NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Spotlight Innovation Inc. (the "Company") was organized under the laws of the state of Iowa on March 23, 2012 ("inception") under the name Spotlight Innovation, LLC. The Company was founded to identify, validate and finance healthcare-focused companies founded for the purpose of commercializing intellectual property throughout the world. The Company provides strategic partners the opportunity to participate in the financing of a preferred search for, acquisition of, and/or funding of companies holding licenses for the commercialization of intellectual property developed by academic institutions. The principals of the Company have been involved in all stages of the commercialization of healthcare intellectual property over the last ten years. On December 16, 2013, Spotlight Innovation LLC was merged into Spotlight Innovation Inc. (formerly known as American Exploration Corporation) through a reverse merger transaction. The consolidated financial statements reflect operating results of the combined entities.
On June 4, 2014, the Company, through its subsidiary, Celtic Biotech Iowa, Inc. ("Celtic Iowa"), entered into a share exchange agreement with Celtic Biotech, Ltd., an Irish Limited Company ("CBL"), to provide for continued development and eventual marketing of the intellectual property of CBL. The primary intellectual property of CBL is an invention that relates to the compositions and methods combining snake venom toxin with chemotherapeutic agent(s) for cancer therapy.
On June 2, 2015, the Company concluded its purchase of 82.25% ownership interest in Memcine Pharmaceuticals, Inc., a Delaware corporation, ("Memcine") to provide for continued development of its Immunoplex™ vaccine platform technology, which is designed to use the body's own naturally occurring targeting system to deliver vaccine components to immune cells and stimulate a robust response. Memcine Pharmaceuticals has a licensing agreement for its technologies with the University of Iowa.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of the assets acquired and liabilities assumed in the acquisition of Memcine and share-based compensation.
Principles of Consolidation
The consolidated financial statements include the Company's accounts, including those of the Company's subsidiaries Celtic Iowa and Memcine. During the year ended December 31, 2014, Celtic Iowa acquired 95% of the outstanding shares of CBL. During the year ended December 31, 2015, the Company acquired an 82.25% interest in Memcine. Accordingly, the Company has consolidated CBL, Celtic Biotech, Inc. and Memcine. All significant intercompany accounts and transactions have been eliminated.
Non-Controlling Interest
The Company is required to report its non-controlling interest in CBL and Memcine as a separate component of shareholders' equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interest and to the shareholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interest are allocated to the non-controlling interest even when those losses are in excess of the non-controlling interest's investment basis.
Loss per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and "if converted" method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
For the years ended December 31, 2015 and 2014, the dilutive effect of 655,200 and 5,200 options, and 1,385,000 and 1,276,671 warrants, 2,053,132 and 1,504,650 common shares issuable for conversion of convertible debt, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). The Company had $299,919 and $9,068 cash equivalents at December 31, 2015 and 2014, respectively.
Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the FDIC). As of December 31, 2015, the Company had no cash balances that were uninsured.
The Company had maintained cash in escrow which was restricted from immediate and general use by the Company. In December 2015, as part of the Termination and Release Agreements discussed in Note 6, the Company charged the $119,625 balance at December 31, 2015 to bad debt as the Company believes the amount to be uncollectable.
Foreign exchange and currency translation
For the years ended December 31, 2015 and 2014, the Company maintained cash accounts in U.S. dollars as well as European Union euros, and incurred certain expenses denominated in U.S. dollars and European Union euros. The Company's functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are translated using exchange rates at the end of each period. Exchange gains or losses on transactions are included in earnings. Adjustments resulting from the translation process are reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. For all periods presented, any exchange gains or losses or translation adjustments resulting from foreign currency transactions are included in the statements of operations as other income (expense).
In-Process Research and Development
In-process research and development ("IPR&D") represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. During periods after completion, those acquired indefinite-lived assets are amortized based on their useful life. During the year ended December 31, 2014, the Company acquired IPR&D assets in its acquisition of CBL. The fair value of the assets acquired was $6,977,347. These assets are still subject to research and development completion and accordingly, no amortization has been recorded.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is 3-10 years.
Impairment of Long-Lived Assets and Intangibles
The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to fair value. For the years ended December 31, 2015, the Company recorded $212,541 in impairment to the Company's intangible assets related to the Memcine acquisition.
Deferred Financing Costs
We have incurred debt origination costs in connection with the issuance of short-term convertible debt. These costs are capitalized as deferred financing costs and amortized using the straight-line method over the term of the related convertible debt.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.
Income Taxes
The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
Fair Value of Financial Instruments
The Company follows FASB ASC 820,
Fair Value Measurement
("ASC 820"), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.
As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
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Level 1 – Quoted prices in active markets for identical assets or liabilities.
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Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company's IPR&D assets were valued on a discounted cash flow model using the income approach. The inputs to the model were within level 3 of the fair value hierarchy.
Subsequent Events
The Company evaluated subsequent events through the date when financial statements are issued for disclosure consideration.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company's operations, financial position or cash flows.
NOTE 3. GOING CONCERN
The Company is an early stage company and as such has not generated revenues from operations and there is no assurance of any future revenues. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2015, the Company has accumulated deficit of $18,643,652 and has a working capital deficit of $4,682,471. These factors raise substantial doubt as to the Company's ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon the Company's successful efforts to raise sufficient capital and then attain profitable operations. Management is investigating all options to raise enough funds to meet the Company's working capital requirements through either the sale of the Company's common stock or other financings. There can be no assurances, however, that management will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtained on terms satisfactory to the Company.
NOTE 4. BUSINESS COMBINATIONS
Acquisition of CBL
The Company, through its subsidiary Celtic Iowa, entered into a share exchange agreement with CBL. Celtic Iowa issued to CBL 474,419 shares of Celtic lowa Preferred Stock, with a fair value of $0.75 per share. In exchange, the Company received shares equal to 95% of the total outstanding shares of CBL.
Fair value at June 4, 2014
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Cash
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$
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1,656
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Accounts receivable – related party
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1,349
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Property, plant and equipment
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9,000
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IPR&D
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6,977,347
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Total assets
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6,989,352
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Accounts payable and accrued liabilities
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(242,693
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)
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Short-term debt – related party
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(204,186
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)
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Total liabilities
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(446,879
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)
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Purchase price
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$
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6,542,473
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The Company recorded the 5% non-controlling interest in CBL at a fair value of $327,124. The preferred shares issued are convertible into common shares of Celtic Iowa on a one for one basis and are redeemable at the Company's option in five years at the stated par value of $5 per share. The preferred shares have preferential rights to the net assets of Celtic Iowa in the case of liquidation up to the par value of the stock. While the Company maintains voting control through the common stock of Celtic Iowa and controls management decisions of Celtic Iowa, the Company's rights to the net assets are subordinated to the preferred stock up to a net asset value of $2,372,095. As a result, the Company has recorded non-controlling interest in Celtic Iowa of $2,372,078, which is the value attributed to the Preferred stock issued by Celtic Iowa. The Preferred Stock of Celtic Iowa is eliminated in consolidation.
CBL has had limited activity during the years ended December 31, 2015 and 2014. Accordingly, the Company has not presented Pro Forma information for the acquisition as the impact to the Company's operations was deemed immaterial.
Memcine
On June 2, 2015, the Company acquired 82.25% of the ownership in Memcine for $30,000.
The following table summarizes the allocation of the purchase price to the net assets acquired:
Fair value at June 2, 2015
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Cash
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$
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27,071
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Property, plant and equipment
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18,071
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IPR&D
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212,541
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Total assets
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257,683
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Accounts payable and accrued liabilities
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(854
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)
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Deferred liabilities
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(220,465
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)
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Total liabilities
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(221,319
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)
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Net assets acquired
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$
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36,364
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The Company recorded the 17.75% non-controlling interest in Memcine at a fair value of $6,364.
Memcine had immaterial activity during year ended December 31, 2015. Accordingly, the Company has not presented pro forma information for the acquisition as the impact to the Company's operations was deemed immaterial.
The Company recorded an impairment of $212,541 as of December 31, 2015 to impair the intangible assets acquired in the acquisition of Memcine.
NOTE 5. NOTES PAYABLE
On December 10, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable to unrelated third parties:
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Date
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Stated
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Original
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of
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Interest
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|
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Principal
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Due
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Promissory Note
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Note
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Rate
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|
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Amount
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|
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Date
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#1
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05/29/09
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|
|
10
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%
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$
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30,000
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|
|
On Demand
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|
#2
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06/05/09
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|
|
10
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%
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|
$
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5,911
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|
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On Demand
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|
#3
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08/16/09
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|
|
10
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%
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$
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50,000
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|
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On Demand
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#4
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09/27/10
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|
|
10
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%
|
|
$
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60,000
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|
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On Demand
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|
#5
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|
06/02/10
|
|
|
5
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%
|
|
$
|
50,000
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|
|
On Demand
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|
#6
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|
02/04/11
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|
|
5
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%
|
|
$
|
30,000
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|
|
On Demand
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|
#7
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|
05/04/11
|
|
|
5
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%
|
|
$
|
35,000
|
|
|
On Demand
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|
#8
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|
08/11/11
|
|
|
10
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%
|
|
$
|
20,000
|
|
|
On Demand
|
|
#9
|
|
12/05/11
|
|
|
10
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%
|
|
$
|
20,000
|
|
|
On Demand
|
|
#10
|
|
04/28/12
|
|
|
10
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%
|
|
$
|
30,000
|
|
|
On Demand
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|
Total
|
|
|
|
|
|
|
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$
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330,911
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The Company also assumed $92,923 in accrued interest related to these notes. The Company recorded $28,541 and $28,720 in interest expense for the years ended December 31, 2015 and 2014, respectively, on the above notes payable.
As of December 31, 2015, and through the date of these financial statements, the Company has not received any demand notice from the lenders noted above for payment of principal or interest on these notes payable.
The Company also assumed a liability for previous advances made by American Exploration's former CEO in the amount of $23,433. These advances are due on demand and do not bear interest. During the year ended December 31, 2015 the Company made payments on the advances in the amount of $3,500 reducing the amount to $19,933 at December 31, 2015.
NOTE
6. CONVERTIBLE DEBENTURES
Kopriva Note
On September 27, 2013, the Company entered into a convertible note in the amount of $40,000 from an investor. The term of this note is fifteen months from commencement. During the term of this note, interest shall accrue on the unpaid principal balance at a fixed rate equal to 10% per annum, compounded annually. Should the Company default on the note, the outstanding balance of this note shall bear interest at the default rate of 20% per annum, compounded annually. In addition to the interest accrued the holder received warrants to purchase up to 100,000 shares of common stock. The conversion feature of the note and the exercise price of the warrants is the greater of (i) a discount of 40% to the 20 day average closing market price prior to the day that the warrant is executed or (ii) $0.20 per share. The warrants will have a term of thirty-six (36) months from the date of repayment or conversion of the note. The relative fair value of the warrants issued on the date of grant was $25,136 and was recorded as a debt discount on the note.
In connection with the note, the convertible debenture was also analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed. The Company recorded a debt discount of $14,864 for the fair value of the beneficial conversion feature. The Company is amortizing the combined debt discounts from the warrants and beneficial conversion feature over the term of the note.
On December 19, 2014, the Company entered an agreement to extinguish the note and its accrued interest in exchange for 102,000 shares of common stock. This agreement modified the terms of the conversion which resulted in the holder receiving more shares. As a result of the modification of the conversion feature, the Company determined that the change in the fair value of the conversion feature was greater than 10% and accordingly, recorded $120,085 as a loss on debt extinguishment which was the difference in fair value of the new conversion feature and the carrying value of the note and accrued interest on the date of modification. The Company recorded the issuance of the common stock on conversion at its fair value of $165,003 based on the market price on the date of grant. As of December 31, 2014, these shares were not issued and the fair value of the common stock was recorded as a stock payable. In January 2015, the Company issued the 102,000 share of common stock in settlement of stock payable at the fair value of $165,003.
Convertible Debt Associated with Letters of Credit
On April 4, 2014, the Company entered into a line of credit (the "Line of Credit") with Denver Savings Bank in the principal amount of $752,325. The Line of Credit provides that the Company can indirectly borrow up to the aforementioned principal amount from the Bank until April 1, 2017. Interest accrues at the rate of 4.25% per year. The loan is repayable on demand, but if no demand is made, then quarterly payments of accrued interest calculated on the amount of credit outstanding. As security for the Line of Credit a third party (the "Cosigner") cosigned the Line of Credit, and pledged certain collateral. In exchange for this pledge the Company issued the Cosigner 150,000 shares of common stock of the Company, and agreed to issue 30,000 shares of its common stock upon each one year anniversary of the Line of Credit, provided that the Line of Credit remains in effect. The shares of common stock had a fair value of $183,000 based on the market price on the date of grant and have been recorded as interest expense.
On April 4, 2014, the Cosigner and three third parties entered into a Security and Loan Agreement (the "SLA"). The SLA ensures that the Cosigner will be fully remunerated should the Company default on the Line of Credit. The SLA provides a guaranty to the Cosigner from the three third parties, which have pledged to repay any outstanding amounts on the Line of Credit should the Company default on the Line of Credit.
The Company may request draw downs on the Line of Credit at any time. Once a request is made, the Cosigner withdraws the funds and issues them to the third parties. The third parties will then loan the Company the funds from the Line of Credit through convertible promissory notes (the "Convertible Notes"). As the Company is both obligated to the Bank, as primary obligor, and to the third parties through the Convertible Notes, the Company has recorded liabilities on both obligations. The amounts attributable to the Line of Credit directly are recorded as non-cash interest expense. As of December 31, 2015, the Company had borrowed $752,325 through the Line of Credit, and issued Convertible Notes with the third parties in the amount of $752,325. The Convertible Notes accrue interest at 20.5% per annum and mature in six months from the dates of issuance. The proceeds from the Convertible Notes are reduced for original issuance discount fees. The Company received $572,220 in net proceeds from the Convertible Notes. These fees were recorded as a debt discount on the Convertible Notes. The Convertible Notes also contain a conversion feature which allows the Company to convert the Convertible Notes into shares of the Company's common stock. The conversion price is the lower of 50% of the prior 20 days average market price on the date of conversion, or $0.50 per share. However, in no event will the conversion price be lower than $0.25 per shares. The Company analyzed the Convertible Notes for a beneficial conversion feature. As a result of the in-the-money conversion price, the Company determined that a beneficial conversion feature did exist and recorded a debt discount of $186,869.
The Convertible Notes also contained attached warrants that allow the holders to purchase one share of common stock of the Company for each warrant exercised. The Company was obligated to issue 752,325 warrants with an exercise price of i) lower of 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years. The Company calculated the relative fair value of the warrants using the Black-Scholes model at $385,351, which was recorded as a debt discount to the Convertible Notes. As of December 31, 2014, the Company has not issued the warrants and has recorded the relative fair value as a warrant payable. The Company issued the warrants in 2015 as settlement of warrants payable.
The Company is amortizing the combined debt discounts from the original issue discounts, warrants and beneficial conversion feature over the term of the Convertible Notes. The Company recorded interest expense of $82,003 related to the amortization of the debt discounts for the year ended December 31, 2015. The Company also recorded $150,846 in interest expense for the year ended December 31, 2015.
Additional Convertible Notes Associated with Additional Line of Credit
On July 29, 2014 the Company entered into an agreement with a third party individual (the "Individual") to guarantee an additional line of credit (the "Additional Line of Credit") in the amount of $250,000 with Denver Savings Bank. In exchange for the guarantee, the Company issued 42,300 shares of its common stock to the Individual. The shares of common stock had a fair value of $33,840 based on the market price on the date of grant and have been recorded as deferred financing costs. The Company has not made any borrowings on this Additional Line of Credit.
The Individual and three third parties entered into a Security and Loan Agreement (the "SLA"). The SLA ensures that the Individual will be fully remunerated should the Company default on the Line of Credit. The SLA provides a guaranty to the Individual from the three third parties, which have pledged to repay any outstanding amounts on the Line of Credit should the Company default on the Additional Line of Credit.
As of December 31, 2015, $135,000 has been drawn on the Additional Line of Credit. Once a request is made, the Individual withdraws the funds and issues them to the third parties. The third parties will then loan the Company funds, net guarantee fees from the Line of Credit through convertible promissory notes (the "Convertible Notes"). The third party guarantors require the Company to repay all funds drawn under the Additional Line of Credit to the bank in addition to the obligation to pay the guarantors for the principal amount of the convertible notes, as a guarantee fee. As the Company is both obligated to the Bank, as a cosignor to the Additional Line of Credit and to the third parties through the Convertible Notes, the Company records liabilities on both obligations.
The Company enters into the Convertible Notes with the third parties in the amount borrowed. The Convertible Notes accrue interest at 20.5% per annum and mature in six months from the dates of issuance. The Convertible Notes contain a conversion feature which allows the Company to convert the Convertible Notes into shares of the Company's common stock. The conversion price is the lower of 50% of the prior 20 days average market price on the date of conversion, or $0.50 per share. However, in no event will the conversion price be lower than $0.25 per shares. The Company analyzed the Convertible Notes for a beneficial conversion feature. As a result of the in-the-money conversion price, the Company determined that a beneficial conversion feature did exist and recorded a debt discount of $67,015.
The Convertible Notes also contained attached warrants that allow the holders to purchase one share of common stock of the Company for each warrant exercised. The warrants have an exercise price of i) lower of 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years. The Company calculated the relative fair value of the warrants using the Black-Scholes model at $67,985, which was recorded as a debt discount to the Convertible Notes.
The Company is amortizing the combined debt discounts from the original issue discounts, warrants and beneficial conversion feature over the term of the Convertible Notes and Additional Convertible Notes. The Company recorded interest expense of $217,003 related to the amortization of the debt discounts for year ended December 31, 2015. The Company also recorded $176,252 in interest expense for year ended December 31, 2015.
On March 27, 2015, the Company entered into a convertible note (the "Greig Note") in the amount of $2,500,000 with a related party investor and received proceeds of $1,620,000, net of debt service, origination fee and legal fees. The term of the Greig Note is 60 months from commencement. During the term of the Greig Note, interest shall accrue on the unpaid principal balance at a rate equal to the prime rate plus five percentage points per annum, compounded annually, for the first 36 months; and prime rate plus six percentage points in the last 24 months. Should the Company default on the Greig Note, the outstanding balance of the Greig Note shall bear interest at the default rate of two additional percentage points per annum, compounded annually. The Company issued warrants to purchase 250,000 and 300,000 shares of the Company's common stock to K4, LLC and The Grieg Companies, respectively, as consideration for entering into the convertible note. The warrants have an exercise price equal to 50% of the 20 day average closing market price of the Company's common stock prior to the date of exercise, provided that the exercise price shall not be below $1.50 per share. The Greig Note also contains a conversion feature that allows the investor to convert the unpaid principal and accrued interest into shares of the Company's common stock at a price of $1.50 per share. The warrants will have a term of 36 months from the date of repayment or conversion of the Greig Note. The relative fair value of the warrants issued on the date of grant was $652,504 and was recorded as a debt discount on the Greig Note. The Company analyzed the Greig Note for a beneficial conversion feature. As a result of the in-the-money conversion price, the Company determined that a beneficial conversion feature did exist and recorded a debt discount of $967,496.
The Company is amortizing the combined debt discounts from the original issue discounts, warrants and beneficial conversion feature over the term of the Convertible Notes. The Company accrued interest expense of $175,685 and recorded amortization of the debt discount as interest expense for $370,313 prior to the termination agreement in December 2015.
On December 31, 2015, the Company closed a series of Termination and Release Agreements (the "Termination Agreements") which provided for the termination of certain agreements and instruments. The following is a brief summary of the transactions set forth in the Termination Agreements, and does not purport to be complete and is qualified in its entirety by reference to the full text of the Termination Agreements:
ASC 470-40 requires that a gain or loss be recognized in the early extinguishment of debt in the period the debt is extinguished. As part of the termination of the March 2015 Note, and issuance of the December 2015 Note, the Company recorded a Loss of Extinguishment of debt in the amount of $1,250,608.
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-
|
The Company and The Greig Companies terminated the Convertible Promissory Note in the principal amount of $2,500,000 dated March 27, 2015. $100,000 of the $600,000 debt service reserve held by The Greig Companies, Inc. shall be returned to the Company within five business days of the execution by all parties of the Termination Agreement, and the remaining $500,000 shall be repaid to the Company in equal quarterly payments of $42,404 over three years which includes interest accrued at the rate of 3.25% per annum. The Company issued 500,000 shares of common stock to The Greig Companies, Inc. which are to be held by the Company and disbursed as the debt reserve is repaid. As of December 31, 2015, no payments have been received from The Greig Companies and no shares have been issued.
|
|
|
|
|
-
|
Pursuant to the Termination Agreements, the Convertible Promissory Note was transferred to K4, LLC through the issuance of a new convertible promissory note in the principal amount of $2,500,000. Interest accrues on the principal amount of the note at the rate of eight percent (8%) per annum. The Company has the right to prepay all or a portion of the outstanding principal sum of the December 2015 Note as follows: (a) on or before December 31, 2016 only with the written consent of the holder, such consent not to be unreasonably withheld, for such purposes including but not limited to a NASDAQ listing of the securities of the Company or as a condition to an equity financing by the Company; and (b) at any time after December 31, 2016 upon thirty days written notice by the Company to the holder. The holder of the December 2015 Note has the right to convert all or a portion of the principal sum of the December 2015 note into shares of common stock of the Company in denominations of not less than $250,000 as follows: (i) at any time up to December 31, 2016, at a discount of 20% of the average price per share of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion, but not less than a price of $0.90 per share; (ii) at any time after December 31, 2016 and up to the close of business on December 31, 2017, at a discount of 15% of the average price per share of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion, but not less than a price of $1.35 per share; or (iii) at any time after December 31, 2017 and up to the close of business on March 27, 2020, at a discount of 5% of the average price per share of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion, but not less than a price of $1.85 per share. The warrant to purchase 300,000 shares of Common Stock of the Company dated March 27, 2015 held by the holder of the December 2015 Note was terminated and replaced with (i) a warrant to purchase 300,000 shares of common stock at a price of $1.00 per share for a three year term, and (ii) a warrant to purchase an additional 200,000 shares of common stock of the Company at a price of $1.25 per share, for a three year term. The issuance of the new Note resulted in a debt extinguishment in the amount of $1,676,731.
|
|
-
|
The Company and its counterparties terminated a series of Convertible Promissory Notes with Warrants with Lextacan Development, Ltd., Ocana Limited, and Tosca Limited in the aggregate principal amount of $865,000. This series of Convertible Promissory Notes with Warrants was issued in connection with the Company's existing two Lines of Credit totaling $1,003,300 with the Denver Savings Bank, of which the Company has drawn down $865,000, which remains due and payable by the Company to the Denver Savings Bank pursuant thereto. The termination resulted in $1,250,608 of extinguishment of related party debt as contributed capital.
|
|
|
|
|
-
|
The Company and its counterparties terminated a series of agreements (including (i) Unit Subscription Agreements (USA Control No. 849207105 STLT No's: 01-10), (ii) Confidential Memorandum of Terms (MOT Control No. 849207105 STLT), (iii) Account Management Agreements (AMA Control No: AMA 849207105 STLT), and (iv) Escrow & Compliance Attorney Agreement, collectively referred to as the "Subscription Agreements") with nine investors, Copperbottom Investments, Ltd., Britannia Securities International, Ltd., Agri-Technologies International, Ltd., On Time Investments, ltd., RnD Company, Ltd., Rooftop Holdings, Ltd., Sequence Investments Ltd., Anybright Investments, Ltd., and Orange Investments, Ltd. (collectively the "Investors"). These agreements required the purchase by the Investors of shares of Series A Preferred Stock and Warrants of the Company based on certain formulas contained in the Subscription Agreements. Pursuant to this Termination Agreement the Investors have no further obligations to provide funding to the Company, and the Company has no obligation to accept such funds. All of the shares of Series A Preferred Stock, Series C Preferred Stock, and Warrants held in trust pursuant to the Subscription Agreements are terminated, cancelled and returned to the treasury of the Company.
|
The aggregate maturities of long-term debt as of December 31, 2015 are as follows:
|
|
Demand
Notes
|
|
|
Long-Term
Debt
|
|
|
Line of
Credit
|
|
2016
|
|
$
|
385,373
|
|
|
$
|
-
|
|
|
$
|
-
|
|
2017
|
|
|
-
|
|
|
|
175,000
|
|
|
|
888,300
|
|
2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2020
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
125,000
|
|
|
|
-
|
|
Total Principal
|
|
$
|
385,373
|
|
|
$
|
2,800,000
|
|
|
$
|
888,300
|
|
NOTE 7. DEFERRED LIABILITIES
In September 2012, Memcine received financial assistance from Iowa Economic Development Authority ("IEDA"). Memcine entered into an agreement with IEDA, whereby IEDA would provide $150,000 in cash proceeds to Memcine in exchange for a 2% royalty on future gross revenues of Memcine to be paid to IEDA as repayment for the financial assistance. Total royalties to be paid will be $225,000 and the payment terms are on a semi-annual basis. To date, Memcine has not produced any revenues and has not been obligated to make repayment of the financial assistance. The contract also includes an acceleration clause which would require the Company to make a lump sum repayment of the financial assistance plus accrued interest at 6% per annum beginning from the date the proceeds were disbursed to Memcine should any of the following occur:
a)
|
Memcine issues an initial public offering
|
|
|
b)
|
Memcine relocates outside of the state of Iowa
|
|
|
c)
|
Memcine sells 51% or more of the company's assets or the company
|
As a condition to the acquisition by the Company, Memcine applied and was granted a waiver of the acceleration clause. Accordingly, the future repayment obligation is recorded as a long-term deferred liability. As of December 31, 2015, the outstanding principal was $220,465.
NOTE 8. DERIVATIVE LIABILITIES
During the year ended December 31, 2015, the Company issued convertible notes to various investors in the principal amount of $300,000. The convertible notes accrues interest on the principal amount at a rate of Citibank Prime Rate plus six percent. The convertible notes convert into shares of common stock of the Company in certain instances as discussed below. Upon the closing of a Qualified Financing, the Company will issue warrants to each noteholder equal to 33.3% of the shares of common stock issuable thereunder, at an exercise price equal to 110% of the price offered in the Qualified Financing. Such warrants shall have a term of three years.
A Qualified Financing means the issuance of equity securities to one or more investor in the amount of $2,000,000 or more of gross cash proceeds, of any conversion of outstanding securities.
Conversion features of the Notes are as follows:
|
·
|
Upon the occurrence of a Qualified Financing within six months from the date of issuance, the note automatically converts, without any further action by the holder, into shares of common stock of the Company at a 35% discount to the pre-money valuation at the time of such Qualified Financing.
|
|
|
|
|
·
|
Upon the occurrence of a Qualified Financing within six and twelve months from the date of issuance, the note automatically converts, without any further action by the holder, into shares of common stock of the Company at a 75% discount to the pre-money valuation at the time of such Qualified Financing.
|
|
|
|
|
·
|
The Holder has the further right to convert the full principal amount of the note prior to a Qualified Financing and after the three-month anniversary of the issuance of the note, at a price equal to the lower of $0.75 or the average price of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion.
|
Due to the structure of the agreements and some of the terms contained therein, the Company determined that the issuance of these convertible notes resulted in derivative liability. The Company utilized a Black-Scholes option-pricing model and recorded a derivative liability in the amount of $278,482 related to these convertible notes for the year ended December 31, 2015.
NOTE 9. LEASES
The Company has one lease agreement. Our subsidiary, Memcine Pharmaceuticals, Inc., entered into an office lease agreement with the University of Iowa. The lease is for the period of September 1, 2015 through August 31, 2016 at a rate of $720 per month. The lease may be renewed for successive one-year period, with the lease rate to be agreed to 45 days prior to renewal.
Lease Schedule
Year
|
|
Lease
Obligation
|
|
2016
|
|
$
|
5,760
|
|
Total
|
|
$
|
5,760
|
|
NOTE 10. INCOME TAXES
At December 31, 2015 and 2014, the Company's deferred tax assets consisted primarily of net operating loss carry forwards acquired from American Exploration in the merger. For the years ended December 31, 2015 and 2014, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At December 31, 2015 and 2014, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.
As of December 31, 2015, the Company had a net operating loss carry forward of approximately $16 million, which will expire between years 2028 and 2035. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards are expected to be subject to significant annual limitations for the change in ownership that resulted in the merger with American Exploration.
NOTE 11. EQUITY
The Company has authorized the issuance of 3,000,000 shares of Series A preferred stock, 500,000 shares of Series C preferred stock, 1,500,000 shares of preferred stock and 4,000,000,000 shares of common stock.
COMMON STOCK
2015 Issuances
Stock Subscriptions
During the year ended December 31, 2015, the Company issued several subscription units that consisted of common stock and warrants. The Company received subscriptions for 253,335 shares of common stock and 95,000 warrants to purchase one share of common stock for each warrant, for net cash proceeds of $190,000. The warrants have an exercise price of $1.25 per share and expire 3 years of the date of issuance. The relative fair value of the warrants using the Black-Scholes model was $78,777.
Other Stock Issuances
On January 5, 2015, the Company issued 33,334 shares of common stock for a subscription received in December 2014. The subscription consisted of 33,334 shares of common stock and 12,500 warrants to purchase one share of common stock for each warrant, for net cash proceeds of $25,000. The warrants have an exercise price of $1.25 per share and expire three years after the date of issuance. The relative fair value of the common stock was $13,702 and was recorded as a stock payable as of December 31, 2014. Warrants were issued during the year ended December 31, 2015.
On January 9, 2015, the Company issued 102,000 shares to Jennifer Kopriva in settlement of stock payable owed as of December 31, 2014 for services. The shares had a fair value of $165,003 based on the market price on the date of grant.
On January 9, 2015, the Company issued 55,000 shares to Rachel Pettit in settlement of stock payable owed as of December 31, 2014. The shares had a fair value of $91,000 based on the market price on the date of grant.
On February 3, 2015, the Company issued 25,000 shares to Daniel Pettit for services. The shares were issued at $1.65 per share and recorded as share-based compensation of $41,250.
On February 28, 2015, the Company entered into a stock for services agreement with Michael Reysack, the Company's Investor Relations Officer, to issue 156,139 shares of common stock for services. The fair value of these shares was $257,629 based on the market price on the date of grant.
On April 28, 2015, the Company issued 30,000 shares to Jared DeVries for interest on debt. The shares were issued at $1.25 per share and recorded as interest expense of $37,500.
On April 28, 2015, the Company issued 2,600 shares to Rachael Pettit for services. The shares were issued at $1.25 per share and recorded as share-based compensation of $3,250.
On June 6, 2015, the Company issued 25,000 shares to Daniel Pettit for services. The shares were issued at $1.25 per share and recorded as share-based compensation of $31,250.
On July 10, 2015, the Company issued 500,000 to Sundrop Consulting in accordance with a consulting agreement. The shares were issued at $1.05 per share and recorded as share-based compensation of 525,000.
On November 25, 2015, the Company issued 250,000 shares to the Community Foundation for Greater Des Moines as part of an agreement with Sundrop Consulting. The shares were issued in exchange for 1,000,000 warrants that were terminated. No additional expense was recorded as the fair value of the warrants exceeded the fair value of the common stock.
On December 8, 2015, the Company issued 100,000 shares of the Company's common stock to the Company's CFO for services and recorded the shares at the fair value at the date of issuance recording the transaction as share-based compensation of $90,000.
2014 Issuances
Stock Subscriptions
During the year ended December 31, 2014, the Company issued several subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 413,341 shares of common stock and 155,000 warrants to purchase one share of common stock for each warrant, for net cash proceeds of $310,000. The warrants have an exercise price of $1.25 per share and expire 3 years of the date of issuance. As of December 31, 2014, the Company had not issued 155,000 warrants and 33,334 shares of common stock attributable to a subscription in the amount of $25,000. Accordingly, the Company has recorded the relative fair value of the warrants and common stock as payables in the amounts of $142,042 and $13,702, respectively.
Other Stock Issuances
During the year ended December 31, 2014, the Company issued 1,105,970 shares of common stock in full extinguishment of a debenture with a principal balance of $110,598 and $7,515 of accrued interest. The shares were issued at 50% of the market price on the conversion date. No gain or loss was recorded on the conversion.
The Company issued 150,000 shares to an individual in return for his guarantee of the Letter of Credit at Denver Savings Bank. The shares were valued at the market price of $183,000 at the time of grant. (See Note 7.)
On July 29, 2014, the Company entered into an agreement with a third party individual to guarantee an additional Line of Credit in the amount of $250,975 with Denver Savings Bank. In exchange for the guarantee, the Company issued 42,300 shares of its common stock to the individual. The shares of common stock had a fair value of $86,715 based on the market price on the date of grant and have been recorded as deferred financing costs. The Company has not made any borrowings on this Line of Credit.
The Company issued 100,000 shares to an individual as a fee for extending the due date of his debenture. The debenture was paid on April 8, 2014 and the shares were issued on June 11, 2014. The share value was stated at the market price of $80,000 at the time of grant.
On July 30, 2014, the Company entered into an agreement with BFS Financial, Inc. ("BFS") and issued 50,000 shares of the Company's common stock. The agreement calls for BFS to assist the Company in raising capital. BFS is entitled to a 12% fee for all proceeds received by the Company from investors introduced to the Company by BFS for up to one year. The Company is also obligated to issue BFS an additional 50,000 shares of common stock upon receiving the first $100,000 in proceeds. The Company valued the shares issued at $102,500 based on the market price on the date of grant. In October 2014, the Company terminated the agreement with BFS. Accordingly, the additional 50,000 shares of common stock will not be issued.
On October 30, 2014, the Company issued 18,450 shares of common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $30,443 based on the market price on the date of grant.
On October 24, 2014, the Company issued 4,242 shares of common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $6,999 based on the market price on the date of grant.
OPTIONS
Upon the acquisition of American Exploration, the Company adopted the 2009 Stock Option Plan (the "2009 Plan"). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock.
The Company, as part of the merger, issued and exchanged 5,200 stock options to individuals who previously held stock options in American Exploration. These stock options were valued at $6,934 using the Black-Scholes model which was included in the purchase price of American Exploration.
2015 EQUITY INCENTIVE PLAN
On November 25, 2015, the Company authorized the Spotlight Innovation, Inc. 2015 Equity Incentive Plan (the "2015 Plan") to:
|
·
|
Encourage selected employees, directors and consultants to improve operations and increase profits;
|
|
|
|
|
·
|
Encourage selected employees, directors and consultants to accept or continue employment or association with the Company it its Subsidiaries;
|
|
|
|
|
·
|
Increase the interest of selected employees, directors and consultants in the Company's welfare through participation in the growth in value of the common stock of the Company; and
|
|
|
|
|
·
|
Align the interest of the Company with selected employees, directors and consultants.
|
Eligible persons who at the date of grant of an Option is an employee of the Company or of any Subsidiary of the Company is eligible to receive NQSOs or ISOs under the 2015 Plan. Every person who at the date of the grant is a consultant, or non-employee director of, the Company or any Subsidiary of the Company is eligible to receive NQSOs under the 2015 Plan.
The total number of shares which may be issued under the Options granted pursuant to the 2015 Plan shall not exceed the 3,600,000 Shares. The shares covered by the portion of any grant under the 2015 Plan which expires unexercised shall become available again for grant under the 2015 Plan.
On November 25, 2015, the Company granted incentive stock options and non-qualified stock options to acquire an aggregate of 2,600,000 shares of the Company's common stock under the Company's 2015 Plan to various officers and consultants of the Company. The options have exercise prices of $1.10 to $1.21. Each option was granted under a three-year vesting term, 25% upon grant, and 25% on each of the first, second and third anniversary of grant date. Of the 2,600,000 options granted, 150,000 were issued to an executive officer and the remaining 1,600,000 were issued to certain consultants of the Company.
The fair value of each option award is estimated on the date of grant using a Black-Sholes valuation model that uses the assumptions noted in the following table.
|
|
2015 Equity
Option Plan
|
|
Expected Volatility
|
|
|
142.16
|
%
|
Expected Dividends
|
|
$
|
0
|
|
Expected Term in years
|
|
|
3
|
|
The weighted-average grant-date fair value of options granted in 2015 is $1.04.
A summary of the stock option activity for the years ended December 31, 2015 and 2014 is presented below:
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding December 31, 2013
|
|
|
5,200
|
|
|
$
|
359.04
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2014
|
|
|
5,200
|
|
|
|
359.04
|
|
Granted
|
|
|
2,600,000
|
|
|
|
1.11
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2015
|
|
|
2,605,200
|
|
|
$
|
1.82
|
|
Exercisable December 31, 2015
|
|
|
655,200
|
|
|
$
|
3.95
|
|
The following table provides information as of December 31, 2015 regarding shares authorized for issuance under our equity compensation plans, including individual compensation arrangements.
|
|
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)
|
|
|
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
|
|
|
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding column (a))
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
3,605,200
|
|
|
$
|
3.95
|
|
|
|
5,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans Not Approved by Security Holders
|
|
|
1,364,171
|
(1)
|
|
|
1.40
|
|
|
|
-
|
|
Total
|
|
|
4,969,371
|
|
|
$
|
2.23
|
|
|
|
5,050,000
|
|
_____________
(1)
|
Includes options to purchase 4,000,000- shares of common stock, up to 8,000 shares of common stock reserved under the 2009 Plan, and 3,600,000 shares of common stock reserved under the 2015 Plan.
|
Warrants
During the year ended December 31, 2015, the Company received subscriptions to acquire 253,335 shares of common stock and 95,000 warrants to purchase one share of common stock each, for net cash proceeds of $190,000. The warrants have an exercise price of $1.25 per share, and expire three years of the date of issuance. The relative fair value of the warrants based on the Black-Scholes model was $78,777.
The Company issued warrants to purchase 135,000 shares of common stock in conjunction with the Additional Convertible Notes during January 2015. The exercise price is equal to the lower of: (i) 50% of the prior 20 days average market price on the date of exercise, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years. The relative fair value of the warrants based on the Black-Scholes model was $67,985. As of December 31, 2015, the Company entered into a termination agreement and terminated the Additional Convertible Notes issued January 2015, cancelling the warrants to purchase 135,000 shares of common stock.
The Company granted warrants to purchase 250,000 and 300,000 shares of common stock to related parties in conjunction with a convertible note dated March 27, 2015. The warrants have an exercise price of $1.50 per share, and expire thirty-six (36) months from the date of repayment or conversion of the convertible note. The relative fair value of the warrants based on the Black-Scholes model was $652,504. As of December 31, 2015, the Company entered into a termination agreement and terminated the convertible note dated March 27, 2015, cancelling the warrants to purchase 250,000 and 300,000 shares of common stock.
On March 30, 2015, the Company issued warrants to purchase 359,620 shares of common stock to a related party in conjunction with a settlement of an outstanding payable in the amount of $419,413. The warrants have an exercise price of $1.25 per share, and expire five years from the date of issuance. The fair value of the warrants based on the Black-Scholes model was $449,398. Accordingly, the Company recorded a loss on extinguishment of debt of $29,984. Pursuant to the December 2015 termination agreements, the warrants to purchase 359,620 share of common stock were cancelled.
On June 3, 2015, the Company issued warrants to purchase 200,000 shares of common stock to an unrelated third party in conjunction to a services agreement. The warrants were priced at $1.25 per share and expire in 1.7 years from issuance. The fair value of the warrants based upon the Black-Scholes model is $246,852.
On June 23, 2015, the Company issued warrants to purchase 1,000,000 shares of common stock to an unrelated party in conjunction to a services agreement. The warrants have an exercise price of $1.25 per share, and expire in 2.2 years from issuance. The fair value of the warrants based upon the Black-Scholes model is $1,043,457. As of December 31, 2015, these warrants were forfeited.
On December 31, 2015, the Company issued warrants to purchase 200,000 and 300,000 shares of Common Stock in conjunction with a convertible note dated December 31, 2015. The warrants have an exercise price of $1.25 and $1.00 per share, respectively, and expire thirty-six (36) months from the date of issuance. The relative fair value of the warrants based on the Black-Scholes model was $187,051 and $280,726, respectively.
The fair value of the above warrants was determined by using the Black-Scholes option-pricing model. Variables used in the model for the warrants issued include: i) discount rates ranging from 0.69% to 1.31%; ii) expected terms ranging from 2.00 to 5.00 years; iii) expected volatility ranging from 323.95% to 393.03%; iv) zero expected dividends and v) stock price of $0.94 to $1.65.
During the year ended December 31, 2015, the Company issued 692,317 warrants that were granted in the year ended December 31, 2014 and were recorded as a warrant payable. The Company recorded $692,317 in additional paid-in capital for the issuance of the warrants in satisfaction of the warrants payable.
During the year ended December 31, 2014, the Company issued subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 413,341 shares of common stock and 155,000 warrants to purchase one share of common stock each for net cash proceeds of $310,000. The warrants have an exercise price of $1.25 per share and expire three years from the date of issuance. The relative fair value of the warrants was $142,042.
As of December 31, 2014, the Company was obligated to issue 752,325 warrants to purchase one share of common stock for each warrant, in conjunction with the issuance of the Convertible Notes. The warrants have an exercise price of the lower of i) 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event with the exercise price be lower than $0.25 per share. The warrants have a term of three years. The Company calculated the relative fair value of the warrants using the Black-Scholes model at $385,351. However, as of December 31, 2014, the Company has not issued these warrants and has recorded them as a warrant payable.
On December 19, 2014, the Company agreed to issue 100,000 warrants to purchase one share of common stock for each warrant in connection with a consulting agreement. The warrants have a term of three years and an exercise price of $1.29 per share. The fair value of the warrants on the date of grant using the Black-Scholes model was $164,924. As of December 31, 2014, these warrants have not been issued and are recorded in warrants payable.
The fair value of the above 2014 warrants was determined by using the Black-Scholes option-pricing model. Variables used in the model for the warrants issued include: i) discount rates ranging from 0.79% to 1.10%; ii) expected terms of 3.0 years; iii) expected volatility ranging from 399.22% to 409.43%; iv) zero expected dividends and v) stock prices ranging from $0.75 to 2.00.
A summary of the warrant activity for the years ended December 31, 2015 and 2014 is presented below:
|
|
Warrants
|
|
|
Weighted-Average Exercise Price
|
|
Outstanding December 31, 2013
|
|
|
1,381,671
|
|
|
$
|
1.41
|
|
Granted
|
|
|
1,005,000
|
|
|
|
0.72
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
(160,000
|
)
|
|
|
1.46
|
|
Outstanding at December 31, 2014
|
|
|
2,226,671
|
|
|
|
1.10
|
|
Granted
|
|
|
2,839,620
|
|
|
|
1.25
|
|
Exercised
|
|
|
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
(3,054,620
|
)
|
|
|
1.11
|
|
Outstanding December 31, 2015
|
|
|
2,011,671
|
|
|
$
|
1.29
|
|
Exercisable December 31, 2015
|
|
|
2,011,671
|
|
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$
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1.29
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The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of December 31, 2015 is 1.58 years.
NOTE
12. PRIVATE PLACEMENT
On June 4, 2014, the Company entered into a series of agreements related to an equity arrangement for the sole purpose of funding acquisitions. The agreements require the Company to issue 1,051,200 Convertible Series A Preferred Stock in exchange for $41,418,000 to nine investors, through a private placement of 900 Units, under certain circumstances, consisting of 1,168 Convertible Series A Preferred Stock (convertible into common shares of the Company) and warrants to purchase 413,964,900 common shares of the Company. The warrants have exercise prices from $0.25 to $0.7035 per share and terms of four to six years. The Company can receive up to $165,681,009 if all the warrants are exercised. The Convertible Series A Preferred Stock may convert into common shares of the Company at a rate of 1 share of Series A Preferred stock for 100 shares of common stock and must be converted within three years.
Under the terms of the agreements the Investors' cash of $41,418,000 ($46,020 per Unit sold) has been deposited in a restricted account with an Intermediary, whereby an Account Management Agreement between the Investors, the Company, and the Intermediary governs the release of funds to the Company from the restricted account. The Company has placed with the Intermediary, the Securities to be released to the investors at the same time and ratio as the funds are released to the Company. The Company will record the fair value of the Securities as they are issued to the investors by the Intermediary.
On December 31, 2015, the Company entered into the Termination Agreements which provided for the termination of all of the agreements and instruments referenced above, as described in Note 6.
NOTE 13. RELATED PARTY TRANSACTIONS
As a result of the acquisition of CBL, as disclosed in Note 4, the Company assumed two short-term notes payable due to a related party. The debts are denominated in Euros, and on June 4, 2014, the date of acquisition, the carrying amount of the debts was approximately $204,186. The notes accrue compounded interest at 5% per annum and were due in November and December 2014. As of December 31, 2015, these notes were still outstanding and the carrying value of the notes was $168,949. The Company has negotiated an extension of the due date to December 31, 2015 for the note that was due in December 2014. The notes are currently in default.
On March 30, 2015, the Company entered into a consulting agreement with The Greig Companies Inc., whose principal is a significant shareholder of the Company. The consultant will provide corporate and strategic growth advisory services. The Company has agreed to pay the consultant a $10,000 monthly fee with an additional per diem reimbursement of $1,250 for days traveling. The term of the contract is three years. In August 2015, the Company terminated this agreement pursuant to the Termination Agreements described in Note 6.
NOTE 14. COMMITMENTS
AND CONTINGENCIES
The Company, through its subsidiary Celtic Biotech Iowa, Inc., entered into a license agreement to license technology for novel therapy for chronic kidney disease owned by Zheng-Hong Qin of Wilmington, Massachusetts. The agreement provides for a 7% royalty payment on all net sales related to the licensed therapies. As of December 31, 2015, no sales have been made.
On December 19, 2014, the Company entered into an agreement with a third party to provide investor relations consulting services. The Company agreed to issue 25,000 shares of restricted common stock at the time of the agreement and up to 150,000 additional shares based on milestones achieved by the consultant. As of December 31, 2014, the consultant had achieved one of the milestones and was due an additional 25,000 shares. The fair value of the 50,000 shares of common stock to be issued to the consultant was $91,000 based on the market price on the dates of grant which was recorded as a stock payable at December 31, 2014. During the three months ended March 31, 2015, the consultant met an additional milestone which required the Company to issue 25,000 shares of common stock. The shares were valued at $41,250 based on the market price on the date grant. All of the shares earned by the consultant were issued in January and February of 2015. On April 29, 2015, the consulting agreement was mutually terminated. As a result of the termination of the agreement, 100,000 warrants were cancelled.
On April 29, 2015, the Company entered into a three-year consulting agreement with Sundrop Consulting, Inc. ("Sundrop") and agreed to compensate Sundrop as follows: $10,669 per month; 25,000 shares of common stock upon execution of the agreement; a warrant to purchase 100,000 shares of the Company's common stock at $1.29 per share with an expiration date of December 19, 2017. In addition, the Company agreed to pay a bonus of $300,000 in cash and 500,000 shares of common stock if the Company receives $10 million in financing through the efforts of Sundrop; a bonus of $100,000 in cash and 300,000 shares of common stock if the Company achieves a listing of its securities on the New York Stock Exchange or Nasdaq; and a bonus of $750,000 in cash and 1.5 million shares of common stock if the Company receives $40 million in financing through the efforts of Sundrop.
On June 23, 2015, the Company amended the agreement with Sundrop as follows: a) the Company will compensate Sundrop $10,669 per month in bi-weekly installments of $5,334, b) bonus provision whereby the Company will issue 500,000 shares of Common Stock at the signing of the agreement with an additional 500,000 issued at the one year anniversary of the agreement and 500,000 issued at the two year anniversary of the agreement providing the agreement remains in effect, c) Sundrop is issued warrants for the right to purchase 1,000,000 shares of common stock at $1.25 per share expiring on December 19, 2017, d) an annual raise of $10,000 for every $1,000,000 in financing received by the Company during the term of the agreement.
On July 1, 2015, the Company entered into an agreement with DAK Capital, LLC ("DAK") to provide investment banking and capital advisory services in connection with the Company's efforts to raise capital and with respect to such other matters as to which the Company and DAK may agree. The agreement has a minimum term of six months and a monthly non-refundable payment of $10,000 to DAK. In the event that DAK completes a transaction for the benefit of the Company of at least $10 million during this six-month term, the agreement is automatically extended for eighteen additional months. Each transaction is subject to payment of a success fee of 8% to DAK, as well as warrants equal to the amount of the transaction, each with a term of five years.
On July 14, 2015, CBL entered into a clinical agreement with Immunoclin, Ltd., a United Kingdom corporation, to carry out the phase 1b (and potentially phase 2) trial of the drug Crotoxin. The agreement calls for Celtic Iowa to pay to Immunoclin, Ltd. 525,330 Euro (approximately $573,944) over the period of the trial, which is expected to last 18 months.
NOTE 15. SUBSEQUENT EVENTS
On January 5, 2016, the Company received $50,000 in proceeds from Shawn W. Rouse related to the subscription agreement entered into by and between Mr. Rouse and the Company. The notes convert into shares of common stock of the Company in certain instances as discussed below. Upon the closing of a Qualified Financing, the Company will issue to each holder of a Note warrants equal to 33.3% of the shares of Common Stock issuable thereunder, at an exercise price equal to 110% of the price offered in the Qualified Financing. Such warrants shall have a term of three years.
A Qualified Financing means the issuance of equity securities to one or more investor in the amount of $2,000,000 or more of gross cash proceeds, of any conversion of outstanding securities.
Conversion features of the Notes are as follows:
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Upon the occurrence of a Qualified Financing within six months from the date of issuance, the note automatically converts, without any further action by the holder, into shares of common stock of the Company at a 35% discount to the pre-money valuation at the time of such Qualified Financing.
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Upon the occurrence of a Qualified Financing within six and twelve months from the date of issuance, the note automatically converts, without any further action by the holder, into shares of common stock of the Company at a 75% discount to the pre-money valuation at the time of such Qualified Financing.
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The Holder has the further right to convert the full principal amount of the note prior to a Qualified Financing and after the three-month anniversary of the issuance of the note, at a price equal to the lower of $0.75 or the average price of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion.
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On January 11, 2016, Jennifer Korpriva exercised her warrants to purchase to purchase 100,000 shares of Spotlight Common stock. The exercise price was at 60% of the average closing market price for the 20 trading days preceding the exercise. Total proceeds received from the exercise was $55,140.
On January 14, 2016, the Company received $25,000 in proceeds from Eric Turner related to the subscription agreement entered into by and between Mr. Turner and the Company. The notes convert into shares of common stock of the Company in certain instances as discussed below. Upon the closing of a Qualified Financing, the Company will issue to each noteholder of a Note warrants equal to 33.3% of the shares of Common Stock issuable thereunder, at an exercise price equal to 110% of the price offered in the Qualified Financing. Such warrants shall have a term of three years.
On January 15, 2016, the Company received $325,000 in proceeds from K4 Enterprises, LLC related to the subscription agreement entered into by and between K4 Enterprises and the Company. The notes convert into shares of common stock of the Company in certain instances as discussed below. Upon the closing of a Qualified Financing, the Company will issue to each holder of a Note warrants equal to 33.3% of the shares of Common Stock issuable thereunder, at an exercise price equal to 110% of the price offered in the Qualified Financing. Such warrants shall have a term of three years.
On February 12, 2016, the Company received $50,000 in proceeds from Craig Lang related to the subscription agreement entered into by and between Craig Lang and the Company. The notes convert into shares of common stock of the Company in certain instances as discussed below. Upon the closing of a Qualified Financing, the Company will issue to each holder of a Note warrants equal to 33.3% of the shares of Common Stock issuable thereunder, at an exercise price equal to 110% of the price offered in the Qualified Financing. Such warrants shall have a term of three years.
On August 19, 2016, the Company entered into a Sponsored Research Agreement (the "SRA") with the Florida State University Research Foundation ("FSURF") starting September 1, 2016, to perform certain research, over a two-year period, related to the discovery, synthetic modification, and preclinical validation of drug-like compounds intended to treat patients with Zika virus infection to be directed by Dr. Hengli Tang. The SRA provides for payments by the Company to the FSURF of $147,000 upon each of the commencement of the research and six months thereafter. The Company is also responsible for additional contributions toward the direct and indirect costs of the research as per the terms of the SRA.