UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended: December 31, 2017

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of each Exchange on which registered
N/A		N/A

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.0001 per share

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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

 

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

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s last completed second quarter, based upon the closing price of the common stock of $0.09 on such date , is $12,070,870.

 

As of May 30, 2018, there were 223,744,872 shares of the issuer’s common stock, par value $0.0001, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Business	4
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	32
Item 2.	Properties	32
Item 3	Legal Proceedings	32
Item 4.	Mine Safety Disclosures	32
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	35
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 8.	Financial Statements and Supplementary Data	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A.	Controls and Procedures	49
Item 9B.	Other Information	50
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	50
Item 11.	Executive Compensation	55
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	59
Item 13.	Certain Relationships and Related Transactions, and Director Independence	60
Item 14.	Principal Accounting Fees and Services	61
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	63
Item 16,	Form 10-K Summary
	Signatures	67

 

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This report 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 discussed in greater detail under Item 1A – “Risk Factors” of this report.

 

We caution that the factors described herein and other 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.

 

INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

 

When used in this report the terms:

 

	●	“OncBioMune Pharmaceuticals”, “we”, “us” or “our” refers to OncBioMune Pharmaceuticals, Inc., a Nevada corporation, and/or its subsidiaries as the context may require;
	●	“Vitel Laboratorios”, refers to Vitel Laboratorios, S.A. de C.V., a Mexican variable stock corporation, and a wholly owned subsidiary of OncBioMune Pharmaceuticals effective as of March 10, 2017;
	●	“Oncbiomune México” refers to Oncbiomune México, S.A. De C.V., a Mexican company and a 100% owned subsidiary of OncBioMune Pharmaceuticals and
	●	“Oncbiomune” refers to Oncbiomune, Inc., a Louisiana corporation and a wholly-owned subsidiary of OncBioMune Pharmaceuticals.

 

 

PART I

 

ITEM 1. BUSINESS

 

Business Overview

 

We are 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.

 

Strategy

 

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 partners 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 product candidates.

 

The key elements to our business and scientific strategy are to:

 

	●	develop and commercialize ProscaVax as well as the other technologies that come from our vaccine platform in the United States, Mexico and Latin America as cancer treatments where we believe a company our size can successfully compete;
	●	Develop and commercialize a diverse portfolio of licensed and acquired drugs that address a focused brand of therapeutic indications or that represent significant market opportunities;
	●	Develop and commercialize drugs globally through joint ventures;
	●	Develop and commercialize our targeted therapies globally;
	●	Develop our drug candidates by establishing strategic collaborations with pharmaceutical and biotechnology companies to further develop and market our product candidates; and
	●	Establish infrastructure and capabilities to support the future commercialization of our products. Our management team has extensive experience developing and/or commercializing pharmaceutical products and as our product candidates advance, we intend to add the appropriate additional regulatory and commercial expertise to maximize the potential for successful product launches and franchise management. In certain instances, we will seek partners to maximize the commercial potential of our product candidates, develop drug candidates and establish strategic collaborations with pharmaceutical and biotechnology companies to further develop and market our product candidates.

 

OncBioMune

 

ProscaVax Update. Our lead product, ProscaVax™ has completed vaccination of prostate cancer patients in its Phase 1a and we intend to commence two Phase 2 clinical trials in 2018. . On May 11, 2018, the Institutional Review Board and Scientific Review Committee at the Dana-Farber Cancer Institute approved the clinical trial of ProscaVax™, the Company’s lead immunotherapy product from its platform, at Beth Israel Deaconess Medical Center and Dana-Farber. It is expected that the clinical trial will be enrolling patients in the near future.

 

Our Company’s clinical efforts began with a mouse model used to test a whole cell mouse mammary cancer vaccine. Laboratory research conducted by OncBioMune demonstrated that when mice are vaccinated either subcutaneously or intraperitoneally with a series of whole cell preparations of mouse mammary carcinoma cells combined with granulocyte-macrophage colony-stimulating factor (GM-CSF) and Interleukin-2 (IL-2) and then transplanted with the same tumor cells, the growth of the cancerous tumor is significantly inhibited. Also, the adjuvants alone (GM-CSF and IL-2) either injected subcutaneously or intraperitoneally do not inhibit growth of the tumor.

 

 

Dr. Jonathan Head, our Chief Executive Officer noted that development of this mouse model should allow future studies to investigate the possible use of allogeneic mammary cell lines in a whole cell vaccine with IL-2 and GM-CSF as adjuvants. This early research is important in our efforts to expand into additional indications for our platform. Our intent is to continue studies of our technology that we believe could lead to an off-the-shelf breast cancer therapeutic vaccine and possible preventative vaccine for high-risk breast cancer patients.

 

This preclinical finding further supports the efficacy of the Company’s proprietary therapeutic cancer vaccine platform. OncBioMune’s prostate cancer vaccine, ProscaVax, which is built upon the same platform, is currently being evaluated in a Phase 1 clinical trial in PSA recurrent prostate cancer in both hormone-naïve and hormone-independent patients in the United States. Two Phase 2 clinical trials of ProscaVax in prostate cancer patients will commence in 2018 in the United States. One trial in patients with PSA recurrent disease and another in active surveillance patients. The clinical trials will be enrollng this summer. The active survalliance trial will be conducted at Beth Israel Deaconness and Dana Farber cancer Center, both Harvard University Medical Centers. While the late stage trial in recurrent disease will be hosted by Urology Centers of North Texas.

 

Our Phase 1 clinical trial evaluated our novel cancer vaccine, ProscaVax, in PSA (Prostate Specific Antigen) recurrent prostate cancer in both hormone-naïve and hormone-independent patients. The trial was hosted at the University of California San Diego Moores Cancer Center and Veterans Hospital in La Jolla, California (“UCSD/VA”) under the U.S. Food and Drug Administration’s Investigational New Drug (IND) program with funding from the U.S. Navy Cancer Vaccine Program.

 

20 patients were enrolled in the Phase 1a trial, completed vaccination and are in long term follow-up. The trial established a strong safety profile for ProscaVax, as to date no serious adverse events or dose limiting adverse events have been reported. All adverse events due to the vaccine were Grade 1 with no Grade 2, 3 or 4 adverse events attributable to the vaccine. We believe these results further validate a showing of minimal toxicity due to the Company’s vaccine technology

 

Preliminary data from the UCSD/VA trial shows ProscaVax provides a meaningful clinical benefit to prostate cancer patients. These data include:

 

	●	All 20 patients in the Phase 1a portion of the trial have received their complete vaccine injection series and are in long term follow-up.
	●	None of the 20 patients who have completed their vaccine series have had a dose limiting adverse event (DLAE)
	●	None of the 20 patients who have completed their vaccine series have had a serious adverse event (SAE).
	●	15 of 18 patients (83%) at 31 weeks post first vaccine have had an increased immune response to PSA as determined with a LBA
	●	14 of 20 patients (57%) have had an increase in their PSA doubling time (slowed progression)
	●	4 of the 20 patients who have completed their vaccine series have experienced disease progression (one radiological, three PSA) at 31 weeks.

 

The trial was originally designed as a Phase 1a/1b study with 20 patients to be enrolled in the Phase 1a portion and 28 in the Phase 1b. As previously disclosed, based upon encouraging preliminary data, we are foregoing the Phase 1b portion of the trial and advancing into a Phase 2 clinical trial hosted by the Urology Clinics of North Texas (“UCNT”). The Phase 2a at UCNT will be similar in design to the UCSD/VA Trial in La Jolla and will evaluate ProscaVax in PSA recurrent prostate cancer in hormone-naïve patients. More specifically, the Phase 2 Clinical trial at the UCNT will treat PSA recurrent patients/biochemical failure patients with the initial 6 vaccines, as in the previous Phase 1a, followed by a maintenance series of alternating monthly IL-2 injections and vaccines (three of each). Our contract research organization partner, Theradex Oncology, is reviewing the protocol for this trial at UCNT of ProscaVax for submission to the FDA. We intend to begin this trial no later than the third quarter of 2018.

 

 

In addition, we are working to initiate a Phase 2 trial of ProscaVax in early-stage prostate cancer patients in the “active surveillance” stage of disease at Harvard’s Beth Israel-Deaconess Medical Center with additional patients from Harvard-affiliated Hospitals and Research Institutes. This will be a 120 patient clinical trial with 40 control patients in active surveillance and 80 active surveillance patients receiving ProscaVax (full series of vaccines and vaccines with IL-2). This trial was approved by the IRB at Beth Israel Deaconess and Dana Farber Cancer center on May 11, 2018.

 

With a strong safety profile now established for ProscaVax with no serious adverse events or dose limiting adverse events reported, we believe we have further validated prior research in hundreds of patients showing minimal toxicity of our vaccine technology. We believe that the additional clinical trials will further support the previously reported efficacy of ProscaVax in both early and late stage prostate cancer.

 

Intellectual Property

 

As a matter of regular course, we have obtained, and intend to actively seek to obtain, when appropriate, protection for our current and prospective products and proprietary technology by means of United States and foreign patents, trademarks, and applications for each of the foregoing. In addition, we rely upon trade secrets and contractual agreements to protect certain of our proprietary technology and products. ProscaVax is a novel biologic, and it is difficult to predict how competition could develop and accordingly which aspects of our related intellectual property may prove the most significant in the future. We currently have a patent application relating to protein therapeutic cancer vaccines and a provisional patent application relating to taxane- and taxoid-protein compositions. Both United States patent applications expire in 2031. In addition, we had a patent that expired in 2014 relating to vaccination of cancer patients using tumor-associated antigens mixed with interleukin-2 and granulocyte-macrophage colony stimulating factor.

 

Patent expiration dates may be subject to patent term extension depending on certain factors. In addition, following expiration of a basic product patent or loss of patent protection resulting from a legal challenge, it may be possible to continue to obtain commercial benefits from other characteristics such as clinical trial data, product manufacturing trade secrets, uses for products, and special formulations of the product or delivery mechanisms.

 

We intend to continue using our scientific experience to pursue and patent new developments to enhance our position in the cancer field. Patents, if issued, may be challenged, invalidated, declared unenforceable, circumvented or may not cover all applications we desire. Thus, any patent that we own or license from third parties may not provide adequate protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties may not result in issued patents. Also, patents may not provide us with adequate proprietary protection or advantages against competitors with, or who could develop, similar or competing technologies, or who could design around our patents. In addition, future legislation may impact our competitive position in the event brand-name and follow-on biologics do not receive adequate patent protection. From time to time, we have received invitations to license third-party patents.

 

We also rely on trade secrets and know-how that we seek to protect, in part, by using confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality agreements from companies that receive our confidential data. For employees, consultants and contractors, we require agreements providing that all inventions conceived while rendering services to us shall be assigned to us as our exclusive property.

 

 

Competition

 

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Pharmaceutical and biotechnology companies, academic institutions and other research organizations are actively engaged in the discovery, research and development of products designed to address prostate cancer and other indications. There are products currently under development by other companies and organizations that could compete with ProscaVax or other products that we are developing. Products such as chemotherapeutics, androgen metabolism or androgen receptor antagonists, endothelin A receptor antagonists, antisense compounds, angiogenesis inhibitors and gene therapies for cancer are also under development by a number of companies and could potentially compete with ProscaVax and our other product candidates. In addition, many universities and private and public research institutes may in the future become active in cancer research, which may be in direct competition with us. Docetaxel (also referred to by its brand name Taxotere) was approved by the FDA for the therapeutic treatment of metastatic, androgen-independent prostate cancer in 2004 and JEVTANA® (cabazitaxel) was approved in 2010 for use in men as a second line therapy following progression after initial treatment with docetaxel.

 

In 2011, ZYTIGA® (abiraterone acetate) was approved for use in men with prostate cancer with progression following treatment with a chemotherapeutic regime. In 2012, ZYTIGA was approved, in combination with prednisone, to treat men with metastatic castrate-resistant prostate cancer prior to receiving chemotherapy, and Xtandi (Enzalutamide), an androgen receptor inhibitor, was approved to treat men with metastatic castrate-resistant prostate cancer who previously received docetaxel chemotherapy. In 2013, Xofigo (radium RA 223 dichloride) injection was approved for the treatment of patients with castration-resistant prostate cancer (CRPC), symptomatic bone metastases and no known visceral metastatic disease. Other therapies such as Bavarian Nordic’s PROSTVAC® are the subject of ongoing clinical trials in men with metastatic castrate-resistant prostate cancer. PROSTVAC®, currently in Phase 3 clinical development, is a therapeutic cancer vaccine being studied in men with asymptomatic or minimally symptomatic metastatic castrate-resistant prostate cancer.

 

Our competitors include major pharmaceutical companies. These companies may have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing. In addition, smaller competitors may collaborate with these large established companies to obtain access to their resources.

 

Our ability to successfully commercialize ProscaVax and our other potential products, and compete effectively with third parties will depend, in large part, on:

 

	●	the perception of physicians and other healthcare professionals of the safety, efficacy and relative benefits of ProscaVax or our other products compared to those of competing products or therapies;
	●	the effectiveness of our sales and marketing efforts in appropriately targeting a resonant clinical message to both oncologists and urologists;
	●	the willingness of physicians to adopt a new treatment regimen consisting of infusion of an immunotherapy;
	●	reimbursement policies for ProscaVax or our other product candidates, if developed and approved;
	●	the price of ProscaVax and that of other products we may develop and commercialize relative to competing products;
	●	our ability to manufacture ProscaVax and other products we may develop on a cost-effective commercial scale;
	●	our ability to accurately forecast demand for ProscaVax, and our product candidates if regulatory approvals are achieved; and
	●	our ability to advance our other product candidates through clinical trials and through the FDA approval process and those of non-United States regulatory authorities.

 

Competition among approved marketed products will be based upon, among other things, efficacy, reliability, product safety, price-value analysis, and patent position. Our competitiveness will also depend on our ability to advance our product candidates, license additional technology, maintain a proprietary position in our technologies and products, obtain required government and other approvals on a timely basis, attract and retain key personnel and enter into corporate relationships that enable us and our collaborators to develop effective products that can be manufactured cost-effectively and marketed successfully.

 

 

Regulatory

 

General

 

Government authorities in the United States and other countries extensively regulate, among other things, the preclinical and clinical testing, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution of biologic products. In the United States, the FDA subjects pharmaceutical and biologic products to rigorous review under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations.

 

FDA Approval Process

 

To obtain approval of our product candidates from the FDA, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and preclinical and clinical trials. The collection of these data, as well as the preparation of applications for review by the FDA, are costly in time and effort, and may require significant capital investment. We may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing any products we may develop.

 

A company typically conducts human clinical trials in three sequential phases, but the phases may overlap. Phase 1 trials consist of testing of the product in a small number of patients or healthy volunteers, primarily for safety at one or more doses. Phase 1 trials in cancer are often conducted with patients who are not healthy and who have end-stage or metastatic cancer. Phase 2 trials, in addition to safety, evaluate the efficacy of the product in a patient population somewhat larger than Phase 1 trials. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically dispersed test sites. Prior to commencement of each clinical trial, a company must submit to the FDA a clinical plan, or “protocol,” which must also be approved by the Institutional Review Boards at the institutions participating in the trials. The trials must be conducted in accordance with the FDA’s good clinical practices. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time.

 

To obtain marketing authorization, a company must submit to the FDA the results of the preclinical and clinical testing, together with, and among other things, detailed information on the manufacture and composition of the product, in the form of a new drug application or, in the case of a biologic such as ProscaVax, a biologics license application.

 

We are also subject to a variety of regulations governing clinical trials and sales of our products outside the United States. Whether or not FDA approval has been obtained, approval of conduct of a clinical trial or authorization of a product by the comparable regulatory authorities of foreign countries and regions must be obtained prior to the commencement of marketing the product in those countries. The approval process varies from one regulatory authority to another and the time may be longer or shorter than that required for FDA approval based on local regulations. In the E.U., Canada and Australia, regulatory requirements and approval processes are similar, in principle, requiring a rigorous assessment of the data to ensure a product has satisfactorily demonstrated an acceptable benefit/risk profile prior to regulatory approval for marketing.

 

Fast Track Designation/Priority Review

 

Congress enacted the Food and Drug Administration Modernization Act of 1997 (the “Modernization Act”) in part to ensure the availability of safe and effective drugs, biologics and medical devices by expediting the development and review for certain new products. The Modernization Act establishes a statutory program for the review of Fast Track products, including biologics. A Fast Track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the Fast Track program, the sponsor of a new drug or biologic may request that the FDA designate the drug or biologic as a Fast Track product at any time during the development of the product, prior to a new drug application submission.

 

 

Post-Marketing Obligations

 

The Food and Drug Administration Amendments Act of 2007 expanded FDA authority over drug products after approval. All approved drug products are subject to continuing regulation by the FDA, including record-keeping requirements, reporting of adverse experiences with the product, sampling and distribution requirements, notifying the FDA and gaining its approval of certain manufacturing or labeling changes, complying with certain electronic records and signature requirements, submitting periodic reports to the FDA, maintaining and providing updated safety and efficacy information to the FDA, and complying with FDA promotion and advertising requirements. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as warning letters, suspension of manufacturing, seizure of product, injunctive action, criminal prosecution, or civil penalties.

 

The FDA may require post-marketing studies or clinical trials to develop additional information regarding the safety of a product. These studies or trials may involve continued testing of a product and development of data, including clinical data, about the product’s effects in various populations and any side effects associated with long-term use. The FDA may require post-marketing studies or trials to investigate known serious risks or signals of serious risks or identify unexpected serious risks and may require periodic status reports if new safety information develops. Failure to conduct these studies in a timely manner may result in substantial civil fines.

 

Drug and biologics manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and to list their products with the FDA. The FDA periodically inspects manufacturing facilities in the United States and abroad in order to assure compliance with the applicable cGMP regulations and other requirements. Facilities also are subject to inspections by other federal, foreign, state or local agencies. In complying with the cGMP regulations, manufacturers must continue to assure that the product meets applicable specifications, regulations and other post-marketing requirements. We must ensure that third-party manufacturers continue to ensure full compliance with all applicable regulations and requirements. Failure to comply with these requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing or recall or seizure of product.

 

Also, newly discovered or developed safety or efficacy data may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, additional preclinical or clinical studies, or even in some instances, revocation or withdrawal of the approval. Violations of regulatory requirements at any stage, including after approval, may result in various adverse consequences, including the FDA’s withdrawal of an approved product from the market, other voluntary or FDA-initiated action that could delay or restrict further marketing, and the imposition of civil fines and criminal penalties against the manufacturer and Biologics License Applications (“BLA”) holder. In addition, discovery of previously unknown problems may result in restrictions on the product, manufacturer or BLA holder, including withdrawal of the product from the market. Furthermore, new government requirements may be established that could delay or prevent regulatory approval of our products under development, or affect the conditions under which approved products are marketed.

 

We are also subject to a variety of regulations governing post-marketing obligations for our product in the European Union. As part of the approval process governed by European regulations, a company may be required to complete post marketing commitments as a condition of approval to assess additional information regarding the safety of a product. The EMA may require post-marketing studies to investigate known serious risks or signals of serious risks or identify unexpected serious risks and may require periodic status reports if new safety information develops. Failure to complete post-marketing requirements in a timely manner may result in substantial fines including the risk to continued marketing in the European Union.

 

Biosimilars

 

The Biologics Price Competition and Innovation Act (“BPCIA”) was passed on March 23, 2010 as Title VII to the Patient Protection and Affordable Care Act. The law provides for an abbreviated approval pathway for biological products that demonstrate biosimilarity to a previously-approved biological product. The BPCIA provides 12 years of exclusivity for innovator biological products. The BPCIA may be applied to our product in the future and could be applied to allow approval of biosimilars to our products.

 

 

Federal Anti-Kickback, False Claims Laws & The Federal Physician Payment Sunshine Act

 

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws are relevant to certain marketing practices in the pharmaceutical industry. These laws include anti-kickback statutes, false claims statutes, and the federal Physician Payment Sunshine Act. The federal healthcare program anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good or service for which payment may be made under federal health care programs such as the Medicare and Medicaid programs. For example, this statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Violations of the federal anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties and exclusion from participation in federal healthcare programs. The federal Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 and subsequent legislation (collectively, “PPACA”), among other things, amends the intent requirement of the federal anti-kickback statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions; however, the exceptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exception or safe harbor may be subject to scrutiny.

 

Federal false claims laws prohibit, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment, or knowingly making, or causing to be made, a false record or statement material to a false or fraudulent claim. For example, several pharmaceutical and other healthcare companies have faced enforcement actions under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. In addition, anti-kickback statute violations and certain marketing practices, including off-label promotion, may also implicate false claims laws. Federal false claims laws violations may result in imprisonment, criminal fines, civil monetary damages and penalties and exclusion from participation in federal healthcare programs. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs. A number of states have anti-kickback laws that apply regardless of the payer.

 

In addition, the federal Physician Payment Sunshine Act will require extensive tracking of physician and teaching hospital payments, maintenance of a payments database, and public reporting of the payment data. The Centers for Medicare & Medicaid Services (“CMS”) recently issued a final rule implementing the Physician Payment Sunshine Act provisions and clarified the scope of the reporting obligations, requiring manufacturers to begin tracking on August 1, 2013 and reporting payment data to CMS by March 31, 2014. Failure to comply with the reporting obligations may result in civil monetary penalties.

 

State Laws

 

Marketing Restrictions and Disclosure Requirements. A number of states, such as Minnesota, Massachusetts and Vermont, have requirements that restrict pharmaceutical marketing activities. These state requirements limit the types of interactions we may have with healthcare providers licensed in these jurisdictions. In addition, a number of states have laws that require pharmaceutical companies to track and report payments, gifts and other benefits provided to physicians and other health care professionals and entities. Still other state laws mandate implementation of specific compliance policies to regulate interactions with health care professionals.

 

State Fraud and Abuse Laws. Several states have enacted state law equivalents of federal laws, such as anti-kickback and false claims laws. These state laws may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payer.

 

State Price Reporting Requirements. Some states, including Texas, New Mexico and Vermont, have enacted state price disclosure requirements that may apply to any drug sold in the state, subject to specific state requirements.

 

Healthcare Reform. Certain states, such as Massachusetts, are pursuing their own programs for health reform. These programs may include cost containment measures that could affect state healthcare benefits, particularly for higher priced drugs. Under PPACA, states will have authority to define packages of “essential health benefits” that health plans in the individual and small group markets must offer beginning in 2014. The definition of these packages could affect coverage of our products by those plans.

 

 

Sale of Pharmaceutical Products. Many states have enacted their own laws and statutes applicable to the sale of pharmaceutical products within the state, with which we must comply. We are also subject to certain state privacy and data protection laws and regulations.

 

Coverage and Reimbursement by Third-Party Payers

 

Our sale of ProscaVax is dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans.

 

Medicare Part B Coverage and Reimbursement of Drugs and Biologicals

 

In the United States, the Medicare program is administered by CMS. Coverage and reimbursement for products and services under Medicare are determined in accordance with the Social Security Act and pursuant to regulations promulgated by CMS, as well as the agency’s subregulatory coverage and reimbursement determinations. Medicare Part B provides limited coverage of outpatient drugs and biologicals that are furnished “incident to” a physician’s services. Generally, “incident to” drugs and biologicals are covered only if they satisfy certain criteria, including that they are of the type that is not usually self-administered by the patient and they are reasonable and necessary for a medically accepted diagnosis or treatment.

 

Medicare Part B pays providers under a payment methodology using average sales price (“ASP”) information. Manufacturers are required to provide ASP information to CMS on a quarterly basis. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation for each day in which the misrepresentation was applied. This information is used to compute Medicare payment rates, updated quarterly based on this ASP information. The Medicare Part B payment methodology for physicians is ASP plus six percent and can change only through legislation. There is a mechanism for comparison of ASP for a product to the widely available market price and the Medicaid Average Manufacturer Price for the product, which could cause further decreases in Medicare payment rates, although this mechanism has yet to be utilized. The statute establishes the payment rate for new drugs and biologicals administered in hospital outpatient departments that are granted “pass-through status” at the rate applicable in physicians’ offices (i.e., ASP plus six percent) for two to three years after FDA approval. CMS establishes the payment rates for drugs and biologicals that do not have pass-through status by regulation.

 

The methodology under which CMS establishes reimbursement rates is subject to change, particularly because of budgetary pressures facing the Medicare program and the federal government. Beginning April 1, 2013, Medicare payments for all items and services, including drugs and biologicals, will be reduced by up to 2% under the sequestration required by the Budget Control Act of 2011, Pub. L. No. 112-25 (“BCA”), as amended by the American Taxpayer Relief Act of 2012, Pub. L. 112-240 (“ATRA”), unless Congress acts to prevent the cuts. The Medicare Modernization Act of 2003 made changes in reimbursement methodology that reduced the Medicare reimbursement rates for many drugs, including oncology therapeutics. In the past year, Congress has considered additional reductions in Medicare reimbursement for drugs as part of legislation to reduce the budget deficit. Similar legislation could be enacted in the future. The Medicare regulations and interpretive determinations that determine how drugs and services are covered and reimbursed also are subject to change.

 

Pharmaceutical Pricing and Reimbursement Under Medicaid and Other Programs

 

In many of the markets in which we may do business in the future, the prices of pharmaceutical products are subject to direct price controls (by law) and to drug reimbursement programs with varying price control mechanisms.

 

We expect that ProscaVax will be made available to patients that are eligible for Medicaid benefits. A condition of federal funds being made available to cover our products under Medicaid and Medicare Part B is our participation in the Medicaid drug rebate program, established by the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508, and as amended by subsequent legislation, including PPACA. Under the Medicaid drug rebate program, we will pay a rebate to each state Medicaid program for each unit of ProscaVax paid for by those programs. The rebate amount varies by quarter, and is based on pricing data reported by us on a monthly and quarterly basis to CMS. These data include the monthly and quarterly average manufacturer price (“AMP”) for our drugs, and in the case of innovator products like ProscaVax, the quarterly best price (the “QBP”), which is our lowest price in a quarter to any commercial or non-governmental customer. If we become aware that our reported prices for prior quarters are incorrect or should be changed to reflect late-arriving pricing data, we would be obligated to submit the corrected data for a period not to exceed 12 quarters from the quarter in which the data originally were due. Any corrections to our pricing data could result in an overage or underage in our rebate liability for past quarters, depending on the nature of the correction.

 

 

The availability of federal funds under Medicaid and Medicare Part B to pay for any products that are approved for marketing also is conditioned on our participation in the Public Health Service 340B drug pricing program. The 340B drug pricing program requires participating manufacturers to agree to charge statutorily-defined covered entities no more than the 340B “ceiling price” for the manufacturer’s covered outpatient drugs. These covered entities include hospitals that serve a disproportionate share of low-income patients, as well as a variety of community health clinics and other recipients of health services grant funding. PPACA expanded the 340B program to include certain free standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals, each as defined by the Act. The 340B ceiling price for a drug is calculated using a statutory formula that is based on the AMP and Medicaid rebate amount for the drug. Any revisions to previously reported Medicaid pricing data also may require revisions to the 340B ceiling prices that were based on those data and could require the issuance of refunds.

 

If we make ProscaVax available for purchase by authorized users of the Federal Supply Schedule (“FSS”) of the General Services Administration pursuant to an FSS contract with the Department of Veterans Affairs (“VA”), the Veterans Health Care Act of 1992 (“VHCA”), would require us to offer deeply discounted FSS contract pricing to four federal agencies commonly referred to as the “Big Four” — the VA, the Department of Defense (“DoD”), the Coast Guard and the Public Health Service (including the Indian Health Service) — for federal funding to be made available for reimbursement of any of our products under the Medicaid program, Medicare Part B and for our products to be eligible to be purchased by those four federal agencies and certain federal grantees. FSS pricing to those four federal agencies must be equal to or less than the federal ceiling price (“FCP”). The FCP is based on a weighted average wholesaler price known as the non-federal average manufacturer price (“Non-FAMP”). We are required to report Non-FAMP to the VA on a quarterly and annual basis. If we misstate Non-FAMP or FCP, we must restate these figures. In addition, if we are found to have knowingly submitted false information to the government, the VHCA provides for civil monetary penalties of $100,000 per item of false information in addition to other penalties the government may impose.

 

The FSS contract is a federal procurement contract that includes standard government terms and conditions and extensive disclosure and certification requirements. All items on FSS contracts are subject to a standard FSS contract clause that requires FSS contract price reductions under certain circumstances where pricing is reduced to an agreed “tracking customer.” Further, in addition to the “Big Four” agencies, all other federal agencies and some non-federal entities are authorized to access FSS contracts. If we overcharge the government in connection with our FSS contract, whether due to a misstated FCP or otherwise, we would be required to refund the difference to the government.

 

Data Privacy

 

Numerous federal and state laws, including state security breach notification laws, state health information privacy laws and federal and state consumer protection laws, govern the collection, use and disclosure of personal information. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. In addition, most healthcare providers who prescribe our product and from whom we obtain patient health information are subject to privacy and security requirements under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). We are not a HIPAA covered entity, and we do not operate as a business associate to any covered entities. Therefore, these privacy and security requirements do not apply to us. However, we could be subject to criminal penalties if we knowingly obtain individually identifiable health information from a covered entity in a manner that is not authorized or permitted by HIPAA or for aiding and abetting the violation of HIPAA. We are unable to predict whether our actions could be subject to prosecution in the event of an impermissible disclosure of health information to us. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. These laws could create liability for us or increase our cost of doing business.

 

Mexico

 

In Mexico, where we conducted business prior to our discontinuation of the Vitel business in December 2017, we are subject to the laws and regulatory authorities of the Federal Commission for the Protection from Sanitary Risks (“COFEPRIS”). As previously disclosed, on December 29, 2017, we determined to sell or otherwise dispose of our interest in Vitel Laboratorios S.A. de C.V. (“Vitel”) and Oncbiomune México, S.A. De C.V. (“OBMP Mexico”). but have not yet entered into definitive agreements. Please see “Acquisition of Vitel Laboratorios” below.

 

 

European Regulatory Authorities for Reimbursement

 

In the European Union, national governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost of such products to consumers. The approach taken varies from member state to member state. Some jurisdictions operate positive and/or negative list systems under which products may be marketed only once a reimbursement price has been agreed. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure on healthcare costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products, as exemplified by the role of the National Institute for Health and Clinical Excellence in the United Kingdom, which evaluates the data supporting new medicines and passes reimbursement recommendations to the government. In addition, in some countries cross-border imports from low-priced markets (parallel imports) exert commercial pressure on pricing within a country.

 

Environmental and Safety Laws

 

We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of hazardous materials, including chemicals and radioactive and biological materials. Our operations produce such hazardous waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third parties for the disposal of such substances, and store our low level radioactive waste at our facilities until the materials are no longer considered radioactive. We are also subject to various laws and regulations governing laboratory practices and the experimental use of animals.

 

We are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”), and the Environmental Protection Agency (the “EPA”), and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations that may affect our research and development programs.

 

Employees

 

As of May 30, 2018, we had 3 full time employees. None of our employees are represented by a union. We believe we have good relations with our employees.

 

Our Corporate History and Recent Developments

 

Historical Businesses

 

We were incorporated under the laws of the State of Nevada on March 18, 2005. From 2010 until 2013, we engaged in the pharmaceutical business. During 2013, we decided to divest the balance of our pharmaceutical assets and engage in the digital media business, which encompasses social discovery aspects of the internet, primarily through an engagement website with mobile and tablet applications.

 

Amended and Restated Articles of Incorporation

 

On August 12, 2015, we amended and restated our articles of incorporation to, among other things:

 

	●	change our corporate name from Quint Media, Inc. to OncBioMune Pharmaceuticals, Inc.,
	●	increase our authorized shares to 520,000,000, of which 500,000,000 shares are common stock, with a par value of $0.0001 per share, and 20,000,000 shares are preferred stock, with a par value of $0.0001 per share, and
	●	effect a reverse stock split, which became effective on August 27, 2015 (“Reverse Stock Split”), of our outstanding common stock pursuant to which every 139.23 issued and outstanding shares of our common stock was reclassified and converted into one share of common stock. No cash was paid or distributed as a result of the Reverse Stock Split, and no fractional shares were issued. All fractional shares which would otherwise have been required to be issued as a result of the Reverse Stock Split were rounded up to a whole share.

 

 

On August 20, 2015, we filed a Certificate of Designation with the Nevada Secretary of State, designating 1,000,000 shares of preferred stock as Series A Preferred Stock (“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 shall not be required (except to the extent they are entitled to vote with holders of common stock as set forth herein) for taking any corporate action. On August 27, 2015, the Financial Industry Regulatory Authority approved the Reverse Stock Split and our corporate name change.

 

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.

 

Acquisition of OncBioMune, Inc.

 

Effective as of September 2, 2015, we closed the exchange (the “Exchange”) pursuant to that certain share exchange agreement dated as of June 22, 2015, as amended, among OncBioMune, the OncBioMune stockholders and us (the “Exchange Agreement”). On September 2, 2015, pursuant to the terms of the Exchange Agreement, we issued an aggregate of 47,000,000 shares of our common stock (representing approximately 91.3% of our then-outstanding common stock) and 1,000,000 shares of our Series A preferred stock (representing 100% of our outstanding Series A preferred shares) in exchange for 47,000,000 shares of OncBioMune’s common stock. As a result, the OncBioMune stockholders became our stockholders and OncBioMune became our wholly-owned subsidiary.

 

In connection with our corporate name change to OncBioMune Pharmaceuticals, Inc., the trading symbol for our common stock was changed from “QUNI” to “OBMP.” Also, effective as of September 2, 2015, we changed our fiscal year end from February 28 to December 31.

 

 

Shareholders Agreement with Vitel Laboratorios, S.A. de C.V.

 

On August 19, 2016, we entered into a Shareholders Agreement (the “Shareholders Agreement”) with Vitel Laboratorios related to their ownership of Oncbiomune México. 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 Laboratorios is an unrelated third party. Oncbiomune Mexico is authorized to issue 10,000 shares of Common Stock, of which 5,000 shares have been subscribed for and issued to us and 5,000 shares have been subscribed for and issued to Vitel Laboratorios.

 

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 will be managed by a four person board of directors that includes Jonathan F. Head, Ph. D. who will be Chairman of the Board of Directors, Manuel Cosme Odabachian, Andrew (Al) Kucharchuck, and Carlos F. Alaman Volnie. Under the terms of the Shareholder Agreement, Dr. Head and Mr. Kucharchuck were appointed by us and Messrs. Odabachian and Alaman-Volnie were appointed by Vitel Laboratorios.

 

This Agreement became effective as of August 19, 2016 and, except as otherwise set forth herein, will continue in effect thereafter until terminated upon the mutual consent of all of the Parties hereto. We expect to dissolve OBM Mexico when we dispose of Vitel.

 

Acquisition of Vitel Laboratorios

 

On March 10, 2017, we completed the acquisition of 100% of the issued and outstanding capital stock of Vitel Laboratorios from its shareholders Manuel Cosme Odabachian and Carlos Fernando Alaman Volnie (collectively, the “Vitel Stockholders”) on March 10, 2017 (the “Closing Date”) pursuant to the terms and conditions of a Contribution Agreement to the Property of Trust F/2868 entered into among we and the Vitel Stockholders on the Closing Date (the “Contribution Agreement”). Pursuant to the terms of the Contribution Agreement we issued 61,158,013 shares of our unregistered common stock, par value $0.0001 per share (the “Common Stock”) and 5,000,000 shares of Series B preferred stock (the “Series B Preferred”) to Banco Actinver, S.A., in its capacity as Trustee (the “Trustee”) of the Irrevocable Management Trust Agreement Trust No. 2868 (the “Trust Agreement”) for the benefit of the Vitel Stockholders in exchange for 100% of the issued and outstanding capital stock of Vitel Laboratorios (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 will be held by the Trustee for the benefit of our company as provided for in the Trust Agreement and 2% of the Vitel Shares will be transferred to OBMP. Vitel Laboratorios became a wholly owned subsidiary of our company as of the Closing Date. In addition, we agreed to issue 2,892,000 shares of Series B Preferred to Jonathan F. Head, Ph. D, our Chief Executive Officer and a member of the Board of Directors of our company as provided for in the Contribution Agreement.

 

To induce the Vitel Stockholders to enter into the Contribution Agreement and as a condition to close the transactions set forth in that agreement, we, the Vitel Stockholders, Dr. Head and Andrew A. Kucharchuk, our 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 we, Dr. Head, Mr. Kucharchuk, Mr. Cosme and Mr. Alaman dated as of the Closing Date (the “Stockholders’ Agreement”); (ii) the Trust Agreement; (iii) we, Vitel Laboratorios and the Vitel Stockholders entered into employment agreements with Messrs. Cosme and Alaman; (iv) we and Dr. Head and Mr. Kucharchuk entered into amendments to their respective employment agreements with, and stock option awards to, Dr. Head and Mr. Kucharchuk; (v) we, Dr. Head, Mr. Kucharchuk and the Vitel Stockholders agreed to consent to an amendment to our Articles of Incorporation and bylaws substantially in the form of the documents attached to the Stockholders’ Agreement as Exhibit E; (vi) to elect Mr. Cosme, Mr. Alaman, Dr. Head and Mr. Kucharchuk as directors of Vitel Laboratorios and such directors to elect Mr. Cosme, Mr. Alaman, Dr. Head and Mr. Kucharchuk as officers of Vitel Laboratorios; and Vitel Asesores, S.C. agreed to change its name to a name not containing the word “Vitel”.

 

In addition, Mr. Cosme and Mr. Alaman agreed to forgive all stockholder loans and related party debt to Vitel Laboratorios and its shareholders and their Affiliates; Vitel Laboratorios will have an amount of working capital of $10,000 (ten thousand Dollars 00/100) as of the Closing Date; each of Vitel Laboratorios and OBMP shall have a total indebtedness in their balance sheet as of the date hereof in an amount of no greater than $450,000 (four hundred and fifty thousand Dollars 00/100) as set forth in the schedules of assets and liabilities of Vitel Laboratorios and the financial statements of OBMP, attached as Schedule 3.1(k) and Schedule 3.2(l), respectively to the Contribution Agreement; and Vitel Asesores, S.C. transferred all intellectual property in its name to Vitel.

 

 

The Stockholders Agreement

 

The following is a summary of Stockholders Agreement.

 

Establishment of Trust; Trust Contribution. Mr. Cosme, Mr. Alaman and our company agreed to establish a trust pursuant to the Trust Agreement described below. Mr. Cosme and Mr. Alaman each contributed, assigned and transferred to us ownership of, and title over, one share of the capital stock of Vitel Laboratorios (the “Vitel Shares”) and Mr. Cosme and Mr. Alaman contributed, assigned and transferred to the Trustee (as defined in the Trust Agreement”) ownership of, and title over, the remaining 98 Vitel Shares for the benefit of our company pursuant to the terms and conditions of the Trust Agreement. The Company shall contribute, assign and transfer to the Trustee ownership of, and title over, 61,258,013 newly-issued shares of Common Stock and 2,107,681 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. Each of Mr. Cosme and Mr. Alaman understands and agrees that 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 the Trustee pursuant to the written instructions it receives from we. For such purposes, and pursuant to the bylaws of Vitel Laboratorios, we shall have the authority to instruct the Trustee regarding exercising any corporate rights it may be entitled to in its capacity as the majority Vitel Laboratorios shareholder.

 

Composition of the Board of Directors. The Stockholders’ Agreement permits the Vitel Stockholders to appoint one member to the Board of Directors, one designated by Dr. Head and Mr. Kucharchuk (the “Management Designee”), and two (2) 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. Mr. Cosme shall be the initial designee of the Vitel Stockholders to the Board of Directors (the “Vitel Designee”), Dr. Head shall be the initial designee of the Management Stockholders (the “Management Designee”), and Charles L. Rice, Jr. and Daniel S. Hoverman shall be the initial independent designees jointly appointed by the Management Stockholders and the Vitel Stockholders (hereinafter all members of the Board of Directors which are not the Vitel Designee or the Management Designee, the “Independent Designees”).

 

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 Laboratorios with a vote from a majority of its members.

 

Charter or Bylaw Provisions. Each stockholder of our company who is a party to the Stockholders’ Agreement (each, a “Stockholder”) agrees to vote all of its Company Securities (as defined in the Shareholders Agreement) that are entitled to vote or execute proxies or written consents, as the case may be, and to take all other actions necessary, to ensure that our Articles of Incorporation and Bylaws (a) facilitate, and do not at any time conflict with, any provision of the Stockholders’ Agreement and (b) permit each Stockholder to receive the benefits to which each such Stockholder is entitled under the Stockholders’ Agreement. In addition, on the date of the Stockholders’ Agreement, the Vitel Stockholders and Management Stockholders agreed to sign, or direct the Trustee to sign, the written consents necessary to amend our Articles of Incorporation and Bylaws, substantially in the form of the documents attached to the Stockholders’ Agreement as Exhibit E.

 

Restrictions on Transfer. Generally, the Stockholders may note 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 our 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% (twenty per cent) 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 our company who are a party to the Stockholders’ Agreement, with a copy to us, 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% (fifty per cent) 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 (3) years as of the Closing Date; (ii) in connection with any Shareholder, whenever such Shareholder directly or indirectly owns less than 5% (five per cent) of the fully diluted shares of our company; or (iii) upon the consummation of a Liquidation Event (as defined in the Stockholders’ Agreement).

 

The Trust Agreement

 

Establishment of Trust; Trust Contribution. Effective as of March 10, 2017, Mr. Cosme, Mr. Alaman and our company entered into the Irrevocable Management Trust Agreement Number F/2868 between Mr. Cosme, Mr. Alaman (collectively, “Beneficiary A”), we (“Beneficiary B”) and the Trustee (the “Trust Agreement”) for the purpose of establishing a trust to hold the OBM Shares and 98 shares of Vitel Laboratorios’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. Beneficiary A and Beneficiary B are collectively referred to as the “Beneficiaries”.

 

Authorities of the Trustee. The Trustee shall have all authorities and powers of attorney required to comply with the Trust Purposes, pursuant to the terms of Article 391 of the Mexican General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito), as amended, or supplemented from time to time (the “LGTOC”); provided that the Trustee shall act at all times pursuant to the instructions of the Beneficiaries.

 

Property Rights - Vitel Shares. The property rights resulting from the Vitel Shares contributed to the Trust Property (as defined in the Trust Agreement) shall be exercised by the Trustee exclusively for the benefit, and in terms of, the written instructions it receives from Beneficiary B. Beneficiary B shall receive the amounts corresponding to dividends, equity reimbursements, or for any other concept that Vitel Laboratorios distributes to its shareholders (the “Vitel Distributions”).

 

Property Rights - OBM Shares. The property rights resulting from the OBM Shares contributed to the Trust Property shall be exercised by the Trustee exclusively for the benefit, and in terms of, the written instructions it receives from Beneficiary A. Beneficiary A shall receive the amounts corresponding to dividends, equity reimbursements, or for any other concept that OBM distributes to its shareholders (the “OBM Distributions”).

 

 

Corporate Rights - Vitel Shares. The corporate rights resulting from the Vitel Shares shall be exercised by the Trustee pursuant to the written instructions it receives from Beneficiary B. For such purposes, and pursuant to the bylaws of Vitel Laboratorios, Beneficiary B shall have the authority to instruct the Trustee regarding exercising any corporate rights it may be entitled to in its capacity as the majority Vitel Laboratorios shareholder, including, but not limited to, calling shareholder meetings, voting the Vitel Shares pursuant to the instructions given by Beneficiary B, executing unanimous written consents in lieu of a meeting, adopting resolutions agreeing to pay the Vitel Distributions and, in general, resolve any and all matters associated with Vitel Laboratorios, and exercising any other right it may be entitled to in its capacity as the majority Vitel Laboratorios shareholder, pursuant to the provisions of this Agreement, the Vitel Laboratorios bylaws, and Applicable Law.

 

Corporate Rights - OBM Shares. The corporate rights resulting from the OBM Shares shall be exercised by the Trustee pursuant to the written instructions it receives from Beneficiary A. For such purposes, and pursuant to the bylaws of OBM, Beneficiary A shall have the authority to instruct the Trustee regarding exercising any corporate rights it may be entitled to in its capacity as an OBM shareholder, including, but not limited to, calling special shareholder meetings, voting the OBM Shares pursuant to the instructions given by the Beneficiary A, executing unanimous written consents in lieu of a meeting, adopting resolutions agreeing to pay the OBM Distributions and, in general, resolve any and all matters associated with OBM, and exercising any other right it may be entitled to in its capacity as an OBM shareholder, pursuant to the provisions of this Agreement, the OBM bylaws, the Shareholders Agreement, United States of America Securities Law and applicable law.

 

Transfer of Beneficiary Rights. Transfer of the rights of the Beneficiaries are restricted in certain circumstances as provided for in Clause IV of the Trust Agreement (other than certain Permitted Transfers), including a right for first refusal if all of our securities are deregistered with the Securities and Exchange Commission.

 

Tax Obligations. The Beneficiaries shall pay, as applicable, and without limitation, all taxes of any kind, contributions, and other tax liabilities that may be payable, imposed, or assessed in connection with executing the Trust Agreement, and the distributions received pursuant hereto (jointly, “Taxes”), and the Trustee shall not be liable in connection with the foregoing.

 

Termination. The Trust Agreement shall remain in full force and effect until the terms and conditions applicable to the Trust Property have been complied and performed in their entirety, and until this has been confirmed in writing, jointly by the Beneficiaries, except that this Trust may be terminated when: (a) ownership of and title over the Trust Property are transferred pursuant to the Trust Purposes; or (b) any of the circumstances set forth in article 392 (three hundred ninety-two) of the LGTOC (except for the provisions of section VI (six) of such article 392 (three hundred ninety-two)) occurs.

 

In the event that the Beneficiaries jointly instruct it in writing and it is permitted by the Shareholders Agreement, the Trustee shall return ownership of and title over the Trust Property to the respective Beneficiaries, and these shall be required to receive it. The parties agree to execute any documents required to comply with the terms of this Clause, including those that the Trustee requires.

 

Maximum Term. The initial term of the Trust Agreement will be 5 (five) years counted from its execution, and upon its expiration such term will subsequently be automatically extended for 1 (one) additional 2 (two) year term, unless the Beneficiaries jointly give notice in writing to the Trustee of their desire to terminate the present Agreement within 90 (ninety) calendar days in advance of the corresponding expiration date, in the understanding that this Agreement may not exceed in any event the term set forth in subsection III of article 394 of the LGTOC.

 

Discontinuation of the Vitel Business

 

On December 29, 2017, we determined to sell or otherwise dispose of our interest in Vitel and OBMP. Accordingly, Vitel and Oncbiomune Mexico are now treated as a discontinued operation. This decision will enable us to focus more of our efforts and resources on the Phase 2 clinical trial of Proscavax in the United States. In connection with the foregoing, Manuel Cosme Odabachian resigned as a member of the board of directors of OBMP and as an officer of the Company on December 22, 2017. Carlos Alaman also resigned as an officer of Vitel. We expect to terminate the Contribution Agreement, Stockholders Agreement and Trust Agreement, but have not yet entered into definitive agreements for the sale or disposition.

 

 

ITEM 1A. RISK FACTORS

 

Risks Relating to our Product Commercialization Pursuits

 

If we fail to achieve and sustain commercial success for ProscaVax, our business will suffer, our future prospects may be harmed and our stock price would likely decline.

 

We have never sold or marketed our pharmaceutical products in our continuing operations. Unless we can successfully commercialize ProscaVax or another product candidate or acquire the right to market other approved products, our business will be materially adversely affected. Our ability to generate revenues for ProscaVax will depend on, and may be limited by, a number of factors, including the following:

 

	●	Our ability to receive approval of ProscaVax by the FDA;
	●	acceptance of and ongoing satisfaction with ProscaVax by the medical community, patients receiving therapy and third-party payers in the United States, and eventually in foreign markets if we receive marketing approvals abroad;
	●	our ability to develop and expand market share for treating late stage prostate cancer patients, both in the United States and potentially in the rest of the world if we receive marketing approvals outside of the United States, in the midst of numerous competing products for late stage prostate cancer, many of which are in late stage clinical development;
	●	whether data from clinical trials for the additional indication of early stage prostate cancer patients are positive and whether such data, if positive, will be sufficient to achieve approval from the FDA and its foreign counterparts to market and sell ProscaVax for this additional indication;
	●	adequate coverage or reimbursement for ProscaVax by government healthcare programs and third-party payors, including private health coverage insurers and health maintenance organizations; and
	●	the ability of patients to afford any required co-payments for ProscaVax.

 

If for any reason we are unable to sell ProscaVax, our business would be seriously harmed and could fail.

 

If ProscaVax were to become the subject of problems related to its efficacy, safety, or otherwise, our ability to generate revenues from ProscaVax could be seriously harmed.

 

ProscaVax, in addition to any other of our drug candidates that may be approved by the FDA, will be subject to continual review by the FDA, and we cannot assure you that newly discovered safety issues will not arise. With the use of any newly marketed drug by a wider patient population, serious adverse events may occur from time to time that initially do not appear to relate to the drug itself. Any safety issues could cause us to suspend or cease marketing of our approved products, cause us to modify how we market our approved products, subject us to substantial liabilities, and adversely affect our revenues and financial condition. In the event of a withdrawal of ProscaVax from the market, our revenues would decline significantly and our business would be seriously harmed and could fail.

 

Adoption of ProscaVax for the treatment of patients with either early stage or advanced prostate cancer may be slow or limited for a variety of reasons, including competing therapies and perceived difficulties in the treatment process or delays in obtaining reimbursement. If ProscaVax is not successful in broad acceptance as a treatment option for prostate cancer, our business would be harmed.

 

The rate of adoption of ProscaVax for early stage or advanced prostate cancer and the ultimate market size will be dependent on several factors, including the education of treating physicians on the patient treatment process with ProscaVax and immunotherapies generally. A significant portion of the prospective patient base for treatment with ProscaVax may be under the care of urologists who may be less experienced with immunotherapy than oncologists. Acceptance by urologists of ProscaVax as a treatment option may be measurably slower than adoption by oncologists of ProscaVax as a therapy and may require more educational effort by us.

 

 

To achieve global success for ProscaVax as a treatment, we will need to obtain approvals by foreign regulatory authorities. Data from our completed clinical trials of ProscaVax may not be sufficient to support approval for commercialization by regulatory agencies governing the sale of drugs outside of the United States. This could require us to spend substantial sums to develop sufficient clinical data for licensure by foreign authorities. Submissions for approval by foreign regulatory authorities may not result in marketing approval by these authorities for the requested indication. In addition, certain countries require pricing to be established before reimbursement for the specific indication may be obtained. We may not receive or maintain marketing approvals at favorable pricing levels or at all, which could harm our ability to market ProscaVax globally. Prostate cancer is common in many regions where the healthcare support systems are limited and reimbursement for ProscaVax may be limited or unavailable, which will likely limit or slow adoption in these regions. If we are unable to successfully achieve the full global market potential of ProscaVax due to diagnosis practices or regulatory hurdles, our future prospects would be harmed and our stock price could decline.

 

Risks Relating to Our Financial Position and Operations

 

There is no way to predict the final outcome of our acquisition and subsequent disposal of Vitel Laboratorios and Oncbiomune Mexico

 

On March 10, 2017, we completed the acquisition of 100% of the issued and outstanding capital stock of Vitel Laboratorios from its shareholders Manuel Cosme Odabachian and Carlos Fernando Alaman Volnie (collectively, the “Vitel Stockholders”) pursuant to the terms and conditions of the Contribution Agreement entered into among the Company and the Vitel Stockholders . We 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. We do not expect Proscavax’s development to be affected by the disposition of Vitel discussed below.

 

On December 29, 2017, our Board of Directors determined to sell or otherwise dispose of the Company’s interest in Vitel and Oncbiomune México due to disputes with the original Vitel shareholders and a resulting lack of control over the assets and operations of Vitel and OncBiomune Mexico. Accordingly, Vitel and Oncbiomune México are now treated as a discontinued operation.

 

We cannot predict the final outcome of our negotiations with and continued investigations into certain actions of the Vitel Shareholders, or the timeline for the expected disposition. We cannot quantify the cost of identifying, investigating and pursuing actionable claims, if any, and the amount of capital expended prior to a recovery, if any, may be significant. In addition, we may not realize any value associated with our sale, disposition or liquidation of Vitel and Oncbiomune Mexico.

 

There is substantial doubt about our ability to continue as a going concern.

 

We had had net loss of $20,513,138 and $2,013,632 for the years ended December 31, 2017 and 2016, respectively. The net cash used in operations were $2,294,341 and $1,544,003 for the years ended December 31, 2017 and 2016, respectively. Additionally, the Company had an accumulated deficit of $23,655,989 and $3,142,851, at December 31, 2017 and 2016, respectively, had a stockholders’ deficit of $14,822,020 at December 31, 2017, had a working capital deficit of $14,808,978 at December 31, 2017, had no revenues from continuing operations for the years ended December 31, 2017 and 2016 ,and we defaulted on our debt. These conditions, among others, raise substantial doubt about our ability to continue as a going concern for a period of twelve months for the issuance date of this report as described in footnote 2 in our consolidated financial statements for the year ended December 31, 2017. Although management believes there is substantial doubt about our ability to continue as a going concern, they do not reflect any adjustments that might result if we are unable to continue our business. Our consolidated financial statements contain additional note disclosure describing the circumstances that lead to this disclosure. Even if we are able to successfully realize our commercialization goals for ProscaVax, because of the numerous risks and uncertainties associated with commercialization of a biologic, we may still require additional funding. And in any event, we are unable to predict when we will become profitable, if at all. Even if we do produce revenues and achieve profitability, we may not be able to maintain or increase profitability.

 

 

Risks from Competitive Factors

 

Our competitors may develop and market products that are less expensive, more effective, safer or reach the market sooner, which may diminish or eliminate the commercial success of any products we may commercialize.

 

Competition in the cancer therapeutics field is intense and is accentuated by the rapid pace of advancements in product development. In addition, we compete with other clinical-stage companies and institutions for clinical trial participants, which could reduce our ability to recruit participants for our clinical trials. Delay in recruiting clinical trial participants could adversely affect our ability to bring a product to market prior to our competitors. Further, research and discoveries by others may result in breakthroughs that render potential products obsolete before they generate revenue.

 

Products such as chemotherapeutics, androgen metabolism or androgen receptor antagonists, endothelin A receptor antagonists, antisense compounds, angiogenesis inhibitors and gene therapies for cancer are also under development by a number of companies and could potentially compete with ProscaVax and our other product candidates. In addition, many universities and private and public research institutes may in the future become active in cancer research, which may be in direct competition with us.

 

Some of our competitors in the cancer therapeutics field have substantially greater research and development capabilities and manufacturing, marketing, financial and managerial resources than we do. Acquisitions of competing companies by large pharmaceutical and biotechnology companies could enhance our competitors’ resources. In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of our products. We expect that competition among products approved for sale will be based, among other things, on product efficacy, price, safety, reliability, availability, patent protection, and sales, marketing and distribution capabilities. Our profitability and financial position will suffer if our products receive regulatory approval, but cannot compete effectively in the marketplace.

 

We could face competition for ProscaVax or other approved products from biosimilar products that could impact our profitability.

 

We may face competition in Europe from biosimilar products, and we expect we may face competition from biosimilars in the future in the United States as well. To the extent that governments adopt more permissive approval frameworks and competitors are able to obtain broader marketing approval for biosimilars, our products will become subject to increased competition. Expiration or successful challenge of applicable patent rights could trigger such competition, and we could face more litigation regarding the validity and/or scope of our patents. We cannot predict to what extent the entry of biosimilar products or other competing products could impact our future potential sale of ProscaVax in the E.U., where biosimilars to other innovator biological products are already available. Our inability to compete effectively in foreign territories would reduce global sales potential, which could have a material adverse effect on our results of operations.

 

On March 23, 2010, PPACA became law and authorized FDA approval of biosimilar products. PPACA established a period of 12 years of data exclusivity for reference products and outlined statutory criteria for science-based biosimilar approval standards. Under this framework, data exclusivity protects the data in the innovator’s regulatory application by prohibiting, for a period of 12 years, others from gaining FDA approval based in part on reliance or reference to the innovator’s data. FDA has not yet announced implementation of the biosimilars regulatory approval pathway; however, PPACA does not require the agency to do so before it may approve biosimilars. The new law does not change the duration of patents granted on biologic products. Because of this pathway for the approval of biosimilars in the U. S., we may in the future face greater competition from biosimilar products and downward pressure on our product prices, sales and revenues, subject to our ability to enforce our patents.

 

 

Failure to retain key personnel could impede our ability to develop our products and to obtain new collaborations or other sources of funding.

 

We depend, to a significant extent, on the efforts of our key employees, including senior management and senior scientific, clinical, regulatory, operational and other personnel. The development of new therapeutic products requires expertise from a number of different disciplines, some of which are not widely available.

 

We depend upon our scientific staff to discover new product candidates and to develop and conduct pre-clinical studies of those new potential products. Our clinical and regulatory staff is responsible for the design and execution of clinical trials in accordance with FDA requirements and for the advancement of our product candidates toward FDA approval and submission of data supporting approval. The quality and reputation of our scientific, clinical and regulatory staff, especially the senior staff, and their success in performing their responsibilities, may directly influence the success of our product development programs. As we pursue successful commercialization of ProscaVax, our sales and marketing, and operations executive management staff takes on increasing significance and influence upon our organizational success. In addition, our executive officers are involved in a broad range of critical activities, including providing strategic and operational guidance. The loss of these individuals, or our inability to retain or recruit other key management and scientific, clinical, regulatory, medical, operational and other personnel, may delay or prevent us from achieving our business objectives. We face intense competition for personnel from other companies, universities, public and private research institutions, government entities and other organizations.

 

Risks Relating to Collaboration Arrangements and Reliance on Third Parties

 

We must rely at present on relationships with third-party suppliers to supply necessary components used in our products, which relationships are not easy to replace.

 

We rely upon contract manufacturers for components used in the manufacture of ProscaVax. Problems with any of our suppliers’ facilities or processes could result in failure to produce or a delay in production of adequate supplies of the antigen or other components we use in the manufacture of ProscaVax. This could delay or reduce commercial sales and materially harm our business. Any prolonged interruption in the operations of our suppliers’ facilities could result in cancellation of orders, loss of components in the process of being manufactured or a shortfall in availability of a necessary component. A number of factors could cause interruptions, including the inability of a supplier to provide raw materials, equipment malfunctions or failures, damage to a facility due to natural disasters, changes in FDA or equivalent other country authorities’ regulatory requirements or standards that require modifications to manufacturing processes, or action by us to implement process changes or other similar factors. Because manufacturing processes are complex and are subject to a lengthy FDA or equivalent non-United States regulatory approval process, alternative qualified supply may not be available on a timely basis or at all. Difficulties or delays in our suppliers’ manufacturing and supply of components could delay our clinical trials, increase our costs, damage our reputation and, for ProscaVax, cause us to lose revenue or market share if we are unable to timely meet market demands.

 

We rely on single source vendors for some key components for ProscaVax and our active immunotherapy product candidates, which could impair our ability to manufacture and supply our products.

 

We currently depend on single source vendors for components used in ProscaVax and other active immunotherapy candidates. Any production shortfall that impairs the supply of the antigen in ProscaVax to us could have a material adverse effect on our business, financial condition and results of operations. If we are unable to obtain a sufficient quantity of antigen, there could be a substantial delay in successfully developing a second source supplier. In addition, we rely on single-source unaffiliated third-party suppliers for certain other raw materials, medical devices and components necessary for the formulation, fill and finish of our products. Certain of these raw materials, medical devices and components are the proprietary products of these unaffiliated third-party suppliers and are specifically cited in the drug application with regulatory agencies so that they must be obtained from that specific sole source and could not be obtained from another supplier unless and until the regulatory agency approved such supplier. An inability to continue to source product from any of these suppliers, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for ProscaVax or other products, which could adversely affect our product sales and operating results materially or our ability to conduct clinical trials, either of which could significantly harm our business.

 

 

If we fail to enter into any needed collaboration agreements for our product candidates, we may be unable to commercialize them effectively or at all.

 

Product collaborations are complex and any potential discussions may not result in a definitive agreement for many reasons. For example, whether we reach a definitive agreement for a collaboration would depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the potential market for the product candidate, the costs and complexities of manufacturing and delivering the product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. If we were to determine that a collaboration for a particular product is necessary to commercialize it and we were unable to enter into such a collaboration on acceptable terms, we might elect to delay or scale back the commercialization of a product in order to preserve our financial resources or to allow us adequate time to develop the required physical resources and systems and expertise ourselves.

 

If we enter into a collaboration agreement we consider acceptable, the collaboration may not proceed as quickly, smoothly or successfully as we plan. The risks in a collaboration agreement generally include:

 

	●	the collaborator may not apply the expected financial resources or required expertise in developing the physical resources and systems necessary to successfully commercialize a product;
	●	the collaborator may not invest in the development of a sales and marketing force and the related infrastructure at levels that ensure that sales of a product reach their full potential;
	●	disputes may arise between us and a collaborator that delay the commercialization of the product or adversely affect its sales or profitability; or
	●	the collaborator may independently develop, or develop with third parties, products that could compete with the product.

 

With respect to a collaboration for any of our products or product candidates, we are dependent on the success of our collaborators in performing their respective responsibilities and the continued cooperation of our collaborators. Our collaborators may not cooperate with us to perform their obligations under our agreements with them. We cannot control the amount and timing of our collaborators’ resources that will be devoted to activities related to our collaboration agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed in collaboration with us. A collaborator may have the right to terminate the collaboration at its discretion. Any termination may require us to seek a new collaborator, which we may not be able to do on a timely basis, if at all, or require us to delay or scale back the commercialization efforts. The occurrence of any of these events could adversely affect the commercialization of product candidates we may commercialize and materially harm our business and stock price by slowing the pace of growth of such sales, by reducing the profitability of the product or by adversely affecting the reputation of the product in the market.

 

Risks Relating to Our Clinical Trial and Product Development Initiatives

 

The costs of our product candidate development and clinical trials are difficult to estimate and will be very high for many years, preventing us from making a profit for the foreseeable future, if ever.

 

Clinical and other studies necessary to obtain approval of a new drug can be time consuming and costly, especially in the United States, but also in foreign countries. Our estimates of the costs associated with future clinical trials and research may be substantially lower than what we actually experience. It is impossible to predict what we will face in the development of a product41 candidate, such as ProscaVax. The purpose of clinical trials is to provide both us and regulatory authorities with safety and efficacy data in humans. It is relatively common to revise a trial or add subjects to a trial in progress. These examples of common variances in product development and clinical investigations demonstrate how predicted costs may exceed reasonable expectations. The difficult and often complex steps necessary to obtain regulatory approval, especially that of the FDA and the European Union’s European Medicine’s Agency (the “EMA”), involve significant costs and may require several years to complete. We expect that we will need substantial additional financing over an extended period of time in order to fund the costs of future clinical trials, related research, and general and administrative expenses.

 

The extent of our clinical trials and research programs are primarily based upon the amount of capital available to us and the extent to which we receive regulatory approvals for clinical trials. We have established estimates of the future costs of the Phase 2 clinical trial for ProscaVax, but, as explained above, that estimate may not prove correct. We expect the phase 2 clinical trial at Dana-Farber Hospital and Beth Isreal Deaconess Hospital to take 3 years and cost roughly $5,100,000. The Phase 2 clinical trial in late stage patients hosted by Urology Centers of North Texas is expected to cost $1,300,000 and take 18 months.

 

 

Our clinical and pre-clinical candidates in the pipeline for other potential cancer immunotherapies and targeted products may never reach the commercial market for a number of reasons.

 

To sustain our business, we focus substantial resources on the search for new pharmaceutical products. These activities include engaging in discovery research and product development, conducting pre-clinical and clinical studies, and seeking regulatory approval in the United States for product candidates and in other countries for ProscaVax and other products we may market in the future. Our long-term success depends on the discovery and development of new drugs that we can commercialize. Our cancer immunotherapy and targeted program pipeline candidates are still at a relatively early stage in the development process. There can be no assurance that these product candidates or any other potential therapies we may pursue will become a marketed drug. In addition, we may find that certain products cannot be manufactured on a commercial scale and, therefore, they may not be economical to produce, or may be precluded from commercialization by proprietary rights of third parties.

 

A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify disease targets and product candidates require substantial technical, financial and human resources, whether or not we ultimately identify any candidates. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield candidates for clinical development for a number of reasons, including difficulties in formulation which cannot be overcome, timing and competitive concerns.

 

An Investigative New Drug (“IND”) application must become effective before human clinical trials may commence. The IND application is automatically effective 30 days after receipt by the FDA unless before that time, the FDA raises concerns or questions about the product’s safety profile or the design of the trials as described in the application. In the latter case, any outstanding concerns must be resolved with the FDA before clinical trials can proceed. Thus, the submission of an IND may not result in FDA authorization to commence clinical trials in any given case. After authorization is received, the FDA retains the authority to place the IND, and clinical trials under that IND, on clinical hold. If we are unable to commence clinical trials or clinical trials are delayed indefinitely, we would be unable to develop additional product candidates and our business could be materially harmed. Clinical trials, both in the United States and in other countries, can be delayed for a variety of reasons, including:

 

	●	delays or failures in obtaining regulatory authorization to commence a trial because of safety concerns of regulators relating to our product candidates or similar product candidates of our competitors or failure to follow regulatory guidelines;
	●	delays or failures in obtaining clinical materials and manufacturing sufficient quantities of the product candidate for use in trials;
	●	delays or failures in reaching agreement on acceptable terms with prospective study sites;
	●	delays or failures in obtaining approval of our clinical trial protocol from an institutional review board (“IRB”) or ethics committee (“EC”) to conduct a clinical trial at a prospective study site;
	●	delays in recruiting patients to participate in a clinical trial;
	●	failure of our clinical trials and clinical investigators to be in compliance with the FDA’s Good Clinical Practices or equivalent other country regulations and requirements;
	●	unforeseen safety issues, including negative results from ongoing pre-clinical studies;
	●	inability to monitor patients adequately during or after treatment;
	●	unexpected adverse events occurring during the clinical trial;

 

 

	●	failure by third-party clinical trial managers to comply with regulations concerning protection of patient health data;
	●	difficulty monitoring multiple study sites;
	●	failure of our third-party clinical trial managers to satisfy their contractual duties, comply with regulations or meet expected deadlines; and
	●	determination by regulators that the clinical design of the trials is not adequate.

 

The nature and efforts required to complete a prospective research and development project are typically indeterminable at very early stages when research is primarily conceptual and may have multiple applications. Once a focus towards developing a specific product candidate has been developed, we obtain more visibility into the efforts that may be required to reach conclusion of the development phase. However, there are inherent risks and uncertainties in developing novel biologics in a rapidly changing industry environment. To obtain approval of a product candidate from the FDA or other country regulatory authorities, we must, among other requirements, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate. In most cases, this entails extensive laboratory tests and pre-clinical and clinical trials. The collection of this data, as well as the preparation of applications for review by the FDA and other regulatory agencies outside the United States are costly in time and effort, and may require significant capital investment.

 

We may encounter significant difficulties or costs in our efforts to obtain FDA approvals or approvals to market products in foreign markets. For example, the FDA or the equivalent in jurisdictions outside the United States may determine that our data is not sufficiently compelling to warrant marketing approval, or may require we engage in additional clinical trials or provide further analysis which may be costly and time consuming. Regardless of the nature of our efforts to complete development of our products and receive marketing approval, we may encounter delays that render our product candidates uncompetitive or otherwise preclude us from marketing products.

 

We may be required to obtain additional funding to complete development of product candidates or in order to commercialize approved products. However such funding may not be available to us on terms we deem acceptable or at all. Our ability to access additional capital is dependent on the success of our business and the perception by the market of our future business prospects. In the event we were unable to obtain necessary funding, we might halt or temporarily delay ongoing development projects.

 

Pre-clinical testing and clinical trials for product candidates must satisfy stringent regulatory requirements or we may be unable to utilize the results.

 

The pre-clinical testing and clinical trials of any product candidates that we develop must comply with regulations by numerous federal, state and local government authorities in the United States, principally the FDA, and by similar governmental authorities in other countries. Clinical trials are subject to continuing oversight by governmental regulatory authorities and institutional review boards and must meet the requirements of these authorities in the United States and other countries, including those for informed consent and good clinical practices. We may not be able to comply with these requirements, which could disqualify completed or ongoing clinical trials. We may experience numerous unforeseen events during, or as a result of, the testing process that could delay or prevent commercialization of our product candidates, including the following:

 

	●	safety and efficacy results from human clinical trials may show the product candidate to be less effective or safe than desired or earlier results may not be replicated in later clinical trials;
	●	the results of pre-clinical studies may be inconclusive or they may not be indicative of results that will be obtained in human clinical trials;
	●	after reviewing relevant information, including pre-clinical testing or human clinical trial results, we may abandon or substantially restructure programs that we might previously have believed to be promising;

 

 

	●	we, the FDA, an IRB, an EC, or similar regulatory authorities in other countries may suspend or terminate clinical trials if the participating patients are being exposed to unacceptable health risks or for other reasons; and
	●	the effects of our product candidates may not be the desired effects or may include undesirable side effects or other characteristics that interrupt, delay or cause us or the FDA, or equivalent governmental authorities in other countries, to halt clinical trials or cause the FDA or non-United States regulatory authorities to deny approval of the product candidate for any or all target indications.

 

Each phase of clinical testing is highly regulated, and during each phase there is risk that we will encounter serious obstacles or will not achieve our goals, and accordingly we may abandon a product in which we have invested substantial amounts of time and money. In addition, we must provide the FDA and foreign regulatory authorities with pre-clinical and clinical data that demonstrate that our product candidates are safe and effective for each target indication before they can be approved for commercial distribution. We cannot state with certainty when or whether any of our products now under development will be approved or launched; or whether any products, once approved and launched, will be commercially successful.

 

The FDA, other non-United States regulatory authorities, or an Advisory Committee may determine our clinical trials data regarding safety or efficacy are insufficient for regulatory approval.

 

Although we obtain guidance from regulatory authorities on certain aspects of our clinical development activities, these discussions are not binding obligations on regulatory authorities. Regulatory authorities may revise or retract previous guidance or may disqualify a clinical trial in whole or in part from consideration in support of approval of a potential product for commercial sale or otherwise deny approval of that product. Even if we obtain successful clinical safety and efficacy data, we may be required to conduct additional, expensive trials to obtain regulatory approval. FDA, or equivalent other country authorities, may elect to obtain advice from outside experts regarding scientific issues and/or marketing applications under FDA or other country authority review through the FDA’s Advisory Committee process or other country procedures. Views of the Advisory Committee or other experts may differ from those of the FDA, or equivalent other country authority, and may impact our ability to commercialize a product candidate.

 

If we encounter difficulties enrolling patients in our clinical trials, our trials could be delayed or otherwise adversely affected.

 

Clinical trials for our product candidates may require that we identify and enroll a large number of patients with the disease under investigation. We may not be able to enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical trials in a timely manner.

 

Patient enrollment is affected by factors including:

 

	●	design of the trial protocol;
	●	the size of the patient population;
	●	eligibility criteria for the study in question;
	●	perceived risks and benefits of the product candidate under study;
	●	availability of competing therapies and clinical trials;

 

	●	efforts to facilitate timely enrollment in clinical trials;
	●	patient referral practices of physicians;
	●	the ability to monitor patients adequately during and after treatment; and
	●	geographic proximity and availability of clinical trial sites for prospective patients.

 

 

Additionally, even if we are able to identify an appropriate patient population for a clinical trial, there can be no assurance that the patients will continue in the clinical trial through completion.

 

If we have difficulty enrolling or maintaining a sufficient number of patients with sufficient diversity to conduct our clinical trials as planned, we may need to delay or terminate ongoing or planned clinical trials, either of which would have a negative effect on our business.

 

Risks Related to Regulation of the Pharmaceutical Industry

 

ProscaVax and our other products in development cannot be sold if we do not maintain or gain required regulatory approvals.

 

Our business is subject to extensive regulation by numerous state and federal governmental authorities in the United States, including the FDA, and potentially by foreign regulatory authorities, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the pre-clinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. Other applicable non-United States regulatory authorities have equivalent powers. Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: withdrawal of product approval, notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We are required in the United States and in foreign countries to obtain approval from regulatory authorities before we can manufacture, market and sell our products.

 

Obtaining regulatory approval for marketing of a product candidate in one country does not assure we will be able to obtain regulatory approval in other countries. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Once approved, the FDA and other United States and non-United States regulatory authorities have substantial authority to limit the uses or indications for which a product may be marketed, restrict distribution of the product, require additional testing, change product labeling or mandate withdrawal of our products. The marketing of our approved products will be subject to extensive regulatory requirements administered by the FDA and other regulatory bodies, including: the manufacturing, testing, distribution, labeling, packaging, storage, reporting and record-keeping related to the product, advertising, promotion, and adverse event reporting requirements. In addition, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in required post-marketing studies, additional regulatory controls or restrictions, or even lead to withdrawal of a product from the market.

 

In general, the FDA and equivalent other country authorities require labeling, advertising and promotional materials to be truthful and not misleading, and marketed only for the approved indications and in accordance with the provisions of the approved label. If the FDA or other regulatory authorities were to challenge our promotional materials or activities, they may bring enforcement action.

 

Our failure to obtain approval, significant delays in the approval process, or our failure to maintain approval in any jurisdiction will prevent us from selling a product in that jurisdiction. Any product and its manufacturer will continue to be subject to strict regulations after approval, including but not limited to, manufacturing, quality control, labeling, packaging, adverse event reporting, advertising, promotion and record-keeping requirements. Any problems with an approved product, including the later exhibition of adverse effects or any violation of regulations could result in restrictions on the product, including its withdrawal from the market, which could materially harm our business. The process of obtaining approvals in foreign countries is subject to delay and failure for many of the same reasons.

 

Regulatory authorities could also add new regulations or change existing regulations at any time, which could affect our ability to obtain or maintain approval of our products. ProscaVax and our investigational cellular immunotherapies are novel. As a result, regulatory agencies lack experience with them, which may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of ProscaVax outside of the United States and with respect to our active immunotherapy products under development. We are unable to predict when and whether any changes to regulatory policy affecting our business could occur, and such changes could have a material adverse impact on our business. If regulatory authorities determine that we have not complied with regulations in the research and development of a product candidate, a new indication for an existing product or information to support a current indication, they may not approve the product candidate or new indication or maintain approval of the current indication in its current form or at all, and we would not be able to market and sell it. If we were unable to market and sell our products or product candidates, our business and results of operations would be materially and adversely affected.

 

 

Failure to comply with foreign regulatory requirements governing human clinical trials and failure to obtain marketing approval for product candidates could prevent us from selling our products in foreign markets, which may adversely affect our operating results and financial condition.

 

The requirements governing the conduct of clinical trials, manufacturing, testing, product approvals, pricing and reimbursement outside the United States vary greatly from country to country. In addition, the time required to obtain approvals outside the United States may differ significantly from that required to obtain FDA approval. We may not obtain foreign regulatory approvals on the timeframe we may desire, if at all. Approval by the FDA does not assure approval by regulatory authorities in other countries, and foreign regulatory authorities could require additional testing. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to develop foreign markets for our products and may have a material adverse effect on our business and future prospects.

 

Our product sales depend on adequate coverage and reimbursement from third-party payers.

 

Our sale of ProscaVax is dependent on the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans. We rely in large part on the reimbursement coverage by federal and state sponsored government programs such as Medicare and Medicaid in the United States and equivalent programs in other countries. In the event we seek approvals to market ProscaVax in foreign territories, we will need to work with the government-sponsored healthcare systems in Europe and other foreign countries that are the primary payers of healthcare costs in those regions. Governments and private payers may regulate prices, reimbursement levels and/or access to ProscaVax and any other products we may market to control costs or to affect levels of use of our products. We cannot predict the availability or level of coverage and reimbursement for ProscaVax or our product candidates and a reduction in coverage and/or reimbursement for our products could have a material adverse effect on our product sales and results of operations.

 

We use hazardous materials in our business and must comply with environmental laws and regulations, which can be expensive.

 

Our operations produce hazardous waste products, including chemicals and radioactive and biological materials. We are subject to a variety of federal, state and local laws and regulations relating to the use, handling, storage and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials complies with the standards prescribed by state and federal laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. We generally contract with third parties for the disposal of such hazardous waste products and store our low level radioactive waste at our facilities in compliance with applicable environmental laws until the materials are no longer considered radioactive. We are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”), and the Environmental Protection Agency (the “EPA”), and to regulation under the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations that may affect our research and development programs. We may be required to incur further costs to comply with current or future environmental and safety laws and regulations. In addition, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result, including remediation, and any such liability could exceed our resources.

 

Risks in Protecting Our Intellectual Property

 

If we are unable to protect our proprietary rights or to defend against infringement claims, we may not be able to compete effectively or operate profitably.

 

We invent and develop technologies that are the basis for or incorporated in our potential products. We protect our technology through United States and foreign patent filings, trademarks and trade secrets. We have issued patents, and applications for United States and foreign patents in various stages of prosecution. We expect that we will continue to file and prosecute patent applications and that our success depends in part on our ability to establish and defend our proprietary rights in the technologies that are the subject of issued patents and patent applications.

 

 

The fact that we have filed a patent application or that a patent has issued, however, does not ensure that we will have meaningful protection from competition with regard to the underlying technology or product. Patents, if issued, may be challenged, invalidated, declared unenforceable or circumvented or may not cover all applications we may desire. Our pending patent applications as well as those we may file in the future may not result in issued patents. Patents may not provide us with adequate proprietary protection or advantages against competitors with, or who could develop, similar or competing technologies or who could design around our patents. Patent law relating to the scope of claims in the pharmaceutical field in which we operate is continually evolving and can be the subject of some uncertainty. The laws providing patent protection may change in a way that would limit protection.

 

We also rely on trade secrets and know-how that we seek to protect, in part, through confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality agreements from companies that receive our confidential data. For employees, consultants and contractors, we require confidentiality agreements providing that all inventions conceived while rendering services to us shall be assigned to us as our exclusive property. It is possible, however, that these parties may breach those agreements, and we may not have adequate remedies for any breach. It is also possible that our trade secrets or know-how will otherwise become known to or be independently developed by competitors.

 

We are also subject to the risk of claims, whether meritorious or not, that our products or immunotherapy candidates infringe or misappropriate third-party intellectual property rights. Defending against such claims can be quite expensive even if the claims lack merit. And if we are found to have infringed or misappropriated a third-party’s intellectual property, we could be required to seek a license or discontinue our products or cease using certain technologies or delay commercialization of the affected product or products, and we could be required to pay substantial damages, which could materially harm our business.

 

We may be subject to litigation with respect to the ownership and use of intellectual property that will be costly to defend or pursue and uncertain in its outcome.

 

Our business may bring us into conflict with our licensees, licensors or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business.

 

Litigation relating to the ownership and use of intellectual property is expensive, and our position as a relatively small company in an industry dominated by very large companies may cause us to be at a disadvantage in defending our intellectual property rights and in defending against claims that our immunotherapy candidates infringe or misappropriate third-party intellectual property rights. Even if we are able to defend our position, the cost of doing so may adversely affect our profitability. We may in the future be subject to patent litigation and may not be able to protect our intellectual property at a reasonable cost if such litigation is initiated. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.

 

We are exposed to potential product liability claims, and insurance against these claims may not be adequate and may not be available to us at a reasonable rate in the future.

 

Our business exposes us to potential liability risks inherent in the research, development, manufacturing and marketing of drug candidates and products. If any of our drug candidates in clinical trials or our marketed products harm people or allegedly harm people, we may be subject to costly and damaging product liability claims. Most, if not all, of the patients who participate in our clinical trials are already seriously ill when they enter a trial. We have clinical trial insurance coverage, and commercial product liability insurance coverage. However, this insurance coverage may not be adequate to cover all claims against us. There is also a risk that adequate insurance coverage will not be available in the future on commercially reasonable terms, if at all. The successful assertion of an uninsured product liability or other claim against us could cause us to incur significant expenses to pay such a claim, could adversely affect our product development or product sales and could cause a decline in our product revenues. Even a successfully defended product liability claim could cause us to incur significant expenses to defend such a claim, could adversely affect our product development and could cause a decline in our product revenues. In addition, product liability claims could result in an FDA or equivalent non-United States regulatory authority investigation of the safety or efficacy of our products, our manufacturing processes and facilities, or our marketing programs. An FDA or equivalent non-United States regulatory authority investigation could also potentially lead to a recall of our products or more serious enforcement actions, limitations on the indications for which they may be used, or suspension or withdrawal of approval.

 

 

Risks Relating to an Investment in Our Common Stock

 

Market volatility may affect our stock price, and the value of an investment in our common stock may be subject to sudden decreases.

 

The trading price for our common stock has been, and we expect it to continue to be, volatile. The price at which our common stock trades depends on a number of factors, including the following, many of which are beyond our control:

 

●

the relative success of our commercialization efforts for ProscaVax;

 

	●	our ability to integrate Vitel Laboratorios into our company and successfully market its products in Mexico, Central and South America
	●	pre-clinical and clinical trial results and other product development activities;
	●	our historical and anticipated operating results, including fluctuations in our financial and operating results or failure to meet revenue guidance;
	●	changes in government regulations affecting product approvals, reimbursement or other aspects of our or our competitors’ businesses;
	●	announcements of technological innovations or new commercial products by us or our competitors;
	●	developments concerning our key personnel;
	●	our ability to protect our intellectual property, including in the face of changing laws;
	●	announcements regarding significant collaborations or strategic alliances;
	●	publicity regarding actual or potential performance of products under development by us or our competitors;
	●	market perception of the prospects for biotechnology companies as an industry sector; and
	●	general market and economic conditions.

 

During periods of extreme stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to their individual operating performance. Furthermore, historically our common stock has experienced greater price volatility than the stock market as a whole.

 

We do not intend to pay cash dividends on our common stock in the foreseeable future.

 

We have never declared or paid cash dividends on our capital stock. We are not currently profitable. To the extent we become profitable, we intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Accordingly, our stockholders will not realize a return on their investment unless and until they sell shares after the trading price of our shares appreciates from the price at which the shareholder purchased.

 

 

As an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.

 

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

	●	have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
	●	comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements (i.e., an auditor discussion and analysis);
	●	submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency”; and
	●	disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

In addition, Section 102 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an “emerging growth company” until (i) the last day of the fiscal year of the Company during which it had total annual gross revenues of $1,070,000,000 or more; (ii) the last day of the fiscal year of the Company following the fifth anniversary of the date of the first sale of common equity securities of the Company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which the Company has, during the previous three year period, issued more than $1,000,000,000 in non-convertible debt; or (iv) the date on which the Company is deemed to be a large accelerated filer, as defined in Rule 12b-2..

 

Until such time, however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Trading on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.

 

Our common stock is quoted on the OTCQB tier of the OTC Markets. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the New York Stock Exchange. These factors may result in investors having difficulty reselling any shares of our common stock.

 

Our stock price is likely to be highly volatile because of several factors, including a limited public float.

 

The market price of our common stock has been volatile in the past and is likely to be highly volatile in the future because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.

 

 

Other factors that could cause such volatility may include, among other things:

 

	●	actual or anticipated fluctuations in our operating results;
	●	the absence of securities analysts covering us and distributing research and recommendations about us;
	●	we may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
	●	overall stock market fluctuations;
	●	announcements concerning our business or those of our competitors;
	●	actual or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
	●	conditions or trends in the industry;
	●	litigation;
	●	changes in market valuations of other similar companies;
	●	future sales of common stock;
	●	departure of key personnel or failure to hire key personnel; and
	●	general market conditions.

 

Any of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

Our principal executive offices at 11441 Industriplex Blvd, Suite 190, Baton Rouge, LA 70809 are leased from a third party. The lease, which commenced on September 1, 2015 and expires on August 31, 2020, provides for a monthly rent of $3,066.67, plus common area expenses, until September 2018. Thereafter, the monthly rent is $3,200, plus common area expenses.

 

We believe our facilities are adequate for our current and future needs in the U.S.

 

ITEM 3. 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 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is quoted on the PINK, operated by the OTC Markets Group. Our symbol is “OBMP.”

 

The following table shows the quarterly range of high and low bid information for our common stock over the fiscal quarters for the last two fiscal years as quoted on the OTCQB. We obtained the following high and low bid information from the OTCQB. These over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

Fiscal Year Ended December 31, 2017

 

Fiscal Quarter Ended		High				Low
December 31, 2017		$	0.08			$	0.03
September 30, 2017		$	0.17			$	0.06
June 30, 2017		$	0.30			$	0.05
March 31, 2017		$	0.42			$	0.11

 

Fiscal Year Ended December 31, 2016

 

Fiscal Quarter Ended		High				Low
December 31, 2016		$	0.19			$	0.10
September 30, 2016		$	0.33			$	0.15
June 30, 2016		$	0.90			$	0.10
March 31, 2016		$	5.25			$	0.86

 

On May 30, 2018, the closing price of our common stock on the OTCQB was $0.03 per share.

 

Holders of Common Stock

 

As of May 30, 2018, there were approximately 178 record holders of our common stock. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

 

Recent Sales of Unregistered Securities

 

During the year ended December 31, 2017, pursuant to the Purchase Agreement, we issued 2,000,000 shares of our common stock to an investor for net cash proceeds of $407,787.

 

From May 2017 to December, 2017, we issued 10,608,890 shares of our common stock upon the conversion of principal note balances of $410,514 and interest of $15,358.

 

From October 1, 2017 to December 31, 2017, pursuant to unit subscription agreements, we issued 16,491,265 shares of our unregistered common stock to investors for cash proceeds of $164,713 and a subscription receivable of $200 or $0.01 per share.

 

 

The common stock was issued in reliance upon the exemption provided by Section 4(a)(2) under the Securities Act of 1933, as amended.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Effective February 18, 2011, our board of directors adopted and approved the 2011 stock option plan. The purpose of the 2011 stock option plan is to enhance the long-term stockholder value of our company by offering opportunities to directors, key employees, officers, independent contractors and consultants of our company to acquire and maintain stock ownership in our company in order to give these persons the opportunity to participate in our company’s growth and success, and to encourage them to remain in the service of our company. A total of 43,094 shares of our common stock are available for issuance and during the 12 month period after the first anniversary of the adoption of the 2011 stock option plan by our board of directors, and during each 12 month period thereafter, our board of directors is authorized to increase the number of shares issuable by up to 10,744 shares.

 

The following table summarizes certain information regarding our equity compensation plan as of December 31, 2017.

 

Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)

Weighted-average exercise price of outstanding options, warrants and rights (b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by security holders

-

N/A

-

Equity compensation plans not approved by security holders

-

N/A

43,094

Total

-

N/A

43,094

 

DESCRIPTION OF SECURITIES

 

The following description of our capital stock is based upon our amended and restated articles of incorporation, as amended, our bylaws and applicable provisions of law, in each case as currently in effect. This discussion does not purport to be complete and is qualified in its entirety by reference to our amended and restated articles of incorporation, as amended, and our bylaws.

 

Authorized Capital Stock

 

As of the date of this Report, our authorized capital stock consists of (i) 500,000,000 shares of common stock, par value $0.0001 per share, and (ii) 20,000,000 shares of preferred stock, par value $0.0001 per share, 1,000,000 of which have been designated Series A Preferred Stock, and 7,892,000 of which have been designated Series B Preferred Stock. At May 30, 2018 we had 223,744,872 shares of common stock, 1,000,000 shares of Series A preferred stock, and 7,892,000 shares of our Series B preferred stock issued and outstanding.

 

Common Stock

 

The holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the election of directors. There is no right to cumulate votes in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the board of directors out of funds legally available for payment of dividends subject to the prior rights of holders of preferred stock and any contractual restrictions we have against the payment of dividends on common stock. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and have no right to convert their common stock into any other securities.

 

 

Preferred Stock

 

The preferred stock is issuable in one or more series with such designations, voting powers, if any, preferences and relative, participating, optional or other special rights, and such qualifications, limitations and restrictions, as are determined by resolution of our board of directors. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by shareholders and could adversely affect the rights and powers, including voting rights, of the holders of common stock.

 

Description of Series A Preferred Stock

 

Our amended and restated articles of incorporation, as amended, authorize 1,000,000 shares of Series A preferred stock, 1,000,000 of which are outstanding as of May 30, 2018. There are no sinking fund provisions applicable to our Series A preferred stock.

 

Liquidation Preference. In the event of a liquidation or winding up of the Company, a holder of Series A preferred stock will be entitled to receive share for share with the holders of shares of common stock, all the assets of the Company, after the rights of the holders of the preferred stock have been satisfied.

 

Dividends. The Series A preferred stock is entitled to receive, share for share with the holders of shares of common stock, such dividends if, as and when declared from time to time by the board of directors.

 

Voting. Except as otherwise provided in the certificate of designation or by law, each holder of Series A preferred stock is entitled to 500 votes for each share held. Holders of common stock and holders of Series A preferred stock vote on all matters, including the election of directors, together as one class.

 

Redemption. The Series A preferred stock is not redeemable.

 

Description of Series B Preferred Stock

 

Our amended and restated articles of incorporation, as amended, authorize 7,892,000 shares of Series B preferred stock, 7,892,000 of which are outstanding as of May 30, 2018. There are no sinking fund provisions applicable to our Series B preferred stock.

 

Liquidation Preference. In the event of a liquidation or winding up of the Company, a holder of Series B preferred stock will 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 Company, after the rights of the holders of the Series A Preferred Stock have been satisfied.

 

Dividends. The Series B preferred stock is entitled to receive, share for share with the holders of shares of common stock and Series A preferred stock, such dividends if, as and when declared from time to time by the board of directors.

 

Voting. Except as otherwise provided in the certificate of designation or by law, each holder of Series B preferred stock is entitled to 100 votes for each share held. Holders of common stock and holders of Series B preferred stock vote on all matters, including the election of directors, together as one class.

 

Redemption. The Series B preferred stock is redeemable at any time after the date of issuance of any shares of Series B preferred stock (the “Issuance Date”) upon the earliest to occur of (i) a holder of 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 its subsidiaries, or (iii) five years after the Issuance Date, the Company has the right to redeem all of the then outstanding shares of Series B preferred stock held by such holder at a price equal to the Stated Value of $0.0001 per share (the “Redemption Price”).

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are 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 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 partners 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 product candidates.

 

Our lead product, ProscaVax™ is scheduled to commence two Phase 2 clinical study in 2018 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 was 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

 

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.

 

On December 29, 2017, our Board of Directors of the Company determined to sell or otherwise dispose of our interest in Vitel and Oncbiomune Mexico due to disputes with the original Vitel Shareholders resulting in a lack of control over the assets and operations of Vitel and Oncbiomune Mexico. Accordingly, Vitel and Oncbiomune Mexico are now treated as a discontinued operation. This decision will enable us to focus more of our efforts and resources on the Phase 2 clinical trial of Proscavax in the United States.

 

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 initiation 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. We anticipate that the trial will expand the results that we found in our Phase 1 clinical trial in a different patient population. 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.

 

 

Results of Operations

 

The following table summarizes the results of operations for the years ending December 31, 2017 and 2016 and was based primarily on the comparative audited financial statements, footnotes and related information for the periods identified and should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report.

 

		Year Ended, December 31, 2017				Year Ended, December 31, 2016
Loss from operations		$	(2,463,126	)		$	(1,804,045	)
Other expense, net			(12,385,910	)			(209,587	)
Loss from continuing operations before provision for income taxes			(14,849,036	)			(2,013,632	)
Provision for income taxes			-				-
Loss from continuing operations			(14,849,036	)			(2,013,632	)
Loss from discontinued operations, net of income taxes			(5,664,102	)			-
Net loss			(20,513,138	)			(2,013,632	)
Other comprehensive loss:
Foreign currency translation adjustment			25,184				-
Comprehensive loss		$	(20,487,954	)		$	(2,013,632	)

 

Operating Revenue, Costs of Revenues, and Gross Margin

 

We did not generate any revenues from continuing operations for the years ended December 31, 2017 and 2016.

 

Operating Expenses

 

For the year ended December 31, 2017, operating expenses amounted to $2,463,126 as compared to $1,804,045 for the year ended December 31, 2016, an increase of $659,081, or 36.5%. These are not inclusive of the expenses reclassified to the operating results of discontinued operations reflected in our consolidated statements of operations. For the year ended December 31, 2017 and 2016 operating expenses consisted of the following:

 

		Year Ended, December 31,
		2017				2016
Professional fees		$	1,367,191			$	817,014
Compensation expense			766,829				678,436
Research and development expense			103,915				94,383
General and administrative expenses			225,191				214,212
Total		$	2,463,126			$	1,804,045

 

●	For the year ended December 31, 2017, professional fees increased by $550,177 or 67.3%, as compared to the year ended December 31, 2016. The increase was primarily attributable to an increase in investor relations fees of approximately $469,000 related to building investor awareness and interest in our stock, a decrease in legal fees of approximately $44,000 and increase in consulting fees of approximately $25,000, and an increase in accounting and audit fees of approximately $101,000.
●	For the year ended December 31, 2017, compensation expense increased by $88,393 or 13.0%, as compared to the year ended December 31, 2016. On February 2, 2016, we entered into employment agreements with Jonathan F. Head, Ph.D. (“Dr. Head”) to serve as our Chief Executive Officer and with Andrew Kucharchuk (“Mr. Kucharchuk), our President and Chief Financial Officer. 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.
●	For the year ended December 31, 2017, research and development expense increased by $9,532 or 10.1%, as compared to the year ended December 31, 2016 related to a slight increase in research activities.
●	For the year ended December 31, 2017, general and administrative expenses increased by $10,979 or 5.1%, as compared to the year ended December 31, 2016. The increase was primarily to an increase in health insurance expense, travel and entertainment, rent expense and other general and administrative expenses.

 

 

Loss from Operations

 

For the year ended December 31, 2017, loss from operations amounted to $2,463,126 as compared to $1,804,045 for the year ended December 31, 2016, an increase of $659,081, or 36.5%. These increases are primarily a result of the increases in operating expenses discussed above.

 

Other Income (Expenses)

 

For the year ended December 31, 2017 we had total other expenses, net of $12,385,910 as compared to $209,587 for the year ended December 31, 2016, an increase of $12,176,323 or 5,809.7%. This increase was primarily due to the increase in loss from the initial fair value and changes in fair value of derivative liabilities of $12,091,895 and an increase in interest expense of $1,045,075 due to an increase in interest-bearing debt and amortization of debt discount offset by an increase in debt settlement income of $960,647.

 

Loss from Continuing Operations

 

For the year ended December 31, 2017, loss from continuing operations amounted to $14,849,036, or $(0.16) per share (basic and diluted) as compared to $2,013,632, or $(0.03) per share (basic and diluted) for the year ended December 31, 2016, an increase of $12,835,404, or 637.4%. These increases are primarily a result of the increases in operating expenses and other expenses as discussed above.

 

Loss from discontinued operations, net of income taxes.

 

Our loss from discontinued operations was $5,664,102, or $(0.04) per share (basic and diluted), for the year ended December 31, 2017, as compared with loss a from discontinued operations of $0, or $(0.00) per share (basic and diluted), for the year ended December 31, 2016.

 

The summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is as follows:

 

		Years Ended December 31,
		2017				2016
Revenues		$	445,601			$	-
Cost of revenues			255,866				-
Gross profit			189,735				-
Operating expenses:
Impairment losses			4,760,646				-
Other operating expenses			741,612				-
Total operating expenses			5,502,258				-
Loss from operations			(5,312,523	)			-
Other expense, net			16,107				-
Loss from discontinued operations before income taxes			(5,328,630	)			-
Loss on disposal of discontinued operations			(335,472	)			-
Loss from discontinued operations, net of income taxes		$	(5,664,102	)		$	-

 

For the year ended December 31, 2017, we recorded an impairment loss of $4,718,817. On the acquisition date of Vitel, the purchase price exceeded the fair value of the net assets acquired by approximately $4,718,817, which was recorded as intangible assets. Additionally, we recorded an impairment loss related to an acquired drug of $41,829. Based on our review of long-lived assets for impairment, we recognized an impairment loss of $4,760,646 since the sum of expected undiscounted future cash flows is less than the carrying amount of the intangible assets.

 

 

Net Loss

 

For the year ended December 31, 2017, we had a net loss of $20,513,138 or $(0.16) per common share (basic and diluted) as compared to a net loss of $2,013,632 or $(0.03) per common share (basic and diluted) for the year ended December 31, 2016, an increase of $18,499,506, or 918.7%.

 

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 gain of $25,184 for the year ended December 31, 2017. During the year ended December 31, 2016, we did not have any foreign subsidiaries. This non-cash gain had the effect of reducing our reported comprehensive loss.

 

Comprehensive loss

 

As a result of our foreign currency translation gain, we had comprehensive loss for the year ended December 31, 2017 of $20,487,954 compared to a comprehensive loss of $2,013,632 for the year ended December 31, 2016, an increase of $18,474,322, or 917.5%.

 

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 $14,822,020 and $1,431 of cash as of December 31, 2017 and working capital deficit of $842,637 and no cash as of December 31, 2016.

 

The following table sets forth a summary of changes in our working capital deficit from December 31, 2017 to December 31, 2016:

 

										December 31, 2017 to December 31, 2016
		December 31, 2017				December 31, 2016				Change				Percentage Change
Working capital deficit:
Total current assets		$	14,117			$	41,309			$	(27,192	)			(65.8	)%
Total current liabilities			(14,836,137	)			(883,946	)			(13,952,191	)			(1,578.4	)%
Working capital deficit:		$	(14,822,020	)		$	(842,637	)		$	(13,979,383	)			(1,659.0	)%

 

The increase in working capital deficit was primarily attributable to a decrease in current assets of $27,192, an increase in current liabilities of $13,952,191, including an increase in derivative liabilities of $11,564,705.

 

Cash Flows

 

A summary of cash flow activities is summarized as follows:

 

		Year Ended December 31, 2017				Year Ended December 31, 2016
Cash used in operating activities		$	(2,294,341	)			(1,544,003	)
Cash used in investing activities			(20,490	)			-
Cash provided by financing activities			2,324,930				871,234
Effect of exchange rate changes on cash			(8,668	)			-
Net increase (decrease) in cash		$	10,099				(672,769	)

 

 

Net cash flow used in operating activities was $2,294,341 for the year ended December 31, 2017 as compared to $1,544,003 for the year ended December 31, 2016, an increase of $750,338.

 

	●	Net cash flow used in operating activities for the year ended December 31, 2017 primarily reflected our net loss of $20,513,168 adjusted for the add-back on non-cash items such as derivative expense of $12,238,036, stock-based compensation expense of $250,221, amortization of debt discount of $708,167, other non-cash default interest expense of $269,218 and debt settlement income of $1,005,273, and changes in operating asset and liabilities consisting primarily of an increase in accounts payable of $164,611, an increase in liabilities of discontinued operations of $273,009 and an increase in accrued liabilities of $235,800.
	●	Net cash flow used in operating activities for the year ended December 31, 2016 primarily reflected a net loss of $2,013,632 adjusted for non-cash items such as stock-based compensation of $89,825, amortization of debt discount of $94,688, derivative expense of $146,141, and a gain of extinguishment of debt of $65,047, and changes in operating assets and liabilities consisting primarily of an increase in accounts payable of $111,343 and an increase in accrued liabilities of $73,457.

 

Net cash flow used in investing activities was $20,490 for the year ended December 31, 2017 as compared to $0 for the year ended December 31, 2016. During the year ended December 31, 2017, we received cash from acquisition of Vitel of $39,144 offset by cash used for the acquisition of property and equipment of $715, for the acquisition of property and equipment – discontinued operations of $1,223, the acquisition of a drug for $50,000, and a decrease in cash upon disposal of our Mexican operations.

 

Net cash provided by financing activities was $2,324,930 for the year ended December 31, 2017 as compared to $871,234 for the year ended December 31, 2016. During the year ended December 31, 2017, we received net proceeds from the sale of common stock of $1,252,673, received net cash from convertible debt of $473,240, net proceeds from notes payable of $538,875 and proceeds from related party advances of $256,584, offset by the payment of convertible debt of $96,371, and payments to the line of credit $99,741. During the year ended December 31, 2016, we received net proceeds from the sale of common stock of $534,428, received net cash from convertible debt of $350,000, net proceeds from related party advances of $5,000 and received net cash from bank line of credit of $50,033, offset by the payment of debt issue costs of $69,039.

 

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. 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

 

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying consolidated financial statements, the Company had a net loss of $20,513,138 and $2,013,632 for the years ended December 31, 2017 and 2016, respectively. The net cash used in operations were $2,294,341 and $1,544,003 for the years ended December 31, 2017 and 2016, respectively. Additionally, the Company had an accumulated deficit of $23,655,989 and $3,142,851, at December 31, 2017 and 2016, respectively, had a stockholders’ deficit of $14,808,978 at December 31, 2017, had a working capital deficit of $14,822,020 at December 31, 2017, had no revenues from continuing operations for the years ended December 31, 2017 and 2016, and we defaulted on our debt. Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance date of this report. On March 10, 2017, the Company completed the acquisition of 100% of the issued and outstanding capital stock of Vitel and in December 2017, due to disputes with the original Vitel shareholders which resulted in a lack of control over the assets and operations of Vitel and ONC Mexico, we reflected the operations of Vitel and ONC Mexico as discontinued operations. 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. 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.

 

 

Current and Future Financings

 

In October 2014, the Company entered into a $100,000 revolving promissory note (the “Revolving Note”) with Regions Bank (the “Lender”). The unpaid principal balance of the Revolving Note is payable on demand and any unpaid principal and interest is payable due not later than October 27, 2017, is secured by deposits located at the Lender, and bears interest computed at a variable rate of interest which is equal to the Lender’s prime rate plus 1.7% (5.95% and 5.45% at December 31, 2017 and December 31, 2016, respectively). The Company will pay to Lender a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may, at any time or from time to time, prepay the Revolving Note in whole or in part without penalty. On November 16, 2017 the line of credit was fully paid off by Jonathan F. Head, the liability for which is reflected under Due to related parties in the accompanying consolidated financial statements.

 

At December 31, 2017 and 2016, the Company had $0 and $99,741, respectively, in borrowings outstanding under the Revolving Note with $0 and $259, respectively, available for borrowing under such note. The weighted average interest rate during the years ended December 31, 2017 and 2016 was approximately 5.76% and 5.20%, respectively.

 

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 had the right to sell to, and Lincoln Park was obligated to purchase, up to an additional $10 million 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 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.

 

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.

 

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

 

From July 2016 to December 31, 2016, pursuant to the Purchase Agreement with Lincoln Park dated October 20, 2015, the Company issued an aggregate of 1,400,000 shares of its common stock to Lincoln Park for net proceeds of $191,850 and a subscription receivable of $11,190 which was collected in January 2016.

 

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.

 

 

On November 23, 2016 (the “Original Issue Date”) the Company entered into and closed on the transaction set forth in the Amended and Restated Securities Purchase Agreement (the “Securities Purchase Agreement”) 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 “Notes”); and (ii) warrants (the “Warrants”) to purchase 2,333,334 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 under the Securities Purchase Agreement occurred on November 23, 2016.

 

During the year ended December 31, 2017, pursuant to the Purchase Agreement, the Company issued 2,000,000 shares of its common stock to Lincoln Park for net cash proceeds of $407,787.

 

On March 13, 2018, we and Lincoln Park entered into a termination agreement pursuant to which the parties terminated (i) the Purchase Agreement between them dated October 20, 2015 and (ii) the related registration rights agreement pursuant to which we had agreed to file a registration statement with the Securities and Exchange Commission covering the shares issuable under the Equity Line Agreement and related share issuances.

 

May 2016 Financing

 

On May 23, 2016, the Company entered into a $40,000 convertible promissory note (the “Convertible Note”) with Crown Bridge Partners, LLC (“Crown”). The unpaid principal and interest was payable no later than May 22, 2017 and bears interest computed at a rate of interest which is equal to 8.0% per annum. The Company may prepay any amount outstanding under the Convertible Note by making a payment to Crown of an amount in cash equal to the principal amount multiplied by a prepayment penalty percentage. Crown was entitled, at their option, at any time after the issuance of the Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock. The Conversion Price was 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. On November 23, 2016, the Company repaid this Convertible Note by paying the principal amount outstanding of $40,000, all accrued interest due, and a prepayment penalty aggregating $62,000. In connection with the repayment of this Convertible Note, the Company recorded a gain from extinguishment of debt of $44,625.

 

November 2016 Financing

 

On November 23, 2016, the Company entered into and closed on the transaction set forth in an Amended and Restated Securities Purchase Agreements (the “Securities Purchase Agreements”) it entered into with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $350,000: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “November 2016 Notes”); and (ii) warrants (the “Warrants”) to purchase 2,333,334 shares of the Company’s common stock at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined in the Warrants) (see below for reduction of warrant exercise price) which are exercisable for a period of five years from November 23, 2016. The aggregate principal amount of the November 2016 Notes was $350,000 and the Company received $300,000 after giving effect to the original issue discount of $50,000. The November 2016 Notes bear interest at a rate equal to 10% per annum (which interest rate increased to 24% per annum upon the occurrence of an Event of Default (as defined in the November 2016 Notes)), had a maturity date of July 23, 2017 and were convertible (principal, and interest) at any time after the issuance date of the November 2016 Notes into shares of the Company’s Common Stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the Note) (see below for reduction of conversion price), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the November 2016 Notes shall be convertible and the Warrants shall be exercisable at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The November 2016 Notes provide for two amortization payments on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 120% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 125% of the applicable amortization payment. Due to non-payment of the November 2016 Notes, an event of default occurred and accordingly, the November 2016 Notes and Warrants are convertible and exercisable based on the default terms.

 

 

On May 23, 2017, in connection with the November 2016 Notes, the Company entered into forbearance agreements (the “Forbearance Agreements”) with the Purchases whereby the Purchasers waived any event of default, as defined in the November 2016 Notes. The Company failed to make a payment on May 23, 2017 to each of the Holders as required pursuant to the November 2016 Notes which resulted in an event of default under such Notes. As of result of the event of default, the aggregate amount owing under the November 2016 Notes as of May 23, 2017 was increased to $509,135 with such amount including a mandatory default amount of $141,299 and accrued interest of $17,836 resulting in debt settlement expense of $141,299. The Forbearance Agreement also provides for the Holders to forbear their right to demand an immediate cash payment of the principal amount due plus accrued interest as a result of the Company’s failure to satisfy its payment obligations to the Holder on May 23, 2017 so long as the Company complies with its other obligations under the November 2016 Notes and the other transaction documents. The Forbearance Agreements did not waive the default interest rate of 24%. In consideration therefore, and as currently set forth in the November 2016 Notes, the Holders shall be entitled to convert such notes from time to time at their discretion in accordance with the terms of the November 2016 Notes and the November 2016 Notes shall not be subject to repayment unless agreed to by the Holder of such Note. In connection with the Forbearance Agreement, the Company increased the principal balance of the November 2016 Notes by $159,135, reduced accrued interest payable by $17,836, and recorded debt settlement expense of $141,299.

 

The Company also increased the principal amount of these notes by $42,327 for other default charges and other expenses. This amount was charges to interest expense on the accompanying consolidated statement of operations.

 

The November 2016 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these November 2016 Notes, the Company sold stock at a share price of $0.075 per share then to $0.05 per share and then $0.01 per share. Accordingly, pursuant to these ratchet provisions, the conversion price on the November 2016 Notes were lowered to $0.05 per share then to $0.03 per share and then to $0.006 per share and the exercise price of the November 2016 Warrants was lowered to $0.006. Additionally, the total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants to 13,611,114 warrants (see Note 9). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless exercise of 9,074,076 of these warrants (see Note 9). The remaining 4,537,038 warrants were then ratcheted to 22,685,192 warrants based on the new ratcheted down $0.006 per share exercise price.

 

June 2017 Financing

 

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

 

The aggregate principal amount of the June 2017 Notes is $233,345 and the Company received $200,000 after giving effect to the original issue discount of $33,345. The June 2017 Notes bear interest at a rate equal to 10% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the June 2017 Notes)), have a maturity date of February 2, 2018 and are convertible (principal, and interest) at any time after the issuance date of issuance into shares of the Company’s common stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the June 2017 Notes), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the June 2017 Note shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the common stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The June 2017 Notes provide for 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 and then $.01 per share. Accordingly, pursuant to these ratchet provisions, the conversion price of the notes were lowered to $0.006 per shares and the exercise price of the June 2017 Warrants were lowered to $0.006 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from 1,555,632 warrants to 45,372,600 warrants, an increase of 43,816,968 warrants.

 

July 2017 Financing

 

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

 

The July 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these July 2017 Notes, the Company sold stock at a share price of $0.05 per share and then at $0.01 per share. Accordingly, pursuant to these ratchet provisions, the conversion price of the notes were lowered to $0.006 per share and the exercise price of the July 2017 Warrants were lowered to $0.006 per share and the total number of July 2017 Warrants were increased on a full ratchet basis from 4,769,763 warrants to 79,496,050 warrants, an increase of 74,726,287 warrants.

 

 

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.

 

 

January 2018 Financing

 

On January 29, 2018, the Company entered into and closed on a 4^th Securities Purchase Agreement (the “4th Securities Purchase Agreement”) with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the 4 th Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $333,333: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,333 (the “January 2018 Notes”); and (ii) 5 year warrants (the “January 2018 Warrants”) to purchase 8,333,333 shares of the Company’s common stock par value $0.001 per share at an exercise price of $0.04 per share (subject to adjustments under certain conditions as defined in the Warrants). The closing under the 4 th Securities Purchase Agreement occurred on January 29, 2018. These Notes bear interest at a rate equal to 5% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the Notes)), have a maturity date of September 29, 2018 and are convertible (principal, and interest) at any time after the issuance date of these Notes into shares of the Company’s Common Stock at a conversion price equal to $0.03 per share (subject to adjustment as provided in the Note), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the January 2018 Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”) and the exercise price of the January 2018 Warrants shall be 60% of the Default Conversion Price. These Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the original issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 110% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 115% of the applicable amortization payment. These Notes may be prepaid at any time until the 180th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date through the five months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest during the six month following the Original Issue Date. In order to prepay these Notes, the Company shall provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser may convert the Notes in whole or in part at the Conversion Price.

  

The Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transactions. The conversion price is also subject to adjustment if we issue or sell shares of our common stock for a consideration per share less than the conversion price then in effect. In addition, subject to limited exceptions, a holder will not have the right to convert any portion of its Note if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion. The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice.

 

The initial exercise price of the Warrants is $0.04 per share, subject to adjustment as described below, and the Warrants are exercisable for five years after the issuance date. The Warrants are exercisable for cash at any time and are exercisable on a cashless basis at any time there is no effective registration statement registering the shares of common stock underlying the Warrants. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders. The exercise price of the Warrants is also subject to full ratchet price adjustment if the Company issues common stock at a price per share lower than the then-current exercise price of the Warrant.

 

March 2018 Financing

 

On March 13, 2018, we entered into a 5^th Securities Purchase Agreement (the “5^th Securities Purchase Agreement”) securities with three institutional investors for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Purchase Agreement, we issued for an aggregate subscription amount of $300,000: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,333 (the “Notes”) and (ii) warrants (the “Warrants”) to purchase an aggregate of 8,333,333 shares of our common stock at an exercise price of $0.04 per share. The aggregate principal amount of the Notes is $333,333 and as of the date we received $61,000 after giving effect to the original issue discount of $33,333 and offering costs of $10,000 which are treated as a debt discount, the payment of legal and accounting fees of $29,000 not related to these Notes, and the funding of an escrow account held by the escrows agent of $200,000. The Notes bear interest at a rate of 5% per year (which interest rate shall be increased to 18% per year upon the occurrence of an Event of Default (as defined in the Notes)), shall mature eight months from issuance and the principal and interest are convertible at any time at a conversion price equal to $0.02 per share (subject to adjustment as provided in the Notes); provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days. $200,000 of the aggregate subscription amount shall be held in escrow and released upon the upon the satisfaction of certain conditions or waiver thereof by all of the investors, including: (i) we shall have filed its annual report for the fiscal year ending December 31, 2017 on or prior to April 17, 2018, (ii) we shall have sold or otherwise disposed of its subsidiaries Vitel Laboratorios, S.A. de C.V. and Oncbiomune México, S.A. De C.V. and reserved an aggregate of 46,158,013 shares currently held by Vitel principals for the benefit of the investors and (iii) we shall at all times be in full compliance with the conditions set forth in Rule 144(i)(2).

 

 

Ancillary Agreements. In connection with our obligations under the Notes, we entered into a Security Agreement, Pledge Agreement and Subsidiary Guaranty with Calvary Fund I LP, as agent, pursuant to which we granted a lien on all assets of the Company and the Subsidiary (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 our obligations under the Notes. Upon an Event of Default (as defined in the 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.

 

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 $5,000 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.

 

Common Stock for debt conversion

 

From May 2017 to December, 2017, the Company issued 10,608,890 shares of its common stock upon the conversion of principal note balances of $410,513 and interest of $15,358.

 

Sales of Common Stock and Warrants Pursuant to Subscription Agreements

 

During the year ended December 31, 2016, pursuant to stock subscription agreements, the Company issued 102,341 shares of its common stock to investors for cash proceeds of $51,926.

 

During the year ended December 31, 2016, pursuant to unit subscription agreements, the Company issued 1,937,696 shares of its common stock and 968,844 five-year warrants to purchase common shares for $0.30 per common share to investors for cash proceeds of $279,462 and a subscription receivable of $11,190 which was collected prior to issuance of the report dated December 31, 2016.

 

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

 

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

 

From October 1, 2017 to December 31, 2017, pursuant to unit subscription agreements, the Company issued 16,491,265 shares of its unregistered common stock to investors for cash proceeds of $164,713 and a subscription receivable of $200 or $0.01 per share.

 

Future Financings

 

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 our 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. Specific risks associated with these critical accounting policies are described in the following paragraphs.

 

Impairment of long-lived assets

 

In accordance with ASC Topic 360, we review 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. We recognize 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 our review of long-lived assets for impairment, in the third quarter of 2017, we recognized a goodwill and intangible assets impairment loss of $4,760,646 since the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The impairment loss includes an impairment of goodwill intangibles of $4,718,817 recorded in connection with the acquisition of Vitel.

 

Research and development

 

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

 

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.

 

Derivative liabilities

 

The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to income or expense as part of gain or loss on extinguishment.

 

 

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See Index to Financial Statements and Financial Statement Schedules appearing on pages F-1 to F-26 of this annual report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. 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 company’s 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 our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our company’s disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2017, our disclosure controls and procedures were not effective. The ineffectiveness of our disclosure controls and procedures was due to material weaknesses, which we identified, in our report on internal control over financial reporting.

 

Internal control over financial reporting

 

Management’s annual report on internal control over financial reporting

 

Our management, including our principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017. Our management’s evaluation of our internal control over financial reporting was based on the framework in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that as of December 31, 2017, our internal control over financial reporting was not effective.

 

The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which we identified in our internal control over financial reporting: (1) the lack of multiples levels of management review on complex accounting and financial reporting issues, and business transactions, (2) a lack of adequate segregation of duties and necessary corporate accounting resources in our financial reporting process and accounting function as a result of our limited financial resources to support hiring of personnel and implementation of accounting systems, and (3) a lack of operational controls and lack of controls over assets by the acquired subsidiaries.

 

 

We expect to be materially dependent upon third parties to provide us with accounting consulting services related to accounting services for the foreseeable future. We believe this will be sufficient to remediate the material weaknesses related to our accounting discussed above. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses and significant deficiencies in our disclosure controls and procedures will not result in errors in our financial statements which could lead to a restatement of those financial statements.

 

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.

 

Limitations on Effectiveness of Controls

 

Our principal executive officer and principal financial officer do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additional controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to SEC rules that permit us to provide only management’s report on internal control over financial reporting in this annual report on Form 10-K.

 

Changes in internal control over financial reporting

 

Except for the lack of control of our Mexico assets of operations caused by a dispute with the original Vitel Shareholders, there was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the year ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Board of Directors and Executive Officers

 

The following table sets forth the names, positions and ages of our directors and executive officers as of the date of this report.

 

Name		Age		Position
Jonathan F. Head, Ph. D.		67		Chief Executive Officer and Director
Andrew Kucharchuk		37		Chief Financial Officer and President
Daniel S. Hoverman		42		Director
Charles L. Rice, Jr.		53		Director
Robert N. Holcomb		49		Director

 

 

Biographical information concerning the directors and executive officers listed above is set forth below. The information presented includes information each individual has given us about all positions they hold and their principal occupation and business experience for the past five years. In addition to the information presented below regarding each director’s specific experience, qualifications, attributes and skills that led our board to conclude that he should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. Each has demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to our company and our board of directors.

 

Jonathan F. Head, Ph. D. Dr. Head served as OncBioMune’s President and Chief Scientific Officer from 2005 until September 2015, and has served as our Chief Executive Officer and a member of our board of directors since September 2015. He has also been President and Director of Research at the Mastology Research Institute of the Elliott-Elliott-Head Breast Cancer Research and Treatment Center since 1988. Dr. Head is an Adjunct Associate Professor of Biochemistry at Tulane University School of Medicine, an Adjunct Professor of Physical and Biological Sciences at Delta State University and an Adjunct Associate Professor at Louisiana State University School of Veterinary Medicine. Previously, he has held positions in the Division of Cell Biology of Naylor Dana Institute for Disease Prevention of the American Health Foundation in New York, the Department of Immunology at Cornell University Medical School in New York, and the Department of Pediatrics at Mt. Sinai Medical School in New York. He was also Director/Department Head of Tumor Cell Biology at the Center for Clinical Sciences, International Clinical Laboratories in Nashville, Tennessee. Dr. Head’s scientific background and his leadership role at the Elliott-Elliott-Head Breast Cancer Research and Treatment Center provide him with expertise and qualifications to serve as a member of our board.

 

Andrew Kucharchuk. Mr. Kucharchuk served as OncBioMune’s Chief Financial Officer from 2009 to September 2015, and has served as our Chief Financial Officer, President and was a member of our board of directors from September 2015 until March 2017. Mr. Kucharchuk is a graduate of Louisiana State University and Tulane University’s Freeman School of Business, where he earned an MBA with a Finance Concentration. Mr. Kucharchuk’s role as an executive officer of our company gives him unique insights into our day-to-day operations, a practical understanding of the issues and opportunities that face us and our strategic planning, commercial growth, and strategic transactions, giving him the appropriate and valuable qualifications to serve as an executive officer.

 

Daniel S. Hoverman. On December 30, 2015, Mr. Hoverman was elected as a member of our board. Mr. Hoverman, age 42, has served as a Managing Director at Regions Securities, LLC, an affiliate of Regions Bank, since November 2016. At Regions, Mr. Hoverman is responsible for advising companies on sale, financing and other strategic corporate transactions. Previously, Mr. Hoverman was a Director and senior member of Houlihan Lokey, Inc.’s Mergers & Acquisitions Group. Before joining Houlihan in 2010, Mr. Hoverman was a Director with Credit Suisse in Hong Kong in the Office of the General Counsel, and a Director with UBS in New York in the Equity Capital Markets Group. Mr. Hoverman started his career with Kirkland & Ellis in New York, where he was a corporate attorney. Mr. Hoverman is a CFA charter holder, and holds a Juris Doctor and Masters in Business Administration from Columbia University and a Bachelor of Arts from Yale University.

 

Charles L. Rice, Jr. Mr. Rice has served as a member of our board of directors since November 2015. He has been president and chief executive officer of Entergy New Orleans, Inc., an $800 million a year electric and gas utility, since 2010. After his first legal private practice position in Louisiana with Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., Mr. Rice joined Entergy in the legal department in 2000, serving as senior counsel in the Entergy Services, Inc. litigation group and then as manager of labor relations litigation support in human resources. Mr. Rice was recruited into New Orleans city government in 2002 as the city attorney and later took the critical role of chief administrative officer for the City of New Orleans, where he managed 6,000 employees and the city’s $600 million budget. In 2005, the law firm of Barrasso, Usdin, Kupperman, Freeman & Sarver, L.L.C. recruited him back to private practice, where he was named partner. Returning to Entergy in 2009, Rice served as director of utility strategy where he was responsible for coordinating regulatory, legislative, and communications efforts to develop and execute strategies that advanced commercial objectives for the company’s regulated service areas. He then served as director of regulatory affairs for Entergy New Orleans.

 

 

Mr. Rice holds a bachelor’s degree in business administration from Howard University, a juris doctorate from Loyola University’s School of Law and master’s degree in business administration from Tulane University. After graduating from Howard University, he was commissioned as a second lieutenant in the United States Army and served as a military intelligence officer with the 101st Airborne Division (Air Assault) at Fort Campbell, Ky. While in the Army, he earned the Airborne Badge, Air Assault badge and was awarded the Army Commendation and the Army Achievement medals. He is a member of the Alabama and Louisiana State Bar Associations, the American Bar Association, the New Orleans Bar Association, and the National Bar Association. Mr. Rice’s business, regulatory and legal experience give him the skills and appropriate qualifications to serve as a member of our board.

 

Robert N. Holcomb. Mr. Holcomb, age 48, has served as the president and owner of Holcomb CPA Firm, P.A. in Rolling Fork, MS since 2005. He also has been serving as the president and executive director of the MS Breast Foundation since July 2003. Mr. Holcomb earned his Bachelor of Business Administration degree from Delta State University in 1992. He is also Certified Public Accountant.

 

There are no family relationships between any of the executive officers and directors. Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified.

 

Stockholders’ Agreement

 

Pursuant to the terms of the Stockholders’ Agreement entered into among us, Dr. Head and Messrs. Kucharchuk, Cosme and Alaman dated March 10, 2017 as discussed above in Item 1 Business - Our Corporate History and Recent Developments - The Stockholders Agreement, Messrs. Cosme and Alaman (the “Vitel Shareholders”) are permitted to appoint one member to the Board of Directors, Dr. Head and Mr. Kucharchuk are permitted to appoint one member to the Board of Directors, two (2) independent directors shall be designated jointly by Dr. Head and Mr. Kucharchuk (the “Management Stockholders”) on the one hand, and the Vitel Shareholders, 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. Mr. Cosme was appointed to the Board of Directors as the initial designee of the Vitel Stockholders (the “Vitel Designee”), Dr. Head was appointed to the Board of Directors as the initial designee of the Management Stockholders (the “Management Designee”), and Charles L. Rice, Jr. and Daniel S. Hoverman shall be the initial independent designees jointly appointed by the Management Stockholders and the Vitel Stockholders.

 

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 Laboratorios with a vote from a majority of its members.

 

Each stockholder of our company who is a party to the Stockholders’ Agreement (each, a “Stockholder”) agreed to vote all of their Company Securities (as defined in the Shareholders Agreement) that are entitled to vote or execute proxies or written consents, as the case may be, and to take all other actions necessary, to ensure that our Articles of Incorporation and Bylaws (a) facilitate, and do not at any time conflict with, any provision of the Stockholders’ Agreement and (b) permit each Stockholder to receive the benefits to which each such Stockholder is entitled under the Stockholders’ Agreement. In addition, on the date of the Stockholders’ Agreement, the Vitel Stockholders and Management Stockholders agreed to sign, or direct the Trustee to sign, the written consents necessary to amend our Articles of Incorporation and Bylaws, substantially in the form of the documents attached to the Stockholders’ Agreement as Exhibit E.

 

Family Relationships

 

No family relationships exist between any of our current or former directors or executive officers.

 

 

Involvement in Certain Legal Proceedings

 

Our directors and executive officers have not been involved in any of the following events during the past 10 years:

 

	1.	any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
	2.	any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
	3.	being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;
	4.	being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
	5.	being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
	6.	being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of copies of such reports and representations from the reporting persons, we believe that during the fiscal year ended December 31, 2017:

 

	●	Manuel Odabachian, a member of the Board of Directors, failed to timely file one Form 3 to report the acquisition of 30,579,007 shares of Common Stock and 2,500,000 shares of Series B Preferred Stock.
	●	Carlos Fernando Alaman Volnie, , a member of the Board of Directors, failed to timely file one Form 3 to report the acquisition of 30,579,006 shares of Common Stock and 2,500,000 shares of Series B Preferred Stock.
	●	Andrew Kucharchuk, Chief Financial Officer of the Company, failed to timely file one Form 4 to report the acquisition of 2,000,000 options to acquire shares of Common Stock.
	●	Charles L. Rice, Jr., , a member of the Board of Directors, failed to timely file one Form 4 to timely report the acquisition of 60,000 shares of Common Stock and employee stock options to purchase 350,000 shares of Common Stock at an exercise price of $0.27 per share.

 

Code of Ethics

 

We have not adopted a code of ethics because our board of directors believes that our small size does not merit the expense of preparing, adopting and administering a code of ethics. Our board of directors intends to adopt a code of ethics when circumstances warrant.

 

Corporate Governance

 

Term of Office

 

Each director of our company is to serve for a term of one year ending on the date of subsequent annual meeting of stockholders following the annual meeting at which such director was elected. Notwithstanding the foregoing, each director is to serve until his successor is elected and qualified or until his death, resignation or removal. Our board of directors is to elect our officers and each officer is to serve until his successor is elected and qualified or until his death, resignation or removal.

 

 

Committees of the Board

 

Our board of directors held two formal meeting during the year ended December 31, 2017. All other proceedings of our board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the State of Nevada and our By-laws, as valid and effective as if they had been passed at a meeting of our directors duly called and held.

 

We currently do not have nominating or compensation committees or committees performing similar functions nor do we have a written nominating or compensation committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by our board of directors.

 

We do not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors. We do not currently have any specific or minimum criteria for the election of nominees to our board of directors and we do not have any specific process or procedure for evaluating such nominees. Our board of directors assesses all candidates, whether submitted by management or shareholders, and makes recommendations for election or appointment.

 

A shareholder who wishes to communicate with our board of directors may do so by directing a written request to the address appearing on the first page of this annual report.

 

Audit Committee and Audit Committee Financial Expert

 

We do not have a standing audit committee at the present time. Our board of directors has determined that we do not have a board member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.

 

We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have an audit committee because we believe that the functions of an audit committee can be adequately performed by the board of directors. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

Summary Compensation

 

The following table summarizes all compensation earned by Dr. Head, our Chief Executive Officer after the Exchange, Mr. Kucharchuk, our Chief Financial Officer and President after the Exchange, for their services as OncBioMune executives in the past two fiscal years.

 

2017 SUMMARY COMPENSATION TABLE

FOR OUR NAMED EXECUTIVE OFFICERS

 

Name and Principal Position		Fiscal Year				Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)				Non- Equity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($) (1)				Total ($)
Jonathan F. Head, Ph. D.			2017				275,000				-				-				146,799				-				-				6,000				427,799
Chief Executive Officer.			2016				275,000				-				-				-				-				-				6,000				427,799
Andrew Kucharchuk,			2017				200,000				-				-				146,799				-				-				6,000				206,000
Chief Financial Officer and President			2016				200,000				-				-				-				-				-				6,000				206,000
Manuel Cosme,			2017				166,814				-				-				-				-				-				-				166,814
Former Global Operations General Manager – Vitel Laboratories	(1)		2016				-				-				-				-				-				-				-				-
Carlos Fernando Alaman Volnie,			2017				166,814				-				-				-				-				-				-				166,814
Former Chief Operating Officer – Vitel Laboratorios	(2)		2016				-				-				-				-				-				-				-				-

 

(1) Mr. Cosme was appointed as the Global Operations General Manager of Vitel on March 10, 2017 and resigned in December 2017.

 

(2) Mr. Volnie was appointed as the Chief Operating Officer of Vitel on March 10, 2017 and resigned in December 2017.

 

Compensation of Management

 

Dr. Head and Mr. Kucharchuk were appointed as executive officers effective September 2, 2015. A description of their employment agreement follows:

 

Dr. Head and Mr. Kucharchuk are eligible to participate in the registrant’s standard benefit programs for all named executive officers, which includes, but is not limited to, receipt of medical benefits.

 

(1) Consists of auto allowance paid or accrued at $500 per month.

 

Employment Agreement with Jonathan F. Head, Ph.D.

 

As of February 2, 2016, Dr. Head entered into an Employment Agreement with us (“Head Employment Agreement”), to serve as 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 Head Employment Agreement 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 Head Employment Agreement 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.

 

 

Dr. Head’s employment agreement was amended on March 10, 2017 to extend the term to March 9, 2020 and to provide for 100% vesting of any unvested portion of any outstanding equity, or equity-based award granted to them by us upon termination of his employment agreement without cause, as a result of a breach of the agreement by us or upon his death or disability. In addition, the Board of Directors awarded Dr. Head an option to purchase 2,000,000 shares of our Common Stock at an exercise price of $0.25 per share, the date of the grant. One-third of the stock options vest on each anniversary date of the award 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 our company or a subsidiary of our on the vesting dates (except as otherwise provided for in the employment agreement between us and the optionee as described above).

 

Employment Agreement with Andrew Kucharchuk

 

As of February 2, 2016, Mr. Kucharchuk entered into an Employment Agreement with us (the “Kucharchuk Employment Agreement”), to serve as 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 Kucharchuk Employment Agreement 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 Kucharchuk Employment Agreement 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.

 

Mr. Kucharchuk’s employment agreement was amended on March 10, 2017 to extend the term to March 9, 2020 and to provide for 100% vesting of any unvested portion of any outstanding equity, or equity-based award granted to them by us upon termination of his employment agreement without cause, as a result of a breach of the agreement by us or upon his death or disability. In addition, the Board of Directors awarded Mr. Kucharchuk an option to purchase 2,000,000 shares of our Common Stock at an exercise price of $0.25 per share, the date of the grant. One-third of the stock options vest on each anniversary date of the award 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 our company or a subsidiary of our on the vesting dates (except as otherwise provided for in the employment agreement between us and the optionee as described above).

 

Provisions Present in Both Employment Agreements

 

Each of the Head Employment Agreement and the Kucharchuk Employment Agreement (each is referred to herein as an “Employment Agreement”) provide as to Dr. Head and Mr. Kucharchuk (each referred to herein as an “Executive”), respectively, that:

 

(i) Executive shall be eligible for an annual target bonus payment in an amount equal to ten percent (10%) 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;

 

(ii) Executive shall be entitled to receive all benefits and perquisites provided by the Company to senior executives, including paid vacation time, medical/health insurance, cell phone, business expense reimbursement, use of a company car or car allowance, and automobile insurance;

 

(iii) Executive shall be eligible to participate in any executive stock award/equity incentive plans the Company’s Board of Directors may adopt;

 

(iv) Executive’s employment: (1) shall be terminated automatically upon the death or Disability (as defined in the Employment Agreement) of Executive; (2) may be terminated for Cause (as defined in the Employment Agreement) at any time by the Company; (3) may be terminated at any time by the Company without Cause with 30 days’ advance notice to Executive; (4) may be terminated at any time by Executive with 30 days’ advance notice to the Company, and shall be terminated automatically if Executive does not accept assumption of the Employment Agreement by, or an offer of employment from, a purchaser of all or substantially all of the assets of the Company; or (5) may be terminated at any time by Executive if the Company materially breaches the Employment Agreement with Executive and fails to cure such breach within 30 days of written notice of such breach from Executive, provided that Executive has given notice of such breach within 90 days after he has knowledge thereof and the Company did not have Cause to terminate Executive at the time such breach occurred.

 

 

(v) In the event of the death or Disability of Executive during the term of the Employment Agreement, Executive shall not be entitled to any further compensation or other payments or benefits under the Employment Agreement except for the following: (1) Executive shall be entitled to any unpaid salary, bonus, or benefits accrued and earned by him up to and including the date of such death or Disability; and (2) the Company shall continue to pay to Executive (or his estate) Executive’s then effective per annum rate of salary and provide to Executive (or to his family members covered under his family medical coverage) the same family medical coverage as provided to Executive on the date of such death or Disability for a period equal to the lesser of (i) twelve (12) months following the date of such death or Disability or (ii) the balance of the term that would have remained under the Employment Agreement at such date had Executive’s death or disability not occurred;

 

(vi) If Executive’s employment is terminated by the Company without Cause or by Executive if the Company materially breaches the Employment Agreement and fails to cure such breach, the Company shall continue to pay to Executive the per annum rate of salary then in effect and provide him and his family with the benefits then in effect for the balance of the term that would have remained under the Employment Agreement had such termination not occurred; and

 

(vii) If Executive’s employment is terminated by the Company with Cause or is terminated by Executive with 30 days’ advance notice or Executive does not accept assumption of the Employment Agreement, Executive shall be entitled to no further compensation or other payments or benefits under the Employment Agreement, except as to that portion of any unpaid salary and benefits accrued and earned by him up to and including the date of termination.

 

Each Employment Agreement also contains various restrictive covenants, including covenants relating to non-competition, non-solicitation, and non-disclosure (confidentiality).

 

Vitel Laboratorios, S.A. de C.V. Employment Agreements

 

On March 10, 2017, Vitel Laboratorios entered into employment agreements with each of Messrs. Cosme and Alaman. Mr. Cosme was appointed as Vitel Laboratorios’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 Laboratorios and will be its two most senior executive officers reporting to Vitel Laboratorios’s Board of Directors with all other employees of Vitel Laboratorios reporting directly or indirectly to them.

 

Each of the agreements provides for a base salary of $187,500, annual bonuses and other compensation as required under Mexican Federal Labor Law and an annual bonus target of 50% of salary based on performance objectives to be established by the Company’s Board of Directors annually. In addition, Messrs. Cosme and Alaman are entitled to a $500.00 monthly car allowance, health insurance reimbursement of up to $5,000 per year and other benefits required under Mexican law. The employment agreement also contains a non-compete provision prohibiting them from engaging in business activities that compete with Vitel Laboratorios’ 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 Laboratorios under their respective employment agreements. In addition, if Messrs. Cosme and Alaman seek to pursue any future business opportunities that do not interfere with their obligations to Vitel Laboratorios, they are required to notify the Company and provide it with a notice and an opportunity to participate in such opportunity.

 

The employment agreements may be terminated upon the employee’s death or disability, and with or without cause. In the event Vitel Laboratorios 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 Laboratorios’ 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.

 

On December 29, 2017, our Board of Directors determined to sell or otherwise dispose of its interest in Vitel and Oncbiomune México due to disputes with the original shareholders of Vitel which resulted in a lack of control of the assets and operations Vitel and OncBiomune Mexico. In connection with the decision to dispose of Vitel, on December 22, 2017, Mr. Cosme and Mr.Alaman resigned from their positions with our Company.

 

 

Outstanding Equity Awards at 2017 Fiscal Year-End

For Named Executive Officers

 

The following table sets forth certain information concerning the outstanding equity awards as of December 31, 2017, for each named executive officer.

 

			Option Awards																				Stock Awards
Name			Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options				Option Exercise Price				Option Expiration Date				Number of Shares or Units of Stock that Have Not Vested				Market Value of Shares or Units of Stock that Have Not Vested				Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that Have Not Vested
Jonathan F. Head, Ph. D.			666,667				1,333,333				—				0.25				3/9/2027				—				—				—				—
Andrew Kucharchuk			666,667				1,333,333				—				0.25				3/9/2027				—				—				—				—
Manuel Cosme.			—				—				—				—				N/A				—				—				—				—
Carlos Fernando Alaman Volnie			—				—				—				—				N/A				—				—				—				—

 

Compensation of Directors

 

The following table sets forth certain information regarding the compensation paid to our directors during the fiscal year ended December 31, 2017:

 

Name

Fees earned or cash paid

Stock Awards

Option Awards

All other compensation

Total

Jonathan F. Head, Ph. D.

$

-

$

-

$

-

$

-

$

-

Manuel Cosme (1)

$

-

$

-

$

-

$

-

$

-

Daniel S. Hoverman

$

-

$

-

$

-

$

-

$

-

Charles L. Rice, Jr.

$

-

$

-

$

-

$

-

$

-

 

(1) December 22, 2017, Mr. Cosme resigned as a member of the Board of Directors of the Company.

 

As of December 31, 2017, there are no other cash compensation arrangements in place for members of the Board of Directors acting as such.

 

 

Long-Term Incentive Plans, Retirement or Similar Benefit Plans

 

There are currently no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers, except that we may reimburse our executive employees for up to 70% of their health insurance premiums under their individual policies. We may provide employee benefit plans to our employees in the future.

 

Our directors, executive officers and employees may receive stock options at the discretion of our board of directors.

 

Resignation, Retirement, Other Termination, or Change in Control Arrangements

 

We do not have arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information regarding beneficial ownership of our common stock, Series A preferred stock and Series B Preferred Stock as of May 30, 2017, by (i) each person known by us to be the beneficial owner of more than 5% of our outstanding common stock, (ii) each director and each of our Named Executive Officers and (iii) all executive officers and directors as a group.

 

The number of shares of common stock beneficially owned by each person is determined under the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which such person has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after the date hereof, through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) with respect to the shares set forth in the following table. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of those shares.

 

Common Stock

 

Name and Address of Beneficial Owner(1)		Common Stock Beneficial Ownership				Percent of Class(2)				Series A Preferred Beneficial Ownership				Percent of Class(3)				Outstanding Series B Preferred Beneficial Ownership				Percent of Class(4)
Named Executive Officers and Directors:
Jonathan F. Head, Ph. D.			16,926,078				7.6	%			500,000				50.0	%			2,892,000				36.6	%
Andrew A. Kucharchuk			5,000,000				2.2	%			-				-				-				-
Daniel S. Hoverman			60,000				0.0	%			-				-				-				-
Charles L. Rice, Jr.			60,000				0.0	%			-				-				-				-
Robert N. Holcomb			6,420,000				2.9	%
All executive officers and directors as a group (five persons)			28,466,078				12.7	%			500,000				50.0	%			2,892,000				36.6	%
Other 5% Stockholders:
Robert L. Elliott, Jr. M.D.			16,926,079				0.08	%			500,000				50.0	%			-				-	%
Manuel Cosme Odabachian(5)			30,579,007				13.7	%			-				-				2,500,000				31.7	%
Carlos F. Alaman Volnie (6)			30,579,006				13.7	%			-				-				2,500,000				31.7	%

 

* Less than 1%.

 

	(1)	Unless otherwise indicated, the business address of each person listed is in care of OncBioMune Pharmaceuticals, Inc., 11441 Industriplex Blvd, Suite 190, Baton Rouge LA 70809.
	(2)	Calculated on the basis of 223,744,842 issued and outstanding shares of Common Stock as of May 30, 2018.

 

 

	(3)	Calculated on the basis of 1,000,000 issued and outstanding shares of Series A preferred stock as of May 30, 2018. Holders of our Series A preferred stock are entitled to 500 votes per share.
	(4)	Calculated on the basis of 7,892,000 issued and outstanding shares of Series B preferred stock as of May 30, 2018. Holders of our Series A preferred stock are entitled to 100 votes per share.
	(5)	Shares are owned by Banco Actinver, S.A., in its capacity as Trustee of the Irrevocable Management Trust Agreement Trust No. 2868 and reflects shares beneficially owned by Mr. Cosme whose address is Monte Pelvoux 130, Floor 3, Mexico City, Mexico 11000.
	(6)	Shares are owned by Banco Actinver, S.A., in its capacity as Trustee of the Irrevocable Management Trust Agreement Trust No. 2868 and reflects shares beneficially owned by Mr. Cosme whose address is Monte Pelvoux 130, Floor 3, Mexico City, Mexico 11000.

 

Changes in Control

 

Shares of the Company’s Common Stock, Series A preferred and Series B preferred are subject to the terms and conditions of the Trust Agreement and the Shareholders Agreement. See Item 1 Business - Our Corporate History and Recent Developments – The Trust Agreement and Item 1 Business - Our Corporate History and Recent Developments – The Stockholders Agreement. Consequently, these agreements may at a subsequent date result in a change in control of the company.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

Except as disclosed below, since January 1, 2017, there have been no transactions, or currently proposed transactions, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in which any of the following persons had or will have a direct or indirect material interest:

 

	(i)	Any director or executive officer of our company;
	(ii)	Any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock;
	(iii)	Any member of the immediate family (including spouse, parents, children, siblings and in-laws) of any of the foregoing persons, and any person (other than a tenant or employee) sharing the household of any of the foregoing persons.

 

From time to time, the Company receives advances from and repays such advances to the Company’s chief executive officer and chief financial officer for working capital purposes. Additionally, from time to time, the Company receives working capital advances from and made working capital advances to The Sallie Astor Burdine Breast Foundation (the “Foundation”), a not-for-profit foundation where the Company’s chief executive officer was a Board member until March 17, 2017. Furthermore, from time to time, Vitel’s General Manager of Global Operations and Vitel’s Chief Operations Officer, both of who are beneficial shareholders of the Company (together referred to as the Vitel Officers), paid expenses on behalf of the Company and the Company reimburses the Vitel Officers or these expenses. The advances are non-interest bearing and are payable on demand. A final balance due to the Company of $2,244 was written off in 2016.

 

For the year ended December 31, 2017 and 2016, due from/(to) related parties activity consisted of the following:

 

		Foundation				CEO				CFO				Vitel Officers				Total
Balance due from (to) related parties at December 31, 2015		$	3,200			$	5,900			$	8,700			$	-			$	17,800
Working capital advances made			5,094				-				3,795				-				8,889
Working capital advances received			-				(55,500	)			-				-				(55,500	)
Repayments made			-				50,500				-				-				50,500
Amounts deemed uncollectible and expensed			(2,244	)			-				-				-				(2,244	)
Repayments received			(6,050	)			(5,900	)			(12,495	)			-				(24,445	)
Balance due to related parties at December 31, 2016			-				(5,000	)			-				-				(5,000	)
Working capital advances received			-				(161,602	)			-				(6,444	)			(168,046	)
Repayments made			-				7,250				-				6,444				13,694
Payments made on line of credit on the Company’s behalf			-				(102,232	)			-				-				(102,232	)
Balance due to related parties at December 31, 2017		$	-			$	(261,584	)		$	-			$	-			$	(261,584	)

 

 

Director Independence

 

Because the Company’s Common Stock is not currently listed on a national securities exchange, the Company has used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:

 

●	the director is, or at any time during the past three years was, an employee of the company;
●	the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
●	a family member of the director is, or at any time during the past three years was, an executive officer of the company;
●	the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
●	the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of th Company served on the compensation committee of such other entity; or
●	the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.

 

Based on this review, Messrs. Hoverman, Rice and Holcomb are independent directors pursuant to the requirements of NASDAQ.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

On March 9, 2017, the Company’s Board of Directors approved the dismissal of its independent registered public accounting firm Anton & Chia, LLP (“Anton Chia”). Anton Chia audited our financial statements for the fiscal years ended December 31, 2015 and December 31, 2014. On the same day our Board of Directors ratified the engagement of Salberg & Company, P.A. (“Salberg”) as our independent registered public accounting firm and Salberg engagement became effective as of March 9, 2017.

 

 

The following table sets forth the fees billed to our company for the years ended December 31, 2017 and 2016 for professional services rendered by our independent registered public accounting firm Salberg:

 

Fees		2017				2016
Audit Fees		$	66,800			$	20,500
Audit-Related Fees			27,400				-
Tax Fees			-				-
Other Fees			-				-
Total Fees		$	77,636			$	-

 

The following table sets forth the fees billed to our company for the years ended December 31, 2017 and 2016 for professional services rendered by our independent registered public accounting firm Anton Chia:

 

Fees		2017				2016
Audit Fees		$	2,500			$	-
Audit-Related Fees			-				-
Tax Fees			-				-
Other Fees			-				-
Total Fees		$	2,500			$	20,500

 

Audit Fees

 

Audit fees were for professional services rendered for the audits of our financial statements and for review of our quarterly financial statements during the 2017 and 2016 fiscal years.

 

Audit-related Fees

 

This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees”.

 

Tax Fees

 

As our independent registered public accountants did not provide any services to us for tax compliance, tax advice and tax planning during the fiscal years ended December 31, 2016 and 2017, no tax fees were billed or paid during those fiscal years.

 

All Other Fees

 

Our independent registered public accountants did not provide any products and services not disclosed in the table above during the 2017 and 2016 fiscal years. As a result, there were no other fees billed or paid during those fiscal years.

 

Pre-Approval Policies and Procedures

 

Our entire board of directors, which acts as our audit committee, pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by our board of directors before the respective services were rendered.

 

Our board of directors has considered the nature and amount of fees billed by our independent registered public accounting firm and believe that the provision of services for activities unrelated to the audit is compatible with maintaining their respective independence.

 

 

PART IV

 

ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES

 

(a)	1.	Financial Statements
		The financial statements and Report of Independent Registered Public Accounting Firm are listed in the “Index to Financial Statements and Schedules” on page F-1 and included on pages F-2 through F-26.
	2.	Financial Statement Schedules
		All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the “Commission”) are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein.
	3.	Exhibits (including those incorporated by reference).

 

Exhibit No.		Description
3.1		Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s registration statement on Form 10-SB filed with the SEC on September 8, 2006).
3.2		Certificate of Change (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed with the SEC on September 15, 2008).
3.3		Articles of Merger (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed with the SEC on December 28, 2010).
3.4		Certificate of Change effective August 7, 2013 (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed with the SEC on August 8, 2013).
3.5		Articles of Merger dated effective August 7, 2013 (incorporated by reference to Exhibit 3.2 to the registrant’s current report on Form 8-K filed with the SEC on August 8, 2013).
3.6		Amended and Restated Articles of Incorporation filed with the Nevada Secretary of State on August 12, 2015 (incorporated by reference to Exhibit 3.6 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 13, 2016).
3.7		Certificate of Designation of Series A Preferred Stock filed with the Nevada Secretary of State on August 20, 2015 (incorporated by reference to Exhibit 3.7 to the registrant’s Annual Report on Form 10-K filed with the SEC on April 13, 2016).
3.8		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed with the SEC on November 1, 2013).
3.9		Certificate of Designation, Rights and Preferences of Series B Preferred Stock filed with the Nevada Secretary of State on March 7, 2017 (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.1+		2011 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8- K filed with the SEC on February 22, 2011).
10.2		Form of $50,000 Promissory Note Amendment dated April 19, 2012 (incorporated by reference to Exhibit 4.2 to the registrant’s annual report on Form 10-K for the fiscal year ended February 29, 2012 filed with the SEC on May 18, 2012).

 

 

10.3		Form of $250,000 Promissory Note Amendment dated April 19, 2012 (incorporated by reference to Exhibit 4.3 to the registrant’s annual report on Form 10-K for the fiscal year ended February 29, 2012 filed with the SEC on May 18, 2012).
10.4		Termination Agreement dated June 27, 2012 with Apricus Biosciences, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on June 28, 2012).
10.5		Form of $200,000 Promissory Note Amendment dated July 25, 2012 (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on July 27, 2012).
10.6		Form of $50,000 Promissory Note Amendment dated July 25, 2012 (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on July 31, 2012).
10.7		Form of $250,000 Promissory Note Amendment dated July 25, 2012 (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed with the SEC on July 31, 2012).
10.8		Web Site Asset Purchase Agreement dated May 17, 2013 between Lakefield Media Holding AG, Flawsome XLerator GmBH and Pediatrix Inc. (incorporated by reference to Exhibit 10.49 to the registrant’s annual report on Form 10-K for the fiscal year ended February 28, 2013 filed with the SEC on June 28, 2013).
10.9		Consulting Agreement dated May 29, 2013 with Flawsome XLerator GmBH (incorporated by reference to Exhibit 10.50 to the registrant’s annual report on Form 10-K for the fiscal year ended February 28, 2013 filed with the SEC on June 28, 2013).
10.10		Form of Private Placement Subscription Agreement including Form of Promissory Note (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on September 26, 2013).
10.11		Form of Promissory Note Amendment dated August 31, 2013 (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed with the SEC on September 26, 2013).
10.12		Form of Promissory Note Amendment dated August 31, 2013 (incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed with the SEC on September 26, 2013).
10.13		Form of Private Placement Subscription Agreement (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on December 2, 2013).
10.14		Form of Warrant Certificate (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed with SEC on December 2, 2013).
10.15		Form of subscription agreement with promissory note attached (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on February 18, 2014).
10.16		Form of subscription agreement with promissory note attached (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on April 4, 2014).
10.17		Form of subscription agreement with promissory note attached (incorporated by reference to Exhibit 10.23 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended May 31, 2014, filed with the SEC on July 21, 2014).
10.18		Form of subscription agreement with promissory note attached (incorporated by reference to Exhibit 10.23 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended August 31, 2014, filed with the SEC on October 14, 2014).
10.19		Debt Settlement Agreement dated March 10, 2015 by and between Quint Media Inc., Leone Group, LLC, American Capital Ventures, Inc., Georgia Georgopoulos, Catherin Cozias and Trels Investments, Ltd. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on March 16, 2015).

 

 

10.20		Debt Settlement Agreement dated June 17, 2015 by and between Quint Media Inc., Leone Group, LLC and American Capital Ventures, Inc. (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed with the SEC on June 24, 2015).
10.21		Share Exchange Agreement dated as of June 22, 2015 among the registrant, OncBioMune, Inc. and the OncBioMune, Inc. stockholders (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on June 24, 2015).
10.22		Amendment #1 effective as of September 2, 2015 to the Share Exchange Agreement dated June 22, 2015 by and between the registrant, OncBioMune, Inc., Robert L. Elliott, M.D. and Jonathan F. Head, Ph. D. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on September 8, 2015).
10.23		Purchase Agreement dated as of October 20, 2015 by and between OncBioMune Pharmaceuticals, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on October 26, 2015).
10.24		Registration Rights Agreement dated as of October 20, 2015, by and between OncBioMune Pharmaceuticals, Inc. and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed with the SEC on October 26, 2015).
10.26+		Employment Agreement between OncBioMune Pharmaceuticals, Inc. and Jonathan F. Head, Ph.D. effective as of February 2, 2016 (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on February 5, 2016).
10.26+		Employment Agreement between OncBioMune Pharmaceuticals, Inc. and Andrew Kucharchuk effective as of February 2, 2016 (incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed with the SEC on February 5, 2016).
10.27		Consulting Agreement between OncBioMune and SABR Capital Management, LLC dated as of May 13, 2016 (incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed with the SEC on May 16, 2016).
10.28		Promissory Note made by OncBioMune, L.L.C. and issued to Regions Bank (incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed with the SEC on May 16, 2016).
10.29		Shareholders Agreement by and between OncBiMune Mexico, S.A. de C.v. and Vitel Laboratorios, S.A. de C.v. and OncBioMune Pharmaceuticals Inc. dated as of August 19, 2016 (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the SEC on August 26, 2016).
10.30		Securities Purchase Agreement (incorporated by reference to Exhibit 10.2 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016, filed with the SEC on November 21, 2016).
10.31		Form of Note (incorporated by reference to Exhibit 10.3 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016, filed with the SEC on November 21, 2016).
10.32		Form of Warrant (incorporated by reference to Exhibit 10.4 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016, filed with the SEC on November 21, 2016).
10.33		Form of Security Agreement (incorporated by reference to Exhibit 10.5 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016, filed with the SEC on November 21, 2016).

 

 

10.34		Form of Pledge Agreement (incorporated by reference to Exhibit 10.6 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016, filed with the SEC on November 21, 2016).
10.35		Form of Subsidiary Guaranty (incorporated by reference to Exhibit 10.7 to the registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2016, filed with the SEC on November 21, 2016).
10.36		Amended and Restated Securities Purchase Agreement dated as of November 23, 2016 (incorporated by reference to Exhibit 10.1 to registrant’s current report on Form 8-K filed with the SEC on November 28, 2016).
10.37		Contribution Agreement to the Property of Trust F/2868 entered into among Manuel Cosme Odabachian, Carlos Fernando Alaman Volnie and OncBioMune Pharmaceuticals, Inc. dated March 10, 2017 (incorporated by reference to Exhibit 10.1 to registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.38		Irrevocable Trust Agreement Number F/2868 entered into among Manuel Cosme Odabachian, Carlos Fernando Alaman Volnie and OncBioMune Pharmaceuticals, Inc. as beneficiaries and Banco Actinver, S.A., as Trustee (“Banco Actinver”) (the “Trust Agreement”) dated March 10, 2017 (incorporated by reference to Exhibit 10.2 to registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.39		Shareholders Agreement among OncBioMune Pharmaceuticals, Inc., Jonathan F. Head, Ph.D., Andrew A. Kucharchuk, Manuel Cosme Odabachian and Carlos Fernando Alaman Volnie dated March 10, 2017 (incorporated by reference to Exhibit 10.3 to registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.40		Form of Individual Employment Agreement for Vitel Laboratorios, S.A. de C.V. (incorporated by reference to Exhibit 10.4 to registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.41+		Form of Amendment to Employment Agreement for OncBioMune Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.5 to registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.42+		Form of Stock Option for OncBioMune Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.6 to registrant’s current report on Form 8-K filed with the SEC on March 13, 2017).
10.43+		Form of Non-Qualified Stock Option Agreement for Directors for OncBioMune Pharmaceuticals. (incorporated by reference to Exhibit 10.1 to registrant’s current report on Form 8-K filed with the SEC on April 21, 2017).
10.44		Forbearance Agreement by and among OncBioMune Pharmaceuticals, Inc., Cavalry Fund I LP, Lincoln Park Capital Fund, LLC and Puritan Partners LLC dated as of May 23, 2017. (incorporated by reference to Exhibit 10.7 to registrant’s current report on Form 8-K filed with the SEC on June 6, 2017).
10.45*		Form of Securities Purchase Agreement dated January 29, 2018
10.46*		Form of Note issued January 29, 2018
10.47*		Form of Warrant issued January 29, 2018
10.48*		Security Agreement dated January 29, 2018
10.49*		Pledge Agreement dated January 29, 2018
10.50*		Subsidiary Guarantee dated January 29, 2018
10.51*		Form of Securities Purchase Agreement dated March 13, 2018
10.52*		Form of Note issued March 13, 2018
10.53*		Form of Warrant issued March 13, 2018
10.54*		Security Agreement dated March 13, 2018
10.55*		Pledge Agreement dated March 13, 2018
10.56*		Subsidiary Guarantee dated March 13, 2018
21.1*		Subsidiaries of Registrant
31.1*		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
32.1*		Certification of Principal Executive Officer and 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.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: May 31, 2018	By:	/s/ Jonathan F. Head
		Jonathan F. Head, Ph. D. Chief Executive Officer

 

POWER OF ATTORNEY

 

Each person whose signature appears below hereby appoints Jonathan F. Head, Ph. D. and Andrew Kucharchuk as attorneys-in-fact with full power of substitution, severally, to execute in the name and on behalf of the registrant and each such person, individually and in each capacity stated below, one or more amendments to the annual report on Form 10-K, which amendments may make such changes in the report as the attorney-in-fact acting deems appropriate and to file any such amendment to the annual report on Form 10-K with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature		Title		Date
/s/ Jonathan F. Head, Ph. D.		Chief Executive Officer and Director		May 31, 2018
Jonathan F. Head, Ph. D.		(principal executive officer)
/s/ Andrew Kucharchuk		Chief Financial Officer and President		May 31, 2018
Andrew Kucharchuk		(principal financial and accounting officer)
/s/ Daniel S. Hoverman		Director		May 31, 2018
Daniel S. Hoverman
/s/ Charles L. Rice, Jr.		Director		May 31, 2018
Charles L. Rice, Jr.
/s/ Robert N. Holcomb		Director		May 31, 2018
Robert N. Holcomb

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017 and 2016

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - As of December 31, 2017 and 2016	F-3
Consolidated Statements of Operations and Comprehensive Loss- For the Years Ended December 31, 2017 and 2016	F-4
Consolidated Statements of Changes in Stockholders’ Deficit - For the Years Ended December 31, 2017 and 2016	F-5
Consolidated Statements of Cash Flows – For the Years Ended December 31, 2017 and 2016	F-6
Notes to Consolidated Financial Statements	F-7 to F-31

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of:

OncBiomune Pharmaceuticals, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of OncBiomune Pharmaceuticals Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows, for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has a net loss and cash used in operations of $20,513,138 and $2,294,341, respectively, in 2017 and has a working capital deficit, stockholders’ deficit and accumulated deficit of $14,822,020, $14,808,978 and $23,655,989, respectively, at December 31, 2017. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s Plan in regards to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Salberg & Company, P.A.

SALBERG & COMPANY, P.A.

We have served as the Company’s auditor since 2017.

Boca Raton, Florida

May 31, 2018

 

2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431

Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920

www.salbergco.com • info@salbergco.com

Member National Association of Certified Valuation Analysts • Registered with the PCAOB

Member CPAConnect with Affiliated Offices Worldwide • Member Center for Public Company Audit Firms

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		December 31, 2017				December 31, 2016
ASSETS
CURRENT ASSETS:
Cash		$	1,431			$	-
Subscription receivable			-				11,190
Prepaid expenses and other current assets			12,686				30,119
Total Current Assets			14,117				41,309
OTHER ASSETS:
Property and equipment, net			6,642				9,604
Security deposit			6,400				6,400
Total Assets		$	27,159			$	57,313
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Convertible debt, net of discounts		$	686,383			$	54,688
Line of credit			-				99,741
Notes payable			538,875				-
Bank overdraft			-				812
Accounts payable			378,227				213,616
Accrued liabilities			309,312				108,034
Derivative liabilities			11,966,760				402,055
Liabilities of discontinued operations			694,996				-
Due to related parties			261,584				5,000
Total Current Liabilities			14,836,137				883,946
Commitments and contingencies (Note 8)
STOCKHOLDERS’ DEFICIT:
Preferred stock, $0.0001 par value; 20,000,000 designated;
Series A Preferred stock ($0.0001 par value; 1,000,000 shares designated; 1,000,000 issued and outstanding at December 31, 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 December 31, 2017 and December 31, 2016, respectively)			789				-
Common stock: $.0001 par value, 500,000,000 shares authorized; 170,336,237 and 60,807,846 issued and outstanding at December 31, 2017 and December 31, 2016, respectively			17,034				6,081
Additional paid-in capital			8,803,904				2,310,037
Accumulated deficit			(23,655,989	)			(3,142,851	)
Accumulated other comprehensive gain			25,184				-
Total Stockholders’ Deficit			(14,808,978	)			(826,633	)
Total Liabilities and Stockholders’ Deficit		$	27,159			$	57,313

 

See accompanying notes to consolidated financial statements.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

		For the Year Ended
		December 31,
		2017				2016
REVENUES		$	-			$	-
OPERATING EXPENSES:
Professional fees			1,367,191				817,014
Compensation expense			766,829				678,436
Research and development expense			103,915				94,383
General and administrative expenses			225,191				214,212
Total Operating Expenses			2,463,126				1,804,045
LOSS FROM OPERATIONS			(2,463,126	)			(1,804,045	)
OTHER INCOME (EXPENSE):
Interest expense			(1,153,146	)			(108,071	)
Derivative expense			(12,238,036	)			(146,141	)
Debt settlement income, net of settlement expense			1,005,272				44,625
Total Other Income (Expense)			(12,385,910	)			(209,587	)
LOSS FROM CONTINUING OPERATIONS			(14,849,036	)			(2,013,632	)
DISCONTINUED OPERATIONS:
Loss from discontinued operations			(5,328,630	)			-
Loss from disposal of discontinued operations			(335,472	)			-
Total Loss from Discontinued Operations			(5,664,102	)			-
NET LOSS		$	(20,513,138	)		$	(2,013,632	)
COMPREHENSIVE LOSS:
Net loss		$	(20,513,138	)		$	(2,013,632	)
Other comprehensive gain:
Unrealized foreign currency translation gain			25,184				-
Comprehensive loss		$	(20,487,954	)		$	(2,013,632	)
NET LOSS PER COMMON SHARE - Basic and Diluted:
Continuing operations - Basic and diluted		$	(0.12	)		$	(0.03	)
Discontinued operations - basic and diluted			(0.04	)			-
		$	(0.16	)		$	(0.03	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted			128,916,989				58,305,875

 

See accompanying notes to consolidated financial statements.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2017 and 2016

 

		Series A								Series B																								Accumulated				Total
		Preferred Stock								Preferred Stock								Common Stock								Additional								other				Stockholders’
		# of Shares				Amount				# of Shares				Amount				# of Shares				Amount				Paid-in Capital				Accumulated Deficit				comprehensive gain				Equity (Deficit)
Balance, December 31, 2015			1,000,000			$	100.00				-			$	-				57,107,809			$	5,711			$	1,678,789			$	(1,129,219	)		$	-			$	555,381
Common stock issued for services			-				-				-				-				260,000				26				85,974				-				-				86,000
Shares issued for cash pursuant to stock purchase agreement																			1,400,000				140				202,900				-				-				203,040
Shares issued for cash and subscription receivable pursuant to subscription agreements			-				-				-				-				2,040,037				204				342,374				-				-				342,578
Net loss			-				-				-				-				-				-				-				(2,013,632	)			-				(2,013,632	)
Balance, December 31, 2016			1,000,000				100				-				-				60,807,846				6,081				2,310,037				(3,142,851	)			-				(826,633	)
Common stock issued for services			-				-				-				-				470,000				47				35,803				-				-				35,850
Accretion of stock options			-				-				-				-				-				-				214,082				-				-				214,082
Series B preferred stock issued for services			-				-				2,892,000				289				-				-				-				-				-				289
Shares issued for cash pursuant to stock purchase agreement			-				-				-				-				2,000,000				200				407,587				-				-				407,787
Shares issued for cash and subscription receivable pursuant to subscription agreements			-				-				-				-				25,744,401				2,574				831,322				-				-				833,896
Shares issued upon conversion of convertible debt and interest			-				-				-				-				10,608,890				1,061				424,811				-				-				425,872
Shares issued upon cashless warrant exercise			-				-				-				-				9,547,087				955				(955	)			-				-				-
Shares issued in connection with acquisition			-				-				5,000,000				500				61,158,013				6,116				4,580,735				-				-				4,587,351
Capital contribution			-				-				-				-				-				-				482				-				-				482
Net loss			-				-				-				-				-				-				-				(20,513,138	)							(20,513,138	)
Foreign currency translation adjustment			-				-				-				-				-				-				-				-				25,184				25,184
Balance, December 31, 2017			1,000,000			$	100				7,892,000			$	789				170,336,237			$	17,034			$	8,803,904			$	(23,655,989	)		$	25,184			$	(14,808,978	)

 

See accompanying notes to consolidated financial statements.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For The Year Ended
		December 31,
		2017				2016
CASH FLOWS USD IN OPERATING ACTIVITIES
Net loss		$	(20,513,138	)		$	(2,013,632	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			3,677				1,098
Depreciation - discontinued operations			258				-
Stock-based compensation			250,221				89,825
Amortization of debt discount			708,167				94,688
Derivative expense			12,238,036				146,141
Gain of extinguishment of debt			-				(65,047	)
Non-cash default interest expense			269,218				-
Debt settlement income			(1,005,273	)			-
Bad debt expense			-				2,244
Impairment loss - discontinued operations and disposal of discontinued operations			5,096,118				-
Change in operating assets and liabilities:
Assets of discontinued operations			(20,439	)			-
Due from related parties			-				15,556
Prepaid expenses and other current assets			5,394				324
Accounts payable			164,611				111,343
Liabilities of discontinued operations			273,009				-
Accrued liabilities			235,800				73,457
NET CASH USED IN OPERATING ACTIVITIES			(2,294,341	)			(1,544,003	)
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment			(715	)			-
Acquisition of property and equipment - discontinued operations			(1,223	)			-
Acquisition of intangible assets			(50,000	)			-
Decrease in cash upon disposal of business			(7,696	)			-
Cash received in acquisition			39,144				-
NET CASH USED IN INVESTING ACTIVITIES			(20,490	)			-
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party advances			256,584				56,000
Payments of related party advances			-				(51,000	)
Increase/(decrease) in bank overdraft			(812	)			812
Proceeds from line of credit			-				56,165
Payments to line of credit			(99,741	)			(6,132	)
Proceeds from convertible debt, net			473,240				390,000
Repayment of convertible debt			(96,371	)			(40,000	)
Debt issue costs paid			-				(69,039	)
Proceeds from notes payables			538,875				-
Capital contribution			482				-
Proceeds from sale of common stock and subscription receivables			1,252,673				534,428
NET CASH PROVIDED BY FINANCING ACTIVITIES			2,324,930				871,234
NET INCREASE (DECREASE) IN CASH			10,099				(672,769	)
Effect of exchange rate changes on cash			(8,668	)			-
CASH, beginning of year			-				672,769
CASH, end of year		$	1,431			$	-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	314,517			$	9,243
Income taxes		$	-			$	-
Non-cash investing and financing activities:
Issuance of common stock for convertible debt and interest		$	425,872			$	-
Issuance of common stock recorded as prepaid expenses		$	-			$	68,000
Increase in prepaid expenses and accrued liabilities		$	-			$	15,300
Reclassification of interest payable to convertible debt		$	17,836			$	-
Sale of common stock for subscription receivable		$	-			$	11,190
Increase in debt discount and derivative liabilities		$	473,240			$	320,961
Issuance of common stock for services		$	-			$	-
Liabilities assumed in acquisition		$	438,578			$	-
Less: assets acquired in acquisition			307,112				-
Net liabilities assumed			131,466				-
Fair value of shares for acquisition			4,587,351				-
Increase in intangible assets		$	4,718,817			$	-

 

See accompanying notes to consolidated financial statements.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

 

Organization

 

OncBioMune Pharmaceuticals, Inc. (the “Company,” “we,” “us” or “our”) is a biotechnology company specializing in innovative cancer treatment therapies. The Company has proprietary rights to a breast and prostate patent vaccine, as well as a process for the growth of cancer tumors. The Company’s mission is to improve the overall patient condition through innovative bio immunotherapy with proven treatment protocols, to lower deaths associated with cancer and reduce the cost of cancer treatment. The Company’s technology is safe, and utilizes clinically proven research methods of treatment to provide optimal success of patient recovery.

 

On August 19, 2016, the Company and Vitel Laboratorios, S.A. de C.V., a Mexican variable stock corporation (“Vitel”) entered into a Shareholders’ Agreement related to the launch of Oncbiomune México, S.A. De C.V. (“Oncbiomune Mexico”) for the purposes of developing and commercializing the Company’s PROSCAVAX vaccine technology and cancer technologies in México, Central and Latin America (“MALA”). Under the terms of the Shareholders Agreement, the Company agreed to assign to Oncbiomune Mexico limited patent and intellectual property rights and trademarks related to its OVCAVAX, PROSCAVAX vaccine technology and cancer technologies and future developments related to these technologies. Through March 10, 2017, the Company and Vitel each owned 50% of Oncbiomune Mexico and Oncbiomune Mexico was treated as an equity-method investee for accounting purposes. Oncbiomune Mexico had minimal activity in 2016 and through March 10, 2017. On March 10, 2017, Oncbiomune Mexico became a wholly owned subsidiary of the Company.

 

On March 10, 2017 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding capital stock of Vitel from its shareholders Manuel Cosme Odabachian and Carlos Fernando Alaman Volnie (collectively, the “Vitel Stockholders”) pursuant to the terms and conditions of a Contribution Agreement to the Property of Trust F/2868 entered into among the Company and the Vitel Stockholders on the Closing Date (the “Contribution Agreement”). Vitel is a revenue-stage Mexico-based pharmaceutical company that sells generic drugs in MALA. The Company acquired Vitel for the purpose of commercializing the Company’s PROSCAVAX vaccine technology and cancer technologies in MALA and to utilize Vitel’s distribution network and customer and industry relationships.

 

On December 29, 2017, the Board of Directors of the Company determined to sell or otherwise dispose of its interest in Vitel and Oncbiomune México due to disputes with the original Vitel Stockholders and resulting loss of operational control of the assets and operations of Vitel and OncBiomune Mexico. Accordingly, the Vitel and Oncbiomune México are now treated as a discontinued operation (See Note 3).

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principals of consolidation

 

The Company’s consolidated financial statements include the financial statements of OncBioMune Pharmaceuticals, Inc. and its wholly-owned subsidiaries, OncBioMune, Inc., Vitel and Oncbiomune México, S.A. De C.V.. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Going concern

 

These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying consolidated financial statements, the Company had a net loss of $20,513,138 and $2,013,632 for the years ended December 31, 2017 and 2016, respectively. The net cash used in operations were $2,294,341 and $1,544,003 for the years ended December 31, 2017 and 2016, respectively. Additionally, the Company had an accumulated deficit of $23,655,989 and $3,142,851, at December 31, 2017 and 2016, respectively, had a stockholders’ deficit of $14,808,978 at December 31, 2017, had a working capital deficit of $14,822,020 at December 31, 2017, had no revenues from continuing operations for the years ended December 31, 2017 and 2016, and has defaulted on its debt. Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance date of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. Management believes that our capital resources are not currently adequate to continue operating and maintaining its business strategy for the fiscal year ending December 31, 2017. The Company will seek to raise capital through additional debt and/or equity financings to fund its operations in the future.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Although the Company has historically raised capital from sales of equity and from the issuance of promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail or cease operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Use of estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates during the years ended December 31, 2017 and 2016 include the valuation of assets and liabilities of discontinued operations, useful life of property and equipment, assumptions used in assessing impairment of long-term assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in the business acquisition.

 

Concentrations

 

Generally, the Company relies on one vendor as a single source of raw materials to produce certain components of its cancer treatment products. The Company believes that other vendors are available to supply these materials if the Company cannot obtain these materials from its single source vendor.

 

Fair value of financial instruments and fair value measurements

 

FASB ASC 820 — Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on December 31, 2017. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

 

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

 

The carrying amounts reported in the consolidated balance sheets for cash, due from and to related parties, prepaid expenses, line of credit payable, accounts payable and accrued liabilities, approximate their fair market value based on the short-term maturity of these instruments.

 

At December 31, 2017

At December 31, 2016

Description

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

Derivative liabilities

—

—

11,966,760

—

—

402,055

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

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

 

		For the Year ended December 31, 2017				For the Year ended December 31, 2016
Balance at beginning of year		$	402,055			$	-
Initial valuation of derivative liabilities included in debt discount			473,240				320,961
Initial valuation of derivative liabilities included in derivative expense			730,700				260,479
Reclassification of derivative liabilities to debt settlement income			(478,645	)			(65,047	)
Reclassification of derivative liabilities to debt settlement income upon cashless exercise of warrants			(667,926	)			-
Change in fair value included in derivative expense			11,507,336				(114,338	)
Balance at end of year		$	11,966,760			$	402,055

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Cash and cash equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. At December 31, 2017 and 2016, the Company did not have any cash equivalents.

 

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of December 31, 2017 and 2016. The Company has not experienced any losses in such accounts through December 31, 2017.

 

Accounts receivable – discontinued operations

 

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

 

Inventories – discontinued operations

 

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

 

Property and equipment

 

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

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Impairment of long-lived assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. Based on the Company’s review of long-lived assets for impairment, in the third quarter of 2017, the Company recognized a goodwill and intangible assets impairment loss of $4,760,646 since the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The impairment loss includes an impairment of goodwill and intangibles of $4,718,817 recorded in connection with the acquisition of Vitel (see Note 3).

 

Derivative liabilities

 

The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to income or expense as part of gain or loss on extinguishment.

 

Revenue recognition – discontinued operations

 

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

 

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

 

Income taxes

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

On December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent. The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of December 31, 2017, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Research and development

 

Research and development costs incurred in the development of the Company’s products are expensed as incurred. For the years ended December 31, 2017 and 2016, research and development costs were $103,915 and $94,383, respectively, and are included in operating expenses on the accompanying consolidated statements of operations.

 

Stock-based compensation

 

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

 

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

 

Basic and diluted loss per share

 

Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method). These common stock equivalents may be dilutive in the future. All potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

		December 31, 2017				December 31, 2016
Stock warrants			153,151,959				3,304,872
Convertible debt			140,126,333				2,333,333
Stock options			4,000,000				-

 

The following table presents a reconciliation of basic and diluted net loss per share:

 

		Years Ended December 31,
		2017				2016
Net loss for basic and diluted attributable to common shareholders		$	(20,513,138	)		$	(2,013,632	)
From continuing operations			(14,849,036	)			(2,013,632	)
From discontinued operations		$	(5,664,102	)		$	-
Weighted average common stock outstanding– basic and diluted			128,916,989				58,305,875
Net loss per share of common stock
From continuing operations – basic and diluted		$	(0.12	)		$	(0.03	)
From discontinued operations – basic and diluted			(0.04	)			-
Net loss per common share - basic and diluted		$	(0.16	)		$	(0.03	)

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Foreign currency translation

 

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

 

Asset and liability accounts at December 31, 2017 were translated at 19.6708 Pesos to $1.00, which was the exchange rates on the balance sheet date. Equity accounts were translated at their historical rate. The average translation rates applied to the statements of operations for the year ended December 31, 2017 was 18.4971 Pesos to $1.00. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.

 

Related parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.

 

Recent accounting pronouncements

 

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

 

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

 

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

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

NOTE 3 – ACQUISITION OF AND DISCONTINUED OPERATIONS OF VITEL AND ONCBIOMUNE MEXICO

 

On March 10, 2017 (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding capital stock of Vitel from the Vitel Stockholders pursuant to the terms and conditions of a Contribution Agreement to the Property of Trust F/2868 entered into among the Company and the Vitel Stockholders on the Closing Date (the “Contribution Agreement”). Vitel is a revenue-stage Mexico-based pharmaceutical company that develops and commercializes specialty drugs in MALA. The Company acquired Vitel for the purpose of commercializing the Company’s PROSCAVAX vaccine technology and cancer technologies in MALA and to utilize Vitel’s distribution network and customer and industry relationships.

 

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

 

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

 

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

 

The Stockholders Agreement

 

The following is a summary of Stockholders Agreement.

 

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

 

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

 

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

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

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

 

Cash		$	39,144
Accounts receivable			161,466
Inventories			54,952
Recoverable taxes			50,792
Other current assets			278
Property and equipment			480
Goodwill and other intangible assets			4,718,817
Total assets acquired at fair value			5,025,929
Accounts payable and accrued expenses			432,354
Payroll taxes			6,224
Total liabilities assumed			438,578
Total purchase consideration		$	4,587,351

 

The assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition date with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business combination date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the purchase price measurement period, the Company recorded adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments were determined. Such adjustment caused an increase in goodwill and other intangible assets acquired of $23,221 in the fourth quarter of 2017.

 

The purchase price exceeded the fair value of the net assets acquired by $4,718,817 which was recorded as goodwill and other intangible assets. Based on the Company’s review of long-lived assets for impairment, the Company recognized an impairment loss of $4,718,817 during the three months ended September 30, 2017 since the sum of expected undiscounted future cash flows is less than the carrying amount of the intangible assets.

 

The Company recorded acquisition and transaction related expenses in the period in which they are incurred. During the year ended December 31, 2017, acquisition and transaction related expenses primarily consisted of legal fees of approximately $104,000.

 

On December 29, 2017, the Board of Directors of the Company determined to sell or otherwise dispose of its interest in Vitel and Oncbiomune Mexico due to disputes with the original Vitel Stockholders and resulting loss of operational control of the assets and operations of Vitel and OncBiomune Mexico. Accordingly, Vitel and Oncbiomune Mexico are now treated as a discontinued operation for all periods presented in accordance with ASC 205-20. This decision will enable the company to focus more of its efforts and resources on the Phase 2 clinical trial of Proscavax in the United States.

 

Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the business of the Oncbiomune Mexico and Vitel are now considered discontinued operations because of management’s decision of December 29, 2017.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

The assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2017 and 2016 is set forth below.

 

		December 31, 2017				December 31, 2016
Assets:
Current assets:
Cash		$	-				-
Total current assets			-				-
Total assets		$	-			$	-
Liabilities:
Current liabilities:
Accounts payable		$	692,592			$	-
Due to related parties			432				-
Payroll liabilities			1,972				-
Total current liabilities			694,996				-
Total liabilities		$	694,996			$	-

 

The summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is as follows:

 

		Years Ended December 31,
		2017				2016
Revenues		$	445,601			$	-
Cost of revenues			255,866				-
Gross (loss) profit			189,735				-
Operating expenses:
Compensation expense			335,381				-
Professional fees			171,043				-
Impairment loss – goodwill and other intangibles			4,760,646				-
General and administrative expenses			235,188				-
Total operating expenses			5,502,258				-
Loss from operations			(5,312,523	)			-
Other expense, net			(16,107	)			-
Loss from discontinued operations			(5,328,630	)			-
Loss from disposal of discontinued operations – impairment of tangible assets			(335,472	)			-
Loss from discontinued operations, net of income taxes		$	(5,664,102	)		$	-

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

At December 31, 2017 and 2016, property and equipment consisted of the following:

 

		Useful Life		2017				2016
Leasehold improvements		5 Years		$	23,976			$	23,976
Furniture and equipment					715				-
					24,691				23,976
Less: accumulated depreciation					(18,049	)			(14,372	)
Property and equipment, net				$	6,642			$	9,604

 

For the years ended December 31, 2017 and 2016, depreciation and amortization expense amounted to $3,677 and $1,098, respectively.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

NOTE 5 – LINE OF CREDIT

 

In October 2014, the Company entered into a $100,000 revolving promissory note (the “Revolving Note”) with Regions Bank (the “Lender”). The unpaid principal balance of the Revolving Note is payable on demand and any unpaid principal and interest is payable due not later than October 27, 2017, is secured by deposits located at the Lender, and bears interest computed at a variable rate of interest which is equal to the Lender’s prime rate plus 1.7% (5.95% and 5.45% at December 31, 2017 and December 31, 2016, respectively). The Company will pay to Lender a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after its due date. The Company may, at any time or from time to time, prepay the Revolving Note in whole or in part without penalty. On November 16, 2017 the line of credit was fully paid off by the Company’s CEO and the liability was transferred to due to related parties on the accompanying consolidated balance sheets.

 

At December 31, 2017 and 2016, the Company had $0 and $99,741, respectively, in borrowings outstanding under the Revolving Note with $0 and $259, respectively, available for borrowing under such note. The weighted average interest rate during the years ended December 31, 2017 and 2016 was approximately 5.76% and 5.20%, respectively.

 

NOTE 6 – CONVERTIBLE DEBT

 

May 2016 Financing

 

On May 23, 2016, the Company entered into a $40,000 convertible promissory note (the “Convertible Note”) with Crown Bridge Partners, LLC (“Crown”). The unpaid principal and interest was payable no later than May 22, 2017 and bears interest computed at a rate of interest which is equal to 8.0% per annum. Crown was entitled, at their option, at any time after the issuance of the Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock at a conversion price equal to 58% multiplied by the “Market Price”, which is calculated as the lowest trading price, as defined, for the Company’s common stock during the twenty trading day period ending on the last complete trading day prior to the conversion date. The Company may prepay any amount outstanding under the Convertible Note by making a payment to Crown of an amount in cash equal to the principal amount multiplied by a prepayment penalty percentage. On November 23, 2016, the Company repaid this Convertible Note by paying the principal amount outstanding of $40,000, all accrued interest due, and a prepayment penalty aggregating $62,000. In connection with the repayment of this Convertible Note, the Company recorded a gain from extinguishment of debt of $44,625.

 

November 2016 Financing

 

On November 23, 2016, the Company entered into and closed on the transaction set forth in an Amended and Restated Securities Purchase Agreements (the “Securities Purchase Agreements”) it entered into with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $350,000: (i) 14.29% Original Issue Discount 10% Senior Secured Convertible Notes (the “November 2016 Notes”); and (ii) warrants (the “Warrants”) to purchase 2,333,334 shares of the Company’s common stock at an initial exercise price of $0.175 (subject to adjustments under certain conditions as defined in the Warrants) (see below for reduction of warrant exercise price) which are exercisable for a period of five years from November 23, 2016. The aggregate principal amount of the November 2016 Notes was $350,000 and the Company received $300,000 after giving effect to the original issue discount of $50,000. The November 2016 Notes bear interest at a rate equal to 10% per annum (which interest rate increased to 24% per annum upon the occurrence of an Event of Default (as defined in the November 2016 Notes)), had a maturity date of July 23, 2017 and were convertible (principal, and interest) at any time after the issuance date of the November 2016 Notes into shares of the Company’s Common Stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the Note) (see below for reduction of conversion price), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the November 2016 Notes shall be convertible and the Warrants shall be exercisable at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The November 2016 Notes provide for two amortization payments on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 120% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 125% of the applicable amortization payment. Due to non-payment of the November 2016 Notes, an event of default occurred and accordingly, the November 2016 Notes and Warrants are convertible and exercisable based on the default terms.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

On May 23, 2017, in connection with the November 2016 Notes, the Company entered into forbearance agreements (the “Forbearance Agreements”) with the Purchases whereby the Purchasers waived any event of default, as defined in the November 2016 Notes. The Company failed to make a payment on May 23, 2017 to each of the Holders as required pursuant to the November 2016 Notes which resulted in an event of default under such Notes. As of result of the event of default, the aggregate amount owing under the November 2016 Notes as of May 23, 2017 was increased to $509,135 with such amount including a mandatory default amount of $141,299 and accrued interest of $17,836 resulting in debt settlement expense of $141,299. The Forbearance Agreement also provides for the Holders to forbear their right to demand an immediate cash payment of the principal amount due plus accrued interest as a result of the Company’s failure to satisfy its payment obligations to the Holder on May 23, 2017 so long as the Company complies with its other obligations under the November 2016 Notes and the other transaction documents. The Forbearance Agreements did not waive the default interest rate of 24%. In consideration therefore, and as currently set forth in the November 2016 Notes, the Holders shall be entitled to convert such notes from time to time at their discretion in accordance with the terms of the November 2016 Notes and the November 2016 Notes shall not be subject to repayment unless agreed to by the Holder of such Note. In connection with the Forbearance Agreement, the Company increased the principal balance of the November 2016 Notes by $159,135, reduced accrued interest payable by $17,836, and recorded debt settlement expense of $141,299.

 

The Company also increased the principal amount of these notes by $42,327 for other default charges and other expenses. This amount was charges to interest expense on the accompanying consolidated statement of operations.

 

The November 2016 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these November 2016 Notes, the Company sold stock at a share price of $0.075 per share then to $0.05 per share and then $0.01 per share. Accordingly, pursuant to these ratchet provisions, the conversion price on the November 2016 Notes were lowered to $0.05 per share then to $0.03 per share and then to $0.006 per share and the exercise price of the November 2016 Warrants was lowered to $0.006. Additionally, the total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants to 13,611,114 warrants (see Note 9). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless exercise of 9,074,076 of these warrants (see Note 9). The remaining 4,537,038 warrants were then ratcheted to 22,685,192 warrants based on the new ratcheted down $0.006 per share exercise price.

 

June 2017 Financing

 

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

 

The aggregate principal amount of the June 2017 Notes is $233,345 and the Company received $200,000 after giving effect to the original issue discount of $33,345. The June 2017 Notes bear interest at a rate equal to 10% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the June 2017 Notes), have a maturity date of February 2, 2018 and are convertible (principal, and interest) at any time after the issuance date of issuance into shares of the Company’s common stock at an initial conversion price equal to $0.15 per share (subject to adjustment as provided in the June 2017 Notes), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the June 2017 Note shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the common stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”). The June 2017 Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 120% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 125% of the applicable amortization payment.

 

The June 2017 Notes may be prepaid at any time until the 180th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date through the three months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the June 2017 Notes and accrued and unpaid interest during months four through six following the Original Issue Date. In order to prepay the June 2017 Notes, the Company shall provide 20 Trading Days prior written notice to the Holder, during which time the Holder may convert the June 2017 Notes in whole or in part at the Conversion Price.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

The June 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June 2017 Notes, the Company sold stock at a share price of $0.05 per share and then $.01 per share. Accordingly, pursuant to these ratchet provisions, the conversion price of the notes were lowered to $0.006 per shares and the exercise price of the June 2017 Warrants were lowered to $0.006 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from 1,555,632 warrants to 45,372,600 warrants, an increase of 43,816,968 warrants (see Note 9).

 

July 2017 Financing

 

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

 

The July 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these July 2017 Notes, the Company sold stock at a share price of $0.05 per share and then at $0.01 per share. Accordingly, pursuant to these ratchet provisions, the conversion price of the notes were lowered to $0.006 per share and the exercise price of the July 2017 Warrants were lowered to $0.006 per share and the total number of July 2017 Warrants were increased on a full ratchet basis from 4,769,763 warrants to 79,496,050 warrants, an increase of 74,726,287 warrants (see Note 9).

 

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

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

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

 

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

 

From May 2017 to December, 2017, the Company issued 10,608,890 shares of its common stock upon the conversion of principal note balances of $408,454 and interest of $17,418.

 

Derivative liabilities pursuant to Notes and Warrants

 

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

 

In connection with the issuance of the November 2016 Notes and Warrants in November 2016, on the initial measurement date, the fair values of the embedded conversion option derivative and warrant derivative of $581,440 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Convertible Note of $36,000 and the Notes of $284,961, with the remainder of $260,479 charged to current period operations as initial derivative expense. In connection with the issuance of June 2017 and July 2017 Notes and Warrants, on the initial measurement date of the June 2017 and July 2017 Notes and Warrants, the fair values of the embedded conversion option and warrant derivatives of $1,203,940 was recorded as derivative liabilities, $730,700 was charged to current period operations as initial derivative expense, and $473,240 was recorded as a debt discount and was amortized into interest expense over the term of the Notes.

 

At the end of the period, the Company revalued the embedded conversion option and warrant derivative liabilities. In connection with these revaluations and the initial derivative expense, the Company recorded derivative expense of $12,238,036 and $146,141 for the year ended December 31, 2017 and 2016, respectively.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

During the year ended December 31, 2017 and 2016, the fair value of the derivative liabilities was estimated using the Binomial valuation model with the following assumptions:

 

		2017				2016
Dividend rate			0				0
Term (in years)			0.01 to 5.00 years				0.58 to 5.0 years
Volatility			127.8% to 189.8	%			190.7% to 210.8	%
Risk-free interest rate			1.03% to 2.20	%			0.63% to 1.83	%

 

At December 31, 2017 and December 31, 2016, the convertible debt consisted of the following:

 

		December 31, 2017				December 31, 2016
Principal amount		$	840,757			$	350,000
Less: unamortized debt discount			(154,374	)			(295,312	)
Convertible note payable, net		$	686,383			$	54,688

 

For the year ended December 31, 2017 and 2016, amortization of debt discounts related to this Convertible Note and the Notes amounted to $708,167 and $94,688, respectively, which has been included in interest expense on the accompanying consolidated statements of operations. The weighted average interest rate during the years ended December 31, 2017 and 2016 was approximately 15.4% and 9.0%, respectively.

 

NOTE 7 – LOANS PAYABLE

 

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

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

Due to related parties

 

From time to time, the Company receives advances from and repays such advances to the Company’s chief executive officer and chief financial officer for working capital purposes. Additionally, from time to time, the Company receives working capital advances from and made working capital advances to The Sallie Astor Burdine Breast Foundation (the “Foundation”), a not-for-profit foundation where the Company’s chief executive officer was a Board member until March 17, 2017. Furthermore, from time to time, Vitel’s General Manager of Global Operations and Vitel’s Chief Operations Officer, both of who are beneficial shareholders of the Company (together referred to as the Vitel Officers), paid expenses on behalf of the Company and the Company reimburses the Vitel Officers or these expenses. The advances are non-interest bearing and are payable on demand.

 

For the year ended December 31, 2017 and 2016, due to related party activity consisted of the following:

 

		Foundation				CEO				CFO				Vitel Officers				Total
Balance due from (to) related parties at December 31, 2015		$	3,200			$	5,900			$	8,700			$	-			$	17,800
Working capital advances made			5,094				-				3,795				-				8,889
Working capital advances received			-				(55,500	)			-				-				(55,500	)
Repayments made			-				50,500				-				-				50,500
Amounts deemed uncollectible and expensed			(2,244	)			-				-				-				(2,244	)
Repayments received			(6,050	)			(5,900	)			(12,495	)			-				(24,445	)
Balance due to related parties at December 31, 2016			-				(5,000	)			-				-				(5,000	)
Working capital advances received			-				(161,602	)			-				(6,444	)			(168,046	)
Repayments made			-				7,250				-				6,444				13,694
Payments made on line of credit on the Company’s behalf			-				(102,232	)			-				-				(102,232	)
Balance due to related parties at December 31, 2017		$	-			$	(261,584	)		$	-			$	-			$	(261,584	)

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Other

 

During the year ended December 31, 2017, the Company owed amounts to a company owned by the Vitel Officers for consulting services performed prior to March 10, 2017, the acquisition date of Vitel. In connection with the balances owed, during the period from March 10, 2017 (the acquisition date) to December 31, 2017, the Company paid interest expense of $6,078 to this company which was reclassified to loss from discontinued operations on the accompanying consolidated statements of operations and repaid all amounts due of $10,563. At December 31, 2017, the Company did not owe any balances to this company. Additionally, during the year ended December 31 2017, the Company paid $23,000 and $8,599 to this company owned by the Vitel Officers for consulting fees and for administrative fees, respectively which were reclassified to loss from discontinued operations on the accompanying consolidated statements of operations.

 

NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT)

 

On August 12, 2015, the Company filed amended and restated Articles of Incorporation with the Nevada Secretary of State to authorize 520,000,000 shares of capital stock, of which 500,000,000 shares are common stock, with a par value of $0.0001 per share (“Common Stock”), and 20,000,000 shares are preferred stock, with a par value of $0.0001 per share (“Preferred Stock”).

 

Series A Preferred Stock

 

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

 

The holders of Series A Preferred Stock shall have no special voting rights and their consent is not required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. On December 31, 2017 and 2016, there were 1,000,000 shares of the Company’s Series A Preferred Stock outstanding. Of these shares, 500,000 are held by our Chief Executive Officer and 500,000 shares are held by a former member of our Board of Directors.

 

Series B Preferred Stock

 

On March 7, 2017, the Company filed a certificate of designation, preferences and rights of Series B preferred stock (the “Certificate of Designation”) with the Secretary of State of the State of Nevada to designate 7,892,000 shares of its previously authorized preferred stock as Series B preferred stock, par value $0.0001 per share and a stated value of $0.0001 per share. The Certificate of Designation and its filing was approved by the Company’s board of directors without shareholder approval as provided for in the Company’s articles of incorporation and under Nevada law. The holders of shares of Series B preferred stock are entitled to dividends or distributions share for share with the holders of the Common Stock, if, as and when declared from time to time by the Board of Directors. The holders of shares of Series B preferred stock have the following voting rights:

 

	●	Each share of Series B preferred stock entitles the holder to 100 votes on all matters submitted to a vote of the Company’s stockholders.
	●	Except as otherwise provided in the Certificate of Designation, the holders of Series B preferred stock, the holders of Company common stock and the holders of shares of any other Company capital stock having general voting rights and shall vote together as one class on all matters submitted to a vote of the Company’s stockholders; and
	●	Commencing at any time after the date of issuance of any shares of the Series B Preferred Stock (the “Issuance Date”) and upon the earliest of the occurrence of (i) a holder of the Series B Preferred Stock owning, directly or indirectly as a beneficiary or otherwise, shares of Common Stock which are less than 5.0% of the total outstanding shares of Common Stock, (ii) the date a holder of the Series B Preferred Stock is no longer an employee of the Company or any of its subsidiaries or (iii) five years after the Issuance Date, the Company shall have the right to redeem all of the then outstanding Series B Preferred Stock held by such holder at a price equal to the Stated Value (the “Redemption Price”). The Series B Preferred Stock which is redeemed as provided for in the Certificate of Designations shall be returned to the Company (and, if not so returned, shall automatically be deemed canceled). The Redemption Price shall be mailed to such holder at the holder’s address of record, and the Series B Preferred Stock owned by such holder shall be canceled.

 

In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding-up of the Corporation, the holders of the Series B Preferred Stock shall be entitled to receive, share for share with the holders of shares of Common Stock and Series A Preferred Stock, all the assets of the Corporation of whatever kind available for distribution to stockholders, after the rights of the holders of the Series A Preferred Stock have been satisfied.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

In March 2017, the Company issued 2,892,000 shares of Series B Preferred to Jonathan F. Head, Ph. D, the Company’s Chief Executive Officer and a member of the Board of Directors of the Company as provided for in the Contribution Agreement. The Series B preferred stock issued to Dr. Head and were determined to have nominal value of $289, or $.0001 per shares, and was recorded as compensation expense. In addition, in March 2017 the Company issued 5,000,000 shares of Series B Preferred to Banco Actinver for the benefit of the Vitel Stockholders as partial consideration in the exchange for 100% of the issued and outstanding capital stock of Vitel. (See Note 3). The 5,000,000 shares of Series B preferred stock primarily gives the holder voting rights and were determined to have nominal value of $500, or $.0001 per shares. As of December 31, 2017, there are 7,892,000 shares of Series B Preferred issued and outstanding.

 

Common stock issued for services

 

On January 1, 2016, the Company issued 60,000 vested shares of common stock valued at $.30 per common share or $18,000 to a director for services to be rendered on the Company’s board of directors. The shares were valued at the most recent cash price paid of $.30 per share. In connection with these shares, the Company recorded stock-based compensation of $18,000.

 

On May 13, 2016, the Company entered into a six-month consulting agreement for business development services, Pursuant to the agreement, the Company shall pay the consultant a monthly fee of $4,000 beginning on May 15, 2016 and, thereafter, on the fifteenth day of each month. In addition, the Company issued the consultant and/or its affiliates 200,000 shares of the Company’s common stock. The common shares were valued at the most recent quoted trading price of $0.34 per share or $68,000. In connection with these shares, the Company recorded stock-based consulting expense of $68,000 which was amortized over the service period. If the Company chooses to extend the agreement, the Company shall pay the consultant a monthly fee of $7,500 beginning on November 15, 2016 and, thereafter, on the first of each month and the Company shall issue to the consultant 100,000 Shares of the Company’s common stock. Beginning November 2016, the Company negotiated the monthly cash fee to $5,000 per month and is currently negotiating the number shares issuable. As of December 31, 2017 ads 2016, the shares had not been issued and the Company valued such shares issuable on the grant date of November 15, 2016 based on the quoted fair market value of shares issuable of $0.153 per common share and recorded consulting fees of $15,300 and accrued liabilities of $15,300.

 

On February 27, 2017, the Company issued 150,000 shares of its unregistered common stock to an employee as a bonus for services to the Company. The shares were valued at the most recent cash price paid of $0.075 per share. In connection with these shares, the Company recorded stock-based compensation of $11,250.

 

On April 13, 2017, the Company issued 20,000 shares of its unregistered common stock to a consultant for business development services performed. The shares were valued at the most recent cash price paid of $0.075 per share. In connection with these shares, the Company recorded stock-based compensation of $1,500.

 

On July 5, 2017, the Company issued 300,000 shares of its unregistered common stock to a consultant for business development services performed. The shares were valued at the quoted trading price on the date of grant of $0.077 per share. In connection with these shares, the Company recorded stock-based consulting fees of $23,100.

 

Common stock issued for acquisition

 

On March 10, 2017, pursuant to the terms of the Contribution Agreement, the Company issued 61,158,013 shares of its unregistered common stock to Banco Actinver, S.A., in its capacity as Trustee (the “Trustee”) of the Irrevocable Management Trust Agreement Trust No. 2868 (the “Trust Agreement”) for the benefit of the Vitel Stockholders in exchange for 100% of the issued and outstanding capital stock of Vitel (See Note 3). The 61,158,013 shares of common stock were valued at $4,586,851, based on the acquisition-date fair value of our common stock of $0.075 per share based on recent sales of the Company’s common stock pursuant to unit subscription agreements.

 

Common stock purchase agreement

 

On October 20, 2015, the Company entered into a common stock purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to, and Lincoln Park is obligated to purchase, up to $10.1 million in amounts of shares, as described below, of the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing on the date that a registration statement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed which occurred on December 15, 2015. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 100,000 shares of Common Stock on any business day (such purchases, “Regular Purchases”), provided that at least one business day has passed since the most recent purchase, and provided, however that Lincoln Park’s committed obligation under any single Regular Purchase shall not exceed $50,000, provided that the amount the Company may sell to Lincoln Park under a single Regular Purchase may increase under certain circumstances as described in the Purchase Agreement but in no event will the amount of a single Regular Purchase exceed $500,000. The purchase price of shares of Common Stock related to the future funding will be based on a formula tied to the prevailing market prices of such shares at the time of sales. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the Common Stock is not below the threshold price as set forth in the Purchase Agreement. The Company’s sales of shares of Common Stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 4.99% of the then outstanding shares of the Common Stock.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

In connection with the Purchase Agreement, in 2015, the Company issued as a commitment fee to Lincoln Park 1,000,000 shares of Common Stock. Lincoln Park represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)), and the Company sold the securities in reliance upon an exemption from registration contained in Section 4(a)(2) under the Securities Act. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

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

 

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

 

From July 2016 to December 31, 2016, pursuant to the Purchase Agreement with Lincoln Park dated October 20, 2015, the Company issued an aggregate of 1,400,000 shares of its common stock to Lincoln Park for net proceeds of $191,850 and a subscription receivable of $11,190 which was collected in January 2016.

 

During the year ended December 31, 2017, pursuant to the Purchase Agreement, the Company issued 2,000,000 shares of its common stock to Lincoln Park for net cash proceeds of $407,787.

 

Common stock issued for debt conversion

 

From May 2017 to December, 2017, the Company issued 10,608,890 shares of its common stock upon the conversion of principal note balances of $410,514 and interest of $15,358 (see Note 6).

 

Common stock issued for cash

 

During the year ended December 31, 2016, pursuant to stock subscription agreements, the Company issued 102,341 shares of its common stock to investors for cash proceeds of $51,926.

 

During the year ended December 31, 2016, pursuant to unit subscription agreements, the Company issued 1,937,696 shares of its common stock and 968,844 five-year warrants to purchase common shares for $0.30 per common share to investors for cash proceeds of $279,462 and a subscription receivable of $11,190 which was collected prior to issuance of the report dated December 31, 2016.

 

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

 

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

 

From October 1, 2017 to December 31, 2017, pursuant to unit subscription agreements, the Company issued 16,491,265 shares of its unregistered common stock to investors for cash proceeds of $164,713 and a subscription receivable of $200 or $0.01 per share.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Warrants

 

The November 2016 Warrants include a down-round provision under which the exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these November 2016 Warrants, the Company sold stock at a share price of $0.075 per share, $0.05 per share and $0.01 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the November 2016 Warrants was lowered to $0.006. Additionally, the total number of November 2016 Warrants were increased on a full ratchet basis from 2,333,334 warrants to 13,611,114 warrants (see Note 6). In September 2017, the Company issued 9,547,087 shares of its common stock upon the cashless exercise of 9,074,076 of these warrants (see Note 6). The remaining 4,537,038 warrants were then ratcheted to 22,685,192 warrants based on the new ratcheted down $0.006 per share exercise price. Upon the cashless exercise of these warrants, the Company valued such warrants using the Binomial valuation model and calculated a fair value of $667,926 which was recorded as a reduction of derivative liabilities and as debt settlement income.

 

On June 2, 2017, in connection with the 2^nd Securities Purchase Agreement (see Note 6), the Company issued the June 2017 Warrants to purchase 1,555,633 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.175 (subject to adjustments under certain conditions as defined in the June 2017 Warrants). The June 2017 Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these June 2017 Notes, the Company sold stock at a share price of $0.05 per share and $0.01 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the June 2017 Warrants were lowered to $0.006 per share and the total number of June 2017 Warrants were increased on a full ratchet basis from 1,555,632 warrants to 45,372,600 warrants, an increase of 43,816,968 warrants (see Note 6).

 

On July 26, 2017, in connection with the 3rd Securities Purchase Agreement (see Note 6), the Company issued the July 2017 Warrants to purchase 4,769,763 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.10 (subject to adjustments under certain conditions as defined in the July 2017 Warrants). The July 2017 Notes and related Warrants include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Subsequent to the date of these July 2017 Notes, the Company sold stock at a share price of $0.05 per share and $0.01 per share. Accordingly, pursuant to these ratchet provisions, the exercise price of the July 2017 Warrants were lowered to $0.006 per share and the total number of July 2017 Warrants were increased on a full ratchet basis from 4,769,763 warrants to 79,496,050 warrants, an increase of 74,726,287 warrants.

 

Warrant activities for the years ended December 31, 2017 and 2016 are summarized as follows:

 

		Number of Warrants				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Balance Outstanding December 31, 2015			2,694				69.60
Granted			3,302,178				0.21
Balance Outstanding December 31, 2016			3,304,872			$	0.27				4.82				0
Issued on a full ratcheted basis			147,969,189				0.006
Issued in connection with financings			10,951,974				0.17
Exercised			(9,074,076	)			0.03
Balance Outstanding December 31, 2017			153,151,959			$	0.02				4.41			$	5,754,600
Exercisable, December 31, 2017			153,151,959			$	0.02				4.41			$	5,754,600

 

Stock options

 

On March 10, 2017, the non-management members of the Board of Directors determined that it was in the best interests of the Company to reward the Company’s chief executive officer and chief financial officer of the Company by amending their employment agreements and awarding them stock options in order to provide incentives to retain and motivate them in their roles with the Company. The stock option award included options for each of them to purchase 2,000,000 shares (the “Stock Options”) of Common Stock at an exercise price of $0.25 per share. One-third of the Stock Options vest on March 10, 2017, March 10, 2018, and March 10, 2019, respectively, and are exercisable at any time after vesting until 10 years after the grant date. The Stock Options vest so long as the optionee remains an employee of the Company or a subsidiary of the Company on the vesting dates (except as otherwise provided for in the employment agreement between the Company and the optionee).

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

The fair value of this option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 203.4%; risk-free interest rate of 1.93%; and, an estimated holding period of 6 years. In connection with these options, the Company valued these options at a fair value of $293,598 and will record stock-based compensation expense over the vesting period. During the year ended December 31, 2017, the Company recorded stock-based compensation expense of $214,082 related to these options.

 

At December 31, 2017, there were 4,000,000 options outstanding and 1,333,334 options vested and exercisable. As of December 31, 2017, there was $79,516 of unvested stock-based compensation expense to be recognized through December 2026. The aggregate intrinsic value at December 31, 2017 was approximately $0 and was calculated based on the difference between the quoted share price on December 31, 2017 and the exercise price of the underlying options.

 

Stock option activities for the year ended December 31, 2017 are summarized as follows:

 

		Number of Option				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Balance Outstanding December 31, 2016			-			$	-
Granted			4,000,000				0.25
Balance Outstanding December 31, 2017			4,000,000			$	0.25				9.19			$	0
Exercisable, December 31, 2017			1,333,334			$	0.25				9.19			$	0

 

NOTE 10 – INCOME TAXES

 

The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets at December 31, 2017 and 2016 consist of net operating loss carryforwards. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.

 

On December 22, 2017, the United States signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent.

 

The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.

 

The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2017 and 2016 were as follows:

 

		Years Ended December 31,
		2017				2016
Income tax benefit at U.S. statutory rate of 34%		$	(6,974,000	)		$	(685,000	)
Income tax benefit – state			(1,641,000	)			(161,000	)
Non-deductible expenses			7,570,000				112,000
Effect of change in U.S. effective rate to 21%			324,000				-
Change in valuation allowance			721,000				734,000
Total provision for income tax		$	-			$	-

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

The Company’s approximate net deferred tax asset as of December 31, 2017 and 2016 was as follows:

 

Deferred Tax Asset:		December 31, 2017				December 31, 2016
Net operating loss carryforward		$	1,486,000			$	1,107,000
Total deferred tax asset			1,486,000				1,107,000
Less: valuation allowance			(1,486,000	)			(1,107,000	)
Net deferred tax asset		$	-			$	-

 

The net operating loss carryforward in the United States was approximately $5,125,000 and $945,000 at December 31, 2017, respectively. The Company provided a valuation allowance equal to the net deferred income tax asset as of December 31, 2017 and 2016 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the valuation allowance was $1,045,000 in 2017. As a result of the reduction of the federal corporate income tax rate, the Company reduced the cumulative value of its net deferred tax asset by $666,000 which was recorded as a corresponding reduction to the valuation allowance during the fourth quarter of 2017. The potential tax benefit arising from the loss carryforward will expire in 2037.

 

The Company had incurred a loss from discontinued operations of $5,664,102 for the year ended December 31, 2017. Such loss is attributable to the Company’s Mexico operations. Management believes there will be no tax benefit from such loss and accordingly, no deferred tax asset and corresponding valuation reserve has been provided for at December 31, 2017.

 

Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation as a result of ownership changes that could occurred in 2017 and may occur in the future. The Company has not conducted a study to determine the limitations on the utilization of these net operating loss carryforwards. If necessary, the deferred tax assets will be reduced by any carryforward that may not be utilized or expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

 

The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2017 and 2016 Corporate Income Tax Returns are subject to Internal Revenue Service examination.

 

NOTE 11 – COMMITMENTS AND CONTINCENGIES

 

Lease

 

Effective September 1, 2015, the Company leases its facilities under non-cancelable operating leases. The Company has the right to renew certain facility leases for an additional five years. Rent expense was $47,846 and $44,857 for the years ended December 31, 2017 and 2016, respectively.

 

Future minimum lease payments under non-cancelable operating leases at December 31, 2017 are as follows:

 

Years ending December 31,		Amount
2019			38,400
2020			25,600
Total minimum non-cancelable operating lease payments		$	64,000

 

Employment agreements

 

On February 2, 2016, the Company entered into an employment agreement with Jonathan F. Head, Ph.D. (“Dr. Head”) to serve as the Company’s Chief Executive Officer, the term of which runs for three years (from February 2, 2016 through February 1, 2019) and renews automatically for one year periods unless a written notice of termination is provided not less than 120 days prior to the automatic renewal date. The employment agreement with Dr. Head provides that Dr. Head’s salary for calendar year 2016 shall be $275,000 and for calendar year 2017 and for each calendar year thereafter during the term of the employment agreement with Dr. Head shall be an amount determined by the Board of Directors, which in no event shall be less than the annual salary that was payable by the Company to Dr. Head for the immediately preceding calendar year.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

On February 2, 2016, the Company entered into an employment agreement with Andrew Kucharchuk (“Mr. Kucharchuk) to serve as the Company’s President and Chief Financial Officer, the term of which runs for three years (from February 2, 2016 through February 1, 2019) and renews automatically for one year periods unless a written notice of termination is provided not less than 120 days prior to the automatic renewal date. The employment agreement with Mr. Kucharchuk provides that Mr. Kucharchuk’s salary for calendar year 2016 shall be $200,000 and for calendar year 2017 and for each calendar year thereafter during the term of the employment agreement with Mr. Kucharchuk shall be an amount determined by the Board of Directors, which in no event shall be less than the annual salary that was payable by the Company to Mr. Kucharchuk for the immediately preceding calendar year.

 

The above executives shall be eligible for an annual target bonus payment in an amount equal to ten percent of his base salary (“Bonus”). The Bonus is determined based on the achievement of certain performance objectives of the Company as established by the Board of Directors. The Bonus may be greater or less than the target Bonus, based on the level of achievement of the applicable performance objectives

 

On March 10, 2017, the non-management members of the Board of Directors determined that it was in the best interests of the Company to reward the Company’s chief executive officer and chief financial officer of the Company by amending their employment agreements and awarding them stock options in order to provide incentives to retain and motivate them in their roles with the Company. The Company amended each of the February 2, 2016 employment agreements of the Company’s chief executive officer and chief financial officer to extend the term to March 9, 2020 and to provide for 100% vesting of any unvested portion of any outstanding equity, or equity-based award granted to them by the Company upon termination of their respective employment agreements without cause, as a result of a breach of the agreement by the Company or upon their respective death or disability.

 

The stock option award included options for each of them to purchase 2,000,000 shares (the “Stock Options”) of Common Stock at an exercise price of $0.25 per share. One-third of the Stock Options vest on March 10, 2017, March 10, 2018, and March 10, 2019, respectively, and are exercisable at any time after vesting until 10 years after the grant date. The Stock Options vest so long as the optionee remains an employee of the Company or a subsidiary of the Company on the vesting dates (except as otherwise provided for in the employment agreement between the Company and the optionee).

 

Vitel Employment agreements

 

On March 10, 2017, Vitel entered into employment agreements with each of Messrs. Cosme and Alaman who were the sellers of Vitel (the “Vitel Employment Agreements”). Mr. Cosme was appointed as Vitel’s General Manager of Global Operations and Mr. Alaman was appointed as its Chief Operations Officer. Both of Messrs. Cosme and Alaman will be responsible for, supervising, managing, planning, directing and organizing the activities of the Vitel and will be its two most senior executive officers reporting to Vitel’s Board of Directors with all other employees of Vitel reporting directly or indirectly to them.

 

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

 

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

 

In December 2017, Messrs. Cosme and Alaman terminated their respective employment agreements.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

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

 

Future minimum commitment payments under continuing employment agreements at December 31, 2017 are as follows:

 

Years ending December 31,		Amount
2018			475,000
2019			39,600
Total minimum commitment employment agreement payments		$	514,600

 

NOTE 12 - SUBSEQUENT EVENTS

 

Financings

 

January 2018 Financing

 

On January 29, 2018, the Company entered into and closed on a 4^th Securities Purchase Agreement (the “4^th Securities Purchase Agreement”) with three institutional investors (the “Purchasers”) for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the 4^th Securities Purchase Agreement, the Company issued upon closing to the Purchasers for an aggregate subscription amount of $333,333: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,333 (the “January 2018 Notes”); and (ii) 5 year warrants (the “January 2018 Warrants”) to purchase 8,333,333 shares of the Company’s common stock par value $0.001 per share at an exercise price of $0.04 per share (subject to adjustments under certain conditions as defined in the Warrants). The closing under the 4^th Securities Purchase Agreement occurred on January 29, 2018. The aggregate principal amount of the January 2018 Notes is $333,333 and the Company received $295,000 after giving effect to the original issue discount of $33,333 and offering costs of $5,000. These Notes bear interest at a rate equal to 5% per annum (which interest rate is increased to 24% per annum upon the occurrence of an Event of Default (as defined in the Notes)), have a maturity date of September 29, 2018 and are convertible (principal, and interest) at any time after the issuance date of these Notes into shares of the Company’s Common Stock at a conversion price equal to $0.03 per share (subject to adjustment as provided in the Note), provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the January 2018 Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days of the Common Stock as reported on the OTCQB or other principal trading market (the “Default Conversion Price”) and the exercise price of the January 2018 Warrants shall be 60% of the Default Conversion Price.

 

These Notes provide for three amortization payments on the six-month, seven-month and eight-month anniversary of the original issue date with each amortization payment being one third of the total outstanding principal and interest. If the six-month amortization payment is made in cash then the payment is an amount equal to 110% of the applicable amortization payment and if the seven-month or the eight-month amortization payments are made in cash then the payment is an amount equal to 115% of the applicable amortization payment. These Notes may be prepaid at any time until the 180th day following the Original Issue Date at an amount equal to (i) 115% of outstanding principal balance of the Note and accrued and unpaid interest during the period from the Original Issue Date through the five months following the Original Issue Date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest during the six month following the Original Issue Date. In order to prepay these Notes, the Company shall provide 20 Trading Days prior written notice to the Purchaser, during which time the Purchaser may convert the Notes in whole or in part at the Conversion Price.

 

March 2018 Financing

 

On March 13, 2018, the Company entered into a 5^th Securities Purchase Agreement (the “5^th Securities Purchase Agreement”) securities with three institutional investors for the sale of the Company’s convertible notes and warrants. Pursuant to the terms provided for in the Purchase Agreement, the Company issued for an aggregate subscription amount of $333,333: (i) 10% Original Issue Discount 5% Senior Secured Convertible Notes in the aggregate principal amount of $333,333 (the “Notes”) and (ii) warrants (the “Warrants”) to purchase an aggregate of 12,350,000 shares of the Company’s common stock at an exercise price of $0.04 per share. The aggregate principal amount of the Notes is $333,333 and as of the date the Company received $61,000 after giving effect to the original issue discount of $33,333 and offering costs of $10,000 which are treated as a debt discount, the payment of legal and accounting fees of $29,000 not related to these Notes, and the funding of an escrow account held by the escrows agent of $200,000. The Notes bear interest at a rate of 5% per year (which interest rate shall be increased to 18% per year upon the occurrence of an Event of Default (as defined in the Notes)), shall mature eight months from issuance and the principal and interest are convertible at any time at a conversion price equal to $0.02 per share (subject to adjustment as provided in the Notes); provided, however, that if an event of default has occurred, regardless of whether such Event of Default has been cured or remains ongoing, the Notes shall be convertible at 60% of the lowest closing price during the prior twenty trading days.

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

The Notes provide for amortization payments on each of the six-month anniversary of the issue date, seven-month anniversary of the issue date and on the maturity date with each amortization payment being one third of the total outstanding principal and all interest accrued as of the payment date. If the six-month amortization payment is made in cash then the Company shall pay the holder 110% of the applicable amortization payment and if the seven-month or the maturity date amortization payments are made in cash then the Company shall pay the holder 115% of the applicable amortization payment. The holder may elect at its option to receive the amortization payments in common stock subject to certain equity conditions.

 

The Notes may be prepaid at any time until the 180th day following the original issue date at an amount equal to (i) 115% of outstanding principal balance of the Note and accrued and unpaid interest through the five month anniversary of the issue date, and (ii) 120% of outstanding principal balance of the Notes and accrued and unpaid interest from the fifth month anniversary of the issue date through the six month anniversary of the issue date. In order to prepay the Notes, the Company shall provide 20 trading days prior written notice to the holders, during which time a holder may convert its Note in whole or in part at the conversion price.

 

The Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transactions. The conversion price is also subject to adjustment if we issue or sell shares of our common stock for a consideration per share less than the conversion price then in effect. In addition, subject to limited exceptions, a holder will not have the right to convert any portion of its Note if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion. The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice to us.

 

The initial exercise price of the Warrants is $0.04 per share, subject to adjustment as described below, and the Warrants are exercisable for five years after the issuance date. The Warrants are exercisable for cash at any time and are exercisable on a cashless basis at any time there is no effective registration statement registering the shares of common stock underlying the Warrants. The exercise price of the Warrants is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock and also upon any distributions of assets, including cash, stock or other property to the Company’s stockholders. The exercise price of the Warrants is also subject to full ratchet price adjustment if the Company issues common stock at a price per share lower than the then-current exercise price of the Warrant.

 

The Notes contain certain adjustment provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transactions. The conversion price is also subject to adjustment if we issue or sell shares of our common stock for a consideration per share less than the conversion price then in effect. In addition, subject to limited exceptions, a holder will not have the right to convert any portion of its Note if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to its conversion. The holder may increase or decrease this ownership limitation to any percentage not exceeding 9.99% upon 61 days prior written notice.

 

In connection with the issuance of the January 2018 Notes and Warrants, the Company determined that the terms of these Note and Warrants contain terms that included a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments and the Warrants were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives and Warrants were determined using the Binomial valuation model. At the end of each period, on the date that debt was converted into common shares, and on the date of a cashless exercise of warrants, the Company revalued the embedded conversion option and warrants derivative liabilities.

 

In connection with the issuance of the January 2018 Notes and Warrants in January 2018, on the initial measurement date, the fair values of the embedded conversion option derivative and warrant derivative of $356,011 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Convertible Note of $295,000, with the remainder of $61,011 charged to current period operations as initial derivative expense.

 

Escrow Agreement

 

$200,000 of the aggregate subscription amount of the March 2018 financing shall be held in escrow and released upon the upon the satisfaction of certain conditions or waiver thereof by all of the investors, including: (i) the Company shall have filed its annual report for the fiscal year ending December 31, 2017 on or prior to April 17, 2018, (ii) the Company shall have sold or otherwise disposed of its subsidiaries Vitel and Oncbiomune México, S.A. De C.V. and reserved an aggregate of 46,158,013 shares currently held by Vitel principals for the benefit of the investors and (iii) the Company shall at all times be in full compliance with the conditions set forth in Rule 144(i)(2).

 

 

ONCBIOMUNE PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 and 2016

 

Ancillary Agreements

 

In connection with the Company’s obligations under the Notes, the Company and its subsidiary OncBioMune, Inc. entered into a security agreement with Calvary Fund I LP, as agent, pursuant to which the Company and the Subsidiary granted a lien on all assets of the Company and the Subsidiary, for the benefit of the holders, to secure the Company’s obligations under the Notes. The Company also entered into a pledge agreement with Cavalry and the Subsidiary executed a subsidiary guaranty. Upon an Event of Default (as defined in the Notes), the holders may, among other things, collect or take possession of the Collateral, proceed with the foreclosure of the security interest in the Collateral or sell, lease or dispose of the Collateral.

 

Additional Purchaser Rights and Company Obligations

 

The Purchase Agreement also requires the Company to pay counsel for the holders $10,000, satisfy the current public information requirements under SEC Rule 144(c), refrain from issuing securities for a period of 30 days from closing and provides the holders with rights of participation in future financings for a period of 12 months from the closing.

 

Termination of October 20, 2015 Agreements

 

On March 13, 2018, the Company and Lincoln Park Capital Fund, LLC (“Lincoln Park”) entered into a termination agreement (the “Termination Agreement”) pursuant to which the parties terminated (i) the purchase agreement between them dated October 20, 2015 (the “Equity Line Agreement”) that provided the Company the right to sell to Lincoln Park, at its sole discretion, up to $10,100,000 of the Company’s common stock and (ii) the related registration rights agreement pursuant to which the Company had agreed to file a registration statement with the Securities and Exchange Commission covering the shares issuable under the Equity Line Agreement and related share issuances.

 

Shares issued upon conversion of debt

 

From January 1, 2018 to May 31, 2018, the Company issued 34,379,512 shares upon conversion of debt of $249,359, accrued interest of $36,016 and for default interest and penalties of $55,890.

 

Shares issued for cash

 

In January 2018, pursuant to a unit subscription agreement, the Company issued 600,000 shares of its unregistered common stock to an investor for cash proceeds of $6,000, or $0.01 per share.

 

Shares issued for cashless exercise of warrants

 

During January and February 2018, the Company issued 18,429,093 shares of its common stock upon the cashless exercise of 25,357,414 of these warrants.

 

Grant of stock options

 

On May 8, 2018, the Company granted an aggregate of 17,500,000 stock options to purchase 17,500,000 shares of the Company’s common stock at $0.0135 per share as follows: 15,000,000 options were granted to officers and directors of the Company, 500,000 options were granted to an employee, and 2,000,000 option to the Company’s scientific advisory board. These options vest in one year from the grant date and expire on May 8, 2028. The fair value of these option grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 0%; expected volatility of 243%; risk-free interest rate of 2.81%; and, an estimated term based on the simplified method of 5.5 years. In connection with these options, the Company valued these options at a fair value of approximately $233,000 and will record stock-based compensation expense over the vesting term.