UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 20162017

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to __________________

 

Commission file number 000-52218

 

ONCBIOMUNE PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada 20-2590810
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

11441 Industriplex Blvd, Suite 190

Baton Rouge, LA

 70809
(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code:(225) 227-2384

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

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

 

Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]Accelerated filer [  ]
Non-accelerated filer [  ]Smaller reporting company [X]
(Do not check if a smaller reporting company)
Emerging growth company [  ] 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 60,207,846152,669,639 shares as of November 14, 2016.20, 2017.

 

 

 

 

 

ONCBIOMUNE PHARMACEUTICALS, INC.

Form 10-Q

September 30, 2017

TABLE OF CONTENTS

 

 Page
 PART I - FINANCIAL INFORMATION 
   
Item 1.Financial Statements3
 Condensed Consolidated Balance Sheets - As of September 30, 20162017 (unaudited) and December 31, 201520163
 Condensed Consolidated Statements of Operations for the Three &and Nine Months Ended September 30, 20162017 and 20152016 (unaudited)4
 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20162017 and 20152016 (unaudited)5
 Condensed notesNotes to Unaudited Consolidated Financial Statements6
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1425
Item 3.Quantitative and Qualitative Disclosures About Market Risk2034
Item 4.Controls and Procedures2135
   
 PART II - OTHER INFORMATION 
   
Item 1.Legal Proceedings2135
Item 1A.Risk Factors2135
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2135
Item 3.Defaults Upon Senior Securities2135
Item 4.Mine Safety Disclosures2136
Item 5.Other Information2136
Item 6.Exhibits2336
   
Signatures2437

 

2

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 September 30, 2016 December 31, 2015  September 30, 2017 December 31, 2016 
 (Unaudited)    (Unaudited)   
ASSETS                
CURRENT ASSETS:                
Cash $10,587  $672,769  $83,563  $- 
Due from related parties  1,999   17,800 
Accounts receivable  93,356   - 
Inventories  106,249   - 
Subscription receivable  -   11,190 
Prepaid expenses and other current assets  45,285   18,968   99,589   30,119 
                
Total Current Assets  57,871   709,537   382,757   41,309 
                
OTHER ASSETS:                
Property and equipment, net  9,879   10,702   8,503   9,604 
Security deposit  6,400   6,400   6,400   6,400 
                
TOTAL ASSETS $74,150  $726,639 
Total Assets $397,660  $57,313 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)        
LIABILITIES AND STOCKHOLDERS’ DEFICIT        
                
CURRENT LIABILITIES:                
Convertible debt, net $289,089  $54,688 
Line of credit $98,741  $49,708   99,208   99,741 
Notes payable  538,875   - 
Bank overdraft  -   812 
Accounts payable  229,310   102,273   757,804   213,616 
Accrued liabilities  774   19,277   256,537   108,034 
Derivative liability  70,648   - 
Due to related party  20,000     
Convertible promissory note, Net  14,167   - 
Derivative liabilities  2,122,848   402,055 
Due to related parties  48,469   5,000 
                
Total Current Liabilities  433,640   171,258   4,112,830   883,946 
                

STOCKHOLDERS’ EQUITY (DEFICIT):

        
Commitments and contingencies (Note 8)        
        
STOCKHOLDERS’ DEFICIT:        
Preferred stock, $0.0001 par value; 20,000,000 authorized;                
Series A Preferred stock ($0.0001 Par Value; 1,000,000 Shares Authorized; 1,000,000 and none issued and outstanding at September 30, 2016 and December 31, 2015, respectively)  100   100 
Common stock: $.0001 par value, 500,000,000 shares authorized; 59,600,512 and 57,107,809 issued and outstanding at September 30, 2016 and December 31, 2015, respectively  5,960   5,711 
Series A Preferred stock ($0.0001 par value; 1,000,000 shares authorized; 1,000,000 issued and outstanding at September 30, 2017 and December 31, 2016)  100   100 
Series B Preferred stock ($0.0001 par value; 7,892,000 shares authorized; 7,892,000 and none issued and outstanding at September 30, 2017 and December 31, 2016, respectively)  789   - 
Common stock: $.0001 par value, 500,000,000 shares authorized; 152,669,639 and 60,807,846 issued and outstanding at September 30, 2017 and December 31, 2016, respectively  15,267   6,081 
Additional paid-in capital  2,152,528   1,678,789   8,568,798   2,310,037 
Accumulated deficit  (2,518,078)  (1,129,219)  (12,271,297)  (3,142,851)
Accumulatedother comprehensive loss  (28,827)  - 
                

Total Stockholders’ Equity (Deficit)

  (359,490)  555,381 
Total Stockholders’ Deficit  (3,715,170)  (826,633)
                
Total Liabilities and Stockholders’ Equity (Deficit) $74,150  $726,639 
Total Liabilities and Stockholders’ Deficit $397,660  $57,313 

 

See accompanying condensed notes to unaudited condensed consolidated financial statements.

 

3

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

 For the Three Month Ended For the Nine Months Ended 
 For the Three Month Ended For the Nine Month Ended  September 30, September 30, 
 September 30, September 30,  2017 2016 2017 2016 
 2016 2015 2016 2015  (Unaudited) (Unaudited) (Unaudited) (Unaudited) 
                  
REVENUES $-  $-  $-  $-  $118,572  $-  $278,686  $- 
                                
COST OF REVENUES  53,168   -   156,084   - 
                
GROSS PROFIT  65,404   -   122,602   - 
                
OPERATING EXPENSES:                                
Professional fees  238,085   78,989   549,184   94,489   373,379   238,085   1,323,230   549,184 
Compensation expense  167,088   85,447   536,706   156,719   267,475   167,088   806,341   536,706 
Consulting fees - related party  650   -   22,597   - 
Research and development expense  5,201   26,579   85,736   34,662   5,488   5,201   73,720   85,736 
Bad debt expense  1,251   -   43,497   - 
General and administrative expenses - related party  243   -   8,449   - 
General and administrative expenses  51,322   29,691   162,695   60,497   143,185   51,322   315,264   162,695 
Impairment loss  4,736,692   -   4,736,692   - 
                                
Total Operating Expenses  461,696   220,706   1,334,321   346,367   5,528,363   461,696   7,329,790   1,334,321 
                                
LOSS FROM OPERATIONS  (461,696)  (220,706)  (1,334,321)  (346,367)  (5,462,959)  (461,696)  (7,207,188)  (1,334,321)
                                
OTHER INCOME (EXPENSE):                                
Interest expense  (12,613)  (644)  (19,890)  (1,517)  (203,347)  (12,613)  (526,708)  (19,890)
Interest expense - related party  (6,078)  -   (6,078)  - 
Derivative income (expense)  109,858   -   (34,648)  -   (1,363,793)  109,858   (2,327,322)  (34,648)
Other  -   100   -   6,100 
Debt settlement income, net of settlement expense  929,409   -   938,469   - 
Loss on foreign currency transactions  6,811   -   381   - 
                                
Total Other Income (Expense)  97,245   (544)  (54,538)  4,583   (636,998)  97,245   (1,921,258)  (54,538)
                                
NET LOSS $(364,451) $(221,250) $(1,388,859) $(341,784) $(6,099,957) $(364,451) $(9,128,446) $(1,388,859)
                                
COMPREHENSIVE LOSS:                
Net loss $(6,099,957) $(364,451) $(9,128,446) $(1,388,859)
                
Other comprehensive loss:                
Unrealized foreign currency translation loss  (10,711)  -   (28,827)  - 
                
Comprehensive loss $(6,110,668) $(364,451) $(9,157,273) $(1,388,859)
                
NET LOSS PER COMMON SHARE - Basic and Diluted: $(0.01) $(0.00) $(0.02) $(0.01) $(0.04) $(0.01) $(0.08) $(0.02)
                                
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                                
Basic and diluted  58,471,197   48,467,036   57,667,941   47,494,386   139,917,339   58,471,197   117,671,151   57,667,941 

 

See accompanying condensed notes to unaudited condensed consolidated financial statements.

 

4

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 For The Nine Months Ended 
 For The Nine Months Ended  September 30, 
 September 30,  2017 2016 
 2016 2015  (Unaudited) (Unaudited) 
          
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss $(1,388,859) $(341,784) $(9,128,446) $(1,388,859)
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation  823   -   2,364   823 
Stock-based compensation  69,000   -   213,521   69,000 
Amortization of debt discount  14,167   -   453,720   14,167 
Derivative expense  34,648   -   2,327,322   34,648 
Debt settlement income  (938,469)  - 
Bad debt expense  43,497   - 
Impairment loss  4,736,692   - 
Change in operating assets and liabilities:                
Accounts receivable  53,543   - 
Inventories  (44,940)  - 
Due from related parties  15,801   (9,900)  -   15,801 
Prepaid expenses and other current assets  (9,317)  (3,684)  (3,113)  (9,317)
Security Deposit  -   (6,400)
Accounts payable  127,037   1,683   89,082   127,037 
Accounts payable - related party  (10,563)  - 
Accrued liabilities  (18,503)  (18,474)  171,328   (18,503)
                
NET CASH USED IN OPERATING ACTIVITIES  (1,155,203)  (378,559)  (2,034,462)  (1,155,203)
                
CASH FLOWS FROM INVESTING ACTIVITIES                
Cash received in recapitalization  -   4,676 
Acquisition of property and equipment  (715)  - 
Acquisition of intangible assets  (50,000)  - 
Cash received in acquisition  39,144   - 
                
NET CASH PROVIDED BY INVESTING ACTIVITIES  -   4,676 
NET CASH USED IN INVESTING ACTIVITIES  (11,571)  - 
                
CASH FLOWS FROM FINANCING ACTIVITIES                
Proceeds from related party advances  20,000   34,600   43,452   20,000 
Payments of related party advances  -   (43,400)
Decrease in bank overdraft  (812)  - 
Proceeds from line of credit  53,860   63,368   -   53,860 
Payments to line of credit  (4,827)  (30,848)  (533)  (4,827)
Proceeds from convertible debt  36,000   100,000 
Proceeds from sale of common stock  387,988   334,003 
Proceeds from convertible debt, net  473,240   36,000 
Proceeds from notes payables  538,875   - 
Capital contribution  482   - 
Proceeds from sale of common stock and subscription receivable  1,087,960   387,988 
                
NET CASH PROVIDED BY FINANCING ACTIVITIES  493,021   457,723   2,142,664   493,021 
                
NET INCREASE (DECREASE) IN CASH  (662,182)  83,840   96,631   (662,182)
        
Effect of exchange rate changes on cash  (13,068)  - 
                

CASH, beginning of period

  672,769   100,760   -   672,769 
                
CASH, end of period $10,587  $184,600  $83,563  $10,587 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid during the period for:                
Interest $4,075  $1,517  $17,134  $4,075 
Income taxes $-  $-  $-  $- 
                
Non-cash financing activities:        
Increase in debt discount and derivative liability $36,000  $- 
Non-cash investing and financing activities:        
Issuance of common stock for convertible debt and interest $390,612  $- 
Reclassification of interest payable to convertible debt $17,836  $- 
Increase in debt discount and derivative liabilities $473,240  $36,000 
Issuance of common stock for services $68,000  $-  $-  $68,000 
        
Liabilities assumed in acquisition $433,947  $- 
Less: assets acquired in acquisition  325,702   - 
Net liabilities assumed  108,245   - 
Fair value of shares for acquisition  4,587,351   - 
Increase in intangible assets $4,695,596  $- 

 

See accompanying condensed notes to unaudited condensed consolidated financial statements.

 

5

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20162017

(Unaudited)

 

NOTE 1 -ORGANIZATION AND NATURE OF OPERATIONS

 

OncBioMune Pharmaceuticals, Inc. (the “Company,” “we,” “us” or “our”) was incorporated under the laws of the State of Nevada on March 18, 2005, as PediatRx, Inc. From July 2010 until early fiscal year 2014, the Company engaged in the pharmaceutical business. During the fiscal year ended February 28, 2014, the Company divested itself of the balance of its pharmaceutical assets and engaged in the digital media business.

Acquisition of OncBioMune, Inc.

Upon completion of a share exchange between our company and the shareholders of OncBioMune, Inc. (“ONC”) on September 2, 2015 as previously disclosed, we becameis a biotechnology company specializing in innovative cancer treatment therapies. We haveThe Company has proprietary rights to a breast and prostate cancer therapeutic vaccines,patent vaccine, as well as a process for the growth of cancer cells and targeted chemotherapies. Ourtumors. The Company’s mission is to improve the overall patient condition through innovative bio immunotherapy with proven treatment protocols.

Oncbiomune México, S.A. De C.V.

As previously disclosed, on August 19, 2016,protocols, to lower deaths associated with cancer and reduce the Companycost of cancer treatment. The Company’s technology is safe, and Vitel Laboratorios S.A. de C.V. (“Vitel”), a Mexico-based pharmaceutical company that developsutilizes clinically proven research methods of treatment to provide optimal success of patient recovery. We are also developing and commercializes highcommercializing specialty drugs in Mexico and other Latin American countries following our March 10, 2017 acquisition of Vitel Laboratorios, S.A. de C.V.

On March 10, 2017 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding capital stock of Vitel Laboratorios, S.A. de C.V., a Mexican variable stock corporation (“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 Shareholders’ Agreement related to the launch of Oncbiomune México, S.A. De C.V. (“Oncbiomune Mexico”)revenue-stage Mexico-based pharmaceutical company that develops and commercializes specialty drugs in MALA. The Company acquired Vitel for the purposespurpose of developing and commercializing the Company’s PROSCAVAX vaccine technology and cancer technologies in México, CentralMALA and Latin America (“MALA”). Under the terms of the Shareholders Agreement, the Company has agreed to assign to Oncbiomune Mexico limited patentutilize Vitel’s distribution network and intellectual property rightscustomer and trademarks related to our OVCAVAX, PROSCAVAX vaccine technology and cancer technologies and future developments related to these technologies. These rights will permit Oncbiomune Mexico to use and develop these technologies in MALA.industry relationships. (See Note 3).

Planned Acquisition of Vitel

On November 2, 2016, we signed a non-binding term sheet to acquire Vitel as contemplated when we entered into the Shareholders’ Agreement. Pursuant to the term sheet, our planned acquisition of Vitel will be structured as an all-stock transaction with both OncBioMune and Vitel contributing equity interests into a newly created trust, resulting in Vitel operating as a wholly owned subsidiary of OncBioMune.

Basis of presentation and principles of consolidation

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiary, ONC. 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, 2015 and 2014 of ONC which were included in the Company’s annual report on Form 10-K as filed with the Securities and Exchange Commission on April 13, 2016.

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

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 the accompanying unaudited condensed consolidated financial statements, the Company had a net loss of $1,388,859 and $341,748 for the nine months ended September 30, 2016 and 2015, respectively. The net cash used in operations were $1,155,203 and $378,559 for nine months ended September 30, 2016 and 2015, respectively. Additionally, the Company had an accumulated deficit of $2,518,078 and $1,129,219, at September 30, 2016 and December 31, 2015, and had no revenues for the nine months ended September 30, 2016 and 2015. Effective September 2, 2015, the Company entered into the Exchange Agreement which changed the nature of its business and management. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that the Company’s capital resources are not currently adequate to continue operating and maintaining its business strategy for the fiscal year ending December 31, 2016. 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 unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

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., Vitel and Oncbiomune México, S.A. De C.V.. 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, 2016 and 2015 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 April 17, 2017.

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 a net loss of $9,128,446 and $1,388,859 for the nine months ended September 30, 2017 and 2016, respectively. The net cash used in operations were $2,034,462 and $1,155,203 for the nine months ended September 30, 2017 and 2016, respectively. Additionally, the Company had an accumulated deficit of $12,271,297 and $3,142,851 at September 30, 2017 and December 31, 2016, respectively, had a working capital deficit of $3,730,073 at September 30, 2017, had minimal revenues since inception, and is currently in default on certain convertible debt instruments, loans, and a bank line of credit. 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. On March 10, 2017, the Company completed the acquisition of 100% of the issued and outstanding capital stock of Vitel. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate to continue operating and maintaining its business strategy for the fiscal year ending December 31, 2017. The Company will seek to raise capital through additional debt and/or equity financings to fund our operations in the future.

6

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

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 three and nine months ended September 30, 20162017 and 20152016 include the valuation of accounts receivable, valuation of inventories, 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, and the fair value of non-cash equity transactions.transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in the business acquisition.

 

Fair value of financial instruments and fair value measurements

 

FASB ASC 820 —Fair Value Measurements and Disclosures,defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on September 30,December 31, 2016. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

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.

 

The carrying amounts reported in the consolidated balance sheets for cash, employee loans,due from and to related parties, prepaid expenses, loans payable, line of credit payable, payroll liabilities, and accounts payable and accrued liabilities, approximate their fair market value based on the short-term maturity of these instruments. The Company accounts for one instrument at fair value using level 3 valuation.

 

 At September 30, 2016 At December 31, 2015  At September 30, 2017 At December 31, 2016 
Description Level 1 Level 2 Level 3 Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 
Derivative liability       $70,648          
Derivative liabilities       $2,122,848         402,055 

7

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

 

A roll forward of the level 3 valuation financial instruments is as follows:

 

  Derivative
Liability
 
Balance at December 31, 2015 $- 
Initial measurement of derivative liability reflected as debt discount  36,000 
Initial measurement of derivative liability reflected in derivative expense  40,012 
Change in fair value included in derivative expense  (5,364)
Balance at September 30, 2016 $70,648 
  Derivative Liabilities 
Balance at December 31, 2016 $402,055 
Initial valuation of derivative liabilities included in debt discount  473,240 
Initial valuation of derivative liabilities included in derivative expense  730,700 
Reclassification of derivative liabilities to debt settlement income upon conversion  (411,842)
Reclassification of derivative liabilities to debt settlement income upon cashless exercise of warrants  (667,927)
Change in fair value included in derivative expense  1,596,622 
Balance at September 30, 2017 $2,122,848 

 

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 equivalent

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, 2017 and December 31, 2016, the Company did not have any cash equivalents.

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of September 30, 2017 and December 31, 2016. The Company has not experienced any losses in such accounts through September 30, 2017. Additionally, the Company maintains cash at financial institutions in Mexico. At September 30, 2017 and December 31, 2016, cash balances held in Mexico banks of $62,673 and $0, respectively, are uninsured.

Accounts receivable

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.

Inventories

Inventories, consisting of finished goods related to the Company’s products are stated at the lower of cost and net realizable value utilizing the first-in first-out (FIFO) method. A reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected net realizable value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the net realizable value. These reserves are recorded based on estimates.

Property and equipment

Property are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to five years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

8

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20162017

(Unaudited)

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. Based on the Company’s review of long-lived assets for impairment, 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.

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

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company records revenue when the products have been shipped to the customer. The Company reports its sales net of actual sales returns and the amount of reserves established for anticipated sales returns based on historical rates. The Company estimates and records a liability for potential returns and records this as a reduction of revenue in the same period the related revenue is recognized. The Company also offers cash discounts to certain customers as an incentive for prompt payment. The Company accounts for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell through to the final customer is established which may be upon receipt of payment from the Company’s customer.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50 for“Equity-Based Payments to Non-Employees”, all share-based payments to consultants and other third-parties,non-employees, including grants of stock options, are recognized in the consolidated financial statements as compensation expense is recognized over the service period of the award.consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the consolidated financial statements accordingly.

 

Basic and diluted earningsloss per share

 

Pursuant to ASC 260-10-45, basic earningsloss per common share is computed by dividing income (loss) available to common shareholdersnet loss by the weighted average number of shares of common stock outstanding for the periods presented. Diluted incomeloss per share is computed by dividing net income (loss)loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during eachthe period. Diluted income (loss) per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulting in the issuance of common stock that would then share in the Company’s income (loss) subject to anti-dilution limitations.

NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basic and diluted earnings per share (continued)

Potentially dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method). These common stock equivalents may be dilutive in the future.

9

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

All potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

 September 30, 2016 September 30, 2015  September 30, 2017 September 30, 2016 
Total stock warrants  867,870   2,694 
Stock warrants  23,479,438   867,870 

Convertible debt

  

547,345

   -   19,068,568   547,345 
Stock options  4,000,000   - 

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“Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of September 30, 2017 and December 31, 2016, 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, 2017.

Research and development

Research and development costs incurred in the development of the Company’s products are expensed as incurred.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company and its U.S. subsidiary is the U.S. dollar and the functional currency of the Company’s subsidiaries located in Mexico is the Mexican Peso (“Peso”). For the subsidiaries whose functional currencies are the Peso, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the spot exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency included in the results of operations as incurred. Additionally, transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates.

All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. The Company did not enter into any material transactions in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at September 30, 2017 were translated at 18.12765 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 18.87931 Pesos to $1.00. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.

10

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

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

 

In August 2014, the2015, FASB issued ASU 2014-15,2015-14,DisclosureDeferral of Uncertainties About an Entity’s Abilitythe Effective Date, which amends ASC Topic 606,Revenue from Contracts with Customers.ASC Topic 606 was established by previously-issued ASU 2014-09, discussed below. For public business entities, the amendments in ASU 2015-14 defer the effective date of ASU 2014-09 to Continue as a Going Concern, that will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial doubt and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. This standard is effective for public entities for annualreporting periods endingbeginning after December 15, 2016. Earlier application2017. Early adoption of this standardASU 2014-09 is permitted. This standard is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.

On January 5, 2016, theIn May 2014, FASB issued ASU No. 2016-012014-09,Revenue from Contracts with Customers, which established ASC Topic 606. The new revenue recognition standard eliminates all industry-specific guidance and provides a five-step analysis of transactions to amenddetermine when and how revenue is recognized. The premise of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The amendments in this ASU may be applied retrospectively to each period presented, or as a cumulative effect adjustment as of the date of adoption. Management is currently evaluating the accounting, guidance on the classificationtransition and measurement of financial instruments. The standard requires that all investments in equity securities, including other ownership interests, are carried at fair value through net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidationdisclosure requirements of the investee or for whichstandard and expects to know the entity has elected the predictability exception to fair value measurement. Additionally, the standard requires that the portion of the total fair value change caused by a changefinancial statement impact upon adoption in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. The Company does not anticipate the guidance to have a material impact on its consolidated financial statements or notes to its consolidated financial statements.2018.

 

On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements and notes to its consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11,Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception.The ASU allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted classified as liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company is evaluating the impact of the revised guidance and believes that this will have a significant impact on its consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

11

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20162017

(Unaudited)

 

On March 30, 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”) to amend the accounting guidance for share-based payment accounting. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016NOTE 3 –ACQUISITION OF VITEL LABORATORIOS, S.A. de C.V.

 

Other accounting standardsOn March 10, 2017 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding capital stock of Vitel Laboratorios, S.A. de C.V., a Mexican variable stock corporation (“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 develops and commercializes specialty drugs in MALA. The Company acquired Vitel for the purpose of commercializing the Company’s PROSCAVAX vaccine technology and cancer technologies in MALA and to utilize Vitel’s distribution network and customer and industry relationships.

Pursuant to the terms of the Contribution Agreement, the Company issued 61,158,013 shares of its common stock and 5,000,000 shares of Series B preferred stock to Banco Actinver, S.A., in its capacity as Trustee (“Banco Actinver”) of the Irrevocable Management Trust Agreement Trust No. 2868 (the “Trust Agreement”) for the benefit of the Vitel Stockholders in exchange for 100% of the issued and outstanding capital stock of Vitel (the “Vitel Shares”). The Common Stock and Series B Preferred will be held by Trustee for the benefit of the Vitel Stockholders as provided for in the Trust Agreement and 98% of the Vitel Shares are held by Banco Actinver for the benefit of the Company as provided for in the Trust Agreement and 2% of the Vitel Shares were transferred to the Company. Vitel became a wholly owned subsidiary of the Company as of the Closing Date as the Company has full control of the Vitel Shares through the Trust.

In addition, the Company issued 2,892,000 shares of Series B Preferred to Jonathan F. Head, Ph. D, the Company’s Chief Executive Officer and a member of the Board of Directors of the Company (the “Board of Directors”) as provided for in the Contribution Agreement. The Series B preferred stock issued to Dr. Head and were determined to have nominal value of $289 or $.0001 per shares and was recorded as compensation expense.

To induce the Vitel Stockholders to enter into the Contribution Agreement and as a condition to close the transactions set forth in that agreement, the Company, the Vitel Stockholders, Dr. Head and Andrew A. Kucharchuk, the Company’s President, Chief Financial Officer and a Director also entered into the following agreements as of the Closing Date or perform the following actions (i) a Stockholder’s Agreement among the Company, Dr. Head, Mr. Kucharchuk, Mr. Cosme and Mr. Alaman dated as of the Closing Date (the “Stockholders’ Agreement”); (ii) the Trust Agreement; (iii) the Company, Vitel and the Vitel Stockholders entered into employment agreements with Messrs. Cosme and Alaman; (iv) the Company and Dr. Head and Mr. Kucharchuk entered into amendments to the employment agreements with, and stock option awards to, Dr. Head and Mr. Kucharchuk; (v) the Company, Dr. Head, Mr. Kucharchuk and the Vitel Stockholders agreed to consent to an amendment to the Company’s Articles of Incorporation and bylaws; (vi) and to elect Mr. Cosme, Mr. Alaman, Dr. Head and Mr. Kucharchuk as directors of Vitel and such directors to elect Mr. Cosme, Mr. Alaman, Dr. Head and Mr. Kucharchuk as officers of Vitel.

The Stockholders Agreement

The following is a summary of Stockholders Agreement.

The Vitel Stockholders and the Company established a trust pursuant to the Trust Agreement described below. Mr. Cosme and Mr. Alaman each contributed, assigned and transferred to the Company ownership of, and title over, one share of the capital stock of Vitel (the “Vitel Shares”) and Mr. Cosme and Mr. Alaman contributed, assigned and transferred to Banco Actinver (as defined in the Trust Agreement”) ownership of, and title over, the remaining 98 Vitel Shares for the benefit of the Company pursuant to the terms and conditions of the Trust Agreement. The Company contributed, assigned and transferred to Banco Actinver ownership of, and title over, 61,158,013 newly-issued shares of Common Stock and 5,000,000 newly-issued shares of Series B Preferred Stock with 100 votes per share (collectively, the “OBM Shares”), for the benefit of Mr. Cosme and Mr. Alaman pursuant to the terms and conditions of the Trust Agreement. The OBM Shares held by the Trust have not been and will not be registered under the Securities Act of 1933, as amended, (“Securities Act”) and are restricted securities under the Securities Act and the rules and regulations promulgated thereunder and are subject to the restrictions on transfer contained in Article 4 of the Shareholders’ Agreement.

Corporate Rights. The corporate rights resulting from the Vitel Shares contributed to the Trust will be exercised by Banco Actinver pursuant to the written instructions it receives from the Company. For such purposes, and pursuant to the bylaws of Vitel, the Company shall have the authority to instruct Banco Actinver regarding exercising any corporate rights it may be entitled to in its capacity as the majority Vitel shareholder.

12

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

Composition of the Board of Directors. The Stockholders’ Agreement permits the Vitel Stockholders to appoint one member to the Board of Directors, one designated by Dr. Head and Mr. Kucharchuk (the “Management Designee”), and two independent directors shall be designated jointly by Dr. Head and Mr. Kucharchuk (the “Management Stockholders”) on the one hand, and the Vitel Stockholders, on the other, and the Management Stockholders or the Management Designee and the Vitel Stockholders or the Vitel Designee shall jointly appoint, as soon as practicable, an independent fifth member of the Board of Directors.

Board of Directors Resolutions. The Stockholders’ Agreement requires the Board of Directors to adopt any and all resolutions with a vote from a majority of its members, provided that for any “Major Decision” as defined in the Stockholders’ Agreement, either the Vitel Designee or the Management Designee shall vote in favor of adopting the corresponding resolution. In the event of a deadlock amongst the members of the Vitel Board of Directors, the Board of Directors shall cast the deciding vote to resolve the deadlock amongst the board members of Vitel with a vote from a majority of its members.

Restrictions on Transfer.Generally, the Stockholders may not at any time, except as discussed below, transfer their respective Company Securities (x) to any of their Affiliates, their spouse, children, grandchildren, parents, sisters, brothers, nieces, nephews or any other relative within the second degree of kindred or a trust or other entity under a Stockholder’s control (the “Permitted Transferees“), or (y) with the prior consent of the other Stockholders which are also a party hereto, or (z) as otherwise permitted under the Stockholders’ Agreement (each, a “Permitted Transfer “), in the understanding that (1) each Management Stockholder will be considered a Permitted Transferee with respect to each other and each Vitel Stockholder will be considered a Permitted Transferee with respect to each other, (2) transfers by the Stockholders that are a party hereto resulting from their death shall be considered a Permitted Transfer, and (3) any Stockholder that is a party hereto may act individually in regards to the rights provided for in the Stockholders’ Agreement.

Right of First Refusal. In the event a Stockholder that is a party to the Stockholders’ Agreement wishes to transfer its Company Securities (other than a transfer which is part of an acquisition or strategic transaction approved by the directors of the Company as a Major Decision), the other non-transferring Stockholders that are also a party to the Stockholders’ Agreement shall have the irrevocable right of first refusal to purchase that shares of the selling shareholder.

Right of Co-Sale (Tag Along). In the event that any stockholder who is a party to the Stockholders’ Agreement or group of such stockholders intends to accept an offer (either solicited or unsolicited) from any third party to acquire or otherwise transfer Company Securities (as defined in the Stockholders’ Agreement), representing at least 20% of the outstanding Company Securities, on a fully diluted basis, the selling stockholder shall give an offer notice in writing to the other stockholders of the Company who are a party to the Stockholders’ Agreement, with a copy to the Company, containing the terms and conditions of such offer received from the interested third party. Each such stockholder shall have the right to participate in such offer by selling the pro rata proportion of its Company Securities pursuant to such offer to acquire or otherwise Transfer Company Securities (as defined in the Stockholders’ Agreement).

Drag Along. In the event a stockholder who is a party to the Stockholders’ Agreement or group of such stockholders representing at least 32% (thirty two per cent) of the outstanding Company Securities, on a fully diluted basis, intends to accept an offer from any third party to acquire or otherwise Transfer Company Securities, representing at least 50% of the outstanding Company Securities, on a fully diluted basis, and the transaction is approved by the Board of Directors as a Major Decision, then each such stockholder shall be obligated to sell its Company Securities pursuant to the offer to purchase. In case the drag along provision included herein is enforced, all the stockholders participating in such sale shall receive the same terms and conditions of sale based on their respective holdings of Company Securities and shall otherwise be treated equally based on such ownership interest.

Termination. The Stockholders’ Agreement terminates upon the earlier of the following: (i) three years as of the Closing Date; (ii) in connection with any Shareholder, whenever such Shareholder directly or indirectly owns less than 5% of the fully diluted shares of the Company; or (iii) upon the consummation of a Liquidation Event (as defined in the Stockholders’ Agreement).

Effective as of March 10, 2017, Mr. Cosme, Mr. Alaman and the Company entered into the Irrevocable Management Trust Agreement Number F/2868 between Mr. Cosme, Mr. Alaman, the Company and Banco Actinver (the “Trust Agreement”) for the purpose of establishing a trust to hold the OBM Shares and 98 shares of Vitel’s capital stock which were transferred to Trustee pursuant to the Trust Agreement, in addition to other property the beneficiaries may elect to contribute to the trust. The trust structure of this acquisition transaction was established in order to provide certain income tax benefits to the seller pursuant to Mexican tax law.

In connection with the acquisition, the Company issued 61,158,013 unregistered shares of its common stock valued at $4,586,851, based on the acquisition-date fair value of our common stock of $.075 per share based on recent sales of the Company’s common stock pursuant to unit subscription agreements and 5,000,000 shares of Series B preferred stock which primarily gives the holder voting rights and were determined to have nominal value of $500.

13

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

The fair value of the assets acquired and liabilities assumed were based on management estimates of the fair values on March 10, 2017. Based upon the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

Cash $39,144 
Accounts receivable  178,835 
Inventories  54,952 
Recoverable taxes  50,792 
Other current assets  1,499 
Property and equipment  480 
Goodwill and other intangible assets  4,695,596 
Total assets acquired at fair value  5,021,298 
     
Accounts payable and accrued expenses  427,723 
Payroll taxes  6,224 
Total liabilities assumed  433,947 
     
Total purchase consideration $4,587,351 

The assets acquired and liabilities assumed are recorded at their estimated fair value on the acquisition date with subsequent changes recognized in earnings or proposedloss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business combination date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the purchase price measurement period, the Company will record adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments were determined.

The purchase price exceeded the fair value of the net assets acquired by FASBapproximately $4,695,596, which was recorded as goodwill or other intangible assets pending the Company analysis of the fair values. The fair value of intangible assets may be based upon the discounted cash flow method that doinvolves inputs that are not require adoption until a future date areobservable in the market (Level 3). Goodwill assigned represents the amount of consideration transferred in excess of the fair value assigned to identifiable assets acquired and liabilities assumed. Any goodwill recorded is not expected to have a material impactbe deductible for U.S. income tax purposes. Based on the financial statements upon adoption. Company’s review of long-lived assets for impairment, the Company recognized an impairment loss of $4,695,596 since the sum of expected undiscounted future cash flows is less than the carrying amount of the goodwill.

The Company does not discuss recent pronouncements thatshall record acquisition and transaction related expenses in the period in which they are not anticipated to have an impact on or are unrelated to its financial condition, resultsincurred. During the nine months ended September 30, 2017, acquisition and transaction related expenses primarily consisted of operations, cash flows or disclosures.legal fees of approximately $104,000.

 

NOTE 34LINE OF CREDIT

 

In October 2014, ONCthe Company entered into a $100,000 revolving promissory note (the “Revolving Note”) with Regions Bank (the “Lender”). The unpaid principal balance of the Revolving Note is payable on demand and any unpaid principal and interest is payable due not later than October 27, 2017, is secured by deposits located at the Lender, and bears interest computed at a variable rate of interest which is equal to the Lender’s prime rate plus 1.7% (5.20%(5.95% and 5.20%5.45% at September 30, 20162017 and December 31, 2015,2016, respectively). ONCThe Company will pay to Lender a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may, at any time or from time to time, prepay the Revolving Note in whole or in part without penalty. As of the date of this report, the Lender has not renewed the Revolving Note and the Company is currently in default. Upon default, the interest increased by 2.0%.

 

At September 30, 20162017 and December 31, 2015,2016, the Company had $98,741$99,208 and $49,708,$99,741, respectively, in borrowings outstanding under the Revolving Note with $1,259 and $50,292, respectively, available for borrowing under such note.Note. The weighted average interest rate during the nine months ended September 30, 20162017 was approximately 5.20%5.76%.

 

NOTE 4 –CONVERTIBLE PROMISSORY NOTE

14

 

On May 23, 2016, the Company entered into a $40,000 convertible promissory note (the “Convertible Note”) with Crown Bridge Partners, LLC (the “Lender”). The unpaid principal and interest is payable no later than May 22, 2017 and bears interest computed at a rate of interest which is equal to 8.0% per annum. Any amount of principal or interest on this Convertible Note, which is not paid by the maturity date, shall bear interest at the rate of 22% per annum from the due date until paid. The Company may prepay any amount outstanding under the Convertible Note by making a payment to the Lender of an amount in cash equal as follow:

Time Frame after Convertible Note DatePrepayment Penalty Amount
Initial 30 day period115% multiplied the amount of prepayment
31st to 60th day120% multiplied the amount of prepayment
61st to 90th day125% multiplied the amount of prepayment
91st to 120th day130% multiplied the amount of prepayment
120th to 150th day135% multiplied the amount of prepayment
151st to l80th day140% multiplied the amount of prepayment

The prepayment is subject to the Lender’s prior written acceptance in the Lender’s sole discretion. The Company may not prepay any amount outstanding under the Convertible Note after the 180th day after the issuance of the Convertible Note.

The Lender is entitled, at their option, at any time after the issuance of the Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock. The Conversion Price is the Variable Conversion Price (“VCP”) as defined in the Convertible Note and subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events. VCP means 58% multiplied by the “Market Price”, which is calculated as the lowest trading price, as defined, for the Company’s common stock during the twenty trading day period ending on the last complete trading day prior to the conversion date. If at any time while the Convertible Note is outstanding, the lowest trading prices for the Company’s common stock is equal to or lower than $0.10, then an additional discount of five percent (5%) will be factored into the VCP until the Convertible Note is no longer outstanding (resulting in a discount rate of 47% assuming no other adjustments are triggered hereunder). In the event that shares of the Company’s common stock are not deliverable via DWAC following the conversion of any amount thereunder, an additional five percent (5%) discount shall be factored into the VCP until the Convertible Note is no longer outstanding (resulting in a discount rate of 47% assuming no other adjustments are triggered hereunder).

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20162017

(Unaudited)

 

NOTE 5 –CONVERTIBLE DEBT

November 2016 Financing

On November 23, 2016, the Company entered into and closed on the transaction set forth in an Amended and Restated Securities Purchase Agreements (the “Securities Purchase Agreements”) it entered into with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $350,000: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “November 2016 Notes”); and (ii) warrants (the “Warrants”) to purchase 2,333,334 shares of the Company’s common stock at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined in the Warrants) (see below for reduction of warrant exercise price) which are exercisable for a period of five years from November 23,2016. The aggregate principal amount of the November 2016 Notes was $350,000 and the Company received $300,000 after giving effect to the original issue discount of $50,000. The November 2016 Notes bear interest at a rate equal to 10% per annum (which interest rate increased to 24% per annum upon the occurrence of an Event of Default (as defined in the November 2016 Notes)), had a maturity date of July 23, 2017 and were convertible (principal, and interest) at any time after the issuance date of the November 2016 Notes into shares of the Company’s Common Stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the Note) (see below for reduction 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. The Forbearance Agreement also provides for the Holders to forbear their right to demand an immediate cash payment of the principal amount due plus accrued interest as a result of the Company’s failure to satisfy its payment obligations to the Holder on May 23, 2017 so long as the Company complies with its other obligations under the November 2016 Notes and the other transaction documents. The Forbearance Agreements did not waive the default interest rate of 24%. In consideration therefore, and as currently set forth in the November 2016 Notes, the Holders shall be entitled to convert such notes from time to time at their discretion in accordance with the terms of the November 2016 Notes and the November 2016 Notes shall not be subject to repayment unless agreed to by the Holder of such Note. In connection with the issuanceForbearance Agreement, the Company increased the principal balance of the Convertible Note above, the Company determined that the termsNovember 2016 Notes by $159,135, reduced accrued interest payable by $17,836, and recorded debt settlement expense of the Convertible Note$141,299.

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 and $0.05 per share. Accordingly, pursuant to these ratchet provisions, the conversion price on the November 2016 Notes were lowered to $0.075 per share and then to $0.05 per share and the exercise price of the November 2016 Warrants was lowered to $0.03. Additionally, the total number of November 2016 Warrants were increased on a full ratchet basis by an aggregate amount of 11,277,780 (see Note 8). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless exercise of 9,074,076 warrants (see Note 8).

 

June 2017 Financing

On June 2, 2017, the Company entered into a 2nd Securities Purchase Agreement (the “2nd 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 2nd Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $233,345: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “June 2017 Notes”); and (ii) warrants (the “June 2017 Warrants”) to purchase 1,555,633 shares of the Company’s common stock, par value $0.001 per share at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined in the June 2017 Warrants) and exercisable for five years after the issuance date.

15

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

The aggregate principal amount of the June 2017 Notes is $233,345 and the Company received $200,000 after giving effect to the original issue discount of $33,345. The June 2017 Notes bear interest at a rate equal to 10% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the June 2017 Notes)), have a maturity date of February 2, 2018 and are convertible (principal, and interest) at any time after the issuance date of issuance into shares of the Company’s common stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the June 2017 Notes), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the June 2017 Note shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the common stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The June 2017 Notes provide for 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.

The June 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June 2017 Notes, the Company sold stock at a share price of $0.05 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the June 2017 Warrants were lowered to $0.03 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from 1,555,632 warrants to 9,074,520 warrants, an increase of 7,518,888 warrants (see Note 8).

July 2017 Financing

On July 26, 2017, the Company entered into and closed on a 3rd Securities Purchase Agreement (the “3rd Securities Purchase Agreement”) with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the 3rd Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $300,000: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,883 (the “July 2017 Notes”); and (ii) warrants (the “July 2017 Warrants”) to purchase 4,769,763 shares of the Company’s common stock at an exercise price of $0.10 per share (subject to adjustments under certain conditions as defined in the Warrants). The closing under the 3rdSecurities Purchase Agreement occurred on July 26, 2017. These Notes bear interest at a rate equal to 5% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the Notes)), have a maturity date of March 25, 2018 and are convertible (principal, and interest) at any time after the issuance date of these Notes into shares of the Company’s Common Stock at a conversion price equal to $0.07 per share (subject to adjustment as provided in the Note), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the July 2017 Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”) and the exercise price of the July 2017 Warrants shall be 60% of the Default Conversion Price. These Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 110% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 115% of the applicable amortization payment. These Notes may be prepaid at any time until the 210th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date through the three months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest during months four through seven following the Original Issue Date. In order to prepay these Notes, the Company shall provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser may convert the Notes in whole or in part at the Conversion Price.

16

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

The November 2016 Notes, June 2017 Notes and July 2017 Notes contain certain covenants, such as restrictions on the incurrence of indebtedness, creation of liens, payment of restricted payments, redemptions, payment of cash dividends and the transfer of assets. These Notes also contains certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transactions. The conversion price is also subject to adjustment if the Company issues or sells shares of its common stock for a consideration per share less than the conversion price then in effect, or issue options, warrants or other securities convertible or exchange for shares of its common stock at a conversion or exercise price less than the conversion price of these Notes then in effect. If either of these events should occur, the conversion price is reduced to the lowest price at which these securities were issued or are exercisable. The Company granted the Purchasers certain rights of first refusal on future offerings by the Company for as long as the Purchasers hold these Notes. In addition, subject to limited exceptions, the Purchasers will not have the right to convert any portion of these Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The Purchaser may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to the Company.

The November 2016, June 2017 and July 2017 Warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price and they are also exercisable on a cashless basis at any time there is no effective registration statement registering the shares of common stock underlying the Warrants. The exercise price of these Warrants are subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Common Stock and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders. The exercise price of these Warrants are also subject to full ratchet price adjustment if the Company sells or grants any option to purchase, sells or re-prices any common stock or common stock equivalents, as defined, at an exercise price lower than the then-current exercise price of these Warrants with the exception for certain exempted issuances and subject to certain limitations on the reduction of the exercise price as provided in the Warrants. In the event of a fundamental transaction, as described in these Warrants and generally including any reorganization, recapitalization or reclassification of the Common Stock, the sale, transfer or other disposition of all or substantially all of the Company’s properties or assets, the Company’s consolidation or merger with or into another person, the acquisition of more than 50% of the outstanding Common Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by the outstanding Common Stock, the holders of these Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised these Warrants immediately prior to such fundamental transaction; provided that upon the occurrence of certain fundamental transactions, the holder can require the Company to purchase these Warrants for cash at a price equal to the higher of the Black Scholes Value of the unexercised portion of these Warrants or difference between the cash per share paid in the fundamental transaction and the exercise price per share. The holders of these Warrants will not have the right to exercise any portion of these Warrants if the holder (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of these Warrants.

In connection with the Company’s obligations under the November 2016, June 2017 and July 2017 Notes, the Company entered into a Security Agreement, Pledge Agreement and Subsidiary Guaranty with Calvary Fund I LP, as agent, pursuant to which the Company granted a lien on all assets of the Company (the “Collateral”) excluding permitted indebtedness which includes a first lien held by Regions Bank in connection with the $100,000 revolving promissory note entered into with Regions Bank in October 2014, for the benefit of the Purchasers, to secure the Company’s obligations under the Notes. Upon an Event of Default (as defined in the related Notes), the Purchasers may, among other things, collect or take possession of the Collateral, proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.

From May 2017 to September 2017, the Company issued 9,433,557 shares of its common stock upon the conversion of principal note balances of $378,453 and interest of $12,158 (see Note 8).

Derivative liabilities pursuant to Notes and Warrants

In connection with the issuance of the November 2016, June 2017 and July 2017 Notes and Warrants, the Company determined that the terms of these Note and Warrants contain terms that included a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments and the Warrants were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives wasand Warrants were determined using the Black- Scholes Option Pricing Model. OnBinomial 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.

17

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

In connection with the issuance of June 2017 and July 2017 Notes and Warrants in June 2017, on the initial measurement date of the June 2017 and July 2017 Notes and Warrants, the fair values of the embedded conversion option derivativeand warrant derivatives of $76,012$1,203,940 was recorded as a derivative liability andliabilities, $730,700 was allocated as a debt discount up to the net proceeds of the Convertible Note of $36,000 with the remainder of $40,012 charged to current period operations as initial derivative expense. expense, and $473,240 was recorded as a debt discount and will be amortized into interest expense over the term of the respective Note.

At the end of eachthe period, the Company revaluesrevalued the embedded conversion option and warrant derivative liabilities. ForIn connection with these revaluations, the threeCompany recorded derivative expense of $1,596,622 and $34,648 for the nine months ended September 30, 2017 and 2016, aggregate derivative income (expense) from changes in fair value of derivative liabilities and the initial derivative expense amounted to $109,858 and $(34,648), respectively, which is recorded as a component of other income/(expense) in the accompanying consolidated statements of operations.respectively.

 

During the nine months ended September 30, 2016,2017, the fair value of the derivative liabilities was estimated using the Black-Scholes option-pricingBinomial valuation model with the following assumptions:

 

Dividend rate  0 
Term (in years)  0.670.01 to 1.05.00 years 
Volatility  337.24%168.4% to 366.97199.6%
Risk-free interest rate  0.45%1.03% to 0.691.89%

 

For the three and nine months ended September 30, 2016, amortization of debt discounts related to these convertible note amounted to $10,000 and $14,167, respectively, which has been included in interest expense on the accompanying statements of operations.

At September 30, 20162017 and December 31, 2015,2016, the Convertible Noteconvertible debt consisted of the following:

 

 September 30, 2016 December 31, 2015  September 30, 2017 December 31, 2016 
Principal amount $40,000  $-  $697,910  $350,000 
Less: unamortized debt discount  (25,833)  -   (408,821)  (295,312)
Convertible note payable, net $14,167  $-  $289,089  $54,688 

 

At September 30, 2016,2017 and December 31, 2015,2016, the Company had $40,000$697,910 and $0,$350,000, respectively, in borrowings outstanding under the Convertible Note.Notes. The weighted average interest rate during the nine monthsperiod ended September 30, 20162017 was approximately 8.0%11.2%.

NOTE 6 –LOANS 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 of $538,875. The Loans bear interest at an annual rate of 33.3% and are unsecured. Loans aggregating $139,125 were due on or before October 1, 2017 and are currently in default, and loans aggregating $399,750 are due on or before January 1, 2018.

 

NOTE 57RELATED-PARTY TRANSACTIONS

Due to related parties

 

From time to time, the Company receives advances from and makes advances to The Sallie Astor Burdine Breast Foundation (the “Foundation”), a not-for-profit foundation created by our chief executive officer who is also a board member of the Foundation, for working capital purposes. The advances are non-interest bearing and are payable on demand.

From time to time, the Company receives advances from and makesrepays such advances to the Company’s chief executive officer and chief financial officer for working capital purposes. Additionally, from time to time, Vitel’s General Manager of Global Operations and Vitel’s Chief Operations Officer, both of who are beneficial shareholders of the Company (together referred to as the Vitel Officers), paid expenses on behalf of the Company and the Company reimburses the Vitel Officers or these expenses. The advances are non-interest bearing and are payable on demand.

 

For the nine months ended September 30, 2016,2017, due from/(to)to related parties’party activity consisted of the following:

 

  Foundation  CEO  CFO 
Balance due from (to) related parties at December 31, 2015 $3,200  $5,900  $8,700 
Working capital advances made  4,594   -   3,250 
Working capital advances received  -   (20,000)  - 
Repayments received  (6,050)  (5,900)  (11,695)
Balance due from (to) related parties at September 30, 2016 $1,744  $(20,000) $255 
  CEO  CFO  Vitel Officers  Total 
Balance due to related parties at December 31, 2016 $5,000  $-  $-  $5,000 
Working capital advances received  50,000   -   6,444   56,444 
Repayments made  (7,000)  -   (5,975)  (12,975)
Balance due to related parties at September 30, 2017 $48,000  $-  $469  $48,469 

18

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARYSUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20162017

(Unaudited)

 

Other

During the nine months ended September 30, 2017, the Company owed amounts to a company owned by the Vitel Officers for consulting services performed prior to March 10, 2017, the acquisition date of Vitel. In connection with the balances owed, during the period from March 10, 2017 (the acquisition date) to September 30, 2017, the Company paid interest expense of $6,078 to this company which was reflected as interest expense - related party on the accompanying unaudited condensed consolidated statements of operations and repaid all amounts due of $10,563. At September 30, 2017, the Company did not owe any balances to this company. Additionally, during the nine months ended September 30, 2017, the Company paid $22,597 and $8,449 to this company owned by the Vitel Officers for consulting fees and for administrative fees, respectively.

NOTE 68STOCKHOLDERS’ DEFICITEQUITY (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 (“Common Stock”), and 20,000,000 shares are preferred stock, with a par value of $0.0001 per share (“Preferred Stock”).

 

Series A Preferred Stock

 

On August 20, 2015, the Company filed the Certificate of Designation with the Nevada Secretary of State, designating 1,000,000 shares of the authorized 20,000,000 Preferred Stock as Series A Preferred Stock. Each holder of Series A Preferred Stock is entitled to 500 votes for each share of Series A Preferred Stock held as of the applicable date on any matter that is submitted to a vote or for the consent of the stockholders of the Company.

The holders of Series A Preferred Stock shall have no special voting rights and their consent is not required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. On September 2, 2015, in connection with the Exchange, the Company issued 1,000,000 shares of the Company’s Series A Preferred Stock, representing 100% of the outstanding Series A Preferred. Of these shares, 500,000 were issued to our Chief Executive Officer and 500,000 shares were issued to one of the membersa former member of our Board of Directors. As of September 30, 2017, there are 1,000,000 shares of Series A Preferred Stock issued and outstanding.

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.

19

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

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 $.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 $.0001 per shares. As of September 30, 2017, there are 7,892,000 shares of Series B Preferred issued and outstanding.

Common Stock

 

Common stock issued for services

 

On January 1, 2016,February 27, 2017, the Company issued 60,000150,000 shares of its unregistered common stock valued at $.30 per common share or $18,000 to an employee as a directorbonus for services to be rendered on the Company’s board of directors.Company. The shares were valued at the most recent cash price paid of $.30$0.075 per share. In connection with these shares, the Company recorded stock-based compensation of $18,000.$11,250.

 

On MayApril 13, 2016,2017, the Company entered intoissued 20,000 shares of its unregistered common stock to a six-month consulting agreementconsultant for business development services. Pursuant to the agreement, the Company shall pay the consultant a monthly fee of $4,000 beginning on May 15, 2016 and, thereafter, on the fifteenth day of each month. In addition, the Company issued the consultant and/or its affiliates 200,000 shares of the Company’s common stock.services performed. The common shares were valued at the most recent cash price paid of $0.075 per share. In connection with these shares, the Company recorded stock-based compensation of $1,500.

On July 5, 2017, the Company issued 300,000 shares of its unregistered common stock to a consultant for business development services performed. The shares were valued at the quoted trading price on the date of $0.34grant of $0.077 per share or $68,000.share. In connection with these shares, the Company recorded stock-based consulting expensefees of $51,000 and prepaid expenses of $17,000 which will be amortized over the remaining service period. If the Company chooses to extend the agreement, the Company shall pay the consultant a monthly fee of $7,500 beginning on November 15, 2016 and, thereafter, on the first of each month and the Company shall issue to the consultant 100,000 Shares of the Company’s common stock.$23,100.

 

Common stock issued for cashacquisition

 

During the nine months ended September 30, 2016,On March 10, 2017, pursuant to subscription agreements,the terms of the Contribution Agreement, the Company issued 102,34161,158,013 shares of its unregistered common stock to investorsBanco Actinver, S.A., in its capacity as Trustee (the “Trustee”) of the Irrevocable Management Trust Agreement Trust No. 2868 (the “Trust Agreement”) for cash proceedsthe benefit of $51,926.

During the three months ended September 30, 2016,Vitel Stockholders in exchange for 100% of the issued and outstanding capital stock of Vitel (See Note 3). The 61,158,013 shares of common stock were valued at $4,586,851, based on the acquisition-date fair value of our common stock of $0.075 per share based on recent sales of the Company’s common stock pursuant to unit subscription agreements, the Company issued 1,730,362 shares of its common stock and 865,176 five-year warrants to purchase common shares for $0.30 per common share to investors for cash proceeds of $259,552.

Warrants

Warrant activities for the nine months ended September 30, 2016 are summarized as follows:

  Number of
Warrants
  Weighted
Average
Exercise
Price
  Weighted Average
Remaining
Contractual Term
(Years)
  Aggregate
Intrinsic
Value
 
Balance Outstanding December 31, 2015  2,694  $69.60   2.15  $- 
Granted  865,176   0.30   4.88   - 
Forfeited  -   -   -   - 
Balance Outstanding September 30, 2016  867,870  $0.51   4.87  $- 
                 
Exercisable, September 30, 2016  867,870  $0.51   4.87  $- 

11

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARY

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)agreements.

 

Common stock purchase agreement

 

On October 20, 2015, the Company entered into a common stock purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Upon signing the Purchase Agreement, Lincoln Park agreed to purchase 333,334 shares of the Company’s common stock for $100,000 or $0.30 per share as an initial purchase under the Purchase Agreement.

Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to, and Lincoln Park is obligated to purchase, up to an additional $10.0$10.1 million in amounts of shares, as described below, of the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing on the date that a registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed.filed which occurred on December 15, 2015. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 50,000100,000 shares of Common Stock on any business day (such purchases, “Regular Purchases”), provided that at least one business day has passed since the most recent purchase, and provided, however that Lincoln Park’s committed obligation under any single Regular Purchase shall not exceed $50,000, provided that the amount the Company may sell to Lincoln Park under a single Regular Purchase may increase under certain circumstances as described in the Purchase Agreement but in no event will the amount of a single Regular Purchase exceed $500,000. The purchase price of shares of Common Stock related to the future funding will be based on a formula tied to the prevailing market prices of such shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Common Stock is not below the threshold price as set forth in the Purchase Agreement. The Company’s sales of shares of Common Stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 4.99% of the then outstanding shares of the Common Stock.

 

20

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

In connection with the Purchase Agreement, the Company issued as a commitment fee to Lincoln Park 1,000,000 shares of Common Stock. Lincoln Park represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)), and the Company sold the securities in reliance upon an exemption from registration contained in Section 4(a)(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the Common Stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares.

 

The net proceeds under the Purchase Agreement to the Company will depend on the frequency and prices at which the Company sells shares of its stock to Lincoln Park. The Company expects that any proceeds received by the Company from such sales to Lincoln Park under the Purchase Agreement will be used for general corporate purposes and working capital requirements.

 

In July andDuring the nine months ended September 2016, 30, 2017, pursuant to the Purchase Agreement, with Lincoln Park dated October 20, 2015, the Company issued an aggregate of 400,0002,000,000 shares of its common stock to Lincoln Park for net cash proceeds of $76,510.$407,787.

Common stock issued for debt conversion

From May 2017 to September 2017, the Company issued 9,433,557 shares of its common stock upon the conversion of principal note balances of $378,453 and interest of $12,158 (see Note 5).

Common stock and warrants issued for cash

During the six months ended June 30, 2017, pursuant to unit subscription agreements, the Company issued 8,253,136 shares of its unregistered common stock and 4,126,579 five-year warrants to purchase common shares for an exercise price of $0.30 per common share to investors for cash proceeds of $618,983 or $0.075 per share.

In July 2017, pursuant to a unit subscription agreement, the Company issued 1,000,000 shares of its unregistered common stock and 500,000 five-year warrants to purchase common shares for an exercise price of $0.30 per common share to investors for cash proceeds of $50,000 or $0.05 per share.

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 and $0.05 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the November 2016 Warrants were lowered to $0.03 per share and the total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants to 13,611,114 warrants, an increase of 11,277,780 warrants (see Note 5). 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 5). Upon the cashless exercise of these warrants, the Company valued such warrants using the Binomial valuation model and calculated a fair value of $667,926 which was recorded as a reduction of derivative liabilities and as debt settlement income.

On June 2, 2017, in connection with the 2nd Securities Purchase Agreement (see Note 5), the Company issued the June 2017 Warrants to purchase 1,555,633 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.175 (subject to adjustments under certain conditions as defined in the June 2017 Warrants). The June 2017 Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June 2017 Notes, the Company sold stock at a share price of $0.05 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the June 2017 Warrants were lowered to $0.03 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from 1,555,632 warrants to 9,074,520 warrants, an increase of 7,518,888 warrants (see Note 5).

21

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

On July 26, 2017, in connection with the 3rd Securities Purchase Agreement (see Note 5), the Company issued the July 2017 Warrants to purchase 4,769,763 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.10 (subject to adjustments under certain conditions as defined in the July 2017 Warrants).

Warrant activities for the nine months ended September 30, 2017 are summarized as follows:

  Number of Warrants  Weighted Average
Exercise Price
  Weighted Average Remaining Contractual Term (Years)  Aggregate
Intrinsic Value
 
Balance Outstanding December 31, 2016  3,304,872  $0.27         
Issued on a full ratcheted basis  18,796,668   0.03         
Issued in connection with financings  10,951,974   0.17         
Exercised  (9,074,076)  0.03         
Balance Outstanding September 30, 2017  23,979,438  $0.11   4.66  $590,354 
Exercisable, September 30, 2017  23,979,438  $0.11   4.66  $590,354 

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, 2017, the Company recorded stock-based compensation expense of $177,382 related to these options.

At September 30, 2017, there were 4,000,000 options outstanding and 1,333,334 options vested and exercisable. As of September 30, 2017, there was $116,216 of unvested stock-based compensation expense to be recognized through December 2026. The aggregate intrinsic value at September 30, 2017 was approximately $0 and was calculated based on the difference between the quoted share price on September 30, 2017 and the exercise price of the underlying options.

Stock option activities for the nine months ended September 30, 2017 are summarized as follows:

  Number of Option  Weighted Average Exercise Price  Weighted Average Remaining Contractual Term (Years)  Aggregate Intrinsic Value 
Balance Outstanding December 31, 2016  -  $-         
Granted  4,000,000   0.25         
Balance Outstanding September 30, 2017  4,000,000  $0.25   9.44  $0 
Exercisable, September 30, 2017  1,333,334  $0.25   9.44  $0 

22

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

 

NOTE 79COMMITMENTS 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 8 –SUBSEQUENT EVENTS

In OctoberOn March 10, 2017, the non-management members of the Board of Directors determined that it was in the best interests of the Company to reward the Company’s chief executive officer and chief financial officer of the Company by amending their employment agreements and awarding them stock options in order to provide incentives to retain and motivate them in their roles with the Company. The Company amended each of the February 2, 2016 pursuant to a stock purchase agreement with Lincoln Park dated October 20, 2015, whereby we have the right to sell to, and Lincoln Park is obligated to purchase, up to an $10 million in amounts of sharesemployment agreements of the Company’s common stock, subjectchief executive officer and chief financial officer to certain limitations, from timeextend the term to time, over the 36-month period,March 9, 2020 and to provide for 100% vesting of any unvested portion of any outstanding equity, or equity-based award granted to them by the Company issued 400,000 sharesupon termination of its common stock to Lincoln Park for net proceedstheir respective employment agreements without cause, as a result of $58,190.a breach of the agreement by the Company or upon their respective death or disability.

 

In OctoberThe 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 November 2016, pursuant to subscription agreements,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 issued 207,334 sharesor a subsidiary of its common stockthe Company on the vesting dates (except as otherwise provided for in the employment agreement between the Company and 103,668 five-year warrants to purchase common shares for $0.30 per common share to investors for cash proceeds of $31,100.the optionee).

 

Planned Acquisition of Vitel Employment agreements

 

On November 2, 2016, we signed a non-binding term sheet to acquireMarch 10, 2017, Vitel as contemplated when we entered into employment agreements with each of Messrs. Cosme and Alaman who were the Shareholders’ Agreement. Pursuant to the term sheet, our planned acquisitionsellers of Vitel (the “Vitel Employment Agreements”). Mr. Cosme was appointed as Vitel’s General Manager of Global Operations and Mr. Alaman was appointed as its Chief Operations Officer. Both of Messrs. Cosme and Alaman will be structuredresponsible for, supervising, managing, planning, directing and organizing the activities of the Vitel and will be its two most senior executive officers reporting to Vitel’s Board of Directors with all other employees of Vitel reporting directly or indirectly to them.

Each of the Vitel Employment Agreements provides for a base salary of $187,500, annual bonuses and other compensation as required under Mexican Federal Labor Law and an all-stock transactionannual bonus target of 50% of salary based on performance objectives to be established by the Company’s Board of Directors annually. In addition, Messrs. Cosme and Alaman are entitled to a $500 monthly car allowance, health insurance reimbursement of up to $5,000 per year and other benefits required under Mexican law. The Vitel Employment Agreements also contains a non-compete provision prohibiting them from engaging in business activities that compete with both OncBioMuneVitel’s current business and allows them to continue to operate their ongoing pharmaceuticals business so long as such business does not interfere with their duties to Vitel contributing equity interests intounder their respective employment agreements. In addition, if Messrs. Cosme and Alaman seek to pursue any future business opportunities that do not interfere with their obligations to Vitel, they are required to notify the Company and provide it with a newly created trust, resultingnotice and an opportunity to participate in such opportunity.

23

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(Unaudited)

The Vitel operatingEmployment Agreements may be terminated upon the employee’s death or disability, and with or without cause. In the event Vitel terminates either of Messrs. Cosme and Alaman’s employment upon their death or disability, for cause (as defined in the employment agreement) or if either of them should resign without cause, the person resigning is entitled to payment of their base salary through the date of termination and certain severance payments they are legally entitled to receive under Mexican Federal Labor Law. At Vitel’s option, it may terminate their employment without cause or the employee may terminate the agreement for good cause (as defined in the agreement) in which event the person terminated is entitled to (i) the equivalent amount of the corresponding severance payment set forth in the Mexican Federal Labor Law for an unjustified dismissal, or if greater (ii) the equivalent amount of up to three years’ gross salary and certain amounts mandated under Mexican labor laws, depending on the date of termination less the number of months elapsed after March 10, 2017. The severance payment shall be paid in equal monthly installments over the remaining term so long as the employee is in compliance with the non-compete provisions provided for in the employment agreement.

The Company is a guarantor of Vitel’s obligations under the Vitel Employment Agreements. The Vitel Employment Agreements do not represent additional purchase consideration.

NOTE 9 – CONCENTRATIONS

Geographic concentrations of sales

For the nine months ended September 30, 2017, total sales to customers located in Mexico represent 100% total revenues.

Customer concentrations

For the nine months ended September 30, 2017, four customers accounted for approximately 87.3% of total sales (43.2%, 20.6%, 12.6% and 10.9%, respectively). The Company did not have customers during the 2016 periods. A reduction in sales from or loss of such customers would have a material adverse effect on the Company’s consolidated results of operations and financial condition. At September 30, 2017, five customers accounted for 97.2% of the accounts receivable balance (30.5%, 19.0%, 21.0%, 13.8%, and 12.9%, respectively).

Vendor and product concentrations

Generally, the Company’s subsidiary, Onc BioMune, Inc., relies on one vendor as a wholly ownedsingle source of raw materials to produce certain components of its cancer treatment products. The Company believe that other vendors are available to supply these materials if the Company cannot obtain these materials from its single source vendor.

For the nine months ended September 30, 2017, the Company’s subsidiary, Vitel, purchased all of OncBioMune. Upon completionits product from one supplier located in Mexico. This supplier obtains its products from one suppler located in Germany. The loss of this supplier may have a material adverse effect on the acquisitionCompany’s consolidated results of operations and financial condition.

During the nine months ended September 30, 2017, the Company’s subsidiary, Vitel, Manuel Cosme Odabachian, Chief Executive Officer of Vitel, is expected to join our company as an executive officerpurchased and continue to lead operations in Mexico and abroad.sold four products.

24

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K for the fiscal year ended December 31, 2015,2016, as filed with the SEC on April 13, 2016.17, 2017.

 

We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.

 

Overview

 

We were incorporated under the laws of the State of Nevada on March 18, 2005. From 2010 until 2013, weare a clinical-stage biopharmaceutical company engaged in the development of novel cancer immunotherapy products, with a proprietary vaccine technology that is designed to stimulate the immune system to attack its own cancer while not hurting the patient. We are also commercializing specialty drugs in Mexico and other Latin American countries following our March 10, 2017 acquisition of Vitel Laboratorios discussed below.

We seek to create a portfolio of product candidates that may be developed as therapeutics for our own proprietary programs or for development by potential collaborative partners. We recognize that the product development process is subject to both high costs and a high risk of failure. We believe that identifying a variety of product candidates and working in conjunction with other pharmaceutical business. During 2013, we decided to divestpartners may minimize the risk of failure, fill the product pipeline gap at major pharmaceutical companies, and ultimately increase the likelihood of advancing clinical development and potential commercialization of the balance of our pharmaceutical assets and engage in the digital media business.

Acquisition of OncBioMune, Inc. and our operations

Upon completion of a share exchange between our company and the shareholders of OncBioMune, Inc. (“ONC”) on September 2, 2015 as previously disclosed, we became a biotechnology company specializing in innovative cancer therapies. We have proprietary rights to a breast and prostate cancer therapeutic vaccines, a process for the growth of cancer cells and targeted chemotherapies. Our mission is to improve the overall patient condition through innovative immunotherapy with proven treatment protocols.product candidates.

 

Our lead product, ProscaVax™ is scheduled to commence a Phase 2 clinical study later in 2017 following our Phase 1 clinical trials in 2016 and into 2017.

On March 10, 2017, we completed the acquisition of Vitel Laboratorios (the “Vitel Acquisition”). The Vitel Acquisition is expected to transform OncBioMune into a revenue-generating international pharmaceutical company with a more diverse product line with a particularly deep reach throughout Mexico, Central and Latin America, and relationships across Europe and Asia. The Vitel Acquisition includes the acquisition of two drugs it licenses and sells in Mexico, Bekunis® for constipation and Cirkused® for stress. Approved for sale in the fourth quarter of 2016, the two over-the-counter products have generated significant sales that have exceeded Vitel’s early projections. Vitel has a total of seven other products that are either already in the registration stage or planned for launch later in 2017.

By acquiring Vitel, we indirectly acquired Vitel’s 50% ownership interest in Oncbiomune México, an entity in which we acquired a 50% interest when we jointly launched this company. Oncbiomune Mexico was launched for the purposes of developing and commercializing our PROSCAVAX vaccine technology and cancer technologies in México, Central and Latin America (“MALA”) for the treatment of prostate, ovarian and various other types of cancer and includes a portfolio of owned products and licenses with OncBioMune.

Vitel has license agreements covering the Mexican market with Roha Arnzemittel, GmbH (“Roha”) for Bekunis® (for constipation) and Cirkused® (for stress), as well as licensing rights to the remainder of Roha’s pipeline at Vitel’s discretion.

25

Vitel also has Mexican territorial rights through licensing agreements with; Kamada for KamRab® (for rabies), KamRho® (an Rh immunization) and Glassia® (for Anti-D deficiency); Aqvida for Imatinib (for cancer), and other oncology products; QPharma for Androferti (a male fertility drug) and is currently developing two innovative orphan drugs through their own research and development.

For Mexico, Central and Latin America, Vitel has relationships that are expected to forge development and commercialization of several products, including, Gem Pharmaceuticals for GPX-150 (for sarcoma); EOC Pharma for Telatinib (for first line oral gastric cancer treatment); and Rational Vaccines for the first and only herpes Vaccine technology for the treatment of HSV-2 and HSV-1.

In addition to its product pipeline and relationships, Vitel’s network channel partners cover a wide range of drug development and marketing. A sampling of relationships includes, CID Information Systems (marketing intelligence), Grupo Nichos (pharmaceutical salesforce, demand generation), CeroGrados (pharmaceutical warehousing, and old chain), CRO’s authorized by the Federal Commission for the Protection from Sanitary Risks (“COFEPRIS”) in Mexico and Regulatory Affairs parties that are authorized by the COFEPRIS for dossier build up and pre-inspection.

In addition to the assets we acquired through the Vitel Acquisition, our current product portfolio consists of three target therapies and a vaccine platform that allows us to create a therapeutic vaccine for any solid tumor cancer. The vaccine platform has treated over 300 patients. We are in the planning stage of a Phase 2 clinical trial of our lead product, ProscaVax®. The trial will be under the direction of Glenn Bubley, MD and the lead site will be Harvard’s Beth Israel Deaconess Medical Center, with additional other hospitals in the Harvard Health System. TheWe anticipate that the trial will expand the results that we found in our Phase 1 clinical trial in a different patient population. We expect to file a new drug application after the completion of the Phase 2 trial. We also hope to develop our other proprietary technologies, such as the paclitaxel-albumin conjugate with regard to which we plan to file an orphan drug indication within the next two years.

 

Oncbiomune México, S.A. De C.V.

On August 19, 2016, we entered into a Shareholders Agreement (the “Shareholders Agreement”) with Vitel Laboratorios, S.A. de C.V., a Mexican company (“Vitel”) related to their ownership of Oncbiomune México, S.A. De C.V., a Mexican company (“Oncbiomune Mexico”). Oncbiomune Mexico was launched for the purposes of developing and commercializing our PROSCAVAX vaccine technology and cancer technologies in México, Central and Latin America (“MALA”) for the treatment of prostate, ovarian and various other types of cancer. Vitel is an unrelated third party. Under the terms of the Shareholders Agreement, we have agreed to assign to Oncbiomune Mexico and its affiliates limited patent and intellectual property rights and trademarks related to our OVCAVAX, PROSCAVAX vaccine technology and cancer technologies and future developments related to these technologies. These rights will permit Oncbiomune Mexico to use and develop these technologies in MALA. Oncbiomune Mexico is currently conducting patient screening in Mexico for a Phase 2/3 trial evaluating ProscaVax in PSA recurrent prostate cancer in hormone-naïve and hormone-independent patients.

Planned Acquisition of Vitel

On November 2, 2016, we signed a non-binding term sheet to acquire Vitel as contemplated when we entered into the Shareholders’ Agreement. Pursuant to the term sheet, our planned acquisition of Vitel will be structured as an all-stock transaction with both OncBioMune and Vitel contributing equity interests into a newly created trust, resulting in Vitel operating as a wholly owned subsidiary of OncBioMune. Upon completion of the acquisition of Vitel, Manuel Cosme Odabachian, Chief Executive Officer of Vitel, is expected to join our company as an executive officer and continue to lead operations in Mexico and abroad.

Vitel has a drug portfolio that includes 12 drug candidates licensed for the Mexican market. Late in the third quarter, Vitel commercialized Bekunis® for constipation and Cirkused® for stress, two over-the-counter products licensed from ROHA Arzneimittel GmbH. Upon closing the acquisition of Vitel, OncBioMune would immediately begin recognizing revenue from the sales of these products in Mexico. Vitel is actively working to next commercialize Vesanoid® (tretinoin), an oral retinoid anti-cancer chemotherapy drug, during the current quarter or early in the first quarter of 2017. Vesanoid has been approved by the Mexican government agency, the Federal Commission for the Protection against Sanitary Risk (COFEPRIS), for the treatment of Acute Promyelocytic Leukemia (APL), the M3 subtype of Acute Myelogenous Leukemia (AML). Vitel licensed Mexican marketing rights to Vesanoid from German-based Cheplapharm Arzneimittel GmbH. Also in Vitel’s pipeline are KamRAB®, a human anti-rabies immune globulin therapy, and KamRHO®, a Rho (D) human immunoglobulin for the suppression of Rh immunization in Rho(D)-negative women delivering a Rho(D)-positive fetus or when the Rh type of fetus is unknown. Vitel has licensed rights to market these products in Mexico from Kamada Ltd.

The acquisition of Vitel is expected to be transformational to our company, as we expect become a revenue-generating biotechnology company following a rollout of these products and the completion of our planned acquisition of Vitel. We believe that Vitel will be able to duplicate is success in bringing Bekunis and Cirkused to market in Mexico when we begin marketing efforts in Mexico and throughout Latin America for other drugs in our pipeline and ProscaVax.

As we work towards completing the planned acquisition of Vitel, our two management teams are mapping out a pipeline development and launch plan for a variety of new products using our combined resources which we expect to be revenue generating.

Results of Operations

 

Three and Nine monthsMonths Ended September 30, 20162017 Compared to Three and Nine monthsMonths Ended September 30, 20152016

 

Revenue, Costs of Revenues, and Gross Margin

 

During the three and nine months ended September 30, 2017, we generated revenue of $118,572 and $278,686, respectively, which related to product sales in Mexico during the period from the date of the Vitel acquisition (March 10, 2017) to September 30, 2017. We did not generate any revenues for the three and nine months ended September 30, 2016 and 2015.2016. We expect to begin generatinggenerate future revenues from product sales in Mexico upon completionas discussed above in the Overview section.

During the three and nine months ended September 30, 2017, we recorded costs of sales of $53,168 and $156,084 and gross margin of $65,404 and $122,602, respectively, which related to product sales in Mexico during the period from the date of the plannedVitel acquisition (March 10, 2017) to September 30, 2017. We did not generate any cost of Vitel as discussed above.revenues or gross profit during the three and nine months ended September 30, 2016.

 

Operating Expenses

 

For the three months ended September 30, 2016,2017, operating expenses amounted to $461,696$5,528,363 as compared to $220,706$461,696 for the three months ended September 30, 2015,2016, an increase of $240,990$5,066,667, or 109.2%1,097.4%. For the nine months ended September 30, 2016,2017, operating expenses amounted to $1,334,321$7,329,790 as compared to $346,367$1,334,321 for the nine months ended September 30, 2015,2016, an increase of $987,954$5,995,469, or 285.2%449.3%. For the three and nine months ended September 30, 20162017 and 2015,2016, operating expenses consisted of the following:

 

 Three Months Ended
September 30,
 Nine months Ended
September 30,
  Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
 2016 2015 2016 2015  2017 2016 2017 2016 
Professional Fees $238,085  $78,989  $549,184  $94,489 
Compensation  167,088   85,447   536,706   156,719 
Professional fees $373,379  $238,085  $1,323,230  $549,184 
Compensation expense  267,475   167,088   806,341   536,706 
Consulting fees – related party  650   -   22,597   - 
Research and development expense  5,201   26,579   85,736   34,662   5,488   5,201   73,720   85,736 
Bad debt expense  1,251   -   43,497   - 
General and administrative expenses – related party  243   -   8,449   - 
General and administrative expenses  51,322   29,691   162,695   60,497   143,185   51,322   315,264   162,695 
Impairment loss  4,736,692   -   4,736,692   - 
Total $461,696  $220,706  $1,334,321  $346,367  $5,528,363  $461,696  $7,329,790  $1,334,321 

26

 

 For the three months ended September 30, 2016,2017, professional fees increased by $159,096$135,294 or 201.4%56.8%, as compared to the three months ended September 30, 2015. The2016. For the nine months ended September 30, 2017, professional fees increased by $774,046, or 140.9%, as compared to the nine months ended September 30, 2016. For the three and nine months ended September 30, 2017, the increase was primarily attributable to an increase in investor relations fees of $58,033approximately $139,000 and $555,000 related to building investor awareness anand interest in our stock, a (decrease) increase in legal fees of $26,112,approximately $(41,000) and $115,000, an increase in consulting fees of approximately $20,000 and $24,000, and an increase in accounting fees of $12,000. For the nine months ended September, 2016,approximately $21,000 and $81,000 offset by a decrease in other professional fees, increased by $454,695, or 481.2%, as compared to the nine months ended September 30, 2015. The increase was primarily attributable to an increase in investor relations fees of $345,949, an increase in legal fees of $67,824, and an increase in accounting fees of $63,825.respectively.
   
 For the three months ended September 30, 2016,2017, compensation expense increased by $81,641$100,387, or 95.5%60.0%, as compared to the three months ended September 30, 2015.2016. For the nine months ended September 30, 2016,2017, compensation expense increased by $379,987,$269,635, or 242.5%50.28%, as compared to the nine months ended September 30, 2015. The increase is primarily attributable2016. On February 2, 2016, we entered into employment agreements with Jonathan F. Head, Ph.D. (“Dr. Head”) to compensation expense paid toserve as our Chief Executive Officer and with Andrew Kucharchuk (“Mr. Kucharchuk), our President and Chief Financial OfficerOfficer. The employment agreement with Dr. Head provides that Dr. Head’s salary shall be $275,000 and the employment agreement with Mr. Kucharchuk provides that Mr. Kucharchuk’s salary shall be $200,000. Additionally, on March 10, 2017, pursuant to their February 2, 2016employment agreements, we entered into employment agreements with our companyeach of Messrs. Cosme and amount paidAlaman who were the sellers of Vitel (the “Vitel Employment Agreements”). Mr. Cosme was appointed as Vitel’s General Manager of Global Operations and Mr. Alaman was appointed as its Chief Operations Officer. Both of Messrs. Cosme and Alaman will be responsible for, supervising, managing, planning, directing and organizing the activities of the Vitel and will be its two most senior executive officers reporting to Robert Elliott, M.D., our chief medical officer and memberVitel’s Board of our boardDirectors with all other employees of directors.Vitel reporting directly or indirectly to them. Each of the Vitel Employment Agreements provides for a base salary of $187,500.
   
 During the nine months ended September 30, 2017, we incurred consulting fees – related party of $22,597 which related to fees paid to a company owned by officers of Vitel who are also beneficial shareholders of the Company. We did not incur such consulting fees during the nine months ended September 30, 2016.
For the three and nine months ended September 30, 2017, research and development expense increased (decreased) by $287, or 5.5%, and $(12,016), or 14.0%, as compared to the three and nine months ended September 30, 2016, respectively, which related to an overall decrease in research activities.
For the three and developmentnine months ended September 30, 2017, bad debt expense decreasedamounted to $43,497 as compared to $0 for the three and nine months ended September 30, 2016 which related to the recording for an allowance for doubtful accounts on accounts receivable balances.
During the nine months ended September 30, 2017, we incurred general and administrative expenses – related party of $8,449, which related to fees paid to a company owned by $21,378officers of Vitel who are also beneficial shareholders of the Company. We did not incur such expenses during the nine months ended September 30, 2016.
For the three months ended September 30, 2017, general and administrative expenses increased by $91,863, or 80.4%179.0%, as compared to the three months ended September 30, 2015 related to a decrease in research activities.2016. For the nine months ended September 30, 2016, research2017, general and development expenseadministrative expenses increased by $51,074$152,569, or 147.3%93.8%, as compared to the nine months ended September 30, 2015 related to2016. For the three months ended September 30, 2017, the increase was primarily due an increase in research activities duringgeneral and administrative expenses incurred related the first 6acquisition of Vitel of approximately $77,000 and an increase in other general and administrative expenses of approximately $15,000. For the nine months of 2016 offset by a decrease in research and development activities during the quarter ended September 30, 2016.2017, the increase was primarily due an increase in general and administrative expenses incurred related the acquisition of Vitel of approximately $134,000 and an increase in other general and administrative expenses of approximately $19,000.
   
 

For the three months ended September 30, 2016, general and administrative expenses increased by $21,631 or 72.9%, as compared to the three months ended September 30, 2015. The increase was primarily due to an increase in health insurance expense, travel and entertainment, rent expense and other general and administrative expenses. For the nine months ended September 30, 2016, general2017, we recorded an impairment loss of $4,736,692 and administrative expenses increased$4,736,692, respectively. On the acquisition date of Vitel, the purchase price exceeded the fair value of the net assets acquired by $102,198 or 168.9%,approximately $4,695,596, which was recorded as comparedintangible assets. Based on our review of long-lived assets for impairment, we recognized an impairment loss of $4,695,596 since the sum of expected undiscounted future cash flows is less than the carrying amount of the intangible assets. Additionally, we recorded an impairment loss $41,096 related to the nine months ended September 30, 2015. The increase was primarily due towrite of an increaseacquired drug. We did not record any impairment loss in health insurance expense, travel and entertainment, rent expense and other general and administrative expenses.during the 2016 periods.

 

Loss from Operations

 

For the three months ended September 30, 2016,2017, loss from operations amounted to $461,696$5,462,959 as compared to $220,706$461,696 for the three months ended September 30, 2015,2016, an increase of $240,990$5,066,667, or 109.2%1,083.2%. For the nine months ended September 30, 2016,2017, loss from operations amounted to $1,334,321$7,207,188 as compared to $346,367$1,334,321 for the nine months ended September 30, 2015,2016, an increase of $987,954$5,872,867, or 285.2%440.1%. This increase isThese increases are primarily a result of the increaseincreases in operating expenses, partially offset by gross profit discussed above.

27

 

Other Income (Expense)

 

For the three months ended September 30, 2016,2017, we had nettotal other expense of $636,998 as compared to total other income of $97,245 as compared to net total other expense of $(544) for the three months ended September 30, 2015,2016, a change of $97,789.$734,243, or 755.0%. This change was primarily due to the recording of a loss from the fair value of derivative liabilities of $1,363,793 in the 2017 period as compared to income from the fair value of derivative liabilities of $109,858 in the 2016 period, an increase in interest expense of approximately $197,000 due to an increase in interest-bearing debt and amortization of debt discount which has been included in interest expense, and an increase in an increase in debt settlement income of $929,409.

For the nine months ended September 30, 2017, we had total other expense of $1,921,258 as compared to total other expense of $54,538 for the nine months ended September 30, 2016, an increase of $1,866,720, or 3,422.8%. This increase was primarily due to the recording of expense from the change in fair value of derivative liabilities of $109,585 offset by$2,292,674 and an increase in interest expense of $11,969$512,896 due to an increase in interest-bearing debt. For the nine months ended September 30, 2016, we had net total other expense of $(54,538) as compared to net total other income of $4,583 for the nine months ended September 30, 2015, a change of $(59,121). The increase was primarily due to the increase of $34,648 in derivative expense related to a debt financing, and increases in interest expense related to an increase in borrowings and an increase in the amortization of debt discount of $14,167 which has been included in interest expense.expense, offset by the recording of debt settlement income of $938,469 related to conversion of debt and exercise of warrants on a cashless basis.

 

Net Loss

 

For the three months ended September 30, 2016,2017, we had a net loss of $6,099,957, or $(0.04) per common share (basic and diluted) as compared to a net loss of $364,451, or $(0.01) per common share (basic and diluted) as compared to a net loss of $221,250 or $(0.00) per common share (basic and diluted) for the three months ended September 30, 2015,2016, an increase of $143,201$5,735,506, or 64.7%1,573.7%.

For the nine months ended September 30, 2016,2017, we had a net loss of $9,128,446, or $(0.08) per common share (basic and diluted) as compared to a net loss of $1,388,859, or $(0.02) per common share (basic and diluted) as compared to a net loss of $341,784 or $(0.01) per common share (basic and diluted) for the nine months ended September 30, 2015,2016, an increase of $1,047,075$7,739,587, or 306.4%557.3%.

Foreign currency translation loss

The functional currency of our subsidiaries operating in Mexico is the Mexican Peso (“Peso”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $10,711 and $28,827 for the three and nine months ended September 30, 2017, respectively. During the nine months ended September 30, 2016, we did not have any foreign subsidiaries. This non-cash loss had the effect of increasing our reported comprehensive loss.

Comprehensive loss

As a result of our foreign currency translation loss, we had comprehensive loss for the nine months ended September 30, 2017 of $9,157,273, compared to comprehensive loss of $1,388,859 for the nine months ended September 30, 2016. Additionally, we had comprehensive loss for the three months ended September 30, 2017 of $6,110,668, compared to comprehensive loss of $364,451 for the three months ended September 30, 2016.

 

Liquidity and Capital Resources

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital deficit of $(375,769)$3,730,073 and $10,587cash of cash$83,563 as of September 30, 20162017 and a working capital deficit of $538,279$842,637 and $672,769 ofno cash as of December 31, 2015.2016.

 

     December 31, 2015 to
September 30, 2016
      December 31, 2016
to September 30, 2017
 
 September 30, 2016 December 31, 2015 Change in
working capital
 Percentage
Change
  September 30, 2017 December 31, 2016 Change Percentage Change 
Working capital:                
Working capital deficit:                
Total current assets $

57,871

  $709,537  $(651,666)  (91.8)% $382,757  $41,309  $341,448   826.6%
Total current liabilities  

433,640

   171,258   

(262,382

)  (153.2)%  (4,112,830)  (883,946)  (3,228,884)  (365.3)%
Working capital: $(375,769) $538,279  $(914,048)  (169.8)%
Working capital deficit: $(3,730,073) $(842,637) $(2,887,436)  342.7%

 

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From December 31, 20152016 to September 30, 2016,2017, our working capital decreaseddeficit increased by $914,048$2,887,436 and was primarily due to a decrease in cash of $662,182, an increase in bank linederivative liabilities of credit$1,720,793, an increase in convertible debt, net of $234,901, an increase in notes payable of $49,033,$538,875, and an increase in accounts payable and accrued expenses of $108,534,$692,691 offset by an increase in cash of $83,563, an increase in accounts receivable of $93,356, and an increase in derivative liabilityinventories of $70,648.$106,249.

 

Cash Flows

 

Changes in our cash balance are summarized as follows:

 

  Nine months Ended
September 30, 2016
  Nine months Ended
September 30, 2015
 
Cash used in operating activities $(1,155,203) $(378,559)
Cash provided by investing activities  0   4,676 
Cash provided by financing activities  493,021   457,723 
Net increase (decrease) in cash $(662,182) $83,840 
  Nine months Ended September 30, 2017  Nine months Ended September 30, 2016 
Net cash used in operating activities $(2,034,462) $(1,155,203)
Net cash used in investing activities  (11,571)  - 
Net cash provided by financing activities  2,142,664   493,021 
Effect of exchange rate changes on cash  (13,068)  - 
Net increase (decrease) in cash $83,563  $(662,182)

 

Net Cash Used in Operating Activities

 

Our cash used in operating activities for the nine monthsmonth ended September 30, 20162017 as compared to our cash used in operating activities for the nine months ended September 30, 20152016 increased by $776,644. For the nine months ended September 30, 2016, cash used in operating activities consisted of our net loss of $1,388,859 adjusted for the add back of non-cash items such as depreciation expense of $823, stock based compensation of $69,000, amortization of debt discount of $14,167, derivative expense $34,648 and changes in operating assets and liabilities of $115,018.$879,259. The increase inis attributable to the increase use of cash in operating activities was primarily due to an increase in cash used to pay executive salaries andfor investor relations services, other employees and related payroll taxes of approximately $536,706 and increase in amounts paid for professional fees, and travel.

For the nine months ended September 30, 2015, cash used in operating activities consisted of our net loss of $341,784 adjusted for changes in operating assets and liabilities of $(36,775).compensation.

 

Net Cash Provided ByUsed in Investing Activities

 

Cash flows provided byused in investing activities for the nine months ended September 30, 20162017 was $0$11,571 as compared to $4,676$0 for the nine months ended September 30, 2015, a decrease2016, an increase of $4,676.$11,571. During the nine months ended September 30, 2015,2017, we received proceedscash from recapitalizationacquisition of $4,676.Vitel of $39,144 offset by the $715 cost of property and equipment we acquired and the acquisition of a drug for $50,000.

 

Cash Provided By Financing Activities

 

Cash flows provided by financing activities for the nine months ended September 30, 20162017 was $493,021$2,142,664 as compared to $457,723$493,021 for the nine months ended September 30, 2015,2016, an increase of $35,298.$1,649,643. During the nine months ended September 30, 2017, we received net proceeds from the sale of common stock of $1,087,960 as compared to $387,988 for the nine months ended September 30, 2016, proceeds of $43,452 from related party advances, net proceeds from convertible debt of $473,240, and proceeds from notes payable of $538,875, partially offset by a decrease in a bank overdraft and payments to our line of credit. During the nine months ended September 30, 2016, we received net proceeds from our bank line of credit of $49,033, net proceeds from convertible debt of $36,000, proceeds of $20,000 from related party advances, and proceeds from the sale of common stock of $387,988. During the nine months ended September 30, 2015, we received net proceeds from convertible debt of $100,000, proceeds from the sale of common stock of $334,003, net proceeds from our bank line of credit of $32,520, offset by net payments of related party advances of $(8,800).

 

Cash Requirements

 

Our management does not believe that our current capital resources will be adequate to continue operating our company and maintaining our business strategy for more than 12 months.months from the date of this report. Accordingly, we will have to raise additional capital in the near future to meet our working capital requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, if and when it is needed, we will be forced to scale down or perhaps even cease the operation of our business.

 

Going Concern

 

Our unaudited condensed 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 theour accompanying unaudited condensed consolidated financial statements, the Companywe had a net loss of $1,388,859$9,128,446 and $341,784$1,388,859 for the nine months ended September 30, 20162017 and 2015,2016, respectively. The net cash used in operations were $2,034,462 and $1,155,203 and $378,559 for the nine months ended September 30, 20162017 and 2015,2016, respectively. Additionally, we had an accumulated deficit of $2,518,078$12,271,297 and $3,142,851 at September 30, 2017 and at December 31, 2016, andrespectively, had no revenue for the nine months endeda working capital deficit of $3,730,073 at September 30, 2016. Effective September 2, 2015,2017, had minimal revenues since inception, and we entered intoare in default on certain convertible debt instruments, loans and a bank line of credit. Management believes that these matters raise substantial doubt about our ability to continue as a going concern for twelve months from the Exchange Agreement which changedissuance date of this report. On March 10, 2017, we completed the natureacquisition of our business100% of the issued and management.outstanding capital stock of Vitel. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate to continue operating and maintaining its business strategy for the fiscal year ending December 31, 2016.2017. We will seek to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of equity and from the issuance of promissory notes, there is no assurance that weit will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the near future, management expects that we 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 we be unable to continue as a going concern.

29

 

Current and Future Financings

Line of Credit

 

In October 2014, we entered into a $100,000 revolving promissory note (the “Revolving Note”) with Regions Bank (the “Lender”). The unpaid principal balance of the Revolving Note is payable on demand and any unpaid principal and interest is payable due not later than October 27, 2017, is secured by deposits located at the Lender, and bears interest computed at a variable rate of interest which is equal to the Lender’s prime rate plus 1.7% (5.20%(5.95% and 5.45% at September 30, 2016)2017 and December 31, 2016, respectively). We will pay to Lender a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. We may, at any time or from time to time, prepay the Revolving Note in whole or in part without penalty. At September 30, 20162017 and December 31, 2015,2016, we had $98,741$99,208 and $49,708,$99,741, respectively, in borrowings outstanding under the Revolving Note with $1,259$792 and $50,292,$259, respectively, available for borrowing under such note. The weighted average interest rate during the nine months ended September 30, 20162017 was approximately 5.20%5.76%. As of the date of this report, the Lender has not renewed the Revolving Note and we are currently in default. Upon default, the interest increased by 2.0%.

Loans Payable

From June 2017 to September 2017, we entered into loan agreement with several third parties (the “Loans”). Pursuant to the loan agreements, we borrowed an aggregate of $538,875. The Loans bear interest at an annual rate of 33.3% and are unsecured. Loans aggregating $139,125 were due on or before October 1, 2017 and are currently in default, and loans aggregating $399,750 are due on or before January 1, 2018.

Securities Purchase Agreements

 

On October 20, 2015, we entered into a purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Upon signing the Purchase Agreement, Lincoln Park agreed to purchase 333,334 shares of the Company’s common stock for $100,000 as an initial purchase under the Purchase Agreement. Under the terms and subject to the conditions of the Purchase Agreement, we have the right to sell to, and Lincoln Park is obligated to purchase, up to an additional $10 million$10,100,000 in amounts of shares, as described below, of our common stock, subject to certain limitations, from time to time, over the 36-month period commencing on the date that a registration statement, which we agreed to file with the SECSecurities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed. We may direct Lincoln Park, at our sole discretion and subject to certain conditions, to purchase up to 50,000100,000 shares of Common Stock on any business day (such purchases, “Regular Purchases”), provided that at least one business day has passed since the most recent purchase, and provided, however that Lincoln Park’s committed obligation under any single Regular Purchase shall not exceed $50,000, provided that the amount the Company may sell to Lincoln Park under a single Regular Purchase may increase under certain circumstances as described in the Purchase Agreement but in no event will the amount of a single Regular Purchase exceed $500,000. The purchase price of shares of Common Stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales. In addition, we may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Common Stock is not below the threshold price as set forth in the Purchase Agreement. Our sales of shares of Common Stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 4.99% of the then outstanding shares of the Common Stock.

 

In connection with the Purchase Agreement, we issued as a commitment fee to Lincoln Park 1,000,000 shares of Common Stock. Lincoln Park represented to us, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)), and the Company sold the securities in reliance upon an exemption from registration contained in Section 4(a)(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

30

The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. We have the right to terminate the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of Common Stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price of our Common Stock and determinations by us as to the appropriate sources of funding for us and our operations. Lincoln Park has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our shares.

 

The net proceeds under the Purchase Agreement to us will depend on the frequency and prices at which the Company sells shares of its stock to Lincoln Park. We expect that any proceeds received by us from such sales to Lincoln Park under the Purchase Agreement will be used for general corporate purposes and working capital requirements. During 2016, we received net proceeds of $191,850 and a subscription receivable of $11,190 which was collected in January 2017 under the Purchase Agreement. During the nine months ended September 30, 2016 and the year ended December 31, 2015, we received $76,510 and $95,000 under2017, pursuant to the Purchase Agreement, respectively.we issued 2,000,000 shares of our common stock to Lincoln Park for net cash proceeds of $407,787.

 

There can be no assurance that funding will be available under the Purchase Agreement or if additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, if and when it is needed, we will be forced to scale down or perhaps even cease the operation of our business.

 

November 2016 Financing

On MayNovember 23, 2016, we entered into and closed on the transaction set forth in an Amended and Restated Securities Purchase Agreements (the “Securities Purchase Agreements”) it entered into with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase Agreement, we issued a $40,000 convertible promissory noteupon closing to the Purchasers for an aggregate subscription amount of $350,000: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “Convertible Note”“November 2016 Notes”); and (ii) warrants (the “Warrants”) to Crown Bridge Partners, LLC (the “Lender”).purchase 2,333,334 shares of the Company’s common stock at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined in the Warrants) (see below for reduction of warrant exercise price) which are exercisable for a period of five years from November 23,2016. The unpaidaggregate principal amount of the November 2016 Notes was $350,000 and we received $300,000 after giving effect to the original issue discount of $50,000. The November 2016 Notes bear interest is payable no later than May 22, 2017 and bears interest computed at a rate of interest which is equal to 8.0%10% per annum. Any amountannum (which interest rate increased to 24% per annum upon the occurrence of principal or interest onan Event of Default (as defined in the Convertible Note, which is not paid by theNovember 2016 Notes)), had a maturity date shall bear interest at the rate of 22% per annum from the due date until paid.

We may prepay any amount outstanding under the Convertible Note by making a payment to the Lender of an amount in cash equal as follow:

Time Frame after Convertible Note DatePrepayment Penalty Amount
Initial 30 day period115% multiplied the amount of prepayment
31st to 60th day120% multiplied the amount of prepayment
61st to 90th day125% multiplied the amount of prepayment
91st to 120th day130% multiplied the amount of prepayment
120th to 150th day135% multiplied the amount of prepayment
151st to l80th day140% multiplied the amount of prepayment

The prepayment is subject to the Lender’s prior written acceptance in the Lender’s sole discretion. The Company may not prepay any amount outstanding under the Convertible Note after the 180th day after the issuance of the Convertible Note.

The Lender is entitled, at their option,July 23, 2017 and were convertible (principal, and interest) at any time after the issuance date of the Convertible Note, to convert all or any lesser portionNovember 2016 Notes into shares of the outstandingCompany’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 amounttrading market (the “Default Conversion Price”). Due to non-payment of the November 2016 Notes, an event of default occurred and accrued but unpaid interestaccordingly, 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, we entered into forbearance agreements (the “Forbearance Agreements”) with the Company’s common stock. The Conversion Price isPurchases whereby the Variable Conversion Price (“VCP”)Purchasers waived any event of default, as defined in the Convertible Note and subject, inNovember 2016 Notes. We failed to make a payment on May 23, 2017 to each case, to equitable adjustments for stock splits, stock dividends or rights offerings byof the Company relatingHolders as required pursuant to the Company’s securities or the securitiesNovember 2016 Notes which resulted in an event of any subsidiarydefault under such Notes. As of result of the Company, combinations, recapitalization, reclassifications, extraordinary distributionsevent 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 similar events. VCP means 58% multiplied by the “Market Price”, which is calculated as the lowest trading price, as defined,accrued interest of $17,836 resulting in debt settlement expense of $141,299. The Forbearance Agreement also provides for the Company’s common stock duringHolders to forbear their right to demand an immediate cash payment of the twenty trading day period ending on the last complete trading day prior to the conversion date. If at any time while the Convertible Note is outstanding, the lowest trading prices for the Company’s common stock is equal to or lower than $0.10, then an additional discount of five percent (5%) will be factored into the VCP until the Convertible Note is no longer outstanding (resulting inprincipal amount due plus accrued interest as a discount rate of 47% assuming no other adjustments are triggered hereunder). In the event that sharesresult of the Company’s common stock arefailure to satisfy its payment obligations to the Holder on May 23, 2017 so long as we comply with our other obligations under the November 2016 Notes and the other transaction documents. The Forbearance Agreements did not deliverable via DWAC followingwaive the conversiondefault interest rate of any amount thereunder, an additional five percent (5%) discount24%. In consideration therefore, and as currently set forth in the November 2016 Notes, the Holders shall be factored intoentitled to convert such notes from time to time at their discretion in accordance with the VCP untilterms of the Convertible Note is no longer outstanding (resulting in a discount rateNovember 2016 Notes and the November 2016 Notes shall not be subject to repayment unless agreed to by the Holder of 47% assuming no other adjustments are triggered hereunder).

such Note. In connection with the issuanceForbearance Agreement, we increased the principal balance of the Convertible Note above, we determined that the termsNovember 2016 Notes by $159,135, reduced accrued interest payable by $17,836, and recorded debt settlement expense of the Convertible Note$141,299.

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 usthe Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these November 2016 Notes, we sold stock at a share price of $0.075 per share and $0.05 per share. Accordingly, pursuant to these ratchet provisions, the conversion price on the November 2016 Notes were lowered to $0.075 per share and then to $0.05 per share and the exercise price of the November 2016 Warrants was lowered to $0.03. Additionally, the total number of November 2016 Warrants were increased on a full ratchet basis by an aggregate amount of 11,277,780. In September 2017, we issued 9,547,087 shares of our common stock upon the cashless exercise of 9,074,076 warrants.

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June 2017 Financing

 

DuringOn June 2, 2017, we entered into a 2nd Securities Purchase Agreement (the “2nd Securities Purchase Agreement”) with the ninePurchasers for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the 2nd Securities Purchase Agreement, we issued upon closing to the Purchasers for an aggregate subscription amount of $233,345: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “June 2017 Notes”); and (ii) warrants (the “June 2017 Warrants”) to purchase 1,555,633 shares of the Company’s common stock, par value $0.001 per share at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined in the June 2017 Warrants) and exercisable for five years after the issuance date.

The aggregate principal amount of the June 2017 Notes is $233,345 and we received $200,000 after giving effect to the original issue discount of $33,345. The June 2017 Notes bear interest at a rate equal to 10% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the June 2017 Notes)), have a maturity date of February 2, 2018 and are convertible (principal, and interest) at any time after the issuance date of issuance into shares of the Company’s common stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the June 2017 Notes), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the June 2017 Note shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the common stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The June 2017 Notes provide for 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 ended September 30, 2016,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, we 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.

The June 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June 2017 Notes, the Company sold stock at a share price of $0.05 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the June 2017 Warrants were lowered to $0.03 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from 1,555,632 warrants to 9,074,520 warrants, an increase of 7,518,888 warrants.

July 2017 Financing

On July 26, 2017, we entered into and closed on a 3rd Securities Purchase Agreement (the “3rd Securities Purchase Agreement”) with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the 3rd Securities Purchase Agreement, we issued upon closing to the Purchasers for an aggregate subscription agreements,amount of $300,000: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,883 (the “July 2017 Notes”); and (ii) warrants (the “July 2017 Warrants”) to purchase 4,769,763 shares of the Company’s common stock at an exercise price of $0.10 per share (subject to adjustments under certain conditions as defined in the Warrants). The closing under the 3rdSecurities Purchase Agreement occurred on July 26, 2017. These Notes bear interest at a rate equal to 5% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the Notes)), have a maturity date of March 25, 2018 and are convertible (principal, and interest) at any time after the issuance date of these Notes into shares of the Company’s Common Stock at a conversion price equal to $0.07 per share (subject to adjustment as provided in the Note), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the July 2017 Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”) and the exercise price of the July 2017 Warrants shall be 60% of the Default Conversion Price. These Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 110% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 115% of the applicable amortization payment. These Notes may be prepaid at any time until the 210th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date through the three months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest during months four through seven following the Original Issue Date. In order to prepay these Notes, the Company issued 102,341shall provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser may convert the Notes in whole or in part at the Conversion Price.

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The November 2016 Notes, June 2017 Notes and July 2017 Notes contain certain covenants, such as restrictions on the incurrence of indebtedness, creation of liens, payment of restricted payments, redemptions, payment of cash dividends and the transfer of assets. These Notes also contains certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transactions. The conversion price is also subject to adjustment if we issue or sell shares of our 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 investorsthe lowest price at which these securities were issued or are exercisable. The Company granted the Purchasers certain rights of first refusal on future offerings by the Company for as long as the Purchasers hold these Notes. In addition, subject to limited exceptions, the Purchasers will not have the right to convert any portion of these Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The Purchaser may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to the Company.

The November 2016, June 2017 and July 2017 Warrants are exercisable for shares of the Company’s common stock upon the payment in cash of the exercise price and they are also exercisable on a cashless basis at any time there is no effective registration statement registering the shares of common stock underlying the Warrants. The exercise price of these Warrants are subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Common Stock and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders. The exercise price of these Warrants are also subject to full ratchet price adjustment if the Company sells or grants any option to purchase, sells or re-prices any common stock or common stock equivalents, as defined, at an exercise price lower than the then-current exercise price of these Warrants with the exception for certain exempted issuances and subject to certain limitations on the reduction of the exercise price as provided in the Warrants. In the event of a fundamental transaction, as described in these Warrants and generally including any reorganization, recapitalization or reclassification of the Common Stock, the sale, transfer or other disposition of all or substantially all of the Company’s properties or assets, the Company’s consolidation or merger with or into another person, the acquisition of more than 50% of the outstanding Common Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by the outstanding Common Stock, the holders of these Warrants will be entitled to receive upon exercise of the Warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised these Warrants immediately prior to such fundamental transaction; provided that upon the occurrence of certain fundamental transactions, the holder can require the Company to purchase these Warrants for cash proceedsat a price equal to the higher of $51,926.the Black Scholes Value of the unexercised portion of these Warrants or difference between the cash per share paid in the fundamental transaction and the exercise price per share. The holders of these Warrants will not have the right to exercise any portion of these Warrants if the holder (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of these Warrants.

In connection with our obligation under the November 2016, June 2017 and July 2017 Notes, we entered into a Security Agreement, Pledge Agreement and Subsidiary Guaranty with Calvary Fund I LP, as agent, pursuant to which the Company granted a lien on all assets of the Company (the “Collateral”) excluding permitted indebtedness which includes a first lien held by Regions Bank in connection with the $100,000 revolving promissory note entered into with Regions Bank in October 2014, for the benefit of the Purchasers, to secure the Company’s obligations under the Notes. Upon an Event of Default (as defined in the related Notes), the Purchasers may, among other things, collect or take possession of the Collateral, proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.

From May 2017 to September 2017, we issued 9,433,557 shares of our common stock upon the conversion of principal note balances of $378,453 and interest of $12,158.

Other

 

During the threesix months ended SeptemberJune 30, 2016,2017, pursuant to unit subscription agreements, the Companywe issued 1,730,3628,253,136 shares of itsour unregistered common stock and 865,1764,126,579 five-year warrants to purchase common shares for an exercise price of $0.30 per common share to investors for cash proceeds of $259,552.$618,983 or $0.075 per share.

 

On June 1, 2016, we entered into an agreement (the “Agreement”) with Dawson James Securities, Inc., a FINRA member broker-dealer (“Dawson”),In July 2017, pursuant to which the Company invited Dawson to introduce to the Company, on a fully disclosedunit subscription agreement, we issued 1,000,000 shares of our unregistered common stock and non-exclusive basis, one or more parties that might be interest in participating in an offering (the “Offering”) of the Company’s securities by the Company pursuant to an exemption from the Securities Act.

Dawson’s role is to (i) refer a potential party that may be interested in the Offering to the Company (each, a “Prospect”), and (ii) if the Company so requests, assist in contacting, communicating or setting meeting with such Prospects and, if appropriate, to provide all deal services and functions relating to any transactions resulting from the Offering. Pursuant to the terms of the Agreement, in no event shall a Prospect be deemed a customer of Dawson for purposes of the Offering; nor shall Dawson be required to make a sale to the Prospect under the Agreement. To the contrary, Dawson shall not make any sales in the Offering and has no power to bind the Company.

At the closing of the Offering, the Company shall compensate Dawson as follows: (i) the Company shall pay to Dawson 8% of the gross proceeds invested by all Prospects in the Offering, and (ii) the Company shall issue to Dawson500,000 five-year warrants to purchase that numbercommon shares for an exercise price of securities equal$0.30 per common share to 8%investors for cash proceeds of the aggregate number of securities sold to Prospects in the Offering.$50,000 or $0.05 per share.

 

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The Agreement may be terminated for any reason by either party upon 30 days’ prior written notice to the other party.

 

We will require additional financing to fund our planned operations. We currently do not have committed sources of additional financing and may not be able to obtain additional financing particularly, if the volatile conditions of the stock and financial markets, and more particularly the market for early development stage company stocks persist.

There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, if and when it is needed, we will be forced to further delay or further scale down some or all of our activities or perhaps even cease the operations of the business.

Since inception we have funded our operations primarily through equity and debt financings and we expect that we will continue to fund our operations through the equity and debt financing, either alone or through strategic alliances. If we are able to raise additional financing by issuing equity securities, our existing stockholders’ ownership will be diluted. Obtaining commercial or other loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

There is no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his, her, or its investment in our common stock. Further, we may continue to be unprofitable.

Critical Accounting Policies

 

We have identified the following policies as critical to its business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment.

 

Research and development

 

Research and development costs incurred in the development of the Company’s products are expensed as incurred.

Derivative liabilities

We have certain financial instruments that are embedded derivatives associated with capital raises. We evaluates all of our 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

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. We record revenue when the products have been shipped to the customer. We report our sales net of actual sales returns and the amount of reserves established for anticipated sales returns based on historical rates. We estimate and record a liability for potential returns and record this as a reduction of revenue in the same period the related revenue is recognized. We also offers cash discounts to certain customers as an incentive for prompt payment. We account for cash discounts by reducing accounts receivable by the prompt pay discount amount and recognizes the discount as a reduction of revenue in the same period the related revenue is recognized.

Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell through to the final customer is established which maybe upon receipt of payment by our customer.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is recognized over the service period of the award.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

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ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure controls and procedures

 

We maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e), promulgated by the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2016,2017, our disclosure controls and procedures were not effective.

 

The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting: (1) the lack of multiplemultiples levels of management review of material contractson complex accounting and expenses, andfinancial reporting issues, (2) a lack of adequate segregation of duties relatingand necessary corporate accounting resources in our financial reporting process and accounting function as a result of our limited financial resources to the initiationsupport hiring of transactionspersonnel and payments to vendors. Until such time as we expandimplementation of accounting systems and (3) lack of experienced accounting staff at our staff to include additional accounting personnel, itnewly acquired subsidiaries located in Mexico. It is likely that we will continue to report material weaknesses in our internal control over financial reporting.

 

A material weakness is a deficiency or a combination of control deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting during the quarter ended September 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

ITEM 1A. RISK FACTORS

 

Not applicable to smaller reporting companies.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the three months ended September 30, 2016, pursuant to subscription agreements,On July 5, 2017, we issued 33,959300,000 shares of itsour unregistered common stock to investorsa consultant for cash proceedsbusiness development services performed. The shares were valued at the quoted trading price on the date of $5,125.grant of $0.077 per share.

 

During the three months ended September 30, 2016,In July 2017, pursuant to a unit subscription agreements,agreement, we issued 1,730,3621,000,000 shares of itsour unregistered common stock and 865,176500,000 five-year warrants to purchase common shares for an exercise price of $0.30 per common share to investors for cash proceeds of $259,552.$50,000 or $0.05 per share.

During the quarterly period ended September 2017, we issued 5,537,800 shares of our common stock upon the conversion of principal note balances of $188,217 and interest of $10,098.

In September 2017, we issued 9,547,087 shares of our common stock upon the cashless exercise of 9,074,076 warrants.

 

The above securities were issued in reliance upon the exemptions provided by Section 4(a)(2) under the Securities Act of 1933, as amended.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.As of September 30, 2017, we were in default on certain of our convertible debt instruments and loans caused by the non-payment of balance due pursuant to the repayment terms.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

Effective November 16, 2016, Robert L. Elliott, M.D., resigned as the Company’s Chief Medical Officer and a member of its board of directors for personal reasons. The Company has agreed to pay Dr. Elliott his compensation through December 31, 2016 and to provide him with access to the Company’s U.S. corporate offices through December 31, 2016.None.

Financing Transaction - General

On November 18, 2016 (the “Original Issue Date”) the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase Agreement, the Company agreed to issue upon closing to the Purchasers for an aggregate subscription amount of $300,000: (i) 10% Original Issue Discount Senior Secured Convertible Notes (the “Notes”); and (ii) warrants (the “Warrants”) to purchase 2,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at an exercise price of $0.175 (subject to adjustments under certain conditions as defined in the Warrants). The closing date under the Securities Purchase Agreement is expected to occur no later than November 30, 2016.

The Notes.The aggregate principal amount of the Notes is $300,000 and the Company will receive $270,000 after giving effect to the 10% original issue discount. The 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 Notes)), have a maturity date of July 21, 2017 and are convertible (principal, and interest) at any time after the issuance date of the Notes into shares of the Company’s Common Stock at a conversion price equal to $0.15 per share (subject to adjustment as provided in the Note), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the 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 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 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 Notes and accrued and unpaid interest during months four through six following the Original Issue Date. In order to prepay the Notes, the Company shall provide 20 Trading Days prior written notice to the Holder, during which time the Holder may convert the Notes in whole or in part at the Conversion Price.

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 subject to adjustment if we issue or sell shares of our common stock for a consideration per share less than the conversion price then in effect, or issue options, warrants or other securities convertible or exchange for shares of our common stock at a conversion or exercise price less than the conversion price of the 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. We granted the Purchasers certain rights of first refusal on future offerings by us for as long as the Purchasers hold the Notes. In addition, subject to limited exceptions, the Purchasers will not have the right to convert any portion of the Note if the Purchaser, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s Common Stock outstanding immediately after giving effect to its conversion. The Purchaser may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to us. In addition, we granted the Purchasers certain rights of first refusal on future offerings by us for as long as the Purchasers hold the Notes.

The Warrants. As described above, holders of the Notes received Warrants to purchase up to 2,000,000 shares of Common Stock. The initial exercise price for the Warrants is $0.175 per share, subject to adjustment as described below, and the Warrants are exercisable for five years after the issuance date. The Warrants are exercisable for shares of 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 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 sells or grants any option to purchase, sell or re-price any Common Stock or Common Stock Equivalents (as defined therein) at an exercise price lower than the then-current exercise price of the Warrant 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 the 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 Warrant for cash at a price equal to the higher of the Black Scholes Value of the unexercised portion of the Warrant or difference between the cash per share paid in the fundamental transaction and the exercise price per share. The holder of Warrants will not have the right to exercise any portion of the Warrant 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. The foregoing description is qualified in its entirety by reference to the full text of the form of Warrant filed as Exhibit 10.4 hereto and is incorporated by reference into this Item 1.01.

Ancilliary Agreements.In connection with the Company’s obligations under the Notes, the Company and its subsidiary, OncBioMune, Inc. (the “Subsidiaries”) entered into a Security Agreement, Pledge Agreement and Subsidiary Guaranty with Calvary Fund I LP, as agent, pursuant to which the Company and the Subsidiary granted a lien on all assets of the Company and the Subsidiary (the “Collateral”) excluding permitted indebtedness, for the benefit of the Purchasers, to secure the Company’s obligations under the Notes. Upon an Event of Default (as defined in the Notes), the Purchaser may, among other things, collect or take possession of the Collateral, proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.

Additional Purchaser Rights and Company Obligations

The Securities Purchase Agreement includes additional purchaser rights and Company obligations including obligations on the Company to reimburse the Purchasers $15,000 for legal fees and expenses, satisfy the current public information requirements under SEC Rule 144(c), obligations on the Company with respect to the use of proceeds from the sale of securities and Purchaser rights to participate in future Company financings. Reference should be made to the full text of the Securities Purchase Agreement filed as Exhibit 10.2 hereto, which is incorporated by reference into this Item 5.

The issuance of the Common Stock is exempt from the registration requirements from the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof. The Company has not engaged in general solicitation or advertising with regard to the issuance and sale of the Note and the Warrants and has not offered securities to the public in connection with such issuance and sale.

The foregoing description of the terms of the Securities Purchase Agreement, the Notes, the Security Agreement, the Warrant, the Pledge Agreement, and the Subsidiary Guaranty, do not purport to be complete and are qualified in their entirety by reference to the provisions of such agreements, the forms of which are filed as exhibits 10.2, 10.3, 10.4, 10.5, 10.6 and 10.7 to this Current Report on Form 8-K.

Note Payoff

            On November 22, 2016, the Company will pay $62,000 as payment in full for the Convertible Promissory Note in the original principal amount of $40,000 issued to Crown Bridge Partners, LLC on May 23, 2016.

ITEM 6. EXHIBITS

 

Exhibit No. Description of Exhibit
   
10.110.1+ ShareholdersForm of Non-Qualified Stock Option Agreement among OncBioMune Pharmaceuticals, Inc., Vitel Laboratorios, S.A. de C.V., and Oncbiomune México, S.A. De C.V. dated August 19, 2016for Directors (incorporated by reference to Exhibit 10.1 ofto the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2016)April 21, 2017).
10.2*

Securities Purchase Agreement

10.3*

Form of Note

10.4*

Form of Warrant

10.5*

Form of Security Agreement

10.6*

Form of Pledge Agreement

10.7*

Form of Subsidiary Guaranty

   
31.1* Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.
   
31.2* Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002.
   
32.1* Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
   
32.2* Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
   
101.INS* XBRL INSTANCE DOCUMENT
   
101.SCH* XBRL TAXONOMY EXTENSION SCHEMA
   
101.CAL* XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
   
101.DEF* XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
   
101.LAB* XBRL TAXONOMY EXTENSION LABEL LINKBASE
   
101.PRE* XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 ONCBIOMUNE PHARMACEUTICALS, INC.
   
Dated: November 21, 201620, 2017By:/s/ Jonathan F. Head, PhD
  Jonathan F. Head, PhD
  Chief Executive Officer (principal executive officer)
   
Dated: November 21, 201620, 2017By:/s/ Andrew Kucharchuk
  Andrew Kucharchuk
  Chief Financial Officer and President (principal financial officer and principal accounting officer)

 

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