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 June 30, 2018

 

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.)

 

11147 Aurora Avenue

Aurora Business Park, Building 3

Urbandale, IA 50322

(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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth 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)

Emerging growth company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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 August 22, 2018, the Company had 35,762,157 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

 

21

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

Item 4.

Controls and Procedures

 

26

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

27

 

Item 1A.

Risk Factors

 

27

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

Item 3.

Defaults Upon Senior Securities

 

27

 

Item 4.

Mine Safety Disclosures

 

27

 

Item 5.

Other Information

 

27

 

Item 6.

Exhibits

 

28

 

Signatures

 

29

 

 

 
3
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SPOTLIGHT INNOVATION INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

ASSETS

Current assets:

 

 

 

 

 

 

Cash

 

$ 1,950

 

 

$ 66,118

 

Accounts receivable

 

 

360

 

 

 

-

 

Inventory

 

 

189,820

 

 

 

192,726

 

Prepaid expenses

 

 

1,798

 

 

 

4,012

 

Other assets

 

 

6,000

 

 

 

-

 

Total current assets

 

 

199,928

 

 

 

262,856

 

 

 

 

 

 

 

 

 

 

Property, and equipment, net

 

 

8,361

 

 

 

9,033

 

In-process research and development

 

 

6,977,347

 

 

 

6,977,347

 

Total assets

 

$ 7,185,636

 

 

$ 7,249,236

 

 

LIABILITIES AND EQUITY (DEFICIT)

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$ 858,852

 

 

$ 592,696

 

Accounts payable and accrued liabilities – related parties

 

 

383,026

 

 

 

337,091

 

Accrued liabilities

 

 

730,309

 

 

 

644,220

 

Notes payable

 

 

170,669

 

 

 

171,006

 

Short-term debt – related parties

 

 

1,291,235

 

 

 

948,073

 

Stock payable

 

 

4,080

 

 

 

-

 

Total current liabilities

 

 

3,438,171

 

 

 

2,693,086

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Notes payable – related parties, net of debt discounts of $206,244 and $256,284, respectively

 

 

1,293,756

 

 

 

1,243,716

 

Convertible debentures, net of debt discounts of $876,778 and $687,556, respectively

 

 

599,754

 

 

 

332,209

 

Convertible debentures – related party, net of debt discounts of $412,928 and $245,407, respectively

 

 

197,072

 

 

 

89,593

 

Derivative liability

 

 

-

 

 

 

13,508

 

Royalty liabilities

 

 

2,818,347

 

 

 

2,128,916

 

Total long-term liabilities

 

 

4,908,929

 

 

 

3,807,942

 

Total liabilities

 

 

8,344,040

 

 

 

6,501,028

 

 

 

 

 

 

 

 

 

 

Equity (deficit):

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value, 3,000,000 shares authorized, 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Series C preferred stock, $0.001 par value, 500,000 shares authorized, 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Preferred stock, $0.001 par value, 1,500,000 shares authorized 0 shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, $0.001 par value, 4,000,000,000 shares authorized, 35,762,157 and 34,290,934 shares issued and outstanding, respectively

 

 

35,762

 

 

 

34,291

 

Additional paid-in capital

 

 

40,046,891

 

 

 

39,949,116

 

Accumulated deficit

 

 

(43,373,268 )

 

 

(41,539,533 )

Total equity (deficit) attributable to Spotlight Innovation Inc.

 

 

(3,287,555 )

 

 

(1,556,126 )

Non-controlling interest

 

 

2,129,151

 

 

 

2,304,334

 

Total equity (deficit)

 

 

(1,158,404 )

 

 

748,208

 

Total liabilities and equity (deficit)

 

$ 7,185,636

 

 

$ 7,249,236

 

 

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

 

 
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Table of Contents

 

SPOTLIGHT INNOVATION INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

For the Six

Months Ended

 

 

For the Six

Months Ended

 

 

 

June 30,

2018

 

 

June 30,

2017

 

 

June 30,

2018

 

 

June 30,

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

$ 2,232

 

 

$ -

 

 

$ 16,690

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

 

1,497

 

 

 

68,225

 

 

 

4,353

 

 

 

121,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT (LOSS)

 

 

735

 

 

 

(68,225 )

 

 

12,337

 

 

 

(121,100 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

562,732

 

 

 

803,917

 

 

 

1,096,535

 

 

 

2,440,692

 

Research and development expense

 

 

183,044

 

 

 

392,140

 

 

 

442,198

 

 

 

567,306

 

Depreciation expense

 

 

862

 

 

 

1,281

 

 

 

1,915

 

 

 

2,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses  

 

 

746,638

 

 

 

1,197,338

 

 

 

1,540,648

 

 

 

3,010,559

 

LOSS FROM OPERATIONS  

 

 

(745,903 )

 

 

(1,265,563 )

 

 

(1,528,311 )

 

 

(3,131,659 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on change in present value of royalty liabilities  

 

 

(71,118 )

 

 

(50,901 )

 

 

(66,027 )

 

 

(50,901 )

Interest expense  

 

 

(218,998 )

 

 

(379,721 )

 

 

(421,376 )

 

 

(899,357 )

Loss on derivative liability

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,364 )

Gain on extinguishment of debt and related derivative liability

 

 

-

 

 

 

37,971

 

 

 

-

 

 

 

243,716

 

Other income  

 

 

-

 

 

 

25,848

 

 

 

-

 

 

 

59,692

 

Gain (loss) on foreign currency exchange  

 

 

10,482

 

 

 

(12,238 )

 

 

6,796

 

 

 

(13,959 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

(279,634 )

 

 

(379,041 )

 

 

(480,607 )

 

 

(665,173 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,025,537 )

 

 

(1,644,604 )

 

 

(2,008,918 )

 

 

(3,796,832 )

Net loss attributable to non-controlling interest holder  

 

 

(76,968 )

 

 

(96,875 )

 

 

(175,183 )

 

 

(192,734 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Spotlight Innovation Inc. shareholders

 

$ (948,569 )

 

$ (1,547,729 )

 

$ (1,833,735 )

 

$ (3,604,098 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share - basic and diluted

 

$ (0.03 )

 

$ (0.05 )

 

$ (0.05 )

 

$ (0.12 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic and diluted

 

 

34,441,796

 

 

 

32,479,100

 

 

 

34,394,943

 

 

 

30,615,991

 

 

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

 

 

 
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Table of Contents

 

SPOTLIGHT INNOVATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Six Months Ended June 30,

2018

 

 

Six Months Ended June 30,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$ (2,008,918 )

 

$ (3,796,832 )

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

 

 

 

 

 

 

 

 

Share-based compensation

 

 

61,483

 

 

 

1,027,723

 

Depreciation and amortization

 

 

1,915

 

 

 

2,561

 

Loss on change of fair value of derivative liability

 

 

-

 

 

 

4,364

 

Amortization of debt discount

 

 

307,753

 

 

 

727,694

 

Interest expense on derivative liability that exceeds face value

 

 

-

 

 

 

96,541

 

Gain on extinguishment of debt and related derivative liability

 

 

-

 

 

 

(243,716 )

(Gain) loss on foreign currency exchange

 

 

(6,796 )

 

 

13,959

 

Unrealized loss on change in present value of royalty liabilities

 

 

66,027

 

 

 

50,901

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(360 )

 

 

 

 

Inventory

 

 

2,906

 

 

 

-

 

Prepaid expenses

 

 

(3,786 )

 

 

(27,445 )

Accrued interest from notes receivable

 

 

-

 

 

 

(59,693 )

Accounts payable

 

 

265,408

 

 

 

200,837

 

Accounts payable and accrued liabilities - related parties

 

 

45,935

 

 

 

7,802

 

Accrued liabilities

 

 

86,089

 

 

 

(96,161 )

Net cash used in operating activities

 

 

(1,182,344 )

 

 

(2,091,465 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Cash paid for notes receivable

 

 

-

 

 

 

(36,771 )

Cash paid for purchase of fixed assets

 

 

(1,245 )

 

 

(774 )

Net cash used in investing activities

 

 

(1,245 )

 

 

(37,545 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repayment of notes payable

 

 

(243,029 )

 

 

(806,500 )

Proceeds from convertible debenture

 

 

469,800

 

 

 

1,515,000

 

Proceeds from convertible note – related party

 

 

300,000

 

 

 

-

 

Proceeds from demand note – related party

 

 

592,650

 

 

 

1,235,000

 

Net cash provided by financing activities

 

 

1,119,421

 

 

 

1,943,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash during the period

 

 

(64,168 )

 

 

(185,510 )

Cash, beginning of the period

 

 

66,118

 

 

 

313,333

 

Cash, end of the period

 

$ 1,950

 

 

$ 127,823

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOWS INFORMATION

 

 

 

 

 

 

 

 

Income taxes paid

 

$ -

 

 

$ -

 

Interest paid

 

$ 25,000

 

 

$ 41,053

 

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING AND FINANCING TRANSACTIONS

 

 

 

 

 

 

 

 

Common shares issued for extinguishment of debt and related derivative liability

 

$ 25,000

 

 

$ 495,816

 

Extinguishment of related party debt and derivative liability as contributed capital

 

$ 13,508

 

 

$ -

 

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

 

$ 3,334

 

 

$ 39,232

 

Debt discount for relative fair value of royalty liabilities attached to convertible debentures

 

$ 623,405

 

 

$ 991,386

 

Stock payable issued for conversion of convertible debenture

 

$ -

 

 

$ 400,082

 

Common shares issued for stock payable

 

$ -

 

 

$ 3,926,976

 

Derivative liability related to convertible debentures

 

$ -

 

 

$ 288,676

 

 

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

 

 
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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. 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. In late summer/early fall of 2016, the Company changed its disease focus and has revised its product offerings including the addition of new indications and the elimination of previous programs.

 

As of June 30, 2018, the Company had four subsidiaries: Celtic Biotech Iowa, Inc. “Celtic Iowa”, Caretta Therapeutics, LLC (“Caretta”), SMA Therapeutics, LLC (“SMA”), and Zika Therapeutics, LLC (“Zika”).

 

As of June 30, 2018, the non-controlling interest ownership percentage for subsidiaries are as follows:

 

Subsidiary

 

Percentage of

Non-controlling Interest

 

Owner of Non-controlling Interest

Celtic Biotech Iowa, Inc.

 

5

%

 

 

Various

Caretta Therapeutics, LLC

 

35

%

 

 

K4 Enterprises

SMA Therapeutics, LLC

 

20

%

 

 

K4 Enterprises

Zika Therapeutics, LLC

 

20

%

 

 

K4 Enterprises

 

K4 Enterprises, an entity partially owned and controlled by the President and Chief Executive Officer of the Company.

 

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.

 

 
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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, 2017 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 debt instruments, derivatives, the fair value of royalty liabilities 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 majority of the non-controlling interest is controlled by K4 Enterprises. 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.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a 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 $1,950 and $66,118 of cash equivalents at June 30, 2018 and December 31, 2017, respectively.

 

 
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Accounts Receivable.

 

Accounts receivable typically consist of receivables derived from the sale of our non-opioid product Venodol. The Company has classified these as short-term assets in the consolidated balance sheet because the Company expects repayment or recovery within the next 12 months. The Company evaluates these accounts receivable for collectability considering the results of operations and, when necessary, records allowances for expected unrecoverable amounts.

 

Allowance for Doubtful Accounts

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized in general and administrative expense. As of June 30, 2018, no allowances have been recorded.

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value, using an average cost method. Costs include 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 inventory to the new cost basis.

 

Concentrations of Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). As of June 30, 2018, 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 has 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 have not been impaired nor has any amortization 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 six months ended June 30, 2018 and 2017, the Company recorded no in impairment to the Company’s long-lived assets.

 

Deferred Financing Costs

 

We have incurred debt origination costs in connection with the issuance of short-term convertible debt. These costs are accounted as an offset to reduce convertible debt as debt discount and amortized using the effective interest rate method over the term of the related convertible debt.

 

 
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Royalty Liabilities

 

The royalty rights agreements entered into in connection with the issuances of our convertible promissory notes, issued under the Company’s private placement discussed in Note 7, are treated as sales of future revenues that meet the requirements of Accounting Standards Codification Topic 470 “Debt” to be treated as debt. The estimated future cash outflows under the royalty rights agreements have been combined with the convertible promissory notes issuance costs and interest payable to calculate the effective interest rate of the convertible promissory notes and will be accounted for as interest expense using the effective interest rate method over the term of the convertible promissory notes and royalty rights agreements. Estimating the future cash outflows under the royalty rights agreements requires us to make certain estimates and assumptions about future sales of Venodol products. These estimates of the magnitude and timing of Venodol sales are subject to significant variability due to the current status of development of Venodol products, and thus are subject to significant uncertainty. Therefore, the estimates are likely to change, which may result in future adjustments. The Company records unrealized gains and losses on the change in the present value of the royalty liabilities.

 

Revenue Recognition

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Under the modified retrospective method, prior period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included no significant changes as a result of this adoption. While the Company does not expect 2018 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning on January 1, 2018. Refer to Note 4 – Revenue from Contracts with Customers for additional information.

 

Cost of Revenue

 

The Company’s cost of revenue consists of all costs associated with the production and shipping to our outside warehouse as well as all components costs. The cost to produce sample products that are given out for promotional purposes are also included in the cost of revenue.

 

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.

 

Loss per Common Share

 

Basic 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 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.

 
 
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For the six months ended June 30, 2018 and 2017, the dilutive effect of the issuance of 230,940 and 454,000 warrants, and 74,973, and 948,079 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.

 

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 has evaluated subsequent events through the date when the consolidated financial statements were issued for disclosure consideration.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements and related disclosures.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect that the ASU will have on our financial position, results of operations, and disclosures.

 
 
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Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

 

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 consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of June 30, 2018, the Company had accumulated net losses of $43,373,268 and had a working capital deficit of $3,235,183. 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. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Change in Accounting Policy

 

The Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Refer to Note 2 – Summary of Significant Accounting Policies for additional information.

 

Disaggregation of Revenue from Contracts with Customers.

 

The following table disaggregates revenue by significant product type for the three and six months ended June 30, 2018:

 

 

 

Three months

ended

June 30,

2018

 

 

Six months

ended

June 30,

2018

 

Venodol sales

 

$ 2,232

 

 

$ 16,690

 

Total revenue from customers

 

$ 2,232

 

 

$ 16,690

 

 

There were no significant contract liabilities or transaction price allocations to any remaining performance obligations as of June 30, 2018.

 

NOTE 5. INVENTORY

 

Inventory consisted of the following:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Venom

 

$ 28,771

 

 

$ 28,771

 

Packaging

 

 

19,439

 

 

 

19,577

 

Bottles, Caps & Roll-Ons

 

 

2,026

 

 

 

2,026

 

Finished Goods

 

 

139,584

 

 

 

142,352

 

Total Inventory

 

$ 189,820

 

 

$ 192,726

 

 
 
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NOTE 6. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

Description

 

Useful lives

(years)

 

 

June 30,

2018

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Computers

 

5

 

 

$ 10,864

 

 

$ 9,620

 

Software

 

3

 

 

 

761

 

 

 

761

 

Furniture

 

5

 

 

 

1,974

 

 

 

1,974

 

Equipment

 

10

 

 

 

9,000

 

 

 

9,000

 

Subtotal

 

 

 

 

 

22,599

 

 

 

21,355

 

Less accumulated depreciation

 

 

 

 

 

(14,238 )

 

 

(12,322 )

Property and equipment, net

 

 

 

 

$ 8,361

 

 

$ 9,033

 

 

NOTE 7. NOTES PAYABLE

 

The Company’s short-term and long-term liabilities consists of the following:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Notes payable

 

 

 

 

 

 

Notes payable - various

 

$ 170,669

 

 

$ 171,006

 

Total notes payable

 

 

170,669

 

 

 

171,006

 

 

 

 

 

 

 

 

 

 

Short-term debt –related parties

 

 

 

 

 

 

 

 

Demand notes – various related parties

 

 

208,583

 

 

 

218,042

 

Demand note – K4 Enterprises

 

 

1,082,652

 

 

 

730,031

 

Total short-term debt –related parties

 

 

1,291,235

 

 

 

948,073

 

 

 

 

 

 

 

 

 

 

Notes payable – related party

 

 

 

 

 

 

 

 

Notes payable – Mike Kemery

 

 

1,500,000

 

 

 

1,500,000

 

 

 

 

 

 

 

 

 

 

Beginning debt discount

 

 

256,284

 

 

 

-

 

Additions to debt discount

 

 

-

 

 

 

300,000

 

Accretion of interest expense

 

 

(50,040 )

 

 

(43,716 )

Ending debt discount

 

 

206,244

 

 

 

256,284

 

 

 

 

 

 

 

 

 

 

Total notes payable – related party, net debt discount

 

 

1,293,756

 

 

 

1,243,716

 

 

 

 

 

 

 

 

 

 

Convertible debentures

 

 

 

 

 

 

 

 

Convertible debentures – various

 

 

1,476,532

 

 

 

1,007,482

 

 

 

 

 

 

 

 

 

 

Beginning debt discount

 

 

675,273

 

 

 

-

 

Additions to debt discount

 

 

378,146

 

 

 

1,388,605

 

Accretion of interest expense

 

 

(176,641 )

 

 

(713,332 )

Ending debt discount

 

 

876,778

 

 

 

675,273

 

 

 

 

 

 

 

 

 

 

Total convertible debentures, net debt discount

 

 

599,754

 

 

 

332,209

 

 

 

 

 

 

 

 

 

 

Convertible debentures – related parties

 

 

 

 

 

 

 

 

Convertible debentures – various related parties

 

 

610,000

 

 

 

335,000

 

 

 

 

 

 

 

 

 

 

Beginning debt discount

 

 

245,406

 

 

 

-

 

Additions to debt discount

 

 

248,593

 

 

 

356,522

 

Accretion of interest expense

 

 

(81,071 )

 

 

(111,116 )

Ending debt discount

 

 

412,928

 

 

 

245,406

 

 

 

 

 

 

 

 

 

 

Total convertible debentures – related party, net debt discount

 

$ 197,072

 

 

$ 89,593

 

 
 
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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.

 

Prior to April 18, 2017, the Company conducted a private offering for the sale of convertible notes up to an aggregate of $2,500,000. After April 18, 2017, the Company amended and expanded the private offering to allow for the issuance of up to $11,500,000. Under the amended and expanded offering, the Company conducted a private offering (the “Private Placement 2017”), which bear interest at the rate of 7.5% per annum.

 

During the six months ended June 30, 2018, the Company issued convertible notes related and third parties in the aggregate principal amount of $769,800 under the Private Placement 2017. During the six months ended June 30, 2018, the Company recorded $3,334 and $623,405 of debt discount related to the relative fair value of the warrants and royalty liability, respectively, associated with these convertible notes. As of June 30, 2018, a related party noteholder converted their $25,000 note into 74,973 shares of the Company’s common stock, fair valued at $21,742. In connection with the conversion, the Company also recorded $13,508 extinguishment on related party debt and derivative liability as contributed capital.

 
 
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The notes issued under the private placements are convertible into shares of common stock of the Company based upon the table below:

 

 

 

 

Automatic Conversion Upon Maturity

Principal amount of debt

 

Number of convertible debentures

 

Holder

Optional Conversion

 

Conversion price

for automatic conversion

 

Floor Conversion Price

$400,000

 

1 *

 

$0.35

 

$0.35

 

None

$490,000

 

9 **

 

90% of closing bid price 20 consecutive

days prior to conversion

 

80% of 20 consecutive days prior to conversion

 

None

$475,000

 

3

 

90% of closing bid price 20 consecutive

days prior to conversion

 

90% of the closing bid price 20 consecutive days prior to conversion and the floor conversion price

 

See schedule below ***

$1,611,532

 

18

 

90% of the closing bid price 20 consecutive

days prior to conversion

 

90% of the closing bid price 20 consecutive days prior to conversion and the floor conversion price

 

$0.60

_________

* This debt converted into shares of common stock during the year ended December 31, 2017.

** All notes have been converted into shares of common stock during the three months ended March 31, 2018.

*** The floor conversion price for the $475,000 of convertible debt is as follows:

 

Conversion Date (by calendar quarter)

 

Floor Conversion Price

 

2017 Q2

 

$ 0.60

 

2017 Q3

 

$ 0.70

 

2017 Q4

 

$ 0.85

 

2018 Q1

 

$ 1.00

 

Each Subsequent Quarter

 

Increase $0.10

per Quarter

 

 

The holders of the notes were issued a warrant entitling the holder the right to purchase shares of Company common stock, equal to 30% of the value of their original convertible note. The warrant has a three-year term with an exercise price of $1.30 per share. Under the amended and expanded subscription agreement, the Company issued warrants to purchase 626,185 shares of the Company’s common stock with a relative fair value of $32,557.

 

For the six months ended June 30, 2018, the Company issued 230,940 warrants to purchase common stock of the Company with a relative fair value of $3,334 in connection with the private placement conducted during the period.

 

NOTE 8. NOTE PAYABLE - RELATED PARTY

 

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 (an entity partially owned and controlled by the President and Chief Executive Officer of the Company), in the principal amount of $1,500,000. The note carries an interest rate of 4.5% per annum and matures in three 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. The discount is being amortized over the life of the note and the unamortized balance at June 30, 2018 was $206,244, see Note 7.

 

NOTE 9. ROYALTY LIABILITIES

 

The holders of the certain convertible notes referenced in Note 7 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.

 
 
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On April 18, 2017, the Company revised the royalty agreement with the amendment and expansion of the subscription agreement from a maximum aggregate $2,500,000 to a maximum aggregate of $11,500,000. The term of the royalty for OTC Roll-On Venodol and OTC Oral Venodol begins on October 1, 2018 and ends on December 21, 2023. The royalty term of prescription strength Venodol shall be from October 1, 2018 and ending December 31, 2024. Notwithstanding the forgoing, the royalty shall terminate upon the achievement of the Maximum Royalty Amount as described in the table below:

 

Investment parameter

 

Per unit royalty per $100,000 Roll-on

 

 

Per unit royalty per $100,000 Oral

 

 

Per Unit royalty per $100,000 Prescription

 

 

Maximum Royalty Amount

 

Less than $400,000

 

$ 0.00304348

 

 

$ 0.00304348

 

 

$ 0.00347826

 

 

8 times the subscription amount

 

Greater than $400,000

 

$ 0.00391304

 

 

$ 0.00391304

 

 

$ 0.00608696

 

 

12 times the subscription amount

 

 

For 2018, the royalty changed for new subscribers such that the “Royalty Term” shall mean the period beginning October 1, 2018 and ending on the date set forth on the following table for the subscriber’s Affiliated Investment Amount.

 

Affiliated Investment Amount

Royalty Term End Date

Max Royalty Multiple

At least

But less than

 

(of investment amount)

$25,000

$50,000

12/31/2023

4.00

$50,000

$100,000

12/31/2023

5.00

$100,000

$150,000

12/31/2023

6.00

$150,000

$200,000

12/31/2023

7.00

$200,000

$250,000

9/30/2024

8.00

$250,000

$300,000

9/30/2024

9.00

$300,000

$350,000

9/30/2024

10.00

$350,000

$400,000

9/30/2024

11.00

$400,000

$500,000

9/30/2024

12.00

$500,000

$600,000

3/31/2025

12.25

$600,000

$700,000

3/31/2025

12.50

$700,000

$800,000

3/31/2025

12.75

$800,000

$900,000

3/31/2025

13.00

$900,000

$1,000,000

3/31/2025

13.25

$1,000,000

$1,200,000

9/30/2025

13.50

$1,200,000

$1,400,000

9/30/2025

13.75

$1,400,000

$1,600,000

3/31/2026

14.00

$1,600,000

$1,800,000

3/31/2026

14.25

$1,800,000

$2,000,000

9/30/2026

14.50

$2,000,000

 

9/30/2026

15.00

 

For the six months ended June 30, 2018, the Company recorded $623,405 of debt discount related to the relative fair value of the royalty liabilities associated with the new convertible notes, see Note 7. For the six months ended June 30, 2018, the Company recorded an unrealized loss related to the change in present value of the royalty liabilities in the amount of $66,027.

 

NOTE 10. LEASE

 

As of June 30, 2018, the Company had one lease agreement. On December 15, 2016, the Company entered into a commercial sublease with K4 Enterprises 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 Enterprises is a related party. Monthly rent is $1,314, which will increase by 2% annually, plus a proportionate share of expenses, which will initially be $800 per month. Expenses in 2017 increased to $1,286 per month.

 

NOTE 11. INCOME TAXES

 

Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income.

 

At June 30, 2018, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards. For the three months ended June 30, 2018 and 2017, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the consolidated financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At June 30, 2018 and 2017, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.

 
 
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As of June 30, 2018, the Company has a net operating loss carry forward of approximately $36.5 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.

 

On December 22, 2017, new federal tax reform legislation was enacted in the United States (the “2017 Tax Act”), resulting in significant changes from previous tax law. The 2017 Tax Act reduces the federal corporate income tax rate to a flat rate of 21%, from a graduated rate structure with a top rate of 35%, effective January 1, 2018. The rate change, along with certain immaterial changes in tax basis resulting from the 2017 Tax Act, resulted in a reduction of the Company’s net deferred tax assets of approximately $4.7 million, and a corresponding reduction in the valuation allowance.

 

NOTE 12. 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

 

During the six months ended June 30, 2018, the Company issued 74,923 shares of the Company’s common stock for the conversion of a related party convertible note in the amount of $25,000.

 

The Company issued common stock for services during the six months ended June 30, 2018. The table below details the issuances:

 

Month

 

 

Shares Issued

 

 

 

Fair Value

 at Issue Date

 

 

 

 

 

 

 

 

 

 

May 2018

 

 

106,250

 

 

$ 4,771

 

June 2018

 

 

1,290,000

 

 

 

52,632

 

Total

 

 

1,396,250

 

 

$ 57,403

 

 

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 June 30, 2018, 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.

 

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 June 26, 2018, the Compensation Committee of the Board of Directors awarded 1,390,000 shares of common stock to certain officers, directors, employees and key vendors, under the Company’s 2016 Equity Incentive Plan. As of June 30, 2018, the Company had not yet issued 100,000 shares of these awards and recorded stock payable for $4,080.

 
 
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During the six months ended June 30, 2018, the Company issued no options to purchase shares of common stock. A summary of the stock option activity for the six months ended June 30, 2018 is presented below.

 

 

 

Options

 

 

Weighted-Average

Exercise Price

 

Outstanding December 31, 2017

 

 

153,771

 

 

$ 12.48

 

Granted

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

Expired/Forfeited

 

 

-

 

 

 

-

 

Outstanding June 30, 2018

 

 

153,771

 

 

$ 12.48

 

Exercisable June 30, 2018

 

 

153,771

 

 

 

12.48

 

 

Warrants

 

During the six months ended June 30, 2018, the Company issued warrants to purchase 230,940 shares of common stock. These warrants were issued in connection with the Company’s private placement conducted during the six months ended June 30, 2018. These warrants have an exercise price equal to the closing price of the Company’s common stock on the six-month anniversary of the issuance thereof. The relative fair value of the warrants based on the Black-Scholes model was $3,334.

 

During the six months ended June 30, 2018, 95,000 warrants expired with an average exercise price of $1.25.

 

During the six months ended June 30, 2018, 45,000 warrants were terminated with an average exercise price of $1.02

 

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 2.05% to 2.46%; ii) expected terms of 3.00 years; iii) expected volatility ranging from 139% to 147%; iv) zero expected dividends and v) stock price of $0.10 to $0.19.

 

A summary of the warrant activity for the six months ended June 30, 2018 is presented below:

 

 

 

Warrants

 

 

Weighted-Average Exercise Price

 

Outstanding at December 31, 2017

 

 

6,151,845

 

 

$ 1.16

 

Granted

 

 

230,940

 

 

 

1.30

 

Exercised

 

 

-

 

 

 

-

 

Expired/forfeited/terminated

 

 

(140,000 )

 

 

1.18

 

Outstanding June 30, 2018

 

 

6,242,785

 

 

$ 1.16

 

Exercisable June 30, 2018

 

 

6,282,745

 

 

$ 1.16

 

 

The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of June 30, 2018 is 1.13 years.

 

NOTE 13. RELATED PARTY TRANSACTIONS

 

On January 10, 2017, the Company entered into an employment agreement with Cristopher Grunewald pursuant to which he would continue to serve as the Company’s Chief Executive Officer at a salary of $180,000 per annum. The agreement was to continue until the second anniversary thereof, unless terminated earlier pursuant to the agreement. Pursuant to such 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).

 

 
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On May 22, 2017, Mr. Grunewald resigned as Chief Executive Officer of the Company. Pursuant to Mr. Grunewald’s resignation, the Company issued Mr. Grunewald a warrant to purchase 500,000 shares of common stock of the Corporation with an exercise price of $1.25 per share for a term of three years. Mr. Grunewald also agreed to cancel 1,618,627 shares of common stock of the Company previously owned by Mr. Grunewald. Mr. Grunewald remains with the Company in an advisory capacity pursuant to a consulting agreement.

 

Short-term and long-term liabilities to related parties consists of the following:

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Short-term debt –related parties

 

 

 

 

 

 

Demand notes – various related parties

 

 

208,583

 

 

 

218,042

 

Demand note – K4 Enterprises

 

 

1,082,652

 

 

 

730,031

 

Total short-term debt –related parties

 

 

1,291,235

 

 

 

948,073

 

 

 

 

 

 

 

 

 

 

Notes payable – related party

 

 

 

 

 

 

 

 

Notes payable – Mike Kemery

 

 

1,500,000

 

 

 

1,500,000

 

 

 

 

 

 

 

 

 

 

Beginning debt discount

 

 

256,284

 

 

 

-

 

Additions to debt discount

 

 

-

 

 

 

300,000

 

Accretion of interest expense

 

 

(50,040 )

 

 

(43,716 )

Ending debt discount

 

 

206,244

 

 

 

256,284

 

 

 

 

 

 

 

 

 

 

Total notes payable – related party, net debt discount

 

 

1,293,756

 

 

 

1,243,716

 

 

 

 

 

 

 

 

 

 

Convertible debentures – related parties

 

 

 

 

 

 

 

 

Convertible debentures – various related parties

 

 

610,000

 

 

 

335,000

 

 

 

 

 

 

 

 

 

 

Beginning debt discount

 

 

245,406

 

 

 

-

 

Additions to debt discount

 

 

248,593

 

 

 

356,522

 

Accretion of interest expense

 

 

(81,071 )

 

 

(111,116 )

Ending debt discount

 

 

412,928

 

 

 

245,406

 

 

 

 

 

 

 

 

 

 

Total convertible debentures – related party, net debt discount

 

$ 197,072

 

 

$ 89,593

 

 

On April 21, 2017, Dr. Beetler (Director) purchased a convertible note in the principal amount of $25,000 from the Company, in a private placement, and received a warrant to purchase 7,500 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.

 

On June 7, 2017, Dr. Beetler purchased a convertible note in the principal amount of $250,000 from the Company, in a private placement, and received a warrant to purchase 82,500 shares of the Company’s common stock. The warrants have an exercise price of $1.30 per share. 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 and the floor conversion price as described in the table below.

 
 
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Conversion Date (by calendar Quarter)

 

Floor Conversion Price

 

2017 Q2

 

$ 0.60

 

2017 Q3

 

$ 0.70

 

2017 Q4

 

$ 0.85

 

2018 Q1

 

$ 1.00

 

Each Subsequent Quarter

 

Increase $0.10

per Quarter

 

 

·

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.

 

On September 25, 2017, Mr. Arthur (Director) purchased a convertible note in the principal amount of $35,000 from the Company, in a private placement, and received a warrant to purchase 10,500 shares of the Company’s common stock. The warrants have an exercise price of $1.30 per share. 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 and the floor conversion price is $0.60 per share.

 

·

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.

 

In connection with the issuance of the note, Caretta Therapeutics, LLC (a subsidiary of the Company) entered into a royalty agreement with Mr. Arthur pursuant to which Mr. Arthur 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.

 

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 (an entity partially owned and controlled by John Krohn, the President, COO, and CEO of the Company), in the principal amount of $1,500,000. The note carries an interest rate of 4.5% and mature in three 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 March 21, 2018, Ms. Greta Lang (a related party) purchased a convertible note in the principal amount of $275,000 from the Company, in a private placement, and received a warrant to purchase 82,500 shares of the Company’s common stock. 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 (i) 90% of the of the closing price of the common stock for 20 consecutive trading days immediately preceding such conversion (ii) Floor Conversion Price at $0.60 per share.

 

·

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 connection with the issuance of the note, Caretta Therapeutics, LLC (a subsidiary of the Company) entered into a royalty agreement with Ms. Lang pursuant to which Ms. Lang will receive a pro rata share of a royalty during the years ended 2018 through September 30, 2024 of the Company’s subsidiary Caretta Therapeutics, LLC with a maximum royalty amount of 9 times the principal amount of the convertible note.

 

On April 2, 2018, Ms. Greta Lang (a related party) purchased a convertible note in the principal amount of $25,000 from the Company, in a private placement, and received a warrant to purchase 82,500 shares of the Company’s common stock. 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 (i) 90% of the of the closing price of the common stock for 20 consecutive trading days immediately preceding such conversion (ii) Floor Conversion Price at $0.60 per share.

 

·

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 connection with the issuance of the note, Caretta Therapeutics, LLC (a subsidiary of the Company) entered into a royalty agreement with Ms. Lang pursuant to which Ms. Lang will receive a pro rata share of a royalty during the years ended 2018 through September 30, 2024 of the Company’s subsidiary Caretta Therapeutics, LLC with a maximum royalty amount of 9 times the principal amount of the convertible note.

 

As of June 30, 2018, the Company has a demand note with K4 Enterprises, an entity partially owned and controlled by the President and Chief Executive Officer of the Company, in the amount of $1,082,652. There are no formal payment terms, this loan is payable upon demand.

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

 

Overview

 

We are 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 alliances.

 

Plan of Operation

 

As of June 30, 2018, the Company had four subsidiaries: Celtic Biotech Iowa, Inc., Caretta Therapeutics, LLC, SMA Therapeutics, LLC, and Zika Therapeutics, LLC.

 

Cancer

 

On June 4, 2014, Celtic Biotech Iowa, Inc. (hereinafter "Celtic Iowa," a subsidiary of the Company) 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 (“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.

 

Spinal Muscular Atrophy

 

On October 13, 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.

 

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.

 

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.

 

During the six months ended June 30, 2018, the Company raised $769,800 in convertible debt proceeds. The Company anticipates securing additional financing in 2018. 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

 

The following describes the critical accounting policies used in reporting our financial condition and results of operations. In some cases, accounting standards allow more than one alternative accounting method for reporting. In those cases, our reported results of operations would be different should we employ an alternative accounting method.

 
 
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The significant accounting policies and bases of presentation for our consolidated financial statements are described in Note 2 "Summary of Significant Accounting Policies." The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

 

We believe the following accounting policies and estimates to be critical:

 

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, ZT, 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.

 

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.

 

Impairment of Long-Lived Assets and Intangibles

 

The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to fair value. For the six months ended June 30, 2018, the Company has evaluated and recorded no impairment to the Company's intangible assets.

 

Royalty Liabilities

 

The royalty rights agreements entered into in connection with the issuances of our convertible promissory notes, issued under the Company’s private placement discussed in Note 7, are treated as sales of future revenues that meet the requirements of Accounting Standards Codification Topic 470 “Debt” to be treated as debt. The estimated future cash outflows under the royalty rights agreements have been combined with the convertible promissory notes issuance costs and interest payable to calculate the effective interest rate of the convertible promissory notes and will be accounted for as interest expense using the effective interest rate method over the term of the convertible promissory notes and royalty rights agreements. Estimating the future cash outflows under the royalty rights agreements requires us to make certain estimates and assumptions about future sales of Venodol products. These estimates of the magnitude and timing of Venodol sales are subject to significant variability due to the current status of development of Venodol products, and thus are subject to significant uncertainty. Therefore, the estimates are likely to change, which may result in future adjustments. The Company records unrealized gains and losses on the change in the present value of the royalty liabilities.

 
 
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Revenue Recognition

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry-specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 on January 1, 2018, using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Under the modified retrospective method, prior period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included no significant changes as a result of this adoption. While the Company does not expect 2018 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning on January 1, 2018. Refer to Note 4 – Revenue from Contracts with Customers for additional information.

 

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.

 

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.

 

Results of Operations

 

Financial Condition and Changes in Financial Condition

 

Overall Operating Results:

 

Comparison of the Three Months Ended June 30, 2018 with the Three Months Ended June 30, 2017

 

Revenue. For the three months ended June 30, 2018, revenues of $2,232 were generated by Caretta Therapeutics. There was no revenue for the three months ended June 30, 2017.

 
 
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Cost of Sales. For the three months ended June 30, 2018, cost of goods sold decreased to $1,497 from $68,225 for the three months ended June 30, 2017. The decrease was mainly due to reduction of cost of sales due to new product development and contractor costs in the three months ended June 30, 2017. The cost of sales for the three months ended June 30, 2017, were related to Venodol sample costs.

 

General and Administrative Expenses. Our selling, general and administrative expenses decreased to $562,732 for the three months ended June 30, 2018 from $803,917 for the three months ended June 30, 2017, representing a $241,185 decrease. The decrease was primarily related to a reduction of stock compensation expense of $32,249, a reduction in wages and compensation of $39,880, a reduction in advertising and marketing of $33,627, and a reduction in legal and professional fees of $79,833.

 

Other Income (Expense). For the three months ended June 30, 2018, other expense was $279,634, compared to $379,041 for the three months ended June 30, 2017, a decrease of $99,407. The decrease in other expense was primarily due a reduction in interest expense of $160,723.

 

Net Loss. The Company’s net loss was $1,025,537 and $1,644,604 for the three months ended June 30, 2018 and 2017, respectively. The decrease in net loss was mainly due to a reduction in interest expense of $ 160,723, reduced stock compensation expense of $32,240 and other operating reduction costs.

 

Comparison of the Six Months Ended June 30, 2018 with the six Months Ended June 30, 2017

 

Revenue. For the six months ended June 30, 2018, revenues of $16,690 were generated by Caretta Therapeutics. There was no revenue for the six months ended June 30, 2017.

 

Cost of Sales. For the six months ended June 30, 2018 cost of goods sold decreased to $4,353 from $121,100 for the six months ended June 30, 2017. The decrease was mainly due to reduction of cost of sales due to new product development and contractor costs in the six months ended June 30, 2017. The cost of sales for the six months ended June 30, 2017, were related to Venodol sample costs.

 

General and Administrative Expenses. Our selling, general and administrative expenses decreased to $1,096,535 for the six months ended June 30, 2018 from $2,440,692 for the six months ended June 30, 2017, representing a $1,344,157 decrease. The decrease was primarily related to a reduction of stock compensation expense of $966,240, a reduction in advertising and marketing of $142,887, a reduction in legal and professional fees of $165,362 and investor relations of $47,894.

 

Other Income (Expense). For the six months ended June 30, 2018, other expense, net was $480,607, compared to $665,173 for the six months ended June 30, 2017, a decrease of $184,566. The decrease in other expense was primarily due a reduction in interest expense of $477,981, partially offset by a decrease in gain on extinguishment of debt and related derivative liability of $243,716.

 

Net Loss. The Company’s net loss was $2,008,918 and $3,796,832 for the six months ended June 30, 2018 and 2017, respectively. The decrease in net loss was mainly due to a reduction in interest expense of $477,981, reduced stock compensation expense of $966,240 and other operating reduction costs.

 

Liquidity and Capital Resources:

 

We are an early stage company and have not generated any revenue to date. We have incurred recurring losses to date. Our consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.

 

The Company had $1,949 in cash and cash equivalents as of June 30, 2018. The Company has negative working capital of $3,235,183, and total stockholders’ deficit of $1,158,404 as of June 30, 2018. For the six months ended June 30, 2018, 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. The Company anticipates it will need approximately $4,000,000 for the next twelve months following the issuance of this filing 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 existing shareholders. We cannot provide any assurances that financing will be available in amounts or on terms acceptable to us, or at all.

 
 
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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 six months ended June 30, 2018, K4 Enterprises has provided short-term operating cash totaling $592,650 in the form of cash advances or direct payment of invoices for the Company.

 

Operating Activities

 

Cash flow from operations – Net cash used in operating activities was $1,182,344 for the six months ended June 30, 2018, compared to $2,091,465 for the six months ended June 30, 2017. Net cash used in operating activities for the six months ended June 30, 2018 was derived from our net loss, which included amortization of debt discount of $307,753 and unrealized loss on change in present value of our royalty liabilities of $66,027. Our net loss from operations for the six months ended June 30, 2018 included a gain on extinguishment of debt and related derivative liability of $0, compared to a gain of $243,716 for the six months ended June 30, 2017.

 

Investing Activities

 

Cash flow from investing activities – Our investing activities used cash of $1,245 for the purchase of property and equipment during the six months ended June 30, 2018. For the six months ended June 30, 2017, our investing activities used cash of $37,545, primarily as a result of cash paid for notes receivable of $36,771 and purchases of property and equipment of $774.

 

Financing Activities

 

Cash flow from financing activities – During the six months ended June 30, 2018, our financing activities provided cash of $1,119,421, primarily as a result of proceeds from convertible debentures of $469,800, proceeds from a related party demand note of $592,650 and proceeds from related party convertible debt of $300,000, offset partially by payments on debt of $243,029. Our financing activities provided cash of 1,943,500 during the six months ended June 30, 2017, primarily as a result of proceeds from convertible debentures of $1,515,000 and proceeds from a demand note of $1,235,000, offset partially by payments on debt of $806,500.

 

Off Balance Sheet Arrangements

 

We do not have any significant 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.

 
 
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Recent Accounting Pronouncements

 

During the six months ended June 30, 2018, there were no accounting standards and interpretations issued which are expected to have a material impact on the Company’s consolidated financial position, results of 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 have performed an evaluation under the supervision and with the participation of our management, including our President and Chief Operating Officer (COO), Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures, (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2018. Based on that evaluation, our management, including our President and COO, CEO and CFO, concluded that our disclosure controls and procedures were not effective as of June 30, 2018 to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure due to the material weaknesses described below.

 

Based on our evaluation under the framework described above, our management concluded that we had “material weaknesses” (as such term is defined below) in our control environment and financial reporting process consisting of the following as of the Evaluation Date:

 

1)

lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our Board of Directors, resulting in ineffective oversight in the establishment and monitoring of required internal control and procedures; and

2)

inadequate segregation of duties consistent with control objectives

 

A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

 

A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended June 30, 2018, 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, 2017.

 

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

 

Item 3. Defaults Upon Senior Securities

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

 
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Item 6. Exhibits

 

Exhibit Number

 

Name of Exhibit

 

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 June 30, 2018 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: August 22, 2018 By: /s/ John M. Krohn

 

 

John M. Krohn

President/Chief Operating Officer, Director

 
     

 

 

 

 

 

By:

/s/ John William Pim

 

    John William Pim

Chief Financial Officer

 

 

 

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