ITEM 1. BUSINESS
Background
Spotlight Innovation Inc. (hereinafter “We” or the “Company”) was incorporated under the laws of the State of Nevada on May 11, 2006 under the name of Minhas Energy Consultants, Inc. On August 6, 2008, we merged with our subsidiary, American Exploration Corporation, and amended our Articles of Incorporation to change our name to American Exploration Corporation, and on December 16, 2013 we acquired through a reverse acquisition, Spotlight Innovation, LLC, a privately held Iowa limited liability company, which we refer to as Spotlight. As described below, pursuant to the acquisition, the members of Spotlight gained control of approximately 97% of the voting securities of our Company. In connection with the merger, which we refer to as the Spotlight merger, we changed our name to Spotlight Innovation, Inc.
Previously, we were engaged in the business of providing professional engineering consulting services to the oil and gas industry, including clients such as petroleum and natural gas companies, oilfield service companies, utilities and manufacturing companies with petroleum and/or natural gas interests and government agencies. Upon the closing of the Merger (as defined below) we are now focused on identifying, validating and partnering with healthcare focused companies, with the purpose of commercializing intellectual property.
Merger
On December 16, 2013, we merged (the “Merger”) with Spotlight, and the Company was the surviving entity. In connection with the Merger the Company: (i) issued an aggregate of 7,500,000 fully paid and non-assessable shares of the Company’s restricted common stock (the “Shares”) on a post Reverse Split basis; (ii) Steven Harding and Brian Manko resigned as officers and directors of the Company; (iii) the Company amended its Amended Articles of Incorporation as follows: (a) amended Article 1 in order to change the name of the Company to Spotlight Innovation Inc., and (b) amended Article 3 in order to increase the number of shares of stock as follows: Four Billion (4,000,000,000), par value $0.001 per share, all of which will be designated “Common Stock,” and Five Million (5,000,000), par value $0.001 shares of preferred stock, 4,000,000 of which are designated as blank check preferred stock, 500,000 shares of Preferred Stock of the Company designated as “Series A Preferred Stock,” and 500,000 shares of Preferred Stock of the Company designated as “Series C Preferred Stock” both with the designations, rights and preferences as set forth on the Certificate of Designation of such Series attached hereto; (iv) appointed Cristopher Grunewald as a member of the Board of Directors and as the President of the Company; (v) amended the articles of incorporation of the Company to change the name of the Company from American Exploration Corporation to Spotlight Innovation Inc.; and (vi) conducted a reverse stock split of one for five hundred (1:500) of the shares of common stock of the Company.
Business
We provide solutions for healthcare-focused companies commercializing healthcare intellectual property developed by major centers of academia in the United States. We focus on identifying, validating and acquiring/cooperating with early stage companies developing healthcare technologies including pharmaceuticals, devices and equipment, diagnostic products and healthcare IT. We place a premium on identifying and targeting disruptive healthcare IP - intellectual property technology with the potential to transform by changing core value propositions and competition in the healthcare industry, and generating the greatest positive impact on the health and well-being of as many people as possible.
We combine innovative thinking with the proven ability to:
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Identify categories of IP that have the attributes of future growth, scalability and profit potential
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Provide accurate, defensible and actionable business analysis
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Identify existing healthcare IP companies with significant growth potential
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Time entry into each category based on technological and cultural readiness
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Identify and overcome barriers to successful commercialization and adoption
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Implement repeatable processes that bring speed, accuracy and efficiency to commercialization
We engage proactively with our portfolio companies by providing oversight, strategic direction, serving on boards, and business development assistance. We drive our portfolio companies for all stakeholders, including entrepreneurs, management, investors and employees. We are building a portfolio of healthcare/life sciences companies, each having the potential to positively impact the health, well-being and longevity of an enormous number of lives.
Celtic
On June 4, 2014 Celtic Biotech Iowa, Inc. (hereinafter “Celtic Iowa,” a subsidiary of the Company) entered into a Share Exchange Agreement (the “Agreement”) with Celtic Biotech Limited (hereinafter “Celtic Limited”). The material terms of the Agreement are as follows:
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Celtic Iowa issued Celtic Limited 474,419 shares of its Series B Preferred Stock (nonvoting, redeemable at $5.00 per share, convertible into shares of common stock of Celtic Iowa under certain liquidation events).
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Terminated the License Agreement dated March 10, 2014 between Celtic Iowa and Celtic Limited, and terminated the 115,839 shares of Celtic Iowa Class B Preferred Shares originally issued thereunder.
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Celtic Limited will be a subsidiary of Celtic Iowa.
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Cristopher Grunewald (President) was named to the Board of Directors of Celtic Limited.
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Paul Reid (Executive of Celtic Limited) was named to the Board of Directors of Celtic Iowa.
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The Common Stock Exchange Agreement between Spotlight Innovation, Inc. and Celtic Biotech Iowa, Inc. dated March 4, 2014 was terminated.
Celtic Limited develops novel therapeutic products for the treatment of solid cancers and pain in humans. Derived from naturally specialized receptor-binding proteins, these products have the potential to reduce treatment costs, increase survivability, and improve the quality of life for cancer patients. Celtic Limited’s products-CB24 (Crotoxin), Cardiotoxin and VRCTC-310- have been shown to possess several desirable properties as therapeutics. Substantive cost competitive advantages include: the products are relatively easy to manufacture; are stable; and are monotherapies that do not need to be used in conjunction with other drugs for efficacy.
In December of 2014, the United States Patent and Trademark Office issued patent number 8,921,305 to Celtic Iowa entitled “Crotoxin Administration for Cancer Treatment and Pain Relief.” The patent protects methods of treating cancer in patients through the administration of Crotoxin, well as methods of treating pain through the administration of Crotoxin, including pain associated with cancer, arthritis, and multiple sclerosis. The current term of the patent is through November of 2029.
EMPLOYEES
We employ one person on a full-time basis and one on a part-time basis. Cristopher Grunewald is our President/Chief Executive Officer. These individuals are primarily responsible for all of our day-to-day operations. Other services are provided by outsourcing and consultant and special purpose contracts.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related to Our Company
We have limited operating history that an investor can use to evaluate the Company, and the likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small startup company.
We have no significant assets, limited financial resources and no revenue to date. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered by a small developing company starting a new business enterprise and the highly competitive environment in which we will operate. Since we have a limited operating history, we cannot assure you that our business will be profitable or that we will ever generate sufficient revenues to meet our expenses and support our anticipated activities.
Our revenue and income potential is uncertain. Any evaluation of our business and prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in our stage. Some of these risks and uncertainties include our ability to:
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execute our business plan and commercialization strategy, including developing relationships;
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create brand recognition;
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respond effectively to competition;
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manage growth in operations;
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respond to changes in applicable government regulations and legislation;
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access additional capital when required;
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attract and retain key personnel.
The Company has a history of operating losses.
The Company has incurred losses since its inception. Its ability to operate profitably in the future is dependent upon its ability to identify, finance, and manage opportunities in an economically successful manner. We expect the Company to incur additional operating losses in the future. No assurance can be given that the Company will be able to generate revenues or operate profitably in the future.
Finding suitable healthcare opportunities may be difficult for us.
While our Officers and Directors believe they have the abilities and experience to locate suitable healthcare companies, they may not be able to do so or the companies they identify could only have limited success. Our business model will not succeed if the companies we acquire do not perform as anticipated. The value will be significantly reduced and negatively affect our results of operations and the price of our common stock. Thus the Company may not perform as planned and may have a material adverse effect on the business of the Company.
Companies in which we acquire may underperform or may fail.
The companies that we partner with may not always perform as planned and could fail. This may happen for a variety of reasons many of which are not under our ability to predict or control. Some of the risks include:
• portfolio companies may have limited financial resources and may be unable to meet their obligations with their debt instruments, which may be accompanied by a deterioration in the value of any collateral and a reduction in the value of the equity components of our investments;
• portfolio companies may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;
• portfolio companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;
• portfolio companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position;
• portfolio companies generally have less publicly available information about their businesses, operations and financial condition; we are required to rely on our ability to obtain adequate information to evaluate the potential returns from investing in these companies; if we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and may lose all or part of our investment in a portfolio company;
In addition, in the course of providing significant managerial assistance to our portfolio companies, we may serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, the Directors (or other officers, managers or affiliates of the Company) may be named as defendants in such litigation, which could result in an expenditure of Company funds (through our indemnification of such individuals) and the diversion of management time and resources. These portfolio risks may limit some, most or all of the income of the Company. Thus the Company may not perform as planned and may have a material adverse effect on your ability to receive distributions as a Member.
The portfolio allocation may not be effective.
The portfolio is currently unknown and would be determined by future events and by the Directors’ investment management process. We intend to structure the portfolio with regards to: risk, style, quality, safety, tax, social responsibility, industry / sector concentration, turnover, and many other situations. Because of unforeseen and uncontrollable factors such as competitive, peer, industry, legal, fiduciary, compliance, and private placement constraints, we may not be able to decide the proper mix and weightings to use in the construction of the optimal portfolio. Thus the Company may not perform as planned and may have a material adverse effect on the business of the Company.
Global economic conditions may hurt results.
The economic conditions of the US and the world economies may deteriorate and hinder Company performance. The US and many parts of the world are in a serious recession. Unemployment rates are near historical post-World War II highs. Thus the Company may not perform as planned. Economic conditions may have a material adverse effect on your ability to receive distributions as a Member.
There may be political risk.
Political risk is the possibility that instability or unrest in one or more regions of the world will affect investment markets. Terrorist attacks, tsunami, war, and pandemics are just examples of events, whether actual or anticipated, that impact investor attitudes toward the market in general and result in system-wide fluctuations in stock prices. Some events, such as the September 11, 2001, attacks on the World Trade Center and the Pentagon, can lead to wide-scale disruptions of financial markets, further exposing investments to risks and directly affect the Company's financial condition, management, or capital structure, and, depending on the investment, can involve international factors as well. If the Company invests overseas, then problems there may undermine those markets, or a new government in a particular country may restrict investment by non-citizens or nationalize businesses. Thus the Company may not perform as planned and may have a material adverse effect on your ability to receive distributions as a Member.
Our Portfolio Companies are not expected to produce revenues in the short term which will require us to raise capital
In order to expand our portfolio it will be necessary for us to make capital expenditures to fund the capital needs of such portfolio companies. As our portfolio companies are not expected to provide cash flow from operations for the foreseeable future, we will have substantial cash requirements to fund the cash flows of the portfolio companies as well as the expenses of the Company. As a result we must rely on cash on hand, and raising new capital to meet our needs. There can be no assurance that any such funding will be available to the Company, or if available, that it will be available on acceptable terms. The exact amount of capital required is not known, and cannot always be accurately predicted, as many factors are outside of our control, such as: delays, complications, progress of research and development, ability to protect proprietary information. In the event we are not able to raise the required capital or we are not able to liquidate our portfolios companies we will be adversely affected in that we will not be able to support our portfolio companies and their abilities to grow will be adversely affected. Financing may not be available or even if available might be at terms which are detrimental to the Company.
Liquidating positions in portfolio companies may be difficult.
In the event our portfolio companies do not perform as anticipated or we are forced to liquidate our interest due to financial constraints, or there is reduced market interest, we may have to sell our interests at a relative discount to the price we initially paid or at a price below market value.
Our success is dependent on our senior management.
Our success is dependent on our senior management team’s ability to execute our strategy. A loss of one or more of the members of our senior management team without adequate replacement could have a material adverse effect on us.
Portfolio Companies may not perform as expected.
While we strive to not only maintain a controlling equity interest and actively participation in the management of portfolio companies, we may not be able to control the day to day operations and significant business decisions of portfolio companies. Existing management of portfolio companies will remain, and most often be responsible to maintain the day to day operations of the portfolio companies. We are dependent on them to continue to develop the portfolio companies according to the guidelines set by us. In the event management of the portfolio companies does not follow the guidance we set forth, it could prevent us from assisting them, financially or otherwise, or could prevent us from maximizing returns on our interests and cause us to incur losses in such portfolio companies.
Ability to manage growth is crucial to our future.
Our ability to operate successfully in the future depends upon our ability to finance, develop, implement and improve the administration of financial and operating systems and controls, expand our capabilities and manage our relationships with universities. Our failure to manage growth effectively could have a material adverse effect on our business or results of operations.
Failure to protect proprietary rights may adversely affect our business.
Intellectual property constitutes an important part of our business. Although the Company currently believes it has adequate protection of its intellectual property, there is no assurance that such protection will be available or sufficient to preclude competition. We rely on a combination of trademark, patent, trade secret and copyright law, license agreements and contractual restrictions, including confidentiality agreements, assignment agreements and non-disclosure agreements, to protect the Company’s proprietary rights, all of which cannot guarantee protection. The inability to protect our proprietary information will reduce the value of the Company’s assets. Any impairment of our Company’s intellectual property could harm our business or ability to compete. Protecting intellectual property rights is costly and time consuming. Although we take efforts to protect our intellectual property, third parties may independently develop intellectual property which is deemed similar to our intellectual property and either infringe upon our rights or we may be forced to cede such rights. As we also license intellectual property it is possible that we could become subject to infringement actions. Any claims against our proprietary property, whether bona fide or not, could subject us to costly litigation. Even though we believe our products do not infringe any third party’s patents, we may have to pay substantial damages, if it is ultimately determined that we have infringed on another parties rights.
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third party claims as a result of litigation or other proceedings.
In connection with the enforcement of our own intellectual property rights, or disputes related to the validity or alleged infringement of third party intellectual property rights, including patent rights, we may in the future be subject to claims, negotiations or litigation. Intellectual property disputes and litigation may be costly and will be disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business.
Third-party intellectual property claims asserted against us could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, subject us to injunctions restricting our sale of products, or cause severe disruptions to our operations or the marketplaces in which we compete.
Healthcare is subject to intense Government regulation.
A change in laws or regulations made by the government, a regulatory body or association may increase the costs of operating the Company and reduce the viability of investments and/or alter our long term goals. Failure to comply with applicable requirements of the FDA or comparable regulation in foreign countries can result in fines, recall or seizure of products, total or partial suspension of production, withdrawal of existing product approvals or clearances, refusal to approve or clear new applications or notices and criminal prosecution. Manufacturers of pharmaceuticals and medical diagnostic devices and operators of laboratory facilities are subject to strict federal and state regulation regarding validation and the quality of manufacturing and laboratory facilities. Failure to comply with these requirements could result in civil or criminal penalties or enforcement proceedings, including the recall of a product or a “cease distribution” order. The enactment of any additional laws or regulations that affect healthcare insurance policy and reimbursement (including Medicare reimbursement) could negatively affect some of our partner companies. If Medicare or private payers change the rates at which our partner companies or their customers are reimbursed by insurance providers for their products, such changes could adversely impact our partner companies.
Significant environmental, health and safety regulation.
Some of our partner companies may be subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including laws and regulations relating to the handling, transportation and disposal of medical specimens, infectious and hazardous waste and radioactive materials, as well as to the safety and health of manufacturing and laboratory employees. In addition, the federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety. Compliance with such regulations could increase operating costs at certain of our partner companies, and the failure to comply could negatively affect the operations and results of some of our partner companies.
EMPLOYEE RISKS
Our ability to attract and retain qualified personnel is crucial to our success.
We depend upon the ability to attract and retain qualified personnel, including trained technical and scientific personnel. Failure to locate and retain the requisite qualified personnel will limit our ability to grow and to launch new products and services.
We depend on key personnel, the loss of which could have a material adverse effect on us.
Our performance depends substantially on the continued services and on the performance of our senior management and other key personnel. Our ability to retain and motivate these and other officers and employees is fundamental to our performance. The unexpected loss of services of one or more of these individuals could have a material adverse effect on us. We are not protected by key-person or similar life insurance covering our executive officers and directors.
Certain legal proceedings and regulatory matters could adversely impact our results of operations.
We may be subject from time to time to various claims involving alleged breach of contract claims, intellectual property and other related claims, and other litigations. Certain of these lawsuits and claims, if decided adversely to us or settled by us, could result in material liability to the Company or have a negative impact on the Company’s reputation or relations with its employees, customers, licensees or other third parties. In addition, regardless of the outcome of any litigation or regulatory proceedings, such proceedings could result in substantial costs and may require that the Company devotes substantial time and resources to defend itself. Further, changes in governmental regulations in the U.S. could have an adverse impact on our results of operations.
The Company’s insurance coverage may not be adequate.
If the Company was held liable for amounts exceeding the limits of its insurance coverage in place at any given time or for claims outside the scope of that coverage, its business, results of operations and financial conditions could be materially and adversely affected.
Assertions by a third party that the Company infringes its intellectual property could result in costly and time-consuming litigation, expensive licenses or the inability to operate as planned.
The healthcare industry is characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. There is a possibility of intellectual property rights claims against the Company. The Company’s technologies may not be able to withstand third-party claims or rights restricting their use. Companies, organizations or individuals, including the Company’s competitors, may hold or obtain patents or other proprietary rights that would prevent, limit or interfere with the Company’s ability to provide the Company’s services or develop new products or services, which could make it more difficult for the Company to operate the Company’s business. Any litigation or claims, whether or not valid, could be time-consuming, expensive to litigate or settle and could divert the Company’s managements’ attention and financial resources. If the Company is determined to have infringed upon a third party’s intellectual property rights, the Company may be required to pay substantial damages, stop using technology found to be in violation of a third party’s rights or seek to obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, or at all, and may significantly increase the Company’s operating expenses or may require the Company to restrict the Company’s business activities in one or more respects.
The Company may also be required to develop alternative non-infringing technology that could require significant effort and expense or may not be feasible. In the event of a successful claim of infringement against the Company and the Company’s failure or inability to obtain a license to the infringed technology, the Company’s business and results of operations could be harmed.
Because we are an early stage company, we expect losses in the future because we have no revenue to offset losses.
We are an early stage company. As we have no current revenue, we are expecting losses over the next 12-24 months because we do not yet have any revenue to offset the expenses associated with the development and implementation of our business plan. We cannot guarantee that we will ever be successful in generating revenue in the future. We recognize that if we are unable to generate revenue, we will not be able to earn profits or continue operations. There is no history upon which to base any assumption as to the likelihood that we will prove successful, and we can provide investors with no assurance that we will generate any operating revenue or ever achieve profitable operations.
Our auditor has expressed substantial doubt as to our ability to continue as a going concern.
Based on our financial history since inception, our auditor has expressed substantial doubt as to our ability to continue as a going concern. If we cannot obtain sufficient funding, we may have to delay or abandon the implementation of our business strategy.
The Company has limited operations on which to evaluate the Company and its prospects.
The Company has limited operations on which to evaluate the Company and its prospects. We have not generated revenues since inception. Accordingly, we have limited historical performance upon which you may evaluate our prospects for achieving our business objectives and becoming profitable in light of the risks, difficulties and uncertainties frequently encountered by early stage companies such as us. Accordingly, before investing in our common stock, you should consider the challenges, expenses and difficulties that we will face as an early stage company, and whether we will ever become profitable. The Company's prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered in this context.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our revenues exceed $1,000,000,000, if we issue more than $1,000,000,000 in non-convertible debt in a three year period, or if the market value of our common stock held by non-affiliates exceeds $100,000,000 as of any April 30 before that time, in which case we would no longer be an emerging growth company as of the following April 30. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the Jobs Act, that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Risks Related to Our Financial Position
If we are unable to obtain funding, our business operations will be harmed, and if we do obtain financing our then existing shareholders may suffer substantial dilution.
We will require funds to develop our products, bring in partner companies and address all necessary concerns to achieve sales and income. We anticipate that we will require additional capital to fund our operations in 2015. Such funds may come from the sale of equity and/or debt securities and/or loans. It is possible that additional capital will be required to effectively support our operations and to otherwise implement our overall business strategy. The inability to raise the required capital will restrict our ability to develop and market our service and may reduce our ability to continue to conduct business operations. If we are unable to obtain necessary financing, we will likely be required to curtail our development plans which could cause the Company to become dormant. We currently do not have any arrangements or agreements to raise additional capital. Any additional equity financing may involve substantial dilution to our then existing shareholders.
Risks Related to an Early Stage Company
The loss of the services of our President could adversely affect our business.
Our success is dependent in large part upon the ability to execute our business plan. In particular, due to the relatively early stage of our business, our future success is highly dependent on the services of our President, who provides much of the necessary experience to execute our business plan. The loss of his services for any reason could impede our ability to achieve our objectives, such as the development of our software and related applications.
While no current lawsuits are filed against the Company, the possibility exists that a claim of some kind may be made in the future.
While no current lawsuits are filed against us, the possibility exists that a claim of some kind may be made in the future. We currently have no plan to purchase liability insurance and we currently lack the resources to purchase such insurance.
Purchasers may have difficulty evaluating the Company’s business because of the absence of an operating history.
The Company has earned no revenue, and therefore has no revenue history on which to evaluate the Company. Potential investors should be aware of the difficulties normally encountered by early stage companies and the high rate of failure of such enterprises. There is no guarantee that we will commence additional business operations or that our business operations will be profitable. For this reason, investors are encouraged to review the Company’s financial information and Prospectus, to have discussions with representatives of the Company and to engage professional advisors to evaluate an investment in the Company.
The Company’s competitors are larger and have greater resources, giving them the ability to utilize commercial practices that may prevent customers from buying the Company’s products and services.
Our business, financial condition, results of operations and prospects for growth will be materially adversely affected if the companies we acquire do not complete the development and commercialization of their intellectual property as anticipated. Many competitors may have greater name recognition, financial, technical, and marketing resources which will place our portfolio companies at a disadvantage in commercialization and development.
We may not be able to manage or integrate future acquisitions, if any because of our lack of cash.
The acquisition and successful integration of such businesses that provide for synergistic or vertical integration opportunities for the Company will be crucial to the success of our acquisition strategy. These acquisitions could place a strain on operations in the future. Our ability to manage future acquisitions, if they occur, will depend on the Company’s ability to successfully evaluate investments, monitor operations, control costs, maintain effective quality controls, expand our internal management and technical and accounting systems and integrate acquired businesses into our company. As you evaluate the prospects of the Company, you should consider the many risks we will encounter during the process of integrating those businesses that may be acquired in the future. Such risks include (i) the distraction of management's attention from other business concerns; (ii) the potential loss of key employees or customers of the acquired businesses; and (iii) the potential inability to integrate controls, standards, systems and personnel.
To fund future acquisitions, we may need to borrow funds or assume the debts of acquired companies, or issue more stock, which may dilute the value of our existing common stock. To incur any additional debt, we must comply with any existing restrictions contained in any indebtedness we may have at that time. If these restrictions are not met and we do not receive necessary consents or waivers of these restrictions, we may be unable to make future acquisitions.
Risks Related to Our Common Stock and Our Status as a Public Company
There is little current trading of our shares. Our stock price is likely to be highly volatile.
Although our shares of Common Stock are quoted on the OTCQB, there is little current trading and no assurance can be given that an active public trading market will develop or, if developed, that it will be sustained. The OTCQB is generally regarded as a less efficient and less prestigious trading market than other national markets. There is no assurance if or when our Common Stock will be quoted on another more prestigious exchange or market. The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
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changes in the healthcare industry and markets;
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competitive pricing pressures;
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our ability to obtain working capital financing;
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technological innovations or new competitors in our market;
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additions or departures of key personnel;
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our ability to execute our business plan;
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operating results that fall below expectations;
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loss of any strategic relationship;
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industry or regulatory developments;
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economic and other external factors; and
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period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock and for some time there will likely be a thin trading market for the stock, which causes trades of small blocks of stock to have a significant impact on the stock price.
Because our Common Stock is likely to be considered a “penny stock,” our trading will be subject to regulatory restrictions.
Our Common Stock is currently, and in the near future will likely continue to be, considered a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure and other requirements may adversely affect the trading activity in the secondary market for our Common Stock.
We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our Common Stock.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. To the extent we do not pay dividends, our stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, shareholders must rely on sales of their Common Stock after price appreciation as the only way to realize their investment, and if the price of our stock does not appreciate, then there will be no return on investment. Shareholders seeking cash dividends should not purchase our Common Stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 2.
ITEM 2. PROPERTIES
Our principal office space is located at 6750 Westown Parkway, Suite 200-226, West Des Moines, Iowa 50266 and 4206 Allison Av. Des Moines, IA 50310.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Annual Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Shares of our common stock commenced trading on the OTC Bulletin Board under the symbol “AEXP” in December 2008, in December 2013 our symbol changed to “STLT.” The market for our common stock is limited, and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as quoted by the NASDAQ OTCQB stock market. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.
All amounts have been adjusted for stock splits.
As of April 8, 2015, we had 75 shareholders of record, which does not include shareholders whose shares are held in street or nominee names.
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not have the intention of paying cash dividends on our common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan, the Spotlight Innovation Inc. 2009 Stock Option Plan (the “2009 Plan”).
A summary of the stock option activity for the years ended December 31, 2014 and 2013 is presented.
Incentive Stock Options
The 2009 Plan further provides that, subject to the provisions of the Stock Option Plan and prior shareholder approval, the Board of Directors may grant to any key individuals who are our employees eligible to receive options, one or more incentive stock options to purchase the number of shares of common stock allotted by the Board of Directors (the "Incentive Stock Options"). The option price per share of common stock deliverable upon the exercise of an Incentive Stock Option shall be at least 100% of the fair market value of our common shares, and in the case of an Incentive Stock Option granted to an optionee who owns more than 10% of the total combined voting power of all classes of our stock, shall not be less than 100% of the fair market value of our common shares. The option term of each Incentive Stock Option shall be determined by the Board of Directors, which shall not commence sooner than from the date of grant and shall terminate no later than ten (10) years from the date of grant of the Incentive Stock Option, subject to possible early termination as described above.
As of the date of this Annual Report, no Stock Options have been exercised.
Management intends to review and potentially update the 2009 plan to better meet our future needs.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 2014, the Company issued several subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 413,341 shares of common stock and 155,000 warrants to purchase one share of common stock each, for net cash proceeds of $310,000. The warrants have an exercise price of $1.25 per share and expire 3 years of the date of issuance. As of December 31, 2014, the Company had not issued 155,000 warrants and 33,334 shares of common stock attributable to a subscription in the amount of $25,000. Accordingly, the Company has recorded the relative fair value of the warrants and common stock as payables in the amounts of $144,042 and $13,702, respectively.
During the year ended December 31, 2014, the Company issued 1,105,970 shares of common stock in full extinguishment of a debenture with a principal balance of $110,598 and $7,515 of accrued interest. The shares were issued at 50% of the market price on the conversion date. No gain or loss was recorded on the conversion.
The Company issued 150,000 shares to an individual in return for his guarantee of the Letter of Credit at Denver Savings Bank. The shares were valued at the market price of $183,000 at the time of grant. (See Note 7.)
On July 29, 2014, the Company entered into an agreement with a third party individual (the “Individual”) to guarantee an additional Line of Credit in the amount of $250,975 with Denver Savings Bank. In exchange for the guarantee, the Company issued 42,300 shares of its common stock to the individual. The shares of common stock had a fair value of $86,715 based on the market price on the date of grant and have been recorded as deferred financing costs. The Company has not made any borrowings on this Line of Credit.
The Company issued 100,000 shares to an individual as a fee for extending the due date of his debenture. The debenture was paid on April 8, 2014 and the shares were issued on June 11, 2014. The share value was stated at the market price of $80,000 at the time of grant.
On July 30, 2014, the Company entered into an agreement with BFS Financial, Inc. (“BFS”) and issued 50,000 shares of the Company’s common stock. The agreement calls for BFS to assist the Company in raising capital. BFS is entitled to a 12% fee for all proceeds received by the Company from investors introduced to the Company by BFS for up to one year. The Company is also obligated to issue BFS an additional 50,000 shares of common stock upon receiving the first $100,000 in proceeds. The Company valued the shares issued at $102,500 based on the market price on the date of grant. In October 2014, the Company terminated the agreement with BFS. Accordingly, the additional 50,000 shares of common stock will not be issued.
On June 4, 2014, the Company entered into a series of agreements related to an equity arrangement for the sole purpose of funding acquisitions. The agreements require the Company to issue 1,051,200 Convertible Series A Preferred Stock in exchange for $41,418,000 to nine investors, through a private placement of 900 Units (the “Securities”) consisting of 1,168 Convertible Series A Preferred Stock (convertible into common shares of the Company) and warrants to purchase 413,964,900 common shares of the Company. The warrants have exercise prices from $0.25 to $0.7035 per share and terms of four to six years. The Company can receive up to $165,681,009 if all the warrants are exercised. The Convertible Series A Preferred Stock may convert into common shares of the Company at a rate of 1 share of Series A Preferred stock for 100 shares of common stock and must be converted within three years.
Under the terms of the Unit Subscription Agreement (USA), the Investors' cash of $41,418,000 ($46,020 per Unit sold) has been deposited in a restricted account with an Intermediary, whereby an Account Management Agreement (AMA) between the Investors, the Company, and the Intermediary governs the release of funds to the Company from the restricted account. The Company has placed with the Intermediary, the Securities to be released to the investors at the same time and ratio as the funds are released to the Company. The Company will record the fair value of the Securities as they are issued to the investors by the Intermediary.
The restricted cash will be released to the Company with the approval of the Investors. A request first must be made to the Investors' representative along with a Use of Proceeds (UOP) and, after review and approval by the Investors' representative, will the funds be released. There are 36 planned periodic installments pursuant to the AMA schedule, which have already been approved by the Company and the Investors.
The release of funds is based upon the trading volumes of the Company’s common stock, at or above a minimum bid price which will cause a release of a percentage of each periodic “Breakout” funds to the Company. There are provisions within the agreement which address the release of funds to the Company in the event that:
1.) trading volume is below the minimums, and
2.) average bid prices are above or below the minimums.
On September 30, 2014, the Company issued 296,373 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed.
On October 30, 2014, the Company issued 18,450 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $30,443 based on the market price on the date of grant.
On October 24, 2014, the Company issued 4,242 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $6,999 based on the market price on the date of grant.
On October 27, 2014, the Company issued 1,818 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $3,000 based on the market price on the date of grant.
On December 19, 2014, the Company agreed to issue 100,002 shares of common stock to a note holder in full settlement of a note. These shares have not been issued as of December 31, 2014 and are recorded as stock payable. (See Note 7, Kopriva Note)
On December 19, 2014, the Company agreed to issue 55,000 shares of common stock to a third party for investor relations. The shares had a fair value of $91,000 based on the market price on the date of grant. These shares have not been issued as of December 31, 2014 and are recorded as stock payable.
On July 31, 2014, the Company issued 3,496,373 shares of the Company’s common stock to the Company’s CEO and a third party consultant in settlement of the stock payable of $4,720,105 and recorded additional share-based compensation of $8,086.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Annual Report, particularly in the section entitled "Risk Factors." Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
RESULTS OF OPERATION
Fiscal Year Ended December 31, 2014 Compared to Fiscal Year Ended December 31, 2013.
Our net loss for fiscal year ended December 31, 2014 was $3,625,527 compared to a net loss of $6,810,198 for the fiscal year ended December 31, 2013, a decrease of $3,184,671. During fiscal years ended December 31, 2014 and 2013, we did not generate any revenue. The decrease in net loss was primarily a result of current year decreases in general and administrative expenses of $3,679,911 and increases in interest expense of $1,273,324 incurred for current levels of debt. These increases are offset by prior year losses on impairment of goodwill from the acquisition of American Exploration in the amount of $856,388 and stock compensation of $4,773,127. Stock compensation for the year ended December 31, 2014 was $406,953.
During fiscal year ended December 31, 2014, we incurred operating expenses of $1,486,636 compared to $6,022,935 incurred during fiscal year ended December 31, 2013, a decrease of $4,536,299. The decrease in operating expenses was primarily attributable to decreases of general and administrative expenses of $3,679,911 offset by prior year losses on impairment of goodwill from the acquisition of American Exploration in the amount of $856,388, and stock compensation of $4,773,127.
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 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.
We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities, although there is no guarantee we will be able to raise such funds.
PLAN OF OPERATION
Management has successfully closed on one acquisition to date (Celtic Biotech) and has entered into a Securities Purchase Agreement to acquire a majority of the outstanding securities of Memcine Pharmaceuticals, Inc.) which the Company anticipates will close by the second quarter of 2015.
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 commencing and structuring new business operations. We would finance these expenses with further issuances of equity securities and debt issuances. The Company believes that it will need $700,000 to fund operations over the next 12 months. We expect we would need to raise additional capital and generate revenues to meet long-term operating requirements. 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.
Letter of Credit
On April 4, 2014, the Company entered into a letter of credit (the “Letter of Credit”) with Denver Savings Bank in the principal amount of $752,325. The Letter of Credit provides that the Company can borrow up to the aforementioned principal amount from the Bank until April 1, 2017. Interest accrues at the rate of 4.25% per year. The loan is repayable on demand, but if no demand is made, then quarterly payments of accrued interest calculated on the amount of credit outstanding. As security for the Letter of Credit a third party (the “Cosigner”) cosigned the Letter of Credit, and pledged certain collateral. In exchange for this pledge the Company issued to the Cosigner, 150,000 shares of common stock of the Company, and agreed to issue 30,000 shares of its common stock upon each one year anniversary of the Letter of Credit, provided that the Letter of Credit remains in effect. The shares of common stock had a fair value of $183,000 based on the market price on the date of grant and have been recorded a deferred financing costs.
On April 4, 2014, the Cosigner and three third parties entered into a Security and Loan Agreement (the “SLA”). The SLA ensures that the Cosigner will be fully remunerated should the Company default on the Letter of Credit. The SLA provides a guaranty to the Cosigner from the three third parties, which have pledged to repay any outstanding amounts on the Letter of Credit should the Company default on the Letter of Credit. Any amounts borrowed on the Letter of Credit will be issued directly to the three third parties from the Cosigner. The third parties will then loan the Company the funds from the Letter of Credit through convertible promissory notes (the “Convertible Notes”).
The Company may request draw downs on the Line of Credit at any time. Once a request is made, the Cosigner withdraws the funds and issues them to the third parties. The third parties will then loan the Company the funds from the Line of Credit through convertible promissory notes (the “Convertible Notes”). As the Company is both obligated to the Bank, as primary obligor, and to the third parties through the Convertible Notes, the Company has recorded liabilities on both obligations. The amounts attributable to the Line of Credit directly are recorded as non-cash interest expense. As of December 31, 2014, the Company had borrowed $752,325 through the Line of Credit and a corresponding amount was recorded as interest expense.
The Company entered into the Convertible Notes with the third parties in the amount of $752,325. The Convertible Notes accrue interest at 20.5% per annum and mature in six months from the dates of issuance. The Convertible Notes contain a conversion feature which allows the Company to convert the Convertible Notes into shares of the Company’s common stock. The conversion price is the lower of 50% of the prior 20 days average market price on the date of conversion, or $0.50 per share. However, in no event will the conversion price be lower than $0.25 per shares. The Company analyzed the Convertible Notes for a beneficial conversion feature. As a result of the in-the-money conversion price, the Company determined that a beneficial conversion feature did exist and recorded a debt discount of $752,325.
The Convertible Notes also contained attached warrants that allow the holders to purchase one share of common stock of the Company for each warrant exercised. The Company was obligated to issue 750,000 warrants with an exercise price of i) lower of 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years. The Company calculated the relative fair value of the warrants using the Black-Scholes model at $385,351, which was recorded as a debt discount to the Convertible Notes. As of December 31, 2014, the Company has not issued the warrants and has recorded the relative fair value as a warrant payable.
The Company is amortizing the combined debt discounts from the warrants and beneficial conversion feature over the term of the Convertible Notes. The Company recorded interest expense of $670,321 related to the amortization of the debt discounts for the year ended December 31, 2014. The Company also recorded $187,031 in interest expense for the year ended December 31, 2014.
The Company is amortizing the combined debt discounts from the warrants and beneficial conversion feature over the term of the Convertible Notes. The Company recorded interest expense of $670,321 related to the amortization of the debt discounts for the year ended December 31, 2014. The Company also recorded $187,031 in interest expense for the year ended December 31, 2014.
On July 29, 2014 the Company entered into an agreement with a third party individual (the “Individual”) to guarantee an additional Line of Credit in the amount of $250,000 with Denver Savings Bank. In exchange for the guarantee, the Company issued 42,300 shares of its common stock to the Individual. The shares of common stock had a fair value of $33,840 based on the market price on the date of grant and have been recorded as deferred financing costs. The Company has not made any borrowings on this Line of Credit.
While there can be no guarantees, we intend to secure additional financings through the offerings of our common stock or debt financing. Management also intends to seek out institutional capital in the next 12 months. We will also continue to work with our existing debt holders to extend or reduce principal amount including pay-off agreements.
Fiscal Year Ended December 31, 2014 Compared to Fiscal Year Ended December 31, 2013 - Operating Activities
The Company has not generated revenues. As a result, our operating activities have, to date, resulted in net cash used. For the fiscal year ended December 31, 2014, net cash used in operating activities was $768,609 compared to $209,784 for fiscal year ended December 31, 2013. Net cash used in operating activities consisted primarily of our net loss of $3,625,257 which was offset by noncash amounts of $703,035 in amortization of the debt discount, $1,019,715 in amortization of deferred financing costs, $406,953 in share based compensation, $525 in depreciation and amortization, $120,085 in loss on debt settlement and $80,000 in shares issued to a convertible debt holder for debt extensions. The increase in the use of cash for operating activities from the year ended December 31, 2014 compared to the year ended December 31, 2013 was related to obtaining financing and investors to maintain development and operations.
Fiscal Year Ended December 31, 2014 Compared to Fiscal Year Ended December 31, 2013 - Investing Activities
For fiscal years ended December 31, 2014 and 2013, net cash flows provided (used) in investing activities was $18,405 as compared to ($92,961) during the year ended December 31, 2013. The net cash provided in investing was primarily related to funds received in the acquisition of Celtic Biotech LTD of $1,655 plus restricted cash received on the convertible debt of $4,500.
Fiscal Year Ended December 31, 2014 Compared to Fiscal Year Ended December 31, 2013 - Financing Activities
We have financed our operations primarily from debt or the issuance of equity instruments. For the fiscal year ended December 31, 2014, net cash flows provided from financing activities was $782,221 compared to $316,072 during the fiscal year ended December 31, 2013. Cash flows from financing activities for the fiscal year ended December 31, 2014 consisted primarily of $572,221 in proceeds from a line of credit, and $310,000 in proceeds from the sale of the Company’s common stock and warrants and $2,500 from proceeds from convertible debentures.. In addition these cash flows were offset by $100,000 of principle payments on the convertible debt and $2,500 of principle payments on related party debt.
MATERIAL COMMITMENTS
Promissory Notes
The following table shows the promissory notes entered into by the Company:
The Company also assumed a liability for previous advances made by our former CEO in the amount of $23,433. These advances are due on demand and do not bear interest.
The Company also assumed $92,923 in accrued interest related to these notes. The Company recorded $28,720 and $1,653 in interest expense for the years ended December 31, 2014 and 2013 on the above notes payable.
As of December 31, 2014, the Company has not received any demand notice from the lenders noted above for payment of principal or interest on these notes payable.
As of the date of this Annual Report, we are negotiating a settlement with all creditors regarding payment provisions, there is no guarantee that we will be able to arrive at a mutually agreeable settlement or that these creditors would not demand repayment.
Convertible Debenture
The Company has a convertible debenture (the “Debenture”) in the amount of CDN $115,098 (USD $110,598). The Debenture is due on demand and accrues interest at 5% per annum. The Debenture includes a conversion feature that allows the holder to convert the Debenture into common stock of the Company at the greater of (i) 50% of the market price on the date of conversion or (ii) $0.001. On January 30, 2014, the holders of the Debenture converted the full balance into shares of the Company’s common stock. As a result, the Company issued 1,105,970 shares of common stock in full settlement of the principal balance of $110,598 and $7,515 of accrued interest. The shares were issued at 50% of the market price on the conversion date. No gain or loss was recorded on the conversion.
Danley Note
In connection with the Merger, the Company assumed the following loans: September 15, 2012, loan agreement (the “Loan”) with The Danley Group (“Lender”) to borrow $50,000 at an annual compounding rate of 2.7%, due March 15, 2013. In addition, the Company agreed to pay a $50,000 premium at maturity. The Company has recorded the additional premium as a debt discount and increased the face amount of the note to $100,000. The debt discount is being amortized over the life of the Loan. During the years ended December 31, 2013 and 2012, the Company amortized the debt discount and recorded $20,833 and $29,187, respectively, as additional interest expense. For the period from inception through December 31, 2013, the Company recognized and amortized $50,000 of the debt discount as interest expense. On May 8, 2013, the Loan’s maturity date was extended to September 15, 2013, and Cris Grunewald, our President, signed a personal guarantee of obligations to repay a total amount of $100,000 plus accrued interest. On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock per warrant for a further extension of the Loan’s maturity date to December 31, 2013. The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise. The Company recorded the $707,803 in fair value of the shares and warrants as interest expense. The Loan matured on December 31, 2013. As a result of the default the Company accrued interest at 10% per annum. On April 8, 2014, the Company paid $119,590 in full settlement of the Loan. No gain or loss was recorded.
Kopriva Note
In connection with the Merger, the Company assumed a convertible note (the “Note”) dated October 4, 2013 in the amount of $40,000 from an investor. The term of this Note is fifteen months from October 4, 2013. During the term of this Note, interest shall accrue on the unpaid principal balance at a fixed rate equal to 10% per annum, compounded annually. Should the Company default on the Note, the outstanding balance of this Note shall bear interest at the default rate of 20% per annum, compounded annually. In addition to the interest accrued the holder received warrants to purchase up to 100,000 shares of common stock. The conversion feature of the Note and the exercise price of the warrants is the greater of (i) a discount of 40% to the 20 day average closing market price prior to the day that the warrant is executed or (ii) $0.20 per share. The warrants have a term of thirty-six (36) months from the date of repayment or conversion of the Note.
On December 19, 2014, the Company entered an agreement to settle the note and its accrued interest in exchange for 100,002 shares of common stock.
PURCHASE OF SIGNIFICANT EQUIPMENT
We have not previously nor do we intend to purchase any significant equipment during the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
GOING CONCERN
The independent auditors' report accompanying our December 31, 2014 and December 31, 2013 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. We have suffered recurring losses from operations, have a working capital deficit and are currently in default of the payment terms of certain note agreements. These factors raise substantial doubt about our ability to continue as a going concern.
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.
Use of Estimates
The preparation of 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.
In-Process Research and Development
In-process research and development (“IPR&D”) represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. During periods after completion, those acquired indefinite-lived assets are amortized based on their useful life. During the year ended December 31, 2014, the Company acquired IPR&D assets in its acquisition of CBL. 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.
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 under FASB ASC Topic 718, Compensation - Stock Compensation (“ASC 718”). 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 nonvested 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. 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, as defined in ASC 718, if any, are recognized as an addition to paid-in capital.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Spotlight Innovation Inc.
West Des Moines, IA
We have audited the accompanying consolidated balance sheets of Spotlight Innovation Inc. (formerly American Exploration Corporation) as of December 31, 2014 and 2013 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of Spotlight Innovation Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Spotlight Innovation Inc. as of December 31, 2014 and 2013 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that Spotlight Innovation Inc. will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, Spotlight Innovation Inc. has suffered recurring losses from operations and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GBH CPAs, PC
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 15, 2015
SPOTLIGHT INNOVATION INC.
(Formerly American Exploration Corporation)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
SPOTLIGHT INNOVATION INC.
(Formerly American Exploration Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The accompanying notes are an integral part of these consolidated financial statements.
SPOTLIGHT INNOVATION INC.
(Formerly American Exploration Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The accompanying notes are an integral part of these consolidated financial statements.
SPOTLIGHT INNOVATION INC.
(Formerly American Exploration Corporation)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
The accompanying notes are an integral part of these consolidated financial statements.
SPOTLIGHT INNOVATION INC.
(Formerly American Exploration Corporation)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Spotlight Innovation Inc. (the “Company”) was organized under the laws of the state of Iowa on March 23, 2012 (“inception”) under the name Spotlight Innovation, LLC. The Company was founded to identify, validate and finance healthcare-focused companies founded for the purpose of commercializing intellectual property throughout the world. The Company provides strategic partners the opportunity to participate in the financing of a preferred search for, acquisition of, and/or funding of companies holding licenses for the commercialization of intellectual property developed by academic institutions. The principals of the Company have been involved in all stages of the commercialization of healthcare intellectual property over the last ten years. On December 16, 2013, Spotlight Innovation LLC was merged into Spotlight Innovation Inc. (formerly known as American Exploration Corporation) through a reverse merger transaction. The consolidated financial statements reflect operating results of the combined entities.
On June 4, 2014, the Company, through its wholly-owned subsidiary, Celtic Biotech Iowa, Inc. (“Celtic Iowa”), entered into a share exchange agreement with Celtic Biotech, Ltd., an Irish Limited Company (“CBL”), to provide for continued development and eventual marketing of the intellectual property of CBL. The primary intellectual property of CBL is an invention that relates to the compositions and methods combining snake venom toxin with chemotherapeutic agent(s) for cancer therapy.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of the assets acquired and liabilities assumed in the acquisition of CBL and share-based compensation.
Principles of Consolidation
The consolidated financial statements include the Company’s accounts, including those of the Company’s wholly owned subsidiary Celtic Iowa. During the year ended December 31, 2014, Celtic Iowa acquired 95% of the outstanding shares of CBL. Accordingly, the Company has consolidated CBL and its wholly-owned subsidiary Celtic Biotech, Inc. All significant intercompany accounts and transactions have been eliminated.
Non-Controlling Interest
The Company is required to report its non-controlling interest as a separate component of shareholders’ equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interest and to the shareholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interest are allocated to the non-controlling interest even when those losses are in excess of the non-controlling interest’s investment basis.
Loss per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.
For the years ended December 31, 2014 and 2013, the dilutive effect of 5,200 and 0 options, 1,276,671 and 1,381,671 warrants, and 1,504,650 and 458,222 common shares, issuable for conversion of convertible debt respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation ("FDIC"). The Company had $9,068 and $19,102 cash equivalents at December 31, 2014 and 2013, respectively.
The Company maintains cash in escrow accounts which are restricted from immediate and general use by the Company. The restricted cash amount of $122,250 at December 31, 2014 is restricted subject to the Company registering the shares of its common stock issued to an investor, for free trading.
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). For the year ended December 31, 2014, the Company had $122,250 of restricted cash balances that were uninsured. The Company has not experienced any losses on such accounts.
Foreign exchange and currency translation
For the years ended December 31, 2014 and 2013, the Company maintained cash accounts in U.S. dollars as well as European Union euros, and incurred certain expenses denominated in U.S. dollars and European Union euros. The Company's functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are translated using exchange rates at the end of each period. Exchange gains or losses on transactions are included in earnings. Adjustments resulting from the translation process are reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. 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. During the year ended December 31, 2014, the Company acquired IPR&D assets in its acquisition of CBL. 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.
Equipment
Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is 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 years ended December 31, 2014 and 2013, the Company recorded $0 and $856,388 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 capitalized as deferred financing costs and amortized using the straight-line method over the term of the related convertible debt.
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.
Income Taxes
The Company’s results of operations through December 16, 2013 were as a limited liability company. A limited liability company (“LLC”) is not a tax paying entity. Any income or operating loss arising from the activities of the partnership is reported, after appropriate adjustments, on the personal income tax returns of the members. Adjustments to the income or loss allocated to a particular member will be required when the tax basis and accounting basis of net contributions made by an individual member are not equal. Because the LLC is not a tax paying entity, its financial statements are different from those of tax paying entities. Specifically, on the statement of operations, there is no provision for federal income tax benefit that must be accrued relating to the LLC’s net taxable loss during the year. In addition, the balance sheet does not present any assets or liabilities for deferred income taxes that might arise from different methods used to measure net income for the statement of operations and taxable income for the members. The Company filed as a C Corporation for the last 15 days of the year ended December 31, 2013 and again for the year ending December 31, 2014.
Following its filing as a C-corporation, the Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized.
Fair Value of Financial Instruments
The Company follows FASB ASC 820, Fair Value Measurement (“ASC 820”), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.
As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s IPR&D assets were valued on a discounted cash flow model using the income approach. The inputs to the model were within level 3 of the fair value hierarchy.
Subsequent Events
The Company evaluated subsequent events through the date when financial statements are issued for disclosure consideration.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-10 “ Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. ASU 2014-10 eliminates all incremental financial reporting requirements for development stage entities by removing ASC Topic 915 “Development Stage Entities”, from the FASB Accounting Standards Codification. The ASU 2014-10 clarified that the guidance in Topic 275 “Risks and Uncertainties” is applicable to entities that have not yet commenced operations. Accordingly, upon adopting the ASU 2014-10 and eliminating development stage information, entities should re-evaluate their disclosures under Topic 275. The Company decided to adopt this pronouncement in the second quarter of 2014. As a result, cumulative information in the Company’s statements of operations, its statements of cash flows and the notes to its unaudited consolidated financial statements was removed.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard requires management to assess the company’s ability to continue as a going concern. Disclosures are required if there is substantial doubt as to the company’s continuation as a going concern within one year after the issue date of financial statements. The standard provides guidance for making the assessment, including consideration of management’s plans which may alleviate doubt regarding the company’s ability to continue as a going concern. ASU 2014-15 is effective for years beginning after December 15, 2016. We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements.
NOTE 3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2014, the Company has accumulated net losses of $10,601,946 and has a working capital deficit of $3,927,365. 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. BUSINESS COMBINATIONS
Merger with American Exploration Corporation
On December 16, 2013, the Company completed the transaction contemplated by the February 12, 2013, merger agreement (the “Merger Agreement”) with American Exploration Corp, a wholly-owned subsidiary of the Company, a company based in the State of Nevada ("American Exploration").
Pursuant to the Merger Agreement on December 16, 2013, American Exploration was merged with the Company, with the Company continuing as the surviving entity and American Exploration becoming a wholly-owned subsidiary of the Company (the ”Merger”). In connection with the Merger the Company issued 245,458 shares of its common stock and options to purchase 5,200 shares of the Company’s common stock.
Additionally, in connection with the Merger, the Company approved a 1:500 reverse stock split. All share and per share amounts in the consolidated financial statements and footnotes have been retroactively restated for the impact of the reverse split. The Company, as a result of the reverse acquisition, has restated its equity as a recapitalilzation from a limited liability company into a corporation. All equity amounts prior to the merger have been retroactively restated for the impact of the reverse acquisition.
The acquisition was accounted for as a “reverse acquisition,” and the Company was deemed to be the accounting acquirer in the acquisition. American Exploration’s assets and liabilities are recorded at their fair value. The Company’s assets and liabilities are carried forward at their historical costs. The financial statements of the Company are presented as the continuing accounting entity since it is the acquirer for the purpose of applying purchase accounting. The equity section of the balance sheet and earnings per share of Company are retroactively restated to reflect the effect of the exchange ratio established in the Merger Agreement. Goodwill is recorded for the excess of fair value of consideration transferred and fair value of net assets. As a result of the issuance of the shares of common stock pursuant to the Merger Agreement, a change in control of the Company occurred.
The purchase price on the date of acquisition was:
Management evaluated the amount of goodwill associated with the transaction following the allocation of fair value to the assets and liabilities acquired and determined that the goodwill should be fully impaired and has reflected the impairment on the statement of operations as of the date of the merger.
Acquisition of CBL
The Company, through its wholly-owned subsidiary Celtic Iowa, entered into a share exchange agreement with CBL. Celtic Iowa issued to CBL 474,419 shares of its Preferred B Stock, par value of $5.00 per share. In exchange, the Company received shares equal to 95% of the total outstanding shares of CBL.
As there is no existing market for the preferred shares of Celtic Iowa, the Company used the fair value of the acquired net assets of CBL to determine the purchase price. The following table summarizes the allocation of the purchase price to the net assets acquired:
The Company recorded the 5% non-controlling interest in CBL at a fair value of $327,124. The preferred shares issued are convertible into common shares of Celtic Iowa on a one for one basis and are redeemable at the Company’s option in five years at the stated par value of $5 per share. The preferred shares have preferential rights to the net assets of Celtic Iowa in the case of liquidation up to the par value of the stock. While the Company maintains voting control through the common stock of Celtic Iowa and controls management decisions of Celtic Iowa, the Company’s rights to the net assets are subordinated to the preferred stock up to a net asset value of $2,372,095. As a result, the Company has recorded non-controlling interest in Celtic Iowa of $2,372,078, which is the value attributed to the Preferred B stock issued by Celtic Iowa. The Preferred Stock of Celtic Iowa is eliminated in consolidation.
CBL has had immaterial activity during the years ended December 31, 2014 and 2013. Accordingly, the Company has not presented Pro Forma information for the acquisition as the impact to the Company’s operations was deemed immaterial.
NOTE 5. DEPOSITS
During the year ended December 31, 2013, the Company made deposits of $12,250 on a letter of intent to acquire 90% of CBL. During the year ended December 31, 2014, the Company made additional expenditures on the acquisition of $26,255 which were recorded as legal expenses. The Company recorded $12,250 as an investment in Celtic Iowa, which has been eliminated in the consolidated financial statements, and the remaining balance was recorded as expense as of the date of the share exchange agreement on June 4, 2014 to legal expenses.
NOTE 6. NOTES PAYABLE
On December 10, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable to unrelated third parties:
The Company also assumed a liability for previous advances made by American Exploration’s former CEO in the amount of $23,433. These advances are due on demand and do not bear interest.
The Company also assumed $97,436 in accrued interest related to these notes. The Company recorded $28,720 and $1,653 in interest expense for the years ended December 31, 2014 and 2013, respectively, on the above notes payable.
As of December 31, 2014, and through the date of these financial statements, the Company has not received any demand notice from the lenders noted above for payment of principal or interest on these notes payable.
NOTE 7. CONVERTIBLE DEBENTURES
Convertible Debenture Assumed in Merger
On December 16, 2013, the Company assumed the liabilities of American Exploration which included a convertible debenture (the “Debenture”) in the amount of CDN $115,098 (USD $117,749) plus accrued interest. The Debenture is due on demand and accrued interest at 5% per annum.
The Debenture included a conversion feature that allowed the holder to convert the Debenture into common stock of the Company at the greater of (i) 50% of the market price on the date of conversion or (ii) $0.001.
On January 30, 2014, the holders of the Debenture converted the full balance into shares of the Company’s common stock. As a result, the Company issued 1,105,970 shares of common stock in full settlement of the principal balance of $110,598 and $7,515 of accrued interest. The shares were issued at 50% of the market price on the conversion date. No gain or loss was recorded on the conversion.
The Company recorded $365 in interest expense during the year ended December 31, 2014 related to this Debenture.
Danley Note
On September 15, 2012, the Company entered into a loan agreement (the “Loan”) with The Danley Group (“Lender”) to borrow $50,000 at an annual compounding rate of 2.7%, due March 15, 2013. In addition, the Company agreed to pay a $50,000 premium at maturity. The Company recorded the additional premium as a debt discount and increased the face amount of the note to $100,000. The debt discount was amortized over the life of the Loan. For the years ended December 31, 2014 and 2013, the Company recognized $0 and $20,833 of the debt discount as interest expense, respectively.
The Loan was contingently convertible upon the closing of the merger with American Exploration. The conversion feature was 50% of the market price on the date of maturity.
On May 8, 2013, the Loan’s maturity date was extended to September 15, 2013, by signing a guarantee of obligations to repay a total amount of $100,000 plus accrued interest.
On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock for each warrant for a further extension of the Loan’s maturity date to December 31, 2013. The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise. However, the exercise price cannot be less than $0.20 per share. The fair value of the shares on the date of grant was $178,160 and the fair value of the warrants on the date of grant was $529,643. The Company recorded the $707,803 in fair value of the shares and warrants as interest expense.
The Loan matured on December 31, 2013. As of December 31, 2013, the Company recorded $25,000 as a debt discount related to the fair value of the contingent conversion feature as a result of the merger with American Exploration and maturity of the Loan. The Company expensed the debt discount of $25,000 immediately as the Loan was convertible on that date. The Company repaid the note in the amount of $100,000, with accrued interest of $16,362, on April 8, 2014. The Company incurred additional extension fees of 100,000 shares of common stock which was issued by the Company on June 11, 2014 and $30,228 in cash. The Company recorded $80,000 in interest expense for the value of the shares, which was based on the market price of $0.80 per share on the date of grant and $30,228 in interest expense for the cash paid.
Kopriva Note
On September 27, 2013, the Company entered into a convertible note (the “Note”) in the amount of $40,000 from an investor. The term of this Note is fifteen months from commencement. During the term of this Note, interest shall accrue on the unpaid principal balance at a fixed rate equal to 10% per annum, compounded annually. Should the Company default on the Note, the outstanding balance of this Note shall bear interest at the default rate of 20% per annum, compounded annually. In addition to the interest accrued the holder received warrants to purchase up to 100,000 shares of common stock. The conversion feature of the Note and the exercise price of the warrants is the greater of (i) a discount of 40% to the 20 day average closing market price prior to the day that the warrant is executed or (ii) $0.20 per share. The warrants will have a term of thirty-six (36) months from the date of repayment or conversion of the Note. The relative fair value of the warrants issued on the date of grant was $25,136 and was recorded as a debt discount on the Note.
In connection with the Note, the convertible debenture was also analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed. The Company recorded a debt discount of $14,864 for the fair value of the beneficial conversion feature. The Company is amortizing the combined debt discounts from the warrants and beneficial conversion feature over the term of the Note. The Company recorded interest expense of $32,000 and $8,000 related to the amortization of the debt discounts for the years ended December 31, 2014 and 2013, respectively. The Company also recorded $3,866 and $8 in interest expense for the years ended December 31, 2014 and 2013, respectively.
On December 19, 2014, the Company entered an agreement to extinguish the Note and its accrued interest in exchange for 100,002 shares of common stock. This agreement modified the terms of the conversion which resulted in the holder receiving more shares. As a result of the modification of the conversion feature, the Company determined that the change in the fair value of the conversion feature was greater than 10% and accordingly, recorded $120,085 as a loss on debt extinguishment which was the difference in fair value of the new conversion feature and the carrying value of the Note and accrued interest on the date of modification. The Company recorded the issuance of the common stock on conversion at its fair value of $165,003 based on the market price on the date of grant. As of December 31, 2014, these shares have not been issued and the fair value of the common stock is recorded as a stock payable.
Convertible Debt associated with Letters of Credit
On April 4, 2014, the Company entered into a line of credit (the “Line of Credit”) with Denver Savings Bank in the principal amount of $752,325. The Line of Credit provides that the Company can indirectly borrow up to the aforementioned principal amount from the Bank until April 1, 2017. Interest accrues at the rate of 4.25% per year. The loan is repayable on demand, but if no demand is made, then quarterly payments of accrued interest calculated on the amount of credit outstanding. As security for the Line of Credit a third party (the “Cosigner”) cosigned the Line of Credit, and pledged certain collateral. In exchange for this pledge the Company issued the Cosigner 150,000 shares of common stock of the Company, and agreed to issue 30,000 shares of its common stock upon each one year anniversary of the Line of Credit, provided that the Line of Credit remains in effect. The shares of common stock had a fair value of $183,000 based on the market price on the date of grant and have been recorded as interest expense.
On April 4, 2014, the Cosigner and three third parties entered into a Security and Loan Agreement (the “SLA”). The SLA ensures that the Cosigner will be fully remunerated should the Company default on the Line of Credit. The SLA provides a guaranty to the Cosigner from the three third parties, which have pledged to repay any outstanding amounts on the Line of Credit should the Company default on the Line of Credit.
The Company may request draw downs on the Line of Credit at any time. Once a request is made, the Cosigner withdraws the funds and issues them to the third parties. The third parties will then loan the Company the funds from the Line of Credit through convertible promissory notes (the “Convertible Notes”). As the Company is both obligated to the Bank, as primary obligor, and to the third parties through the Convertible Notes, the Company has recorded liabilities on both obligations. The amounts attributable to the Line of Credit directly are recorded as non-cash interest expense. As of December 31, 2014, the Company had borrowed $752,325 through the Line of Credit and a corresponding amount was recorded as interest expense.
The Company entered into the Convertible Notes with the third parties in the amount of $752,325. The Convertible Notes accrue interest at 20.5% per annum and mature in six months from the dates of issuance. The proceeds from the Convertible Notes are reduced for original issuance discount fees. The Company received $572,220 in net proceeds from the Convertible Notes. These fees were recorded as a debt discount on the Convertible Notes. The Convertible Notes also contain a conversion feature which allows the Company to convert the Convertible Notes into shares of the Company’s common stock. The conversion price is the lower of 50% of the prior 20 days average market price on the date of conversion, or $0.50 per share. However, in no event will the conversion price be lower than $0.25 per shares. The Company analyzed the Convertible Notes for a beneficial conversion feature. As a result of the in-the-money conversion price, the Company determined that a beneficial conversion feature did exist and recorded a debt discount of $186,869.
The Convertible Notes also contained attached warrants that allow the holders to purchase one share of common stock of the Company for each warrant exercised. The Company was obligated to issue 752,325 warrants with an exercise price of i) lower of 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years. The Company calculated the relative fair value of the warrants using the Black-Scholes model at $385,351, which was recorded as a debt discount to the Convertible Notes. As of December 31, 2014, the Company has not issued the warrants and has recorded the relative fair value as a warrant payable.
The Company is amortizing the combined debt discounts from the original issue discounts, warrants and beneficial conversion feature over the term of the Convertible Notes. The Company recorded interest expense of $703,035 related to the amortization of the debt discounts for the year ended December 31, 2014. The Company also recorded $226,490 in interest expense for the year ended December 31, 2014.
Security and Loan Agreement
On July 29, 2014 the Company entered into an agreement with a third party individual (the “Individual”) to guarantee an additional line of credit (the “Additional Line of Credit”) in the amount of $250,000 with Denver Savings Bank. In exchange for the guarantee, the Company issued 42,300 shares of its common stock to the Individual. The shares of common stock had a fair value of $33,840 based on the market price on the date of grant and have been recorded as deferred financing costs. The Company has not made any borrowings on this Additional Line of Credit.
The Individual and three third parties entered into a Security and Loan Agreement (the “SLA”). The SLA ensures that the Individual will be fully remunerated should the Company default on the Line of Credit. The SLA provides a guaranty to the Individual from the three third parties, which have pledged to repay any outstanding amounts on the Line of Credit should the Company default on the Line of Credit.
As of December 31, 2014, no funds have been drawn on the Additional Line of Credit. The Company may request draw downs on the Line of Credit at any time. Once a request is made, the Individual withdraws the funds and issues them to the third parties. The third parties will then loan the Company funds, net guarantee fees from the Line of Credit through convertible promissory notes (the “Convertible Notes”). The third party guarantors require the Company to repay all funds drawn under the Additional Line of Credit to the bank in addition tot the obligation to pay the guarantors for the principal amount of the convertible notes, as a guarantee fee. As the Company is both obligated to the Bank, as a cosignor to the Additional Line of Credit and to the third parties through the Convertible Notes, the Company will record liabilities on both obligations.
The Company will enter into the Convertible Notes with the third parties in the amount borrowed. The Convertible Notes accrue interest at 20.5% per annum and mature in six months from the dates of issuance. The Convertible Notes contain a conversion feature which allows the Company to convert the Convertible Notes into shares of the Company’s common stock. The conversion price is the lower of 50% of the prior 20 days average market price on the date of conversion, or $0.50 per share. However, in no event will the conversion price be lower than $0.25 per shares.
The Convertible Notes also contained attached warrants that allow the holders to purchase one share of common stock of the Company for each warrant exercised. The warrants have an exercise price of i) lower of 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years.
NOTE 8. INCOME TAXES
Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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 December 31, 2014 and 2013, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards acquired from American Exploration in the Merger. For the years ended December 31, 2014 and 2013, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At December 31, 2014 and 2013, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.
As of December 31, 2014 and 2013, the Company has a net operating loss carry forward of approximately $9.2 million and $6.0, respectively, which will expire between years 2028 and 2034. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards are expected to be subject to significant annual limitations for the change in ownership that resulted in the Merger.
NOTE 9. EQUITY
The Company has authorized the issuance of 3,000,000 shares of Series A convertible preferred stock, 500,000 shares of Series C preferred stock, 1,500,000 shares of preferred stock and 4,000,000,000 shares of common stock.
COMMON STOCK
2014 Issuances
Stock Subscriptions
During the year ended December 31, 2014, the Company issued several subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 413,341 shares of common stock and 155,000 warrants to purchase one share of common stock for each warrant, for net cash proceeds of $310,000. The warrants have an exercise price of $1.25 per share and expire 3 years of the date of issuance. As of December 31, 2014, the Company had not issued 155,000 warrants and 33,334 shares of common stock attributable to a subscription in the amount of $25,000. Accordingly, the Company has recorded the relative fair value of the warrants and common stock as payables in the amounts of $142,042 and $13,702, respectively.
Other Stock Issuances
During the year ended December 31, 2014, the Company issued 1,105,970 shares of common stock in full extinguishment of a debenture with a principal balance of $110,598 and $7,515 of accrued interest. The shares were issued at 50% of the market price on the conversion date. No gain or loss was recorded on the conversion.
The Company issued 150,000 shares to an individual in return for his guarantee of the Letter of Credit at Denver Savings Bank. The shares were valued at the market price of $183,000 at the time of grant. (See Note 7.)
On July 29, 2014, the Company entered into an agreement with a third party individual (the “Individual”) to guarantee an additional Line of Credit in the amount of $250,975 with Denver Savings Bank. In exchange for the guarantee, the Company issued 42,300 shares of its common stock to the individual. The shares of common stock had a fair value of $86,715 based on the market price on the date of grant and have been recorded as deferred financing costs. The Company has not made any borrowings on this Line of Credit.
The Company issued 100,000 shares to an individual as a fee for extending the due date of his debenture. The debenture was paid on April 8, 2014 and the shares were issued on June 11, 2014. The share value was stated at the market price of $80,000 at the time of grant.
On July 30, 2014, the Company entered into an agreement with BFS Financial, Inc. (“BFS”) and issued 50,000 shares of the Company’s common stock. The agreement calls for BFS to assist the Company in raising capital. BFS is entitled to a 12% fee for all proceeds received by the Company from investors introduced to the Company by BFS for up to one year. The Company is also obligated to issue BFS an additional 50,000 shares of common stock upon receiving the first $100,000 in proceeds. The Company valued the shares issued at $102,500 based on the market price on the date of grant. In October 2014, the Company terminated the agreement with BFS. Accordingly, the additional 50,000 shares of common stock will not be issued.
On October 30, 2014, the Company issued 18,450 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $30,443 based on the market price on the date of grant.
On October 24, 2014, the Company issued 4,242 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $6,999 based on the market price on the date of grant.
On October 27, 2014, the Company issued 1,818 shares of the Company’s common stock to a third-party in settlement of the stock payable owed to the third-party for services performed. The shares had a fair value of $3,000 based on the market price on the date of grant.
On December 19, 2014, the Company agreed to issue 100,002 shares of common stock to a note holder in full settlement of a note. These shares have not been issued as of December 31, 2014 and are recorded as stock payable. (See Note 7, Kopriva Note)
On December 19, 2014, the Company agreed to issue 55,000 shares of common stock to a third party for investor relations. The shares had a fair value of $91,000 based on the market price on the date of grant. These shares have not been issued as of December 31, 2014 and are recorded as stock payable.
On July 31, 2014, the Company issued 3,496,373 shares of the Company’s common stock to the Company’s CEO and a third party consultant in settlement of the stock payable of $4,720,105 and recorded additional share-based compensation of $8,086.
2013 Issuances
During the year ended December 31, 2013, the Company issued several subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 530,176 shares of common stock and 418,389 warrants to purchase one share of common stock each for net cash proceeds $276,072. The warrants have an exercise price of $1.29 per share, and expires 48 months following an effective registration statement on the underlying shares or 24 months following the closing of any registered debt or equity offering contemplated by the Company subsequent to the merger with American Exploration. The issuances were as follows:
Other Stock Issuances
On August 7, 2013, the Company issued 15,100 shares of common stock for services related to consulting.The fair value of the shares was $10,268 based on the most recent sale of the Company’s common stock to a third party.
On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock per warrant for a further extension of the Loan’s maturity date to December 31, 2013.The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise.However, the exercise price cannot be less than $0.20 per share.The relative fair value of the common shares on the date of grant was $178,160 and the relative fair value of the warrants on the date of grant was $529,643.
On December 16, 2013, the Company issued 245,458 shares of common stock in connection with the Merger with American Exploration.The shares had a fair value of $330,816 based on the market price on the date of grant.
OPTIONS
Upon the acquisition of American Exploration, the Company adopted the 2009 Stock Option Plan (the “2009 Plan”). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock.
The Company, as part of the Merger, issued and exchanged 5,200 stock options to individuals who previously held stock options in American Exploration. These stock options were valued at $6,934 using the Black-Scholes model which was included in the purchase price of American Exploration.
A summary of the stock option activity for the years ended December 31, 2014 and 2013 is presented below:
The weighted average remaining contractual term of the outstanding options and exercisable options at December 31, 2014 and 2013 is 5.21 and 6.21 years, respectively.
WARRANTS
During the year ended December 31, 2013, the Company issued several subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 530,176 shares of common stock and 418,389 warrants to purchase one share of common stock each for net cash proceeds $276,072. The warrants have an exercise price of $1.29 per share and expires 48 months following an effective registration statement on the underlying shares or 24 months following the closing of any registered debt or equity offering contemplated by the Company subsequent to the merger with American Exploration. The relative fair value of the warrants was $135,727.
On September 27, 2013, the Company issued 100,000 warrants to purchase one share of common stock per warrant, in connection with the Note. The exercise price of the warrants is the greater of i) a discount of 40% to the 20 day average closing market price prior to the day that the warrant is executed or ii) $0.20 per share. The warrants will have a term of thirty-six (36) months from the date of repayment or conversion of the Note. The relative fair value of the warrants was $25,136 and was recorded by the Company as a debt discount to the Note.
On October 4, 2013, the Company issued 262,000 shares of common stock and 800,000 warrants to purchase one share of common stock per warrant for a further extension of the Loan’s maturity date to December 31, 2013. The warrants have an exercise price of 60% of the 20 day average market price prior to the date of exercise. However, the exercise price cannot be less than $0.20 per share. The relative fair value of the warrants on the date of grant was $529,643.
On August 2, 2013 and November 20, 2013, the Company issued 31,641 warrants to purchases one share of common stock per warrant to a consultant of the Company for services. The warrants have an exercise price of $1.29 per share, and expires 48 months following an effective registration statement on the underlying shares or 24 months following the closing of any registered debt or equity offering contemplated by the Company subsequent to the merger with American Exploration. The fair value of the warrants was $42,754 based on the Black-Scholes model and was recorded as share-based compensation.
The fair value of the above 2013 warrants were determined by using the Black-Scholes option-pricing model. Variables used in the model for the warrants issued include :i) discount rates ranging from 0.38% to 0.79%; ii) expected terms ranging from 4.25 to 5.70 years; iii) expected volatility ranging from 250.09% to 285.88%; iv) zero expected dividends and v) stock price of $0.68.
A summary of the warrant activity for the years ended December 31, 2014 and 2013 is presented below:
The weighted average remaining contractual term of the outstanding warrants and exercisable warrants as of December 31, 2014 is 2.29 years.
WARRANTS PAYABLE
During the year ended December 31, 2014, the Company issued subscription units that consisted of common stock and warrants. The Company received subscriptions to acquire 413,341 shares of common stock and 155,000 warrants to purchase one share of common stock each for net cash proceeds of $310,000. The warrants have an exercise price of $1.25 per share and expire three years from the date of issuance. The relative fair value of the warrants was $142,042.
As of December 31, 2014, the Company was obligated to issue 752,325 warrants to purchase one share of common stock for each warrant, in conjunction with the issuance of the Convertible Notes. The warrants have an exercise price of the lower of i) 50% of the prior 20 days average market price on the date of conversion, or ii) $0.50 per share. However, in no event will the exercise price be lower than $0.25 per share. The warrants have a term of three years. The Company calculated the relative fair value of the warrants using the Black-Scholes model at $385,351. However, As of December 31, 2014, the Company has not issued these warrants and has recorded them as a warrant payable.
On December 19, 2014, the Company agreed to issue 100,000 warrants to purchase one share of common stock for each warrant in connection with a consulting agreement. The warrants have a term of three years and an exercise price of $1.29 per share. The fair value of the warrants on the date of grant using the Black-Scholes model was $164,924. As of December 31, 2014 these warrants have not been issued are recorded in warrants payable.
The fair value of the above 2014 warrants was determined by using the Black-Scholes option-pricing model. Variables used in the model for the warrants issued include :i) discount rates ranging from 0.79% to 1.10%; ii) expected terms of 3.0 years; iii) expected volatility ranging from 399.22% to 409.43%; iv) zero expected dividends and v) stock prices ranging from of $0.75 to 2.00.
NOTE 10. PRIVATE PLACEMENT
On June 4, 2014, the Company entered into a series of agreements related to an equity arrangement for the sole purpose of funding acquisitions. The agreements require the Company to issue 1,051,200 Convertible Series A Preferred Stock in exchange for $41,418,000 to nine investors, through a private placement of 900 Units (the “Securities”) consisting of 1,168 Convertible Series A Preferred Stock (convertible into common shares of the Company) and warrants to purchase 413,964,900 common shares of the Company. The warrants have exercise prices from $0.25 to $0.7035 per share and terms of four to six years. The Company can receive up to $165,681,009 if all the warrants are exercised. The Convertible Series A Preferred Stock may convert into common shares of the Company at a rate of 1 share of Series A Preferred stock for 100 shares of common stock and must be converted within three years.
Under the terms of the Unit Subscription Agreement (USA), the Investors' cash of $41,418,000 ($46,020 per Unit sold) has been deposited in a restricted account with an Intermediary, whereby an Account Management Agreement (AMA) between the Investors, the Company, and the Intermediary governs the release of funds to the Company from the restricted account. The Company has placed with the Intermediary, the Securities to be released to the investors at the same time and ratio as the funds are released to the Company. The Company will record the fair value of the Securities as they are issued to the investors by the Intermediary.
The restricted cash will be released to the Company with the approval of the Investors. A request first must be made to the Investors' representative along with a Use of Proceeds (UOP) and, after review and approval by the Investors' representative, will the funds be released. There are 36 planned periodic installments pursuant to the AMA schedule, which have already been approved by the Company and the Investors.
The release of funds is based upon the trading volumes of the Company’s common stock, at or above a minimum bid price which will cause a release of a percentage of each periodic “Breakout” funds to the Company. There are provisions within the agreement which address the release of funds to the Company in the event that:
1.) trading volume is below the minimums, and
2.) average bid prices are above or below the minimums.
Pursuant to the Unit Subscription Agreement the Company has agreed to use its best efforts to register the securities underlying the agreement which the Company anticipates will occur in April 2015.
NOTE 11. RELATED PARTY TRANSACTIONS
As a result of the acquisition of CBL, as disclosed in Note 4, the Company assumed two short-term notes payable due to a related party. The debts are denominated in Euros, and on June 4, 2014, the date of acquisition, the carrying amount of the debts were $204,186 after foreign currency translation. The notes accrue compounded interest at 5% per annum and were due in November and December 2014. As of December 31, 2014, these notes were still outstanding and the carrying value of the notes was $183,000 after foreign currency translation. The Company has negotiated an extension of the due date to December 31, 2015 for the note that was due in December 2014. The Company note due in November 2014 is currently in default.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company signed a Memorandum of Understanding with Black Swan, LLC to provide certain government relations and related services. The MOU provides for compensation to Black Swan of a monthly cash retainer as well as a grant of 150,000 common shares at a date that is mutually agreed upon by the parties:
(1)
A monthly retainer, the amount and duration of which to be determined, but in any event a total of $7,500 shall be paid to Black Swan for our initial work during the period ending December 31, 2014 ($3,750 of which has previously been paid by the Company to Black Swan);
(2)
A grant of equity in the amount of 150,000 shares, or the equivalent options with a strike price of $1.00, or other functionally equivalent interest in the Company with a current market value of $250,000; and
(3)
An increase in the monthly retainer or a bonus payment equal to 10% of private money and 6% of public money received by the Company or its subsidiaries through introductions provided by Black Swan to the Company.
On December 19, 2014, the Company entered into an agreement with a third party to provide investor relation consulting services. The Company agreed to issue 30,000 shares of restricted common stock at the time of the agreement and up to 150,000 additional shares based on milestones achieved by the consultant. As of December 31, 2014, the consultant had achieved one of the milestones and was due and additional 25,000 shares. The fair value of the 55,000 shares of common stock to be issued to the consultant was $91,000 based on the market price on the dates of grant. As of December 31, 2014, these shares had not been issued and were recorded as stock payable.
NOTE 13. SUBSEQUENT EVENTS
On February 28, 2015, the Company entered into a stock for services agreement with Michael Reysack, the Company’s Investor Relations Officer, to issue 156,139 shares of common stock for services. The fair value of these shares was $257,629 based on the market price on the date of grant.
On March 3, 2015, Celtic Biotech Iowa, Inc. acquired a license from Zeng Hong Qin to produce and sell Novel therapy for chronic kidney disease, derived from cobra venom. The license has a term that expires on the date that the patents on the therapies expire. The Company is obligated to pay a 7% royalty on all net sales related to the licensed therapies.
On March 27, 2015, the Company issued warrants to purchase 300,000 shares of the Company’s common stock to K4, LLC, a subsidiary of The Greig Companies, to enter into an unsecured convertible promissory note (the “Promissory Note”) with The Greig Companies. The warrants have a five-year term and an exercise price of the greater of: i) 50% of the average closing stock bid over the 20 trading days prior to conversion or ii) $1.50 per share. The fair value of the warrants were $374,906 using the Black-Scholes model on the date of grant, which were recorded as additional debt discount against the Promissory Note.
On March 31, 2015, the Company closed on the Promissory Note in the principal amount of $2,500,000 with The Greig Companies, Inc. The Promissory Note has a maturity date of March 27, 2020, and bears interest at the rate of Prime plus five percent (5%) during the first 36 months, increasing to an interest of Prime plus six percent (6%) for the remaining 24 months. The Promissory Note is convertible into shares of common stock of the Company at an exercise price of the greater of i) 50% of the average closing stock bid over the 20 trading days prior to conversion or ii) $1.50 per share.
In conjunction with the Promissory Note, the Company also issued warrants (the “Warrants”) to purchase 250,000 shares of common stock of the Company to The Greig Companies, Inc. The Warrants have a five-year term and are exercisable into shares of common stock of the Company at an exercise price of the greater of i) 50% of the average closing stock bid over the 20 trading days prior to conversion or ii) $1.50 per share. The relative fair value of the warrants issued was $277,716 which was recorded as a debt discount against the Promissory Notes.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no disagreements with our current accountants on any matters related to accounting and financial disclosure issues. Our principal independent registered public accounting firm is GBH CPAs, PC. Their address is 6002 Rogerdale, Suite 500, Houston TX, 77072 and telephone number is 713.482.0000.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, as appropriate, in order to allow timely decisions in connection with required disclosure.
We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) who also acts as our principal financial officer, of the effectiveness of our disclosure controls and procedures, (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2014 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.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our CEO who also acts as our principal financial officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014, and concluded that our internal control over financial reporting was not effective at December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. We identified a material weakness in our internal control over financial reporting primarily attributable to limited accounting and SEC reporting expertise within the Company and the Company has insufficient written policies and procedures for accounting and finanical reporting with repsect to the requirements and application of accounting principles generally accepted in the United States of America ("GAAP") and SEC disclosure requirements. Due to being an early stage company, we have limited financial ability to remedy this staffing deficiency at this time; however, we will add additional accounting and SEC reporting expertise in the future as funds permit.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system 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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our CEO who also acts as our principal financial officer, has concluded that these controls and procedures are not effective at the “reasonable assurance” level.
CHANGES IN INTERNAL CONTROLS
No significant changes were implemented in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
AUDIT COMMITTEE
Our Board of Directors has not established an audit committee. The respective role of an audit committee has been conducted by our Board of Directors. The audit committee's primary function will be to provide advice with respect to our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee's primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations; (iv) oversee management's establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Our directors and executive officers, their ages and positions held are as follows:
Business Experience
The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed, and including other directorships held in reporting companies.
Cristopher Grunewald. Mr. Grunewald is a financial executive and entrepreneur with background in the healthcare and biotechnology sectors, private equity and investment banking. He has been involved in all stages of the commercialization of healthcare IP developed by premiere research and development institutions.
David F. Hostelley
David Hostelley was appointed Chief Financial Officer of the Company in June, 2014. Dr. Hostelley, our Chief Financial Officer and Director, is a CPA (inactive) licensed by the state of Ohio. In 1984, he earned his Ph.D. in management while a lecturer in the MBA Program of Baldwin-Wallace College. He formerly lectured in Accounting and Management for Walsh University, North Canton, Ohio. For the past five years to the present he has served as CEO/CFO and board member of publicly traded companies, which are:
From 08-09 to 01-11 EARI.PK / Entertainment Arts Research, Inc.
From 06-10 to 07-11 QEBR.OB / Virtual Medical International, Inc.
From 03-11 to 9-11 CVSL.OB / Cardio Vascular Medical Device, Inc.
From 06-15-14 to present STLT.OB / Spotlight Innovation Inc.
He has structured numerous acquisitions in the fields of printing, oil and gas development, private schools, insurance agencies, hotels, manufacturing, debit card issuance, health products and health clubs and service entities. He has formed Not-For-Profit entities and serves on the board of trustees. In his capacity of trainer in the field of Project Management, Dr. Hostelley has taught the executives of: Ford Motor Company, Westinghouse, National Fuel Gas, General Electric, Stromberg-Carlson, Doehler-Jarvis, Marvin Windows, Progressive Insurance, EDI Engineering, Sun Exploration, Tennessee Valley Authority, SPX Corporation, The Venezuelan Oil Ministry, Ford Museum in Greenfield Village, and numerous other companies. He has lectured in South Africa, Venezuela, Canada, and the United States. He is active in his Church.
COMMITTEES OF THE BOARD OF DIRECTORS
As of the date of this Annual Report, we have not established an audit committee, a compensation committee nor a nominating committee.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or have been involved in any legal proceeding concerning: (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction permanently or temporarily enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity; or (iv) being found by a court, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law (and the judgment has not been reversed, suspended or vacated).
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the persons who beneficially own more than ten percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to us pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the reports received by us and on the representations of the reporting persons, we believe that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2014; with the exception of Cris Grunewald (CEO).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive Officer and those executive officers that earned in excess of $100,000 during fiscal years ended December 31, 2014 and 2013 (collectively, the “Named Executive Officers”):
SUMMARY COMPENSATION TABLE
_______________
(1)
Mr. Grunewald was named President of the Company on July 24, 2013 and became chairman on December 10, 2013.
(2)
Mr. Harding resigned as President July 24, 2013, and resigned as officer and director of the Company on December 10, 2013.
(3)
Mr. Manko resigned on December 10, 2013
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2014
There were no stock options granted to officers of the Company during the year ended December 31, 2014.
DIRECTOR COMPENSATION TABLE
The following table sets forth information relating to compensation paid to our directors during fiscal year ended December 31, 2014 and 2013:
EMPLOYMENT AGREEMENTS
During 2013 we entered into an agreement with Cristopher Grunewald, President, CEO, Secretary and sole Director of the Company for ten years, and receive a salary of $120,000 per annum and the issuance of 3,200,000 shares of common stock.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of April 15, 2015, the following table sets forth certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of April 15, 2015, there are 11,890,150 shares of common stock issued and outstanding.
____________
*
Less than one percent.
(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding as of the date of this Annual Report. As of the date of this Annual Report, there are 100,000 shares to Dr. Dale Grunewald, and 100,000 shares to Steven C. Quick shares issued and outstanding. Beneficial ownership amounts reflect the 2013 Reverse Stock Split.
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of control of our Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
As of the date of this Annual Report, other than as disclosed below, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transactions, which has materially affected or will materially affect us during fiscal year ended December 31, 2014.
EMPLOYMENT ARRANGEMENTS
As of the date of this Annual Report, we have agreed to pay Cristopher Grunewald our President, CEO and sole director as described above. David F. Hostelley, our CFO, is working on a verbal extension of his contract, which expired January 31, 2015.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES
The following exhibits are filed as part of this Annual Report.
(1) Incorporated by reference from our Registration Statement on Form SB-2 filed with the Commission on March 5, 2006.
(2) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on August 8, 2008.
(3) Incorporated by reference from our Current Report on Form 8-K filed with the Commission on November 6, 2008 and our Amendment No. 1 to Current Report filed with the Commission on January 25, 2009.
(4) Incorporated by reference from Form Current Report on Form 8-K filed with the Commission on October 19, 2009.
(5) Incorporated by reference from Quarterly Report on Form 10-Q filed with the Commission on November 20, 2009.
(6) Incorporated by reference from Current Report on Form 8-K filed with the Commission on August 17, 2009.
(7) Incorporated by referenced from Current Report on Form 8-K filed with the Commission November 4, 2009.
(8) Incorporated by reference from Current Report on Form 8-K filed with the Commission February 15, 2013.
(9) Incorporated by reference from Current Report on Form 8-K filed with the Commission March 14, 2014.
(10) Incorporated by reference from Current Report on Form 8-K filed with the Commission April 9, 2014.
(11) Incorporated by reference from Current Report on Form 8-K filed with the Commission June 6, 2014.
(12) Incorporated by reference from Current Report on Form 8-K filed with the Commission June 13, 2014.
(13) Incorporated by reference from Current Report on Form 8-K filed with the Commission June 24, 2014.
(14) Incorporated by reference from Current Report on Form 8-K filed with the Commission July 1, 2014.
(15) Incorporated by reference from Current Report on Form 8-K filed with the Commission August 25, 2014.
(16) Incorporated by reference from Current Report on Form 8-K filed with the Commission March 10, 2015.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: April 15, 2015
By:
/s/ Cris Grunewald
Director