NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Spotlight Innovation Inc. (the “Company”) was organized under the laws of the state of 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”). Spotlight Innovation Inc. is a pharmaceutical company focused on acquiring the intellectual property rights to innovative and proprietary therapeutics designed to address unmet medical needs, with an emphasis on rare, emerging, or 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 December 31, 2016, the Company had four subsidiaries: Celtic Biotech Iowa, Inc. “Celtic Iowa”, Caretta Therapeutics, LLC (“Caretta”), SMA Therapeutics, LLC (“SMA”), and Zika Therapeutics, LLC (“Zika”).
Cancer
On June 4, 2014, Celtic Biotech Iowa, Inc. acquired Celtic Biotech Limited (hereinafter "CBL"). CBL 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.
Pain Management
Caretta Therapeutics, LLC 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 Virus Infection
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. The research is being conducted under the direction of Professor Hengli Tang.
Spinal Muscular Atrophy
In October 2016, the Company entered into an Exclusive License Agreement with Indiana University Research and Technology Corporation to commercialize STL-182, an orally-available small molecule that may have therapeutic potential for treating spinal muscular atrophy. Spinal Muscular Atrophy is an autosomal recessive disorder that is a leading genetic cause of death in infants and toddlers.
Additionally, the Company had interests in the following entities that was terminated during the year ended December 31, 2016:
CDT Veterinary Therapeutics, LLC (“CDT”) 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 suspend its activities in CDT Veterinary Therapeutics, Inc.
The Company acquired approximately 82% of Memcine Pharmaceuticals, Inc. ("Memcine") in June 2015. On October 12, 2016, the Company terminated its interest in Memcine, and 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of the assets acquired and liabilities assumed in the acquisition of Memcine and share-based compensation.
Principles of Consolidation
The consolidated financial statements include the Company's accounts, including those of the Company's subsidiaries. Accordingly, the Company has consolidated CBL, Celtic Iowa, CDT (Suspended), Caretta, Zika, and SMA. All significant intercompany accounts and transactions have been eliminated.
Non-Controlling Interest
The Company is required to report its non-controlling interest in all subsidiaries 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.
In the fourth quarter of 2016 the Company discontinued its operations with Memcine Pharmaceuticals. As part of the discontinuation, the Company sold it 100% of its rights including the non-controlling interest in Memcine.
Loss per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and "if converted" method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
For the years ended December 31, 2016 and 2015, the dilutive effect of 153,771 and 655,200 options, and 3,414,600 and 1,385,000 warrants, 0 and 2,053,132 common shares issuable for conversion of convertible debt, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). The Company had $313,333 and $253,231 cash equivalents at December 31, 2016 and 2015, respectively.
Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the FDIC. As of December 31, 2016, the Company had cash balances of $53,283 that were uninsured.
Foreign exchange and currency translation
For the years ended December 31, 2016 and 2015, the Company maintained cash accounts in U.S. dollars as well as European Union euros, and incurred certain expenses denominated in U.S. dollars and European Union euros. The Company's functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are translated using exchange rates at the end of each period. Exchange gains or losses on transactions are included in earnings. For all periods presented, any exchange gains or losses or translation adjustments resulting from foreign currency transactions are included in the statements of operations as other income (expense).
In-Process Research and Development
In-process research and development ("IPR&D") represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. During periods after completion, those acquired indefinite-lived assets are amortized based on their useful life. The fair value of the assets acquired was $6,977,347. These assets are still subject to research and development completion and accordingly, no amortization has been recorded.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is 3-10 years.
Impairment of Long-Lived Assets and Intangibles
The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to fair value. For the year ended December 31, 2016, the Company has evaluated and recorded no impairment to the Company's intangible assets.
Deferred Financing Costs
We have incurred debt origination costs in connection with the issuance of short-term convertible debt. These costs are capitalized as deferred financing costs and amortized using the straight-line method over the term of the related convertible debt.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.
Income Taxes
The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
Fair Value of Financial Instruments
The Company follows FASB ASC 820,
Fair Value Measurement
("ASC 820"), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.
As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
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. The Company's IPR&D assets were valued on a discounted cash flow model using the income approach. The inputs to the model were within Level 3 of the fair value hierarchy.
Subsequent Events
The Company evaluated subsequent events through the date when financial statements are issued for disclosure consideration.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company's operations, financial position or cash flows.
NOTE 3. GOING CONCERN
The Company is an early stage company and as such has not generated revenues from operations and there is no assurance of any future revenues. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2016, the Company has an accumulated deficit of $35,369,670 and has a working capital deficit of $4,956,319. 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. DISCONTINUED OPERATIONS
Memcine
On June 2, 2015, the Company acquired 82.25% of the ownership in Memcine for $30,000.
The following table summarizes the allocation of the purchase price to the net assets acquired:
Fair value at June 2, 2015
|
|
|
|
Cash
|
|
$
|
27,071
|
|
Property, plant and equipment
|
|
|
18,071
|
|
IPR&D
|
|
|
212,541
|
|
Total assets
|
|
|
257,683
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(854
|
)
|
Deferred liabilities
|
|
|
(220,465
|
)
|
Total liabilities
|
|
|
(221,319
|
)
|
Net assets acquired
|
|
$
|
36,364
|
|
The Company recorded the 17.75% non-controlling interest in Memcine at a fair value of $6,364.
On October 12, 2016 the Company terminated its interests in Memcine pursuant to a Termination Agreement with Memcine, the University of Iowa Research Foundation, and Dr. Tony Vanden Bush. The Company has reclassified the results from operations of Memcine to discontinued operations.
The following table summarizes the results of the Memcine business included in the consolidated statement of income as discontinued operations:
|
|
2016
|
|
|
2015
|
|
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
General and administrative expenses
|
|
|
48,986
|
|
|
|
90,437
|
|
Depreciation
|
|
|
1,311
|
|
|
|
829
|
|
Research & development
|
|
|
125,652
|
|
|
|
55,237
|
|
Impairment of long-lived asset
|
|
|
-
|
|
|
|
212,541
|
|
Income before taxes
|
|
|
(175,949
|
)
|
|
|
(359,044
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Results from discontinued operations
|
|
|
(175,949
|
)
|
|
|
(359,044
|
)
|
Gain from disposal of discontinued operations
|
|
|
229,055
|
|
|
|
-
|
|
Net income (loss) from discontinued operations
|
|
$
|
53,106
|
|
|
$
|
(359,044
|
)
|
The following table presents the assets and liabilities of Memcine classified as discontinued operations in the accompanying balance sheet as of December 31, 2015:
|
|
2015
|
|
Current assets of discontinued operations - Cash
|
|
$
|
46,688
|
|
Long-term assets of discontinued operations - Property, plant and equipment, net
|
|
|
20,194
|
|
Total assets of discontinued operations
|
|
$
|
66,882
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
36,560
|
|
Accrued liabilities
|
|
|
42,316
|
|
Deferred liabilities
|
|
|
220,465
|
|
Current liabilities of discontinued operations
|
|
$
|
299,341
|
|
Non-transferable balance sheet positions, such as intercompany payables of $299,574 as of October 12, 2016 were considered forgiven and netted against the gain on the disposal.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Description
|
|
Useful lives
(years)
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Computers
|
|
|
5
|
|
|
$
|
9,620
|
|
|
$
|
5,221
|
|
Software
|
|
|
3
|
|
|
|
761
|
|
|
|
–
|
|
Furniture
|
|
|
5
|
|
|
|
1,200
|
|
|
|
–
|
|
Equipment
|
|
|
10
|
|
|
|
9,000
|
|
|
|
9,000
|
|
Subtotal
|
|
|
|
|
|
|
20,581
|
|
|
|
14,221
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(7,426
|
)
|
|
|
(2,701
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
13,155
|
|
|
$
|
11,520
|
|
NOTE 6. NOTES RECEIVABLE
During 2016, the Company made two investments in SOLX, Inc. (“SOLX”), a private company that develops innovative surgical technologies to treat refractory glaucoma and preserve vision. The Company purchased $200,000 and $800,000 in Senior Convertible Promissory notes, maturing October 1, 2017. The notes carry an interest rate of 10%. No periodic interest payments will be made, however upon maturity the principal balance and the accrued interest will be paid unless converted to equity. On a fully converted basis, the principal represents about a 10% interest in SOLX. Of the 10% interest, 3% has been assigned to K4 Enterprises, LLC (“K4”).
NOTE 7. NOTES PAYABLE
During the year ended December 31, 2015, the Company issued convertible notes to various investors in the principal amount of $300,000. The convertible notes accrues interest on the principal amount at a rate of Citibank Prime Rate plus six percent. The convertible notes convert into shares of common stock of the Company in certain instances as discussed below. Upon the closing of a Qualified Financing, defined as 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 (“Qualified Financing”), the Company will issue warrants to each noteholder equal to 33.3% of the shares of common stock issuable thereunder, at an exercise price equal to 110% of the price offered in the Qualified Financing. Such warrants shall have a term of three years.
The conversion features of the Notes are as follows:
|
·
|
Upon the occurrence of a Qualified Financing within six months from the date of issuance, the note automatically converts, without any further action by the holder, into shares of common stock of the Company at a 35% discount to the pre-money valuation at the time of such Qualified Financing.
|
|
|
|
|
·
|
Upon the occurrence of a Qualified Financing within six and twelve months from the date of issuance, the note automatically converts, without any further action by the holder, into shares of common stock of the Company at a 75% discount to the pre-money valuation at the time of such Qualified Financing.
|
|
|
|
|
·
|
The Holder has the further right to convert the full principal amount of the note prior to a Qualified Financing and after the three-month anniversary of the issuance of the note, at a price equal to the lower of $0.75 or the average price of the common stock of the Company during the 20 consecutive trading days immediately prior to such conversion.
|
Due to the structure of the agreements and some of the terms contained therein, the Company determined that the issuance of these convertible notes resulted in derivative liability. The Company utilized a Black-Scholes option-pricing model and recorded a derivative liability in the amount of $278,482 related to these convertible notes for the year ended December 31, 2015.
During the three months ended March 31, 2016, the Company entered into subscription agreements with certain individuals and entities for purchase of an aggregate of $550,000 principal amount of convertible notes.
During the year ended December 31, 2016, the Company settled $155,000 of debt with a note holder by issuing $100,000 and $50,000 of stock payable. The Company recorded a gain on settlement of debt in the amount of $107,824. As of December 31, 2016, due to the statute of limitations, the Company wrote-off a note payable owed to a third party in the amount of $60,000. The Company also recorded a gain on settlement of debt in the amount of $60,000 related to the write-off of this debt.
For the year ended December 31, 2016, the Company entered into a special conversion offer with nine holders of the convertible notes above to convert the aggregate amount of $850,000 and accrued interest of $32,300 into 3,317,971 shares of common stock, fair valued at $1,161,290. The conversion price was $0.3575, based on the terms of the notes. The Company also recorded a gain on extinguishment of debt and related derivative liability in the amount of $341,130 and $488,221 as contributed capital. In addition, prior to the conversion discussed above, the Company recorded a change in fair value of the derivative liability in the amount of $78,159 related to the $850,000 convertible notes.
During 2016, the Company conducted a private placement and issued convertible notes in the aggregate principal amount of $1,382,000, which bear interest at the rate of 7.5% per annum. The notes are 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 notes mature 24 months after issuance, if not converted prior to the maturity date, the notes 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. The holders of the notes will receive, in the aggregate, pro rata based on investment, a total of five percent of the revenues of Caretta Therapeutics, LLC during the years ended December 31, 2017, 2018, 2019 and 2020. The investors also received a warrant to purchase that number of shares equal to 30% of the amount invested, for a period of two years, at an exercise price per share equal to 110% of the closing bid price of the common stock of the Company on the six month anniversary of the date of issuance of such warrant. During the year ended December 31, 2016, the Company recorded $1,817,315 and $713,442 of derivative liability and royalty liability, respectively, associated with these convertible notes. In addition, the Company also recorded debt discount related to the relative fair value of the warrants in the amount of $156,552. As of December 31, 2016, these convertible notes were converted into 2,704,005 shares of common stock fair valued at 2,673,443. The Company also recorded a gain on extinguishment of debt and related derivative liability in the amount of $411,995.
On October 16, 2016, pursuant to a series of transactions, a Convertible Note (dated December 31, 2015) in the principal amount of $2.5 million issued by the Company to K4, an entity owned by John M. Krohn, President, Chief Operating Officer and Director of the Company, was cancelled and replaced with a new Amended and Restated Convertible Note (“Amended Note”) in the principal amount of $2.5 million. 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 the consent of K4, 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 to K4. The 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 of the Amended Note is December 31, 2021. K4 waived repayment of a $700,000 loan. The Company agreed to issue 4,000,000 shares of common stock to K4, with standard restrictive legend. K4 agreed to terminate the following warrants:
Issuance Date
|
|
Expiration Date
|
|
Exercise Price
|
|
# Warrants / Shares
|
10/05/2013
|
|
10/05/2016 (1)
|
|
$1.46 / share
|
|
160,000
|
10/05/2013
|
|
10/05/2017
|
|
$1.46 / share
|
|
160,000
|
10/05/2013
|
|
10/05/2018
|
|
$1.46 / share
|
|
160,000
|
12/31/2015
|
|
12/31/2018
|
|
$1.00 / share
|
|
300,000
|
12/31/2015
|
|
12/31/2018
|
|
$1.25 / share
|
|
200,000
|
_______
(1)
|
The expired warrants were part of the amended debt negotiations and were reissued with a new expiration date.
|
The Company issued warrants to K4 as set forth below:
Expiration Date
|
|
Exercise Price / Share
|
|
# Warrants / Shares
|
12/31/2019
|
|
$1.46
|
|
320,000
|
12/31/2019
|
|
$1.00
|
|
300,000
|
12/31/2019
|
|
$1.25
|
|
200,000
|
12/31/2019
|
|
$1.46
|
|
160,000
|
12/31/2019
|
|
$1.00
|
|
500,000
|
As of December 31, 2016, the Company recorded the issuance of the 4,000,000 shares to K4 at fair value of $3,760,000, as more fully discussed in Note 11. The extinguishment of the $2.5 million and the $700,000 notes mentioned above resulted in the Company recording a loss on extinguishment in the amount of $3,134,507.
On December 19, 2016, the Company issued a convertible note to K4 in the principal amount of $830,000; interest accrues at the rate of 6% per annum, and is convertible at the option of K4 into shares of common stock of the Company at a price equal to 70% of the average closing bid price of the common stock of the Company during the six months immediately prior to such conversion. The Company also issued K4 warrants to purchase 2,075,000 shares of the Company’s common stock at an exercise price of $1.20 per share until December 31, 2018. On December 16, 2016, the Company (i) issued 350,000 common membership units of its subsidiary Caretta Therapeutics, LLC to K4, (ii) issued 200,000 common membership units of its subsidiary Zika Therapeutics, LLC to K4, (iii) issued 200,000 common membership units of its subsidiary SMA Therapeutics and (iv) assigned to K4 30% of the distributions and income received by the Company from its investment in SOLX, Inc.
On December 31, 2016, the Company issued a convertible note to K4 in the principal amount of $170,000, at the rate of 6% per annum, and is convertible at the option of K4 into shares of common stock of the Company at a price equal to 70% of the average closing bid price of the common stock of the Company during the six months immediately prior to such conversion. The Company also issued K4 warrants to purchase 425,000 shares of the Company’s common stock at an exercise price of $1.20 per share until December 31, 2018.
In connection with the $170,000 and $830,000 convertible notes, the Company recorded debt discount of $472,450 related to the relative fair value of the attached warrants. The convertible notes resulted in a derivative liability in the amount of $1,970,694, of which the Company recorded additional debt discount of $527,550 and expensed the remainder of $1,443,144. Prior to conversion discussed below, the Company recorded a change in fair value of the derivative liability in the amount of $621,867 related to the $830,000 convertible note.
As of December 31, 2016, K4 (pursuant to the terms of the respective instruments): (i) converted the $170,000 note, in its entirety, into 388,726 shares of common stock of the Company (at a price of $0.43733 per share) fair valued at $233,235, (ii) converted the entire Amended Note into 3,333,333 shares of common stock of the Company (at a price of $0.75 per share) fair valued at $2,500,000, and (iii) converted the entire $830,000 note into 1,897,896 shares of common stock of the Company (at a price of $0.43733 per share) fair valued at $1,138,737.
NOTE 8. LINES 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, 2016, 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.
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 the full principal amount 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.
NOTE 9. LEASES
As of December 31, 2016, the Company has one lease agreement. On December 15, 2016, the Company entered into a commercial sublease with K-4 in Urbandale, Iowa, for a term of five years, commencing December 15, 2016, ending December 1, 2021, and automatically continuing on a year-to-year basis thereafter, unless terminated in accordance with the provisions thereof. Monthly rent is $1,314, which will increase by 2% annually, plus a proportionate share of expenses, which will initially be $800 per month.
NOTE 10. INCOME TAXES
At December 31, 2016 and 2015, the Company's deferred tax assets consisted primarily of net operating loss carry forwards acquired from American Exploration in the merger. For the years ended December 31, 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 December 31, 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 December 31, 2016, the Company had a net operating loss carry forward of approximately $33.3 million, which will expire between years 2028 and 2036. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards are expected to be subject to significant annual limitations for the change in ownership that resulted in the merger with American Exploration.
NOTE 11. EQUITY
The Company has authorized 3,000,000 shares of Series A preferred stock, 500,000 shares of Series C preferred stock, 1,500,000 shares of preferred stock and 4,000,000,000 shares of common stock.
2015 Issuances
On January 5, 2015, the Company issued 33,334 shares of common stock for a subscription received in December 2014. The subscription consisted of 33,334 shares of common stock and 12,500 warrants to purchase one share of common stock for each warrant, for net cash proceeds of $25,000. The warrants have an exercise price of $1.25 per share and expire three years after the date of issuance. The relative fair value of the common stock was $13,702 and was recorded as a stock payable as of December 31, 2014. Warrants were issued during the year ended December 31, 2016.
On January 9, 2015, the Company issued 102,000 shares to Jennifer Kopriva in settlement of stock payable owed as of December 31, 2014 for services. The shares had a fair value of $165,003 based on the market price on the date of grant.
On January 9, 2015, the Company issued 55,000 shares to Rachel Pettit in settlement of stock payable owed as of December 31, 2014. The shares had a fair value of $91,000 based on the market price on the date of grant.
On February 3, 2015, the Company issued 25,000 shares to Daniel Pettit for services. The shares were issued at $1.65 per share and recorded as share-based compensation of $41,250.
On February 28, 2015, the Company entered into a stock for services agreement with Michael Reysack, the Company's Investor Relations Officer, to issue 156,139 shares of common stock for services. The fair value of these shares was $257,629 based on the market price on the date of grant.
On April 28, 2015, the Company issued 30,000 shares to Jared DeVries for interest on debt. The shares were issued at $1.25 per share and recorded as interest expense of $37,500.
On April 28, 2015, the Company issued 2,600 shares to Rachael Pettit for services. The shares were issued at $1.25 per share and recorded as share-based compensation of $3,250.
On June 6, 2015, the Company issued 25,000 shares to Daniel Pettit for services. The shares were issued at $1.25 per share and recorded as share-based compensation of $31,250.
On July 10, 2015, the Company issued 500,000 to Sundrop Consulting in accordance with a consulting agreement. The shares were issued at $1.05 per share and recorded as share-based compensation of 525,000.
On November 25, 2015, the Company issued 250,000 shares to the Community Foundation for Greater Des Moines as part of an agreement with Sundrop Consulting. The shares were issued in exchange for 1,000,000 warrants that were terminated. No additional expense was recorded as the fair value of the warrants exceeded the fair value of the common stock.
On December 8, 2015, the Company issued 100,000 shares of the Company's common stock to the Company's CFO for services and recorded the shares at the fair value at the date of issuance recording the transaction as share-based compensation of $90,000.
2016 Issuances
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.
The Company issued 25,000 shares on September 1, 2016 in settlement of a stock payable with a fair value of $21,500.
The Company issued 1,707,944 shares of common stock for employee services in lieu of cash compensation in 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
|
|
|
50,000
|
|
|
|
33,250
|
|
October
|
|
|
127,944
|
|
|
|
97,310
|
|
December
|
|
|
725,000
|
|
|
|
471,250
|
|
Total
|
|
|
1,707,944
|
|
|
$
|
999,060
|
|
The Company issued 278,108 shares of common stock for vendor services in accordance with a vendor agreement. The fair value of the common stock at issuance was $96,782 and has been recorded as a marketing expense.
In September 2016, the Company entered into a termination agreement in which 100,000 options to purchase common stock were terminated for the issuance of 50,000 shares of common stock. The fair value of the options on the termination date was $36,318 and the shares had a fair value of $40,250. The Company recorded a loss on options exchanged for common stock with third parties in the amount of $3,933.
In December 2016, the Company entered into exchange agreements with employees, consultants and directors of the Company to exchange 2,650,000 options, granted under the 2015 equity incentive plan, for 466,000 shares of common stock. The fair value of the options on the exchange date was $831,938 and the shares had a fair value of $302,900. The Company recorded stock compensation of $831,938, a loss on options exchanged for common stock with related parties and a gain on options exchanged for common stock with third parties of $494,395. The Company also recorded $34,644 as contributed capital related stock exchanged for related party options.
For the year ended December 31, 2016, the Company recorded amortization of stock options in the amount of $1,484,078, related to the options issued under the 2015 equity incentive plan.
As discussed in Note 7, for the year ended December 31, 2016, the Company entered into a special conversion offer with nine holders of convertible notes in the aggregate amount of $850,000 and accrued interest of $32,300. Eight of the note holders converted an aggregate of $400,000 of debt and $15,200 of accrued interest into an aggregate of 1,561,398 shares of common stock, fair valued at $546,489. The conversion price was $0.3575, based on the terms of the notes. The Company also recorded $48,701 as contributed capital.
As discussed in Note 7, during 2016, the Company conducted a private placement and issued convertible notes in the aggregate principal amount of $1,382,000. The Company also issued 414,600 warrant to purchase common stock as debt inducement, the relative fair value of the warrants was $156,552. As of December 31, 2016, these convertible notes were converted into 2,704,005 shares of common stock fair valued at $2,673,443. The Company recorded $117,588 as contributed capital.
As discussed in Note 7, the Company issued 4,000,000 shares of common stock in connection with the extinguishment of $3,200,000 of debt to K4 during 2016, total fair value of shares issued was $3,760,000. The Company issued an aggregate of 1,480,000 warrants to purchase share of common stock as debt inducement, the total relative fair value of the issued warrants was $889,923. The Company also recorded additional debt discount of $1,556,589 for the beneficial conversion feature pursuant to the terms of the Amended and Restated Convertible Note.
Transaction with K4 Enterprises, LLC.
As discussed in Note7, for the year ended December 31, 2016, the Company entered into a special conversion offer with nine holders of convertible notes in the aggregate amount of $850,000 and accrued interest of $32,300. K4, one of the nine note holders, converted $450,000 of debt and $17,100 of accrued interest into 1,756,573 shares of common stock, fair valued at $614,801. The conversion price was $0.3575, based on the terms of the notes. The Company also recorded $439,520 as contributed capital.
During 2016, the Company issued convertibles in the amounts of $170,000 and $830,000 to K4 (Note 7). The Company issued K4 2,500,000 warrants to purchase common stock as debt inducement with these convertible notes, relative fair value of the warrants was $472,450. For the year ended December 31, 2016, K4 (pursuant to the terms of the respective instruments): (i) converted the $170,000 note into 388,726 shares of common stock of the Company (at a price of $0.43733 per share), fair valued at $233,235, (ii) converted the entire $830,000 note into 1,897,896 shares of common stock of the Company (at a price of $0.43733 per share), fair valued at $1,138,738, and (iii) converted the entire $2.5 million Amended Note into 3,333,333 shares of common stock of the Company (at a price of $0.75 per share), fair valued at $2,500,000. The Company recorded $976,854 as contributed capital related to the extinguishment of the $170,000 and $830,000 debt and related derivative liabilities with K4. As of December 31, 2016, the Company has not issued the aggregate of 5,619,955 shares discussed above to K4. The Company recorded stock payable to K4 in the amount of $3,871,973 related to these shares.
On December 16, 2016, the Company (i) issued 350,000 common membership units of its subsidiary Caretta Therapeutics, LLC to K4 for proceeds of $350,000, (ii) issued 200,000 common membership units of its subsidiary Zika Therapeutics, LLC to K4 for proceeds of $20,000, (iii) issued 200,000 common membership units of its subsidiary SMA Therapeutics for proceeds of $20,000. The Company recorded a total of $390,000 in non-controlling interest in these subsidiaries during the year ended December 31, 2016.
Options
Upon the acquisition of American Exploration, the Company adopted the 2009 Stock Option Plan (the "2009 Plan"). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock. The Company, as part of the merger in 2013, issued and exchanged 5,200 stock options to individuals who previously held stock options in American Exploration.
2015 Equity Incentive Plan
On November 25, 2015, the Company authorized the Spotlight Innovation, Inc. 2015 Equity Incentive Plan (the "2015 Plan")
The total number of shares which may be issued under 2015 Plan shall not exceed the 3,600,000 Shares. The shares covered by the portion of any grant under the 2015 Plan which expires unexercised shall become available again for grant under the 2015 Plan.
In November 2015, the Company granted incentive stock options and non-qualified stock options to acquire an aggregate of 2,600,000 shares of the Company's common stock under the Company's 2015 Plan to various officers and consultants of the Company. The options have exercise prices of $1.10 to $1.21. Each option was granted under a three-year vesting term, 25% upon grant, and 25% on each of the first, second and third anniversary of grant date. Of the 2,600,000 options granted, 150,000 were issued to an executive officer and the remaining 2,450,000 were issued to certain consultants of the Company. The fair value of these options $2,382,078.
2016 Equity Incentive Plan
On December 13, 2016, the Company adopted the Spotlight Innovation Inc. 2016 Equity Incentive Plan (the “2016 Plan”) and reserved 5,000,000 shares of common stock under the 2016 Plan.
On December 23, 2016, the Company issued an aggregate of 231,000 shares of its common stock pursuant to the 2016 Plan, in exchange for options to purchase 300,000 shares of the common stock as follows:
Name
|
|
Number of
Shares issued
|
|
|
Number of
Option Shares
that were
canceled as a
result of the exchange
|
|
John Krohn (Our President, COO and a Director)
|
|
|
108,000
|
|
|
|
75,000
|
|
Craig Lang (A Director)
|
|
|
108,000
|
|
|
|
75,000
|
|
Cristopher Grunewald (Our CEO)
|
|
|
15,000
|
|
|
|
150,000
|
|
Total
|
|
|
231,000
|
|
|
|
300,000
|
|
On December 23, 2016, the Company granted to John William Pim, the Company’s Chief Financial Officer 125,000 shares of the Company’s common stock, valued at $81,250 pursuant to the 2016 Plan. The Company also issued an aggregate of 235,000 shares of common stock pursuant to the 2016 Plan to certain non-executive officers and consultants of the Company in exchange for options to purchase an aggregate of 2,350,000 shares of the Company’s common stock originally issued pursuant to the 2015 Plan.
Fair Value
The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model that uses the assumptions noted in the following table.
|
|
2015 Equity
Incentive Plan
|
|
|
2016 Equity
Incentive Plan
|
|
Expected Volatility
|
|
|
142.16
|
%
|
|
301-320
|
%
|
Expected Dividends
|
|
$
|
0
|
|
|
|
0
|
|
Expected Term in years
|
|
|
3
|
|
|
3-4
|
|
The weighted-average grant-date fair value of options granted in 2016 is $0.54.
Summary Stock Option Activity
A summary of the stock option activity for the years ended December 31, 2016 and 2015 is presented below:
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding December 31, 2014
|
|
|
5,200
|
|
|
$
|
359.04
|
|
Granted
|
|
|
2,600,000
|
|
|
|
1.11
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2015
|
|
|
2,605,200
|
|
|
$
|
1.82
|
|
Granted
|
|
|
448,571
|
|
|
|
0.54
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
2,900,000
|
|
|
|
1.06
|
|
Outstanding December 31, 2016
|
|
|
153,771
|
|
|
$
|
12.48
|
|
Exercisable December 31, 2016
|
|
|
153,771
|
|
|
|
12.48
|
|
The following table provides information as of December 31, 2016 regarding shares authorized for issuance under our equity compensation plans, including individual compensation arrangements.
|
|
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)
|
|
|
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
|
|
|
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding column (a))
|
|
Equity Compensation Plans Approved by Security Holders
|
|
|
3,605,200
|
|
|
$
|
3.95
|
|
|
|
5,050,000
|
|
Equity Compensation Plans Not Approved by Security Holders
|
|
|
1,364,171
|
|
|
|
1.40
|
|
|
|
-
|
|
Total
|
|
|
4,969,371
|
|
|
$
|
2.77
|
|
|
|
5,050,000
|
|
Warrants
During the year ended December 31, 2016, the Company issued warrants to purchase 414,600 shares of common stock. These warrants were issued in connection with the Company’s private placement conducted during the year ended December 31, 2016. These warrants have an exercise price equal to the closing price of the common stock of the Company on the six-month issuance thereof. The relative fair value of the warrants based on the Black-Scholes model was $156,552.
During the year ended December 31, 2016, the Company issued warrants to purchase 2,500,000 shares of common stock. These warrants were issued in connection with the Company’s convertible notes to K4 of $170,000 and $830,000 during the year ended December 31, 2016. These warrants have an exercise price equal to $1.20 per share. The relative fair value of the warrants based on the Black-Scholes model was $472,450.
During the year ended December 31, 2016, the Company issued warrants to purchase 1,480,000 shares of common stock. These warrants were issued in connection with the Company’s Amended and Restated Convertible Note dated October 18, 2016. These warrants have an exercise price equal ranging from $1.00 to $1.46 in accordance with the terms of the agreement. The relative fair value of the warrants based on the Black-Scholes model was $889,923.
The fair value of the above warrants was determined by using the Black-Scholes option-pricing model. Variables used in the model for the warrants issued include: i) discount rates ranging from 0.0% to 1.40%; ii) expected terms ranging from 0 to 5.00 years; iii) expected volatility ranging from 0% to 323.01%; iv) zero expected dividends and v) stock price of $0.64 to $1.48.
A summary of the warrant activity for the years ended December 31, 2016 and 2015 is presented below:
|
|
Warrants
|
|
|
Weighted-Average Exercise Price
|
|
Outstanding December 31, 2014
|
|
|
2,226,671
|
|
|
$
|
1.10
|
|
Granted
|
|
|
2,839,620
|
|
|
|
1.25
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired/forfeited
|
|
|
(3,054,620
|
)
|
|
|
1.11
|
|
Outstanding at December 31, 2015
|
|
|
2,011,671
|
|
|
|
1.29
|
|
Granted
|
|
|
4,394,600
|
|
|
|
1.19
|
|
Exercised
|
|
|
(100,000
|
)
|
|
|
1.68
|
|
Expired/forfeited/terminated
|
|
|
(480,000
|
)
|
|
|
1.46
|
|
Outstanding December 31, 2016
|
|
|
5,826,271
|
|
|
$
|
1.19
|
|
Exercisable December 31, 2016
|
|
|
5,826,271
|
|
|
$
|
1.19
|
|
The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of December 31, 2016 is 1.56 years.
NOTE 12. RELATED PARTY TRANSACTIONS
John M. Krohn, President, Chief Operating Officer and Director of the Company, is a 50% owner of K4. As disclosed in Note 7, the Company has entered into several financing agreements with K4. As disclosed in Note 9, the Company entered into a Sublease with K4, to occupy the current offices of the Company. On December 16, 2016, the Company (i) issued K4 350,000 common membership units of its subsidiary Caretta Therapeutics, LLC, (ii) issued K4 200,000 common membership units of its subsidiary Zika Therapeutics, LLC, (iii) issued K4 200,000 common membership units of its subsidiary SMA Therapeutics, LLC and (iv) assigned to K4 30% of the distributions and income received by the Corporation from its investment in SOLX, Inc.
On October 5, 2016, Caretta entered into a license agreement with Dr. Paul Reid, of Celtic Biotech, Iowa. On August 31, 2016, Mr. Arthur purchased a convertible note in the principal amount of $20,000 from the Company, in a private placement, and received a warrant to purchase 6,000 shares of the Company’s common stock. These warrants have an exercise price equal to the closing price of the Company common stock of the six-month issuance thereof.
The material terms of the note are:
|
·
|
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.
|
|
|
|
|
·
|
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.
|
In December 2016, Mr. Arthur converted the note in its entirety into 54,054 shares of the Company’s common stock.
The warrant issued to Mr. Arthur provides for the issuance of warrants to purchase 6,000 shares of common stock of the Company at an exercise price of $0.497, 110% of the closing bid price of the common stock of the Company on the six- month anniversary of the issuance date of the convertible note.
On August 31, 2016 and November 5, 2016, Dr. Agarwal purchased a principal amount of $250,000 and $100,000, respectively, of the note from the Company, in a private placement, and received warrants to purchase an aggregate of 105,000 shares of the Company’s common stock. The exercise price of the warrants is 110% of the closing bid price of the common stock of the Company on the six-month anniversary of the issuance date of the convertible note. For the warrants to purchase the first 75,000 common shares, the exercise price is $0.497.
In connection with the issuance of the notes, Caretta Therapeutics, LLC (a subsidiary of the Company) entered into a Royalty Agreement with Mr. Arthur and Dr. Agarwal pursuant to which Mr. Arthur and Dr. Agarwal will receive a pro rata share of a royalty during the years ended 2017, 2018, 2019 and 2020 of the Company’s subsidiary Caretta Therapeutics, LLC as follows:
|
·
|
Aggregate of 5% of net revenue.
|
|
|
|
|
·
|
Net revenues 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 in the respective note.
|
As of December 31, 2016, the Company has a demand note with K4 in the amount of $132,251. There are no formal payment terms, this loan is payable upon demand.
NOTE 13. SUBSEQUENT EVENTS
On January 10, 2017, the Company entered into an employment agreement with Cristopher Grunewald pursuant to which he is continuing to serve as the Company’s Chief Executive Officer, at a salary of $180,000 per annum. The agreement shall continue until the second anniversary thereof, unless terminated earlier pursuant to the agreement. Mr. Grunewald’s employment may be terminated by either the Company or by Mr. Grunewald at any time and for any reason; provided that, unless otherwise provided in the agreement, either party shall be required to give the other party at least 30 days advance written notice of any termination of Mr. Grunewald’s employment. In the event that Mr. Grunewald’s employment is terminated Without Cause by the Company or by Mr. Grunewald for Good Reason (as these terms are defined in the agreement) or subject to the terms of the agreement as a result of a Change in Control (as defined in the agreement), Mr. Grunewald shall be entitled to monthly payments equal to 12 months’ salary for the year in which the termination occurred as well as to receive payment for any accrued amounts (as defined in the agreement).
On January 13, 2017, the Company issued an aggregate of 1,235,000 shares of its common stock, valued at $802,750 pursuant to the 2016 Plan to non-executive officers and consultants of the Company.
Subsequent to December 31, 2016, K4 has loaned the Company an additional $475,000. There are no formal payment terms, this loan is payable upon demand. There is no stated interest rate.
During 2017, the Company has accepted subscriptions for $380,000 of convertible notes in the Private Placement (See Note 7 above).