CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
NOTE
1 -
ORGANIZATION AND NATURE OF OPERATIONS
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 an immunotherapy platform with an initial concentration
on prostate and breast cancers that can also be used to fight any solid tumor. Additionally, the Company has targeted therapies.
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 to 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. Prior
to 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 prior to 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, Vitel and Oncbiomune México were treated as a discontinued
operation through December 31, 2017 and were deconsolidated effective January 1, 2018 (See Note 3).
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and principles of consolidation
The
Company’s consolidated financial statements include the financial statements of OncBioMune Pharmaceuticals, Inc. and its
wholly-owned subsidiaries, OncBioMune, Inc. (for all periods presented) and, Vitel and Oncbiomune México, S.A. De C.V.
(from March 10, 2017 to December 31, 2017). All significant intercompany accounts and transactions have been eliminated in consolidation.
Management
acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements
which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement
of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation
S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year
as a whole. Certain information and note disclosure normally included in financial statements prepared in accordance with U.S.
GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not
include all the information and notes necessary for comprehensive financial statements These unaudited condensed consolidated
financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated
financial statements for the years ended December 31, 2017 and 2016 of the Company which were included in the Company’s
annual report on Form 10-K as filed with the Securities and Exchange Commission on May 31, 2018.
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 unaudited condensed
consolidated financial statements, the Company had net loss from operations of $1,283,269 and $6,783,133 for the nine months ended
September 30, 2018 and 2017, respectively. The net cash used in operations was $1,296,789 and $2,034,012 for the nine months ended
September 30, 2018 and 2017, respectively. Additionally, the Company had an accumulated deficit of $19,691,677 and $23,655,989
at September 30, 2018 and December 31, 2017, respectively, had a stockholders’ deficit of $10,242,869 and $14,808,978 at
September 30, 2018 and December 31, 2017, respectively, and had a working capital deficit of $10,254,158 at September 30, 2018,
had no revenues from continuing operations since inception, and is currently in default on certain convertible debt instruments.
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.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
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 a period of twelve months from the issuance date of this report. The Company will seek to
raise capital through additional debt and/or equity financings to fund its operations in the future.
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 nine months ended September 30, 2018 and 2017 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.
Any production shortfall that impairs the supply of the antigen in ProscaVax™ to the Company could have a material adverse
effect on the Company’s business, financial condition and results of operations. If the Company is unable to obtain a sufficient
quantity of antigen, there could be a substantial delay in successfully developing a second source supplier.
Fair
value of financial instruments and fair value measurements
Accounting
Standards Codification (“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 September 30, 2018 and 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 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 that 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.
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
The
carrying amounts reported in the consolidated balance sheets for cash, due to related parties, prepaid expenses, convertible debt,
notes payable, accounts payable and accrued liabilities, approximate their fair market value based on the short-term maturity
of these instruments. The Company accounts for certain instruments at fair value using level 3 valuation. Assets and liabilities
measured at fair value on a recurring basis are as follows at September 30, 2018 and December 31, 2017:
|
|
At September 30, 2018
|
|
|
At December 31, 2017
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,042,374
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,966,760
|
|
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
Derivative Liabilities
|
|
Balance at December 31, 2017
|
|
$
|
11,966,760
|
|
Initial valuation of derivative liabilities included in debt discount
|
|
|
1,926,643
|
|
Initial valuation of derivative liabilities included in derivative expense
|
|
|
1,803,207
|
|
Reclassification of derivative liabilities to gain on debt extinguishment upon conversion of debt
|
|
|
(365,564
|
)
|
Reclassification of derivative liabilities to gain on debt extinguishment upon cashless exercise of warrants
|
|
|
(666,756
|
)
|
Reclassification of derivative liabilities to gain on debt extinguishment for debt settlement
|
|
|
(1,323,111
|
)
|
Change in fair value included in derivative income (expense)
|
|
|
(6,298,805
|
)
|
Balance at September 30, 2018
|
|
$
|
7,042,374
|
|
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 September 30, 2018 and December
31, 2017, 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 September 30, 2018 and December 31, 2017. The Company has not experienced
any losses in such accounts through September 30, 2018.
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.
Impairment
of long-lived assets
In
accordance with ASC 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. On September 30, 2017, the Company
recognized an impairment loss of $4,736,692 since the sum of expected undiscounted future cash flows is less than the carrying
amount of the asset. The impairment loss consists of an impairment of intangibles of $4,695,596 recorded in connection with the
acquisition of Vitel (see Note 3) and the impairment of an acquired drug formula of $41,096 included in the discontinued operations.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
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 other 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 other income or expense as part of gain or loss on extinguishment.
Revenue
recognition
In
May 2014, FASB issued an update Accounting Standards Update, ASU 2014-09, establishing ASC 606 —
Revenue from Contracts
with Customers
. ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities
to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition
guidance. This standard, which is effective for interim and annual reporting periods in fiscal years that begin after December
15, 2017, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires
certain additional disclosures. The Company adopted this standard in 2018 using the modified retrospective approach, which requires
applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect
adjustment to retained earnings as of the beginning of the fiscal year of adoption. Based on an evaluation of the impact ASU 2014-09
will have on the Company’s sources of revenue, the Company has concluded that ASU 2014-09 did not have any impact on the
process for, timing of, and presentation and disclosure of revenue recognition from customers.
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.
Through
March 31, 2018, pursuant to ASC 505-50 —
Equity-Based Payments to Non-Employees
, all share-based payments to non-employees,
including grants of stock options, were 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. In June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of
the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services
from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods
within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition
guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018, and the adoption did not have any
impact on its consolidated financial statements.
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.
The
Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740. 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 September 30, 2018 and December 31, 2017, the Company had no uncertain
tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to
examination are the years ending on and after December 31, 2011. The Company recognizes interest and penalties related to uncertain
income tax positions in other expense. However, no such interest and penalties were recorded as of September 30, 2018.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
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) and shares issuable
for convertible debt (using the as-if converted method). These common stock equivalents may be dilutive in the future. 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:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Stock warrants
|
|
|
206,635,707
|
|
|
|
23,479,438
|
|
Convertible debt
|
|
|
175,711,301
|
|
|
|
19,068,568
|
|
Stock options
|
|
|
21,500,000
|
|
|
|
4,000,000
|
|
The
following table presents a reconciliation of basic and diluted net income per share:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Income (loss) per common share - basic:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
3,964,312
|
|
|
$
|
(8,698,694
|
)
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(429,752
|
)
|
Net income (loss)
|
|
$
|
3,964,312
|
|
|
$
|
(9,128,446
|
)
|
Weighted average common shares outstanding - basic
|
|
|
224,271,427
|
|
|
|
117,671,151
|
|
Net income (loss) per common share – basic:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.02
|
|
|
|
(0.07
|
)
|
From discontinued operations
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
Net income (loss) per common share - basic
|
|
$
|
0.02
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share - diluted:
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
3,964,312
|
|
|
$
|
(6,783,133
|
)
|
Add: interest of convertible debt
|
|
|
1,391,270
|
|
|
|
(526,708
|
)
|
Less: derivative income and debt settlement income
|
|
|
(6,605,218
|
)
|
|
|
(1,388,853
|
)
|
Less: gain on foreign currency transactions
|
|
|
(33,633
|
)
|
|
|
-
|
|
Numerator for loss from continuing operations per common share - diluted
|
|
|
(1,283,269
|
)
|
|
|
(8,698,694
|
)
|
Numerator for loss from discontinuing operations per common share - diluted
|
|
|
-
|
|
|
|
(429,752
|
)
|
Net loss per common share – diluted
|
|
$
|
(1,283,269
|
)
|
|
$
|
(9,128,446
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
224,271,427
|
|
|
|
117,671,151
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
Weighted average common shares outstanding – diluted
|
|
|
224,271,427
|
|
|
|
117,671,151
|
|
Net loss per common share – diluted:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.00
|
)
|
|
|
(0.07
|
)
|
From discontinued operations
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Net loss per common share - diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.07
|
)
|
Research
and development
Research
and development costs incurred in the development of the Company’s products are expensed as incurred. For the nine months
ended September 30, 2018 and 2017, research and development costs were $101,097 and $73,720, respectively, and are included in
operating expenses on the accompanying consolidated statements of operations.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
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 discontinued subsidiaries located in Mexico is the Mexican
Peso (“Peso”). For the discontinued subsidiaries whose functional currencies were the Peso, for the periods ended
September 30, 2017, results of operations and cash flows were translated at average exchange rates during the period, assets and
liabilities were translated at the spot exchange rate at the end of the period, and equity was translated at historical exchange
rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars
were included in determining comprehensive loss. Assets and liabilities denominated in foreign currencies were 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 will not have, any material effect on the results of operations
of the Company.
Asset
and liability accounts related to the Company’s discontinued Mexico operations at December 31, 2017 were translated at 19.670
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 nine months ended September 30, 2017 was 18.808
Pesos to $1.00. Cash flows from the Company’s operations are calculated based upon the local currencies using the average
translation rate. During 2018, the Company did not have any foreign currency translation or transaction adjustments.
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 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 for 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 2017-11 is 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.
In
March 2018, pursuant to ASC 505-50 —
Equity-Based Payments to Non-Employees
, all share-based payments to non-employees,
including grants of stock options, were 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.
In
June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting,
which simplifies
several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation
guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07
is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early
adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company
early adopted ASU No. 2018-07 in the second quarter of 2018, and the adoption did not have any 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
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
NOTE
3 –
DECONSOLIDATION AND DISCONTINUATION OF OPERATIONS OF VITEL AND ONCBIOMUNE MEXICO
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, as of December 31, 2017, the Company presented Vitel and Oncbiomune
Mexico as discontinued operations and effective January 1, 2018 has deconsolidated these wholly-owned subsidiaries in accordance
with ASC 810-10 —
Consolidation
. However, at September 30, 2018 and after deconsolidation, the Company has recorded
the liabilities of these subsidiaries that existed at December 31, 2017 as a contingent liability and therefore reflected liabilities
of discontinued operation of $686,547 on the accompanying condensed consolidated balance sheet, which consist of accounts payable
balances incurred through December 31, 2017.
Pursuant
to ASC 205-20 —
Presentation of Financial Statements - Discontinued Operations
, the business of the Oncbiomune Mexico
and Vitel are now considered discontinued operations because of the Board of Director’s decision of December 29, 2017.
The
assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of September
30, 2018 and December 31, 2017, and for the nine months ended September 30, 2018 and 2017 is set forth below.
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
|
-
|
|
Total current assets
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
686,547
|
|
|
$
|
692,592
|
|
Due to related parties
|
|
|
-
|
|
|
|
432
|
|
Payroll liabilities
|
|
|
-
|
|
|
|
1,972
|
|
Total current liabilities
|
|
|
686,547
|
|
|
|
694,996
|
|
Total liabilities
|
|
$
|
686,547
|
|
|
$
|
694,996
|
|
The
summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is
as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
278,686
|
|
Cost of revenues
|
|
|
-
|
|
|
|
156,084
|
|
Gross profit
|
|
|
-
|
|
|
|
122,602
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
546,657
|
|
Other expenses
|
|
|
-
|
|
|
|
5,697
|
|
Total operating and other expenses
|
|
|
-
|
|
|
|
552,354
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
(429,752
|
)
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
NOTE
4 –
CONVERTIBLE DEBT
November
2016 Financing
On
November 23, 2016, the Company entered into Amended and Restated Securities Purchase Agreements (the “Amended and Restated
Securities Purchase Agreements”) with three institutional investors (the “Purchasers”) for the sale of the Company’s
convertible notes and warrants. Pursuant to the Amended and Restated Securities Purchase Agreements, 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 aggregate of 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
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 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”). 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.
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 which was recorded in May 2017. The Forbearance Agreements
also provide 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 Agreements, in May 2017, 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. In 2017,
the Company also increased the principal amount of these notes by $42,327 for other default charges and other expenses.
In
2017, the Company converted $369,423 and $32,878 of outstanding principal and interest, respectively, of the November 2016 Notes
into 8,362,338 shares of common stock.
During
the six months ended June 30, 2018, the Company fully converted the remaining outstanding principal and interest of $139,712 and
$21,869, respectively, of the November 2016 Notes into 13,028,779 shares of common stock. As of September 30, 2018, there were
no November 2016 Notes outstanding.
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 7). 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 7). 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. As of September 30, 2018, there
were 22,685,192 warrants outstanding under the November 2016 Warrants.
June
2017 Financing
On
June 2, 2017, the Company entered into a Securities Purchase Agreement (the “Second 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 Second Securities Purchase Agreement, the Company issued 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 an aggregate of 1,555,633 shares of the Company’s common stock, par value
$0.0001 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.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
The
aggregate principal amount of the June 2017 Notes was $233,345 and the Company received $190,000 after giving effect to the original
issue discount of $33,345 and $10,000 of offering costs. 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, 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 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. 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. During the six months ended June 30, 2018,
the Company also increased the principal amount of these notes by $2,268 for other default charges and other expenses. During
the nine months ended September 30, 2018, the Company converted $118,786 and $7,036 outstanding principal and interest, respectively,
of the June 2017 Notes into 14,864,066 shares of common stock. In addition, pursuant a securities purchase agreement dated September
24, 2018, the Company purchased back from one Purchaser, a June 2017 Note with $37,814 and $4,534 of outstanding principal and
interest, respectively, (see—
Puritan Settlement Agreement
below). As of September 30, 2018, the June 2017 Notes had
outstanding principal and accrued interest of $79,277 and $21,257, respectively.
The
June 2017 Notes and related 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 then
$0.01 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. During
the nine months ended September 30, 2018, the Company initially issued 6,893,145 shares of its common stock upon the cashless
exercise of 9,074,520 of the June 2017 Warrants. The Company issued an additional 1,605,492 shares of common stock pursuant to
the ratchet adjustment of the converted 9,074,520 warrants bringing the total shares issued to 8,498,637. In addition, pursuant
to a securities purchase agreement dated September 24, 2018, the Company purchased back, from one Purchaser, June 2017 Warrants
to purchase 6,049,680 (post anti-dilution) of the Company’s common stock (see—
Puritan Settlement Agreement
below). As of September 30, 2018, there were 30,248,400 warrants outstanding under the June 2017 Warrants.
July
2017 Financing
On
July 26, 2017, the Company entered into a Securities Purchase Agreement (the “Third 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 Third Securities Purchase Agreement, the Company issued 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 an aggregate of 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 July 2017 Notes were issued on July 26, 2017. The July 2017 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 July 2017
Notes)), have a maturity date of March 25, 2018 and are convertible (principal, and interest) at any time after the issuance date
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 July 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 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. The July 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 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. The July 2017 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 July 2017
Notes and accrued and unpaid interest during months four through seven following the Original Issue Date. In order to prepay the
July 2017 Notes, the Company shall provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser
may convert the July 2017 Notes in whole or in part at the Conversion Price. During the nine months ended September 30, 2018,
the Company converted $60,861 and $10,558 outstanding principal and interest, respectively, of the July 2017 Notes into 14,691,253
shares of common stock. In addition, pursuant to a securities purchase agreement dated September 24, 2018, the Company purchased
back, from one Purchaser, a July 2017 Note with $155,812 and $38,395 of outstanding principal and interest, respectively (see—
Puritan
Settlement Agreement
below). As of September 30, 2018, the July 2017 Notes had outstanding principal and accrued interest
of $250,763 and $55,665, respectively.
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 July 2017 Notes was lowered to $0.006
per share and the exercise price of the July 2017 Warrants was lowered to $0.006 per share and the total number of July 2017 Warrants
was 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 7). During the nine months ended September 30, 2018, the Company issued 24,216,732 shares of its common stock upon the cashless
exercise of 26,498,683 of these warrants. As of September 30, 2018, there were 52,997,367 warrants outstanding under the July
2017 Warrants.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
January
2018 Financing
On
January 29, 2018, the Company entered into a Securities Purchase Agreement (the “Fourth 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 Fourth Securities Purchase Agreement, the Company issued 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 an aggregate of 8,333,333 shares
of the Company’s common stock par value $0.0001 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 Fourth 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 January 2018 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 January 2018 Notes)), have a maturity date of September 29, 2018 and are convertible (principal, and interest) at any time
after the issuance date 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 January 2018 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 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. The January 2018 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. The January 2018 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 January 2018 Notes and accrued and unpaid interest during the six month following the Original Issue
Date. In order to prepay the January 2018 Notes, the Company shall provide 20 Trading Days prior written notice to the Purchaser,
during which time the Purchaser may convert the January 2018 Notes in whole or in part at the Conversion Price. Pursuant to a
securities purchase agreement dated September 24, 2018, the Company purchased back, from one Purchaser, a January 2018 Note with
$111,111 and $98,031 outstanding principal and interest, respectively (see—
Puritan Settlement Agreement
below). As
of September 30, 2018, the January 2018 Notes had outstanding principal and accrued interest of $222,222 and $22,340, respectively.
The
January 2018 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 January 2018 Notes, the Company defaulted on these Notes. Accordingly, pursuant to the default
provisions, the conversion price of the notes were lowered to 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 and the total number of January
2018 Warrants were increased on a full ratchet basis from 8,333,334 warrants to 22,675,740 and then to 24,785,110, an aggregate
increase of 16,451,776 warrants (see Note 7). Pursuant to a securities purchase agreement dated September 24, 2018, the Company
purchased back, from one Purchaser, warrants to purchase 7,558,580 (post anti-dilution) of the Company’s common stock (see—
Puritan
Settlement Agreement
below). As of September 30, 2018, there were 17,226,530 warrants outstanding under the January 2018 Warrants.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
March
2018 Financing
On
March 13, 2018, the Company entered into a Securities Purchase Agreement (the “Fifth Securities Purchase Agreement”)
securities with the Purchasers for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided
for in the Fifth 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 “March 2018 Notes”)
and (ii) warrants (the “March 2018 Warrants”) to purchase an aggregate of 12,500,000 shares of the Company’s
common stock at an exercise price of $0.04 per share. The aggregate principal amount of the March 2018 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 March 2018 Notes and
the funding of an escrow account held by an escrow agent of $200,000. The March 2018 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 March 2018
Notes)), have a maturity date of November 13, 2018 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 March 2018 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 March 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 March 2018
Warrants shall be 60% of the Default Conversion Price. The March 2018 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 March 2018 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 March 2018 Notes, the Company shall
provide 20 trading days prior written notice to the holders, during which time a holder may convert its March 2018 Notes in whole
or in part at the conversion price. Pursuant to a securities purchase agreement dated September 24, 2018, the Company purchased
back, from one Purchaser, a convertible note with $111,111 and $97,383 outstanding principal and accrued interest, respectively
(see—
Puritan Settlement Agreement
below). As of September 30, 2018, the March 2018 Notes had outstanding principal
and interest of $222,222 and $15,969, respectively.
The
March 2018 Notes and related March 2018 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 March 2018 Notes, the Company defaulted on these Notes. Accordingly, pursuant to
the default provisions, the conversion price of the March 2018 Notes was lowered to the Default Conversion Price and the exercise
price of the March 2018 Warrants shall be 60% of the Default Conversion Price and the total number of March 2018 Warrants was
increased on a full ratchet basis from 12,500,000 warrants to 34,013,607 and then to 38,176,303, an aggregate increase of 25,676,303
warrants (see Note 7). Pursuant to a securities purchase agreement dated September 24, 2018, the Company purchased back, from
one Purchaser, warrants to purchase 11,337,869 (post anti-dilution) of the Company’s common stock (see—
Puritan
Settlement Agreement
below). As of September 30, 2018, there were 26,838,434 warrants outstanding under the March 2018 Warrants.
July
2018 Financing
On
July 25, 2018, the Company entered into a securities purchase agreement (the “Sixth Securities Purchase Agreement”)
with an institutional investor for the sale of a convertible note in the aggregate principal amount of $150,000 (the “July
2018 Note”). The July 2018 Note bears interest at 8% per year and will mature on the one year anniversary of the date of
issue. The July 2018 Note is convertible into common stock at a 25% discount to the average of the closing prices of the common
stock for the prior five trading days including the date upon which a notice of conversion is received by the Company or its transfer
agent. The 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 common stock outstanding immediately after giving effect to its
conversion. The July 2018 Note may be prepaid at the Company’s option at a 105% premium between 30 days and 180 days after
issuance, and at a 110% premium between 180 days after issuance and the maturity date. Upon certain events defined in the note
as “sale events”, the holder may demand repayment of the note for 125% of the principal plus accrued but
unpaid interest. The note also includes certain penalties upon the occurrence of an event of default, including an increase in
the principal and reduction in the conversion rate, as further described in the July 2018 Note. The Company agreed to use its
best efforts to file a proxy statement and take all necessary corporate actions in order to obtain shareholder approval to increase
its authorized shares of common stock or effect a reverse split to allow for reserving sufficient shares of common stock to allow
for full conversion of the July 2018 Note. As of September 30, 2018, the July 2018 Note had outstanding principal and accrued
interest of $150,000 and $2,236, respectively.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
September
2018 Financing
On
September 24, 2018, the Company entered into a securities purchase agreement (the “Seventh Purchase Agreement,” and
together with the Amended and Restated Purchase Agreements and the Second, Third, Fourth, Fifth and Sixth Purchase Agreement,
the “Securities Purchase Agreements”) with four accredited investors (the “Seventh Round Purchasers,”
and together with the Purchasers, the “Note Purchasers”) for the sale of the Company’s convertible notes and
warrants. Pursuant to the Seventh Purchase Agreement, the Company issued to the Seventh Round Purchasers for an aggregate subscription
amount of $1,361,111: (i) 10% Original Issue Discount 5% Senior Convertible Notes in the aggregate principal amount of $1,361,111
(the “September 2018 Notes”) and (ii) 5 year warrants (the “September 2018 Warrants”) to purchase an aggregate
of 51,041,667 shares of the Company’s common stock at an exercise price of $0.04 per share (subject to adjustments under
certain conditions as defined in the September 2018 Warrants)The Company received $1,181,643 in aggregate net proceeds from the
sale, net of $136,111 original issue discount and $43,257 in legal fees. The September 2018 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
September 2018 Notes)), shall mature on May 24, 2019 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 September 2018 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. The September 2018 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
during month six following the original issuance date of the notes. 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. As of September 30, 2018, the September 2018 Notes had outstanding principal and accrued interest of $1,361,111
and $1,119, respectively.
The
initial exercise price of the September 2018 Warrants is $0.04 per share, subject to adjustment as described below, and the September
2018 Warrants are exercisable for five years after the issuance date. The September 2018 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. As of September 30, 2018, there were 51,041,667 warrants outstanding
under the September 2018 Warrants.
The
June 2017, July 2017, January 2018, March 2018, July 2018 and September 2018 Notes (collectively, the “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. The 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 Note Purchasers certain rights of first refusal on future offerings by the Company for as long as the
Note Purchasers hold the Notes. In addition, subject to limited exceptions, the Note Purchasers will not have the right to convert
any portion of the Notes if the Note 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 Note Purchaser
may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to
the Company.
The
November 2016, June 2017, July 2017, January 2018, March 2018 and September 2018 Warrants (collectively, the “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 the 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
the 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 the 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 the 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 the Warrants immediately prior to such fundamental transaction; provided that upon the
occurrence of certain fundamental transactions, the holder can require the Company to purchase the Warrants for cash at a price
equal to the higher of the Black Scholes Value of the unexercised portion of the Warrants or difference between the cash per share
paid in the fundamental transaction and the exercise price per share. The holders of the Warrants will not have the right to exercise
any portion of the 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 the Warrants.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
To
secure the Company’s obligations under each of the June 2017, July 2017, January 2018, March 2018, and September 2018 Notes,
the Company entered into Security Agreements, Pledge Agreements and Subsidiary Guaranty’s 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 included 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 Note Purchasers. Upon an Event of Default (as defined in the related Notes), the
Note 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.
During
the nine months ended September 30, 2018, the Company converted an aggregate of $319,359 and $37,738 outstanding principal and
interest of the Notes, respectively, and $55,890 of default interest, into 46,419,653 shares of its common stock. During the nine
months ended September 30, 2018, the Company issued 32,715,368 shares of its common stock upon the cashless exercise of 35,573,203
of the Warrants related to these Notes (see Note 7—
Warrants
).
Puritan
Settlement Agreement
On September 24, 2018,
the Company and Puritan Partners LLC (“Puritan”) entered into a securities purchase agreement (the “Puritan
Purchase Agreement”), pursuant to which the Company purchased (using proceeds from the September 2018 Notes) back from Puritan,
June 2017, July 2017, January 2018, March 2018 and July 2018 Notes having an aggregate outstanding principal and accrued but unpaid
interest amount of $654,191 and [June 2017, January 2018 and March 2018] Warrants to purchase up to 24,946,128 shares of common
stock as well as the securities and certain rights associated thereunder for an aggregate purchase price of $900,000, which was
paid on September 26, 2018. In connection with the purchase and extinguishment of the above mentioned notes and warrants, the
Company paid $245,809 for additional penalties and interest which is reflected in loss on debt extinguishment. Additionally,
the Company revalued the derivative liabilities associated with these notes and warrants and recorded a gain on debt extinguishment
of $1,323,111.
Derivative
Liabilities Pursuant to Notes and Warrants
In
connection with the issuance of the Notes and Warrants, the Company determined that the terms of the Notes 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 ASC 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, March 2018, July 2018 and September 2018 Notes and related Warrants, during
the nine months ended September 30, 2018, on the initial measurement date, the fair values of the embedded conversion option derivative
and warrant derivative of $3,729,850 was recorded as derivative liabilities and was allocated as a debt discount up to the net
proceeds of the January 2018, March 2018, July 2018 and September 2018 Notes of $1,926,643, with the remainder of $1,803,207 charged
to current period operations as initial derivative expense.
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 income (expense) of $4,495,598 and $(2,327,322)
for the nine months ended September 30, 2018 and 2017, respectively.
During
the nine months ended September 30, 2018, the fair value of the derivative liabilities was estimated using the Binomial valuation
model with the following assumptions:
Dividend rate
|
|
|
-
|
%
|
Term (in years)
|
|
|
0.01 to 5.00
years
|
|
Volatility
|
|
|
188.9 to 197.1
|
%
|
Risk-free interest rate
|
|
|
2.07 to 2.96
|
%
|
At
September 30, 2018 and December 31, 2017, the convertible debt consisted of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Principal amount
|
|
$
|
2,285,596
|
|
|
$
|
840,757
|
|
Less: unamortized debt discount
|
|
|
(1,491,141
|
)
|
|
|
(154,374
|
)
|
Convertible notes payable, net
|
|
$
|
794,455
|
|
|
$
|
686,383
|
|
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
For
the nine months ended September 30, 2018 and 2017, amortization of debt discounts related to the November 2016 Notes and the Notes
amounted to $848,280 and $453,720, respectively, which has been included in interest expense on the accompanying consolidated
statements of operations. The weighted average interest rate during the nine months ended September 30, 2018 and 2017 was approximately
14.5% and 11.2%, respectively.
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.
NOTE
5 –
NOTES PAYABLE
From
June 2017 to September 2017, the Company entered into loan agreements with several third parties (the “Loans”). Pursuant
to the loan agreements, the Company borrowed an aggregate principal amount of $538,875. The Loans bear interest at an annual rate
of 33.3%, are unsecured and are in default. As of September 30, 2018 and December 31, 2017, loan principal due to these third
parties amounted to $538,875 and $538,875, respectively. At September 30, 2018 and December 31, 2017, interest payable related
to these Loans amounted to $205,547 and $71,332, respectively.
NOTE
6 –
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 for working
capital purposes. For the nine months ended September 30, 2018, due to related party activity consisted of the following:
|
|
Total
|
|
Balance due to related parties at December 31, 2017
|
|
$
|
261,584
|
|
Working capital advances received
|
|
|
250,663
|
|
Repayments made
|
|
|
(178,424
|
)
|
Balance due to related parties at September 30, 2018
|
|
$
|
333,823
|
|
NOTE
7 –
STOCKHOLDERS’ DEFICIT
Shares
Authorized
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, 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. As of September
30, 2018 and December 31, 2017, there were 1,000,000 shares of the Company’s Series A Preferred Stock issued and 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.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
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.
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 $0.0001 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 which primarily gives the holder voting rights and were determined
to have nominal value of $500, or $0.0001 per shares. As of September 30, 2018 and December 31, 2017, there are 7,892,000 shares
of Series B Preferred issued and outstanding.
Common
Stock
Shares
issued for cash
In
January 2018, pursuant to a unit subscription agreement, the Company issued 600,000 shares of its common stock to an investor
for cash proceeds of $6,000, or $0.01 per share.
Shares
issued for services
During the three months
ended September 30, 2018, pursuant to the agreement, the Company issued 2,500,000 shares of its common stock with a grant date
value of $52,500 or $0.021 per share as reported on the OTC Pink Marketplace on the grant date, in exchange for legal services.
Common
stock issued for debt conversion
During the nine months
ended September 30, 2018, the Company converted an aggregate of $319,359 and $39,164 outstanding principal and interest
of convertible debt, respectively, and $55,890 of default interest related to the convertible debt, into 46,419,653 shares of
its common stock (see Note 4).
Shares
issued for cashless exercise of warrants
During
the nine months ended September 30, 2018, the Company issued 32,715,368 shares of its common stock upon the cashless exercise
of 35,573,203 of its warrants (see Note 4).
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
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.
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.
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. As of September 30, 2018, there were 22,685,192 warrants outstanding under the November 2016 Warrants.
On
June 2, 2017, in connection with the Second Securities Purchase Agreement, the Company issued the June 2017 Warrants to purchase
an aggregate of 1,555,633 shares of the Company’s common stock, par value $0.0001 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 the 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. During the nine months
ended September 30, 2018, the Company initially issued 6,893,145 shares of its common stock upon the cashless exercise of 9,074,520
of these warrants. The Company issued an additional 1,605,492 shares of common stock pursuant to the ratchet adjustment of the
converted 9,074,520 warrants bringing the total shares issued to 8,498,637. In addition, pursuant to a securities purchase agreement
dated September 24, 2018, the Company purchased back, from one Purchaser, June 2017 Warrants to purchase 6,049,680 (post anti-dilution)
of the Company’s Common Stock (see Note 4—
Puritan Settlement Agreement
). As of September 30, 2018, there were
30,248,400 warrants outstanding under the June 2017 Warrants.
On
July 26, 2017, in connection with the Third Securities Purchase Agreement, the Company issued the July 2017 Warrants to purchase
an aggregate of 4,769,763 shares of the Company’s common stock, par value $0.0001 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. During
the nine months ended September 30, 2018, the Company issued 24,216,732 shares of its common stock upon the cashless exercise
of 26,498,683 of these warrants. As of September 30, 2018, there were 52,997,367 warrants outstanding under the July 2018 Warrants.
On
January 29, 2018, in connection with the Fourth Securities Purchase Agreement, the Company issued the January 2018 Warrants to
purchase an aggregate of 8,333,334 shares of the Company’s common stock, par value $0.0001 per share at an exercise price
of $0.04 (subject to adjustments under certain conditions as defined in the January 2018 Warrants). The January 2018 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 the 4
th
Securities Purchase Agreement, the Company defaulted on the Notes. Accordingly, pursuant to the default
provisions, the exercise price of the January 2018 Warrants became 60% of the Default Conversion Price and the total number of
January 2018 Warrants were increased on a full ratchet basis from 8,333,334 warrants to 22,675,740 and then to 24,785,110,
an aggregate increase of 16,451,776 warrants. Pursuant to a securities purchase agreement dated September 24, 2018, the Company
purchased back, from one Purchaser, January 2018 Warrants to purchase 7,558,580 (post anti-dilution) of the Company’s common
stock (see Note 4—
Puritan Settlement Agreement
). As of September 30, 2018, there were 17,226,530 warrants outstanding
under the January 2018 Warrants.
On
March 13, 2018, in connection with the Fifth Securities Purchase Agreement, the Company issued the March 2018 Warrants to purchase
an aggregate of 12,500,000 shares of the Company’s common stock, par value $0.0001 per share at an exercise price of $0.04
(subject to adjustments under certain conditions as defined in the March 2018 Warrants). The March 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 the Fifth
Securities Purchase Agreement, the Company defaulted on the Notes. Accordingly, pursuant to the default provisions, the exercise
price of the March 2018 Warrants became 60% of the Default Conversion Price and the total number of March 2018 Warrants were increased
on a full ratchet basis from 12,500,000 warrants to 34,013,605 and then to 38,176,303, an aggregate increase of 25,676,303 warrants.
Pursuant to a securities purchase agreement dated September 24, 2018, the Company purchased back, from one Purchaser, March 2018
Warrants to purchase 11,337,869 (post anti-dilution) of the Company’s common stock (see Note 4—
Puritan Settlement
Agreement
). As of September 30, 2018, there were 26,838,434 warrants outstanding under the March 2018 Warrants.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
On
September 24, 2018, in connection with the Seventh Securities Purchase Agreement, the Company issued the September 2018 Warrants
to purchase an aggregate of 51,041,667 shares of the Company’s common stock, par value $0.0001 per share at an exercise
price of $0.04 (subject to adjustments under certain conditions as defined in the September 2018 Warrants). The September 2018
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. As of
September 30, 2018, there were 51,041,667 warrants outstanding under the September 2018 Warrants.
During
the nine months ended September 30, 2018, the Company issued a total of 32,715,369 shares of its common stock upon the cashless
exercise of 35,573,203 of these warrants (see Note 4).
Warrant
activities for the nine months ended September 30, 2018 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding December 31, 2017
|
|
|
153,151,959
|
|
|
$
|
0.020
|
|
|
|
|
|
|
|
|
|
Issued in connection with financings
|
|
|
114,003,080
|
|
|
$
|
0.025
|
|
|
|
|
|
|
|
|
|
Reduction in warrants related to settlement of debt
|
|
|
(24,946,129
|
)
|
|
$
|
0.013
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(35,573,203
|
)
|
|
$
|
0.006
|
|
|
|
|
|
|
|
|
|
Balance Outstanding September 30, 2018
|
|
|
206,635,707
|
|
|
$
|
0.025
|
|
|
|
4.13
|
|
|
$
|
2,117,038
|
|
Exercisable, September 30, 2018
|
|
|
206,635,707
|
|
|
$
|
0.025
|
|
|
|
4.13
|
|
|
$
|
2,117,038
|
|
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).
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 nine months ended September 30, 2018 and 2017,
the Company recorded stock-based compensation expense of $154,068 and $177,382 related to these options, respectively.
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 options were granted 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.
At
September 30, 2018, there were 21,500,000 options outstanding and 2,666,668 options vested and exercisable. As of September 30,
2018, there was $158,198 of unvested stock-based compensation expense to be recognized through May 2019. The aggregate intrinsic
value at September 30, 2018 was approximately $0.01 and was calculated based on the difference between the quoted share price
on September 30, 2018 and the exercise price of the underlying options.
ONCBIOMUNE
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2018
(Unaudited)
Stock
option activities for the nine months ended September 30, 2018 are summarized as follows:
|
|
Number of Option
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding December 31, 2017
|
|
|
4,000,000
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
17,500,000
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Balance Outstanding September 30, 2018
|
|
|
21,500,000
|
|
|
$
|
0.06
|
|
|
|
9.39
|
|
|
$
|
0.00
|
|
Exercisable, September 30, 2018
|
|
|
2,666,668
|
|
|
$
|
0.25
|
|
|
|
8.44
|
|
|
$
|
0.01
|
|
NOTE
8 –
COMMITMENTS AND CONTINGENCIES
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.
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.
NOTE
9 -
SUBSEQUENT EVENTS
Common
stock issued for debt conversion
Subsequent
to September 30, 2018, the Company converted $60,433 and $1,156 of outstanding principal and accrued interest, respectively,
of convertible notes into 11,085,742 shares of common stock.
Convertible
Debt Assignment
Subsequent
to September 30, 2018, the one of the March 2018 Notes was assigned to another investor which resulted in the Company incurring
approximately $103,100 of penalty interest.
November 2018 Financing
On November 13, 2018,
the Company entered into a securities purchase agreement (the “Eighth Purchase Agreement” a) with an institutional
accredited investor (the “Eighth Round Purchaser,”) for the sale of the Company’s convertible notes and warrants.
Pursuant to the Eighth Purchase Agreement, the Company issued to the Eighth Round Purchasers for an aggregate subscription amount
of $127,778: (i) 10% Original Issue Discount 5% Senior Convertible Note in the aggregate principal amount of $127,778 (the “November
2018 Note”) and (ii) 5 year warrants (the “November 2018 Warrant”) to purchase an aggregate of 4,743,750 shares
of the Company’s common stock at an exercise price of $0.04 per share (subject to adjustments under certain conditions as
defined in the November 2018 Warrant). The Company received $115,000 in aggregate net proceeds from the sale, net of $127,778
Original Issue Discount. The November 2018 Note bears 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 November 2018 Note)), has a maturity date of July
13, 2019 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 November 2018 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 Note shall be convertible at 60% of the lowest closing price
during the prior twenty trading days. The November 2018 Note provides 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 Note 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 Note and accrued and unpaid interest during month six following the original issuance
date of the notes. 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 initial exercise
price of the November 2018 Warrant is $0.04 per share, subject to adjustment as described below, and the November 2018 Warrant
is exercisable for five years after the issuance date. The November 2018 Warrant is exercisable for cash at any time and is 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.