10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2016

Commission File No. 000-52542

Spotlight Innovation Inc.

(Name of small business issuer in its charter)

Nevada	98-0518266
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6750 Westown Parkway, Suite 200-226

West Des Moines, IA 50266

(Address of principal executive offices)

(515) 274-9087

(Issuer’s telephone number)

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

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

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

Large accelerated filer	¨	Accelerated Filer	¨
Non-accelerated filer	¨	Smaller Reporting Company	x
(Do not check if smaller reporting company)

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

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

Special Note Regarding Forward-Looking Statements

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

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

 

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Consolidated Balance Sheets (unaudited)		4
	Consolidated Statements of Operations (unaudited)		5
	Consolidated Statements of Cash Flows (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19
Item 4.	Controls and Procedures		19
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		20
Item 1A.	Risk Factors		20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3.	Defaults Upon Senior Securities		20
Item 4.	Mine Safety Disclosures		20
Item 5.	Other Information		20
Item 6.	Exhibits		21
Signatures			22

 

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PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

SPOTLIGHT INNOVATION INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash	$	289,264		$	299,919
Prepaid expense		117,003			17,500
Total current assets		406,267			317,419
Property, plant and equipment, net of accumulated depreciation of $6,385 and $3,529, respectively		32,019			31,714
In-process research and development		6,977,347			6,977,347
Total assets	$	7,415,633			7,326,480
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	243,654		$	140,803
Accrued liabilities		747,596			527,287
Accounts payable – related parties		3,560			3,560
Stock payable		50,000			26,250
Notes payable		170,696			385,373
Lines of credit, net of discounts of $8,626 and $19,717, respectively		994,674			868,583
Short-term debt – related party		1,038,515			168,949
Deferred liabilities		225,000			220,465
Derivative liabilities		-			278,482
Convertible debentures – related parties, net of debt discounts of $766,010 and $555,753, respectively		2,378,990			2,244,247
Total liabilities		5,852,685			4,863,999
Stockholders’ equity:
Series A preferred stock, $5.00 par value, 500,000 shares authorized, 0 shares issued and outstanding		-			-
Series C preferred stock, $5.00 par value, 500,000 shares authorized, 0 shares issued and outstanding		-			-
Preferred stock, $0.001 par value, 4,000,000 shares authorized 0 shares issued and outstanding		-			-
Common stock, $0.001 par value, 4,000,000,000 shares authorized, 19,361,800 and 14,627,026 shares issued and outstanding, respectively		19,362			14,627
Additional paid-in capital		22,425,443			18,760,400
Accumulated deficit		(23,171,473	)		(18,643,652	)
Non-controlling interest		2,289,616			2,331,106
Total stockholders’ equity		1,562,948			2,462,481
Total liabilities and stockholders’ equity	$	7,415,633		$	7,326,480

 

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

4

SPOTLIGHT INNOVATION INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the Three Months Ended			For the Three Months Ended			For the Nine Months Ended			For the Nine Months Ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
REVENUE	$	-		$	-		$	-		$	-
OPERATING EXPENSES:
General and administrative expenses		1,555,931			1,799,468			3,775,578			3,208,479
Research and development expense		68,150			254,844			181,572			258,496
Depreciation expense		1,619			-			4,856			-
Settlement of payables		-			-			-			4,076
Total operating expenses		1,625,700			2,054,312			3,962,006			3,471,051
LOSS FROM OPERATIONS		(1,625,700	)		(2,054,312	)		(3,962,006	)		(3,471,051	)
OTHER INCOME (EXPENSE):
Interest expense		(172,268	)		(182,003	)		(497,908	)		(763,195	)
Gain on derivative liability		26,068			-			78,160			-
Other income		4,955			146			7,988			477
Gain on foreign currency exchange		193			31,180			111			64,422
Loss on settlement of debt		(195,656	)		-			(195,656	)		-
Total other expense		(336,708	)		(150,677	)		(607,305	)		(698,296	)
Net loss		(1,962,408	)		(2,204,989	)		(4,569,311	)		(4,169,347	)
Net loss attributable to non-controlling interest holder		(12,755	)		(21,245	)		(41,490	)		(22,267	)
Net loss attributable to Spotlight Innovation Inc.	$	(1,949,653	)	$	(2,183,744	)	$	(4,527,821	)	$	(4,147,080	)
Net loss per common share - basic and diluted	$	(0.12	)	$	(0.17	)	$	(0.30	)	$	(0.31	)
Weighted average number of common shares outstanding - basic and diluted		15,920,123			14,277,026			15,447,745			13,828,277

See accompanying notes to the unaudited consolidated financial statements.

 

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SPOTLIGHT INNOVATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(unaudited) 

	Nine Months Ended September 30, 2016			Nine Months Ended September 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(4,569,311	)	$	(4,169,347	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		4,856			1,625
Amortization of debt discount		157,785			462,188
Interest expense from common shares issued for modification of convertible debt		-			37,500
Loss on settlement of debt and payables		195,656			4,076
Share-based compensation		1,697,117			1,983,764
Gain on fair value of derivative liability		(78,160	)		-
Gain on foreign currency exchange		(111	)		(64,422	)
Changes in operating assets and liabilities:
Prepaid expense		(99,503	)		(26,250	)
Accounts payable		265,343			(148,744	)
Accounts payable - related party		-			86,485
Accrued liabilities		229,531			463,293
Deferred liabilities		4,535			-
Net cash used in operating activities		(2,192,261	)		(1,369,832	)
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash		-			2,625
Acquisition of Memcine, net of cash received of $27,071		-			(2,929	)
Cash paid for purchase of fixed assets		(5,161	)		(5,220	)
Net cash used in investing activities		(5,161	)		(5,524	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable		(98,373	)		(2,500	)
Proceeds from convertible debenture - net		1,195,000			-
Proceeds from line-of-credit		115,000			-
Proceeds from short-term debt – related party		870,000			-
Proceeds from convertible debentures – related parties		-			1,719,800
Proceeds from sale of common shares and warrants		105,140			190,000
Net cash provided by financing activities		2,186,767			1,907,300
Increase/(decrease) in cash during the period		(10,655	)		531,944
Cash, beginning of the period		299,919			9,068
Cash, end of the period	$	289,264		$	541,012
SUPPLEMENTAL CASH FLOWS INFORMATION
Income taxes paid	$	-		$	-
Interest paid	$	73,373		$	28,750
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Deferred financing costs for convertible debentures	$	-		$	-
Debt discount for relative fair value of warrants attached to convertible debentures	$	146,003		$	277,598
Beneficial conversion feature for convertible debentures	$	412,310		$	999,310
Stock payable issued in settlement of debt	$	50,000		$	-
Shares issued in settlement of convertible debt	$	1,186,175		$	-
Shares issued in settlement of accounts payable	$	96,781		$	-
Common shares issued for stock payable	$	21,500		$	269,705
Warrants issued in satisfaction of warrants payable	$	-		$	385,351
Warrants issued for extinguishment of accounts payable – related party	$	-		$	419,419
Derivative liability	$	(200,323	)	$	-
Reclassification of debt and interest to accrued liabilities	$	102,748		$	-

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

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SPOTLIGHT INNOVATION INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Spotlight Innovation Inc. (the “Company”) was organized under the laws of the state of Nevada on March 23, 2012 under the name Spotlight Innovation, LLC. In December 2013, the Company, through a reverse acquisition, merged with American Exploration Corporation (“American Exploration”). The Company is a life science company that identifies and acquires rights of innovative, proprietary technologies designed to address unmet medical needs, with an emphasis on rare, emerging and neglected diseases. To find and evaluate unique opportunities, we leverage our extensive relationships with leading scientists, academic institutions and other sources. We provide value-added development capability to accelerate progress. When scientifically significant benchmarks have been achieved, we will endeavor to partner with proven market leaders via sale, out-license or strategic alliance.

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

Celtic Biotech Iowa, Inc.

On June 4, 2014, Celtic Biotech Iowa, Inc. (hereinafter "Celtic Iowa," a subsidiary of the Company) acquired Celtic Biotech Limited (hereinafter "Celtic Limited"). Celtic Limited was founded in 2003 in Dublin, Ireland and is developing novel and highly specialized compounds derived from snake venom, for the treatment of solid cancers and cancer imaging.

Memcine Pharmaceuticals, Inc.

The Company acquired approximately 82% of Memcine Pharmaceuticals, Inc. ("Memcine") in June 2015. The Company agreed to provide Memcine with up to $3,000,000 to fund the operations of Memcine via investment, grants or other means over the course of operations, upon the achievement of certain milestones, as determined by the board of directors of Memcine. Memcine, founded in 2010, holds the exclusive worldwide rights to Immunoplex,™, a vaccine platform technology developed at the University of Iowa, with universal application to numerous antigens developed to improve vaccine efficacy by using more efficient targeting and delivery.

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

CDT Veterinary Therapeutics, Inc.

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

Caretta Therapeutics, Inc.

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

Zika Therapeutics, Inc.

Zika Therapeutics, Inc. (“ZT”) was formed in August 2016 to pursue the therapeutic treatment for this emerging health threat. On August 19, 2016, the Company entered a Sponsored Research Agreement (the “SRA”) with the Florida State University Research Foundation (“FSURF”) starting September 1, 2016, to perform certain research, over a two-year period, related to the discovery, synthetic modification, and preclinical validation of drug-like compounds intended to treat patients with Zika virus infection to be directed by Dr. Hengli Tang.

 

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Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate disclosures contained in the audited financial statements for the most recent fiscal year, as reported in the Form 10-K for the period ended December 31, 2015 filed with the SEC, have been omitted.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of option and warrant transactions.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts, including those of the Company’s subsidiaries Celtic Iowa and Memcine. During the year ended December 31, 2014 the Company acquired 95% of the outstanding shares of Celtic Biotech. During the year ended December 31, 2015, the Company acquired 82.25% of the outstanding shares of Memcine. Accordingly, the Company has consolidated Celtic Limited, Celtic Iowa and Memcine. All significant intercompany accounts and transactions have been eliminated.

Non-Controlling Interest

The Company is required to report the non-controlling interest in Celtic Limited, a subsidiary of Celtic Iowa, and Memcine, as a separate component of shareholders’ equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interest and to the shareholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interest are allocated to the non-controlling interest even when those losses are in excess of the non-controlling interest’s investment basis.

Loss per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

For the nine months ended September 30, 2016 and 2015, the dilutive effect of the issuance of 448,571 and 5,200 options, 208,500 and 885,000 warrants, and 3,317,971, and 1,774,650 common shares issuable for conversion of convertible debt, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

 

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Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). As of September 30, 2016, the Company had $0 of cash balances that were uninsured. The Company has not experienced any losses on such accounts.

Foreign exchange and currency translation

For the three months ended September 30, 2016 and 2015, the Company maintained cash accounts in U.S. Dollars and European Union euros, and incurred certain expenses denominated in European Union euros. The Company's and its consolidated subsidiaries’ functional and reporting currency is the U.S. Dollar. Transactions denominated in foreign currencies are remeasured into U.S. Dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are remeasured using exchange rates at the end of each period. Exchange gains or losses on re-measurements are included in earnings.

In the event that the functional currency of a Company’s consolidated subsidiary was not the U.S. Dollar, then that subsidiary’s foreign currency monetary assets and liabilities are translated into U.S. Dollars at the current exchange rate and non-monetary assets and liabilities are translated using historical exchange rates. Such adjustments resulting from the translation process would be reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. As of September 30, 2016, and 2015, the Company had no subsidiaries with functional currencies that required translation.

In-Process Research and Development

In-process research and development (“IPR&D”) represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. During periods after completion, those acquired indefinite-lived assets are amortized based on their useful life. 

Equipment

Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is 3-10 years.

Impairment of Long-Lived Assets and Intangibles

The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to fair value. For the nine months ended September 30, 2016 and 2015, the Company recorded $0 in impairment to the Company’s long-lived assets. 

 

9

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if such historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.

Income Taxes

The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized. 

Fair Value of Financial Instruments

The Company follows FASB ASC 820, Fair Value Measurement (“ASC 820”), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.

As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.

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

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Subsequent Events

The Company evaluated subsequent events through the date when financial statements are issued for disclosure consideration.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.

 

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NOTE 3. GOING CONCERN

The Company is an early stage company and as such has not generated revenues from operations and there is no assurance of any future revenues. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2016, the Company had accumulated net losses of $23,171,473, and had a working capital deficit of $5,446,418. These factors raise substantial doubt as to the Company’s ability to continue as a going concern.

The ability of the Company to continue as a going concern is dependent upon the Company’s successful efforts to raise sufficient capital and then attain profitable operations. Management is investigating all options to raise enough funds to meet the Company’s working capital requirements through either the sale of the Company’s common stock or other financings. There can be no assurances, however, that management will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtained on terms satisfactory to the Company.

NOTE 4. NOTES PAYABLE

On December 16, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable too unrelated third parties:

	Date	Stated			Original
	of	Interest			Principal		Due
Promissory Note	Note	Rate			Amount		Date
#1	05/29/09		10	%	$	30,000	On Demand
#2	06/05/09		10	%	$	7,698	On Demand
#3	08/16/09		10	%	$	50,000	On Demand
#4	09/27/10		10	%	$	60,000	On Demand
#5	06/02/10		5	%	$	50,000	On Demand
#6	02/04/11		5	%	$	30,000	On Demand
#7	05/04/11		5	%	$	35,000	On Demand
#8	08/11/11		10	%	$	20,000	On Demand
#9	12/05/11		10	%	$	20,000	On Demand
#10	04/28/12		10	%	$	30,000	On Demand
Total					$	593,698

The Company also assumed $92,923 in accrued interest related to these notes. The Company recorded $21,861 and $21,540 in interest expense for the nine months ended September 30, 2016 and 2015, respectively, on the above notes payable. On September 1, 2016, the Company agreed to a settlement and release agreement with Pierco Management as set forth in the table below:

Promissory Note	Issue Date	Original Principal		Interest Rate
#5	6/2/2010	$	50,000	5%
#6	2/4/2011	$	30,000	5%
#7	4/5/2011	$	35,000	5%
#8	8/11/2011	$	20,000	10%
#9	12/5//2011	$	20,000	10%
Total		$	155,000

 

11

The Company and Pierco Management agreed to the following:

· Immediate cash payment of $25,000 from the Company.

· A deferred cash payment of $25,000 due in 90 days from the effective date.

· Issuance to Pierco Management of $50,000 worth of Company common stock using the average closing price for the 20 consecutive trading days preceding the effective date of the agreement.

The Company also assumed a liability for previous advances made by American Exploration’s former CEO in the amount of $23,433 of which the Company repaid $3,500 in calendar year 2015 bringing the balance to the current $19,933 at September 30, 2016. These advances are due on demand and do not bear interest.

On December 31, 2015 recorded a guarantee for one of the lenders in the amount of $34,529.

On September 6, 2016, the Company agreed to assume the unpaid interest for the portion of the April and July Letters-of-Credit with Denver Savings Bank that was to be paid from the debt service reserve as set forth in the Termination and Release Agreements in December 2015. The assumption of the interest resulted in the Company recording an additional $83,441 of interest expense for the nine months ended September 30, 2016.

NOTE 5. CONVERTIBLE INSTRUMENTS

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

NOTE 6. INCOME TAXES

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

At September 30, 2016, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards acquired in connection with the merger. For the nine months ended September 30, 2016 and 2015, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At September 30, 2016 and 2015, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.

As of September 30, 2016, the Company has a net operating loss carry forward of approximately $21 million, which will expire between years 2028 and 2035. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards are expected to be subject to significant annual limitations for the change in ownership that resulted in the Merger.

NOTE 7. EQUITY

The Company has authorized the issuance of 500,000 shares of Series A preferred stock, 500,000 shares of Series C preferred stock, 4,000,000 shares of preferred stock and 4,000,000,000 shares of common stock.

Common Stock

On January 11, 2016, a holder exercised warrants to purchase 100,000 shares of common stock. The exercise price was 60% of the average closing market price for the 20 consecutive trading days preceding the exercise date. Total proceeds received from the exercise was $55,140. On September 8, 2016, the Company sold 108,695 shares for $50,000 in proceeds.

 

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Common Stock Issued for Services

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

Month	Shares issued		Fair Value at issue date
April		780,000	$	377,500
August		25,000		19,750
September		100,000		73,500

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

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

Convertible Notes

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

· The notes have a term of 24 months. In the event the note has not been converted at the maturity date, the convertible note will automatically convert into shares of common stock of the Company at a per share price equal to 80% of the closing bid price of the common stock of the Company during the 20 consecutive trading days immediately preceding the maturity date.

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

· At any time prior to the maturity date, the note is convertible into shares of common stock of the Company at a price per share equal to 90% of the closing bid price of the common stock during the 20 consecutive trading days immediately preceding such conversion.

The Company also issued warrants to purchase 208,500 shares of common stock of the Company (the number of shares is equal to thirty percent of the amount invested in the notes based on the exercise price of the warrants (the exercise price is defined as 110% of the closing bid price of the common stock of the Company on the six month anniversary of the issuance date of the note)).

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

· Aggregate of 5% of net revenue.

· Net revenues is defined as gross revenues, minus all license/royalty fees and cost of goods sold.

· Royalties will cease once the investor has received two times the amount invested.

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

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

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Options

2009 Plan

In 2009, the Company adopted the 2009 Stock Option Plan (the “2009 Plan”). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock.

As of September 30, 2016, there are 5,200 stock options outstanding under the 2009 Plan which were issued prior to the merger. These stock options were valued at $6,934 using the Black-Scholes model which was included in the purchase price of American Exploration.

2015 Equity Incentive Plan

On November 25, 2015, the Company authorized the Spotlight Innovation Inc. 2015 Equity Incentive Plan (the “Plan”) to:

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

· Encourage selected employees, directors and consultants to accept or continue employment or association with the Company or its Subsidiaries

· Increase the interest of selected employees, directors and consultants in the Company’s welfare through participation in the growth in value of the common stock of the Company (the “Shares”); and

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

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

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

	Options		Weighted-Average Exercise Price
Outstanding December 31, 2015		2,605,200	$	1.82
Granted		448,571		0.54
Exercised		-		-
Expired		-		-
Outstanding September 30, 2016		3,053,771	$	1.63
Exercisable September 30, 2016		903,771	$	2.99

 

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Warrants

During the nine months ended September 30, 2016, a holder exercised warrants to purchase 100,000 shares of common stock at a price of $0.5514 per share for total proceeds of $55,140.

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

	Warrants			Weighted-Average Exercise Price
Outstanding December 31, 2015		2,011,671		$	1.29
Granted		208,500			0.65
Exercised		(100,000	)		0.55
Expired		-			-
Outstanding at September 30, 2016		2,120,171			1.26
Exercisable September 30, 2016		2,120,171			1.26

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

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

NOTE 8. RELATED PARTY TRANSACTIONS

As a result of the acquisition of Celtic Limited, Celtic Iowa assumed two short-term notes payable due to a related party (the mother of the founder of Celtic). The debt is denominated in Euros and on June 4, 2014, the date of the acquisition, the carrying amount of the debts were $204,186 after foreign currency remeasurement. The notes accrue compounded interest at 5% per annum and were due in November and December 2014. As of September 30, 2016, these notes are still outstanding and the carrying amount of these notes is $168,515. In March 2016, the Company negotiated an extension for both notes to December 31, 2017.

NOTE 9. SUBSEQUENT EVENTS

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

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

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

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

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

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

 

Issuance Date	Expiration Date	Exercise Price	# Warrants / Shares
10/05/2013	10/05/2016	$1.46 / share	120,000
10/05/2013	10/05/2017	$1.46 / share	120,000
10/05/2013	10/05/2018	$1.46 / share	120,000
12/31/2015	12/31/2018	$1.00 / share	300,000
12/31/2015	12/31/2018	$1.25 / share	200,000

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

Expiration Date	Exercise Price / Share	# Warrants / Shares
12/31/2019	$1.46	360,000
12/31/2019	$1.00	300,000
12/31/2019	$1.25	200,000
12/31/2019	$1.00	500,000

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

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

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

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

Overview

The Company is a life sciences company that identifies and acquires rights to innovative proprietary technologies designed to address unmet medical needs, with an emphasis on rare, emerging and neglected diseases. To find and evaluate unique opportunities, we leverage our extensive relationships with leading scientists, academic institutions and other sources. We provide value-added development capability to accelerate the progress. When scientifically significant benchmarks have been achieved, we will endeavor to partner with proven market leaders via sale, out-license or strategic alliance. We believe that targeting rare and/or neglected indications offers and accelerated path to market, support from nonprofit advocacy groups, scarcity of competition, and pricing leverage.

Plan of Operation

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

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

The Company anticipates securing additional financing in 2016. Additional issuances of equity or convertible debt securities could result in dilution to our current shareholders. Further, such securities may have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. There can be no assurances, however, that management will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtained on terms satisfactory to the Company.

Critical Accounting Policies

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

Financial Condition and Changes in Financial Condition

Overall Operating Results:

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources:

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

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

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

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

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

 

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

Off Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

Item 3. Defaults Upon Senior Securities

The Company was in technical default of some of its obligations. On September 1, 2016, the Company agreed to a settlement and release agreement with Pierco Management as set forth in the table below

Promissory note #	Issue Date	Original Principal		Interest Rate
#5	6/2/2010	$	50,000	5%
#6	2/4/2011	$	30,000	5%
#7	4/5/2011	$	35,000	5%
#8	8/11/2011	$	20,000	10%
#9	12/5//2011	$	20,000	10%
Total		$	155,000

The Company and Pierco Management agreed to the following:

· Immediate cash payment of $25,000 from the Company.

· A deferred cash payment of $25,000 due in 90 days from the effective date.

· Issuance to Pierco Management of $50,000 worth of Company common stock using the average closing price for the 20 consecutive trading days preceding the effective date of the agreement.

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

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number	Name of Exhibit
10.36	License Agreement between Spotlight Innovation Inc. and Paul Reid dated October 5, 2016.
10.37	Exclusive License Agreement between Spotlight Innovation Inc. and Indiana University Research and Technology Corporation dated October 13, 2016.
10.38	Standard Exclusive License Agreement with Sublicensing Terms executed as of November 8, 2016 by and between the Spotlight Innovation Inc. and the Florida State University Research Foundation, Inc.
31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32.1	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101**	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 are formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. (2)

__________________  

(1)

Filed herewith.

(2)

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

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SIGNATURES

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

	SPOTLIGHT INNOVATION INC.
Dated: November 17, 2016	By:	/s/ Cristopher Grunewald
		Cristopher Grunewald
		President/Chief Executive Officer, Director
	By:	/s/ William Pim
		William Pim Chief Financial Officer

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EX-10.36

[***] Indicates Redacted Information Subject to a Request for Confidential Treatment.

EXHIBIT 10.36

LICENSE AGREEMENT

This License Agreement (hereinafter called “Agreement”), to be effective as of the 29^th day of August, 2016 (hereinafter called "Agreement Date"), is by and between Paul Reid, an individual having an address of 9610 NW 24 Court, Sunrise, FL 33322 (hereinafter called “Reid”), and Caretta Therapeutics, Inc. a corporation organized under the laws of Iowa, and having a principal place of business at 6750 Western Parkway, Suite 200 226, West Des Moines, Iowa 50266 and its Affiliates (hereinafter, collectively referred to as “Caretta Therapeutics”) (together, the “Parties” and individually, a “Party”).

WITNESSETH:

WHEREAS, Reid has certain Intellectual Property including the Reid Patents relating to cobra venom, components thereof, formulations and the use of same, related Materials and Technical information (as defined herein);

WHEREAS the Company wishes to license the Reid Patents and the related Materials and Technical Information on terms and conditions set forth herein, in order to conduct research with the Intellectual Property and to develop, manufacture and sell Products, as further described herein; and

WHEREAS, Reid wishes to license the Reid Patents, Materials, and Technical Information to Company in consideration for the royalty payments recited herein.

NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto expressly agree as follows:

1. DEFINITIONS AS USED HEREIN

1.1 "Affiliates" shall mean any corporation, partnership, joint venture or other entity of which the common stock or other equity ownership thereof is fifty (50%) or more owned by the Party.

1.2 “Field” shall include all fields involving research, and use of the Intellectual Property including the development, making, using and selling of Products (as defined herein) and processes related thereto.

 

1

1.3 “Intellectual Property” shall include the Reid Patents, Materials and Technical Information.

1.4 “Materials” shall mean any and all tangible physical materials of Reid necessary for research related to, development of, making, using and selling of Products or materials otherwise delivered to Caretta Therapeutics by Reid in connection with this Agreement as listed in Exhibit B. Any Materials delivered to Caretta Therapeutics not listed shall be promptly identified in an amended Exhibit B provided by Reid to and accepted by Caretta Therapeutics.

1.6 “Product(s)” shall mean products or processes of Caretta Therapeutics which, but for this license, would infringe the Reid Patents or use the Materials or Technical Information and which fall within the Field.

1.7 “Reid Patents” shall mean patents and applications as set forth in Appendix A, and all continuations, continuations-in-part, divisionals, reissues, reexaminations, international and applications and patents claiming priority thereto.

1.8 “Technical Information” shall mean know-how, processes, methodologies, specifications, inventions developed by Reid and provided to and received by Caretta Therapeutics which is not patented or patentable and which is Confidential Information and is necessary or useful for the research of or use of Intellectual Property including the development, making, using and selling of Products and processes related thereto.

1.9 “Valid Claim” shall mean a claim of an issued patent or pending patent application which has not been held unpatentable, invalid or unenforceable by an unappealed or unappealable decision by a court or agency of competent jurisdiction.

2. GRANT OF LICENSE

2.1 Reid hereby grants to Caretta Therapeutics and its affiliates an exclusive, worldwide right and license to use the Intellectual Property in the Field for the purposes of research of the Intellectual Property and to develop, have developed, make, have made, use, sell, have sold, import, export, distribute or otherwise exploit Products.

2.2 Caretta Therapeutics shall have the right to sublicense the Intellectual Property to third parties for the purpose of research of Intellectual Property and the making, using, selling, importing, exporting, distributing or otherwise exploitation of Products, where such third parties’ work is under the control and direction of Caretta Therapeutics.

 

2

2.3 Caretta Therapeutics agrees to apply to all Products covered by the Reid Patents the appropriate patent markings on an exposed surface of every Product or related packaging or documentation thereto or by virtual marking or other notice provided for at 35 USC §287. The content, form, location and language used in such markings shall be in accordance with the laws and practices of the United States or the jurisdiction in which such Products are sold.

2.4 At its expense, Caretta Therapeutics has, and shall use best efforts to maintain during the term of this Agreement and during any time after termination that it sells any Products, all permits, licenses, authorizations and approvals of, and has made all applicable filings, applications and registrations with, all governmental authorities that are necessary to enable it to sell the Products within any country or jurisdiction. Caretta Therapeutics shall use best efforts to comply with all applicable laws, codes, regulations, ordinances and rules with respect to the Products promulgated by any and all federal, state, municipal or other legislative bodies, courts or agencies having jurisdiction over the business of Caretta Therapeutics, over products of the nature of the Products or over the procurement, storage or use of any of the equipment, materials or supplies utilized by Caretta Therapeutics in connection therewith.

2.5 Use of the Reid Patents, Material and Technical Information by Reid for research purposes only shall not be considered a breach of this Agreement.

2.6 If Caretta Therapeutics decides to abandon or forego distribution of Products in a particular country, it will so notify Reid at least sixty days (60) prior to such abandonment and allow Reid the opportunity to distribute Products at his own expense and control under the U.S. registered trademark used by Caretta Therapeutics in association with the Products without payment by Reid to Caretta Therapeutics. Sales of less than $60,000.00 annually for 2 consecutive years shall constitute abandonment or the foregoing of distribution of products in a particular country.

3. PAYMENTS

3.1 In consideration of the foregoing, Caretta Therapeutics agrees to pay to Reid the greater of a royalty rate of one dollar and twenty cents ($1.20) for each Product sold, or sixty thousand dollars ($60,000) per year while this Agreement is in effect. All payments to Reid shall be nonrefundable. Payments to Reid shall continue for a minimum of twelve (12) years from the Agreement Date.

3.2 Caretta Therapeutics agrees to forward to Reid within forty-five (45) days after the end of each quarter (ending March 31, June 30, September 30 and December 31) a statement showing the number of Products sold during the preceding calendar quarter together with a computation of the royalties due and payment for all such royalties. All royalty payments due shall be expressed in and paid in United States of America currency, without deduction of exchange, collection or other charges, to Reid, by check or by wire transfer (along with applicable wire transfer fees) to the account of Reid at such bank as Reid may from time to time designate by notice to Caretta Therapeutics.

 

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3.3 In the event that any payment due hereunder is not made when due, the payment shall accrue interest beginning on the tenth day following the due date thereof, calculated at the rate of one (1.0%) per month on the date said payment is due, the interest being compounded on the last day of each calendar quarter, provided, however, that in no event shall said annual interest rate exceed the maximum legal interest rate for corporations. Each such payment when made shall be accompanied by all interest so accrued. Said interest and the payment and acceptance thereof shall not negate or waive the right of Reid to seek any other remedy, legal or equitable, to which it may be entitled because of the delinquency of any payment.

3.4 Caretta Therapeutics shall be responsible for all taxes, charges and duties imposed by governments and authorities in connection with the manufacture, sale, use and delivery of any Products, and all other taxes imposed by government except for Reid’s income taxes imposed by any country or local government.

4. RECORDS AND INSPECTION

Caretta Therapeutics shall maintain or cause to be maintained a true and correct set of records pertaining to the sales of the Products sold by Caretta Therapeutics under this Agreement. During the term of this Agreement and for a period of two (2) years thereafter, Caretta Therapeutics agrees to permit an accountant selected by Reid and reasonably acceptable to Caretta Therapeutics to have access during ordinary business hours to such records as are maintained by Caretta Therapeutics as may be necessary, in the opinion of such accountant, to determine the correctness of any report and/or payment made under this Agreement. The cost of any inspection shall be borne by Reid, except that Caretta Therapeutics shall bear the cost of any inspection which reveals that royalties were underpaid by 10% or more of the total amount due for the time period which the inspection covered. Termination of this Agreement shall not affect the right of Reid to receive royalties and statements of account from Caretta Therapeutics covering the sale of Products during the term of this Agreement or sales made during the six (6) months following the termination of this Agreement.

5. PROSECUTION OF PATENT APPLICATIONS AND LITIGATION OF PATENTS

5.1 The patent applications identified in Exhibit A shall be prosecuted at the sole control and expense of Reid other than as provided in section 5.2 and 5.3 below. Caretta Therapeutics agrees that it shall cooperate in the prosecution of such patents including signing any necessary documents or providing copies of data already created in order to advance such prosecution. Reid will promptly copy Caretta Therapeutics on all correspondence and prosecution documents regarding the patent applications and provide Caretta Therapeutics at least forty-five (45) days to review and comment on prosecution matters. Reid will thoughtfully consider Caretta Therapeutics comments on prosecution matters and suggestions regarding in which countries a patent application should be filed. If Reid decides to abandon or forego prosecution of an application in a particular country, he will so notify Caretta Therapeutics at least sixty days (60) prior to such abandonment and allow Caretta Therapeutics the opportunity to take over prosecution of the application at its own expense and control, and to grant a perpetual royalty-free license in the territory where the application was filed, or the option of accepting assignment of the application in that particular country without further payment by Caretta Therapeutics.

5.2 Caretta Therapeutics will have the right to initiate any legal action against a third party infringer of any of the Reid Patents, including those listed in Exhibit A or an application or continuing application of same which has matured into a patent, in its own name and at its sole control and expense. Should Caretta Therapeutics elect to initiate legal action against such third party, Reid agrees to join the legal action as a party plaintiff and to cooperate in the legal action. Neither Party will consent to the entry of any judgment or enter into any settlement with respect to such action or suit without the prior written consent of the other, which will not be unreasonably withheld, if such judgment or settlement would adversely impact, enjoin or grant relief against the other Party.

 

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5.3 Within [***] of the last date of execution of this Agreement by a Party, Reid agrees to [***].

(i) [***]

(ii) [***]

(iii) [***]

5.4 In the event Reid [***] as set forth in Section 5.3 above Caretta Therapeutics agrees to reimburse Reid for all reasonable attorney and filing fees associated therewith.

5.5 It is agreed that if Caretta Therapeutics or any of its employees or officers or third parties working under control and/or direction of Caretta Therapeutics shall make any inventions, improvements, modifications, updates and/or further develop any Product which is covered by the any claim of the Reid Patents, such improvements, modifications, updates and/or further developments (collectively “Improvements”) shall be promptly disclosed to Reid. Inventorship shall determine ownership as provided for under U.S. patent laws. In the event the Improvements are jointly invented by Reid and an employee, officer or third party working under control and/or direction of Caretta Therapeutics (“Caretta Therapeutics Improvement”), Caretta Therapeutics shall have an option for an exclusive world-wide sublicensable license from Reid to rights in any patentable joint invention, and the parties will negotiate in good faith for consideration payable to Reid for such exclusive license. The parties will mutually agree on matters regarding patent counsel and prosecution of the patents and shall share costs.

In the event the Improvements are solely invented by an employee, officer or third party working under control and/or direction of Caretta Therapeutics, Reid shall have a non-exclusive world-wide non-sublicensenable license for research purposes only. Caretta Therapeutics will be solely responsible for prosecution of all patent filings to a Caretta Therapeutics Improvement and all costs related thereto.

6. TERM AND EXPIRATION

Unless earlier terminated as hereinafter provided, the license shall extend for the life of the last to expire or abandonment of the Reid Patents and shall then expire automatically. After such expiration, Caretta Therapeutics shall be granted a fully paid perpetual world-wide non-exclusive license to the Materials and Technical Information.

7. TERMINATION

7.1 In the event of default or failure by Caretta Therapeutics to perform any of the terms, covenants or provisions of this Agreement, Caretta Therapeutics shall have sixty (60) days after the giving of written notice of such default by Reid to correct such default. If such default is not corrected within the said sixty (60) day period, Reid shall have the right, at its option, to cancel and terminate this Agreement.

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7.2 Reid shall have the right, at its option, to cancel and terminate this Agreement in the event that Caretta Therapeutics shall (i) become involved in insolvency, dissolution, bankruptcy or receivership proceedings affecting the operation of its business or (ii) make an assignment of all or substantially all of its assets for the benefit of creditors, or in the event that (iii) a receiver or trustee is appointed for Caretta Therapeutics and Caretta Therapeutics shall, after the expiration of thirty (30) days following any of the events enumerated above, have been unable to secure a dismissal, stay or other suspension of such proceedings.

7.3 Caretta Therapeutics shall have the right to terminate this Agreement by giving thirty (30) days written notice thereof to Reid.

7.4 Upon the termination of this Agreement pursuant to Sections 7.2 to 7.3, Caretta Therapeutics shall promptly cease accepting any new orders for Products and shall have six (6) months from the date of termination within which to sell (i) Products already manufactured that are subject to orders accepted prior to the date of termination and (ii) Products that are in the process of manufacture as of the date of termination. Sales of Products after the date of termination shall be subject to the same payment of royalties to Reid as Products sold during the term of the Agreement. After six (6) months from the date of termination, Caretta Therapeutics shall cease all sales of the Products. For termination under any other section, Caretta Therapeutics shall immediately cease sales of all Products. In the event of termination of this Agreement pursuant to Sections 7.1 to 7.3 or Section 11.12, all rights to the Intellectual Property other than Caretta Therapeutics Improvements as per section 5.3 shall revert to Reid. At the date of any termination of this Agreement, Caretta Therapeutics shall, at Reid’s option, destroy or return the Material.

7.5 No termination of this Agreement shall constitute a termination or a waiver of any rights of either Party against the other Party accruing at or prior to the time of such termination. The obligations of Sections 3, 4, 5, 9 and 11 shall survive termination of this Agreement.

8. ASSIGNABILITY

This Agreement shall be binding upon and shall inure to the benefit of Reid and its assigns and successors in interest, and shall be binding upon and shall inure to the benefit of Caretta Therapeutics and the successor to all or substantially all of its assets or business to which this Agreement relates, but shall not otherwise be assignable or assigned by either Party without prior written approval by the other Party being first obtained. Notwithstanding the foregoing, however, Caretta Therapeutics shall have the right to assign all of its rights, duties and obligations under this Agreement to any Affiliate of Caretta Therapeutics, whether in connection with a merger, consolidation or otherwise, or to any person acquiring all or substantially all of the assets of Caretta Therapeutics, whether pursuant to a merger, consolidation or otherwise. Such assignee shall promptly notify Licensor of the occurrence of any such event and agree to be bound by all the terms and conditions of this Agreement.

 

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9. CONFIDENTIAL INFORMATION

The Parties agree they and their officers, agents, consultants, employees and affiliates will not disclose, publish or use for purposes other than stated herein without the other Party’s prior written consent any trade secret, confidential technology or business information of the other (“Confidential Information”) to any third party. Obligations of confidentiality shall survive expiration or termination of this Agreement for a period of five (5) years unless such information is identified as trade secret, in which case confidentiality shall be maintained until no longer subject to trade secret protection through no fault of the receiving Party. The obligations here shall not apply to the following:

i. is now or later becomes, through no fault of the receiving Party, generally known or available to the public;

ii. information which a Party can prove is already in its own possession at the time of disclosure and which was not acquired from the other party directly or indirectly;

iii. information which a Party can prove was independently developed without use of Confidential Information received from the other Party;

iv. information rightfully acquired from a third party with the right to make such disclosure who did not obtain it under an obligation of confidentiality;

v. where the other Party agrees in writing to waive confidentiality obligations of this agreement;

vi. is required to be disclosed by operation of law, governmental regulation or court order, provided the receiving Party gives the disclosing Party notice of such required disclosure prior to making such disclosure, and the receiving Party uses all reasonable effort to secure confidential protection for such information.

It is further understood and agreed that specific information disclosed hereunder shall not be deemed to be within any one or more of the foregoing exceptions merely because it is embraced by more general information that is within any one or more of the exceptions.

10. NOTICES

All notices, reports or communication pursuant to this Agreement shall be sent to such Party via (i) United States Postal Service certified mail, return receipt requested, postage prepaid, (ii) overnight courier, or (iii) facsimile transmission, addressed to it at its address set forth below or as it shall designate by written notice given to the other Party. Notice shall be sufficiently made or given (a) on the date of mailing or (b) when a facsimile printer reflects receipt.

In the case of Reid:

9610 NW 24 Court, Sunrise, FL 33322

In the case of Caretta Therapeutics:

6750 Western Parkway, Suite 200 226

West Des Moines, IA 50266

Phone: (515) 274-9087

 

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11. ADDITIONAL PROVISIONS

11.1 Governing Law. This agreement shall be governed by and construed in accordance with the laws of the State of Iowa.

11.2 Force Majeure. No liability hereunder shall result to a Party by reason of delay in performance caused by force majeure, that is circumstances beyond the reasonable control of the Party, including, without limitation, acts of God, fire, flood, war, terrorism, civil unrest, labor unrest, or shortage of or inability to obtain material or equipment.

11.3 Relationship. Caretta Therapeutics and Reid are independent contractors. Nothing in this Agreement or the course of dealing of the parties shall be construed to constitute the Parties hereto as partners, joint ventures or as agents or distributors for one another, or as authorizing any Party to obligate the other in any manner.

11.4 Entire Agreement. The terms and conditions herein constitute the entire agreement between the Parties and shall supersede all previous agreements, either oral or written, between the Parties hereto with respect to the subject matter hereof. No agreement of understanding bearing on this Agreement shall be binding upon either Party hereto unless it shall be in writing and signed by the duly authorized officer or representative of each of the Parties and shall expressly refer to this Agreement.

11.5 Warranty of Right and Authority. Each of the Parties represents and warrants to the other that it has the full right and authority to enter into this Agreement, and that it is not aware of any impediment which would inhibit its ability to perform the terms and conditions imposed on it by this Agreement. Nothing contained herein shall be interpreted as a warranty, express or implied as to the patentability, enforceability or validity of any patent application or patent owned or controlled by either Party.

11.6 Further Acts and Instruments. Each Party agrees to execute, acknowledge and deliver such further instruments and do all such other acts as may be necessary or appropriate to effect the purpose and intent of this Agreement.

11.7 Severability. In the event any one or more of the provisions of this Agreement should for any reason be held by any court or authority having jurisdiction over this Agreement or either of the Parties hereto to be invalid, illegal or unenforceable, such provision shall be reformed within the jurisdiction of such court or authority to as nearly approximate the intent of the parties as possible, and if the provision is unreformable the Parties shall meet to discuss what steps should be taken to remedy the situation; otherwise and elsewhere this Agreement shall not be affected.

11.8 Captions. The captions to this Agreement are for convenience only and are to be of no force or effect in construing or interpreting the provisions of this Agreement.

11.9 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

11.10 Interpretation. This Agreement has been jointly prepared by the Parties and their respective legal counsel and shall not be strictly construed against either Party.

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11.11 Cooperation. Reid agrees that he shall be responsible for the production of (a) sufficient quantities of clinical-grade drug (topical, oral, other formulations) to allow Caretta Therapeutics to conduct early-stage clinical trials in North America (FDA pathway), and (b) sufficient quantities of homeopathic oral formulations that are ready for sale and distribution in Asia (homeopathy pathway).  Reid further agrees that he will cooperate with Caretta Therapeutics to build a robust patent estate covering the use of venom-derived drugs to treat diseases/syndromes/conditions in which pain is a common or primary symptom.  Reid will agree to prepare and file multiple provisional patent applications, as needed, and Caretta Therapeutics will reimburse Reid fully for all patent prosecution costs.  Caretta Therapeutics will be responsible for designing and conducting IND-enabling, preclinical animal studies as well as clinical trials, using the drugs furnished by Reid, including selection of principal investigator(s) and research site(s). Reid agrees to assist Caretta Therapeutics in the drafting of regulatory filings and discussions with the FDA, especially with regard to product characterization and quality control, compliance with Good Manufacturing Practices, inspection of manufacturing facilities, and other product-related issues. Caretta Therapeutics acknowledges that Reid has represented that in order to properly manufacture and market the Products, Caretta Therapeutics must budget a minimum of $2.5 million with at least 60% of that budget dedicated to marketing of Products during the thirty (30) months following the Agreement Date. Marketing shall include, but is limited to, Internet, news print, radio, television, sponsorships and clinical studies. Caretta Therapeutics acknowledges that the commitment to a budget is a material inducement for Reid to enter into this Agreement. The parties agree that they shall collaborate, in good faith, within 60 days of the Agreement Date, to formulate a suitable budget for the manufacture and marketing of the Product (the “Budget”). In the event Caretta Therapeutics fails to abide by the Budget, and such failure is not cured within 60 days, provided Reid has not breached this Agreement, it shall be considered a material breach of this Agreement pursuant to which Reid can terminate upon written notice after the expiration of the foregoing cure period. In the event Reid breaches the terms of this Agreement, by failure to consult, cooperate or otherwise, upon written notice, with a 30 day cure peiod, Reid shall be prohibited from pursuing the advancement of the Product, or any development of the above described patents, unless and until Reid repays Caretta Therapeutics all monies it has provided for the development and marketing of the Product.

 

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IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement in multiple originals by their duly authorized officers and representatives on the respective dates shown below, but effective as of the Agreement Date.

Dr. Paul Reid Caretta Therapeutics, Inc.

Name: ____________________ Name: ______________________

Title: _____________________ Title: _______________________

Date: _____________________ Date: _______________________

EXHIBIT A

PATENTS

Title	Country	Application Number	Publication number
Composition and method for oral delivery of cobra venom	US	USSN 14/04382	US20140030354
Composition and method for oral delivery of cobra venom	Canada	CA20102806790	CA20102806790
Composition and method for oral delivery of cobra venom	China	CN2010844674	CN102573861
Composition and method for oral delivery of cobra venom	International PCT	PCT/US2010/044290	WO2011017354
Novel skin care formulation	International PCT	PCT/US2014/053738	WO 2015/031903
Novel skin care formulation	Singapore	SG11201602332R	SG11201602332R
Novel skin care formulation	Hong Kong	16107855.1	N/A
Novel skin care formulation	India	201627008859	N/A
Novel skin care formulation	China	201480055211.3	CN105682667A
Novel skin care formulation	Malaysia	PI2016701137	N/A

 

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EXHIBIT B

MATERIALS

Production	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
Packaging	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
Support Data	[***]
	[***]
	[***]
	[***]
	[***]
	[***]
Regulatory	[***]
	[***]
	[***]
Clinical	[***]
	[***]
	[***]
Reference literature	[***]
	[***]
Marketing	[***]

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EX-10.37

[***] Indicates Redacted Information Subject to a Request for Confidential Treatment.

EXHIBIT 10.37

IURTC Agreement Number [***]

EXCLUSIVE LICENSE AGREEMENT

OF OCTOBER 13, 2016

between

INDIANA UNIVERSITY RESEARCH AND TECHNOLOGY CORPORATION

and

SPOTLIGHT INNOVATION, INC.

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Introduction: This exclusive license agreement (the “Agreement”) is made and entered into as of October 13, 2016 (the “Effective Date”) by and between:

Indiana University Research and Technology Corporation (“IURTC”), a non-profit corporation organized under the laws of Indiana, having its principal offices at 518 Indiana Ave., Indianapolis, Indiana 46202, and

Spotlight Innovation, Inc. (“Spotlight”), a company organized under the laws of Nevada, having its principal offices at 6750 Westown Pkwy Ste 200-226, West Des Moines, Iowa 50266.

The Parties hereby agree:

1 Background : IURTC and The Brigham and Women’s Hospital, Inc. (“BWH”) are co-owners of certain intellectual property rights invented by Elliot Androphy, M.D. at Indiana University and Kevin Hodgetts, Ph.D. at BWH (the “Inventors”; collectively, Indiana University and BWH are the “Institutions”). IURTC and BWH entered into an agreement effective January 1, 2016 which grants IURTC the right to grant licenses under both parties’ ownership rights in the intellectual property. IURTC is willing to grant licenses to these intellectual property rights provided the rights are used to further scientific research, for new product development, and for other applications in the public interest. Spotlight represents to IURTC that it has the necessary product development, manufacturing, and marketing capabilities to commercialize products based on such intellectual property rights. Spotlight desires to obtain a license to commercialize these intellectual property rights upon the terms and conditions set forth in this Agreement.

2 Definitions: In addition to other capitalized terms defined herein, the following words and phrases have the meanings assigned to them below.

2.1 Affiliate: Any entity that, directly or indirectly, owns or controls Spotlight or that is owned or controlled by or is under common ownership or control with Spotlight. Own(s) or control(s) means:

2.1.1 Direct or indirect ownership of at least fifty percent (50%) of the outstanding voting securities of a corporation;

2.1.2 The right to receive at least fifty percent (50%) of the earnings of the entity in question; or

2.1.3 The right to control the business decisions of the entity in question.

 

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2.2 Development Plan: Spotlight’s good faith, bona fide plan for the development, manufacture, promotion, importation, use, sale, and marketing of Licensed Products. The Development Plan will include, at a minimum, then current:

2.2.1 Definitions and/or specifications for each Licensed Product planned for development;

2.2.2 Tasks to be performed by Spotlight and/or Sublicensees to develop each Licensed Product to the point of First Commercial Sale and thereafter to maximize Sales, including without limitation estimated time schedules for specific tasks;

2.2.3 Tasks to be performed to achieve any regulatory approval or other certification of each Licensed Product, including without limitation estimated time schedules for each; and

2.2.4 Identification of the primary country(ies) in which each Licensed Product is or will be Sold, and a good faith estimate of time of First Commercial Sale in the primary country(ies) where Licensed Product is not yet Sold.

2.3 Field: Human therapeutic for spinal muscular atrophy.

2.4 First Commercial Sale: The earliest date of Sale of a Licensed Product by Spotlight or any of its Sublicensees. The transfer of Licensed Products by Spotlight or its Sublicensees strictly for their internal laboratory and clinical research and development purposes or beta-testing prior to regulatory approval does not constitute a First Commercial Sale, provided that Spotlight and its Sublicensees receive no payment or other consideration or value for such Licensed Product in excess of the actual documented costs of producing and transporting such Licensed Product.

2.5 Licensed Product: Any product or process that: (i) is claimed in the Patent Rights; and/or (ii) is made by, uses, incorporates, is used by, or results from a process that is claimed in the Patent Rights.

2.6 Net Sales: The gross receipts for the Sale of Licensed Products, less the following to the extent documented to IURTC and only insofar as they are included in gross receipts and are separately billed:

2.6.1 Trade, quantity, and cash rebates on Licensed Products actually provided to third parties;

2.6.2 Credits, allowances, or refunds, not to exceed the original invoice amount, actually allowed for actual claims, damaged goods, rejections, or returns of Licensed Products; and

2.6.3 Excise, sale, use, or other taxes, other than income taxes and value added taxes, that are included in gross receipts and that are paid to Spotlight or Sublicensees for Licensed Products.

If Sales are not in an arms-length transaction or are between Spotlight, Affiliates, or Sublicensees, then the gross receipts of the Sale will be deemed to be the annual average gross invoiced amount in the same country for arms-length transactions for the Licensed Product.

 

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2.7 Party: Individually, IURTC or Spotlight. Collectively, IURTC and Spotlight may be referred to as the “Parties.”

2.8 Patent Rights: IURTC’s and BWH’s rights in:

2.8.1 U.S. provisional patent applications [***];

2.8.2 All U.S. patent applications claiming priority to the above-referenced patents or applications, including without limitation divisionals, equivalent continuations, and subject matter claimed in continuations-in-part applications that is entitled to the priority filing date of any of the above;

2.8.3 Foreign equivalent applications claiming priority to the above-referenced patents or applications;

2.8.4 Patents issuing from any of the above-referenced applications;

2.8.5 Any of the foregoing during reissue, re-examination, opposition, or post-grant review proceedings;

2.8.6 Reissues and re-examinations of any of the above-referenced patents; and

2.8.7 Any extensions of or supplementary protection certificates referencing any of the above patents.

2.9 The terms Sale, Sold, Sell: Any transaction in which a Licensed Product is manufactured, exchanged, or transferred for value, including without limitation sales, leases, licenses, rentals, provision of services through the practice of Licensed Products, and other modes of distribution or transfer of a Licensed Product. A Sale of a Licensed Product will be deemed to have been made upon the earliest of the dates on which Spotlight or its Sublicensee (or anyone acting as a result of, on behalf of, or for the benefit of Spotlight or any of its Sublicensees) invoices, ships, provides, or receives value for a Licensed Product.

2.10 Sublicense: Each agreement, however captioned, in which Spotlight directly, or indirectly through privity of contract with a Sublicensee:

2.10.1 Grants, conveys, or otherwise transfers any of the rights granted hereunder;

2.10.2 Agrees not to assert one or more of the Patent Rights or agrees not to sue, prevent, or seek a legal remedy for the practice of same;

2.10.3 Has obtained the agreement from another entity not to practice the Patent Rights;

2.10.4 Has agreed with any other entity to do any of the foregoing, or to forbear from offering or doing any of the foregoing with any other entity, including without limitation licenses, option agreements, right of first refusal agreements, standstill agreements, settlement agreements, co-development agreements, co-promotion agreements, joint venture agreements, and other agreements; or

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2.10.5 Has another party Sell, offer for Sale, manufacture, or import Licensed Product.

2.11 Sublicensee: Each entity, other than Spotlight or Affiliates that have satisfied the requirements of Paragraph 3.2, that enters into a Sublicense.

2.12 Sublicensing Revenue: The remuneration received under each Sublicense, including without limitation the fair market cash value of any and all non-cash consideration, including without limitation license issue fees, option fees, other licensing fees, milestone payments, minimum annual royalties, equity, or other payments of any kind whatsoever (but excluding solely running royalties paid by Licensee to IURTC for Net Sales by Sublicensees), irrespective of whether such revenues are received in the form of cash, barter, credit, stock, warrants, release from debt, goods or services, licenses back, and/or a premium on the sale of equity (i.e., payments for equity that exceed the pre-Sublicense value).

2.13 Term: Commencing on the Effective Date and continuing until the expiration of the last of the Patent Rights, unless earlier terminated in accordance with this Agreement.

2.14 Territory: Anywhere in the world, except those countries to which export of technology or goods is prohibited by applicable U.S. export control laws or regulations.

3 Grant:

3.1 Subject to the terms and conditions of this Agreement and Spotlight’s compliance therewith, and in consideration of Spotlight’s satisfaction of its obligations hereunder, IURTC hereby grants to Spotlight and Spotlight hereby accepts an exclusive license under the Patent Rights, to make, have made, use, offer for Sale, Sell, and import Licensed Products solely in the Field and the Territory.

3.2 Subject to the terms and conditions of this Agreement and Affiliate compliance therewith, the rights licensed to Spotlight hereunder, except for the right to grant Sublicenses, may be extended to Affiliates provided that each such Affiliate first agrees in a written agreement to be bound by the terms and conditions of this Agreement as Spotlight is bound, and such agreement: (i) names IURTC as a third party beneficiary; (ii) terminates upon termination of this Agreement with obligations that survive for Spotlight surviving for Affiliates; and (iii) is not transferable. Any Affiliate that desires to exercise any of the rights granted hereunder will enter into such written agreement with Spotlight prior to exercising such rights. Spotlight will deliver to IURTC a copy of said agreement and any amendment thereto within thirty (30) days of each execution. Spotlight agrees to be fully responsible for the performance of such Affiliates and liable for their compliance therewith and herewith.

3.3 Subject to the terms and conditions of this Agreement and Sublicensee compliance therewith and with its Sublicense, Spotlight may grant Sublicenses, conditioned on such compliance, to third parties under this Agreement. Only Spotlight, and not its Sublicensees, is permitted to grant Sublicenses unless IURTC provides prior written consent in each instance. If such consent is provided, which IURTC may withhold for any reason, then all terms and conditions applicable to Sublicensee hereunder will also apply to Sublicensee’s Sublicensee.

3.3.1 Each Sublicense will be consistent with the terms and conditions of this Agreement, including without limitation Paragraphs 8.3 and 13.5 and Article 14 and will:

3.3.1.1 Contain the terms and conditions set forth in Paragraph 2.6 and the definitions it references therein, and in Paragraphs 3.4, 3.6, 3.7, 6.3, 6.4, 8.4, 8.5, 9.7, 16.6, and 16.7, and in Article 7 modified only to indicate that Sublicensee is under the same obligations as Spotlight;

3.3.1.2 Contain the terms and conditions set forth in Paragraph 6.2 and the definitions it references modified only to indicate that the Sublicensee is obligated to Spotlight as Spotlight is to IURTC;

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3.3.1.3 Contain the terms and conditions set forth in Articles 11, 12, and Paragraph 7.5, modified only to indicate that the Sublicensee is obligated to IURTC and the Institutions as Spotlight is obligated to IURTC and the Institutions hereunder; and

3.3.1.4 State that if Spotlight enters bankruptcy or receivership, voluntarily or involuntarily, then upon notice from IURTC, each Sublicensee will pay Sublicensee’s royalties on Net Sales and Sublicensing Revenue then or thereafter due directly to IURTC for the account of Spotlight. IURTC will remit to Spotlight any amounts received that exceed the sum actually owed by Spotlight to IURTC.

3.3.2 Within thirty (30) days of the effective date of each Sublicense and each amendment thereto, Spotlight will provide IURTC a complete copy of the Sublicense and all amendments and exhibits thereto, along with Spotlight’s representation and warranty that no prior, contemporaneous, planned, or proposed contractual relationships between Spotlight and Sublicensee contain consideration to Spotlight reasonably attributable to the sublicensed rights. If the original Sublicense is written in a language other than English, the copy of the Sublicense and all exhibits thereto will be accompanied by a complete translation written in English that Spotlight represents and warrants will be a true and accurate translation of the Sublicense and its exhibits. Spotlight will also notify IURTC promptly upon the termination of each Sublicense.

3.3.3 Spotlight agrees to be fully responsible for the performance of Sublicensees and liable for their compliance hereunder. Any act or omission by a Sublicensee that would be a breach of this Agreement if imputed to Spotlight will be deemed to be a breach by Spotlight of this Agreement.

3.4 IURTC, the Institutions, BWH’s affiliates, and the Inventors retain the right to practice the Patent Rights for educational and/or research purposes, for patient care and treatment purposes, and to permit other non-profit entities to do the same for educational and/or research purposes. Spotlight agrees not to directly or indirectly restrict the rights of the Institutions, other non-profit entities, or their respective faculty, staff, students, or employees from publishing the results of their research or transferring materials related to the Patent Rights, provided, however, that any such publications that are disclosed to IURTC will be provided to Spotlight for its review at least thirty (30) days prior to publication so that Spotlight may discuss with IURTC its interest in such disclosures.

3.5 This Agreement provides Spotlight, Affilates, and Sublicensees no ownership rights of any kind in the Patent Rights or any Confidential Information (as defined in Paragraph 7.1) provided by or on behalf of IURTC. All rights, titles, and interests in and to tangible and/or intangible property of IURTC or the Institutions, including without limitation those rights expressly reserved in Paragraph 3.4 and ownership of the Patent Rights and any Confidential Information provided, remain the property of IURTC. Nothing in this Agreement will be construed as a sale thereof or conferring, by implication, estoppel, or otherwise, upon Spotlight, Affiliates, Sublicensees, or any party in privity with, or any customer of any of the foregoing, any right, title, or interest of IURTC or the Institutions except as expressly granted in Paragraphs 3.1-3.3. Spotlight will provide notice of Field and Territory limitations on Licensed Products to prevent any implied license outside the Field or Territory.

3.6 In accordance with 35 U.S.C. §§ 200-212, 37 C.F.R. Part 401, and in the relevant government research contracts with the Institutions, the U.S. government retains certain rights and may impose certain requirement with respect to subject inventions as that term is defined therein. To the extent applicable, such rights and requirements include without limitation: (i) the grant of a nonexclusive, non-transferable, irrevocable, fully paid-up license to practice or have practiced for or on behalf of the government the subject inventions throughout the world; and (ii) the requirement that subject inventions and products produced through the use of subject inventions that are used or sold in the U.S. be manufactured substantially in the U.S. The rights granted in this Agreement are expressly made subject to these laws and regulations as they may be amended from time to time, and Spotlight agrees to comply and enable IURTC and the Institutions to comply with all such laws and regulations, including without limitation to submit information requested by IURTC to satisfy the Institutions’ reporting requirements in connection therewith. Spotlight represents and warrants that it, all Affiliates extended rights under Paragraph 3.2, and all Sublicensees constitute a “small business firm” as defined in 15 U.S.C. §632, and Spotlight will promptly notify IURTC of any change thereof that occurs during the term.

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3.7 Spotlight will mark all Licensed Products Sold in the U.S. with the applicable Patent Rights and in a manner not inconsistent with 35 U.S.C. §287(a), and will mark all Licensed Products Sold in other countries with the applicable Patent Rights in a manner not inconsistent with the laws and regulation then applicable in each such country. Spotlight acknowledges that it will be liable to IURTC for infringement damages lost due to a failure to mark Licensed Products and/or due to the improper or defective marking of the Patent Rights.

4 Diligence: Spotlight agrees to develop, promote, and Sell Licensed Products within the Field and throughout the Territory in accordance with the terms and conditions of this Agreement and applicable laws and regulations.

4.1 Within ninety (90) days of the Effective Date, Spotlight will provide IURTC with a Development Plan. No later than January 31 of each subsequent year during the Term, Spotlight will provide IURTC with written updates to the Development Plan. The updates will summarize in reasonable detail the progress achieved during the previous year, any problems encountered in the development, evaluation, testing, pre-production manufacturing, First Commercial Sale, and/or initial marketing of each Licensed Product, and plans for the future regarding the foregoing. Upon reasonable request by IURTC, Spotlight will consult with IURTC about tasks, schedules, and progress.

4.2 Spotlight will achieve directly or through a Sublicensee the following commercial goals by the dates set forth below:

4.2.1 [***]

4.2.2 [***]

4.2.3 [***] Spotlight will provide IURTC with commercially reasonable evidence of Spotlight’s or Sublicensee’s achievement of each of such goals within thirty (30) days after the corresponding date.

5 Financial Consideration:

5.1 Within thirty (30) days of the Effective Date, Spotlight will pay to IURTC [***].

5.2 Spotlight will pay to IURTC a running royalty of Net Sales by Spotlight and Sublicensee saccording to the following table.

[***][***][***][***][***][***]

The royalty will apply to all Licensed Products made during the Term, though specific Licensed Products may be Sold after the Term. No multiple royalties will be payable because: (i) the Licensed Product is later sold or used following the Sale of the Licensed Product generating the Net Sale hereunder; or (ii) the manufacture or use of the Licensed Product is covered by more than one of the Patent Rights. Royalties will be paid to IURTC within thirty (30) days of the end of each calendar quarter in which the Net Sales occurred.

5.3 Beginning with the [***] calendar year, Spotlight will pay to IURTC an annual maintenance fee according to the table below:

 

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The maintenance fee will be paid by Spotlight to IURTC on January 1 of the calendar year for which it is owed, with the first payment due on January 1, [***]. Maintenance fee payments may be credited toward payments due to IURTC under Paragraphs 5.2, 5.4, and 5.5 but only for those payments that accrue in the same calendar year in which the maintenance fee was due and paid.

5.4 Spotlight will pay to IURTC [***] of all Sublicensing Revenue. IURTC’s percentage of Sublicensing Revenue will be paid by Spotlight to IURTC within thirty (30) days of the end of each calendar quarter in which Spotlight received the Sublicensing Revenue.

5.5 Spotlight will pay to IURTC the following performance milestone payments:

5.5.1 [***]

5.5.2 [***]

5.5.3 [***]

5.5.4 [***]

Spotlight will promptly notify IURTC of the achievement of a performance milestone. Should Spotlight receive Sublicensing Revenue for a Sublicensee’s achievement of a particular performance milestone, Spotlight will pay to IURTC the greater of the payment listed above or IURTC’s percentage of Sublicensing Revenue under Paragraph 5.4. Performance milestone payments will be paid by Spotlight to IURTC within thirty (30) days of the end of each calendar quarter in which the performance milestone is achieved.

6 Payment and Reports:

6.1 All dollar ($) amounts referred to in this Agreement are expressed in U.S. dollars. All payments to IURTC are non-refundable and, except as provided in Paragraph 5.3, non-creditable, may not be placed in escrow, and will be made in U.S. dollars by check or electronic transfer (without deduction of any transfer fees) payable solely to “Indiana University Research and Technology Corporation.”

6.1.1 Checks will be sent to:

Indiana University Research and Technology Corporation

518 Indiana Ave.

Indianapolis, IN 46202

The IURTC Agreement Number [***] and purpose of the payment will be included with the check.

6.1.2 Wire transfer payments will be sent to:

 

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[***]

The IURTC Agreement Number [***] and purpose of the payment will be included with the wire transfer information. Spotlight will add wire transfer fees to the payment.

6.1.3 Any amounts due in currency other than U.S. dollars will be converted to U.S. dollars at the conversion rate for the foreign currency as published in the Eastern edition of The Wall Street Journal as of the last business day in the U.S. of the applicable payment period.

6.2 Spotlight will deliver to IURTC, with each payment made under Paragraph 6.1, a written report describing the purpose of the payment and setting forth the calculation of the payment being made to IURTC, including without limitation the following:

6.2.1 For payments under Paragraph 5.2, calculations of payments due by Spotlight, by each Affiliate extended rights under Paragraph 3.2, and by each Sublicensee on a Licensed Product-by-Licensed Product and country-by-country basis: the number of Licensed Products Sold; gross receipts for Sales; deductions as described in Paragraph 2.6, giving totals by each type; and calculation of Net Sales;

6.2.2 For payments under Paragraphs 5.2, 5.4, and 5.5, the serial numbers of the patent applications and patents of the Patent Rights that may cover each Licensed Product;

6.2.3 For payments under Paragraphs 5.2, 5.4, and 5.5, a description and list of amounts credited against the maintenance fee; and

6.2.4 For payments under Paragraph 5.4, the name of the Sublicensee paying the Sublicensing Revenue.

6.3 Spotlight will maintain complete, continuous, and accurate books of account and records sufficient to enable IURTC’s independent auditor to verify the amounts paid under this Agreement, and for otherwise verifying its and Affiliates’ granted rights under Paragraph 3.2 and Sublicensees’ performance hereunder and compliance herewith. The books and records will be maintained for at least three (3) years following the quarter after submission of the reports required by this Article. Upon reasonable notice by IURTC and during normal business hours, Spotlight will give IURTC (or auditors or inspectors appointed by and representing IURTC) access to all books and records, including without limitation for Sales of Licensed Products, to conduct at IURTC’s expense an audit or review of those books and records. This access will be available at least once every calendar year during the Term and for the three (3) calendar years thereafter. Any underpayment will be promptly paid, with interest as set forth in Paragraph 6.4, to IURTC. Any overpayment will be granted to Spotlight solely and exclusively as a credit against future payment. If the audit or review reflects an underpayment or overpayment by five percent (5%) or more for any calendar quarter, then Spotlight will promptly reimburse IURTC for the costs and expenses of the accountants and auditors in connection with the review and audit.

6.4 All payments not paid by Spotlight to IURTC when due will accrue interest, from the due date until payment is received by IURTC, at an annual rate equal to two percent (2%) above the prime rate published in the Eastern edition of The Wall Street Journal at the beginning of the period of arrearage (or the maximum allowed by law, if less). In the event of default in payment, collection agency’s fees of the delinquent balance and out-of-pocket attorney fees plus any applicable court costs will be added to the amount due to IURTC. Spotlight will reimburse IURTC within fifteen (15) days of each invoice for all such costs.

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6.5 Any taxes required to be withheld by Spotlight from payments due under Article 5 to comply with the tax laws of the U.S. or any other country will be promptly paid by Spotlight to the appropriate tax authorities, and Spotlight will furnish IURTC with original tax receipts or other appropriate evidence issued by the appropriate tax authorities sufficient to enable IURTC to support a claim for income tax credit or refund in respect to any sum so withheld.

7 Confidentiality:

7.1 The terms and conditions of Articles 4 and 5 and information exchanged between the Parties under Articles 4, 6, and 9, and 10, tangible materials and technical information provided by or on behalf of IURTC, as well as any information designated by a Party in any reasonable manner as confidential within a reasonable time after it is delivered to the receiving Party, are “Confidential Information.”  

7.2 During the Term and for a period of three (3) years thereafter, the receiving Party agrees to maintain in secrecy and not disclose to any third party any Confidential Information received. The receiving Party will use the Confidential Information received solely as necessary to perform its obligations and exercise its rights in accordance with the terms and conditions of this Agreement.

7.3 Confidential Information does not include information that:

7.3.1 Is or becomes part of the public domain through no fault of the receiving Party;

7.3.2 Was known to the receiving Party before disclosure by the disclosing Party as established by documentary evidence;

7.3.3 Is identical subject matter originally and independently developed by the receiving Party’s personnel without knowledge, use of, or access to any disclosing Party’s Confidential Information as established by documentary evidence; or

7.3.4 Was disclosed to the receiving Party without restriction by a third party having a right to make the disclosure.

7.4 Notwithstanding the other terms of this Article 7:

7.4.1 Spotlight may, to the extent necessary, use Confidential Information to secure governmental approval to clinically test or market a Licensed Product or to show to a potential sublicensee or contractor subject to an appropriate confidentiality agreement. Spotlight will, in any such use, take all reasonably available steps to maintain confidentiality of the disclosed information and to guard against any further disclosure;

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7.4.2 IURTC may report consideration received under this Agreement and Spotlight’s progress under Article 4, including without limitation providing Development Plans and reports, to the Institutions and the Inventors and to the U.S. government under Paragraph 3.6; and

7.4.3 The receiving Party may disclose Confidential Information when required by law, regulation, or court order provided it has first notified the disclosing Party and it reasonably cooperates therewith in obtaining a protective order or other remedy of the disclosing Party’s election.

7.5 Spotlight may not use or permit the use of the name of IURTC, the Institutions, or any trustee, director, officer, staff member, employee, student or agent of the Institutions or any adaptation thereof or use the trademarks, including without limitation logos, of any of the foregoing for any commercial, advertisement, or promotional purpose without the prior written consent of IURTC and the BWH or the individual whose name is to be used. For BWH, such approval will be obtained from BWH’s Chief Public Affairs Officer. Notwithstanding the foregoing, Spotlight will be permitted to disclose the existence and terms of this Agreement, including the name of IURTC, to the extent required under federal securities laws, or to the extent consistent with Spotlight’s past practices with regard to public disclosures to stockholders. Consistent with the foregoing, each Party including UABRF may state that Spotlight licensed from IURTC one or more of the patent applications and/or patents in the Licensed Patents, list Inventor names, and describe the type and extent of licenses.

8 Representations and Warranties:

8.1 IURTC represents and warrants that:

8.1.1 It is a corporation organized, existing, and in good standing under the laws of Indiana;

8.1.2 It has the authority to enter into this Agreement and that the person signing on its behalf has the authority to do so; and

8.1.3 To the best of its knowledge, it is the co-owner (subject to any rights retained by the U.S. government by operation of law) of the Patent Rights and that it has the authority to grant the licenses set forth herein.

8.2 Spotlight represents and warrants that:

8.2.1 It is a company duly organized, existing, and in good standing under the laws of Nevada;

8.2.2 The execution, delivery, and performance of this Agreement have been authorized by all necessary corporate action on the part of Spotlight and that the person signing this Agreement on behalf of Spotlight has the authority to do so;

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8.2.3 The making, exercising of any right, or performance of any obligation under this Agreement does not violate any separate agreement it has with a third party, and in so acting, Spotlight will not breach the terms and conditions of this Agreement or fail to comply with applicable laws, regulations, and court orders;

8.2.4 It is not a party to any agreement or arrangement that would prevent it from performing its duties and fulfilling its obligations to IURTC under this Agreement;

8.2.5 It has and will maintain at the time specified in Article 12, the insurance coverage called for in Article 12;

8.2.6 It will obtain any additional licenses from any third party needed to perform and fulfill its duties and obligations under this Agreement; and

8.2.7 There is no pending litigation and no threatened claims against it that could impair its ability or capacity to perform and fulfill its duties and obligations under this Agreement.

8.2.8 As of the Effective Date it is a small entity as defined in 37 CFR 1.27, and it will promptly notify IURTC of any change to its entity status through acquisition, addition of employees, sublicensing this Agreement, or any other mechanism.

8.3 IURTC AND BWH PROVIDE THE PATENT RIGHTS “AS IS.” EXCEPT AS PROVIDED IN PARAGRAPH 8.1, IURTC AND BWH MAKE NO REPRESENTATIONS OR WARRANTIES, AND EXPRESSLY DISCLAIMS ON BEHALF OF IURTC AND THE INSTITUTIONS ALL OTHER REPRESENTATIONS AND WARRANTIES, WHETHER EXPRESS, STATUTORY, IMPLIED, OR OTHERWISE, INCLUDING WITHOUT LIMITATION:

8.3.1 A warranty or representation by IURTC or the Institutions as to the validity, scope, enforceability, or efficacy of the Patent Rights;

8.3.2 A warranty or representation by IURTC or the Institutions that the exercise of any rights granted in this Agreement, including without limitation practicing the Patent Rights, does not or will not infringe patents, copyrights, trademarks, trade secrets or other tangible or intangible property rights of third parties;

8.3.3 A warranty or representation by IURTC or the Institutions of operability, that development of a Licensed Product is possible, or to safety, effectiveness, or commercial viability of Licensed Products;

8.3.4 An obligation to bring or prosecute actions or suits against third parties for infringement of the Patent Rights;

8.3.5 A grant, by implication, estoppel, or otherwise, of any licenses or rights under patents or other intellectual property rights of IURTC, the Institutions, or other persons, other than the rights expressly granted herein to the Patent Rights;

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8.3.6 Directly or indirectly operating or applying as a waiver of sovereign immunity by IU or Indiana;

8.3.7 Imposing any obligation or any liability on any party contrary to the laws of Indiana; and

8.3.8 IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OF THE PATENT RIGHTS OR ANY LICENSED PRODUCTS FOR ANY PURPOSE. In no event will IURTC, BWH or any of its affiliates or any of their respective trustees, directors, officers, medical and professional staff, employees and agentsbe liable, including without limitation to Spotlight, its Affiliates, its Sublicensees, and their respective affiliates, successors, assigns, independent contractors, and agents, or to any third party regarding any claim arising from or relating to the exercise of any right granted, including without limitation Spotlight’s use of the Patent Rights; or from the manufacture, use, or importation of products; or for any claim for loss of profits or loss or interruption of business; or for indirect, special, exemplary, punitive, or consequential damages of any kind. The above limitations on liability apply even if advised of the possibility of such damages.

8.4 The rights granted to Spotlight under this Agreement are contingent upon compliance with applicable U.S. export laws and regulations, including without limitation the Arms Export Control Act, as amended, and the Export Administration Act of 1979. The transfer of certain technical data and commodities may require a license from the cognizant agency of the U.S. Government and/or written assurances by Spotlight that Spotlight will not export data or commodities to certain foreign countries without prior approval of such agency. IURTC does not represent that a license is not required, or that, if required, such a license will be issued.

8.5 The rights granted to Spotlight under this Agreement are contingent upon compliance with the U.S. Foreign Corrupt Practices Act. Notwithstanding anything to the contrary herein, IURTC is not obligated to take any action that it believes in good faith may cause it to be in violation of the U.S. Foreign Corrupt Practices Act or other U.S. laws and such inaction will not give rise to liability hereunder.

9 Prosecution of Patent Rights:

9.1 IURTC will prepare, file, prosecute, defend, and maintain the Patent Rights in its discretion in accordance with the terms and conditions herein using attorneys of its choosing. IURTC will instruct its attorneys to keep Spotlight informed of patent prosecution in the Field and to seek Spotlight’s comments and suggestions prior to taking material actions for the same (provided Spotlight is not in breach of this Agreement).

9.2 IURTC will authorize Spotlight to communicate directly with IURTC’s patent counsel. All information exchanged among IURTC’s counsel, the Parties, and/or the Inventors regarding the preparation, filing, prosecution, issue, defense, or maintenance of the Patent Rights will be deemed Confidential Information of IURTC. In addition, the Parties acknowledge and agree that, with regard to such preparation, filing, prosecution, issue, defense, and maintenance of the Patent Rights, the interests of the Parties as licensor and licensee are to obtain the strongest and broadest patent protection possible, and as such, are aligned and legal in nature. The Parties agree and acknowledge that they have not waived, and nothing in this Agreement constitutes a waiver of, any legal privilege concerning the Patent Rights, including without limitation, privilege under the common interest doctrine and similar or related doctrines.

9.3 Spotlight will reimburse IURTC [***] within thirty (30) days after the Effective Date for expenses incurred prior to the Effective Date for the Patent Rights.

9.4 During the Term, Spotlight will reimburse IURTC for all reasonable and documented costs and expenses incurred by IURTC relating to the Patent Rights within thirty (30) days of receipt of billing invoices for such costs and expenses.

 

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9.5 Notwithstanding anything to the contrary herein:

9.5.1 IURTC may request written confirmation from Spotlight that it will satisfy its reimbursement obligations for any particular fees or expenditures for the Patent Rights at least sixty (60) days in advance of the date on which such expenditure is to be made or such fee is due to be paid. If Spotlight elects not to pay in accordance with Paragraph 9.6 or fails to respond, then such Patent Rights will be removed from the Agreement, the license granted to Spotlight for those patent applications or patents in the Patent Rights will terminate, the definition of Patent Rights will be unilaterally amended to exclude such rights, and IURTC will be free, at IURTC’s sole discretion and without any further obligation to Spotlight regarding such former Patent Rights, including without limitation, to prosecute and maintain for IURTC’s sole use and benefit, to license or to abandon the patent applications or patents;

9.5.2 In addition, IURTC may, at its sole discretion, require payment of a retainer from Spotlight for filing fees prior to filing patent applications in foreign countries, foreign annuities, or other direct costs paid on behalf of IURTC for the Patent Rights to any patent office;

9.5.3 Should Spotlight become delinquent at any time for the reimbursement of patenting costs, IURTC may, at its sole discretion, require Spotlight to pay in advance of all future actions undertaken by counsel regarding the Patent Rights; and

9.5.4 In addition to and not in lieu of its other rights and remedies hereunder, IURTC will have no obligations to Spotlight under this Article 9 if Spotlight is delinquent in its payments.

9.6 If Spotlight elects not to incur fees or expenditures for any Patent Rights, Spotlight will give IURTC written notice of such election at least sixty (60) days in advance of the date on which such expenditure is to be made or such fee is due to be paid. Upon IURTC’s receipt of such notice, or if any payment due under this Article 9 is delinquent for more than thirty (30) days, the license granted to Spotlight for those patent applications or patents in the Patent Rights will terminate, the definition of Patent Rights will be unilaterally amended to exclude such rights, and IURTC will be free, at IURTC’s sole discretion and without any further obligation to Spotlight regarding such former Patent Rights, including without limitation, to continue prosecution and maintenance for IURTC’s sole use and benefit, to license or to abandon the patent applications or patents.

9.7 Spotlight and IURTC agree that the Patent Rights will be extended by all means provided by U.S. or foreign law or regulation, including without limitation extensions provided under U.S. law at 35 U.S.C. §154(b) and 156, and foreign supplementary protection certificates. Spotlight hereby agrees to provide IURTC with all necessary assistance in securing such extension, including without limitation, providing all information regarding applications for regulatory approval, approvals granted, and the timing of same. Spotlight acknowledges that extension under 35 U.S.C. §156 must be applied for within sixty (60) days of the date that a Licensed Product receives permission under the provision of law under which the applicable regulatory review period occurred for commercial marketing or use, and that Spotlight’s failure to promptly provide the necessary information or assistance to IURTC during such sixty day period will cause serious injury to IURTC, for which Spotlight will be liable at law. The Parties will also cooperate in selecting the Licensed Product each supplementary protection certificate referencing the Patent Rights will list.

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10 Third Party Infringement:

10.1 Spotlight will give prompt written notice to IURTC of any known or suspected infringement of the Patent Rights after which Spotlight at its sole expense may attempt to abate any infringement of the Patent Rights in the Field and the Territory. Upon receipt of IURTC’s written consent, such consent not to be unreasonably withheld, Spotlight may initiate and prosecute actions in IURTC’s name against third parties for infringement and/or unfair trade practices through outside counsel of its choice which is reasonably acceptable to IURTC. Spotlight will consult with IURTC prior to and in conjunction with all significant issues regarding such action including without limitation settlement thereof, will keep IURTC informed of all proceedings, and will provide copies to IURTC of all pleadings, legal analyses, and other papers related to such actions. IURTC will provide reasonable assistance to Spotlight in prosecuting any such actions and will be compensated by Spotlight, including without limitation for its reasonable out-of-pocket expenses, which IURTC will only be required to expend if Spotlight has approved same for reimbursement. Absent IURTC’s and BWH’s prior written consent, Spotlight will not settle or compromise any claim or action in a manner that grants rights or concessions to a third party to the Patent Rights or a Licensed Product or admits the fault of or creates any obligation on IURTC, IU, BWH, or any Inventor.

10.2 Any damages paid (including without limitation statutory damages, compensatory damages, lost profits damages, exemplary damages, increased damages, and awards of costs and attorney fees) will first be applied to reimbursement of Spotlight’s reasonable costs, expenses, and legal fees, including without limitation amounts Spotlight has reimbursed or must reimburse to IURTC. The remaining balance of such damages will be distributed [***].

10.3 If Spotlight fails or declines to take any action under Paragraph 10.1 within a reasonable time after learning of third party infringement or unfair trade practices, IURTC will have the right, but not the obligation, to take appropriate actions against any such third party at its sole expense and to retain all recovered damages. In such instances, Spotlight will cooperate as requested by IURTC, including without limitation joining in an action and will be reimbursed by IURTC for its reasonable and documented out-of-pocket expenses, which Spotlight will only be required to expend if IURTC has approved same for reimbursement.

11 Indemnification:

11.1 Spotlight will indemnify, defend, and hold harmless IURTC, the Institutions, their respective affiliates, Board of Directors, trustees, employees, faculty, staff, students, Inventors, successors, heirs, assigns, independent contractors, and agents (collectively, “IURTC Indemnitees”) from and against any and all judgments, liabilities, losses, damages, actions, claims, costs, or expenses (including without limitation all attorney fees and costs incurred by IURTC Indemnitees) (collectively, “Losses”) arising out of or relating to the exercise of any rights conveyed under this Agreement and/or by Sublicense, breach of any term or condition under this Agreement and/or Sublicense, and/or the negligence, willful malfeasance, and/or willful misconduct by Spotlight and/or Affiliates, successors, assigns, or Sublicensees, including without limitation:

11.1.1 The use of any Patent Rights, including without limitation, in the design, development, production, manufacture, sale, offer for sale, use, importation, exportation, lease, marketing, or promotion of any Licensed Product;

11.1.2 Product liability, injury or death to any person, damage to property, or any injury to business, including without limitation, business interruption or damage to reputation, arising out of and/or relating to the use of the Patent Rights or a Licensed Product; and

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11.1.3 Any third party claim that any use of Confidential Information or licensing of the Patent Rights, or development, provision, or use of Licensed Products violates or infringes a third party’s intellectual property rights;

except to the extent of the Losses that are solely attributable to the breach, negligence, recklessness, willful malfeasance, or willful misconduct of IURTC.

11.2 Spotlight at its sole expense will defend third party claims. Spotlight will have the right to conduct the defense of such actions through outside counsel of its choice which is reasonably acceptable to IURTC and BWH. Spotlight will consult with IURTC and BWH prior to and in conjunction with all significant issues, will keep IURTC and BWH informed of all proceedings, and will provide copies to IURTC and BWH of all pleadings, legal analyses, and other papers related to such actions. IURTC will provide reasonable assistance to Spotlight in defending any such actions, and IURTC Indemniteeswill have the right to retain its own counsel, at the expense of Spotlight, if representation of such Indemnitees by counsel retained by Spotlight would be inappropriate because of actual or potential differences in the interests of such Indemnitees and any other party represented by such counsel. Spotlight will not settle or compromise any claim or action in a manner that admits the fault of, imposes restrictions, or creates obligations on IURTC Indemnitees or requires any financial payment or admission of liability by IURTC Indemnitees. Spotlight will consult with IURTC and BWH prior to any proposed settlement.

11.3 If Spotlight fails to defend a claim or action within twenty (20) days of learning of the same, in addition to and not in lieu of other rights and remedies, IURTC may assume the defense for the account of and at the risk of Spotlight, and any resulting liability, including attorney fees, will be deemed conclusively to be a liability of Spotlight. Spotlight’s failure or refusal to act is a material breach of this Agreement.

12 Insurance:

12.1 Commencing on the Effective Date, Spotlight will maintain insurance that is reasonably sufficient to fulfill its obligations under this Agreement, including without limitation workers’ compensation insurance with statutory limits as required by law; commercial general liability insurance with coverage of not less than [***] for any single occurrence and [***] in the aggregate. Upon commencing human testing or sales, Spotlight will maintain product liability insurance that is reasonably sufficient to fulfill its obligations under this Agreement, but not less than [***] for any single occurrence and [***] in the aggregate. In connection with the conduct of any clinical testing, Spotlight will maintain professional liability insurance (errors and omissions) that is reasonably sufficient to fulfill its obligations under this Agreement, but not less than [***] for any single occurrence and [***] in the aggregate. Upon commencement of coverage (as required above) and thereafter annually upon renewal, Spotlight will provide IURTC and BWH with written evidence of insurance. Such insurance will list IURTC Indemnitees as an additional insured. All policies will be endorsed to indicate that they provide primary coverage without right of contribution by any insurance carrier or self-insured by IURTC Indemnitees. A waiver of subrogation in favor of the Indemnitees will also be endorsed to the policies. If such coverage is not written on an “occurrence” basis (i.e., it is written on a “claims made” basis), Spotlight will maintain such insurance coverage during the term of this Agreement and for five (5) years thereafter. For purposes of this Paragraph 12.1, references to “Spotlight” will include any Affiliates extended rights under Paragraph 3.2 and Sublicensees.

 

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12.2 Beginning at such time as any such product, process or service is being commercially distributed, sold, leased or otherwise transferred, or performed or used (other than for the purpose of obtaining regulatory approvals), by Spotlight, Affiliates extended rights under Paragraph 3.2 or Sublicensees, Spotlight will, at its sole cost and expense, procure and maintain commercial general liability insurance in amounts not less than [***] per incident and [***] annual aggregate and naming the IURTC Indemnitees as additional insureds. Such commercial general liability insurance will provide (i) product liability coverage and (ii) broad form contractual liability coverage for Spotlight’s indemnification under Article 11 of this Agreement. [***]. The minimum amounts of insurance coverage required under this Paragraph 12.2 will not be construed to create a limit of Spotlight’s liability with respect to its indemnification under Article 11 of this Agreement.

12.3 Spotlight will provide IURTC and BWH with written evidence of such insurance upon request of IURTC and/or BWH. Spotlight will provide IURTC and BWH with written notice at least thirty (30) days prior to the cancellation, non-renewal or material change in such insurance; if Spotlight does not obtain replacement insurance providing comparable coverage prior to the expiration of such thirty (30) day period, IURTC will have the right to terminate this Agreement effective at the end of such thirty (30) day period without notice or any additional waiting periods.

12.4 Spotlight will maintain such commercial general liability insurance beyond the termination of this Agreement during (i) the period that any such product, process, or service is being commercially distributed, sold, leased or otherwise transferred, or performed or used (other than for the purpose of obtaining regulatory approvals), by Spotlight or by a Sublicensee, Affiliates extended rights under Paragraph 3.2 or agent of Spotlight and (ii) a reasonable period after the period referred to in Paragraph 12.4 (i) above which in no event will be less than fifteen (15) years.

13 Termination:

13.1 Spotlight may terminate this Agreement with or without cause on ninety (90) days advance written notice to IURTC. The rights granted by IURTC herein, including without limitation in Article 3, will terminate and automatically revert to IURTC at the end of the 90-day period.

13.2 Time is of the essence for Spotlight to develop Licensed Products and make payments and reports theron. The fee stated in Paragraph 5.1 and the reimbursement of past patent costs under Paragraph 9.3 are due within thirty (30) days after the Effective Date, and if such payments are not received by IURTC thereby, this Agreement is null, void, and without effect.

13.3 IURTC may terminate this Agreement in whole or in part on sixty (60) days advance written notice to Spotlight upon Spotlight’s breach of this Agreement, including without limitation for:

13.3.1 Failure to timely pay any fee, royalty, or other payment required, including without limitation, those due under Article 5, Paragraph 6.3, Article 9, or Paragraph 10.2, and including without limitation any interest on and fees and costs attributable to the collection of late payments under Paragraph 6.4;

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13.3.2 Failure to timely provide reports or notices, including without limitation, those due under Paragraphs 3.2, 3.3, 4.1, 6.2, or 14.1;

13.3.3 Failure to keep accurate and completed books and records under Paragraph 6.3;

13.3.4 Failure to obtain, maintain, or timely report levels of insurance under Article 12;

13.3.5 Failure to include all required terms in Sublicenses or inclusion of any terms prohibited under Paragraph 3.3;

13.3.6 Failure to indemnify IURTC Indemnitees or properly inform or involve IURTC under Article 11; and

13.3.7 Breach of Spotlight’s representations or warranties under Paragraph 8.2.

13.4 To the extent not prohibited by applicable law, Spotlight agrees that in the event Spotlight by its own actions or the action of any of its shareholders or creditors files or has filed against it, with an order for relief being entered, a case under the U.S. Bankruptcy Code of 1978, as previously or hereafter amended, IURTC will be entitled to relief from the automatic stay of Section 362 of Title 11 of the U.S. Code, as amended, on or against the exercise of the rights and remedies available to IURTC. Spotlight hereby waives the benefits of such automatic stay and consents and agrees to raise no objection to such relief. Spotlight further agrees that IURTC, at its sole discretion, may immediately terminate this Agreement by means of a written notice to Spotlight in the event that a creditor or other claimant takes possession of, or a receiver, administrator, or similar officer is appointed over any of the assets of Spotlight, or in the event that Spotlight makes any voluntary arrangement with its creditors or becomes subject to any court or administration order under any U.S. bankruptcy proceedings or insolvency law. Spotlight will promptly inform IURTC of its intention to file a voluntary petition in bankruptcy or of another’s communicated intention to file a voluntary petition in bankruptcy.

13.5 As of the date of termination of this Agreement by either Party for any reason under the terms herein, including expiration of the Term, all rights granted by IURTC will terminate and automatically revert to IURTC. Upon termination other than through expiration of this Agreement, Spotlight agrees not to practice or permit another to practice the Patent Rights. All terms and conditions herein that, by their express terms or by implication, are to be performed after the termination of this Agreement or are prospective in nature will survive termination, as the case may be, including without limitation the provisions in Articles 5, 6, 7, 8, 11, and 12 and Spotlight’s obligations to pay fees, royalties, or other payments and patent expenses accruing prior thereto. Articles 11 and 12 will survive expiration of this Agreement.

13.6 Upon termination of this Agreement, Spotlight will promptly notify its Affiliates extended rights under Paragraph 3.2 and Sublicensees of such termination. Any rights previously granted by Spotlight under Paragraphs 3.2 and 3.3 will be automatically revoked thirty (30) days following the effective date of termination of this Agreement. However, any Sublicensee in compliance with its Sublicense and evidencing to IURTC its ability to meet the requirements of Article 4 and Paragraph 3.5 has the right to enter into a written license agreement with IURTC before its Sublicense is revoked, through which such Sublicensee will become bound to IURTC on substantially the same terms and conditions, including without limitation financial terms, as Sublicensee was bound to Spotlight under the Sublicense, but only to the extent that each financial term is no less favorable to IURTC than those set forth in Article 5 and Paragraph 9.4, and provided that the Sublicense does not impose any obligations on IURTC in excess of those imposed under this Agreement. If any Sublicensee desires to enter into such a license agreement, it will be wholly the responsibility of that Sublicensee to notify IURTC of such desire within thirty (30) days after the effective date of termination of this Agreement. IURTC hereby agrees to enter into such written license agreement, with modifications negotiated in good faith as is reasonably necessary to accommodate the functional and structural differences between Spotlight and IURTC. Time is of the essence for a Sublicensee to provide notice of its desire for such license and to negotiate in good faith in a timely manner to effectuate a license. Failure of a Sublicensee to timely provide such notice or enter into such license will automatically result in the termination of the Sublicense and all rights granted thereunder or hereunder, including but not limited to IURTC’s obligation to enter into such license with Sublicensee.

 

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14 Assignment of this Agreement:

14.1 This Agreement will not be assigned, in whole or in part, by either Party to any third party without the written consent of the non-assigning Party. Such consent will not be unreasonably withheld. However, Spotlight may assign this entire Agreement to a third party that acquires [***], through merger, sale, acquisition, or other similar transaction, provided that:

14.1.1 Spotlight is not in breach of this Agreement in any respect;

14.1.2 Spotlight demonstrates to IURTC’s satisfaction that the successor has or is likely to acquire capital and manpower resources sufficient to fulfill the obligations it is assuming hereunder and the expertise to meet its requirements under Article 4; and

14.1.3 The successor agrees in writing (with a copy sent to IURTC within ten (10) days of the effective date of the assignment) to assume all obligations and liabilities of Spotlight to IURTC.

14.2 The rights granted in this Agreement may not be encumbered, pledged, or hypothecated in any way by Spotlight or any Sublicensee, including without limitation to secure any purchase, lease, or loan. Any conveyance in contravention with the terms and conditions of this Agreement is null and void.

14.3 This Agreement is binding on the Parties and their respective successors and assigns and inures to the benefit of the Parties and their respective permitted successors and permitted assigns.

15 Notice:

15.1 Any required or permissive notice under this Agreement will be sufficient if in writing and delivered personally, by recognized national overnight courier, or by registered or certified mail, postage prepaid and return receipt requested, to the address below and will be deemed to have been given as of the date shown on the receipt if by certified or registered mail, or the day following dispatch if by overnight courier.

If to IURTC:

Vice President

Office of Technology Commercialization

Attn: IURTC Agreement Number [***]

Indiana University Research and Technology Corporation

518 Indiana Ave.

Indianapolis, IN 46202

 

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If to Spotlight:

President

Spotlight Innovation Inc.

6750 Westown Pkwy Ste 200-226

West Des Moines, IA 50266

15.2 For the convenience of the Parties in administering this Agreement, the Parties may direct inquiries as follows:

	If to IURTC:	If to Spotlight:
Patent prosecution	[***]	geoffrey.laff@spotlightinnovation.com
Patent cost reimbursement	[***]	geoffrey.laff@spotlightinnovation.com
Financial consideration	[***]	geoffrey.laff@spotlightinnovation.com

16 General Provisions:

16.1 This Agreement will be construed, interpreted, and applied according to the laws of Indiana, without regard to its or any other jurisdiction’s conflicts of laws provisions. Spotlight agrees that all claims, disputes, or controversies arising under or relating to this Agreement, including without limitation those concerning the validity, construction, or scope of any of the Patent Rights that are not barred by sovereign immunity will be subject to the exclusive jurisdiction and venue of the state or Federal District Court seated in Marion County, Indiana. Neither Party waives its right to seek reimbursement of documented attorney fees in any action to enforce this Agreement.

16.2 No waiver of any breach of this Agreement will constitute a waiver of any other breach of the same or any other provision of this Agreement, and no waiver will be effective unless made in writing by the Party against whom the waiver is sought to be asserted. The delay or failure to assert a right or to insist upon compliance with any term or condition of this Agreement will not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition.

16.3 The Parties acknowledge that they have read this Agreement in its entirety and agree that this instrument comprises the entire agreement, contract, and understanding of the Parties on the subject matter of this Agreement. The Parties acknowledge that invoices, purchase orders, or other mechanisms for administering any payment or obligation set forth herein will not contain terms and conditions separate from, in addition to, and/or in conflict with this Agreement, and that any such terms, if present, will be void and without effect and will not be enforceable by either Party. The Parties had an opportunity to be advised by counsel of their choosing and as such the clauses of this Agreement will not be strictly construed against the drafter.

 

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16.4 Spotlight agrees to register and give required notice concerning this Agreement, at its expense, in each country where an obligation exists under law to so register or give notice. This Agreement cannot be changed, modified, or amended except by a written instrument subscribed by authorized representatives of the respective Parties.

16.5 Neither Party is an agent, employer, employee, partner, joint venturer, or contractor of the other as a result of this Agreement. The representations, warranties, covenants, and undertakings contained in this Agreement are for the sole benefit of the Parties and their permitted successors and permitted assigns and will not be construed as conferring any rights on any third party. Neither Party may in any way pledge the other Party’s credit or incur any obligation on behalf of or bind the other Party on its behalf.

16.6 The provisions of this Agreement are severable in that if any provision in this Agreement is finally determined by a court of competent jurisdiction to be invalid or unenforceable, such invalidity or non-enforceability will not in any way affect the validity or enforceability of the remaining provisions or the validity or enforceability of such provision in any jurisdiction where valid and enforceable. Any invalid or unenforceable provision will be reformed by the Parties to effectuate their intent as evidenced on the Effective Date.

16.7 Spotlight agrees that in the event a faculty or staff member of the Institutions serves Spotlight in the capacity of consultant, officer, employee, board member, advisor, or other designation, under contract or otherwise, such faculty or staff member is subject to compliance with the Institution’s conflict of interest and conflict of commitment policies, including without limitation the obligation to complete a disclosure therefor, will serve solely in his or her individual capacity, as an independent contractor, and not as an agent or representative of IURTC or the Institutions, that IURTC or the Institutions exercises no authority or control over such faculty or staff member while acting in such capacity, that IURTC and the Institutions receive no benefit from such activity, and that IURTC and the Institutions assume no liability or obligation in connection with any such work or service undertaken by such faculty or staff member. Spotlight further agrees that any breach, error, act, or omission by such faculty or staff member acting in the capacity set forth above in this Paragraph will not be imputed or otherwise attributed to IURTC or the Institutions, including without limitation to constitute a breach by IURTC of this Agreement.

16.8 This Agreement may be executed in counterparts, each of which will be deemed an original and all of which when taken together will be deemed one instrument.

Witness: The Parties have caused this valid and binding agreement to be executed by their duly qualified representatives as of the Effective Date.

Spotlight:	IURTC:
Signature
	Marie C. Kerbeshian, Ph.D.
Name	Vice President
	Office of Technology Commercialization
Title
Date	Date

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EX-10.38

EXHIBIT 10.38

[***] Indicates redacted information subject to a request for confidential treatment.

STANDARD EXCLUSIVE LICENSE AGREEMENT

WITH SUBLICENSING TERMS

TABLE OF CONTENTS

Section 1	Definitions	3
Section 2	Grant	5
Section 3	Due Diligence	6
Section 4	Payments	7
Section 5	Certain Warranties and Disclaimers of FSURF	9
Section 6	Record Keeping	10
Section 7	Patent Prosecution	10
Section 8	Infringement and Invalidity	11
Section 9	Term and Termination	12
Section 10	Assignability	13
Section 11	Dispute Resolution Procedures	13
Section 12	Product Liability; Conduct of Business	15
Section 13	Use of Names	16
Section 14	Miscellaneous	16
Section 15	Notices	17
Section 16	Contract Formation and Authority	19
Section 17	United States Government Interests	19
Section 18	Confidentiality	20
Section 19	University Rules and Regulations	20
Appendix A –	Inter-institutional Agreement	22
Appendix B –	Development Plan	23
Appendix C –	Development Report	24
Appendix D –	FSURF Royalty Report	25
Appendix E –	Due Diligence	26

1

This Agreement is made effective the ____ day of _____________, 2016, (the “Effective Date”) by and between the Florida State University Research Foundation, Inc. (hereinafter called “FSURF”), a nonstock, nonprofit Florida corporation, having its principal place of business at 2000 Levy Avenue, Suite 351, Tallahassee, Florida 32310, and Spotlight Innovation Inc. (hereinafter called “Licensee”), a corporation organized and existing under the laws of Nevada, having its principle place of business at 6750 Westown Pkwy, Ste. 200-226, Des Moines, Iowa 50266;

WHEREAS, U.S. Department of Health and Human Services, as represented by National Center for Advancing Translational Sciences (HHS), and Johns Hopkins University (JHU) are co-owners with Florida State University Research Foundation of certain inventions that are described in the “Licensed Patents” (defined below) and has granted FSURF the right to license its undivided rights pursuant to that certain Inter-institutional Agreement effective [***] and attached as Appendix A;

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below, the parties covenant and agree as follows:

 

2

Section 1 Definitions

1.1	The term “Affiliate” shall mean: (a) any person or entity which controls at least fifty percent (50%) of the equity or voting stock of the Licensee or (b) any person or entity fifty percent (50%) of whose equity or voting stock is owned or controlled by the Licensee or (c) any person or entity of which at least fifty percent (50%) of the equity or voting stock is owned or controlled by the same person or entity owning or controlling at least fifty percent (50%) of Licensee or (d) any entity in which any officer or employee is also an officer or employee of Licensee or any person who is an officer or employee of Licensee.
1.2	“Development Plan” shall mean a written report summarizing the development activities that are to be undertaken by the Licensee to bring Licensed Products and/or Licensed Processes to the market. The Development Plan is attached as Appendix B.
1.3	“Development Report” shall mean a written account of Licensee’s progress under the Development Plan having at least the information specified on Appendix C to this Agreement, and shall be sent to the address specified on Appendix C.
1.4	“Licensed Field” shall include treatment of viral infection(s).
1.5	“Licensed Patents” shall refer to and mean all of the following FSURF intellectual property:

1.5.1

the United States patent(s)/patent application(s) U.S. Provisional patent applications [***], and all U.S. patents and foreign patents and patent applications based on these U.S. applications.

1.5.2

United States and foreign patents issued from the applications listed in 1.5.1 above and from divisionals and continuations of these applications, to the extent the claims are directed to subject matter specifically described in the applications listed in 1.5.1 above and are dominated by the claims of those patent applications and patents issuing thereon or reissues thereof, and any and all foreign patents and patent applications corresponding thereto, all to the extent owned or controlled by Florida State University.

1.6 “Licensed Product” and “Licensed Process” shall mean:

1.6.1 In the case of a Licensed Product, any product or part thereof developed by or on behalf of Licensee that:

(a)	is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Licensed Patents, in any country in which any product is made, used or sold;
(b)	is manufactured by using a process which is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Licensed Patents, in any country in which any such process is used or in which any such product is used or sold.

 

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1.6.2 In the case of a Licensed Process, any process which:

(a) is covered in whole or in part by an issued, unexpired claim or a pending claim contained in the Licensed Patents in any country in which such process is practiced.

1.7	“Licensed Territory” shall be worldwide.
1.8	“Liquidation Event” means (a) a merger, share exchange or other reorganization, (b) the sale by one or more stockholders of a majority of the voting power of Licensee, (c) the sale of all or substantially all of the assets of Licensee, or (d) an asset sale of a Licensed Product(s) and or Licensed Process(es), in which, with respect to (a), (b), and (c), the stockholders of Licensee prior to such transaction do not own, directly or indirectly, a majority of the voting power of the acquiring, surviving or successor entity, as the case may be. For the avoidance of doubt, a Liquidation Event shall not include the issuance and sale of Licensee’s equity securities, or securities convertible into Licensee’s equity securities, in a private placement transaction or other transaction that is not an Initial Public Offering or the issuance of Licensee’s equity securities to a bona fide creditor of Licensee in exchange for the cancellation of indebtedness owed by Licensee, in each case, even if such sale or issuance transaction results in the stockholders of Licensee immediately prior to such transaction not owning, directly or indirectly, a majority of the voting power of Licensee after such transaction.
1.9	“Net Sales” shall mean the gross invoice price charged by, and the value of non-cash consideration owed to, Licensee, an Affiliate or a Sublicensee for sales of Licensed Products and Licensed Processes, less (a) sales taxes or other taxes (other than income taxes), (b) shipping and insurance charges, (c) actual allowances, rebates, credits, or refunds for returned or defective goods, chargeback payments (or the equivalent thereof), (d) trade, quantity, and other discounts, retroactive price reductions, or other allowances actually allowed or granted from the billed amount and taken (provided that such discounts shall be limited to discounts in amounts customary in the trade), and (e) any import or export duties, tariffs, or similar charges incurred with respect to the import or export of Licensed Products or Licensed Processes into or out of any country in the Licensed Territory. Licensed Products and Licensed Processes will be considered sold when it is shipped, delivered, or invoiced, whichever is earlier, by Licensee, an Affiliate or a Sublicensee, as the case may be. Notwithstanding the foregoing, Net Sales shall not include, and shall be deemed zero with respect to (a) the distribution of reasonable quantities of promotional samples of Licensed Products and (b) Licensed Products and Licensed Processes provided for clinical trials and research purposes. For purposes of calculating Net Sales, a sale to a Sublicensee for end use by the Sublicensee will be treated as a sale at Licensee’s list price. For clarity, the term “Net Sales” does not include consideration received by Licensee for the grant of rights under a Sublicense (for which payment shall be governed solely by Section 2.2.2 hereof) or for royalties under a Sublicense (for which payment shall be governed solely by Section 2.2.2 hereof).
1.10	The term “Sublicensee” shall mean any third party to whom Licensee confers the right to make, use or sell Licensed Product and/or Licensed Processes and/or any of the intellectual property rights embodied in Licensed Patents.

4

Section 2 Grant

2.1 License.

2.1.1

License Under Licensed Patents

FSURF hereby grants to Licensee an exclusive license, limited to the Licensed Field and the Licensed Territory, under the Licensed Patents to make, use and sell Licensed Products and/or Licensed Processes. FSURF reserves to itself, Florida State University, HHS, and JHU the right to make and use the Licensed Patents, Licensed Products and/or Licensed Processes solely for their internal research, clinical (including, but not limited to patient care), and educational purposes. In addition, FSURF reserves to itself, as well as to Florida State University, HHS, JHU and to all non-profit research institutions, the right to use materials that might be covered under Licensed Patents solely for their internal research, educational, and clinical purposes and to meet all applicable governmental requirements governing the ability to transfer materials. This license grant is subject to the government license rights in Section 17 herein.

2.2 Sublicense.

2.2.1	Licensee may grant written, Sublicenses to third parties. Any agreement granting a Sublicense shall state that the Sublicense is subject to the termination of this Agreement. Licensee shall have the same responsibility for the activities of any Sublicensee or Affiliate as if the activities were directly those of Licensee. This right is subject to the requirement that any sublicense is subject to the HHS Inter-Institutional Agreement attached as Appendix A.
2.2.2	In respect to Sublicenses granted by Licensee under 2.2.1 above, Licensee shall pay to FSURF an amount equal to what Licensee would have been required to pay to FSURF had Licensee sold the amount of Licensed Products or Licensed Processes sold by such Sublicensee. In addition, if Licensee receives any fees, minimum royalties, or other payments in consideration for any rights granted under a Sublicense, and such payments are not based directly upon the amount or value of Licensed Products or Licensed Processes sold by the Sublicensee, then Licensee shall pay FSURF an amount equal to [***] of such payments for any Sublicense entered into during the first two years following the Effective Date, and an amount equal to [***] of such payments for a Sublicense entered into thereafter, of such payments in the manner specified in Section 4. Licensee shall not receive from Sublicensees anything of value in lieu of cash payments in consideration for any Sublicense under this Agreement without the express prior written permission of FSURF.
2.2.3	Licensee shall provide FSURF with an unredacted copy of each sublicense agreement and any agreement which transfers intellectual property rights granted hereunder, at least thirty (30) days prior to the execution of the sublicense agreement and a fully executed version within thirty (30) days of execution.
2.2.4	In the event that FSURF notifies Licensee in writing of a third party’s interest in a field of use which Licensee is not addressing at the time of receipt of the notice, Licensee shall respond to FSURF in writing within thirty (30) days of receipt of such notice to inform FSURF whether Licensee intends to pursue the Field of Use. If in such response, Licensee elects to forego the Field of Use, FSURF may terminate the Licensee’s license in said field and negotiate and execute said license directly.

5

Section 3 Due Diligence

3.1 Development.

3.1.1 Licensee agrees to and warrants that:

(a)	it has, or will obtain, the expertise necessary to independently evaluate the inventions of the Licensed Patents;
(b)	it will establish and actively and diligently pursue the Development Plan (see Appendix B) to the end that the inventions of the Licensed Patents will be utilized to provide Licensed Products and/or Licensed Processes for sale in the retail market within the Licensed Field;
(c)	it will diligently develop markets for Licensed Products and Licensed Processes; and
(d)	until the date of first commercial sale of Licensed Products or Licensed Processes, it will supply FSURF with a written Development Report annually fifteen (15) days after the end of the calendar year (see Appendix C).

3.1.2	Licensee agrees that the first commercial sale of products to the retail customer shall occur on or before [***] or FSURF shall have the right to terminate the Agreement pursuant to Section 9.3 hereto. In addition, Licensee agrees to pay the product development milestone payments listed in Section 4.3.3 and to complete the due diligence activities listed in Appendix E or FSURF shall have the right to terminate the Agreement pursuant to Section 9.3. Licensee will notify FSURF in writing as each milestone or due diligence activity is met.
3.1.3	Licensee may issue a written request to negotiate extensions of individual milestones listed in Section 4.3.3 or due dates for individual due diligence activities listed in Appendix E. Provided that such requests are received by FSURF no less than ninety (90) days prior to the original due date in the case of milestone payments, or no less than forty five (45) days prior to the original due date in the case of due diligence activities, and that each request describes fully Licensee’s diligent efforts to achieve the milestones or complete the due diligence activities, FSURF shall consider in good faith such requests. Upon granting each such request, FSURF and Licensee shall negotiate in good faith the length of the extension. FSURF shall not unreasonably withhold requests to negotiate extensions.
3.1.4	Florida State University policies may require approval of clinical trials involving technology invented at the University. Accordingly, Licensee will notify FSURF prior to commencing any clinical trials at Florida State University or its affiliated medical facilities.

 

6

Section 4 Payments

4.1	Obligation in Lieu of License Issue Fee (Alternative Fee).
	In lieu of a license issue fee, in the case of a Liquidation Event after the Effective Date, Licensee agrees to pay to FSURF an amount equal to [***] of the transaction value ascribed to those assets, products, and properties related to or stemming from the licensed technology defined in the Agreement (the “Alternative Fee”). Payment of the Alternative Fee shall be due thirty (30) days following the closing of such Liquidation Event.
4.2	Royalty.
	Licensee agrees to pay to FSURF as earned royalties a royalty calculated as a percentage of Net Sales from the sale of Licensed Product and/or Licensed Process. The royalty is deemed earned as of the earlier of the date the Licensed Product and/or Licensed Process is actually sold and paid for, the date an invoice is sent by Licensee or its Sublicensee(s), or the date a Licensed Product and/or Licensed Process is transferred to a third party for any promotional reasons. The royalty shall remain fixed while this Agreement is in effect at a rate of [***] of Net Sales.
4.3	Other Payments.

4.3.1 Licensee agrees to pay FSURF maintenance fees according to the schedule below upon each anniversary of the Effective Date.

Payment	[***]
$ [***]	[***]
$ [***]	[***]
$ [***]	[***]
$ [***]	[***]
$ [***]	[***] and every [***] thereafter on the same date, for the life of this Agreement.

4.3.2 Upon the first quarter that sales are made, the maintenance fee shall no longer be required, and minimum royalty payments shall be made according to the schedule below and shall be creditable against royalties.

Payment	[***]
$ [***]	[***]
$ [***]	[***]
$ [***]	[***]
$ [***]	[***] and every [***] thereafter on the same date, for the life of this Agreement.
Upon the first quarter following the quarter in which commercial sales of the applicable Licensed Product and/or Licensed Process begin, the above minimum royalties shall be paid on a quarterly basis, with such amounts due within thirty (30) days of the end of the calendar quarter, such calendar quarters ending on March 31, June 30, September 30, and December 31. Any minimum royalty paid in a calendar year will be credited against the earned royalties for that calendar year. Any earned royalties paid in a calendar year will be credited against the minimum royalties due for said calendar year. It is understood that earned royalties will be applied against minimum royalties on a calendar year basis, and that sales of Licensed Products and/or Licensed Processes requiring the payment of earned royalties made during a prior or subsequent calendar year shall have no effect on the annual minimum royalty due FSURF for other than the same calendar year in which the royalties were earned.

 

7

4.3.3	In addition to all other payments required under this Agreement, Licensee agrees to pay FSURF milestone payments, as follows:
	Milestone payments for the first product:
	[***]– upon the earlier of (a) the [***], or (b) [***] anniversary of the date of this license. [***]– upon the earlier of (a) [***], or (b) [***] anniversary of the Effective Date. [***]– upon the [***]. [***]– upon filing of the [***]. [***]– within [***] after the [***].
	Milestones payments for each additional product:
	[***]– upon [***]. [***]– upon [***] [***]– within [***] after the [***].

4.4 Accounting for Payments.

4.4.1	Amounts owing to FSURF under Sections 4.1 and 4.2 shall be paid on a quarterly basis after the amount of minimum royalties paid is exceeded, with such amounts due and received by FSURF on or before the thirtieth day following the end of the calendar quarter ending on March 31, June 30, September 30 or December 31 in which such amounts were earned. Any amounts which remain unpaid after the date they are due to FSURF shall accrue interest from the due date at the rate of [***]. However, in no event shall this interest provision be construed as a grant of permission for any payment delays. Licensee shall also be responsible for repayment to FSURF of any attorney, collection agency, or other out-of-pocket FSURF expenses required to collect overdue payments due from this Section or any other applicable section of this Agreement.
4.4.2	Except as otherwise directed, all amounts owing to FSURF under this Agreement shall be paid in U.S. dollars to FSURF at the following address:
	President Florida State University Research Foundation, Inc. Attn: Gary K. Ostrander 2000 Levy Avenue, Suite 351 Tallahassee, FL 32310 All royalties owing with respect to Net Sales stated in currencies other than U.S. dollars shall be converted at the rate shown in the Federal Reserve Noon Valuation - Value of Foreign Currencies on the day preceding the payment due date.

8

4.4.3

A certified full accounting statement showing how any amounts payable to FSURF under Section 4.3 have been calculated shall be submitted to FSURF on the date of each such payment. In addition to being certified, such accounting statements shall contain a written representation signed by an executive officer of Licensee that states that the statements are true, accurate, and fairly represent all amounts payable to FSURF pursuant to this Agreement. Such accounting shall be on a per-country and product line, model or trade name basis and shall be summarized on the form shown in Appendix D – FSURF Royalty Report of this Agreement.

4.4.4

FSURF is exempt from paying income taxes under U.S. law. Therefore, all payments due under this Agreement shall be made without deduction for taxes, assessments, or other charges of any kind which may be imposed on FSURF by any government outside of the United States or any political subdivision of such government with respect to any amounts payable to FSURF pursuant to this Agreement. All such taxes, assessments, or other charges shall be assumed by Licensee.

  

Section 5 Certain Warranties and Disclaimers of FSURF

5.1 FSURF warrants that, except as otherwise provided under Section 17.1 of this Agreement and the Inter-Institutional Agreement attached as Appendix A, with respect to U.S. Government interests, it is the co-owner of the Licensed Patents or otherwise has the right to grant the licenses granted to Licensee in this Agreement. However, nothing in this Agreement shall be construed as:

5.1.1	a warranty or representation by FSURF as to the validity or scope of any right included in the Licensed Patents;
5.1.2	a warranty or representation that anything made, used, sold or otherwise disposed of under the license granted in this Agreement will or will not infringe patents of third parties;
5.1.3	an obligation to bring or prosecute actions or suits against third parties for infringement of Licensed Patents;
5.1.4	an obligation to furnish any know-how not provided in Licensed Patents or any services other than those specified in this Agreement; or
5.1.5	a warranty or representation by FSURF that it will not grant licenses to others to make, use or sell products not covered by the claims of the Licensed Patents which may be similar and/or compete with products made or sold by Licensee.

5.2 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, FSURF MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY OF LICENSED PATENTS CLAIMS, ISSUED OR PENDING. FSURF ASSUMES NO RESPONSIBILITIES WHATSOEVER WITH RESPECT TO USE, SALE, OR OTHER DISPOSITION BY LICENSEE, ITS SUBLICENSEE(S), OR THEIR VENDEES OR OTHER TRANSFEREES OF PRODUCT INCORPORATING OR MADE BY USE OF INVENTIONS LICENSED UNDER THIS AGREEMENT.

 

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Section 6 Record Keeping

6.1	Licensee and its Sublicensee(s) shall keep books and records sufficient to verify the accuracy and completeness of Licensee’s and its Sublicensee(s)’s accounting referred to above, including without limitation, inventory, purchase and invoice records, manufacturing records, sales analysis, general ledgers, financial statements, and tax returns relating to the Licensed Products and/or Licensed Processes. Such books and records shall be preserved for a period not less than six years after they are created or as required by federal law, both during and after the term of this Agreement.
6.2	Licensee and its Sublicensee(s) shall take all steps necessary so that FSURF may, within thirty (30) days of its written request, audit, review and/or copy all of the books and records at a single U.S. location to verify the accuracy of Licensee’s and its Sublicensee(s)’s accounting. Such review may be performed by any authorized employees of FSURF as well as by any attorneys and/or accountants designated by FSURF, upon reasonable notice and during regular business hours. If a deficiency with regard to any payment hereunder is determined, Licensee and its Sublicensee(s) shall pay the deficiency within thirty (30) days of receiving notice thereof along with applicable interest as described in Section 4.4.1. If a royalty payment deficiency for a calendar year exceeds [***] of the royalties paid for that year, then Licensee and its Sublicensee(s) shall be responsible for paying FSURF’s out-of-pocket expenses incurred with respect to such review.
6.3	At any time during the term of this agreement, FSURF may request in writing that Licensee verify the calculation of any past payments owed to FSURF through the means of a self-audit. Within ninety (90) days of the request, Licensee shall complete a self-audit of its books and records to verify the accuracy and completeness of the payments owed. Within thirty (30) days of the completion of the self-audit, Licensee shall submit to FSURF a report detailing the findings of the self-audit and the manner in which it was conducted in order to verify the accuracy and completeness of the payments owed. If Licensee has determined through its self-audit that there is any payment deficiency, Licensee shall pay FSURF the deficiency along with applicable interest under Section 4.4.1 with the submission of the self-audit report to FSURF.

Section 7 Patent Prosecution

7.1

FSURF shall diligently prosecute and maintain the Licensed Patents using counsel of its choice. FSURF shall provide Licensee with copies of all patent applications amendments, and other filings with the United States Patent and Trademark Office and foreign patent offices. FSURF will also provide Licensee with copies of office actions and other communications received by FSURF from the United States Patent and Trademark Office and foreign patent offices relating to Licensed Patents. Licensee agrees to keep such information confidential.

7.2

Licensee shall pay to FSURF the sum of [***], within thirty (30) days of the Effective Date to reimburse any and all expenses associated with preparation, filing, prosecution, issuance, maintenance, defense, and reporting of the Licensed Patents incurred prior to the Effective Date. (NOTE: the above referenced dollar amount in this Section 7.2 is subject to change, as all related patent prosecution expense invoices may not have been received from the law firm at the time of license terms negotiation. In addition, the amounts in this article are separate from other amounts due for payment listed elsewhere.)

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7.3 Licensee shall be responsible for and pay all costs and expenses incurred by FSURF related to the preparation, filing, prosecution, issuance, maintenance, defense and reporting of the Licensed Patents subsequent to and separate of those expenses cited in Section 7.2 within thirty (30) days of receipt of an invoice from FSURF. It shall be the responsibility of Licensee to keep FSURF fully apprised of the “small entity” status of Licensee and all Sublicensees with respect to the U.S. patent laws and with respect to the patent laws of any other countries, if applicable, and to inform FSURF of any changes in writing of such status, within thirty (30) days of any such change. In the event that additional licenses are granted to licensees for alternate fields-of-use, patent expenses associated with Licensed Patents will be divided proportionally between the number of existing licensees. In the case of foreign patent protection, if a licensee declines to reimburse FSURF for its proportional share of patent expenses in any particular country, then said licensee relinquishes the right to commercialize Licensed Products in the specified country.

 

Section 8 Infringement and Invalidity

8.1

In the event that any Licensed Patents are infringed by a third party, Licensor and joint owners of the Licensed Patents (subject to and as described in the Inter-Institutional Agreement attached as Appendix A) shall have the first right and choice, but not obligation, to defend the Licensed Patents. Licensee shall have the right, but not the obligation, to defend the Licensed Patents after Licensor and joint owners elect not to commence a suit either by formal notice to Licensee or by failure to act within the ninety (90) day period following notification of the infringer, to institute, prosecute and control any action or proceeding with respect to such infringement, by counsel of its choice, including any declaratory judgment action arising from such infringement provided, however, prior to instituting such action, Licensee shall first meet with FSURF and provide FSURF with (i) a written estimate of the expenses that would reasonably be incurred in connection with such action or proceeding and (ii) financial records reasonably sufficient to reasonably demonstrate that it has the financial wherewithal to pay such expenses as they fall due through the conclusion of such action or proceeding by means of judgment or other final, non-appealable decision or a plan to raise such funds. In the event that any Patent Rights licensed to Licensee are infringed by a third party prior to Licensee filing an investigational new drug application (“IND”) for a Licensed Product, prior to any enforcement action being taken by either FSURF or Licensee regarding such infringement, FSURF and Licensee shall discuss, and will mutually agree, in writing, as to how to handle such infringement by such third party. Licensee shall be free to enter into a settlement, consent judgment, or other voluntary disposition with respect to any such action, provided that any settlement, consent judgment or other voluntary disposition thereof which (i) materially limits the scope, validity, or enforceability of patents included in the Patent Rights or (ii) admits fault or wrongdoing on the part of FSURF must be approved by FSURF, such approval not to be unreasonably withheld. Licensee’s request for such approval shall include complete copies of final settlement documents, a detailed summary of such settlement, and any other information material to such settlement. FSURF shall provide Licensee notice of its approval or denial within fifteen (15) business days of any request for such approval by Licensee, provided that (i) in the event FSURF wishes to deny such approval, such notice shall include a detailed written description of FSURF’s reasonable objections to the proposed settlement, consent judgment, or other voluntary disposition and (ii) FSURF shall be deemed to have approved of such proposed settlement, consent judgment, or other voluntary disposition in the event it fails to provide such notice within such fifteen (15) day period in accordance herewith. If Licensee recovers monetary damages in the form of lost profits from a third party infringer as a remedy for the infringement of Patent Rights licensed hereunder, then Licensee shall first apply such recovery to the costs and expenses incurred in obtaining or negotiating for such recovery (including attorneys’ fees) and reimburse FSURF for the costs and expenses it reasonably incurred in obtaining or negotiating for such recovery (including attorneys’ fees), and pay to FSURF the royalties on the remaining portion of such lost profits at the rate specified in Section 4.2. If Licensee recovers monetary damages in the form of a reasonable royalty as a remedy for the infringement of Patent Rights, then, after applying such royalty to the recovery of the costs and expenses incurred in obtaining or negotiating for such royalty (including attorneys’ fees) and reimbursing FSURF for the costs and expenses it reasonably incurred in obtaining or negotiating for such recovery (including attorneys’ fees), the remaining amount of any such royalty shall be treated as Sublicensing Royalty Revenue in accordance with Section 2.2.2.

8.2

Notwithstanding the foregoing, and in FSURF’s sole discretion, FSURF shall be entitled to participate through counsel of its own choosing in any legal action involving the invention and Patent Rights. Nothing in the foregoing Sections shall be construed in any way which would limit the authority of the Florida Attorney General. FSURF and Licensee agree to notify each other promptly of each infringement or possible infringement of Licensed Patents, as well as any facts which may affect the validity, scope or enforceability of the patent rights of which any party becomes aware.

 

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Section 9 Term and Termination

9.1	The term of this license shall begin on the Effective Date of this Agreement and continue until the date that no Licensed Patent remains an enforceable patent, unless earlier terminated as provided herein.
9.2	Licensee may terminate this Agreement at any time by giving at least sixty (60) days written notice of such termination to FSURF. Such a notice shall be accompanied by a statement of the reasons for termination.
9.3	FSURF may terminate this Agreement by giving Licensee at least thirty (30) days written notice if Licensee:

9.3.1	is delinquent on any report or payment;
9.3.2	is not diligently developing and commercializing Licensed Product and Licensed Process;
9.3.3	is in breach of any provision;
9.3.4	provides any false report;
9.3.5	goes into bankruptcy, liquidation or proposes having a receiver control any assets;
9.3.6	violates any laws or regulations of applicable government entities;
9.3.6	shall cease to carry on its business pertaining to Licensed Patents; or
9.3.8	fails for more than two (2) calendar quarters to make payments of earned royalties under Section 4.2.
Termination under this Section 9.3 will take effect thirty (30) days after written notice by FSURF unless Licensee remedies the problem in that 30-day period.

 

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9.4	FSURF may immediately terminate this Agreement upon the occurrence of the second separate default by Licensee within any consecutive three-year period for failure to pay royalties, patent or any other expenses when due.
9.5	Upon the termination of this Agreement for any reason, nothing herein shall be construed to release either party from any obligation that matured prior to the effective date of such termination. Licensee shall remain obligated to provide an accounting for and to pay royalties earned to the date of termination, and any minimum royalties shall be prorated as of the date of termination by the number of days elapsed in the applicable calendar year. Licensee may, however, after the effective date of such termination, sell all Licensed Products, and complete Licensed Products in the process of manufacture at the time of such termination and sell the same, provided that Licensee shall remain obligated to provide an accounting for and to pay running royalties thereon.
9.6	Licensee shall be obligated to deliver to FSURF, within ninety (90) days of the date of termination of this agreement, complete and unredacted copies of all documentation prepared for or submitted for all regulatory approvals of Licensed Products or Licensed Processes.

Section 10 Assignability

This Agreement may not be transferred or assigned by Licensee except with the prior written consent of FSURF, which will not be unreasonably withheld. Licensee may, on written notice to FSURF and with FSURF’s consent, assign this Agreement to an acquirer of all or substantially all of Licensee's stock or assets, in which case assignee assumes all responsibilities under this license, however Licensee shall not be released of its obligations that matured prior to assignment.

Section 11 Dispute Resolution Procedures

11.1

Mandatory Procedures.

In the event either party intends to file a lawsuit against the other with respect to any matter in connection with this Agreement, compliance with the procedures set forth in this Section shall be a condition precedent to the filing of such lawsuit, other than for injunctive relief. Either party may terminate this Agreement as provided in this Agreement without following the procedures set forth in this section.

 

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11.1.1	When a party intends to invoke the procedures set forth in this section, written notice shall be provided to the other party. Within thirty (30) days of the date of such notice, the parties agree that representatives designated by the parties shall meet at mutually agreeable times and engage in good faith negotiations at a mutually convenient location to resolve such dispute.
11.1.2	If the parties fail to meet within the time period set forth in Section 11.1.1 above or if either party subsequently determines that negotiations between the representatives of the parties are at an impasse, the party declaring that the negotiations are at an impasse shall give notice to the other party stating with particularity the issues that remain in dispute.
11.1.3	Not more than fifteen (15) days after the giving of such notice of issues, each party shall deliver to the other party a list of the names and addresses of at least three individuals, any one of whom would be acceptable as a neutral advisor in the dispute (the “Neutral Advisor”) to the party delivering the list. Any individual proposed as a Neutral Advisor shall have experience in determining, mediating, evaluating, or trying intellectual property litigation and shall not be affiliated with the party that is proposing such individual.
11.1.4	Within ten (10) days after delivery of such lists, the parties shall agree on a Neutral Advisor. If they are unable to so agree within that time, within five (5) days, they shall each select one individual from the lists. Within five (5) days, the individuals so selected shall meet and appoint a third individual from the lists to serve as the Neutral Advisor. Within thirty (30) days after the selection of a Neutral Advisor:

(a)

The parties shall each provide a written statement of the issues in dispute to the Neutral Advisor.

(b)

The parties shall meet with the Neutral Advisor in Tallahassee, Florida on a date and time established by the Neutral Advisor. The meeting must be attended by persons authorized to make final decisions on behalf of each party with respect to the dispute. At the meeting, each party shall make a presentation with respect to its position concerning the dispute. The Neutral Advisor will then discuss the issues separately with each party and attempt to resolve all issues in the dispute. At the meeting, the parties will enter into a written settlement agreement with respect to all issues that are resolved. Such settlement agreement shall be final and binding with respect to such resolved issues and may not be the subject of any lawsuit between the parties, other than a suit for enforcement of the settlement agreement.

11.1.5	The expenses of the Neutral Advisor shall be shared by the parties equally. All other out-of-pocket costs and expenses for the alternative dispute resolution procedure required under this Section shall be paid by the party incurring the same.
11.1.6	Positions taken and statements made during this alternative dispute resolution procedure shall be deemed settlement negotiations and shall not be admissible for any purpose in any subsequent proceeding.

 

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11.2	Failure to Resolve Dispute.
	If any issue is not resolved at the meeting with the Neutral Advisor, either party may file appropriate administrative or judicial proceedings with respect to the issue that remains in dispute. No new issues may be included in the lawsuit without the mandatory procedures set forth in this section having first been followed.

11.3 If Licensee or any of its Affiliates (i) brings a Patent Challenge against FSURF, or (ii) Licensee or any of its Affiliates assists another party in bringing a Patent Challenge against FSURF (except as required under a court order or subpoena), and (iii) FSURF does not choose to exercise its rights to terminate this Agreement pursuant to Section 9.3 then, in the event that such a Patent Challenge is successful, Licensee will have no right to recoup any consideration, including royalties, paid during the period of challenge. In the event that a Patent Challenge is unsuccessful, Licensee shall reimburse FSURF for all reasonable legal fees and expenses incurred in its defense against the Patent Challenge.

Section 12 Product Liability; Conduct of Business

12.1

Licensee and its Sublicensee(s) shall, at all times during the term of this Agreement and thereafter, indemnify, defend and hold FSURF, the Florida Board of Governors, the Florida State University Board of Trustees, Florida State University, JHU, The Johns Hopkins Hospital, The Johns Hopkins Health System Corporation, U.S. Department of Health and Human Services, as represented by National Center for Advancing Translational Sciences (HHS) and each of their directors, officers, employees, and agents, and the inventors of the Licensed Patents “Indemnitees”, regardless of whether such inventors are employed by Florida State University, and/or HHS, and/or JHU at the time of the claim, harmless against all claims and expenses, including legal expenses and reasonable attorneys’ fees, whether arising from a third party claim or resulting from FSURF’s enforcing this indemnification clause against Licensee, arising out of the death of or injury to any person or persons or out of any damage to property and against any other claim, proceeding, demand, expense and liability of any kind whatsoever (other than patent infringement claims) resulting from the production, manufacture, sale, use, lease, consumption, marketing, or advertisement of Licensed Products or Licensed Process(es) or arising from any right or obligation of Licensee hereunder. Notwithstanding the above, FSURF at all times reserves the right to retain counsel of its own to defend FSURF, the Florida Board of Governors’, the Florida State University Board of Trustees, Florida State University, and the inventor’s interests.

12.2

Licensee warrants that it now maintains and will continue to maintain liability insurance coverage at a minimum level of [***] per claim until first commercial use, and at a minimum level of [***] per claim at and continuing after first initial human testing or first commercial sale and that such insurance coverage lists Indemnitees’ as additional insureds. Within ninety (90) days after the execution of this Agreement and thereafter annually between January 1 and January 31 of each year, Licensee will present evidence to FSURF that the coverage is being maintained with Indemnitees listed as additional insureds. In addition, Licensee shall provide FSURF with at least thirty (30) days prior written notice of any change in or cancellation of the insurance coverage.

 

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Section 13 Use of Names

Licensee and its Sublicensee(s) shall not use the names of FSURF and joint owners (see Appendix A), or of Florida State University, nor of any of either institution's employees, agents, or affiliates, nor the name of any inventor of Licensed Patents, nor any adaptation of such names, in any promotional, advertising or marketing materials or any other similar form of publicity, or to suggest any endorsement by the such entities or individuals, without the prior written approval of FSURF in each case.

Section 14 Miscellaneous

14.1	This Agreement shall be construed in accordance with the internal laws of the State of Florida. Venue for any legal action shall be the state or federal courts in Leon County, Florida.
14.2	The parties hereto are independent contractors and not joint venturers or partners.
14.3	Licensee shall ensure that it applies patent markings that meet all requirements of U.S. law, 35 U.S.C. §287, with respect to all Licensed Products subject to this Agreement.
14.4	This Agreement constitutes the full understanding between the parties with reference to the subject matter hereof, and no statements or agreements by or between the parties, whether orally or in writing, shall vary or modify the written terms of this Agreement. This Agreement supercedes and replaces any and all previous agreements between the Parties. Neither party shall claim any amendment, modification, or release from any provisions of this Agreement by mutual agreement, acknowledgment, or otherwise, unless such mutual agreement is in writing, signed by the other party, and specifically states that it is an amendment to this Agreement. Failure of either party to require performance by the other of any provision herein shall in no way affect the rights of that party to enforce same. The waiver of either party of any breach shall never be construed to be a waiver of any succeeding breach or a waiver of the provision itself.
14.5	Licensee shall not encumber or otherwise grant a security interest in any of the rights granted hereunder to any third party.
14.6	Licensee acknowledges that it is subject to and agrees to abide by the United States laws and regulations (including the Export Administration Act of 1979 and Arms Export Contract Act) controlling the export of technical data, computer software, laboratory prototypes, biological material, and other commodities. The transfer of such items may require a license from the cognizant agency of the U.S. Government or written assurances by Licensee that it shall not export such items to certain foreign countries without prior approval of such agency. FSURF neither represents that a license is or is not required or that, if required, it shall be issued.
14.7	Licensee is responsible for any and all wire/bank fees associated with all payments due to FSURF pursuant to this agreement.
14.8	Survival.

 

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The provisions of this Section shall survive termination of this Agreement. Upon termination of the Agreement for any reason, the following sections of the License Agreement will remain in force as non-cancelable obligations:
·	Section 6 Record Keeping
·	Section 9 Requirement to pay royalties on sale of Licensed Products made, and in process, at time of License Agreement termination
·	Section 12 Product Liability; Conduct of Business
·	Section 13 Use of Names
·	Section 18 Confidentiality

14.9 This Agreement is subject to the terms and conditions of Appendix A, the terms of which are incorporated herein, which is an agreement between the U.S. Department of Health and Human Services, Johns Hopkins University, and Florida State University Research Foundation regarding technology collaboratively developed and jointly owned.

Section 15 Notices

Any notice required to be given pursuant to the provisions of this Agreement shall be in writing and shall be deemed to have been given

· when delivered personally, or

· if sent by facsimile transmission, when receipt thereof is acknowledged at the facsimile number of the recipient as set forth below, or

· the second day following the day on which the notice has been delivered prepaid to a national air courier service, or

· five (5) business days following deposit in the U.S. mail if sent certified mail, (return receipt acknowledgement is not required to certify delivery).

 

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15.1 If to Florida State University Research Foundation, Inc.:

President Florida State University Research Foundation, Inc. Attn: Gary K. Ostrander 2000 Levy Avenue, Suite 351 Tallahassee, FL 32310 Facsimile Number: (850) 644-3658
with a copy to:
Office of Commercialization Florida State University Attn: Executive Director 95 Chieftan Way, 312 Dittmer Bldg. Tallahassee, FL 32306-4391	FSU Office of Research Legal Counsel 3012 Westcott N. Annex 222 S. Copeland Street Tallahassee, FL 32306-1330 850-645-0108 (facsimile)

15.2	If to Licensee:
	President Spotlight Innovation Inc. Attn: Cris Grunewald 6750 Westown Pkwy, Ste. 200-226 West Des Moines, Iowa 50266

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Section 16 Contract Formation and Authority

The submission of this Agreement does not constitute an offer, and this document shall become effective and binding only upon the execution by duly authorized representatives of both Licensee and FSURF. Copies of this Agreement that have not been executed and delivered by both FSURF and Licensee shall not serve as a memorandum or other writing evidencing an agreement between the parties. This Agreement shall automatically terminate and be of no further force and effect, without the requirement of any notice from FSURF to Licensee, if FSURF does not receive the License Issue Fee or certificates representing shares issued to FSURF pursuant to this Agreement, as applicable, within thirty (30) days of the Effective Date.

16.1	FSURF and Licensee hereby warrant and represent that the persons signing this Agreement have authority to execute this Agreement on behalf of the party for whom they have signed.
16.2	Force Majeure.
	No default, delay, or failure to perform on the part of Licensee or FSURF shall be considered a default, delay or failure to perform otherwise chargeable hereunder, if such default, delay or failure to perform is due to epidemics, war, embargoes, fire, earthquake, hurricane, flood, acts of God, or default of common carrier. In the event of such default, delay or failure to perform, any date or times by which either party is otherwise scheduled to perform shall be extended automatically for a period of time equal in duration to the time lost by reason of the excused default, delay or failure to perform.

Section 17 United States Government Interests

17.1

It is understood that the United States Government (through any of its agencies or otherwise) has funded research during the course of or under which any of the inventions of the Licensed Patents were conceived or made. The United States Government, as a co-owner of the Licensed Patents, is entitled, to certain rights, under the provisions of 35 U.S.C. §202-212 and applicable regulations of Title 37 of the Code of Federal Regulations. These include a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced the inventions of such Licensed Patents for governmental purposes. Any license granted to Licensee in this Agreement shall be subject to such right. FSURF shall have the right to share all Sublicensees’ confidential information with JHU and HHS for the purpose of compliance with the Inter-Institutional Agreement attached as Appendix A.

17.2

Licensee agrees that for Licensed Products covered by the Licensed Patents that are subject to the non-exclusive royalty-free license to the United States Government, said Licensed Products will be manufactured substantially in the United States. Licensee further agrees that it shall abide by all the requirements and limitations of U.S. Code, Title 35, Chapter 18, and implementing regulations thereof, for all patent applications and patents invented in whole or in part with federal money.

 

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Section 18 Confidentiality

Each Party shall maintain all information of the other Party which is treated by such other Party as proprietary or confidential and appropriately marked “proprietary” or “confidential” (referred to herein as “Confidential Information”) in confidence, and shall not disclose, divulge or otherwise communicate such confidential information to others, or use it for any purpose, except pursuant to, and in order to carry out, the terms and objectives of this Agreement, and each party hereby agrees to exercise every reasonable precaution to prevent and restrain the unauthorized disclosure of such confidential information by any of its Affiliates, directors, officers, employees, consultants, subcontractors, Sublicensees or agents. The parties agree to keep the terms of this Agreement confidential, provided that each party may disclose this Agreement to their authorized agents and investors who are bound by similar confidentiality provisions. Notwithstanding the foregoing, Confidential Information of a party shall not include information which: (a) was lawfully known by the receiving party prior to disclosure of such information by the disclosing party to the receiving party; (b) was or becomes generally available in the public domain, without the fault of the receiving party; (c) is subsequently disclosed to the receiving party by a third party having a lawful right to make such disclosure; (d) is required by law, rule, regulation or legal process to be disclosed, provided that the receiving party making such disclosure shall take all reasonable steps to restrict and maintain to the extent possible confidentiality of such disclosure and shall provide reasonable notice to the other party to allow such party the opportunity to oppose the required disclosure; or (e) has been independently developed by employees or others on behalf of the receiving party without access to or use of disclosing party’s information as demonstrated by written record. Each party’s obligations under this Section 18 shall extend for a period of five (5) years from termination or expiration of this Agreement.

Section 19 University Rules and Regulations

Licensee understands and agrees that Florida State University personnel who are engaged by Licensee, whether as consultants, employees or otherwise, or who possess a material financial interest in Licensee, are subject to the Florida State University’s policies regarding outside activities and financial interests and, Florida State University’s Intellectual Property Policy, and a monitoring plan which addresses conflicts of interests associated therewith as required by Chapter 112, Florida Statutes. Any term or condition of an agreement between Licensee and such Florida State University personnel which seeks to vary or override such personnel’s obligations to Florida State University may not be enforced against such personnel, Florida State University or FSURF, without the express written consent of an individual authorized to vary or waive such obligations on behalf of Florida State University and FSURF. Furthermore, should an interest of Licensee conflict with the interest of Florida State University, Florida State University personnel are obligated to resolve such conflicts according to the guidelines and policies set forth by Florida State University.

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the dates indicated below.

FLORIDA STATE UNIVERSITY RESEARCH FOUNDATION, INC.

_____________________________________ Date: _______________, 2016

Gary K. Ostrander

President, Florida State University Research Foundation

LICENSEE

By: ___________________________________ Date: ____________, 2016

Name and Office: _____________________________________________

 

21

Appendix A - Inter-institutional Agreement

 

22

Appendix B - Development Plan

The starting point for the Development Plan will be the group of compounds previously identified by Prof. Hengli Tang and collaborators and described in Provisional Patent Application [***]. Novel compounds (prodrugs or other derivatives) will be synthesized with the aim of optimizing characteristics such as oral bioavailability, CNS penetration, pharmacodynamic (PD) and pharmacokinetic (PK) properties, and safety. The ultimate goals of the Development Program are to complete preclinical and clinical testing of one or more lead drug candidates, prepare and file a New Drug Application, obtain marketing approval, and commence product manufacturing and sales.

A.	Development activities to be undertaken
	(Please break activities into subunits)

1.	Testing of lead compounds in small animal and human brain organoid model for ZIKV inhibition. We will test the efficacy of lead compounds in both IFNAR-/- mice and C57BL/6 mice. Multiple assays, including body weight loss, lethality, and viral load in blood and tissues, will be used to determine if a compound is effective against ZIKV infection. We will also use the human brain organoid system as a complementary model to avoid pitfalls of species-specific differences and safeguard the success of our project.
2.	Determination of mechanism of action (this project is concurrent with other activities and not part of a sequence of activities). We will use a combined approach of biochemistry, molecular biology, and virology to identify the compound target and dissect its mechanism of action (MOA). We will label the compound and identify its binding partner in cells and in vitro; we will map any drug resistant mutations in cell culture and determine the specific steps of the virus life cycle to which the compound targets.
3.	Optimization of lead compounds in each class. For both classes of compounds, we will perform iterative rounds of analog synthesis and testing, typically on a biweekly or monthly schedule. The chemistry team will design and synthesize compounds; the biology team will test the compounds in assays; and the Drug Metabolism and Pharmacokinetics (DMPK) team will evaluate compound physical properties. During lead optimization, it is necessary to address ADME and toxicological liabilities and to improve the lead compound’s DMPK properties. The goal lead optimization is to identify an advanced lead candidate with drug-like properties, efficacy in animal models, and low toxicity.
4.	Advanced safety testing for lead candidates. Once advanced lead candidates are identified, we will begin to build a safety package for the compound. This in general will consist of non-GLP toxicology studies in a rodent and a non-rodent species. Upon successful completion of the exploratory toxicology studies, we will manufacture sufficient amounts of application program interface (API) under GMP conditions to support GLP toxicology studies in two species under GLP conditions, including GLP genotoxicity and safety pharmacology studies under GLP conditions. The results from these studies will form the body of the regulatory filing to open an IND with the FDA.

B. Estimated total development time

II. Governmental Approval

A.	Types of submissions required
B.	Government agency, e.g., FDA, EPA, etc.

III. Proposed Market Approach (this may include/involve an exit strategy)

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Appendix C - Development Report

When appropriate, indicate estimated start date and finish date for activities.

I. Date Development Plan Initiated and Time Period Covered by this Report.

II. Development Report.

A.	Activities completed since last report including the object and parameters of the development, when initiated, when completed and the results.
B.	Activities currently under investigation, i.e., ongoing activities including object and parameters of such activities, when initiated, and projected date of completion.

III. Future Development Activities.

A.	Activities to be undertaken before next report including, but not limited to, the type and object of any studies conducted and their projected starting and completion dates.
B.	Estimated total development time remaining before a product will be commercialized.

IV. Changes to Initial Development Plan.

A.	Reasons for change.
B.	Variables that may cause additional changes.

V. Items to be Provided if Applicable:

A.	Information relating to Licensed Products or Licensed Processes that has become publicly available, e.g., published articles, competing products, patents, etc.
B.	Development work being performed by third parties, other than Licensee, to include name of third party, reasons for use of third party, planned future uses of third parties including reasons why and type of work.
C.	Update of competitive information trends in industry, government compliance (if applicable) and market plan.
D.	Information and copies of relevant materials evidencing the status of any patent applications or other protection relating to Licensed Products, or Licensed Processes or the Licensed Patents.

PLEASE SEND DEVELOPMENT REPORTS TO:
	with a copy to:
President	Office of Commercialization
Florida State University Research Foundation, Inc.	Florida State University
Attn: Gary K. Ostrander	Attn: Executive Director
2000 Levy Avenue, Suite 351	95 Chieftan Way, 312 Dittmer Bldg.
Tallahassee, FL 32310	Tallahassee, FL 32306-4391
Facsimile Number: (850) 644-3658	Facsimile Number: (850) 644-3675

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Appendix D - FSURF Royalty Report

Licensee: ________________________________	Agreement No.: _____________
Inventor: ________________________________	P#: P
Period Covered:           From:  _____/_/___2___        Through:____ /_ /2_________
Prepared By ______________________________	Date: _____________________
Approved By: _____________________________	Date: _____________________

If license covers several major product lines, please prepare a separate report

for each line. Then combine all product lines into a summary report.

Report Type:	¨	Single Product Line Report:
	¨	Multiproduct Summary Report.  Page 1 of ________ Pages
	¨	Product Line Detail.  Line: _________ Tradename: _______________ Page: __________
Report Currency:	¨	U. S. Dollars        ¨ Other ____________________________________________________

	Unit	Gross	* Less:	Net	Royalty	Period Royalty Amount
Country	Sales	$$ Sales	Allowances	$$ Sales	Rate	This Year	Last Year
U.S.A.
Canada
Europe:
Japan
Other:
TOTAL:

Total Royalty: _______________ Conversion Rate: ____________ Royalty in U.S. Dollars: $                                          

The following royalty forecast is non-binding and for FSURF’s internal planning purposes only:

Royalty Forecast Under This Agreement: Next Quarter:__________ Q2:__________ Q3:__________ Q4:__________

* On a separate page, please indicate the reasons for returns or other adjustments if significant.

Also note any unusual occurrences that affected royalty amounts during this period.

To assist FSURF's forecasting, please comment on any significant expected trends in sales volume.

25

Appendix E – Due Diligence

Due Diligence Activity	Completion Date
Synthesis of novel analog(s) of parent compound(s) to create a First Lead Compound (“FLC”)	[***]
ZIKV inhibition testing of FLC in mice	[***]
ZIKV inhibition testing of FLC in human brain organoid system	[***]
GMP Manufacturing of FLC (small scale)	[***]
Non-GLP toxicology testing in rodents and non-rodents	[***]
Pre-IND meeting with FDA	[***]
Identification of packaging, labeling and compatibility testing	[***]
GLP toxicology testing of FLC in rodents and non-rodents	[***]
Submission of IND	[***]
Initiation of Phase 1 clinical trial	[***]
ADME, PK, GLP testing of FLC	[***]
Initiation of Phase 2 clinical trial	[***]
CMC development (product characterization, purity, potency, qualification, validation of analytical methods and processes, bioequivalence and bioavailability)	[***]
End of Phase 2 meeting with FDA	[***]
Two-year stability testing	[***]
Initiation of Phase 3 clinical trial	[***]
Pre-NDA meeting with FDA	[***]
Submission of NDA	[***]
Sale of first FDA-approved drug	[***]

26

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECURITIES EXCHANGE ACT OF 1934

RULE 13a-14(a) OR 15d-14(a)

I, Cristopher Grunewald, President and Chief Executive Officer, certify that: 

1.	I have reviewed this Form 10-Q for Spotlight Innovation Inc. for the quarter ended September 30, 2016;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   I have disclosed, based on the most recent evaluation of internal control over financial reporting, to the registrant's other certifying officer and registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	Spotlight Innovation Inc.
Date: November 17, 2016	By:	/s/ Cristopher Grunewald
	Name:	Cristopher Grunewald
	Title:	President, Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECURITIES EXCHANGE ACT OF 1934

RULE 13a-14(a) OR 15d-14(a)

 I, William Pim, Chief Financial Officer and Principal Accounting Officer, certify that: 

1.	I have reviewed this Form 10-Q for Spotlight Innovation Inc. for the quarter ended September 30, 2016;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's other certifying officer and registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

	Spotlight Innovation Inc.
Date: November 17, 2016	By:	/s/ William Pim
	Name:	William Pim
	Title:	Chief Financial Officer (Principal Accounting Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, Chief Executive Officer and Chief Financial Officer of Spotlight Innovation Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their knowledge, the Quarterly Report on Form 10-Q of Spotlight Innovation Inc. for quarter ended September 30, 2016, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Spotlight Innovation Inc.

Date: November 17, 2016	By:	/s/ Cristopher Grunewald
		Cristopher Grunewald President, Chief Executive Officer (Principal Executive Officer)
	By:	/s/ William Pim
		William Pim
		Chief Financial Officer (Principal Financial Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to Spotlight Innovation Inc. and will be retained by Spotlight Innovation Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 15, 2016
Document And Entity Information
Entity Registrant Name	SPOTLIGHT INNOVATION, INC.
Entity Central Index Key	0001388486
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		21,285,514
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2016

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash	$ 289,264	$ 299,919
Prepaid expenses	117,003	17,500
Total current assets	406,267	317,419
Property, plant and equipment, net of accumulated depreciation of $6,385 and $3,529, respectively	32,019	31,714
In process research and development	6,977,347	6,977,347
Total assets	7,415,633	7,326,480
Current liabilities:
Accounts payable	243,654	140,803
Accrued liabilities	747,596	527,287
Accounts payable - related parties	3,560	3,560
Stock payable	50,000	26,250
Notes payable	170,696	385,373
Lines of credit, net of discounts of $8,626 and $19,717, respectively	994,674	868,583
Short-term debt – related party	1,038,515	168,949
Deferred liabilities	225,000	220,465
Derivative liabilities		278,482
Convertible debentures – related parties, net of debt discounts of $766,010 and $555,753, respectively	2,378,990	2,244,247
Total liabilities	5,852,685	4,863,999
Stockholders' equity:
Preferred stock
Common stock, $0.001 par value, 4,000,000,000 shares authorized, 19,361,800 and 14,627,026 shares issued and outstanding, respectively	19,362	14,627
Additional paid-in capital	22,425,443	18,760,400
Accumulated deficit	(23,171,473)	(18,643,652)
Non-controlling interest	2,289,616	2,331,106
Total stockholders' equity	1,562,948	2,462,481
Total liabilities and stockholders' equity	7,415,633	7,326,480
Series A Preferred Stock [Member]
Stockholders' equity:
Preferred stock
Series C Preferred Stock [Member]
Stockholders' equity:
Preferred stock

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Property, plant and equipment, net of accumulated depreciation	$ 6,385	$ 3,529
Lines of credit, net of discounts	8,626	19,717
Convertible debentures, net of debt discounts	$ 766,010	$ 555,753
Preferred Stock Par Value	$ 0.001	$ 0.001
Preferred Stock Shares Authorized	4,000,000	4,000,000
Preferred Stock Shares Issued	0	0
Preferred Stock Shares Outstanding	0	0
Common Stock Par Value	$ 0.001	$ .001
Common Stock Shares Authorized	4,000,000,000	4,000,000,000
Common Stock Shares Issued	19,361,800	14,627,026
Common Stock Shares Outstanding	19,361,800	14,627,026
Series A Preferred Stock [Member]
Preferred Stock Par Value	$ 5.00	$ 5.00
Preferred Stock Shares Authorized	500,000	500,000
Preferred Stock Shares Issued	0	0
Preferred Stock Shares Outstanding	0	0
Series C Preferred Stock [Member]
Preferred Stock Par Value	$ 5.00	$ 5.00
Preferred Stock Shares Authorized	500,000	500,000
Preferred Stock Shares Issued	0	0
Preferred Stock Shares Outstanding	0	0

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Consolidated Statements Of Operations
REVENUE
OPERATING EXPENSES:
General and administrative expenses	1,555,931	1,799,468	3,775,578	3,208,479
Research and development expense	68,150	254,844	181,572	258,496
Depreciation expense	1,619		4,856
Settlement of payables			196,656	4,076
Total operating expenses	1,625,700	2,054,312	3,962,006	3,471,051
LOSS FROM OPERATIONS	(1,625,700)	(2,054,312)	(3,962,006)	(3,471,051)
OTHER INCOME (EXPENSE):
Interest expense	(172,268)	(182,003)	(497,908)	(763,195)
Gain on derivative liability	26,068		78,160
Other income	4,955	146	7,988	477
Gain on foreign currency exchange	193	31,180	111	64,422
Loss on settlement of debt	(195,656)		(195,656)
Total other expense	(336,708)	(150,677)	(607,305)	(698,296)
Net loss	(1,962,408)	(2,204,989)	(4,569,311)	(4,169,347)
Net loss attributable to non-controlling interest holder	(12,755)	(21,245)	(41,490)	(22,267)
Net loss attributable to Spotlight Innovation Inc.	$ (1,949,653)	$ (2,183,744)	$ (4,527,821)	$ (4,147,080)
Net loss per common share - basic and diluted	$ (0.12)	$ (0.17)	$ (0.30)	$ (0.31)
Weighted average number of common shares outstanding - basic and diluted	15,920,123	14,277,026	15,447,745	13,828,277

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (4,569,311)	$ (4,169,347)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	4,856	1,625
Amortization of debt discount	157,785	462,188
Interest expense from common shares issued for modification of convertible debt		37,500
Loss on settlement of debt and payables	196,656	4,076
Share-based compensation	1,697,117	1,983,764
Gain on fair value of derivative liability	(78,160)
Gain on foreign currency exchange	(111)	(64,422)
Changes in operating assets and liabilities:
Prepaid expense	(99,503)	(26,250)
Accounts payable	265,343	(148,744)
Accounts payable - related party		86,485
Accrued liabilities	229,531	463,293
Deferred Liabilities	4,535
Net cash used in operating activities	(2,192,261)	(1,369,832)
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash		2,625
Acquisition of Memcine, net of cash received of $27,071		(2,929)
Cash paid for purchase of fixed assets	(5,161)	(5,220)
Net cash used in investing activities	(5,161)	(5,524)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable	(98,373)	(2,500)
Proceeds from convertible debenture - net	1,195,000
Proceeds from line-of-credit	115,000
Proceeds from short-term debt – related party	870,000
Proceeds from convertible debentures - related parties		1,719,800
Proceeds from sale of common shares and warrants	105,140	190,000
Net cash provided by financing activities	2,186,767	1,907,300
Increase/(decrease) in cash during the period	(10,655)	531,944
Cash, beginning of the period	299,919	9,068
Cash, end of the period	289,264	541,012
SUPPLEMENTAL CASH FLOWS INFORMATION
Income taxes paid
Interest paid	73,373	28,750
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Deferred financing costs for convertible debentures
Debt discount for relative fair value of warrants attached to convertible debentures	146,003	277,598
Beneficial conversion feature for convertible debentures	412,310	999,310
Stock payable issued in settlement of debt	50,000
Shares issued in settlement of convertible debt	1,186,175
Shares issued in settlement of accounts payable	96,781
Common shares issued for stock payable	21,500	269,705
Warrants issued in satisfaction of warrants payable		385,351
Warrants issued for extinguishment of accounts payable - related party		419,419
Derivative liability	(200,323)
Reclassification of debt and interest to accrued liabilities	$ 102,748

XML

STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Consolidated Statements Of Cash Flows
Net of cash received	$ 27,071

XML

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Spotlight Innovation Inc. (the “Company”) was organized under the laws of the state of Nevada on March 23, 2012 under the name Spotlight Innovation, LLC. In December 2013, the Company, through a reverse acquisition, merged with American Exploration Corporation (“American Exploration”). The Company is a life science company that identifies and acquires rights of innovative, proprietary technologies designed to address unmet medical needs, with an emphasis on rare, emerging and neglected diseases. To find and evaluate unique opportunities, we leverage our extensive relationships with leading scientists, academic institutions and other sources. We provide value-added development capability to accelerate progress. When scientifically significant benchmarks have been achieved, we will endeavor to partner with proven market leaders via sale, out-license or strategic alliance.

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

Celtic Biotech Iowa, Inc.

On June 4, 2014, Celtic Biotech Iowa, Inc. (hereinafter "Celtic Iowa," a subsidiary of the Company) acquired Celtic Biotech Limited (hereinafter "Celtic Limited"). Celtic Limited was founded in 2003 in Dublin, Ireland and is developing novel and highly specialized compounds derived from snake venom, for the treatment of solid cancers and cancer imaging.

Memcine Pharmaceuticals, Inc.

The Company acquired approximately 82% of Memcine Pharmaceuticals, Inc. ("Memcine") in June 2015. The Company agreed to provide Memcine with up to $3,000,000 to fund the operations of Memcine via investment, grants or other means over the course of operations, upon the achievement of certain milestones, as determined by the board of directors of Memcine. Memcine, founded in 2010, holds the exclusive worldwide rights to Immunoplex,™, a vaccine platform technology developed at the University of Iowa, with universal application to numerous antigens developed to improve vaccine efficacy by using more efficient targeting and delivery.

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

CDT Veterinary Therapeutics, Inc.

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

Caretta Therapeutics, Inc.

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

Zika Therapeutics, Inc.

Zika Therapeutics, Inc. (“ZT”) was formed in August 2016 to pursue the therapeutic treatment for this emerging health threat. On August 19, 2016, the Company entered a Sponsored Research Agreement (the “SRA”) with the Florida State University Research Foundation (“FSURF”) starting September 1, 2016, to perform certain research, over a two-year period, related to the discovery, synthetic modification, and preclinical validation of drug-like compounds intended to treat patients with Zika virus infection to be directed by Dr. Hengli Tang.

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate disclosures contained in the audited financial statements for the most recent fiscal year, as reported in the Form 10-K for the period ended December 31, 2015 filed with the SEC, have been omitted.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of option and warrant transactions.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts, including those of the Company’s subsidiaries Celtic Iowa and Memcine. During the year ended December 31, 2014 the Company acquired 95% of the outstanding shares of Celtic Biotech. During the year ended December 31, 2015, the Company acquired 82.25% of the outstanding shares of Memcine. Accordingly, the Company has consolidated Celtic Limited, Celtic Iowa and Memcine. All significant intercompany accounts and transactions have been eliminated.

Non-Controlling Interest

The Company is required to report the non-controlling interest in Celtic Limited, a subsidiary of Celtic Iowa, and Memcine, as a separate component of shareholders’ equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interest and to the shareholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interest are allocated to the non-controlling interest even when those losses are in excess of the non-controlling interest’s investment basis.

Loss per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

For the nine months ended September 30, 2016 and 2015, the dilutive effect of the issuance of 448,571 and 5,200 options, 208,500 and 885,000 warrants, and 3,317,971, and 1,774,650 common shares issuable for conversion of convertible debt, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). As of September 30, 2016, the Company had $0 of cash balances that were uninsured. The Company has not experienced any losses on such accounts.

Foreign exchange and currency translation

For the three months ended September 30, 2016 and 2015, the Company maintained cash accounts in U.S. Dollars and European Union euros, and incurred certain expenses denominated in European Union euros. The Company's and its consolidated subsidiaries’ functional and reporting currency is the U.S. Dollar. Transactions denominated in foreign currencies are remeasured into U.S. Dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are remeasured using exchange rates at the end of each period. Exchange gains or losses on re-measurements are included in earnings.

In the event that the functional currency of a Company’s consolidated subsidiary was not the U.S. Dollar, then that subsidiary’s foreign currency monetary assets and liabilities are translated into U.S. Dollars at the current exchange rate and non-monetary assets and liabilities are translated using historical exchange rates. Such adjustments resulting from the translation process would be reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. As of September 30, 2016, and 2015, the Company had no subsidiaries with functional currencies that required translation.

In-Process Research and Development

In-process research and development (“IPR&D”) represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. During periods after completion, those acquired indefinite-lived assets are amortized based on their useful life. 

Equipment

Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is 3-10 years.

Impairment of Long-Lived Assets and Intangibles

The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to fair value. For the nine months ended September 30, 2016 and 2015, the Company recorded $0 in impairment to the Company’s long-lived assets. 

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if such historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.

Income Taxes

The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized. 

Fair Value of Financial Instruments

The Company follows FASB ASC 820, Fair Value Measurement (“ASC 820”), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.

As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.

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

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Subsequent Events

The Company evaluated subsequent events through the date when financial statements are issued for disclosure consideration.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.

XML

GOING CONCERN

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 3. GOING CONCERN

The Company is an early stage company and as such has not generated revenues from operations and there is no assurance of any future revenues. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2016, the Company had accumulated net losses of $23,171,473, and had a working capital deficit of $5,446,418. These factors raise substantial doubt as to the Company’s ability to continue as a going concern.

The ability of the Company to continue as a going concern is dependent upon the Company’s successful efforts to raise sufficient capital and then attain profitable operations. Management is investigating all options to raise enough funds to meet the Company’s working capital requirements through either the sale of the Company’s common stock or other financings. There can be no assurances, however, that management will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtained on terms satisfactory to the Company.

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NOTES PAYABLE

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 4. NOTES PAYABLE

On December 16, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable too unrelated third parties:

	Date	Stated			Original
	of	Interest			Principal		Due
Promissory Note	Note	Rate			Amount		Date
#1	05/29/09		10	%	$	30,000	On Demand
#2	06/05/09		10	%	$	7,698	On Demand
#3	08/16/09		10	%	$	50,000	On Demand
#4	09/27/10		10	%	$	60,000	On Demand
#5	06/02/10		5	%	$	50,000	On Demand
#6	02/04/11		5	%	$	30,000	On Demand
#7	05/04/11		5	%	$	35,000	On Demand
#8	08/11/11		10	%	$	20,000	On Demand
#9	12/05/11		10	%	$	20,000	On Demand
#10	04/28/12		10	%	$	30,000	On Demand
Total					$	593,698

The Company also assumed $92,923 in accrued interest related to these notes. The Company recorded $21,861 and $21,540 in interest expense for the nine months ended September 30, 2016 and 2015, respectively, on the above notes payable. On September 1, 2016, the Company agreed to a settlement and release agreement with Pierco Management as set forth in the table below:

Promissory Note	Issue Date	Original Principal		Interest Rate
#5	6/2/2010	$	50,000	5%
#6	2/4/2011	$	30,000	5%
#7	4/5/2011	$	35,000	5%
#8	8/11/2011	$	20,000	10%
#9	12/5//2011	$	20,000	10%
Total		$	155,000

The Company and Pierco Management agreed to the following:

· Immediate cash payment of $25,000 from the Company.

· A deferred cash payment of $25,000 due in 90 days from the effective date.

· Issuance to Pierco Management of $50,000 worth of Company common stock using the average closing price for the 20 consecutive trading days preceding the effective date of the agreement.

The Company also assumed a liability for previous advances made by American Exploration’s former CEO in the amount of $23,433 of which the Company repaid $3,500 in calendar year 2015 bringing the balance to the current $19,933 at September 30, 2016. These advances are due on demand and do not bear interest.

On December 31, 2015 recorded a guarantee for one of the lenders in the amount of $34,529.

On September 6, 2016, the Company agreed to assume the unpaid interest for the portion of the April and July Letters-of-Credit with Denver Savings Bank that was to be paid from the debt service reserve as set forth in the Termination and Release Agreements in December 2015. The assumption of the interest resulted in the Company recording an additional $83,441 of interest expense for the nine months ended September 30, 2016.

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CONVERTIBLE INSTRUMENTS

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 5. CONVERTIBLE INSTRUMENTS

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

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INCOME TAXES

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 6. INCOME TAXES

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

At September 30, 2016, the Company’s deferred tax assets consisted primarily of net operating loss carry forwards acquired in connection with the merger. For the nine months ended September 30, 2016 and 2015, the material reconciling items between the tax benefit computed at the statutory rate and the actual benefit recognized in the financial statements consisted of expenses related to share-based compensation and the change in the valuation allowance during the applicable period. At September 30, 2016 and 2015, the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.

As of September 30, 2016, the Company has a net operating loss carry forward of approximately $21 million, which will expire between years 2028 and 2035. Due to the change in ownership provisions of the Tax Reform Act of 1986, our net operating loss carry forwards are expected to be subject to significant annual limitations for the change in ownership that resulted in the Merger.

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EQUITY

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

NOTE 7. EQUITY

The Company has authorized the issuance of 500,000 shares of Series A preferred stock, 500,000 shares of Series C preferred stock, 4,000,000 shares of preferred stock and 4,000,000,000 shares of common stock.

Common Stock

On January 11, 2016, a holder exercised warrants to purchase 100,000 shares of common stock. The exercise price was 60% of the average closing market price for the 20 consecutive trading days preceding the exercise date. Total proceeds received from the exercise was $55,140. On September 8, 2016, the Company sold 108,695 shares for $50,000 in proceeds.

Common Stock Issued for Services

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

Month	Shares issued		Fair Value at issue date
April		780,000	$	377,500
August		25,000		19,750
September		100,000		73,500

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

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

Convertible Notes

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

· The notes have a term of 24 months. In the event the note has not been converted at the maturity date, the convertible note will automatically convert into shares of common stock of the Company at a per share price equal to 80% of the closing bid price of the common stock of the Company during the 20 consecutive trading days immediately preceding the maturity date.

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

· At any time prior to the maturity date, the note is convertible into shares of common stock of the Company at a price per share equal to 90% of the closing bid price of the common stock during the 20 consecutive trading days immediately preceding such conversion.

The Company also issued warrants to purchase 208,500 shares of common stock of the Company (the number of shares is equal to thirty percent of the amount invested in the notes based on the exercise price of the warrants (the exercise price is defined as 110% of the closing bid price of the common stock of the Company on the six month anniversary of the issuance date of the note)).

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

· Aggregate of 5% of net revenue.

· Net revenues is defined as gross revenues, minus all license/royalty fees and cost of goods sold.

· Royalties will cease once the investor has received two times the amount invested.

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

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

Options

2009 Plan

In 2009, the Company adopted the 2009 Stock Option Plan (the “2009 Plan”). The 2009 Plan allows the Company to issue options to officers, directors and employees, as well as consultants, to purchase up to 7,000,000 shares of common stock.

As of September 30, 2016, there are 5,200 stock options outstanding under the 2009 Plan which were issued prior to the merger. These stock options were valued at $6,934 using the Black-Scholes model which was included in the purchase price of American Exploration.

2015 Equity Incentive Plan

On November 25, 2015, the Company authorized the Spotlight Innovation Inc. 2015 Equity Incentive Plan (the “Plan”) to:

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

· Encourage selected employees, directors and consultants to accept or continue employment or association with the Company or its Subsidiaries

· Increase the interest of selected employees, directors and consultants in the Company’s welfare through participation in the growth in value of the common stock of the Company (the “Shares”); and

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

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

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

	Options		Weighted-Average Exercise Price
Outstanding December 31, 2015		2,605,200	$	1.82
Granted		448,571		0.54
Exercised		-		-
Expired		-		-
Outstanding September 30, 2016		3,053,771	$	1.63
Exercisable September 30, 2016		903,771	$	2.99

Warrants

During the nine months ended September 30, 2016, a holder exercised warrants to purchase 100,000 shares of common stock at a price of $0.5514 per share for total proceeds of $55,140.

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

	Warrants			Weighted-Average Exercise Price
Outstanding December 31, 2015		2,011,671		$	1.29
Granted		208,500			0.65
Exercised		(100,000	)		0.55
Expired		-			-
Outstanding at September 30, 2016		2,120,171			1.26
Exercisable September 30, 2016		2,120,171			1.26

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

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

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RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 8. RELATED PARTY TRANSACTIONS

As a result of the acquisition of Celtic Limited, Celtic Iowa assumed two short-term notes payable due to a related party (the mother of the founder of Celtic). The debt is denominated in Euros and on June 4, 2014, the date of the acquisition, the carrying amount of the debts were $204,186 after foreign currency remeasurement. The notes accrue compounded interest at 5% per annum and were due in November and December 2014. As of September 30, 2016, these notes are still outstanding and the carrying amount of these notes is $168,515. In March 2016, the Company negotiated an extension for both notes to December 31, 2017.

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Note 9. SUBSEQUENT EVENTS

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

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

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

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

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

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

Issuance Date	Expiration Date	Exercise Price	# Warrants / Shares
10/05/2013	10/05/2016	$1.46 / share	120,000
10/05/2013	10/05/2017	$1.46 / share	120,000
10/05/2013	10/05/2018	$1.46 / share	120,000
12/31/2015	12/31/2018	$1.00 / share	300,000
12/31/2015	12/31/2018	$1.25 / share	200,000

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

Expiration Date	Exercise Price / Share	# Warrants / Shares
12/31/2019	$1.46	360,000
12/31/2019	$1.00	300,000
12/31/2019	$1.25	200,000
12/31/2019	$1.00	500,000

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

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

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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2016

Summary Of Significant Accounting Policies Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those regarding the valuation of option and warrant transactions.

Principles of Consolidation

The consolidated financial statements include the Company’s accounts, including those of the Company’s subsidiaries Celtic Iowa and Memcine. During the year ended December 31, 2014 the Company acquired 95% of the outstanding shares of Celtic Biotech. During the year ended December 31, 2015, the Company acquired 82.25% of the outstanding shares of Memcine. Accordingly, the Company has consolidated Celtic Limited, Celtic Iowa and Memcine. All significant intercompany accounts and transactions have been eliminated.

Non-Controlling Interest

The Company is required to report the non-controlling interest in Celtic Limited, a subsidiary of Celtic Iowa, and Memcine, as a separate component of shareholders’ equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interest and to the shareholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interest are allocated to the non-controlling interest even when those losses are in excess of the non-controlling interest’s investment basis.

Loss per Common Share

Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) attributable to common shareholders by the weighted-average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercise of stock options and warrants or the assumed conversion of convertible debt instruments, using the treasury stock and “if converted” method. For periods in which net losses are incurred, weighted average shares outstanding is the same for basic and diluted loss per share calculations, as the inclusion of common share equivalents would have an anti-dilutive effect.

For the nine months ended September 30, 2016 and 2015, the dilutive effect of the issuance of 448,571 and 5,200 options, 208,500 and 885,000 warrants, and 3,317,971, and 1,774,650 common shares issuable for conversion of convertible debt, respectively, were excluded from the diluted earnings per share calculation because their effect would have been anti-dilutive.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk include cash deposits placed with financial institutions. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits as guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). As of September 30, 2016, the Company had $0 of cash balances that were uninsured. The Company has not experienced any losses on such accounts.

Foreign exchange and currency translation

For the three months ended September 30, 2016 and 2015, the Company maintained cash accounts in U.S. Dollars and European Union euros, and incurred certain expenses denominated in European Union euros. The Company's and its consolidated subsidiaries’ functional and reporting currency is the U.S. Dollar. Transactions denominated in foreign currencies are remeasured into U.S. Dollars at exchange rates in effect on the date of the transactions. Assets and liabilities are remeasured using exchange rates at the end of each period. Exchange gains or losses on re-measurements are included in earnings.

In the event that the functional currency of a Company’s consolidated subsidiary was not the U.S. Dollar, then that subsidiary’s foreign currency monetary assets and liabilities are translated into U.S. Dollars at the current exchange rate and non-monetary assets and liabilities are translated using historical exchange rates. Such adjustments resulting from the translation process would be reported in a separate component of other comprehensive income and are not included in the determination of the results of operations. As of September 30, 2016, and 2015, the Company had no subsidiaries with functional currencies that required translation.

In-Process Research and Development

In-process research and development (“IPR&D”) represents the estimated fair value assigned to research and development projects acquired in a purchased business combination that have not been completed at the date of acquisition and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated research and development efforts. During the periods prior to completion or abandonment, those acquired indefinite-lived assets are not amortized but are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. During periods after completion, those acquired indefinite-lived assets are amortized based on their useful life. 

Equipment

Equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred. Renewals and betterments which extend the life or improve existing equipment are capitalized. Upon disposition or retirement of equipment, the cost and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is 3-10 years.

Impairment of Long-Lived Assets and Intangibles

The Company performs impairment tests on its long-lived assets when circumstances indicate that their carrying amounts may not be recoverable. If required, recoverability is tested by comparing the estimated future undiscounted cash flows of the asset or asset group to its carrying value. If the carrying value is not recoverable, the asset or asset group is written down to fair value. For the nine months ended September 30, 2016 and 2015, the Company recorded $0 in impairment to the Company’s long-lived assets. 

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for stock and stock options based on the grant date fair value of the awards. The Company determines the fair value of stock option grants using the Black-Scholes option pricing model. The Company determines the fair value of shares of non-vested stock (also commonly referred to as restricted stock) based on the last quoted price of our stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates, if such historical forfeiture rates are available. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital.

Income Taxes

The Company utilizes the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry-forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that the value of such assets will be realized. 

Fair Value of Financial Instruments

The Company follows FASB ASC 820, Fair Value Measurement (“ASC 820”), which clarifies fair value as an exit price, establishes a hierarchal disclosure framework for measuring fair value, and requires extended disclosures about fair value measurements. The provisions of ASC 820 apply to all financial assets and liabilities measured at fair value.

As defined in ASC 820, fair value, clarified as an exit price, represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a result, fair value is a market-based approach that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.

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

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Subsequent Events

The Company evaluated subsequent events through the date when financial statements are issued for disclosure consideration.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company’s operations, financial position or cash flows.

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NOTES PAYABLE (Tables)

9 Months Ended

Sep. 30, 2016

American Exploration [Member]

Notes payable

On December 16, 2013, the Company assumed the liabilities of American Exploration which included the following notes payable too unrelated third parties:

	Date	Stated			Original
	of	Interest			Principal		Due
Promissory Note	Note	Rate			Amount		Date
#1	05/29/09		10	%	$	30,000	On Demand
#2	06/05/09		10	%	$	7,698	On Demand
#3	08/16/09		10	%	$	50,000	On Demand
#4	09/27/10		10	%	$	60,000	On Demand
#5	06/02/10		5	%	$	50,000	On Demand
#6	02/04/11		5	%	$	30,000	On Demand
#7	05/04/11		5	%	$	35,000	On Demand
#8	08/11/11		10	%	$	20,000	On Demand
#9	12/05/11		10	%	$	20,000	On Demand
#10	04/28/12		10	%	$	30,000	On Demand
Total					$	593,698

Pierco Management [Member]

Notes payable

The Company also assumed $92,923 in accrued interest related to these notes. The Company recorded $21,861 and $21,540 in interest expense for the nine months ended September 30, 2016 and 2015, respectively, on the above notes payable. On September 1, 2016, the Company agreed to a settlement and release agreement with Pierco Management as set forth in the table below:

Promissory Note	Issue Date	Original Principal		Interest Rate
#5	6/2/2010	$	50,000	5%
#6	2/4/2011	$	30,000	5%
#7	4/5/2011	$	35,000	5%
#8	8/11/2011	$	20,000	10%
#9	12/5//2011	$	20,000	10%
Total		$	155,000

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EQUITY (Tables)

9 Months Ended

Sep. 30, 2016

Common Stock Issued for Services

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

Month	Shares issued		Fair Value at issue date
April		780,000	$	377,500
August		25,000		19,750
September		100,000		73,500

Stock Option [Member]

Summary of stock option activity

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

	Options		Weighted-Average Exercise Price
Outstanding December 31, 2015		2,605,200	$	1.82
Granted		448,571		0.54
Exercised		-		-
Expired		-		-
Outstanding September 30, 2016		3,053,771	$	1.63
Exercisable September 30, 2016		903,771	$	2.99

Warrant [Member]

Summary of stock option activity

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

	Warrants			Weighted-Average Exercise Price
Outstanding December 31, 2015		2,011,671		$	1.29
Granted		208,500			0.65
Exercised		(100,000	)		0.55
Expired		-			-
Outstanding at September 30, 2016		2,120,171			1.26
Exercisable September 30, 2016		2,120,171			1.26

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Summary Of Significant Accounting Policies Details Narrative
Dilutive effect of options to purchase	448,571	5,200
Dilutive effect of warrants to purchase	208,500	885,000
Common shares issuable for conversion of convertible debt	3,317,971	1,774,650
Impairment of intangible assets	$ 0	$ 0
Cash at concentrations of credit risk	$ 0

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GOING CONCERN (Details Narrative) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Going Concern Details Narrative
Accumulated net losses	$ (23,171,473)	$ (18,643,652)
Working capital deficit	$ 5,446,418

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NOTES PAYABLE (Details)	9 Months Ended
	Sep. 30, 2016 USD ($)
Original Principal Amount	$ 593,698
Promissory Note One [Member]
Date of note	May 29, 2009
Stated Interest rate	10.00%
Original Principal Amount	$ 30,000
Due date	On Demand
Promissory Note Two [Member]
Date of note	Jun. 05, 2009
Stated Interest rate	10.00%
Original Principal Amount	$ 7,698
Due date	On Demand
Promissory Note Three [Member]
Date of note	Aug. 16, 2009
Stated Interest rate	10.00%
Original Principal Amount	$ 50,000
Due date	On Demand
Promissory Note Four [Member]
Date of note	Sep. 27, 2010
Stated Interest rate	10.00%
Original Principal Amount	$ 60,000
Due date	On Demand
Promissory Note Five [Member]
Date of note	Jun. 02, 2010
Stated Interest rate	5.00%
Original Principal Amount	$ 50,000
Due date	On Demand
Promissory Note Six [Member]
Date of note	Feb. 04, 2011
Stated Interest rate	5.00%
Original Principal Amount	$ 30,000
Due date	On Demand
Promissory Note Seven [Member]
Date of note	May 04, 2011
Stated Interest rate	5.00%
Original Principal Amount	$ 35,000
Due date	On Demand
Promissory Note Eight [Member]
Date of note	Aug. 11, 2011
Stated Interest rate	10.00%
Original Principal Amount	$ 20,000
Due date	On Demand
Promissory Note Nine [Member]
Date of note	Dec. 05, 2011
Stated Interest rate	10.00%
Original Principal Amount	$ 20,000
Due date	On Demand
Promissory Note Ten [Member]
Date of note	Apr. 28, 2012
Stated Interest rate	10.00%
Original Principal Amount	$ 30,000
Due date	On Demand

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NOTES PAYABLE (Details 1)	9 Months Ended
	Sep. 30, 2016 USD ($)
Original Principal Amount	$ 593,698
Promissory Note Five [Member]
Issue Date	Jun. 02, 2010
Original Principal Amount	$ 50,000
Interest rate	5.00%
Promissory Note Six [Member]
Issue Date	Feb. 04, 2011
Original Principal Amount	$ 30,000
Interest rate	5.00%
Promissory Note Seven [Member]
Issue Date	May 04, 2011
Original Principal Amount	$ 35,000
Interest rate	5.00%
Promissory Note Eight [Member]
Issue Date	Aug. 11, 2011
Original Principal Amount	$ 20,000
Interest rate	10.00%
Promissory Note Nine [Member]
Issue Date	Dec. 05, 2011
Original Principal Amount	$ 20,000
Interest rate	10.00%
Promissory Note [Member]
Original Principal Amount	$ 155,000

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NOTES PAYABLE (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Notes Payable Details Narrative
Interest expense	$ 21,861	$ 21,540
Notes payable remaining amount	19,933
Interest expense to related party	$ 83,441

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INCOME TAXES (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Income Taxes Details Narrative
Valuation Allowance	100.00%	100.00%
Net operating loss carry forward	$ 21,000,000
Net operating loss carry forward expire years	2028 and 2035

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EQUITY (Details)	9 Months Ended
	Sep. 30, 2016 USD ($) shares
April [Member]
Shares issued in common stock | shares	780,000
Fair value at issue date | $	$ 377,500
August [Member]
Shares issued in common stock | shares	25,000
Fair value at issue date | $	$ 19,750
September [Member]
Shares issued in common stock | shares	100,000
Fair value at issue date | $	$ 73,500

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EQUITY (Details 1) - Stock Option [Member]	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Options
Outstanding December 31, 2015 | shares	2,605,200
Granted | shares	448,571
Exercised | shares
Expired | shares
Outstanding September 30, 2016 | shares	3,053,771
Exercisable September 30, 2016 | shares	903,771
Weighted-Average Exercise Price
Weighted-Average Exercise Price Outstanding December 31, 2015 | $ / shares	$ 1.82
Granted | $ / shares	0.54
Exercised | $ / shares
Expired | $ / shares
Weighted-Average Exercise Price Outstanding September 30, 2016 | $ / shares	1.63
Weighted-Average Exercise Price Exercisable September 30, 2016 | $ / shares	$ 2.99

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EQUITY (Details 2) - Warrant [Member]	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Options
Outstanding December 31, 2015 | shares	2,011,671
Granted | shares	208,500
Exercised | shares	(100,000)
Expired | shares
Outstanding September 30, 2016 | shares	2,120,171
Exercisable September 30, 2016 | shares	2,120,171
Weighted-Average Exercise Price
Weighted-Average Exercise Price Outstanding December 31, 2015 | $ / shares	$ 1.29
Granted | $ / shares	0.65
Exercised | $ / shares	.55
Expired | $ / shares
Weighted-Average Exercise Price Outstanding September 30, 2016 | $ / shares	1.26
Weighted-Average Exercise Price Exercisable September 30, 2016 | $ / shares	$ 1.26

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EQUITY (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Issuance of common stock	905,000
Stock options outstanding	5,200
Proceeds from sale of common shares and warrants	$ 105,140	$ 190,000
Board of Director [Member]
Number of options issued	448,571
Warrant [Member]
Weighted average remaining contractual term	1 year 3 months 4 days

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RELATED PARTY TRANSACTIONS (Details Narrative)	Sep. 30, 2016 USD ($)
Related Party Transactions Details Narrative
Long term debt - related party	$ 168,515