Annual report pursuant to Section 13 and 15(d)

Equity

v2.4.1.9
Equity
 12 Months Ended
Dec. 31, 2014
Equity [Abstract]  
Equity
4. Equity
 
Common Stock
 
On July 17, 2012, the Company issued 7,770,000 shares of common stock 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.
 
In October of 2014, the Company issued 1,110,000 shares of common stock with no par value to eighteen individual investors that had participated in a prior entity founded by Nemus' then current president. Such entity has been insolvent and not operating since the inception date of Nemus. The issuance of these shares was in exchange for the signing of a release of claims against the Company, its President, and the former entity. The Company recorded a general and administrative expense of $466,200 in the fourth quarter of 2014 to reflect the fair market value of the common stock issued in exchange for the release of claims. The fair market value of the common stock issued was determined via an independent third-party valuation conducted as of October 31, 2014.
 
Preferred Stock
 
The Company has authorized 20,000,000 shares of preferred stock with a par value of $0.001 per share; there were no shares issued or outstanding as of December 31, 2014 and 2013.
 
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 of 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 and October 31, 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.
 
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 December 31, 2014, options (net of canceled or expired options) covering an aggregate of 1,730,000 shares of the Company's common stock had been granted under the 2014 Plan, and the Company had 1,730,000 options outstanding and 1,470,000 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 1,730,000 shares during the year ended December 31, 2014, under the 2014 Plan.
 
The following is a summary of activity under the 2014 Plan as of December 31, 2014:
 
Options Outstanding
Shares Available
Weighted Average
for Grant of
Number of
Exercise
Options
Shares
Price per Share
Price
Balance at December 31, 2013
0
0
NA
NA
Approval of authorized shares
3,200,000
Options granted
(1,730,000
)
1,730,000
$
0.42
$
0.42
Options exercised
0
0
Options cancelled
0
0
Balance at December 31, 2014
1,470,000
1,730,000
$
0.42
$
0.42
 
The weighted average remaining contractual life in years of the options outstanding as of December 31, 2014 was 9.86 years.
 
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company's stock exceeded the exercise price of the stock options at December 31, 2014 for those stock options for which the quoted market price was in excess of the exercise price ("in-the-money options"). As of December 31, 2014, the aggregate intrinsic value of options outstanding was $12,680,900. As of December 31, 2014, no options to purchase shares of common stock were exercisable.
 
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 statement of operations includes compensation expense for stock-based awards based on the estimated grant date fair value over the requisite service period. For the year ended December 31, 2014, the Company recognized stock-based compensation expense of $10,772 which was recorded as a general and administrative expense in the consolidated statement of operations.
 
The total amount of unrecognized compensation cost related to non-vested stock options was $2,076,928 as of December 31, 2014. This amount will be recognized over a weighted average period of 4.86 years.
 
Valuation Assumptions
 
The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company's common stock for similar terms. The expected term was estimated using the simplified method as permitted under SAB No. 110, since the Company has no recent exercise or forfeiture history that is representative of options granted during the year. The expected term represents the estimated period of time that stock options are expected to be outstanding, which is less than the contractual term which is generally ten years. The risk-free interest rate is based on the U.S. Treasury yield. The expected dividend yield is zero, as the Company does not anticipate paying dividends in the near future. The weighted average assumptions for employee options are as follows:
 
 
Years Ended December 31
2014
2013
Dividend yield
0.00%
NA
Volatility factor
75.00%
NA
Risk-free interest rate
1.93%
NA
Expected term (years)
6.5
NA
Weighted-average fair value of options granted during the periods
$1.21
NA