PART I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
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to Table of Contents
OWC Pharmaceutical Research Corp.
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Consolidated Balance Sheets
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At
June 30, 2016 (Unaudited) and December 31, 2015 (Audited)
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Table of Contents
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June 30,
2016
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December 31,
2015
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(Unaudited)
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(Audited)
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ASSETS
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Current assets:
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Cash
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$
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162,283
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$
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357,161
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Other receivables
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7,699
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11,797
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Prepaid expenses
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11,535
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38,591
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Total current assets
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181,517
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407,549
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Property and equipment, net
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19,934
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22,899
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Total Assets
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$
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201,451
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$
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430,448
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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Current liabilities:
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Accounts
payable - trade
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$
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31,713
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$
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28,125
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Accrued
expenses
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24,418
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24,607
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Customer
deposit
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150,000
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50,000
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Advances and
account payable to related parties
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1,820
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1,820
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Derivatives
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53,572
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-
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Convertible notes payable, net of discount
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51,969
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3,074
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Convertible note payable,
in default
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37,500
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3,074
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Total current liabilities
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350,992
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107,626
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Total liabilities
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350,992
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107,626
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Stockholders'
equity (deficit):
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Preferred stock,
$0.00001 par value; 20,000,000 shares authorized; no shares issued and outstanding
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-
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-
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Common stock,
$0.00001 par value; 500,000,000 shares authorized; and
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81,460,875 issued and outstanding at June 30, 2016 and December 31, 2015
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815
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|
815
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Additional paid in
capital
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8,541,599
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8,533,525
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Common stock subscription receivable
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(651,730)
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(651,730)
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Accumulated
deficit
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(8,036,984)
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(7,548,866)
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Accumulated
other comprehensive loss
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(3,241)
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(10,922)
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Total
stockholders' equity (deficit)
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(149,541)
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322,822
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Total Liabilities and Stockholders' equity (deficit)
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$
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201,451
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$
|
430,448
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See notes to
unaudited interim consolidated financial statements.
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OWC Pharmaceutical Research Corp.
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Consolidated Statements of Operations
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For
the Three and Six-Months Ended June 30, 2016 and 2015
(Unaudited)
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Table of Contents
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For
the three
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For
the three
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For
the six
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For
the six
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months
ended
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months
ended
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months
ended
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months
ended
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June 30, 2016
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June 30, 2015
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June 30, 2016
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June 30, 2015
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Revenues
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$
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-
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$
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-
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$
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-
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$
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-
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|
|
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Expenses
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General and
administrative
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84,466
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532,815
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306,022
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824,090
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Research and
development
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34,776
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76,612
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71,819
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189,940
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(Loss) from operations
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(119,242)
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(609,427)
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(377,841)
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(1,014,030)
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Other income
(expense):
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Interest
expense
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(40,562)
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-
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(41,560)
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-
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Change in fair value of derivative liabilities
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16,647
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-
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(11,598)
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-
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Amortization
of debt discount
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(30,573)
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-
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(57,119)
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-
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Total other
(expense)
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(54,488)
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-
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(110,277)
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-
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Total costs and expenses
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(173,730)
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(609,427)
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(488,118)
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(1,014,030)
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Net
income (loss) before income
taxes
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(173,730)
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(609,427)
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(488,118)
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(1,014,030)
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Income tax
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-
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-
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|
-
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-
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|
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|
|
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Net
income (loss)
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$
|
(173,730)
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$
|
(609,427)
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$
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(488,118)
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$
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(1,014,030)
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Basic and diluted
per share amounts:
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Basic and diluted net
loss
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$
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(0.00)
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$
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(0.02)
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$
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(0.01)
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$
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(0.02)
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Weighted average
shares outstanding (basic and diluted)
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81,460,875
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40,129,063
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$
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81,460,875
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$
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58,799,819
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See notes
to unaudited interim financial statements.
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OWC Pharmaceutical Research Corp.
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Consolidated Statements Comprehensive Loss
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For
the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)
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For the three months
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For the three months
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For the six months
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For the six months
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ended June 30, 2016
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ended June 30, 2015
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ended June 30, 2016
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ended June 30, 2015
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Net loss
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$
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(173,730)
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$
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(609,427)
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$
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(488,118)
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$
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(1,014,030)
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Other comprehensive income, net of tax:
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Foreign currency translation adjustments
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(3,952)
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(650)
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7,681
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(5,608)
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Total other comprehensive income, net of tax
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(3,952)
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(650)
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7,681
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(5,608)
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Comprehensive loss
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$
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(177,682)
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$
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(610,077)
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$
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(480,437)
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$
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(1,019,638)
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See notes to
unaudited interim consolidated financial statements.
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OWC Pharmaceutical Research Corp.
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Statements of Cash Flows
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For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
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Table of Contents
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For
the six
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For
the six
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months
ended
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months
ended
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June 30, 2016
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June 30, 2015
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Cash
flows from operating activities:
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Net loss
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$
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(488,118)
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$
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(1,014,030)
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Adjustments to reconcile
net loss to net cash used in operating activities:
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Derivative valuation adjustments
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11,598
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-
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Amortization
of debt discount
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57,119
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-
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Depreciation expense
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4,825
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4,524
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Common stock
issued for services
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-
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241,170
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Warrants issued for services
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8,074
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10,839
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Changes in net assets and
liabilities:
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(Increase) decrease in accounts receivable
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4,098
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2,612
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(Increase) decrease in accounts receivable - related party
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-
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11,188
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(Increase) decrease in prepaid expenses
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27,056
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-
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Increase (decrease) in
accounts payable
- related party
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-
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138
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Increase (decrease) in accounts payable
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3,589
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35,762
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Increase (decrease) in customer deposits
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100,000
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-
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Increase (decrease) in accrued
expenses
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(190)
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(40,697)
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Cash used in operating
activities
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(271,949)
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(751,106)
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Cash flow from
investing activities:
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Purchase of equipment
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(1,860)
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(3,179)
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Cash
used in investing activities
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(1,860)
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(3,179)
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Cash flow from
financing activities:
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Proceeds
from issuance of common stock
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-
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90,000
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Proceeds of debt borrowings
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78,500
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-
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Payment of financing costs
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(7,250)
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-
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Cash provided by
financing activities
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71,250
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90,000
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Foreign currency translation
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7,681
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(5,608)
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Change in cash
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(194,878)
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(669,893)
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Cash - beginning of
period
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357,161
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1,469,267
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Cash - end of period
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$
|
162,283
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$
|
799,374
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Supplement cash flow
information:
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Non-cash transactions:
|
|
|
|
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Debt
discount arising from derivatives
|
$
|
41,974
|
$
|
-
|
|
|
|
|
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See notes to
unaudited interim financial statements.
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OWC Pharmaceutical Research Corp.
Notes to Unaudited Interim
Consolidated Financial Statements
June 30, 2016
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Table of Contents
1. The Company and Significant Accounting Policies
Organizational Background:
OWC Pharmaceutical Research Corp. ("OWCP" or the "Company") is a Delaware
corporation and was incorporated under the laws of the State of Delaware on
March 7, 2008. We are a 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 of cannabis-based medical products (the
"Product Prospects") for the treatment of multiple myeloma, psoriasis and
fibromyalgia as well as development of a cannabis soluble tablet delivery
system that may have applications for other indications. We also provide
consulting services to governmental and private entities to assist them with
developing and implementing tailor-made comprehensive medical cannabis
programs.
The accompanying financial statements of OWCP were prepared
from the accounts of the Company under the accrual basis of accounting.
Basis of Presentation:
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
The Company has not established any source of revenue to cover its operating
costs, and as such, has incurred an operating loss since inception. These
and other factors raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
Principles of Consolidation:
The financial statements
include the accounts of OWC Pharmaceutical Research Corp. and its wholly
owned subsidiary One World Cannabis, Inc. (OWC). All significant
inter-company balances and transactions have been eliminated.
Significant Accounting Policies
Use of Estimates:
The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statement and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from the estimates.
Cash and Cash Equivalents:
For financial
statement presentation purposes, the Company considers those short-term,
highly liquid investments with original maturities of three months or less
to be cash or cash equivalents. There were no cash equivalents at June 30,
2016 and December 31, 2015.
Property and Equipment:
New property and
equipment are recorded at cost. Property and equipment included in the
bankruptcy proceedings and transferred to the Trustee had been valued at
liquidation value. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, generally 5 years.
Expenditures for renewals and betterments are capitalized. Expenditures for
minor items, repairs and maintenance are charged to operations as incurred.
Gain or loss upon sale or retirement due to obsolescence is reflected in the
operating results in the period the event takes place.
Valuation of Long-Lived Assets:
We review the
recoverability of our long-lived assets including equipment, goodwill and
other intangible assets, when events or changes in circumstances occur that
indicate that the carrying value of the asset may not be recoverable. The
assessment of possible impairment is based on our ability to recover the
carrying value of the asset from the expected future pre-tax cash flows
(undiscounted and without interest charges) of the related operations. If
these cash flows are less than the carrying value of such asset, an
impairment loss is recognized for the difference between estimated fair
value and carrying value. Our primary measure of fair value is based on
discounted cash flows. The measurement of impairment requires management to
make estimates of these cash flows related to long-lived assets, as well as
other fair value determinations.
Foreign Currency:
Non-U.S. entity operations are
recorded in the functional currency of each entity. Results of operations
for non-U.S. dollar functional currency entities are translated into U.S.
dollars using average currency rates. Assets and liabilities are translated
using currency rates at period end. Foreign currency translation adjustments
are recorded as a component of other comprehensive income (loss) within
stockholders' equity.
Stock Based Compensation:
Stock-based awards are
accounted for using the fair value method in accordance with ASC 718,
Share-Based Payments. Our primary type of share-based compensation consists
of stock options. We use the Black-Scholes option pricing model in valuing
options. The inputs for the valuation analysis of the options include the
market value of the Company's common stock, the estimated volatility of the
Company's common stock, the exercise price of the warrants and the risk free
interest rate.
Accounting For Obligations And Instruments Potentially To Be Settled
In The Company's Own Stock:
We account for obligations
and instruments potentially to be settled in the Company's stock in
accordance with FASB ASC 815, Accounting for Derivative Financial
Instruments. This issue addresses the initial balance sheet classification
and measurement of contracts that are indexed to, and potentially settled
in, the Company's own stock.
Fair Value of Financial Instruments:
FASB ASC
825, "Financial Instruments," requires entities to disclose the fair value
of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate
fair value. FASB ASC 825 defines fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. At June 30, 2016 and December 31, 2015, the
carrying value of certain financial instruments (cash and cash equivalents,
accounts payable and accrued expenses.) approximates fair value due to the
short-term nature of the instruments or interest rates, which are comparable
with current rates.
Fair Value Measurements:
The Company measures
fair value under a framework that utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurements)
and the lowest priority to unobservable inputs (level 3 measurements). The
three levels of inputs which prioritize the inputs used in measuring fair
value are:
Level 1: Inputs to the valuation methodology are unadjusted quoted prices
for identical assets or liabilities in active markets that the Company has
the ability to access.
Level 2: Inputs to the valuation methodology include:
- Quoted prices
for similar assets or liabilities in active markets;
- Quoted prices for
identical or similar assets or liabilities in inactive markets;
- Inputs
other than quoted prices that are observable for the asset or liability;
- Inputs that are derived principally from or corroborated by observable
market data by correlation or other means.
If the asset or liability has
a specified (contractual) term, the level 2 input must be observable for
substantially the full term of the asset or liability.
Level 3: Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
The assets or liability's fair value measurement level within the fair
value hierarchy is based on the lowest level of any input that is
significant to the fair value measurement. Valuation techniques used need to
maximize the use of observable inputs and minimize the use of unobservable
inputs. The following table presents assets that were measured and recognize
at fair value on June 30, 2016 and December 31, 5and the year then ended
on a recurring basis:
Fair Value Measurements at June 30, 2016
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Quoted Prices in Active
|
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Significant Other
|
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Significant
|
|
|
|
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Markets for Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
None
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Total
assets at fair value
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Fair Value Measurements at December 31, 2015
|
|
|
|
|
Quoted Prices in Active
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Markets for Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
None
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Total
assets at fair value
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
When the Company changes its valuation inputs for measuring financial
assets and liabilities at fair value, either due to changes in current
market conditions or other factors, it may need to transfer those assets or
liabilities to another level in the hierarchy based on the new inputs used.
The Company recognizes these transfers at the end of the reporting period
that the transfers occur. For the fiscal periods ended June 30, 2016 and
December 31, 2015, there were no significant transfers of financial assets
or financial liabilities between the hierarchy levels.
Earnings per Common Share:
We compute net income
(loss) per share in accordance with ASC 260, Earning per Share. ASC 260
requires presentation of both basic and diluted earnings per share (EPS) on
the face of the income statement. Basic EPS is computed by dividing net
income (loss) available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period.
Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period using the treasury stock method and convertible preferred
stock using the if-converted method. In computing Diluted EPS, the average
stock price for the period is used in determining the number of shares
assumed to be purchased from the exercise of stock options or warrants.
Diluted EPS excludes all dilutive potential shares if their effect is
anti-dilutive.
Income Taxes:
We have adopted ASC 740, Accounting for
Income Taxes. Pursuant to ASC 740, we are required to compute tax asset
benefits for net operating losses carried forward. The potential benefits of
net operating losses have not been recognized in these financial statements
because the Company cannot be assured it is more likely than not it will
utilize the net operating losses carried forward in future years.
We must make certain estimates and judgments in determining income tax
expense for financial statement purposes. These estimates and judgments
occur in the calculation of certain tax assets and liabilities, which arise
from differences in the timing of recognition of revenue and expense for tax
and financial statement purposes.
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and the tax basis of assets and
liabilities using the tax rates and laws in effect when the differences are
expected to reverse. ASC 740 provides for the recognition of deferred tax
assets if realization of such assets is more likely than not to occur.
Realization of our net deferred tax assets is dependent upon our generating
sufficient taxable income in future years in appropriate tax jurisdictions
to realize benefit from the reversal of temporary differences and from net
operating loss, or NOL, carryforwards. We have determined it more likely
than not that these timing differences will not materialize and have
provided a valuation allowance against substantially all of our net deferred
tax asset.
Management will continue to evaluate the realizability of the deferred
tax asset and its related valuation allowance. If our assessment of the
deferred tax assets or the corresponding valuation allowance were to change,
we would record the related adjustment to income during the period in which
we make the determination. Our tax rate may also vary based on our results
and the mix of income or loss in domestic and foreign tax jurisdictions in
which we operate.
In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
liabilities for anticipated tax audit issues in the U.S. and other tax
jurisdictions based on our estimate of whether, and to the extent to which,
additional taxes will be due. If we ultimately determine that payment of
these amounts is unnecessary, we will reverse the liability and recognize a
tax benefit during the period in which we determine that the liability is no
longer necessary. We will record an additional charge in our provision for
taxes in the period in which we determine that the recorded tax liability is
less than we expect the ultimate assessment to be.
ASC 740 which requires recognition of estimated income taxes payable or
refundable on income tax returns for the current year and for the estimated
future tax effect attributable to temporary differences and carry-forwards.
Measurement of deferred income tax is based on enacted tax laws including
tax rates, with the measurement of deferred income tax assets being reduced
by available tax benefits not expected to be realized.
Uncertain Tax Positions:
When tax returns are
filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. In accordance with the guidance
of FASB ASC 740-10, Accounting for Uncertain Income Tax Positions, the
benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it
is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken
that exceeds the amount measured as described above should be reflected as a
liability for unrecognized tax benefits in the accompanying consolidated
balance sheets along with any associated interest and penalties that would
be payable to the taxing authorities upon examination.
Our federal and state income tax returns are open for fiscal years ending
on or after December 31, 2010. We are not under examination by any
jurisdiction for any tax year. At June 30, 2016, we had no material
unrecognized tax benefits and no adjustments to liabilities or operations
were required under FASB ASC 740-10.
Recent Accounting Pronouncements
Share-Based Payments:
In March 2016, amended guidance was issued for employee share-based
payment awards. The amended guidance makes several modifications related to
the accounting for forfeitures, employer tax withholding on share-based
compensation and excess tax benefits or deficiencies. The amended guidance
also clarifies the statement of cash flows presentation for share-based
awards. The amended guidance is effective for us prospectively commencing in
the first quarter of 2018. Early adoption is permitted.
Deferred Income Taxes:
In November 2015, amended guidance was issued for the balance sheet
classification of deferred income taxes. The amended guidance requires the
classification of all deferred tax assets and liabilities as noncurrent on
the balance sheet instead of separating deferred taxes into current and
noncurrent amounts. Early adoption is permitted.
In April 2015, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2015-03, "Interest-Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs." ASU 2015-03 requires that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with
debt discounts. Currently, debt issuance costs are recognized as deferred
charges and recorded as other assets. The guidance is effective for annual
and interim periods beginning after December 15, 2015 with early adoption
permitted and is to be implemented retrospectively. Adoption of the new
guidance will only affect the presentation of the Company's consolidated
balance sheets and will have no impact to our financial statements.
Management does not anticipate that the adoption of these standards will
have a material impact on the financial statements.
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related intangible assets, income taxes, insurance
obligations and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other resources. Actual results may
differ from these estimates under different assumptions or conditions.
The Financial Statements presented herein have been prepared by us in
accordance with the accounting policies described in our December 31, 2015
Annual Report and should be read in conjunction with the Notes to Financial
Statements which appear in that report.
In the opinion of management, the information furnished in these interim
financial statements reflects all adjustments necessary for a fair statement
of the financial position and results of operations and cash flows as of and
for the three and six-month periods ended June 30, 2016 and 2015. All such
adjustments are of a normal recurring nature. The Financial Statements do
not include some information and notes necessary to conform to annual
reporting requirements.
2. Stockholders' Equity
During the Year 2016:
Options Issued for Services:
During the three months ended March 31, 2016, we issued 200,000 common
stock options. The options valued at $8,074 were granted for services
provided by unrelated parties. The fair value of the options was estimated
at the date of grant using the Black-Sholes-Merton pricing model. The
Black-Sholes-Merton pricing model assumptions used are as follows: expected
dividend yield of 0%; risk-free interest rate of 1.11%; expected volatility
of 196%, and option term of 2.75 years.
During the Year 2015:
Stock Issued for Cash:
In February of 2015, we sold 800,000 shares to one investor for the
offering price of $0.05 per share that resulted in total proceeds of
$40,000. We also received $50,000 through a placement of common stock units.
Those units were sold at $0.15 per unit. Each unit consisted of one share of
common stock and one warrant to purchase common stock. We issued 333,333
shares through March 31st to one investor of this offering. The warrants are
exercisable at $0.25 and expired on December 31, 2016.
Stock Issued for Services:
On February 16, 2015, we issued 500,000 shares for consulting services
valued at $500 based on the fair market value of the stock on the date of
issuance. These shares were subsequently cancelled in April 2015 and the
company issued only 100,000 shares instead in July 2015.
Warrants Granted
As part of the 2015 unit offering, the Company issued a total of 333,333
warrants to purchase up to 333,333 shares of common stock at $0.25 per
share.
The relative fair value of the warrants attached to the common stock
issued was estimated at the date of grant using the Black-Sholes-Merton
pricing model. The relative fair value of the attached to the common stock
component is $26,416 and the relative fair value of the warrants is $23,584
as of the grant date.
In February, 2015 we issued 64,935 warrants for services. The warrants
are exercisable at $0.25 and expire February 23, 2016. We used the
Black-Scholes-Merton pricing model and inputs described below to estimate
the fair value of $10,839.
The Black-Sholes-Merton pricing model assumptions used are as follows:
expected dividend yield of 0%; risk-free interest rate of 0.10%-.0.11%;
expected volatility of 242%, and warrant exercise period based upon the
stated terms.
3. Related Party Transactions
Due Related Parties:
Amounts due related parties totaled $1,820 and $1,820 at June 30, 2016 and December
31, 2015, respectively. The company paid $0 and $21,943 in rent to a related
party during the six-month period ended June 30, 2016 and 2015,
respectively.
4. Notes Payable
Unsecured Notes Payable With Conversion Rights:
A convertible note for $78,500 issued on February 2, 2016, bears interest
at 8.0% per annum until paid or converted and matures November 2, 2016. Any
or all of the outstanding balance of the note may be converted at the option
of the holder at any time into common stock of the company at a variable
conversion price of 65% of market price. Upon the issuance of the
convertible note, the Company bifurcated the embedded conversion feature and
recorded an initial derivative liability of $41,974 (the estimated fair
market value at the date of grant based on the Binomial option pricing
model) all of which was allocated as debt discount.
During 2015 the Company agreed to provide unsecured promissory notes with
an unrelated party for $37,500. The note is non-interest bearing and is due
on June 16, 2016. The note has not been paid and is in default at June 30,
2016. The note has a future conversion right that allows the
holder to convert the principal balance into the Company's common stock at
the lender's sole discretion at 50% of the then market price per share. In
accordance with ASC 470, the Company has analyzed the beneficial nature of
the conversion terms and determined that a beneficial conversion feature (BCF)
exists because the effective conversion price was less than the quoted
market price at the time of the issuance. The Company calculated the value
of the BCF using the intrinsic method as stipulated in ASC 470. The BCF of
$37,500 had been recorded as a discount to the notes payable and to
Additional Paid-in Capital.
For the six months June 30, 2016, the Company has amortized $57,119 ($0
in 2015) of the discount arising from the embedded derivative and beneficial
conversion feature of the two outstanding notes. The aggregate carrying
value of the convertible notes is as follows:
|
|
June 30, 2016
|
|
December 31, 2015
|
Face amount of the notes
|
$
|
(78,500)
|
$
|
37,500
|
Unamortized discount
|
|
(26,531)
|
|
(34,426)
|
Net balance
|
$
|
51,969
|
$
|
3,074
|
5. Derivative Liabilities
Embedded Conversion Feature
To properly account for the convertible notes payable discussed in Note
4, the Company performed a detailed analysis to obtain a thorough
understanding of the transaction. The Company reviewed FASB ASC 815, to
identify whether any equity-linked features in the notes are freestanding or
embedded. The notes were then analyzed in accordance with FASB ASC 815 to
determine if the anti-dilution feature should be bifurcated and accounted
for at fair value and remeasured at fair value in income. The Company
determined that the anti-dilution feature met the requirements for
bifurcation pursuant to FASB ASC 815 due to the variable conversion price
and therefore accounted for the anti-dilution features of the notes as a
derivative liability. Changes in fair value of the derivative financial
instruments are recognized in the Company's statement of operations as a
derivative valuation gain or loss.
The adjustment to market of $53,572 at June 30, 2016 resulted in a charge
of $11,598 for the six months then ended and a gain of $16,647 for the three
months then ended.
The Company values its simple conversion option derivatives using the a
lattice model. Assumptions used include:
- life through the note maturity date
- expected volatility-152%,
- expected dividends-none
- exercise prices as set forth in the
agreements,
- common stock price of the underlying share on the
valuation date, and
- number of shares to be issued if the instrument is
converted
6. Going Concern
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
The Company has not established any source of revenue to cover its operating
costs, and as such, has incurred an operating loss since inception. Further,
as of June 30, 2016, the cash resources of the Company were insufficient to
meet its current business plan. These and other factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
asset or the amounts and classification of liabilities that may result from
the possible inability of the Company to continue as a going concern.
7. Subsequent Events
There were no subsequent events following the period ended June 30, 2016
and throughout the date of the filing of Form 10-Q.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
Back to Table of Contents
The following discussion contains forward-looking statements.
Forward-looking statements give our current expectations or forecasts of future events.
You can identify these statements by the fact that they do not relate strictly to
historical or current facts. They use of words such as "anticipate",
"estimate", "expect", "project", "intend",
"plan", "believe", and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. From time to
time, we also may provide forward-looking statements in other materials we release to the
public.
Plan of Operations
We
are engaged in
research
and development of cannabis-based medical products for the treatment of
a variety of medical conditions such as multiple
myeloma, psoriasis, fibromyalgia, post-traumatic stress disorder (PTSD)
and migraine, and (ii)
consulting services to companies and governmental agencies with respect to complex international medical cannabis protocols and
regulations.
We
have not yet commenced any significant activities related to our consulting services.
Our
goal is to become a leader in the research and development of cannabis-based medical drugs and treatments. To achieve our goal,
we plan to focus our activities on the following areas:
Research
and Development
Our
research
and development is focused primarily on exploring several formulations
containing active compounds from the cannabis
plant, including (but not exclusive to) the cannabinoids CBD and THC,
and identifying potential therapeutic applications of the
synergistic effects of these active compounds. The synergistic
contributions of our formulations have not yet been scientifically
researched and demonstrated. We aim to standardize the formulations
across the extracts as a whole, not simply by reference to
their key active components (CBD and/or THC).
Although
there are existing reports and studies on CBD and THC, our formulations will contain several active compounds from the cannabis
plant, that must be fully researched and documented in order to verify its effectiveness to indications, at what doses and which
method of administration will be the most appropriate and effective.
One
World
Cannabis plans to produce pharmaceutical-grade cannabinoid-based
products and treatments, that will be standardized in composition,
formulation and dose, administered by means of an appropriate and
efficient delivery system, and tested in properly controlled
pre-clinical and clinical studies. OWC plans to conduct its researche,
led by internationally renowned investigators, at the facilities
of leading Israeli hospitals and scientific institutions. The Company
will adhere to legislation, rules and guidelines regarding
the investigations. Dr. Baruch, OWC's Director of Research and
Regulatory Affairs, and Alon Sinai, OWC's Chief Operating
Officer, will monitor the investigations and researches.
To
date,
OWC has signed three research collaboration and license agreements with
Sheba Academic Medical Center, Tel Hashomer, Israel
("Sheba"). Sheba is a university-affiliated hospital that serves as
Israel's national medical center and the
most comprehensive medical center in the Middle East. Within the
framework of the agreements with Sheba, OWC will initiate three
studies at the Sheba facilities to explore the effect of three
formulations, all based on active ingredients in the cannabis extracts,
on multiple myeloma, psoriasis and fibromyalgia (a specific formulation
to each indication).
In
addition,
OWC signed an R&D service agreement with G.C. Group Ltd., an Israeli
pharmaceutical R&D company, in April 2015,
to provide formulation development services for OWC's new delivery
system in the form of a cannabis soluble tablet. The
cannabis soluble tablet could provide physicians with the ability to
control and administrate optimal dosage, to replace the most
common usage/delivery method of medical cannabis today, which is not
acceptable by scientists and physicians, such as smoking,
edibles and oil extracts with no adequate means of dosage control. The
agreement was terminated on December 31, 2015.
The
Company
expects to start developing other delivery systems, designed for
different indications, during 2016.
The
Company
has recently signed a Memorandum of Understanding (MoU) with Emilia
Cosmetics Ltd., a large Israeli private label manufacturer,
for the development, manufacture and marketing of a cannabinoid-based
topical cream to treat psoriasis. The Company will initiate
the development of the topical cream by the end of the first quarter of
2016, at Emilia Cosmetics labs located in Yerucham, Israel.
After the completion of the formulation development, expected to be
during the second quarter of 2016, the Company will initiate
a phase I study at the Sheba facilities to explore the effect of topical
cream on psoriasis. However, we do not know if our expectations
will be fulfilled in a timely manner, if at all, or that the costs of
development will exceed our anticipation.
To
date,
One World Cannabis has filed eight provisional patents with the United
States Patent and Regulatory Office (USPTO), all
related to its line of activity related to cannabis-based medical
products. Assuming the successful completion of the clinical
trials, of which there can be no assurance, the Company believes that it
will be able to retain the intellectual rights and secure
patent protections.
While
we
retain full ownership on our intellectual property rights that we
conceived prior to the signing of the research collaboration
and license agreements with Sheba Academic Medical Center, the psoriasis
and fibromyalgia agreements with Sheba provide that all
intellectual property rights that is conceived during the course of the
research is to be jointly owned by Sheba and One World
Cannabis.
Pursuant
to
the collaboration agreements, we expect to pay Sheba $330,000 for
conducting the multiple myeloma trial between the 3rd quarter
of 2015 and the second quarter of 2016. In addition, we expect to
commence pre-clinical studies on fibromyalgia and psoriasis
during the second quarter of 2016. Pursuant to the collaboration
agreements, we are obliged to pay Sheba $300,000 throughout 2016
for conducting the psoriasis research, and $100,000 for the fibromyalgia
research during the two years of the study. We currently
have the financial resources to fund our obligations under these
agreements, but anticipate that we will require additional funding
during the next 12 months for our continuing and planned expanded
operations.
Research
and Development Status
The
following table summarizes the stages of development for each of our current Product Prospects.
Target
Indication
|
|
Collaborator
|
|
Status
|
|
|
|
|
|
|
Multiple
Myeloma
|
|
Sheba
|
|
●
|
Entered
into a research agreement for in vitro studies
|
|
|
Academic
|
|
●
|
Negotiating
terms of a research agreement for in vivo studies
|
|
|
Medical
Center
|
|
●
|
Completed
one in vitro study
|
|
|
|
|
●
|
Proceeding
with further pre-clinical in vitro studies (safety and toxicity, pharmacokinetic, and pharmacodynamic)
|
|
|
|
|
●
|
Submitted
a clinical trial protocol to the Israeli Institutional Review Board and received its approval to commence a clinical study
|
|
|
|
|
●
|
Intend
to commence a clinical study in the first quarter of 2016
|
|
|
|
|
●
|
Drafted
a clinical trial protocol synopsis, which we believe will assist us
in preparing an application for orphan status designation
|
|
|
|
|
|
|
|
|
|
|
●
|
Entered
into a Research Collaboration and License Agreement but have not commenced any studies to date
|
Psoriasis
|
|
Sheba
Academic
Medical Center
|
|
●
|
Drafted
a protocol of a Phase I, double blind, randomized, placebo
controlled, multiple escalating dose study to determine the safety,
tolerability and pharmacokinetic profile of medical grade cannabis
in healthy volunteers
|
|
|
|
|
|
|
|
|
|
|
●
|
Entered
into a nonbinding memorandum of understanding for the development, manufacture and marketing of a cannabinoid-based topical
cream
|
Psoriasis
|
|
Emilia
Cosmetics Ltd.
|
|
●
|
Intend
to enter into a binding agreement in the second quarter of 2016
|
|
|
|
|
●
|
Intend
to initiate development of the topical cream in the second quarter of 2016
|
|
|
|
|
|
|
|
|
|
|
●
|
Entered
into a research agreement for in vitro studies
|
Fibromyalgia
|
|
Sheba
Academic
Medical Center
|
|
●
|
Drafted
a clinical trial protocol synopsis, which we believe will assist us
in preparing an application for orphan status designation
|
|
|
|
|
|
|
New
delivery system - cannabis soluble tablet
|
|
G.C.
Group
Ltd.
|
|
●
|
Completed
a proof of concept (the R=Research phase) of the desired end product (the soluble tablet) to test the fabric, durability,
solidification and other features of the cannabis soluble tablet.
|
OWC's
Investigation on Multiple Myeloma
Dr.
Merav
Leiba, Head of Multiple Myeloma Outpatient Clinic and Multiple Myeloma
Research Lab at Sheba's Hematology Institute,
led the in vitro tests on multiple myeloma. Dr. Leiba, a specialist in
Internal Medicine and Hematology, was a postdoctoral fellow
at the Jerome Lipper Multiple Myeloma Center at Dana Farber Cancer
Institute, Boston, Massachusetts (2006-2008). Dr. Leiba has
participated in numerous clinical and investigational studies aimed at
developing novel drugs for multiple myeloma.
Our
in
vitro tests results on multiple myeloma cells studied outside their
normal biological context, on which we announced on June
17, 2015, led us to proceed with further pre-clinical study (safety and
toxicity, PK, PD) of our formulation, to find out whether
it has scientific merit for further development as an investigational
new drug. While we are encouraged by the results of the
limited in vitro tests, there can be no assurance that any clinical
trial will result in commercially viable products or treatments.
Clinical
trials
are expensive, time consuming and difficult to design and implement.
We, as well as the regulatory authorities in Israel
and elsewhere, such as an IRB (Helsinki committee), IMCU - Israel
Medical Cannabis Unit, or the FDA, may suspend, delay or terminate
our clinical trials at any time, may require us, for various reasons, to
conduct additional clinical trials, or may require a
particular clinical trial to continue for a longer duration than
originally planned, including, among others:
●
lack
of effectiveness of any formulation or delivery system during clinical trials;
●
discovery of serious or unexpected toxicities or side effects experienced by trial participants or other safety issues;
●
slower than expected rates of subject recruitment and enrollment rates in clinical trials;
●
delays
or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials due to regulatory and
manufacturing constraints;
●
delays in obtaining regulatory authorization to commence a trial, including IRB approvals, licenses required for obtaining and
using cannabis for research, either before or after a trial is commenced;
●
unfavorable results from ongoing pre-clinical studies and clinical trials.
●
patients or investigators failing to comply with study protocols;
●
patients
failing to return for post-treatment follow-up at the expected rate;
●
sites
participating in an ongoing clinical study withdraw, requiring us to engage new sites;
●
third-party
clinical
investigators decline to participate in our clinical studies, do not
perform the clinical studies on the anticipated
schedule, or act in ways inconsistent with the established investigator
agreement, clinical study protocol, good clinical practices,
and other Institutional Review Board requirements;
●
third-party entities do not perform data collection and analysis in a timely or accurate manner or at all;
●
regulatory
inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies;
Any
of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Consulting
Services
OWCP
believes
that the complexity of the medical cannabis programs has created a
demand for consulting and advisory services in different
aspects of the medical cannabis industry. The Company's services are
designed to help government officials, policy-makers
and regulatory agencies develop and implement tailor-made comprehensive
medical cannabis programs. In addition, One World Cannabis
offers medical cannabis regulatory compliance services and patient-care
consultancy services.
Our
initial activities to secure consulting contracts will be in member states of the European Union and states of the United States
that allow for public medical cannabis programs.
OWC
management has the expertise in designing training programs for physicians, caregivers, and researches that are essential to the
establishment of a successful, patient-focused medical cannabis program. By working with policy-makers, government officials,
public agencies, and privately owned businesses, we believe we can also raise the public's awareness of the benefits of
cannabis-based treatments and products.
In
furtherance
of our plans, we may, in the future, consider strategic acquisitions
and joint ventures as well as other projects
to grow our business activities including but not limited to: product
licensing and royalty agreements, consulting, and strategic
alliances to support our Product Prospect development. However, there
can be no assurance that this strategy will be successful
in generating any revenues or growing out business.
Results
of Operations during the three months ended June 30, 2016 as compared to the
three months ended June 30, 2015
We
have not generated any revenue during the three months ended June 30, 2016 and
2015. We have operating expenses related to
general and administrative expenses and research and development. During the
three months ended June 30, 2016, we
incurred a net loss of $173,730 due to general and administrative expenses of $84,466, research and development expenses of
$34,776, interest expenses of $40,562, a valuation gain on derivatives of $16,647 and expenses due to amortization of debt
discount of $30,573 as compared to a net loss of $609,427 due to general and administrative expenses of
$532,815 and research and development expenses of $76,612.
Our
general
and administrative expenses decreased by $448,349 during the three
months ended June 30, 2016 as compared
to the same period in the prior year.
This decrease of 84% is primarily the
result of decreased stock-based compensation.
The charge relating to stock-based compensation expense was $0
for the three months ended June 30, 2016, compared to $238,989 for the three
months ended June 30, 2015.
Our research and development expenses decreased to $34,776 during the
three months ended June 30, 2016, compared to $76,612 during the same period in
the prior year. The decrease by $41,836 or 55% was primarily due to
decreased payments related to our collaboration agreements.
Results
of Operations during the six months ended June 30, 2016 as compared to the
six months ended June 30, 2015
We
have not generated any revenue during the six months ended June 30, 2016 and
2015. We have operating expenses related to
general and administrative expenses and research and development. During the
six months ended June 30, 2016, we
incurred a net loss of $488,118 due to general and administrative expenses of $306,022, research and development expenses of
$71,819, interest expenses of $41,560, a valuation loss on derivatives of $11,598 and expenses due to amortization of debt
discount of $57,119 as compared to a net loss of $1,014,030 due to general and administrative expenses of
$824,090 and research and development expenses of $189,940.
Our
general
and administrative expenses decreased by $518,068 during the six
months ended June 30, 2016 as compared
to the same period in the prior year.
This decrease of 63% is primarily the
result of decreased stock-based compensation.
The charge relating to stock-based compensation expense was $0
for the six months ended June 30, 2016, compared to $241,170 for the six
months ended June 30, 2015.
Our research and development expenses decreased to $71,819 during the
six months ended June 30, 2016, compared to $189,940 during the same period in
the prior year. The decrease by $118,121 or 62% was primarily due to
decreased payments related to our collaboration agreements.
Liquidity
and Capital Resources
On
June 30, 2016, we had current assets of $181,517 consisting of $162,283
in cash, other receivables of $7,699 and prepaid expenses of $11,535. We had
property and equipment valued at $19,934, net of $16,688 in accumulated depreciation,
as of June 30, 2016. We had total assets of $201,451 as of
June 30, 2016.
On December 31, 2015, we had current assets of $407,549 consisting of $357,161
in cash, other receivables of $11,797 and prepaid assets of $38,591. We had
property and equipment, net of accumulated depreciation of $11,863, valued at $22,899 as of December 31, 2015. We had total assets of $430,448 as of
December 31, 2015.
On
June 30, 2016, we had $350,994 in current liabilities consisting of $31,713
in accounts payable, $24,418 in accrued expenses, customer deposits of $150,000,
advances and accounts payables to related parties of $1,820, derivative liabilities valued at $53,572, convertible notes
payable of $51,969 and a convertible note in default of $37,500.
On
December 31, 2015, we had $107,626 in current liabilities consisting of $28,125
in accounts payable, $24,607 in accrued expenses, advances and accounts payables
to related parties of $1,820, customer deposits of $50,000 and convertible notes
payable of $3,074.
We
had negative working capital of $169,475 at June 30, 2016 as compared to
positive working capital of $299,923 on December 31, 2015. Our accumulated deficit as
of June 30, 2016 and December 31, 2015 were $8,036,984 and $7,548,866, respectively.
We used
$271,949 in our operating activities during the six month ended June 30, 2016, which was due to a net loss of $488,118
offset by derivative valuations adjustments of $11,598, amortization of debt discount expense of $57,119, depreciation expense of $4,825,
warrant expenses valued
at $8,047, a decrease in accounts receivable of $4,098, an increase
in accounts payable of $4,098, an increase in customer deposits of $100,000,
a decrease in prepaid expenses of $27,056 and a decrease in accrued expenses of
$190.
We used $751,106 in our operating activities during the six months ended
June 30, 2015, which was due to a net loss of $1,014,030 offset by depreciation
expenses of $4,524, shares issued for services valued at $241,170, warrants issued
for services valued at $10,839, a decrease in accounts receivable of $11,188,
an increase in
advances and accounts payable to related parties of $138, an
increase
in accounts payable of $35,762 and a decrease in accrued expenses of $40,697.
We used
$1,860 and $3,179 during the six months ended June 30, 2016 and 2015,
respectively, to purchase property
and equipment.
Our
financing
activities during the six months ended June 30, 2016 provided us
with $71,250 through proceeds of $78,500 from debt issuance offset buy $7,250 in
debt issuance cost. We financed our negative cash flow from
operations during the six months ended June 30, 2015 through
proceeds from issuance of common stock of $90,000.
Based
upon
our cash position of $162,283 at June 30, 2016, we believe that we
need to raise additional capital, either equity
or debt during the second half of
fiscal year 2016 in order to fund our plan of operations
including our research and development initiatives for the next twelve
months. There can be no assurance, however, that additional
capital will be sufficient to fund our currently anticipated expenditure
requirements for the next twelve-month period nor can
there be any assurance that financing will be available at satisfactory
terms and conditions or at all, for that matter.
Our
auditors
have issued an opinion on our financial statements which includes a
statement describing our going concern status. This
means that there is substantial doubt that we can continue as an
on-going business for the next twelve months unless we obtain
additional capital to pay our bills and meet our other financial
obligations. This is because we have not generated any revenues
and no revenues are anticipated until we begin marketing the product.
Accordingly, we must raise capital from sources other than
the actual sale of the product. We must raise capital to implement our
project and stay in business. Even if we raise the maximum
amount of money in this offering, we do not know how long the money will
last, however, we do believe it will last at least twelve
months.
Our
lack
of operating history may make it difficult to raise capital. Our
inability to borrow funds or raise equity capital to facilitate
our business plan may have a material adverse effect on our financial
condition and future prospects.
Funding
of Our Research Programs
On
October
22, 2014, we have entered into a collaboration agreement with Sheba
Academic Medical Center, a hospital in Tel-Aviv, Israel,
relating to the use of cannabis to treat Myeloma. Within the framework
of this collaboration agreement, the Company currently
conducts pre-clinical studies on multiple myeloma, which have commenced
in April 2015 and we commenced pre-clinical studies
on fibromyalgia in the second quarter of 2016. Pursuant to the agreement,
we are obligated to pay Sheba $330,000 between the third
quarter of 2015 and second quarter of 2016.
We
are obligated to provide $300,000 in funding in the second quarter of 2016 related to the Psoriasis research conducted at Sheba.
We have funding obligations of $100,000 related to the Fibromyalgia research due during two years of the studies.
At
present, we use our available working capital to fund these studies. However, we will need to raise additional funding prior to
or if clinical studies are to commence.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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None.
ITEM
4. CONTROLS AND PROCEDURES
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Evaluation of disclosure controls and
procedures.
As of
June 30, 2016, the Company's chief executive officer and chief financial
officer conducted an evaluation regarding the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Exchange Act.
Based upon the evaluation of these controls and procedures as provided under
the
Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control-Integrated
Framework (2013)
, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were
ineffective as June 30, 2016.
Management has identified corrective actions to address the weaknesses and
plans to implement them during the fourth quarter of 2016.
Changes
in Internal Control Over Financial Reporting
There were no changes in
the Company's internal control over financial reporting during the
second quarter of 2016, which were identified in connection with
management's evaluation required by paragraph (d) of Rules 13a-15 and
15d-15 under the Exchange Act, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting.