The following unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary for a fair statement of the interim periods presented have been included. The year-end balance sheet data was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States of America. Operating results for the three- and nine-month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the financial statements and footnotes thereto included in the Company's Current Report on Form 8-K filed with the SEC on August 9, 2017.
Condensed Notes to
Consolidated
Financial Statements
(Unaudited)
Note 1 - Background
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. Oncolix paid $315,000 in cash and paid a fee to an investment banker of $50,000 in connection with this transaction.
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 as described further herein. The merger is treated as a reverse acquisition of AEPP for financial accounting and reporting purposes. As such, Oncolix/DE is treated as the acquirer for accounting and financial reporting purposes while AEPP is 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 is treated as an expense of the merger, and the shares of AEPP Common Stock not owned by Oncolix/DE are treated as shares 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.
In the merger, each stockholder of Oncolix/DE received 20 shares of a substantially identical class of AEPP stock (Common or Series A Preferred, each with a par value of $0.0001) in exchange for each share of Oncolix/DE (par value $0.001). In addition, each option or warrant became exercisable for 20 shares of the identical class of AEPP stock for each share of Oncolix/DE, and the exercise price was adjusted by dividing the price per Oncolix/DE share by 20. The shares of AEPP Common Stock owned by Oncolix/DE were cancelled in the merger. After the merger, AEPP had 103,536,703 shares of Common Stock, $0.0001 par value, issued and outstanding, of which 71,770,200 shares were issued to the former stockholders of Oncolix/DE. In addition, AEPP had 62,138,680 shares of Series A Preferred Stock, $0.0001, issued and outstanding, all of which were owned by the former stockholders of Oncolix/DE. The financial statements for all periods have been adjusted to reflect the adjusted number of shares resulting from the exchange ratio in the merger (the 20:1 exchange ratio), effectively a stock split for accounting purposes, and the adjustment of the par value to $0.0001.
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 condensed consolidated financial statements, “We”, “Us”, “Our”, “Oncolix” or the “Company” refers to Oncolix/DE prior to April 2017 and the combined 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 Current Report on Form 8-K filed with the Securities and Exchange Commission on August 9, 2017. The results of operations for the three- and nine-month periods of 2017 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. 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 business.
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 August 2017, we completed a debt financing through the issuance of the convertible notes (the “August Notes”) that should fund operations beyond the end of 2017. See Note 5. The August Notes mature in seven installments during 2018. We are currently seeking financing that would fund repayment of this debt and fund operations through at least 2019. Accordingly, our continued operations are dependent on our ability to 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, 2016. 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 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 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 730-10, “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 $0 and $3,600 during the three months ended September 30, 2017 and 2016, respectively, and $7,076 and $305,098 during the nine months ended September 30, 2017 and 2016, 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, 2017, 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. We believe the reverse merger on August 3, 2017, will 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 Prolanta. In addition, a transfer of shares held by GHC among its affiliated companies provided additional restrictions on the utilization of tax attributes.
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 2017 or 2018. 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 existing current assets of the Company. Accordingly, the cumulative unpaid compensation is included in the accompanying condensed balance sheets as a non-current liability, deferred compensation. As of September 30, 2017, and December 31, 2016, $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.
Rent expense
We lease administrative offices in Houston, Texas under a lease which expires on March 31, 2019. Rent expense for the three months ended September 30, 2017 and 2016 was $10,584 and $10,786, and for the nine months ended September 30, 2017 and 2016 was $31,564 and $30,677, respectively. The remaining rental obligation under the lease is $9,336 in the remainder of 2017, $40,680 in 2018 and $10,248 in 2019.
Note 3 - Stockholders’ Deficit
We have 950,000,000 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, 2017, 103,878,536 shares of Common Stock and 63,038,284 shares of Series A Preferred Stock were issued and outstanding. The shares of Common Stock include the 31,766,503 shares held by the remaining shareholders of Oncolix prior to our acquisition of control on April 8, 2017.
In addition, as of September 30, 2017, 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 and warrants to acquire up to 64,660,120 shares of Common Stock. 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, and we may issue an additional 55,872,837 shares of Common Stock if holders of secured notes voluntarily convert.
Series A Preferred Stock
Each share of Series A Preferred Stock is currently convertible into one share of Common Stock. This conversion ratio is subject to 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 September 30, 2017, the liquidation preference of the outstanding shares of Series A Preferred Stock is $4,727,871. 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. 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 shares of Series A Preferred Stock may be converted into Common Stock at any time, but 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, 2017, and December 31, 2016, the unearned portion of the value of the equity issued, $43,090, is reflected as prepaid services in the accompanying condensed balance sheets.
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, 2017, and December 31, 2016, respectively, the unearned portion of the value of the equity issued reflected as a prepayment in the accompanying condensed balance sheets was $269,999 and $319,999, respectively. 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, 2017 and December 31, 2016. 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, 2017, and December 31, 2016, respectively, we have issued warrants to acquire up to 49,477,380 and 50,810,720 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. During August 2017, one holder exercised on a cashless basis his warrants to acquire 2,333,340 shares and was issued 899,604 shares of Series A Preferred Stock.
Warrants to Acquire Common Stock
As of September 30, 2017, and December 31, 2016, respectively, we have issued warrants to acquire up to 64,660,121 and 0 shares of Common Stock (the “Common Warrants”). See Note 5. The Common Warrants expire if not otherwise exercised on or prior to August 3, 2022. The exercise price of Common Warrants to acquire 61,460,121 shares is $0.09 per share, and the exercise price of Common Warrants to acquire 3,200,000 shares is $0.0825per share, subject to adjustment for certain dilutive transactions. The Common Warrants may be exercised on a cash-less basis, and have anti-dilution provisions for issuances below the then-current exercise price.
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 2017. As of September 30, 2017, and December 31, 2016, options to acquire 6,800,000 and 7,200,000 shares of Common Stock, respectively were outstanding. One option to acquire 200,000 shares was forfeited in July 2017, and one option to acquire 200,000 shares was exercised for $0.005 per share in September 2017. 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 2016 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.
These excluded Common Stock equivalents and other potentially dilutive securities during the three and nine months ended September 30, 2017 and 2016 included the following:
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Common-Equivalent Shares
as of September 30,
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2017
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2016
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Series A Preferred Stock outstanding
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63,038,284
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62,138,160
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Warrants to acquire Series A Preferred Stock
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49,477,380
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50,810,720
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Options to acquire Common Stock
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6,800,000
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7,200,000
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Warrants to acquire Common Stock
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64,660,120
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-
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Shares of Series A Preferred Stock that may be issued for future clinical services
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14,000,000
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14,000,000
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Shares issuable upon conversion of notes
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55,872,837
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-
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253,848,621
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134,148,880
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See Notes 3 and 5 for the terms of these securities.
Note 5 – Notes Payable
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. See Note 8.
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 is accretion.
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.
Sale of July 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
August 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 Notes”) with a stated principal balance of $4,190,463. The August 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.
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%).
The August Notes bear interest at a rate of 10% per annum, payable quarterly on November 1, 2017, February 1, 2018, and May 1, 2018 and thereafter, on a monthly basis until maturity. 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 2017 Notes is November 1, 2018, but commencing on May 1, 2018 and on the first day of each month thereafter until maturity, we are required to redeem an amount of the 2017 Notes equal to 1/7th 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.
The August Notes are convertible at the option of the holders at a conversion price equal to the lesser of (i) $0.075 per share of Common Stock, and (ii) 75% of the 10-day average closing bid price of the Common Stock for the 10-day period prior to the effective date of the registration statement (subject to a floor of $0.0545 per share). The August 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 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 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 Notes prior to the date of any such prepayment.
The August 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 Notes, failure to timely file Securities and Exchange Commission filings, and failure to satisfy certain market conditions.
On the date of issuance, the August 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 is $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 Notes was reduced to zero. The principal due at maturity ($4,190,463) plus the 10% bonus payable will be accreted as additional interest over the life of the notes.
During the three months and nine months ended September 30, 2017, respectively, we recorded $437,390 and $437,390 of interest expense attributable to the August Notes, of which $369,877 and $369,877 is accretion.
Given the significant conditions of default, including market conditions, all of the principal balance in the accompanying balance is classified as a current liability.
As of September 30, 2017, the carrying basis (excluding accrued interest) is comprised of:
|
|
As of
September 30,
2017
|
|
Principal due at maturity, including 10% bonus
|
|
$
|
4,609,509
|
|
Unamortized issue costs and discount
|
|
|
(4,239,632
|
)
|
Carrying amount in the accompanying Balance Sheet
|
|
$
|
369,877
|
|
Note 6 - Related-Party Transactions
As of September 30, 2017, GHC was the largest stockholder of the Company, and GHC is an affiliate of GHS. An affiliate of GHS is the site for clinical trial activities. Accounts payable to GHC and GHS for services approximated $61,935 at September 30, 2017 and December 31, 2016.
We have engaged 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 have licensed certain manufacturing technology and will pay a royalty of up to 2% of future sales of products that utilize such technology.
Engagement of placement agent
In connection with our prior financing activities, we engaged a placement agent which received a fee based on the proceeds received by us and a warrant to acquire our Common Stock. The placement agent will also receive a fee equal to 4% of cash received by Oncolix on the exercise of the Common Warrants issued. See Notes 3 and 5.
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.
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.