Acquisition, Discontinuation of Operations and Deconsolidation of Vitel and Oncbiomune Mexico

12 Months Ended

Dec. 31, 2018

Business Combinations [Abstract]

Acquisition, Discontinuation of Operations and Deconsolidation of Vitel and Oncbiomune Mexico

NOTE 3 – ACQUISITION, DISCONTINUATION OF OPERATIONS AND DECONSOLIDATION OF VITEL AND ONCBIOMUNE MEXICO

Acquisition of Vitel

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 issued to Dr. Head and were determined to have nominal value of $289 or $0.0001 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.

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 $0.075 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.

On February 20, 2019, pursuant to the Certificate of Designation, the Company exercised its right to redeem all of the 5,000,000 shares of the Series B Preferred outstanding held by to Banco Actinver, S.A., in its capacity as Trustee of the Trust Agreement for the benefit of Mr. Cosme and Mr. Alaman equal to the stated value. The total redemption price equaled $500 which was equal to $0.0001 per share of Series B Preferred (see Note 9 “Series B Preferred Share” and Note 13).

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. The purchase price exceeded the fair value of the net asset acquired by approximately $4,695,596, which was recorded as goodwill and other intangible assets pending the Company’s analysis of the fair values. 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 increasing the goodwill and other intangible assets to $4,718,817.

In 2017, the Company 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 asset. The impairment loss which is included in the loss from discontinued operations consists of an impairment of intangibles of $4,718,817 recorded in connection with the acquisition of Vitel and the impairment of an acquired drug formula of $41,096.

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.

Discontinuation of Operations and Deconsolidation of Vitel

On December 29, 2017, the Board of Directors of the Company determined to sell or otherwise dispose of its interest in Vitel and Oncbiomune Mexico due to disputes with the original Vitel Stockholders and resulting loss of operational control of the assets and operations of Vitel and Oncbiomune Mexico. Accordingly, as of December 31, 2017, the Company presented Vitel and Oncbiomune Mexico as discontinued operations and effective January 1, 2018 has deconsolidated these wholly-owned subsidiaries in accordance with ASC 810-10 - Consolidation. However, at December 31, 2018 and after deconsolidation, the Company has recorded the liabilities of these subsidiaries that existed at December 31, 2017 as a contingent liability and therefore reflected liabilities of discontinued operation of $686,547 on the accompanying consolidated balance sheet, which consist of accounts payable balances incurred through December 31, 2017.

Pursuant to ASC 205-20 - Presentation of Financial Statements - Discontinued Operations, the business of the Oncbiomune Mexico and Vitel were accounted for as discontinued operations because of the Board of Director’s decision of December 29, 2017.

The assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2018 and 2017 is set forth below.

	December 31,
	2018		2017
Assets:
Current assets:
Cash	$	—	$	—
Total current assets		—		—
Total assets	$	—	$	—
Liabilities:
Current liabilities:
Accounts payable	$	686,547	$	692,592
Due to related parties		—		432
Payroll liabilities		—		1,972
Total current liabilities		686,547		694,996
Total liabilities	$	686,547	$	694,996

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

	Years Ended December 31,
	2018		2017
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	)