ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following information should be read in conjunction with the unaudited condensed consolidated financial information and the notes
thereto included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission
(“SEC”) on April 1, 2019. Our actual results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in
this Quarterly Report on Form 10-Q, particularly in “Cautionary Note Regarding Forward-Looking Statements,” and discussed
in the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31,
2018 and in Item 1A. Risk Factors.
Overview
We
are an early stage medical cannabis research and development company that applies conventional pharmaceutical research protocols
and disciplines to the field of medical cannabis with the objective of establishing a leadership position in the research and
development of medical cannabis therapies, products and delivery technologies. We are currently engaged in the research and development
and have conducted trials on the efficacy of cannabis-based medical products (the “Cannabis-Based Medical Products”)
commencing with our cannabis-based topical ointment for the treatment of psoriasis. In addition, we also are pursuing the use
of our Cannabis-Based Medical Products for the treatment of multiple myeloma, post-traumatic stress disorder (“PTSD”),
chronic pain and fibromyalgia, and have made significant advancements in the development of a cannabis soluble tablet delivery
system that could have applications for other indications. We are also capable of providing consulting and advisory services to
governmental and private entities to assist them with developing and implementing tailor-made, comprehensive medical cannabis
programs, although we have not generated significant revenues from such services to date.
We
have been engaged in research and development and consulting and advisory activities through our wholly-owned Israeli subsidiary,
One World Cannabis Ltd., since July 2014. To date, we have entered into binding agreements with major hospitals and medical research
facilities in Israel for the purpose of conducting research studies and trials related to the development and use of Cannabis-Based
Medical Products for the treatment of multiple myeloma, psoriasis, PTSD, chronic pain and fibromyalgia, and for the development
of a cannabis soluble tablet delivery system.
On
January 29, 2019, we executed a Clinical Trial agreement with the Souraski Medical Center Fund in Tel Aviv to perform a Single-Dose,
Randomized, Crossover Study to compare the Safety, Tolerability and Pharmacokinetics of OWC’s Medical Grade Cannabis - Orally
Disintegrating Tablets (MGC-ODT) with Buccal Sativex®, in Healthy Adult Volunteers. This Clinical Trial Agreement (the “Agreement”)
is entered into by and among One World Cannabis Ltd. and The Medical, Infrastructure and Health Services Fund of the Tel Aviv
Medical Center, Israel, and Prof. Jacob Ablin M.D. as the Principal Investigator. The primary objectives of the study are to:
1.
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Investigate
the pharmacokinetics profile of THC, 11-OH THC and CBD following a single sublingual dose of MGC-ODT.
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2.
|
Compare
the pharmacokinetic profiles of THC, THC metabolite 11-hydroxy-THC and CBD following a single administration of the investigational
MGC-ODT vs. Sativex® Oromucosal Spray (“Sativex®”).
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3.
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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 September 25, 2019, we received Top Line Results (“TLR”) of our single-dose,
randomized, crossover study to compare the safety, tolerability and pharmacokinetics (PK) of OWC’s Medical Grade Cannabis
- Orally Disintegrating Tablets (MGC-ODT) vs. buccal Sativex®, in healthy adult volunteers. The study was conducted at the
Sourasky Medical Center in Tel Aviv. In this study, participants were administered randomly, either Sativex® (5.4 mg THC,
5.0 mg CBD) or OWC-ODT (4.2 mg THC, 5 mg CBD), and then crossed over, with a minimum interval of two weeks. We collected Plasma
in the 24 hours following drug administration, at pre-determined time points while monitoring side effects. The concentrations
of THC, CBD and 11-OH-THC were quantified, and their plasma PK determined.
The
TLR showed that both MGC-ODT and Sativex® administration had comparable mean times of peak concentration and half-life and
elimination rates for each of the three analytes (THC, THC metabolite 11-hydroxy-THC and CBD). The results indicated dose-related
comparability of both products in both rate of absorption and bioavailability. The incidence of treatment related adverse events
(“AEs”) were similar between the treatments.
The
most common treatment related AEs were hunger (reported in 25% of subjects treated with MGC-ODT), thirst (reported in 18.75% and
6.25% of subjects treated with MGC-ODT and Sativex®, respectively), dizziness (reported in 18.75% and 18.75% of subjects treated
with MGC-ODT and Sativex®, respectively) and dysgeusia (reported in 12.5% and 25% of subjects treated with MGC-ODT and Sativex®,
respectively). Administration of MGC-ODT was judged to be well tolerated and no unexpected safety signals were observed.
Our
TLR conclusions were that MGC-ODT has a tolerable safety profile and appeared to have similar PK and bioavailability as Sativex®.
Based on such top line data, OWC intends to apply to the Israel Ministry of Health to obtain necessary approvals to market its
Medical Grade Cannabis - Orally Disintegrating Tablets in Israel.
On September 16, 2019, we received a Bid Price
Deficiency Notice (the “Notice”) from OTC Markets Group that our bid price had closed below $0.01 for more than 30
consecutive calendar days and thus no longer met the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards
Section 2.3(2). The Notice stated that, pursuant to Section 4.1 of the OTCQB Standards, we was granted a cure period of 90 calendar
days during which the minimum closing bid price for our common stock must be $0.01 or greater for ten consecutive trading days
in order to continue trading on the OTCQB marketplace. If this requirement is not met by December 15, 2019, the Company will be
removed from the OTCQB marketplace. On November 7, 2019, our cure period was extended until February 5, 2020.
April
2018 PIPE
On
April 30, 2018 (the “Initial Date”), we consummated a private placement transaction (the “April 2018 PIPE”)
by entering into a Securities Purchase Agreement (the “Agreement”) with a non-US-based institutional investor (the
“Purchaser”), pursuant to which, we sold and the Purchaser bought, (i) 500 shares of our new series of preferred stock
designated as Series A Convertible Preferred Stock (the “Preferred Stock”), which were initially convertible into
25,000,000 shares of common stock at an initial conversion price of $0.20 per share (which was adjusted upon occurrence of the
Triggering Event (as defined below), subject to adjustment pursuant to the anti-dilution provisions of the Preferred Stock, and
(ii) Warrants (the “Warrants”) representing the right to acquire initially 12,500,000 shares of common stock over
a period of five years from the Initial Date at an initial exercise price of $0.22 per share, which is subject to certain adjustments
including anti-dilution provisions, for an aggregate purchase price of $5,000,000.
Commencing
January 1, 2019 through September 30, 2019, the Purchaser converted an aggregate of 61 shares of Preferred Stock into an aggregate
of 77,362,264 shares of the common stock at the conversion prices in effect on the respective conversion dates. Since September
30, 2019 through November 12, 2019, the Purchaser converted an additional two shares of Preferred Stock into an aggregate of 17,856,000
Shares of common stock at the conversion prices in effect on the respective conversion dates.
Newbridge
Securities Corporation, through LifeTech Capital (“Newbridge”), acted as exclusive placement agent for the April 2018
PIPE and we were obligated to pay a cash fee of $375,000 to Newbridge and issue to them warrants to purchase 2,500,000 shares
of common stock (or 10% of the aggregate number of fully diluted shares of common stock that have been purchased by the Purchaser)
over a period of three years from the Initial Date at an exercise price of $0.20 per share, which is subject to certain adjustments
including anti-dilution provisions. In addition, we are also obligated to pay Newbridge a warrant solicitation fee equal to 4%
of the gross proceeds that we receive upon cash exercise of any Warrants purchased by the Purchaser in connection with the Agreement
(since the Initial Date through September 30, 2019, no solicitation fee was earned as no warrants were exercised).
In
connection with the Agreement, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”)
with the Purchaser, pursuant to which, among other things, we have agreed to use our commercially reasonable best efforts to (i)
prepare and file with the SEC within 60 calendar days of the offering a registration statement covering the shares of common stock
underlying the Preferred Stock and Warrants and (ii) have the registration statement and any amendment thereto to be declared
effective by the SEC within 90 calendar days from the date of the initial filing of such registration statement. We filed a registration
statement covering the shares of common stock underlying the Preferred Stock and Warrants, which was declared effective by the
SEC on July 2, 2018.
The
Warrants are considered a freestanding instrument, as we believe they are legally detachable and separately exercisable.
The
accounting effects of the April 2018 PIPE transaction for the nine months ended September 30, 2019 are discussed in Note 4 to
our Consolidated Financial Statements included herein.
Going
Concern
The
development and commercialization of our products is expected to require substantial expenditures. We have not yet generated material
revenues from operations and therefore are dependent upon external sources for financing our operations. In addition, in each
year since our inception we reported losses from operations and negative cash flows from operating activities. Moreover, we might
be required to redeem shares of our Series A Convertible Preferred Stock in a cash amount that will not allow us to maintain our
operations for the next twelve months. This means that there is substantial doubt that we can continue as a going concern for
the next twelve months unless we obtain additional capital to pay our bills and meet our other financial obligations. Accordingly,
we must raise capital from sources other than the actual sale of the products. We must raise capital to implement our projects
and stay in business. There can be no assurance that we will be able to continue to raise equity and/or debt capital from investors
on terms and conditions satisfactory to us, or otherwise, and/or have adequate capital resources required by us to fund our current
and future planned operations. If we are unable to obtain adequate capital resources to fund operations, we may be required to
delay, scale back or eliminate some or all of our plan of operations, which may have a material adverse effect on our business,
results of operations and ability to continue as a going concern.
Our
lack of operating history and our obligation to the holders of our Series A Convertible Preferred Stock may make it difficult
to raise capital. Our inability to borrow funds or raise equity capital to facilitate our business plan may have a material adverse
effect on our financial condition and future prospects.
Our
Study on Psoriasis
On
June 28, 2018, we announced the successful completion of the first part of our Phase I, placebo controlled, maximal dose trial
(the “Psoriasis Trial”) to determine the safety and tolerability of the topical ointment containing medical grade
cannabis (the “Topical Ointment”) in healthy volunteers. The completed part of our Psoriasis Trial consisted of application
of escalating doses of the Topical Ointment to healthy volunteers and was successfully completed with no adverse effects. On January
29, 2019 we reported positive Phase 1 safety data for our medical grade cannabis MGC ointment for the treatment of skin diseases.
No severe adverse events were observed in the trial.
On
July 18, 2019, we received approval from the Israeli Medical Cannabis Agency to perform an efficacy study with OWC topical ointment
on psoriatic patients. Currently, the study is planned to be conducted at the Kaplan Medical Center, an academic medical center
in Israel.
Results
of Operations
Results
of Operations during the three months ended September 30, 2019, as compared to the three months ended September 30, 2018
We
have not generated any revenue during the three months ended September 30, 2019 or 2018. We have operating expenses related to
research and development expenses and general and administrative expenses.
During
the three months ended September 30, 2019, we had a net loss of $287,000 due to general and administrative expenses of $519,000,
research and development expenses of $168,000, other income of $100,000, income of $77,000 from the revaluation of liability related
to the warrants, income of $274,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred
Stock, loss of $49,000 from revaluation of embedded derivative related to price protection feature and financial expenses of $2,000,
as compared to a net income of $992,000 for the three months ended September 30, 2018, due to general and administrative expenses
of $543,000, research and development expenses of $126,000, income of $925,000 from the revaluation of liability related to the
warrants, loss of $1,247,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock
and financial expenses of $1,000 during the three months ended September 30, 2018.
Our
general and administrative expenses decreased by $24,000 or 4.4% during the three months ended September 30, 2019 as compared
to the same period in the prior year, primarily due to decreased of stock-based compensation and amortization of services receivable
expenses. The charges relating to stock-based compensation and services receivable expenses were $70,000 for the three months
ended September 30, 2019, compared to an expense of $141,000 for the three months ended September 30, 2018.
Our
research and development expenses decreased by $42,000 or 33% during the three months ended September 30, 2019 as compared to
the same period in the prior year, primarily due to increase in head count and to active trials costs.
Results
of Operations during the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018
We
have not generated any revenue during the nine months ended September 30, 2019 or 2018. We have operating expenses related to
research and development expenses and general and administrative expenses.
During
the nine months ended September 30, 2019, we had a net income of $6,420,000 due to general and administrative expenses of $1,408,000,
research and development expenses of $773,000, other income of $100,000, income of $1,362,000 from the revaluation of liability
related to the warrants, income of $7,201,000 from revaluation of bifurcated embedded derivative related to Series A Convertible
Preferred Stock, loss of $53,000 from revaluation of embedded derivative related to price protection feature and financial expenses
of $9,000, as compared to a net loss of $5,178,000 for the nine months ended September 30, 2018, due to general and administrative
expenses of $2,120,000, research and development expenses of $493,000, expense of $823,000 from issuance costs related to April
30, 2018 Series A Convertible Preferred Stock, income of $1,075,000 from the revaluation of liability related to the warrants,
expense of $2,814,000 from revaluation of bifurcated embedded derivative related to Series A Convertible Preferred Stock and financial
expenses of $3,000 during the nine months ended September 30, 2018.
Our
general and administrative expenses decreased by $712,000 or 50.5% during the nine months ended September 30, 2019 as compared
to the same period in the prior year, primarily due to decreased stock-based compensation and amortization of services receivable
expenses. The charges relating to stock-based compensation and services receivable expenses were $250,000 for the nine months
ended September 30, 2019, compared to an expense of $1,057,000 for the nine months ended September 30, 2018, the expense decreased
due to the end of vesting period of the previously granted options.
Our
research and development expenses increased by $280,000 or 56.7% during the nine months ended September 30, 2019 as compared to
the same period in the prior year mainly due to increase in head count and to active trials costs.
The
income from revaluation of bifurcated embedded derivative related to Series A convertible Preferred Stock increased by $6,126,000
or 670% is due to reduction in our share price.
Liquidity
and Capital Resources
As
of September 30, 2019, we had current assets of $1,695,000 consisting of $1,465,000 in cash and cash equivalents and other current
assets of $230,000. As of September 30, 2019, we had property and equipment carried at $74,000, net of $31,000 in accumulated
depreciation and lease right-of-use asset of $47,000. We had total assets of $1,773,000 as of September 30, 2019.
As
of December 31, 2018, we had current assets of $3,516,000 consisting of $3,464,000 in cash and cash equivalents and other current
assets of $52,000. We had property and equipment valued at $73,000, net of $36,000 in accumulated depreciation. We had total assets
of $3,553,000 as of December 31, 2018.
As
of September 30, 2019, we had $543,000 in current liabilities consisting of $286,000 in accounts payable, $231,000 in other current
liabilities and lease liabilities of $26,000.
As
of December 31, 2018, we had $438,000 in current liabilities consisting of $98,000 in accounts payable, $240,000 in other current
liabilities and deferred revenues of $100,000.
We
had positive working capital of $1,152,000 as of September 30, 2019 compared to positive working capital of $3,078,000 as of December
31, 2018. Our accumulated deficit as of September 30, 2019 and December 31, 2018 was $23,434,000 and $27,222,000, respectively.
As
of September 30, 2019, we had $1,467,000 in non-current liabilities consisting of $12,000 in bifurcated embedded derivative related
to Series A Convertible Preferred Stock, $53,000 in derivative related to price protection feature, $113,000 in liability related
to warrants to purchase common stock, $21,000 in lease liabilities and $725,000 in liability related to shares to be issued.
We
used $1,992,000 in our operating activities during the nine months ended September 30, 2019, which was due to a net income of
$6,420,000, amortization of services receivable of $108,000, stock-based compensation expenses of $142,000, revaluation income
of liability related to warrants to purchase common stock of $1,362,000, revaluation income of bifurcated embedded derivative
related to the Series A Convertible Preferred Stock of $7,201,000, depreciation expense of $8,000, an increase in accounts payable
of $188,000, a decrease in deferred income of $100,000, revaluation of derivative related to price protection of $53,000, an increase
in other current assets of $178,000 and a decrease in other liabilities of $70,000.
We
used $1,748,000 in our operating activities during the nine months ended September 30, 2018, which was due to a net loss of $5,178,000
partially offset by amortization of services receivable of $690,000, stock-based compensation of $367,000, revaluation income
of liability related to warrants to purchase common stock of $1,075,000, revaluation expense of bifurcated embedded derivative
related to the Series A Convertible Preferred Stock of $2,814,000, Direct and incremental issuance cost related to April 2018
PIPE transaction of $483,000, depreciation expense of $6,000, an increase in accounts payable of $167,000, a decrease in other
current assets expenses of $15,000 and decrease in other current liability of $ 36,000.
Our
financing activities during the nine months ended September 30, 2018 provided us with $4,918,000 of proceeds from issuance of
Series A redeemable convertible preferred stock, embedded derivative related to contingent redemption feature and detachable warrants,
net of issuance costs, and $105,000 through collection of a stock subscription receivable. We generated no cash from financing
activities during the nine months ended September 30, 2019.
We
used $23,000 in our investing activities during the nine months ended September 30, 2018, which was due to acquisition of property
and equipment.
Based
upon $1,465,000 of cash held by us on September 30, 2019 we believe that we do not have sufficient cash to allow us to maintain
our operations for the next twelve-month period. As of September 30, 2019, we are not in compliance with the Equity Conditions
(as defined in our Series A Certificate of Designation) and therefore beginning January 31, 2019, for every 30-days period thereafter,
at the request of the purchaser, we might be required to redeem in cash, 1/12th of the outstanding shares of Series A Convertible
Preferred Stock, for an amount equal to 110% of the stated value ($10,000) of such shares of Series A Convertible Preferred Stock
plus any accrued but unpaid dividends up to the Mandatory Redemption Date (as defined in the Certificate of Designation). As of
the date of issuance of these financial statements, the Purchaser has not requested redemption in cash of any shares of Series
A Convertible Preferred Stock. Management considered the significance of such conditions in relation to our ability to meet its
current and future obligations and determined that such conditions raise substantial doubt about our ability to continue as a
going concern. We believe that in order to execute on our plans we need to raise additional capital, either equity or debt, and
there can be no assurance that additional capital will be sufficient to fund our anticipated expenditure requirements to execute
on our plans. There is also no assurance that additional capital will be on terms and conditions favorable to us.
The
development and commercialization of our products is expected to require substantial expenditures. We have not yet generated material
revenues from operations and do not expect to do so in the foreseeable future, and therefore we are dependent upon external sources
for financing our operations. As of September 30, 2019, we have an accumulated deficit of $23,434,000. In addition, during the
nine months ended September 30, 2019, excluding the non-cash revaluation income of liability related to warrants to purchase common
stock in an amount of $1,362,000, and the non-cash revaluation of bifurcated embedded derivative in an amount of $7,201,000, we
reported losses, and negative cash flows from operating activities.
Funding
of Our Research Programs
On
October 22, 2014, we entered into a service agreement with the Sheba Academic Medical Center’s hospital (“Sheba”)
relating to the use of cannabis to treat multiple myeloma. Within the framework of this service agreement, we conducted pre-clinical
studies on multiple myeloma, which have commenced in April 2015. Pursuant to this service agreement, we are obligated to pay Sheba
$170,000. None of the services have not been provided by Sheba and we have not made any payments yet.
In
addition, pursuant to another service agreement, we were obliged to pay Sheba an additional $170,000 throughout 2017 and 2018
for conducting the Study for the cream for treatment of psoriasis. As of September 30, 2019, the services have been provided by
Sheba and we have paid the entire amount of $63,000.
Pursuant
to a Clinical Trial Agreement, we are obligated to pay the Souraski Medical Center $137,000 for conducting the study for the single-dose,
randomized, crossover study to compare the safety, tolerability and pharmacokinetics (PK) of OWC’s Medical Grade Cannabis
- Orally Disintegrating Tablets (MGC-ODT) vs. buccal Sativex®, in healthy adult volunteers. As of September 30, 2019, the
services have been provided by Souraski Medical Center, and we have not made any payments yet.
At
present, we use our available working capital to fund these studies.
Our
expenditures allocated to our corporate activities conducted through our facilities in Ramat Gan were $37,000 for the nine months
period ended September 30, 2019 and we expect such expenditures to amount to a total of approximately $49,000 for the year ending
December 31, 2019.
Off
Balance Sheet Arrangements
As
of September 30, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K,
promulgated under the Securities Act of 1934.
Contractual
Obligations and Commitments
There
have been no material changes to our contractual obligations and commitments as reported in our Annual Report on Form 10-K for
the year ended December 31, 2018, filed with the SEC on April 1, 2019.
Critical
Accounting Policies
Our
significant accounting policies are described in Note 2 to our consolidated financial statements as reported in our Annual Report
on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, and in Note 2 to our interim consolidated
financial statements as reported in our Quarterly Report on Form 10-Q for the nine months period ended September 30, 2019. There
have been no changes to the policies reported in the 2018 Form 10-K.