Notes to Condensed
Consolidated
Financial Statements
(Unaudited)
Note 1 – Background and Basis of Presentation
On April 8, 2017, Oncolix, Inc., a private Delaware corporation (“Oncolix/DE”) acquired approximately 66% of the outstanding common stock of Advanced Environmental Petroleum Producers, Inc., a Florida corporation (“AEPP”), a public entity traded on the over-the-counter market with limited or no operating activities and no indebtedness. On August 3, 2017, pursuant to a reverse merger, AEPP acquired all of the outstanding equity interest of Oncolix/DE and assumed responsibility for the issuance of equity securities under Oncolix/DE’s options, warrants and convertible debt (the “Merger”) as described further herein. The Merger was treated as a reverse acquisition of AEPP for financial accounting and reporting purposes. As such, Oncolix/DE was treated as the acquirer and AEPP was treated as the acquired entity for accounting and financial reporting purposes.
Accordingly, the financial statements of AEPP for all periods prior to August 3, 2017 are those of Oncolix/DE. Because of the acquisition of a controlling interest on April 8, 2017, the financial statements of AEPP are consolidated with Oncolix/DE since April 2017. The $365,000 purchase price for stock of AEPP by Oncolix/DE was treated as an expense of the merger, and the shares of AEPP Common Stock not owned by Oncolix/DE are treated as shares issued and outstanding subsequent to April 2017. AEPP’s assets, liabilities and results of operations for periods after April 2017 are the consolidated assets, liabilities and results of operations of AEPP and Oncolix/DE.
Contemporaneously with the Merger, Oncolix issued a series of short-term senior secured convertible notes (the “August 2017 Notes”) and related warrants to acquire Common Stock (i) in exchange for prior indebtedness of Oncolix/DE and (ii) for cash proceeds of $2 million. During June 2018, the terms of the August 2017 Notes were renegotiated, and additional secured convertible notes (the “June 2018 Notes”) and related warrants were issued for approximately $1.1 million in cash. See Note 5.
On September 27, 2017, AEPP filed an amendment with the Florida Secretary of State and changed its name to Oncolix, Inc. As used in these consolidated financial statements, “We”, “Us”, “Our”, “Oncolix” or the “Company” refers to Oncolix/DE prior to April 2017 and the consolidated Oncolix and Oncolix/DE subsequent to such date.
These condensed consolidated financial statements are unaudited; however, in the opinion of management, these condensed statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These condensed consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the SEC and do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three-month and six-month periods ending September 30, 2018 are not necessarily indicative of the results to be expected for the full year.
Description of business
We are developing medical therapies for the treatment of cancer. The Company’s activities are focused on the development of Prolanta™ for the treatment of gynecological cancers and Cyclosam™ a radiopharmaceutical licensed in October 2018. See Note 8. Oncolix is incorporated in Florida, and we commenced operations on January 24, 2007. At the commencement of our operations, certain intellectual property was transferred to us by a subsidiary of Greenville Health Corporation (collectively, “GHC”), a component unit of Greenville Health System (“GHS”) of South Carolina. Prior to the Merger in August 2017, GHC was the majority stockholder of Oncolix. See Notes 3, 6 and 7.
As a clinical-stage biotechnology company, we have no revenues and must raise substantial additional capital to support the completion of our development and commercialization activities. The Company’s business is subject to significant risks and uncertainties, including the risk of failure to secure additional funding for the Company’s future operations and to repay its existing indebtedness.
Going concern
We have experienced negative cash flows from operations since the commencement of operations, and we expect these losses to continue into the foreseeable future as we continue the development and clinical testing of our principal product candidate, Prolanta™, and seek regulatory approval to market products. In June 2018, we completed a debt financing through the issuance of the June 2018 Notes which are expected to fund our operations into December 2018. See Note 5. To fund our operations beyond this date, we have commenced a private placement for the sale of units of our Common Stock and warrants to acquire Common Stock. See Note 8. The August 2017 Notes and the June 2018 Notes mature in five installments during 2019. Accordingly, our continued operations are dependent on our ability to complete the current private placement, and then to subsequently raise additional capital through the sale of equity or debt securities or through the licensing of our products. In the event we are unable to raise sufficient funds, we would have to substantially alter, or possibly even discontinue or curtail operations, or sell assets at distressed prices. This uncertainty raises substantial doubt about our ability to continue as a going concern, as noted in the opinion of our independent registered public accounting firm in the audited financial statements as of December 31, 2017. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Note 2 - Summary of Significant Accounting Policies
Use of estimates
To prepare our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), we are required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates were made regarding the realization of deferred tax assets, the calculation of the fair value of stock options and warrants awarded, the estimation of the value of warrants issued in conjunction with capital stock, and the projected realization of the carrying basis of our assets. 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 could differ from the estimates and assumptions used.
Cash and cash equivalents
Our cash balances are not restricted from use and we have no investments or marketable securities during the periods reported. Marketable securities with maturities of three months or less are considered to be cash equivalents.
Research and development
Research and development costs, which are comprised of costs incurred in performing research and development activities including wages and associated employee benefits of employees engaged in research; the cost of consultants engaged in our research activities; the cost of developing methods to manufacture our investigational drug products; the costs of production of investigation drugs for use in research, animal and human testing; the costs of the testing of our products in animal models and in human testing; the cost of research conducted on our behalf at academic institutions; the depreciation of equipment used in research; the cost of obtaining patents for the protection of our intellectual property; and other costs associated with these activities. These costs are accounted for in accordance with Accounting Standards Codification (“ASC”) subtopic 730, “Research and Development,” which requires all research and development costs to be charged to expense as incurred.
Our agreements with both the manufacturer of our drug Prolanta and the organizations that will provide monitoring and regulatory services for our clinical trials provide that our capital stock was issued for part of the value of the total services rendered. The original value of the stock issued was recorded as a prepayment of future services and is expensed as the services are rendered. The remaining balance is reflected as prepaid services in the accompanying condensed balance sheets.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, depreciation is recognized using the straight-line method, allocating the cost of the assets over their estimated useful lives of five years for laboratory equipment and three years for office furniture and equipment. Property and equipment is fully depreciated, and there was no depreciation expense recorded in any period presented.
Intangible assets
The costs of obtaining patent protection for our intellectual property are expensed as incurred given the uncertainty of successful development, ultimate regulatory approval and commercialization of products developed using this technology.
Deferred offering costs
Oncolix defers legal and certain other costs related to financing activities until the completion or termination of the offering. If the financing to which such costs are related is terminated, such costs are expensed. If the costs are related to a debt financing, the costs are amortized as additional interest expense over the period prior to maturity.
Concentrations of risk
We have engaged a contract manufacturer to develop methods of production of Prolanta and to produce quantities necessary for our animal and human testing. Accordingly, our operations are dependent upon the manufacturer’s ability to manufacture suitable quantities of Prolanta in compliance with regulatory requirements and within acceptable timeframes, and to maintain regulatory licenses for its operations. Failure to maintain such regulatory requirements would have a material impact on our operations. We incurred contract manufacturing costs of $63,679 and $3,600 during the three months ended September 30, 2018 and 2017, respectively, and $73,604 and $7,076 during the nine months ended September 30, 2018 and 2017, respectively.
Financial instruments
Our financial instruments consist of cash and cash equivalents, accounts payable and notes payable. We believe that the carrying amounts of the financial instruments classified as current assets and liabilities approximate their fair values because of their short-term nature. As discussed in Note 5, certain of our notes payable have a conversion feature at a discount to future equity offerings. We evaluate the carrying value of these notes payable at the closing of any offering to determine of an adjustment is appropriate. As of September 30, 2018, no adjustments were required.
Income taxes
We account for income taxes under the asset and liability method, which requires recognition of deferred tax assets, subject to valuation allowances, and liabilities for the expected future tax consequences of events that have been included in the condensed financial statements or tax returns. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established if it is more likely than not that all or a portion of the net deferred tax assets will not be realized.
If substantial changes in our ownership should occur, as defined in Section 382 of the Internal Revenue Code, there could be limitations on the amount of net loss carry forwards that could be used to offset future taxable income. Changes in ownership that occurred in 2017 may restrict the use of accumulated tax attributes prior to such date, but this is not expected to affect our federal tax liability for the foreseeable future given the early stage of development of our product candidates and the expected future tax losses from future development activities.
We will recognize the impact of an uncertain tax position only if that position is more likely than not of being sustained upon examination by the taxing authority based on the technical merits of the position. We will account for interest and penalties relating to an uncertain tax position in the current period statement of operations, as necessary.
Stock-based compensation
We maintained an equity compensation plan under which incentive stock options and non-qualified stock options were granted to employees, independent members of our Board of Directors and outside consultants. The right to make grants under this plan expired on December 31, 2016, and we expect a new plan will be adopted in 2018 or 2019. We recognize stock-based compensation in accordance with ASC topic 718, “Compensation.”
Deferred compensation
The officers of the Company have voluntarily deferred the payment of certain compensation in varying amounts from 2012 through 2016, and such deferral has varied with the financial resources available to Oncolix. During 2015, these officers agreed that the deferred compensation would be paid only from the proceeds of future equity offerings or the sale of assets, and not be paid using the then-existing current assets of the Company. These officers extended this deferral commitment in conjunction with the June 2018 Notes. Accordingly, the cumulative unpaid compensation is included in the accompanying condensed balance sheets as a non-current liability, deferred compensation. As of September 30, 2018, $1,268,013 is reflected as deferred compensation in the accompanying condensed balance sheets.
Recent accounting standards
On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. ASU No. 2016-02 requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases of property, plant and equipment with lease terms greater than 12 months. Prior to this accounting standard, only capital leases were recognized on the balance sheet. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. This ASU must be applied using a retrospective approach upon adoption. The Company believes this ASU will not have a significant effect on its financial statements.
Note 3 - Stockholders’ Deficit
We have 8,000,000,000 authorized shares of Common Stock, $0.0001 par value, and 250,000,000 authorized shares of preferred stock, of which 150,000,000 are designated as Series A Preferred Stock, $0.0001 par value. As of September 30, 2018, 108,477,936 shares of Common Stock were issued and outstanding, and 63,038,284 shares of Series A Preferred Stock, convertible into 105,064,017 shares of Common Stock, were issued and outstanding.
In addition, as of September 30, 2018, we have outstanding options to acquire up to 6,800,000 shares of Common Stock, warrants to acquire up to 49,477,380 shares of Series A Preferred Stock (which upon exercise would be convertible into 82,462,465 shares of Common Stock) and warrants to acquire up to 251,513,750 shares of Common Stock. We may issue an additional 220,123,951 shares of Common Stock if holders of secured notes voluntarily convert. If all derivative and convertible securities were fully exercised and converted into Common Stock, there would be a total of 774,442,119 shares of Common Stock outstanding. In addition, we may be obligated to issue an additional 14,000,000 shares of Series A Preferred Stock in exchange for future clinical research services in the amount of $1,050,000.
Series A Preferred Stock
Each share of Series A Preferred Stock is currently convertible into 1.666667 shares of Common Stock, reflecting an adjustment related to the modification of the terms of the August 2017 Notes and related warrants and the issuance of the June 2018 Notes and related warrants as described below. This conversion ratio is subject to further adjustment for certain dilutive events. If a liquidation event occurs, each share of Series A Preferred Stock is entitled to a liquidation preference of $0.075 per share, and then each share will receive distributions ratably with the Common Stock based on the then-existing conversion ratio. As of December 31, 2017, and September 30, 2018, the liquidation preference of the outstanding shares of Series A Preferred Stock is $4,727,871.
During June 2018, the modification of the terms of secured notes and related warrants and the issuance of new notes and related warrants resulted in anti-dilution adjustments to the Series A Preferred Stock. The conversion price of the Series A Preferred Stock was adjusted from $0.0707 as of December 31, 2017 to $0.0450 as of September 30, 2018, and the shares of Series A Preferred Stock may be converted into Common Stock at any time at the ratio of 1.66667 shares of Common Stock for every share of Series A Preferred Stock (an increase from 1.0608 as of December 31, 2017). The change in the number of Common shares into which the Series A shares may convert was treated as a dividend and valued at the closing market price on the date of the change. This “dividend” of $841,547 is recorded in the accompanying financial statements as an increase in Additional Paid in Capital and an increase in Accumulated Deficit.
The holders of Series A Preferred Stock have voting rights with the Common Stock based on the then-existing conversion ratio, and also have certain separate voting rights for certain matters. As long as at least 14,000,000 shares of Series A Preferred Stock are outstanding, the holders of the Series A Preferred Stock have certain protective rights to nominate a director to the Board of Directors, who shall have the right to approve certain transactions. In addition, as long as at least 14,000,000 shares of Series A Preferred Stock are outstanding, the holders of the Series A Preferred Stock have the right to vote separately as a class to approve certain amendments to the certificate of incorporation, any liquidation event, and certain issuances of capital stock.
The Series A Preferred Stock will automatically convert upon either the written consent of the holders of the majority of such shares or the closing of a firm-commitment underwritten public offering with gross proceeds of at least $10 million.
GHC liquidation rights
On January 24, 2007, the Company issued 24,000,000 shares of Common Stock to GHC in exchange for certain intellectual property and a commitment by GHC to invest $3.0 million to fund the Company’s operations. GHC retains the rights to the contributed intellectual property in the event of a bankruptcy or liquidation of the Company. GHC has subordinated these rights in connection with the Company’s borrowings.
Clinical research arrangements and payment in equity
During August 2011, we agreed to pay 10% of the cost of services rendered by a non-US based clinical research organization through the issuance of 333,340 shares of Common Stock at $0.15 per share. The $50,000 value of the Common Stock was recorded as a prepayment of future services. As of September 30, 2018, the unearned portion of the value of the equity issued, $43,090, was expensed as a result of changes in the contractual relationship.
During January 2015, as part of a financing transaction described below, we agreed to pay the cost of services by a US-based clinical research organization through the issuance of Series A Preferred Stock and warrants to acquire Series A Preferred Stock. The $450,000 value of the initial issuance of Series A Preferred Stock was recorded as a prepayment of future services. As of September 30, 2018, the unearned portion of the value of the equity issued reflected as a prepayment in the accompanying condensed balance sheets was $150,000. Additionally, the clinical research organization may perform an additional $1,050,000 in services and receive an additional 14,000,000 shares of Series A Preferred Stock.
Texas Emerging Technology Fund Investment
The Texas Emerging Technology Fund (“TETF”), an economic development affiliate of the State of Texas, is the majority holder of the Company’s Series A Preferred Stock as of September 30, 2018. We agreed to certain conditions related to the TETF investment, including certain representations and warranties. Our obligations to TETF generally expire on September 30, 2020. In the event that we do not maintain our principal place of business or principal executive offices in Texas, TETF may require us to repay the $3.9 million investment plus eight percent interest per annum, compounded annually, from the date of the investment, essentially as a stipulated damage or penalty, and TETF will retain its shares of Series A Preferred Stock. In the event of a breach of other conditions of the investment or representations and warranties, TETF may seek any remedies it may have in law or equity. We can terminate our obligations to TETF at any time by the repayment of the amount invested plus 8% interest calculated as described above.
Warrants to Acquire Series A Preferred Stock
As of September 30, 2018, we have issued warrants to acquire up to 49,477,380 shares of Series A Preferred Stock (the “Preferred Warrants”). The Preferred Warrants expire if not otherwise exercised at various dates commencing on January 16, 2020 and ending May 12, 2022. The exercise price is $0.0825 per share, subject to adjustment for certain dilutive transactions. The Preferred Warrants may be exercised on a cash-less basis. Upon exercise, the Series A Preferred shares underlying the warrants would be convertible into 82,462,465 shares of Common Stock.
Warrants to Acquire Common Stock
As of September 30, 2018, we have issued warrants to acquire up to 251,513,750 shares of Common Stock (the “Common Warrants”). The terms are summarized in the following table:
|
|
Number of Common Shares
|
|
|
Exercise Price
|
|
|
Expiration
Date(s)
|
|
Issued with August 2017 Notes
|
|
|
176,418,511
|
|
|
$
|
0.030
|
|
|
August 2022
|
|
Issued to Placement Agents of August 2017 Notes
|
|
|
16,761,852
|
|
|
$
|
0.030
|
|
|
August 2022
|
|
Issued with June 2018 Notes
|
|
|
51,481,332
|
|
|
$
|
0.036
|
|
|
May 2023
|
|
Issued to Placement Agents of June 2018 Notes
|
|
|
4,952,055
|
|
|
$
|
0.036
|
|
|
May 2023
|
|
Issued to Directors of Oncolix
|
|
|
1,900,000
|
|
|
$
|
0.036
|
|
|
December 2022 to June 2023
|
|
Total
|
|
|
251,513,750
|
|
|
|
|
|
|
|
|
These warrants may be exercised on a cash-less basis and have anti-dilution provisions for issuances below the then-current exercise price. These “down round” protections do not prevent the warrants being linked to our Common Stock under the provisions of ASU 2017-11, and the warrants are settleable only for Common Stock. Accordingly, the warrants are not treated as a derivative in the accompanying financial statements.
2007 Stock Option Plan
The authority to make grants under the 2007 Stock Option Plan expired on December 31, 2016, and no further grants may be made. We expect to adopt a new plan in 2018 or 2019. As of September 30, 2018, options to acquire 6,800,000 shares of Common Stock were outstanding. These options are fully vested and are exercisable at an average price of approximately $0.01 per share.
We recognize stock-based compensation expense for equity awards over the requisite service period of each grant using the Black-Scholes option pricing model to estimate the fair value of the stock options on the date of grant. There was no unamortized stock-based compensation expense recognized related to stock options during any period in 2018 and 2017.
Note 4 – Loss Per Common Share
Basic loss per Common share is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Diluted loss per share is computed using the average shares outstanding for the period and applying the treasury stock method to potentially dilutive outstanding options and warrants. In all applicable periods, all potential Common Stock equivalents were anti-dilutive and, accordingly, were not included in the computation of diluted loss per share.
The Common Stock equivalents and other potentially dilutive securities excluded from the loss per share computation during the nine months ended September 30, 2018 and 2017 included the following:
|
|
Common-Equivalent
Shares as of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Series A Preferred Stock outstanding, Common equivalent
|
|
|
105,064,017
|
|
|
|
63,038,284
|
|
Warrants to acquire Series A Preferred Stock, Common equivalent
|
|
|
82,462,465
|
|
|
|
49,477,380
|
|
Options to acquire Common Stock
|
|
|
6,800,000
|
|
|
|
6,800,000
|
|
Warrants to acquire Common Stock
|
|
|
251,513,750
|
|
|
|
64,660,120
|
|
Shares issuable upon conversion of Notes
|
|
|
220,123,951
|
|
|
|
55,872,837
|
|
|
|
|
665,964,183
|
|
|
|
239,848,621
|
|
See Notes 3 and 5 for the terms of these securities.
Note 5 – Notes Payable
As of September 30, 2018, the outstanding debt of the Company is comprised of senior secured convertible notes due commencing in 2019. The carrying basis (excluding accrued interest) of the notes is reflected in the accompanying balance sheet net of unamortized discount associated with the valuation of warrants issued in conjunction with the debt and net of the expenses incurred in the issuance of the debt:
|
|
As of September 30, 2018
|
|
Principal due at maturity,
|
|
|
|
including 10% bonus
|
|
$
|
7,264,091
|
|
Unamortized issue costs and
|
|
|
|
|
discount
|
|
|
(1,421,294
|
)
|
Carrying amount in the
|
|
|
|
|
accompanying Balance Sheet
|
|
$
|
5,842,797
|
|
Accrued interest payable
|
|
$
|
364,874
|
|
Sale of 2016 Secured Notes
During the second half of 2016, we sold units of a 10% secured note payable (the “2016 Notes”) and a warrant to acquire shares of Series A Preferred Stock. As of December 31, 2016, we issued $200,000 in principal amount of the 2016 Notes and warrants to acquire 2,666,700 shares of Series A Preferred Stock at $0.0825 per share. The original maturities of the 2016 Notes were between March 2017 and May 2017 and the 2016 Notes secured by the assets of Oncolix. The warrants are exercisable through January 2022, and were assigned a value of $41,365 using a Black-Scholes formula, which was recorded as a discount to the notes. Upon maturity, if the noteholders were not offered an option to convert the notes into a new equity offering by the Company, the noteholder will also be entitled to receive an additional 20% of the principal amount of the 2016 Notes. The discount attributable to the value of the warrants, the 20% premium, and an additional discount related to the fees and expenses of the issuance of the 2016 Notes of $16,000 was accreted as additional interest expense over the life of the notes.
The 2016 Notes had the right to voluntarily convert into the units sold in 2017, as described in the sections below. As a result, the principal of the 2016 Notes was convertible into Common Stock at the price of $0.075 per Common share.
During March 2017, $100,000 of principal amount of the 2016 Notes was exchanged for a new series of notes being sold in 2017 – see the following section. The maturity date of the remaining $100,000 of principal of 2016 Notes was extended through May 12, 2017, in exchange for an increase in the interest rate to 18% and the issuance of a warrant to acquire 500,000 shares of Series A Preferred Stock. The warrant is exercisable at $0.0825 per share and expires if not exercised on or prior to March 14, 2022. The discount attributable to the value of this additional warrant ($8,465) was being accreted as additional interest expense over the extended maturity period of the 2016 Note. In May 2017, the maturity of this note was further extended in July 2017, and we issued a second warrant to acquire 500,000 shares of Series A Preferred Stock. The warrant is exercisable at $0.0825 per share and expires if not exercised on or prior to May 12, 2022. The discount attributable to the value of this additional warrant ($11,435) was being accreted as additional interest expense over the extended maturity period of the 2016 Note. During August 2017, the balance of this debt ($120,000) was paid.
During the three months and nine months ended September 30, 2017, respectively, we recorded $3,256 and $89,222 of interest expense attributable to the 2016 Notes, of which $1,293 and $77,814 was accretion. No amounts were recorded in 2018.
Sale of Convertible Notes in 2017
During 2017 we sold units consisting of a convertible promissory note (the “2017 Notes”) and a warrant to acquire shares of Common Stock at $0.0825 per share. The 2017 Notes were secured by the assets of the Company and subordinated to the 2016 Notes. As of August 3, 2017, we had issued units for $1,185,000 in cash and the exchange for 2016 Notes, with a principal balance of $1,320,621 and warrants to acquire 17,608,280 shares of Common Stock. We paid fees to the placement agent of $103,500 in cash and were obligated to issue warrants to acquire 1,580,000 shares of Common Stock. These warrants a were assigned a value of $389,421 using a Black-Scholes formula, and these warrants were exchanged for new warrants in the August debt sale as described below. In addition, we incurred cash expenses of $93,889.
The maturity of the 2017 Notes was extended to November 2018. At maturity, if we had not offered the noteholders an option to exchange the 2017 Notes for equity securities in an offering with at least $5 million in gross proceeds, each noteholder would also receive an additional payment equal to 20% of the principal of the 2017 Note. The discount attributable to the value of the warrants, the 20% premium, and an additional discount related to the fees and expenses of the issuance of the notes of $197,389 were being accreted as additional interest expense over the life of the notes.
The 2017 Notes could also be converted by each holder into shares of Common Stock at a price of $0.075 per Common Shares.
The 2017 Notes and accrued interest were exchangeable at a discount into a new equity offering. Interest of 10% was payable quarterly in arrears, and could be paid in our Common Stock at $0.075 per share. On March 31, 2017, and June 30, 2017, we elected to pay accrued interest as of such date by issuing 178,100 and 447,400 shares of our Common Stock, respectively. Such Common Stock was issued in April 2017 and July 2017, respectively.
During August 2017, all of the 2017 Notes and related warrants were exchanged for a new series of units of convertible debt and warrants. See below.
During the three months and nine months ended September 30, 2017, respectively, we recorded $269,494 and $646,208 of interest expense attributable to the 2017 Notes, of which $256,379 and $586,810 is accretion. No amounts were recorded in 2018.
Sale of July 2017 Secured Notes
During July 2017, we sold an $160,000 in principal of secured notes the (“July Notes”) and warrants to acquire 3,200,000 shares of Common Stock at $0.0825 per share. The July Notes were due in February 2018 and the warrants are exercisable through July 2022. The July Notes were secured by all of the assets of the Company and by Oncolix (Delaware). As noted in the following paragraph, the July 2017 Notes were exchanged in a subsequent debt offering in August 2017.
During the three months and nine months ended September 30, 2017, respectively, we recorded $103,914 and $103,914 of interest expense attributable to the 2017 Notes, of which $87,914 and $87,914 is accretion. No interest expense was recorded in 2018 related to these notes.
Sale of August 2017 Secured Notes
On August 3, 2017, we (i) exchanged $1,561,894 of the outstanding balance of debt plus accrued under the 2017 Notes and the July Notes and amounts payable under a consulting agreement and (ii) received $2,000,000 cash for an aggregated purchase price of $3,561,894 in consideration for the issuance of a new series of secured notes (the “August 2017 Notes”) with a stated principal balance of $4,190,463. The August 2017 Notes were issued at a 15% discount as noted. In addition, holders of the 2017 Notes exchanged warrants to acquire 17,608,280 shares of Common Stock at $0.0825 per share for new Warrants to acquire Common Stock at $0.09 per share as described below. The total warrants issued were 55,872,836 shares. These warrants to acquire Common Stock have a five-year term, cashless exercise provisions and anti-dilution protections.
During June 2018, the terms of the August 2017 Notes and the related warrants were modified as described below.
The feature of the August 2017 Notes allowing conversion into Common Stock was not bifurcated and treated separately as a derivative in the financial statements. This conversion feature, which includes “down round” protection to the noteholders, is considered linked to our Common Stock under the guidance of ASU 2017-11, which was early-adopted by the Company. This conversion feature is considered settleable only for Common Stock and would be classified as equity if bifurcated from the August 2017 Notes. Similarly, the related warrants are also considered linked to our Common Stock under the provisions of ASU 2017-11, and are settleable only for Common Stock. Accordingly, the warrants are not accounted for as a derivative.
We incurred cash offering costs of $277,289 in connection with the offering, including $164,800 paid to a placement agent. In addition, the placement agent surrendered its rights to receive warrants in connection with the 2017 Notes and received warrants to acquire 5,587,284 shares at $0.09 per share. These warrants a were assigned a value of $267,422 using a Black-Scholes formula. The closing Oncolix Common Stock price on the date of issuance was $0.109, and the warrants have a five-year term. Because of the limited trading history of Oncolix Common Stock, we continue to use 40% as an estimate of volatility rather than use the historical trading activity of the pre-merger shell (with a volatility of less than 10%).
On the date of issuance, the August 2017 Notes were convertible into Common Stock at $0.075 per share, or at a conversion price below the closing market price of $0.109. This “discount” is considered a beneficial conversion feature for accounting purposes. The allocation of carrying basis between the warrants issued and the notes was determined based on relative valuation. The carrying basis attributable to the warrants to acquire Common Stock was $1,194,934. The discount of the initial conversion price from market related to the beneficial conversion feature of the debt was approximately $1,822,000, and such amount was recorded as a reduction of debt and increase in Additional paid-in capital. After deducting offering costs of $544,711 (including the placement agent warrant), the initial net carrying basis of the August 2017 Notes was reduced to zero. The principal due at maturity ($4,190,463) plus the 10% bonus payable was being accreted as additional interest over the original life of the notes.
In June 2018, the terms of the August 2017 Notes were modified to change the payment terms, increase the principal amount due at maturity, and change the conversion price into Common Stock. This modification was accounted for as an extinguishment and reissuance of debt in accordance with ASC 470-20 and 470-50. The remaining unaccreted discount as of the date of modification, $1,706,733, was expensed in the accompanying financial statements as a loss on the refinancing of debt. The resulting amount due at maturity of $4,609,509 (including the 10% bonus payable at maturity) was treated as the face value exchanged for the modified debt. Pursuant to the terms of the modification, the principal value of the August 2017 Notes was increased by 30% to $5,447,602. The modified amount due at maturity is $5,992,362 (including the 10% bonus due at maturity). The issue costs related to the modification of the August 2017 Notes and the issuance of new debt totaled $136,171. The resulting discount of $1,519,023 is being accreted as additional interest expense over the life of the debt.
The August 2017 Notes bear interest at a rate of 10% per annum, payable monthly commencing on April 1, 2019 until the maturity date on August 1, 2019. The interest is payable in cash or, at the option of the Company, subject to compliance with certain strict volume and price conditions, in fully tradable Common Stock at a 25% discount to the average of the five lowest closing bid prices for the 20 trading days prior to the interest payment date. The final maturity of the August 2017 Notes is August 1, 2019, but commencing on April 1, 2019 and on the first day of each month thereafter until maturity, we are required to redeem an amount of the August 2017 Notes equal to 1/5th of the original principal amount, plus 10% of such monthly redemption amount as a bonus. The principal payments shall be made in cash or, subject to the satisfaction of with certain strict volume and price conditions, in Common Stock valued at a 25% discount to the average of the five lowest closing bid prices for the 20 trading days prior to the amortization date.
As modified, the August 2017 Notes are convertible at the option of the holders at a conversion price equal to $0.03 per share of Common Stock. The August 2017 Notes contain customary anti-dilution protection, including full-ratchet anti-dilution adjustments in the event of certain dilutive issuances (that adjust both price and share amounts).
In the event of a closing of an $8 million financing in connection with a change in listing of the Common Stock to Nasdaq or the NYSE, the August 2017 Notes shall be subject to mandatory conversion into Common Stock at a 30% discount to the offering price. We are required to offer to prepay in cash the aggregate principal amount of the August 2017 Notes at 120% of the principal amount thereof plus any unpaid accrued interest to the date of repayment, at maturity, on the sale of substantially all of the assets of the Company, upon a change of control, upon a qualified offering, or upon a “fundamental transaction” of the Company (such as a reverse merger); in such an event, the holders shall have the right to convert the August 2017 Notes prior to the date of any such prepayment.
The August 2017 Notes contain standard negative covenants customary for transactions of this type. The events of default are also customary for transactions of this type, including default in timely payment of principal or interest, failure to observe or perform any covenant or agreement in the note agreements, the commencement of bankruptcy or insolvency proceedings, failure to timely deliver conversion shares underlying the August 2017 Notes, failure to timely file Securities and Exchange Commission filings, and failure to satisfy certain market conditions.
The terms of the warrants to acquire Common Stock issued with the August 2017 Notes were also modified. The exercise price was reduced to $0.03 per share, and the warrant became exercisable for 176,418,508 shares. Using a Black-Scholes formula, the calculated value of the modified warrants was $966,691, less than the value calculated for the warrants at issuance. The warrant issued to the placement agent of the warrants was also modified. Accordingly, the carrying value of the warrants was not modified. The closing Oncolix Common Stock price on the date of modification was $0.022, and the warrants have a 4.6-year remaining term. Because of the limited trading history of Oncolix Common Stock, we continue to use 40% as an estimate of volatility rather than use the historical trading activity of the pre-merger shell (with a volatility of less than 10%).
During August, 2018, the principal amount of $120,000 was converted into 4,000,000 shares of Common Stock by the holders.
During the three months and nine months ended September 30, 2018, we recorded $495,731 and $2,902,948 of interest expense, respectively, attributable to the August 2017 Notes, of which $357,968 and $2,544,022 is accretion. No amounts were recorded in the comparable periods in 2017.
Sale of June 2018 Notes
During June 2018 we sold additional senior secured convertible notes (the “June 2018 Notes”) on terms substantially equivalent to the modified terms of the August 2017 Notes in exchange for $1,084,699 in cash. The June 2018 Notes are convertible into Common Stock at a price of $0.03 per share. The June 2018 Notes were issued at a 15% discount and have a stated principal value of $1,276,116. The convertible notes bear interest at a rate of 10% per annum, with accrued interest payable commencing April 1, 2019, then on the first day of each calendar month thereafter until maturity. The maturity of the convertible notes is August 1, 2019, but commencing on April 1, 2019 and on the first day of each calendar month thereafter until maturity, the Company is required to redeem an amount of the convertible notes equal to 1/5th of the original principal amount, plus 10% of such monthly redemption amount as a bonus.
In conjunction with the sale of these notes, we issued warrants to acquire 51,481,332 shares of Common Stock at an exercise price of $0.036 per share. These warrants to acquire Common Stock have a five-year term, cashless exercise provisions and anti-dilution protections. An identical warrant was issued to a placement agent for 4,952,055 shares of Common Stock. Using a Black Scholes formula, the values assigned to the related warrant and the placement agent warrant were $171,110 and $25,290, respectively, resulting in a recorded value of the June 2018 Notes of $888,299. The related discount of $196,401 is being accreted as additional expense over the life of the debt.
During the three months and nine months ended September 30, 2018, we recorded $130,568 and $175,841 of interest expense, respectively, attributable to the June 2018 Notes, of which $98,005 and $132,644 is accretion. No amounts were recorded in the comparable periods in 2017.
Note 6 - Related-Party Transactions
As of September 30, 2018, an affiliate of GHS holds approximately 40% of the voting interest in Oncolix. An affiliate of GHS is the site for clinical trial activities. Accounts payable to GHS and its affiliates for services were approximately $61,935 at September 30, 2018 and December 31, 2017, respectively.
We have engaged a contract manufacturer and clinical research firms and certain of the costs incurred have been paid or will be paid through the issuance of capital stock. See Note 3.
Note 7 - Commitments and Contingencies
Licenses
We licensed certain manufacturing technology for the production of Prolanta. We continue to evaluate processes and methods of manufacturing, but if we utilize this licensed technology we must pay a royalty of up to 2% of future sales.
Incentive compensation for equity sales
Prior to the Merger, our Chief Executive Officer received 1% of the gross proceeds from certain sales of equity securities of Oncolix/DE, including services paid through the issuance of stock. Such incentive compensation plan has not yet been adopted by Oncolix. No additional compensation expense was recorded pursuant to these arrangements in 2018 and 2017.
Contingent obligations to Texas Emerging Technology Fund
In connection with the investments by the TETF, we agreed to certain conditions, including certain representations and warranties, and the breach of which may result in penalties payable to TETF. See Note 3.
Obligation to GHC Upon Bankruptcy or Liquidation
In connection with the contribution of intellectual property upon the formation of the Company, GHC retains the rights to the contributed intellectual property in the event of the bankruptcy or liquidation of Oncolix. GHC has subordinated these rights to the security interests of the August 2017 Notes.
Severance Arrangements for Officers
The Company has entered into employment agreements with its officers that provide for a severance payment of 12 to 18 months of the officer’s salary in the event of termination without cause or under certain other conditions.
Note 8 – Events Subsequent to September 30, 2018
During October, 2018, the Company licensed a radiopharmaceutical product candidate, Cyclosam, and issued 3,250,000 shares of Common Stock. The Company also incurred certain royalty and development obligations. Additionally, during November 2018, the principal amount of $75,000 of the August 2017 Notes was converted into 2,500,000 shares of Common Stock.
The Company has commenced a private placement of Common Stock and warrants to fund its continued activities. There can be no assurances that these activities will be successful or that any amounts raised will be sufficient to fund the Company’s expected activities. However, based on current market conditions, the Company expects that the private placement would result in substantial additional adti-dilution adjustments to the conversion price of the existing Series A Preferred Stock, the August 2017 Notes and the June 2018 Notes into Common Stock, and reduce the exercise price of the existing warrants to acquire Common Stock. See Notes 3 and 5.