OWC Pharmaceutical Research Corp. - Annual Report: 2013 (Form 10-K)

Registrant's Telephone Number, Including Area Code: (972) 3-7523922

On December 31, 2013, the aggregate market value of the 6,981,450 common stock held by non-affiliates of the Registrant was approximately $69,814 based on the last trade of the Registrants common stock at $0.01 on December 31, 2013. On March 19, 2014, the Registrant had 21,641,450 shares of common stock outstanding.

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.

We are a "smaller reporting company," meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. As a "smaller reporting company," the disclosure we will be required to provide in our SEC filings are less than it would be if we were not considered a "smaller reporting company." Specifically, "smaller reporting companies" are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after January 21, 2013; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, being permitted to provide two years of audited financial statements in annual reports rather than three years.  Decreased disclosures in our SEC filings due to our status as a "smaller reporting company" may make it harder for investors to analyze the Company's results of operations and financial prospects.

We were incorporated in Delaware on March 7, 2008 and are a development stage company engaged in the business of developing equipment covered by a patent (Patent No. 5,497,555). We acquired the patent from Appelfeld Zer Fisher ("AZF"), an Israeli law firm that specializes in intellectual property law including among other things the filing, prosecuting and the commercialization of patents, in a patent transfer and sale agreement dated March 27, 2008 (the "Patent Agreement") for consideration of $17,000. The patent and related technology covers the design and development of an electromagnetic percussion device with a striking piston made of a single monolithic block (the "Device"). Prior to the Patent Agreement with AZF, the Company had not been involved in any similar patent transactions and our management, while having significant business experience, did not have any meaningful experience in technological areas generally or in the field of electromagnets specifically. However, the Company's CFO, a CPA by training, had served as a consultant and/or as CFO to other reporting companies by principally providing SEC reporting and disclosure services. These included companies that had also acquired other patents pursuant to similar patent transfer and sale agreements with AZF, as follows: Crown Dynamics Corp., Dynamic Ventures Corp., Consumer Products Services Group (formerly Global Dynamics Corp.) and Advanced Ventures Corp., all companies with securities registered under Section 12 of the Exchange Act. In addition, we understand that another issuer, Santa Fe Petroleum, Inc. (formerly Baby All Corp.), filed an S-1 in 2011 with disclosure that it had acquired a patent from a party other than AZF. The foregoing information was provided to the Company by its CFO/Director, Mr. Asher Zwebner. We are not aware of other public companies that may have been involved in patent acquisition agreements with AZF.

While we have no independent knowledge regarding whether any of the referenced companies (1) devoted resources to developing the patent or (2) abandoned the patent and engaged in a different business, we have been informed by Mr. Zwebner, or former CFO, that, other than Dynamic Applications, none of the other companies devoted resources to pursue development and commercial use of their respective patents.

On May 5, 2008, we filed a registration statement on Form S-1 pursuant to which we offered and sold to the public 2,000,000 shares of our common stock at $0.04 per share, resulting in gross proceeds of $80,000 and net proceeds of approximately $60,000. Notwithstanding our successful IPO and a subsequent raise of approximately $200,000 in December 2008, the Company cash resources were applied to a significant extent to executive compensation and consulting fees, without devoting resources to the development of the Device. During the period from December 31, 2008 through September 30, 2009, the Company's cash position was reduced from approximately $130,000 to less than $100 and the Company announced that it had ceased efforts to pursue development of the patent.

The Company became delinquent in its reporting obligations under the Securities Exchange Act of 1934 (the "Exchange Act") by its failure to file its annual report on Form 10-K for its year-ended December 31, 2009, any quarterly reports in 2010 and its Form 10-K for the year-ended December 31, 2010 and quarterly reports for the periods ended March 31, 2011 and June 30, 2011. On July 26, 2011, the Company filed Form 15 to suspend it duty to file reports under Sections 13 and 15(d) of the Exchange Act.

On August 9, 2009, the Company entered into a Cooperation and Partnership Agreement with Green Biofuels Holding Ltd. ("GBH"), an Israeli corporation pursuant to which GBH agreed to contribute, convey, assign and transfer all of GBH's rights title and interest in specified carbon credit projects. GBH represented to the Company that it had a contractual right to a carbon credit project in Fuxin, China and had access to various other carbon credit projects in other locations in China and East Europe, including current and future interests in such projects and current and future opportunity to enter into agreements for carbon credit projects.

As consideration the Company agreed to pay GBH an amount equal to 3% of the total gross revenues derived from the assigned projects during the first six years of the agreement, which consideration would only commence when the total gross income derived from the accepted project reached 1 million Euros or approximately $1.4 million.

The Company further agreed to arrange financing of 44,000 Euro for a Fuxin Project within 10 days of the date of the Agreement, and 26,000 Euro for a coal mine and two projects in the Ukraine and Kazakhstan by August 27, 2009. In addition, the Company agreed to provide further financing for the benefit of these aforesaid projects in the amount of 100,000 Euros by September 15, 2009 and 110,000 Euros by October 1, 2009.

On August 9, 2009, pursuant to a separate Private Placement Subscription Agreement, the Company also agreed to issue to each of Messrs. Shlomo Palas, Samuel Keshet and Eliezer Weinberg, the principals of GBH (the GBH Principals"), 7,178,750 shares of the Company's common stock, or a total of 21,538,250 shares, which issuance was subject to the prior finalization and approval of a stock plan relating to the common stock under applicable Israeli law by the Company and/or its Israeli subsidiary.

On January 12, 2010, the Company entered into a termination agreement with Green Biofuels Holding Ltd., an Israeli corporation ("GBH"), and Messrs. Shlomo Palas, Samuel Keshet and Eliezer Weinberg (the "Termination Agreement"). Pursuant to the Termination Agreement, the Cooperation and Partnership Agreement with GBH, dated August 9, 2009, and any rights, title and interest and all obligations and liabilities arising out of or relating to the Carbon Credit Project (as defined in such agreement) were contributed and transferred from the Company to GBH and assumed by GBH and the August 8, 2009 agreement was terminated. Likewise, the Company and Messrs. Shlomo Palas, Samuel Keshet and Eliezer Weinberg terminated their Private Placement Subscription Agreement, also dated August 9, 2009 for subscription of shares of the common stock of the Company, which had not yet been effectuated.

The primary reason for the Termination Agreement was the fact that the Company was unable to fund their funding obligations under the Cooperation Agreement as a result of the nature of the carbon credit projects that were subject of the assignment. As a result, none of the shares that were subject to the Private Placement Subscription Agreement were issued.

An electromagnetic percussion device is generally comprised of the following: (a) a housing; (b) an instrument connected to, and extending beyond, the housing; (c) a driving member reciprocal within the housing, the driving member including an intermediate region of a first diameter and an enlarged anterior head of a second diameter, the second diameter being larger than the first diameter; (d) a piston body reciprocal within the housing and adapted to impact the instrument, the piston body including a coupling element for slidable accommodating the head of the driving member, thereby coupling the driving member and the piston body together, the coupling element including a plurality of leaves which enclose and confine the head of the driving member when the coupling element is within the housing but which can be moved apart when the coupling element is outside the housing to allow the head of the driving member to be inserted into, or removed from, the coupling element; (e) an electromagnetically active body connected to the driving member; and (f) an electromagnetic coil connected to the housing, the coil operationally coupled to the electromagnetically active body so as to cause the reciprocation of the driving member.

Based upon the limited information that we received when we acquired the rights to the Device we believed, and more importantly on the information that we have received from 2011 to the present, we continue to believe, that our Device has unique design features because unlike traditional electromagnetic devices, the positions of the electromagnetic coil and electromagnetically active body are reversed. We believe that this design feature should provide us with an advantage over other devices and should successfully address the shortcomings of the previously known configurations by providing an electromagnetic percussion device whose striking piston is made of a single monolithic block of material. As a result, our Device should be more durable and rugged than heretofore comparable devices described above.

Our Electromagnetic Percussion Devices could be used for hammer drilling, sawing, vibrating device and similar procedures.

Further, in our Device, our design provides that prior to impact between the anterior end of piston body and the posterior end of the instrument, the current in the electromagnetic coil switches direction. This is designed to decelerate the motion of driving member leaving the piston body unaffected by the switch in current direction, creating a small gap between itself and driving member so that at this moment piston body strikes the instrument in a way that there is no direct contact between piston body and the driving member. As a result, no impact shock is transmitted from piston body to driving member thereby reducing wear on driving member and its permanent magnet thereby significantly increasing its useful life and reliability. We believe the switching position feature is unique to our device.

The reverse current through the coil is needed in order to change the polarity of the coil so it can push or pool the drive. The timing of changing the current is important to separate the hammer from the drive member so that the impact energy is not transmitted to the drive, which contains brittle parts as natural magnets. This is accomplished by changing the current direction in the coil before the hammer can impact the tool, and will start to move the drive to the opposite direction disengaged from the hammer. However, the hammer will continue moving forward with the stored energy in the tool.

Notwithstanding the foregoing, there can be no assurance that our Device will be commercially accepted by any particular industry or that it will develop and sustain market acceptance at levels that will result in profitable operations.

From our inception through mid-2011, we were unable and, in fact, did not devote any significant efforts to develop, either alone or with third parties, a Prototype of our Device. Notwithstanding the foregoing, our management continues to believe in the potential of our Device.

During the latter half of 2011, we had discussions with a limited number of unaffiliated persons as well as shareholders for the purpose of raising funds through the sale of restricted shares as part of a plan to pursue the development of a Prototype of our Device. In late 2011 through 2012, we had discussions together with our investors related to renewing our efforts to develop our Device, which was the reason our investors had a renewed interest in our Company. As a result, we engaged the services of a chief scientific advisor with extensive experience in engineering and electromagnetism and in April 2013, we entered into a Development/Manufacturing and Marketing Agreement with GUMI Tel Aviv Ltd.

Our management's position is that its belief in the Device, notwithstanding the rather lengthy delay in development and its mistaken determination in July 2011 to cease development efforts, was justified based upon its ability to successfully conclude the agreement with GUMI.

As part of our management's renewed interest in pursuit of development of our Device with view to its commercial exploitation, we determined to become current with the OTC Markets by filing all reports required by SEC Rule 15c2-11. We have then determined to file a Form 10/12G to again become a reporting company under the Exchange Act. We filed our Form 10 on November 21, 2012.

Because of our limited financial and personnel resources, our plan since the acquisition of the Patent has been to rely on third parties to develop a Prototype of the Device and thereafter to contract for the manufacture and marketing of commercial models of our Device. To that end, on January 15, 2013, the Company entered into a consulting agreement with Gennady Nickelshpur to serve as the Company's chief scientific advisor ("CSA"). The agreement with Mr. Nickelshpur provides for cash compensation based upon an hourly rate and the grant of options pursuant to an ESOP to be adopted by the board of directors. The terms of the ESOP have yet to be determined.

On March 5, 2013, the Company and GUMI Tel Aviv Ltd, a major, privately-held Israeli technology company ("GUMI"), entered into development/manufacturing/marketing agreement ("GUMI Agreement"). GUMI is engaged in the manufacture, import/export, marketing and install industrial equipment and designing technical solutions to major Israeli customers, including, among others, the Israeli Defense Forces (IDF), El-Al Airlines, major Israeli Aerospace companies, as well as foreign industrial customers. Further, GUMI recently entered into a Joint Venture with a large Indian industrial company to build a factory in India to manufacture specially designed pipes for the aviation industry. GUMI has eight operating subsidiaries, approximately 200 full-time employees, more than 100 sub-contractors, and is among Israel's largest manufacturers and distributors of industrial equipment.

Pursuant to the GUMI Agreement, GUMI agreed to: (i) complete the development of the Prototype of the Device; (ii) manufacture the commercial model(s) of the Device; and (iii) market the commercial model(s) of the Device.

In consideration for developing the Prototype and manufacturing and marketing/distributing commercial models of the Device as well as incurring all related costs and expenses in connection therewith, the Company shall compensate GUMI as follows: (i) upon the execution of the GUMI Agreement, the Company granted GUMI warrants (the "Warrants") exercisable to purchase 200,000 shares of the Company's common stock ("Warrant Shares") at an exercise price of $0.05 per share (the "Exercise Price"); (ii) upon completion of the Prototype, granting GUMI additional Warrants to purchase 200,000 additional Warrant Shares at the Exercise Price; and (iii) upon completion of a Commercial Device ready for manufacture and sale, granting GUMI additional Warrants to purchase 200,000 additional Warrant Shares at the Exercise Price. The Warrants shall expire 3 years from the date of each grant and shall be subject to adjustment in the event of any recapitalization of the Company's capital stock.

In addition to the consideration represented by the grant of Warrants, the Agreement further provided that following commencement of sale of the Commercial Device and until such time that GUMI has recouped all costs and expenses that it has incurred and paid in connection with the completion of development of the Prototype and the manufacture of the Commercial Device ("Date of Recoupment"), one hundred (100%) percent of the net sales revenues shall be paid and distributed to GUMI. Further, on and after the Date of Recoupment, net sales revenues under the March 5 GUMI Agreement were to be paid sixty-five (65%) percent to GUMI and thirty-five (35%) percent to the Company.

On April 17, 2013, the Company entered into a Modification Agreement, pursuant to which the above referenced distribution agreement with GUMI was modified and amended as follows: (i) GUMI engaged the services of Mr. Ygal Chapo, a Tel Aviv university trained mechanical engineer, to lead GUMI's design and engineering team developing a working prototype (the "Prototype") of the Company's patented electromagnetic percussion device ("Device") and commercial models of the Device; (ii) the Company agreed to contribute $10,000 to the compensation GUMI is paying its newly designated mechanical engineer; and (iii) the revenue sharing arrangement between GUMI and the Company was changed to 60% to GUMI and 40% to the Company from 65% to GUMI and 35% to the Company.

We were informed by GUMI on May 1, 2013 that it has made significant progress toward completion of the development of the Prototype and that they expect that they will be able to present us with commercial models of our Device within approximately 12 to 16 weeks. As a result, it is our hope and expectation that we will have commercial models available for sale during 2013. On May 5, 2013, GUMI sent a further update regarding their progress, informing us that they had completed phase one of the engineering process and expressing their belief that they have completed a full set of drawings that will enable them to manufacture the Prototype. We were further informed that as soon as the initial Prototype is manufactured, GUMI will undertake industrial testing leading to final drawings, which they stated will result in the manufacture of the Commercial Prototype. In October 2013, GUMI reported that it had completed the Prototype and was developing variations of the Percussion Device for presentation to the diamond and armory industries.

In February 2014, GUMI reported that during the last quarter of 2013 and following certain design modifications, GUMI presented the Percussion Devise to a mid-sized Israeli diamond polishes company and a foreign armory manufacturer. In addition, we have been informed that GUMI's foreign representative has made several sales presentations that have resulted in the request by customers for several units for internal review and evaluation. We have been informed by GUMI that the armory company has requested certain technical modifications by GUMI for product improvement, which modifications are currently being evaluated for cost and feasibility. We also have been informed further that GUMI has discussed commitments for initial purchase orders with the armory company upon completion of the modified Percussion Devices, which discussions are pending.

GUMI also advised us that it has had extensive negotiations with a mid-sized Israeli diamond company discussing pricing as a precondition to their ordering several hundred units under their 2014 budget. We have been informed that if we can agree on pricing, these orders will be placed on or about March 31, 2014.

There can be no assurance that GUMI will be successful in generating orders resulting in significant revenues, if at all. Nevertheless, GUMI has informed us that they remain confident about their ability to commercially exploit the Percussion Device in both the diamond and armory industries, among others.

On March 27, 2008, we executed the Agreement with Appelfeld Zer Fisher, the original owners of the technology, pursuant to which we were granted all rights, title and interest in, the Device and related technologies. The patent application was filed on December 19, 1994 with the United States Patent and Trademark Office. On April 13, 2008, the patent assignment was recorded in the United States Patent and Trademark Office. Our patent remains in full force and effect and will expire on December 18, 2014. In addition to our patent, we will continue to explore entering into negotiations with third parties for the acquisition of additional patents, as well as other intellectual property, to further our business development in the technology area. See the disclosure under "Risk Factors" regarding the limited time before the Company's Patent expires.

There are many companies in the electromagnetic percussion field, including major international manufacturers, having far greater financial and other resources, together with significantly greater operating histories, than the Company. We are not, however, aware of any other company that has developed, manufactured, and/or marketed a device of a similar nature that incorporates a design in which the positions of the electromagnetic coil and electromagnetically active body are reversed.

We believe our patented technology and design incorporated in our Device, should permit us to successfully addresses certain shortcomings of the presently known configurations by providing an electromagnetic percussion machine whose striking piston is made of a single monolithic block of material. The Company believes that its technology is more durable and rugged than previous technologies and/or methods. In addition, as we develop and/or acquire rights to additional technologies, we also expect to face significant competition from other companies engaged in the manufacture and sale of such other technologies, virtually all of which will have far greater financial and other resources and longer operating histories.

We may be subject to the provisions of the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act, among other laws. These acts empower the CPSC to protect the public against unreasonable risks of injury associated with consumer products. The CPSC has the authority to exclude from the market articles that are found to be hazardous and can require a manufacturer to repair or repurchase such devices under certain circumstances. Any such determination by the CPSC is subject to court review. Violations of these acts may also result in civil and criminal penalties. Similar laws exist in some states and cities in the U.S. and in many jurisdictions throughout the world.

Other than our current officers and directors, and our recently retained chief scientific advisor, Gennady Nickelshpur, we have no other full-time or part-time employees. During the next twelve months, we believe that we may be required to hire a limited number of either full or part-time employees to further our business plan related to our Device as well as retain one or more additional advisors to supplement the effors of Mr. Nickelshpur. Our hiring plan is dependent upon available financial resources. We expect that when we complete development of our Device, principally with the efforts of Mr. Nickelshpur, the timing of which we cannot assure, and assuming that our resources are sufficient, that we will need to hire up both part-time and full-time employees and scientific advisors for our operations as they grow.

On October 26, 2012, the Company's reverse stock split on a one-for-one hundred (1:100) basis ("Reverse Split") was implemented and approved by FINRA. In connection with the Reverse Split, the Company also amended its Articles of Incorporation to reduce its authorized shares of capital stock from 20 billion shares comprised of 19.8 billion shares of common stock and 20 million shares of preferred stock to 520 million authorized shares comprised of 500 million shares of common stock and 20 million shares of preferred stock.

On April 17, 2013, the Company entered into an agreement with Sensoil Ltd, an Israeli company, with an address at 27 Maskit St., Hertzliya 46733 Israel ("Sensoil") that is engaged in the design, development, manufacture, installation and service of their Vaduze Monitoring Systems (VMS), a system designed to detect and monitor soil contamination, floods, breaching of dams and Heap Leaching processes. Pursuant to the agreement (the "Representative Agreement"), the Company was designated as Sensoil's sales representative, on a non-exclusive basis, for the United States. The Representative Agreement was for an initial term of one year with automatic renewal terms of one year each. The Company will receive a commission equal to 25% of the first $5 million in sales revenues and 20% of sales revenues in excess of 45 million generated by the Company for Sensoil's products and services in the United States.

On February 28, 2014, the Company received notice from Sensoil that, as a result of its inability to generate any revenues from the sale of Sensoil's products and services in the U.S. and the fact that the Company had not taken any meaningful steps in establishing a sales network for Sensoil in the U.S., Sensoil was not renewing the Representative Agreement. In connection with this action by Sensoil, we have been informed that Sensoil's CEO, who had agreed to serve as our chief marketing advisor, would no act in such capacity. In fact, only limited service were rendered because of our inability to make progress in developing a marketing network in the U.S.

The Representative Agreement with Sensoil Ltd had been part of our plan to seek to enhance our revenue stream by entering into joint ventures or other business arrangements with third parties engaged in technology development, based upon our belief that there are many opportunities for us to develop relationships with technology companies in Israel that can generate revenues in the United States and elsewhere. Notwithstanding the termination of the Representative Agreement by Sensoil, we will continue to explore potential business arrangements with third parties for the purpose of generating revenues to supplement those that we hope to generate from our relationship with GUMI and our Patented Percussion Device.

The Company is filing this Registration Statement on Form 10 under the Exchange Act to have its shares of common stock registered under the Exchange Act and become subject to the reporting obligations of the SEC. The Company believes that being a reporting company under the Exchange Act increases its ability to raise additional capital to expand its current business operations and enhance its ability to effectuate acquisitions and/or mergers with other technology companies in related fields of business, among others. As of the date of this Registration Statement, and until we raise additional capital, we have deferred taking more active steps related to pursuing and/or identifying acquisition and/or merger candidates. Nevertheless, our management team continues to evaluate opportunities related to its current business as well as related technologies. There is currently only a very limited trading market in our shares. There can be no assurance that an active trading market for our common stock will commence. Further, in the event that an active trading market commences, there can be no assurance as to the market price of our shares of common stock, whether any trading market will provide liquidity to investors, or whether any trading market will be sustained. Nevertheless, we believe that our recently implemented Reverse Split and the amendment to our capital structure, together with our ability to raise capital through loans from our directors, officers and affiliated persons, should make investment in our shares more desirable to investors and to the financial community.

We are subject to all of the risks inherent in the establishment and growth of a development stage business. We were established on March 6, 2008, for the purpose of engaging in the development, manufacture, and sale of our Device. While we have not generated any revenues nor have we realized a profit from our operations to date, we believe that our recent ability to raise capital from affiliated persons should enhance our ability to raise equity capital from potential third-party investors. Further, our business arrangement with GUMI for the development, manufacture and sale of our Device should enhance our ability to fulfill our business plan, which includes commercially exploiting of our Device. However, notwithstanding our belief, there can be no assurance that we will be able to generate any significant revenues or profitability, if at all, from our Device. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in growing a development stage business in our industry and, as a result, our Company is a highly speculative venture involving significant financial risk.