This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Registrant has based these
forward-looking statements on its current expectations and projections about future
events. These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about the Registrant that may cause its actual results,
levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should,"
"could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue,"
or the negative of such terms or other similar expressions. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those described in this
Annual Report on Form 10-K and in the Registrant's other Securities and Exchange
Commission filings.
Legal
Proceedings
From
time
to time, we may become involved in various lawsuits and legal
proceedings, which arise, in the ordinary course of business.
We are currently not aware of any legal proceedings or claims that we
believe will have a material adverse effect on our business,
financial condition or operating results.
Government
Laws and Regulations Relating to the Cannabis Industry
Israel
To
date,
our research and development activities have been conducted in and
limited to Israel. The cannabis-based products we are
developing contain controlled substance (cannabis) as defined in the
Israeli Dangerous Drugs Ordinance [New Version], 5733 - 1973.
In Israel, licenses to cultivate, possess and to use cannabis for
medical research are granted by the Ministry of Health, IMCU
- Israel Medical Cannabis Unit, on an ad-hoc basis. OWC obtained
necessary IMCU licenses in order to carry out the research in
collaboration with Sheba Academic Medical Center and with G.C. Group.
OWC is acquiring the cannabis needed for its research activities
from G.K. Medical Cannabis, a government-licensed Israeli medical
cannabis grower. Because we do not have a license to possess
cannabis, the cannabis that is required for the studies must be
transported from the licensed grower directly to Sheba's
laboratories, in compliance with our license to use cannabis for medical
research. We have applied for additional licenses in
order to continue our activities in collaboration with Sheba Academic
Medical Center and with G.C. Group.
Although
we have been successful in obtaining a license to use cannabis for medical research, there can be no assurance that we will be
able to continue to maintain this license in the future.
United
States
In
the
event that we seek to conduct any product-related activities in the
United States in the future, the research and development,
manufacturing, distribution and sale of our Product Prospects will
become subject to the United States' Federal Controlled
Substances Act of 1970 and regulations promulgated thereunder. While
cannabis is a Schedule I controlled substance, products approved
for medical use in the United States that contain cannabis or cannabis
extracts must be placed in Schedules II-V, since approval
by the FDA satisfies the "accepted medical use" requirement. If approved
by the FDA, we expect the products to be
listed by the Drug Enforcement Agency or DEA as a Schedule II or III
controlled substance. Consequently, the manufacture, importation,
exportation, domestic distribution, storage, sale and legitimate use of
our future products will be subject to a significant degree
of regulation by the DEA. In addition, individual states in the United
States have also established controlled substance laws
and regulations. Though state-controlled substances laws often mirror
federal law, because the states are separate jurisdictions,
they may separately schedule our products. To date, a total of 23
states, the District of Columbia and Guam allow for comprehensive
public medical cannabis programs. In addition, 16 states allow use of "low THC, high cannabidiol (CBD)" products for
medical reasons in limited situations.
As
of
the date of this filing, the Company has provided consulting services
to a medical marijuana program with locations in Hawaii
and Pennsylvania. We do not grow or distribute cannabis. However, our
providing of ancillary products and services to state-approved
programs could be deemed to be aiding and abetting illegal activities, a
violation of federal law. We intend to remain within
the guidelines outlined in the Cole Memo (see "The Cole Memo"), however,
we cannot provide assurance that the Company
is in full compliance with the Cole Memo or any other federal laws or
regulations. Where applicable, we will apply for state licenses
that are necessary to conduct our business in compliance with local
laws.
The
Cole Memo
We
intend to conduct rigorous due diligence to verify the legality of all activities that we engage in. We realize that there is
a discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis, from
federal law that prohibits any such activities. As discussed above, the CSA makes it illegal under federal law to manufacture,
distribute, or dispense cannabis. Many states impose and enforce similar prohibitions. Notwithstanding the federal ban, as of
the date of this filing, twenty-three states and the District of Columbia have legalized certain cannabis-related activity.
In
light
of these developments, DOJ Deputy Attorney General James M. Cole issued
a memorandum (the "Cole Memo") to all
United States Attorneys providing updated guidance to federal
prosecutors concerning cannabis enforcement under the CSA. The Cole
Memo guidance applies to all of DOJ's federal enforcement activity,
including civil enforcement and criminal investigations
and prosecutions, concerning cannabis in all states.
The
Cole
Memo reiterates Congress's determination that cannabis is a dangerous
drug and that the illegal distribution and sale
of cannabis is a serious crime that provides a significant source of
revenue to large-scale criminal enterprises, gangs, and cartels.
The Cole Memo notes that DOJ is committed to enforcement of the CSA
consistent with those determinations. It also notes that DOJ
is committed to using its investigative and prosecutorial resources to
address the most significant threats in the most effective,
consistent, and rational way. In furtherance of those objectives, the
Cole Memo provides guidance to DOJ attorneys and law enforcement
to focus their enforcement resources on persons or organizations whose
conduct interferes with any one or more of the following
important priorities:
|
●
|
Preventing
the distribution of cannabis to minors;
|
|
●
|
Preventing
revenue from the sale of cannabis from going to criminal enterprises, gangs, and cartels;
|
|
●
|
Preventing
the diversion of cannabis from states where it is legal under state law in some form to other states;
|
|
●
|
Preventing
state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other
illegal activity;
|
|
●
|
Preventing
violence and the use of firearms in the cultivation and distribution of cannabis;
|
|
●
|
Preventing
drugged driving and the exacerbation of other adverse public health consequences associated with cannabis use;
|
|
●
|
Preventing
the growing of cannabis on public lands and the attendant public
safety and environmental dangers posed by cannabis production
on public lands; and
|
|
●
|
Preventing
cannabis possession or use on federal property.
|
Deputy
Attorney General Cole is issuing supplemental guidance directing that prosecutors also consider the Enforcement Priorities with
respect to federal money laundering, unlicensed money transmitter, and BSA offenses predicated on cannabis-related violations
of the CSA.
FinCEN
Since
the
use of cannabis is illegal under federal law, we or our consulting
clients may have difficulty acquiring or maintaining bank
accounts in the United States. The Financial Crimes Enforcement Network
("FinCEN") provided guidance on February 14,
2014 about how financial institutions can provide services to
cannabis-related businesses consistent with their Bank Secrecy Act
obligations ("BSA"). In general, the decision to open, close, or refuse
any particular account or relationship should
be made by each financial institution based on a number of factors
specific to that institution. These factors may include its
particular business objectives, an evaluation of the risks associated
with offering a particular product or service, and its capacity
to manage those risks effectively. Thorough customer due diligence is a
critical aspect of making this assessment.
In
assessing
the risk of providing services to a cannabis-related business, a
financial institution should conduct customer due diligence
that includes: (i) verifying with the appropriate state authorities
whether the business is duly licensed and registered; (ii)
reviewing the license application (and related documentation) submitted
by the business for obtaining a state license to operate
its cannabis-related business; (iii) requesting from state licensing and
enforcement authorities available information about the
business and related parties; (iv) developing an understanding of the
normal and expected activity for the business, including
the types of products to be sold and the type of customers to be served
(e.g., medical versus recreational customers); (v) ongoing
monitoring of publicly available sources for adverse information about
the business and related parties; (vi) ongoing monitoring
for suspicious activity, including for any of the red flags described in
this guidance; and (vii) refreshing information obtained
as part of customer due diligence on a periodic basis and commensurate
with the risk. With respect to information regarding state
licensure obtained in connection with such customer due diligence, a
financial institution may reasonably rely on the accuracy
of information provided by state licensing authorities, where states
make such information available.
Europe
Even
though
we do not currently intend to distribute any future products or provide
consulting services in Europe, we may do so in
the future. Approximately 250 substances, including cannabis, are listed
in the Schedules annexed to the United Nations Single
Convention on Narcotic Drugs (New York, 1961, amended 1972), the
Convention on Psychotropic Substances (Vienna, 1971) and the
Convention against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances (introducing control on precursors) (Vienna,
1988). The purpose of these listings is to control and limit the use of
these drugs according to a classification of their therapeutic
value, risk of abuse and health dangers, and to minimize the diversion
of precursor chemicals to illegal drug manufacturers. The
1961 UN Single Convention on Narcotic Drugs, as amended in 1972
classifies cannabis as Schedule I ("substances with addictive
properties, presenting a serious risk of abuse") and as Schedule IV
("the most dangerous substances, already listed
in Schedule I, which are particularly harmful and of extremely limited
medical or therapeutic value") narcotic drug. The
1971 UN Convention on Psychotropic Substances classifies
tetrahydrocannabinol (THC) - the principal psychoactive cannabinoid of
cannabis - as schedule I psychotropic substance (Substances presenting a
high risk of abuse, posing a particularly, serious threat
to public health which are of very little or no therapeutic value).
Most
countries
in Europe are parties to these conventions, which govern international
trade and domestic control of these substances,
including cannabis. They may interpret and implement their obligations
in a way that creates a legal obstacle to our obtaining
manufacturing and/or marketing approval for our products in those
countries or to providing consulting services in those countries.
These countries may not be willing or able to amend or otherwise modify
their laws and regulations to permit our products to be
manufactured and/or marketed, or for us to provide consulting services,
or achieving such amendments to the laws and regulations
may take a prolonged period of time. While some countries in Europe such
as the United Kingdom, Germany, the Czech Republic, France,
Romania, and Finland have decriminalized cannabis or permit its use for
medical purposes, no country has completely legalized
it.
Regulations
Related to the Drug Regulatory Process
We
operate
in a highly controlled regulatory environment. Stringent regulations
establish requirements relating to analytical, toxicological
and clinical standards and protocols in respect of the testing of
pharmaceuticals. Regulations also cover research, development,
manufacturing and reporting procedures, both pre- and post-approval.
Failure to comply with regulations can result in stringent
sanctions, including product recalls, withdrawal of approvals, seizure
of products and criminal prosecution. Further, may countries
have stringent regulations relating to the possession and use of
cannabis.
Before
obtaining
regulatory approvals for the commercial sale of our future product
candidates, we must demonstrate through preclinical
studies and clinical trials that our product candidates are safe and
effective. Historically, the results from preclinical studies
and early clinical trials often have not accurately predicted results of
later clinical trials. In addition, a number of pharmaceutical
products have shown promising results in clinical trials but
subsequently failed to establish sufficient safety and efficacy results
to obtain necessary regulatory approvals. We expect to incur substantial
expense for, and devote a significant amount of time
to, preclinical studies and clinical trials. Many factors can delay the
commencement and rate of completion of clinical trials,
including the inability to recruit patients at the expected rate, the
inability to follow patients adequately after treatment,
the failure to manufacture sufficient quantities of materials used for
clinical trials, and the emergence of unforeseen safety
issues and governmental and regulatory delays. If a product candidate
fails to demonstrate safety and efficacy in clinical trials,
this failure may delay development of other product candidates and
hinder our ability to conduct related preclinical studies and
clinical trials. Additionally, as a result of these failures, we may
also be unable to obtain additional financing.
Governmental
authorities
in all major markets require that a new pharmaceutical product be
approved or exempted from approval before it is
marketed, and have established high standards for technical appraisal,
which can result in an expensive and lengthy approval process.
The time to obtain approval varies by country and some products are
never approved. The lengthy process of conducting clinical
trials, seeking approval and the subsequent compliance with applicable
statutes and regulations, if approval is obtained, are
very costly and require the expenditure of substantial resources.
A
summary of the Israeli, U.S. and EU regulatory processes follow below.
Israel
In
order
to conduct clinical testing on humans in Israel, special authorization
must first be obtained from the ethics committee
and general manager of the institution in which the clinical studies are
scheduled to be conducted, as required under the Guidelines
for Clinical Trials in Human Subjects implemented pursuant to the
Israeli Public Health Regulations (Clinical Trials in Human
Subjects), as amended from time to time, and other applicable
legislation. These regulations also require authorization from the
Israeli Ministry of Health, except in certain circumstances, and in the
case of genetic trials, special fertility trials and similar
trials, an additional authorization of the overseeing institutional
ethics committee. The institutional ethics committee must,
among other things, evaluate the anticipated benefits that are likely to
be derived from the project to determine if it justifies
the risks and inconvenience to be inflicted on the human subjects, and
the committee must ensure that adequate protection exists
for the rights and safety of the participants as well as the accuracy of
the information gathered in the course of the clinical
testing. Since, at this time, we intend to perform all of the clinical
studies in Israel, we will be required to obtain authorization
from the ethics committee and general manager of each institution in
which we intend to conduct our clinical trials, and in most
cases, from the Israeli Ministry of Health.
Israel's
Ministry
of Health, which regulates medical testing, has adopted protocols that
correspond, generally, to those of the FDA and
the EMA, making it comparatively straightforward for studies conducted
in Israel to satisfy FDA and the European Medicines Agency
requirements, thereby enabling medical technologies subjected to
clinical trials in Israel to reach U.S. and EU commercial markets
in an expedited fashion. Many members of Israel's medical community have
earned international prestige in their chosen fields
of expertise and routinely collaborate, teach and lecture at leading
medical centers throughout the world. Israel also has free
trade agreements with the United States and the European Union.
Currently
we do not conduct any product-related activities such as research, development, manufacturing or marketing activities outside
of Israel, nor do we expect to for the foreseeable future.
United
States
In
the
United States, the Public Health Service Act and the Federal Food,
Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the safety and effectiveness
standards for our products and the raw materials and components used in
the production of, testing, manufacture, labeling, storage,
record keeping, approval, advertising and promotion of product
candidates on a product-by-product basis.
Preclinical
tests include
in vitro
and
in vivo
evaluation of the
product candidate, its chemistry, formulation and stability,
and animal studies to assess potential safety and efficacy. Certain
preclinical tests must be conducted in compliance with good
laboratory practice regulations. Violations of these regulations can, in
some cases, lead to invalidation of the studies, requiring
them to be replicated. After laboratory analysis and preclinical
testing, testing, a sponsor files an Investigational New Drug
application, or IND, to begin human testing. Typically, a manufacturer
conducts a three-phase human clinical testing program which
itself is subject to numerous laws and regulatory requirements,
including adequate monitoring, reporting, record keeping and informed
consent. In Phase I, small clinical trials are conducted to determine
the safety and proper dose ranges of product candidates.
In Phase II, clinical trials are conducted to assess safety and gain
preliminary evidence of the efficacy of product candidates.
In Phase III, clinical trials are conducted to provide sufficient data
for the statistically valid evidence of safety and efficacy.
The time and expense that will be required for us to perform this
clinical testing can vary and is substantial. We cannot be certain
that we will successfully complete Phase I, Phase II or Phase III
testing within any specific time period, if at all. Furthermore,
the FDA, the Institutional Review Board responsible for approving and
monitoring the clinical trials at a given site, the Data
Safety Monitoring Board, where one is used, or we may suspend the
clinical trials at any time on various grounds, including a
finding that subjects or patients are exposed to unacceptable health
risk.
If
the
clinical data from these clinical trials (Phases I, II and III) are
deemed to support the safety and effectiveness of the
candidate product for its intended use, then we may proceed to seek to
file with the FDA, a New Drug Application, or NDA, seeking
approval to market a new drug for one or more specified intended uses.
We have not completed our clinical trials for any candidate
product for any intended use and therefore, we cannot ascertain whether
the clinical data will support and justify filing an NDA.
Nevertheless, if and when we are able to ascertain that the clinical
data supports and justifies filing an NDA, we intend to make
such appropriate filings.
The
purpose
of the NDA is to provide the FDA with sufficient information so that it
can assess whether it ought to approve the candidate
product for marketing for specific intended uses. The fact that the FDA
has designated a drug as an orphan drug for a particular
intended use does not mean that the drug has been approved for
marketing. Only after an NDA has been approved by the FDA is marketing
appropriate. A request for orphan drug status must be filed before the
NDA is filed. The orphan drug designation, though, provides
certain benefits, including a seven-year period of market exclusivity
subject to certain exceptions.
The
NDA
normally contains, among other things, sections describing the
chemistry, manufacturing, and controls, non-clinical pharmacology
and toxicology, human pharmacokinetics and bioavailability,
microbiology, the results of the clinical trials, and the proposed
labeling which contains, among other things, the intended uses of the
candidate product.
We
cannot
take any action to market any new drug or biologic product in the
United States until our appropriate marketing application
has been approved by the FDA. The FDA has substantial discretion over
the approval process and may disagree with our interpretation
of the data submitted. The process may be significantly extended by
requests for additional information or clarification regarding
information already provided. As part of this review, the FDA may refer
the application to an appropriate advisory committee,
typically a panel of clinicians. Satisfaction of these and other
regulatory requirements typically takes several years, and the
actual time required may vary substantially based upon the type,
complexity and novelty of the product. Government regulation
may delay or prevent marketing of potential products for a considerable
period of time and impose costly procedures on our activities.
We cannot be certain that the FDA or other regulatory agencies will
approve any of our products on a timely basis, if at all.
Success in preclinical or early stage clinical trials does not assure
success in later-stage clinical trials. Even if a product
receives regulatory approval, the approval may be significantly limited
to specific indications or uses and these limitations
may adversely affect the commercial viability of the product. Delays in
obtaining, or failures to obtain regulatory approvals,
would have a material adverse effect on our business.
Even
after
we obtain FDA approval, we may be required to conduct further clinical
trials (i.e., Phase IV trials) and provide additional
data on safety and effectiveness. We are also required to gain separate
approval for the use of an approved product as a treatment
for indications other than those initially approved. In addition, side
effects or adverse events that are reported during clinical
trials can delay, impede or prevent marketing approval. Similarly,
adverse events that are reported after marketing approval can
result in additional limitations being placed on the product's use and,
potentially, withdrawal of the product from the
market. Any adverse event, either before or after marketing approval,
can result in product liability claims against us.
As
an alternate path for FDA approval of new indications or new formulations of previously-approved products, a company may file
a Section 505(b)(2) NDA, instead of a "stand-alone" or "full" NDA. Section 505(b)(2) of the Food, Drug,
and Cosmetic Act, or FDC, was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise
known as the Hatch-Waxman Amendments. Section 505(b)(2) permits the submission of an NDA where at least some of the information
required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a
right of reference. Some examples of products that may be allowed to follow a 505(b)(2) path to approval are drugs that have a
new dosage form, strength, route of administration, formulation or indication. The Hatch-Waxman Amendments permit the applicant
to rely upon certain published nonclinical or clinical studies conducted for an approved product or the FDA's conclusions
from prior review of such studies. The FDA may require companies to perform additional studies or measurements to support any
changes from the approved product. The FDA may then approve the new product for all or some of the labeled indications for which
the reference product has been approved, as well as for any new indication supported by the NDA. While references to nonclinical
and clinical data not generated by the applicant or for which the applicant does not have a right of reference are allowed, all
development, process, stability, qualification and validation data related to the manufacturing and quality of the new product
must be included in an NDA submitted under Section 505(b)(2).
To
the
extent that the Section 505(b)(2) applicant is relying on the FDA's
conclusions regarding studies conducted for an already
approved product, the applicant is required to certify to the FDA
concerning any patents listed for the approved product in the
FDA's Orange Book publication. Specifically, the applicant must certify
that: (i) the required patent information has not
been filed; (ii) the listed patent has expired; (iii) the listed patent
has not expired, but will expire on a particular date
and approval is sought after patent expiration; or (iv) the listed
patent is invalid or will not be infringed by the new product.
The Section 505(b)(2) application also will not be approved until any
non-patent exclusivity, such as exclusivity for obtaining
approval of a new chemical entity, listed in the Orange Book for the
reference product has expired. Thus, the Section 505(b)(2)
applicant may invest a significant amount of time and expense in the
development of its products only to be subject to significant
delay and patent litigation before its products may be commercialized.
In
addition to regulating and auditing human clinical trials, the FDA regulates and inspects equipment, facilities, laboratories
and processes used in the manufacturing and testing of such products prior to providing approval to market a product. We have
currently received no approvals to market our products from the FDA or other foreign regulators.
We
may
also be subject to various federal, state and international laws
pertaining to health care "fraud and abuse,"
including anti-kickback laws and false claims laws. The federal
Anti-kickback law, which governs federal healthcare programs (e.g.,
Medicare, Medicaid), makes it illegal to solicit, offer, receive or pay
any remuneration in exchange for, or to induce, the referral
of business, including the purchase or prescription of a particular
drug. Many states have similar laws that are not restricted
to federal healthcare programs. Federal and state false claims laws
prohibit anyone from knowingly and willingly presenting, or
causing to be presented for payment to third party payers (including
Medicare and Medicaid), claims for reimbursement, including
claims for the sale of drugs or services, that are false or fraudulent,
claims for items or services not provided as claimed,
or claims for medically unnecessary items or services. If the government
or a whistleblower were to allege that we violated these
laws there could be a material adverse effect on us, including our stock
price. Even an unsuccessful challenge could cause adverse
publicity and be costly to respond to, which could have a materially
adverse effect on our business, results of operations and
financial condition. A finding of liability under these laws can have
significant adverse financial implications for us and can
result in payment of large penalties and possible exclusion from federal
healthcare programs. We will consult counsel concerning
the potential application of these and other laws to our business and
our sales, marketing and other activities and will make
good faith efforts to comply with them. However, given their broad reach
and the increasing attention given by law enforcement
authorities, we cannot assure you that some of our activities will not
be challenged or deemed to violate some of these laws.
European
Economic Area
Although
we
are not currently seeking regulatory approval in the EU, we or our
potential future licensees may do so in the future. As such,
a summary of the EU regulatory processes follows below.
A
medicinal product may only be placed on the market in the European
Economic Area, or EEA, composed of the 27 EU member states,
plus Norway, Iceland and Lichtenstein, when a marketing authorization
has been issued by the competent authority of a member state
pursuant to Directive 2001/83/EC (as recently amended by Directive
2004/27/EC), or an authorization has been granted under the
centralized procedure in accordance with Regulation (EC) No. 726/2004 or
its predecessor, Regulation 2309/93. There are essentially
three community procedures created under prevailing European
pharmaceutical legislation that, if successfully completed, allow
an applicant to place a medicinal product on the market in the EEA.
Centralized
Procedure
Regulation
726/2004/EC
now governs the centralized procedure when a marketing authorization is
granted by the European Commission, acting
in its capacity as the European Licensing Authority on the advice of the
EMA. That authorization is valid throughout the entire
community and directly or (as to Norway, Iceland and Liechtenstein)
indirectly allows the applicant to place the product on the
market in all member states of the EEA. The EMA is the administrative
body responsible for coordinating the existing scientific
resources available in the member states for evaluation, supervision and
pharmacovigilance of medicinal products. Certain medicinal
products, as described in the Annex to Regulation 726/2004, must be
authorized centrally. These are products that are developed
by means of a biotechnological process in accordance with Paragraph 1 to
the Annex to the Regulation. Medicinal products for human
use containing a new active substance for which the therapeutic
indication is the treatment of acquired immune deficiency syndrome,
or AIDS, cancer, neurodegenerative disorder or diabetes must also be
authorized centrally. Starting on May 20, 2008, the mandatory
centralized procedure was extended to autoimmune diseases and other
immune dysfunctions and viral diseases. Finally, all medicinal
products that are designated as orphan medicinal products pursuant to
Regulation 141/2000 must be authorized under the centralized
procedure. An applicant may also opt for assessment through the
centralized procedure if it can show that the medicinal product
constitutes a significant therapeutic, scientific or technical
innovation or that the granting of authorization centrally is in
the interests of patients at the community level. For each application
submitted to the EMA for scientific assessment, the EMA
is required to ensure that the opinion of the Committee for Medicinal
Products for Human Use, or CHMP, is given within 210 days
after receipt of a valid application. This 210 days period does not
include the time that the applicant to answer any questions
raised during the application procedure, the so-called 'clock stop'
period. If the opinion is positive, the EMA is
required to send the opinion to the European Commission, which is
responsible for preparing the draft decision granting a marketing
authorization. This draft decision may differ from the CHMP opinion,
stating reasons for diverging for the CHMP opinion. The draft
decision is sent to the applicant and the member states, after which the
European Commission takes a final decision. If the initial
opinion of the CHMP is negative, the applicant is afforded an
opportunity to seek a re-examination of the opinion. The CHMP is
required to re-examine its opinion within 60 days following receipt of
the request by the applicant. All CHMP refusals and the
reasons for refusal are made public on the EMA website. Without a
centralized marketing authorization it is prohibited to place
a medicinal product that must be authorized centrally on the market in
the EU.
Mutual
Recognition and Decentralized Procedures
With
the
exception of products that are authorized centrally, the competent
authorities of the member states are responsible for granting
marketing authorizations for medicinal products placed on their national
markets. If the applicant for a marketing authorization
intends to market the same medicinal product in more than one member
state, the applicant may seek an authorization progressively
in the community under the mutual recognition or decentralized
procedure. Mutual recognition is used if the medicinal product
has already been authorized in a member state. In this case, the holder
of this marketing authorization requests the member state
where the authorization has been granted to act as reference member
state by preparing an updated assessment report that is then
used to facilitate mutual recognition of the existing authorization in
the other member states in which approval is sought (the
so-called concerned member state(s)). The reference member state must
prepare an updated assessment report within 90 days of receipt
of a valid application. This report together with the approved Summary
of Product Characteristics, or SmPC (which sets out the
conditions of use of the product), and a labeling and package leaflet
are sent to the concerned member states for their consideration.
The concerned member states are required to approve the assessment
report, the SmPC and the labeling and package leaflet within
90 days of receipt of these documents. The total procedural time is 180
days.
The
decentralized
procedure is used in cases where the medicinal product has not received
a marketing authorization in the EU at the
time of application. The applicant requests a member state of its choice
to act as reference member state to prepare an assessment
report that is then used to facilitate agreement with the concerned
member states and the grant of a national marketing authorization
in all of these member states. In this procedure, the reference member
state must prepare, for consideration by the concerned
member states, the draft assessment report, a draft SmPC and a draft of
the labeling and package leaflet within 120 days after
receipt of a valid application. As in the case of mutual recognition,
the concerned member states are required to approve these
documents within 90 days of their receipt.
For
both
mutual recognition and decentralized procedures, if a concerned member
state objects to the grant of a marketing authorization
on the grounds of a potential serious risk to public health, it may
raise a reasoned objection with the reference member state.
The points of disagreement are in the first instance referred to the
Co-ordination Group on Mutual Recognition and Decentralized
Procedures, or CMD, to reach an agreement within 60 days of the
communication of the points of disagreement. If member states
fail to reach an agreement, then the matter is referred to the EMA and
CHMP for arbitration. The CHMP is required to deliver a
reasoned opinion within 60 days of the date on which the matter is
referred. The scientific opinion adopted by the CHMP forms
the basis for a binding European Commission decision.
Irrespective
of
whether the medicinal product is assessed centrally, de-centrally or
through a process of mutual recognition, the medicinal
product must be manufactured in accordance with the principles of good
manufacturing practice as set out in Directive 2003/94/EC
and Volume 4 of the rules governing medicinal products in the European
community. Moreover, community law requires the clinical
results in support of clinical safety and efficacy based upon clinical
trials conducted in the European community to be in compliance
with the requirements of Directive 2001/20/EC, which implements good
clinical practice in the conduct of clinical trials on medicinal
products for human use. Clinical trials conducted outside the European
community and used to support applications for marketing
within the EU must have been conducted in a way consistent with the
principles set out in Directive 2001/20/EC. The conduct of
a clinical trial in the EU requires, pursuant to Directive 2001/20/EC,
authorization by the relevant national competent authority
where a trial takes place, and an ethics committee to have issued a
favorable opinion in relation to the arrangements for the
trial. It also requires that the sponsor of the trial, or a person
authorized to act on his behalf in relation to the trial, be
established in the community.
National
Procedure
This
procedure
is available for medicinal products that do not fall within the scope
of mandatory centralized authorization and are
intended for use in only one EU member state. Specific procedures and
timelines differ between member states, but the duration
of the procedure is generally 210 days and based on a risk/efficacy
assessment by the competent authority of the member state
concerned, followed by determination of SmPC, package leaflet and label
text/layout and subsequently grant of the marketing authorization.
Marketing authorizations granted on this basis are not mutually
recognized by other member states.
There
are various types of applications for marketing authorizations:
Full
Applications
. A full application is one that is made under any of
the community procedures described above and "stands
alone" in the sense that it contains all of the particulars and
information required by Article 8(3) of Directive 2001/83
(as amended) to allow the competent authority to assess the quality,
safety and efficacy of the product and in particular the
balance between benefit and risk. Article 8(3)(l) in particular refers
to the need to present the results of the applicant's
research on (i) pharmaceutical (physical-chemical, biological or
microbiological) tests, (ii) preclinical (toxicological and
pharmacological)
studies and (iii) clinical trials in humans. The nature of these tests,
studies and trials is explained in more detail in Annex
I to Directive 2001/83/EC. Full applications would be required for
products containing new active substances not previously approved
by the competent authority, but may also be made for other products.
Abridged
Applications
. Article 10 of Directive 2001/83/EC contains exemptions
from the requirement that the applicant provide the results
of its own preclinical and clinical research. There are three regulatory
routes for an applicant to seek an exemption from providing
such results, namely (i) cross-referral to an innovator's results
without consent of the innovator, (ii) well established
use according to published literature and (iii) consent to refer to an
existing dossier of research results filed by a previous
applicant.
Cross-referral
to Innovator's Data
Articles
10(1)
and 10(2)(b) of Directive 2001/83/EC provide the legal basis for an
applicant to seek a marketing authorization on the basis
that its product is a generic medicinal product (a copy) of a reference
medicinal product that has already been authorized, in
accordance with community provisions. A reference product is, in
principle, an original product granted an authorization on the
basis of a full dossier of particulars and information. This is the main
exemption used by generic manufacturers for obtaining
a marketing authorization for a copy product. The generic applicant is
not required to provide the results of preclinical studies
and of clinical trials if its product meets the definition of a generic
medicinal product and the applicable regulatory results
protection period for the results submitted by the innovator has
expired. A generic medicinal product is defined as a medicinal
product:
|
●
|
having
the same qualitative and quantitative composition in active substance as the reference medicinal product;
|
|
●
|
having
the same pharmaceutical form as the reference medicinal product; and
|
|
●
|
whose
bioequivalence with the reference medicinal product has been demonstrated by appropriate bioavailability studies.
|
Applications
in
respect of a generic medicinal product cannot be made before the expiry
of the protection period. Where the reference product
was granted a national marketing authorization pursuant to an
application made before October 30, 2005, the protection period
is either 6 years or 10 years, depending upon the election of the
particular member state concerned. Where the reference product
was granted a marketing authorization centrally, pursuant to an
application made before November 20, 2005, the protection period
is 10 years. For applications made after these dates, Regulation
726/2004 and amendments to Directive 2001/83/EC provide for a
harmonized protection period regardless of the approval route utilized.
The harmonized protection period is in total 10 years,
including eight years of research data protection and two years of
marketing protection. The effect is that the originator's
results can be the subject of a cross-referral application after eight
years, but any resulting authorization cannot be exploited
for a further two years. The rationale of this procedure is not that the
competent authority does not have before it relevant
tests and trials upon which to assess the efficacy and safety of the
generic product, but that the relevant particulars can, if
the research data protection period has expired, be found on the
originator's file and used for assessment of the generic
medicinal product. The 10-year protection period can be extended to 11
years where, in the first eight years post-authorization,
the holder of the authorization obtains approval for a new indication
assessed as offering a significant clinical benefit in comparison
with existing products.
If
the
copy product does not meet the definition of a generic medicinal
product or if certain types of changes occur in the active
substance(s) or in the therapeutic indications, strength, pharmaceutical
form or route of administration in relation to the reference
medicinal product, Article 10(3) of Directive 2001/83/EC provides that
the results of the appropriate preclinical studies or clinical
trials must be provided by the applicant.
Well-Established
Medicinal Use
Under
Article
10a of Directive 2001/83/EC, an applicant may, in substitution for the
results of its own preclinical and clinical research,
present detailed references to published literature demonstrating that
the active substance(s) of a product have a well-established
medicinal use within the community with recognized efficacy and an
acceptable level of safety. The applicant is entitled to refer
to a variety of different types of literature, including reports of
clinical trials with the same active substance(s) and epidemiological
studies that indicate that the constituent or constituents of the
product have an acceptable safety/efficacy profile for a particular
indication. However, use of the published literature exemption is
restricted by stating that in no circumstances will constituents
be treated as having a well-established use if they have been used for
less than 10 years from the first systematic and documented
use of the substance as a medicinal product in the EU. Even after 10
years' systematic use, the threshold for well-established
medicinal use might not be met. European pharmaceutical law requires the
competent authorities to consider among other factors
the period over which a substance has been used, the amount of patient
use of the substance, the degree of scientific interest
in the use of the substance (as reflected in the scientific literature)
and the coherence (consistency) of all the scientific
assessments made in the literature. For this reason, different
substances may reach the threshold for well-established use after
different periods, but the minimum period is 10 years. If the applicant
seeks approval of an entirely new therapeutic use compared
with that to which the published literature refers, additional
preclinical and/or clinical results would have to be provided.
Informed
Consent
Under
Article
10c of Directive 2001/83/EC, following the grant of a marketing
authorization the holder of such authorization may consent
to a competent authority utilizing the pharmaceutical, preclinical and
clinical documentation that it submitted to obtain approval
for a medicinal product to assess a subsequent application relating to a
medicinal product possessing the same qualitative and
quantitative composition with respect to the active substances and the
same pharmaceutical form.
Law
Relating to Pediatric Research
Regulation
(EC)
1901/2006 (as amended by Regulation (EC) 1902/2006) was adopted on
December 12, 2006. This Regulation governs the development
of medicinal products for human use in order to meet the specific
therapeutic needs of the pediatric population. It requires any
application for marketing authorization made after July 26, 2008 in
respect of a product not authorized in the European Community
on January 26, 2007 (the time the Regulation entered into force), to
include the results of all studies performed and details
of all information collected in compliance with a pediatric
investigation plan agreed by the Pediatric Committee of the EMA, unless
the product is subject to an agreed waiver or deferral or unless the
product is excluded from the scope of Regulation 1902/2006
(generics, hybrid medicinal products, biosimilars, homeopathic and
traditional (herbal) medicinal products and medicinal products
containing one or more active substances of well-established medicinal
use). Waivers can be granted in certain circumstances where
pediatric studies are not required or desirable. Deferrals can be
granted in certain circumstances where the initiation or completion
of pediatric studies should be deferred until appropriate studies in
adults have been performed. Moreover, this regulation imposes
the same obligation from January 26, 2009 on an applicant seeking
approval of a new indication, pharmaceutical form or route of
administration for a product already authorized and still protected by a
supplementary protection certificate granted under Regulation
EC 469/2009 and its precursor (EEC) 1768/92 or by a patent that
qualifies for the granting of such a supplementary protection
certificate. The pediatric Regulation 1901/2006 also provides, subject
to certain conditions, a reward for performing such pediatric
studies, regardless of whether the pediatric results provided resulted
in the grant of a pediatric indication. This reward comes
in the form of an extension of six months to the supplementary
protection certificate granted in respect of the product, unless
the product is subject to orphan drug designation, in which case the
10-year market exclusivity period for such orphan products
is extended to 12 years. If any of the non-centralized procedures for
marketing authorization have been used, the six-month extension
of the supplementary protection certificate is only granted if the
medicinal product is authorized in all member states.
Post-authorization
Obligations
In
the
pre-authorization phase the applicant must provide a detailed
pharmacovigilance plan that it intends to implement post-authorization.
An authorization to market a medicinal product in the EU carries with it
an obligation to comply with many post-authorization
organizational and behavioral regulations relating to the marketing and
other activities of authorization holders. These include
requirements relating to post-authorization efficacy studies,
post-authorization safety studies, adverse event reporting and other
pharmacovigilance requirements, advertising, packaging and labeling,
patient package leaflets, distribution and wholesale dealing.
The regulations frequently operate within a criminal law framework and
failure to comply with the requirements may not only affect
the authorization, but also can lead to financial and other sanctions
levied on the company in question and responsible officers.
As a result of the currently on-going overhaul of EU pharmacovigilance
legislation the financial and organizational burden on
market authorization holders will increase significantly, such as the
obligation to maintain a pharmacovigilance system master
file that applies to all holders of marketing authorizations granted in
accordance with Directive 2001/83/EC or Regulation (EC)
No 726/2004. Marketing authorization holders must furthermore collect
data on adverse events associated with use of the authorized
product outside the scope of the authorization. Pharmacovigilance for
biological products and medicines with a new active substance
will be strengthened by subjecting their authorization to additional
monitoring activities. The EU is currently in the process
of issuing implementing regulations for the new pharmacovigilance
framework.
Any
authorization
granted by member state authorities, which within three years of its
granting is not followed by the actual placing
on the market of the authorized product in the authorizing member state
ceases to be valid. When an authorized product previously
placed on the market in the authorizing member state is no longer
actually present on the market for a period of three consecutive
years, the authorization for that product shall cease to be valid. The
same two three year periods apply to authorizations granted
by the European Commission based on the centralized procedure.
ITEM 1A. RISK FACTORS
Back to Table of Contents
Risks
Related to Our Financial Position and Capital Requirements
Our
independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern.
The
audited
financial statements included in this annual report have been
prepared assuming that we will continue as a going
concern and do not include any adjustments that might result if we cease
to continue as a going concern. We believe that in order
to continue as a going concern, including the costs of being a public
company, we will need approximately $65,000 per year simply
to cover our administrative, legal and accounting fees. We have incurred
significant losses since our inception. We have
funded these losses primarily through the sale of restricted shares of
our Common Stock and the issuance of convertible notes,
which have subsequently been converted into restricted shares of Common
Stock.
Based
on
our financial history, in its report on the financial statements for
the year ended December 31, 2015 our independent registered
public accounting firm has expressed substantial doubt as to our ability
to continue as a going concern. To date we have not generated
any revenues and we do not anticipate generating any significant
revenues in 2016.
Notwithstanding
our
success in raising over $2.1 million from the sale of our securities,
principally during 2014, 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
the Company, 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 operate as a going concern.
We
face many of the risks and difficulties frequently encountered by relatively new companies with respect to our operations.
The
Company's
business involves two distinct operations: (i) conducting scientific
research and development in collaboration
with leading universities and institutions in Israel on the use of
cannabis for medical treatment and (ii) providing consulting
services to assist clients with establishing their own medical cannabis
treatment programs. We have not yet generated any significant
revenues from any of our two distinct business operations.
Notwithstanding the significant scientific and medical experience
of OWC's management and research collaborators, neither the Company nor
OWC have any significant operating history as a
medical research company engaged in cannabis research or a consulting
firm providing advisory services related to medical cannabis
upon which an evaluation of the Company and its prospects could be
based. There can be no assurance that our management will
be successful in being able to commercially exploit the results, if any,
from our medical and scientific research projects or
that we will be able to develop products and treatments that will enable
us to generate sufficient revenues to meet our expenses
or to achieve and/or maintain profitability.
If
we
are unable to raise sufficient capital as needed, we may be required to
reduce the scope of our research and development activities,
which could harm our business plans, financial condition and operating
results, or cease our operations entirely, in which case,
you will lose all your investment.
Risks
Relating to Our Product Prospects and Future Products, Our Services and the Cannabis Industry
Changes
in consumer preferences and acceptance of cannabis-based medical products and treatments and any negative trends will adversely
affect our business.
We
are substantially dependent on continued market acceptance and proliferation of cannabis-based medical products and treatments.
We believe that as cannabis-based products and treatments become more widely accepted by the medical/scientific communities and
the public at large, the stigma associated with cannabis-based medical products and treatments will moderate and, as a result,
consumer demand will likely continue to grow. However, we cannot predict the future growth rate and size of the market, assuming
that the regulatory climate permits, of which there can be no assurance. Any negative outlook on cannabis-based medical products
will adversely affect our business prospects.
In
addition,
we believe that large, well-funded pharmaceutical and other related
businesses and industries may have a strong economic
reasons to be in strong opposition to cannabis-based medical products.
We believe that the pharmaceutical industry may not easily
surrender control of any product, such as cannabis-based products, that
could generate significant revenue. The pharmaceutical
industry is well-funded with a strong and experienced lobby presence at
both the federal and state levels as well as internationally,
that surpasses financial resources of the current group of medical
cannabis research and development companies. Any effort the
pharmaceutical lobby could or might undertake to halt or delay the newly
developing medical cannabis industry could have a detrimental
impact on our business.
These
pressures
could also limit or restrict the introduction and marketing of any such
product. Adverse publicity from cannabis misuse
or adverse side effects from cannabis or other cannabinoid products may
adversely affect the commercial success or marketability.
The nature of our business attracts and may be expected to continue to
attract a high level of public and media interest and,
in the event of any related adverse publicity, we may not succeed in
monetizing our products.
Our
involvement in the cannabis industry may make it difficult to obtain insurance coverage.
In
the
event that we decide to commence business operations in the U.S., of
which there can be no assurance, obtaining and maintaining
necessary insurance coverage, for such things as workers compensation,
general liability, product liability and directors and
officers insurance, may be more difficult and/or expensive for us to
find because we are involved in the cannabis industry. There
can be no assurance that we will be able to find such insurance in the
near future, if needed, or that the cost of coverage will
be affordable or cost-effective. If, either because of unavailability or
cost prohibitive reasons, we are compelled to operate
without insurance coverage, we may be prevented from entering certain
business sectors, experience inhibited growth potential
and/or expose us to additional risks and financial liabilities.
We
are entering a potentially highly competitive market.
Demand
for
medical cannabis-based products is dependent on a number of social,
political and economic factors that are beyond our control.
While we believe that demand for such medical products will continue to
grow, there is no assurance that such increase in demand
will happen, that we will benefit from any demand increase or that our
business, in fact, will ever become profitable.
The
emerging
markets for cannabis-related medical research and development is and
will likely remain both competitive and evolve into
becoming even more so. In particular, we face strong competition from
larger and better funded companies that may be in the process
of offering similar products and treatments that we intend to offer.
Many of our current and potential competitors have longer
operating histories, significantly greater financial, marketing and
other resources than we may be expected to have for the foreseeable
future, notwithstanding our belief in the strength of our management
team.
These
competitors may be able to react to market changes, respond more rapidly to new regulations and/or allocate greater resources
to the development and promotion of their products than we can. Furthermore, some of these competitors may make acquisitions or
establish collaborative relationships among themselves or with third parties to increase their ability to rapidly gain market
share.
Given
the
rapid changes affecting the cannabis-related medical research and
development industry, we may not be able to create and maintain
a competitive advantage in the marketplace. Our success will depend on
our ability to develop innovative cannabis-related products
and treatments working with our university and institutional partners
that will be accepted, especially with ever-changing legal
and regulatory environment. Our success will depend on our ability to
respond to, among other things, changes in the economy,
market conditions, and competitive pressures. Any failure by us to
anticipate or respond adequately to such changes could have
a material adverse effect on our financial condition, operating results,
liquidity, cash flow and our operational performance.
Changes
in legislation or regulation in the health care systems in the United States and foreign jurisdictions may affect us.
Our
ability
to successfully commercialize our cannabis-based medical products and
treatments may depend on how Israel, the US and
other respective governments and/or health administrations provide
coverage and/or reimbursements for our cannabis-based Product
Prospects and treatments. The ongoing efforts of governments, insurance
companies, and other participants in the health care services
industry to trim health care costs may adversely affect our ability to
achieve profitability.
In
certain
foreign markets, including major markets in the European Union, pricing
of prescription pharmaceuticals is subject to
governmental control. Price negotiations with governmental authorities
may range from 6 to 12 months or longer after the receipt
of regulatory marketing approval for a product. Our business could be
detrimentally effected if reimbursements of our cannabis-based
products is unavailable or limited if pricing is set at unacceptable
levels.
We
depend substantially on collaboration with our research and development partners.
We
do
not have in-house research facilities and, as a consequence, we must
rely on collaboration agreements with industry partners,
as well as leading academic medical centers, in order to develop,
research, produce and commercialize our novel cannabinoid-based
therapies targeting a variety of different indications and effectively
help patients in need.
Dr. Yehuda Baruch, OWC's Director of Research and Regulatory Affairs, is highly
qualified by both training and experience, is monitoring the progress of the
investigation and research of our medical cannabis development. In addition,
Alon Sinai, Chief Operating Officer of OWC, serves as our key liaison with our
collaboration partners at the major Israeli hospitals and medical centers. See
the disclosure under "
Directors, Executive Officers, Promoters and Control Persons - Key Medical Personnel
of One World Cannabis
" below.
To
date,
OWC has signed three research collaboration and license agreements with
Sheba Academic Medical Center located in Tel Hashomer,
Israel ("Sheba"). Sheba is a university-affiliated hospital that serves
as one of Israel's national medical
centers and is one of the most advanced medical centers in the Middle
East. Within the framework of the agreements with Sheba,
OWC will initiate three studies at the Sheba facilities to explore the
effect of three formulations, all based on active ingredients
in the cannabis extracts, on multiple myeloma, psoriasis and
fibromyalgia. Each formulation will be targeted at one of the three
indications.
In
August
6, 2015, OWC signed a Memorandum of Understanding with Emilia Cosmetics
Ltd., a large Israeli private label manufacturer,
for the development, manufacture and marketing of a cannabinoid-based
topical cream to treat psoriasis. The Company intends to
enter into a binding agreement with Emilia Cosmetics, which will set
forth milestones and payment terms, in the second quarter
of 2016 and to initiate the development of the topical cream by the end
of the second quarter of 2016 at the Emilia Cosmetics labs
located in Yerucham, Israel. However, there is no guarantee that we will
be able to enter into a binding agreement with Emilia
Cosmetics on terms favorable to us or at all. The Company expects to
complete the development process in the second quarter of
2016 and then to initiate a phase I study at the Sheba facilities to
explore the efficacy of the topical cream on psoriasis. However,
we do not know if our expectations with respect to the development
process will be fulfilled in a timely manner, if at all, or
if the costs of development will exceed our anticipation.
While
we retain full ownership of our intellectual property, or other proprietary rights and trade secrets that were conceived
prior to entry into the agreements with Sheba, the psoriasis and fibromyalgia research agreements with Sheba provide
that all intellectual property and other rights that are conceived during the course of the collaboration will be jointly owned
by Sheba and One World Cannabis.
Collaboration
agreements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and
commercialize cannabis-based medical products.
We
may
also enter into collaboration agreements with pharmaceutical companies
and/or biotechnology institutions for the development
or commercialization of our cannabis-based Product Prospects and
treatments, which agreements may contain provisions based upon,
among other things, the merits of retaining certain rights. We will face
significant competition in seeking appropriate collaborators
and in negotiating agreements at acceptable terms, if at all. We may not
be successful in our efforts to enter, implement and
maintain collaboration agreements. Disagreements stemming from
collaboration agreements concerning development, intellectual property,
regulatory or commercialization matters can lead to delays and, in some
cases, termination of our collaboration agreements or
otherwise result in the potentially significant costs and fees in
seeking to enforce or protect our rights, if any. Any such disagreements
can be difficult if, in fact, neither of the parties has final decision
making authority. The resulting outcome of any disputes
and/or disagreements would in all likelihood adversely affect our
business.
Clinical
trials
of cannabis-based medical products and treatments are novel terrain
with very limited or non-existing clinical trials history;
we face a significant risk that the trials will not result in
commercially viable products and treatments.
At
present, there is no documented history of clinical trials from which we can derive any scientific conclusions, or prove that
our present assumptions for the current and planned research are scientifically compelling. The results from our 2015 in
vitro studies on the effect of a formulation comprised of Cannabidiol (CBD) and tetrahydrocannabinol (THC) on multiple myeloma
cells studied outside their normal biological context indicated a 100% mortality rate of myeloma cells in 60% of the cultured
cells within a 24 to 48 hour period, and highlight the abilities of cannabis oil extract to successfully fight multiple myeloma
cancer. While we are encouraged by the results of the limited in vitro tests, there can be no assurance that any clinical trial
will result in commercially viable products or treatments.
Clinical
trials
are expensive, time consuming and difficult to design and implement.
We, as well as the regulatory authorities in Israel
and elsewhere, such as an IRB (Helsinki committee), IMCU - Israel
Medical Cannabis Unit, or the FDA, may suspend, delay or terminate
our clinical trials at any time, may require us, for various reasons, to
conduct additional clinical trials, or may require a
particular clinical trial to continue for a longer duration than
originally planned, including, among others:
●
lack
of effectiveness of any formulation or delivery system during clinical trials;
●
discovery
of serious or unexpected toxicities or side effects experienced by trial participants or other safety issues;
●
slower than expected rates of subject recruitment and enrollment rates in clinical trials;
●
delays
or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials due to regulatory and
manufacturing constraints;
●
delays
in obtaining regulatory authorization to commence a trial, including IRB approvals, licenses required for obtaining and using
cannabis for research, either before or after a trial is commenced;
●
unfavorable
results from ongoing pre-clinical studies and clinical trials.
●
patients
or investigators failing to comply with study protocols;
●
patients
failing to return for post-treatment follow-up at the expected rate;
●
sites
participating in an ongoing clinical study withdraw, requiring us to engage new sites;
●
third-party
clinical
investigators decline to participate in our clinical studies, do not
perform the clinical studies on the anticipated
schedule, or act in ways inconsistent with the established investigator
agreement, clinical study protocol, good clinical practices,
and other Institutional Review Board requirements;
●
third-party
entities do not perform data collection and analysis in a timely or accurate manner or at all;
or
●
regulatory
inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies.
Any
of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Our
failure to comply with existing and potential future laws and regulations relating to drug development could harm our plan of
operations.
Our
business is, and will be, subject to wide-ranging, existing laws and regulations of the State of Israel, the U.S. (federal and
states), and other governments in each of the countries we may develop and market our Product Prospects. We must comply to all
regulatory requirements if we expect to be successful.
If
any
of our cannabis-based Product Prospects and treatments is approved in
the United States, it will be subject to ongoing regulatory
requirements including federal and state requirements. As a result, we
and our collaborators and/or joint venture partners must
continue to expend time, money and effort in all areas of regulatory
compliance, including, if applicable, manufacturing, production,
quality control and assurance and, of upmost importance, clinical
trials. We will also be required to report certain adverse reactions
and production problems, if any and applicable, to the FDA, and to
comply with advertising and promotion requirements for our
cannabis-based Product Prospects and treatments.
Any
failure
to comply with ongoing regulatory requirements may significantly and
adversely affect our ability to conduct clinical
trials which are prerequisite to our ability to commercialize our
cannabis-based medical products and related treatments. If regulatory
sanctions are applied or if regulatory approval, once obtained, is for
any reason withdrawn, the value of our business and our
operating results could be materially adversely affected.
The
FDA has not approved cannabis as a safe and effective drug for any indication.
The
FDA
has not approved the whole-plant extract of Cannabis as a safe and
effective drug for any indication. Although the FDA has
not approved any drug product containing or derived from botanical
cannabis, the FDA is aware that there is considerable interest
in its use to attempt to treat a number of medical conditions. Before
conducting testing in humans of a drug that has not been
approved by the FDA, we will need to submit an investigational new drug
(IND) application, which is reviewed by the FDA.
Failure to comply with applicable U.S. requirements may subject a
company to a variety of administrative or judicial sanctions,
such as FDA refusal to approve pending NDAs, warning letters, product
recalls, product seizures, total or partial suspension of
production or distribution, injunctions, fines, civil penalties and
criminal prosecution.
Failure
to secure the necessary Israeli licenses to use cannabis for medical research could limit our ability to execute our research
and development activities, delay the launch of our products and adversely affect the results of our business operations.
To
date,
we are only conducting our research in Israel and, in fact, have
limited our activities to Israel. The medical products
we are developing contain cannabis, a "controlled substance" as defined
in the Israeli Dangerous Drugs Ordinance
[New Version], 5733 - 1973. In Israel, licenses to cultivate, possess
and to use cannabis for medical research are granted by
the Ministry of Health, Israel Medical Cannabis Unit (IMCU), on an
ad-hoc basis. OWC acquires the cannabis needed for its research
activities from G.K. Medical Cannabis, a government-licensed Israeli
medical cannabis grower. OWC obtained necessary IMCU licenses
in order to carry out the research in collaboration with Sheba and with
G.C. Group. Because OWC does not have a license to possess
cannabis, the cannabis is transported from the grower directly to the
labs at Sheba and at G.C. Group, in accordance with our
license to use cannabis for medical research. We have applied for
further licenses in order to continue our activities. Although
we have an established track record of successfully obtaining the
requisite licenses as required, there can be no assurance that
we will continue to be able to secure licenses in the future. If we fail
to comply with Israeli rules and regulations related
to the licensing of cannabis, we may not be able to research and develop
our Product Prospects as we intend or at all. We
have been successful in obtaining a license to use cannabis for medical
research, but there can be no assurances that we will
be able to continue to maintain this license in the future.
If
we
choose to distribute our future products in the United States, we will
be subject to controlled substance laws and regulations;
failure to receive necessary approvals may delay the launch of our
products and failure to comply with these laws and regulations
may adversely affect the results of our business operations.
Our
future
products will contain controlled substances as defined in the federal
Controlled Substances Act of 1970, or CSA. Controlled
substances that are pharmaceutical products are subject to a high degree
of regulation under the CSA, which establishes, among
other things, certain registration, manufacturing quotas, security,
recordkeeping, reporting, import, export and other requirements
administered by the DEA. The DEA classifies controlled substances into
five schedules: Schedule I, II, III, IV or V substances.
Schedule I substances by definition have a high potential for abuse,
have no currently "accepted medical use" in the
United States, lack accepted safety for use under medical supervision,
and may not be prescribed, marketed or sold in the United
States. Pharmaceutical products approved for use in the United States
may be listed as Schedule II, III, IV or V, with Schedule
II substances considered to present the highest potential for abuse or
dependence and Schedule V substances the lowest relative
risk of abuse among such substances. Schedule I and II drugs are subject
to the strictest controls under the CSA, including manufacturing
and procurement quotas, security requirements and criteria for
importation. In addition, dispensing of Schedule II drugs is further
restricted. For example, they may not be refilled without a new
prescription.
While
Cannabis
is a Schedule I controlled substance, products approved for medical use
in the United States that contain Cannabis or
Cannabis extracts must be placed in Schedules II - V, since approval by
the FDA satisfies the "accepted medical use"
requirement. If and when our Product Prospects receive FDA approval, the
DEA will make a scheduling determination and place it
in a schedule other than Schedule I in order for it to be prescribed to
patients in the United States. If approved by the FDA,
we expect the finished dosage forms of our Product Prospects to be
listed by the DEA as a Schedule II or III controlled substance.
Consequently, their manufacture, importation, exportation, domestic
distribution, storage, sale and legitimate use will be subject
to a significant degree of regulation by the DEA. The scheduling process
may take one or more years beyond FDA approval, thereby
significantly delaying the launch of our Product Prospects. Furthermore,
if the FDA, DEA or any foreign regulatory authority determines
that Product Prospects may have potential for abuse, it may require us
to generate more clinical data than that which is currently
anticipated, which could increase the cost and/or delay the launch of
our Product Prospects.
We
expect
that our Product Prospects will be scheduled as Schedule II or III, as a
result of which we will also need to identify
wholesale distributors with the appropriate DEA registrations and
authority to distribute the products to pharmacies and other
healthcare providers, and these distributors would need to obtain
Schedule II or III distribution registrations. The failure to
obtain, or delay in obtaining, or the loss of any of those registrations
could result in increased costs to us. If a Product Prospects
is a Schedule II drug, pharmacies would have to maintain enhanced
security with alarms and monitoring systems and they must adhere
to recordkeeping and inventory requirements. This may discourage some
pharmacies from carrying the product. Furthermore, state
and federal enforcement actions, regulatory requirements, and
legislation intended to reduce prescription drug abuse, such as
the requirement that physicians consult a state prescription drug
monitoring program, may make physicians less willing to prescribe,
and pharmacies to dispense, Schedule II products.
We
may
manufacture the commercial supply of our Product Prospects outside of
the United States. If a Product Prospect is approved
by the FDA and classified as a Schedule II or III substance, an importer
can import for commercial purposes if it obtains from
the DEA an importer registration and files an application with the DEA
for an import permit for each import. The DEA provides
annual assessments/estimates to the International Narcotics Control
Board which guides the DEA in the amounts of controlled substances
that the DEA authorizes to be imported. The failure to identify an
importer or obtain the necessary import authority, including
specific quantities, could affect the availability of a Product Prospect
and have a material adverse effect on our business, results
of operations and financial condition. In addition, an application for a
Schedule II importer registration must be published in
the Federal Register, and there is a waiting period for third party
comments to be submitted.
Individual
states
have also established controlled substance laws and regulations. Though
state-controlled substance laws often mirror federal
law, because the states are separate jurisdictions, they may separately
schedule our product candidates as well. While some states
automatically schedule a drug based on federal action, other states
schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we
obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of
such product. We or our potential future partners would
also need to obtain separate state registrations, permits or licenses in
order to be able to obtain, handle, and distribute controlled
substances for clinical trials or commercial sale, and failure to meet
applicable regulatory requirements could lead to enforcement
and sanctions by the states in addition to those from the DEA or
otherwise arising under federal law.
Our
ability to provide consulting services in the United States is dependent on additional states legalizing medical marijuana.
While
continuing
with scientific investigations into medical effects and benefits of
cannabis, the Company anticipates that it will
begin generating revenue through providing consulting services related
to medical marijuana programs. Continued development of
the medical marijuana market is dependent upon continued legislative
authorization of marijuana at the state level for medical
purposes and, in certain states, including California, based on the
specifics of the legislation passed in that state. Any number
of factors could slow or halt the progress. Furthermore, progress, while
encouraging, is not assured, and the process normally
encounters set-backs before achieving success. While there may be ample
public support for legislative proposals, key support
must be created in the legislative committee or a bill may never advance
to a vote. Numerous factors impact the legislative process.
Any one of these factors could slow or halt the progress and adoption of
marijuana for medical purposes, which would limit the
market for our services and products and negatively impact our business
and revenues.
State
and municipal governments in which we provide consulting services or seek to provide consulting services may have, or may adopt
laws that adversely affect our ability to do business.
While
the
federal government has the right to regulate and criminalize marijuana,
which it has in fact done, state and municipal governments
may adopt additional laws and regulations that further criminalize or
negatively affect marijuana businesses. States that currently
have laws that decriminalize or legalize certain aspects of marijuana,
such as medical marijuana, could in the future, reverse
course and adopt new laws that further criminalize or negatively affect
marijuana businesses. Additionally, municipal governments
in these states may have laws that adversely affect marijuana
businesses, even though there are no such laws at the state level.
For example, municipal governments may have zoning laws that restrict
where marijuana operations can be located and the manner
and size of which they can expand and operate. These municipal laws,
like the federal laws, may adversely affect our ability to
do business, and adverse enforcement actions under these laws may lead
to costly litigation and a closure of the businesses with
which we have contracts or royalty-fee structures in place, in turn,
affecting our own business. Moreover, if additional states
do not adopt laws that legalize certain aspects of the marijuana
industry, we may not be able to expand our business in the manner
in which we prefer.
Also,
given
the complexity and rapid change of the federal, state and local laws
pertaining to marijuana, the Company may incur substantial
legal costs associated with complying with these laws and in acquiring
the necessary state and local licenses required by our
business endeavors. For example, some states permit entities to enter
into joint venture relationships with individual license
holders that provide for revenue sharing arrangements. In other states,
revenue sharing is not permitted, and we will accept fee-for-service
arrangement on a cost-plus basis for our services. State and municipal
governments may also limit the number of specialized licenses
available or apply stringent compliance requirements necessary to
maintain the license. These developments may limit our ability
to expand our negatively affect our business model.
The
businesses that we consult for with may have difficulty accessing the services of banks in the United States, which may
make it difficult for them to purchase our products and services.
As
discussed
above, the use of marijuana is illegal under federal law. Therefore,
there is a strong argument that banks cannot accept
for deposit funds from the drug trade and therefore cannot do business
with our clients that operate medical marijuana programs.
On February 14, 2014, the U.S. Department of the Treasury Financial
Crimes Enforcement Network ("FinCEN") released
guidance to banks "clarifying Bank Secrecy Act ("BSA") expectations for
financial institutions seeking to provide
services to marijuana-related businesses." In addition, U.S. Rep. Jared
Polis (D-CO) has stated he will seek an amendment
to banking regulations and laws in order to allow banks to transact
business with state-authorized medical marijuana treatment
programs. While these are positive developments, there can be no
assurance this legislation will be successful, or that, even
with the FinCEN guidance, banks will decide to do business with medical
marijuana retailers, or that, in the absence of actual
legislation, state and federal banking regulators will not strictly
enforce current prohibitions on banks handling funds generated
from an activity that is illegal under federal law. The inability of
potential clients in our target markets to open accounts
and otherwise use the services of banks may make it difficult for such
potential clients to purchase our products and services
and could materially harm our business.
If
we
choose to engage in research and development or consulting activities
in Europe, controlled substance legislation may restrict
or limit our ability to provide consulting services or to research,
manufacture and develop a commercial market for our products.
Approximately
250
substances, including cannabis, are listed in the Schedules annexed to
the United Nations Single Convention on Narcotic Drugs
(New York, 1961, amended 1972), the Convention on Psychotropic
Substances (Vienna, 1971) and the Convention against Illicit Traffic
in Narcotic Drugs and Psychotropic Substances (introducing control on
precursors) (Vienna, 1988). The purpose of these listings
is to control and limit the use of these drugs according to a
classification of their therapeutic value, risk of abuse and health
dangers, and to minimize the diversion of precursor chemicals to illegal
drug manufacturers. The 1961 UN Single Convention on
Narcotic Drugs, as amended in 1972 classifies cannabis as Schedule I
("substances with addictive properties, presenting
a serious risk of abuse") and as Schedule IV ("the most dangerous
substances, already listed in Schedule I, which
are particularly harmful and of extremely limited medical or therapeutic
value") narcotic drug. The 1971 UN Convention on
Psychotropic Substances classifies tetrahydrocannabinol (THC) - the
principal psychoactive cannabinoid of cannabis - as schedule
I psychotropic substance (Substances presenting a high risk of abuse,
posing a particularly, serious threat to public health which
are of very little or no therapeutic value). Most countries in Europe
are parties to these conventions, which govern international
trade and domestic control of these substances, including cannabis. They
may interpret and implement their obligations in a way
that creates a legal obstacle to our obtaining manufacturing and/or
marketing approval for our products in those countries. These
countries may not be willing or able to amend or otherwise modify their
laws and regulations to permit our products to be manufactured
and/or marketed, or achieving such amendments to the laws and
regulations may take a prolonged period of time.
Laws
and regulations affecting therapeutic uses of marijuana are constantly evolving.
The
constant
evolution of laws and regulations affecting the research and
development of cannabis-based medical products and treatments
could detrimentally affect our business. Laws and regulations related to
the therapeutic uses of marijuana are subject to changing
interpretations. These changes may require us to incur substantial costs
associated with legal and compliance fees and ultimately
require us to alter our business plan. Furthermore, violations or
alleged violation of these laws could disrupt our business and
result in a material adverse effect on our operations. In addition, we
cannot predict the nature of any future laws, regulations,
interpretations or applications of laws and regulations and it is
possible that new laws and regulations may be enacted in the
future that will be directly applicable to our business.
Risks
Related to Intellectual Property
Costly
litigation may be necessary to protect our intellectual property rights and we may be subject to claims alleging the violation
of the intellectual property rights of others.
We
may
face significant expense and liability as a result of litigation or
other proceedings relating to patents and other intellectual
property rights of others. In the event that another party has also
filed a patent application or been issued a patent relating
to an invention or technology claimed by us in pending applications, we
may be required to participate in an interference proceeding
declared by the U.S. Patent and Trademark Office to determine priority
of invention, which could result in substantial uncertainties
and costs for us, even if the eventual outcome were favorable to us. We,
or our licensors, also could be required to participate
in interference proceedings involving issued patents and pending
applications of another entity. An adverse outcome in an interference
proceeding could require us to cease using the technology or to license
rights from prevailing third parties.
The
cost
to us of any patent litigation or other proceeding relating to our
licensed patents or patent applications, even if resolved
in our favor, could be substantial. Our ability to enforce our patent
protection could be limited by our financial resources,
and may be subject to lengthy delays.
A
third party may claim that we are using inventions claimed by their
patents and may go to court to stop us from engaging in our
normal operations and activities, such as research, development and the
sale of any future products. Such lawsuits are expensive
and would consume time and other resources. There is a risk that the
court will decide that we are infringing the third party's
patents and will order us to stop the activities claimed by the patents,
redesign our products or processes to avoid infringement
or obtain licenses (which may not be available on commercially
reasonable terms). In addition, there is a risk that a court will
order us to pay the other party damages for having infringed their
patents.
Moreover,
there
is no guarantee that any prevailing patent owner would offer us a
license so that we could continue to engage in activities
claimed by the patent, or that such a license, if made available to us,
could be acquired on commercially acceptable terms. In
addition, third parties may, in the future, assert other intellectual
property infringement claims against us with respect to
our product candidates, technologies or other matters.
We
rely on confidentiality agreements that could be breached and may be difficult to enforce, which could result in third parties
using our intellectual property to compete against us.
Although
we
believe that we take reasonable steps to protect our intellectual
property, including the use of agreements relating to the
non-disclosure of confidential information to third parties, as well as
agreements that purport to require the disclosure and
assignment to us of the rights to the ideas, developments, discoveries
and inventions of our employees and consultants while we
employ them, the agreements can be difficult and costly to enforce.
Although we seek to obtain these types of agreements from
our contractors, consultants, advisors and research collaborators, to
the extent that employees and consultants utilize or independently
develop intellectual property in connection with any of our projects,
disputes may arise as to the intellectual property rights
associated with our products. If a dispute arises, a court may determine
that the right belongs to a third party. In addition,
enforcement of our rights can be costly and unpredictable. We also rely
on trade secrets and proprietary know-how that we seek
to protect in part by confidentiality agreements with our employees,
contractors, consultants, advisors or others. Despite the
protective measures we employ, we still face the risk that:
|
●
|
these
agreements may be breached;
|
|
●
|
these
agreements may not provide adequate remedies for the applicable type of breach;
|
|
●
|
our
trade secrets or proprietary know-how will otherwise become known; or
|
|
●
|
our
competitors will independently develop similar technology or proprietary information.
|
If
we are unable to protect our intellectual property adequately, our business and commercial prospects will suffer.
Other
parties
may claim that our cannabis-based medical products infringe on their
proprietary and perhaps patent protected rights.
We may be subject to claims and costly legal proceedings regarding
alleged infringement by us of the intellectual property rights
and patents of third parties. Such claims, whether or not meritorious,
may result in the expenditure of significant financial
and managerial resources, legal fees, result in injunctions, temporary
restraining orders and/or require the payment of damages.
In the event that our patents do not fully protect us, we may need to
obtain licenses from third parties who allege that we have
infringed on their lawful rights. However, such licenses may not be
available on terms acceptable to us or at all. In addition,
we may not be able to obtain or utilize on terms that are favorable to
us, or at all, licenses or other rights with respect to
intellectual property we do not own.
Risks
Related to Management and Personnel
If
we are unable to hire and retain key personnel, we may not be able to implement our business plan and our business may fail.
Our
future
success depends, to a significant extent, on our ability to attract,
train and retain capable scientists and physicians,
enter into collaboration agreements for our research and managerial
personnel. Recruiting and retaining capable personnel, particularly
those with expertise with medical research, is vital to our success. If
we are unable to attract and retain qualified employees,
our business may fail and our investors could lose their entire
investment.
At
present,
we believe to have the necessary key personal to carry out our business
plans but there can be no assurance that our
beliefs prove unfounded. If we are unable to protect our intellectual
property, our business will be materially adversely affected.
Our
future success is dependent, in part, on the performance and continued service of Dr. Yehuda Baruch, OWC's director of research
and regulatory affairs and Alon Sinai, OWC's Chief Operating Officer.
The
Company is dependent to a great deal on Dr. Yehuda Baruch, OWC's Director of Research and Regulatory Affairs, to
conduct and oversee our clinical studies. We are also dependent on the services of Alon Sinai, OWC's Chief Operating
Officer, in negotiating and serving as our liaison with our collaboration partners at major Israeli medical centers. The loss
of Dr. Baruch's services and those of Mr. Sinai could have a material adverse effect on the operations and prospects of
the Company. Dr. Baruch is expected to handle all aspects of our research and regulatory affairs related to developing our
Product Prospects. At this time, the Company does not currently have "key man" life insurance for Dr. Baruch or
Mr. Sinai.
Risks
Related to Our Common Stock
In
addition to securities that have been or may be in the future issued to Kodiak Capital under the Note and Purchase Agreement,
the Company currently has outstanding warrants, options and convertible notes, the exercise and conversion
of which may be expected to dilute the value of our shares.
The
Company has granted warrants and if those are exercised, the issuance of up to 15,631,602 shares of Common Stock of the Company
may dilute the value of shares held by existing shareholders. We also issued a $78,500 convertible note in February 2016 that
is convertible in August 2016 at a conversion price of 65% of the average of the three lowest prices for our common stock during
the ten day trading period ending prior to the conversion date. Also, 200,000 shares of our common stock may be issued upon the
exercise of outstanding options.
There
can be no assurance of a liquid public trading market for our common stock or whether investors will be able to readily be able
to sell their shares of common stock.
At
present,
our Common Stock is subject to quotation on the OTCQB market under the
symbol OWCP. There is only a limited, liquid public
trading market for our Common Stock and there can be no assurance that a
more liquid market will ever develop or be sustained.
Market liquidity will depend on the perception of our business and any
steps that our management might take to bring public awareness
of our business to the investing public within the parameters of the
federal securities laws. There can be given no assurance
that there will be any awareness generated or sustained. Consequently,
investors may not be able to liquidate their investment
or liquidate it at a price paid by investors equal to or greater than
their initial investment in our Common Stock. As a result,
holders of our Common Stock may not find purchasers for their shares
should they to decide to sell the Common Stock held by them
at any particular time if ever. Consequently, our Common Stock should be
purchased only by investors who have no immediate need
for liquidity in their investment and who can hold our Common Stock,
possibly for a prolonged period of time.
In
the event an active trading market develops for our common stock, the market price may, from time-to-time, be volatile.
In
the
event an active trading market develops for our Common Stock, the
market price of our Common Stock may be highly volatile,
as is the market for securities subject to quotation on OTC Markets in
particular. Some of the factors that may materially affect
the market price of our Common Stock are beyond our control, such as
changes in conditions or trends in the industry in which
we operate, general market and economic conditions in the United States
and world-wide as well as the number of our shares of
Common Stock being purchased and sold at any particular time. These
factors may materially adversely affect the market price of
our Common Stock, regardless of our historic business performance or
future prospects. In addition, the public stock markets have
experienced and may be expected to experience extreme price and trading
volume volatility. This volatility has significantly affected
the market prices of securities of many companies for reasons frequently
unrelated to their operating performance. These market
fluctuations may adversely affect the market price of our Common Stock.
A
large number of additional shares will be available for resale into the public market pursuant to Rule 144, which may cause the
market price of our common stock to decline significantly.
Sales
of
a substantial number of shares of our Common Stock in the public market
will become available pursuant to Rule 144 promulgated
by the SEC under the Act, could adversely affect the market price of our
Common Stock. As of December 31, 2015, we had 81,460,875
shares of Common Stock outstanding, of which 51,278,458 shares of Common
Stock are restricted as a result of applicable federal
securities laws. As restrictions on resale of other shares of Common
Stock expire, pursuant to the provisions of Rule 144 or otherwise,
the market price could drop significantly if the holders of these
restricted shares sell them or are perceived by the market as
intending to sell them at any given date or over any particular period
of time. For a more detailed description of the risks associated
with this Risk Factor, see the disclosure under the caption "Shares
Eligible for Future Sale" contained in this Prospectus.
If
holders of restricted securities sell a large number of shares pursuant to Rule 144 under the Act, they could adversely affect
the market price for our Common Stock, which adverse affect could be sustained and over which we have no control.
You
will experience dilution of your ownership interest because of the future issuance of additional shares of our common stock or
our preferred stock.
In
the
future, we may issue our authorized but previously unissued equity
securities, including shares of our Common Stock, resulting
in the dilution of the ownership interests of our present shareholders.
We are authorized to issue an aggregate of 500,000,000
shares of Common Stock, par value $0.00001 per share, of which
81,460,875 shares are currently outstanding.
We
may
also issue additional shares of our Common Stock, warrants or other
securities that are convertible into or exercisable for
the purchase of shares of our Common Stock in connection with hiring
and/or retaining employees or consultants, future acquisitions,
future sales of our securities for capital raising purposes, or for
other business purposes. The future issuance of any such additional
shares of our Common Stock or other securities, for any reason including
those stated above, may have a negative impact on the
market price of our Common Stock. There can be no assurance that the
issuance of any additional shares of Common Stock, warrants
or other convertible securities may not be at a price (or exercise
prices) below the then prevailing price at which shares of
our Common Stock will be quoted on the OTCQB Market.
We
may never pay any dividends to our shareholders.
We
currently
intend to retain any future earnings for use in the operation and
expansion of our business. Accordingly, we do not
expect to pay any dividends in the foreseeable future, but will review
this policy as circumstances dictate. The declaration and
payment of all future dividends, if any, will be at the sole discretion
of our board of directors, which retains the right to
change our dividend policy at any time. Consequently, shareholders must
rely on sales of their Common Stock after price appreciation,
which may never occur, as the only way to realize any future gains on
their investment.
Insiders
will continue to have substantial control over us after this offering and will be able to influence corporate matters.
Our directors and executive officers and present shareholders holding more than
5% of our Common Stock will continue to own of record and beneficially, in the
aggregate, approximately 12.97% of our outstanding Common Stock (without
accounting for any shares that may be issued to Kodiak Capital under the
Purchase Agreement). As a result, if these shareholders were to choose to act
together, they would be able to exercise significant influence over all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions, such as a merger or other sale of our
Company or all or a significant percentage of our assets. This concentration of
ownership could limit your ability to influence corporate matters and may have
the effect of delaying or preventing a third party from acquiring control over
us. For information regarding the ownership of our outstanding stock by our
executive officers and directors and their affiliates, see the disclosure under
the caption "
Security
Ownership of Certain Beneficial Owners and Management
."
We
cannot
assure you that the interests of our management and affiliated persons
will coincide with the interests of the investors.
So long as our management and affiliated persons collectively controls a
significant portion of our Common Stock, these individuals
and/or entities controlled by them, will continue to collectively be
able to strongly influence or effectively control our decisions.
Anti-takeover
provisions of the Delaware General Corporation Law may discourage or prevent a change of control, even if an acquisition would
be beneficial to our shareholders, which could reduce our stock price.
We
are
subject to the provisions of Section 203 of the Delaware General
Corporation Law, which may prohibit certain business combinations
with shareholders owning 15% or more of our outstanding voting stock.
These and other provisions in our amended and restated certificate
of incorporation, amended and restated bylaws and Delaware law could
make it more difficult for shareholders or potential acquirers
to obtain control of our board of directors or initiate actions that are
opposed by our then-current board of directors, including
a merger, tender offer or proxy contest involving our Company. Any delay
or prevention of a change of control transaction or changes
in our board of directors could cause the market price of our Common
Stock to decline.
State
Blue Sky registration and potential limitations on resale of our common stock.
The
holders
of our shares of common stock and those persons who desire to purchase
our common stock in any trading market that might
develop, should be aware that there may be state blue-sky law
restrictions upon the ability of investors to resell our securities.
Accordingly, investors should consider the secondary market our
securities to be a limited one.
It
is
the present intention of management after the active commencement of
operations in to seek coverage and publication of information
regarding the Company in an accepted publication manual, which permits a
manual exemption. The manual exemption permits a security
to be distributed in a particular state without being registered if the
Registrant issuing the security has a listing for that
security in a securities manual recognized by the state.
However,
it is not enough for the security to be listed in a recognized manual. The listing entry must contain (1) the names of issuer's
officers, and directors, (2) an issuer's balance sheet, and (3) a profit and loss statement for either the fiscal year preceding
the balance sheet or for the most recent fiscal year of operations. Furthermore, the manual exemption is a non-issuer exemption
restricted to secondary trading transactions, making it unavailable for issuers selling newly issued securities.
Most
of the accepted manuals are those published in Standard and Poor's, Moody's Investor Service, Fitch's Investment
Service, and Best's Insurance Reports, and many states expressly recognize these manuals. A smaller number of states declare
that they "recognize securities manuals" but do not specify the recognized manuals. The following states do not have
any provisions and therefore do not expressly recognize the manual exemption: Alabama, Georgia, Illinois, Kentucky, Louisiana,
Montana, South Dakota, Tennessee, Vermont and Wisconsin.
Our
common stock is considered a Penny Stock, which may be subject to restrictions on marketability, so you may not be able to sell
your shares.
We
may
be subject now and in the future to the Penny Stock rules if our shares
of Common Stock sell below $5.00 per share. Penny
stocks generally are equity securities with a price of less than $5.00.
The penny stock rules require broker-dealers to deliver
a standardized risk disclosure document prepared by the SEC which
provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer must also provide
the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its
salesperson, and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson
compensation information must be given to the customer orally or in
writing prior to completing the transaction and must be given
to the customer in writing before or with the customer's confirmation.
In
addition,
the penny stock rules require that prior to a transaction, the broker
dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and
receive the purchaser's written agreement to the transaction.
The penny stock rules are burdensome and may reduce purchases of any
Offerings and reduce the trading activity for shares of our
Common Stock. As long as our shares of Common Stock are subject to the
penny stock rules, the holders of such shares of Common
Stock may find it more difficult to sell their securities.
The
control
deficiencies in our internal control over financial reporting may until
remedied cause errors in our financial statements
or cause our filings with the SEC to not be timely.
We
have
identified control deficiencies in our internal control over financial
reporting as of the evaluation done by management
as of December 31, 2015. If our internal control over financial
reporting or disclosure controls and procedures are not effective,
there may be errors in our financial statements that could require a
restatement or our filings may not be timely made with the
SEC. Based on the work undertaken and performed by us, however, we
believe the financial statements contained in our reports filed
with the SEC are fairly stated in all material respects in accordance
with GAAP for each of the periods presented. We intend to
implement additional corporate governance and control measures to
strengthen our control environment as we are able, but we may
not achieve our desired objectives. We may identify material weaknesses
and control deficiencies in our internal control over
financial reporting in the future that may require remediation and could
lead investors losing confidence in our reported financial
information, which could lead to a decline in our stock price.
Our
shares of common stock are thinly traded, so stockholders may be unable to sell at or near ask prices or at all if they need to
sell shares to raise money or otherwise desire to liquidate their shares.
Our
common
stock is "thinly-traded," meaning that the number of persons interested
in purchasing our common stock at or
near ask prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors,
including the fact that we are a small company that is relatively
unknown to stock analysts, stock brokers, institutional investors
and others in the investment community that generate or influence sales
volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more seasoned
and viable. As a consequence, there may be periods of several
days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We
cannot give stockholders any assurance that a broader or more active
public trading market for our common shares will develop
or be sustained, or that current trading levels will be sustained.
Reporting
requirements under the Exchange Act and compliance with the Sarbanes-Oxley Act of 2002, including establishing and maintaining
acceptable internal controls over financial reporting, are costly and may increase substantially.
The
rules
and regulations of the SEC require a public company to prepare and file
periodic reports under the Exchange Act, which will
require that the Company engage legal, accounting, auditing and other
professional service providers. The engagement of such services
is costly and continuing. Additionally, the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act") requires, among
other things, that we design, implement and maintain adequate internal
controls and procedures over financial reporting. The costs
of complying with the Sarbanes-Oxley Act and the limited technically
qualified personnel we have may make it difficult for us
to design, implement and maintain adequate internal controls over
financial reporting. We expect these costs to be approximately
$25,000 per year or perhaps more as our operations increase in scope and
magnitude. In the event that we fail to maintain an effective
system of internal controls or discover material weaknesses in our
internal controls, we may not be able to produce reliable financial
reports and/or discover and report fraud, which may harm our overall
financial condition and result in loss of investor confidence
and a decline in our share price.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act
of 2010 and other applicable securities rules and regulations. Our legal and financial compliance costs related to these rules
and regulations may increase, make some activities more difficult, time-consuming or costly and increase demand on our systems
and resources. The Exchange Act requires, among other things, that we file annual and quarterly, and, from time-to-time, current
reports with respect to our business and operating results.
We
are
working with our legal, independent accounting and financial advisors
to identify those areas in which changes should or could
be made to improve our financial and management control systems in order
to manage our growth and our legal obligations as a public
company. These areas include corporate governance, corporate control,
disclosure controls and procedures and financial reporting
and accounting systems. We have made, and will continue to make, changes
in these and other areas, if and when any perceived deficiencies
are discovered. However, we anticipate that the expenses associated with
being a reporting public company are expected to be both
material and continuing. We estimate that the aggregate cost of legal
services; accounting and audit functions; personnel, such
as a chief financial officer familiar with the obligations of public
company reporting; and consultants to design and implement
internal controls could be material. In addition, if and when we retain
independent directors and/or additional members of senior
management, we may incur additional expenses related to director
compensation and/or premiums for directors' and officers'
liability insurance ("D&O Insurance"), the costs of which we cannot
estimate at this time. We may also incur additional
expenses associated with investor relations and similar functions, the
cost of which we also cannot estimate at this time. However,
these additional expenses individually, or in the aggregate, may also be
expected to be material.
In
addition,
being a public company could make it more difficult or more costly for
us to obtain certain types of insurance, including
D&O Insurance, and we may be forced to accept reduced policy limits
and coverage or incur substantially higher costs to obtain
the same or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified
persons to serve on our board of directors, our board committees or as
executive officers.
The
increased
costs associated with operating as a public company may decrease our
net income or increase our net loss, and may cause
us to reduce costs in other areas of our business or increase the prices
of our product to offset the effect of such increased
costs. Additionally, if these requirements divert our management's
attention from other business concerns, they could have
a material adverse effect on our business, financial condition and
results of operations.
Our
by-laws
provide for indemnification of our directors and the purchase of
D&O insurance at our expense and limit their potential
or actual liability which may result in a significant cost to us and
damage the interests of our shareholders.
The
Company's
By-Laws include provisions that eliminate the personal liability of the
directors of the Company for monetary
damages to the fullest extent possible under the laws of the State of
Delaware as well as other applicable laws. These provisions
eliminate the liability of directors to the Company and its shareholders
for monetary damages arising out of any violation of
a director of his fiduciary duty of due care. Under Delaware law,
however, such provisions do not eliminate the personal liability
of a director for: (i) breach of the director's duty of loyalty; (ii)
acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law; (iii) payment of dividends or
repurchases of stock other than from lawfully available
funds; or (iv) any transaction from which the director derived an
improper benefit. These provisions do not affect a director's
liabilities under the federal securities laws or the recovery of damages
by third parties.
Upon
dissolution of the Company, our stockholders may not recoup all or any portion of their investment.
In
the
event of a liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the proceeds and/or assets
of the Company remaining after giving effect to such transaction, and
the payment of all of our debts and liabilities will be
distributed to the holders of common stock on a pro rata basis. There
can be no assurance that we will have available assets to
pay to the holders of common stock, or any amounts, upon such a
liquidation, dissolution or winding-up of the Company. In this
event, our stockholders could lose some or all of their investment.
Risks
Related to our Agreements with Kodiak Capital
The
sale
of our common stock to Kodiak Capital may cause dilution, and the sale
of the shares of common stock acquired by Kodiak Capital,
or the perception that such sales may occur, could cause the price of
our common stock to fall. Similarly, the issuance of common
stock to Kodiak pursuant to the Note could cause the price of our common
stock to fall.
On
December
17, 2015, we entered into the Purchase Agreement with Kodiak Capital.
Pursuant the Purchase Agreement, Kodiak Capital
has committed to purchase up to an aggregate of $750,000 of our common
stock. The shares that may be sold pursuant to the Purchase
Agreement in the future may be sold by us to Kodiak Capital at our
discretion from time to time, commencing after the SEC has
declared effective the registration statement that includes this
prospectus and concluding on the one year anniversary thereof.
The per share purchase price for the shares that we may sell to Kodiak
Capital under the Purchase Agreement will fluctuate based
on the price of our common stock, and will be equal to 70% of the lowest
closing bid price of the common stock for the five consecutive
trading days immediately following our request for Kodiak Capital to
purchase the shares. Depending on market liquidity at the
time, sales of such shares may cause the trading price of our common
stock to fall.
We
generally
have the right to control the timing and amount of any sales of our
shares to Kodiak Capital, except that, pursuant
to the terms of the Purchase Agreement, we would be unable to sell
shares to Kodiak Capital if such purchase would result in its
beneficial ownership equaling more than 9.99% of the outstanding common
stock. Kodiak Capital may ultimately purchase all, some
or none of the shares of our common stock that may be sold pursuant to
the Purchase Agreement and, after it has acquired shares,
Kodiak Capital may sell all, some or none of those shares. Therefore,
sales to Kodiak Capital by us could result in substantial
dilution to the interests of other holders of our common stock.
Additionally, the sale of a substantial number of shares of our
common stock to Kodiak Capital, or the anticipation of such sales, could
make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might
otherwise wish to effect sales.
The
Note has a principal amount of $37,500 and matures on June 17, 2016. It is convertible into shares of common stock, anytime at
the holder's discretion, following the earlier of the maturity date or the effective date of the registration statement,
at a conversion price equal to 50% of the lowest daily volume weighted average price of the common stock for the 30 trading days
ending on the trading day immediately before the relevant conversion date. The conversion price of the Note will fluctuate based
on the price of our common stock and thus we cannot predict the number of shares that we will be required to issue to remain in
compliance with the terms of the Note. Therefore, issuance of conversion shares by us under the Note could result in substantial
dilution to the interests of other holders of our common stock.
Kodiak
Capital will pay less than the then-prevailing market price for our common stock for purchases under the Purchase Agreement.
The
common
stock to be issued to Kodiak Capital pursuant to the Purchase Agreement
will be purchased at a 30% discount to the lowest
closing bid price of the common stock for the five consecutive trading
days immediately following our request for Kodiak Capital
to purchase the shares. Kodiak Capital has a financial incentive to sell
our common stock immediately upon receiving the shares
to realize the profit equal to the difference between the discounted
price and the market price. If Kodiak Capital sells the shares,
the price of our common stock could decrease. If our stock price
decreases, Kodiak Capital may have a further incentive to sell
the shares of our common stock that it holds. These sales may have a
further impact on our stock price.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
Back to Table of Contents
None.
ITEM 2. DESCRIPTION OF PROPERTY
Back to Table of Contents
Our
principal executive office is located at 22 Shacham Street, P.O. Box 8324, Petach Tikva, 4918103, Israel. Our telephone number
in Israel is +972 (0)3-758-2657/9. Our executive office is a rented suite located in the Beit Dvir building. We pay $1,650 per
month for 461 square foot of office space to a related party. We believe that this space is adequate for our current and immediately foreseeable
operating needs.
ITEM 3. LEGAL PROCEEDING
Back to Table of Contents
From
time
to time, we may become involved in various lawsuits and legal
proceedings, which arise, in the ordinary course of business.
We are currently not aware of any legal proceedings or claims that we
believe will have a material adverse effect on our business,
financial condition or operating results.
ITEM 4. MINE SAFETY DISCLOSURES
Back to Table of Contents
Not Applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION
Back to Table of Contents
The
following
discussion and analysis provides information that we believe is
relevant to an assessment and understanding of our results
of operations and financial condition. You should read this analysis in
conjunction with our audited consolidated financial statements
and related notes. This discussion and analysis contains
statements of a forward-looking nature relating to future events or our
future financial performance. These statements are only
predictions, and actual events or results may differ materially. In
evaluating such statements, you should carefully consider
the various factors identified in this annual report, which could cause
actual results to differ materially from those expressed
in, or implied by, any forward-looking statements, including those set
forth in "Risk Factors" in this annual report.
See "Cautionary Note Regarding Forward-Looking Statements."
Plan
of Operations
We
are engaged in two distinct business sectors and we may require additional capital to implement our business plan and fund our
operations.
Our
two distinct business operations are:
(i)
research
and development of cannabis-based medical products for the treatment of
a variety of medical conditions such as multiple
myeloma, psoriasis, fibromyalgia, post-traumatic stress disorder (PTSD)
and migraine, and
(ii)
consulting services to companies and governmental agencies with respect to complex international medical cannabis protocols and
regulations.
We
have not yet commenced any significant activities related to our consulting services.
In
2008,
we acquired the patent for our Device and from 2008 until 2011, we
devoted our limited resources and efforts to the development
of our Device. During late 2011 and into 2012, we renewed our interest
in pursuing development of our Device and, subsequent to
our year ended December 31, 2012, we entered into an agreement with GUMI
to develop a Device prototype, which was successfully
completed. GUMI has completed the manufacture of several commercial
models of the Device that GUMI is presently devoting resources
to market under the terms of our agreement. We continue to be dependent
upon the ability of GUMI to successfully market our Device,
which process has started. However, we have not yet derived any revenues
from GUMI's on-going marketing efforts, which commenced
in late 2013 and concluded in 2015. The marketing efforts were not
successful in obtaining any customers for In February 2016
we signed a mutual release and cancellation agreement with GUMI
terminating our relationship.
Our
goal is to become a leader in the research and development of cannabis-based medical drugs and treatments. To achieve our goal,
we plan to focus our activities on the following areas:
Research
and Development
Our
research
and development is focused primarily on exploring several formulations
containing active compounds from the cannabis
plant, including (but not exclusive to) the cannabinoids CBD and THC,
and identifying potential therapeutic applications of the
synergistic effects of these active compounds. The synergistic
contributions of our formulations have not yet been scientifically
researched and demonstrated. We aim to standardize the formulations
across the extracts as a whole, not simply by reference to
their key active components (CBD and/or THC).
Although
there are existing reports and studies on CBD and THC, our formulations will contain several active compounds from the cannabis
plant, that must be fully researched and documented in order to verify its effectiveness to indications, at what doses and which
method of administration will be the most appropriate and effective.
One
World
Cannabis plans to produce pharmaceutical-grade cannabinoid-based
products and treatments, that will be standardized in composition,
formulation and dose, administered by means of an appropriate and
efficient delivery system, and tested in properly controlled
pre-clinical and clinical studies. OWC plans to conduct its researche,
led by internationally renowned investigators, at the facilities
of leading Israeli hospitals and scientific institutions. The Company
will adhere to legislation, rules and guidelines regarding
the investigations. Dr. Baruch, OWC's Director of Research and
Regulatory Affairs, and Alon Sinai, OWC's Chief Operating
Officer, will monitor the investigations and researches.
To
date,
OWC has signed three research collaboration and license agreements with
Sheba Academic Medical Center, Tel Hashomer, Israel
("Sheba"). Sheba is a university-affiliated hospital that serves as
Israel's national medical center and the
most comprehensive medical center in the Middle East. Within the
framework of the agreements with Sheba, OWC will initiate three
studies at the Sheba facilities to explore the effect of three
formulations, all based on active ingredients in the cannabis extracts,
on multiple myeloma, psoriasis and fibromyalgia (a specific formulation
to each indication).
In
addition,
OWC signed an R&D service agreement with G.C. Group Ltd., an Israeli
pharmaceutical R&D company, in April 2015,
to provide formulation development services for OWC's new delivery
system in the form of a cannabis soluble tablet. The
cannabis soluble tablet could provide physicians with the ability to
control and administrate optimal dosage, to replace the most
common usage/delivery method of medical cannabis today, which is not
acceptable by scientists and physicians, such as smoking,
edibles and oil extracts with no adequate means of dosage control. The
agreement was terminated on December 31, 2015.
The
Company
expects to start developing other delivery systems, designed for
different indications, during 2016.
The
Company
has recently signed a Memorandum of Understanding (MoU) with Emilia
Cosmetics Ltd., a large Israeli private label manufacturer,
for the development, manufacture and marketing of a cannabinoid-based
topical cream to treat psoriasis. The Company will initiate
the development of the topical cream by the end of the first quarter of
2016, at Emilia Cosmetics labs located in Yerucham, Israel.
After the completion of the formulation development, expected to be
during the second quarter of 2016, the Company will initiate
a phase I study at the Sheba facilities to explore the effect of topical
cream on psoriasis. However, we do not know if our expectations
will be fulfilled in a timely manner, if at all, or that the costs of
development will exceed our anticipation.
To
date,
One World Cannabis has filed eight provisional patents with the United
States Patent and Regulatory Office (USPTO), all
related to its line of activity related to cannabis-based medical
products. Assuming the successful completion of the clinical
trials, of which there can be no assurance, the Company believes that it
will be able to retain the intellectual rights and secure
patent protections.
While
we
retain full ownership on our intellectual property rights that we
conceived prior to the signing of the research collaboration
and license agreements with Sheba Academic Medical Center, the psoriasis
and fibromyalgia agreements with Sheba provide that all
intellectual property rights that is conceived during the course of the
research is to be jointly owned by Sheba and One World
Cannabis.
Pursuant
to
the collaboration agreements, we expect to pay Sheba $330,000 for
conducting the multiple myeloma trial between the 3rd quarter
of 2015 and the second quarter of 2016. In addition, we expect to
commence pre-clinical studies on fibromyalgia and psoriasis
during the first quarter of 2016. Pursuant to the collaboration
agreements, we are obliged to pay Sheba $300,000 throughout 2016
for conducting the psoriasis research, and $100,000 for the fibromyalgia
research during the two years of the study. We currently
have the financial resources to fund our obligations under these
agreements, but anticipate that we will require additional funding
during the next 12 months for our continuing and planned expanded
operations.
Research
and Development Status
The
following table summarizes the stages of development for each of our current Product Prospects.
Target
Indication
|
|
Collaborator
|
|
Status
|
|
|
|
|
|
|
Multiple
Myeloma
|
|
Sheba
|
|
●
|
Entered
into a research agreement for in vitro studies
|
|
|
Academic
|
|
●
|
Negotiating
terms of a research agreement for in vivo studies
|
|
|
Medical
Center
|
|
●
|
Completed
one in vitro study
|
|
|
|
|
●
|
Proceeding
with further pre-clinical in vitro studies (safety and toxicity, pharmacokinetic, and pharmacodynamic)
|
|
|
|
|
●
|
Submitted
a clinical trial protocol to the Israeli Institutional Review Board and received its approval to commence a clinical study
|
|
|
|
|
●
|
Intend
to commence a clinical study in the first quarter of 2016
|
|
|
|
|
●
|
Drafted
a clinical trial protocol synopsis, which we believe will assist us
in preparing an application for orphan status designation
|
|
|
|
|
|
|
|
|
|
|
●
|
Entered
into a Research Collaboration and License Agreement but have not commenced any studies to date
|
Psoriasis
|
|
Sheba
Academic
Medical Center
|
|
●
|
Drafted
a protocol of a Phase I, double blind, randomized, placebo
controlled, multiple escalating dose study to determine the safety,
tolerability and pharmacokinetic profile of medical grade cannabis
in healthy volunteers
|
|
|
|
|
|
|
|
|
|
|
●
|
Entered
into a nonbinding memorandum of understanding for the development, manufacture and marketing of a cannabinoid-based topical
cream
|
Psoriasis
|
|
Emilia
Cosmetics Ltd.
|
|
●
|
Intend
to enter into a binding agreement in the first quarter of 2016
|
|
|
|
|
●
|
Intend
to initiate development of the topical cream in the first quarter of 2016
|
|
|
|
|
|
|
|
|
|
|
●
|
Entered
into a research agreement for in vitro studies
|
Fibromyalgia
|
|
Sheba
Academic
Medical Center
|
|
●
|
Drafted
a clinical trial protocol synopsis, which we believe will assist us
in preparing an application for orphan status designation
|
|
|
|
|
|
|
New
delivery system - cannabis soluble tablet
|
|
G.C.
Group
Ltd.
|
|
●
|
Completed
a proof of concept (the R=Research phase) of the desired end product (the soluble tablet) to test the fabric, durability,
solidification and other features of the cannabis soluble tablet.
|
OWC's
Investigation on Multiple Myeloma
Dr.
Merav
Leiba, Head of Multiple Myeloma Outpatient Clinic and Multiple Myeloma
Research Lab at Sheba's Hematology Institute,
led the in vitro tests on multiple myeloma. Dr. Leiba, a specialist in
Internal Medicine and Hematology, was a postdoctoral fellow
at the Jerome Lipper Multiple Myeloma Center at Dana Farber Cancer
Institute, Boston, Massachusetts (2006-2008). Dr. Leiba has
participated in numerous clinical and investigational studies aimed at
developing novel drugs for multiple myeloma.
Our
in
vitro tests results on multiple myeloma cells studied outside their
normal biological context, on which we announced on June
17, 2015, led us to proceed with further pre-clinical study (safety and
toxicity, PK, PD) of our formulation, to find out whether
it has scientific merit for further development as an investigational
new drug. While we are encouraged by the results of the
limited in vitro tests, there can be no assurance that any clinical
trial will result in commercially viable products or treatments.
Clinical
trials
are expensive, time consuming and difficult to design and implement.
We, as well as the regulatory authorities in Israel
and elsewhere, such as an IRB (Helsinki committee), IMCU - Israel
Medical Cannabis Unit, or the FDA, may suspend, delay or terminate
our clinical trials at any time, may require us, for various reasons, to
conduct additional clinical trials, or may require a
particular clinical trial to continue for a longer duration than
originally planned, including, among others:
●
lack
of effectiveness of any formulation or delivery system during clinical trials;
●
discovery of serious or unexpected toxicities or side effects experienced by trial participants or other safety issues;
●
slower than expected rates of subject recruitment and enrollment rates in clinical trials;
●
delays
or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials due to regulatory and
manufacturing constraints;
●
delays in obtaining regulatory authorization to commence a trial, including IRB approvals, licenses required for obtaining and
using cannabis for research, either before or after a trial is commenced;
●
unfavorable results from ongoing pre-clinical studies and clinical trials.
●
patients or investigators failing to comply with study protocols;
●
patients
failing to return for post-treatment follow-up at the expected rate;
●
sites
participating in an ongoing clinical study withdraw, requiring us to engage new sites;
●
third-party
clinical
investigators decline to participate in our clinical studies, do not
perform the clinical studies on the anticipated
schedule, or act in ways inconsistent with the established investigator
agreement, clinical study protocol, good clinical practices,
and other Institutional Review Board requirements;
●
third-party entities do not perform data collection and analysis in a timely or accurate manner or at all;
●
regulatory
inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies;
Any
of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Consulting
Services
OWCP
believes
that the complexity of the medical cannabis programs has created a
demand for consulting and advisory services in different
aspects of the medical cannabis industry. The Company's services are
designed to help government officials, policy-makers
and regulatory agencies develop and implement tailor-made comprehensive
medical cannabis programs. In addition, One World Cannabis
offers medical cannabis regulatory compliance services and patient-care
consultancy services.
Our
initial activities to secure consulting contracts will be in member states of the European Union and states of the United States
that allow for public medical cannabis programs.
OWC
management has the expertise in designing training programs for physicians, caregivers, and researches that are essential to the
establishment of a successful, patient-focused medical cannabis program. By working with policy-makers, government officials,
public agencies, and privately owned businesses, we believe we can also raise the public's awareness of the benefits of
cannabis-based treatments and products.
In
furtherance
of our plans, we may, in the future, consider strategic acquisitions
and joint ventures as well as other projects
to grow our business activities including but not limited to: product
licensing and royalty agreements, consulting, and strategic
alliances to support our Product Prospect development. However, there
can be no assurance that this strategy will be successful
in generating any revenues or growing out business.
Results
of Operations during the year ended December 31, 2015 as compared to the year ended
December 31, 2014
We
have not generated any revenue during the years ended December 31, 2015 and 2014. We have operating expenses related to
general and administrative expenses and research and development expenses. During the
year ended December 31, 2015, we
incurred a net loss of $1,654,988 due to general and administrative expenses of $1,380,029, research and development expenses of
$271,394, interest expenses of $491 and expenses due to amortization of debt
discount of $3,074 as compared to
a net loss of $5,070,673 due to general and administrative expenses of
$4,873,223, research and development expenses of $160,325, interest expenses of
$3,185, interest income of $94 and amortization of debt discount of $34,034.
Our
general
and administrative expenses decreased by $3,493,194 or 72% during the year
ended December 31, 2015 as compared
to the same period in the prior year due to a significant decrease in
non-cash compensation expense. During the year
ended December 31, 2015, our research and
development expenses increased by $111,069 or 69% as compared to the same
period in the prior year.
Liquidity
and Capital Resources
On December 31, 2015, we had current assets of $407,549 consisting of $357,161
in cash, other receivables of $11,797 and prepaid assets of $38,591. We had
property and equipment, net of accumulated depreciation of $11,863,
valued at $22,899
as of December 31, 2015. We had total assets of $430,448 as of
December 31, 2015. We had total assets of $1,522,812 as of December 31, 2014,
consisting of $1,469,267 in cash, $24,091 in other assets
and equipment, net of accumulated depreciation of $2,940, valued at $29,454.
On
December 31, 2015, we had $107,626 in current liabilities consisting of $28,125
in accounts payable, $24,607 in accrued expenses, advances and accounts payables
to related parties of $1,820, customer deposits of $50,000 and convertible notes
payable of $3,074.
On December 31, 2014, we had total liabilities of $60,304 consisting of
$16,523 in accounts payable, $43,643 in accrued expenses
and $138 in advances and accounts payable to related parties.
We
had positive working capital of $299,923 at December 31, 2015 and $1,433,054 at December 31, 2014. Our accumulated deficits as
of December 31, 2015 and December 31, 2014 were $7,548,866 and $5,893,878, respectively.
We
used
$1,216,130 in our operating activities during the year ended December 31, 2015, which was due to a net loss of $1,654,988
offset by amortization of debt discount expenses of $3,074, depreciation expenses of $9,123, shares issued for services
valued at $360,370, warrants issued for services valued
at $10,839, an increase in accounts receivable of $11,797, a decrease in prepaid
expenses of $23,000, a decrease in
accounts payable to a related party of $1,682, an increase
in accounts payable of $11,604, in increase in customer deposits of $50,000 and a
decrease in accrued expenses of
$19,037.
We used $602,404 in our operating activities during the year 2014, which was due to a net loss of $5,070,673 offset by increases in amortization of debt discount of $34,034,
depreciation expenses of $2,740, non-cash compensation expenses valued at $567,716, warrants issued for services
valued at $3,857,136, increase in accounts payable to related party of $138, increase in accounts payable of $16,519, increase of accrued expenses of
$14,076 and decrease in other current assets of $24,090.
We
used
$2,569 during the year ended December 31, 2015 and $32,194
during the same period in the prior year to purchase property
and equipment.
Our
financing
activities during the year ended December 31, 2015 provided us
with $124,000 from the issuance of 1,416,667
shares of common stock. We financed our negative cash flow from
operations during the year ended December 31, 2014 through
proceeds from issuance of common stock of $2,066,476, capital contribution
through debt forgiveness valued at $28,436 and proceeds of
debt borrowings of $14,500 offset by $14,500 in debt payments.
Based
upon
our cash position of $357,161 at December 31, 2015, we believe that we
may need to raise additional capital, either equity
or debt during the first half of
fiscal year 2016 in order to fund our plan of operations
including our research and development initiatives for the next twelve
months. There can be no assurance, however, that additional
capital will be sufficient to fund our currently anticipated expenditure
requirements for the next twelve-month period nor can
there be any assurance that financing will be available at satisfactory
terms and conditions or at all, for that matter.
Our
auditors
have issued an opinion on our financial statements which includes a
statement describing our going concern status. This
means that there is substantial doubt that we can continue as an
on-going business for the next twelve months unless we obtain
additional capital to pay our bills and meet our other financial
obligations. This is because we have not generated any revenues
and no revenues are anticipated until we begin marketing the product.
Accordingly, we must raise capital from sources other than
the actual sale of the product. We must raise capital to implement our
project and stay in business. Even if we raise the maximum
amount of money in this offering, we do not know how long the money will
last, however, we do believe it will last at least twelve
months.
Our
lack
of operating history may make it difficult to raise capital. Our
inability to borrow funds or raise equity capital to facilitate
our business plan may have a material adverse effect on our financial
condition and future prospects.
Funding
of Our Research Programs
On
October
22, 2014, we have entered into a collaboration agreement with Sheba
Academic Medical Center, a hospital in Tel-Aviv, Israel,
relating to the use of cannabis to treat Myeloma. Within the framework
of this collaboration agreement, the Company currently
conducts pre-clinical studies on multiple myeloma, which have commenced
in April 2015 and we expect to commence pre-clinical studies
on fibromyalgia in the first quarter of 2016. Pursuant to the agreement,
we are obligated to pay Sheba $330,000 between the third
quarter of 2015 and second quarter of 2016.
We
are obligated to provide $300,000 in funding in the second quarter of 2016 related to the Psoriasis research conducted at Sheba.
We have funding obligations of $100,000 related to the Fibromyalgia research due during two years of the studies.
Our
expenditures allocated to our corporate activities conducted through our facilities in Petach Tikva were $1,200,000 for
the year ended December 31, 2015 and we expect will be $900,000 for the year ended December 31, 2016.
At
present, we use our available working capital to fund these studies. However, we will need to raise additional funding prior to
or if clinical studies are to commence.
Off-Balance
Sheet Arrangements
As
of
December 31, 2015 and 2014, 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
As
of December 31, 2015 and 2014, we did not have any contractual obligations.
Critical
Accounting Policies
Our
significant accounting policies are described in the notes to our financial statements for the years ended December 31, 2015 and
2014, and are included elsewhere in this annual report.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Back to Table of Contents
We have not entered
into, and do not expect to enter into, financial instruments for trading or hedging
purposes.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Back to Table of Contents
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Back to
Table of Contents
To the Board of Directors
OWC Pharmaceutical Research Corp.
Petach Tikva, Israel
We have audited the accompanying consolidated balance sheets of OWC Pharmaceutical
Research Corp. (the
"Company") as of December 31, 2015 and 2014 and the related
consolidated statements of
operations, consolidated statements of comprehensive loss, consolidated
statement of changes in stockholders equity (deficit) and consolidated
statements of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of OWC Pharmaceutical Research Corp. as of December 31,
2015 and 2014 and the results of its operations and cash flows for the periods described above in
conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 7 to the financial statements, the
Company suffered a net loss from operations and has no source of revenue, which raises
substantial doubt about its ability to continue as a going concern. Managements
plans regarding those matters are also described in Note 7. The financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
March 31, 2015
OWC Pharmaceutical Research Corp.
|
Consolidated Balance Sheets
|
At
December 31, 2015 and 2014
|
Back to
Table of Contents
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31,
2014
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
$
|
357,161
|
$
|
1,469,267
|
Other receivables
|
|
11,797
|
|
-
|
Prepaid expenses
|
|
38,591
|
|
24,091
|
Total current assets
|
|
407,549
|
|
1,493,358
|
|
|
|
|
|
Property and equipment, net
|
|
22,899
|
|
29,454
|
|
|
|
|
|
Total Assets
|
$
|
430,448
|
$
|
1,522,812
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts
payable - trade
|
$
|
28,125
|
$
|
16,523
|
Accrued
expenses
|
|
24,607
|
|
43,643
|
Advances
and accounts payable to
related parties
|
|
1,820
|
|
138
|
Customer
deposit
|
|
50,000
|
|
-
|
Convertible notes payable, net of discount
|
|
3,074
|
|
-
|
Total current liabilities
|
|
107,626
|
|
60,304
|
|
|
|
|
|
Total liabilities
|
|
107,626
|
|
60,304
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
|
|
|
Preferred stock,
$0.00001 par value; 20,000,000 shares authorized; no shares issued and outstanding
|
|
-
|
|
-
|
Common stock,
$0.00001 par value; 500,000,000 shares authorized; and
|
|
|
|
|
81,460,875 and 78,429,241 issued and outstanding at December 31, 2015 and 2014,
respectively
|
|
815
|
|
784
|
Additional paid in
capital
|
|
8,533,525
|
|
8,000,847
|
Common stock subscription receivable
|
|
(651,730)
|
|
(651,730)
|
Accumulated
deficit
|
|
(7,548,866)
|
|
(5,893,878)
|
Accumulated
other comprehensive income
|
|
(10,922)
|
|
6,485
|
Total
stockholders' equity
|
|
322,822
|
|
1,462,508
|
Total Liabilities and Stockholders' equity (deficit)
|
$
|
430,448
|
$
|
1,522,812
|
|
The
accompanying notes to the consolidated financial statements are an integral part of these financial
statements.
|
OWC Pharmaceutical Research Corp.
|
Consolidated Statements of Operations
|
For
the Years Ended December 31, 2015 and 2014
|
Back to
Table of Contents
|
|
|
For the year ended
|
|
For the year ended
|
|
|
December 31, 2015
|
|
December 31, 2014
|
|
|
|
|
|
Revenues
|
$
|
-
|
$
|
-
|
|
|
|
|
|
Expenses:
|
|
|
|
|
General and administrative
|
|
1,380,029
|
|
4,873,223
|
Research and development
|
|
271,394
|
|
160,325
|
Loss from operations
|
|
(1,651,423)
|
|
(5,033,548)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
Interest expense
|
|
(491)
|
|
(3,185)
|
Interest income
|
|
-
|
|
94
|
Amortization of debt discount
|
|
(3,074)
|
|
(34,034)
|
Total other (expense)
|
|
(3,565)
|
|
(37,125)
|
Total costs and expenses
|
|
(1,654,988)
|
|
(5,070,673)
|
|
|
|
|
|
Net loss before income taxes
|
|
(1,654,988)
|
|
(5,070,673)
|
Income tax
|
|
-
|
|
-
|
|
|
|
|
|
Net loss
|
$
|
(1,654,988)
|
$
|
(5,070,673)
|
|
|
|
|
|
Basic and diluted per share amounts:
|
|
|
|
|
Basic and diluted net
loss
|
$
|
(0.02)
|
$
|
(0.10)
|
|
|
|
|
|
Weighted average shares outstanding (basic and diluted)
|
|
80,591,237
|
|
52,209,962
|
|
The accompanying notes to the
consolidated financial statements are an integral part of these financial
statements.
|
OWC Pharmaceutical Research Corp.
|
Consolidated Statements Comprehensive Loss
|
For
the Years Ended December 31, 2015 and 2014
|
Back to
Table of Contents
|
|
|
|
|
|
|
|
For the year ended
|
|
For the year ended
|
|
|
December 31, 2015
|
|
December 31, 2014
|
|
|
|
|
|
Net loss
|
$
|
(1,654,988)
|
$
|
(5,070,673)
|
|
|
|
|
|
Other comprehensive income
(loss) adjustments, net of tax:
|
|
|
|
|
Foreign currency translation adjustments
|
|
(17,407)
|
|
6,485
|
Total other comprehensive income
(loss) adjustments
, net of tax
|
|
(17,407)
|
|
6,485
|
|
|
|
|
|
Total comprehensive loss, net of tax
|
$
|
(1,672,395)
|
$
|
(5,064,188)
|
|
The
accompanying notes to the consolidated financial statements are an integral part of these financial
statements.
|
OWC Pharmaceutical Research Corp.
|
Consolidated Statement
of Changes in Stockholders' Equity (Deficit)
|
For the Years Ended December 31, 2015 and
2014
|
Back to
Table of Contents
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Total
|
|
Common
|
|
Additional
|
|
Subscription
|
|
Accumulated
|
|
Other
|
|
Stockholders'
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Receivable
|
|
Deficit
|
|
Comprehensive
|
|
Deficit
|
Balance at
December 31, 2013
|
21,641,450
|
$
|
217
|
$
|
697,278
|
$
|
-
|
$
|
(823,205)
|
$
|
-
|
$
|
(125,710)
|
Warrants
issued for services
|
-
|
|
-
|
|
3,857,136
|
|
-
|
|
-
|
|
-
|
|
3,857,136
|
Stock issued upon conversion of debt and accrued interest
|
13,263,300
|
|
133
|
|
132,509
|
|
-
|
|
-
|
|
-
|
|
132,642
|
Forgiveness of indebtedness to former related party
|
-
|
|
-
|
|
28,436
|
|
-
|
|
-
|
|
-
|
|
28,436
|
Stock issued for services
|
6,995,416
|
|
70
|
|
567,647
|
|
-
|
|
-
|
|
-
|
|
567,716
|
Stock issued for cash at $0.005
|
4,700,000
|
|
47
|
|
23,453
|
|
-
|
|
-
|
|
-
|
|
23,500
|
Stock issued for cash at $0.05
|
13,034,585
|
|
130
|
|
651,600
|
|
(651,730)
|
|
-
|
|
-
|
|
-
|
Stock issued for cash at $0.09
|
12,936,662
|
|
129
|
|
1,164,171
|
|
-
|
|
-
|
|
-
|
|
1,164,300
|
Stock issued for cash at $0.15
|
5,857,828
|
|
59
|
|
878,617
|
|
-
|
|
-
|
|
-
|
|
878,676
|
Foreign currency translation adjustments
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
6,485
|
|
6,485
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(5,070,673)
|
|
-
|
|
(5,070,673)
|
Balance at December 31, 2014
|
78,429,241
|
$
|
784
|
$
|
8,000,847
|
$
|
(651,730)
|
$
|
(5,893,878)
|
$
|
6,485
|
$
|
1,462,508
|
Warrants
issued for services
|
-
|
|
-
|
|
10,839
|
|
-
|
|
-
|
|
-
|
|
10,839
|
Stock issued for services
|
1,614,935
|
|
17
|
|
360,353
|
|
-
|
|
-
|
|
-
|
|
360,370
|
Stock issued for cash at $0.05
|
800,000
|
|
8
|
|
39,992
|
|
-
|
|
-
|
|
-
|
|
40,000
|
Stock issued for cash at $0.15
|
333,333
|
|
3
|
|
49,997
|
|
-
|
|
-
|
|
-
|
|
50,000
|
Stock issued for cash at $0.12
|
283,334
|
|
3
|
|
33,997
|
|
-
|
|
-
|
|
-
|
|
34,000
|
Beneficial conversion feature
|
-
|
|
-
|
|
37,500
|
|
-
|
|
-
|
|
-
|
|
37,500
|
Foreign currency translation
adjustments
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(17,407)
|
|
(17,407)
|
Net loss
|
-
|
|
-
|
|
-
|
|
-
|
|
(1,654,988)
|
|
-
|
|
(1,654,988)
|
Balance
at December 31, 2015
|
81,460,843
|
$
|
815
|
$
|
8,533,525
|
$
|
(651,730)
|
$
|
(7,548,866)
|
$
|
(10,922)
|
$
|
322,822
|
|
The accompanying notes to the consolidated financial statements are integral part of these
financial statements.
|
OWC Pharmaceutical Research Corp.
|
Consolidated Statements of Cash Flows
|
For the Years Ended December 31, 2015 and 2014
|
Back to
Table of Contents
|
|
|
|
|
|
|
|
For the year
ended
|
|
For the year
ended
|
|
|
December 31, 2015
|
|
December 31, 2014
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net loss
|
$
|
(1,654,988)
|
$
|
(5,070,673)
|
Adjustments to reconcile
net loss to net cash used in operating activities:
|
|
|
|
|
Amortization
of debt discount
|
|
3,074
|
|
34,034
|
Depreciation expense
|
|
9,123
|
|
2,740
|
Common stock
issued for services
|
|
360,370
|
|
567,716
|
Warrants
issued for services
|
|
10,839
|
|
3,857,136
|
Changes in net assets and
liabilities:
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
(11,797)
|
|
-
|
(Increase) decrease in prepaid expenses
|
|
23,000
|
|
(24,090)
|
Increase (decrease) a
ccounts payable - related party
|
|
1,682
|
|
138
|
Increase (decrease) in accounts payable
|
|
11,604
|
|
16,519
|
Increase (decrease) in customer deposit
|
|
50,000
|
|
-
|
Increase
(decrease) in accrued expenses
|
|
(19,037)
|
|
14,076
|
Cash used in operating
activities
|
|
(1,216,130)
|
|
(602,404)
|
|
|
|
|
|
Cash flow from
investing activities:
|
|
|
|
|
Purchase of equipment
|
|
(2,569)
|
|
(32,194)
|
Cash used
in investing activities
|
|
(2,569)
|
|
(32,194)
|
|
|
|
|
|
Cash flow from
financing activities:
|
|
|
|
|
Contributed capital - debt forgiven
|
|
-
|
|
28,436
|
Proceeds
from issuance of common stock
|
|
124,000
|
|
2,066,476
|
Proceeds of
debt borrowings
|
|
-
|
|
14,500
|
Principal payments
|
|
-
|
|
(14,500)
|
Cash provided by
financing activities
|
|
124,000
|
|
2,094,912
|
|
|
|
|
|
Foreign currency translations
|
|
(17,407)
|
|
6,485
|
|
|
|
|
|
Change in cash
|
|
(1,112,106)
|
|
1,466,798
|
Cash - beginning of
period
|
|
1,469,267
|
|
2,469
|
Cash - end of period
|
$
|
357,161
|
$
|
1,469,267
|
|
|
|
|
|
Supplement cash flow
information:
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
Beneficial conversion feature
|
$
|
37,500
|
$
|
-
|
Convertible note issued for issuance fees
|
$
|
37,500
|
$
|
-
|
Debt and
accrued interest converted into equity
|
$
|
-
|
$
|
132,642
|
|
|
|
|
|
The
accompanying notes to the consolidated financial statements are an integral part of these financial
statements.
|
OWC Pharmaceutical Research Corp.
Notes to
Consolidated Financial Statements
December 31, 2015
Back to
Table of Contents
Note 1. The Company and Significant Accounting Policies
Organizational Background:
OWC Pharmaceutical
Research Corp. ("OWCP" or the "Company") is a Delaware corporation and was
incorporated under the laws of the State of Delaware on March 7, 2008. The
Company is engaged in research and development of Cannabis-based medical
products for the treatment of a variety of medical conditions and/or
diseases such as multiple myeloma, psoriasis, PTSD, migraines and a unique
delivery system.
The accompanying financial statements of OWCP were prepared
from the accounts of the Company under the accrual basis of accounting.
Certain amounts in the financial statements have been reclassified to
conform to the current presentation. The reclassifications had no effect on
the reported net loss.
Basis of Presentation:
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a going
concern. The Company has not established any source of revenue to cover its
operating costs, and as such, has incurred an operating loss since
inception. These and other factors raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
Principles of Consolidation:
he financial statements include the accounts of OWC
Pharmaceutical Research Corp. and its wholly owned subsidiary One World
Cannabis, Inc. (OWC). All significant inter-company balances and
transactions have been eliminated.
Significant Accounting Policies
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statement and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from the estimates.
Cash and Cash Equivalents:
For financial statement presentation purposes, the Company
considers those short-term, highly liquid investments with original
maturities of three months or less to be cash or cash equivalents. There
were no cash equivalents at December 31, 2015 and December 31, 2014.
Property and Equipment:
New property and equipment are recorded at cost. Property
and equipment included in the bankruptcy proceedings and transferred to the
Trustee had been valued at liquidation value. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally 5 years. Expenditures for renewals and betterments are
capitalized. Expenditures for minor items, repairs and maintenance are
charged to operations as incurred. Gain or loss upon sale or retirement due
to obsolescence is reflected in the operating results in the period the
event takes place.
Valuation of Long-Lived Assets:
We review the recoverability of our long-lived assets
including equipment, goodwill and other intangible assets, when events or
changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is based
on our ability to recover the carrying value of the asset from the expected
future pre-tax cash flows (undiscounted and without interest charges) of the
related operations. If these cash flows are less than the carrying value of
such asset, an impairment loss is recognized for the difference between
estimated fair value and carrying value. Our primary measure of fair value
is based on discounted cash flows. The measurement of impairment requires
management to make estimates of these cash flows related to long-lived
assets, as well as other fair value determinations.
Foreign Currency:
Non-U.S. entity operations are recorded in the functional
currency of each entity. Results of operations for non-U.S. dollar
functional currency entities are translated into U.S. dollars using average
currency rates. Assets and liabilities are translated using currency rates
at period end. Foreign currency translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) within stockholders' equity.
Stock Based Compensation:
Stock-based awards are accounted for using the fair value
method in accordance with ASC 718, Share-Based Payments. Our primary type of
share-based compensation consists of stock options. We use the Black-Scholes
option pricing model in valuing options. The inputs for the valuation
analysis of the options include the market value of the Company's common
stock, the estimated volatility of the Company's common stock, the exercise
price of the warrants and the risk free interest rate.
Accounting For Obligations And Instruments Potentially To
Be Settled In The Company's Own Stock:
We account for obligations and instruments potentially to be
settled in the Company's stock in accordance with FASB ASC 815, Accounting
for Derivative Financial Instruments. This issue addresses the initial
balance sheet classification and measurement of contracts that are indexed
to, and potentially settled in, the Company's own stock.
Fair Value of Financial Instruments:
FASB ASC 825, "Financial Instruments," requires entities to
disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for which it
is practicable to estimate fair value. FASB ASC 825 defines fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. At December 31,
2015 and December 31, 2014, the carrying value of certain financial
instruments (cash and cash equivalents, accounts payable and accrued
expenses.) approximates fair value due to the short-term nature of the
instruments or interest rates, which are comparable with current rates.
Fair Value Measurements:
The Company measures fair value under a framework that
utilizes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of inputs which
prioritize the inputs used in measuring fair value are:
Level 1: Inputs to the valuation methodology are unadjusted
quoted prices for identical assets or liabilities in active markets that the
Company has the ability to access.
Level 2: Inputs to the valuation
methodology include:
- Quoted prices for similar assets or liabilities in
active markets;
- Quoted prices for identical or similar assets or
liabilities in inactive markets;
- Inputs other than quoted prices that
are observable for the asset or liability;
- Inputs that are derived
principally from or corroborated by observable market data by correlation or
other means.
If the asset or liability has a specified (contractual)
term, the level 2 input must be observable for substantially the full term
of the asset or liability.
Level 3: Inputs to the valuation methodology
are unobservable and significant to the fair value measurement.
The assets or liability's fair value measurement level
within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. Valuation techniques used
need to maximize the use of observable inputs and minimize the use of
unobservable inputs. The following table presents assets and liabilities that were measured
and recognize at fair value on December 31, 2015 and December 31, 2014 and
the year then ended on a recurring basis:
Fair Value Measurements at December 31, 2015
|
|
|
|
|
Quoted Prices
in Active
|
|
Significant
Other
|
|
Significant
|
|
|
|
|
Markets for
Identical Assets
|
|
Observable
Inputs
|
|
Unobservable
Inputs
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
None
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Total
assets and liabilities at fair value
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Fair Value Measurements at December 31, 2014
|
|
|
|
|
Quoted Prices
in Active
|
|
Significant
Other
|
|
Significant
|
|
|
|
|
Markets for
Identical Assets
|
|
Observable
Inputs
|
|
Unobservable
Inputs
|
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
None
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
Total
assets and liabilities at fair value
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
When the Company changes its valuation inputs for measuring
financial assets and liabilities at fair value, either due to changes in
current market conditions or other factors, it may need to transfer those
assets or liabilities to another level in the hierarchy based on the new
inputs used. The Company recognizes these transfers at the end of the
reporting period that the transfers occur. For the fiscal periods ended
December 31, 2015 and December 31, 2014, there were no significant transfers
of financial assets or financial liabilities between the hierarchy levels.
Earnings per Common Share:
We compute net income (loss)
per share in accordance with ASC 260, Earning per Share. ASC 260 requires
presentation of both basic and diluted earnings per share (EPS) on the face
of the income statement. Basic EPS is computed by dividing net income (loss)
available to common shareholders (numerator) by the weighted average number
of shares outstanding (denominator) during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period
using the treasury stock method and convertible preferred stock using the
if-converted method. In computing Diluted EPS, the average stock price for
the period is used in determining the number of shares assumed to be
purchased from the exercise of stock options or warrants. Diluted EPS
excludes all dilutive potential shares if their effect is anti-dilutive.
Income Taxes:
We have adopted ASC 740, Accounting for Income Taxes.
Pursuant to ASC 740, we are required to compute tax asset benefits for net
operating losses carried forward. The potential benefits of net operating
losses have not been recognized in these financial statements because the
Company cannot be assured it is more likely than not it will utilize the net
operating losses carried forward in future years.
We must make certain
estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation
of certain tax assets and liabilities, which arise from differences in the
timing of recognition of revenue and expense for tax and financial statement
purposes.
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and the tax basis of assets and
liabilities using the tax rates and laws in effect when the differences are
expected to reverse. ASC 740 provides for the recognition of deferred tax
assets if realization of such assets is more likely than not to occur.
Realization of our net deferred tax assets is dependent upon our generating
sufficient taxable income in future years in appropriate tax jurisdictions
to realize benefit from the reversal of temporary differences and from net
operating loss, or NOL, carryforwards. We have determined it more likely
than not that these timing differences will not materialize and have
provided a valuation allowance against substantially all of our net deferred
tax asset.
Management will continue to evaluate the realizability of the
deferred tax asset and its related valuation allowance. If our assessment of
the deferred tax assets or the corresponding valuation allowance were to
change, we would record the related adjustment to income during the period
in which we make the determination. Our tax rate may also vary based on our
results and the mix of income or loss in domestic and foreign tax
jurisdictions in which we operate.
In addition, the calculation of our
tax liabilities involves dealing with uncertainties in the application of
complex tax regulations. We recognize liabilities for anticipated tax audit
issues in the U.S. and other tax jurisdictions based on our estimate of
whether, and to the extent to which, additional taxes will be due. If we
ultimately determine that payment of these amounts is unnecessary, we will
reverse the liability and recognize a tax benefit during the period in which
we determine that the liability is no longer necessary. We will record an
additional charge in our provision for taxes in the period in which we
determine that the recorded tax liability is less than we expect the
ultimate assessment to be.
ASC 740 which requires recognition of
estimated income taxes payable or refundable on income tax returns for the
current year and for the estimated future tax effect attributable to
temporary differences and carry-forwards. Measurement of deferred income tax
is based on enacted tax laws including tax rates, with the measurement of
deferred income tax assets being reduced by available tax benefits not
expected to be realized.
Uncertain Tax Positions:
When tax returns are
filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. In accordance with the guidance
of FASB ASC 740-10, Accounting for Uncertain Income Tax Positions, the
benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes it
is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken
that exceeds the amount measured as described above should be reflected as a
liability for unrecognized tax benefits in the accompanying consolidated
balance sheets along with any associated interest and penalties that would
be payable to the taxing authorities upon examination.
Our federal and
state income tax returns are open for fiscal years ending on or after
December 31, 2010. We are not under examination by any jurisdiction for any
tax year. At December 31, 2015 we had no material unrecognized tax benefits
and no adjustments to liabilities or operations were required under FASB ASC
740-10.
Recent Accounting Pronouncements
In April 2015, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards Update
("ASU") 2015-03, "Interest-Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires
that debt issuance costs related to a recognized debt liability be presented
in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. Currently, debt issuance
costs are recognized as deferred charges and recorded as other assets. The
guidance is effective for annual and interim periods beginning after
December 15, 2015 with early adoption permitted and is to be implemented
retrospectively. Adoption of the new guidance will only affect the
presentation of the Company's consolidated balance sheets and will have no
impact to our financial statements.
Management does not anticipate that
the adoption of these standards will have a material impact on the financial
statements.
The preparation of these financial statements in conformity
with accounting principles generally accepted in the United States requires
us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related intangible assets, income taxes,
insurance obligations and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other resources. Actual
results may differ from these estimates under different assumptions or
conditions.
2. Stockholders' Equity
Common Stock Issuance in 2015:
1,416,667 Shares of Common Stock Issued for Cash
In connection with a private placement of 10,000,000 shares of common stock in
February of 2015 we sold 800,000 shares to one investor for the offering price
of $0.05 per share that resulted in total proceeds of $40,000. During 2015, we
also received $50,000 through a placement of common stock units. Those units
were sold at $0.15 per unit. Each unit consisted of one share of common stock
and one warrant to purchase common stock. We are obligated to issue 333,333
shares to one investor of this offering. The $50,000 received through the unit
offering is carried as subscription payable in stockholders' equity at June 30,
2015. The related warrants are exercisable at $0.25 and expire on December 31,
2016. The relative fair value of the attached to the common stock component is
$26,416 and the relative fair value of the warrants is $23,584 as of the grant
date.
During the period ended June 30, 2015, the Company cancelled 500,000 shares
of common stock previously issued for services.
During 2015, we received $34,000 through a placement of 283,334 shares of
common stock (during the third quarter 200,000 shares and during the fourth
quarter 83,334 shares). The shares were sold in units at $0.24 per unit
($0.12 per share). Each unit consisted of two shares of common stock and two
warrants to purchase common stock. 141,6367 warrants are exercisable at
$0.12 and expire 12 months from the date of issuance while the other 141,667
warrants are exercisable at $0.25 and expire 24 months from the date of
issuance. The relative fair value of the attached to the common stock
component is $18,672 and the relative fair value of the warrants is $15,328
as of the grant date.
1,614,935 Shares of Common Stock Issued for Services
During the year ended December 31, 2015 we issued 1,614,935 shares of our
common stock to unrelated parties as payment for services. The shares were
valued at the closing price as of the date of the agreements (ranging from
$0.19 to $0.25) and resulted in full recognition of $360,370 in consulting
services expense.
Common Stock Issuance in 2014:
During 2014 we issued 56,787,791 shares according following description. In
addition to 21,641,450 shares outstanding at 12/31/2013, made a balance of
total 78,429,241 shares outstanding on 12/31/2014.
13,263,300 Shares of Common Stock Issued upon Conversion of Debt
In the first quarter of 2014 we issued 13,084,000 shares of our common stock
in settlement of $114,414 in convertible note payable plus associated
accrued interest of $16,435. The conversion occurred within the terms of the
promissory note and no gain or loss resulted.
In the third quarter of 2014 we issued 179,300 shares of our common stock in
settlement of $1,500 in convertible note payable plus associated accrued
interest of $293. The conversion occurred within the terms of the promissory
note and no gain or loss resulted.
6,995,416 Shares of Common Stock Issued for Services
During the year ended December 31, 2014 we issued 595,416 shares (400,000
shares of our common stock to two unrelated parties and to the Company's CFO
195,416 shares) as payment for services. We also issued 400,000 shares to
two former officers and directors of the company as part of a severance
agreement. The shares were valued at the closing price as of the date of the
agreements (ranging from $0.25 to $0.28) and resulted in full recognition of
$155,716 and $112,000, respectively, in consulting services expense.
We also issued 6,000,000 shares of our common stock to six unrelated parties
as payment for services (during first quarter we issued 9,108,600 shares and
canceled 3,108,600 shares during second quarter). The shares were valued at
the closing price as of the date of the agreement ($0.05) and resulted in
full recognition of $300,000 in consulting services expense.
36,529,075 Shares of Common Stock Issued for Cash
We raised capital through four different private placements of common stock
in 2014.
We sold 4,700,000 shares (1,750,000 shares during first quarter and
2,950,000 shares during the second) to six investors for the offering price
of $0.005 per share that resulted in total proceeds of $23,500.
We sold 13,034,585 shares through a placement of common stock. Those shares
were sold on fourth quarter to nine investors for the offering price of
$0.05 per share resulting in proceeds of $651,730. As of December 31, 2014,
the proceeds of this offering are carried as subscriptions receivable.
We sold 12,936,662 shares through a placement of common stock units
(9,392,218 shares during second quarter and 3,544,444 shares during third
quarter). Those units were sold to twenty-two investors for the offering
price of $0.09 per share resulting in proceeds of $1,164,300. Each unit
consisted of one share of common stock and one warrant to purchase common
stock. The warrants are exercisable at $0.16 and expire one year from the
date of issuance. The relative fair value of the common stock component and
warrants (based on the Black-Scholes option pricing model) was estimated
$340,758 and $823,542, respectively. The Black Sholes-Merton pricing model
assumptions used are as follows: expected dividend yield of 0%; risk-free
interest rate of 0.10% - 0.11%; expected volatility of 249%, and warrant
term of one year.
We sold 5,857,828 shares through a placement of common stock units
(3,694,666 shares during third quarter and 2,163,162 shares during fourth
quarter). Those units were sold to fifteen investors for the offering price
of $0.15 per share resulting in proceeds of $878,676. Each unit consisted of
one share of common stock and one warrant to purchase common stock. The
warrants are exercisable at $0.25 and expire one year from the date of
issuance. The relative fair value of the common stock component and warrants
(based on the Black-Scholes option pricing model) was estimated to be
$373,706 and $504,970, respectively. The Black-Sholes Merton pricing model
assumptions used are as follows: expected dividend yield of 0%; risk-free
interest rate of 0.10%-.0.11%; expected volatility of 249%, and warrant term
of one year.
A summary of the offerings is as follows:
Offering
|
Common Stock Subscribed
|
Proceeds
|
Warrants
|
Exercise Price
|
Term
|
$0.005 per share
|
4,700,000
|
$23,500
|
-
|
-
|
-
|
$0.05 per share
|
13,034,585
|
$651,730
|
-
|
-
|
-
|
$0.09 per share
|
12,936,662
|
$1,164,300
|
12,936,662
|
$0.16
|
1 year
|
$0.15 per share
|
5,857,828
|
$878,676
|
5,858,828
|
$0.25
|
1 year
|
Warrants Issued for Services:
During the year ended December 31, 2014 we issued 14,350,000
common stock warrants. 350,000 of those warrants valued at $82,640 were
granted to former related parties while 14,000,000 warrants valued at
$3,774,496 were granted for services provided by unrelated parties. The fair
value of the warrants was estimated at the date of grant using the
Black-Sholes-Merton pricing model. The BlackSholes-Merton pricing model
assumptions used are as follows: expected dividend yield of 0%; risk-free
interest rate of 0.47% to 0.49%; expected volatility of 241%, and warrant
term of two years. In conjunction with the 2014 unit offerings the Company
issued a total of 18,794,490 warrants to purchase up to 18,794,490 shares of
common stock at $0.16 - $0.25 per share.
As part of the 2015 unit offerings the Company issued a
total of 616,667 warrants to purchase up to 616,667 shares of common stock
ranging from $0.12 to $0.25 per share. The relative fair value of the
warrants attached to the common stock issued was estimated at the date of
grant using the Black-Sholes-Merton pricing model. The relative fair value
of the attached to the common stock component is $45,088 and the relative
fair value of the warrants is $38,912 as of the grant date.
In February, 2015 we granted 64,935 warrants for services.
The warrants are exercisable at $0.25 and expire February 23, 2016. We used
the Black-Scholes-Merton pricing model to estimate the fair value of
$10,839. The Black-Sholes-Merton pricing model assumptions used are as
follows: expected dividend yield of 0%; risk-free interest rate of 0.10% -
0.11%; expected volatility of 242%, and warrant exercise period based upon
the stated terms.
|
Warrants
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (months)
|
Aggregate
Intrinsic Value*
|
Warrants outstanding at December
31, 2013
|
600,000
|
$0.05
|
-
|
-
|
Granted
|
33,144,490
|
$0.17
|
-
|
-
|
Exercised
|
-
|
$0.00
|
-
|
-
|
Lapsed
|
-
|
$0.00
|
-
|
-
|
Warrants outstanding at December
31, 2014
|
33,744,490
|
$0.16
|
12.1
|
$2,892,800
|
Granted
|
681,602
|
$0.22
|
-
|
-
|
Exercised
|
-
|
$0.00
|
-
|
-
|
Lapsed
|
(18,794,490)
|
$0.19
|
-
|
-
|
Warrants outstanding at December 31, 2015
|
15,631,602
|
$0.14
|
7.3
|
$-
|
Warrants exercisable at December 31, 2015
|
15,631,602
|
$0.14
|
7.3
|
$-
|
* Amount by which the fair value of the stock at the balance
sheet date exceeds the exercise price
The following table summarizes the status of the Company's
aggregate warrants as of December 31, 2015:
Range of
Exercise Prices
|
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (months)
|
Shares
|
Weighted
Average Exercise Price
|
$0.01 - $0.15
|
15,091,667
|
$0.14
|
7.1
|
15,091,667
|
$0.14
|
$0.16 - $0.25
|
539,935
|
$0.25
|
12.9
|
539,935
|
$0.25
|
Total Warrants
|
15,631,602
|
|
|
15,631,602
|
|
3. Related Party Transactions
Due Related Parties:
Amounts due related parties totaled
$1,820 at December 31, 2015 and $138 at December 31, 2014, respectively. The
company paid $21,943 in rent to a related party in 2015. Accounts receivable
from related parties was $0 at December 31, 2015 and $0 at December 31,
2014.
We
loaned
OWC $903,494 and $660,764 without interest in the years ended December
31, 2015 and 2014, respectively, to fund its operations.
As of December 31, 2015, OWC owed us $1,564,258.
We
have engaged in the following transactions with officers, directors and employees of OWCP or OWC since January 1, 2014:
In
October
2014 we issued 132,500 shares of common stock for services valued at $371,00
based upon the closing prices of our common stock of
$0.28 per share to Shmuel De-Saban, our Chief Financial
Officer. In December 2014, we sold Mr. De-Saban 62,916 shares of shares
of common stock at a purchase price of $0.28 per share.
In
October 2014, we sold 2,104,480 shares of common stock at a purchase price of $0.05 per share to Ziv Turner, the Chief Executive
Officer of OWC.
In
October 2014 we sold 861,250 shares of common stock at a purchase price of $0.05 per share to Alon Sinai, the Chief Operating
Officer of OWC. In December 2014 we sold Mr. Sinai 150,000 shares of common stock at a purchase price of $0.05 per share.
In
December 2014 we sold 2,120,000 shares of common stock at a purchase price of $0.05 per share to Dr. Yehuda Baruch, OWC's
Director of Research and Regulatory Affairs.
Agreements
with Executive Officers
On
July 15, 2014, the Company entered into a services agreement with Mr. Bignitz pursuant to which Mr. Bignitz agreed to serve as
our Chief Executive Officer for compensation of $1,000 per month through December 31, 2015. Mr. Bignitz's compensation for
2016 is $1,000 per month.
On
July
11, 2014, the Company entered into a services agreement with Shmuel
De-Saban pursuant to which Mr. De-Saban agreed to serve
as our Chief Financial Officer for compensation consisting of 132,500
shares of common stock issued on October 23, 2014 and 62,916
shares of common stock issued on December 22, 2014. On October 2, 2014,
the Company entered into a supplement to the employment
agreement with Mr. De-Saban pursuant to which it issued Mr. De-Saban
options to purchase 977,080 shares of common stock at an
exercise price of $0.01, which options expire on October 1, 2018. The
options shall vest upon the achievement of certain milestones
by OWC. As of December 31, 2015, no milestone has been achieved and no
options have vested. Mr. De-Saban agreed to forfeit his
options on January 31, 2016 in connection with entry into a new services
agreement. On January 31, 2016, the Company and Mr. De-Saban
entered into a new services agreement pursuant to which he agreed to
serve as our Chief Financial Officer for compensation consisting
of 195,416 shares of common stock. Either party may terminate the
agreement without cause upon 30 days notice. The Company may
terminate the agreement for cause, effective upon delivery of notice.
On
July 15, 2014, the Company entered into a settlement agreement with Ori Goore, a former director and the former Chief Executive
Officer of the Company, pursuant to which, upon his resignation from all positions with the Company, the Company paid Mr. Goore
$7,500 and issued Mr. Goore 250,000 shares of common stock and two-year warrants to purchase 150,000 shares of common stock at
an exercise price of $0.14 per share.
On
July
15, 2014, the Company entered into a settlement agreement with Eli
Gonen, a former director of the Company, pursuant to which,
upon his resignation from all positions with the Company, the Company
issued Mr. Gonen 250,000 shares of common stock and two-year
warrants to purchase 150,000 shares of common stock at an exercise price
of $0.14 per share.
On
August
29, 2015 the company entered into a services agreement with Mr. Toker
pursuant to which Mr. Toker agreed to serve as our
Chief Science Officer for compensation of $2,000 per month. On January
18, 2016 the Company issued Mr. Toker options to purchase
100,000 shares of common stock. 50,000 of the options shall vest six
months from the date of grant at an exercise price of $0.10
per share and the remaining 50,000 shall vest one year from the date of
grant at an exercise price of $0.30 per share. The options
shall expire five years from the date of grant.
4. Notes Payable
Unsecured Notes Payable With Conversion Rights
During 2015 the Company agreed to provide unsecured
promissory notes with an unrelated party for $37,500. The note is
non-interest bearing and is due on June 16, 2016. The note has a future
conversion right that allows the holder to convert the principal balance
into the Company's common stock at the lender's sole discretion at 50% of
the then market price per share.
In accordance with ASC 470, the Company has analyzed the
beneficial nature of the conversion terms and determined that a beneficial
conversion feature (BCF) exists because the effective conversion price was
less than the quoted market price at the time of the issuance. The Company
calculated the value of the BCF using the intrinsic method as stipulated in
ASC 470. The BCF of $37,500 has been recorded as a discount to the notes
payable and to Additional Paid-in Capital.
For the year ended December 31, 2015 the Company has
amortized $3,074 of the beneficial conversion feature which has also been
recorded as interest expense. The carrying value of convertible note is as
follows:
Face amount of the note
|
$
|
37,500
|
Unamortized discount
|
|
(34,426)
|
Carrying value at December 31, 2015
|
$
|
3,074
|
On February 28, 2014, eleven holders of convertible notes
with an aggregate principal balance of $114,414 and accrued interest of
$16,435 converted their notes and accrued interest into 13,084,000 shares of
common stock. Upon conversion, $34,034 of unamortized discount arising from
the previously recorded beneficial conversion feature was recognized as
additional interest expense. The conversion occurred within the terms of the
promissory note and no gain or loss resulted.
Unsecured Notes Payable Without Conversion Rights
During 2014, the Company signed a series of three new
unsecured promissory notes with unrelated parties for an aggregate of
$14,500. The notes bear interest at 1% per annum and are due one year from
the date of issuance. The notes were paid in full in 2014.
5. Future Commitment and Issuance of Warrants
On March 5, 2013, the Company and GUMI Tel Aviv Ltd, a
major, privately-held Israeli technology company ("GUMI"), entered into
development/manufacturing/marketing agreement ("GUMI Agreement"). GUMI is
engaged in the manufacture, import/export, marketing and install industrial
equipment and designing technical solutions.
Pursuant to the GUMI Agreement, GUMI agreed to: (i) complete
the development of the Prototype of the Patented Device; (ii) manufacture
the commercial model(s) of the Patented device; and (iii) market the
commercial model(s) of the Patented Device.
In consideration for developing the Prototype and
manufacturing and marketing/distributing commercial models of the Patented
Device as well as incurring all related costs and expenses in connection
therewith, the Company shall compensate GUMI as follows: (i) upon the
execution of the GUMI Agreement, the Company granted GUMI warrants (the
"Warrants") exercisable to purchase 200,000 shares of the Company's common
stock ("Warrant Shares") at an exercise price of USD$0.05 per share (the
"Exercise Price"); (ii) upon completion of the Prototype, granting GUMI
additional Warrants to purchase 200,000 additional Warrant Shares at the
Exercise Price; and (iii) upon completion of a Commercial Device ready for
manufacture and sale, granting GUMI additional Warrants to purchase 200,000
additional Warrant Shares at the Exercise Price. The Warrants shall expire 3
years from the date of each grant and shall be subject to adjustment in the
event of any recapitalization of the Company's capital stock.
In addition to the consideration represented by the grant of
Warrants, the Agreement further provides that following commencement of sale
of the Commercial Device and until such time that GUMI has recouped all
costs and expenses that it has incurred and paid in connection with the
completion of development of the Prototype and the manufacture of the
Commercial Device ("Date of Recoupment"), one hundred (100%) percent of the
net sales revenues shall be paid and distributed to GUMI. On and after the
Date of Recoupment, net sales revenues shall be paid sixty-five (65%)
percent to GUMI and thirty-five (35%) percent to the Company.
The Company recorded $107,074 in fiscal year 2013 in
expenses related to 600,000 vested warrants previously granted to GUMI Tel
Aviv Ltd. The warrants were valued using the Black-Scholes option pricing
model. The inputs for the valuation analysis of the warrants include the
market value of the Company's common stock were as follows: the estimated
volatility of the Company's common stock used in the Black-Scholes option
pricing model was 318%, the exercise price and the risk free interest rate
used were $0.05 and 0.36%, respectively. All warrants are fully vested.
6. Income Taxes
We have adopted ASC 740 which provides for the recognition
of a deferred tax asset based upon the value the loss carry-forwards will
have to reduce future income taxes and management's estimate of the
probability of the realization of these tax benefits. Our net operating loss
carryovers incurred prior to 2010 considered available to reduce future
income taxes were reduced or eliminated through a change of control (I.R.C.
Section 382(a)) and the continuity of business limitation of I.R.C. Section
382(c).
We have a current operating loss carry-forward of $_______
resulting in deferred tax assets of $_____. We have determined it more
likely than not that these timing differences will not materialize and have
provided a valuation allowance against substantially all our net deferred
tax asset.
|
|
December 31, 2015
|
|
December 31, 2014
|
Individual components giving rise to the deferred tax assets are as
follows:
|
|
|
|
|
Future
tax benefits arising from net operating loss carryovers
|
$
|
1,980,900
|
$
|
1,632,100
|
Future
tax benefits arising from equity compensation
|
|
36,400
|
|
36,400
|
Total
|
$
|
2,017,300)
|
$
|
1,668,500
|
Less valuation allowance
|
|
(2,017,300)
|
|
(1,668,500)
|
Net deferred
|
$
|
-
|
$
|
-
|
|
|
|
|
|
The components of pretax loss are as follows:
|
|
|
|
|
US
|
|
|
|
|
Non-US
|
$
|
(690,420)
|
$
|
(4,588,573)
|
Change
in valuation allowance
|
|
(964,568)
|
|
(482,100)
|
|
$
|
(1,654,988)
|
$
|
(5,070,673)
|
Future utilization of currently generated federal and state
NOL and tax credit carry forwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended and similar state provisions. The annual
limitation may result in the expiration of NOL and tax credit carry forwards
before full utilization.
The Company is not under examination by any jurisdiction for
any tax year. Our federal and state income tax returns are open for fiscal
years ending on or after December 31, 2012.
7. Going Concern
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a going
concern. The Company has not established any source of revenue to cover its
operating costs, and as such, has incurred an operating loss since
inception. Further, as of December 31, 2015, the cash resources of the
Company were insufficient to meet its current business plan. These and other
factors raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of asset or the amounts and classification of liabilities
that may result from the possible inability of the Company to continue as a
going concern.
8. Subsequent Events
There were no subsequent events following the period ended
December 31, 2015 and throughout the date of the filing of Form 10-K.