UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

 

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

Commission file number 0-54856

 

OWC Pharmaceutical Research Corp.

(Exact Name Of Registrant As Specified In Its Charter)

 

Delaware   98-0573566
(State of Incorporation)   (I.R.S. Employer Identification No.)
     
30 Shacham Street. P.O.B. 8324 Petach Tikva, Israel   4918103
(Address of Principal Executive Offices)   (ZIP Code)

 

Registrant’s Telephone Number, Including Area Code: +972-3-917-1921

 

Securities Registered Pursuant to Section 12(g) of The Act: Common Stock, $0.0001 par value

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

On June 30, 2016, the aggregate market value of the 68,029,729 shares of common stock held by non-affiliates of the Registrant was approximately $1,020,446 based on the closing price of $0.015 of the Registrant’s common stock on June 30, 2016. On March 31, 2017, the Registrant had 144,719,287 shares of common stock outstanding.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act) or a smaller reporting company.

 

Large accelerated filer [  ] Accelerated filer [  ] Non-Accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

 

 

 
 

 

TABLE OF CONTENTS

 

Item   Description   Page
 
PART I
ITEM 1.   DESCRIPTION OF BUSINESS   3
ITEM 1A.   RISK FACTORS   18
ITEM 1B.   UNRESOLVED STAFF COMMENTS   30
ITEM 2.   PROPERTIES   30
ITEM 3.   LEGAL PROCEEDINGS   30
ITEM 4.   MINE SAFETY DISCLOSURES   30
PART II
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES   31
ITEM 6.   SELECTED FINANCIAL DATA   34
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION   34
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK   40
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   41
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   67
ITEM 9A.   CONTROLS AND PROCEDURES   67
ITEM 9B.   OTHER INFORMATION   68
PART III
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   68
ITEM 11.   EXECUTIVE COMPENSATION   71
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   72
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE   73
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES   73
         
    PART IV    
         
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES   73

 

   - 2 -  
   

 

PART I

 

ITEM 1. DESCRIPTION OF BUSINESS Back to Table of Contents

 

Cautionary Statement regarding Forward-Looking Statements

 

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.

 

Overview

 

We are a medical cannabis research and development company that applies conventional pharmaceutical research protocols and disciplines to the field of medical cannabis with the objective of establishing a leadership position in the research and development of medical cannabis therapies, products and delivery technologies. We are currently engaged in the research and development and have conducted trials on the efficacy of cannabis-based medical products (the “Cannabis-Based Medical Products”) commencing with our cannabis-based topical cream for the treatment of psoriasis. In addition, we also are pursuing the use of our Cannabis-Based Medical Products for the treatment of multiple myeloma, post-traumatic stress disorder (“PTSD”) and fibromyalgia, and have made significant advancements in the development of a cannabis soluble tablet delivery system that could have applications for other indications. We are also capable of providing consulting services to governmental and private entities to assist them with developing and implementing tailor-made comprehensive medical cannabis programs, although we have not generated any revenues from such services to date.

 

We have been engaged in research and development and consulting activities through our wholly-owned Israeli subsidiary, One World Cannabis Ltd (“OWC”) since July 2014. To date, we have executed binding agreements with major hospitals and medical research facilities in Israel for the purpose of conducting research studies and trials related to the development and use of Cannabis-Based Medical Products for the treatment of myeloma, psoriasis, , and for the development of a cannabis soluble tablet delivery system. We recently announced promising clinical results from the testing of our cannabis-based topical cream for the treatment of psoriasis, an autoimmune disease that causes red, scaly patches to appear on the skin, and can be associated with other serious health conditions, including diabetes, heart disease and depression. Skin cells in patients with psoriasis grow at an abnormally fast rate, causing a buildup of lesions that tend to burn and itch. While the real cause of psoriasis is not known, genetics are believed to play a major role in its development. According to the National Psoriasis Foundation, psoriasis affects 7.5 million people in the United States.

 

In addition to our agreements with major Israeli hospitals and research institutions, as well as distribution agreements with private corporations discussed in more detail below, we also provide consulting and advisory services and have entered into a binding agreement with an American corporation to advise it on establishing a medical cannabis treatment program. These agreements, as stated above, are described in more detail below.

 

Former Operations

 

In 2008, we acquired a patent relating to our electromagnetic percussion device (the “Device”). In March 2013, we entered into a manufacturing and distribution agreement with GUMI Tel Aviv Ltd. (“GUMI”), a technology company engaged in the manufacture and sale of industrial equipment, to develop, manufacture and market the Device. To date, we have not derived any revenues from GUMI’s marketing efforts. We abandoned this line of business in 2015 and in February 2016 terminated our agreement with GUMI, executing mutual general releases.

 

We were incorporated in Delaware on March 7, 2008 under the name Dynamic Applications Corp. We changed our name to OWC Pharmaceutical Research Corp. on December 9, 2014. We formed our fully owned subsidiary OWC in Israel on July 6, 2014. Our principal executive offices are located at 30 Shacham Street. P.O. Box 8324 Petach Tikva, Israel 4918103 and our telephone number is 972 (0) 3-758-2657.

 

   - 3 -  
   

 

Our Research and Development Activities

 

Since 2014, our focus has been on researching and developing cannabis-based formulations for the treatment of multiple myeloma, psoriasis, PTSD and fibromyalgia. We believe a significant need remains for novel oral and safe drugs for patients who do not respond to existing therapies or for whom these therapies are unsuitable. Our research and development is focused primarily on exploring several formulations containing active compounds from the cannabis plant, including (but not limited 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 fully-researched and scientifically demonstrated and that is the purpose of the studies we have been conducting in collaboration with major Israeli health institutions discussed more fully below.

 

We aim to standardize the formulations of our Cannabis-Based Medical Products 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 upon completion are expected to possibly contain several additional active compounds from the cannabis plant that have not been as well studied to date by others. Our formulations must be fully-researched and documented in order to verify their efficacy at treating indications, the appropriate dosage levels and the appropriate methods of administration. As we continue to experience promising results through research and development, we intend to produce pharmaceutical-grade cannabinoid-based products and treatments 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. During the past two years ended December 31, 2016 and 2015, we spent $141,858 and $271,394 on research and development, respectively.

 

We are continuing to conduct our research, led by internationally renowned investigators, at the facilities of leading Israeli hospitals and scientific institutions. Dr. Yehuda Baruch, our Chief Science Officer and OWC’s Director of Research and Regulatory Affairs, and Alon Sinai, OWC’s Chief Operating Officer, will monitor the studies. Our team of specialists also includes Dr. Miri Sani our regulatory adviser and Dr. Sharon Rozenblat, who is a Senior Advisor to the Scientific Advisory Boardand Dr. Merav Leiba, also a Senior Science Advisor of OWC.

 

Research Collaboration and License Agreements

 

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 the studies at the Sheba facilities to explore the effect of formulations, all based on active ingredients in the cannabis extracts, on multiple myeloma, and psoriasis. Each formulation will be targeted at one of the three indications.

 

Pursuant to the collaboration agreements, we are expected to pay Sheba $170,000 for conducting the multiple myeloma trial between the 3rd quarter of 2015 and the second quarter of 2016. In addition, we commenced pre-clinical studies on the treatment of psoriasis during the second quarter of 2016. Pursuant to the collaboration agreements, we are obliged to pay Sheba $85,000 throughout 2017 for conducting the safety study for the cream. We currently have the financial resources to fund our current obligations under these agreements, but anticipate that we will require additional funding during the next 12 months for our continuing and planned expanded operations. As of December 31, 2016, we have paid Sheba $64,389 according Sheba’s payment requests.

 

Dr. Leiba led our 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. The results indicated a 100% mortality rate of myeloma cells in 80% of the cultured cells within a 24 to 48-hour period, and highlight the potential abilities of cannabis oil extract to fight multiple myeloma cancer cells. We believe that the results of this study indicate a potential to develop a more effective treatment for multiple myeloma than standard therapies. Based on the results of this pre-clinical study, we proceeded with further pre-clinical studies (safety and toxicity, pharmacokinetic, and pharmacodynamic) of our formulation.

 

On August 6, 2015, OWC signed a Memorandum of Understanding with Emilia Cosmetics Ltd. (“Emilia”), a large Israeli private label manufacturer and a world-leading company in the field of development, production, manufacturing and packaging of health and beauty products including for treatment of human skin disease, for the development, manufacture and marketing of a cannabinoid-based topical cream to treat psoriasis. On November 27, 2016, we entered into a license agreement with Emilia (the “License Agreement”). During the fourth quarter of 2016, the Company completed the development process and then initiated a phase I study at Sheba to explore the safety of the topical cream on psoriasis. Prior to entering into the License Agreement, the Company and Emilia conducted a development and evaluation program (as defined in the License Agreement) for the development of a specific product comprising Emilia’s formulation with certain medical cannabis extract provided by OWC for topical treatment of psoriasis.

 

   - 4 -  
   

 

Pursuant to the License Agreement, Emilia granted a limited license to us with respect to Emilia’s licensed intellectual property to be developed and commercialized worldwide in the topical treatment of psoriasis in humans with OWC’s Product. If such trial proves successful, Emilia will grant OWC an exclusive, worldwide, transferable, royalty-bearing license, with the right to grant sublicenses, to use, sell and commercially exploit the Emilia intellectual property, in consideration for which, from and after the first commercial sales of the licensed product, OWC shall pay to Emilia a royalty at the rate of ten percent of net sales (as defined in the License Agreement) during the period beginning upon the first commercial sale and ending ten years thereafter. In the event the sale of the licensed product during the royalty term reaches the minimum sales targets set forth in the License Agreement, the royalty term will be extended for an additional five-year term.

 

In April 2015, OWC engaged G.C. Group Ltd., an Israeli corporation specializing in pharmaceutical R&D to provide formulation development services for OWC’s new delivery system in the form of a cannabis soluble tablet. We see a soluble tablet as providing a superior method of delivery, allowing physicians and researchers to better control the dosage amounts. We believe that the most common usage/delivery methods of medical cannabis in practice today (smoking or ingesting edibles or oil extracts) do not provide an adequate means of dosage control. G.C. Group Ltd. successfully completed the first phase of development, 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. The agreement was terminated on December 31, 2015. However, the Company plans to continue the development process. The Company started developing other delivery systems, designed for different indications, during the first quarter of 2016.

 

On December 29, 2016, we entered into a Research Agreement with Medical Research Infrastructure Development and Health Services Fund by Chaim Sheba Medical Center, a non-profit organization incorporated under the laws of the State of Israel (the “Fund”).

 

Pursuant to the Research Agreement, the Fund shall perform a Phase I, double blind, randomized, placebo-controlled, maximal dose study (the “Study”) to determine the safety, tolerability of topical cream containing MGC (“Medical Grade Cannabis” or the “Study Drug”) in healthy volunteers, employing the services of Dr. Aviv Barzilay, Director of the Department of Dermatology- Chaim Sheba Medical Center, Tel Hashomer, Israel, to lead the Study (the “Investigator”). The Study shall be conducted in compliance with the following, as defined in the Research Agreement: (1) the Protocol; (2) the Ministry Guidelines; (3) the instructions and terms specified in the Helsinki Committee’s approval; (4) the ICH-GCP; (5) the Helsinki Declarations; (6) the applicable laws, rules and regulations regulating such studies which are applicable in Israel (the “Applicable Laws”); and (7) written instructions and prescriptions issued by the OWC and governing the administration of the Study Drug.

 

On February 1, 2017, following the very encouraging results that have been achieved at the mid-point of the Study, the Company determined to extend the size and scope of the Study for the purpose, among other things, of checking the biological markers that have been generated to date with respect to the treatment of psoriasis (proliferation/ inhibition and several interleukins). Despite extending its size and scope of the Study, the Registrant expects to compete the Study during the 2 nd or 3 rd quarters of 2017.

 

Our Product Prospects Pipeline

 

The table below sets forth our current pipeline of Product Prospects, including the target indication and status of each.

 

   - 5 -  
   

 

Target Indication   Collaborator   Status
           
Multiple Myeloma   Sheba Academic   Entered into a research agreement for in vitro studies
    Medical Center   Negotiating terms of a research agreement for in vivo studies
        Completed one in vitro study
        Proceeding with further pre-clinical in vitro studies (safety and toxicity, pharmacokinetic, and pharmacodynamic)
        Expect to submit 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 third quarter of 2017
        Drafted a clinical trial protocol synopsis, which we believe will assist us in preparing an application for orphan status designation
           
Psoriasis   Sheba Academic   Entered into a Research Collaboration and License Agreement but have not commenced any studies to date
    Medical Center   Received an IRB approval for 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. The study should begin in or about April 2017.
           
Psoriasis   Emilia Cosmetics Ltd.   Entered into a nonbinding memorandum of understanding for the development, manufacture and marketing of a cannabinoid-based topical cream
        We finished the development of the topical cream in the first quarter of 2016.
           
Fibromyalgia  

Sheba Academic

Medical Center

  Drafted a clinical trial protocol synopsis
           
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. This arrangement was terminated effective on December 31, 2015.

 

Market Opportunity

 

According to the 2014 edition of the Marijuana Business Factbook, U.S. retail sales of medical cannabis are expected to rise significantly over the next five years from an estimated $2.2 billion in 2014 to $8.2 billion in 2018. We believe that cannabis-based formulations have the potential to effectively treat multiple myeloma, psoriasis, PTSD and fibromyalgia.

 

Controlled substance legislation differs between countries (and jurisdictions within those countries) and legislation in certain countries may restrict or limit our ability to distribute or sell our products. We believe that the United States will represent a major market for our cannabis-based Product Prospects due, in large part, to state level legislation allowing comprehensive public medical cannabis programs. A total of 28 states, the District of Columbia and Guam now allow for comprehensive public medical cannabis programs. Recently approved efforts in 16 states allow use of “low THC, high cannabidiol (CBD)” products for medical reasons in limited situations.

 

In Europe, medical cannabis programs regulatory frameworks exist in several countries, such as the Netherlands, Italy, Germany, Finland and the Czech Republic. It can also be expected that there will be policy changes in the member countries of the European Union concerning the medical use of cannabis and cannabis-based products. We believe that there will be rising demand for cannabis derived medical products and that future growth is expected to be driven by favorable changes in legislation and demographic factors.

 

Multiple myeloma is a hematological (blood) cancer that develops in the plasma cells found in bone marrow. Plasma cells are a type of white blood cell responsible for producing antibodies (immunoglobulins) which are critical for maintaining the body’s immune system. Through a complex, multi-step process, healthy plasma cells transform into malignant myeloma cells. Myeloma cells result in the production of abnormal antibodies, or M proteins. The M proteins offer no benefit to the body, and as the amount of M protein increases, it crowds out normally functioning immunoglobulins. This ultimately causes multiple myeloma symptoms such as bone damage or kidney problems. Multiple myeloma is considered to be incurable but treatable. Remissions may be induced with steroids, chemotherapy, proteasome inhibitors, immunomodulatory drugs such as thalidomide or lenalidomide, and stem cell transplants. Radiation therapy is sometimes used to reduce pain from bone lesions. According to the American Cancer Society, in the United States the lifetime risk of getting multiple myeloma is 1 in 143 and it is estimated that 30,330 new cases will be diagnosed in 2016.

 

   - 6 -  
   

 

Fibromyalgia is a chronic health problem that causes pain throughout the body and other symptoms such as fatigue and cognitive (memory or thought) problems. According to the National Fibromyalgia Association the disorder affects an estimated ten million people in the United States and an estimated 3 to 6% of the world population. There is no known cure and a variety of prescription medications are often used to reduce pain levels and improve sleep. On June 21, 2007, the U.S. Food and Drug Administration approved Lyrica (pregabalin) as the first drug to treat fibromyalgia. Cymbalta (duloxetine HCl) was approved in June 2008 and Savella (milnacipranHCl) was approved in January 2009, both of which are now a generic formulations no longer under patent protection.

 

Psoriasis is a skin condition that affects 2% to 3% of the general population according to the National Psoriasis Foundation. The disease is manifested by scaly plaques on the skin and in the severe form has a major effect on the physical and emotional well-being of the patients. Topical agents are typically used for mild disease, phototherapy for moderate disease, and systemic agents for severe disease. For moderate to severe cases, systemic biologic drugs, delivered via IV, have dominated the market. According to the National Psoriasis Foundation, common side effects of biologics include respiratory infections, flu-like symptoms, and injection site reactions while rare side effects include serious nervous system disorders, such as multiple sclerosis, seizures, or inflammation of the nerves of the eyes, blood disorders, and certain types of cancer. According to Global Data, the psoriasis treatment market was worth $3.6 billion in 2010 and is forecast to grow to $6.7 billion by 2018. The current common treatments for psoriasis include topical and systemic drugs, steroids, immunosuppressive drugs such as Cyclosporine A (by Novartis), methotrexate or MTX and biological drugs such as Enbrel (by Amgen), Amevive (by Biogen but whose patent expired in 2013) and Ustakinumabn (by Janssen Immunology).

 

Our Consulting Services

 

We believe that the complexity of the medical cannabis industry has created a demand for consulting and advisory services in different aspects of the industry. Our employees have substantial experience designing training programs for physicians, caregivers, and researchers that are essential to the establishment of a successful, patient-focused medical cannabis program. Our services are designed to help government officials, policy-makers and regulatory agencies develop and implement tailor-made comprehensive medical cannabis programs. In addition, we also offer medical cannabis regulatory compliance services and patient-care consultancy services to private corporations. 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. To date, no revenues have been generated from this arrangement and no definitive agreement has been executed.

 

Our Medmar Agreements

 

On October 11, 2015, OWC entered into a memorandum of understanding with Medmar LLC, organized under the laws of the State of Maryland with operations in Hawaii and Pennsylvania (“Medmar”) for the purpose of granting an exclusive, non-transferable, royalty-bearing license, to manufacture, produce, publicize, promote and market the licensed products described therein in the State of Hawaii and the State of Pennsylvania, pursuant to which MedMar has paid us $100,000. On February 8, 2016, OWC and Medmar II, an affiliate of Medmar, executed a right of first refusal agreement granting Medmar certain rights in connection with the commercialization of our Cannabis-Based Medical Products in other states in the USA, pursuant to which Medmar has paid $50,000.

 

On March 17, 2016, Medmar and OWC executed a consulting and license agreement pursuant to which OWC granted to Medmar an exclusive, non-transferable, royalty-bearing license, to manufacture, produce, publicize, promote and market the certain of our products (as defined in the license agreement) in the State of Maryland, against payment by Medmar to OWC of a royalty.

 

On September 28, 2016, we entered into a non-recourse loan agreement with Medmar pursuant to which Medmar agreed to loan OWC a total of $300,000 in installments of $50,000 each on a non-interest bearing basis with no conversion rights. The loan, which was made on a non-recourse basis, may be prepaid at any time, is due 36 months from the date of the loan. Our obligation to repay the shall be made only by the set-off of royalties payable by Medmar to OWC, if and only to the extent Medmar is required to pay any royalties to OWC under the March 17, 2016 license agreement referenced above. To the extent that the royalties payable to OWC under the license agreement shall be insufficient to repay the loan, for any reason whatsoever, Medmar agreed to waive any repayment rights and/or any claim for any such deficiency. $250,000 of the loan proceeds were funded before the year-ended December 31, 2016 and the last tranche of $50,000 was funded in February 2017 by Medmar.

 

Marketing and Sales

 

We do not currently have any marketing or sales capabilities. We intend to license to, or enter strategic alliances with, larger companies in the pharmaceutical business, which are equipped to market and/or sell our products, if any, through their well-developed marketing capabilities and distribution networks. We intend to out-license some or all our patent rights to more than one party to achieve the fullest development, marketing and distribution of any products we develop.

 

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Our Strengths

 

Notwithstanding the fact that we have only commenced our cannabis-based medical research, we believe that we offer the following key characteristics in our approach to developing our cannabis-based Product Prospects:

 

Our leading medical professionals are recognized leaders in medical cannabis treatments
   
We received approval from the Israeli Institutional Review Board for an in vitro clinical study for the treatment of multiple myeloma
   
We have already filed eight provisional patent applications with the U.S. Patent and Trademark Office;
   
We have entered into three research and license agreements with Sheba to conduct research on multiple myeloma, psoriasis and fibromyalgia
   
Understanding governmental regulation is a prerequisite for success in our industry and our team has substantial knowledge and experience with respect to the rules of drug development and medical cannabis programs
   
OWC’s scientific team has many years of experience in diverse but relevant disciplines, including medical research and regulatory affairs, as well as extensive cannabis-related issues experience

 

Intellectual Property

 

Our success depends in significant part on our ability to protect the proprietary nature of our Product Prospects, technology and know-how, to operate without infringing on the proprietary rights of others, and to defend challenges and oppositions from others and prevent others from infringing on our proprietary rights, including our provisional patents described below. We have not acquired any intellectual property from Dr. Baruch or Mr. Sinai. Rather, they have brought to the Company their wealth of know-how in matters related to medical cannabis, based upon their many years of experience in the medical field as well as Dr. Baruch’s service leading the Medical Cannabis Unit of the Israeli Ministry of Health.

 

We plan to continue to seek patent protection in the United States and other countries for our proprietary technologies. To date, our intellectual property portfolio includes eight provisional patents, filed with the USPTO, all related to our line of activity (pharmaceutical formulations; drug delivery; therapeutic uses of cannabinoids and other cannabis compounds), as well as know-how and trade secrets.

 

The table below depicts the Company’s provisional patent applications:

 

Application number   Description of Provisional Patent   Filing Date
62/084,568   Use of Cannabis to Treat Myeloma   11/26/2014
62/085,663   Use of Cannabis to Treat PTSD   12/01/2014
62/088,599   Use of Cannabis to Treat Migraine   12/07/2014
62/092,849   Novel Condom Comprising Cannabis Derived Compositions to Decrease of Erectile Dysfunction Symptoms   12/17/2014
62/095,020   Use of Cannabis to Treat Psoriasis   12/21/2014
62/135,185   Preparations of Cannabis Emulations and Methods Thereof   03/19/2015
62/160,609   Use of Cannabis to Treat Fibromyalgia, Methods of and Compositions Thereof   05/13/2015
62/173,992   Synergistic Use of Cannabis for Testing Multiple Myeloma   06/11/2015

 

We anticipate that we will file additional patent applications in conjunction with our research, testing, and development of our cannabis-based Product Prospects.

 

Our policy is to seek patent protection for the technology, inventions and improvements that we consider important to the development of our business, but only in those cases where we believe that the costs of obtaining patent protection is justified by the commercial potential of the technology, and typically only in those jurisdictions that we believe present significant commercial opportunities.

 

   - 8 -  
   

 

Competition

 

We face competition from larger companies that are or may be in the process of offering similar products to ours. 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.

 

Competitors may include major pharmaceutical and biotechnology companies and public and private research institutions. Management cannot be certain that we will be able to compete against current or future competitors or that competitive pressure will not seriously harm our business prospects. These competitors may be able to react to market changes, respond more rapidly to new regulations 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 to increase their ability to rapidly gain market share. Large pharmaceutical companies may eventually enter the market.

 

Given the rapid changes affecting the global, national, and regional economies in general and cannabis-related medical research and development in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Time-to-Market is an important factor and our success will depend on our ability to develop innovative products that will be accepted by patients.

 

Our success will also depend on our ability to respond quickly to, among other things, changes in the economy, market conditions, and competitive pressures. Any failure to anticipate or respond adequately to such changes could have a material effect on our financial condition, operating results, liquidity, cash flow and our operational performance.

 

There can be given no assurance that any of our on cannabis-based medical products will obtain regulatory approval in the US or in other markets that we intent to market such products.

 

Employees

 

We presently have no full-time employees. Our Chief Executive Officer and Chief Financial Officer are employed under service agreements with the Company. Our officers and directors are expected to dedicate approximately 60% of their professional time to our business until such time that we receive regulatory approval of any Product Prospect. OWC currently has four employees. OWC’s employees conduct our medical research through collaboration agreements with third parties.

 

Legal Proceedings

 

The Company has filed an action in the Supreme Court of the State of New York, New York County for alleged legal malpractice against the NYC law firm of Sichenzia Ross Ference Kesner LLP and Marc J. Ross, Esq. a partner at Sichenzia Ross (collectively, the “Defendants”). Our claims arise out of legal services allegedly negligently performed by the Defendants related to the: (i) filing of a registration statement on Form S-1; (ii) the withdrawal of the S-1; (iii)delayed filing of a second S-1; and (iv)related contracts and convertible note instrument that resulted in OWCP suffering damages in excess of $2 million in equity and the issuance of approximately 35 million shares upon conversion of a note without any consideration or benefit to OWCP. We brought the action seeking recovery of monetary damages noted above due to the defendants’ alleged failure to exercise a professional standard of care in their representation of OWCP. The action is now in the pleading stages. Reference is made to our Form 8-K filed with the SEC on November 30, 2016, and specifically to the details contained in our attorney’s demand letter to Sichenzia Ross and Ross prior to the commencement of the lawsuit.

 

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.

 

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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.

 

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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 account or relationship should be made by each financial institution based on several factors specific to that institution. These factors may include its 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 about 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. 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.

 

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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.

 

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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 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 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).

 

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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.

 

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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.

 

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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.

 

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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.

 

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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 and other factors described in the audited financial statements as of and for the year ended December 31, 2016, our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern in its report on the financial statements and elsewhere in the financial statements. To date, we have not generated significant revenues and we do not anticipate generating any significant revenues in 2017.

 

Notwithstanding our success in raising $325,000 from the sale of our securities in 2016, and in excess of $1,700,000 during 2017 through the date of this Annual Report, 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 continue 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 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 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.

 

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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.

 

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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, the Registrant’s Chief Science Officer and OWC’s Director of Research and Regulatory Affairs, who 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 “Item 10. 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 widely recognized as one of the most advanced medical centers in the Middle East. Within the framework of the agreements with Sheba, OWC will initiate two studies at the Sheba facilities to explore the effect of three formulations, all based on active ingredients in the cannabis extracts, on multiple myeloma and psoriasis.

 

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 entered into a binding agreement with Emilia Cosmetics, which set forth all terms, in the fourth quarter of 2016.Emilia Cosmetics labs located in Yerucham, Israel. The Company completed the development process in the fourth quarter of 2016 and then initiated 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 collaboration will be jointly owned by Sheba and OWC Ltd.

 

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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 potential abilities of cannabis oil extract to successfully fight multiple myeloma cancer cells and, hopefully treat multiple myeloma in patients, when and if approved. 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.

 

 

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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.

 

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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.

 

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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 for which we plan to provide consulting services 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.

 

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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.

 

   - 25 -  
   

 

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

 

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.

 

   - 26 -  
   

 

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, 2016, we had 81,460,875 shares of Common Stock outstanding, of which 51,278,458 shares of Common Stock are restricted and are subject to the resale provisions of Rule 144 and Regulations D and S under the united States federal securities laws and the rules and regulations promulgated by the SEC thereunder. 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. When restrictions on resale lapse, and if holders of previously 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 144,719,287 shares are outstanding at March 31, 2017. In addition, current holders of our common stock will experience dilution in their equity ownership from the exercise of outstanding common stock purchase warrants and stock options granted under our 2016 ESOP.

 

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 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

 

   - 27 -  
   

 

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.

 

   - 28 -  
   

 

The material weaknesses 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 material weaknesses in our internal control over financial reporting as of the evaluation done by management as of December 31, 2016. 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 other material weaknesses and control deficiencies in our internal control over financial reporting in the future that may require remediation and could result in 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.

 

   - 29 -  
   

 

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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS Back to Table of Contents

 

None.

 

ITEM 2. PROPERTIES Back to Table of Contents

 

Our principal executive office is located at 30 Shacham Street, P.O. Box 8324, Petach Tikva, 4918103, Israel. Our telephone number in Israel is +972 (0)3-758-2657/9. We pay $1,586 per month for 90 square meterS of office space to a related party. We believe that this space (used with additional company) is adequate for our current and immediately foreseeable operating needs.

 

ITEM 3. LEGAL PROCEEDING Back to Table of Contents

 

The Company has filed an action for alleged legal malpractice against the NYC law firm of Sichenzia Ross Ference Kesner LLP and Marc J. Ross, Esq. a partner at Sichenzia Ross (collectively the “Defendants”) in New York State Supreme Court, New York County. Our claims arise out of legal services allegedly negligently performed by the Defendants related to the: (i) filing of a registration statement on Form S-1; (ii) the withdrawal of the S-1; (iii) delayed filing of a second S-1; and (iv) related contracts and a convertible note instrument that resulted in OWCP suffering damages in excess of $2 million in equity and the issuance of approximately 35 million shares upon conversion of a note without any consideration or benefit to OWCP. We brought the action seeking recovery of monetary damages noted above due to the defendants’ alleged failure to exercise a professional standard of care in their representation of OWCP. The action is now in the pleading stages. Reference is made to our Form 8-K filed with the SEC on November 30, 2016, and specifically to the details contained in our attorney’s demand letter to Sichenzia Ross and Mr. Ross prior to the commencement of the lawsuit. We cannot predict the ultimate outcome of this matter.

 

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.

 

   - 30 -  
   

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES Back to Table of Contents

 

Market Information

 

Our common stock is quoted on the OTCQB under the symbol “OWCP.” The following table sets forth for the periods indicated, the high and lo w sales prices per share of our common stock as reported by the OTCQB.

 

    Price Range  
Period   High     Low  
Year Ended December 31, 2015:                
First Quarter   $ 0.26     $ 0.16  
Second Quarter   $ 0.30     $ 0.14  
Third Quarter   $ 0.27     $ 0.18  
Fourth Quarter   $ 0.14     $ 0.03  
Year Ended December 31, 2016:                
First Quarter   $ 0.15     $ 0.01  
Second Quarter   $ 0.10     $ 0.01  
Third Quarter   $ 0.06     $ 0.01  
Fourth Quarter   $ 0.22     $ 0.01  
Year Ending December 31, 2017:                
First Quarter   $ 3.23     $ 0.17  

 

The transfer agent of our common stock is VStock Transfer LLC, 18 Lafayette Place, Woodmere, NY 11598, (212) 828-8436.

 

As of March 31, 2017, there were 128 holders of record of our common stock. As of such date, 144,719,287 shares of our common stock were issued and outstanding.

 

We have 36,000,000 shares of Common Stock authorized under our 2016 ESOP, of which options to purchase 34,850,000 shares of Common Stock have been granted. Reference is made to the disclosure in Note 8c to the notes to consolidated financial statements.

 

Common Stock

 

Holders of shares of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The holders of Common Stock do not have cumulative voting rights in the election of directors. Holders of shares of our Common Stock are entitled to receive dividends when and if declared by our Board out of funds legally available therefore, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Upon our dissolution or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of our Common Stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of shares of our common stock do not have preemptive, subscription, redemption or conversion rights and there are no redemption or sinking fund provisions applicable to tour Common Stock.

 

Preferred Stock

 

At December 31, 2016, the Company has 20,000,000 shares of preferred stock, par value $0.001 (“Preferred Stock”) authorized, none of which are outstanding. Our Board of Directors has the authority to fix the powers, preferences, rights, qualifications, limitations or restrictions of the Preferred Stock and any series thereof, as well as the right to issue Preferred Stock and any series thereof without further action by our stockholders.

 

During the past three years, the Company has sold the following securities which were not registered under the Securities Act of 1933, as amended.

 

   - 31 -  
   

 

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.

 

   - 32 -  
   

 

A summary of the private offerings of unregistered securities in 2014 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  

 

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. 141,667 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.

 

On December 17, 2015, the Company entered into the Purchase Agreement and Registration Rights Agreement with Kodiak Capital and issued Kodiak Capital the Note in the principal amount of $37,500. The Note does not bear interest and matures on June 17, 2016. It is convertible into shares of common stock, at the holder’s discretion, on the earlier of the maturity date or the effective date of the registration statement registering the shares issuable upon conversion of the Note, 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. Pursuant to the Purchase Agreement we have the right to sell, from time to time, up to an aggregate of $750,000 shares of common stock to Kodiak Capital during the one-year period commencing on the effective date of the registration statement registering the shares issuable under the Purchase Agreement and Note. The Company will control the timing and amount of future sales to Kodiak Capital, if any, but 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 our outstanding common stock. The purchase price of the shares that may be sold to Kodiak Capital under the Purchase Agreement will be equal to a 30% discount to the lowest closing bid price for the Company’s common stock for the five trading days immediately following our request for Kodiak Capital to purchase the shares. Such securities were issued pursuant to an exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. Kodiak Capital represented to the Company that it (i) is an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended, (ii) is knowledgeable, sophisticated and experienced in making investment decisions of this kind, and (iii) has had adequate access to information about the Company.

 

Common Stock Issuance in 2016:

 

2,500,000 Shares of Common Stock Issued for Cash

 

On November 3, 2016, we entered into a Reg S Unit Subscription Agreement with Michepro Holding Ltd (“Michepro”), pursuant to which the Investor subscribed for 2,307,692 Units consisting of shares and warrants for a cash consideration of $300,000. In connection with the Unit Subscription Agreement, Michepro was issued Class G Warrants exercisable for a period of twenty-four (24) months to purchase 761,538 Shares at an exercise price $0.25; and Class H Warrants exercisable for a period of thirty-six (36) months to purchase 761,538 Shares at an exercise price $0.40.

 

   - 33 -  
   

 

On December 29, 2016, we entered into a Reg S Unit Subscription Agreement with Jeff Smurlick (“Investor”), pursuant to which the Investor subscribed for 192,308 shares for a cash consideration of $25,000. In connection with the Unit Subscription Agreement, Investor was issued Class G Warrants exercisable for a period of twenty-four (24) months to purchase 192,308 Shares at an exercise price $0.25; and Class H Warrants exercisable for a period of thirty-six (36) months to purchase 192,308 Shares at an exercise price $0.40.

 

53,844,599 Shares of Common Stock Issued for Note Conversion

 

In August and September 2016, the Company issued 20,142,568 shares underlying a $78,500 convertible note previously issued to Vis Vires. The note was issued to an investor pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended.

 

In September and October 2016, the Company issued 33,702,031 shares underlying a $37,500 convertible note previously issued to Kodiak Capital LLC. The note was issued to an investor pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended. Reference is made to the Registrant’s Form 8-K filed with the SEC on November 30, 2016 with respect to the issuance of these shares.

 

1,642,308 Shares of Common Stock Issued for Services

 

On November 22, 2016, the Company entered into a Corporate Management Services Agreement with Sorelenco Limited. In consideration for services, the Company agreed to issue to Sorelenco: (i) 1,442,308 shares of the common stock; (ii) Class M Warrants exercisable for a period of twelve (12) months to purchase 1,250,000 Shares at an exercise price $0.08; (iii) Class G Warrants exercisable for a period of twenty-four (24) months to purchase 448,462 Shares at an exercise price $0.25; and (iv) Class H Warrants exercisable for a period of thirty-six (36) months to purchase 448,462 Shares at an exercise price $0.40.

 

On November 28, 2016, the Company entered into a Consulting Agreement with Bear Creek Capital. In consideration for the services, the Company issued to Bear Creek 100,000 shares of Common Stock.

 

On December 16, 2016, the Company entered into a Consulting Agreement with Jeff Smurlick, pursuant to which the Consultant shall provide the Company with services in the areas of investor relations and business development. In consideration for the services, the Company issued to the Consultant 200,000 Class G Warrants and 200,000 Class H Warrants identical to the Class G and Class H Warrants described above.

 

On December 14, 2016, the Company issued 50,000 shares of Common Stock to Securities Compliance Services for securities compliance services. The shares were previously authorized to be issued on in April 2015. On December 14, 2016, the Company issued 50,000 shares of Common Stock to Ivo Heiden for securities compliance services. The shares were previously authorized to be issued in April 2015.

 

ITEM 6. SELECTED FINANCIAL DATA Back to Table of Contents

 

Not required.

 

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.”

 

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Plan of Operations

 

We are engaged in research and development of cannabis-based medical products for the treatment of a variety of medical conditions such as multiple myeloma, psoriasis, fibromyalgia, post-traumatic stress disorder (PTSD) and migraine, and (ii) consulting services to companies and governmental agencies with respect to complex international medical cannabis protocols and regulations.

 

We have not yet commenced any significant activities related to our third-party consulting services.

 

Recent Developments

 

On September 28, 2016, we entered into a loan agreement (the “Loan Agreement”) with Medmar LLC, pursuant to which Medmar has agreed to loan us a total of $300,000 (the “Loan”) on a non-interest bearing basis, with no conversion rights. The Loan is due in 36 months from the Effective Date, and repayment shall be made only by the set off of royalties payable by Medmar to us as follows: (i) prior to the full repayment of the Loan, which OWC Ltd may prepay at any time, if and to the extent Medmar is required to pay any royalties to OWC under a License Agreement dated March 17, 2016, Medmar shall set off such royalties from the outstanding principal balance of the Loan; (ii) OWC shall not be required to pay the Loan other than through the set off from the royalties; and (iii) the Loan is a non-recourse loan, meaning that if and to the extent that the royalties are insufficient for any reason in order to fully repay the Loan, Medmar waived any right and/or claim to any deficiency.

 

In addition, the Loan Agreement also provides that: (i) subject to Medmar funding the entire Loan, Medmar shall receive the exclusive right to manufacture, produce, publicize, promote and market the OWC’s Licensed Products (as defined in the above-referenced License Agreement) in any state in the U.S., subject to a new license agreement to be negotiated and signed between the parties with respect to each and every state; (ii) the rights to be granted to Medmar under (i) above shall expire within three (3) years subject to certain conditions and limitations; and (iii) the right of first refusal agreement between the parties that was executed on February 8, 2016 providing Medmar certain rights in connection with the commercialization of Licensed Products in the States of Hawaii and Pennsylvania be terminated.

 

During 2016, Medmar funded $250,000 of the loan and funded the remaining $50,000 in 2017 as provided in the loan funding schedule.

 

On November 3, 2016, we entered into a Reg S Unit Subscription Agreement (the “Subscription Agreement”) with Michepro Holding Ltd, pursuant to which Michepro subscribed for and purchased the Registrant’s securities for cash consideration of $300,000 in a unit offering consisting of: (i) 2,307,692 shares of the Registrant’s common stock (the “Shares”); (ii) Class G Warrant exercisable for a period of twenty-four (24) months to purchase 761,538 additional Shares at an exercise price of $0.25 per Share; and (iii) Class H Warrant exercisable for a period of thirty-six (36 ) months to purchase 761,538 additional Shares at an exercise price of $0.40.

 

In addition to the execution of the Subscription Agreement, we entered into a Joint Venture Memorandum of Understanding dated November 3, 2016 pursuant to which Michepro and the Company have agreed as follows: (i) to establish a strategic marketing and distribution alliance (the “Alliance”) to promote the sale of our Products in the EU; (ii) OWC shall hold an interest of 75% in the Alliance and Michepro shall hold the remaining 25% interest; (iii) OWC shall provide the Alliance with OWC’s Products for sale and distribution solely in the EU, at prices to be agreed between the parties from time to time; and (iv) Michepro shall be responsible to the day-to-day management of the Alliance, at its own costs. In addition, Michepro shall make available to the Alliance its knowledge, business connection and personnel in order to maximize the sales of our Products in the EU. As of December 31, 2016, the Alliance had no assets and operations.

 

On November 27, 2016, we entered into a license agreement (the “License Agreement”) with Emilia Cosmetics Ltd., a world-leading company in the field of development, production, manufacturing and packaging of health and beauty products including for treatment of human skin disease.

 

Prior to entering into the License Agreement, the Parties conducted a Development and Evaluation Program (as defined in the License Agreement) for the development of a specific product comprising Emilia’s formulation with certain medical cannabis extract provided by us for topical treatment of Psoriasis.

 

Pursuant to the License Agreement, Emilia has granted a limited license to us with respect to Emilia’s Licensed Intellectual Property to be developed and commercialized worldwide in the topical treatment of Psoriasis in humans with our product and upon the successful achievement of the trial, Emilia will grant us an exclusive, worldwide, transferable, royalty-bearing license, with the right to grant sublicenses, to use, sell and commercially exploit the Emilia Intellectual Property (the “License”). In consideration for the License, from and after the first commercial sales of the Licensed Product, we shall pay to Emilia a royalty at the rate of ten (10%) percent of net sales during the period of time beginning upon the first commercial sale and ending ten (10) years thereafter (the “Royalty Term”). In the event the sale of the Licensed Product during the Royalty Term reaches the minimum sales targets mutually agreed by the Parties as set forth in the License Agreement, the Royalty Term will extend to an additional five (5) year term.

 

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On December 29, 2016, OWC we entered into a Research Agreement with Medical Research Infrastructure Development and Health Services Fund by Chaim Sheba Medical Center, pursuant to the Research Agreement, the Fund shall perform a Phase I, double blind, randomized, placebo-controlled, maximal dose study (the “Study”) to determine the safety, tolerability of topical cream containing MGC (“Medical Grade Cannabis” or the “Study Drug”) in healthy volunteers, employing the services of Dr. Aviv Barzilay, Director of the Department of Dermatology- Chaim Sheba Medical Center, Tel Hashomer, Israel, to lead the Study (the “Investigator”). The Study shall be conducted in compliance with the following, as defined in the Research Agreement: (1) the Protocol; (2) the Ministry Guidelines; (3) the instructions and terms specified in the Helsinki Committee’s approval; (4) the ICH-GCP; (5) the Helsinki Declarations; (6) the applicable laws, rules and regulations regulating such studies which are applicable in Israel (the “Applicable Laws”); and (7) written instructions and prescriptions issued by the OWC and governing the administration of the Study Drug.

 

We have been conducting a study on the efficacy of the cannabinoid-based topical cream for the treatment of skin conditions generally and psoriasis specifically, which commenced in November, 2016 (the “Study”).

 

On February 1, 2017, following the very encouraging results that have been achieved at the mid-point of the Study, the Registrant’s Board of Directors and the management and scientific personnel of OWC Ltd have determined to extend the size and scope of the Study for the purpose of, among other things, checking the biological markers that have been generated to date with respect to the treatment of psoriasis (proliferation/ inhibition and several interleukins). Despite extending its size and scope of the Study, the Registrant expects to compete the Study within the same projected time frame.

 

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 as outlined above.

 

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 research, led by internationally renowned investigators, at the facilities of leading Israeli hospitals and scientific institutions. The Company will adhere to legislation, rules and guidelines regarding the investigations. Dr. 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.

 

   - 36 -  
   

 

The Company finished the development of the topical cream by the end of fourth of 2016, at Emilia Cosmetics labs located in Yerucham, Israel. After the completion of the formulation development, the Company will initiate a phase I study at the Sheba facilities to explore the effect of topical cream on psoriasis. Prior to that we will conduct a safety study on the second quarter of 2017. 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.

 

The Company started developing other delivery systems, designed for different indications, during 2016.

 

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 expected to pay Sheba $170,000 for conducting the multiple myeloma trial between the 3rd quarter of 2015 and the second quarter of 2016. In addition, we expect to commence pre-clinical studies on psoriasis during the second quarter of 2016. Pursuant to the collaboration agreements, we are obliged to pay Sheba $85,000 throughout 2017 for conducting the psoriasis 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. As of December 31, 2016, we have paid Sheba $64,389 according Sheba’s payment requests for services provided by Sheba through that date.

 

Research and Development Status

 

Target Indication   Collaborator   Status
           
Multiple Myeloma   Sheba Academic   Entered into a research agreement for in vitro studies
    Medical Center   Negotiating terms of a research agreement for in vivo studies
        Completed one in vitro study
        Proceeding with further pre-clinical in vitro studies (safety and toxicity, pharmacokinetic, and pharmacodynamic)
        Expect to submit 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 third quarter of 2017
        Drafted a clinical trial protocol synopsis, which we believe will assist us in preparing an application for orphan status designation
           
Psoriasis   Sheba Academic   Entered into a Research Collaboration and License Agreement but have not commenced any studies to date
    Medical Center   Received an IRB approval for 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. The study should begin in or about April 2017.
           
Psoriasis   Emilia Cosmetics Ltd.     Entered into a nonbinding memorandum of understanding for the development, manufacture and marketing of a cannabinoid-based topical cream
        We finished the development of the topical cream in the first quarter of 2016.
           
Fibromyalgia   Sheba Academic
Medical Center
  Drafted a clinical trial protocol synopsis
           
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.

 

   - 37 -  
   

 

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.

 

   - 38 -  
   

 

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, 2016 as compared to the year ended December 31, 2015

 

We have not generated significant revenue during the years ended December 31, 2016 and 2015. We have operating expenses related to general and administrative expenses and research and development expenses. During the year ended December 31, 2016, we incurred a net loss of $2,287,329 due principally to general and administrative expenses of $ 2,006,216 and research and development expenses of $141,858, adjusted for convertible loans of $180,340, exchange differences on principal of long-term loan of $16,972, other finance income of $8,057 compared to a net loss of $1,654,988 due to general and administrative expenses of $1,380,029, research and development expenses of $271,394, and financing expenses of $3,565 in the prior year.

 

Our general and administrative expenses increased $626,187 during the year ended December 31, 2016 as compared during the year ended December 31, 2015. The increase was due to a significant increase in non-cash compensation expense $1,097,650. During the year ended December 31, 2016, our research and development expenses decreased by $129,536 or 47.7% as compared to the same period in the prior year.

 

Liquidity and Capital Resources

 

On December 31, 2016, we had current assets of $481,695 consisting of $472,282 in cash and other current assets of $9,413. We had property and equipment, net of accumulated depreciation of $21,549, carried at $15,073 as of December 31, 2016. We had total assets of $496,768 as of December 31, 2016. On December 31, 2015, we had current assets of $407,549 consisting of $357,161 in cash and other current assets of $50,388. We had property and equipment, net of accumulated depreciation of $11,863, carried at $22,899 as of December 31, 2015. We had total assets of $430,448 as of December 31, 2015.

 

On December 31, 2016, we had $145,780 in current liabilities consisting of $7,694 in accounts payable, $38,086 in other current liabilities and deferred revenues of $100,000. On December 31, 2015, we had $107,626 in current liabilities consisting of $28,125 in accounts payable, $29,501 and deferred revenues of $50,000.

 

In addition, at December 31, 2016 and 2015, we had a long-term liabilities of $250,000 and -0-, respectively. The $250,000 in long-term liabilities at December 31, 2016, is payable to Medmar LLC under a $300,000 non-recourse, non-interest bearing and non-convertible loan due 36 months from the date of the loan agreement in September 2016. This loan is only repayable from royalties payable by Medmar to the Company under a license agreement and, to the extent that royalties, if any, are insufficient to repay the loan, the Company has no obligation to pay any deficiency.

 

We had positive working capital of $335,915 at December 31, 2016 and $299,923 at December 31, 2015. Our accumulated deficits as of December 31, 2016 and December 31, 2015 were $9,836,195 and $7,548,866, respectively.

 

We used $529,269 in our operating activities during the year ended December 31, 2016, which was due to a net loss of $2,287,329 offset by exchange differences on principal of long-term loan of $16,972, adjustments of convertible loans of $180,340, depreciation expense of $9,686, stock-based compensation and amortization of services receivable of $1,468,859, a decrease in other assets of $40,975, a decrease in accounts payable of $20,431, an increase in deferred revenues of $50,000 and an increase in other liabilities of $11,659.

 

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 adjustments of convertible loans of $3,074, depreciation expenses of $9,123, stock-based compensation of $371,209, an increase in accounts receivable of $11,796, a decrease in other assets of $23,000, an increase in accounts payable of $11,604, in increase in deferred revenues of $50,000 and a decrease in other liabilities of $17,335.

 

   - 39 -  
   

 

We used $1,860 during the year ended December 31, 2016 and $2,569 during the same period in the prior year to purchase property and equipment.

 

We financed our negative cash flow from operations during the year ended December 31, 2016 through proceeds from issuance of common stock of $325,000 from the issuance of 2,500,000 shares of common stock, and net proceeds of debt borrowings of $321,250. 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.

 

Based upon our cash position of $472,282 at December 31, 2016, we believe that we will need to raise additional capital, either equity or debt during the first half of fiscal year 2017 to fund our plan of operations including our research and development initiatives for the next twelve months. We raised during the first quarter of 2017 $1,752,716 through proceeds from issuance of 4,537,954 shares of common stock. 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 independent 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 material revenues and no material 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 projects and stay in business. Even if we raise additional funds, we do not know how long these funds will last.

 

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. Pursuant to the agreement, we are obligated to pay Sheba $170,000. We are obligated to provide $85,000 in funding in the third quarter of 2017 related to the Psoriasis research conducted at Sheba.

 

At present, we use our available working capital to fund these studies. However, we expect that we will need to raise additional funding prior to or when our clinical studies are commenced.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2016, and 2015, 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, 2016 and 2015, 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, 2016 and 2015, and are included elsewhere in this annual report.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

 

   - 40 -  
   

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Back to Table of Contents

 

Report of Independent Registered Public Accounting Firm - Fahn Kanne & Co. Grant Thornton Israel  
Report of Independent Registered Public Accounting Firm - M&K CPAS, PLLC  
Financial Statements:  
Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015  
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2016 and 2015  
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015  
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015  
Notes to Consolidated Financial Statements  

 

   - 41 -  
   
 

 

 

We have audited the accompanying consolidated balance sheet of OWC Pharmaceutical Research Corp, Inc. and subsidiary (hereinafter: the “Company”) as of December 31, 2016, and the related consolidated statement of operations and comprehensive loss, stockholders’ equity and cash flows for the year ended December 31, 2016. 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 audit.

 

We conducted our audit in accordance with the 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. We were not engaged to perform an audit of the Company’s 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OWC Pharmaceutical Research Corp, Inc. and subsidiary as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1B, the Company has not yet generated material revenues from its operations to fund its activities. As of December 31, 2016, the Company has an accumulated deficit of $9,836,195. Also, during the years ended December 31, 2016 and 2015 the Company incurred losses of $2,287,329 and $1,654,988, respectively, along with negative cash flows from operating activities. These conditions, along with other matters as set forth in Note 1B, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1B. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ FAHN KANNE & CO. GRANT THORNTON ISRAEL  
Certified Public Accountants (Isr.)  
   
Tel-Aviv, Israel  
April 17, 2017  

 

Certified Public Accountants

Fahn Kanne & Co. is the Israeli member firm of Grant Thornton International Ltd

 

   - 42 -  
   

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors
OWC Pharmaceutical Research Corp.

 

Petach Tikva, Israel

 

We have audited the accompanying consolidated balance sheet of OWC Pharmaceutical Research Corp. (the “Company”) as of December 31, 2015 and the related consolidated statement of operations, consolidated statement of comprehensive loss, consolidated statement of changes in stockholders’ equity and consolidated statement of cash flows for the year 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 the results of its operations and cash flows for the period 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 1B 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. Management’s plans regarding those matters are also described in Note 1B. 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  
April 17, 2016  

 

   - 43 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

    US dollars (except share data)  
    December 31,  
    2016     2015  
ASSETS                
Current assets                
Cash and cash equivalents     472,282       357,161  
Other current assets (Note 3)     9,413       50,388  
                 
Total current assets     481,695       407,549  
                 
Property and equipment (Note 4)     15,073       22,899  
                 
Total Assets     496,768       430,448  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable     7,694       28,125  
Other current liabilities     38,086       29,501  
Deferred revenues (Note 7A1)     100,000       50,000  
Total current liabilities     145,780       107,626  
                 
Non-recourse loan (Note 6)     250,000       -  
Total liabilities     395,780       107,626  
Commitments and Contingencies (Note 7)                
Stockholders’ Equity (Note 8):                
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 authorized: 139,447,782 and 81,460,875 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively     1,395       815  
Additional paid-in capital     11,036,751       8,533,525  
Services receivable     (455,283 )     -  
Common stock subscriptions receivable     (651,730 )     (651,730 )
Accumulated deficit     (9,836,195 )     (7,548,866 )
Accumulated other comprehensive income (loss)     6,050       (10,922 )
Total stockholders’ equity     100,988       322,822  
Total Liabilities and Stockholders’ Equity     496,768       430,448  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

   - 44 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    US dollars (except share data)  
    December 31,  
    2016     2015  
             
Revenue (Note 7A1)     50,000       -  
                 
Operating expenses:                
Research and development     (141,858 )     (271,394 )
General and administrative (Note 9)     (2,006,216 )     (1,380,029 )
Total operating expenses     (2,148,074 )     (1,651,423 )
                 
Operating loss     (2,098,074 )     (1,651,423 )
Financing expenses, net (Note 10)     (189,255 )     (3,565 )
Net loss     (2,287,329 )     (1,654,988 )
                 
Other comprehensive income (loss):                
Foreign currency translation adjustment     16,972       (17,407 )
                 
Comprehensive loss     (2,270,357 )     (1,672,395 )
                 
Basic and diluted per share amounts (Note 12):                
Basic and diluted net loss     (0.02 )     (0.02 )
                 
Weighted average shares outstanding (basic and diluted)     96,362,150       80,591,237  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

   - 45 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

    Common Stock                          
    Shares     Common Stock     Additional paid-in capital     Subscription Receivable     Accumulated Deficit    

 

 

Services receivable

    Accumulated Other Comprehensive Income (Loss)     Total Stockholders’ Deficit  
US dollars (except share data)                                                
Balance at December 31, 2014     78,429,273       784       8,000,847       (651,730 )     (5,893,878 )     -       6,485       1,462,508  
                                                                 
                                                                 
Stock based compensation     1,614,935       17       371,192       -       -       -       -       371,209  
Stock issued for cash @ $0.05     800,000       8       39,992       -       -       -       -       40,000  
Stock issued for cash @ $0.15 together with detachable warrants     333,333       3       49,997       -       -       -       -       50,000  
Stock issued for cash @ $0.12 together with detachable warrants     283,334       3       33,997       -       -       -       -       34,000  
Beneficial conversion feature (Note 8D)     -       -       37,500       -       -       -       -       37,500  
Foreign currency translation adjustment     -       -       -       -       -       -       (17,407 )     (17,407 )
Net loss     -       -       -       -       (1,654,988 )     -       -       (1,654,988 )
Balance at December 31, 2015     81,460,875       815       8,533,525       (651,730 )     (7,548,866 )     -       (10,922 )     322,822  
Stock based compensation     100,000       1       1,440,682       -       -       -       -       1,440,683  
Stock issued upon conversion of debt host and accrued interest     53,844,599       539       123,127       -       -       -       -       123,666  
Reclassification of embedded derivative liabilities upon conversion of convertible loans host     -       -       130,998       -       -       -       -       130,998  
Financial instruments issued for services to be received     1,542,308       15       483,444       -       -       (483,459 )     -       -  
Amortization of services receivable (see Note 2I)     -       -       -       -       -       28,176       -       28,176  
Stock issued for cash @ $0.13 together with detachable warrants     2,500,000       25       324,975       -       -       -       -       325,000  
Foreign currency translation adjustment     -       -       -       -       -       -       16,972       16,972  
Net loss     -       -       -       -       (2,287,329 )     -       -       (2,287,329 )
Balance at December 31, 2016     139,447,782       1,395       11,036,751       (651,730 )     (9,836,195 )     (455,283 )     6,050       100,988  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

   - 46 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    US dollars  
    Year ended
December 31,
 
    2016     2015  
             
Cash flows from operating activities:                
Net loss     (2,287,329 )     (1,654,988 )
Adjustments to reconcile net loss to net cash used by operating activities:                
Exchange differences on principal of long term loan     16,972       -  
Adjustments of convertible loans     180,340       3,074  
Depreciation expense     9,686       9,123  
Amortization of services receivable     28,176       -  
Stock based compensation     1,440,683       371,209  
Changes in assets and liabilities:                
Increase in accounts receivable     -       (11,796 )
Decrease in other assets     40,975       23,000  
Increase (decrease) in accounts payable     (20,431 )     11,604  
Increase in deferred revenues     50,000       50,000  
Increase (decrease) in other liabilities     11,659       (17,355 )
Cash used by operating activities     (529,269 )     (1,216,130 )
                 
Cash flows from investing activities:                
Purchase of equipment     (1,860 )     (2,569 )
Cash used in investing activities     (1,860 )     (2,569 )
                 
Cash flows from financing activities:                
Proceeds from issuance of common stock and warrants     325,000       124,000  
Proceeds of debt borrowings, net of related expenses     321,250       -  
Cash provided by financing activities     646,250       124,000  
                 
Net increase (decrease) in cash and cash equivalents     115,121       (1,112,106 )
Balance of cash and cash equivalents at beginning of period     357,161       1,469,267  
Balance of cash and cash equivalents at end of period     472,282       357,161  
                 
Supplementary information on financing activities not involving cash flows:                
                 
Derivative liability converted to additional paid-in capital     130,998       -  
Debt and accrued interest converted to equity     123,666       -  

 

The accompanying notes are an integral part of the consolidated financial statements.

 

   - 47 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1   –   GENERAL

 

  A. Organizational Background

 

    OWC Pharmaceutical Research Corp. (“OWCP” or the “Company”) is a Delaware corporation and was incorporated under the laws of the State of Delaware on March 7, 2008. The Company is a medical cannabis research and development company that applies conventional pharmaceutical research protocols and disciplines to the field of medical cannabis with the objective of establishing a leadership position in the research and development of medical cannabis therapies, products and delivery technologies. The Company is currently engaged in the research and development of cannabis-based medical products (the “Product Prospects”) for the treatment of multiple myeloma, psoriasis and fibromyalgia as well as development of a cannabis soluble tablet delivery system that may have applications for other indications. The Company also provides consulting services to governmental and private entities to assist them with developing and implementing tailor-made comprehensive medical cannabis programs.
     
    The accompanying consolidated financial statements of OWCP and its wholly owned subsidiary One World Cannabis, Ltd. (“OWC” or the “Israeli subsidiary”) were prepared from the accounts of the Company under the accrual basis of accounting.

 

  B. Liquidity and going concern uncertainty

 

    The development and commercialization of the Company’s product is expected to require substantial expenditures. The Company has not yet generated material revenues from operations, and therefore is dependent upon external sources for financing its operations. As of December 31, 2016, the Company has an accumulated deficit of $9,836,195, and its stockholders’ equity is $100,988. In addition, in each year since its inception the Company reported losses and negative cash flows from operating activities. Management considered the significance of such conditions in relation to the Company’s ability to meet its current and future obligations and determined that such conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. Until such time as the Company generates sufficient revenue to fund its operations (if ever), the Company plans to finance its operations through the sale of equity or equity-linked securities and/or debt securities and, to the extent available, short term and long term loans. There can be no assurance that the Company will succeed in obtaining the necessary financing to continue its operations as a going concern.
     
    During 2016 and 2015, the Company raised a total amount of approximately $325,000 and $124,000 (net of related expenses), respectively from the issuance of units including Common Stock and warrants (see Note 8). In addition, during 2016 the Company raised funds through issuance of convertible loans and a non recourse loan from Medmar (see Note 6).

 

  C. Risk factors

 

    As described in the above paragraph, the Company has a limited operating history and faces a number of risks and uncertainties, including risks and uncertainties regarding continuation of the development process, demand and market acceptance of the Company’s products, the effects of technological changes, competition and the development of products by competitors. Additionally, other risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Company’s future results and the availability of necessary financing. In addition, the Company expects to continue incurring significant operating costs and losses in connection with the development and marketing of its products. The Company has not yet generated material revenues from its operations to fund its activities and therefore is dependent on the receipt of additional funding from its stockholders and/ or new investors in order to continue its operations.

 

   - 48 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

  A. Basis of Presentation

 

    The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

 

  B. Principles of Consolidation

 

    The financial statements include the accounts of OWC Pharmaceutical Research Corp. and its wholly owned Israeli subsidiary. All significant inter-company balances and transactions have been eliminated.

 

  C. 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 statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to (i) Stock based compensation (ii) the going concern assumptions.

 

  D. Functional currency

 

    The functional currency of the Company is the US dollar, which is the currency of the primary economic environment in which it operates. In accordance with ASC 830, “Foreign Currency Matters” (ASC 830), balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the applicable balance sheet date. For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used. Gains or losses arising from changes in the exchange rates used in the translation of such transactions are presented within financing income or expenses.
     
    Non-U.S. entity operations are recorded in New Israeli Shekels the functional currency of the Israeli subsidiary. Results of operations for non-U.S. dollar functional currency entities are translated into U.S. dollars using average currency rates or actual action date currency rate. 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.

 

  E. 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, 2016 and 2015.

 

  F. Property and Equipment

 

    New property and equipment are recorded at cost. 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.

 

  G. Impairment of Long-Lived Assets

 

    The Company reviews the recoverability of our long-lived assets including property and equipment, 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.

 

   - 49 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  H. Warrants

 

    The Company reviews the terms of all warrants issued and classifies the warrants as a component of permanent equity if they are freestanding financial instruments that are legally detachable and separately exercisable, contingently exercisable, do not embody an obligation for the Company to repurchase its own shares, and permit the holders to receive a fixed number of shares of common stock upon exercise. In addition, the warrants must require physical settlement and may not provide any guarantee of value or return. Warrants that meet these criteria are initially recorded at their grant date fair value and are not subsequently remeasured. Warrants that do not meet this criteria represent a derivative liability and are measured upon initial recognition and remeasured at subsequent reporting periods at their fair value. Changes in the fair value of any liability – classified instruments are recorded in the consolidated statement of operations.

 

  I. Stock-Based Compensation

 

    The Company accounts for stock-based compensation to employees in accordance with ASC Topic 718, Compensation – Stock Compensation . Accordingly, stock based compensation to employees is recognized in the statement of operations as an operating expense, based on the fair value of the award that is ultimately expected to vest. The fair value of stock-based compensation is estimated using the Black Scholes option-pricing model. 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 awards and the risk free interest rate. The Company has expensed compensation costs, net of estimated forfeitures, on a straight-line basis, over the requisite service period of the award.
     
    Stock based payments awarded to consultants (non-employees) are accounted for in accordance with ASC Topic 505-50, “ Equity-Based Payments to Non-Employees ”. However, when the Company grants to non-employees a fully vested, nonforfeitable equity instrument, such grants are measured based on the fair value of the award at the date of grant. When the fully vested, nonforfeitable equity instruments are granted for services to be received in future periods, the measured cost is recognized as an increase to stockholders’ equity at the measurement date with an offsetting amount as a deduction from stockholders’ equity within the caption “Services receivable”. Such amount is subsequently amortized to the statement of operations over the term of the services as an operating expense, as if the Company has paid periodic payments of cash for the services received from such service provider.

 

  J. Accounting For Obligations and Instruments Potentially To Be Settled In The Company’s Own Stock

 

    The Company accounts 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.

 

  K. Fair Value of Financial Instruments

 

    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. ASC 825 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between market participants. At December 31, 2016 and December 31, 2015, 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.

 

   - 50 -  
   

 

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  L. 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.
     
    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, 2016 and December 31, 2015, there were no significant transfers of financial assets or financial liabilities between the hierarchy levels.
     
    As of December 31, 2016 and 2015, no assets or liabilities were required to be measured at fair value on a recurring basis.

 

  M. Convertible Loans

 

    The Company considers the provisions of ASC Topic 815 - 40, ”Derivatives and Hedging - Contracts in Entity’s Own Equity” with respect to convertible loans. When the Company determines that the embedded conversion feature is not considered indexed to the Company’s own stock, the embedded conversion feature is bifurcated from the host instrument and is accounted for at fair value as a derivative liability. Accordingly, upon initial recognition, the embedded conversion feature is measured at fair value and the remaining proceeds are allocated to the loan component (Host). In subsequent periods the derivative liability is measured at fair value through profit or loss (with changes presented within financing income or expense, as applicable) and the loan component is measured at amortized cost. The amount that was allocated to the embedded conversion feature upon initial recognition, created a discount on the loan component. Such discount is amortized as interest expense to profit or loss over the term of the loan until its stated maturity.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  M. Convertible Loans (cont.)

 

    When the Company determine that the embedded conversion feature should not be separated from the host instrument because it qualified for equity classification, the Company applies ASC Topic 470 - 20, ”Debt - Debt with Conversion and Other Options ” which clarifies the accounting for instruments with beneficial conversion features or contingency adjustable conversion ratios. The beneficial conversion feature is calculated by allocating the proceeds received in a financing transactions to the convertible loan and to any detachable warrants included in the transaction, if any, and by measuring the intrinsic value of the convertible loan, based on the effective conversion price as a result of the allocated proceeds. The amount of the beneficial conversion feature is recorded as a discount on the convertible loan with a corresponding amount credited directly to equity as additional paid-in capital. After the initial recognition, the discount on the convertible loan is amortized as interest expense over the term of the loans.

 

  N. Earnings per Common Share

 

    The Company computes 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 with respect to options and warrants and convertible loans or 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.

 

  O. Liability for employee rights upon retirement

 

    The Israeli subsidiary’s liability for employee rights upon retirement with respect to its Israeli employees is calculated pursuant to the Israeli Severance Pay Law, based on the most recent salary of each employee multiplied by the number of years of employment of each such employee as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment, or ratable portion thereof for periods less than one year. The Israeli subsidiary makes monthly deposits to insurance policies and severance pay funds.
     
    The deposited funds may be withdrawn upon the fulfillment of the Israeli subsidiary’s severance obligations pursuant to Israeli severance pay laws or labor agreements with its employees. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits or losses.
     
    Severance expenses for the year ended December 31, 2016, and 2015 amounted to $30,000 and $15,000, respectively.

 

  P. Income Taxes

 

    The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. Accordingly, deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the enacted tax rates expected to be in effect when these differences reverse. Valuation allowances in respect of deferred tax assets are provided for, if necessary, to reduce deferred tax assets to amounts more likely than not to be realized.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  P. Income Taxes (cont.)

 

    The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more-likely-than-not recognition threshold. The Company’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Company did not recognize such items in its fiscal 2016 and 2015 financial statements and did not recognize any liability with respect to unrecognized tax position in its balance sheet.

 

  Q. Revenue Recognition

 

    Revenues from consulting services are recognized when the services are rendered or when applicable, if the consideration is non-refundable, upon expiration of the Company’s performance obligation.
     
    Deferred revenue includes amounts received with respect to consultation services not yet recognized as revenues. Such revenues are deferred and recognized on a straight-line basis over the service period or when service is provided, as applicable to the contract.

 

  R. Research and development expenses

 

    Research and development expenses are charged to operations as incurred.

 

  S. Concentrations of credit risk

 

    Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with major banks in Israel and the United States of America. Management believes that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments. As of December 31, 2016 and 2015 the balances of accounts receivable were not material and accordingly such balances do not represent substantial concentration of credit risk. The Company does not have any significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

 

  T. Contingencies

 

    The Company records accruals for loss contingencies arising from claims, litigation and other sources when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. Legal costs incurred in connection with loss contingencies are expensed as incurred.

 

  U. Reclassifications

 

    Certain reclassifications from the prior year presentation have been made to conform to the current year presentation. These reclassifications did not have material impact on the Company’s equity, net assets, results of operations or cash flows.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  V. Adoption of New Accounting Standards

 

    In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 also provide guidance related to the required disclosures as a result of management evaluation.
     
    The amendments in ASU 2014-15 became effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Accordingly, management applied the guidance of ASU 2014-15 to these financial statements and has determined that there is a substantial doubt about the Company’s ability to continue as a going concern. Certain disclosures were updated to conform to the disclosures required under ASU 2014-15.

 

  W. Recently Issued Accounting Standards

 

    In May 2014, The FASB issued Accounting Standard Update 2014-09 , Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).
     
    ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 also requires entities to disclose sufficient information, both quantitative and qualitative, to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
     
    During 2016, the FASB issued several Accounting Standard Updates that focuses on certain implementation issues of the new revenue recognition guidance including Narrow-Scope Improvements and Practical Expedients, Principal versus Agent Considerations and Identifying Performance Obligations and Licensing.
     
    An entity should apply the amendments in this ASU using one of the following two methods: 1. Retrospectively to each prior reporting period presented with a possibility to elect certain practical expedients, or, 2. Retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If an entity elects the latter transition method, it also should provide certain additional disclosures.
     
    For a public entity, the amendments in ASU 2014-09 (including the amendments introduced through recent ASU’s) are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period (the first quarter of fiscal year 2018 for the Company). Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
     
    The Company intends to adopt ASU 2014-09 as of January 1, 2018.
     
    The Company is in the process of evaluating the impact of ASU 2014-09 on its revenue streams and selling contracts, if any, and on its financial reporting and disclosures. Management is expecting to complete the evaluation of the impact of the accounting and disclosure changes on the business processes, controls and systems throughout 2017. Since the Company did not report so far, material revenues, management believes that the adoption of ASU 2014-09 will not have significant impact on its financial statements.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 2   -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

 

  W. Recently Issued Accounting Standards (cont.)

 

    In November 2015, the FASB has issued Accounting Standards Update (ASU) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on organizations’ balance sheet. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods (i.e., in the first quarter of 2017 for calendar year-end companies).Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods. The Company does not believe this ASU will have a significant impact on its consolidated financial statements.
     
    In March 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.
     
    Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments also simplify two areas specific to private companies.
     
    For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period periods (i.e., in the first quarter of 2017 for calendar year-end companies).
     
    The Company is in the process of assessing the impact, if any, of ASU 2016-09 on its consolidated financial statements.

 

NOTE 3   –   OTHER CURRENT ASSETS

 

    US dollars  
    December 31,  
    2016     2015  
             
Prepaid expenses     1,536       38,591  
Others     7,877       11,797  
      9,413       50,388  

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 4   –   PROPERTY AND EQUIPMENT

 

    US dollars  
    December 31,  
    2016     2015  
             
Furniture and office equipment     2,407       2,407  
Computers     24,641       24,641  
Photography     7,714       7,714  
Machinery     1,860       0  
      36,622       34,762  
Less – accumulated depreciation     (21,549 )     (11,863 )
      15,073       22,899  

 

During the years ended December 31, 2016 and 2015, depreciation expenses amounted to $9,686 and $9,123, respectively, and new equipment purchases amounted to $1,860 and $2,569, respectively.

 

NOTE 5   –   LINE OF CREDIT

 

  As of December 31, 2016, the Company had an unutilized credit line of approximately $7,500 with its Israeli bank. Borrowings under the line of credit are secured by funds on deposit with the bank at the time of borrowing, which generally must be sufficient to cover the principal amount of the borrowings in full.

 

NOTE 6   -   NON-RECOURSE LOAN

 

  On September 28, 2016 (the “Effective Date”), OWC entered into a non-recourse loan agreement (the “Loan Agreement”) with Medmar LLC (“Medmar”), pursuant to which Medmar has agreed to loan OWC a total of $300,000 (the “Loan”) on a non-interest bearing basis, with no conversion rights. The Loan is due in 36 months from the Effective Date, and repayment shall be made only by the set off of royalties payable by Medmar to OWC as follows: (i) prior to the full repayment of the Loan, which OWC may prepay at any time, if and to the extent Medmar is required to pay any royalties to OWC under a License Agreement dated March 17, 2016 (see Note 7A1), Medmar shall set off such royalties from the outstanding principal balance of the Loan; (ii) OWC shall not be required to pay the Loan other than through the set off from the royalties; and (iii) the Loan is a non-recourse loan, meaning that if and to the extent that the royalties are insufficient for any reason in order to fully repay the Loan, Medmar waived any right and/or claim to any deficiency.
   
  In addition, the Loan Agreement also provides that: (i) subject to Medmar funding the entire Loan, Medmar shall receive the exclusive right to manufacture, produce, publicize, promote and market OWC’s Licensed Products (as defined in the above-referenced License Agreement) in any state in the U.S., subject to a new license agreement to be negotiated and signed between the parties with respect to each and every state; (ii) the rights to be granted to Medmar under (i) above shall expire within three (3) years subject to certain conditions and limitations; and (iii) the right of first refusal agreement between the parties that was executed on February 8, 2016 providing Medmar certain rights in connection with the commercialization of Licensed Products in the States of Hawaii and Pennsylvania be terminated (see Note 7A1).
   
  As at December 31, 2016, the amount of the loan received by OWC was $250,000 and the balance of $50,000 was received subsequent to balance sheet date. See Note 14B.
   
  As the Company does not expect to earn any royalties from Medmar during the 12 months subsequent to the balance sheet date, the entire amount of the loan is presented as a long-term liability as of December 31, 2016.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 7   -   COMMITMENTS AND CONTINGENCIES

 

  A. Commitments

 

  1. On October 11, 2015, OWC entered into a memorandum of understanding with Medmar for the purpose of granting an exclusive, non-transferable, royalty-bearing license, to manufacture, produce, publicize, promote and market the licensed products described therein in the State of Hawaii and the State of Pennsylvania, pursuant to which Medmar has paid OWC $100,000 ($50,000 in each of 2015 and 2016). On February 8, 2016, OWC and Medmar II, an affiliate of Medmar, executed a right of first refusal agreement providing Medmar certain rights in connection with the commercialization of OWC’s Cannabis-Based Medical Products in other states in the USA, pursuant to which Medmar has paid $50,000 to the Company.
     
    On March 17, 2016, Medmar and OWC executed a consulting and license agreement pursuant to which OWC granted to Medmar an exclusive, non-transferable, royalty-bearing license, to manufacture, produce, publicize, promote and market certain of OWC’s products (as defined in the license agreement) in the State of Maryland, against payment by Medmar to OWC of a royalty. As part of this agreement, the Company received from Medmar an amount of $50,000 as a non-refundable advance.
     
    In 2016, and as OWC does not have any performance obligation in connection with the agreement, OWC recorded revenues in an amount of $50,000.
     
  2. In April 2015 OWC engaged G.C. Group Ltd., an Israeli corporation specializing in pharmaceutical R&D to provide formulation development services for OWC’s new delivery system in the form of a cannabis soluble tablet. G.C. Group Ltd. successfully completed the first phase of development, a proof of concept of the desired end-product (the soluble tablet) to test the fabric, durability, solidification and other features of the cannabis soluble tablet.
     
    The agreement was terminated on December 31, 2015. However, OWC plans to continue the development process. OWC started developing other delivery systems, designed for different indications, during the first quarter of 2016.
     
  3. On November 3, 2016, OWC entered into a Joint Venture Memorandum of Understanding with Michepro Holding Ltd. (“EU Partner”), (“JV” or “MOU”). The EU Partner and OWC have agreed as follows: (i) to establish a strategic marketing and distribution alliance (the “JV”) to promote the sale of OWC’s Products in the European Union (the “EU”); (ii) the interest of the parties in the JV shall be held by the parties such that the EU Partner shall hold 25% of such interest and OWC shall hold the remaining 75% of such interest; (iii) OWC shall provide the JV with OWC’s Products for sale and distribution solely in the EU, at prices to be agreed between the parties from time to time; and (iv) EU Partner shall be responsible for the day-to-day management of the JV, at its own costs, and for this purpose shall make available to the JV its knowledge, business connection and personnel, all in order to maximize the sales of OWC’s Products in the EU through the JV. The JV had not commenced operations and did not have any assets or liabilities as of December 31, 2016.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 7   -   COMMITMENTS AND CONTINGENCIES (cont.)

 

  A. Commitments (cont.)

 

  4. On August 6, 2015, OWC signed a Memorandum of Understanding with Emilia Cosmetics Ltd. (“Emilia”), a large Israeli private label manufacturer which operates in the field of development, production, manufacturing and packaging of health and beauty products including for treatment of human skin disease, for the development, manufacture and marketing of a cannabinoid-based topical cream to treat psoriasis.
     
    On November 27, 2016, the Company and OWC (the “Group”) entered into a license agreement with Emilia (the “License Agreement”). During the fourth quarter of 2016, the Group completed the development process and then initiated a phase I study at Sheba to explore the safety of the topical cream on psoriasis. Prior to entering into the License Agreement, the Group and Emilia conducted a development and evaluation program (as defined in the License Agreement) for the development of a specific product comprising Emilia’s formulation with certain medical cannabis extract provided by the Group for topical treatment of psoriasis.
     
    Pursuant to the License Agreement, Emilia granted a limited license to the Group with respect to Emilia’s licensed intellectual property to be developed and commercialized worldwide in the topical treatment of psoriasis in humans with OWC’s Product. If such trial proves successful, Emilia will grant the Group an exclusive, worldwide, transferable, royalty-bearing license, with the right to grant sublicenses, to use, sell and commercially exploit the Emilia intellectual property, in consideration for which, from and after the first commercial sales of the licensed product, the Group shall pay to Emilia a royalty at the rate of ten percent of net sales during the period beginning upon the first commercial sale and ending ten years thereafter. In the event the sale of the licensed product during the royalty term reaches the minimum sales targets set forth in the License Agreement, the royalty term will be extended for an additional five-year term.
     
  5. On December 29, 2016, OWC entered into a Research Agreement with Medical Research Infrastructure Development and Health Services Fund (“fund”) by Chaim Sheba Medical Center. Pursuant to the Research Agreement, the Fund shall perform a Phase I, double blind, randomized, placebo-controlled, maximal dose study (the “Study”) to determine the safety and tolerability of topical cream containing MGC (“Medical Grade Cannabis” or the “Study Drug”) in healthy volunteers, employing the services of Dr. Aviv Barzilay, Director of the Department of Dermatology- Chaim Sheba Medical Center, Tel Hashomer, Israel, to lead the Study (the “Investigator”). The Study shall be conducted in compliance with the following, as defined in the Research Agreement: (1) the Protocol; (2) the Ministry Guidelines; (3) the instructions and terms specified in the Helsinki Committee’s approval; (4) the ICH-GCP; (5) the Helsinki Declarations; (6) the applicable laws, rules and regulations regulating such studies which are applicable in Israel (the “Applicable Laws”); and (7) written instructions and prescriptions issued by the OWC and governing the administration of the Study Drug.
     
  6. On October 22, 2014, OWC entered into a collaboration agreement with Sheba Academic Medical Center, a hospital in Tel-Aviv, Israel, relating to the use of cannabis to treat Myeloma. Within the framework of this collaboration agreement, OWC currently conducts pre-clinical studies on multiple myeloma, which have commenced in April 2015.
     
    Pursuant to the collaboration agreements, OWC was required to pay Sheba $170,000 for conducting the multiple myeloma trial between the 3rd quarter of 2015 and the second quarter of 2016. In addition, OWC commenced pre-clinical studies on the treatment of psoriasis during the second quarter of 2016. Pursuant to the collaboration agreements, OWC are obliged to pay Sheba $85,000 throughout 2017 for conducting the safety study for the cream. OWC currently have the financial resources to fund their current obligations under these agreements, but anticipate that they will require additional funding during the next 12 months for their continuing and planned expanded operations. As of December 31, 2016, OWC has paid $64,389.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 7   -   COMMITMENTS AND CONTINGENCIES (cont.)

 

  B. Contingencies

 

  On February 28, 2017, the Company filed an action for alleged legal malpractice against the NYC law firm of Sichenzia Ross FerenceKesner LLP and Marc J. Ross, Esq. a partner at Sichenzia Ross in New York State Supreme Court in New York County. Our claims arise out of legal services allegedly negligently performed by Ross and Sichenzia Ross. We brought the action seeking recovery of monetary damages noted above due to the defendants’ alleged failure to exercise a professional standard of care in their representation of OWCP. The action is now in the pleading stages. The Company cannot predict the ultimate outcome of this action.

 

NOTE 8   -   STOCKHOLDERS’ EQUITY

 

  A. Common Stock

 

  Holders of shares of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The holders of common stock do not have cumulative voting rights in the election of directors. Holders of shares of our common stock are entitled to receive dividends when and if declared by our Board out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Upon our dissolution or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of our common stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of shares of our common stock do not have preemptive, subscription, redemption or conversion rights and there are no redemption or sinking fund provisions applicable to tour common stock.

 

  B. Stock and Warrants Issued for Cash

 

  1. On August 31, 2015 and September 30, 2015 (“dates of issuance”), the Company received $34,000 through a placement of 283,334 shares of common stock. 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. 141,667 warrants were exercisable at $0.12 and expired 12 months from the dates of issuance. The other 141,667 warrants are exercisable at $0.25 and expire 24 months from the dates 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. Such warrants were classified within stockholders’ equity.
     
    For purposes of discussions that follow, the term “restricted shares of common stock” means that the shares of common stock were not issued under an effective registration statement that has been filed with the Securities and Exchange Commission.
     
  2. In February of 2015 the Company sold 800,000 common shares to one investor for the offering price of $0.05 per share that resulted in total proceeds of $40,000.
     
  3. During 2015, the Company also received $50,000 through a placement of 333,333 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. The related warrants were exercisable at $0.25 and expired on December 31, 2016. The relative fair value 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. Such warrants were classified within stockholders’ equity.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 8   -   STOCKHOLDERS’ EQUITY (cont.)

 

  B. Stock and Warrants Issued for Cash (cont.)

 

  4. In December 2016, the Company received $325,000 through a placement of 2,500,000 common stock units. Those units were sold at $0.13 per unit. Each unit consisted of two shares of common stock and warrants to purchase common stock. 953,846 class “G” warrants exercisable at $0.25 expire on December 2, 2018 and 953,846 class “H” warrants exercisable at $0.40 expire on December 2, 2019. Such warrants were classified within stockholders’ equity.
     
    The fair value of the warrants and options was estimated at the date of grant using the Black-Sholes-Merton pricing model. The Black-Sholes-Merton pricing model assumptions used are as follows: expected dividend yield of 0%; risk-free interest rate of 0.11%; expected volatility of 278%, and option term of 5.0 years.

 

  C. Stock Based Compensation

 

  1. Grants to non-employees

 

  A. During the year ended December 31, 2015 the Company issued 2,114,935 shares of our common stock to unrelated parties as payment for services. During 2015, the Company cancelled 500,000 shares of common stock previously issued for services. The remaining issued shares (1,614,935) were valued at the closing prices as of the dates of the agreements (ranging from $0.19 to $0.25) and resulted in full recognition of $360,370 in consulting services expense during fiscal year 2015.
     
  B. In February, 2015 the Company issued 64,935 warrants for services. The warrants were exercisable at $0.25 and expired February 23, 2016. The Company used the Black-Scholes-Merton pricing model to estimate the fair value of $10,839. Such amount was charged to expenses in 2015. 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.
     
  C. On November 22, 2016, the Company entered into a Corporate Management Services Agreement with Sorelenco Limited. In consideration for services, the Company agreed to issue to Sorelenco: (i) 1,442,308 restricted shares of the common stock, par value $0.0001 (the “Shares”); (ii) Class M Warrants exercisable for a period of twelve (12) months to purchase 1,250,000 Shares at an exercise price $0.08; (iii) Class G Warrants exercisable for a period of twenty-four (24) months to purchase 448,462 Shares at an exercise price $0.25; and (iv) Class H Warrants exercisable for a period of thirty-six (36) months to purchase 448,462 Shares at an exercise price $0.40. The aggregate fair value of the restricted shares and warrants was $432,200. This transaction represents an initiation of business relations between the parties. As the equity instruments issued are fully vested and nonforfeitable, the fair value of the grant was recognized as an increase to stockholders’ equity at the measurement date with an offsetting amount as a deduction from stockholders’ equity within the caption “Services receivable” (See Note 2I above). Such amount will be recognized as consulting expense over the term of the agreement. In 2016 the Company recognized $22,893 in expense and $409,307 as services receivable as of December 31, 2016.
     
  D. On November 28, 2016, the Company entered into a Consulting Agreement with Bear Creek Capital. In consideration for the services, the Company issued to Bear Creek 100,000 restricted shares of Common Stock. The aggregate fair value of the restricted shares was $10,000. This transaction represents initiation of business relations between the parties. As the equity instruments issued are fully vested and nonforfeitable, the fair value of the grant was recognized as an increase to stockholders’ equity at the measurement date with an offsetting amount as a deduction from stockholders’ equity within the caption “Services receivable” (See Note 2I above). Such amount, will be recognized as consulting expense over the term of the agreement. In 2016 the Company recognized $3,587 in expense and $6,413 as services receivable as of December 31, 2016.

 

   - 60 -  
   

 

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 8   -  STOCKHOLDERS’ EQUITY (cont.)

 

  C. Stock Based Compensation (cont.)

 

  1. Grants to non-employees (cont.)

 

  A. On December 16, 2016, the Company entered into a Consulting Agreement with Jeff Smurlick, pursuant to which the Consultant shall provide the Company with services in the areas of investor relations and business development. In consideration for the services, the Company issued to the Consultant 200,000 Class G Warrants and 200,000 Class H Warrants identical to the Class G and Class H Warrants described above. The aggregate fair value of the warrants was $41,259. This transaction represents initiation of business relations between the parties. As the equity instruments issued are fully vested and nonforfeitable, the fair value of the grant was recognized as an increase to stockholders’ equity at the measurement date with an offsetting amount as a deduction from stockholders’ equity within the caption “Services receivable” (See Note 2I above). Such amount will be recognized as consulting expense over the term of the agreement. In 2016 the Company recognized $1,696 in expense and $39,563 as services receivable as of December 31, 2016. On December 14, 2016, the Company issued 50,000 restricted shares of Common Stock to Securities Compliance Services for securities compliance services. The aggregate fair value of the restricted shares was $19,000. The entire fair value was recognized as consulting expense in 2016.

 

  2. Grants to employees

 

  A. In January 2016 the Company granted 200,000 options exercisable into 200,000 shares of common stock at $0.05 per share valued at $6,342. The options were granted for employees. See B below.
     
  B. In December 2016 the Company approved the 2016 Employee Incentive Plan. The 2016 Plan provides for the issuance of common stock, stock options and other stock-based awards to employees, officers, directors, consultants, and advisors. The number of shares reserved for issuance under the 2016 Plan is 36,000,000 shares of common stock. In 2016 the Company granted options exercisable into 34,850,000 shares under the plan at the exercise price of $0.05 per share. The granted options become vested over a two (2) year period from its date of grant. The options shall vest 1/3 on grant date and remaining 2/3 on a quarterly basis (8.33% per quarter)
     
    The Company estimates that the expected life of the options granted using the simplified method allowable under Staff Accounting Bulletin No. 107, Share Based Payments. The interest rate is based on the U.S. Treasury bill rates for U.S. treasury bills with terms commensurate with the expected term of the option grants on the grant date of the option. The following table summarizes the assumptions used in computing fair value:

 

    2016  
       
Risk-free interest rate     1.10 %
Dividend yield     0.00 %
Expected volatility     269 %
Expected term (in years)     5.0  
Weighted average grant date fair value of options granted during the period   $ 0.11  

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 8   -  STOCKHOLDERS’ EQUITY (cont.)

 

  C. Stock Based Compensation (cont.)

 

  2. Grants to employees (cont.)

 

  C. The following tables present a summary of the status of the grants to employees, officers and directors as of December 31, 2016.

 

      Number     Weighted average exercise price  
Balance outstanding at
December 31, 2015
      -       -  
                   
Granted       35,050,000     $ 0.051  
Balance outstanding at
December 31, 2016
      35,050,000     $ 0.051  
Balance exercisable at
December 31, 2016
      11,716,665     $ 0.051  

 

    As of December 31, 2016, all options granted are expected to vest and the weighted-average remaining contractual life of all options is 4.9 years. The weighted-average fair value of all stock options granted for the year ended December 31, 2016 was $0.11.
     
    The following tables summarize information about options outstanding at December 31, 2016:

 

Exercise price (US$)     Outstanding at December 31, 2016     Weighted average remaining contractual life (months)     Exercise price (US$)     Exercisable at December 31, 2016     Weighted average remaining contractual life (months)  
                                 
0.05       34,850,000       59.5     $ 0.05       11,616,665       59.5  
$0.10-$0.30       200,000       31.9       $0.10-$0.30       100,000       25.0  
        35,050,000                       11,716,665          

 

  D. Unsecured Notes Payable with Conversion Rights

 

A convertible loan for $78,500 issued on February 2, 2016, bears interest at 8.0% per annum until paid or converted and had an original maturity date of November 2, 2016. Any or all of the outstanding balance of the note may be converted at the option of the holder at any time into common stock of the Company at a variable conversion price of 65% of market price. Upon the issuance of the convertible note, the Company bifurcated the embedded conversion feature and recorded an initial derivative liability of $41,974 (the estimated fair value at the date of grant based on the Binomial option pricing model) all of which was allocated as debt discount.

 

During 2015 the Company agreed to provide unsecured promissory notes with an unrelated party for $37,500. The note was non-interest bearing and was due on September 16, 2016. The note had not been paid and was in default at September 30, 2016. The note had a future conversion right that allowed 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 (as defined) 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) existed 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 had been recorded as a discount to the notes payable and to Additional Paid-in Capital in fiscal 2015 upon initial recognition of such note.

 

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OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 8   -  STOCKHOLDERS’ EQUITY (cont.)

 

  D. Unsecured Notes Payable with Conversion Rights (cont.)

 

    For year ended December 31, 2016 the Company has amortized $83,650 ($3,074 in 2015) of the discount arising from the embedded derivative and beneficial conversion feature of the above described notes. As a result of the conversion described below, the accounting for the above described notes is complete as of December 31, 2016.
     
    During August and September 2016, in accordance with the original terms of the notes, at the option of the note holders, the entire combined principal balance of $116,000 and interest of $3,140 was converted into 53,844,599 shares of common stock. At the date of conversions, the entire derivative liability associated with the bifurcated conversion feature was marked-to-market, resulting in an increase to the total derivative liability of $55,998 which was reclassified to additional paid-in capital on the date of conversion. The change in derivative fair value was recorded as a derivative valuation charge (within financing expenses) in the Consolidated Statement of Operations. (See E below).
     
    However, as the $37,500 note was in default, the Company was required to amend the conversion price to 25% of the market price (as defined) , in accordance with the original terms of such note.

 

  E. Embedded Conversion Feature

 

    To properly account for the $78,500 convertible note issued during February 2016 discussed in Note 8D above, the Company performed a detailed analysis to obtain a thorough understanding of the transaction. The Company reviewed FASB ASC 815, to identify whether any equity-linked features in the notes are freestanding or embedded. The notes were then analyzed in accordance with FASB ASC 815 to determine if the anti-dilution feature should be bifurcated and accounted for at fair value and remeasured at fair value in income. The Company determined that the anti-dilution feature met the requirements for bifurcation pursuant to FASB ASC 815 due to the variable conversion price and therefore accounted for the anti-dilution features of the notes as a derivative liability. Changes in fair value of the derivative financial instruments were recognized in the Company’s statement of operations as a derivative valuation gain or loss.
     
    The adjustment to market of $55,998 resulted in a charge of $14,024 for the year ended December 31, 2016.
     
    The Company measured the conversion option derivatives using the lattice model. Assumptions used include:

 

    life through the note maturity date
       
    expected volatility-152%,
       
    expected dividends-none
       
    exercise prices as set forth in the agreements,
       
    common stock price of the underlying share on the valuation date, and
       
    number of shares to be issued if the instrument is converted

 

   - 63 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 9   -   GENERAL AND ADMINISTRATIVE EXPENSES

 

    US dollars  
    Year ended
December 31,
 
    2016     2015  
Salaries and related expenses     91,962       389,233  
Professional fees (*)     1,725,065       732,467  
Travel and expenses     25,685       67,787  
Depreciation     9,686       9,123  
Insurance     20,600       24,367  
Other     133,218       157,052  
      2,006,216       1,380,029  
(*) Including stock based compensation     1,468,859       371,209  

 

NOTE 10   -  FINANCING EXPENSES, NET

 

    US dollars  
    Year ended
December 31,
 
    2016     2015  
Adjustments of convertible loans     180,340       -  
Exchange differences on principal of long term loan     16,972       -  
Others, net     (8,057 )     3,565  
      189,255       3,565  

 

NOTE 11   -  INCOME TAXES

 

The Company has 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).

 

The Company has a current operating loss carry-forward in the United States of approximately $6,500,000 and in Israel of approximately $1,900,000, resulting in deferred tax assets of $2,666,175. The Company has determined it more likely than not that the related deferred tax assets will not materialize and have provided a valuation allowance against substantially all our net deferred tax asset.

 

    In US Dollars  
    December 31  
    2016     2015  
Individual components giving rise to the deferred tax assets are as follows::                
Future tax benefit arising from net operating loss carryovers     2,666,175       1,980,900  
Less valuation allowance     (2,666,175 )     (1,980,900 )
Net deferred     -       -  

 

   - 64 -  
   

 

OWC PHARMACEUTICAL RESEARCH CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

 

NOTE 11   -  INCOME TAXES (cont.)

 

The components of pretax loss are as follows:

 

      In US Dollars  
      December 31  
      2016     2015  
               
U.S.       (1,888,489 )     (690,420 )
Non-U.S.       (398,840 )     (964,568 )
        (2,287,329 )     (1,654,988 )

 

    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, 2013.
     
    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, the Company would record the related adjustment to income during the period in which the Company makes 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 the Company operate.
     
    In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes 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 the Company ultimately determines that payment of these amounts is unnecessary, the Company will reverse the liability and recognize a tax benefit during the period in which the Company determines that the liability is no longer necessary. The Company will record an additional charge in our provision for taxes in the period in which the Company determine that the recorded tax liability is less than the Company expects the ultimate assessment to be.

 

NOTE 12   -  LOSS PER SHARE

 

The loss and the weighted average number of shares used in computing basic and diluted loss per share for the years ended December 31, 2016 and 2015, are as follows:

 

    US dollars  
    Year ended December 31,  
    2016     2015