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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  OWC Pharmaceutical Research Corp    OWCP

OWC PHARMACEUTICAL RESEARCH CORP

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OWC PHARMACEUTICAL RESEARCH : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/13/2019 | 04:09pm EDT

The following information should be read in conjunction with the unaudited condensed consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission ("SEC") on April 1, 2019. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Cautionary Note Regarding Forward-Looking Statements," and discussed in the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2018 and in Item 1A. Risk Factors.



Overview


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

We have been engaged in research and development and consulting and advisory activities through our wholly-owned Israeli subsidiary, One World Cannabis Ltd., since July 2014. To date, we have entered into binding agreements with major hospitals and medical research facilities in Israel for the purpose of conducting research studies and trials related to the development and use of Cannabis-Based Medical Products for the treatment of multiple myeloma, psoriasis, PTSD, chronic pain and fibromyalgia, and for the development of a cannabis soluble tablet delivery system.

On July 18, 2019, we received approval from the Israeli Medical Cannabis Agency to perform an efficacy study with OWC topical ointment on psoriatic patients. Currently, the study is planned to be conducted at the Kaplan Medical Center, an academic medical center in Israel.

We believe this is the first time that the Israeli Medical Cannabis Agency has issued a permit for the treatment of psoriasis with a cannabis-based product. The study will be divided into the following two consecutive stages: (1) a pilot efficacy and dosage study; and (2) based on the results of the first stage, a double blind, placebo-controlled study.

On January 29, 2019, we executed a Clinical Trial agreement with the Souraski Medical Center Fund in Tel Aviv to perform a Single-Dose, Randomized, Crossover Study to compare the Safety, Tolerability and Pharmacokinetics of OWC's Medical Grade Cannabis - Orally Disintegrating Tablets (MGC-ODT) with Buccal Sativex®, in Healthy Adult Volunteers. This Clinical Trial Agreement (the "Agreement") is entered into by and among One World Cannabis Ltd. and The Medical, Infrastructure and Health Services Fund of the Tel Aviv Medical Center, Israel, and Prof. Jacob Ablin M.D. as the Principal Investigator. The primary objectives of the study are:

1. To investigate the pharmacokinetics profile of THC, 11-OH THC and CBD

following a single sublingual dose of MGC-ODT.

2. To compare the pharmacokinetic profiles of THC, THC metabolite 11-hydroxy-THC

and CBD following a single administration of the investigational MGC-ODT vs.

Sativex® Oromucosal Spray.

3. To monitor and compare the safety and tolerability of the MGC-ODT and Sativex®

   in the participating subjects.




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On April 15, 2019 we commenced the study.

On January 29, 2019 we reported positive safety data from our Phase 1 trial for our medical grade cannabis MGC ointment for the treatment of skin diseases. No severe adverse events were observed in the trial.



April 2018 PIPE


On April 30, 2018 (the "Initial Date"), we consummated a private placement transaction (the "April 2018 PIPE") by entering into a Securities Purchase Agreement (the "Agreement") with a non-US-based institutional investor (the "Purchaser"), pursuant to which, we sold and the Purchaser bought, (i) 500 shares of our new series of preferred stock designated as Series A Convertible Preferred Stock (the "Preferred Stock"), which were initially convertible into 25,000,000 shares of Common Stock at an initial conversion price of $0.20 per share (which was adjusted upon occurrence of the Triggering Event (as defined below), subject to adjustment pursuant to the anti-dilution provisions of the Preferred Stock, and (ii) Warrants (the "Warrants") representing the right to acquire initially 12,500,000 shares of Common Stock over a period of five years from the Initial Date at an initial exercise price of $0.22 per share, which is subject to certain adjustments including anti-dilution provisions, for an aggregate purchase price of $5,000,000.

Commencing January 1, 2019 through June 30, 2019, the Purchaser converted an aggregate of 59 shares of Preferred Stock into an aggregate of 61,662,264 shares of the Common Stock at the conversion prices in effect on the respective conversion dates. Since June 30, 2019 through August 12, 2019, the Purchaser did not convert any additional shares of Preferred Stock.

Newbridge Securities Corporation, through LifeTech Capital ("Newbridge"), acted as exclusive placement agent for the April 2018 PIPE and we are obligated to pay a cash fee of $375,000 to Newbridge and issue to them warrants to purchase 2,500,000 shares of Common Stock (or 10% of the aggregate number of fully diluted shares of Common Stock that have been purchased by the Purchaser) over a period of three years from the Initial Date at an exercise price of $0.20 per share, which is subject to certain adjustments including anti-dilution provisions. In addition, we are also obligated to pay Newbridge a warrant solicitation fee equal to 4% of the gross proceeds that we receive upon cash exercise of any Warrants purchased by the Purchaser in connection with the Agreement (since the Initial Date through June 30, 2019, no solicitation fee was earned as no warrants were exercised).

In connection with the Agreement, we entered into a Registration Rights Agreement (the "Registration Rights Agreement") with the Purchaser, pursuant to which, among other things, we have agreed to use our commercially reasonable best efforts to (i) prepare and file with the SEC within 60 calendar days of the offering a registration statement covering the shares of Common Stock underlying the Preferred Stock and Warrants and (ii) have the registration statement and any amendment thereto to be declared effective by the SEC within 90 calendar days from the date of the initial filing of such registration statement. We filed a registration statement covering the shares of Common Stock underlying the Preferred Stock and Warrants, which was declared effective by the SEC on July 2, 2018.

The Warrants are considered a freestanding instrument, as we believe they are legally detachable and separately exercisable.

The accounting effects of the April 2018 PIPE transaction for the six months ended June 30, 2019 are discussed in Note 4 to our Consolidated Financial Statements included herein.



Going Concern


The development and commercialization of our products is expected to require substantial expenditures. We have not yet generated material revenues from operations and therefore are dependent upon external sources for financing our operations. In addition, in each year since our inception we reported losses and negative cash flows from operating activities. Moreover, we might be required to redeem shares of our Series A Convertible Preferred Stock in cash amount that will not allow us to maintain our operations for the next twelve months. This means that there is substantial doubt that we can continue as a going concern for the next twelve months unless we obtain additional capital to pay our bills and meet our other financial obligations. Accordingly, we must raise capital from sources other than the actual sale of the products. We must raise capital to implement our projects and stay in business. There can be no assurance that we will be able to continue to raise equity and/or debt capital from investors on terms and conditions satisfactory to us, or otherwise, and/or have adequate capital resources required by us to fund our current and future planned operations. If we are unable to obtain adequate capital resources to fund operations, we may be required to delay, scale back or eliminate some or all of our plan of operations, which may have a material adverse effect on our business, results of operations and ability to continue as a going concern.



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Our lack of operating history may make it difficult to raise capital. Our inability to borrow funds or raise equity capital to facilitate our business plan may have a material adverse effect on our financial condition and future prospects.




Our Study on Psoriasis



On June 28, 2018, we announced the successful completion of the first part of our Phase I, placebo controlled, maximal dose trial (the "Psoriasis Trial") to determine the safety and tolerability of the topical ointment containing medical grade cannabis (the "Topical Ointment") in healthy volunteers. The completed part of our Psoriasis Trial consisted of application of escalating doses of the Topical Ointment to healthy volunteers and was successfully completed with no adverse effects. After the completion of the second part of our Psoriasis trial, we plan to initiate a Phase II Trial to demonstrate the efficacy of the Topical Ointment in treating mild to moderate psoriasis and other inflammatory skin diseases.

On January 29, 2019 we reported positive Phase 1 safety data for our medical grade cannabis MGC ointment for the treatment of skin diseases. No severe adverse events were observed in the trial.

On July 18, 2019, we received approval from the Israeli Medical Cannabis Agency to perform an efficacy study with OWC topical ointment on psoriatic patients. Currently, the study is planned to be conducted at the Kaplan Medical Center, an academic medical center in Israel.

We expect to initiate a Phase 2 trial of MGC ointment for the treatment of psoriasis during the fourth quarter of 2019.



Results of Operations


Results of Operations during the three months ended June 30, 2019, as compared to the three months ended June 30, 2018

We have not generated any revenue during the three months ended June 30, 2019 or 2018. We have operating expenses related to research and development expenses and general and administrative expenses.

During the three months ended June 30, 2019, we earned a net income of $7,707,000 due to general and administrative expenses of $395,000, research and development expenses of $320,000, income of $210,000 from the revaluation of liability related to the warrants, income of $8,217,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock and financial expenses of $5,000, as compared to a net loss of $3,209,000 for the three months ended June 30, 2018, due to general and administrative expenses of $756,000, research and development expenses of $212,000, loss of $823,000 from issuance costs related to April 30, 2018 Series A Convertible Preferred Stock, income of $150,000 from the revaluation of liability related to the warrants, loss of $1,567,000 from revaluation of bifurcated embedded derivative related to Series A convertible Preferred Stock and financial expenses of $1,000 during the three months ended June 30, 2018.

Our general and administrative expenses decreased by $361,000 or 52% during the three months ended June 30, 2019 as compared to the same period in the prior year, primarily due to decreased of stock-based compensation and amortization of services receivable expenses. The charges relating to stock-based compensation and services receivable expenses were $105,000 for the three months ended June 30, 2019, compared to an expense of $330,000 for the three months ended June 30, 2018.

Our research and development expenses increased by $108,000 or 51% during the three months ended June 30, 2019 as compared to the same period in the prior year mainly due to increase in head count and to active trials costs.



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Results of Operations during the six months ended June 30, 2019, as compared to the six months ended June 30, 2018

We have not generated any revenue during the six months ended June 30, 2019 or 2018. We have operating expenses related to research and development expenses and general and administrative expenses.

During the six months ended June 30, 2019, we earned a net income of $6,707,000 due to general and administrative expenses of $893,000, research and development expenses of $605,000, income of $1,285,000 from the revaluation of liability related to the warrants, income of $6,927,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock and financial expenses of $7,000, as compared to a net loss of $4,186,000 for the six months ended June 30, 2018, due to general and administrative expenses of $1,577,000, research and development expenses of $368,000, loss of $823,000 from issuance costs related to April 30, 2018 Series A Convertible Preferred Stock, income of $150,000 from the revaluation of liability related to the warrants, loss of $1,567,000 from revaluation of bifurcated embedded derivative related to Series A convertible Preferred Stock and financial expenses of $1,000 during the six months ended June 30, 2018.

Our general and administrative expenses decreased by $684,000 or 76.4% during the six months ended June 30, 2019 as compared to the same period in the prior year, primarily due to decreased of stock-based compensation and amortization of services receivable expenses. The charges relating to stock-based compensation and services receivable expenses were $180,000 for the six months ended June 30, 2019, compared to an expense of $916,000 for the six months ended June 30, 2018.

Our research and development expenses increased by $237,000 or 64.4% during the six months ended June 30, 2019 as compared to the same period in the prior year mainly due to increase in head count and to active trials costs.

Liquidity and Capital Resources

As of June 30, 2019, we had current assets of $2,249,000 consisting of $1,840,000 in cash and cash equivalents and other current assets of $409,000. As of June 30, 2019, we had property and equipment carried at $74,000, net of $41,000 in accumulated depreciation and lease right-of-use asset of $53,000. We had total assets of $2,335,000 as of June 30, 2019.

As of December 31, 2018, we had current assets of $3,516,000 consisting of $3,464,000 in cash and cash equivalents and other current assets of $52,000. We had property and equipment valued at $73,000, net of $36,000 in accumulated depreciation. We had total assets of $3,553,000 as of December 31, 2018.

As of June 30, 2019, we had $516,000 in current liabilities consisting of $104,000 in accounts payable, $286,000 in other current liabilities, deferred revenues of $100,000 and lease liabilities of $26,000.

As of December 31, 2018, we had $438,000 in current liabilities consisting of $98,000 in accounts payable, $240,000 in other current liabilities and deferred revenues of $100,000.

We had positive working capital of $1,733,000 as of June 30, 2019 compared to positive working capital of $3,078,000 as of December 31, 2018. Our accumulated deficit as of June 30, 2019 and December 31, 2018 was $22,384,000 and $27,222,000, respectively.

As of June 30, 2019, we had $1,234,000 in non-current liabilities consisting of $288,000 in bifurcated embedded derivative related to Series A Convertible Preferred Stock, $4,000 in derivative related to price protection, $190,000 in liability related to warrants to purchase common stock, $27,000 in lease liabilities and $725,000 in liability related to shares to be issued.

We used $1,620,000 in our operating activities during the six months ended June 30, 2019, which was due to a net income of $6,707,000 ,amortization of services receivable of $71,000, stock-based compensation expenses of $109,000, revaluation income of liability related to warrants to purchase common stock of $1,285,000, revaluation income of bifurcated embedded derivative related to the Series A Convertible Preferred Stock of $6,927,000, depreciation expense of $6,000, an increase in accounts payable of $6,000, recording of derivative related to price protection of $4,000, an increase in other current assets of $357,000 and a decrease in other liabilities of $46,000.



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We used $1,321,000 in our operating activities during the six months ended June 30, 2018, which was due to a net loss of $4,186,000 partially offset by amortization of services receivable of $814,000, stock-based compensation of $585,000, revaluation income of liability related to warrants to purchase common stock of $150,000, revaluation expense of bifurcated embedded derivative related to the Series A Convertible Preferred Stock of $1,567,000, depreciation expense of $4,000, an increase in accounts payable of $63,000 and an increase in other current assets expenses of $18,000.

Our financing activities during the six months ended June 30, 2018 provided us with $105,000 through collection of a stock subscription receivable. There were no cash flows from financing activities during the six months ended June 30, 2019.

Based upon $1,840,000 of cash held by us on June 30, 2019 we believe that we do not have sufficient cash to allow us to maintain our operations for the next twelve-month period. As of June 30, 2019, we are not in compliance with the Equity Conditions (as defined in our Series A Certificate of Designation) and therefore beginning January 31, 2019, for every 30-days period thereafter, at the request of the purchaser, we might be required to redeem in cash, 1/12th of the outstanding shares of Series A Convertible Preferred Stock, for an amount equal to 110% of the stated value ($10,000) of such shares of Series A Convertible Preferred Stock plus any accrued but unpaid dividends up to the Mandatory Redemption Date (as defined in the Certificate of Designation). As of the date of issuance of these financial statements, the Purchaser has not requested redemption in cash of any shares of Series A Convertible Preferred Stock. Management considered the significance of such conditions in relation to our ability to meet its current and future obligations and determined that such conditions raise substantial doubt about the Company's ability to continue as a going concern. We believe that in order to execute on our plans we need to raise additional capital, either equity or debt, and there can be no assurance that additional capital will be sufficient to fund our anticipated expenditure requirements to execute on our plans. There is also no assurance that additional capital will be on terms and conditions favorable to us.

The development and commercialization of our products is expected to require substantial expenditures. We have not yet generated material revenues from operations and do not expect to do so in the foreseeable future, and therefore we dependent upon external sources for financing our operations. As of June 30, 2019, we have an accumulated deficit of $22,384,000. In addition, during the six months ended June 30, 2019, excluding the revaluation income of liability related to warrants to purchase common stock in an amount of $1,285,000, and the revaluation of bifurcated embedded derivative in an amount of $6,927,000, we reported losses, and negative cash flows from operating activities.

Funding of Our Research Programs

On October 22, 2014, we entered into a service agreement with the Sheba Academic Medical Center's hospital ("Sheba") relating to the use of cannabis to treat myeloma. Within the framework of this service agreement, we conducted pre-clinical studies on multiple myeloma, which have commenced in April 2015. Pursuant to this service agreement, we are obligated to pay Sheba $170,000. As of June 30, 2019, we have paid Sheba $66,000 as per Sheba's payment requests.

In addition, pursuant to another service agreement, we were obliged to pay Sheba $170,000 throughout 2017 and 2018 for conducting the Study for the cream for treatment of psoriasis. As of June 30, 2019, we have paid the entire amount.

Pursuant to a Clinical Trial Agreement, we are obligated to pay the Souraski Medical Center$137,000 for conducting the study for the single-dose, randomized, crossover study to compare the safety, tolerability and pharmacokinetics (PK) of OWC's Medical Grade Cannabis - Orally Disintegrating Tablets (MGC-ODT) vs. buccal Sativex®, in healthy adult volunteers. As of June 30, 2019, we have not made any payments to the Souraski Medical Center.

At present, we use our available working capital to fund these studies.

Our expenditures allocated to our corporate activities conducted through our facilities in Ramat Gan were $24,000 for the six months period ended June 30, 2019 and we expect it will be a total of approximately $49,000 for the year ending December 31, 2019.



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Off Balance Sheet Arrangements

As of June 30, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, promulgated under the Securities Act of 1934.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments as reported in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019.

Critical Accounting Policies

Our significant accounting policies are described in Note 2 to our consolidated financial statements as reported in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, and in Note 2 to our interim consolidated financial statements as reported in our Quarterly Report on Form 10-Q for the six months period ended June 30, 2019. There have been no changes to the policies reported in the 2018 Form 10-K.

© Edgar Online, source Glimpses

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Managers
NameTitle
Mordechai Bignitz President, Chief Executive Officer & Director
Stanley Hirsch Chairman
Alon Sinai Chief Operating Officer
Sigal Russo-Gueta Chief Financial Officer
Yehuda Baruch Chief Medical & Regulatory Officer
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