Three
Months Ended September 30, 2019
|
|
Series
A Convertible
Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Services
Receivable
|
|
|
Common Stock Subscriptions Receivable
|
|
|
Accumulated
Deficit
|
|
|
Other
Comprehensive Income (Loss)
|
|
|
Total
Stockholders’
Deficit
|
|
Balance at June 30, 2019 (unaudited)
|
|
|
431
|
|
|
|
3,628
|
|
|
|
216,265,874
|
|
|
|
2
|
|
|
|
19,
627
|
|
|
|
(50
|
)
|
|
|
(239
|
)
|
|
|
(22,384
|
)
|
|
|
1
|
|
|
|
(3,043
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Amortization of services receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37
|
|
Dividend on Series A redeemable convertible preferred stock (see
also Note 4B)
|
|
|
-
|
|
|
|
-
|
|
|
|
12,512,000
|
|
|
|
*
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
(62
|
)
|
Accretion of Series A convertible preferred stock to redemption
value (see also Note 4B)
|
|
|
-
|
|
|
|
701
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(701
|
)
|
|
|
-
|
|
|
|
(701
|
)
|
Partial conversion of Series A Convertible Preferred stock into
common stock (see also Note 4B)
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
15,700,000
|
|
|
|
1
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(287
|
)
|
|
|
-
|
|
|
|
(287
|
)
|
Balance at September 30, 2019 (unaudited)
|
|
|
429
|
|
|
|
4,314
|
|
|
|
244,477,874
|
|
|
|
3
|
|
|
|
19,677
|
|
|
|
(13
|
)
|
|
|
(239
|
)
|
|
|
(23,434
|
)
|
|
|
(2
|
)
|
|
|
(4,008
|
)
|
*)
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 SERIES A CONVERTIBLE PREFERRED
STOCK
AND STOCKHOLDERS’ DEFICIT
(In
thousands, except share and per share amounts)
(Unaudited)
Three
Months Ended September 30, 2018
|
|
Series
A Convertible
Preferred Stock
|
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Services
Receivable
|
|
|
Common Stock Subscriptions Receivable
|
|
|
Accumulated
Deficit
|
|
|
Other
Comprehensive Income (Loss)
|
|
|
Total
Stockholders’
Deficit
|
|
Balance
at June 30, 2018 (unaudited)
|
|
|
500
|
|
|
|
532
|
|
|
|
147,758,908
|
|
|
|
2
|
|
|
|
17,527
|
|
|
|
(194
|
)
|
|
|
(239
|
)
|
|
|
(19,280
|
)
|
|
|
3
|
|
|
|
(2,181
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105
|
|
Amortization
of services receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
Dividend
on Series A redeemable convertible preferred stock (see also Note 4B)
|
|
|
-
|
|
|
|
-
|
|
|
|
242,572
|
|
|
|
-
|
|
|
|
114
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
45
|
|
Accretion
of Series A convertible preferred stock to redemption value (see also Note 4B)
|
|
|
-
|
|
|
|
804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(804
|
)
|
|
|
-
|
|
|
|
(804
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(992
|
)
|
|
|
-
|
|
|
|
(992
|
)
|
Balance
at September 30, 2018 (unaudited)
|
|
|
500
|
|
|
|
1,336
|
|
|
|
148,001,480
|
|
|
|
2
|
|
|
|
17,746
|
|
|
|
(158
|
)
|
|
|
(239
|
)
|
|
|
(21,145
|
)
|
|
|
1
|
|
|
|
(3,793
|
)
|
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)
(Unaudited)
|
|
US dollars
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6,420
|
|
|
|
(5,178
|
)
|
Adjustments to reconcile net income (loss) to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
8
|
|
|
|
6
|
|
Stock-based compensation
|
|
|
142
|
|
|
|
690
|
|
Amortization of services receivable
|
|
|
108
|
|
|
|
367
|
|
Direct and incremental issuance cost related to April 2018 PIPE transaction
|
|
|
-
|
|
|
|
483
|
|
Revaluation of liability related to warrants to purchase common stock
|
|
|
(1,362
|
)
|
|
|
(1,075
|
)
|
Revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock
|
|
|
(7,201
|
)
|
|
|
2,814
|
|
Revaluation of embedded derivative related to price protection feature
|
|
|
53
|
|
|
|
-
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in lease right-of-use assets, net
|
|
|
20
|
|
|
|
-
|
|
Decrease in deferred revenue
|
|
|
(100
|
)
|
|
|
-
|
|
Decrease (increase) in other current assets
|
|
|
(178
|
)
|
|
|
14
|
|
Increase in accounts payable
|
|
|
188
|
|
|
|
167
|
|
Increase in other current liabilities
|
|
|
(70
|
)
|
|
|
(36
|
)
|
Decrease in lease liabilities
|
|
|
(20
|
)
|
|
|
-
|
|
Cash used in operating activities:
|
|
|
(1,992
|
)
|
|
|
(1,748
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2
|
)
|
|
|
(23
|
)
|
Cash used in investing activities
|
|
|
(2
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series A redeemable convertible preferred stock, bifurcated embedded derivative and detachable warrants, net of issuance costs
|
|
|
-
|
|
|
|
4,918
|
|
Proceeds from the payments of stock subscriptions
|
|
|
-
|
|
|
|
105
|
|
Cash provided by financing activities
|
|
|
-
|
|
|
|
5,023
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments on cash and cash equivalents
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
(1,999
|
)
|
|
|
3,247
|
|
Balance of cash and cash equivalents at beginning of period
|
|
|
3,464
|
|
|
|
970
|
|
Balance of cash and cash equivalents at end of period
|
|
|
1,465
|
|
|
|
4,217
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
Beneficial Conversion Feature on Redeemable Convertible Series A Preferred Stock
|
|
|
-
|
|
|
|
773
|
|
Issuance costs in form of liability related to warrants
|
|
|
-
|
|
|
|
117
|
|
Dividend on Series A Convertible Preferred Stock
|
|
|
194
|
|
|
|
114
|
|
Accretion of Series A Convertible Preferred Stock to redemption value
|
|
|
2,438
|
|
|
|
1,336
|
|
Partial conversion of shares of Series A Convertible Preferred Stock into shares of common stock
|
|
|
1,267
|
|
|
|
-
|
|
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”) 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 “Products Prospects”) for the treatment
of multiple myeloma, psoriasis, chronic pain syndromes, fibromyalgia PTSD and development of unique delivery systems. These delivery
systems 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 potential commercialization of the Company’s products is expected to require substantial expenditures. The
Company has not yet generated material revenues from operations and therefore is dependent upon external sources for financing
its operations. As of September 30, 2019, the Company has an accumulated deficit of $23,434. In addition, in each year since its
inception the Company reported losses from operations and negative cash flows from operating activities. Moreover, the Company
is not in compliance with the Equity Conditions (as defined in the Company’s Series A Certificate of Designation) and therefore
the Purchaser in the April 2018 PIPE transaction (each as defined 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 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 an investor (the “Purchaser” and “the
April 2018 PIPE”), pursuant to which, the Company issued (i) 500 shares of Preferred Stock designated as Series A Convertible
Preferred Stock that were initially convertible into 25,000,000 shares of common stock and (ii) Warrants that were 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 nine months ended September 30, 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 several risks and uncertainties, including risks and uncertainties regarding
continuation of the development process, demand and market acceptance of the Company’s products, the effects of technological
changes, competition and the development of products by competitors. Additionally, other risk factors also exist, such as the
ability to manage growth and the effect of planned expansion of operations on the Company’s future results and the availability
of necessary financing. In addition, the Company expects to continue incurring significant operating costs and losses in connection
with the development and marketing of its products.
On
September 16, 2019, the Company received a Bid Price Deficiency Notice (the “Notice”) from OTC Markets Group that
the Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days and thus no longer met the Standards
for Continued Eligibility for OTCQB as per the OTCQB Standards Section 2.3(2). The Notice stated that, pursuant to Section 4.1
of the OTCQB Standards, the Company was granted a cure period of 90 calendar days during which the minimum closing bid price for
the Company’s common stock must be $0.01 or greater for ten consecutive trading days in order to continue trading on the
OTCQB marketplace. If this requirement is not met by December 15, 2019, the Company will be removed from the OTCQB marketplace.
On November 7, 2019, the Company’s cure period was extended until February 5, 2020.
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 December 31, 2018 has been derived from the consolidated financial statements contained in our
Annual Report on form 10-K.
The
results for the nine months ended September 30, 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) Income Per Share
The
Company computes net (loss) income per share in accordance with ASC 260, “Earnings per share”. Basic (loss) income
per share is computed by dividing net (loss) income attributable to common stockholders by the weighted-average number of shares
of common stock 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 and nine months ended September 30, 2018 and three months ended September 30, 2019.
Diluted
(loss) income per common share is computed similar to basic (loss) income per share, except that the denominator is increased
to include the number of additional potential shares of common stock that would have been outstanding if the potential shares
of common stock had been issued and if the additional shares of common stock were dilutive. Potential shares of common stock 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 shares of common stock consist of stock options, certain stock warrants and restricted stock awards issued under the
Company’s 2016 Plan and their potential dilutive effect is considered using the treasury method and of the Series A Convertible
Preferred Stock, certain stock warrants, bifurcated embedded derivative related to the Series A Convertible Preferred Stock and
embedded derivative related to price protection feature which their potential dilutive effect is considered using the “if-converted
method”.
The net (loss) income attributable
to common stockholders and the weighted average number of shares used in computing basic and diluted net (loss) income per share
for the three and nine months ended September 30, 2019 and 2018, is as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(287
|
)
|
|
$
|
(992
|
)
|
Accretion of Redeemable Convertible Series A Preferred Stock to redemption
value (*)
|
|
|
(701
|
)
|
|
|
(804
|
)
|
Dividend on Redeemable Convertible Series A Preferred
Stock (**)
|
|
|
(62
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders for basic and diluted net (loss) income
per share
|
|
$
|
(1,050
|
)
|
|
$
|
(1,865
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares of common stock used in computing diluted net loss (income) per share
|
|
|
232,581,448
|
|
|
|
147,975,274
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock from continuing operations,
basic
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
Net (loss) income per share of common stock from continuing operations,
diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
|
Nine Months Ended
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
6,420
|
|
|
$
|
(5,178
|
)
|
Accretion of Redeemable Convertible Series A Preferred Stock to redemption
value (*)
|
|
|
(2,438
|
)
|
|
|
(1,336
|
)
|
Dividend on Redeemable Convertible Series A Preferred Stock (**)
|
|
|
(194
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders for basic net (loss) income per share
|
|
$
|
3,788
|
|
|
$
|
(6,628
|
)
|
Revaluation of liability related to warrants to purchase common stock
|
|
|
-
|
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders for diluted net
loss per share
|
|
$
|
3,788
|
|
|
$
|
(7,703
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Shares of common stock used in computing basic net (loss) income per share
|
|
|
196,695,464
|
|
|
|
147,831,823
|
|
Incremental shares from assumed exercise of warrants to purchase common stock
|
|
|
-
|
|
|
|
1,418,569
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock used in computing diluted net (loss) income per share
|
|
|
196,695,464
|
|
|
|
149,250,393
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock from continuing operations,
basic
|
|
$
|
0.02
|
|
|
$
|
(0.04
|
)
|
Net (loss) income per share of common stock from continuing operations,
diluted
|
|
$
|
0.02
|
|
|
$
|
(0.05
|
)
|
|
(*)
|
As discussed
in Note 4, the Company shall be required to offer to redeem 1/12 of the Series A Preferred Stock 270 days following the closing
date and every 30 days thereafter throughout the remaining of the term. In addition, in the event the Investor desires to
have all or portion of its Series A Preferred Stock redeemed, it shall be redeemed for an amount equal to 110% of the Stated
Value of such Series A Preferred Stock plus any unpaid accrued dividend to the mandatory redemption day, and may be redeemed
in cash, or by the sole discretion of the Company, in the Company’s Common Stocks, following to the terms as defined
in the Certificate of Designation.
|
|
|
|
|
(**)
|
The net loss
used for the computation of basic and diluted net loss per share for the three and nine months periods ended September 30,
2019, includes the preferred dividend requirement of 5% per share per annum for the Series A Preferred Stock, which shall
be due and payable in cash or in Common Stock of the Company in the sole discretion of the Company, as defined in the certificate
of designation (see also Note 4B).
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
For
the three and nine months ended September 30, 2019, diluted net loss per share excludes the impact of stock options, stock warrants
and Series A Convertible Preferred Stock totaling 46,935,469 and 47,213,861 shares, respectively, as the effect of their inclusion
would be anti-dilutive. For the three and nine months ended September 30, 2018, diluted net loss per share excludes the impact
of stock options, certain stock warrants, restricted stock awards, Series A Convertible Preferred Stock and bifurcated embedded
derivative related to the contingent redemption feature of the Series A Convertible Preferred Stock totaling 73,210,393 and 58,210,393
shares, respectively, as the effect of their inclusion would be anti-dilutive.
Recently
Adopted Accounting Pronouncements
|
A.
|
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.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
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 the Company 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.
The
components of lease costs, lease term and discount rate are as follows:
|
|
Nine Months
Ended
|
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
Operating lease cost:
|
|
|
|
|
Vehicles
|
|
|
20
|
|
|
|
|
20
|
|
Remaining Lease Term
|
|
|
|
|
Vehicles
|
|
|
1.3-2.3 years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
vehicles
|
|
|
5
|
%
|
The
following is a schedule, by years, of maturities of operating lease liabilities as of September 30, 2019:
Period:
|
|
|
|
The
remainder of 2019
|
|
|
7
|
|
2020
|
|
|
28
|
|
2021
|
|
|
16
|
|
Total
operating lease payments
|
|
|
51
|
|
Less:
imputed interest
|
|
|
4
|
|
Present
value of lease liabilities
|
|
|
47
|
|
|
B.
|
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.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
2
|
-
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|
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 2018-07effective January 1, 2019, did not have a significant impact on the Company’s consolidated financial
statements.
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.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3:
|
|
FAIR
VALUE MEASUREMENTS (Cont.)
|
|
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 and embedded derivative related to
price protection feature have been classified at Level 3.
In
estimating the fair value of the Warrants as of September 30, 2019 and December 31, 2018, the Company used the following assumptions:
12,500,000
Purchaser Warrants:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Risk-free interest rate (1)
|
|
|
1.56
|
%
|
|
|
2.49
|
%
|
Expected volatility (2)
|
|
|
218.4
|
%
|
|
|
214.5
|
%
|
Expected life (in years) (3)
|
|
|
3.58
|
|
|
|
4.33
|
|
Expected dividend yield (4)
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair value per Warrant
|
|
$
|
0.009
|
|
|
$
|
0.1
|
|
2,500,000
Newbridge Warrants:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Risk-free
interest rate (1)
|
|
|
1.68
|
%
|
|
|
2.47
|
%
|
Expected
volatility (2)
|
|
|
108.0
|
%
|
|
|
219.9
|
%
|
Expected
life (in years) (3)
|
|
|
1.58
|
|
|
|
2.33
|
|
Expected
dividend yield (4)
|
|
|
0
|
%
|
|
|
0
|
%
|
Fair
value per Warrant
|
|
$
|
0.0002
|
|
|
$
|
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.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3:
|
|
FAIR
VALUE MEASUREMENTS (Cont.)
|
The
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 September 30, 2019:
|
|
Fair value of
liability
related to
warrants
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
1,475
|
|
Revaluation of warrants to purchase Common Stock recognized in earnings
|
|
|
(1,362
|
)
|
|
|
|
|
|
Balance at September 30, 2019 (unaudited)
|
|
$
|
113
|
|
In
estimating the fair value of the bifurcated embedded derivative related to Series A Convertible Preferred Stock, the Company used
the following assumptions:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Risk-free interest rate (1)
|
|
|
1.83
|
%
|
|
|
2.62
|
%
|
Expected volatility (2)
|
|
|
106.17
|
%
|
|
|
82.65
|
%
|
Expected life (in years) (3)
|
|
|
0.5
|
|
|
|
1.01
|
|
|
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
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 nine months ended September 30, 2019:
|
|
Fair value of bifurcated
embedded
derivative
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
8,129
|
|
Revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock recognized in earnings
|
|
|
(7,201
|
)
|
Partial conversion of Preferred Stock into shares of common stock
|
|
|
(916
|
)
|
|
|
|
|
|
Balance at September 30, 2019 (unaudited)
|
|
$
|
12
|
|
The
revaluation is resulted mainly due to reduction in the Company’s share price during the nine months ended September 30,
2019.
In
estimating the fair value of the embedded derivative related to price protection feature, the Company used the following assumptions:
|
|
September
30, 2019
|
|
|
|
|
|
Risk-free
interest rate (1)
|
|
|
1.83
|
%
|
Expected
volatility (2)
|
|
|
106.17
|
%
|
Expected
life (in years) (3)
|
|
|
0.5
|
|
|
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 price protection feature.
|
|
|
|
|
3.
|
Expected
life - the expected life was based on the expiration date of the price protection feature.
|
The
Level 3 liabilities associated with the embedded derivative related to price protection feature are measured at fair value on
a recurring basis. The following tabular presentation reflects the components of such liability associated with such embedded
derivatives for the nine months ended September 30, 2019:
|
|
Fair value of
embedded
derivative
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
-
|
|
Revaluation of embedded derivative related to price protection feature recognized in earnings
|
|
|
53
|
|
|
|
|
|
|
Balance at September 30, 2019 (unaudited)
|
|
$
|
53
|
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
3:
|
|
FAIR
VALUE MEASUREMENTS (Cont.)
|
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”) the bifurcated
embedded derivative related to Series A Convertible Preferred Stock and the embedded derivative related to price protection feature
by using the services of external independent appraiser.
During
the period commencing April 30, 2018 and ended September 30, 2019, no warrants have been exercised. As of September 30, 2019,
there were 15,000,000 outstanding unexercised Warrants (including Warrants issued to both the Purchaser and Newbridge) related
to the April 2018 PIPE.
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.
|
|
|
When
the obligation for accrued dividend is settled through the issuance of the Company’s common stock and the number
of shares to be issued to the Purchaser is considered as fixed and determinable, the accrued dividend is recorded as additional
paid-in capital versus deduction of accumulated deficit. As of September 30, 2019, accrued dividend of $61 will be settled
through issuance of the Company’s common stock but the number of shares to be issued to the Purchaser is not considered
as fixed and determinable, thus such accrued dividend was recorded as accrued liability.
|
|
|
During
the period commencing April 30, 2018 through December 31, 2018, the Company recorded $179 as dividend on Series A Convertible
Preferred Stock, of which $114 was paid through December 31, 2018 by issuance of 801,230 shares of common stock. The remaining
$65 which represent the dividend accrued as of December 31, 2018, was paid on January 3, 2019 through issuance of 832,368
shares of common 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.)
|
|
|
During
the period commencing January 1, 2019 through September 30, 2019, the Company recorded $194 as dividend on Series A Convertible
Preferred Stock, of which $133 represents dividend that was paid through September 30, 2019 by issuance of 16,908,217 shares
of common stock (as of September 30, 2019 the Company has an obligation to issue 6,642,441 additional shares of common
stock, which arefixed and determinable). The remainder of $62 will be settled through issuance of the Company’s
common stock but the number of shares to be issued to the Purchaser is not considered as fixed and determinable, thus such
accrued dividend was recorded as part of other current liabilities as of September 30, 2019.
|
|
|
|
|
●
|
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 September 30, 2019,
the aggregate Liquidation Preference amounted to $5,148 (unaudited).
|
|
|
|
|
●
|
Voting
Rights. Holders of the Series A Convertible Preferred Stock are entitled to vote on all matters requiring a vote of the
shareholders 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, subject to a beneficial ownership limitation of 4.99%.
|
|
|
|
|
●
|
Conversion.
The 500 issued shares of the Company’s Series A Convertible Preferred Stock were 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.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
|
|
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 shares of 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 shares of common stock are
received into Holder’s brokerage account and fully cleared for trading, by (y) 3, minus (B) $0.01.
|
|
|
|
|
|
From
January 1, 2019 through September 30, 2019, the Purchaser converted an aggregate of 61 shares of Preferred Stock into an aggregate
of 77,362,264 shares of the shares of common stock at the conversion prices in effect on the respective conversion dates.
Consequently, the Company reclassified an amount of $916 out of the bifurcated embedded derivative related to optional conversion
feature upon triggering event, and amount of $350 out of the mezzanine, into the equity.
|
|
●
|
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 1/12th 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 products 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.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
As
of September 30, 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, the Company might be required to redeem in cash, 1/12th 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.
|
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 were initially convertible
into 25,000,000 shares of common stock at a conversion price of $0.20 per share, (the conversion price has been adjusted due to
the Trigger Event described below), 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 September 30, 2019, no adjustments have been made to the exercise
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 September 30, 2019, no adjustments have been made to the exercise 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 September
30, 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.
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
4
|
-
|
SERIES
A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (Cont.)
|
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 shares of 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 shares of common stock are received
into Holder’s brokerage account and fully cleared for trading, by (y) 3, minus (B) $0.01.
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 $113 and $1,475 were measured
at fair value on September 30, 2019 and December 31, 2018, respectively. For the three and nine months ended September 30, 2019,
the Company recorded income in total amount of $77 and $1,362, respectively, due to revaluation of Warrants to purchase shares
of 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 $12 and $8,129 were measured at fair value on September 30, 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 $274 and $7,201 which
was recognized under other income in the statement of comprehensive loss in a separate line for the three and nine months ended
September 30, 2019, respectively. In addition, upon a partial conversion of 61 shares of Series A Convertible Preferred Stock
into 77,362,264 shares of common stock, a relative portion of $916 out of the bifurcated embedded derivative related to optional
conversion feature upon triggering event, and an amount of $350 out of the mezzanine were reclassified to equity.
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 nine months ended September 30, 2019
|
|
Nine months ended
September 30, 2019
|
|
|
|
Unaudited
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
2,226
|
|
Accretion of Preferred Stock to redemption value
|
|
|
2,438
|
|
Partial conversion of Preferred Stock into shares of common stock
|
|
|
(350
|
)
|
Balance at September 30, 2019
|
|
$
|
4,314
|
|
|
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 (50% out of it relates to employee who left
the company after the grant was performed).
|
|
|
|
|
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 September 30, 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
|
|
|
(2,000,000
|
)
|
|
$
|
0.05
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at September 30, 2019
|
|
|
28,750,000
|
|
|
$
|
0.06
|
|
|
|
7.47
|
|
|
$
|
-
|
|
Options exercisable at September 30, 2019
|
|
|
26,250,000
|
|
|
$
|
0.05
|
|
|
|
7.37
|
|
|
$
|
-
|
|
|
(*)
|
The
aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the Company’s
shares common stock on the last traded day of third fiscal 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 September 30, 2019. This amount is impacted by the changes in the fair value of the Company’s shares as of September
30, 2019.
|
|
4.
|
The
following table summarizes information about stock options outstanding at September 30, 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
|
|
|
27,000,000
|
|
|
$
|
0.05
|
|
|
|
7.42
|
|
|
|
26,250,000
|
|
|
$
|
0.05
|
|
$0.22
|
|
|
1,750,000
|
|
|
$
|
0.22
|
|
|
|
9.35
|
|
|
|
-
|
|
|
$
|
-
|
|
Total Shares
|
|
|
28,750,000
|
|
|
$
|
0.06
|
|
|
|
7.54
|
|
|
|
26,250,000
|
|
|
$
|
0.05
|
|
|
5.
|
As
of September 30, 2019, there was $90 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 1.10 years.
|
|
|
|
|
6.
|
The
total equity-based compensation expense related to all the Company’s equity-based awards issued to employees, recognized
for the three and nine months ended September 30, 2019 amounted to $33 and $142, respectively. The expense for the three and
nine months ended September 30, 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.
|
|
|
|
|
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 September 30, 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 $37 and $108 for the three and nine months
ended September 30, 2019, respectively. Unamortized services receivable of $13 as of September 30, 2019, will be recognized
ratable over the remainder of 2019.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 an additional $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 September 30, 2019 the Company has no performance obligation in connection to the license in the State of Hawaii and the
State of Pennsylvania and the right of first refusal and therefore an amount of $100 was recognized as other income in the
Consolidated Statement of Operations and Comprehensive Income (Loss) and not under the scope of ASC 606 as it is not related
to relationship with unrelated party on recurring basis or normal course of business
|
|
|
|
|
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 $119 during the nine months ended September 30, 2018.
|
|
|
|
|
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 to promote the sale of OWC’s Products in the European Union; (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 September 30, 2019.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
|
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 been occurred to date and therefore there is no impact on these consolidated financial statements.
|
|
|
|
|
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
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 nine months ended September 30, 2019. The amounts of $37 and $117
have been recorded as research and development expenses related to the Trial during the period of nine months ended September
30, 2019 and 2018, respectively.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
|
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 multiple 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 nine months ended September 30,
2019 and 2018, the Company has not recorded any research and development expenses related to the Service Agreement.
|
|
|
|
|
7.
|
On
March 14, 2019, OWC executed a clinical trial agreement (the “Clinical Trial Agreement”) with Souraski Medical
Center, a hospital in Tel-Aviv, Israel, relating to 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. Pursuant to the Clinical Trial Agreement, OWC is obliged to pay Souraski $137 for conducting
the study. The amounts of $137 and $0 have been recorded as research and development expenses related to the research agreement
during the period of nine months ended September 30, 2019 and 2018, respectively.
|
|
1.
|
On
February 28, 2017, the Company filed an action for alleged legal malpractice against the law firm of Sichenzia Ross Ference
Kesner LLP (“Sichenzia Ross”) 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.
|
|
|
|
|
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 of its common stock previously 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.
|
|
|
|
|
3.
|
On
December 6, 2018, the Company has entered into a Settlement 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 issuance date of the shares.
|
OWC
PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
5
|
-
|
COMMITMENTS
AND CONTINGENCIES (Cont.)
|
|
|
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.
|
|
|
|
|
|
The
Company and the Plaintiff mutually agreed to dismiss all claims other than the Company’s claims against the Plaintiff
in the USA.
|
|
|
|
|
|
On
June 19, 2019, the withholding tax certificate has been received by the Company. The Company has not yet issued any shares
to the Plaintiff due to an issue that still in progress between the parties. As the obligation will be settled only through
the issuance of the Company’s common stock and as of September 30, 2019 the number of shares to be issued to the Plaintiff
cannot be considered as fixed and determinable, a liability related to shares to be issued was presented as non-current in
total amount of $725.
|
|
|
|
|
|
In
addition, upon providing the withholding tax certificate, the Plaintiff is entitled to receive the shares. Consequently, the
Company recorded a derivative in total amount of $53 relating to the price protection feature.
|
NOTE
6
|
-
|
SUBSEQUENT
EVENTS
|
On November 5, 2019, the Company’s
Board of Directors authorized the Company’s officers, subject to required approval of the Company’s stockholders,
to take necessary actions to effect a reverse stock split of the Company's outstanding Common Stock, $0.00001 par value per share,
at any ratio up to 1-for-700, at such time as the Company's Board of Directors shall determine, in its sole discretion, prior
to December 31, 2020. On November 8, 2019 the Company filed Schedule 14A.
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 significant 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
January 29, 2019, we executed a Clinical Trial agreement 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 to:
1.
|
Investigate
the pharmacokinetics profile of THC, 11-OH THC and CBD following a single sublingual dose of MGC-ODT.
|
|
|
2.
|
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 (“Sativex®”).
|
|
|
3.
|
Monitor
and compare the safety and tolerability of the MGC-ODT and Sativex® in the participating subjects.
|
On
April 15, 2019 we commenced the study. On September 25, 2019, we received Top Line Results (“TLR”) of our single-dose,
randomized, crossover study to compare the safety, tolerability and pharmacokinetics (PK) of OWC’s Medical Grade Cannabis
- Orally Disintegrating Tablets (MGC-ODT) vs. buccal Sativex®, in healthy adult volunteers. The study was conducted at the
Sourasky Medical Center in Tel Aviv. In this study, participants were administered randomly, either Sativex® (5.4 mg THC,
5.0 mg CBD) or OWC-ODT (4.2 mg THC, 5 mg CBD), and then crossed over, with a minimum interval of two weeks. We collected Plasma
in the 24 hours following drug administration, at pre-determined time points while monitoring side effects. The concentrations
of THC, CBD and 11-OH-THC were quantified, and their plasma PK determined.
The
TLR showed that both MGC-ODT and Sativex® administration had comparable mean times of peak concentration and half-life and
elimination rates for each of the three analytes (THC, THC metabolite 11-hydroxy-THC and CBD). The results indicated dose-related
comparability of both products in both rate of absorption and bioavailability. The incidence of treatment related adverse events
(“AEs”) were similar between the treatments.
The
most common treatment related AEs were hunger (reported in 25% of subjects treated with MGC-ODT), thirst (reported in 18.75% and
6.25% of subjects treated with MGC-ODT and Sativex®, respectively), dizziness (reported in 18.75% and 18.75% of subjects treated
with MGC-ODT and Sativex®, respectively) and dysgeusia (reported in 12.5% and 25% of subjects treated with MGC-ODT and Sativex®,
respectively). Administration of MGC-ODT was judged to be well tolerated and no unexpected safety signals were observed.
Our
TLR conclusions were that MGC-ODT has a tolerable safety profile and appeared to have similar PK and bioavailability as Sativex®.
Based on such top line data, OWC intends to apply to the Israel Ministry of Health to obtain necessary approvals to market its
Medical Grade Cannabis - Orally Disintegrating Tablets in Israel.
On September 16, 2019, we received a Bid Price
Deficiency Notice (the “Notice”) from OTC Markets Group that our bid price had closed below $0.01 for more than 30
consecutive calendar days and thus no longer met the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards
Section 2.3(2). The Notice stated that, pursuant to Section 4.1 of the OTCQB Standards, we was granted a cure period of 90 calendar
days during which the minimum closing bid price for our common stock must be $0.01 or greater for ten consecutive trading days
in order to continue trading on the OTCQB marketplace. If this requirement is not met by December 15, 2019, the Company will be
removed from the OTCQB marketplace. On November 7, 2019, our cure period was extended until February 5, 2020.
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 September 30, 2019, the Purchaser converted an aggregate of 61 shares of Preferred Stock into an aggregate
of 77,362,264 shares of the common stock at the conversion prices in effect on the respective conversion dates. Since September
30, 2019 through November 12, 2019, the Purchaser converted an additional two shares of Preferred Stock into an aggregate of 17,856,000
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
PIPE and we were 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 September 30, 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 nine months ended September 30, 2019 are discussed in Note 4 to
our Consolidated Financial Statements included herein.
Going
Concern
The
development and commercialization of our products 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 from operations and negative cash flows from operating activities. Moreover, we might
be required to redeem shares of our Series A Convertible Preferred Stock in a 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 products. 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 and our obligation to the holders of our Series A Convertible Preferred Stock 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. 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.
On
July 18, 2019, we received approval from the Israeli Medical Cannabis Agency to perform an efficacy study with OWC topical ointment
on psoriatic patients. Currently, the study is planned to be conducted at the Kaplan Medical Center, an academic medical center
in Israel.
Results
of Operations
Results
of Operations during the three months ended September 30, 2019, as compared to the three months ended September 30, 2018
We
have not generated any revenue during the three months ended September 30, 2019 or 2018. We have operating expenses related to
research and development expenses and general and administrative expenses.
During
the three months ended September 30, 2019, we had a net loss of $287,000 due to general and administrative expenses of $519,000,
research and development expenses of $168,000, other income of $100,000, income of $77,000 from the revaluation of liability related
to the warrants, income of $274,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred
Stock, loss of $49,000 from revaluation of embedded derivative related to price protection feature and financial expenses of $2,000,
as compared to a net income of $992,000 for the three months ended September 30, 2018, due to general and administrative expenses
of $543,000, research and development expenses of $126,000, income of $925,000 from the revaluation of liability related to the
warrants, loss of $1,247,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock
and financial expenses of $1,000 during the three months ended September 30, 2018.
Our
general and administrative expenses decreased by $24,000 or 4.4% during the three months ended September 30, 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 $70,000 for the three months
ended September 30, 2019, compared to an expense of $141,000 for the three months ended September 30, 2018.
Our
research and development expenses decreased by $42,000 or 33% during the three months ended September 30, 2019 as compared to
the same period in the prior year, primarily due to increase in head count and to active trials costs.
Results
of Operations during the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018
We
have not generated any revenue during the nine months ended September 30, 2019 or 2018. We have operating expenses related to
research and development expenses and general and administrative expenses.
During
the nine months ended September 30, 2019, we had a net income of $6,420,000 due to general and administrative expenses of $1,408,000,
research and development expenses of $773,000, other income of $100,000, income of $1,362,000 from the revaluation of liability
related to the warrants, income of $7,201,000 from revaluation of bifurcated embedded derivative related to Series A Convertible
Preferred Stock, loss of $53,000 from revaluation of embedded derivative related to price protection feature and financial expenses
of $9,000, as compared to a net loss of $5,178,000 for the nine months ended September 30, 2018, due to general and administrative
expenses of $2,120,000, research and development expenses of $493,000, expense of $823,000 from issuance costs related to April
30, 2018 Series A Convertible Preferred Stock, income of $1,075,000 from the revaluation of liability related to the warrants,
expense of $2,814,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock and financial
expenses of $3,000 during the nine months ended September 30, 2018.
Our
general and administrative expenses decreased by $712,000 or 50.5% during the nine months ended September 30, 2019 as compared
to the same period in the prior year, primarily due to decreased stock-based compensation and amortization of services receivable
expenses. The charges relating to stock-based compensation and services receivable expenses were $250,000 for the nine months
ended September 30, 2019, compared to an expense of $1,057,000 for the nine months ended September 30, 2018, the expense decreased
due to the end of vesting period of the previously granted options.
Our
research and development expenses increased by $280,000 or 56.7% during the nine months ended September 30, 2019 as compared to
the same period in the prior year mainly due to increase in head count and to active trials costs.
The
income from revaluation of bifurcated embedded derivative related to Series A convertible Preferred Stock increased by $6,126,000
or 670% is due to reduction in our share price.
Liquidity
and Capital Resources
As
of September 30, 2019, we had current assets of $1,695,000 consisting of $1,465,000 in cash and cash equivalents and other current
assets of $230,000. As of September 30, 2019, we had property and equipment carried at $74,000, net of $31,000 in accumulated
depreciation and lease right-of-use asset of $47,000. We had total assets of $1,773,000 as of September 30, 2019.
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 September 30, 2019, we had $543,000 in current liabilities consisting of $286,000 in accounts payable, $231,000 in other current
liabilities 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 $1,152,000 as of September 30, 2019 compared to positive working capital of $3,078,000 as of December
31, 2018. Our accumulated deficit as of September 30, 2019 and December 31, 2018 was $23,434,000 and $27,222,000, respectively.
As
of September 30, 2019, we had $1,467,000 in non-current liabilities consisting of $12,000 in bifurcated embedded derivative related
to Series A Convertible Preferred Stock, $53,000 in derivative related to price protection feature, $113,000 in liability related
to warrants to purchase common stock, $21,000 in lease liabilities and $725,000 in liability related to shares to be issued.
We
used $1,992,000 in our operating activities during the nine months ended September 30, 2019, which was due to a net income of
$6,420,000, amortization of services receivable of $108,000, stock-based compensation expenses of $142,000, revaluation income
of liability related to warrants to purchase common stock of $1,362,000, revaluation income of bifurcated embedded derivative
related to the Series A Convertible Preferred Stock of $7,201,000, depreciation expense of $8,000, an increase in accounts payable
of $188,000, a decrease in deferred income of $100,000, revaluation of derivative related to price protection of $53,000, an increase
in other current assets of $178,000 and a decrease in other liabilities of $70,000.
We
used $1,748,000 in our operating activities during the nine months ended September 30, 2018, which was due to a net loss of $5,178,000
partially offset by amortization of services receivable of $690,000, stock-based compensation of $367,000, 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 $2,814,000, Direct and incremental issuance cost related to April 2018
PIPE transaction of $483,000, depreciation expense of $6,000, an increase in accounts payable of $167,000, a decrease in other
current assets expenses of $15,000 and decrease in other current liability of $ 36,000.
Our
financing activities during the nine months ended September 30, 2018 provided us with $4,918,000 of proceeds from issuance of
Series A redeemable convertible preferred stock, embedded derivative related to contingent redemption feature and detachable warrants,
net of issuance costs, and $105,000 through collection of a stock subscription receivable. We generated no cash from financing
activities during the nine months ended September 30, 2019.
We
used $23,000 in our investing activities during the nine months ended September 30, 2018, which was due to acquisition of property
and equipment.
Based
upon $1,465,000 of cash held by us on September 30, 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 September 30, 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, 1/12th 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 defined in the Certificate of Designation). 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 our 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 products is expected to require substantial expenditures. We have not yet generated material
revenues from operations and do not expect to do so in the foreseeable future, and therefore we are dependent upon external sources
for financing our operations. As of September 30, 2019, we have an accumulated deficit of $23,434,000. In addition, during the
nine months ended September 30, 2019, excluding the non-cash revaluation income of liability related to warrants to purchase common
stock in an amount of $1,362,000, and the non-cash revaluation of bifurcated embedded derivative in an amount of $7,201,000, 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 multiple 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. None of the services have not been provided by Sheba and we have not made any payments yet.
In
addition, pursuant to another service agreement, we were obliged to pay Sheba an additional $170,000 throughout 2017 and 2018
for conducting the Study for the cream for treatment of psoriasis. As of September 30, 2019, the services have been provided by
Sheba and we have paid the entire amount of $63,000.
Pursuant
to a Clinical Trial Agreement, we are obligated to pay the Souraski Medical Center $137,000 for conducting the study for the single-dose,
randomized, crossover study to compare the safety, tolerability and pharmacokinetics (PK) of OWC’s Medical Grade Cannabis
- Orally Disintegrating Tablets (MGC-ODT) vs. buccal Sativex®, in healthy adult volunteers. As of September 30, 2019, the
services have been provided by Souraski Medical Center, and we have not made any payments yet.
At
present, we use our available working capital to fund these studies.
Our
expenditures allocated to our corporate activities conducted through our facilities in Ramat Gan were $37,000 for the nine months
period ended September 30, 2019 and we expect such expenditures to amount to a total of approximately $49,000 for the year ending
December 31, 2019.
Off
Balance Sheet Arrangements
As
of September 30, 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 nine months period ended September 30, 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 September 30, 2019, our chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness
of our 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 September 30, 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 September 30, 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 a lack of sufficient internal accounting personnel and a 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 nine months ended September
30, 2019. Management is in the process of identifying corrective actions, including for the weaknesses and intends to take
steps necessary to remediate the above material weakness by implementing changes to our internal control over financial reporting.
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 September
30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.