ITEM
1. FINANCIAL STATEMENTS
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
US
dollars (except share data)
|
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
4,649,299
|
|
|
|
970,542
|
|
Other
current assets
|
|
|
91,676
|
|
|
|
74,298
|
|
Total
Current Assets
|
|
|
4,740,975
|
|
|
|
1,044,840
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
|
|
|
33,002
|
|
|
|
16,243
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
4,773,977
|
|
|
|
1,061,083
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES,
REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES A AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
128,151
|
|
|
|
64,814
|
|
Other
current liabilities
|
|
|
150,783
|
|
|
|
105,671
|
|
Deferred
revenue
|
|
|
100,000
|
|
|
|
100,000
|
|
Total
Current Liabilities
|
|
|
378,934
|
|
|
|
270,485
|
|
|
|
|
|
|
|
|
|
|
Embedded
derivative related to contingent redemption feature, at fair value (Note 3)
|
|
|
2,595,466
|
|
|
|
-
|
|
Liability
related to warrants to purchase Common Stock (Note 3)
|
|
|
3,450,000
|
|
|
|
-
|
|
Total
Long Term Liabilities
|
|
|
6,045,466
|
|
|
|
-
|
|
Total
Liabilities
|
|
|
6,424,400
|
|
|
|
270,485
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
Convertible Preferred Stock Series A, $0.00001 par value 20,000,000 shares authorized at June 30, 2018 (unaudited) and December
31, 2017 ; 500 and 0 shares issued and outstanding at June 30, 2018 (unaudited) on December 31, 2017, respectively; Aggregate
liquidation preference $6,000 at June 30 2018 (unaudited) (Note 4)
|
|
|
532,540
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Common stock,
$0.00001 par value; 500,000,000 shares authorized at June 30, 2018 (unaudited) and December 31, 2017 ; 147,758,908 shares
issued and outstanding at June 30, 2018 (unaudited) and December 31, 2017
|
|
|
1,478
|
|
|
|
1,478
|
|
Additional
paid-in capital
|
|
|
17,527,599
|
|
|
|
16,168,469
|
|
Services
receivable
|
|
|
(193,798
|
)
|
|
|
(524,792
|
)
|
Common
stock subscriptions receivable
|
|
|
(238,724
|
)
|
|
|
(344,006
|
)
|
Accumulated
deficit
|
|
|
(19,282,120
|
)
|
|
|
(14,516,912
|
)
|
Accumulated
other comprehensive income
|
|
|
2,602
|
|
|
|
6,361
|
|
Total
Stockholders’ Equity (Deficit)
|
|
|
(2,182,963
|
)
|
|
|
790,598
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities, Redeemable Convertible Preferred Stock Series A and Stockholders’ Equity (Deficit)
|
|
|
4,773,977
|
|
|
|
1,061,083
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
US
dollars (except share data)
|
|
|
|
For
the Three Month Periods Ended June 30,
|
|
|
For
the Six Month Periods
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
212,512
|
|
|
|
211,946
|
|
|
|
367,845
|
|
|
|
245,962
|
|
General
and administrative
|
|
|
755,506
|
|
|
|
231,585
|
|
|
|
1,576,687
|
|
|
|
1,632,937
|
|
Total
operating expenses
|
|
|
968,018
|
|
|
|
443,531
|
|
|
|
1,944,532
|
|
|
|
1,878,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
costs related to April 30, 2018 Redeemable Convertible Series A Preferred Stock (Note 4)
|
|
|
823,208
|
|
|
|
-
|
|
|
|
823,208
|
|
|
|
-
|
|
Revaluation
of liability related to warrants to purchase common stock (Note 3)
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
-
|
|
Revaluation
of embedded derivative related to contingent redemption feature (Note 3)
|
|
|
1,567,766
|
|
|
|
-
|
|
|
|
1,567,766
|
|
|
|
-
|
|
Other
finance expenses, net
|
|
|
963
|
|
|
|
1,595
|
|
|
|
1,588
|
|
|
|
1,595
|
|
Total
other expenses, net
|
|
|
2,241,937
|
|
|
|
1,595
|
|
|
|
2,242,562
|
|
|
|
1,595
|
|
Net
loss
|
|
|
3,209,955
|
|
|
|
445,126
|
|
|
|
4,187,094
|
|
|
|
1,880,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(514
|
)
|
|
|
(2,835
|
)
|
|
|
(3,759
|
)
|
|
|
4,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
(3,210,469
|
)
|
|
|
(447,961
|
)
|
|
|
(4,190,853
|
)
|
|
|
(1,876,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
on Redeemable Convertible Series A Preferred Stock (Note 4)
|
|
|
(45,574
|
)
|
|
|
-
|
|
|
|
(45,574
|
)
|
|
|
-
|
|
Accretion
of Redeemable Convertible Series A Preferred Stock to redemption value (Note 4)
|
|
|
(532,540
|
)
|
|
|
-
|
|
|
|
(532,540
|
)
|
|
|
-
|
|
Net
loss attributable to common stockholders
|
|
|
(3,788,069
|
)
|
|
|
(447,961
|
)
|
|
|
(4,765,208
|
)
|
|
|
(1,876,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (basic)
|
|
|
147,758,908
|
|
|
|
145,829,130
|
|
|
|
147,758,908
|
|
|
|
144,436,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (diluted)
|
|
|
148,619,380
|
|
|
|
145,829,130
|
|
|
|
149,169,470
|
|
|
|
144,436,525
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK
SERIES A AND STOCKHOLDERS’ EQUITY
(DEFICIT)
US DOLLAR
|
|
Redeemable
Convertible Preferred Stock
Series
A
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Services
Receivable
|
|
|
Common
Stock Subscriptions Receivable
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Total
Stockholders’ Equity (Deficit)
|
|
US
dollars (except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
139,447,782
|
|
|
|
1,395
|
|
|
|
11,039,102
|
|
|
|
(592,083
|
)
|
|
|
(395,011
|
)
|
|
|
(9,958,465
|
)
|
|
|
6,050
|
|
|
|
100,988
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
1
|
|
|
|
2,049,738
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,049,739
|
|
Financial
instruments issued for services to be received
|
|
|
-
|
|
|
|
-
|
|
|
|
1,166,127
|
|
|
|
12
|
|
|
|
1,187,014
|
|
|
|
(1,187,026
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization
of services receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,254,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,254,317
|
|
Common
stock issued upon exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750,642
|
|
|
|
18
|
|
|
|
225,142
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
225,160
|
|
Common
stock issued upon exercise of options and warrants on cashless basis
|
|
|
-
|
|
|
|
-
|
|
|
|
890,719
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Payments
received on subscriptions receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,005
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,005
|
|
Common
stock issued for cash @$0.13 together with detachable warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
904,924
|
|
|
|
9
|
|
|
|
117,631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,640
|
|
Common
stock issued for cash @$0.17 together with detachable warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
588,237
|
|
|
|
6
|
|
|
|
99,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Common
stock issued for cash @$0.25 together with detachable warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
520,000
|
|
|
|
5
|
|
|
|
129,995
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130,000
|
|
Common
stock issued for cash @$0.50 together with detachable warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
1,767,250
|
|
|
|
18
|
|
|
|
883,607
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
883,625
|
|
Common
stock issued for cash @$0.70 together with detachable warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
623,227
|
|
|
|
6
|
|
|
|
436,254
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
436,260
|
|
Other
comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,558,447
|
)
|
|
|
-
|
|
|
|
(4,558,447
|
)
|
Balance
at December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
147,758,908
|
|
|
|
1,478
|
|
|
|
16,168,469
|
|
|
|
(524,792
|
)
|
|
|
(344,006
|
)
|
|
|
(14,516,912
|
)
|
|
|
6,361
|
|
|
|
790,598
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
585,555
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
585,555
|
|
Amortization
of services receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
330,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
330,994
|
|
Payments
received on subscriptions receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,282
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,282
|
|
Issuance
of Series A redeemable convertible preferred stock, net of fair value of embedded derivative related to contingent redemption
feature, fair value of and detachable warrants, beneficial conversion feature on Redeemable Convertible Series A Preferred
Stock and net of issuance costs (see also Note 4C)
|
|
|
500
|
|
|
|
*
-)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Beneficial
Conversion Feature on Redeemable Convertible Series A Preferred Stock (see also Note 4C)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
773,575
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
773,575
|
|
Dividend
on Series A redeemable convertible preferred stock (see also Note 4C)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,574
|
)
|
|
|
-
|
|
|
|
(45,574
|
)
|
Accretion
of Series A redeemable convertible preferred stock to redemption value (see also Note 4C)
|
|
|
-
|
|
|
|
532,540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(532,540
|
)
|
|
|
-
|
|
|
|
(532,540
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,759
|
)
|
|
|
(3,759
|
)
|
Net
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,187,094
|
)
|
|
|
-
|
|
|
|
(4,187,094
|
)
|
Balance
at June 30, 2018 (unaudited)
|
|
|
500
|
|
|
|
532,540
|
|
|
|
147,758,908
|
|
|
|
1,478
|
|
|
|
17,527,599
|
|
|
|
(193,798
|
)
|
|
|
(238,724
|
)
|
|
|
(19,282,120
|
)
|
|
|
2,602
|
|
|
|
(2,182,963
|
)
|
*)
Representing an amount less than $1,000
The
accompanying notes are an integral part of the condensed consolidated financial statements.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
US
dollars
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(4,187,094
|
)
|
|
|
(1,880,494
|
)
|
Adjustments
to reconcile net loss
|
|
|
|
|
|
|
|
|
to
cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,947
|
|
|
|
5,585
|
|
Stock-based
compensation
|
|
|
585,555
|
|
|
|
768,936
|
|
Amortization
of services receivable
|
|
|
330,994
|
|
|
|
498,986
|
|
Direct
and incremental issuance cost related to April 2018 PIPE transaction
|
|
|
483,324
|
|
|
|
-
|
|
Revaluation
of liability related to warrants to purchase common stock
|
|
|
(150,000
|
)
|
|
|
-
|
|
Revaluation
of embedded derivative related to contingent redemption feature
|
|
|
1,567,766
|
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in other current assets
|
|
|
(17,378
|
)
|
|
|
(12,900
|
)
|
Increase
in accounts payable
|
|
|
63,338
|
|
|
|
28,206
|
|
Increase
(decrease) in other current liabilities
|
|
|
(463
|
)
|
|
|
1,633
|
|
Cash
used in operating activities:
|
|
|
(1,320,011
|
)
|
|
|
(590,048
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(20,706
|
)
|
|
|
(1,080
|
)
|
Cash
used in investing activities
|
|
|
(20,706
|
)
|
|
|
(1,080
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
-
|
|
|
|
1,667,524
|
|
Proceeds
from the exercise of warrants
|
|
|
-
|
|
|
|
77,083
|
|
Proceeds
from issuance of Series A redeemable convertible preferred stock, embedded derivative related to contingent redemption feature
and detachable warrants, net of issuance costs
|
|
|
4,917,951
|
|
|
|
-
|
|
Proceeds
from the payment of stock subscriptions
|
|
|
105,282
|
|
|
|
-
|
|
Proceeds
of debt borrowings, net of related expenses
|
|
|
-
|
|
|
|
50,000
|
|
Payment
of non-recourse loan
|
|
|
-
|
|
|
|
(300,000
|
)
|
Cash
provided by financing activities
|
|
|
5,023,233
|
|
|
|
1,494,607
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments on cash and cash equivalents
|
|
|
(3,759
|
)
|
|
|
4,134
|
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
3,678,757
|
|
|
|
907,613
|
|
Balance
of cash and cash equivalents at beginning of period
|
|
|
970,542
|
|
|
|
472,282
|
|
Balance
of cash and cash equivalents at end of period
|
|
|
4,649,299
|
|
|
|
1,379,895
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature on Redeemable Convertible Series A Preferred Stock
|
|
|
773,575
|
|
|
|
-
|
|
Dividend
on Redeemable Convertible Series A Preferred Stock
|
|
|
45,574
|
|
|
|
-
|
|
Accretion
of Redeemable Convertible Series A Preferred Stock to redemption value
|
|
|
532,540
|
|
|
|
-
|
|
Issuance
costs in form of liability related to warrants
|
|
|
116,676
|
|
|
|
-
|
|
Net
share settlement of warrant exercise
|
|
|
-
|
|
|
|
260,000
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
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. The Company is a medical cannabis-based 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, chronic pain syndromes, fibromyalgia PTSD and development of unique delivery
systems. These include a cannabis-based topical ointment, cannabis sublingual disintegrating tablet and advanced Nasal delivery.
The
accompanying consolidated financial statements of OWCP and its wholly owned subsidiary One World Cannabis, Ltd. (“OWC”
or the “Israeli subsidiary”) were prepared from the accounts of the Company under the accrual basis of accounting.
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 June 30, 2018, the Company has an accumulated deficit of $19,282,120. In addition, during the six months ended June 30,
2018, the Company reported losses and negative cash flows from operating activities.
On
April 30, 2018, the Company entered into and consummated a Securities Purchase Agreement with a new investor, pursuant to which,
the Company issued (i) 500 shares of Preferred Stock designated as Series A Preferred Stock that are convertible into 25,000,000
shares of common stock and (ii) Warrants that are eligible for conversion into 12,500,000 shares of common stock for an aggregate
purchase price of $5,000,000 (see also Note 4C). Management believes that this fund raising activity mitigates substantial doubt
related to the Company’s ability to continue as a going concern.
The
Company has a limited operating history and faces a number of 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.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions
that affect amounts reported of assets and liabilities at the date of the financial statements and the reported amount of revenues
and expenses during the reporting periods. Actual results could differ from those estimates and be based on events different from
those assumptions. As part of these financial statements, the more significant estimates include (1) stock-based compensation
related to employee and non-employee awards; (2) identification of financial instruments in liabilities, equity and mezzanine
transactions and proper classification and measurement of financial instruments; (3) evaluation of going concern; and (4) contingencies.
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, 2017.
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, 2017 and the condensed consolidated statement of changes in Redeemable Convertible
Preferred Stock Series A and stockholders’ equity (deficit) for the year then ended have been derived from the consolidated
financial statements contained in our Annual Report on form 10-K.
The
results for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the
year ending December 31, 2018 or for any other interim period in the future.
The
accompanying unaudited interim consolidated financial statements as of June 30, 2018, have been prepared in accordance with U.S.
generally accepted accounting principles and standards of the Public Company Accounting Oversight Board for interim financial
information. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements. In the opinion of management, the unaudited interim consolidated financial
statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s consolidated
financial position as of June 30, 2018, the Company’s consolidated results of operations for the three and six months periods
ended June 30, 2018, and the Company’s consolidated cash flow for the six months ended June 30, 2018.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Convertible
Redeemable Series A Preferred Stock
The
Company classified its Convertible Redeemable Series A Preferred Stock outside of Stockholders’ Equity (Deficit) because
certain features of the Company’s Certificate of Designation could require redemption of some or all classes of such Convertible
Redeemable Series A Preferred Stock upon events that are considered not solely within the control of the Company (see also Note
4). Upon initial recognition, the Convertible Redeemable Series A Preferred Stock that were issued together with detachable Warrants
to purchase Common Stock (originally classified as a financial liability) were measured based on the “residual approach”
and were presented net of the direct issuance expenses that were allocated to them.
Further,
the Company has considered the provisions of ASC 815-15, “Derivatives and Hedging - Embedded Derivatives” (“ASC
815-15”), and determined that the embedded conversion feature of the Series A Preferred Stock is eligible to be considered
as clearly and closely related to the host debt instrument, and accordingly, it should not be separated from the host instrument.
The Company applied ASC 470-20 “Debt with Conversion and Other Options” (“ASC 470-20”), which clarifies
the accounting for instruments with BCF or contingently adjustable conversion ratios. Pursuant to this guidance, the amount of
the BCF with respect to the Convertible Redeemable Series A Preferred Stock at the commitment date, was based on the effective
conversion price which is calculated by dividing the proceeds allocated to the convertible preferred stock by the number of shares
into which it is convertible.
The
intrinsic value of the conversion option with respect to the Series A Preferred Stock was recorded at the initial date as a discount
on the Series A Preferred Stock with a corresponding amount credited directly to equity as additional paid-in capital.
However,
as such amount was determined to be greater than the amount of the proceeds originally allocated to the Convertible Redeemable
Series A Preferred Stock, the amount of the discount assigned to the BCF was limited to the amount of the proceeds allocated.
Subsequently, the discount on the Series A Preferred Stock is amortized as accretion to the redemption value of the Series A Preferred
Stock deemed dividend by using a straight-line method.
Warrants
to purchase Common Stock:
The
Company accounts for warrants to purchase shares of its Common Stock, held by Purchaser and placement agent, that include a fundamental
transaction feature pursuant to which such warrants could be required to be settled in cash, as a non-current liability according
to the provisions of ASC 815-40-, “Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASC 815-40”).
The Company measures the warrants upon initial recognition and on subsequent periods at fair value by using the Black-Scholes-Merton
pricing model in each reporting period until they are exercised or expired, with changes in the fair values being recognized in
separate line in the Company’s statement of comprehensive loss (see also Note 3). The direct issuance expenses that were
allocated to the Warrants were expensed as incurred.
Embedded
derivative related to contingent redemption feature:
The
Company determined that the right for Mandatory Redemption Amount (see also Note 4B) which involves a substantial discount, represents
an embedded derivative that should be separately accounted for pursuant to the guidance related to contingently exercisable call
rights in ASC 815-15-25-42. The bifurcated embedded derivative is measured at fair value by using Monte-Carlo pricing model
upon issuance and at each reporting date with changes in fair value recognized in the statement of operations and comprehensive
loss.
Unit
issuance and allocation of issuance costs:
When
multiple instruments are issued in a single transaction (unit issuance), the total proceeds from the transaction are allocated
among the individual freestanding instruments identified. The allocation occurs after identifying all the freestanding instruments
and the subsequent measurement basis for those instruments.
After
allocating the proceeds among the freestanding instruments (i.e., warrant liability and preferred share), the proceeds are further
allocated between the host components (such as the preferred share) and any bifurcated derivatives. Bifurcated derivatives are
initially recognized at fair value and the residual value is allocated to the host component.
The
allocation of issuance costs to freestanding instruments and between host components and bifurcated derivatives is based on the
relative values of such instruments and components.
Issuance
costs allocated to the warrant liability and to bifurcated derivatives was immediately expensed. While issuance costs allocated
to the preferred shares host component classified as mezzanine equity, are recorded as a reduction of the share balance and accreted
up to redemption value.
Net
Loss Per Share
The
Company computes net loss per share in accordance with ASC 260, “Earnings per share”. Basic loss per share is computed
by dividing net loss by the weighted-average number of common shares outstanding during the period, net of the weighted average
number of treasury shares (if any). Securities that may participate in dividends with the common stock (such as the convertible
Series A Preferred Stock) are considered in the computation of basic income per share using the two-class method. However, in
periods of net loss, participating securities are included only if the holders of such securities have a contractual obligation
to share the losses of the Company. Accordingly, the outstanding Series A Preferred Stock, which was issued on April 30, 2018
was excluded from the computation of the net loss per share for the three and six months periods ended June 30, 2018.
Diluted
loss per common share is computed similar to basic earnings per share, except that the denominator is increased to include the
number of additional potential common shares that would have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive. Potential common shares are excluded from the computation for a period in which
a net loss is reported or if their effect is anti-dilutive. The Company’s potential common shares consist of stock options,
certain stock warrants and restricted stock awards issued under the Company’s stock incentive plans and their potential
dilutive effect is considered using the treasury method and of the convertible Series A Preferred Stock, certain stock
warrants and embedded derivative related to the contingent redemption feature of the Series A Preferred Stock which
their potential dilutive effect is considered using the “if-converted method”.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
The
net loss attributable to common stockholders and the weighted average number of shares used in computing basic and diluted net
loss per share from continuing operations for the three and six months periods ended June 30, 2018 and 2017, is as follows:
|
|
Three
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,209,955
|
)
|
|
$
|
(445,126
|
)
|
Accretion
of Redeemable Convertible Series A Preferred Stock to redemption value (*)
|
|
|
(532,540
|
)
|
|
|
-
|
|
Dividend
on Redeemable Convertible Series A Preferred Stock (**)
|
|
|
(45,574
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders for basic net loss per share
|
|
$
|
(3,788,069
|
)
|
|
$
|
(445,126
|
)
|
Revaluation
of liability related to warrants to purchase common stock
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders for diluted net loss per share
|
|
$
|
(3,938,069
|
)
|
|
$
|
(445,126
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares
of common stock used in computing basic net loss per share
|
|
|
147,758,908
|
|
|
|
145,829,130
|
|
Incremental
shares from assumed exercise of warrants to purchase common stock
|
|
|
860,472
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares
of common stock used in computing diluted net loss per share
|
|
|
148,619,380
|
|
|
|
145,829,130
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share of common stock from continuing operations, basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,187,094
|
)
|
|
$
|
(1,880,494
|
)
|
Accretion
of Redeemable Convertible Series A Preferred Stock to redemption value (*)
|
|
|
(532,540
|
)
|
|
|
-
|
|
Dividend
on Redeemable Convertible Series A Preferred Stock (**)
|
|
|
(45,574
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders for basic net loss per share
|
|
$
|
(4,765,208
|
)
|
|
$
|
(1,880,494
|
)
|
Revaluation
of liability related to warrants to purchase common stock
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders for diluted net loss per share
|
|
$
|
(4,915,208
|
)
|
|
$
|
(1,880,494
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares
of common stock used in computing basic and diluted net loss per share
|
|
|
147,758,908
|
|
|
|
144,436,525
|
|
Incremental
shares from assumed exercise of warrants to purchase common stock
|
|
|
1,410,562
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares
of common stock used in computing diluted net loss per share
|
|
|
149,619,470
|
|
|
|
144,436,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share of common stock from continuing operations, basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
(*)
|
As
discussed in Note 4, the Company shall be required to offer to redeem 1/12 of the Series A Preferred Stock 270 days following
the closing date and every 30 days thereafter throughout the remaining of the term. In addition, in the event the Investor
desires to have all or portion of its Series A Preferred Stock redeemed, it shall be redeemed for an amount equal to 110%
of the Stated Value of such Series A Preferred Stock plus any unpaid accrued dividend to the mandatory redemption day, and
may be redeemed in cash, or by to sole discretion of the Company, to the Company’s Common Stocks, following to the terms
as defined in the Certificate of Designation.
|
|
|
|
|
(**)
|
The
net loss used for the computation of basic and diluted net loss per share for the three and six months periods ended June
30, 2018, includes the preferred dividend requirement of 5% per share per annum for the Series A Preferred Stock, which shall
be due and payable in cash or in Common Stock of the Company in the sole discretion of the Company, as defined in the certificate
of designation (see also Note 4B).
|
For
the three and six months periods ended June 30, 2018, diluted loss per share excludes the impact of stock options, stock warrants
and Series A Preferred Stock totaling 75,700,870 shares, as the effect of their inclusion would be anti-dilutive. For the
three and six months periods ended June 30, 2017, diluted loss per share excludes the impact of stock options and stock warrants
totaling 34,243,178 shares.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
|
|
|
|
B.
|
Recent
Accounting Pronouncements
|
|
1.
|
In
February 2016, the FASB issued ASU No. 2016-02, Leases (as amended). This guidance will require that lease arrangements longer
than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in
the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and
interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or
entered into after, the date of initial application, with an option to use certain transition reliefs. Early adoption is permitted.
|
|
|
|
|
|
The
Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related
disclosures.
|
|
|
|
|
2.
|
Commencing
January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (ASU
2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents
in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of
cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years.
|
|
|
|
|
|
This
guidance has no material impact on the Company’s consolidated financial statements.
|
|
|
|
|
3.
|
In
May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation”. The amendment provides guidance about
which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. The
guidance became effective for the fiscal year beginning on January 1, 2018, including interim periods within that year.
|
|
|
|
|
|
This
guidance has no material impact on the Company’s consolidated financial statements.
|
|
4.
|
In
July 2017, the FASB issued ASU 2017-11, “Earnings per share: I. Accounting for Certain Financial Instruments with
Down Round Features”, which allows companies to exclude a down round feature when determining whether a financial
instrument is considered indexed to the entity’s own stock. As a result, financial instruments with down round features
may no longer be required to be accounted classified as liabilities. A company will recognize the value of a down round
feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered,
as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. The guidance
in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach.
The
Company early adopted this guidance in connection to the down round feature within the embedded optional conversion feature
of the preferred stock.
|
|
5.
|
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07, “Improvements to Nonemployee
Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees
for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the
requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years
starting after December 15, 2018, including interim periods within that fiscal year. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
The
Company is currently evaluating the impact of adopting this standard on its financial statements and related disclosures,
but does not expect it to have a material impact.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3:
-
|
FAIR
VALUE MEASUREMENTS
|
ASC
820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value,
the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
ASC
820 also establishes the following fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement.
|
Level
1 -
|
quoted
prices in active markets for identical assets or liabilities;
|
|
Level
2 -
|
inputs
other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar
assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities; or
|
|
Level
3 -
|
unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The
Warrants and embedded derivative related to the contingent redemption feature of the Series A Preferred Stock (see
also Note 4C) have been classified at Level 3.
In
estimating the fair value of the Warrants on the issuance date (April 30, 2018) and June 30, 2018, the Company used the following
assumptions:
12,500,000
Purchaser Warrants:
|
|
June
30,
2018
|
|
|
April
30,
2018
|
|
|
|
|
|
|
|
|
Risk-free
interest rate (1)
|
|
|
2.72
|
%
|
|
|
2.79
|
%
|
Expected
volatility (2)
|
|
|
248.9
|
%
|
|
|
246
|
%
|
Expected
life (in years) (3)
|
|
|
4.83
|
|
|
|
5.00
|
|
Expected
dividend yield (4)
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair
value per Warrant
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
2,500,000
Placement agent Warrants:
|
|
June
30,
2018
|
|
|
April
30,
2018
|
|
|
|
|
|
|
|
|
Risk-free
interest rate (1)
|
|
|
2.61
|
%
|
|
|
2.62
|
%
|
Expected
volatility (2)
|
|
|
258.5
|
%
|
|
|
252.6
|
%
|
Expected
life (in years) (3)
|
|
|
2.83
|
|
|
|
3.00
|
|
Expected
dividend yield (4)
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair
value per Warrant
|
|
$
|
0.23
|
|
|
$
|
0.24
|
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3:
-
|
FAIR
VALUE MEASUREMENTS (Cont.)
|
|
1
|
Risk-free
interest rate - based on yield rates of non-index linked U.S. Federal Reserve treasury bonds.
|
|
|
|
|
2
|
Expected
volatility - was calculated based on actual historical stock price movements of the Company over a term that is equivalent
to the expected term of the option.
|
|
|
|
|
3
|
Expected
life - the expected life was based on the expiration date of the warrants.
|
|
|
|
|
4
|
Expected
dividend yield - was based on the fact that the Company has not paid dividends to its common stockholders in the past and
does not expect to pay dividends to its common stockholders in the future.
|
The
changes in Level 3 liabilities associated with the 2018 Private Placement warrants are measured at fair value on a recurring basis.
The following tabular presentation reflects the components of the liability associated with such warrants as of June 30, 2018:
|
|
Fair
value
of liability
related to
warrants
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
$
|
-
|
|
Recognition
of liability related to Warrants to purchase Common Stock
|
|
|
3,600,000
|
|
Revaluation
of warrants to purchase Common Stock
|
|
|
(150,000
|
)
|
|
|
|
|
|
Balance
at June 30, 2018 (unaudited)
|
|
$
|
3,450,000
|
|
In
estimating the fair value of the embedded derivative related to the contingent redemption feature of the Series A Preferred
Stock, the Company used the following assumptions:
|
|
June
30,
2018
|
|
|
April
30,
2018
|
|
|
|
|
|
|
|
|
Risk-free
interest rate (1)
|
|
|
2.14%-2.42
|
%
|
|
|
2.13%-2.40
|
%
|
Expected
volatility (2)
|
|
|
160
|
%
|
|
|
258.3
|
%
|
Expected
life (in years) (3)
|
|
|
1.48
|
|
|
|
1.64
|
|
|
1.
|
Risk-free
interest rate - based on yield rates of non-index linked U.S. Federal Reserve treasury
bonds.
|
|
2.
|
Expected
volatility - was calculated based on actual historical stock price movements of the Company
over a term that is equivalent to the expected term of the option.
|
|
3.
|
Expected
life - the expected life was based on the expiration date of the mandatory redemption.
|
The
changes in Level 3 liabilities associated with the 2018 Private Placement warrants are measured at fair value on a recurring basis.
The following tabular presentation reflects the components of the liability associated with such warrants as of June 30, 2018:
|
|
Fair
value of
embedded derivative related to contingent redemption feature
|
|
|
|
|
|
Balance
at December 31, 2017
|
|
$
|
-
|
|
Recognition
of embedded derivative related to contingent redemption feature
|
|
|
1,027,700
|
|
Revaluation
of embedded derivative related to contingent redemption feature
|
|
|
1,567,766
|
|
|
|
|
|
|
Balance
at June 30, 2018 (unaudited)
|
|
$
|
2,595,466
|
|
The
Company’s management is measuring the fair value of the 2018 Private Placement warrants issued to the Purchaser and the placement
agent and the embedded derivative related to the contingent redemption feature of the Series A Preferred Stock by
using the services of external independent appraiser.
During
the period commencing April 30, 2018 and ended June 30, 2018, no warrants have been exercised. As of June 30, 2018, there were
15,000,000 outstanding unexercised Warrants (including both investor and placement agent Warrants) related to the 2018 Private
Placement.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
The
Company’s common stock confer upon their holders the following rights:
|
■
|
The
right to participate and vote in the Company’s stockholder meetings, whether annual or special. Each share will entitle
its holder, when attending and participating in the voting in person or via agent or letter, to one vote;
|
|
|
|
|
■
|
The
right to a share in the distribution of dividends, whether in cash or in the form of bonus shares, the distribution of assets
or any other distribution pro rata to the par value of the shares held by them; and
|
|
|
|
|
■
|
The
right to a share in the distribution of the Company’s excess assets upon liquidation pro rata to the par value of the
shares held by them.
|
|
B.
|
Series
A Preferred Stock
|
The
terms of the Series A Preferred Stock are governed by a Certificate of Designation (the “Series A Certificate of Designation”)
filed by the Company with the Delaware Secretary of State on April 30, 2018. Pursuant to the Series A Certificate of Designation,
the Company designated 500 shares of the Company’s preferred stock as “Series A Preferred Stock”. As more fully
described below, for the six months ended June 30, 2018, the Company has issued a total of 500 shares of Series A Preferred Stock
in connection with the Share Purchase Agreement. Following is a summary of the material terms of the Series A Preferred Stock:
|
■
|
Dividends.
Holders of the 500 shares of Series A Preferred Stock (the “ Series A Preferred
Shares”) are entitled to receive dividends on each share of the Series A
Preferred Stock, payable quarterly on March 31, June 30, September 30 and December 31,
commencing June 30, 2018 (which will be prorated) in an amount equal to 5% per annum
of the stated value ($10,000 per share of the Series A Preferred Stock) and which shall
be cumulative. Such dividends are to be paid in cash or freely tradeable shares of our
common stock at our sole discretion, subject to certain conditions. If in the event the
Company elects to pay a dividend in shares of our common stock to the holders of the
Series A Preferred Shares, the number of shares of our common stock will be determined
in accordance with the terms of the Series A Preferred Shares. The Company may only elect
to pay cash dividends to the Series A Preferred Shares to the extent there are amounts
available for the payment of dividends in accordance with applicable Delaware law
As
of June 30, 2018, an amount of $45,574 in connection to the aforesaid dividend has been accrued as part of the other account
liabilities on the consolidated balance sheet since such dividend was paid by the Company by issuance of 242,572 shares
of common stock to the preferred shares holder on July 10, 2018 (see also Note 6A).
|
|
■
|
Liquidation
.
In the event of a Liquidation Event, the holders of Series A Preferred Stock (“Holders”) shall be entitled to
receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its
stockholders (the “Liquidation Funds”), before any amount shall be paid to the holders of any other shares of
capital stock of the Company (“Junior Stock”), but pari passu with any Parity Stock (preferred shares that are
pari passu rank to the Series A Preferred Stock in respect of the preferences as to dividends, redemption rights, distributions
and payments upon the liquidation, dissolution and winding up of the Company then outstanding), an amount per Series A Preferred
Share equal to the greater of (A) the Liquidation Preference thereof on the date of such payment and (B) the Bankruptcy Redemption
Amount (as such term is defined in the Series A Certificate of Designation), provided that if the Liquidation Funds are insufficient
to pay the full amount due to the Holders and holders of shares of Parity Stock, then each Holder and each holder of Parity
Stock shall receive a percentage of the Liquidation Funds equal to the full amount of Liquidation Funds payable to such Holder
and such holder of Parity Stock as a liquidation preference, in accordance with their respective certificate of designations
(or equivalent), as a percentage of the full amount of Liquidation Funds payable to all holders of Series A Preferred Shares
and all holders of shares of Parity Stock. As of June 30, 2018, the aggregate Liquidation Preference amounted to $6,000,000
(unaudited). The foregoing dollar amount does not include dividends, as the Company’s Board of Directors has not declared
any dividends since inception.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
■
|
Voting
Rights
. Holders of the Series A Preferred Shares are entitled to vote on all matters requiring a vote of the shareholder
of the Company as a single stock, and each holder of the Series A Preferred Shares is entitled to vote the number of shares
of common stock into which such holders Series A Preferred Shares would be convertible into as of the record date.
|
|
|
|
|
■
|
Conversion
.
As of June 30, 2018, there were issued and outstanding 500 shares of the Company’s Series A Preferred Shares, which
are currently convertible into 25,000,000 shares of the Company’s common stock at a conversion price of $0.20, subject
to adjustment pursuant to the anti-dilution provisions of the Preferred Shares. The Series A Preferred Shares have a beneficial
ownership limitation such that none of the holders of the Series A Preferred Shares have the right to convert the Series A
Preferred Shares to the extent that after giving effect to such conversion, the holder (together with its affiliates and any
other persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in
excess of 4.99% (the “Maximum Percentage”) of the shares of the Company’s common stock outstanding immediately
after giving effect to such conversion. By written notice to the Company, however, a holder of the Series A Preferred Shares
may waive the Maximum Percentage provision, which such notice will be effective 61 calendar days after the date of such notice.
|
|
|
|
|
■
|
Redemption
.
The terms of the Preferred Shares contain both mandatory and conditional redemption provisions. Certain mandatory redemption
provisions provide that, beginning January 30, 2019 and continuing for every thirty-day period thereafter (each a “Mandatory
Redemption Date”), the Company is required to offer to redeem 1/12
th
of the outstanding Series A Preferred
Shares for an amount equal to 110% of the stated value ($10,000) of such shares of Series A Preferred Stock plus any accrued
but unpaid dividends to the Mandatory Redemption Date (the “Mandatory Redemption Amount”), and may be redeemed
in cash or, at the Company’s sole discretion, freely tradeable shares of the Company’s common stock, subject to
certain conditions. In addition, if the Company receives gross cash proceeds of $10,000,000 or more in connection with a closing
of an offering of the Company’s securities, the terms of the Series A Preferred Shares require the Company to make an
offer to the holders of shares of the Series A Preferred Stock to redeem 50% of the outstanding Series A Preferred Shares
at either (i) 115% of the stated value of each Preferred Share ($10,000) plus any unpaid accrued dividends if redeemed on
or prior to October 30, 2018 or (ii) 120% of the stated value of each Preferred Share ($10,000) plus any unpaid accrued dividends
if redeemed after October 30, 2018 (the “Redemption Premium”). In the event of an asset sale resulting in an amount
of proceeds in excess of $500,000, the Company is required to offer to redeem to 100% of the outstanding Series A Preferred
Shares for the Redemption Premium. The Company may also be required, at the option of holders of the Series A Preferred Shares
to redeem any outstanding shares of Series A Preferred Stock upon a change of control or bankruptcy event. The holders of
the series A Preferred Stock are not required to accept any of the aforementioned offers.
|
|
C.
|
Securities
Purchase Agreement
|
On
April 30, 2018 (the “Initial Date”), the Company consummated a private placement transaction (the “April 2018
PIPE”) by entering into a Securities Purchase Agreement (the “Agreement”) with a non-US-based institutional
investor (the “Purchaser”), pursuant to which, the Company sold and the Purchaser bought, (i) 500 shares of Preferred
Stock designated as Series A Preferred Stock (the “Preferred Stock”), which are convertible into shares of common
stock at a conversion price of $0.20 per share, subject to adjustment pursuant to the anti-dilution provisions of the Preferred
Shares, and (ii) Warrants (the “Warrants”) representing the right to acquire 12,500,000 shares of common stock over
a period of five years from the Initial Date at an exercise price of $0.22 per share, which is subject to certain adjustments
including anti-dilution provisions, for an aggregate purchase price of $5,000,000.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
The
Company engaged Newbridge Securities Corporation, through LifeTech Capital (“Newbridge”), as exclusive placement agent
for the aforesaid Agreement, pursuant to which the Company was required to pay a cash fee to Newbridge and issued to them warrants
to purchase 2.5 million shares of common stock (or 10% of the aggregate number of fully diluted shares of common stock that have
been purchased by an Purchaser) over a period of three years from the Initial Date at an exercise price of $0.20 per share, which
is subject to certain adjustments including anti-dilution provisions. In addition, the Company is also obligated to pay Newbridge
a warrants solicitation fee equal to 4% of the gross proceeds received by the Company upon cash exercise of any Warrants purchased
by the Purchasers in connection with the Agreement.
As
defined in the Agreement, upon certain changes in control events, the Purchaser may elect to receive cash equal to the Black-Scholes
value of the outstanding Warrants. Therefore, the Warrants are considered a freestanding instrument, as the Company believes it
is legally detachable and separately exercisable. Consequently, as of the Initial Date, the Warrants were accounted for and recognized
as a non-current financial liability on the consolidated balance sheet in total amount of $3,600,000 ($600,000 out of which related
to warrants that were granted to Newbridge) under the ASC 815-40-25 and were measured at fair value. Subsequently, the Warrants
are marked to market in each reporting period until they are exercised or expired, as earlier, with changes in the fair value
of the Warrants charged into the statement of comprehensive loss. For the six months ended June 30, 2018, the Company recorded
income in total amount of $150,000 due to revaluation of Warrants to purchase shares of Common Stock in the statement of operations
and comprehensive loss as separate line.
In
addition, the Company identified the contingent redemption feature of the Series A Preferred Stock in case of other
than upon bankruptcy triggering event which is not eligible for the scope exception from ASC 815. Thus, the bifurcated embedded
derivative amounting to $1,027,700 and $2,595,466 was measured at fair value on the Initial Date and June 30, 2018, respectively.
The change in the fair value of $1,567,766 is recognized in the statement of operations and comprehensive loss as a separate line.
At
the Initial Date, the effective conversion price of the Preferred Stock is less than the fair value of the share of Common Stock
at the commitment date. As a result, a BCF amounting to approximately $972,300 was measured assuming full conversion according
to ASC 470-20 However, according to ASC 470-20-30-8, there is a limitation to the amount of the proceeds allocated to the convertible
preferred shares if the intrinsic value of the BCF is greater than the proceeds allocated to the convertible instrument. That
is, the amount of the discount assigned to the BCF shall be limited to the amount of the proceeds allocated to the convertible
preferred share. Consequently, at the Initial Date, a BCF was recognized in total amount of $773,575.
Under
ASC 480-10-S99 “Distinguishing Liabilities from Equity”, since the Preferred Stock have conditional redemption provisions
which are outside of the control of the Company and also contain a deemed liquidation preference, the Preferred Stock were classified
as mezzanine financing at the initial measurement date at the residual amount, which is the difference between the total proceeds
received, the fair value of the Warrants, the fair value of the embedded derivative related to the contingent redemption of Series
A Preferred Stock and after consideration with the amount related to the BCF. Subsequently accrete changes in the redemption value
over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable,
if later) to the earliest redemption date of the instrument using an appropriate methodology. Changes in the redemption value
are considered to be changes in accounting estimates.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
REDEEMABLE
CONVERTIBLE SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
The
below table outlines the change in the mezzanine account during the six months ended June 30, 2018 -
|
|
June
30, 2018
|
|
|
|
Unaudited
|
|
|
|
|
|
Opening
balance, December 31, 2017
|
|
$
|
-
|
|
Gross
proceeds from April 2018 PIPE transaction
|
|
|
5,000,000
|
|
Recognition
of liability related to Warrants to purchase Common Stock
|
|
|
(3,000,000
|
)
|
Recognition
of embedded derivative related to contingent redemption feature
|
|
|
(1,027,700
|
)
|
Allocation
of issuance costs to Preferred Stock
|
|
|
(198,725
|
)
|
Recognition
of BCF on Preferred Stock
|
|
|
(773,575
|
)
|
Accretion
of Preferred Stock to redemption value
|
|
|
532,540
|
|
Closing
balance, June 30, 2018
|
|
$
|
532,540
|
|
The
total direct and incremental issuance costs (including the cash and Warrants fees related to Newbridge) amounted to $1,021,933.
Such amount was allocated based on the relative fair value of the individual freestanding instruments identified (i.e. detachable
warrants, embedded derivative related to the contingent redemption feature of the Series A Preferred Stock and preferred
stock). Issuance costs allocated to freestanding instruments at fair value were immediately expensed as separate line to the statement
of operations and comprehensive loss. Issuance costs allocated to preferred stock have been deducted from mezzanine account.
In
addition, in connection with the Agreement, the Company entered into a Registration Rights Agreement (the “Registration
Rights Agreement”) with the Purchaser, pursuant to which, among other things, the Company is required to use its commercially
reasonable best efforts to (i) prepare and file with the SEC within 60 calendar days of the offering a registration statement
covering the shares of Common Stock underlying the Preferred Stock and Warrants and (ii) have the registration statement and any
amendment thereto to be declared effective by the SEC within 90 calendar days from the date of the initial filing of such registration
statement. On June 14, 2018, the Company filed a registration statements in Form S-1 which was declared effective by July 2, 2018.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
REDEEMABLE
CONVERTIBLE SERIES A PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
D.
|
Stock-based
compensation
|
|
1.
|
In
2016, the Company approved the 2016 Employee Incentive Plan (the “2016 Plan”) which provides for the issuance
of common stock, stock options and other stock-based awards to employees, officers, directors, consultants, and advisors.
The number of shares reserved for issuance under the 2016 Plan is 36,000,000 shares of common stock.
|
|
|
|
|
2.
|
On
February 12, 2018, the Company granted options exercisable into 150,000 shares to its Chairperson of the Audit Committee under
the 2016 Plan at an exercise price of $0.05 per share. The options become vested over a three-year period from the date of
grant. The options shall vest 1/3 one year from the grant date 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 for stock options granted during the six months ended June 30, 2018are as follows: expected dividend yield
of 0%; risk-free interest rate of 1.8%-2.07%; expected volatility of 242%, and expected term of 5 years. The fair value of
the options at the grant date was $63,615. During the three and six month period ended June 30, 2018, as result of such grant,
the Company recognized compensation expense of $10,688 and $16,208 respectively, and there was $47,407 of unrecognized compensation
expense related to non-vested option grants.
|
|
|
|
|
3.
|
The
following tables present a summary of the status of the grants to employees, officers and directors as of June 30, 2018.
|
|
|
Shares
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average remaining contractual term (years)
|
|
|
Aggregate
intrinsic value (*)
|
|
Options
outstanding at December 31, 2017
|
|
|
27,300,000
|
|
|
$
|
0.05
|
|
|
|
4.6
|
|
|
$
|
11,015,580
|
|
Granted
|
|
|
150,000
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Lapsed
|
|
|
50,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
Options
outstanding at June 30, 2018
|
|
|
27,400,000
|
|
|
$
|
0.05
|
|
|
|
4.2
|
|
|
$
|
5,002,550
|
|
Options
exercisable at June 30, 2018
|
|
|
20,725,000
|
|
|
$
|
0.05
|
|
|
|
3.6
|
|
|
$
|
3,786,700
|
|
|
(*)
|
The
aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the Company’s
Ordinary Shares on the last traded day of second quarter of 2018 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders exercised their options on June 30, 2018.
This amount is impacted by the changes in the fair value of the Company’s shares.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
EVENTS
DURING THE PERIOD POLICIES (Cont.)
|
|
|
|
|
D.
|
Stock-based
compensation (Cont.)
|
|
4.
|
The
following table summarizes information about stock options outstanding at June 30, 2018:
|
|
|
Options
Outstanding
|
|
|
|
|
|
Options
Exercisable
|
|
Range
of exercise prices
|
|
Shares
|
|
|
weighted
average exercise price
|
|
|
Weighted
average remaining life (years)
|
|
|
Shares
|
|
|
weighted
average exercise price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05
|
|
|
27,300,000
|
|
|
$
|
0.05
|
|
|
|
4.1
|
|
|
|
20,625,000
|
|
|
$
|
0.05
|
|
$
0.10-$ 0.30
|
|
|
100,000
|
|
|
$
|
0.20
|
|
|
|
3.3
|
|
|
|
100,000
|
|
|
$
|
0.20
|
|
Total
Shares
|
|
|
27,400,000
|
|
|
$
|
0.05
|
|
|
|
4.1
|
|
|
|
20,725,000
|
|
|
$
|
0.05
|
|
|
5.
|
As
of June 30, 2018, there was $423,010 of total unrecognized compensation cost related to non-vested stock options granted under
the 2016 Plan. This cost is expected to be recognized over a weighted-average period of 0.97 years.
|
|
|
|
|
6.
|
The
total equity-based compensation expense related to all of the Company’s equity-based awards, recognized for the three
and six months periods ended June 30, 2018 amounting to $240,074 and $585,555, respectively. These expenses have been recorded
as general and administrative expenses as part of the statement of comprehensive loss.
|
|
|
|
|
7.
|
On
December 12, 2017, the Company entered into a new agreement with a service provider, Lyons Capital LLC, pursuant to which
the service provider rendered services in February 2018 relating to the 2018 Wall Street Conference at the Deerfield Beach
Florida Hilton and sponsorship in the conference for consideration of 150,000 fully vested restricted shares of Common Stock
of the Company. The grant was accounted for under ASC 505-50 “share-based payment arrangement with nonemployees”,
when the fair value of the grant amounting to $72,000 was recorded as part of general and administrative expenses for the
six months ended June 30, 2018. As of June 30, 2018, the aforesaid shares have not been issued by the Company.
|
|
E.
|
Common
stock subscriptions receivable
|
|
In
January 2018, the Company received a cash payment of $105,282 for common stock subscriptions
receivable from a former employee.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGINCIES
|
|
1.
|
On
October 11, 2015, OWC entered into a memorandum of understanding with Medmar for the purpose of granting an exclusive, non-transferable,
royalty-bearing license, to manufacture, produce, publicize, promote and market the licensed products described therein in
the State of Hawaii and the State of Pennsylvania, pursuant to which Medmar has paid OWC $100,000 ($50,000 during each year
ended December 31, 2016 and 2015). On February 8, 2016, OWC and Medmar II, an affiliate of Medmar, executed a right of first
refusal agreement providing Medmar certain rights in connection with the commercialization of OWC’s Cannabis-Based Medical
Products in other states in the USA, pursuant to which Medmar has paid $50,000 to the Company.
|
|
|
|
|
|
On
March 17, 2016, Medmar and OWC executed a consulting and License Agreement (the “Agreement”), pursuant to which
OWC granted to Medmar an exclusive, non-transferable, royalty-bearing license, to manufacture, produce, publicize, promote
and market certain of OWC’s products (as defined in the Agreement) in the State of Maryland, against payment by Medmar
to OWC of a royalty. As part of the Agreement, the Company received from Medmar an amount of $50,000 as a non-refundable advance.
|
|
|
|
|
|
As
of June 30, 2018, the Company deferred revenue in connection to the license in the State of Hawaii and the State of Pennsylvania
and the right of first refusal amounting to aggregate amount of $100,000.
|
|
|
|
|
2.
|
In
August 2017, OWC engaged PharmItBe Ltd, a company specializing in pharmaceutical research and development to develop and produce
a second generation of its cannabis soluble tablet. This development was completed during the second quarter of 2018. The
production of the cannabis soluble tablet for the purpose of clinical trials is expected to be completed during the third
quarter of 2018.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGINCIES (Cont.)
|
|
3
.
|
On
November 3, 2016, OWC entered into a Joint Venture Memorandum of Understanding with Michepro Holding Ltd. (“EU Partner”),
(“JV” or “MOU”). The EU Partner and OWC have agreed as follows: (i) to establish a strategic marketing
and distribution alliance (the “JV”) to promote the sale of OWC’s Products in the European Union (the “EU”);
(ii) the interest of the parties in the JV shall be held by the parties such that the EU Partner shall hold 25% of such interest
and OWC shall hold the remaining 75% of such interest; (iii) OWC shall provide the JV with OWC’s Products for sale and
distribution solely in the EU, at prices to be agreed between the parties from time to time; and (iv) EU Partner shall be
responsible for the day-to-day management of the JV, at its own costs, and for this purpose shall make available to the JV
its knowledge, business connection and personnel, all in order to maximize the sales of OWC’s Products in the EU through
the JV. The JV had not commenced operations and did not have any assets or liabilities as of June 30, 2018.
|
|
|
|
|
4.
|
On
August 6, 2015, OWC signed a Memorandum of Understanding with Emilia Cosmetics Ltd. (“Emilia”),
a large Israeli private label manufacturer which operates in the field of development,
production, manufacturing and packaging of health and beauty products including for treatment
of human skin disease, for the development, manufacture and marketing of a cannabis-based
topical ointment to treat psoriasis.
On
November 27, 2016, the Company and OWC (the “Group”) entered into a license agreement with Emilia (the “License
Agreement”). During the fourth quarter of 2016, the Group completed the development process and then initiated a
phase I study at Chaim Sheba Medical Center (“Sheba”) to explore the safety of the cannabis-based topical
ointment on psoriasis. Prior to entering into the License Agreement, the Group and Emilia conducted a development and
evaluation program (as defined in the License Agreement) for the development of a specific product comprising Emilia’s
formulation with certain medical cannabis extract provided by the Group for topical treatment of psoriasis.
Pursuant
to the License Agreement, Emilia granted a limited license to the Group 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, as defined in the License Agreement. If such trial proves successful, Emilia will grant the Group an exclusive,
worldwide, transferable, royalty-bearing license, with the right to grant sublicenses, to use, sell and commercially exploit
the Emilia intellectual property, in consideration for which, from and after the first commercial sales of the licensed
product, the Group shall pay to Emilia a royalty at the rate of ten percent of net sales during the period beginning upon
the first commercial sale and ending ten years thereafter. In the event the sale of the licensed product during the royalty
term reaches the minimum sales targets set forth in the License Agreement, the royalty term will be extended for an additional
five-year term.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGINCIES (Cont.)
|
|
5.
|
On
December 29, 2016, OWC entered into a Research Agreement with Medical Research Infrastructure Development and Health Services
Fund (“fund”) by Chaim Sheba Medical Center. Pursuant to the Research Agreement, the Fund shall perform a Phase
I, placebo-controlled, maximal dose study (the “Study”) to determine the safety and tolerability of the cannabis-based
topical ointment containing MGC (“Medical Grade Cannabis” or the “Study Drug”) in healthy volunteers,
employing the services of Professor. Aviv Barzilai, Director of the Department of Dermatology- Chaim Sheba Medical Center,
Tel Hashomer, Israel, to lead the Study (the “Investigator”). The Study shall be conducted in compliance with
the following, as defined in the Research Agreement: (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 OWC and governing the administration of the Study Drug. Pursuant to the
collaboration agreements and the related amendments, OWC is obliged to pay Sheba $170,000 throughout 2017 and 2018 for conducting
the safety study for the cannabis-based topical ointment. As of June 30, 2018, OWC has paid Sheba $116,329 as per Sheba’s
payment requests. The Company has recorded $73,232 and $102,232 as Research and Development expenses related to the Study
in the three and six months period ended June 30, 2018.
|
|
|
|
|
|
On
October 22, 2014, OWC 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, OWC conducted pre-clinical
studies on multiple myeloma, which commenced in April 2015. Pursuant to the collaboration agreements, OWC was required to
pay Sheba $170,000 for conducting the multiple myeloma trial between the 3rd quarter of 2015 and the second quarter of 2016.
As of June 30, 2018, the Company has paid Sheba $65,669 as per Sheba’s payment requests. The Company has not recorded
any Research and Development expenses related to this agreement in the six months period ended June 30, 2018.
|
|
|
|
|
|
At
present, OWC uses its available working capital to fund these studies.
|
|
6.
|
In
November 2017, the Company signed a two-year rental agreement with a landlord for its principle office located in Ramat Gan,
Israel. The rental agreement includes an option for one additional year. The monthly rental fees are approximately $4,200
and the remaining minimum payments total approximately $76,000 as of June 30, 2018. During the option period the monthly rental
fees shall increase by approximately 7%. During the three and six months periods ended June 30, 2018, the Company recorded
$12,433 and $37,499 as rental expenses, respectively.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGINCIES (Cont.)
|
|
1.
|
On
February 28, 2017, the Company filed an action for alleged legal malpractice against the NYC law firm of Sichenzia Ross FerenceKesner
LLP and Marc J. Ross, Esq. a partner at Sichenzia Ross in New York State Supreme Court in New York County. The Company’s
claims arise out of legal services allegedly negligently performed by Ross and Sichenzia Ross. The Company brought the action
seeking recovery of monetary damages due to the defendants’ alleged failure to exercise a professional standard of care
in their representation of OWCP. The action is currently pending in the Supreme Court of the State of New York, County of
New York and is in the discovery phase.
|
|
|
|
|
2.
|
The
Company has sued certain individuals in the Supreme Court of the State of New York regarding defaulted obligations related
to 2,354,480 shares granted to them. The matter was conditionally settled as against certain individuals. The Company received
during the period a payment of $105,282 from one individual (see also Note 4E) and is now seeking to enforce that settlement
agreement in court for additional funds amounting to $120,500. The Company has reserved its right to pursue its claims against
one individual for an outstanding sum of approximately $15,000.
|
|
3.
|
On
November 22, 2017, Mr. Ziv Turner, the Company’s subsidiary’s former General
Manager (the “Plaintiff”) filed a claim (the “Claim”) with the
Tel Aviv Regional Court of Labor against the Company, its subsidiary and the Company’s
CEO. The Plaintiff alleged the right to receive Company’s 4,125,000 shares of the
Company’s Common Stock in connection with options granted to him in 2016 and a
cash compensation of approximately $180,000 for breach of rights and damages. On January
23, 2018, the Company filed a statement of defense rejecting all of the Plaintiffs claims.
On April 30, 2018, a first mediation meeting was held, at which the parties presented
their positions. A preliminary hearing was held on July 12, 2018, in which the Plaintiff
amended his Claim with regard to the relief the Plaintiff is seeking. As a result, the
Plaintiff is no longer seeking the right to receive 4,125,000 shares of the Company’s
Common Stock, but rather is now seeking the value of such shares. At this stage we are
unable to assess the probable outcome (see Note 6 C).
|
NOTE
6
|
-
|
SUBSEQUENT
EVENTS
|
|
A.
|
On
July 10, 2018, the Company paid a dividend of 242,572 shares of common stock to the holder of the Series A Preferred Stock,
pursuant to the terms of the Preferred Shares (see also Note 4B).
|
|
|
|
|
B.
|
On
August 1, 2018, the Company announced the initiation of the final stage of its Phase I, placebo controlled, maximal dose study
(the “Psoriasis Study”) to determine the safety and tolerability of topical ointment containing medical grade
cannabis in healthy volunteers. The final stage of the trial comprises the twice daily dosing of healthy volunteers for 6
weeks.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following information should be read in conjunction with the unaudited condensed consolidated financial information and the notes
thereto included in this Quarterly Report on Form 10-Q and the audited condensed consolidated financial information and the notes
thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange
Commission (“SEC”) on April 16, 2018. Our actual results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in
this Quarterly Report on Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements,” and discussed
in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31,
2017.
Overview
We
are an early stage medical cannabis research and development company that applies conventional pharmaceutical research protocols
and disciplines to the field of medical cannabis with the objective of establishing a leadership position in the research and
development of medical cannabis therapies, products and delivery technologies. We are currently engaged in the research and development
and have conducted pre-clinical trials on the efficacy of cannabis-based medical products (the “Cannabis-Based Medical Products”)
commencing with our cannabis-based topical ointment for the treatment of psoriasis. In addition, we also are pursuing the use
of our Cannabis-Based Medical Products for the treatment of multiple myeloma, post-traumatic stress disorder (“PTSD”),
chronic pain and fibromyalgia, and have made significant advancements in the development of a cannabis soluble tablet delivery
system that could have applications for other indications. We are also capable of providing consulting and advisory services to
governmental and private entities to assist them with developing and implementing tailor-made, comprehensive medical cannabis
programs, although we have not generated any revenues from such services to date.
We
have been engaged in research and development and consulting and advisory activities through our wholly-owned Israeli subsidiary,
One World Cannabis Ltd since July 2014. To date, we have entered into binding agreements with major hospitals and medical research
facilities in Israel for the purpose of conducting research studies and trials related to the development and use of Cannabis-Based
Medical Products for the treatment of multiple myeloma, psoriasis, PTSD, chronic pain and fibromyalgia, and for the development
of a cannabis soluble tablet delivery system. We announced promising clinical results from the testing of our cannabis-based topical
ointment for the treatment of psoriasis, an autoimmune disease that causes red, scaly patches to appear on the skin. Skin cells
in patients with psoriasis grow at an abnormally fast rate, causing a buildup of lesions that tend to burn and itch. While the
real cause of psoriasis is not known, genetics are believed to play a major role in its development. According to the American
Academy of Dermatology, psoriasis affects about 3% of the world’s population and 7.5 million people in the United States.
We
have not yet commenced any significant activities related to our third-party consulting services.
April
2018 Private Placement
On
April 30, 2018, we entered into and consummated a Securities Purchase Agreement (the “Agreement”) with a non-US-based
institutional investor (the “Purchaser”). Under the terms and conditions of the Agreement, we sold and the Purchaser
bought, (i) 500 shares of our new series of preferred stock designated as Series A Preferred Stock (the “Preferred Shares”),
which, as of April 30, 2018, were convertible into 25,000,000 shares of our common stock at a conversion price of $0.20 per share,
subject to adjustment pursuant to the anti-dilution provisions of the Preferred Shares, and (ii) Warrants (the “Warrants”)
representing the right to acquire 12,500,000 shares of our common stock at an exercise price of $0.22 per share subject to adjustment
pursuant to the anti-dilution provisions of the Warrants, for an aggregate purchase price of $5,000,000 (the “2018
Private Placement”). Newbridge Securities Corporation (“Newbridge”), through LifeTech Capital, acted as
exclusive placement agent for the transaction and we paid Newbridge a cash fee of $375,000 and issued to them warrants to purchase
2.5 million shares of our common stock at $0.20 per share. The Warrants shall contain customary terms, including provisions for
“cashless” exercise, change of control, price based anti-dilution, and customary demand or piggyback registration
rights. We are also obligated to pay Newbridge a warrants solicitation fee equal to 4% of the gross proceeds that we receive upon
cash exercise of any Warrants purchased by the Purchasers in connection with the offering.
The
terms of the Preferred Stock contain conditional redemption provisions and a deemed liquidation preference feature. In addition,
the terms of each of the Preferred Stock and Warrants provide for anti-dilution protection for issuances of shares of Common Stock
at a price per share less than a price equal to the conversion price or exercise price, as applicable and, that in the event of
a “fundamental transaction” (as described in the Warrants), the investor will have the right to receive the value
of the Warrant as determined in accordance with the Black Scholes option pricing model.
In
connection with the Agreement, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”)
with the Purchaser, pursuant to which, among other things, we have agreed to use our commercially reasonable best efforts to (i)
prepare and file with the SEC within 60 calendar days of the offering a registration statement covering the shares of Common Stock
underlying the Preferred Stock and Warrants and (ii) have the registration statement and any amendment thereto to be declared
effective by the SEC within 90 calendar days from the date of the initial filing of such registration statement. The Company filed
a registration statement covering the shares of Common Stock underlying the Preferred Stock and Warrants, which was declared effective
by the SEC on July 2, 2018.
On
July 10, 2018, we paid a dividend of 242,572 shares of our common stock to the Purchaser pursuant to the terms of the Preferred
Shares.
Our
Study on Psoriasis
On
June 28, 2018, we announced the successful completion of the first part of our Phase I, placebo controlled, maximal dose study
(the “Psoriasis Study”) to determine the safety and tolerability of topical ointment containing medical grade cannabis
(the “Topical Ointment”) in healthy volunteers. The completed part of our Psoriasis Study consisted of application
of escalating doses of the Topical Ointment to healthy volunteers and was successfully completed with no adverse effects. After
the completion of the second part of our Psoriasis Study, we plan to initiate a Phase II study to demonstrate the efficacy of
the Topical Ointment in treating mild to moderate psoriasis and other inflammatory skin diseases.
On
August 1, 2018, we announced the initiation of the final stage of our Phase I, placebo controlled, maximal dose study. The final
stage of the Psoriasis Study comprises the twice daily dosing of healthy volunteers for 6 weeks.
Results
of Operations
Results
of Operations during the three and six months ended June 30, 2018 as compared to the three and six months ended June 30, 2017
We
have not generated any revenue during the three and six months ended June 30, 2018 and 2017. We have operating expenses related
to general and administrative expenses and research and development expenses.
During
the three months ended June 30, 2018, we incurred a net loss of $3,209,955 due to general and administrative expenses of $755,506,
research and development expenses of $212,512, issuance costs related to the April 2018 private placement of the Preferred Shares
of $823,208, income of $150,000 from the revaluation of liability related to the warrants, $1,567,766 from revaluation
of embedded derivative related to the contingent redemption feature of the Series A Preferred Stock and financial expenses
of $963 as compared to a net loss of $445,126 due to general and administrative expenses of $231,585, research and development
expenses of $211,946 and financial expenses of $1,595 during the three months ended June 30, 2017. During the six months ended
June 30, 2018, we incurred a net loss of $4,187,094 due to general and administrative expenses of $1,576,687, research and development
expenses of $367,845, issuance costs related to the April 2018 private placement of the Preferred Shares of $823,208, income of
$150,000 from the revaluation of liability related to the warrants, $1,567,766 from revaluation of embedded derivative related
to the contingent redemption feature of the Series A Preferred Stock and financial expenses of $1,588 as compared
to a net loss of $1,880,494 due to general and administrative expenses of $1,632,937, research and development expenses of $245,962
and financial expenses of $1,595 during the six months ended June 30, 2017.
Our
general and administrative expenses increased by $523,921 or 226% during the three months ended June 30,
2018 as compared to the same period in the prior year, primarily due to increased stock-based compensation and amortization
of services receivable expenses. The charge relating to stock-based compensation and services receivable expenses were $240,074
and $90,297, respectively, for the three months ended June 30, 2018, compared to an income of $288,968 due to true
up of compensation expenses related to options that were forfeited and an expense of $320,120 for the three months
ended June 30, 2017. Our general and administrative expenses decreased by $56,250 or 3.4% during the six months
ended June 30, 2018 as compared to the same period in the prior year, primarily due to decreased stock-based compensation and
amortization of services receivable expenses. The charge relating to stock-based compensation and services receivable expenses
were $585,555 and $330,994 respectively, for the six months ended June 30, 2018, compared to $768,936 and
$498,986 for the six months ended June 30, 2017.
Our
research and development expenses had no material change during the three months ended June 30, 2018 as compared to the
same period in the prior year. Our research and development expenses increased by $121,883 or 50% during the six
months ended June 30, 2018 as compared to the same period in the prior year, primarily due to our continued progress related
to our research and development collaboration agreements, payroll and consultancy.
Liquidity
and Capital Resources
As
of June 30, 2018, we had current assets of $4,740,975 consisting of $4,649,299 in cash and cash equivalents and
other current assets of $91,676. As of June 30, 2018, we had property and equipment valued at $33,002, net of $32,427
in accumulated depreciation. We had total assets of $4,773,977 as of June 30, 2018.
As
of December 31, 2017, we had current assets of $1,044,840 consisting of $970,542 in cash and cash equivalents and other current
assets of $74,298. We had property and equipment valued at $16,243, net of $28,480 in accumulated depreciation. We had
total assets of $1,061,083 as of December 31, 2017.
As
of June 30, 2018, we had $378,934 in current liabilities consisting of $128,151 in accounts payable, $150,783 in other current
liabilities and deferred revenues of $100,000.
As
of December 31, 2017, we had $270,485 in current liabilities consisting of $64,814 in accounts payable, $105,671 in other current
liabilities and deferred revenues of $100,000.
We
had positive working capital of $4,362,041 as of June 30, 2018 compared to positive working capital of $774,355 as of December
31, 2017. Our accumulated deficit as of June 30, 2018 and December 31, 2017 was $19,480,845 and $14,516,912, respectively.
As
of June 30, 2018, we had $6,045,466 in long term liabilities consisting of $2,595,466 in embedded derivative related to the
contingent redemption feature of the Series A Preferred Stock and $3,450,000 in liability related to warrants to purchase
common stock.
We
used $1,320,011 in our operating activities during the six months ended June 30, 2018, which was due to a net loss of $4,187,094
offset by amortization of services receivable of $330,994, stock-based compensation expenses of $585,555, depreciation expense
of $3,947, an increase in accounts payable of $63,338, an increase in other current assets of $17,378, a decrease in other liabilities
of $463, direct and incremental issuance costs related to the April 2018 PIPE Private Placement, revaluation of
liability related to warrants to purchase common stock and an increase of revaluation of embedded derivative related to
the contingent redemption feature of the Series A Preferred Stock of $1,567,766.
We
used $590,048 in our operating activities during the six month ended June 30, 2017, which was due to a net loss of $1,880,494
offset by amortization of services receivable of $498,986, Stock based compensation of $768,936, depreciation expense of $5,585,
an increase in accounts payable of $28,206, an increase in prepaid expenses of $12,900 and an increase in other liabilities of
$1,633.
We
used $20,706 and $1,080 during the six months ended June 30, 2018 and 2017, respectively, to purchase property and equipment.
Our
financing activities during the six months ended June 30, 2018 provided us with $5,023,233 through net proceeds received from
issuance of the Preferred Shares of $4,917,951 and collection of a stock subscription receivable of $105,282 (see also note 4E,
Events During The Period—Common stock subscription receivable in our financial statements included elsewhere in this Quarterly
Report on Form 10-Q). Our financing activities during the six months ended June 30, 2017 provided us with $1,494,607 through proceeds
of $1,667,524 from issuance of common stock, $77,083 from exercise of warrants, $50,000 from non-recourse loan and a repayment
of non-recourse loan of $300,000.
Based
upon our cash position of $4,649,299 on June 30, 2018 we believe that we have sufficient cash to fund our operation in the next
12 months, however we believe that in order to execute on our plans we need to raise additional capital, either equity or debt,
and there can be no assurance that additional capital will be sufficient to fund our anticipated expenditure requirements to execute
on our plans.
The
development and commercialization of our product is expected to require substantial expenditures. We have not yet generated material
revenues from operations and therefore is dependent upon external sources for financing our operations. As of June 30, 2018, we
have an accumulated deficit of $19,282,120. In addition, during the six months ended June 30, 2018, we reported losses and negative
cash flows from operating activities.
On
April 30, 2018, we entered into and consummated a Securities Purchase Agreement with a new investor, pursuant to which, we issued
(i) 500 shares of Preferred Stock designated as Series A Preferred Stock that are convertible into 25,000,000 shares of common
stock and (ii) Warrants that are eligible for conversion into 12,500,000 shares of common stock for an aggregate purchase price
of $5,000,000. See “April 2018 Private Placement” and note 4, in our financial statements included elsewhere
in this Quarterly Report on Form 10-Q.
Funding
of Our Research Programs
On
October 22, 2014, we entered into a collaboration agreement with the Sheba Academic Medical Center’s hospital (“Sheba”)
relating to the use of cannabis to treat myeloma. Within the framework of this collaboration agreement, we conducted pre-clinical
studies on multiple myeloma, which have commenced in April 2015. Pursuant to this collaboration agreement, we are obligated to
pay Sheba $170,000. As of June 30, 2018, we have paid Sheba $65,669 as per Sheba’s payment requests.
In
addition, pursuant to another collaboration agreement, we are obliged to pay Sheba $170,000 throughout 2017 and 2018 for conducting
the Study for the cannabis-based topical ointment for treatment of psoriasis. As of June 30, 2018, we have paid Sheba $116,329
as per Sheba’s payment requests.
At
present, we use our available working capital to fund these studies.
Our
expenditures allocated to our corporate activities conducted through our facilities in Ramat Gan were $37,499 for the six months
period ended June 30, 2018 and we expect it will be approximately $66,000 for the year ending December 31, 2018.
Off
Balance Sheet Arrangements
As
of June 30, 2018, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Contractual
Obligations and Commitments
There
have been no material changes to our contractual obligations and commitments as reported in our Annual Report on Form 10-K for
the year ended December 31, 2017, filed with the SEC on April 16, 2018.
Critical
Accounting Policies
Our
significant accounting policies are described in Note 2 to our consolidated financial statements as reported in our Annual Report
on Form 10-K for the year ended December 31, 2017, filed with the SEC on April 16, 2018, and in Note 2 to our interim consolidated
financial statements as reported in our Quarterly Report on Form 10-Q for the six months period ended June 30, 2018.