NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
A.
|
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. On July 6, 2014, the Company established a wholly-owned subsidiary,
One World Cannabis Ltd. (“OWC” or the “Israeli subsidiary”) under the laws of the State of Israel. The
Company is 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. The Company is 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 and topical cream for localized external treatment
that may have applications for other indications. The Company also provides consulting services to governmental and private entities
to assist them with developing and implementing tailor-made comprehensive medical cannabis programs.
|
B.
|
Liquidity
and going concern uncertainty
|
The
development and commercialization of the Company’s product is expected to require substantial expenditures. The Company
has not yet generated material revenues from operations, and therefore is dependent upon external sources for financing its operations.
As of September 30, 2017, the Company has an accumulated deficit of $13,040,025, and its stockholders’ equity is $1,010,237.
In addition, in each year since its inception the Company has reported losses and negative cash flows from operating activities.
Management considered the significance of such conditions in relation to the Company’s ability to meet its current and future
obligations and determined that such conditions 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.Until such time as the Company generates sufficient revenue to fund its operations (if
ever), the Company plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities
and, to the extent available, short-term and long-term loans. There can be no assurance that the Company will succeed in obtaining
the necessary financing to continue its operations as a going concern.
During
the first nine months of 2017, the Company raised a total amount of $1,667,525 (net of related expenses), from the issuance of
units that included Common Stock and detachable warrants. In addition, during 2017 the Company received $77,083 through the exercise
of warrants. However, the Company also paid net amount of $250,000 in connection with repayment of a Non-recourse loan (see Note
3D).
As
described in the above paragraph, the Company has a limited operating history and faces several risks and uncertainties, including
risks and uncertainties regarding continuation of the development process, demand and market acceptance of the Company’s
products, the effects of technological changes, competition and the development of products by competitors. Additionally, other
risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Company’s
future results and the availability of necessary financing. In addition, the Company expects to continue incurring significant
operating costs and losses in connection with the development and marketing of its products. The Company has not yet generated
material revenues from its operations to fund its activities and therefore is dependent on the receipt of additional funding from
its stockholders and/ or new investors in order to continue its operations.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from the estimates. As applicable to these consolidated financial statements, the most significant estimates and
assumptions relate to (i) stock-based compensation and (ii) the going concern assumptions.
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting
Principles
The
accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with our consolidated
financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
The unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (“SEC”) related to interim financial statements. As permitted under those rules,
certain information and footnote disclosures normally required or included in financial statements prepared in accordance with
U.S. GAAP have been condensed or omitted. The financial information contained herein is unaudited; however, management believes
all adjustments have been made that are considered necessary to present fairly the results of the Company’s financial position
and operating results for the interim periods. All such adjustments are of a normal recurring nature. The accompanying condensed
consolidated balance sheet as of December 31, 2016 has been derived from the consolidated financial statements contained in our
Annual Report on form 10-K.
The
results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for
the year ending December 31, 2017 or for any other interim period in the future.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany balances and transactions
have been eliminated in consolidation.
Certain
reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications
did not have material impact on the Company’s equity, net assets, results of operations or cash flows.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
C.
|
Recently
Issued Accounting Standards
|
|
1.
|
Effective
January 2017, the Company adopted Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheet. The ASU eliminates
the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified
balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as noncurrent. The amendments
apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for
financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual
periods (i.e., in the first quarter of 2017 for calendar year-end companies).Early adoption is permitted for all entities
as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred
tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively,
entities are required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively,
entities are also required to include quantitative information about the effects of the change on prior periods. The adoption
of this ASU did not have a significant impact on the consolidated financial statements.
|
|
|
|
|
2.
|
Effective
January 2017, the Company adopted Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee
share-based payments and affect all organizations that issue share-based payment awards to their employees.
|
|
|
|
|
|
Several
aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences;
(b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments
also simplify two areas specific to private companies.
|
|
|
|
|
|
The
adoption of this ASU did not have a significant impact on the consolidated financial statements.
|
|
|
|
|
3.
|
In
May 2014, The FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU
2014-09”).ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts
with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09
also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial
statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers.
|
|
|
|
|
|
During
2016 and 2017, the FASB issued several Accounting Standard Updates that focused on certain implementation issues of the new
revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations
and Identifying Performance Obligations and Licensing.
|
|
|
|
|
|
An
entity should apply the amendments in this ASU using one of the following two methods:
1. Retrospectively to each prior reporting period presented with a possibility to elect
certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially
applying ASU 2014-09 recognized at the date of initial application. If an entity elects
the latter transition method, it also should provide certain additional disclosures.
|
|
|
|
|
|
For
a public entity, the amendments in ASU 2014-09 (including the amendments introduced through
recent ASU’s) are effective for annual reporting periods beginning after December
15, 2017, including interim periods within that reporting period (the first quarter of
fiscal year 2018 for the Company). Early application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within
that reporting period.
|
|
|
|
|
|
The
Company intends to adopt ASU 2014-09 as of January 1, 2018.
|
|
|
|
|
|
The
Company is in the process of evaluating the impact of ASU 2014-09 on its revenue streams
and selling contracts, if any, and on its financial reporting and disclosures. Management
is expecting to complete the evaluation of the impact of the accounting and disclosure
changes on the business processes, controls and systems throughout 2017. Since the Company
did not report so far, material revenues, management believes that the adoption of ASU
2014-09 will not have significant impact on its financial statements.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
|
|
C.
|
Recently
Issued Accounting Standards (cont.)
|
|
4.
|
Accounting
Standards Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);Derivatives
and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
|
|
|
|
|
|
In
July 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480);Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11).
|
|
|
|
|
|
Among
others, Part I of ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, a provision
in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price
based on the price of future equity offerings. Current accounting guidance creates cost and complexity for organizations that
issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument
or conversion option.
|
|
|
|
|
|
ASU
2017-11 requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock,
for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust
their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked
financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger
within equity.
|
|
|
|
|
|
ASU
2017-11 also addresses navigational concerns within the FASB Accounting Standards Codification related to an indefinite deferral
available to private companies.
|
|
|
|
|
|
The
provisions of the new ASU related to down rounds are effective for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018 (fiscal 2019 for the Company). Early adoption is permitted for all
entities.
|
|
|
|
|
|
The
Company is in the process of evaluating the impact ofpart I of ASU 2017-11 on its financial statements.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3
|
–
|
EVENTS
DURING THE PERIOD
|
|
A.
|
Common
stock and Warrants Issued for cash
|
|
1.
|
During
the period, the Company received $117,640 through a placement of 904,924 common stock units to four investors for the offering
price of $0.13 per unit. Each unit consisted of one share of common stock and two (one “G” and one “H”)
warrants to purchaseone share of common stock. The 904,924 “G” warrants are exercisable at $0.25 and expire two
years from the date of issuance. The 904,924 “H” warrants are exercisable at $0.40 and expire three years from
the date of issuance. Such warrants were classified within stockholders’ equity.
|
|
|
|
|
2.
|
During
the period, the Company received $100,000 through a placement of 588,237 common stock units to three investors for the offering
price of $0.17 per unit. Each unit consisted of one share of common stock and one “H” warrant to purchaseone share
of common stock. The 588,237 “H” warrants are exercisable at $0.40 and expire three years from the date of issuance.
Such warrants were classified within stockholders’ equity
|
|
|
|
|
3.
|
During
the period, the Company received $130,000 through a placement of 520,000 common stock units to five investors for the offering
price of $0.25 per unit. Each unit consisted of one share of common stock and one “I” warrant to purchaseone share
of common stock. The 520,000 “I” warrants are exercisable at $0.50 and expire two years from the date of issuance.
Such warrants were classified within stockholders’ equity.
|
|
|
|
|
4.
|
During
the period, the Company received $883,625through a placement of 1,767,250 common stock units to twenty investors for the offering
price of $0.50 per unit. Each unit consisted of one share of common stock and one “K” warrant to purchaseone share
of common stock. The 1,767,250 “K” warrants are exercisable at $1.00 and expire eighteen months from the date
of issuance. Such warrants were classified within stockholders’ equity.
|
|
|
|
|
5.
|
During
the period, the Company received $436,260 through a placement of 623,227 common stock units to eleven investors for the offering
price of $0.70 per unit. Each unit consisted of one share of common stock and one “L” warrant to purchaseone share
of common stock. The 623,227 “L” warrants are exercisable at $1.40 and expire eighteen months from the date of
issuance. Such warrants were classified within stockholders’ equity.
|
|
B.
|
Stock-based
compensation
|
|
1.
|
During
the period, the Company issued 300,000 fully vested shares of common stock and 400,000 warrants (200,000 “G” warrants
with exercise price of $0.25 and 200,000 “H” warrants with exercise price of $0.40) for the purchase of one share
each of common stock to a consultant as payment for services. As the equity instruments issued are fully vested and non-forfeitable,
the fair value of the grant was recognized as an increase to stockholders’ equity at the measurement date with an offsetting
amount as a deduction from stockholders’ equity within the caption “Services receivable”. This amount will
be recognized as consulting expense over the terms of the agreements. The shares were valued at the closing price as of the
date of the agreements ($0.67) and resulted in current recognition as at September 30, 2017, of $134,367 in consulting services
expense and $66,633 as future services receivable. This amount will be recognized as consulting expense over the terms of
the agreement.
|
|
|
|
|
|
The
warrants were valued using the Black-Scholes-Merton pricing model to estimate the fair value of $153,963 and resulted in current
recognition of $110,094 in additional consulting services expense and $43,869 as additional future services receivable. This
amount will be recognized as consulting expense over the terms of the agreement. 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 282%,
and warrant exercise period based upon the stated terms. See also C1 below.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3
|
–
|
EVENTS
DURING THE PERIOD (cont.)
|
|
B.
|
Stock-based
compensation (cont.)
|
|
2.
|
Under
the Bear Creek Corporate Advisory Consulting agreement executed in November of 2016, the Company became obligated to issue
100,000 additional shares to Bear Creek as of February 28, 2017. The shares were valued at $262,000 and were issued during
April 2017.
|
|
|
|
|
3.
|
During
the period, the Company issued 350,000 “E” warrants that are exercisable at $0.25 and expire two years from the
date of issuance to purchase one share each ofthe Company’s common stock to two unrelated parties as payment for services.
The aggregate fair value of the warrants was $133,210. As the equity instruments issued are fully vested and non-forfeitable,
the fair value of the grant was recognized as an increase to stockholders’ equity at the measurement date with an offsetting
amount as a deduction from stockholders’ equity within the caption “Services receivable”. This amount will
be recognized as consulting expense over the terms of the agreements. The Company recognized $95,254 in current expense and
$37,956 remains as services receivable as of September 30, 2017.
|
|
|
|
|
|
The
Company used the Black-Scholes-Merton pricing model to estimate the fair value. 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 282%,
and warrant exercise period based upon the stated terms.
|
|
|
|
|
4.
|
During
the period, the Company issued 450,000 fully vested shares of common stock to consultants as payment for services. The shares
were valued at the closing price as of the date of the agreements ($0.73) and resulted in current recognition of $129,600
in consulting services expense and $198,900 as future services receivable. This amount will be recognized as consulting expense
over the term of the agreement. The aggregate fair value of the warrants was $328,500. As the equity instruments issued are
fully vested and non-forfeitable, the fair value of the grant was recognized as an increase to stockholders’ equity
at the measurement date with an offsetting amount as a deduction from stockholders’ equity within the caption “Services
receivable”.
|
|
|
|
|
|
The
Company used the Black-Scholes-Merton pricing model to estimate the fair value. 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 282%, and
warrant exercise period based upon the stated terms.
|
|
|
|
|
5.
|
During
the period, the Company issued 416,127 fully vested shares of common stock to a consultant as payment for services. As the
equity instruments issued are fully vested and non-forfeitable, the fair value of the grant was recognized as an increase
to stockholders’ equity at the measurement date with an offsetting amount as a deduction from stockholders’ equity
within the caption “Services receivable”.The shares were valued at the closing price as of the date of the agreements
($0.89) and resulted in current recognition of $166,405 in consulting services expense and $203,948 as future services receivable.
This amount will be recognized as consulting expense over the term of the agreement.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3
|
–
|
EVENTS
DURING THE PERIOD (cont.)
|
|
B.
|
Stock-based
compensation (cont.)
|
|
6.
|
During
the second quarter of 2017,
the
engagement of the Subsidiary’s
CEO was terminated and the CFO resigned. These actions triggered the forfeiture of 10,456,094 options previously granted under
the 2016 Employee Incentive Plan. The forfeitures resulted in the de-recognition of $645,434 of previously recognized compensation
expense related to the pre-vested forfeitures.
|
|
|
|
|
|
As
such award was subject to a clawback feature for certain contingent events, such as termination for cause, the
Company accounted for the cancellation of the award in accordance with the provisions of ASC Topic 718-10-55. Thus, the Company
recognized the original compensation cost related to that grant (which was determined to be less than the current fair value
of such award) as a credit to the statement of operation and comprehensive loss within the line item
“General
and administrative”.
|
|
|
|
|
7.
|
On
August 1, 2017, the Company granted options exercisable into 3,000,000 shares to two officers under the plan at an
exercise price of $0.05 per share. 1,500,000 options become vested over a two (2) year period from its date of grant. The
options shall vest 1/3 on the grant date and the remaining 2/3 on a quarterly basis (8.33% per quarter). The remaining 1,500,000
options become vested over a two (3) year period from its date of grant. The options shall vest 1/3 on the first
anniversary
and the remaining 2/3 on a quarterly basis (8.33% per quarter). The Company used the Black-Scholes-Merton pricing model to
estimate the fair value. The Black-Sholes-Merton pricing model assumptions used are as follows: expected dividend yield of
0%; risk-free interest rate of 1.8%-2.07%; expected volatility of 255%, and expected term of 5-6.5 years. The fair value of
the options at the grant date was $1,019,139. During the three and nine month period ended September 30, 2017 the Company
recognized compensation expense of $295,108, and there was $724,031 of unrecognized compensation expense related to
non-vested option grants.
|
|
|
|
|
|
The following tables present a summary of the status of the grants to employees, officers and directors as of September 30, 2017.
|
Options outstanding at December 31, 2016
|
|
|
35,050,000
|
|
|
$
|
0.050
|
|
Forfeited
|
|
|
(10,456,094
|
)
|
|
$
|
0.050
|
|
Granted
|
|
|
3,000,000
|
|
|
$
|
0.050
|
|
Exercised
|
|
|
(293,906
|
)
|
|
|
-
|
|
Options outstanding at September30, 2017
|
|
|
27,300,000
|
|
|
$
|
0.050
|
|
Options exercisable at September30, 2017
|
|
|
14,617,750
|
|
|
$
|
0.050
|
|
|
1.
|
During
the period, the consultant mentioned in Note 3B1 above, exercised their 400,000 warrants and acquired 334,450 shares of common
stock. In accordance with the original terms of the warrant agreement the exercise of the warrants was made on a net share
settlement basis and resulted in issuance of 334,450 shares by the Company, based on the average market value of the common
shares for the ten day period preceding the date of exercise.
|
|
|
|
|
2.
|
During
the period, the Company received $77,083in cash forthe exercise of 308,334 warrants to purchase 308,334 shares of common stock.
The warrants carried an exercise price of $0.25.
|
|
|
|
|
3.
|
During
the period, the consultant mentioned in Note 8C1E of the
consolidated financial statements
as at December 31, 2016,
exercised their 400,000 warrants and acquired 262,363 shares of common stock. In accordance
with the original terms of the warrant agreement the exercise of the warrants was made on a net share settlement basis and
resulted in issuance of 262,363 shares by the Company, based on the average market value of the common shares for the ten-day
period preceding the date of exercise.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3
|
–
|
EVENTS
DURING THE PERIOD (cont.)
|
|
D.
|
Medmar
Settlement
|
|
|
|
|
|
Further
to Note 6 of the consolidated financial statements as at December 31, 2016, OWC received $50,000 from Medmar LLC (“Medmar”)
during February 2017. On April 21, 2017, OWC served written notice to Medmar of OWC’s determination to prepay the non-recourse
loan by Medmar to OWC in the principal amount of $300,000. OWC exercised what it believes is its absolute right to terminate
certain distribution rights granted to Medmar under the loan agreement and has repaid the entire principal balance of $300,000,
during the period.
|
|
|
|
|
E.
|
On
August 10, 2017, the Company filed an action in the Supreme Court of the State of New York, New York County seeking to recover
unpaid shares due the Company from former employees Ziv Turner, Uri Geller and Dubi Kochvar. The Company has settled the matter
with defendant Jeffrey Low, who has agreed to set aside shares of the Company to fund any judgment received by the Company
against defendant Turner. The action is currently pending and the Company is pursuing default judgments or settlements with
the remaining defendants
|
NOTE
4
|
-
|
SUBSEQUENT
EVENTS
|
In
October 2017, the Company initiated a Phase I safety study at Sheba,blind, randomized, placebo controlled, multiple escalating
dose study to determine the safety, tolerability and pharmacokinetic profile of medical grade cannabis in healthy volunteers.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The 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.
Recent
Developments
On
September 28, 2016, we entered into a loan agreement (the “Loan Agreement”) with Medmar LLC, pursuant to which Medmar
agreed to loan us a total of $300,000 (the “Loan”) on a non-interest bearing basis, with no conversion rights. The
Loan was due in 36 months from the Effective Date, September 22, 2016, and repayment would have been made only by the set off
of royalties payable by Medmar to us as follows: (i) prior to the full repayment of the Loan, which OWC Ltd may prepay at any
time, if and to the extent Medmar is required to pay any royalties to OWC under a License Agreement dated March 17, 2016, Medmar
shall set off such royalties from the outstanding principal balance of the Loan; (ii) OWC shall not be required to pay the Loan
other than through the set off from the royalties; and (iii) the Loan is a non-recourse loan, meaning that if and to the extent
that the royalties are insufficient for any reason in order to fully repay the Loan, Medmar waived any right and/or claim to any
deficiency.
In
addition, the Loan Agreement also provided that: (i) subject to Medmar funding the entire Loan, Medmar shall receive the exclusive
right to manufacture, produce, publicize, promote and market the OWC’s Licensed Products (as defined in the above-referenced
License Agreement) in any state in the U.S., subject to a new license agreement to be negotiated and signed between the parties
with respect to each and every state; (ii) the rights to be granted to Medmar under (i) above shall expire within three (3) years
subject to certain conditions and limitations; and (iii) the right of first refusal agreement between the parties that was executed
on February 8, 2016 providing Medmar certain rights in connection with the commercialization of Licensed Products in the States
of Hawaii and Pennsylvania be terminated.
On
April 21, 2017, OWC served written notice to Medmar of OWC’s determination to repay the non-recourse loan by Medmar to OWC
in the principal amount of $300,000. OWC exercised what it believes is its absolute right to terminate certain distribution rights
granted to Medmar under the loan agreement and has repaid the entire principle balance of $300,000, during the period.
On
February 1, 2017, following the very encouraging results that have been achieved at the mid-point of the psoriasis related study
conducted by OWC with an Israeli research institute, the Registrant’s Board of Directors and the management and scientific
personnel of OWC Ltd have determined to extend the size and scope of the Study for the purpose of, among other things, checking
the biological markers that have been generated to date with respect to the treatment of psoriasis (proliferation/inhibition and
several interleukins).
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 been scientifically
researched and demonstrated in a preclinical model concerning our topical cream formulation. 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).In addition, we are developing
unique delivery systems for our pharmaceutical grade products.
Although
there are existing reports and studies on CBD and THC, our formulations will contain several other active compounds from the cannabis
plant, that must be fully researched and documented in order to verify their effectiveness in specific 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 research, 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. Yehuda Baruch, OWC’s Director of Research and Regulatory Affairs, and Mr. Alon Sinai, OWC’s
Chief Operating Officer, will monitor the research and studies.
To
date, OWC has signed three research collaboration and license agreements as well as service agreements with Sheba Academic Medical
Center, Tel Hashomer, Israel (“Sheba”), with respect to two potential indications. 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 abovementioned agreements with Sheba, as well as other potentially negotiated agreements, OWC intends to
initiate two studies at the Sheba facilities to explore the effect of two formulations, all based on active ingredients in the
cannabis extracts, on multiple myeloma and psoriasis.
Pursuant
to the above-mentioned research agreement in connection with the psoriasis indication, the Medical Research Infrastructure Development
and Health Services of the Chaim Sheba Center (the “Fund”) shall perform a Phase I, randomized, placebo-controlled,
maximal dose study (the “Study”) to determine the safety and tolerability of topical cream containing MGC (“Medical
Grade Cannabis” or the “Study Drug”) in healthy volunteers. Dr. Aviv Barzilay, Director of the Department of
Dermatology at the Chaim Sheba Medical Center will lead the Study (the “Investigator”). The Study as defined in the
Research Agreement, shall be conducted in compliance with the following: (1) the Protocol; (2) the Ministry Guidelines; (3) the
instructions and terms specified in the Helsinki Committee’s approval; (4) the ICH-GCP; (5) the Helsinki Declarations; (6)
the applicable laws, rules and regulations regulating such studies which are applicable in Israel (the “Applicable Laws”);
and (7) written instructions and prescriptions issued by the OWC and governing the administration of the Study Drug.
On
February 1, 2017, following the very encouraging results that were achieved by OWC at the mid-point of the psoriasis related study
conducted by OWC with an Israeli research institute, the Company determined to extend the size and scope of the Study for the
purpose, among other parameters, of checking the biological markers that have been generated to date with respect to the treatment
of psoriasis (proliferation/ inhibition and several interleukins) which was conducted by such institute. Such trial results concluded
that application of OWC’s unique active cannabinoid-based topical cream formulation, resulted in up to 70% improvement in
a variety of inflammation markers directly associated with Psoriasis and inhibition of proliferation.
To
date, our intellectual property portfolio comprises 7 patent families and includes 21 filings in selected domains at various stages
from PCT filings, National Phase filings and Continuations in Part (CIP). Two of the patent families are in the field of Multiple
Myeloma and the other families are in the fields of pharmaceutical emulsions, Fibromyalgia, Migraine, Sexual Function and Skin
Disorders. These filings encompass pharmaceutical compositions and devices in these fields.
The
national phase is the second of the two main phases of the Patent Cooperation Treaty procedure. It follows the international phase
and consists in the processing of the international application before each office of or acting for a contracting state of the
PCT that has been designated in the international application. Assuming the successful completion of the clinical trials, of which
there can be no assurance, we believe that we will be able to retain the intellectual rights and secure patent protection for
our proprietary developments.
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 agreement with Sheba provide that all intellectual property
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 are expected to pay Sheba $170,000 for conducting the multiple myeloma trial between the 3rd
quarter of 2015 and the second quarter of 2016. Pursuant to the collaboration agreements, we are obliged to pay Sheba $85,000
throughout 2017 for conducting the safety study for the cream for treatment of psoriasis. We currently have the financial resources
to fund our current obligations under these agreements, but anticipate that we will require additional funding during the next
12 months for our continuing and planned expanded operations. As of September 30, 2017, we have paid Sheba $65,669 as per Sheba’s
payment requests.
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 and in vivo studies
|
|
|
Academic
|
|
|
|
|
|
Medical
Center
|
|
●
|
Completed
initial in vitro studies
|
|
|
|
|
|
|
|
|
|
|
●
|
Expect
to negotiate agreement and submit a clinical trial protocol to the Israeli Institutional Review Board and receive its approval
to commence a clinical study
|
|
|
|
|
●
|
Intend
to commence a clinical study referred to above in the second half of 2018
|
|
|
|
|
●
|
Drafted
a clinical trial protocol synopsis, which we believe will assist us in preparing an application for orphan status designation
|
|
|
|
|
|
|
Psoriasis
|
|
Sheba
Academic Medical Center
|
|
●
|
Entered
into a Research Collaboration and License Agreement.
|
|
|
|
|
●
|
Received
an IRB approval for a Phase I, blind, randomized, placebo controlled, multiple escalating dose study to determine the safety,
tolerability and pharmacokinetic profile of medical grade cannabis in healthy volunteers.
|
|
|
|
|
|
●
Started
Phase I safety study
|
|
|
|
|
|
|
Psoriasis
|
|
Emilia
Cosmetics Ltd.
|
|
●
|
Entered
into a nonbinding memorandum of understanding for the development, manufacture and marketing of a cannabinoid-based topical
cream.
|
|
|
|
|
●
|
Completed
the development of the topical cream in the first quarter of 2016.
|
|
|
|
|
●
|
Entered
into a final agreement. Pursuant to the License Agreement, Emilia granted a limited license to us with respect to Emilia’s
licensed intellectual property to be developed and commercialized worldwide in the topical treatment of psoriasis in humans
with OWC’s product
|
|
|
|
|
|
|
Fibromyalgia
|
|
|
|
●
|
Drafted
a clinical trial protocol synopsis.
|
|
|
|
|
|
|
New
delivery system - cannabis disintegrating 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 tablet.
|
OW
C’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
test results on multiple myeloma cells studied in vitro, which we announced on June 17, 2015, led us to proceed with further pre-clinical
studies (safety and toxicity, PK, PD) of our formulation, to assess the scientific merit for further development as an investigational
new drug. Whilst 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 our business.
Results
of Operations during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016
We
have not generated any revenue during the three months ended September 30, 2017 and 2016. We have operating expenses related to
general and administrative expenses and research and development. During the three months ended September 30, 2017, we incurred
a net loss of $1,201,067 due to general and administrative expenses of $1,105,794,research and development expenses of $94,475,
and financial expenses of $798 as compared to a net loss of $140,794 due to general and administrative expenses of $74,898, research
and development expenses of $30,363 and financial expenses of $35,533.
Our
general and administrative expenses increased by $1,030,896 during the three months ended September 30, 2017 as compared to the
same period in the prior year. This increase of 1,376% is primarily the result of increased stock-based compensation and amortization
of services receivable expenses. The charge relating to stock-based compensation and services receivable expenseswere$550,809
and $378,513, respectively,for the three months ended September 30, 2017, compared to $0 for the three months ended September
30, 2016.
Our
research and development expenses increased to $94,475 during the three months ended September 30, 2017, compared to $30,363 during
the same period in the prior year. The increase by $64,112 or 211% was primarily due to increased payments related to our collaboration
agreements, consultancy and patent applications.
Results
of Operations during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016
We
have not generated any revenue during the nine months ended September 30, 2017 and 2016. We have operating expenses related to
general and administrative expenses and research and development. During the nine months ended September 30, 2017, we incurred
a net loss of $3,081,560 due to general and administrative expenses of $2,738,731, research and development expenses of $340,436,
and financial expenses of $2,393 as compared to a net loss of $628,912 due to general and administrative expenses of $380,920,
research and development expenses of $102,182, and financial expenses of $145,810.
Our
general and administrative expenses increased by $2,357,811 during the nine months ended September 30, 2017 as compared to the
same period in the prior year. This increase of 619% is primarily the result of increased stock-based compensation and amortization
of services receivable expenses. The charges relating to stock-based compensation and services receivable expenseswere $1,319,745
and $877,500, respectively,for the nine months ended September 30, 2017, compared to stock-based compensation and services receivable
expenses of $8,074 and $0, respectively,for the nine months ended September 30, 2016.
Our
research and development expenses increased to $340,436 during the nine months ended September 30, 2017, compared to $102,182
during the same period in the prior year. The increase by $238,254 or 233% was primarily due to increased payments related to
our collaboration agreements, consultancy and patent applications.
Liquidity
and Capital Resources
On
September 30, 2017, we had current assets of $1,208,901;consisting of $1,113,372 in cash and other current assets of $95,529.
We had property and equipment valued at $9,539, net of $28,163 in accumulated depreciation, as of September 30, 2017. We had total
assets of $1,218,440 as of September 30, 2017.
On
December 31, 2016, we had current assets of $481,695 consisting of $472,282 in cash and other current assets of $9,413. We had
property and equipment valued at $15,073, net of $21,549 in accumulated depreciation as of December 31, 2016. We had total assets
of $496,768 as of December 31, 2016.
On
September 30, 2017, we had $208,203 in current liabilities consisting of $39,847 in accounts payable, $68,356 in other current
liabilities and deferred revenues of $100,000.
On
December 31, 2016, we had $145,780 in current liabilities consisting of $7,694 in accounts payable, $38,086 in other current liabilities
and deferred revenues of $100,000. We also had a non-recourse loan of $250,000 that was classified as a noncurrent liability.
We
had positive working capital of $1,000,698 on September 30, 2017 compared to positive working capital of $335,915 on December
31, 2016. Our accumulated deficit as of September 30, 2017 and December 31, 2016 was $13,040,025 and $9,958,465, respectively.
We
used $860,022 in our operating activities during the nine months ended September 30, 2017, which was due to a net loss
of $3,081,560 offset by amortization of services receivable of $877,500, stock-based compensation of $1,319,745, depreciation
expense of $9,027, an increase in accounts payable of $32,153, an increase in other assets of $46,127, an increase in foreign
currency translation adjustments of $1,030 and an increase in other liabilities of $30,270.
We
used $386,224 in our operating activities during the nine month ended September 30, 2016, which was due to a net loss of $628,912
offset by adjustments of convertible loans of $102,195, Stock based compensation of $8,074, depreciation expense of $7,255, a
decrease in accounts payable of $21,078, a decrease in other assets of $29,454, an increase in deferred revenue of $100,000 a
decrease in foreign currency translation adjustments of $11,614, an increase in accounts receivable of $421 and an increase in
other liabilities of $5,595.
We
used $3,493 and $1,860 during the nine months ended September 30, 2017 and 2016, respectively, to purchase property and equipment.
Our
financing activities during the nine months ended September 30, 2017 provided us with $1,504,605 through proceeds of $1,667,525
from issuance of common stock and warrants, $77,083 from exercise of warrants, $50,000 from non-recourse loan, a repayment
of non-recourse loan of $300,000, and $9,997 from collection of common stock subscriptions receivable. Based
upon our cash position of $1,113,372 on September 30, 2017, 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.
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 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. Pursuant to the collaboration agreement, we are expected to pay Sheba $170,000
for conducting the multiple myeloma trial between the 3rd quarter of 2015 and the second quarter of 2016. In addition, we commenced
pre-clinical studies on the treatment of psoriasis during the second quarter of 2016. Pursuant to the collaboration agreements,
we are obliged to pay Sheba $85,000 throughout 2017 for conducting the safety study for the cream for treatment of psoriasis.
We currently have the financial resources to fund our current obligations under these agreements, but anticipate that we will
require additional funding during the next 12 months for our continuing and planned expanded operations. As of September 30, 2017,
we have paid Sheba $65,669 according Sheba’s payment requests.
Our
expenditures allocated to our corporate activities conducted through our facilities in Petach Tikva were $39,752 for the year
ended December 31, 2016 and we expect will be approximately $40,000 for the year ending December 31, 2017.
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
Back to Table of Contents
None.
ITEM
4. CONTROLS AND PROCEDURES
Back to Table of Contents
Evaluation
of Disclosure Controls and Procedures
As
of September 30, 2017, 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 required by Rules 13a-15 or 15d-15, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures were ineffective as of the end of September
30, 2017 under the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended September 30, 2017 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.