NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Spotlight Innovation Inc. (the “Company”) was organized under the laws of the state of Nevada on March 23, 2012 under the name Spotlight Innovation, LLC. In December 2013, the Company, through a reverse acquisition, merged with American Exploration Corporation (“American Exploration”). The Company is a life science company that identifies and acquires rights of innovative, proprietary technologies designed to address unmet medical needs, with an emphasis on rare, emerging and neglected diseases. To find and evaluate unique opportunities, we leverage our extensive relationships with leading scientists, academic institutions and other sources. We provide value-added development capability to accelerate progress. When scientifically significant benchmarks have been achieved, we will endeavor to partner with proven market leaders via sale, out-license or strategic alliance.
As of June 30, 2016, the Company has three subsidiaries: Celtic Biotech Iowa, Inc., Memcine Pharmaceuticals, Inc. and CDT Veterinary Therapeutics, Inc. (See Note 10 below).
Celtic Biotech Iowa, Inc.
On June 4, 2014, Celtic Biotech Iowa, Inc. (hereinafter "Celtic Iowa," a subsidiary of the Company) acquired Celtic Biotech Limited (hereinafter "Celtic Limited"). Celtic Limited was founded in 2003 in Dublin, Ireland and is developing novel and highly specialized compounds derived from snake venom, for the treatment of solid cancers and cancer imaging.
Memcine Pharmaceuticals, Inc.
The Company acquired approximately 82% of Memcine Pharmaceuticals, Inc. ("Memcine") in June 2015. The Company agreed to provide Memcine with up to $3,000,000 to fund the operations of Memcine via investment, grants or other means over the course of operations, upon the achievement of certain milestones, as determined by the board of directors of Memcine. Memcine, founded in 2010, holds the exclusive worldwide rights to Immunoplex,™, a vaccine platform technology developed at the University of Iowa, with universal application to numerous antigens developed to improve vaccine efficacy by using more efficient targeting and delivery.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate disclosures contained in the audited financial statements for the most recent fiscal year, as reported in the Form 10-K filed with the SEC on August 31, 2016, have been omitted.
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 option and warrant transactions.
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 the Company acquired 95% of the outstanding shares of Celtic Biotech. During the year ended December 31, 2015, the Company acquired 82.25% of the outstanding shares of Memcine. Accordingly, the Company has consolidated Celtic Limited, Celtic Iowa and Memcine. All significant intercompany accounts and transactions have been eliminated.
Non-Controlling Interest
The Company is required to report the non-controlling interest in Celtic
Limited,
a subsidiary of Celtic Iowa 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 six months ended June 30, 2016 and 2015, the dilutive effect of the issuance of 0 and 5,200 options, 0 and 2,992,671 warrants, and 0 and 5,215,967 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.
Concentrations of Credit Risk
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 Federal Deposit Insurance Corporation (“FDIC”). As of June 30, 2016, the Company had $0 of cash balances that were uninsured. The Company has not experienced any losses on such accounts.
Foreign exchange and currency translation
For the six months ended June 30, 2016 and 2015, the Company maintained cash accounts in U.S. Dollars and European Union euros, and incurred certain expenses denominated in European Union euros. The Company's and its consolidated subsidiaries’ functional and reporting currency is the U.S. Dollar. Transactions denominated in foreign currencies are remeasured into U.S. Dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are remeasured using exchange rates at the end of each period. Exchange gains or losses on re-measurements are included in earnings.
In the event that the functional currency of a Company’s consolidated subsidiary was not the U.S. Dollar, then that subsidiary’s foreign currency monetary assets and liabilities are translated into U.S. Dollars at the current exchange rate and non-monetary assets and liabilities are translated using historical exchange rates. Such adjustments resulting from the translation process would be reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. As of June 30, 2016 and 2015, the Company had no subsidiaries with functional currencies that required translation.
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 Celtic Limited, 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. The IPR&D was evaluated for impairment at December 31. 2015 and it was determined that no impairment existed.
Equipment
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 six months ended June 30, 2016 and 2015, the Company recorded $0 in impairment to the Company’s long-lived assets. On December 31, 2015 the Company recorded an impairment of the intangible asset for Memcine of $212,000.
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 such 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.
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 June 30, 2016, the Company has accumulated net losses of $21,221,820, and has a working capital deficit $6,129,772. 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. NOTES PAYABLE
On December 16, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable too 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
|
|
|
Principal
|
|
|
Due
|
|
Promissory Note
|
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Note
|
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Rate
|
|
|
Amount
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|
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Date
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|
|
|
|
|
|
|
|
|
|
|
|
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#1
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05/29/09
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|
|
10
|
%
|
|
$
|
30,000
|
|
|
On Demand
|
|
#2
|
|
06/05/09
|
|
|
10
|
%
|
|
$
|
6,185
|
|
|
On Demand
|
|
#3
|
|
08/16/09
|
|
|
10
|
%
|
|
$
|
50,000
|
|
|
On Demand
|
|
#4
|
|
09/27/10
|
|
|
10
|
%
|
|
$
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60,000
|
|
|
On Demand
|
|
#5
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|
06/02/10
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|
|
5
|
%
|
|
$
|
50,000
|
|
|
On Demand
|
|
#6
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|
02/04/11
|
|
|
5
|
%
|
|
$
|
30,000
|
|
|
On Demand
|
|
#7
|
|
04/05/11
|
|
|
5
|
%
|
|
$
|
35,000
|
|
|
On Demand
|
|
#8
|
|
08/11/11
|
|
|
10
|
%
|
|
$
|
20,000
|
|
|
On Demand
|
|
#9
|
|
12/05/11
|
|
|
10
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%
|
|
$
|
20,000
|
|
|
On Demand
|
|
#10
|
|
04/28/12
|
|
|
10
|
%
|
|
$
|
30,000
|
|
|
On Demand
|
|
|
|
Total
|
|
|
|
|
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$
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331,185
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|
|
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The Company also assumed $97,436 in accrued interest related to these notes. The Company recorded $14,574 and $14,360 in interest expense for the six months ended June 30, 2016 and 2015, respectively, on the above notes payable.
The Company also assumed a liability for previous advances made by American Exploration’s former CEO in the amount of $23,433 of which the Company repaid $3,500 in calendar year 2015 bringing the balance to the current $19,933 at June 30, 2016. These advances are due on demand and do not bear interest.
On December 31, 2015 recorded a guarantee for one of the lenders in the amount of $34,529.
During 2016, the Company has received demand notices from Pierco Management for its part of the assumed American Exploration notes payable for payment of principal and interest. On September 1, 2016, the Company agreed to a settlement and release agreement with Pierco Management as set forth in the table below:
Promissory note #
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Issue
Date
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|
Original
Principal
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|
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Interest
Rate
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#5
|
|
6/2/2010
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|
$
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50,000
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|
|
|
5
|
%
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#6
|
|
2/4/2011
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|
$
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30,000
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|
|
|
5
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%
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#7
|
|
4/5/2011
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|
$
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35,000
|
|
|
|
5
|
%
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#8
|
|
8/11/2011
|
|
$
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20,000
|
|
|
|
10
|
%
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#9
|
|
12/5//2011
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|
$
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20,000
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|
|
|
10
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%
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Total
|
|
|
|
$
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155,000
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|
|
|
|
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The Company and Pierco Management agreed to the following:
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·
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Immediate cash payment of $25,000 from the Company.
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|
|
|
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·
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A deferred cash payment of $25,000 due in 90 days from the effective date.
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|
|
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·
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Issuance to Pierco Management of $50,000 worth of Company common stock using the average closing price for the 20 consecutive trading days preceding the effective date of the agreement.
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NOTE 5. CONVERTIBLE INSTRUMENTS
Kopriva Note
On September 27, 2013, the Company entered into a convertible note (the “Kopriva Note”) in the amount of $40,000 with an investor. The term of the Kopriva Note was fifteen months from commencement. During the term of the Kopriva Note, interest accrued on the unpaid principal balance at a fixed rate equal to 10% per annum, compounded annually. Should the Company default on the Kopriva Note, the outstanding balance of the Kopriva Note bears 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 Kopriva 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 expire December 27, 2017. 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 Kopriva Note. On January 11, 2016, the Kopriva Note was converted into 100,000 shares of common stock at $0.5514 per share.
In connection with the Kopriva Note, the conversion feature 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 Kopriva Note. The Company recorded interest expense of $8,000 related to the amortization of the debt discounts for the three months ended March 31, 2015. The Company also recorded $1,000 in interest expense for the three months ended March 31, 2015.
On December 19, 2014, the Company entered an agreement to extinguish the Kopriva Note and its accrued interest in exchange for 100,002 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 Kopriva 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.
Convertible Debt Associated with Line of Credit
On April 4, 2014, the Company entered into a letter of credit (the “April Letter of Credit”) with Denver Savings Bank in the principal amount of $752,325. The April Letter of Credit provides that the Company can borrow up to the aforementioned principal amount from the Denver Savings Bank until April 1, 2017. Interest accrues at the rate of 4.25% per year. Through December 31, 2015, the Company has drawn down on the full principal amount of the April Letter of Credit. The loan is repayable on demand, but if no demand is made, then quarterly payments of accrued interest calculated on the amount outstanding is due and payable. As security for the April Letter of Credit a third party (the “April Cosigner”) cosigned the April Letter of Credit, and pledged certain collateral. In exchange for this pledge the Company issued to the April 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 April Letter of Credit, provided that the April Letter 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 deferred financing costs.
On July 29, 2014, the Company entered into a letter of credit (the “July Letter of Credit”) with Denver Savings Bank in the principal amount of $250,975. The July Letter of Credit provides that the Company can borrow up to the aforementioned principal amount from the Bank until April 1, 2017. Interest accrues at the rate of 4.25% per year. To date, the Company has drawn down on $250,975 of the July Letter of Credit. The loan is repayable on demand, but if no demand is made, then quarterly payments of accrued interest calculated on the amount outstanding is due and payable. As security for the July Letter of Credit a third party (the “July Cosigner”) cosigned the July Letter of Credit, and pledged certain collateral. In exchange for this pledge the Company issued to the July Cosigner. 42,300 shares of Common Stock of the Company.
On May 2, 2016, the Company drew the balance of the amount available on the July Letter of credit in the amount of $115,000 bringing the amount borrowed on that portion to $250,975.
As of June 30, 2016, the Company has accrued $63,209 related to interest for the two cosigners of the line-of-credit.
In 2014, the Company entered into a series of Convertible Promissory Notes with Warrants with Lextacan Development, Ltd., Ocana Limited, and Tosca Limited in the aggregate principal amount of approximately Eight Hundred Sixty-Five Thousand Dollars ($865,000). This series of Convertible Promissory Notes with Warrants was issued in connection with the April Line of Credit and the July Line of Credit. In December 2015 this series of Convertible Promissory Notes with Warrants was terminated as described below under the heading “Termination and Release Agreements.”
Termination and Release Agreements
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:
- The Company and The Greig Companies, Inc. terminated the Convertible Promissory Note with The Greig Companies, Inc. in the principal amount of $2,500,000 dated March 27, 2015. Subsequent to the termination of the foregoing Convertible Promissory Note, the Company issued a new Note to K4 Enterprises, LLC. One Hundred Thousand Dollars ($100,000) of the Six Hundred Thousand Dollars ($600,000) debt service reserve held by The Greig Companies, Inc. was to be returned to the Company within five business days of the execution by all parties of the Termination Agreement, and the remaining Five Hundred Thousand Dollars ($500,000) is to 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. Pursuant to this termination agreement the Company was to issue to The Greig Companies, Inc. up to 440,000 shares of Common Stock, pro rata, based on the repayment of the aforesaid amount. To date The Greig Companies, Inc. has not made any of the foregoing payments and is in default. As such, the Company has not issued the foregoing shares of Common Stock. The Company is contemplating legal action to enforce its rights under the Termination Agreements and collect the foregoing sums due thereunder.
- The Company and its counterparties terminated a series of Convertible Promissory Notes with Warrants issued in 2014 with Lextacan Development, Ltd., Ocana Limited, and Tosca Limited in the aggregate principal amount of approximately Eight Hundred Sixty-Five Thousand Dollars ($865,000). This series of Convertible Promissory Notes with Warrants was issued in connection with the April Line of Credit and the July Line of Credit.
- 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.
NOTE 6. INCOME TAXES
Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income.
At June 30, 2016, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards acquired from American Exploration in the merger. For the six months ended June 30, 2016 and 2015, 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 June 30, 2016 and 2015, 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 June 30, 2016, the Company has a net operating loss carry forward of approximately $19.1 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.
NOTE 7. EQUITY
The Company has authorized the issuance of 500,000 shares of Series A preferred stock, 500,000 shares of Series C preferred stock, 4,000,000 shares of preferred stock and 4,000,000,000 shares of common stock.
Common Stock
On January 11, 2016, a holder exercised warrants to purchase 100,000 shares of common stock. The exercise price was 60% of the average closing market price for the 20 consecutive trading days preceding the exercise date. Total proceeds received from the exercise was $55,140. During the period April 8, 2016 through April 14, 2016 the Company issued 780,000 shares of common stock for services to the Company. The fair value of the common stock at issue dates totaled $377,500 and has been recorded as stock compensation expense.
Convertible Notes
During the six months ended June 30, 2016, as set forth in the table below, the Company entered into subscription agreements with certain individuals and entities for purchase of an aggregate of $550,000 principal amount of convertible notes.
Date
|
|
Dollar Amount
|
|
January 5, 2016
|
|
$
|
50,000
|
|
January 14, 2016
|
|
$
|
25,000
|
|
January 15, 2016
|
|
$
|
325,000
|
|
February 12, 2016
|
|
$
|
50,000
|
|
April 1, 2016
|
|
$
|
25,000
|
|
April 5,
2016
|
|
$
|
50,000
|
|
Total
|
|
$
|
550,000
|
|
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 agreed to issue to the Notes 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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·
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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 premoney 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 premoney 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.
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OPTIONS
2009 Plan
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 “Plan”) to:
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·
|
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 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 Plan.
The total number of shares which may be issued under the options granted pursuant to the plan shall not exceed the 3,600,000 Shares. The shares covered by the portion of any grant under the plan which expires unexercised shall become available again for grant under the plan.
There were no option or stock warrants granted during the six months ended June 30, 2016. A summary of the stock option activity for the six months ended June 30, 2016 is presented.
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding December 31, 2015
|
|
|
2,605,200
|
|
|
$
|
1.82
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding June 30, 2016
|
|
|
2,605,200
|
|
|
$
|
1.82
|
|
Exercisable June 30, 2016
|
|
|
655,200
|
|
|
$
|
3.95
|
|
Warrants
During the six months ended June 30, 2016, a holder exercised warrants to purchase 100,000 shares of common stock at a price of $0.5514 per share for total proceeds of $55,140. The transaction is detailed in Note 8 below.
A summary of the warrant activity for the six months ended June 30, 2016 is presented below:
|
|
Warrants
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding December 31, 2015
|
|
|
2,011,671
|
|
|
$
|
1.29
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
0.55
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2016
|
|
|
1,911,671
|
|
|
|
1.33
|
|
Exercisable June 30, 2016
|
|
|
1,911,671
|
|
|
|
1.33
|
|
The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of June 30, 2016 is 1.43 years.
NOTE 8. COMMITMENTS AND CONTINGENCIES
During the six months ended June 30, 2016, the Company issued $550,000 principal amount of Notes with material terms and conversion features as follows:
Convertible debt
|
|
Quarter ended March 31, 2016
|
|
|
Quarter ended
June, 30, 2016
|
|
|
Year to date
June 30, 2016
|
|
# 4
|
|
$
|
325,000
|
|
|
|
-
|
|
|
$
|
325,000
|
|
# 3
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
# 4
|
|
|
25,000
|
|
|
|
-
|
|
|
|
25,000
|
|
# 5
|
|
|
50,000
|
|
|
|
-
|
|
|
|
50,000
|
|
# 6
|
|
|
25,000
|
|
|
|
-
|
|
|
|
25,000
|
|
# 7
|
|
|
75,000
|
|
|
|
-
|
|
|
|
75,000
|
|
Total
|
|
$
|
550,000
|
|
|
|
-
|
|
|
$
|
550,000
|
|
For the six months ended June 30, 2016, the Company issued 100,000 shares of common stock pursuant to the exercise of a warrant at a price of $0.5514 per share for total proceeds of $55,140.
On June 14, 2016, the Company accepted the resignation of Steven Katz form the Company Board of Directors and terminated the Engagement Letter and the services of Steve Katz and Associates. As part of the termination agreement, the Company agreed to pay the balance of unpaid fees to Steven Katz& Associates totaling $41,675. Additionally, The Company agreed to issue stock option at the fair market value of the Company stock to be determined by dividing $52,000 by the fair market value of the Company’s common stock.
NOTE 9. RELATED PARTY TRANSACTIONS
As a result of the acquisition of Celtic Limited, Celtic Iowa assumed two short-term notes payable due to a related party. The debt is denominated in Euros and on June 4, 2014, the date of the acquisition, the carrying amount of the debts were $204,186 after foreign currency remeasurement. The notes accrue compounded interest at 5% per annum and were due in November and December 2014. As of June 30, 2016 these notes are still outstanding and the carrying amount of these notes is $168,757. In March 2016, the Company negotiated an extension for both notes to December 31, 2017.
NOTE 10. SUBSEQUENT EVENTS
On July 25, 2016, the Company entered into a service agreement with IRTH Communications, LLC to perform certain Investor relations/Public relations, Internet development, communications and consulting services for the Company. The term of the agreement is 12-months. The Company agreed to pay $7,500 a month. The Company also agreed, as a single one-time retainer payment, to issue $100,000 worth of shares of the Company’s common stock; calculated by the average closing price of the Company’s common stock on its principal exchange for the ten trading days immediately prior to the execution of the agreement. The shares shall be restricted pursuant to the provisions of Rule 144.
On August 1, 2016, the Company entered into a consulting agreement with Dr. Geoffrey Laff, Ph. D to serve in the capacity of Vice President of Scientific Strategy. Dr. Laff will commit 35 hours per week to the company. The term of the agreement is month-to-month. The Company further commits, provided the agreement is still in effect, to the issuance of 65,000 shares of common stock with the standard restrictive legend on February 1, 2017.
In August 2016, we formed a fourth subsidiary, Caretta Therapeutics, Inc., to develop and commercialize products derived from cobra and rattlesnake venom for the treatment of chronic pain. The products are intended to be available in both prescription strength and Over the Counter formulations.
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. The research will be directed by Dr. Hengli Tang. The SRA provides for payments by the Company to the FSURF of $147,000 on September 1, 2016 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. The Company remitted to FSURF the contractual $147,000 on September 1, 2016.
On August 22, 2016, the Company created a Scientific Advisory Board, and named Dr. Hengli Tang as a member of the board. The Company issued Dr. Tang 25,000 shares of common stock. On the first anniversary of the agreement, the Company agreed to grant Dr. Tang an Option (pursuant to the Company’s 2015 Equity Incentive Plan) to purchase 20,000 shares of Common Stock at an exercise price equal to 85% of the published end-of-day market piece on the Option grant date.
On August 24, 2016, the holders of that certain series of Convertible Notes dated December 31, 2016 with an aggregate amount of $850,000 agreed to the Company’s special conversion offer to convert the notes into shares of common stock of the Company. The offer grants to the holders the limited option to convert the notes to common shares of the Company on the following terms:
|
·
|
Principal and accrued interest will convert at the average price on the common stock during the 20 consecutive trading days immediately prior to the conversion.
|
|
|
|
|
·
|
The conversion must be of all of the Holder’s outstanding principal and accrued interest related to the Notes.
|
|
|
|
|
·
|
The conversion will be effective September 15, 2016.
|
|
|
|
|
·
|
If all holders agree to convert under the terms set forth above by September 10, 2016, the Company will also issue one share of common stock to the holder for each $1.00 of principal converted.
|
|
|
|
|
·
|
Upon conversion, all further rights and obligations of the parties under the Note shall terminate.
|
The conversion will result in the issuance of 3,317,972 shares of the Company’s common stock.
On August 25, 2016, the Company entered into a consulting agreement with Cassandra MacArthur, to serve as Senior Vice President of Regulatory Affairs and Compliance. The term of the agreement is 12 months. The Company issued 50,000 shares of common stock. Provided the agreement is still in effect, the Company agrees to issue 100,000 shares of common stock with the standard restrictive legend on the twelve-month anniversary.
On August 31, 2016, the Company proposed convertible notes in the aggregate amount of up to $1,500,000 with an authorized amount up to an aggregate of $2,500,000. The funds are for general use. The terms are as follows:
|
·
|
At any time prior to the maturity date, the Convertible Note is convertible into shares of common stock of the Company at a price per share equal to 90% of the closing bid price of the common stock during the 20 consecutive trading days immediately preceding such conversion.
|
|
|
|
|
·
|
In the event the note has not been converted at the maturity date, the convertible note will automatically convert into shares of common stock of the Company at a per share price equal to 80% of the closing bid price of the common stock of the Company during the 20 consecutive trading days immediately preceding the maturity date.
|
|
|
|
|
·
|
Royalty terms as described below.
|
The term of the convertible note is 24 months. Interest will accrue at 7.5% computed on a 365-day basis. Interest is payable upon conversion of the convertible note at the applicable conversion price.
Investors will share in a royalty during years two, three and four in the following revenues of Caretta Therapeutics, Inc.;
|
·
|
Aggregate of 5% of net revenue.
|
|
|
|
|
·
|
Net revenues is defined as gross revenues, minus all license/royalty fees and cost of goods sold.
|
|
|
|
|
·
|
Royalties will cease once investor has received two times the amount invested.
|
|
|
|
|
·
|
Investors will receive warrants to purchase common stock of the Company equal to 30% of the amount invested based upon the exercise price.
|
|
|
|
|
·
|
The exercise price is defined as 110% of the closing bid price of the common stock of the Company on the six-month anniversary of the date of the issuance.
|
On September 1, 2016, the Company and Pierco Management agreed to a Settlement and Release Agreement for the Pierco notes payable assumed by the Company from American Exploration. The table below sets forth the notes included in the Settlement and Release Agreement:
Promissory note #
|
|
Issue
Date
|
|
Original
Principal
|
|
|
Interest
Rate
|
|
#5
|
|
6/2/2010
|
|
$
|
50,000
|
|
|
|
5
|
%
|
#6
|
|
2/4/2011
|
|
$
|
30,000
|
|
|
|
5
|
%
|
#7
|
|
4/5/2011
|
|
$
|
35,000
|
|
|
|
5
|
%
|
#8
|
|
8/11/2011
|
|
$
|
20,000
|
|
|
|
10
|
%
|
#9
|
|
12/5//2011
|
|
$
|
20,000
|
|
|
|
10
|
%
|
Total
|
|
|
|
$
|
155,000
|
|
|
|
|
|
The Company and Pierco agree to terms as follows;
|
·
|
Immediate cash payment of $25,000 from the Company.
|
|
|
|
|
·
|
A deferred cash payment of $25,000 due in 90 days from the effective date.
|
|
|
|
|
·
|
Issuance to Pierco Management $50,000 worth of the Company’s common stock using the average closing price for the 20 consecutive trading days preceding the effective date of the agreement
|
On September 6, 2016, the Company agreed to assume the unpaid interest for the portion of the April and July Lines-of-Credit that was to be paid from the debt service reserve as set forth in the Termination and Release Agreements in December 2015. The assumption of the interest resulted in the Company recording an additional $43,980 of interest expense for the three months ended March 31, 2016, and $19,229 of interest expense for the three months ended June 30, 2016.
In September 2016, the Company decided to temporarily suspend its activities in CDT Veterinary Therapeutics, Inc.