UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended September 30, 2016

 

Commission File No. 000-52542

 

Spotlight Innovation Inc.

(Name of small business issuer in its charter)

 

Nevada

 

98-0518266

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

6750 Westown Parkway, Suite 200-226

West Des Moines, IA 50266

(Address of principal executive offices)

 

(515) 274-9087

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes  x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated Filer

¨

Non-accelerated filer

¨

Smaller Reporting Company

x

(Do not check if smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 15, 2016, the Company had 21,285,514 outstanding shares of its common stock, par value $0.001.

 

 

 
 
 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report include forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

 

In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

 

 
2
 

  

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

4

 

Consolidated Balance Sheets (unaudited)

 

4

 

Consolidated Statements of Operations (unaudited)

 

5

 

Consolidated Statements of Cash Flows (unaudited)

 

6

 

Notes to Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

19

 

Item 4.

Controls and Procedures

 

19

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

20

 

Item 1A.

Risk Factors

 

20

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

20

 

Item 3.

Defaults Upon Senior Securities

 

20

 

Item 4.

Mine Safety Disclosures

20

 

Item 5.

Other Information

 

20

 

Item 6.

Exhibits

 

21

 

Signatures

 

22

 

 
3
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements (Unaudited)

 

SPOTLIGHT INNOVATION INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

September 30,
2016

 

 

December 31,
2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$ 289,264

 

 

$ 299,919

 

Prepaid expense

 

 

117,003

 

 

 

17,500

 

Total current assets

 

 

406,267

 

 

 

317,419

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $6,385 and $3,529, respectively

 

 

32,019

 

 

 

31,714

 

In-process research and development

 

 

6,977,347

 

 

 

6,977,347

 

Total assets

 

$ 7,415,633

 

 

 

7,326,480

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$ 243,654

 

 

$ 140,803

 

Accrued liabilities

 

 

747,596

 

 

 

527,287

 

Accounts payable – related parties

 

 

3,560

 

 

 

3,560

 

Stock payable

 

 

50,000

 

 

 

26,250

 

Notes payable

 

 

170,696

 

 

 

385,373

 

Lines of credit, net of discounts of $8,626 and $19,717, respectively

 

 

994,674

 

 

 

868,583

 

Short-term debt – related party

 

 

1,038,515

 

 

 

168,949

 

Deferred liabilities

 

 

225,000

 

 

 

220,465

 

Derivative liabilities

 

 

-

 

 

 

278,482

 

Convertible debentures – related parties, net of debt discounts of $766,010 and $555,753, respectively

 

 

2,378,990

 

 

 

2,244,247

 

Total liabilities

 

 

5,852,685

 

 

 

4,863,999

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Series A preferred stock, $5.00 par value, 500,000 shares authorized, 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Series C preferred stock, $5.00 par value, 500,000 shares authorized, 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Preferred stock, $0.001 par value, 4,000,000 shares authorized 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $0.001 par value, 4,000,000,000 shares authorized, 19,361,800 and 14,627,026 shares issued and outstanding, respectively

 

 

19,362

 

 

 

14,627

 

Additional paid-in capital

 

 

22,425,443

 

 

 

18,760,400

 

Accumulated deficit

 

 

(23,171,473 )

 

 

(18,643,652 )

Non-controlling interest

 

 

2,289,616

 

 

 

2,331,106

 

Total stockholders’ equity

 

 

1,562,948

 

 

 

2,462,481

 

Total liabilities and stockholders’ equity

 

$ 7,415,633

 

 

$ 7,326,480

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
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SPOTLIGHT INNOVATION INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

For the Nine

Months Ended

 

 

For the Nine

Months Ended

 

 

 

September 30,

2016

 

 

September 30,

2015

 

 

September 30,

2016

 

 

September 30,

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

1,555,931

 

 

 

1,799,468

 

 

 

3,775,578

 

 

 

3,208,479

 

Research and development expense

 

 

68,150

 

 

 

254,844

 

 

 

181,572

 

 

 

258,496

 

Depreciation expense

 

 

1,619

 

 

 

-

 

 

 

4,856

 

 

 

-

 

Settlement of payables

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,076

 

Total operating expenses

 

 

1,625,700

 

 

 

2,054,312

 

 

 

3,962,006

 

 

 

3,471,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

 

(1,625,700 )

 

 

(2,054,312 )

 

 

(3,962,006 )

 

 

(3,471,051 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(172,268 )

 

 

(182,003 )

 

 

(497,908 )

 

 

(763,195 )

Gain on derivative liability

 

 

26,068

 

 

 

-

 

 

 

78,160

 

 

 

-

 

Other income

 

 

4,955

 

 

 

146

 

 

 

7,988

 

 

 

477

 

Gain on foreign currency exchange

 

 

193

 

 

 

31,180

 

 

 

111

 

 

 

64,422

 

Loss on settlement of debt

 

 

(195,656 )

 

 

-

 

 

 

(195,656 )

 

 

-

 

Total other expense

 

 

(336,708 )

 

 

(150,677 )

 

 

(607,305 )

 

 

(698,296 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,962,408 )

 

 

(2,204,989 )

 

 

(4,569,311 )

 

 

(4,169,347 )

Net loss attributable to non-controlling interest holder

 

 

(12,755 )

 

 

(21,245 )

 

 

(41,490 )

 

 

(22,267 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Spotlight Innovation Inc.

 

$ (1,949,653 )

 

$ (2,183,744 )

 

$ (4,527,821 )

 

$ (4,147,080 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$ (0.12 )

 

$ (0.17 )

 

$ (0.30 )

 

$ (0.31 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic and diluted

 

 

15,920,123

 

 

 

14,277,026

 

 

 

15,447,745

 

 

 

13,828,277

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 
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SPOTLIGHT INNOVATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(unaudited)  

 

 

 

Nine Months

Ended

September 30,

2016

 

 

Nine Months

Ended

September 30,

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$ (4,569,311 )

 

$ (4,169,347 )

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,856

 

 

 

1,625

 

Amortization of debt discount

 

 

157,785

 

 

 

462,188

 

Interest expense from common shares issued for modification of convertible debt

 

 

-

 

 

 

37,500

 

Loss on settlement of debt and payables

 

 

195,656

 

 

 

4,076

 

Share-based compensation

 

 

1,697,117

 

 

 

1,983,764

 

Gain on fair value of derivative liability

 

 

(78,160 )

 

 

-

 

Gain on foreign currency exchange

 

 

(111 )

 

 

(64,422 )

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expense

 

 

(99,503 )

 

 

(26,250 )

Accounts payable

 

 

265,343

 

 

 

(148,744 )

Accounts payable - related party

 

 

-

 

 

 

86,485

 

Accrued liabilities

 

 

229,531

 

 

 

463,293

 

Deferred liabilities

 

 

4,535

 

 

 

-

 

Net cash used in operating activities

 

 

(2,192,261 )

 

 

(1,369,832 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

-

 

 

 

2,625

 

Acquisition of Memcine, net of cash received of $27,071

 

 

-

 

 

 

(2,929 )

Cash paid for purchase of fixed assets

 

 

(5,161 )

 

 

(5,220 )

Net cash used in investing activities

 

 

(5,161 )

 

 

(5,524 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(98,373 )

 

 

(2,500 )

Proceeds from convertible debenture - net

 

 

1,195,000

 

 

 

-

 

Proceeds from line-of-credit

 

 

115,000

 

 

 

-

 

Proceeds from short-term debt – related party

 

 

870,000

 

 

 

-

 

Proceeds from convertible debentures – related parties

 

 

-

 

 

 

1,719,800

 

Proceeds from sale of common shares and warrants

 

 

105,140

 

 

 

190,000

 

Net cash provided by financing activities

 

 

2,186,767

 

 

 

1,907,300

 

 

 

 

 

 

 

 

 

 

Increase/(decrease) in cash during the period

 

 

(10,655 )

 

 

531,944

 

Cash, beginning of the period

 

 

299,919

 

 

 

9,068

 

Cash, end of the period

 

$ 289,264

 

 

$ 541,012

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOWS INFORMATION

 

 

 

 

 

 

 

 

Income taxes paid

 

$ -

 

 

$ -

 

Interest paid

 

$ 73,373

 

 

$ 28,750

 

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING TRANSACTIONS

 

 

 

 

 

 

 

 

Deferred financing costs for convertible debentures

 

$ -

 

 

$ -

 

Debt discount for relative fair value of warrants attached to convertible debentures

 

$ 146,003

 

 

$ 277,598

 

Beneficial conversion feature for convertible debentures

 

$ 412,310

 

 

$ 999,310

 

Stock payable issued in settlement of debt

 

$ 50,000

 

 

$ -

 

Shares issued in settlement of convertible debt

 

$ 1,186,175

 

 

$ -

 

Shares issued in settlement of accounts payable

 

$ 96,781

 

 

$ -

 

Common shares issued for stock payable

 

$ 21,500

 

 

$ 269,705

 

Warrants issued in satisfaction of warrants payable

 

$ -

 

 

$ 385,351

 

Warrants issued for extinguishment of accounts payable – related party

 

$ -

 

 

$ 419,419

 

Derivative liability

 

$ (200,323 )

 

$ -

 

Reclassification of debt and interest to accrued liabilities

 

$ 102,748

 

 

$ -

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 
6
Table of Contents

   

SPOTLIGHT INNOVATION INC.

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 September 30, 2016, the Company had five subsidiaries: Celtic Biotech Iowa, Inc., Memcine Pharmaceuticals, Inc. (see Note 10 below), CDT Veterinary Therapeutics, Inc., Zika Therapeutics, Inc. and Caretta Therapeutics, Inc.

 

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.

 

On October 12, 2016, the Company terminated its interests in Memcine (see Note 10 below).

 

CDT Veterinary Therapeutics, Inc.

 

CDT Veterinary Therapeutics was formed in November 2015 to create reformulated variants of certain compounds, modified to meet the needs of the veterinary market. In September 2016, the Company decided to temporarily suspend its activities in CDT Veterinary Therapeutics, Inc.

 

Caretta Therapeutics, Inc.

 

Caretta Therapeutics, Inc. (“Caretta”) was formed in August 2016 to develop the commercialization of over-the-counter products. Caretta holds a license agreement to develop, manufacture and sell certain products derived from snake venom that may have analgesic properties.

 

Zika Therapeutics, Inc.

 

Zika Therapeutics, Inc. (“ZT”) was formed in August 2016 to pursue the therapeutic treatment for this emerging health threat. On August 19, 2016, the Company entered 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.

 

 
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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 for the period ended December 31, 2015 filed with the SEC, 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 nine months ended September 30, 2016 and 2015, the dilutive effect of the issuance of 448,571 and 5,200 options, 208,500 and 885,000 warrants, and 3,317,971, and 1,774,650 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.

 

 
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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 September 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 three months ended September 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 September 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. 

 

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 nine months ended September 30, 2016 and 2015, the Company recorded $0 in impairment to the Company’s long-lived assets. 

 

 
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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.

 

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

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.

 

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.

 

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.

 

 
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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 September 30, 2016, the Company had accumulated net losses of $23,171,473, and had a working capital deficit of $5,446,418. 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:

 

 

 

Date

 

Stated

 

 

Original

 

 

 

 

 

 

of

 

Interest

 

 

Principal

 

 

Due

 

Promissory Note

 

Note

 

Rate

 

 

Amount

 

 

Date

 

#1

 

05/29/09

 

 

10 %

 

$ 30,000

 

 

On Demand

 

#2

 

06/05/09

 

 

10 %

 

$ 7,698

 

 

On Demand

 

#3

 

08/16/09

 

 

10 %

 

$ 50,000

 

 

On Demand

 

#4

 

09/27/10

 

 

10 %

 

$ 60,000

 

 

On Demand

 

#5

 

06/02/10

 

 

5 %

 

$ 50,000

 

 

On Demand

 

#6

 

02/04/11

 

 

5 %

 

$ 30,000

 

 

On Demand

 

#7

 

05/04/11

 

 

5 %

 

$ 35,000

 

 

On Demand

 

#8

 

08/11/11

 

 

10 %

 

$ 20,000

 

 

On Demand

 

#9

 

12/05/11

 

 

10 %

 

$ 20,000

 

 

On Demand

 

#10

 

04/28/12

 

 

10 %

 

$ 30,000

 

 

On Demand

 

Total

 

 

 

 

 

 

 

$ 593,698

 

 

 

 

 

The Company also assumed $92,923 in accrued interest related to these notes. The Company recorded $21,861 and $21,540 in interest expense for the nine months ended September 30, 2016 and 2015, respectively, on the above notes payable. 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

 

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

 

 

 

 

 

 
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The Company and Pierco Management agreed to the following:

 

· 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 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.

  

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 September 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.

 

On September 6, 2016, the Company agreed to assume the unpaid interest for the portion of the April and July Letters-of-Credit with Denver Savings Bank 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 $83,441 of interest expense for the nine months ended September 30, 2016.

  

NOTE 5. CONVERTIBLE INSTRUMENTS

 

Discussion concerning convertible instruments can be found in Note 7 below.

   

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 September 30, 2016, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards acquired in connection with the merger. For the nine months ended September 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 September 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 September 30, 2016, the Company has a net operating loss carry forward of approximately $21 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. On September 8, 2016, the Company sold 108,695 shares for $50,000 in proceeds.

 

 
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Common Stock Issued for Services

 

The Company issued common stock for services in April, August, and September, 2016. The table below details the issuances:

  

Month

 

Shares

issued

 

 

Fair Value

at issue date

 

 

 

 

 

 

 

 

 

 

April

 

 

780,000

 

 

$ 377,500

 

August

 

 

25,000

 

 

 

19,750

 

September

 

 

100,000

 

 

 

73,500

 

 

Through the nine months ending September 30, 2016, the Company issued 905,000 shares of common stock for services to the Company. The fair value of the common stock at issue dates totaled $470,750 and has been recorded as stock compensation expense.

 

On September 25, 2016, the Company issued 278,108 shares of common stock for vendor services in accordance with the vendor agreement. The shares had a fair value as issue date of $96,782 and was charged to marketing expense.

 

Convertible Notes

 

During the quarter ended September 30, 2016, the Company issued $695,000 in principal amount of convertible notes. The material terms of the notes are as follows:

 

·

The notes have a term of 24 months. 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.

 

 

 

·

Interest accrues at 7.5% computed on a 365-day basis. Interest is payable upon conversion of the convertible note at the applicable conversion price.

 

 

 

·

At any time prior to the maturity date, the 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.

 

The Company also issued warrants to purchase 208,500 shares of common stock of the Company (the number of shares is equal to thirty percent of the amount invested in the notes based on the exercise price of the warrants (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 issuance date of the note)).

 

In connection with the issuance of the notes, Caretta entered into a Royalty Agreement with the investors thereof, whereby the investors will share, pro rata, during years two, three and four of Caretta as follows:

 

·

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 the investor has received two times the amount invested.

 

On September 19, 2016, the nine holders of an aggregate of $850,000 principal amount of convertible notes (originally issued in December, 2015 and January, 2016, collectively referred to as the “Notes”) agreed to convert the Notes into an aggregate of 3,317,971 shares of common stock. The shares of common stock of the Company were issued pursuant to the terms of the Notes, at a conversion price equal to the average of the closing price of the common stock of the Company for the twenty days preceding August 24, 2016, plus one share of common stock per one dollar principal amount of Notes converted.

 

The foregoing securities were issued pursuant to Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder.

 

 
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Options

 

2009 Plan

 

In 2009, 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.

 

As of September 30, 2016, there are 5,200 stock options outstanding under the 2009 Plan which were issued prior to the merger. 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:

 

·

Encourage selected employees, directors and consultants to improve operations and increase profits of the Company

 

 

·

Encourage selected employees, directors and consultants to accept or continue employment or association with the Company or 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 (the “ Shares ”); and

 

 

·

Align the interests of the Company with selected employees, directors and consultants.

 

The total number of shares of common stock which may be issued under the options granted pursuant to the Plan is 3,600,000. The shares covered by the portion of any grant under the plan which expires unexercised shall become available again for grant under the plan.

  

During the quarter ended September 30, 2016, the Company issued options to purchase 448,571 shares of common stock to a former member of the Board of Directors and current Board of Director members. A summary of the stock option activity for the nine months ended September 30, 2016 is presented below.

 

 

 

Options

 

 

Weighted-Average

Exercise Price

 

Outstanding December 31, 2015

 

 

2,605,200

 

 

$ 1.82

 

Granted

 

 

448,571

 

 

 

0.54

 

Exercised

 

 

-

 

 

 

-

 

Expired

 

 

-

 

 

 

-

 

Outstanding September 30, 2016

 

 

3,053,771

 

 

$ 1.63

 

Exercisable September 30, 2016

 

 

903,771

 

 

$ 2.99

 

 

 
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Warrants

 

During the nine months ended September 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.

 

A summary of the warrant activity for the nine months ended September 30, 2016 is presented below:

 

 

 

Warrants

 

 

Weighted-Average

Exercise Price

 

Outstanding December 31, 2015

 

 

2,011,671

 

 

$ 1.29

 

Granted

 

 

208,500

 

 

 

0.65

 

Exercised

 

 

(100,000 )

 

 

0.55

 

Expired

 

 

-

 

 

 

-

 

Outstanding at September 30, 2016

 

 

2,120,171

 

 

 

1.26

 

Exercisable September 30, 2016

 

 

2,120,171

 

 

 

1.26

 

 

The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of September 30, 2016 is 1.26 years.

 

During the quarter ended September 30, 2016, the Company issued warrants to purchase 208,500 shares of common stock in connection with the convertible notes described above. The warrants are exercisable in whole or in part during a term of three years commencing on the issuance date.

 

NOTE 8. 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 mother of the founder of Celtic). 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 September 30, 2016, these notes are still outstanding and the carrying amount of these notes is $168,515. In March 2016, the Company negotiated an extension for both notes to December 31, 2017.

   

NOTE 9. SUBSEQUENT EVENTS

 

On October 12, 2016, the Company entered into a Termination Agreement with Memcine, the University of Iowa Research Foundation, and Dr. Tony Vanden Bush. Pursuant to the termination agreement, the Company terminated and cancelled all of its interest in Memcine, terminated the shareholder agreement of Memcine, and John Krohn and Cristopher Grunewald resigned as officers and directors of Memcine.

 

On October 18, 2016, the Company entered into a Forbearance and Refinancing Agreement (the “Refinancing Agreement”) with K4 to refinance certain financial instruments. Pursuant to the Refinancing Agreement, the Company and K4 agreed as follows:

  

·

 

The December 31, 2015 Convertible Note in the principal amount of $2.5 million was cancelled and replaced with a new Amended and Restated Convertible Note in the principal amount of $2.5 million (the “Amended Note”). The warrants previously issued pursuant to the December 31, 2015 Convertible Note remain in effect. The material terms of the Amended Note include: interest at the rate of 8% per annum, which shall begin to accrue on January 1, 2017; Company may prepay the Amended Note (a) on or before December 31, 2017, with consent, which consent cannot be unreasonably withheld, for such purposes, including but not limited to a Nasdaq listing of the Company’s securities, or as a condition to an equity financing, and (b) at any time after December 31, 2017 upon 30 days written notice by the Company; principal amount and interest may be converted into shares of common stock of the Company at a discount of 15% of the average price of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion, but not less than $0.75; and the maturity date is December 31, 2021.

 

·

Repayment of a $700,000 loan (termination of all related loan documents) was waived.

 

·

The Company agreed to issue 4,000,000 shares of common stock, with standard restrictive legend.

 

 
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·

The following warrants to purchase shares of common stock of the Company were terminated:

 

Issuance Date

Expiration Date

Exercise Price

# Warrants / Shares

10/05/2013

10/05/2016

$1.46 / share

120,000

10/05/2013

10/05/2017

$1.46 / share

120,000

10/05/2013

10/05/2018

$1.46 / share

120,000

12/31/2015

12/31/2018

$1.00 / share

300,000

12/31/2015

12/31/2018

$1.25 / share

200,000

 

·

The Company issued warrants to purchase shares of common stock of the Company as follows:

 

Expiration Date

Exercise Price / Share

# Warrants / Shares

12/31/2019

$1.46

360,000

12/31/2019

$1.00

300,000

12/31/2019

$1.25

200,000

12/31/2019

$1.00

500,000

 

On October 26, 2016, the Company invested $200,000 with the potential to invest an additional $1.3 million dollars, in Solx, Inc. (“Solx”), a privately-held medical device company. Solx is dedicated to developing and commercializing innovative surgical technologies that threat refectory and moderate glaucoma and preserve vision.

  

On October 26, 2016, the Company entered into a restructuring term sheet with K4, whereby K4 agreed to attempt to (i) re-negotiate and assume certain payments owed to two third parties (the “Debt Service”), and (ii) re-negotiate and assume the $752,325 and $250,975 outstanding Letters of Credit with Denver Savings Bank (collectively the “LOCs”), prior to January 31, 2017. If K4 renegotiates and assumes the Debt Service and the LOCs, the Company will, on the closing date, issue to K4 a Convertible Promissory Note with the principal balance equal to the sum of (i) the principal balance outstanding on the LOCs as of the closing date, and (ii) the Debt Service as of the closing date. The Convertible Promissory Note will be converted into shares of common stock of the Company as follows: if converted within 120 days following issuance, at a rate of 65% of the average trading price of the Company’s for the period beginning on and including September 1, 2016 and ending the day before the issuance date, or (ii) $0.55 per share; and if converted after the 120th day following the issuance date thereof, at a rate of 65% of the average price of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion, but not less than $0.55 per share. The Company will, as additional consideration for the refinancing, issue K4 a warrant to purchase 1,875,000 shares of common stock of the Company at an exercise price of $1.20 per share, expiring December 31, 2018.

 

In November 2016, the Company converted Caretta Therapeutics, Inc. from a corporation to a limited liability company.

  

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company is a life sciences company that identifies and acquires rights to 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 the progress. When scientifically significant benchmarks have been achieved, we will endeavor to partner with proven market leaders via sale, out-license or strategic alliance. We believe that targeting rare and/or neglected indications offers and accelerated path to market, support from nonprofit advocacy groups, scarcity of competition, and pricing leverage.

 

Plan of Operation

 

Through September 30, 2016, management successfully completed two acquisitions, Celtic Biotech Iowa, Inc. and Memcine Pharmaceuticals, Inc. and has three other subsidiaries.

  

Generally, we have financed operations to date through the proceeds of the private placement of equity and debt instruments. Management anticipates additional increases in operating expenses and capital expenditures relating to retention of additional personnel, and advancement of our technologies. We anticipate that we will finance these expenses with further issuances of equity securities and debt issuances.

 

The Company anticipates securing additional financing in 2016. Additional issuances of equity or convertible debt securities could result in dilution to our current shareholders. Further, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. 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.

  

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Financial Condition and Changes in Financial Condition

 

Overall Operating Results:

 

Comparison of the Three Months Ended September 30, 2016 with the Three Months Ended September 30, 2015

 

Revenue. For the three months ended September 30, 2016 and September 30, 2015, sales were $0. The lack of revenues is due to the Company continuing to develop technologies in the health field.

 

General and Administrative Expenses . Our selling, general and administrative expenses decreased to $1,625,700 for the three months ended September 30, 2016, from $2,054,312 for the three months ended September 30, 2015, representing a $428,612 decrease. The decrease was mainly due to a decrease in development expense and investor relations expense.

 

 
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Other Income (Expense). For the three months ended September 30, 2016, other expense was $336,708, compared to $150,677 for the three months ended September 30, 2015. The increase in other expense was primarily due a net loss in settlement of debt in the amount of $195,656 for 2016.

 

Net Loss . The Company’s net loss was $1,962,408 and $2,204,989 for the three months ended September 30, 2016 and September 30, 2015, respectively. The increase in net loss was mainly due to an increase in professional fees and consulting services, offset by the change in the fair value of the derivative liability and a net loss in settlement of debt, as noted above.

 

Comparison of the Nine Months Ended September 30, 2016 with the Nine Months Ended September 30, 2015

 

Revenue. For the nine months ended September 30, 2016 and September 30, 2015, sales were $0. The lack of revenues is due to the Company continuing to develop technologies in the health field.

 

General and Administrative Expenses . Our selling, general and administrative expenses increased to $3,962,006 for the nine months ended September 30, 2016, from $3,471,051 for the nine months ended September 30, 2015, representing a $490,955 increase. The increase was mainly due to an increase in professional and consulting fees.

 

Other Income (Expense). For the nine months ended September 30, 2016, other expense was $607,305, compared to $698,296 for the nine months ended September 30, 2015. The decrease in other expense was primarily due to decreased interest expense related to the restructuring of debt and the termination and release agreements the Company entered into as of December 31, 2015 resulting in less interest expense for 2016 as compared to 2015, offset by a net loss in settlement of debt.

 

Net Loss . The Company’s net loss was $4,569,311 and $4,169,347 for the nine months ended September 30, 2016 and 2015, respectively. The increase in net loss was mainly due to an increase in professional fees and consulting services and a decrease in interest expense, as noted above.

 

Liquidity and Capital Resources:

 

The Company had $289,264 in cash as of September 30, 2016. The Company has negative working capital of $5,446,418 and total stockholders’ equity of $1,562,948 as of September 30, 2016. For the nine months ended September 30, 2016, the Company has experienced recurring losses from operations and may not have enough cash and working capital to fund its operations beyond the very near term, which raises substantial doubt about our ability to continue as a going concern. Management has made a similar note in the financial statements. The Company anticipates it will need approximately $3,000,000 for the next twelve months to fund operations. We may be required to seek additional capital by selling debt or equity securities, selling assets, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then shareholders. We provide no assurance that financing will be available in amounts or on terms acceptable to us, or at all.

 

The Company has been receiving funding from K4 Enterprises, LLC (“K4 Enterprises”) beginning in May, 2016 to meet short-term operational needs while the Company attempts to attract new outside funding. For the nine months ended September 30, 2016, K4 Enterprises has provided short-term operating cash totaling $870,000 in the form of cash advances or direct payment of invoices for the Company.

  

Cash Flows for the nine months ended September 30, 2016 and 2015

 

Cash Flows from Operating Activities . The Company had net cash used in operating activities of $2,192,261 and $1,369,832 for the nine months ended September 30, 2016 and 2015, respectively. The increase in net cash used in operating activities is related to the increase in consulting and professional fees incurred during the nine months ended September 30, 2016, compared to the nine months ended September 30, 2015.

 

Cash Flows from Investing Activities . The Company had net cash provided by investing activities of $5,161 for the nine months ended September 30, 2016, compared to net cash used of $5,524 in the nine months ended September 30, 2015.

 

 
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Cash Flows from Financing Activities . The Company had net cash provided by financing activities of $2,186,767 for the nine months ended September 30, 2016, compared to $1,907,300 for the nine months ended September 30, 2015. The increase in cash provided by financing activities is due to proceeds from a demand note from K4 and proceeds from the $2.5 million offering discussed in Note 7 to the consolidated financial statements. 

  

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Recent Accounting Pronouncements

 

During the quarter ended September 30, 2016, there were no accounting standards and interpretations issued which are expected to have a material impact on the Company’s financial position, operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “ smaller reporting company,” as defined by Rule 229.10(f)(1).

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of September 30, 2016 that our disclosure controls and procedures were not effective at ensuring that the material information required to be disclosed in the Exchange Act reports is recorded, processed, summarized and reported as required in applicable SEC rules and forms, due in part, to the limited personnel of the Company. Through the use of external consultants and the review process, management believes that the financial statements and other information presented herewith are materially correct.

  

Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2016, there were no changes in our internal control over financial reporting identified in connection with management’s evaluation of the effectiveness of our internal control over the financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

 

 
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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Neither the Company nor its property is a party to any pending legal proceeding.

 

Item 1A. Risk Factors

 

There are no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the year ended December 31, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Responsive information previously has been included in a Current Report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

The Company was in technical default of some of its obligations. 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 #

 

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 Management agreed to the following:

 

· 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 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.

 

As a result of the settlement and release agreement, the technical default has been resolved.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

 
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Item 6. Exhibits

 

Exhibit Number

 

Name of Exhibit

 

10.36

 

License Agreement between Spotlight Innovation Inc. and Paul Reid dated October 5, 2016.

 

 

 

10.37

 

Exclusive License Agreement between Spotlight Innovation Inc. and Indiana University Research and Technology Corporation dated October 13, 2016.

 

 

 

10.38

 

Standard Exclusive License Agreement with Sublicensing Terms executed as of November 8, 2016 by and between the Spotlight Innovation Inc. and the Florida State University Research Foundation, Inc.

 

31.1

 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)

 

31.2

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. (1)

 

101**

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 are formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. (2)

__________________  

(1)

Filed herewith.

 

 

(2)

Users of this data are advised that pursuant to Rule 406T of Regulation S-T, this XBRL information is being furnished and not filed herewith for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and Sections 11 or 12 of the Securities Act of 1933, as amended, and is not to be incorporated by reference into any filing, or part of any registration statement or prospectus, of Spotlight Innovation Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 
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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

SPOTLIGHT INNOVATION INC.

 

Dated: November 17, 2016

By:

/s/ Cristopher Grunewald

 

Cristopher Grunewald

 

President/Chief Executive Officer, Director

 

By:

  /s/ William Pim

 

William Pim

Chief Financial Officer

 

 

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