NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
NOTE
1 –
ORGANIZATION AND NATURE OF OPERATIONS
Organization
OncBioMune
Pharmaceuticals, Inc. (the “Company,” “we,” “us” or “our”) is a biotechnology
company specializing in innovative cancer treatment therapies. The Company has proprietary rights to a breast and prostate patent
vaccine, as well as a process for the growth of cancer tumors. The Company’s mission is to improve the overall patient condition
through innovative bio immunotherapy with proven treatment protocols, to lower deaths associated with cancer and reduce the cost
of cancer treatment. The Company’s technology is safe, and utilizes clinically proven research methods of treatment to provide
optimal success of patient recovery.
On
August 19, 2016, the Company and Vitel Laboratorios, S.A. de C.V., a Mexican variable stock corporation (“Vitel”)
entered into a Shareholders’ Agreement related to the launch of Oncbiomune México, S.A. De C.V. (“Oncbiomune
Mexico”) for the purposes of developing and commercializing the Company’s PROSCAVAX vaccine technology and cancer
technologies in México, Central and Latin America (“MALA”). Under the terms of the Shareholders Agreement,
the Company agreed to assign to Oncbiomune Mexico limited patent and intellectual property rights and trademarks related to its
OVCAVAX, PROSCAVAX vaccine technology and cancer technologies and future developments related to these technologies. Through March
10, 2017, the Company and Vitel each owned 50% of Oncbiomune Mexico and Oncbiomune Mexico was treated as an equity-method investee
for accounting purposes. Oncbiomune Mexico had minimal activity in 2016 and through March 10, 2017. On March 10, 2017, Oncbiomune
Mexico became a wholly owned subsidiary of the Company.
On
March 10, 2017 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding capital
stock of Vitel from its shareholders Manuel Cosme Odabachian and Carlos Fernando Alaman Volnie (collectively, the “Vitel
Stockholders”) pursuant to the terms and conditions of a Contribution Agreement to the Property of Trust F/2868 entered
into among the Company and the Vitel Stockholders on the Closing Date (the “Contribution Agreement”). Vitel is a revenue-stage
Mexico-based pharmaceutical company that sells generic drugs in MALA. The Company acquired Vitel for the purpose of commercializing
the Company’s PROSCAVAX vaccine technology and cancer technologies in MALA and to utilize Vitel’s distribution network
and customer and industry relationships.
On
December 29, 2017, the Board of Directors of the Company determined to sell or otherwise dispose of its interest in Vitel and
Oncbiomune México due to disputes with the original Vitel Stockholders and resulting loss of operational control of the
assets and operations of Vitel and OncBiomune Mexico. Accordingly, the Vitel and Oncbiomune México are now treated as a
discontinued operation (See Note 3).
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and principals of consolidation
The
Company’s consolidated financial statements include the financial statements of OncBioMune Pharmaceuticals, Inc. and its
wholly-owned subsidiaries, OncBioMune, Inc., Vitel and Oncbiomune México, S.A. De C.V.. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Going
concern
These consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. As reflected in our accompanying consolidated financial statements, the Company had a net loss
of $20,513,138 and $2,013,632 for the years ended December 31, 2017 and 2016, respectively. The net cash used in operations were
$2,294,341 and $1,544,003 for the years ended December 31, 2017 and 2016, respectively. Additionally, the Company had an accumulated
deficit of $23,655,989 and $3,142,851, at December 31, 2017 and 2016, respectively, had a stockholders’ deficit of $14,808,978
at December 31, 2017, had a working capital deficit of $14,822,020 at December 31, 2017, had no revenues from continuing operations
for the years ended December 31, 2017 and 2016, and has defaulted on its debt. Management believes that these matters
raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance date
of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow
positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate
to continue operating and maintaining its business strategy for the fiscal year ending December 31, 2017. The Company will seek
to raise capital through additional debt and/or equity financings to fund its operations in the future.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Although
the Company has historically raised capital from sales of equity and from the issuance of promissory notes, there is no assurance
that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in
the near future, management expects that the Company will need to curtail or cease operations. These consolidated financial statements
do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of
liabilities that might be necessary should the Company be unable to continue as a going concern.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Significant estimates during the years ended December 31, 2017 and 2016 include the valuation
of assets and liabilities of discontinued operations, useful life of property and equipment, assumptions used in assessing impairment
of long-term assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash
equity transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in
the business acquisition.
Concentrations
Generally,
the Company relies on one vendor as a single source of raw materials to produce certain components of its cancer treatment products.
The Company believes that other vendors are available to supply these materials if the Company cannot obtain these materials from
its single source vendor.
Fair
value of financial instruments and fair value measurements
FASB
ASC 820 —
Fair Value Measurements and Disclosures,
defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC
820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement
purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company
on December 31, 2017. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the
amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques
based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority
to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
|
●
|
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
|
|
|
|
|
●
|
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs
derived from or corroborated by observable market data.
|
|
|
|
|
●
|
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market
participants would use in pricing the asset or liability based on the best available information.
|
The
carrying amounts reported in the consolidated balance sheets for cash, due from and to related parties, prepaid expenses, line
of credit payable, accounts payable and accrued liabilities, approximate their fair market value based on the short-term maturity
of these instruments.
|
|
At December 31, 2017
|
|
|
At December 31, 2016
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
11,966,760
|
|
|
|
—
|
|
|
|
—
|
|
|
|
402,055
|
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
For the Year ended December 31, 2017
|
|
|
For the Year ended December 31, 2016
|
|
Balance at beginning of year
|
|
$
|
402,055
|
|
|
$
|
-
|
|
Initial valuation of derivative liabilities included in debt discount
|
|
|
473,240
|
|
|
|
320,961
|
|
Initial valuation of derivative liabilities included in derivative expense
|
|
|
730,700
|
|
|
|
260,479
|
|
Reclassification of derivative liabilities to debt settlement income
|
|
|
(478,645
|
)
|
|
|
(65,047
|
)
|
Reclassification of derivative liabilities to debt settlement income upon cashless exercise of warrants
|
|
|
(667,926
|
)
|
|
|
-
|
|
Change in fair value included in derivative expense
|
|
|
11,507,336
|
|
|
|
(114,338
|
)
|
Balance at end of year
|
|
$
|
11,966,760
|
|
|
$
|
402,055
|
|
ASC
825-10 “Financial
Instruments
”, allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of
three months or less at the purchase date and money market accounts to be cash equivalents. At December 31, 2017 and 2016, the
Company did not have any cash equivalents.
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There
were no balances in excess of FDIC insured levels as of December 31, 2017 and 2016. The Company has not experienced any losses
in such accounts through December 31, 2017.
Accounts
receivable – discontinued operations
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Inventories
– discontinued operations
Inventories,
consisting of finished goods related to the Company’s products are stated at the lower of cost and net realizable value
utilizing the first-in first-out (FIFO) method. A reserve is established when management determines that certain inventories may
not be saleable. If inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected
demand, the Company will record reserves for the difference between the cost and the net realizable value. These reserves are
recorded based on estimates
Property
and equipment
Property
are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three
to five years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal
terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect
the fact that their recorded value may not be recoverable.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Impairment
of long-lived assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference
between the asset’s estimated fair value and its book value. Based on the Company’s review of long-lived assets for
impairment, in the third quarter of 2017, the Company recognized a goodwill and intangible assets impairment loss of $4,760,646
since the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The impairment loss
includes an impairment of goodwill and intangibles of $4,718,817 recorded in connection with the acquisition
of Vitel (see Note 3).
Derivative
liabilities
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires
that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance
sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair
value during the period is recorded as either income or expense. Upon conversion, exercise or repayment, the respective derivative
liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified
to income or expense as part of gain or loss on extinguishment.
Revenue
recognition – discontinued operations
The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the purchase price is fixed or determinable and collectability is reasonably assured. The Company records revenue when the products
have been shipped to the customer. The Company reports its sales net of actual sales returns and the amount of reserves established
for anticipated sales returns based on historical rates. The Company estimates and records a liability for potential returns and
records this as a reduction of revenue in the same period the related revenue is recognized. The Company also offers cash discounts
to certain customers as an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable
by the prompt pay discount amount and recognizes the discount as a reduction of revenue in the same period the related revenue
is recognized.
Certain
sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell
through to the final customer is established which may be upon receipt of payment from the Company’s customer.
Income
taxes
The
Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets
and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The
Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates
is recognized as income or loss in the period that includes the enactment date.
On
December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which,
among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018,
and is permanent. The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC
Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects
of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation
allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period
presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further
regulatory guidance that may be issued as a result of the Act.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740
“Income Taxes
”.
Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not
the position will be sustained upon examination by the tax authorities. As of December 31, 2017, the Company had no uncertain
tax positions that qualify for either recognition or disclosure in the financial statements.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Research
and development
Research
and development costs incurred in the development of the Company’s products are expensed as incurred. For the years ended
December 31, 2017 and 2016, research and development costs were $103,915 and $94,383, respectively, and are included in operating
expenses on the accompanying consolidated statements of operations.
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award.
Pursuant
to ASC 505-50 –
“Equity-Based Payments to Non-Employees”
, all share-based payments to non-employees,
including grants of stock options, are recognized in the consolidated financial statements as compensation expense over the service
period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model,
the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns
with the vesting period of the options, and the Company adjusts the expense recognized in the consolidated financial statements
accordingly.
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common
stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially
dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method). These common stock
equivalents may be dilutive in the future. All potentially dilutive common shares were excluded from the computation of diluted
shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Stock warrants
|
|
|
153,151,959
|
|
|
|
3,304,872
|
|
Convertible debt
|
|
|
140,126,333
|
|
|
|
2,333,333
|
|
Stock options
|
|
|
4,000,000
|
|
|
|
-
|
|
The
following table presents a reconciliation of basic and diluted net loss per share:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss for basic and diluted attributable to common shareholders
|
|
$
|
(20,513,138
|
)
|
|
$
|
(2,013,632
|
)
|
From continuing operations
|
|
|
(14,849,036
|
)
|
|
|
(2,013,632
|
)
|
From discontinued operations
|
|
$
|
(5,664,102
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding– basic and diluted
|
|
|
128,916,989
|
|
|
|
58,305,875
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock
|
|
|
|
|
|
|
|
|
From continuing operations – basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
From discontinued operations – basic and diluted
|
|
|
(0.04
|
)
|
|
|
-
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.03
|
)
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of the parent company and its U.S. subsidiary is
the U.S. dollar and the functional currency of the Company’s subsidiaries located in Mexico is the Mexican Peso (“Peso”).
For the subsidiaries whose functional currencies are the Peso, results of operations and cash flows are translated at average
exchange rates during the period, assets and liabilities are translated at the spot exchange rate at the end of the period, and
equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements
of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments
resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining
comprehensive loss. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the
exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency included in the results of operations as incurred.
Additionally, transactions denominated in foreign currencies are translated into the functional currency at the exchange rates
prevailing on the transaction dates. The Company did not enter into any material transactions in foreign currencies. Transaction
gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset
and liability accounts at December 31, 2017 were translated at 19.6708 Pesos to $1.00, which was the exchange rates on the balance
sheet date. Equity accounts were translated at their historical rate. The average translation rates applied to the statements
of operations for the year ended December 31, 2017 was 18.4971 Pesos to $1.00. Cash flows from the Company’s operations
are calculated based upon the local currencies using the average translation rate.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Recent
accounting pronouncements
On
February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The
accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease
assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement
of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying
asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election
by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize
lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance
on its consolidated financial statements and notes to its consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling Interests with a Scope Exception.
The ASU allows companies to exclude a down round
feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s
own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required
to be accounted classified as liabilities. A company will recognize the value of a down round feature only when it is triggered
and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an
entity will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available
to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing
down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized
to earnings. The guidance in ASU 2017-11is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach.
The Company is evaluating the impact of the revised guidance and believes that this will have a significant impact on its consolidated
financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying consolidated financial statements.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
NOTE
3 –
ACQUISITION OF AND DISCONTINUED OPERATIONS OF VITEL AND ONCBIOMUNE MEXICO
On
March 10, 2017 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding capital
stock of Vitel from the Vitel Stockholders pursuant to the terms and conditions of a Contribution Agreement to the Property of
Trust F/2868 entered into among the Company and the Vitel Stockholders on the Closing Date (the “Contribution Agreement”).
Vitel is a revenue-stage Mexico-based pharmaceutical company that develops and commercializes specialty drugs in MALA. The Company
acquired Vitel for the purpose of commercializing the Company’s PROSCAVAX vaccine technology and cancer technologies in
MALA and to utilize Vitel’s distribution network and customer and industry relationships.
Pursuant
to the terms of the Contribution Agreement, the Company issued 61,158,013 shares of its common stock and 5,000,000 shares of Series
B preferred stock to Banco Actinver, S.A., in its capacity as Trustee (“Banco Actinver”) of the Irrevocable Management
Trust Agreement Trust No. 2868 (the “Trust Agreement”) for the benefit of the Vitel Stockholders in exchange for 100%
of the issued and outstanding capital stock of Vitel (the “Vitel Shares”). The Common Stock and Series B Preferred
will be held by Trustee for the benefit of the Vitel Stockholders as provided for in the Trust Agreement and 98% of the Vitel
Shares are held by Banco Actinver for the benefit of the Company as provided for in the Trust Agreement and 2% of the Vitel Shares
were transferred to the Company. Vitel became a wholly owned subsidiary of the Company as of the Closing Date as the Company has
full control of the Vitel Shares through the Trust.
In
addition, the Company issued 2,892,000 shares of Series B Preferred to Jonathan F. Head, Ph. D, the Company’s Chief Executive
Officer and a member of the Board of Directors of the Company (the “Board of Directors”) as provided for in the Contribution
Agreement. The Series B preferred stock issued to Dr. Head and were determined to have nominal value of $289 or $.0001 per shares
and was recorded as compensation expense.
To
induce the Vitel Stockholders to enter into the Contribution Agreement and as a condition to close the transactions set forth
in that agreement, the Company, the Vitel Stockholders, Dr. Head and Andrew A. Kucharchuk, the Company’s President, Chief
Financial Officer and a Director also entered into the following agreements as of the Closing Date or perform the following actions
(i) a Stockholder’s Agreement among the Company, Dr. Head, Mr. Kucharchuk, Mr. Cosme and Mr. Alaman dated as of the Closing
Date (the “Stockholders’ Agreement”); (ii) the Trust Agreement; (iii) the Company, Vitel and the Vitel Stockholders
entered into employment agreements with Messrs. Cosme and Alaman; (iv) the Company and Dr. Head and Mr. Kucharchuk entered into
amendments to the employment agreements with, and stock option awards to, Dr. Head and Mr. Kucharchuk; (v) the Company, Dr. Head,
Mr. Kucharchuk and the Vitel Stockholders agreed to consent to an amendment to the Company’s Articles of Incorporation and
bylaws; (vi) and to elect Mr. Cosme, Mr. Alaman, Dr. Head and Mr. Kucharchuk as directors of Vitel and such directors to elect
Mr. Cosme, Mr. Alaman, Dr. Head and Mr. Kucharchuk as officers of Vitel.
The
Stockholders Agreement
The
following is a summary of Stockholders Agreement.
The
Vitel Stockholders and the Company established a trust pursuant to the Trust Agreement described below. Mr. Cosme and Mr. Alaman
each contributed, assigned and transferred to the Company ownership of, and title over, one share of the capital stock of Vitel
(the “Vitel Shares”) and Mr. Cosme and Mr. Alaman contributed, assigned and transferred to Banco Actinver (as defined
in the Trust Agreement”) ownership of, and title over, the remaining 98 Vitel Shares for the benefit of the Company pursuant
to the terms and conditions of the Trust Agreement. The Company contributed, assigned and transferred to Banco Actinver ownership
of, and title over, 61,158,013 newly-issued shares of Common Stock and 5,000,000 newly-issued shares of Series B Preferred Stock
with 100 votes per share (collectively, the “OBM Shares”), for the benefit of Mr. Cosme and Mr. Alaman pursuant to
the terms and conditions of the Trust Agreement. The OBM Shares held by the Trust have not been and will not be registered under
the Securities Act of 1933, as amended, (“Securities Act”) and are restricted securities under the Securities Act
and the rules and regulations promulgated thereunder and are subject to the restrictions on transfer contained in Article 4 of
the Shareholders’ Agreement.
Corporate
Rights. The corporate rights resulting from the Vitel Shares contributed to the Trust will be exercised by Banco Actinver pursuant
to the written instructions it receives from the Company. For such purposes, and pursuant to the bylaws of Vitel, the Company
shall have the authority to instruct Banco Actinver regarding exercising any corporate rights it may be entitled to in its capacity
as the majority Vitel shareholder.
Composition
of the Board of Directors.
The Stockholders’ Agreement permits the Vitel Stockholders to appoint one member to the Board
of Directors, one designated by Dr. Head and Mr. Kucharchuk (the “Management Designee”), and two independent directors
shall be designated jointly by Dr. Head and Mr. Kucharchuk (the “Management Stockholders”) on the one hand, and the
Vitel Stockholders, on the other, and the Management Stockholders or the Management Designee and the Vitel Stockholders or the
Vitel Designee shall jointly appoint, as soon as practicable, an independent fifth member of the Board of Directors.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Board
of Directors Resolutions.
The Stockholders’ Agreement requires the Board of Directors to adopt any and all resolutions
with a vote from a majority of its members, provided that for any “Major Decision” as defined in the Stockholders’
Agreement, either the Vitel Designee or the Management Designee shall vote in favor of adopting the corresponding resolution.
In the event of a deadlock amongst the members of the Vitel Board of Directors, the Board of Directors shall cast the deciding
vote to resolve the deadlock amongst the board members of Vitel with a vote from a majority of its members.
Restrictions
on Transfer.
Generally, the Stockholders may not at any time, except as discussed below, transfer their respective Company
Securities (x) to any of their Affiliates, their spouse, children, grandchildren, parents, sisters, brothers, nieces, nephews
or any other relative within the second degree of kindred or a trust or other entity under a Stockholder’s control (the
“
Permitted Transferees
“), or (y) with the prior consent of the other Stockholders which are also a party
hereto, or (z) as otherwise permitted under the Stockholders’ Agreement (each, a “
Permitted Transfer
“),
in the understanding that (1) each Management Stockholder will be considered a Permitted Transferee with respect to each other
and each Vitel Stockholder will be considered a Permitted Transferee with respect to each other, (2) transfers by the Stockholders
that are a party hereto resulting from their death shall be considered a Permitted Transfer, and (3) any Stockholder that is a
party hereto may act individually in regards to the rights provided for in the Stockholders’ Agreement.
Right
of First Refusal
. In the event a Stockholder that is a party to the Stockholders’ Agreement wishes to transfer its Company
Securities (other than a transfer which is part of an acquisition or strategic transaction approved by the directors of the Company
as a Major Decision), the other non-transferring Stockholders that are also a party to the Stockholders’ Agreement shall
have the irrevocable right of first refusal to purchase that shares of the selling shareholder.
Right
of Co-Sale (Tag Along)
. In the event that any stockholder who is a party to the Stockholders’ Agreement or group of
such stockholders intends to accept an offer (either solicited or unsolicited) from any third party to acquire or otherwise transfer
Company Securities (as defined in the Stockholders’ Agreement), representing at least 20% of the outstanding Company Securities,
on a fully diluted basis, the selling stockholder shall give an offer notice in writing to the other stockholders of the Company
who are a party to the Stockholders’ Agreement, with a copy to the Company, containing the terms and conditions of such
offer received from the interested third party. Each such stockholder shall have the right to participate in such offer by selling
the pro rata proportion of its Company Securities pursuant to such offer to acquire or otherwise Transfer Company Securities (as
defined in the Stockholders’ Agreement).
Drag
Along
. In the event a stockholder who is a party to the Stockholders’ Agreement or group of such stockholders representing
at least 32% (thirty two per cent) of the outstanding Company Securities, on a fully diluted basis, intends to accept an offer
from any third party to acquire or otherwise Transfer Company Securities, representing at least 50% of the outstanding Company
Securities, on a fully diluted basis, and the transaction is approved by the Board of Directors as a Major Decision, then each
such stockholder shall be obligated to sell its Company Securities pursuant to the offer to purchase. In case the drag along provision
included herein is enforced, all the stockholders participating in such sale shall receive the same terms and conditions of sale
based on their respective holdings of Company Securities and shall otherwise be treated equally based on such ownership interest.
Termination
.
The Stockholders’ Agreement terminates upon the earlier of the following: (i) three years as of the Closing Date; (ii) in
connection with any Shareholder, whenever such Shareholder directly or indirectly owns less than 5% of the fully diluted shares
of the Company; or (iii) upon the consummation of a Liquidation Event (as defined in the Stockholders’ Agreement).
Effective
as of March 10, 2017, Mr. Cosme, Mr. Alaman and the Company entered into the Irrevocable Management Trust Agreement Number F/2868
between Mr. Cosme, Mr. Alaman, the Company and Banco Actinver (the “Trust Agreement”) for the purpose of establishing
a trust to hold the OBM Shares and 98 shares of Vitel’s capital stock which were transferred to Trustee pursuant to the
Trust Agreement, in addition to other property the beneficiaries may elect to contribute to the trust. The trust structure of
this acquisition transaction was established in order to provide certain income tax benefits to the seller pursuant to Mexican
tax law.
In
connection with the acquisition, the Company issued 61,158,013 unregistered shares of its common stock valued at $4,586,851, based
on the acquisition-date fair value of our common stock of $.075 per share based on recent sales of the Company’s common
stock pursuant to unit subscription agreements and 5,000,000 shares of Series B preferred stock which primarily gives the holder
voting rights and were determined to have nominal value of $500.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
fair value of the assets acquired and liabilities assumed were based on management estimates of the fair values on March 10, 2017.
Based upon the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition:
Cash
|
|
$
|
39,144
|
|
Accounts receivable
|
|
|
161,466
|
|
Inventories
|
|
|
54,952
|
|
Recoverable taxes
|
|
|
50,792
|
|
Other current assets
|
|
|
278
|
|
Property and equipment
|
|
|
480
|
|
Goodwill and other intangible assets
|
|
|
4,718,817
|
|
Total assets acquired at fair value
|
|
|
5,025,929
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
432,354
|
|
Payroll taxes
|
|
|
6,224
|
|
Total liabilities assumed
|
|
|
438,578
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
4,587,351
|
|
The assets acquired and liabilities assumed
were recorded at their estimated fair value on the acquisition date with subsequent changes recognized in earnings or loss. These
estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part
of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business combination date.
As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the
Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After
the purchase price measurement period, the Company recorded adjustments to assets acquired or liabilities assumed in operating
expenses in the period in which the adjustments were determined. Such adjustment caused an increase in goodwill and other
intangible assets acquired of $23,221 in the fourth quarter of 2017.
The
purchase price exceeded the fair value of the net assets acquired by $4,718,817 which was recorded as goodwill and other intangible
assets. Based on the Company’s review of long-lived assets for impairment, the Company recognized an impairment loss of
$4,718,817 during the three months ended September 30, 2017 since the sum of expected undiscounted future cash flows is less than
the carrying amount of the intangible assets.
The
Company recorded acquisition and transaction related expenses in the period in which they are incurred. During the year ended
December 31, 2017, acquisition and transaction related expenses primarily consisted of legal fees of approximately $104,000.
On December 29, 2017,
the Board of Directors of the Company determined to sell or otherwise dispose of its interest in Vitel and Oncbiomune Mexico due
to disputes with the original Vitel Stockholders and resulting loss of operational control of the assets and operations of Vitel
and OncBiomune Mexico. Accordingly, Vitel and Oncbiomune Mexico are now treated as a discontinued operation for all
periods presented in accordance with ASC 205-20. This decision will enable the company to focus more of its efforts and resources
on the Phase 2 clinical trial of Proscavax in the United States.
Pursuant
to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the business of the
Oncbiomune
Mexico and Vitel are now c
onsidered discontinued operations because of management’s
decision of December 29, 2017.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of and
for the fiscal years ended December 31, 2017 and 2016 is set forth below.
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Assets:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
|
-
|
|
Total current assets
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
692,592
|
|
|
$
|
-
|
|
Due to related parties
|
|
|
432
|
|
|
|
-
|
|
Payroll liabilities
|
|
|
1,972
|
|
|
|
-
|
|
Total current liabilities
|
|
|
694,996
|
|
|
|
-
|
|
Total liabilities
|
|
$
|
694,996
|
|
|
$
|
-
|
|
The
summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is
as follows:
|
|
Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
445,601
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
255,866
|
|
|
|
-
|
|
Gross (loss) profit
|
|
|
189,735
|
|
|
|
-
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
335,381
|
|
|
|
-
|
|
Professional fees
|
|
|
171,043
|
|
|
|
-
|
|
Impairment loss – goodwill and other intangibles
|
|
|
4,760,646
|
|
|
|
-
|
|
General and administrative expenses
|
|
|
235,188
|
|
|
|
-
|
|
Total operating expenses
|
|
|
5,502,258
|
|
|
|
-
|
|
Loss from operations
|
|
|
(5,312,523
|
)
|
|
|
-
|
|
Other expense, net
|
|
|
(16,107
|
)
|
|
|
-
|
|
Loss from discontinued operations
|
|
|
(5,328,630
|
)
|
|
|
-
|
|
Loss from disposal of discontinued operations – impairment
of tangible assets
|
|
|
(335,472
|
)
|
|
|
-
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(5,664,102
|
)
|
|
$
|
-
|
|
NOTE
4 -
PROPERTY AND EQUIPMENT
At
December 31, 2017 and 2016, property and equipment consisted of the following:
|
|
Useful Life
|
|
2017
|
|
|
2016
|
|
Leasehold improvements
|
|
5 Years
|
|
$
|
23,976
|
|
|
$
|
23,976
|
|
Furniture and equipment
|
|
|
|
|
715
|
|
|
|
-
|
|
|
|
|
|
|
24,691
|
|
|
|
23,976
|
|
Less: accumulated depreciation
|
|
|
|
|
(18,049
|
)
|
|
|
(14,372
|
)
|
Property and equipment, net
|
|
|
|
$
|
6,642
|
|
|
$
|
9,604
|
|
For
the years ended December 31, 2017 and 2016, depreciation and amortization expense amounted to $3,677 and $1,098, respectively.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
NOTE
5 –
LINE OF CREDIT
In
October 2014, the Company entered into a $100,000 revolving promissory note (the “Revolving Note”) with Regions Bank
(the “Lender”). The unpaid principal balance of the Revolving Note is payable on demand and any unpaid principal and
interest is payable due not later than October 27, 2017, is secured by deposits located at the Lender, and bears interest computed
at a variable rate of interest which is equal to the Lender’s prime rate plus 1.7% (5.95% and 5.45% at December 31, 2017
and December 31, 2016, respectively). The Company will pay to Lender a late charge of 5.0% of any monthly payment not received
by Lender within 10 calendar days after its due date. The Company may, at any time or from time to time, prepay the Revolving
Note in whole or in part without penalty. On November 16, 2017 the line of credit was fully paid off by the Company’s CEO
and the liability was transferred to due to related parties on the accompanying consolidated balance sheets.
At
December 31, 2017 and 2016, the Company had $0 and $99,741, respectively, in borrowings outstanding under the Revolving Note with
$0 and $259, respectively, available for borrowing under such note. The weighted average interest rate during the years ended
December 31, 2017 and 2016 was approximately 5.76% and 5.20%, respectively.
NOTE
6 –
CONVERTIBLE DEBT
May
2016 Financing
On
May 23, 2016, the Company entered into a $40,000 convertible promissory note (the “Convertible Note”) with Crown Bridge
Partners, LLC (“Crown”). The unpaid principal and interest was payable no later than May 22, 2017 and bears interest
computed at a rate of interest which is equal to 8.0% per annum. Crown was entitled, at their option, at any time after the issuance
of the Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest
into the Company’s common stock at a conversion price equal to 58% multiplied by the “Market Price”, which is
calculated as the lowest trading price, as defined, for the Company’s common stock during the twenty trading day period
ending on the last complete trading day prior to the conversion date. The Company may prepay any amount outstanding under the
Convertible Note by making a payment to Crown of an amount in cash equal to the principal amount multiplied by a prepayment penalty
percentage. On November 23, 2016, the Company repaid this Convertible Note by paying the principal amount outstanding of $40,000,
all accrued interest due, and a prepayment penalty aggregating $62,000. In connection with the repayment of this Convertible Note,
the Company recorded a gain from extinguishment of debt of $44,625.
November
2016 Financing
On
November 23, 2016, the Company entered into and closed on the transaction set forth in an Amended and Restated Securities Purchase
Agreements (the “Securities Purchase Agreements”) it entered into with three institutional investors (the “Purchasers”)
for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase
Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $350,000: (i) 14.29% Original
Issue Discount 10% Senior Secured Convertible Notes (the “November 2016 Notes”); and (ii) warrants (the “Warrants”)
to purchase 2,333,334 shares of the Company’s common stock at an initial exercise price of $0.175 (subject to adjustments
under certain conditions as defined in the Warrants) (see below for reduction of warrant exercise price) which are exercisable
for a period of five years from November 23, 2016. The aggregate principal amount of the November 2016 Notes was $350,000 and
the Company received $300,000 after giving effect to the original issue discount of $50,000. The November 2016 Notes bear interest
at a rate equal to 10% per annum (which interest rate increased to 24% per annum upon the occurrence of an Event of Default (as
defined in the November 2016 Notes)), had a maturity date of July 23, 2017 and were convertible (principal, and interest) at any
time after the issuance date of the November 2016 Notes into shares of the Company’s Common Stock at an initial conversion
price equal to $0.15 per share (subject to adjustment as provided in the Note) (see below for reduction of conversion price),
provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains
ongoing, the November 2016 Notes shall be convertible and the Warrants shall be exercisable at 60% of the lowest closing price
during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default
Conversion Price”). The November 2016 Notes provide for two amortization payments on the six-month, seven-month and eight-month
anniversary of the issue date with each amortization payment being one third of the total outstanding principal and interest.
If the six-month amortization payment is made in cash then the payment is an amount equal to 120% of the applicable amortization
payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to
125% of the applicable amortization payment. Due to non-payment of the November 2016 Notes, an event of default occurred and accordingly,
the November 2016 Notes and Warrants are convertible and exercisable based on the default terms.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
On
May 23, 2017, in connection with the November 2016 Notes, the Company entered into forbearance agreements (the “Forbearance
Agreements”) with the Purchases whereby the Purchasers waived any event of default, as defined in the November 2016 Notes.
The Company failed to make a payment on May 23, 2017 to each of the Holders as required pursuant to the November 2016 Notes which
resulted in an event of default under such Notes. As of result of the event of default, the aggregate amount owing under the November
2016 Notes as of May 23, 2017 was increased to $509,135 with such amount including a mandatory default amount of $141,299 and
accrued interest of $17,836 resulting in debt settlement expense of $141,299. The Forbearance Agreement also provides for the
Holders to forbear their right to demand an immediate cash payment of the principal amount due plus accrued interest as a result
of the Company’s failure to satisfy its payment obligations to the Holder on May 23, 2017 so long as the Company complies
with its other obligations under the November 2016 Notes and the other transaction documents. The Forbearance Agreements did not
waive the default interest rate of 24%. In consideration therefore, and as currently set forth in the November 2016 Notes, the
Holders shall be entitled to convert such notes from time to time at their discretion in accordance with the terms of the November
2016 Notes and the November 2016 Notes shall not be subject to repayment unless agreed to by the Holder of such Note. In connection
with the Forbearance Agreement, the Company increased the principal balance of the November 2016 Notes by $159,135, reduced accrued
interest payable by $17,836, and recorded debt settlement expense of $141,299.
The
Company also increased the principal amount of these notes by $42,327 for other default charges and other expenses. This amount
was charges to interest expense on the accompanying consolidated statement of operations.
The November 2016 Notes and related Warrants
include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings
undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these November
2016 Notes, the Company sold stock at a share price of $0.075 per share then to $0.05 per share and then $0.01 per share. Accordingly,
pursuant to these ratchet provisions, the conversion price on the November 2016 Notes were lowered to $0.05 per share then to
$0.03 per share and then to $0.006 per share and the exercise price of the November 2016 Warrants was lowered to $0.006. Additionally,
the total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants to 13,611,114 warrants
(see Note 9). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless exercise of 9,074,076
of these warrants (see Note 9). The remaining 4,537,038 warrants were then ratcheted to 22,685,192 warrants based on the new ratcheted
down $0.006 per share exercise price.
June
2017 Financing
On
June 2, 2017, the Company entered into a 2
nd
Securities Purchase Agreement (the “2
nd
Securities Purchase
Agreement”) with the Purchasers for the sale of the Company’s convertible notes and warrants. Pursuant to the terms
provided for in the 2
nd
Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate
subscription amount of $233,345: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “June 2017
Notes”); and (ii) warrants (the “June 2017 Warrants”) to purchase 1,555,633 shares of the Company’s common
stock, par value $0.001 per share at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined
in the June 2017 Warrants) and exercisable for five years after the issuance date.
The
aggregate principal amount of the June 2017 Notes is $233,345 and the Company received $200,000 after giving effect to the original
issue discount of $33,345. The June 2017 Notes bear interest at a rate equal to 10% per annum (which interest rate is increased
to 24% per annum upon the occurrence of an Event of Default (as defined in the June 2017 Notes), have a maturity date of February
2, 2018 and are convertible (principal, and interest) at any time after the issuance date of issuance into shares of the Company’s
common stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the June 2017 Notes),
provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains
ongoing, the June 2017 Note shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the
common stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The June
2017 Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the issue date
with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization
payment is made in cash then the payment is an amount equal to 120% of the applicable amortization payment and if the seven-month
or the eight-month amortization payments are made in cash then the payment is an amount equal to 125% of the applicable amortization
payment.
The
June 2017 Notes may be prepaid at any time until the 180th day following the Original Issue Date at an amount equal to (i) 115%
of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date through
the three months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the June 2017 Notes and
accrued and unpaid interest during months four through six following the Original Issue Date. In order to prepay the June 2017
Notes, the Company shall provide 20 Trading Days prior written notice to the Holder, during which time the Holder may convert
the June 2017 Notes in whole or in part at the Conversion Price.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
June 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could
be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception.
Subsequent to the date of these June 2017 Notes, the Company sold stock at a share price of $0.05 per share and then $.01 per
share. Accordingly, pursuant to these ratchet provisions, the conversion price of the notes were lowered to $0.006 per shares
and the exercise price of the June 2017 Warrants were lowered to $0.006 per share and the total number of June 2017 Warrants were
increased on a full ratchet basis from 1,555,632 warrants to 45,372,600 warrants, an increase of 43,816,968 warrants (see Note
9).
July
2017 Financing
On
July 26, 2017, the Company entered into and closed on a 3
rd
Securities Purchase Agreement (the “3
rd
Securities Purchase Agreement”) with three institutional investors (the “Purchasers”) for the sale of the Company’s
convertible notes and warrants. Pursuant to the terms provided for in the 3
rd
Securities Purchase Agreement, the Company
issued upon closing to the Purchasers for an aggregate subscription amount of $300,000: (i) 10% Original Issue Discount 5% Senior
Secured Convertible Notes in the aggregate principal amount of $333,883 (the “July 2017 Notes”); and (ii) warrants
(the “July 2017 Warrants”) to purchase 4,769,763 shares of the Company’s common stock at an exercise price of
$0.10 per share (subject to adjustments under certain conditions as defined in the Warrants). The closing under the 3
rd
Securities Purchase Agreement occurred on July 26, 2017. These Notes bear interest at a rate equal to 5% per annum (which interest
rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the Notes)), have a maturity date
of March 25, 2018 and are convertible (principal, and interest) at any time after the issuance date of these Notes into shares
of the Company’s Common Stock at a conversion price equal to $0.07 per share (subject to adjustment as provided in the Note),
provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains
ongoing, the July 2017 Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the
Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”) and the exercise
price of the July 2017 Warrants shall be 60% of the Default Conversion Price. These Notes provide for three amortization payments
on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third of
the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount
equal to 110% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made
in cash then the payment is an amount equal to 115% of the applicable amortization payment. These Notes may be prepaid at any
time until the 210th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance of
the Note and accrued and unpaid interest during the period from the Original Issue Date through the three months following the
Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest during months
four through seven following the Original Issue Date. In order to prepay these Notes, the Company shall provide 20 Trading Days
prior written notice to the Purchaser, during which time the Purchaser may convert the Notes in whole or in part at the Conversion
Price.
The
July 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could
be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception.
Subsequent to the date of these July 2017 Notes, the Company sold stock at a share price of $0.05 per share and then at $0.01
per share. Accordingly, pursuant to these ratchet provisions, the conversion price of the notes were lowered to $0.006 per share
and the exercise price of the July 2017 Warrants were lowered to $0.006 per share and the total number of July 2017 Warrants were
increased on a full ratchet basis from 4,769,763 warrants to 79,496,050 warrants, an increase of 74,726,287 warrants (see Note
9).
The
November 2016 Notes, June 2017 Notes and July 2017 Notes contain certain covenants, such as restrictions on the incurrence of
indebtedness, creation of liens, payment of restricted payments, redemptions, payment of cash dividends and the transfer of assets.
These Notes also contains certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination,
recapitalization or similar transactions. The conversion price is also subject to adjustment if the Company issues or sells shares
of its common stock for a consideration per share less than the conversion price then in effect, or issue options, warrants or
other securities convertible or exchange for shares of its common stock at a conversion or exercise price less than the conversion
price of these Notes then in effect. If either of these events should occur, the conversion price is reduced to the lowest price
at which these securities were issued or are exercisable. The Company granted the Purchasers certain rights of first refusal on
future offerings by the Company for as long as the Purchasers hold these Notes. In addition, subject to limited exceptions, the
Purchasers will not have the right to convert any portion of these Note if the Purchaser, together with its affiliates, would
beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after
giving effect to its conversion. The Purchaser may increase or decrease this ownership limitation to any percentage not exceeding
9.99% upon 61 days prior written notice to the Company.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
November 2016, June 2017 and July 2017 Warrants are exercisable for shares of the Company’s common stock upon the payment
in cash of the exercise price and they are also exercisable on a cashless basis at any time there is no effective registration
statement registering the shares of common stock underlying the Warrants. The exercise price of these Warrants are subject to
adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar
events affecting the Common Stock and also upon any distributions of assets, including cash, stock or other property to the Company’s
stockholders. The exercise price of these Warrants are also subject to full ratchet price adjustment if the Company sells or grants
any option to purchase, sells or re-prices any common stock or common stock equivalents, as defined, at an exercise price lower
than the then-current exercise price of these Warrants with the exception for certain exempted issuances and subject to certain
limitations on the reduction of the exercise price as provided in the Warrants. In the event of a fundamental transaction, as
described in these Warrants and generally including any reorganization, recapitalization or reclassification of the Common Stock,
the sale, transfer or other disposition of all or substantially all of the Company’s properties or assets, the Company’s
consolidation or merger with or into another person, the acquisition of more than 50% of the outstanding Common Stock, or any
person or group becoming the beneficial owner of 50% of the voting power represented by the outstanding Common Stock, the holders
of these Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property
that the holders would have received had they exercised these Warrants immediately prior to such fundamental transaction; provided
that upon the occurrence of certain fundamental transactions, the holder can require the Company to purchase these Warrants for
cash at a price equal to the higher of the Black Scholes Value of the unexercised portion of these Warrants or difference between
the cash per share paid in the fundamental transaction and the exercise price per share. The holders of these Warrants will not
have the right to exercise any portion of these Warrants if the holder (together with its affiliates) would beneficially own in
excess of 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage
ownership is determined in accordance with the terms of these Warrants.
In
connection with the Company’s obligations under the November 2016, June 2017 and July 2017 Notes, the Company entered into
a Security Agreement, Pledge Agreement and Subsidiary Guaranty with Calvary Fund I LP, as agent, pursuant to which the Company
granted a lien on all assets of the Company (the “Collateral”) excluding permitted indebtedness which includes a first
lien held by Regions Bank in connection with the $100,000 revolving promissory note entered into with Regions Bank in October
2014, for the benefit of the Purchasers, to secure the Company’s obligations under the Notes. Upon an Event of Default (as
defined in the related Notes), the Purchasers may, among other things, collect or take possession of the Collateral, proceed with
the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
From
May 2017 to December, 2017, the Company issued 10,608,890 shares of its common stock upon the conversion of principal note balances
of $408,454 and interest of $17,418.
Derivative
liabilities pursuant to Notes and Warrants
In
connection with the issuance of the November 2016, June 2017 and July 2017 Notes and Warrants, the Company determined that the
terms of these Note and Warrants contain terms that included a down-round provision under which the conversion price and exercise
price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts
at inception. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts
in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments and the Warrants
were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each
reporting date. The fair value of the embedded conversion option derivatives and Warrants were determined using the Binomial valuation
model. At the end of each period, on the date that debt was converted into common shares, and on the date of a cashless exercise
of warrants, the Company revalued the embedded conversion option and warrants derivative liabilities.
In
connection with the issuance of the November 2016 Notes and Warrants in November 2016, on the initial measurement date, the fair
values of the embedded conversion option derivative and warrant derivative of $581,440 was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Convertible Note of $36,000 and the Notes of $284,961, with
the remainder of $260,479 charged to current period operations as initial derivative expense. In connection with the issuance
of June 2017 and July 2017 Notes and Warrants, on the initial measurement date of the June 2017 and July 2017 Notes and Warrants,
the fair values of the embedded conversion option and warrant derivatives of $1,203,940 was recorded as derivative liabilities,
$730,700 was charged to current period operations as initial derivative expense, and $473,240 was recorded as a debt discount
and was amortized into interest expense over the term of the Notes.
At
the end of the period, the Company revalued the embedded conversion option and warrant derivative liabilities. In connection with
these revaluations and the initial derivative expense, the Company recorded derivative expense of $12,238,036 and $146,141 for
the year ended December 31, 2017 and 2016, respectively.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
During
the year ended December 31, 2017 and 2016, the fair value of the derivative liabilities was estimated using the Binomial valuation
model with the following assumptions:
|
|
2017
|
|
|
2016
|
|
Dividend rate
|
|
|
0
|
|
|
|
0
|
|
Term (in years)
|
|
|
0.01
to 5.00 years
|
|
|
|
0.58 to 5.0 years
|
|
Volatility
|
|
|
127.8%
to 189.8
|
%
|
|
|
190.7% to 210.8
|
%
|
Risk-free interest rate
|
|
|
1.03%
to 2.20
|
%
|
|
|
0.63% to 1.83
|
%
|
At
December 31, 2017 and December 31, 2016, the convertible debt consisted of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Principal amount
|
|
$
|
840,757
|
|
|
$
|
350,000
|
|
Less: unamortized debt discount
|
|
|
(154,374
|
)
|
|
|
(295,312
|
)
|
Convertible note payable, net
|
|
$
|
686,383
|
|
|
$
|
54,688
|
|
For
the year ended December 31, 2017 and 2016, amortization of debt discounts related to this Convertible Note and the Notes amounted
to $708,167 and $94,688, respectively, which has been included in interest expense on the accompanying consolidated statements
of operations. The weighted average interest rate during the years ended December 31, 2017 and 2016 was approximately 15.4% and
9.0%, respectively.
NOTE
7 –
LOANS PAYABLE
From
June 2017 to December, 2017, the Company entered into loan agreements with several third parties (the “Loans”). Pursuant
to the loan agreements, the Company borrowed an aggregate of $538,875. The Loans bear interest at an annual rate of 33.3% and
are unsecured. Loans aggregating $139,125 were due on or before October 1, 2017 and are currently in default, and loans aggregating
$399,750 were due on or before January 1, 2018 and are currently in default.
NOTE
8 –
RELATED PARTY TRANSACTIONS
Due
to related parties
From
time to time, the Company receives advances from and repays such advances to the Company’s chief executive officer and chief
financial officer for working capital purposes. Additionally, from time to time, the Company receives working capital advances
from and made working capital advances to The Sallie Astor Burdine Breast Foundation (the “Foundation”), a not-for-profit
foundation where the Company’s chief executive officer was a Board member until March 17, 2017. Furthermore, from time to
time, Vitel’s General Manager of Global Operations and Vitel’s Chief Operations Officer, both of who are beneficial
shareholders of the Company (together referred to as the Vitel Officers), paid expenses on behalf of the Company and the Company
reimburses the Vitel Officers or these expenses. The advances are non-interest bearing and are payable on demand.
For
the year ended December 31, 2017 and 2016, due to related party activity consisted of the following:
|
|
Foundation
|
|
|
CEO
|
|
|
CFO
|
|
|
Vitel
Officers
|
|
|
Total
|
|
Balance due from (to) related parties at December 31, 2015
|
|
$
|
3,200
|
|
|
$
|
5,900
|
|
|
$
|
8,700
|
|
|
$
|
-
|
|
|
$
|
17,800
|
|
Working capital advances made
|
|
|
5,094
|
|
|
|
-
|
|
|
|
3,795
|
|
|
|
-
|
|
|
|
8,889
|
|
Working capital advances received
|
|
|
-
|
|
|
|
(55,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(55,500
|
)
|
Repayments made
|
|
|
-
|
|
|
|
50,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,500
|
|
Amounts deemed uncollectible and expensed
|
|
|
(2,244
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,244
|
)
|
Repayments received
|
|
|
(6,050
|
)
|
|
|
(5,900
|
)
|
|
|
(12,495
|
)
|
|
|
-
|
|
|
|
(24,445
|
)
|
Balance due to related parties at December 31, 2016
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,000
|
)
|
Working capital advances received
|
|
|
-
|
|
|
|
(161,602
|
)
|
|
|
-
|
|
|
|
(6,444
|
)
|
|
|
(168,046
|
)
|
Repayments made
|
|
|
-
|
|
|
|
7,250
|
|
|
|
-
|
|
|
|
6,444
|
|
|
|
13,694
|
|
Payments made on line of credit on the Company’s behalf
|
|
|
-
|
|
|
|
(102,232
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(102,232
|
)
|
Balance due to related parties at December 31, 2017
|
|
$
|
-
|
|
|
$
|
(261,584
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(261,584
|
)
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Other
During
the year ended December 31, 2017, the Company owed amounts to a company owned by the Vitel Officers for consulting services performed
prior to March 10, 2017, the acquisition date of Vitel. In connection with the balances owed, during the period from March 10,
2017 (the acquisition date) to December 31, 2017, the Company paid interest expense of $6,078 to this company which was reclassified
to loss from discontinued operations on the accompanying consolidated statements of operations and repaid all amounts due of $10,563.
At December 31, 2017, the Company did not owe any balances to this company. Additionally, during the year ended December 31 2017,
the Company paid $23,000 and $8,599 to this company owned by the Vitel Officers for consulting fees and for administrative fees,
respectively which were reclassified to loss from discontinued operations on the accompanying consolidated statements of operations.
NOTE
9 –
STOCKHOLDERS’ EQUITY (DEFICIT)
On
August 12, 2015, the Company filed amended and restated Articles of Incorporation with the Nevada Secretary of State to authorize
520,000,000 shares of capital stock, of which 500,000,000 shares are common stock, with a par value of $0.0001 per share (“Common
Stock”), and 20,000,000 shares are preferred stock, with a par value of $0.0001 per share (“Preferred Stock”).
Series
A Preferred Stock
On
August 20, 2015, the Company filed the Certificate of Designation with the Nevada Secretary of State, designating 1,000,000 shares
of the authorized 20,000,000 Preferred Stock as Series A Preferred Stock. Each holder of Series A Preferred Stock is entitled
to 500 votes for each share of Series A Preferred Stock held as of the applicable date on any matter that is submitted to a vote
or for the consent of the stockholders of the Company.
The holders of Series A Preferred Stock shall
have no special voting rights and their consent is not required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for the taking of any corporate action. On December 31, 2017 and 2016, there were 1,000,000
shares of the Company’s Series A Preferred Stock outstanding. Of these shares, 500,000 are held by our Chief Executive
Officer and 500,000 shares are held by a former member of our Board of Directors.
Series
B Preferred Stock
On
March 7, 2017, the Company filed a certificate of designation, preferences and rights of Series B preferred stock (the “Certificate
of Designation”) with the Secretary of State of the State of Nevada to designate 7,892,000 shares of its previously authorized
preferred stock as Series B preferred stock, par value $0.0001 per share and a stated value of $0.0001 per share. The Certificate
of Designation and its filing was approved by the Company’s board of directors without shareholder approval as provided
for in the Company’s articles of incorporation and under Nevada law. The holders of shares of Series B preferred stock are
entitled to dividends or distributions share for share with the holders of the Common Stock, if, as and when declared from time
to time by the Board of Directors. The holders of shares of Series B preferred stock have the following voting rights:
|
●
|
Each
share of Series B preferred stock entitles the holder to 100 votes on all matters submitted to a vote of the Company’s
stockholders.
|
|
●
|
Except
as otherwise provided in the Certificate of Designation, the holders of Series B preferred stock, the holders of Company common
stock and the holders of shares of any other Company capital stock having general voting rights and shall vote together as
one class on all matters submitted to a vote of the Company’s stockholders; and
|
|
●
|
Commencing
at any time after the date of issuance of any shares of the Series B Preferred Stock (the “Issuance Date”) and
upon the earliest of the occurrence of (i) a holder of the Series B Preferred Stock owning, directly or indirectly as a beneficiary
or otherwise, shares of Common Stock which are less than 5.0% of the total outstanding shares of Common Stock, (ii) the date
a holder of the Series B Preferred Stock is no longer an employee of the Company or any of its subsidiaries or (iii) five
years after the Issuance Date, the Company shall have the right to redeem all of the then outstanding Series B Preferred Stock
held by such holder at a price equal to the Stated Value (the “Redemption Price”). The Series B Preferred Stock
which is redeemed as provided for in the Certificate of Designations shall be returned to the Company (and, if not so returned,
shall automatically be deemed canceled). The Redemption Price shall be mailed to such holder at the holder’s address
of record, and the Series B Preferred Stock owned by such holder shall be canceled.
|
In
the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Corporation, the
holders of the Series B Preferred Stock shall be entitled to receive, share for share with the holders of shares of Common Stock
and Series A Preferred Stock, all the assets of the Corporation of whatever kind available for distribution to stockholders, after
the rights of the holders of the Series A Preferred Stock have been satisfied.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
In
March 2017, the Company issued 2,892,000 shares of Series B Preferred to Jonathan F. Head, Ph. D, the Company’s Chief Executive
Officer and a member of the Board of Directors of the Company as provided for in the Contribution Agreement. The Series B preferred
stock issued to Dr. Head and were determined to have nominal value of $289, or $.0001 per shares, and was recorded as compensation
expense. In addition, in March 2017 the Company issued 5,000,000 shares of Series B Preferred to Banco Actinver for the benefit
of the Vitel Stockholders as partial consideration in the exchange for 100% of the issued and outstanding capital stock of Vitel.
(See Note 3). The 5,000,000 shares of Series B preferred stock primarily gives the holder voting rights and were determined to
have nominal value of $500, or $.0001 per shares. As of December 31, 2017, there are 7,892,000 shares of Series B Preferred issued
and outstanding.
Common
stock issued for services
On
January 1, 2016, the Company issued 60,000 vested shares of common stock valued at $.30 per common share or $18,000 to a director
for services to be rendered on the Company’s board of directors. The shares were valued at the most recent cash price paid
of $.30 per share. In connection with these shares, the Company recorded stock-based compensation of $18,000.
On
May 13, 2016, the Company entered into a six-month consulting agreement for business development services, Pursuant to the agreement,
the Company shall pay the consultant a monthly fee of $4,000 beginning on May 15, 2016 and, thereafter, on the fifteenth day of
each month. In addition, the Company issued the consultant and/or its affiliates 200,000 shares of the Company’s common
stock. The common shares were valued at the most recent quoted trading price of $0.34 per share or $68,000. In connection with
these shares, the Company recorded stock-based consulting expense of $68,000 which was amortized over the service period. If the
Company chooses to extend the agreement, the Company shall pay the consultant a monthly fee of $7,500 beginning on November 15,
2016 and, thereafter, on the first of each month and the Company shall issue to the consultant 100,000 Shares of the Company’s
common stock. Beginning November 2016, the Company negotiated the monthly cash fee to $5,000 per month and is currently negotiating
the number shares issuable. As of December 31, 2017 ads 2016, the shares had not been issued and the Company valued such shares
issuable on the grant date of November 15, 2016 based on the quoted fair market value of shares issuable of $0.153 per common
share and recorded consulting fees of $15,300 and accrued liabilities of $15,300.
On
February 27, 2017, the Company issued 150,000 shares of its unregistered common stock to an employee as a bonus for services to
the Company. The shares were valued at the most recent cash price paid of $0.075 per share. In connection with these shares, the
Company recorded stock-based compensation of $11,250.
On
April 13, 2017, the Company issued 20,000 shares of its unregistered common stock to a consultant for business development services
performed. The shares were valued at the most recent cash price paid of $0.075 per share. In connection with these shares, the
Company recorded stock-based compensation of $1,500.
On
July 5, 2017, the Company issued 300,000 shares of its unregistered common stock to a consultant for business development services
performed. The shares were valued at the quoted trading price on the date of grant of $0.077 per share. In connection with these
shares, the Company recorded stock-based consulting fees of $23,100.
Common
stock issued for acquisition
On
March 10, 2017, pursuant to the terms of the Contribution Agreement, the Company issued 61,158,013 shares of its unregistered
common stock to Banco Actinver, S.A., in its capacity as Trustee (the “Trustee”) of the Irrevocable Management Trust
Agreement Trust No. 2868 (the “Trust Agreement”) for the benefit of the Vitel Stockholders in exchange for 100% of
the issued and outstanding capital stock of Vitel (See Note 3). The 61,158,013 shares of common stock were valued at $4,586,851,
based on the acquisition-date fair value of our common stock of $0.075 per share based on recent sales of the Company’s
common stock pursuant to unit subscription agreements.
Common
stock purchase agreement
On
October 20, 2015, the Company entered into a common stock purchase agreement (the “Purchase Agreement”), together
with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln
Park”). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to, and
Lincoln Park is obligated to purchase, up to $10.1 million in amounts of shares, as described below, of the Company’s common
stock, subject to certain limitations, from time to time, over the 36-month period commencing on the date that a registration
statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the
Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed which
occurred on December 15, 2015. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions,
to purchase up to 100,000 shares of Common Stock on any business day (such purchases, “Regular Purchases”), provided
that at least one business day has passed since the most recent purchase, and provided, however that Lincoln Park’s committed
obligation under any single Regular Purchase shall not exceed $50,000, provided that the amount the Company may sell to Lincoln
Park under a single Regular Purchase may increase under certain circumstances as described in the Purchase Agreement but in no
event will the amount of a single Regular Purchase exceed $500,000. The purchase price of shares of Common Stock related to the
future funding will be based on a formula tied to the prevailing market prices of such shares at the time of sales. In addition,
the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase
the closing sale price of the Common Stock is not below the threshold price as set forth in the Purchase Agreement. The Company’s
sales of shares of Common Stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares
that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 4.99%
of the then outstanding shares of the Common Stock.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
In
connection with the Purchase Agreement, in 2015, the Company issued as a commitment fee to Lincoln Park 1,000,000 shares of Common
Stock. Lincoln Park represented to the Company, among other things, that it was an “accredited investor” (as such
term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)),
and the Company sold the securities in reliance upon an exemption from registration contained in Section 4(a)(2) under the Securities
Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration
requirements.
The
Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions
to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate
the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to Lincoln Park under the Purchase
Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market
conditions, the trading price of the Common Stock and determinations by the Company as to the appropriate sources of funding for
the Company and its operations. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases
from the Company as it directs in accordance with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in
any manner whatsoever, any direct or indirect short selling or hedging of our shares.
The
net proceeds under the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares
of its stock to Lincoln Park. The Company expects that any proceeds received by the Company from such sales to Lincoln Park under
the Purchase Agreement will be used for general corporate purposes and working capital requirements.
From
July 2016 to December 31, 2016, pursuant to the Purchase Agreement with Lincoln Park dated October 20, 2015, the Company issued
an aggregate of 1,400,000 shares of its common stock to Lincoln Park for net proceeds of $191,850 and a subscription receivable
of $11,190 which was collected in January 2016.
During
the year ended December 31, 2017, pursuant to the Purchase Agreement, the Company issued 2,000,000 shares of its common stock
to Lincoln Park for net cash proceeds of $407,787.
Common
stock issued for debt conversion
From
May 2017 to December, 2017, the Company issued 10,608,890 shares of its common stock upon the conversion of principal note balances
of $410,514 and interest of $15,358 (see Note 6).
Common
stock issued for cash
During
the year ended December 31, 2016, pursuant to stock subscription agreements, the Company issued 102,341 shares of its common stock
to investors for cash proceeds of $51,926.
During
the year ended December 31, 2016, pursuant to unit subscription agreements, the Company issued 1,937,696 shares of its common
stock and 968,844 five-year warrants to purchase common shares for $0.30 per common share to investors for cash proceeds of $279,462
and a subscription receivable of $11,190 which was collected prior to issuance of the report dated December 31, 2016.
During
the six months ended June 30, 2017, pursuant to unit subscription agreements, the Company issued 8,253,136 shares of its unregistered
common stock and 4,126,579 five-year warrants to purchase common shares for an exercise price of $0.30 per common share to investors
for cash proceeds of $618,983 or $0.075 per share.
In
July 2017, pursuant to a unit subscription agreement, the Company issued 1,000,000 shares of its unregistered common stock and
500,000 five-year warrants to purchase common shares for an exercise price of $0.30 per common share to investors for cash proceeds
of $50,000 or $0.05 per share.
From
October 1, 2017 to December 31, 2017, pursuant to unit subscription agreements, the Company issued 16,491,265 shares of its unregistered
common stock to investors for cash proceeds of $164,713 and a subscription receivable of $200 or $0.01 per share.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Warrants
The
November 2016 Warrants include a down-round provision under which the exercise price could be affected by future equity offerings
undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these November
2016 Warrants, the Company sold stock at a share price of $0.075 per share, $0.05 per share and $0.01 per share. Accordingly,
pursuant to these ratchet provisions, the exercise price of the November 2016 Warrants was lowered to $0.006. Additionally, the
total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants to 13,611,114 warrants (see
Note 6). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless exercise of 9,074,076 of
these warrants (see Note 6). The remaining 4,537,038 warrants were then ratcheted to 22,685,192 warrants based on the new ratcheted
down $0.006 per share exercise price. Upon the cashless exercise of these warrants, the Company valued such warrants using the
Binomial valuation model and calculated a fair value of $667,926 which was recorded as a reduction of derivative liabilities and
as debt settlement income.
On
June 2, 2017, in connection with the 2
nd
Securities Purchase Agreement (see Note 6), the Company issued the June 2017
Warrants to purchase 1,555,633 shares of the Company’s common stock, par value $0.001 per share at an exercise price of
$0.175 (subject to adjustments under certain conditions as defined in the June 2017 Warrants). The June 2017 Warrants include
a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken
by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June 2017 Notes,
the Company sold stock at a share price of $0.05 per share and $0.01 per share. Accordingly, pursuant to these ratchet provisions,
the exercise price of the June 2017 Warrants were lowered to $0.006 per share and the total number of June 2017 Warrants were
increased on a full ratchet basis from 1,555,632 warrants to 45,372,600 warrants, an increase of 43,816,968 warrants (see Note
6).
On July 26, 2017, in connection with the 3rd
Securities Purchase Agreement (see Note 6), the Company issued the July 2017 Warrants to purchase 4,769,763 shares of the Company’s
common stock, par value $0.001 per share at an exercise price of $0.10 (subject to adjustments under certain conditions as defined
in the July 2017 Warrants). The July 2017 Notes and related Warrants include a down-round provision under which the conversion
price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not
fixed monetary amounts at inception. Subsequent to the date of these July 2017 Notes, the Company sold stock at a share price
of $0.05 per share and $0.01 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the July 2017
Warrants were lowered to $0.006 per share and the total number of July 2017 Warrants were increased on a full ratchet basis from
4,769,763 warrants to 79,496,050 warrants, an increase of 74,726,287 warrants.
Warrant
activities for the years ended December 31, 2017 and 2016 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2015
|
|
|
2,694
|
|
|
|
69.60
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,302,178
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2016
|
|
|
3,304,872
|
|
|
$
|
0.27
|
|
|
|
4.82
|
|
|
|
0
|
|
Issued on a full ratcheted basis
|
|
|
147,969,189
|
|
|
|
0.006
|
|
|
|
|
|
|
|
|
|
Issued in connection with financings
|
|
|
10,951,974
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(9,074,076
|
)
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2017
|
|
|
153,151,959
|
|
|
$
|
0.02
|
|
|
|
4.41
|
|
|
$
|
5,754,600
|
|
Exercisable, December 31, 2017
|
|
|
153,151,959
|
|
|
$
|
0.02
|
|
|
|
4.41
|
|
|
$
|
5,754,600
|
|
Stock
options
On
March 10, 2017, the non-management members of the Board of Directors determined that it was in the best interests of the Company
to reward the Company’s chief executive officer and chief financial officer of the Company by amending their employment
agreements and awarding them stock options in order to provide incentives to retain and motivate them in their roles with the
Company. The stock option award included options for each of them to purchase 2,000,000 shares (the “Stock Options”)
of Common Stock at an exercise price of $0.25 per share. One-third of the Stock Options vest on March 10, 2017, March 10, 2018,
and March 10, 2019, respectively, and are exercisable at any time after vesting until 10 years after the grant date. The Stock
Options vest so long as the optionee remains an employee of the Company or a subsidiary of the Company on the vesting dates (except
as otherwise provided for in the employment agreement between the Company and the optionee).
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0%; expected volatility of 203.4%; risk-free interest rate of 1.93%; and, an estimated
holding period of 6 years. In connection with these options, the Company valued these options at a fair value of $293,598 and
will record stock-based compensation expense over the vesting period. During the year ended December 31, 2017, the Company recorded
stock-based compensation expense of $214,082 related to these options.
At
December 31, 2017, there were 4,000,000 options outstanding and 1,333,334 options vested and exercisable. As of December 31, 2017,
there was $79,516 of unvested stock-based compensation expense to be recognized through December 2026. The aggregate intrinsic
value at December 31, 2017 was approximately $0 and was calculated based on the difference between the quoted share price on December
31, 2017 and the exercise price of the underlying options.
Stock
option activities for the year ended December 31, 2017 are summarized as follows:
|
|
Number of Option
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,000,000
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2017
|
|
|
4,000,000
|
|
|
$
|
0.25
|
|
|
|
9.19
|
|
|
$
|
0
|
|
Exercisable, December 31, 2017
|
|
|
1,333,334
|
|
|
$
|
0.25
|
|
|
|
9.19
|
|
|
$
|
0
|
|
NOTE
10 –
INCOME TAXES
The
Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred
tax assets at December 31, 2017 and 2016 consist of net operating loss carryforwards. The net deferred tax asset has been fully
offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
On
December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which,
among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018,
and is permanent.
The
Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin
No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the
Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its
deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate
impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance
that may be issued as a result of the Act.
The
items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for
the years ended December 31, 2017 and 2016 were as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax benefit at U.S. statutory rate of 34%
|
|
$
|
(6,974,000
|
)
|
|
$
|
(685,000
|
)
|
Income tax benefit – state
|
|
|
(1,641,000
|
)
|
|
|
(161,000
|
)
|
Non-deductible expenses
|
|
|
7,570,000
|
|
|
|
112,000
|
|
Effect of change in U.S. effective rate to 21%
|
|
|
324,000
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
721,000
|
|
|
|
734,000
|
|
Total provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
Company’s approximate net deferred tax asset as of December 31, 2017 and 2016 was as follows:
Deferred Tax Asset:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Net operating loss carryforward
|
|
$
|
1,486,000
|
|
|
$
|
1,107,000
|
|
Total deferred tax asset
|
|
|
1,486,000
|
|
|
|
1,107,000
|
|
Less: valuation allowance
|
|
|
(1,486,000
|
)
|
|
|
(1,107,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
net operating loss carryforward in the United States was approximately $5,125,000 and $945,000 at December 31, 2017, respectively.
The Company provided a valuation allowance equal to the net deferred income tax asset as of December 31, 2017 and 2016 because
it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the valuation
allowance was $1,045,000 in 2017. As a result of the reduction of the federal corporate income tax rate, the Company reduced
the cumulative value of its net deferred tax asset by $666,000 which was recorded as a corresponding reduction to
the valuation allowance during the fourth quarter of 2017. The potential tax benefit arising from the loss carryforward will expire
in 2037.
The
Company had incurred a loss from discontinued operations of $5,664,102 for the year ended December 31, 2017. Such loss
is attributable to the Company’s Mexico operations. Management believes there will be no tax benefit from such loss and
accordingly, no deferred tax asset and corresponding valuation reserve has been provided for at December 31, 2017.
Additionally,
the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation
as a result of ownership changes that could occurred in 2017 and may occur in the future. The Company has not conducted a study
to determine the limitations on the utilization of these net operating loss carryforwards. If necessary, the deferred tax assets
will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations,
with a corresponding reduction of the valuation allowance.
The
Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2017
and 2016 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
11 –
COMMITMENTS AND CONTINCENGIES
Lease
Effective
September 1, 2015, the Company leases its facilities under non-cancelable operating leases. The Company has the right to renew
certain facility leases for an additional five years. Rent expense was $47,846 and $44,857 for the years ended December 31, 2017
and 2016, respectively.
Future
minimum lease payments under non-cancelable operating leases at December 31, 2017 are as follows:
Years ending December 31,
|
|
Amount
|
|
2019
|
|
|
38,400
|
|
2020
|
|
|
25,600
|
|
Total minimum non-cancelable operating lease payments
|
|
$
|
64,000
|
|
Employment
agreements
On
February 2, 2016, the Company entered into an employment agreement with Jonathan F. Head, Ph.D. (“Dr. Head”) to serve
as the Company’s Chief Executive Officer, the term of which runs for three years (from February 2, 2016 through February
1, 2019) and renews automatically for one year periods unless a written notice of termination is provided not less than 120 days
prior to the automatic renewal date. The employment agreement with Dr. Head provides that Dr. Head’s salary for calendar
year 2016 shall be $275,000 and for calendar year 2017 and for each calendar year thereafter during the term of the employment
agreement with Dr. Head shall be an amount determined by the Board of Directors, which in no event shall be less than the annual
salary that was payable by the Company to Dr. Head for the immediately preceding calendar year.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
On
February 2, 2016, the Company entered into an employment agreement with Andrew Kucharchuk (“Mr. Kucharchuk) to serve as
the Company’s President and Chief Financial Officer, the term of which runs for three years (from February 2, 2016 through
February 1, 2019) and renews automatically for one year periods unless a written notice of termination is provided not less than
120 days prior to the automatic renewal date. The employment agreement with Mr. Kucharchuk provides that Mr. Kucharchuk’s
salary for calendar year 2016 shall be $200,000 and for calendar year 2017 and for each calendar year thereafter during the term
of the employment agreement with Mr. Kucharchuk shall be an amount determined by the Board of Directors, which in no event shall
be less than the annual salary that was payable by the Company to Mr. Kucharchuk for the immediately preceding calendar year.
The
above executives shall be eligible for an annual target bonus payment in an amount equal to ten percent of his base salary (“Bonus”).
The Bonus is determined based on the achievement of certain performance objectives of the Company as established by the Board
of Directors. The Bonus may be greater or less than the target Bonus, based on the level of achievement of the applicable performance
objectives
On
March 10, 2017, the non-management members of the Board of Directors determined that it was in the best interests of the Company
to reward the Company’s chief executive officer and chief financial officer of the Company by amending their employment
agreements and awarding them stock options in order to provide incentives to retain and motivate them in their roles with the
Company. The Company amended each of the February 2, 2016 employment agreements of the Company’s chief executive officer
and chief financial officer to extend the term to March 9, 2020 and to provide for 100% vesting of any unvested portion of any
outstanding equity, or equity-based award granted to them by the Company upon termination of their respective employment agreements
without cause, as a result of a breach of the agreement by the Company or upon their respective death or disability.
The
stock option award included options for each of them to purchase 2,000,000 shares (the “Stock Options”) of Common
Stock at an exercise price of $0.25 per share. One-third of the Stock Options vest on March 10, 2017, March 10, 2018, and March
10, 2019, respectively, and are exercisable at any time after vesting until 10 years after the grant date. The Stock Options vest
so long as the optionee remains an employee of the Company or a subsidiary of the Company on the vesting dates (except as otherwise
provided for in the employment agreement between the Company and the optionee).
Vitel
Employment agreements
On
March 10, 2017, Vitel entered into employment agreements with each of Messrs. Cosme and Alaman who were the sellers of Vitel (the
“Vitel Employment Agreements”). Mr. Cosme was appointed as Vitel’s General Manager of Global Operations and
Mr. Alaman was appointed as its Chief Operations Officer. Both of Messrs. Cosme and Alaman will be responsible for, supervising,
managing, planning, directing and organizing the activities of the Vitel and will be its two most senior executive officers reporting
to Vitel’s Board of Directors with all other employees of Vitel reporting directly or indirectly to them.
Each
of the Vitel Employment Agreements provides for a base salary of $187,500, annual bonuses and other compensation as required under
Mexican Federal Labor Law and an annual bonus target of 50% of salary based on performance objectives to be established by the
Company’s Board of Directors annually. In addition, Messrs. Cosme and Alaman are entitled to a $500 monthly car allowance,
health insurance reimbursement of up to $5,000 per year and other benefits required under Mexican law. The Vitel Employment Agreements
also contains a non-compete provision prohibiting them from engaging in business activities that compete with Vitel’s current
business and allows them to continue to operate their ongoing pharmaceuticals business so long as such business does not interfere
with their duties to Vitel under their respective employment agreements. In addition, if Messrs. Cosme and Alaman seek to pursue
any future business opportunities that do not interfere with their obligations to Vitel, they are required to notify the Company
and provide it with a notice and an opportunity to participate in such opportunity.
The
Vitel Employment Agreements may be terminated upon the employee’s death or disability, and with or without cause. In the
event Vitel terminates either of Messrs. Cosme and Alaman’s employment upon their death or disability, for cause (as defined
in the employment agreement) or if either of them should resign without cause, the person resigning is entitled to payment of
their base salary through the date of termination and certain severance payments they are legally entitled to receive under Mexican
Federal Labor Law. At Vitel’s option, it may terminate their employment without cause or the employee may terminate the
agreement for good cause (as defined in the agreement) in which event the person terminated is entitled to (i) the equivalent
amount of the corresponding severance payment set forth in the Mexican Federal Labor Law for an unjustified dismissal, or if greater
(ii) the equivalent amount of up to three years’ gross salary and certain amounts mandated under Mexican labor laws, depending
on the date of termination less the number of months elapsed after March 10, 2017. The severance payment shall be paid in equal
monthly installments over the remaining term so long as the employee is in compliance with the non-compete provisions provided
for in the employment agreement.
In December 2017, Messrs. Cosme and Alaman terminated their
respective employment agreements.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
Company is a guarantor of Vitel’s obligations under the Vitel Employment Agreements. The Vitel Employment Agreements do
not represent additional purchase consideration.
Future minimum commitment payments under continuing
employment agreements at December 31, 2017 are as follows:
Years ending December 31,
|
|
Amount
|
|
2018
|
|
|
475,000
|
|
2019
|
|
|
39,600
|
|
Total minimum commitment employment agreement payments
|
|
$
|
514,600
|
|
NOTE
12 -
SUBSEQUENT EVENTS
Financings
January
2018 Financing
On
January 29, 2018, the Company entered into and closed on a 4
th
Securities Purchase Agreement (the “4
th
Securities Purchase Agreement”) with three institutional investors (the “Purchasers”) for the sale of the Company’s
convertible notes and warrants. Pursuant to the terms provided for in the 4
th
Securities Purchase Agreement, the Company
issued upon closing to the Purchasers for an aggregate subscription amount of $333,333: (i) 10% Original Issue Discount 5% Senior
Secured Convertible Notes in the aggregate principal amount of $333,333 (the “January 2018 Notes”); and (ii) 5 year
warrants (the “January 2018 Warrants”) to purchase 8,333,333 shares of the Company’s common stock par value
$0.001 per share at an exercise price of $0.04 per share (subject to adjustments under certain conditions as defined in the Warrants).
The closing under the 4
th
Securities Purchase Agreement occurred on January 29, 2018. The aggregate principal amount
of the January 2018 Notes is $333,333 and the Company received $295,000 after giving effect to the original issue discount of
$33,333 and offering costs of $5,000. These Notes bear interest at a rate equal to 5% per annum (which interest rate is increased
to 24% per annum upon the occurrence of an Event of Default (as defined in the Notes)), have a maturity date of September 29,
2018 and are convertible (principal, and interest) at any time after the issuance date of these Notes into shares of the Company’s
Common Stock at a conversion price equal to $0.03 per share (subject to adjustment as provided in the Note), provided, however,
that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the January
2018 Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as
reported on the OTCQB or other principal trading market (the “Default Conversion Price”) and the exercise price of
the January 2018 Warrants shall be 60% of the Default Conversion Price.
These
Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the original issue
date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization
payment is made in cash then the payment is an amount equal to 110% of the applicable amortization payment and if the seven-month
or the eight-month amortization payments are made in cash then the payment is an amount equal to 115% of the applicable amortization
payment. These Notes may be prepaid at any time until the 180th day following the Original Issue Date at an amount equal to (i)
115% of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date
through the five months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued
and unpaid interest during the six month following the Original Issue Date. In order to prepay these Notes, the Company shall
provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser may convert the Notes in whole
or in part at the Conversion Price.
March
2018 Financing
On
March 13, 2018, the Company entered into a 5
th
Securities Purchase Agreement (the “5
th
Securities
Purchase Agreement”) securities with three institutional investors for the sale of the Company’s convertible notes
and warrants. Pursuant to the terms provided for in the Purchase Agreement, the Company issued for an aggregate subscription amount
of $333,333: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,333
(the “Notes”) and (ii) warrants (the “Warrants”) to purchase an aggregate of 12,350,000 shares
of the Company’s common stock at an exercise price of $0.04 per share. The aggregate principal amount of the Notes is $333,333
and as of the date the Company received $61,000 after giving effect to the original issue discount of $33,333 and offering costs
of $10,000 which are treated as a debt discount, the payment of legal and accounting fees of $29,000 not related to these Notes,
and the funding of an escrow account held by the escrows agent of $200,000. The Notes bear interest at a rate of 5% per year (which
interest rate shall be increased to 18% per year upon the occurrence of an Event of Default (as defined in the Notes)), shall
mature eight months from issuance and the principal and interest are convertible at any time at a conversion price equal to $0.02
per share (subject to adjustment as provided in the Notes); provided, however, that if an event of default has occurred, regardless
of whether such Event of Default has been cured or remains ongoing, the Notes shall be convertible at 60% of the lowest closing
price during the prior twenty trading days.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
The
Notes provide for amortization payments on each of the six-month anniversary of the issue date, seven-month anniversary of the
issue date and on the maturity date with each amortization payment being one third of the total outstanding principal and all
interest accrued as of the payment date. If the six-month amortization payment is made in cash then the Company shall pay the
holder 110% of the applicable amortization payment and if the seven-month or the maturity date amortization payments are made
in cash then the Company shall pay the holder 115% of the applicable amortization payment. The holder may elect at its option
to receive the amortization payments in common stock subject to certain equity conditions.
The
Notes may be prepaid at any time until the 180th day following the original issue date at an amount equal to (i) 115% of outstanding
principal balance of the Note and accrued and unpaid interest through the five month anniversary of the issue date, and (ii) 120%
of outstanding principal balance of the Notes and accrued and unpaid interest from the fifth month anniversary of the issue date
through the six month anniversary of the issue date. In order to prepay the Notes, the Company shall provide 20 trading days prior
written notice to the holders, during which time a holder may convert its Note in whole or in part at the conversion price.
The
Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination,
recapitalization or similar transactions. The conversion price is also subject to adjustment if we issue or sell shares of our
common stock for a consideration per share less than the conversion price then in effect. In addition, subject to limited exceptions,
a holder will not have the right to convert any portion of its Note if the holder, together with its affiliates, would beneficially
own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion.
The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written
notice to us.
The
initial exercise price of the Warrants is $0.04 per share, subject to adjustment as described below, and the Warrants are exercisable
for five years after the issuance date. The Warrants are exercisable for cash at any time and are exercisable on a cashless basis
at any time there is no effective registration statement registering the shares of common stock underlying the Warrants. The exercise
price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock
combinations, reclassifications or similar events affecting the common stock and also upon any distributions of assets, including
cash, stock or other property to the Company’s stockholders. The exercise price of the Warrants is also subject to full
ratchet price adjustment if the Company issues common stock at a price per share lower than the then-current exercise price of
the Warrant.
The
Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination,
recapitalization or similar transactions. The conversion price is also subject to adjustment if we issue or sell shares of our
common stock for a consideration per share less than the conversion price then in effect. In addition, subject to limited exceptions,
a holder will not have the right to convert any portion of its Note if the holder, together with its affiliates, would beneficially
own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion.
The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written
notice.
In
connection with the issuance of the January 2018 Notes and Warrants, the Company determined that the terms of these Note and Warrants
contain terms that included a down-round provision under which the conversion price and exercise price could be affected by future
equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly, under
the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”,
the embedded conversion option contained in the convertible instruments and the Warrants were accounted for as derivative liabilities
at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded
conversion option derivatives and Warrants were determined using the Binomial valuation model. At the end of each period, on the
date that debt was converted into common shares, and on the date of a cashless exercise of warrants, the Company revalued the
embedded conversion option and warrants derivative liabilities.
In
connection with the issuance of the January 2018 Notes and Warrants in January 2018, on the initial measurement date, the fair
values of the embedded conversion option derivative and warrant derivative of $356,011 was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Convertible Note of $295,000, with the remainder of $61,011
charged to current period operations as initial derivative expense.
Escrow
Agreement
$200,000 of the aggregate subscription amount
of the March 2018 financing shall be held in escrow and released upon the upon the satisfaction of certain conditions or
waiver thereof by all of the investors, including: (i) the Company shall have filed its annual report for the fiscal year ending
December 31, 2017 on or prior to April 17, 2018, (ii) the Company shall have sold or otherwise disposed of its subsidiaries Vitel
and Oncbiomune México, S.A. De C.V. and reserved an aggregate of 46,158,013 shares currently held by Vitel principals for
the benefit of the investors and (iii) the Company shall at all times be in full compliance with the conditions set forth in Rule
144(i)(2).
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2017 and 2016
Ancillary
Agreements
In
connection with the Company’s obligations under the Notes, the Company and its subsidiary OncBioMune, Inc. entered into
a security agreement with Calvary Fund I LP, as agent, pursuant to which the Company and the Subsidiary granted a lien on all
assets of the Company and the Subsidiary, for the benefit of the holders, to secure the Company’s obligations under the
Notes. The Company also entered into a pledge agreement with Cavalry and the Subsidiary executed a subsidiary guaranty. Upon an
Event of Default (as defined in the Notes), the holders may, among other things, collect or take possession of the Collateral,
proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.
Additional
Purchaser Rights and Company Obligations
The
Purchase Agreement also requires the Company to pay counsel for the holders $10,000, satisfy the current public information requirements
under SEC Rule 144(c), refrain from issuing securities for a period of 30 days from closing and provides the holders with rights
of participation in future financings for a period of 12 months from the closing.
Termination
of October 20, 2015 Agreements
On
March 13, 2018, the Company and Lincoln Park Capital Fund, LLC (“Lincoln Park”) entered into a termination agreement
(the “Termination Agreement”) pursuant to which the parties terminated (i) the purchase agreement between them dated
October 20, 2015 (the “Equity Line Agreement”) that provided the Company the right to sell to Lincoln Park, at its
sole discretion, up to $10,100,000 of the Company’s common stock and (ii) the related registration rights agreement pursuant
to which the Company had agreed to file a registration statement with the Securities and Exchange Commission covering the shares
issuable under the Equity Line Agreement and related share issuances.
Shares
issued upon conversion of debt
From
January 1, 2018 to May 31, 2018, the Company issued 34,379,512 shares upon conversion of debt of $249,359, accrued interest of
$36,016 and for default interest and penalties of $55,890.
Shares
issued for cash
In
January 2018, pursuant to a unit subscription agreement, the Company issued 600,000 shares of its unregistered common stock to
an investor for cash proceeds of $6,000, or $0.01 per share.
Shares
issued for cashless exercise of warrants
During
January and February 2018, the Company issued 18,429,093 shares of its common stock upon the cashless exercise of 25,357,414 of
these warrants.
Grant
of stock options
On
May 8, 2018, the Company granted an aggregate of 17,500,000 stock options to purchase 17,500,000 shares of
the Company’s common stock at $0.0135 per share as follows: 15,000,000 options were granted to officers and directors
of the Company, 500,000 options were granted to an employee, and 2,000,000 option to the Company’s scientific
advisory board. These options vest in one year from the grant date and expire on May 8, 2028. The fair value of these option
grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0%; expected volatility of 243%; risk-free interest rate of 2.81%; and, an estimated term
based on the simplified method of 5.5 years. In connection with these options, the Company valued these options at a fair
value of approximately $233,000 and will record stock-based compensation expense over the vesting term.