, 2020. The Company valued these warrants at $85,500. This amount was recorded as Warrants and was reclassified from the total consideration received for both the common stock and warrants purchased.
In August 2014 as part of the June 2014 Stock Purchase Agreement, the Company issued warrants to purchase up to 550,000 shares of common stock with an exercise price of $1.00 per share that expire in August 2020. The Company valued these warrants at $104,500. This amount was recorded as Warrants and was reclassified from the total consideration received for both the common stock and warrants purchased.
The Company's board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of the warrants, including:
· Contemporaneous valuation prepared by an independent third-party valuation specialist effective as of June 30, 2014,
· 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 private company,
· The Company's stage of development, business strategy and the material risks related to its business and industry,
· The valuation of publicly-traded companies in the biotechnology sectors,
· External market conditions affecting the biotechnology industry sectors,
· The likelihood of achieving a liquidity event for the holders of its common stock, such as an initial public offering, or IPO, or a sale of the Company, given prevailing market conditions, and
· The state of the IPO market for similarly situated privately held biotechnology companies.
There are significant judgments and estimates inherent in the determination of the fair value of the Company's warrants. These judgments and estimates include the assumptions regarding its future operating performance, the time to completing an IPO or other liquidity event and the determination of the appropriate valuation methods. If the Company had made different assumptions, its warrant valuation could have been significantly different.
Income Taxes
Income Taxes
5. Income Taxes
At September 30, 2014, the Company had net operating loss carry forwards ("NOLs") aggregating approximately $1,200,000 which, if not used, expire in 2034. The utilization of these NOLs may become subject to limitations based on past and future changes in ownership of the Company pursuant to Internal Revenue Code Section 382.
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 continue as a going concern and utilize its deferred tax assets, a valuation allowance for the full amount of the deferred tax assets has been established at September 30, 2014. As a result of this valuation allowance there are no income tax benefits reflected in the accompanying statement of operations to offset pre-tax losses.
The Company has no uncertain tax positions as of September 30, 2014 due to limited nature of its operations.
Subsequent Events
Subsequent Events
6. Subsequent Events
Common Stock Issuance to Individual Investors
In October 2014, the Company issued 1,110,000 common shares with no par value to eighteen individual investors that had participated in a prior entity founded by Nemus' then current president. Such entity has been insolvent and not operating since the inception date of Nemus. The issuance of these shares was in exchange for the signing of a release of claims against the Company, its President, and the former entity. The Company will record the settlement expense in the fourth quarter of 2014.
Corporate Headquarters Lease
In October, 2014, we signed a lease agreement for our corporate office headquarters that consists of approximately 3,684 square feet located at 650 Town Center Drive, Suite 620, Costa Mesa, CA 92626.   The lease expires on October 31, 2016 and our annual rent is $64,470, payable in equal monthly installments with annual escalations.
University of Mississippi Option Agreement.
On October 15, 2014, we signed a renewable option agreement for the rights to explore other routes of delivery of UM5050 not yet agreed upon and/or in combination with other cannabinoids or other compatible compounds. There is a one-time up-front option payment of $10,000 due on November 15, 2014 and the option period is for six months expiring on March 31, 2015. At the end of the option period, the Company has the right to renew for an additional six months under the same financial terms and conditions.
Stock Incentive Plans
On October 31, 2014, after the closing of the Merger, our Board of Directors approved the Nemus Bioscience, Inc. 2014 Omnibus Incentive Plan (the "2014 Plan") and granted 1,080,000 options to purchase shares of its common stock pursuant to the 2014 Plan, with the exercise price for such options to be determined based on the fair value of a share of the Company's common stock on the date of grant, as determined by the Company's next available independent third-party valuation.
Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Policies)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("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 financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Liquidity and Going Concern
The Company has incurred operating losses and negative cash flows from operations since our inception. As of September 30, 2014, we had cash and cash equivalents of $1,025,023. In August of 2014, we raised an additional $1,100,000 (see note 4) to be utilized to fund ongoing operations. The Company anticipates that it will continue to incur net losses into the foreseeable future as it continues to advance and develop a number of potential drug candidates into preclinical development activities and expands its corporate infrastructure which includes the costs associated with being a public company. Without additional funding, management believes that the Company will not have sufficient funds to meet its obligations beyond September 2015. These conditions give rise to substantial doubt as to the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company plans to continue to fund its losses from operations and capital funding needs through public or private equity or debt financings, strategic collaborations, licensing arrangements, asset sales, government grants or other arrangements. However, the Company cannot be sure that such additional funds will be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If the Company is unable to secure adequate additional funding, the Company may be forced to make a reduction in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying value of those investments approximates their fair market value due to their short maturity and liquidity. Cash and cash equivalents include cash on hand and amounts on deposit with financial institutions, which amounts may at times exceed federally insured limits. The Company has not experienced any losses on such accounts and does not believe it is exposed to any significant credit risk.
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. We do not have financial assets or liabilities that are measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.
 
Property and Equipment, Net
As of September 30, 2014, the Company had $12,045, of property and equipment, net, consisting primarily of computers for its employees. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line methods based on the estimated useful life of the related assets. Maintenance and repairs that do not extend the life of assets are charged to expense when incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reported in the period the transaction takes place.
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount exceeds the fair value of the asset.
The costs incurred for the rights to use licensed technologies in the research and development process, including licensing fees and milestone payments, will be charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired rights, and are capitalized in situations where there is an identified alternative future use. No cost associated with the use of licensed technologies has been capitalized to date.
Income Taxes
The Company accounts for our deferred income tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities, and net operating loss carry forwards (the "NOLs") and other tax credit carry forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Any interest or penalties would be recorded in the Company's statement of operations in the period incurred.
The Company records a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized. In making such determinations, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. As a result there are no income tax benefits reflected in the statement of operations to offset pre-tax losses.
The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.
Revenue Recognition
The Company is a development stage enterprise 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; employee-related expenses, which include salaries, benefits and stock-based compensation for the personnel involved in our preclinical and clinical drug development activities; and facilities expense, depreciation and other allocated expenses; and equipment and laboratory supplies.
Stock-Based Compensation Expenses
Stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. We use the Black-Scholes option pricing model for estimating the grant date fair value of stock options and warrants using the following assumptions:
· Exercise price - We determined the exercise price based on valuations using the best information available to management at the time of the valuations.
· Volatility – We estimate the stock price volatility based on industry peers who are also in the early development stage given the limited market data available in the public arena.
· Expected term - The expected term is based on a simplified method which defines the life as the average of the contractual term of the options and warrants and the weighted-average vesting period for all open awards.
· Risk-free rate - The risk-free interest rate for the expected term of the option or warrant is based on the average market rate on U.S. treasury securities in effect during the quarter in which the awards were granted.
· Dividends – The dividend yield assumption is based on our history and expectation of paying no dividends.
There was no stock-based compensation for the nine month periods ended September 30, 2014 and 2013.
Segment Information
The Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 280, "Segment Reporting" establishes standards for reporting information about reportable segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group ("CODM"), in deciding how to allocate resources and in assessing performance. The CODM evaluates revenues and gross profits based on product lines and routes to market. Based on the early development stage of our operation, we operate in a single reportable segment.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the financial statements in the period in which they are recognized. Net income (loss) and other comprehensive loss, net of their related tax effect, arrived at a comprehensive loss. For the nine month periods ended September 30, 2014 and 2013, the comprehensive loss was equal to the net loss.
Earnings per share
 
   The Company applies FASB ASC 260, "Earnings per Share." Basic earnings (loss) per share is computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings or loss per share would include the dilutive effect of awards granted to employees under stock-based compensation plans, if any. There were no dilutive awards outstanding at September 30, 2014.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-10 "Development Stage Entities" (Topic 915). The objective of the ASU is to improve financial reporting by reducing the cost and complexity of associated with the incremental reporting requirements for development stage entities. The ASU removes all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the inception-to-date information and certain other disclosures. The ASU also eliminates an exception provided to development stage entities in Topic 810 "Consolidation" for determining whether an entity is a variable interest entity on the basis of amount of investment equity at risk. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Earlier adoption is permitted for any annual or interim period for which financial statements have not yet been issued. Accordingly, the Company has elected to adopt these changes effective July 17, 2012.
In June 2014, the FASB issued ASU No. 2014-12 "Compensation – Stock Compensation" (Topic 718). The ASU provides guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendment requires a performance target that affects vesting and that could be achieved after requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that such performance condition would be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. Those amendments are effective for annual reporting periods beginning after December 15, 2015, and interim periods therein. The Company is currently evaluating the potential impact that adoption may have on its financial statements.
Nature of Operations, Business Activities and Summary of Significant Accounting Policies (Detail Textuals) (USD $)
1 Months Ended 1 Months Ended
Aug. 31, 2014
Sep. 30, 2014
Dec. 31, 2013
Oct. 31, 2014
Subsequent Event
Nemus Acquisition Corp
Nature of Operations, Business Activities and Summary of Significant Accounting Policies [Line Items]
 
 
 
 
Number of shares exchanged
 
 
 
12,880,000 
Common stock outstanding
 
11,770,000 
7,770,000 
16,000,000 
Warrants to purchase shares of common stock issued and outstanding
 
 
 
4,000,000 
Cash and cash equivalents
 
$ 1,025,023 
    
 
Additional fund raised
1,100,000 
 
 
 
Property and equipment, net
 
$ 12,045 
 
 
University of Mississippi ("UM") Agreements (Detail Textuals) (Intellectual Property, USD $)
1 Months Ended 0 Months Ended
Jul. 31, 2013
University of Mississippi ("UM") Agreements
Sep. 29, 2014
Option Agreement
Installment
May 15, 2014
Option Agreement
University Of Mississippi Agreements [Line Items]
 
 
 
Term of memorandum of understanding agreement
5 years 
 
 
Notice period for termination
3 months 
60 days 
 
Normal option fee waived per month by University of Mississippi
 
 
$ 7,500 
One time up front payment
 
65,000 
 
Number of installments
 
 
Annual fees payable
 
25,000 
 
Reimbursement of sunk patent expenses
 
$ 70,000 
 
Commitments and Contingencies (Detail Textuals) (USD $)
1 Months Ended 9 Months Ended 1 Months Ended 9 Months Ended
Jul. 23, 2014
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
University Of Mississippi Lease Agreement
Sep. 30, 2014
Independent Contractor Agreements
Sep. 30, 2013
Independent Contractor Agreements
Sep. 30, 2014
Independent Contractor Agreements
Contractor One
Sep. 30, 2013
Independent Contractor Agreements
Contractor One
Sep. 30, 2014
Independent Contractor Agreements
Contractor Two
Operating Leased Assets [Line Items]
 
 
 
 
 
 
 
 
 
Rent expense
$ 2,259 
$ 6,844 
$ 0 
$ 9,000 
$ 353,000 
$ 90,000 
 
 
 
Notice period for termination
 
 
 
 
30 days 
 
 
 
 
Percentage of contractor expenses for total expenditures
 
 
 
 
 
 
15.00% 
100.00% 
11.00% 
Equity (Detail Textuals) (USD $)
1 Months Ended 1 Months Ended
Aug. 31, 2014
Jul. 17, 2012
Aug. 31, 2014
Warrant
Jul. 17, 2012
Warrant
Sep. 30, 2014
Stock Purchase Agreement June 2014
Warrant
Aug. 31, 2014
Stock Purchase Agreement June 2014
Warrant
Jun. 30, 2014
Stock Purchase Agreement June 2014
Warrant
Equity [Line Items]
 
 
 
 
 
 
 
Number of common stock called by warrants
 
 
2,200,000 
3,000,000 
450,000 
550,000 
1,800,000 
Value of warrants issued
$ 1,100,000 
 
$ 1,100,000 
 
$ 85,500 
$ 104,500 
$ 900,000 
Exercisable price of warrants (in dollars per share)
 
 
 
$ 1.00 
$ 1.00 
$ 1.00 
 
Number of common shares issued to founders and one board member
 
7,770,000 
 
 
 
 
 
Value of common shares issued to founders and one board member
 
$ 1,000 
 
 
 
 
 
Income Taxes (Detail Textuals) (USD $)
Sep. 30, 2014
Income Tax Disclosure [Abstract]
 
Net operating loss carry forwards
$ 1,200,000 
Subsequent Events (Detail Textuals) (USD $)
1 Months Ended 9 Months Ended 0 Months Ended 1 Months Ended
Jul. 23, 2014
Sep. 30, 2014
Sep. 30, 2013
Oct. 15, 2014
Subsequent Event
Oct. 31, 2014
Subsequent Event
Investor
sqft
Oct. 31, 2014
Subsequent Event
2014 Omnibus Incentive Plan
Subsequent Event [Line Items]
 
 
 
 
 
 
Number of common shares issued to individual investors
 
 
 
 
1,110,000 
 
Number of individual investor
 
 
 
 
18 
 
Area of corporate office headquarters
 
 
 
 
3,684 
 
Rent expense
$ 2,259 
$ 6,844 
$ 0 
 
$ 64,470 
 
One-time up-front option payment under University of Mississippi option agreement
 
 
 
$ 10,000 
 
 
Options to purchase shares common stock granted
 
 
 
 
 
1,080,000