PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per share amounts)
|
|
US dollars (except share data)
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,800
|
|
|
|
3,464
|
|
Other current assets
|
|
|
54
|
|
|
|
52
|
|
Total Current Assets
|
|
|
2,854
|
|
|
|
3,516
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
35
|
|
|
|
37
|
|
Operating lease right-of-use assets, net
|
|
|
60
|
|
|
|
-
|
|
Total Assets
|
|
|
2,949
|
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
163
|
|
|
|
98
|
|
Operating lease liabilities, current
|
|
|
26
|
|
|
|
-
|
|
Other current liabilities
|
|
|
220
|
|
|
|
240
|
|
Deferred revenue
|
|
|
100
|
|
|
|
100
|
|
Total Current Liabilities
|
|
|
509
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Operating lease liabilities, non-current
|
|
|
34
|
|
|
|
-
|
|
Liability related to shares to be issued
|
|
|
725
|
|
|
|
725
|
|
Liability related to warrants to purchase Common Stock (Note 3)
|
|
|
400
|
|
|
|
1,475
|
|
Bifurcated embedded derivative, at fair value (Note 3)
|
|
|
8,583
|
|
|
|
8,129
|
|
Total Liabilities
|
|
|
10,251
|
|
|
|
10,767
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock (Note 4B):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, $0.00001 par value; 20,000,000 shares authorized at March 31, 2019 (Unaudited) and December 31, 2018; 440 and 490 shares issued and outstanding at March 31, 2019 (Unaudited) and December 31, 2018, respectively; Aggregate liquidation preference $5,280 at March 31, 2019 (Unaudited) (Note 4B)
|
|
|
2,940
|
|
|
|
2,226
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value; 500,000,000 shares authorized at March 31, 2019 (unaudited) and December 31, 2018; 176,001,007 and 150,207,393 shares issued and outstanding at March 31, 2019 (unaudited) and December 31, 2018, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
19,353
|
|
|
|
18,137
|
|
Services receivable
|
|
|
(86
|
)
|
|
|
(121
|
)
|
Common stock subscriptions receivable
|
|
|
(239
|
)
|
|
|
(239
|
)
|
Accumulated deficit
|
|
|
(29,276
|
)
|
|
|
(27,222
|
)
|
Accumulated other comprehensive income
|
|
|
4
|
|
|
|
3
|
|
Total Stockholders’ Deficit
|
|
|
(10,242
|
)
|
|
|
(9,440
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities, Series A Convertible Preferred Stock, and Stockholders’ Deficit
|
|
|
2,949
|
|
|
|
3,553
|
|
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
(In
thousands, except share and per share amounts)
|
|
For the Three-Month Periods Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
285
|
|
|
|
155
|
|
General and administrative
|
|
|
498
|
|
|
|
821
|
|
Total operating expenses
|
|
|
783
|
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Revaluation of liability related to warrants to purchase common stock (Note 3)
|
|
|
(1,075
|
)
|
|
|
-
|
|
Revaluation of bifurcated embedded derivative (Note 3)
|
|
|
1,290
|
|
|
|
-
|
|
Other finance expense, net
|
|
|
2
|
|
|
|
1
|
|
Total other expense, net
|
|
|
217
|
|
|
|
1
|
|
Net loss
|
|
|
(1,000
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(999
|
)
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
Dividend on Series A Convertible Preferred Stock (Note 4B)
|
|
|
(65
|
)
|
|
|
-
|
|
Accretion of Series A Convertible Preferred Stock to redemption value (Note 4B)
|
|
|
(989
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
|
(2,055
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted per share amounts:
|
|
|
|
|
|
|
|
|
Basic and diluted net loss
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (basic and diluted)
|
|
|
161,749,548
|
|
|
|
147,758,908
|
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF SERIES A CONVERTIBLE PREFERRED
STOCK
AND STOCKHOLDERS’ DEFICIT
(In
thousands, except share and per share amounts)
|
|
Series
A Convertible
Preferred Stock
|
|
|
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’ Deficit
|
|
Balance
at December 31, 2018
|
|
|
490
|
|
|
|
2,226
|
|
|
|
150,207,393
|
|
|
|
2
|
|
|
|
18,137
|
|
|
|
(121
|
)
|
|
|
(239
|
)
|
|
|
(27,222
|
)
|
|
|
3
|
|
|
|
(9,440
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
Amortization of services receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
Dividend on Series A redeemable convertible preferred stock (see
also Note 4B)
|
|
|
-
|
|
|
|
-
|
|
|
|
832,368
|
|
|
|
*)
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
-
|
|
|
|
-
|
|
Accretion of Series A convertible preferred stock to redemption
value (see also Note 4B)
|
|
|
-
|
|
|
|
989
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(989
|
)
|
|
|
-
|
|
|
|
(989
|
)
|
Partial conversion of Series A Convertible Preferred stock into
common stock (see also Note 4B)
|
|
|
(50
|
)
|
|
|
(275
|
)
|
|
|
24,961,347
|
|
|
|
*)
|
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
(1,000
|
)
|
Balance at March 31, 2019 (unaudited)
|
|
|
440
|
|
|
|
2,940
|
|
|
|
176,001,007
|
|
|
|
2
|
|
|
|
19,353
|
|
|
|
(86
|
)
|
|
|
(239
|
)
|
|
|
(29,276
|
)
|
|
|
4
|
|
|
|
(10,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
147,758,908
|
|
|
|
2
|
|
|
|
16,169
|
|
|
|
(525
|
)
|
|
|
(344
|
)
|
|
|
(14,517
|
)
|
|
|
6
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
345
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
345
|
|
Amortization of services receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241
|
|
Payments received on subscriptions receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
Foreign Currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(977
|
)
|
|
|
-
|
|
|
|
(977
|
)
|
Balance at March 31, 2018 (unaudited
|
|
|
-
|
|
|
|
-
|
|
|
|
147,758,908
|
|
|
|
2
|
|
|
|
16,514
|
|
|
|
(284
|
)
|
|
|
(239
|
)
|
|
|
(15,494
|
)
|
|
|
3
|
|
|
|
502
|
|
*)
Representing an amount lower than $1
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
(In
thousands, except share and per share amounts)
|
|
US dollars
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(1,000
|
)
|
|
|
(977
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2
|
|
|
|
2
|
|
Stock-based compensation
|
|
|
40
|
|
|
|
345
|
|
Amortization of services receivable
|
|
|
35
|
|
|
|
240
|
|
Revaluation of liability related to warrants to purchase common stock
|
|
|
(1,075
|
)
|
|
|
-
|
|
Revaluation of bifurcated embedded derivative
|
|
|
1,290
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in lease right-of-use assets, net
|
|
|
7
|
|
|
|
-
|
|
Decrease (increase) in other current assets
|
|
|
(2
|
)
|
|
|
63
|
|
Increase (decrease) in accounts payable
|
|
|
65
|
|
|
|
(2
|
)
|
Decrease in other current liabilities
|
|
|
(20
|
)
|
|
|
(42
|
)
|
Decrease in lease liabilities
|
|
|
(7
|
)
|
|
|
-
|
|
Cash used in operating activities:
|
|
|
(665
|
)
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(10
|
)
|
Cash used in investing activities
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the payments of stock subscriptions
|
|
|
-
|
|
|
|
105
|
|
Cash provided by financing activities
|
|
|
-
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments on cash and cash equivalents
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(664
|
)
|
|
|
(279
|
)
|
Balance of cash and cash equivalents at beginning of period
|
|
|
3,464
|
|
|
|
970
|
|
Balance of cash and cash equivalents at end of period
|
|
|
2,800
|
|
|
|
691
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Dividend on Series A Convertible Preferred Stock
|
|
|
65
|
|
|
|
-
|
|
Accretion of Series A Convertible Preferred Stock to redemption value
|
|
|
989
|
|
|
|
-
|
|
Partial conversion of shares of Series A Convertible Preferred Stock into shares of common stock (Note 4B)
|
|
|
836
|
|
|
|
-
|
|
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 condensed 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.
|
B.
|
Liquidity
and Going Concern
|
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 March 31, 2019, the Company has an accumulated deficit of $29,276. In addition, in each year since its inception the Company
reported losses and negative cash flows from operating activities. Moreover, the Company is not in compliance with the Equity
Conditions (as defined in the Series A Certificate of Designation) and therefore the Purchaser in the April 2018 PIPE transaction
(as discussed below) can elect to redeem its outstanding Series A Convertible Preferred Stock in a cash amount that will not allow
the Company to maintain its operation for the next 12-month period (see also Note 4). Management considered the significance of
such conditions in relation to the Company’s ability to meet its current and future obligations and determined that such
conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going
concern. Until the Company generates sufficient revenues to fund its operations (if ever), the Company plans to finance its operations
through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short-term and long-term
loans. There can be no assurance that the Company will succeed in obtaining the necessary financing to continue its operations
as a going concern.
On
April 30, 2018, the Company entered into a Securities Purchase Agreement with a new investor (the “Purchaser”), pursuant
to which, the Company issued (i) 500 shares of Preferred Stock designated as Series A Convertible Preferred Stock that are initially
convertible into 25,000,000 shares of common stock and (ii) Warrants that are eligible for conversion initially into 12,500,000
shares of common stock for an aggregate purchase price of $5,000 (see also Note 4C) (the “April 2018 PIPE”). In addition,
during the three months ended March 31, 2018, the Company received $105 through payment of stock subscriptions.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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, 2018.
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 March 31, 2019 has been derived from the consolidated financial statements contained in our Annual
Report on form 10-K.
The
results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending
December 31, 2019 or for any other interim period in the future.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S. 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) identification of financial
instruments in liabilities (including embedded derivative), equity and mezzanine transactions and proper classification and measurement
of financial instruments; (2) evaluation of going concern; and (3) contingencies.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
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 attributable to common stockholders 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 Series A convertible 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 Convertible Preferred
Stock, which was issued on April 30, 2018 was excluded from the computation of the net loss per share for the three months period
ended March 31, 2019.
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 Series A convertible Preferred Stock, certain stock warrants
and embedded derivative related to the contingent redemption feature of the Series A convertible Preferred Stock which their potential
dilutive effect is considered using the “if-converted method”.
For
the three months ended March 31, 2019 and 2018, diluted loss per share excludes the impact of stock options, certain stock warrants,
restricted stock awards, Series A convertible Preferred Stock and embedded derivative related to the contingent redemption feature
of the Series A convertible Preferred Stock totaling 70,214,064 and 27,005,370 shares, respectively, as the effect of their inclusion
would be anti-dilutive.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
Recently
Adopted Accounting Pronouncements
On
January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which
supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing
lease liabilities and corresponding Right-of-Use (ROU) assets on the balance sheet and to provide enhanced disclosures surrounding
the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using
the modified retrospective transition approach by applying the new standard to leases existing at the date of initial application
and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for
operating leases, while the Company’s accounting for finance leases remained substantially unchanged (as of the adoption
date the Company is not involved in finance leases as lessee or as lessor).
The Company elected the package
of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease
classification, its assessment on whether a contract was or contains a lease, and its initial direct costs for any leases that
existed prior to January 1, 2019. The Company also elected to keep leases with an initial term of 12 months or less off the balance
sheet and recognize the associated lease payments in the consolidated statements of comprehensive loss on a straight-line basis
over the lease term.
Upon
adoption, the Company recognized total ROU assets of $67, with corresponding liabilities of $67 on the condensed consolidated
balance sheets. The adoption did not impact our beginning retained earnings, or our prior year condensed consolidated statements
of comprehensive loss and condensed consolidated statements of cash flows.
Under
Topic 842, the Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement
date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only
payments that are fixed and determinable at the time of commencement. As most of the Company’s leases do not provide an
implicit rate, the Company use its incremental borrowing rate based on the information available at commencement date in determining
the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on the Company’s
understanding of what its credit rating would be. The Company’s lease terms may include options to extend or terminate the
lease when it is reasonably certain that we will exercise such options.
Operating
leases are included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities,
non-current on the condensed consolidated balance sheets.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The
components of lease costs, lease term and discount rate are as follows:
|
|
Three Months
Ended
|
|
|
|
March 31, 2019
|
|
|
|
(unaudited)
|
|
Operating lease cost:
|
|
|
|
|
vehicle
|
|
|
7
|
|
|
|
|
7
|
|
Remaining Lease Term
|
|
|
|
|
vehicle
|
|
|
1.75-2.75 years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
vehicle
|
|
|
5
|
%
|
The
following is a schedule, by years, of maturities of operating lease liabilities as of March 31, 2019:
Period:
|
|
|
|
The remainder of 2019
|
|
|
21
|
|
2020
|
|
|
28
|
|
2021
|
|
|
17
|
|
Total operating lease payments
|
|
|
66
|
|
Less: imputed interest
|
|
|
6
|
|
Present value of lease liabilities
|
|
|
60
|
|
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
|
In
June 2018, the FASB issued Accounting Standard Update 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-employee
Share-Based Payment Accounting (ASU 2018-07). ASU 2018-07 aligns the measurement and classification guidance for share-based payments
to nonemployees with the guidance for share-based payments to employees, with certain exceptions.
Consistent
with the accounting requirement for employee share-based payment awards, awards within the scope of Topic 718 will be measured
at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the
service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
Equity-classified nonemployee share-based payment awards will be measured at the grant date.
With
respect to awards with performance conditions ASU 2018-07 concludes that, consistent with the accounting for employee share-based
payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment
awards contain such conditions.
ASU
2018-07 also requires that the classification of equity classified nonemployee share-based payment awards will continue to be
subject to the requirements of Topic 718 unless the award was modified after the good has been delivered, the service has been
rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee
is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting.
In
addition, ASU 2018-07 includes certain Non-public Entity-Specific Amendments
ASU
2018-07 is effective for Public entities in annual periods beginning after December 15, 2018, and interim periods within those
years (first quarter of 2019 for the company). Early adoption is permitted, including in an interim period, but not before an
entity adopts the new revenue guidance (which was adopted by the Company in its interim financial statements for 2018).
An
entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified
awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of
the beginning of the fiscal year of adoption. Upon transition, the entity is required to measure these nonemployee awards at fair
value as of the adoption date.
The
adoption of ASU 2018-07 did not have a significant impact on its consolidated financial statements.
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 bifurcated embedded derivative related to Series A convertible Preferred Stock (see also Note 4C) have been classified
at Level 3.
In
estimating the fair value of the Warrants as of March 31, 2019 and December 31, 2018, the Company used the following assumptions:
12,500,000
Purchaser Warrants:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Risk-free interest rate (1)
|
|
|
2.22
|
%
|
|
|
2.49
|
%
|
Expected volatility (2)
|
|
|
224.1
|
%
|
|
|
214.5
|
%
|
Expected life (in years) (3)
|
|
|
4.08
|
|
|
|
4.33
|
|
Expected dividend yield (4)
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair value per Warrant
|
|
$
|
0.03
|
|
|
$
|
0.1
|
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3:
|
FAIR
VALUE MEASUREMENTS (Cont.)
|
2,500,000
Newbridge Warrants:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Risk-free interest rate (1)
|
|
|
2.27
|
%
|
|
|
2.47
|
%
|
Expected volatility (2)
|
|
|
102.9
|
%
|
|
|
219.9
|
%
|
Expected life (in years) (3)
|
|
|
2.08
|
|
|
|
2.33
|
|
Expected dividend yield (4)
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair value per Warrant
|
|
$
|
0.01
|
|
|
$
|
0.09
|
|
|
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 warrants.
|
|
|
|
|
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 April 2018 PIPE 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 March 31, 2019:
|
|
Fair
value of liability
related
to warrants
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
1,475
|
|
Revaluation of warrants to purchase Common Stock
|
|
|
(1,075
|
)
|
|
|
|
|
|
Balance at March 31, 2019 (unaudited)
|
|
$
|
400
|
|
In
estimating the fair value of the bifurcated embedded derivative related to Series A Convertible Preferred Stock, the Company used
the following assumptions:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Risk-free interest rate (1)
|
|
|
2.31
|
%
|
|
|
2.62
|
%
|
Expected volatility (2)
|
|
|
108.36
|
%
|
|
|
82.65
|
%
|
Expected life (in years) (3)
|
|
|
0.84
|
|
|
|
1.01
|
|
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 contingent redemption feature.
|
|
|
|
|
3.
|
Expected
life - the expected life was based on the expiration date of the contingent redemption feature.
|
The
changes in Level 3 liabilities associated with the April 2018 PIPE bifurcated embedded derivatives are measured at fair value
on a recurring basis. The following tabular presentation reflects the components of such liability associated with such bifurcated
embedded derivatives for the three months ended March 31, 2019:
|
|
Fair value of bifurcated
embedded derivative
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
8,129
|
|
Revaluation of bifurcated embedded derivative
|
|
|
1,290
|
|
Partial conversion of Preferred Stock into shares of common stock
|
|
|
(836
|
)
|
|
|
|
|
|
Balance at March 31, 2019 (unaudited)
|
|
$
|
8,583
|
|
The
Company’s management is measuring the fair value of the 2018 Private Placement warrants issued to the Purchaser and Newbridge
Securities Corporation, through LifeTech Capital, the placement agent for the April 2018 PIPE (“Newbridge”) and the
bifurcated embedded derivative related to Series A Convertible Preferred Stock by using the services of external independent appraiser.
During
the period commencing April 30, 2018 and ended March 31, 2019, no warrants have been exercised. As of March 31, 2019, there were
15,000,000 outstanding unexercised Warrants (including Warrants issued to both the Purchaser and Newbridge) related to the April
2018 PIPE.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ 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 Convertible Preferred Stock
|
The
terms of the Series A Convertible 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 Convertible Preferred
Stock”. As more fully described below, on April 30, 2018, the Company issued a total of 500 shares of Series A Convertible
Preferred Stock in connection with the Share Purchase Agreement. Following is a summary of the material terms of the Series A
Convertible Preferred Stock:
|
■
|
Dividends
.
Holders of shares of Series A Convertible Preferred Stock (the ” Series A Convertible Preferred Shares”) are
entitled to receive dividends on each share of the Series A Convertible Preferred Stock, payable quarterly on March 31,
June 30, September 30 and December 31, commencing June 30, 2018 (which was prorated) in an amount equal to 5% per annum
of the stated value ($10 per share of the Series A Convertible Preferred Stock) and which shall be cumulative. Such dividends
are to be paid in cash or freely tradeable shares of the Company’s common stock at its sole discretion, subject
to certain conditions. If in the event the Company elects to pay a dividend in shares of its common stock to the holders
of the Series A Convertible Preferred Shares, the number of shares of its common stock will be determined in accordance
with the terms of the Series A Certificate of Designation. The Company may only elect to pay cash dividends to the Series
A Convertible Preferred Shares to the extent there are amounts available for the payment of dividends in accordance with
applicable Delaware law.
During
the period commencing April 30, 2018 through December 31, 2018, the Company recorded an amount of $179 as dividend on
Series A Convertible Preferred Stock, $65 out of which was paid at January 3, 2019 through issuance of 832,368 shares
of common stock.
During
the period commencing January 1, 2019 through March 31, 2019, the Company recorded an amount of $65 as dividend on Series
A Convertible Preferred Stock which was paid by the Company by issuance of 3,563,950 shares of common stock to the Purchaser
on April 1, 2019 (see also Note 6A).
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
|
■
|
Liquidation
.
In the event of a Liquidation, the holders of Series A Convertible 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 convertible 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 Convertible Preferred Stock 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 Convertible Preferred Stock and all holders of shares of Parity Stock. As of March 31, 2019, the
aggregate Liquidation Preference amounted to $5,280 (unaudited).
|
|
■
|
Voting
Rights
. Holders of the Series A Convertible Preferred Stock 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 Convertible Preferred Stock is entitled to vote
the number of shares of common stock into which such holders Series A Convertible Preferred Stock would be convertible into
as of the record date.
|
|
|
|
|
■
|
Conversion
.
The 500 issued shares of the Company’s Series A Convertible Preferred Stock are
initially 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 Series A Convertible Preferred Stock as provided in the Series A Certificate of
Designation. On November 27, 2018, the conversion price was adjusted as result of occurrence
of the Trigger Event (see also Note 4C). The Series A Convertible Preferred Stock have
a beneficial ownership limitation such that none of the holders of the Series A Convertible
Preferred Stock have the right to convert the Series A Convertible Preferred Stock 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. However, by written notice to the Company, a
holder of the Series A Convertible Preferred Stock may waive the Maximum Percentage provision,
when such notice will be effective 61 calendar days after the notice date.
Due
to the Trigger Event as discussed below, the conversion price was adjusted to an amount equal to (A) 75% of the quotient
determined by dividing (x) the sum of the 3 lowest Closing Prices of the Common Stock during the period beginning 10 Trading
Days prior to such Triggering Event Conversion Date and ending 3 Trading Days after the shares of Common Stock are received
into Holder’s brokerage account and fully cleared for trading, by (y) 3, minus (B) $0.01.
Commencing
January 1, 2019 through March 31, 2019, the Purchaser converted an aggregate of 50 shares of Preferred Stock into an aggregate
of 24,961,347 shares of the Common Stock at the conversion prices in effect on the respective conversion dates.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
|
■
|
Redemption
.
The terms of the Series A Certificate of Designation contains both mandatory and conditional
redemption provisions as follows:
■ Certain
mandatory redemption provisions provide that, beginning January 30, 2019 and continuing for every 30-days period thereafter
(each a “Mandatory Redemption Date”), the Company is required to offer to redeem 1/12
th
of the
outstanding Series A Convertible Preferred Stock for an amount equal to 110% of the stated value ($10) of such shares
of Series A Convertible 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 in freely tradeable
shares of the Company’s common stock if the Company is in full compliance with all of the Equity Conditions as defined
in the Series A Certificate of Designation.
■ Upon
the occurrence of an offering of debt or equity securities of the Company or any of its subsidiaries resulting gross cash
proceeds of not less than $10,000, the Company is required to make an offer to the holders of shares of the Series A Convertible
Preferred Stock to redeem 50% of the outstanding Series A Convertible Preferred Stock at either (i) 115% of the stated
value of each Preferred Share ($10) 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) plus any unpaid accrued dividends if redeemed after October 30,
2018 (the “Redemption Premium”).
■ Upon
sale of assets (other than product to be sold in the normal course of business) of the Company and its subsidiaries in
an amount of proceeds in excess of $500, the Company is required to offer to redeem to 100% of the outstanding Series
A Convertible Preferred Stock for the Redemption Premium, and may be redeemed in cash or, at the Company’s sole
discretion in freely tradeable shares of the Company’s common stock if the Company is in full compliance with all
of the equity conditions as defined in the Series A Certificate of Designation.
■ The
Company may also be required, at the option of holders of the Series A Convertible Preferred Stock to redeem any outstanding
shares of Series A Convertible Preferred Stock upon a Change of Control or Bankruptcy Event. Each Preferred Stock shall
be redeemed for an amount equal to Redemption Premium, and may be redeemed in cash or, at the Company’s sole discretion
in freely tradeable shares of the Company’s common stock if the Company is in full compliance with all of the equity
conditions as defined in the Series A Certificate of Designation.
■ The
Company may, at any time upon at least 15 trading days prior written notice to each holder, redeem all or portion of the
outstanding Preferred Stock in cash in an amount equal to Redemption Premium.
As
of March 31, 2019, the Company is not in compliance with the Equity Conditions and therefore beginning January 31, 2019
for every 30-days period thereafter, at the request of the purchaser, we might be required to redeem in cash, 1/12
th
of the outstanding shares of Series A Convertible Preferred Stock for an amount equal to 110% of the stated
value ($10) of such shares of Series A Convertible Preferred Stock plus any accrued but unpaid dividends up to
the Mandatory Redemption Date. As of the date of issuance of these financial statements, the Purchaser has not requested
redemption in cash of any shares of Series A Convertible Preferred Stock.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
|
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 Convertible Preferred Stock (the “Preferred Stock”), which are initially convertible
into 25,000,000 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 initially 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 (since the Initial Date through March 31, 2019, no adjustments
have been made to the conversion price), for an aggregate purchase price of $5,000.
The
Company engaged 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 2,500,000 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
(since the Initial Date through March 31, 2019, no adjustments have been made to the conversion price). 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 Purchaser in connection with the Agreement (since the Initial Date through March
31, 2019, no solicitation fee was earned).
On
November 27, 2018, the Tel Aviv regional Prosecutor’s Service filed criminal charges against Dr. Yehuda Baruch, the Chief
Medical and Regulatory Affairs Officer of the Company, alleging that Dr. Baruch conducted an improper sexual relationship with
a psychiatric patient. Dr. Baruch denies all allegations. The Company together with its legal counsels believe that such criminal
charges are not directed at, and do not concern, the Company, any actions of Dr. Baruch in the Company or any other of the Company’s
directors or officers. The Company is evaluating its proposed response, if any, considering the allegations brought against Dr.
Baruch.
The
aforesaid charges brought against Dr. Baruch are considered a “trigger event” (the “Trigger Event”) under
the Series A Certificate of Designation. Subject to certain beneficial ownership limitations of the Preferred Stock, at any time
during the period commencing on the date of the occurrence of a Trigger Event and ending on the date of the cure of such Trigger
Event, the Purchaser of the Preferred Stock may, at its option, by delivery of notice to the Company, specify a future date upon
which such holder shall require the Company to convert all, or any number of, Preferred Stock into shares of the Company’s
common stock at an adjusted conversion ratio as specified in the Series A Certificate of Designation.
Due
to the aforesaid Trigger Event, the conversion price was adjusted to an amount equal to (A) 75% of the quotient determined by
dividing (x) the sum of the 3 lowest Closing Prices of the Common Stock during the period beginning 10 Trading Days prior to such
Triggering Event Conversion Date and ending 3 Trading Days after the shares of Common Stock are received into Holder’s brokerage
account and fully cleared for trading, by (y) 3, minus (B) $0.01.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
The
Warrants are considered a freestanding instrument, as the Company believes they are legally detachable and separately exercisable.
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. Consequently, the Warrants were accounted for and recognized as a non-current financial liability
on the consolidated balance sheet under ASC 815-40-25 and were measured at fair value at the initial date and 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. Thus, the Warrants amounting to $400 and $1,475 were measured
at fair value on March 31, 2019 and December 31, 2018, respectively. For the three months period ended March 31, 2019, the Company
recorded income in total amount of $1,075, due to revaluation of Warrants to purchase shares of Common Stock in the statement
of operations and comprehensive loss as separate line (see also Note 3).
In
addition, at the Initial Date, the Company identified several embedded features which require separate accounting as derivatives
under ASC 815-15. Nevertheless, except specific embedded feature relating to contingent redemption feature in case of other than
upon bankruptcy triggering event, the Company determined that all remaining embedded features should not bifurcated from the host
contract or the probability of occurrence of such embedded features is low and therefore the fair value of such embedded features
was determined to be immaterial upon initial recognition. In addition, the Company determined that the Trigger Event is considered
as optional conversion feature upon triggering event that should be estimated at fair value. Thus, the bifurcated embedded derivatives
amounting to $8,583 and $8,129 were measured at fair value on March 31, 2019 and December 31, 2018, respectively. The change in
the fair value is resulted from revaluation of the bifurcated embedded derivatives in total amount of $1,290 which was recognized
under other expenses in the statement of comprehensive loss in a separate line for the three months ended March 31, 2019. In addition,
upon a partial conversion of 50 share of Series A Convertible Preferred Stock into 24,961,347 shares of common stock, a relative
portion of $275 was reclassified to equity (see also Note 3).
Under
ASC 480-10-S99 “Distinguishing Liabilities from Equity”, since the Series A Convertible 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 Convertible Preferred Stock and after consideration with the amount related to the BCF. Subsequently, the
Company accretes 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 as changes in accounting estimates.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
The
below table outlines the change in the mezzanine account during the three months ended March 31, 2019 -
|
|
Three
months ended
March
31, 2019
|
|
|
|
Unaudited
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
2,226
|
|
Accretion of Preferred Stock to redemption
value
|
|
|
989
|
|
Partial conversion
of Preferred Stock into shares of common stock
|
|
|
(275
|
)
|
Balance at March 31, 2019
|
|
$
|
2,940
|
|
|
D.
|
Stock-based
compensation
|
|
1.
|
In
2019, the Company approved the Amended and Restated 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.
|
Stock
options grants:
A.
On
January 14, 2019, the Company granted stock options exercisable into 500,000 shares to several employees under the 2016
Plan at an exercise price of $0.22 per share. The stock options become vested over a three-year period from the date of
grant. The stock 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 of the stock options
by taking into account assumptions as follows: expected dividend yield of 0%; risk-free interest rate of 2.51%; expected
volatility of 252% and expected term of 4.46 years. The fair value of the stock options at the grant date was $64.
B.
On
January 14, 2019, the Company granted stock options exercisable into 1,500,000 shares to its Chief Scientific Officer
under the 2016 Plan at an exercise price of $0.05 per share. 33% of the stock options vested on February 18, 2019 and
the remaining 1,000,000 stock options will vest over a 2-year period commencing on the first quarter after the first vesting
event, in equal quarterly installments of 125,000 stock options per quarter. The Company used the Black-Scholes-Merton
pricing model to estimate the fair value of the stock options by taking into account assumptions as follows: expected
dividend yield of 0%; risk-free interest rate of 2.51%; expected volatility of 286% and expected term of 3.35 years. The
fair value of the stock options at the grant date was $194.
C.
On
February 4, 2019, the Company granted stock options exercisable into 1,500,000 shares to its Chief Financial Officer,
under the 2016 Plan at an exercise price of $0.22 per share. The stock options shall vest over a 3-year period from the
vesting start date, such that approximately 166,656 stock options shall vest upon the 1-year anniversary of the start
date and the remaining stock options shall vest in 8 equal quarterly instalments thereafter. The Company used the Black-Scholes-Merton
pricing model to estimate the fair value of the stock options by taking into account assumptions as follows: expected
dividend yield of 0%; risk-free interest rate of 2.51%; expected volatility of 252% and expected term of 4.49 years. The
fair value of the stock options at the grant date was $151.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
|
3.
|
The
following tables present a summary of the status of the grants to employees, officers and directors as of March 31, 2019:
|
|
|
Shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining
contractual
term (years)
|
|
|
Aggregate
intrinsic
value (*)
|
|
Options outstanding at December 31, 2018
|
|
|
27,250,000
|
|
|
$
|
0.05
|
|
|
|
8.0
|
|
|
$
|
1,453
|
|
Granted
|
|
|
3,500,000
|
|
|
$
|
0.15
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(750,000
|
)
|
|
$
|
0.05
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at March 31,
2019
|
|
|
30,000,000
|
|
|
$
|
0.06
|
|
|
|
8.04
|
|
|
$
|
-
|
|
Options exercisable at March 31,
2019
|
|
|
26,750,000
|
|
|
$
|
0.05
|
|
|
|
7.83
|
|
|
$
|
-
|
|
|
(*)
|
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 first quarter of 2019 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 March 31, 2019.
This amount is impacted by the changes in the fair value of the Company’s shares.
|
|
4.
|
The
following table summarizes information about stock options outstanding at March 31, 2019:
|
|
|
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
|
|
|
27,900,000
|
|
|
$
|
0.05
|
|
|
|
7.92
|
|
|
|
26,650,000
|
|
|
$
|
0.05
|
|
$0.10-$0.30
|
|
|
2,100,000
|
|
|
$
|
0.22
|
|
|
|
9.70
|
|
|
|
100,000
|
|
|
$
|
0.20
|
|
Total Shares
|
|
|
30,000,000
|
|
|
$
|
0.06
|
|
|
|
8.04
|
|
|
|
26,750,000
|
|
|
$
|
0.05
|
|
|
5.
|
As
of March 31, 2019, there was $223 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 0.71 years.
|
|
|
|
|
6.
|
The
total equity-based compensation expense related to all of the Company’s equity-based awards issued to employees, recognized
for the three months ended March 31, 2019 and 2018 amounted to $40 and $345, respectively. The expense for the three months
ended March 31, 2019 is net of credit from reversal of previous expense on forfeited option. These expenses have been recorded
as general and administrative expenses as part of the statement of comprehensive loss.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
|
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 was recorded as part of general and administrative expenses for the year
ended December 31, 2018. As of March 31, 2019, 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 for common stock subscriptions receivable from a former employee.
|
|
F.
|
Amortization
of services receivable
Prior
to January 1, 2019 the Company had granted stock awards to non-employees that are being recognized ratably over the requisite
service periods. The Company recognized amortization of services receivable of $35 and $241 for the three months ended
March 31, 2019 and 2018, respectively.
|
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGENCIES
|
|
1.
|
On
October 11, 2015, OWC entered into a memorandum of understanding with Medmar LLC (“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
$50 to OWC. 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 to OWC.
|
|
|
|
|
|
On
March 17, 2016, Medmar and OWC executed a consulting and License Agreement (the “License 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 License Agreement) in the State of Maryland, against
payment by Medmar to OWC of a royalty. As part of the License Agreement, OWC received from Medmar an advance amount of $50.
As OWC did not have any performance obligation in connection with the agreement, OWC recorded revenues in an amount of $50
during the year ended December 31, 2016.
|
|
|
|
|
|
As
of March 31, 2019 and December 31, 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 in the aggregate amount of $100.
|
|
|
|
|
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 was completed during the fourth quarter of 2018.
OWC recorded research and development expenses of $29 during the three months ended March 31, 2018.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGENCIES (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 March 31, 2019.
|
|
|
|
|
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 “Emilia
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 Emilia License Agreement, the Group and Emilia conducted a development
and evaluation program (as defined in the Emilia 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 Emilia 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 Emilia 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 Emilia License Agreement, the royalty
term will be extended for an additional five-year term.
No
sales have occurred to date and therefore there is no impact on these consolidated financial statements.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
|
5.
|
On
December 29, 2016, OWC entered into a Research Agreement with Medical Research Infrastructure Development and Health Services
Fund (the “Fund”) by Chaim Sheba Medical Center (“Sheba”). Pursuant to the Clinical Research Agreement,
the Fund shall perform a Phase I, double blind, randomized, placebo-controlled, maximal dose clinical trial (the “Psoriasis
Trial”) to determine the safety and tolerability of topical ointment containing MGC (“Medical Grade Cannabis”
or the “Drug Trial”) in healthy volunteers, employing the services of Professor Aviv Barzilay, Director of the
Department of Dermatology- Chaim Sheba Medical Center, Tel Hashomer, Israel, to lead the Trial (the “Investigator”).
The Trial 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 Trials which are applicable
in Israel; and (7) written instructions and prescriptions issued by OWC and governing the administration of the Drug Trial.
On January 29, 2019, the Company reported positive phase I safety data from the Trial. Pursuant to the Research Agreement,
OWC is obliged to pay Sheba $170 for conducting the safety Trial for the ointment, the remainder of payment, $37 was paid
through the period of 3 months ended March 31, 2018. The amounts of $37 and $44 have been recorded as research and development
expenses related to the Trial during the period of three months ended March 31, 2019 and 2018, respectively.
|
|
|
|
|
6.
|
On
October 22, 2014, OWC entered into a Service 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 Service agreement, OWC is required to conduct
pre-clinical studies on multiple myeloma for total payment of $170. During the three months ended March 31, 2019 and 2018,
the Company has not recorded any research and development expenses related to the Service Agreement.
|
|
|
|
|
|
At
present, OWC uses its available working capital to fund these studies.
|
|
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 noted above
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.
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2.
|
The
Company has also sued certain individuals in the Supreme Court of the State of New York regarding defaulted loan obligations
related to 2,354,480 shares granted to them. The matter has been settled as against certain individuals, while the Company
is still pursuing its claims against one individual for an outstanding sum of approximately $15. The Company is currently
monitoring the payment of the settlement funds amounting to $121 which are included as part of Common Stock Subscriptions
Receivable.
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OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
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COMMITMENTS
AND CONTINGENCIES (Cont.)
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3.
|
On
December 6, 2018, the Company has entered into a Settlement Agreement (the “Agreement”) with the “Plaintiff”,
in the Tel Aviv Regional Court of Labor, pursuant to which subject to receiving a withholding tax certificate from the Plaintiff,
the Company will issue to the Plaintiff a number of shares of the Company’s common stock at an aggregate value of $725
on the issuance date. The price per share will be determined based on the average closing price of the share during the three
business days preceding the date in which the Company receives the withholding tax certificate from the Plaintiff.
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In
addition, the Company has provided the Plaintiff a price protection for a period of 6-months (the “Limitation Period”)
commencing the date in which the withholding tax certificate has been received by the Company, under which if the value of
the common stock issued to the Plaintiff falls below $725 at the end of the Limitation Period, in such case the Company will
issue the Plaintiff additional common stock to get the aggregate value back to $725.
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The
Company and the Plaintiff mutually agreed to dismiss all claims other than the Company’s claims against the Plaintiff
in the USA.
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As
of the filing date of these consolidated financial statements, the withholding tax certificate has not been received by the
Company and therefore as of that date, the number of shares to be issued to the Plaintiff, cannot be considered as fixed and
determinable. Also, the Company has not yet issued any shares to the Plaintiff and the price protection feature has not been
granted.
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As
the obligation will be settled only through the issuance of the Company’s common stock, the liability related to shares
to be issued was presented as non-current as of March 31, 2019 and December 31, 2018, in total amount of $725.
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NOTE
6
|
-
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SUBSEQUENT
EVENTS
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A.
|
Dividend
distribution on Series A Convertible Preferred Stock
On
April 1, 2019, the Company paid a dividend of $65 by issuing 3,563,950 shares of common stock to the Purchaser of the
Preferred Stock (see also Note 4B).
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B.
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Commencement
of Safety and Pharmacokinetics (PK) study of OWC’s soluble tablet versus Sativex®
On
April 15, 2019, the Company commenced a single dose, randomized, crossover study to compare the safety, tolerability and
pharmacokinetics (PK) of OWC’s Medical Grade Cannabis - Orally Disintegrating Tablets (MGC-ODT) versus buccal Sativex®,
in healthy adult volunteers (NCT03936907). The study is being conducted at the Souraski Medical Center in Tel Aviv, Israel.
This is a crossover study in which participants are administered with Sativex and OWC’s MGC-ODT, randomly, at least
two weeks apart.
Plasma
is collected during a 24-hour period, at pre-determined times, and side effects are being monitored. The participants’
concentrations of THC, CBD and 11-OH-THC will be quantified, and their plasma PK analyzed. The safety, tolerability and
PK profile following Sativex and MGC-ODT will be compared.
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C.
|
Issuance
of Unregistered Securities
As
discussed in Note 4B, commencing April 1, 2019 through the date of these condensed consolidated financial statements,
the Purchaser converted an aggregate of 5 shares of Preferred Stock into an aggregate of 15,059,605 shares of Common Stock.
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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 consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission
(“SEC”) on April 1, 2019. 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,
2018 and in Item 1A. Risk Factors.
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 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.
On
March 14, 2019, the Company executed a contract with the Souraski Medical Center Fund in Tel Aviv to perform a Single-Dose, Randomized,
Crossover Study to compare the Safety, Tolerability and Pharmacokinetics of OWC’s Medical Grade Cannabis - Orally Disintegrating
Tablets (MGC-ODT) with Buccal Sativex
®
, in Healthy Adult Volunteers. This Clinical Trial Agreement (the “Agreement”)
is entered into by and among One World Cannabis Ltd. and The Medical, Infrastructure and Health Services Fund of the Tel Aviv
Medical Center, Israel, and Prof. Jacob Ablin M.D. as the Principal Investigator. The primary objectives of the study are:
1.
|
To investigate the pharmacokinetics profile of THC,
11-OH THC and CBD following a single sublingual dose of MGC-ODT.
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2.
|
To compare the pharmacokinetic
profiles of THC, THC metabolite 11-hydroxy-THC and CBD following a single administration of the investigational MGC-ODT vs.
Sativex
®
Oromucosal Spray.
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3.
|
To monitor and compare
the safety and tolerability of the MGC-ODT and Sativex
®
in the participating subjects.
|
On
January 29, 2019 we reported positive safety data from our Phase 1 trial for our medical grade cannabis MGC ointment for the treatment
of skin diseases. No severe adverse events were observed in the trial.
April
2018 PIPE
On
April 30, 2018 (the “Initial Date”), we 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, we sold and the Purchaser bought, (i) 500 shares of our new series of preferred stock
designated as Series A Convertible Preferred Stock (the “Preferred Stock”), which were initially convertible into
25,000,000 shares of Common Stock at an initial conversion price of $0.20 per share (which was adjusted upon occurrence of the
Triggering Event (as defined below), subject to adjustment pursuant to the anti-dilution provisions of the Preferred Stock, and
(ii) Warrants (the “Warrants”) representing the right to acquire initially 12,500,000 shares of Common Stock over
a period of five years from the Initial Date at an initial 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.
Commencing
January 1, 2019 through March 31, 2019, the Purchaser converted an aggregate of 50 shares of Preferred Stock into an aggregate
of 24,961,347 shares of the Common Stock at the conversion prices in effect on the respective conversion dates. Since March 31,
2019 through May 14, 2019, the Purchase converted an additional 7 shares of Preferred Stock into an aggregate of 15,064,605 shares
of Common Stock at the conversion prices in effect on the respective conversion dates.
Newbridge Securities Corporation, through
LifeTech Capital (“Newbridge”), acted as exclusive placement agent for the April 2018 PIPPE and we are obligated to
pay a cash fee of $375,000 to Newbridge and issue to them warrants to purchase 2,500,000 shares of Common Stock
(or 10% of the aggregate number of fully diluted shares of Common Stock that have been purchased by the 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, we are also obligated to pay Newbridge a warrant solicitation fee equal to 4% of the gross
proceeds that we receive upon cash exercise of any Warrants purchased by the Purchaser in connection with the Agreement
(since the Initial Date through March 31, 2019, no solicitation fee was earned as no warrants were exercised).
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. We 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.
The
Warrants are considered a freestanding instrument, as we believe they are legally detachable and separately exercisable.
The
accounting effects of the April 2018 PIPE transaction for the three months ended March 31, 2019 are discussed in Note 4 to our
Consolidated Financial Statements included herein. As the April 2018 PIPE transaction was completed on the Initial Date, it did
not impact the accompanying condensed consolidated financial statements for the three months ended March 31, 2018 (which presented
as comparative in this filing).
Going
Concern
The
development and commercialization of our product is expected to require substantial expenditures. We have not yet generated material
revenues from operations and therefore are dependent upon external sources for financing our operations. In addition, in each
year since our inception we reported losses and negative cash flows from operating activities. Moreover, we are required to redeem
shares of our Series A Convertible Preferred Stock in cash amount that will not allow us to maintain our operations for the next
twelve months. This means that there is substantial doubt that we can continue as a going concern for the next twelve months
unless we obtain additional capital to pay our bills and meet our other financial obligations. Accordingly, we must raise capital
from sources other than the actual sale of the product. We must raise capital to implement our projects and stay in business.
There can be no assurance that we will be able to continue to raise equity and/or debt capital from investors on terms and conditions
satisfactory to us, or otherwise, and/or have adequate capital resources required by us to fund our current and future planned
operations. If we are unable to obtain adequate capital resources to fund operations, we may be required to delay, scale back
or eliminate some or all of our plan of operations, which may have a material adverse effect on our business, results of operations
and ability to continue as a going concern.
Our
lack of operating history may make it difficult to raise capital. Our inability to borrow funds or raise equity capital to facilitate
our business plan may have a material adverse effect on our financial condition and future prospects.
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 trial
(the “Psoriasis Trial”) to determine the safety and tolerability of the topical ointment containing medical grade
cannabis (the “Topical Ointment”) in healthy volunteers. The completed part of our Psoriasis Trial 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 trial, we plan to initiate a Phase II Trial to demonstrate the efficacy of
the Topical Ointment in treating mild to moderate psoriasis and other inflammatory skin diseases.
On
January 29, 2019 we reported positive Phase 1 safety data for our medical grade cannabis MGC ointment for the treatment of skin
diseases. No severe adverse events were observed in the trial.
We
expect to initiate a Phase 2 trial of MGC ointment for the treatment of psoriasis during the fourth quarter of 2019.
Results
of Operations
Results
of Operations during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018
We
have not generated any revenue during the three months ended March 31, 2019 or 2018. We have operating expenses related to research
and development expenses and general and administrative expenses.
During
the three months ended March 31, 2019, we incurred a net loss of $1,000,000 due to general and administrative expenses of $498,000,
research and development expenses of $285,000, income of $1,075,000 from the revaluation of liability related to the warrants,
loss of $1,290,000 from revaluation of bifurcated embedded derivative related to Series A convertible Preferred Stock and financial
expenses of $2,000, as compared to a net loss of $977,000 due to general and administrative expenses of $821,000, research and
development expenses of $155,000 and financial expenses of $1,000 during the three months ended March 31, 2018.
Our
general and administrative expenses decreased by $323,000 or 39.3% during the three months ended March 31, 2019 as compared to
the same period in the prior year, primarily due to decreased of stock-based compensation and amortization of services receivable
expenses. The charges relating to stock-based compensation and services receivable expenses were $75,000 for the three months
ended March 31, 2019, compared to an expense of $586,000 for the three months ended March 31, 2018. The decrease in general and
administrative expenses was partially offset by increases in legal and consulting expenses due to reverse share split and increase
in base salary.
Our
research and development expenses increased by $130,000 or 83.9% during the three months ended March 31, 2019 as compared to the
same period in the prior year mainly due to increase in head count and to active trials costs.
Liquidity
and Capital Resources
As
of March 31, 2019, we had current assets of $2,854,000 consisting of $2,800,000 in cash and cash equivalents and other current
assets of $54,000. As of March 31, 2019, we had property and equipment carried at $73,000, net of $38,000 in accumulated depreciation
and lease right-of-use asset of $60,000. We had total assets of $2,949,000 as of March 31, 2019.
Lease
assets and liabilities existed at March 31, 2019, but not at December 31, 2018.
As
of December 31, 2018, we had current assets of $3,516,000 consisting of $3,464,000 in cash and cash equivalents and other current
assets of $52,000. We had property and equipment valued at $73,000, net of $36,000 in accumulated depreciation. We had total assets
of $3,553,000 as of December 31, 2018.
As
of March 31, 2019, we had $509,000 in current liabilities consisting of $163,000 in accounts payable, $220,000 in other current
liabilities, deferred revenues of $100,000 and lease liabilities of $26,000.
As
of December 31, 2018, we had $438,000 in current liabilities consisting of $98,000 in accounts payable, $240,000 in other current
liabilities and deferred revenues of $100,000.
We
had positive working capital of $2,345,000 as of March 31, 2019 compared to positive working capital of $3,078,000 as of December
31, 2018. Our accumulated deficit as of March 31, 2019 and December 31, 2018 was $29,276,000 and $27,222,000, respectively.
As
of March 31, 2019, we had $9,742,000 in non-current liabilities consisting of $8,583,000 in bifurcated embedded derivative related
to Series A Convertible Preferred Stock, $400,000 in liability related to warrants to purchase common stock, $34,000 in lease
liabilities and $725,000 in liability related to shares to be issued.
We
used $665,000 in our operating activities during the three months ended March 31, 2019, which was due to a net loss of $1,000,000
,amortization of services receivable of $35,000, stock-based compensation expenses of $40,000, revaluation income of liability
related to warrants to purchase common stock of $1,075,000, revaluation expense of bifurcated embedded derivative related to the
Series A Convertible Preferred Stock of $1,290,000, depreciation expense of $2,000, an increase in accounts payable of $65,000,
an increase in other current assets of $2,000 and a decrease in other liabilities of $20,000.
We
used $371,000 in our operating activities during the three months ended March 31, 2018, which was due to a net loss of $977,000
partially offset by amortization of services receivable of $240,000, stock-based compensation of $345,000, depreciation expense
of $2,000, a decrease in accounts payable of $2,000, a decrease in other prepaid expenses of $63,000 and a decrease in other current
liabilities of $42,000.
Our
financing activities during the three months ended March 31, 2018 provided us with $105,000 through collection of a stock subscription
receivable. There were no cash flows from financing activities during the three months ended March 31, 2018.
Based upon our cash position of
$2,800,000 on March 31, 2019 we believe that we do not have sufficient cash to allow us to maintain our operations for the
next twelve-month period. As of March 31, 2019, we are not in compliance with the Equity Conditions (as defined in
our Series A Certificate of Designation) and therefore beginning January 31, 2019, for every 30-days period thereafter, at
the request of the purchaser, we might be required to redeem in cash, 1/12
th
of the outstanding shares of Series A
Convertible Preferred Stock, for an amount equal to 110% of the stated value ($10,000) of such shares of Series A
Convertible Preferred Stock plus any accrued but unpaid dividends up to the Mandatory Redemption Date. As of the date of
issuance of these financial statements, the Purchaser has not requested redemption in cash of any shares of Series A
Convertible Preferred Stock. Management considered the significance of such conditions in relation to our ability to meet
its current and future obligations and determined that such conditions raise substantial doubt about the
Company’s ability to continue as a going concern. 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. There is also no assurance that additional capital will be
on terms and conditions favorable to us.
The
development and commercialization of our product is expected to require substantial expenditures. We have not yet generated material
revenues from operations and therefore we dependent upon external sources for financing our operations. As of March 31, 2019,
we have an accumulated deficit of $29,276,000. In addition, during the three months ended March 31, 2019, excluding the revaluation
income of liability related to warrants to purchase common stock in an amount of $1,075,000, and the revaluation of bifurcated
embedded derivative in an amount of $1,290,000, we reported losses, and negative cash flows from operating activities.
Funding
of Our Research Programs
On
October 22, 2014, we entered into a service agreement with the Sheba Academic Medical Center’s hospital (“Sheba”)
relating to the use of cannabis to treat myeloma. Within the framework of this service agreement, we conducted pre-clinical studies
on multiple myeloma, which have commenced in April 2015. Pursuant to this service agreement, we are obligated to pay Sheba $170,000.
As of March 31, 2019, we have paid Sheba $66,000 as per Sheba’s payment requests.
In
addition, pursuant to another service agreement, we were obliged to pay Sheba $170,000 throughout 2017 and 2018 for conducting
the Study for the cream for treatment of psoriasis. As of March 31, 2019, we have paid the entire amount.
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 $12,000 for the three months
period ended March 31, 2019 and we expect it will be a total of approximately $49,000 for the year ending December 31, 2019.
Off
Balance Sheet Arrangements
As
of March 31, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated
under the Securities Act of 1934.
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, 2018, filed with the SEC on April 1, 2019.
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, 2018, filed with the SEC on April 1, 2019, and in Note 2 to our interim consolidated
financial statements as reported in our Quarterly Report on Form 10-Q for the three months period ended March 31, 2019. There
have been no changes to the policies reported in the 2018 Form 10-K.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
of March 31, 2019, the Company’s chief executive officer and chief financial officer conducted an evaluation regarding the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the
Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were ineffective as of March 31, 2019.
Material
Weaknesses and Remediation of Material Weaknesses
The
Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in Exchange Act Rule 13a-15. Internal control over financial reporting is defined in Rule 13a-15(f) and 15(d)-15(f)
under the Exchange Act as a process designed to provide reasonable assurance to the Company’s management and Board of Directors
regarding the preparation and fair presentation of published financial statements. Management conducted an assessment of the Company’s
internal control over financial reporting as of March 31, 2019 based on the framework and criteria established by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Management is not permitted
to conclude that the Company’s internal control over financial reporting is effective if there are one or more material
weaknesses in the Company’s internal control over financing reporting. A material weakness is a deficiency, or a combination
of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement
of a company’s annual or interim consolidated financial statements would not be prevented or detected on a timely basis.
Based on our assessment and those criteria, we have concluded that our internal controls over financial reporting were ineffective
because of the identification of material weaknesses including lack of sufficient internal accounting personnel, lack of sufficient
internal controls (including IT general controls) that encompass the Company as a whole with respect to entity and transactions
level controls in order to ensure complete documentation of complex and non-routine transactions and adequate financial reporting
during the three months ended March 31, 2019. Management has identified corrective actions for the weaknesses and intends to implement
procedures to address before mentioned material weaknesses during the remainder of fiscal year 2019.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation
required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the three months ended March 31, 2019 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.