OWCP OWC Pharmaceuticals Research Corporation (CE)

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

The following information should be read in conjunction with the unaudited condensed consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited condensed consolidated financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on April 16, 2018. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements,” and discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Overview

We are an early stage medical cannabis research and development company that applies conventional pharmaceutical research protocols and disciplines to the field of medical cannabis with the objective of establishing a leadership position in the research and development of medical cannabis therapies, products and delivery technologies. We are currently engaged in the research and development and have conducted pre-clinical trials on the efficacy of cannabis-based medical products (the “Cannabis-Based Medical Products”) commencing with our cannabis-based topical cream for the treatment of psoriasis. In addition, we also are pursuing the use of our Cannabis-Based Medical Products for the treatment of multiple myeloma, post-traumatic stress disorder (“PTSD”), chronic pain and fibromyalgia, and have made significant advancements in the development of a cannabis soluble tablet delivery system that could have applications for other indications. We are also capable of providing consulting and advisory services to governmental and private entities to assist them with developing and implementing tailor-made, comprehensive medical cannabis programs, although we have not generated any revenues from such services to date.

We have been engaged in research and development and consulting and advisory activities through our wholly-owned Israeli subsidiary, One World Cannabis Ltd since July 2014. To date, we have entered into binding agreements with major hospitals and medical research facilities in Israel for the purpose of conducting research studies and trials related to the development and use of Cannabis-Based Medical Products for the treatment of multiple myeloma, psoriasis, PTSD, chronic pain and fibromyalgia, and for the development of a cannabis soluble tablet delivery system. We announced promising clinical results from the testing of our cannabis-based topical cream for the treatment of psoriasis, an autoimmune disease that causes red, scaly patches to appear on the skin. Skin cells in patients with psoriasis grow at an abnormally fast rate, causing a buildup of lesions that tend to burn and itch. While the real cause of psoriasis is not known, genetics are believed to play a major role in its development. According to the American Academy of Dermatology, psoriasis affects about 3% of the world’s population and 7.5 million people in the United States.

We have not yet commenced any significant activities related to our third-party consulting services.

Recent Developments

On April 30, 2018, we entered into and consummated a Securities Purchase Agreement (the “Agreement”) with a non-US-based institutional investor (the “Purchaser”). Under the terms and conditions of the Agreement, we sold and the Purchaser bought, (i) 500 shares of our new series of preferred stock designated as Series A Preferred Stock (the “Preferred Shares”), which, as of April 30, 2018, were convertible into 25,000,000 shares of our common stock at a conversion price of $0.20 per share, subject to adjustment pursuant to the antidilution provisions of the Preferred Shares, and (ii) Warrants (the “Warrants”) representing the right to acquire 12,500,000 shares of our common stock at an exercise price of $0.22 per share subject to adjustment pursuant to the antidilution provisions of the Warrants, for an aggregate purchase price of $5,000,000. Newbridge Securities Corporation (“Newbridge”), through LifeTech Capital, acted as exclusive placement agent for the transaction and we paid Newbridge a cash fee of $375,000 and issued to them warrants to purchase 2.5 million shares of our common stock at $0.20 per share. The Warrants shall contain customary terms, including provisions for “cashless” exercise, change of control, price based anti-dilution, and customary demand or piggyback registration rights. We are also obligated to pay Newbridge a warrants solicitation fee equal to 4% of the gross proceeds that we receive upon cash exercise of any Warrants purchased by the Purchasers in connection with the offering.

The terms of the Preferred Stock contain conditional redemption provisions and a deemed liquidation preference feature. In addition, the terms of each of the Preferred Stock and Warrants provide for anti-dilution protection for issuances of shares of Common Stock at a price per share less than a price equal to the conversion price or exercise price, as applicable and, that in the event of a “fundamental transaction” (as described in the Warrants), the investor will have the right to receive the value of the Warrant as determined in accordance with the Black Scholes option pricing model.

In connection with the Agreement, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchaser, pursuant to which, among other things, we have agreed to use our commercially reasonable best efforts to (i) prepare and file with the SEC within 60 calendar days of the offering a registration statement covering the shares of Common Stock underlying the Preferred Stock and Warrants and (ii) have the registration statement and any amendment thereto to be declared effective by the SEC within 90 calendar days from the date of the initial filing of such registration statement.

Results of Operations

Results of Operations during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017

We have not generated any revenue during the three months ended March 31, 2018 and 2017. We have operating expenses related to general and administrative expenses and research and development expenses. During the three months ended March 31, 2018, we incurred a net loss of $977,139 due to general and administrative expenses of $821,181, research and development expenses of $155,333 and financial expenses of $625 as compared to a net loss of $1,435,365 due to general and administrative expenses of $1,401,349 and research and development expenses of $34,016 during the three months ended March 31, 2017.

Our general and administrative expenses decreased by $580,168 or 41% during the three months ended March 31, 2018 as compared to the same period in the prior year, primarily due to decreased stock-based compensation and amortization of services receivable expenses. The charge relating to stock-based compensation and services receivable expenses were $345,481 and $240,697, respectively, for the three months ended March 31, 2018, compared to $1,057,904 and $178,866 for the three months ended March 31, 2017.

Our research and development expenses increased by $121,317 or 457% during the three months ended March 31, 2018 as compared to the same period in the prior year, primarily due to increased payments related to our research and development collaboration agreements, payroll and consultancy.

Liquidity and Capital Resources

As of March 31, 2018, we had current assets of $703,227 consisting of $691,558 in cash and cash equivalents and other current assets of $11,669. As of March 31, 2018, we had property and equipment valued at $32,919, net of $28,480 in accumulated depreciation. We had total assets of $736,146 as of March 31, 2018.

As of December 31, 2017, we had current assets of $1,044,840 consisting of $970,542 in cash and cash equivalents and other current assets of $74,298. We had property and equipment valued at $16,243, net of $29,890 in accumulated depreciation. We had total assets of $1,061,083 as of December 31, 2017.

As of March 31, 2018, we had $234,472 in current liabilities consisting of $70,926 in accounts payable, $63,546 in other current liabilities and deferred revenues of $100,000.

As of December 31, 2017, we had $270,485 in current liabilities consisting of $64,814 in accounts payable, $105,671 in other current liabilities and deferred revenues of $100,000.

We had positive working capital of $468,755 as of March 31, 2018 compared to positive working capital of $774,355 as of December 31, 2017. Our accumulated deficit as of March 31, 2018 and December 31, 2017 was $15,494,051 and $14,516,912, respectively.

We used $370,541 in our operating activities during the three months ended March 31, 2018, which was due to a net loss of $977,139 offset by amortization of services receivable of $240,697, stock-based compensation expenses of $345,481, depreciation expense of $1,564, a decrease in accounts payable of $1,648, a decrease in prepaid expenses of $62,629 and a decrease in other liabilities of $42,125.

We used $197,591 in our operating activities during the three months ended March 31, 2017, which was due to a net loss of $1,435,365 offset by amortization of services receivable of $178,866, stock-based compensation expenses of $1,057,904, depreciation expense of $2,450, a decrease in accounts payable of $2,631, an increase in prepaid expenses of $4,246 and an increase in other liabilities of $5,431.

We used $10,480 and $1,080 during the three months ended March 31, 2018 and 2017, respectively, to purchase property and equipment.

Our financing activities during the three months ended March 31, 2018 provided us with $105,282 through collection of a stock subscription receivable, (see also note 3B, Events During The Period- Common stock subscription receivable), in our financial statements included elsewhere in this Quarterly Report on Form 10-Q. Our financing activities during the three months ended March 31, 2017 provided us with $1,767,566 through proceeds of $1,650,900 from issuance of common stock and warrants, $66,666 from exercise of warrants into common stock and $50,000 from non-recourse loan.

Based upon our cash position of $691,558 on March 31, 2018 and the additional fund raised on April 30, 2018, we believe that we have sufficient cash to fund our operation in the next 12 months, however we believe that in order to execute on our plans we need to raise additional capital, either equity or debt, and there can be no assurance that additional capital will be sufficient to fund our anticipated expenditure requirements to execute on our plans.

The development and commercialization of our product is expected to require substantial expenditures. We have not yet generated material revenues from operations and therefore is dependent upon external sources for financing its operations. As of March 31, 2018, we have an accumulated deficit of $15,494,051. In addition, during the three months ended March 31, 2018, we reported losses and negative cash flows from operating activities.

On April 30, 2018, we entered into and consummated a Securities Purchase Agreement with a new investor, pursuant to which, we issued (i) 500 shares of Preferred Stock designated as Series A Preferred Stock that are convertible into 25,000,000 shares of common stock and (ii) Warrants that are eligible for conversion into 12,500,000 shares of common stock for an aggregate purchase price of $5,000,000. See note 5, Subsequent Events, in our financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Raising of funds mitigates any substantial doubt related to our ability to continue as a going concern.

Funding of Our Research Programs

On October 22, 2014, we entered into a collaboration agreement with the Sheba Academic Medical Center’s hospital (“Sheba”) relating to the use of cannabis to treat myeloma. Within the framework of this collaboration agreement, we conducted pre-clinical studies on multiple myeloma, which have commenced in April 2015. Pursuant to this collaboration agreement, we are obligated to pay Sheba $170,000. As of March 31, 2018, we have paid Sheba $65,669 as per Sheba’s payment requests.

In addition, pursuant to another collaboration agreement, we are obliged to pay Sheba $170,000 throughout 2017 and 2018 for conducting the Study for the cream for treatment of psoriasis. As of March 31, 2018, we have paid Sheba $43,066 as per Sheba’s payment requests.

At present, we use our available working capital to fund these studies.

Our expenditures allocated to our corporate activities conducted through our facilities in Ramat Gan were $16,496 for the three months period ended March 31, 2018 and we expect it will be approximately $66,000 for the year ending December 31, 2018.

Off Balance Sheet Arrangements

As of March 31, 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 
Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on April 16, 2018.

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to our consolidated financial statements as reported in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on April 16, 2018, and are also included elsewhere in this Quarterly Report on Form 10-Q.