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”). 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 September 30, 2017, 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 (subsidiary of Celtic Iowa, 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 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.
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, 2016 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 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.
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, 2017 and 2016, the dilutive effect of the issuance of 0 and 0 options, 1,087,100 and 0 warrants, and 948,079, and 0 shares of common stock 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 $150,644 and $313,333 cash equivalents at September 30, 2017 and December 31, 2016, respectively.
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, 2017, 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
The Company maintains 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).
Inventory
Inventories are stated at the lower of cost or market, using the average cost method. Cost includes materials, labor, and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis.
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 nine months ended September 30, 2017 and 2016, the Company recorded an impairment to the Company’s long-lived assets. On September 20, 2017, the U.S. Food and Drug Administration ("FDA") denied approval of the application for the SOLX glaucoma treatment. With this development, the Company has determined that the note receivable is fully impaired. See Note 7 below for further details.
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 material 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, 2017, the Company had accumulated net losses of $40,848,377 and had a working capital deficit of $2,300,734. 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 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:
|
|
Three Months
Ended
September 30,
2016
|
|
|
Nine Months
Ended
September 30,
2016
|
|
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
General and administrative expenses
|
|
|
45,316
|
|
|
|
154,866
|
|
Depreciation
|
|
|
437
|
|
|
|
1,311
|
|
Loss before taxes
|
|
|
(45,753
|
)
|
|
|
(156,177
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
Net loss from discontinued operations
|
|
$
|
(45,753
|
)
|
|
$
|
(156,177
|
)
|
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)
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Computers
|
|
|
5
|
|
|
$
|
9,620
|
|
|
$
|
9,620
|
|
Software
|
|
|
3
|
|
|
|
761
|
|
|
|
761
|
|
Furniture
|
|
|
5
|
|
|
|
1,974
|
|
|
|
1,200
|
|
Equipment
|
|
|
10
|
|
|
|
9,000
|
|
|
|
9,000
|
|
Subtotal
|
|
|
|
|
|
|
21,355
|
|
|
|
20,581
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(11,267
|
)
|
|
|
(7,426
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
10,088
|
|
|
$
|
13,155
|
|
NOTE 6. INVENTORY
Inventory consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
|
|
|
Venom
|
|
$
|
28,771
|
|
Packaging
|
|
$
|
19,594
|
|
Bottles, Caps & Roll-Ons
|
|
$
|
2,026
|
|
Finsihed Goods
|
|
$
|
146,978
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
197,368
|
|
NOTE 7. NOTES RECEIVABLE
During 2016, the Company made two investments in SOLX, Inc. (“SOLX”), a Massachusetts-based, privately-held medical device 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, 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 Enterprise, LLC (“K4”). During the nine months ended September 30, 2017, the Company purchased an additional note from SOLX in the amount of $36,771, and accrued interest income of $59,693.
The Company has been issued a warrant to purchase Series A Preferred stock or Series A-2 Preferred stock of SOLX. The warrant allows the Company to purchase 35% of the face value of the Company investment at a price of $0.8170 for Series A Preferred stock or $0.940 for Series A-2 Preferred stock. The expiration date is the earlier of (i) December 6, 2026, (ii) the closing of the initial public offering (IPO) of the SOLX Common Stock, (iii) the closing of the sale or substantially all of the assets of SOLX. The Company accrued interest income of $59,693.
The Company was advised that on September 20, 2017, the FDA sent a formal denial to SOLX of the application for FDA approval of the treatment for refractory glaucoma. SOLX has informed the Company that they will cease operations. The Company has determined, with the FDA denial of the application and SOLX’s assertion to cease operations, the note receivable is fully impaired, and the Company has charged the total balance of $1,116,075 against earnings in the quarter ended September 30, 2017. The value of the warrants issued to the Company by SOLX have been written off given the assertion by SOLX.
NOTE 8. NOTES PAYABLE
During 2016, the Company conducted a private offering of up to $2,500,000 in principal amount of the Company’s convertible promissory notes (the “Private Placement”), 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 ending December 31, 2017, 2018, 2019 and 2020. The investors shall also receive warrants to purchase a 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 issued convertible notes in the aggregate principal amount of $1,382,000, under the Private Placement.
During the nine months ended September 30, 2017, under the Private Placement, the Company issued convertible notes in the aggregate principal amount of $1,957,000. During the nine months ended September 30, 2017, the Company recorded $192,134 and $1,333,562 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 $40,389. As of September 30, 2017, the convertible notes converted into shares 948,079 of common stock, fair valued at $446,564, and stock payable of $400,082. The Company also recorded a gain on extinguishment of debt and related derivative liability in the amount of $243,716. For the nine months ended September 30, 2016, the Company recorded an unrealized loss on the change of present value of the royalty liabilities in the amount of $21,319.
NOTE 9. LEASES
As of September 30, 2017, the Company has one lease agreement. On December 15, 2016, the Company entered into a commercial sublease with K4 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. K4 is a related party. Monthly rent is $1,314, which will increase by two percent (2%) annually, plus a proportionate share of expenses, which will initially be $800 per month.
NOTE 10. 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.
As of September 30, 2017, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards. For the nine months ended September 30, 2017 and 2016, 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. For the nine months ended September 30, 2017 and 2016, the Company recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.
As of September 30, 2017, the Company has a net operating loss carry forward of approximately $39.4 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 authorized equity of the Company consists of: 4,000,000 shares of preferred stock (3,000,000 shares designated as Series A preferred stock, 500,000 shares designated as Series C preferred stock), and 4,000,000,000 shares of common stock.
Common Stock
The Company issued common stock for services during the nine months ended September 30, 2017. The table below details the issuances:
Month
|
|
Shares
Issued
|
|
|
Fair Value
at Issue Date
|
|
January 2017
|
|
|
1,360,000
|
|
|
$
|
884,000
|
|
February 2017
|
|
|
100,000
|
|
|
|
50,000
|
|
April 2017
|
|
|
136,250
|
|
|
|
48,450
|
|
September 2017
|
|
|
106,250
|
|
|
|
14,864
|
|
Total
|
|
|
1,702,500
|
|
|
$
|
997,314
|
|
Treasury Stock
During the nine months ended September 30, 2017, the Company reacquired a total of 2,615,000 shares of its common stock. The shares were previously held by Cris Grunewald, former executive officer and director of the Company, and the shares remained issued, but not outstanding, at September 30, 2017. The shares are recorded at cost of $0.
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, 2017, there are 5,200 stock options outstanding under the 2009 Plan.
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 of common stock which may be issued under the options granted pursuant to the 2015 Plan is 3,600,000. 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.
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. During the nine months ended September 30, 2017, the Company issued no options. A summary of the stock option activity for the nine months ended September 30, 2017 is presented below.
|
|
Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding December 31, 2017
|
|
|
153,771
|
|
|
$
|
12.48
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired/Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding September 30, 2017
|
|
|
153,771
|
|
|
$
|
12.48
|
|
Exercisable September 30, 2017
|
|
|
153,771
|
|
|
|
12.48
|
|
Warrants
During the nine months ended September 30, 2017, the Company issued 587,100 warrants to purchase shares of common stock. These warrants were issued in connection with the Company’s private placement conducted during the nine months ended September 30, 2017. 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 $43,088 on the grant date.
During the nine months ended September 30, 2017, the Company issued 500,000 warrants to purchase shares of common stock as stock compensation pursuant to the consulting agreement with an advisor of the Company. These warrants have a fixed exercise price of $1.25. The relative fair value of the warrants based on the Black-Scholes model was $45,274 on the grant date.
During the nine months ended September 30, 2017, warrants to purchase 794,171 common shares expired with an average exercise price of $1.27.
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 1.38% to 1.66%; ii) expected terms of 3.00 years; iii) expected volatility ranging from 110.71% to 270.27%; iv) zero expected dividends and v) stock price of $0.11 to $0.52.
A summary of the warrant activity for the nine months ended September 30, 2017 is presented below:
|
|
Warrants
|
|
|
Weighted-
Average
Exercise Price
|
|
Outstanding at December 31, 2016
|
|
|
5,826,271
|
|
|
$
|
1.29
|
|
Granted
|
|
|
1,087,100
|
|
|
|
1.07
|
|
Exercised
|
|
|
|
|
|
|
-
|
|
Expired/forfeited/terminated
|
|
|
(794,171
|
)
|
|
|
1.27
|
|
Outstanding September 30, 2017
|
|
|
6,119,200
|
|
|
$
|
1.16
|
|
Exercisable September 30, 2017
|
|
|
6,119,200
|
|
|
$
|
1.16
|
|
The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of September 30, 2017 is 1.77 years.
NOTE 12. RELATED PARTY TRANSACTIONS
John M. Krohn, President, Chief Operating Officer and Director of the Company, is a 50% owner of K4. The Company has entered into several financing agreements with K4. The Company entered into a sublease with K4, to occupy the current offices of the Company. 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, LLC to K4 and (iv) assigned to 30% of the distributions and income receive by the Corporation from its investment in SOLX, Inc. to K4.
On October 5, 2016, Caretta entered into a license agreement with Dr. Paul Reid, of Celtic Biotech, Iowa. Dr Reid is the founder of Celtic Biotech Iowa.
In August 2016, Mr. Ralph Arthur (Board Member) 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 on the six-month issuance thereof.
The material terms of the note are:
|
·
|
At any time prior to the September 25, 2019, 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 purchase of that number of shares of common stock of the Company equal to 30% of the amount invested in the convertible 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 convertible note).
In August and November 2016, Dr. Agarwal (Board Member) purchased an aggregate principal amount of $350,000 of the note (as described above) 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 warrants issued to Dr. Agarwal provides for the issuance of warrants to purchase that number of shares of common stock of the Company equal to 30% of the amount invested in the convertible 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 convertible note).
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 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 September 30, 2017, the Company has a demand note due to K4 in the amount of $447,000. There are no formal payment terms, this loan is payable upon demand.
On July 25, 2017, the Company settled its line-of-credit with the Denver Savings Bank through a promissory note from Mike Kemery, a Principal at K4 Enterprises, LLC, in the principal amount of $1,500,000. The note carries an interest rate of 4.5% and mature in 3 years. Pursuant to the terms of the agreement, the Company incurred a $300,000 loan origination fee, payable on demand. The Company recorded the fee as a debt discount.
On August 2, 2017, the Company received $37,500 from Paul Reid in the form of a demand note. There are no formal terms, this loan is payable upon demand.
As of September 30, 2017, the Company has a demand note due to Mary Reid, a parent of Paul Reid, a Principal with Celtic Ltd. in the principal amount of 150,000 Euros. The Company assumed the note in the acquisition of Celtic. The Company periodically reviews the notes making adjustments based upon the value of the Euro compared to the U.S. Dollar ("USD"). The USD value of the notes at period end September 30, 2017 and 2016 are $176,074 and $168,514, respectively.
NOTE 13. SUBSEQUENT EVENTS
Subsequent to September 30, 2017, the Company issued 1,143,091 shares to Daniel Pettit through a conversion of a $400,000 convertible note. The conversion price was $0.35 per share and included $82 of accrued interest.
Subsequent to September 30, 2017, the Company issued 75,000 shares to John Krohn and 31,250 to William Pim at $0.133 per share in accordance with their employment agreements.