In
this report, unless the context requires otherwise, references to the “Company”, “BioPharma”, “we”,
“us” and “our” are to Nexien BioPharma, Inc., a Delaware corporation, formerly Intiva BioPharma Inc.
Corporate
History
The
Company was incorporated on November 10, 1952 in Michigan as Gantos, Inc. On July 21, 2008, the Company completed its change in
domicile to Delaware and subsequently changed its name to Kinder Holding Corp. Since bankruptcy liquidation in June 2000, the
Company has not had any operations and adopted “fresh-start” accounting as of June 21, 2000, in accordance with procedures
specified by AICPA Statement of Position No. 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy
Code.”
As
of October 13, 2017, the Company completed a reverse acquisition (the “Share Exchange Transaction”) of Intiva BioPharma
Inc., a private Colorado corporation (“Colorado BioPharma”). In connection with the completion of the reverse merger
the Company changed its name to Intiva BioPharma Inc. on November 8, 2017.
Colorado
BioPharma was formed under the laws of the State of Colorado in March 2017 as a wholly-owned subsidiary of Kanativa USA Inc. (formerly
Intiva USA Inc.) engaged in the business of developing drugs containing cannabinoids for the treatment of various diseases, disorders
and medical conditions; the development or licensing of proprietary delivery systems for cannabinoid-based1 pharmaceutical
medications; and the investment in companies and the acquisition of technologies or medications, focused on cannabinoid-based
science through special purpose vehicles, discussed more fully below. Kanativa USA Inc. is a wholly-owned subsidiary of Kanativa
Inc., formerly Intiva Inc., an Ontario, Canada corporation.
The
Company changed its name to Nexien BioPharma, Inc. in September 2018.
On
October 26, 2018, we entered into a Limited Liability Company Interest Purchase Agreement (the “Purchase Agreement”)
with the members of CRx Bio Holdings LLC, a Delaware limited liability company (“CRx”), to acquire all of the membership
interest in CRx in exchange for 11,000,000 restricted shares of our common stock (the “Acquisition”). CRx is engaged
in the research and development of advanced cannabinoid formulations and drug delivery systems with a focus on bioavailability
and related pharmacokinetics and pharmacodynamics (PK/PD) optimization. The Acquisition transaction was consummated on October
26, 2018. By acquiring CRx as a wholly-owned subsidiary, we acquired all of its assets, which consist primarily of three U.S.
provisional patent applications relating to cannabinoid formulations to treat convulsive disorders, chronic traumatic encephalopathy,
and neuropathic pain. At the closing, we issued to the six members of CRx (the “Sellers”) 1,100,000 shares not subject
to any forfeiture restrictions and 9,900,000 shares which shall be released from forfeiture restrictions according to the following
vesting schedule:
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30%
shall be fully vested 12 months following the Closing (October 26, 2019);
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30%
shall be fully vested 24 months following the Closing (October 26, 2020); and
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30%
shall be fully vested 36 months following the Closing (October 26, 2021).
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Any
Seller who is not then providing services to us or any of our subsidiaries on any vesting date, whether through voluntary termination
or termination “for cause,” will forfeit his unvested shares, which will be cancelled.
1
A cannabinoid is one of a class of diverse chemical compounds that acts on cannabinoid receptors in cells that alter neurotransmitter
release in the brain. Ligands for these receptor proteins include the endocannabinoids (produced naturally in the body by animals),
the phytocannabinoids (found in cannabis and some other plants), and synthetic cannabinoids (manufactured artificially). The most
notable cannabinoid is the phytocannabinoid tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis. Cannabidiol
(CBD) is another major constituent of the plant. There are at least 113 different cannabinoids isolated from cannabis, exhibiting
varied effects.
Effective
December 31, 2018, one of the sellers resigned from the Company and forfeited 1,732,500 unvested shares previously issued. In
May 2019, that seller returned to the Company an additional 142,500 vested shares issued in accordance with the Purchase Agreement.
The fair value of the returned shares was credited to the operations as of June 30, 2019.
Business
Plan
The
Company’s business objective is to develop and commercialize novel FDA-compliant cannabinoid pharmaceuticals, drug delivery
systems, and related technologies for diseases, disorders and medical conditions. The Company is utilizing cannabinoids as the
active pharmaceutical ingredients to develop synthetic pharmaceuticals in strict accordance with the U.S. Food and Drug Administration
(“FDA”) pre-clinical and clinical pathways.
The
Company’s current flagship research and development programs are focused on advancing formulations that have the potential
to significantly improve the treatment outcomes of certain convulsive disorders and neuromuscular disorders. As of the date of
this report, work on these research and development programs has ceased due to the lack of sufficient funding. The Company is
currently seeking a business combination opportunity and maintaining the intellectual property assets which management believes
have the most potential.
Our
Drug Development Activities
Due
to the significant amount of financing needed to develop and commercialize a new drug and the Company’s limited resources,
it is focusing its efforts on advancing formulations that have the potential to significantly improve the treatment of epilepsy
and myotonic dystrophy.
Convulsive
Disorders: Epilepsy and Refractory Epilepsy
Epilepsy
is a neurological disorder marked by sudden recurrent episodes of sensory disturbance, loss of consciousness, or convulsions,
associated with abnormal electrical activity in the brain. It is caused by an imbalance in inhibitory and excitatory neurotransmission
resulting in synchronous neural activity. Refractory epilepsy occurs when standard of care medicine is not bringing seizures under
control. This condition, which may be called by other names, such as uncontrolled, intractable, or drug-resistant epilepsy, is
not age specific. Up to one of every three epilepsy patients will develop what is considered refractory epilepsy.
Our
near-term objective is to secure adequate funding to engage in sponsored research collaboration with a leading Ivy League university
medical school in order to develop a pre-clinical proof of concept for the Company’s proposed parenteral-delivered formulations.
CRx had entered into discussions and subsequently, into a Master Service Agreement (MSA) with the medical school prior to its
acquisition by the Company. The study design involves pre-clinical mouse models in two phases: I – MTD and PK/PD modeling,
and II – efficacy modeling in mice bred to be genetically prone to convulsions/seizures, with a primary focus of advancing
a rigorous study design and improving new meritorious research and development by continued collaboration with our academic partners.
Myotonic
Dystrophy
Myotonic
dystrophy (“DM”) is part of a group of genetic disorders called muscular dystrophies, and is the most common form
of muscular dystrophy that begins in adulthood. DM is characterized by progressive muscle wasting and weakness. People with this
disorder often have prolonged muscle contractions (myotonia) and are not able to relax certain muscles after use. Also, affected
people may have slurred speech or temporary locking of their jaw. Signs and symptoms overlap between DM Type 1 (“DM1”)
and Type 2 (“DM2”), although DM2 tends to be milder than DM1. The muscle weakness associated with DM1 particularly
affects the lower legs, hands, neck and face, while muscle weakness in DM2 primarily involves the muscles of the neck, shoulders,
elbows, and hips. The two types of DM are caused by mutations in different genes.
The
use of cannabinoid receptor modulators and/or terpenes for clinical symptom relief in DM patients has not been explored. Current
scientific knowledge of the effects of cannabis on skeletal muscles or other multiple system symptoms in DM is rather limited.
However, some anecdotal reports suggest that cannabis may be supportive in relief of the most common symptoms in both DM1 and
DM2. Unfortunately, currently there is no standard treatment for these symptoms.
Our
patent applications relate to methods and compositions for treating such diseases with the use of cannabinoids and covers the
administration of the drug(s) by such delivery systems as topical, oral, nasal, inhalation or a combination thereof. On July 07,
2020, a utility patent was granted (US10702,495) relating to a method for treating the symptoms of myotonia with a therapeutically
effective amount of cannabidiol and tetrahydrocannabinaol in a subject. Corresponding claims were also submitted in Europe.
In
April 2018, the Company retained Dr. Benedikt Schoser, a world-renowned expert in DM, to advise the Company. To elicit further
information regarding whether DM patients have had any experience with cannabis and if so whether such experience has resulted
in any symptom relief, a questionnaire was sent to a number of DM 1 and DM 2 patients by patient organizations. The results of
the questionnaire suggest further exploration is appropriate. The survey was published in the Journal of Neurology, Neurosurgery
& Psychiatry.
On
August 13, 2019 we filed a pre-IND meeting request (the “Request”) to discuss the requirements for submission of an
Investigation New Drug Application for a combination of Cannabidiol and THC Sublingual Tablet for muscle relaxation in patients
with myotonic dystrophy and for the treatment of myotonia. On October 8, 2019 we received written responses from the FDA to the
questions we raised in the pre-IND meeting request. We are presently evaluating the responses as we seek to move our development
plan forward.
The
FDA pathway for the development of drugs for certain of these genetic muscular diseases may fall under the Orphan Drug Act
of 1983, which was passed by the U.S. Congress to facilitate the development of orphan drugs. The FDA may grant orphan drug
designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals annually in the
United States. Such an orphan drug designation may entitle a recipient to financial incentives, such as opportunities for grant
funding towards clinical trial costs, tax credits for certain research and user fee waivers under certain circumstances. See risk
factor “We may apply for orphan drug status granted by the FDA for some of our drug candidates for the treatment of rare
diseases” below.
An
additional utility patent application (US16/435,756) was filed as a continuation-in-part on June 10, 2019, resulting in the issuance
of patent US10,702,495 on July 07, 2020, to incorporate some early formulation concepts that may show use in the relief of these
DM symptoms. A corresponding application has been filed at the European Patent Office (EP19179559.0).
Our
Drug Delivery System Development Activities
Accu-Break
License Agreement
On
February 28, 2018, we obtained a worldwide exclusive license from Accu-Break Pharmaceuticals, Inc., a Florida corporation (“Accu-Break”)
with respect to a proprietary delivery system for cannabinoid-based medications. We are required to use commercially reasonable
efforts to develop and commercialize one or more products utilizing the licensed technology and will be responsible for the costs
and efforts associated with the design, manufacturing, preclinical, clinical, and regulatory development activities of these licensed
products worldwide.
Commencing
with the first commercial sale in any country worldwide of any licensed product by the Company or any of its affiliates or sublicensees,
the Company shall pay to Accu-Break royalties for licensed products sold, equal to 4% of the Company’s net sales of licensed
products or 25% of the total revenue received by the Company for sales of licensed products by sublicensees. Such royalties shall
continue so long as the manufacture, use, sale, import or offer for sale of the licensed product infringes a valid claim of Accu-Break’s
licensed technology.
In
addition to the royalty payments described above, and as consideration for entering into the agreement, the Company agreed to
pay Accu-Break a license fee of $100,000, which has been paid in full.
The
Company is also required to pay in cash or, at its option in shares of its Common Stock, milestone payments as follows:
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$100,000
upon approval of filing by each regulatory authority of each pharmaceutical licensed product;
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$100,000
upon approval by each regulatory authority of each pharmaceutical licensed product;
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$50,000
upon achievement of $10,000,000 of cumulative net sales for any and all of the licensed products;
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$50,000
upon achievement of $25,000,000 of cumulative net sales for any and all of the licensed products; and
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$50,000
upon achievement of $50,000,000 of cumulative net sales for any and all of the licensed products.
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The
license fee and milestone payments shall be offset against any amounts due to Accu-Break for royalties and sublicensee payments.
The
license granted to the Company shall continue on a country by country basis and licensed product by licensed product basis so
long as the manufacture, use, sale, import or offer for sale of such licensed product infringes a valid claim of any of Accu-Break’s
licensed technology. Upon such expiration, the license, with respect to such country and such licensed product, will be automatically
converted to a fully paid-up royalty-free perpetual license.
The
license may be terminated by Accu-Break only for the Company’s default under the Agreement, which default shall not have
been corrected within 60 days of having received notice of such default.
Due
to the Company’s current limited financial and personnel resources, the Company has estimated that it may not be able to
recover the carrying value of costs capitalized under the Accu-Break license agreement in the near term, and has recognized an
impairment of $65,000 for the year ended June 30, 2019. This accounting action does not affect the Company’s rights under
the license agreement or its intention to monetize this asset when its resources permit.
Patents,
Intellectual Property and Proprietary Rights
Our
current patent applications are related to our drug development projects and their respective drug candidates. We intend to seek
patent protection in the U.S. and other countries as appropriate, related to methods and compositions and proprietary technologies
for the use of cannabinoids receptor modulators and/or terpenes to treat certain diseases, disorders and medical conditions.
To
date, we have filed three provisional patent applications all related to our drug development projects, specifically the use of
cannabinoid receptor modulators and/or terpenes to treat certain diseases or medical conditions. Assuming the successful completion
of clinical trials, of which there can be no assurance, we believe that we will be able to secure patent protection and retain
applicable intellectual property rights.
The
table below depicts the Company’s patent applications:
Description
of the Patent Application filed with USPTO
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Date
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Method
and Compositions for Treating Dystrophies and Myotonia
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Granted
July 07, 2020
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Method
and Compositions for Parenteral Administration of Cannabidiol in the treatment of Convulsive Disorders
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July
31, 2020
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Method
and Compositions for Parenteral Administration of Cannabidiol in the treatment and prevention of Chronic Traumatic Encephalopathy
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July
31, 2020
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Method
and Compositions for the treatment of Neuropathic Pain by Parenteral Administration of Cannabinoids
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July
31, 2020
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In
addition, on June 8, 2018, a U.S. Patent Application was filed relating to the use of cannabinoid receptor modulators and/or terpenes
to treat extreme health hazards due to exposure to organophosphorus nerve agents and/or organophosphorus insecticides. A continuation
was filed on August 01, 2020 relating to a compound disclosed in the patent application with pending applications in Europe and
Canada. An Israeli patent (238946) was granted on July 01, 2019 for the Use of Cannabinoids and Terpenes for Treatment of Organophosphate
and Carbamate Toxicity based on licensed technology from Kotzker Consulting LLC.
Competition
The
emerging markets for cannabinoid-based drug research and development is and will likely remain competitive. In general, the biotechnology
and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition, and a strong emphasis
on proprietary drugs.
We
expect that we will be required to compete with a variety of multinational pharmaceutical companies and specialized biotechnology
companies, as well as drugs and processes being developed at universities and other research institutions. Our competitors may
develop or may already have developed drugs comparable or competitive with our drug candidates. Competitive therapeutic treatments
for diseases, disorders and medical conditions that are included in our drug development projects have already been approved and
accepted by the medical community and any new treatments that may enter the market would face fierce competition.
We
are aware of a number of companies that are engaged in cannabinoid-based drug development. In addition, several other U.S.-based
companies are in early stage discovery and preclinical development utilizing synthetic and/or plant-derived CBD and/or THC.
Established
companies may have a competitive advantage due to their size and experiences, positive cash flows and institutional networks.
Many of our competitors may have significantly greater financial, technical and human resources than we do. Due to these factors,
our competitors may have a range of competitive advantages and may obtain regulatory approval of their drug candidates before
we are able to develop or commercialize our drug candidates. Our competitors may also develop drugs that are safer, more effective,
more widely used and less expensive than ours. 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 and/or increase their
drug line.
Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among
a smaller number of competitors. Smaller and other early-stage companies, such as ours, may also prove to be significant competitors,
particularly through collaborative arrangements with large and established companies. We compete with large and small companies
in recruiting and retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject
registration for clinical trials, as well as in acquiring technologies complementary to our research projects.
Government
Laws and Regulations
As
a development stage company that intends to have its drug candidates approved in the U.S., we are subject to extensive regulation
by regulatory agencies. The U.S. Food, Drug, and Cosmetic Act and its implementing regulations set forth, among other things,
requirements for the research, testing, development, manufacture, quality control, safety, effectiveness, approval, labeling,
storage, record keeping, reporting, distribution, import, export, advertising and promotion of our drugs. Generally, our activities
in other countries will be subject to regulations that are similar in nature and scope as those in the United States, although
there can be important differences. Additionally, some significant aspects of regulation in the European Union are addressed in
a centralized way through the European Medicines Agency (“EMA”) and the European Commission, but country-specific
regulation remains essential in many respects. The process of obtaining regulatory marketing approvals and the subsequent compliance
with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial
resources and we may not be successful.
The
US Regulatory Framework for the Marijuana Industry
On
January 4, 2018, United States Attorney General Jeff Sessions and the Department of Justice (“DOJ”) issued a Memorandum
for all United States Attorneys entitled “Marijuana Enforcement” (the “Sessions Memo”). The effect of
the Sessions Memo has been to rescind the guidance issued on August 29, 2013 relative to medical marijuana enforcement under the
Cole Memorandum (the “Cole Memo”).
The
Sessions Memo instructs federal prosecutors to disregard the previous Obama-era Cole Memo guidance, and instead follow “the
well-established principles that govern all federal prosecutions as reflected in chapter 9-27.000 of the U.S. Attorney’s
Manual.” The Sessions Memo continues, stating, “[t]hese principles require federal prosecutors deciding which cases
to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the
seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes in the
community.”
The
effect of the Cole Memo’s rescission remains to be seen. Since 1980, when chapter 9-27.000 of the U.S. Attorney’s
Manual was originally promulgated, the United States has undergone a dramatic shift in both national and state-level marijuana
policy. In 1980, there were no states in the U.S. with marijuana decriminalization or legalization statutes. As of June 30, 2020,
33 states and the District of Columbia have enacted medical marijuana legislation in some form, with additional states considering
similar legalization measures. As a result, the manner in which the factors identified in chapter 9-27.000 of the U.S. Attorney’s
Manual (e.g. “seriousness of the crime,” “deterrent effect of criminal prosecution,” and cumulative impact
. . . in the community”) are considered and interpreted today as a matter of prosecutorial discretion, will likely be different
than the way in which they were considered and interpreted in 1980.
On
the same day of the Sessions Memo’s release, numerous government officials, legislators and federal prosecutors in states
with medical and recreational marijuana statutes announced their intention to continue the Cole Memo-era status quo despite the
DOJ’s decision to rescind it. The impact that this lack of uniformity between state and federal authorities could have on
individual state cannabis markets and the businesses that operate within them is unclear and the enforcement of relevant federal
laws is a significant risk. Please see disclosure under Item 1A - “Risk Factors” below.
United
States
We
intend to conduct some of our research and development relating to our drug candidates in the United States, at which time, our
research and development, future manufacturing, distribution and sale of our drugs 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,
drugs 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 any of our drug candidates will receive
approval by the FDA, it must be listed by the DEA as a Schedule II or III controlled substance to be allowed for commercialization.
Consequently, the manufacture, importation, exportation, domestic distribution, storage, sale and legitimate use of our future
drugs 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 drugs.
Israel
If
we intend to develop drugs containing cannabis plant-derived cannabinoids, we may conduct our research and development activities
in Israel. The cannabinoid-based drugs we intend to develop, 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. If we proceed in Israel,
we intend to obtain necessary IMCU licenses to carry out our drug development projects. This will require our acquiring the cannabis
needed for our research activities from an Israeli government-licensed medical cannabis grower. Because we do not have a license
to possess cannabis, the cannabis that will be required for our studies must be transported from the licensed grower directly
to our research facilities or those of a contract research organization, in compliance with a license to use cannabis for medical
research. If we proceed with research in Israel, we will apply for all necessary licenses needed to conduct our drug development
projects. There can be given no assurance that we will obtain all necessary licenses and approvals.
Regulations
Related to the Drug Regulatory Process
We
operate in a highly controlled regulatory environment. Strict regulations establish requirements relating to analytical, toxicological
and clinical standards and protocols in respect to 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, many countries
have stringent regulations relating to the possession and use of cannabis or drugs derived from cannabis
Before
obtaining regulatory approvals for the commercial sale of our future drug candidates, we must demonstrate through preclinical
studies and clinical trials that our drug 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, many pharmaceuticals
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 drug candidate fails to demonstrate safety and efficacy in clinical trials, this failure may delay development of other drug
candidates and hinder our ability to conduct related preclinical studies and clinical trials. Additionally, if we have failures,
we may also be expected to experience challenges, delays or even the inability to obtain additional financing at acceptable terms
and conditions.
Governmental
authorities in all major markets require that a new drug 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 drugs 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.
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 drugs and the raw materials and components used in the production of, testing, manufacture,
labeling, storage, record keeping, approval, advertising and promotion of drug candidates on a product-by-product basis.
Preclinical
tests include in vitro and in vivo evaluation of the drug 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 drug candidates. In Phase II, clinical
trials are conducted to assess safety and gain preliminary evidence of the efficacy of drug 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 IRB are 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
drug candidate 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
drug 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 filing.
The
purpose of the NDA is to provide the FDA with sufficient information so that it can assess whether it should approve the drug
candidate for marketing for specific intended uses. The fact that the FDA has designated a drug as an orphan drug for a specific
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
allowed. 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 drug.
We
cannot take any action to market any new drug or biologic drug 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 drug. Government regulation may
delay or prevent marketing of potential drugs 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 drugs 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 drug 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 drug. 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 drug 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 drug’s use and, potentially, withdrawal of the drug 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 drugs, 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 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 drugs 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 drug 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 drug. The
FDA may then approve the new drug for all or some of the labeled indications for which the referenced listed drug 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 drug must be included in an NDA submitted under Section
505(b)(2).
To
the extent that the Section 505(b)(2) applicant is relying on the FDA’s conclusions regarding studies conducted for an already
approved drug, the applicant is required to certify to the FDA concerning any patents listed for the approved drug 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 drug.
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 drug has expired. Thus, the Section 505(b)(2) applicant
may invest a significant amount of time and expense in the development of its drugs only to be subject to significant delay and
patent litigation before its drugs 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 drugs prior to providing approval to market a drug.
Orphan
Drug Designation in the U.S.
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to a drug intended to treat a rare disease or condition,
which is a disease or condition that affects fewer than 200,000 individuals in the United States. If the disease or condition
affects more than 200,000 individuals in the United States, orphan drug designation may nevertheless be available if there is
no reasonable expectation that the cost of developing and making the drug would be recovered from sales in the United States.
In the United States, a drug that has received orphan drug designation is eligible for financial incentives, such as opportunities
for grant funding towards clinical trial costs, tax credits for certain research and user fee waivers under certain circumstances.
The Orphan Drug Act provides that, if a designated drug is approved for the rare disease or condition for which it was designated,
the approved drug will be granted seven years of orphan drug exclusivity, which means the FDA generally will not approve any other
application for a drug containing the same active moiety for the same indication for a period of seven years, except in limited
circumstances, such as a showing of clinical superiority over the drug with orphan drug exclusivity. Orphan drug exclusivity does
not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease
or condition. In the European Union, orphan drug designation also entitles a party to financial incentives such as a reduction
of fees or fee waivers and ten years of market exclusivity following drug approval. This period may be reduced to six years if
the orphan drug designation criteria are no longer met, including where it is shown that the drug is sufficiently profitable not
to justify maintenance of market exclusivity.
Orphan
drug designation must be requested before submission of an application for marketing approval. Products that qualify for orphan
designation may also qualify for other FDA programs that are intended to expedite the development and approval process and, as
a practical matter, clinical trials for orphan products may be smaller, simply because of the smaller patient population. Nonetheless,
the same approval standards apply to orphan-designated products as for other drugs. Orphan drug designation does not convey any
advantage in, or shorten the duration of, the regulatory review and approval process.
Employees
As
of the date of this report, all of our officers are serving without compensation and have no employees. To the extent not covered
by the services of our offices, we expect to use third-party firms and individuals for our drug candidate development and management.
Our
employees are not subject to any collective bargaining agreement.
Research
and Development Activities
We
have incurred $-0- and $63,858 during the fiscal years ended June 30, 2020 and 2019, respectively, on research and development
for the Company. None of these research or development costs are borne by the customer.
You
should carefully consider the risks, uncertainties and other factors described below because they could materially and adversely
affect our business, financial condition, operating results and prospects and could negatively affect the market price of our
Common Stock. Also, you should be aware that the risks and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties that we do not yet know of, or that we currently believe are immaterial, may also impair our business
operations and financial results. Our business, financial condition or results of operations could be harmed by any of these risks.
The trading price of our Common Stock could decline due to any of these risks, and you may lose all or part of your investment.
In
assessing these risks, you should also refer to the other information contained in or incorporated by reference to this Annual
Report on Form 10-K, including our financial statements and the related notes.
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 of BioPharma 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. The development
of pharmaceuticals with the objective of obtaining approval by the FDA and other international regulatory authorities is not a
short-term endeavor for any specific drug candidate. It also requires extremely significant amounts of capital funding for clinical
trials and other matters. At June 30, 2020, the Company had a working capital deficit of $6,365. The Company will require significant
additional capital to fund the implementation and execution of its business plan. This capital, which likely will be millions
of dollars for a single drug candidate, will be required for research, regulatory applications, and clinical trials. We have incurred
an accumulated deficit of $8,447,159 since our inception. We have funded these losses primarily through the sale of restricted
shares of our Common Stock.
Based
on our financial history, in its report on the financial statements for the year ended June 30, 2020, our independent registered
public accounting firm has expressed substantial doubt as to our ability to continue as a going concern. To date, we have not
generated any revenues and we do not anticipate generating any significant revenues during the current fiscal year.
Notwithstanding
BioPharma’s success in raising approximately $2.1 million from the sale of its securities from inception in 2017 through
June 2020, 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, find strategic or financial partners for a specific drug candidate, or have adequate
capital resources required by us to fund our current and future planned operations. If we are unable to obtain adequate capital
resources to fund operations, we may be required to delay, scale back or eliminate some or all of our plan of operations, which
may have a material adverse effect on our business, results of operations and ability to operate as a going concern.
The
Company has negative cash flow for the financial year ended June 30, 2020.
The
Company had negative operating cash flow for the financial year ended June 30, 2020. To the extent that the Company has negative
operating cash flow in future periods, it may need to allocate a portion of its cash reserves to fund such negative cash flow.
The Company may also be required to raise additional funds through the issuance of equity or debt securities. There can be no
assurance that the Company will be able to generate a positive cash flow from its operations, that additional capital or other
types of financing will be available when needed or that these financings will be on terms favorable to the Company.
We
face many of the risks and difficulties frequently encountered by relatively new companies with respect to our operations.
The
Company’s business objective is to conduct scientific research and development related to the use of cannabinoid receptor
modulators and/or terpenes for medical treatment of certain medical conditions and diseases. We have no operating history as a
medical research company engaged in cannabinoid-based research 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 drug development research projects or that we will be able to develop drugs and treatments that will enable us
to generate sufficient revenues to meet our expenses or to achieve and/or maintain profitability.
If
we are unable to raise sufficient capital as needed, we may be required to reduce the scope of our planned 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.
We
currently have no revenues and may never become profitable.
Our
ability to generate revenue and become profitable depends upon our ability to obtain regulatory approval for any of our drug development
projects. Even if we are able to successfully achieve regulatory approval for any of our drug candidates, we do not know when
any of these drugs will generate revenues, if at all. We have not generated, and do not expect to generate, any product revenue
for the foreseeable future, and we expect to continue to incur significant operating losses for the foreseeable future due to
the cost of research and development, preclinical studies and clinical trials and the regulatory approval process for our drug
candidates. The amount of future losses is uncertain and will depend, in part, on the rate of growth of our research and development
expenses as well as other operating expenses. We are unable to predict the timing or amount of these expected increases in operating
expenses. If we are able to obtain approval for any of our drug candidates, we will incur significant costs associated with commercializing
our drug candidates.
We
will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete
any of our drug development projects
Our
research operations are expected to require significant cash expenditures. We expect to spend substantial and increasing amounts
to conduct our planned research and development, including preclinical testing and clinical trials of our drug candidates, to
seek regulatory approvals to eventually market and commercialize any of our drug candidates. As of June 30, 2020, we had only
$10,786 in cash and cash equivalents. Through June 2020, we have raised approximately $2.1 million in equity under private placement
offerings. We believe that current cash is not sufficient to fund our overhead operations through the remainder of calendar 2020.
We estimate that we will require additional capital of at least $40,000 for the remainder of calendar 2020 to maintain our existence
as a public reporting company. As discussed below, determining a budget is subject to a number of factors. In general, this estimate
may higher if our research efforts prove to be successful or lower if the research efforts are not fruitful. Any progress we make
in our research efforts is uncertain because it is difficult to predict our budget for our drug development activities due to
numerous factors, including, without limitation, the rate of progress of preclinical studies, clinical trials, the results of
preclinical studies and clinical trials for such indication and the costs and timing of seeking and obtaining regulatory approvals
for clinical trials. Moreover, changing circumstances may cause us to expend cash significantly faster than we currently anticipate,
and we may need to spend more cash than currently anticipated due to changing circumstances beyond our control. Our future capital
requirements may depend on a wide range of factors, including, but not limited to:
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the
costs related to initiation, progress, timing, costs and results of preclinical studies and clinical trials for our drug candidates;
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any
change in the clinical development plans for these drug candidates;
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the
number and characteristics of drug candidates that we develop;
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the
terms of any future collaboration agreements we may choose to enter;
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the
events related to the outcome, timing and cost of meeting regulatory requirements established by the DEA, the FDA, the European
Medicines Agency (“EMA”) or other comparable foreign regulatory authorities;
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the
potential costs of filing, prosecuting, defending and enforcing our patent claims and other intellectual property;
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the
cost of defending intellectual property disputes; and
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the
cost of marketing and generating revenues for any of our drug candidates.
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We
cannot be certain that additional funding will be available on acceptable terms, if at all. If we are unable to raise additional
capital on terms acceptable to us, we may have to significantly delay, scale back or discontinue one or more of our drug development
projects.
Raising
additional capital may cause dilution to our existing stockholders and restrict our operations.
We
may seek additional capital through a combination of private and public equity offerings, debt financings, strategic partnerships
and alliances, and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, existing ownership interests will be diluted, and the terms of such financings may include liquidation or other
preferences that adversely affect the rights of existing stockholders. Debt financings may be coupled with an equity component,
such as warrants to purchase shares, which could also result in dilution of our existing stockholders’ ownership. The incurrence
of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such
as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property
rights and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens
being placed on our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and
intellectual property. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with
third parties, we may have to relinquish valuable rights to our drug candidates.
The
Company’s officers and directors may be engaged in a range of business activities resulting in potential conflicts of interest.
The
Company may be subject to various potential conflicts of interest because some of its officers and directors may be engaged in
a range of business activities. In addition, the Company’s executive officers and directors may devote time to their outside
business interests, so long as such activities do not materially or adversely interfere with their duties to the Company. In some
cases, the Company’s executive officers and directors may have fiduciary obligations associated with these business interests
that interfere with their ability to devote time to the Company’s business and affairs and that could adversely affect the
Company’s operations. These business interests could require significant time and attention of the Company’s executive
officers and directors.
In
addition, the Company may also become involved in other transactions which conflict with the interests of its directors and the
officers who may from time to time deal with persons, firms, institutions or companies with which the Company may be dealing,
or which may be seeking investments similar to those desired by it. The interests of these persons could conflict with those of
the Company. In addition, from time to time, these persons may be competing with the Company for available investment opportunities.
Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, if
such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a conflict will abstain
from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors
of the Company are required to act honestly, in good faith and in the best interests of the Company.
The
Company is subject to uncertainty regarding legal and regulatory status and changes.
Achievement
of the Company’s business objectives is also contingent, in part, upon compliance with other regulatory requirements enacted
by governmental authorities and obtaining other required regulatory approvals. The regulatory regime applicable to the cannabis
business in the U.S. is currently undergoing significant proposed changes and the Company cannot predict the impact of the regime
on its business once the structure of the regime is finalized. Similarly, the Company cannot predict the timeline required to
secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required
by governmental authorities. Any delays in obtaining, or failing to obtain, required regulatory approvals may significantly delay
or impact the development of markets, products and sales initiatives and could have a material adverse effect on the business,
results of operations and financial condition of the Company. The Company will incur ongoing costs and obligations related to
regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or
in restrictions on the Company’s operations. In addition, changes in regulations, more vigorous enforcement thereof or other
unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise
to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition
of the Company.
Risks
Relating to Our Drug Development Projects
Our
future success will largely depend on the success of our drug candidates, which development will require significant capital resources
and years of clinical development effort.
We
currently have no drug products on the market, and none of our drug development projects has reached preclinical study or clinical
trial status. Our business depends almost entirely on the successful clinical development, regulatory approval and commercialization
of our drug candidates. Investors need to be aware that substantial additional investments including clinical development and
regulatory approval efforts will be required before we are permitted to market and commercialize our drug candidates, if ever.
It may be several years before we can commence clinical trials, if ever. Any clinical trial will be subject to extensive and rigorous
review and regulation by numerous government authorities in the United States, the European Union, and other jurisdictions where
we intend, if approved, to market our drug candidates. Before obtaining regulatory approvals for any of our drug candidates, we
must demonstrate through preclinical testing and clinical trials that the drug candidate is safe and effective for its specific
application. This process can take many years and may include post-marketing studies and surveillance, which would require the
expenditure of substantial resources. Of the large number of drugs in development for approval in the United States and the European
Union, only a small percentage will successfully complete the FDA regulatory approval process or be granted authorization to be
marketed in the European Commission or the other competent authorities in the European Union (“EU”) Member States.
Accordingly, even if we obtain the sufficient financing to fund our planned research, development and clinical programs, we cannot
assure you that any of our drug candidates will be successfully developed or commercialized.
We
may be unable to formulate or scale-up any or all of our drug candidates. There is no guarantee that any of the drug candidates
will be or are able to be produced in a manner to meet the FDA’s criteria for product stability, content uniformity and
all other criteria necessary for product approval in the United States and other markets. Any of our drug candidates may fail
to achieve their specified endpoints in clinical trials. Furthermore, drug candidates may not be approved even if they achieve
their specified endpoints in clinical trials. The FDA may disagree with our trial design and our interpretation of data from clinical
trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials.
The FDA may also approve a drug for fewer or more limited indications than we request, or may grant approval contingent on the
performance of costly post-approval clinical trials (i.e., Phase IV trials). In addition, the FDA may not approve the labeling
claims that we believe are necessary or desirable for the successful commercialization of our drug candidates.
If
we are unable to expand our pipeline and obtain regulatory approval for our drug candidates on the timelines we anticipate, we
will not be able to execute our business strategy effectively and our ability to substantially grow our revenues will be limited,
which would have a material adverse impact on our long-term business, results of operations, financial condition, and prospects.
Our
drug development projects, if approved, may be unable to achieve the expected market acceptance and, consequently, limit our ability
to generate revenue.
Even
when drug development is successful and regulatory approval has been obtained, our ability to generate significant revenue depends
on the acceptance of our drug candidates by physicians and patients. We cannot assure you that any of our drug candidates will
achieve the expected market acceptance and revenue, if and when we obtain the regulatory approvals. The market acceptance of any
drug depends on a number of factors, including the indication statement and warnings approved by regulatory authorities for the
drug label, continued demonstration of efficacy and safety in commercial use, physicians’ willingness to prescribe the drug,
reimbursement from third-party payers such as government health care systems and insurance companies, the price of the drug, the
nature of any post-approval risk management plans mandated by regulatory authorities, competition, and marketing and distribution
support. Any factors preventing or limiting the market acceptance of our drugs could have a material adverse effect on our business,
results of operations and financial condition.
Results
of preclinical studies and earlier clinical trials are not necessarily predictive indicators of future results.
Any
positive results from future preclinical testing of our drug candidates and potential clinical trials may not necessarily be predictive
of the results from Phase 1, Phase 2 or Phase 3 clinical trials. In addition, our interpretation of results derived from clinical
data or our conclusions based on our preclinical data may prove inaccurate. Frequently, pharmaceutical and biotechnology companies
have suffered significant setbacks in clinical trials after achieving positive results in preclinical testing and early clinical
trials, and we cannot be certain that we will not face similar setbacks. These setbacks may be caused by the fact that preclinical
and clinical data can be susceptible to varying interpretations and analyses. Furthermore, certain drug candidates may perform
satisfactorily in preclinical studies and clinical trials, but nonetheless fail to obtain FDA approval, a marketing authorization
granted by the European Commission, or appropriate approvals by government authorities in other countries. If we fail to produce
positive results in our clinical trials for our drug candidates, the development timeline and regulatory approval and commercialization
prospects for them and as a result our business and financial prospects, would be materially adversely affected.
The
regulatory approval processes with the FDA, the EMA and other comparable foreign regulatory authorities is lengthy and inherently
unpredictable.
We
are not permitted to market our drug candidates in the United States or the European Union until we receive approval of a New
Drug Application (“NDA”) from the FDA or a Marketing Authorization Application (“MAA”) from the European
Commission, respectively, or in any foreign countries until we receive the approval from the regulatory authorities of such countries.
Prior to submitting an NDA to the FDA or an MAA to the EMA for approval of our drug candidates we will need to have completed
our preclinical studies and clinical trials. Successfully completing any clinical program and obtaining approval of an NDA or
MAA is a complex, lengthy, expensive and uncertain process, and the FDA or EMA may delay, limit or deny approval of drug candidates
for many reasons, including, among others, because:
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an
inability to demonstrate that our drug candidates are safe and effective in treating patients to the satisfaction of the FDA
or EMA;
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results
of clinical trials that may not meet the level of statistical or clinical significance required by the FDA or EMA;
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disagreements
with the FDA or EMA with respect to the number, design, size, conduct or implementation of clinical trials;
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requirements
by the FDA and EMA to conduct additional clinical trials;
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disapproval
by the FDA or EMA or other applicable foreign regulatory authorities of certain formulations, labeling or specifications of
drug candidates;
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findings
by the FDA or EMA that the data from preclinical studies and clinical trials are insufficient;
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the
FDA or EMA may disagree with the interpretation of data from preclinical studies and clinical trials; and
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the
FDA, European Commission or other applicable foreign regulatory agencies may change their approval policies or adopt new regulations.
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Any
of these factors, many of which are beyond our control, could increase development costs or jeopardize our ability to obtain regulatory
approval for our drug candidates.
We
may apply for orphan drug status granted by the FDA for some of our drug candidates for the treatment of rare diseases.
Regulatory
authorities in some jurisdictions, including the United States and the European Union, may designate drugs for relatively small
patient populations as orphan drugs. The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition
that affects fewer than 200,000 individuals annually in the United States. In the European Union, the EMA’s Committee for
Orphan Medicinal Products grants orphan drug designation to promote the development of drugs that are intended for the diagnosis,
prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons
in the European Union. Additionally, such designation is granted for drugs intended for the diagnosis, prevention or treatment
of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that
sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug.
In
the United States, orphan drug designation entitles a party to financial incentives, such as opportunities for grant funding towards
clinical trial costs, tax credits for certain research and user fee waivers under certain circumstances. In addition, if a drug
receives the first FDA approval for the drug and indication for which it has orphan drug designation, the drug is entitled to
seven years of market exclusivity, which means the FDA may not approve any other application for the same drug for the same indication
for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the drug with orphan
drug exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition,
or the same drug for a different disease or condition. In the European Union, orphan drug designation also entitles a party to
financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity following drug approval. This
period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that
the drug is sufficiently profitable so that market exclusivity is no longer justified.
Our
drug candidates may become subject to controlled substance laws and regulations in the U.S.
While
cannabis is a controlled substance under the CSA in the United States, we plan to initially focus our drug development projects
using cannabinoids that are synthetically produced. Some of these synthetics, such as dronabinol, have been approved by the FDA
for various medical research and conditions. While plant-derived cannabinoids are categorized as Schedule I substances under the
CSA, dronabinol, which is synthetic tetrahydrocannabinol, or THC is a Schedule III substance in capsule form, although it is a
Schedule I substance in bulk form. Even though dronabinol is still a controlled substance, research based on Schedule III substances,
including trials in the United States, are substantially less restrictive.
However,
if we decide to proceed with clinical trials using plant-derived cannabinoids, and are conducting those trials in the United States,
we will become subject to the CSA laws and regulation in addition to FDA regulations. Currently the Company does not intend to
proceed with clinical trials using cannabis-derived cannabinoids in the U.S. If the Company decides to proceed with plant-derived
cannabinoids, it will evaluate where to conduct its research and preclinical trials.
Nevertheless,
our final drugs may contain controlled substances as defined in the CSA. Controlled substances that are pharmaceutical drugs are
subject to a high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing
quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies
controlled substances into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances, by definition, have
a high potential for abuse, have no currently “accepted medical use” in the United States, lack accepted safety for
use under medical supervision, and may not be prescribed, marketed or sold in the United States. Pharmaceutical products approved
for use in the United States may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the
highest potential for abuse or dependence and Schedule V substances the lowest relative risk of abuse among such substances. Schedule
I and II drugs are subject to the strictest controls under the CSA, including manufacturing and procurement quotas, security requirements
and criteria for importation. In addition, dispensing of Schedule II drugs is further restricted. For example, they may not be
refilled without a new prescription.
While
cannabis and certain of its derivatives are Schedule I controlled substances, drugs 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 any of our drug candidates receive FDA approval, the DEA will make a scheduling determination
and place it in a schedule other than Schedule I for it to be prescribed for patients in the United States. If approved by the
FDA, we expect the finished dosage forms of any of our drug candidates 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 drugs. However, the DEA must issue a temporary order scheduling the
drug within 90 days after the FDA approves the drug and the DEA receives a scientific and medical evaluation and scheduling recommendation
from the Department of Health and Human Services. Furthermore, if the FDA, DEA or any foreign regulatory authority determines
that any of our drugs 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 drugs.
Clinical
trials of cannabinoid-based drug candidates are novel with very limited or non-existing history; we face a significant risk that
the trials will not result in commercially viable drugs and treatments.
At
present, there is only a very limited documented clinical trial history from which we can derive any scientific conclusions, or
prove that our present assumptions for the current and planned research are scientifically compelling. While we are encouraged
by the limited results of clinical trials by others, there can be no assurance that any clinical trial will result in commercially
viable drugs or treatments.
Clinical
trials are expensive, time consuming and difficult to design and implement. We, as well as the regulatory authorities 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:
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lack
of effectiveness of any formulation or delivery system during clinical trials;
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discovery
of serious or unexpected toxicities or side effects experienced by trial participants or other safety issues;
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slower
than expected rates of subject recruitment and enrollment rates in clinical trials;
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delays
or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials due to regulatory
and manufacturing constraints;
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delays
in obtaining regulatory authorization to commence a trial, including Institutional Review Board (“IRB”) approvals,
licenses required for obtaining and using cannabis or cannabis derived substances for research, either before or after a trial
is commenced;
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unfavorable
results from ongoing pre-clinical studies and clinical trials;
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patients
or investigators failing to comply with study protocols;
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patients
failing to return for post-treatment follow-up at the expected rate;
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sites
participating in an ongoing clinical study withdraw, requiring us to engage new sites;
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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 IRB requirements;
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third-party
entities do not perform data collection and analysis in a timely or accurate manner or at all; or
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regulatory
inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies.
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Any
of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Changes
in consumer preferences and acceptance of cannabinoid-derived drugs and any negative trends will adversely affect our business.
We
are substantially dependent on initial and continued market acceptance and proliferation of cannabinoid-derived drugs. We believe
that as cannabinoid-derived drugs become more widely accepted by the medical and scientific communities and the public at large,
the stigma associated with cannabinoid-derived drugs 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 framework
is favorable, of which there can be no assurance. Any negative outlook on cannabinoid-derived drugs will adversely affect our
business prospects.
In
addition, while some may believe that large, well-funded pharmaceutical and other related businesses and industries may have material
economic reasons to be in strong opposition to cannabinoid-based drugs, we don’t believe that it is the case. Regardless,
the pharmaceutical industry is well-funded with a strong and experienced lobbying presence at both the federal and state levels
as well as internationally, that surpasses financial resources of the current group of medical cannabinoid research and development
companies. Any effort by the pharmaceutical lobby could or might undertake to halt or delay the development of cannabinoid-based
drugs and could have a detrimental impact on our business.
These
pressures could also limit or restrict the introduction and marketing of any cannabinoid-derived drug. Adverse publicity regarding
cannabis misuse or adverse side effects from cannabis or other cannabinoid-derived drugs 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 drugs.
Our
drug candidates may contain controlled substances, the use of which may generate public controversy.
Since
our drug candidates may contain controlled substances, their regulatory approval may generate public controversy. Political and
social pressures and adverse publicity could lead to delays in approval of, and increased expenses for, our drug candidates. These
pressures could also limit or restrict the introduction and marketing of our drug candidates. Adverse publicity from cannabis
misuse or adverse side effects from cannabis or other cannabinoid-derived drugs may adversely affect the commercial success or
market penetration achievable by our drug candidates. The nature of our business will likely attract a high-level of public and
media interest, and in the event of any resultant adverse publicity, our reputation may be harmed.
The
FDA has not approved any plant-derived cannabinoid drug as a safe and effective drug for any indication.
To
date, the FDA has not approved any plant-derived cannabinoid drug as safe and effective for any indication. However, 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 to the FDA. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative
or judicial sanctions, such as the FDA’s 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.
At
present we have no guaranteed or reliable source of synthetic cannabinoids at an economically feasible price – even though
we intend to focus on the utilization of synthetic cannabinoids
Our
primary objective is to focus our initial drug development utilizing synthetic cannabinoids. While we currently have arrangements
with sources from which we are obtaining synthetic cannabinoids, without any guarantees of supply, there is no assurance that
we will be able to access synthetic cannabinoids in the future, or at an economically feasible price for a reasonable period of
time that would enable us to implement and execute our business plan.
Laws
and regulations affecting therapeutic uses of cannabis are constantly evolving.
The
potential ongoing evolution of laws and regulations affecting the research and development of cannabinoid-based medical drugs
and treatments could detrimentally affect our business. Laws and regulations related to the therapeutic uses of cannabis and cannabinoid-based
drugs may be subject to changing interpretations. These changes may require us to incur substantial costs associated with legal
and compliance fees and may 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.
Our
research activities in the cannabinoid drug industry may make it difficult to obtain insurance coverage.
In
the event that we decide to commence research based on plant-derived cannabinoids in the U.S., obtaining and maintaining necessary
insurance coverage, for such things as workers compensation, general liability, product liability and directors and officers liability
insurance, may be more difficult and/or expensive for us to find because of our research directions utilizing synthetic and/or
plant-derived cannabinoids. There can be no assurance that we will be able to find such insurance, 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
face a potentially highly competitive market.
Demand
for cannabinoid-derived drugs will likely be dependent on a number of social, political and economic factors that are beyond our
control. While we believe that there will be a demand for such drugs, and that the demand will grow, there is no assurance that
such demand will happen, that we will benefit from any demand or that our business, in fact, will ever generate revenues from
our drug development activities or become profitable.
The
emerging markets for cannabinoid-derived drugs and medical research and development is and will likely remain competitive. The
development and commercialization of drugs is highly competitive. We compete with a variety of multinational pharmaceutical companies
and specialized biotechnology companies, as well as products and processes being developed by universities and other research
institutions. Many of our competitors have developed, are developing, or will develop drugs and processes competitive with our
drug candidates. Competitive therapeutic treatments include those that have already been approved and accepted by the medical
community and any new treatments that may enter the market. For some of our drug development directions, other treatment options
are currently available, under development, and may become commercially available in the future. If any of our drug candidates
is approved for the diseases and conditions we are currently pursuing, they may compete with a range of therapeutic treatments
that are either in development or currently marketed.
We
are aware of many companies that are engaged in cannabinoid-derived drug development activities. In addition, other U.S.-based
and foreign-based companies are in early stage discovery and preclinical development utilizing the cannabinoids CBD and/or THC.
Established
companies may have a competitive advantage over us due to their size and experiences, financial resources, and institutional networks.
Many of our competitors may have significantly greater financial, technical and human resources than we do. Due to these factors,
our competitors may have an advantage in marketing their approved drugs and may obtain regulatory approval of their drug candidates
before we are able to, which may limit our ability to develop or commercialize our drug candidates. Our competitors may also develop
drugs that are safer, more effective, more widely used and less expensive than ours. These advantages could materially impact
our ability to develop and, if approved, commercialize our drug candidates successfully. 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.
Our
drug candidates may compete with other plant-derived or synthetic cannabinoid drugs, in addition to competing with state-licensed
medical and recreational marijuana, in markets where the recreational and/or medical use of marijuana is legal. There is continuing
support in the United States for further state legalization of marijuana. In markets where recreational and/or medical marijuana
is not legal, our drug candidates, once approved by regulators, may compete with marijuana or marijuana-based products purchased
in the illegal drug market.
Moreover,
as generic versions of drug products enter the market, the price for such drugs may be expected to decline rapidly and substantially.
Even if we are the first to obtain FDA approval of one of our drug candidates, the future potential approval of generics could
adversely affect the price we are able to charge and the profitability of our product will likely decline.
Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in more resources being concentrated among a smaller
number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies. These companies may compete with us in recruiting and
retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration
for clinical trials, as well as in acquiring technologies complementary to our research projects.
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 federal and state laws and regulations and other governmental bodies
in each of the countries we may develop and/or market our drug candidates. We must comply with all regulatory requirements if
we expect to be successful.
If
any of our cannabinoid-derived drug candidates are approved in the United States, they 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
cannabinoid-derived drug candidates.
Any
failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to conduct clinical
trials which are prerequisites to our ability to commercialize our cannabinoid-based drugs 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.
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 drugs may depend on how the U.S. and other governments and/or health administrations
provide coverage and/or reimbursements for any drugs that we are successful in developing. 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 countries 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 drug. Our business could be detrimentally affected if reimbursements of our drugs is unavailable or limited,
if pricing is set at unacceptable levels.
We
will need to increase the size of our organization and may experience difficulties in managing growth.
At
present, we are a very small company. We expect to experience a period of expansion in headcount, infrastructure and overhead
and anticipate that further expansion will be required to address potential growth and market opportunities. Future growth will
impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate
new members of our management team, employees including researchers, and consultants. Our future financial performance and our
ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.
We
may not be able to successfully expand our business through acquisitions.
We
may review corporate and product acquisition candidates as a part of our growth strategy. If we decide to undertake an acquisition
to obtain, what we view as promising drug candidates, we may not be able to successfully integrate it in order to realize the
full benefit of such acquisition. Factors which may affect our ability to grow successfully through acquisitions include:
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inability
to identify suitable targets given the relatively narrow scope of our drug candidates;
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difficulties
and expenses in connection with integrating the acquired companies and achieving the expected benefits;
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diversion
of management’s attention from current operations;
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the
possibility that we may be adversely affected by risk factors facing the acquired companies;
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possible
dilution of earnings, or in the case of acquisitions made through the issuance of our common shares to the stockholders of
the acquired company, dilution in the percentage of ownership of our existing stockholders;
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potential
losses resulting from undiscovered liabilities of acquired companies not covered by the indemnification we may obtain from
the seller; and
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loss
of key employees of the acquired companies.
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Risks
Related to Collaboration with Third Parties and Intellectual Property Rights
We
will depend on third parties to conduct our research activities.
We
will rely on third parties such as clinical data management organizations and consultants to design, conduct, supervise and monitor
our preclinical studies and clinical trials (the “Third Parties”). We and the Third Parties are required to comply
with various regulations and guidelines from regulatory authorities to ensure that the health, safety and rights of patients are
protected in clinical development and clinical trials, and that trial data integrity is assured. Relying on Third Parties does
not relieve us of certain responsibilities and requirements. If we or any of the Third Parties fail to comply with applicable
requirements, the clinical data generated in our clinical trials may be deemed unreliable and the FDA, the EMA or other comparable
foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications.
There is no assurance that upon inspection by a given regulatory authority, such regulatory authority will determine that any
of our clinical trials comply with such requirements. Failure to comply with these regulations may require us to repeat preclinical
studies and clinical trials, which would delay the regulatory approval process.
The
Third Parties will not be designated as our employees. We therefore cannot control whether they devote sufficient time and resources
to our ongoing clinical and preclinical programs. If the Third Parties do not successfully carry out their contractual duties
or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to clinical protocols
and/or regulatory requirements, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory
approval for, or successfully commercialize our drug candidates. As a result, our commercial prospects for our drug candidates
would be harmed, our costs could increase and our ability to generate revenue could be delayed or reduced.
Clinical
trials are very expensive, time consuming and difficult to design and implement. Our drug candidates are in preclinical development,
which is an extremely preliminary stage of development that includes no regulatory input. We estimate that clinical trials for
these drug candidates, if and when initiated, may continue for several years and may take significantly longer than expected to
complete. In addition, we, the FDA, an institutional review board (IRB), or other regulatory authorities, including state and
local authorities, may suspend, delay or terminate our clinical trials at any time, or the DEA could suspend or terminate the
registrations and quota allotments we require in order to procure and handle controlled substances, for various reasons, including:
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Lack
of effectiveness of any product candidate during clinical trials;
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Discovery
of serious or unexpected toxicities or side effects experienced by study participants or other safety issues;
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Slower
than expected rates of subject recruitment and enrollment rates in clinical trials;
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Difficulty
in retaining subjects who have initiated a clinical trial but who may withdraw at any time due to adverse side effects from
the therapy, insufficient efficacy, fatigue with the clinical trial process, or for any other reason;
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Delays
or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials, in particular, obtaining
sufficient quantities of synthetic or plant-derived cannabinoids due to regulatory and manufacturing constraints.
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Inadequacy
of or changes in our manufacturing process or product formulation;
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Delays
in obtaining regulatory authorization to commence a study, or “clinical holds” or delays requiring suspension
or termination of a study by a regulatory agency, including by the FDA, before or after a study is commenced;
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DEA-related
recordkeeping, reporting, or security violations at a clinical site, leading the DEA or state authorities to suspend or revoke
the site’s controlled substance license and causing a delay or termination of planned or ongoing studies;
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Changes
in applicable regulatory policies and regulations;
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Delays
or failure in reaching agreement(s) on acceptable terms in clinical trial contracts or protocols with prospective clinical
trial sites;
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Uncertainty
regarding proper dosing;
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Unfavorable
results from ongoing clinical trials and preclinical studies;
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Failure
of the Third Parties or other third-party contractors to comply with all contractual and regulatory requirements or to perform
their services in a timely or acceptable manner;
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Failure
by us, our employees, our consultants, the Third Parties, or their employees to comply with all applicable FDA, DEA or other
regulatory requirements relating to the conduct of clinical trials or the handling, storage, security and recordkeeping for
controlled substances;
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Scheduling
conflicts with participating clinicians and clinical institutions;
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Failure
to design appropriate clinical trial protocols;
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Insufficient
data to support regulatory approval;
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Inability
or unwillingness of medical investigators to follow our clinical protocols;
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Difficulty
in maintaining contact with subjects during or after treatment, which may result in incomplete data; or
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Regulatory
concerns with cannabinoid-derived drugs generally and the potential for abuse of the drugs.
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Generally,
there is a high rate of failure for drug candidates proceeding through clinical trials. We may suffer significant setbacks in
our clinical trials similar to the experience of many other companies in the pharmaceutical and biotechnology industries, even
after receiving promising results in early trials. Further, even if we view the results of a clinical trial to be positive, the
FDA or other regulatory authorities may disagree with our interpretation of the data. In the event that we abandon or are delayed
in our clinical development efforts related to our drug candidates, we may not be able to execute on our business plan effectively,
we may not be able to generate revenues from our drug development activities, become profitable, resulting in our reputation in
the industry and in the investment community likely becoming significantly damaged and this could adversely affect the price of
our shares.
We
intend to rely upon Third Parties to formulate and produce our drug candidates in accordance with our clinical protocols and all
applicable regulatory requirements, including the FDA’s good clinical practice regulations and current good manufacturing
practices and DEA and state regulations governing the handling, storage, security and recordkeeping for controlled substances.
These Third Parties are anticipated to play a significant role in the formulation process and the development of our drug candidates.
We intend to likely rely on these Third Parties for the formulation and development of the products to be utilized in our clinical
and preclinical studies, and we will likely control minimally certain aspects of their activities.
We
intend to rely on Third Parties to conduct and oversee our clinical trials. If these Third Parties do not meet our deadlines or
otherwise conduct the trials as required, we may not be able to obtain regulatory approval for or commercialize our drug candidates
when expected or at all.
We
may also rely upon various medical institutions, clinical investigators and contract laboratories to conduct our trials in accordance
with our clinical protocols and all applicable regulatory requirements, including the FDA’s good clinical practice regulations
and DEA and state regulations governing the handling, storage, security and recordkeeping for controlled substances. These Third
Parties are anticipated to play a significant role in the conduct of these trials and the subsequent collection and analysis of
data from the clinical trials. We intend to rely heavily on these parties for the execution of our clinical and preclinical studies,
and control only certain aspects of their activities.
If
any of our clinical trial sites terminate their involvement in one of our clinical trials for any reason, we may experience the
loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those
patients to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific
advisors or consultants to us from time to time and receive cash or equity compensation in connection with their services. If
these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data
generated at the applicable clinical trial site may be questioned by the FDA.
We
may conduct clinical trials for our drug candidates outside the United States, and the FDA may not accept data from such trials.
We
may choose to conduct one or more of our clinical trials outside the United States. Although the FDA may accept data from clinical
trials conducted outside the United States, acceptance of such study data by the FDA is subject to certain conditions. For example,
the study must be well designed and conducted and performed by qualified investigators in accordance with ethical principles.
The study population must also adequately represent the U.S. population, and the data must be applicable to the U.S. population
and U.S. medical practice in ways that the FDA deems clinically meaningful. Generally, the patient population for any clinical
studies conducted outside of the United States must be representative of the population for whom we intend to label the product
in the United States. In addition, such studies would be subject to the applicable local laws, and FDA acceptance of the data
would be dependent upon its determination that the studies also complied with all applicable U.S. laws and regulations. There
can be no assurance the FDA will accept data from trials conducted outside of the United States, as much of the criteria is evaluated
in the discretion of the FDA. If the FDA does not accept any such data, it would likely result in the need for additional trials,
which would be costly and time-consuming and delay aspects of our business plan.
If
we rely on Third Parties, our internal capacity to perform these functions will be limited. Outsourcing these functions involves
risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at
all. In addition, the use of Third Parties requires us to disclose our proprietary information to these parties, which could increase
the risk that this information will be misappropriated. Though we will carefully manage our relationships with these Third Parties,
there can be no assurance that challenges or delays in the future will not have a material adverse impact on our business, financial
condition and prospects.
If
a Third Party terminates or fails to perform its obligations under an agreement with us, the prospects of regulatory approval
of our drugs candidates could be delayed or terminated.
At
present, we are not party to any collaborative arrangement with a Third Party, although we may pursue such arrangements before
commencing any preclinical studies or clinical trials for our drug candidates. If we enter into future collaborative arrangements
for the research and development of any drug and any Third Party does not devote sufficient time and resources to our drug candidates,
we may not realize the potential commercial benefits of the collaborative agreement, and our results of operations may be materially
adversely affected. In addition, if any such future Third Party were to breach or terminate its arrangements with us, the development
of any drug candidate could be delayed or terminated.
If
we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate for our drug candidates,
our competitive position could be harmed.
Our
commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual property protection
in the U.S. and other countries with respect to our proprietary technology and drug candidates. We will rely on trade secret,
patent, copyright and trademark laws, and confidentiality and other agreements with employees and third parties, all of which
offer only limited protection. We are seeking to protect our proprietary positions by filing patent applications in the United
States and abroad related to our novel technologies and drugs that are important to our business.
We
do not know whether any of the pending patent applications for any of our drug candidates will result in the issuance of patents.
The patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual
questions and have often been the subject of litigation. As a result, the issuance, scope, validity, enforceability and commercial
value of any of our potential future patents are highly uncertain. The steps we will take to protect our proprietary rights may
not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights,
both inside and outside the United States. Patent examination processes may require us to narrow the claims for our pending patent
applications, which may limit the scope of patent protection that may be obtained if the patents are granted. The rights to be
granted under future patents issued to us may not provide us with the proprietary protection or competitive advantages we seek.
If we are unable to obtain and maintain patent protection for our technology and drugs, or if the scope of the patent protection
obtained is not sufficient, our competitors could develop and commercialize technology and drugs similar or superior to ours,
and our ability to successfully commercialize our technology and drugs may be adversely affected.
The
issuance of a patent may not always be conclusive as to its inventorship, scope, validity or enforceability. Our issued patents
may be challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in the loss of patent protection,
the narrowing of claims in such patents or the invalidity or unenforceability of such patents, which could limit our ability to
stop others from using or commercializing similar or identical technology and drugs, or limit the duration of the patent protection
for our technology and drugs.
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 due to litigation or other proceedings relating to patents and other intellectual property
rights of others. If 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 application or patent litigation, 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 use inventions claimed by their patents and may go to court to stop us from engaging in research,
development and/or the sale of any of our future drugs. Such lawsuits are expensive and would consume time and other resources.
There is a risk that the court will decide that we are infringing on the third party’s patents and will order us to stop
the activities claimed by the patents. 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
drug candidates, technologies or other matters.
We
will 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.
We
will 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. These
agreements may be difficult and costly to enforce. Although we will seek to obtain these types of agreements from these Third
Parties, 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 drug candidates. If a dispute
arises, a court may determine that the right belongs to a third party. Enforcement of our rights can be costly and unpredictable.
Despite the protective measures we intent to employ, we will still face the risk that:
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these
agreements may be breached;
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these
agreements may not provide adequate remedies for the applicable type of breach;
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our
trade secrets or proprietary know-how will otherwise become known; or
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our
competitors will independently develop similar technology or proprietary information.
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Intellectual
property rights may not necessarily address all potential threats to our competitive advantage.
The
degree of future protection afforded by our intellectual property rights may be uncertain because intellectual property rights
have limitations, and may not adequately protect us to enable us to maintain any competitive advantage. The following factors
may weaken our protection:
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compounds
may be made by others that are the same or similar to our drug candidates, but are not covered by our patent claims;
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inventions
covered by our future patents or pending patent may have been discovered by others previously;
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independently
developed similar or alternative technologies may duplicate any of our technologies without infringing our intellectual property
rights;
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pending
patents may not lead to issued patents;
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our
future issued patents may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result
of legal challenges;
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our
competitors might conduct research and development activities in the United States and other countries that provide a safe
harbor from patent infringement claims for certain research and development activities, as well as in countries where we do
not have patent rights; and
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the
patents of others may have an adverse effect on our business.
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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 under the symbol “NXEN”. There is only a limited and
non-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. We can provide
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 specific time, if ever. Consequently, our Common Stock should be purchased only by investors who have no immediate
need for liquidity from their investment and who can hold our Common Stock potentially 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.
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 both in the United States and
globally, 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 business
prospects. In addition, the public stock markets have experienced and may be expected to experience extreme price and trading
volume volatility. These market fluctuations may adversely affect the market price of our Common Stock.
A
large number of additional shares will be available for resale into the public market pursuant to Rule 144, which may cause the
market price of our Common Stock to decline significantly.
Sales
of a substantial number of shares of our Common Stock in the public market will become available pursuant to Rule 144 promulgated
by the SEC under the Act, and could adversely affect the market price of our Common Stock. As of September 24, 2020, we have 55,781,196
shares of Common Stock outstanding, of which 45,904,161 are restricted due to applicable federal securities laws. As restrictions
on the resale of 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.
If
holders of restricted securities sell a large number of shares pursuant to Rule 144, they could adversely affect the market price
for our Common Stock, over which we will likely have no control.
You
may experience dilution of your ownership interest because of the potential of 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 stockholders. We are authorized to issue an aggregate of 200,000,000
shares of Common Stock, par value $0.0001 per share, of which 55,781,196 shares of Common Stock are outstanding as of September
24, 2020.
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 in the U.S. over-the-counter market.
We
may never pay any dividends to our stockholders.
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, stockholders 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 and will be able to influence corporate matters.
As
of September 24, 2020, our directors and executive officers and stockholders holding more than 5% of our Common Stock own of record
and beneficially, in the aggregate, approximately 65% of our outstanding Common Stock. As a result, if these stockholders were
to choose to act together, they would be able to exercise considerable influence over all matters requiring stockholder 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 Item 12 - “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
We
cannot assure you that the interests of our management and affiliated persons will coincide with the interests of other stockholders.
As long as our management and affiliated persons collectively control a substantial portion of our Common Stock, these individuals
and/or entities controlled by them, including Kanativa USA Inc., will continue to collectively be able to strongly influence or
effectively control our decisions.
Our
Common Stock is 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 longer when trading activity in our Common Stock 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 its share
price. We cannot give stockholders any assurance that a broader or more active public trading market for our Common Stock will
develop or be sustained, or that current trading levels will be sustained.
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 stockholders, 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 stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation,
bylaws and Delaware law could make it more difficult for stockholders 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, 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 to seek coverage and publication of information regarding the Company in an accepted publication
manual, which will result in a “manual exemption.” The manual exemption permits a security to be distributed in a
specific 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 include Mergent/Moody’s Manuals, 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.
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
are subject now to the Penny Stock rules since our shares of Common Stock sell below $5.00 per share. Penny stocks generally are
equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk
disclosure document prepared by the SEC which provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market value of each penny
stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information
must be given to the customer orally or in writing prior to completing the transaction and must be given to the customer in writing
before or with the customer’s confirmation.
In
addition, the penny stock rules require that prior to a transaction, the broker dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our
Common Stock. As long as our shares of Common Stock are subject to the penny stock rules, the holders of such shares of Common
Stock may find it more difficult to sell their securities.
The
control deficiencies in our internal control over financial reporting may until remedied cause errors in our financial statements
or cause our filings with the SEC to not be timely.
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 generally accepted accounting principles (“GAAP”)
for each of the periods presented.
At
present, our internal control over financial reporting or disclosure controls and procedures are not effective. We identified
material weaknesses including lack of sufficient internal accounting personnel in order to ensure complete documentation of complex
transactions and adequate financial reporting during the years ended June 30, 2020 and 2019.
We
intend to implement additional corporate governance and control measures to strengthen our control environment as we are able,
but we may not achieve our desired objectives. We may identify material weaknesses and control deficiencies in our internal control
over financial reporting in the future that may require remediation and could lead investors losing confidence in our reported
financial information, which could lead to a decline in our stock price.
Reporting
requirements under the Exchange Act and compliance with the Sarbanes-Oxley Act of 2002 (SOX), 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 Securities Exchange
Act of 1934 (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, SOX requires, among other
things, that we design, implement and maintain adequate internal controls and procedures over financial reporting. The costs of
complying with SOX 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 $50,000 per year or perhaps
more as our operations increase in scope and magnitude. If 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, SOX, 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 to manage our growth and our legal obligations as a public company.
These areas include corporate governance, corporate and internal controls, 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 additional independent directors and/or 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 costs for which we cannot estimate at this time. However,
these additional expenses individually, or in the aggregate, may also be expected to be material.
In
addition, being a public company could make it more difficult, or more costly for us to obtain certain types of insurance, including
D&O Insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain
the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified
persons to serve on our board of directors, our board committees or as executive officers.
The
increased costs associated with operating as a public company may decrease our net income or increase our net losses, and may
cause us to reduce costs in other areas of our business or increase the prices of our drug 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 stockholders.
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 stockholders 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.
Financial
Industry Regulatory Authority, Inc. (“FINRA”) sales practice requirements may limit a stockholder’s
ability to buy and sell our Common Stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend
that their customers buy our Common Stock, which may limit your ability to buy and sell our stock and have an adverse effect on
the market for our shares.
If
we fail to maintain effective internal controls over financial reporting, the price of our Common Stock may be adversely affected.
Our
internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the
disclosure of which may have an adverse impact on the price of our Common Stock. We are required to establish and maintain appropriate
internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established,
could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.
In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions
that need to be addressed or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions
that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our
internal controls over financial reporting may have an adverse impact on the price of our Common Stock.
We
are required to comply with certain provisions of Section 404 of SOX and if we fail to comply in a timely manner, our business
could be harmed and our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of SOX require an annual assessment of internal controls over financial reporting,
and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm.
The standards that must be met for management to assess the internal controls over financial reporting as effective are evolving
and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect
to incur expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how
long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial
reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may
not be able to complete the assessment and remediation process on a timely basis. In addition, although attestation requirements
by our independent registered public accounting firm are not presently applicable to us, we could become subject to these requirements
in the future and we may encounter problems or delays in completing the implementation of any resulting changes to internal controls
over financial reporting. If our Chief Executive Officer or Chief Financial Officer determines that our internal controls over
financial reporting are not effective as defined under Section 404, we cannot predict how the market prices of our shares will
be affected; however, we believe that there is a risk that investor confidence and share value may be negatively affected.
Our
share price could be volatile and our trading volume may fluctuate substantially.
The
price of our common shares has been and may in the future continue to be extremely volatile, with the sale price fluctuating from
a low of pennies per share to a high of $3.95 during the two most recently completed fiscal years. Many factors could have a significant
impact on the future price of our common shares, including:
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our
inability to raise additional capital to fund our operations, whether through the issuance of equity securities or debt;
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our
failure to successfully implement our business objectives and strategic growth plans;
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compliance
with ongoing regulatory requirements;
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market
acceptance of our drug candidates, once approved for sale;
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changes
in government regulations;
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general
economic conditions and other external factors; and
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actual
or anticipated fluctuations in our quarterly financial and operating results; and
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the
degree of trading liquidity in our common shares.
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Our
annual and quarterly results may fluctuate greatly, which may cause substantial fluctuations in our Common Stock price.
Our
annual and quarterly operating results may in the future fluctuate significantly depending on a number of factors. Any unfavorable
change in these or other factors could have a material adverse effect on our operating results for a particular quarter or year,
which may cause downward pressure on our Common Stock price. We expect quarterly and annual fluctuations to continue for the foreseeable
future.
Risks
Related to the Regulation of Cannabis in the United States
While
cannabis is legal in many U.S. state jurisdictions, it continues to be a controlled substance under the United States CSA.
In
the United States, cannabis is largely regulated at the state level. To the Company’s knowledge, there are to date a total
of 29 states, plus the District of Columbia, Puerto Rico and Guam, that have legalized cannabis in some form. Notwithstanding
the permissible regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a controlled
substance under the CSA and as such, violates federal law in the United States.
The
United States Congress has passed appropriations bills each of the last three years that have not appropriated funds for the prosecution
of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these
appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state law.
However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time
choose to appropriate funds to fully prosecute the CSA, any individual or business – even those that have fully complied
with state law – could be prosecuted for violations of federal law. And if Congress restores funding, the government will
have the authority to prosecute individuals for violations of the law where before it lacked funding under the CSA’s five-year
statute of limitations.
Violations
of federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements
arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including,
but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse
effect on the Company, including its reputation and ability to conduct business, the listing of its securities on various stock
exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares.
In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any
such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and
extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
Currently
the Company does not intend to proceed with clinical trials using cannabis-derived cannabinoids in the U.S. If the Company decides
to proceed with plant-derived cannabinoids, it could become subject to risks relating to the characterization of cannabis as a
controlled substance.
The
approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined.
As
a result of the conflicting views between state legislatures and the federal government regarding cannabis, involvement in the
cannabis industry in the United States is subject to inconsistent legislation and regulation. The response to this inconsistency
was addressed in the Cole Memo addressed to all United States district attorneys acknowledging that notwithstanding the designation
of cannabis as a controlled substance at the federal level in the United States, several U.S. states have enacted laws relating
to cannabis.
The
Cole Memo outlined certain priorities for the DOJ relating to the prosecution of cannabis offences. In particular, the Cole Memo
noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and
effective regulatory systems to control the cultivation, distribution and possession of cannabis, conduct in compliance with those
laws and regulations is less likely to be a priority at the federal level. Notably, however, the DOJ has never provided specific
guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memo standard.
In
light of limited investigative and prosecutorial resources, the Cole Memo concluded that the DOJ should be focused on addressing
only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized
as a high priority. In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged
that much of the Cole Memo had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018,
Attorney General Jeff Sessions issued the Sessions Memo, which rescinded the Cole Memo. The Sessions Memo rescinded previous nationwide
guidance specific to the prosecutorial authority of the United States Attorneys relative to cannabis enforcement on the basis
that they are unnecessary, given the well-established principles governing federal prosecution that are already in place. Those
principles are included in chapter 9.27.000 of the United States Attorneys’ Manual and require federal prosecutors deciding
which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney
General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes
on the community.
As
a result of the Sessions Memo, federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether
to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions.
No direction was given to federal prosecutors in the Sessions Memo as to the priority they should ascribe to such cannabis activities,
and as a result it is uncertain how active federal prosecutors will be in relation to such activities. Further, the Sessions Memo
did not discuss the treatment of medical cannabis by federal prosecutors.
Medical
cannabis is currently protected against enforcement by enacted legislation in the United States Congress in the form of the Rohrabacher-Blumenauer
Amendment (the “RBA”) which similarly prevents federal prosecutors from using federal funds to impede the implementation
of medical cannabis laws enacted at the state level, subject to Congress restoring such funding. Subsequent to the issuance of
the Sessions Memo on January 4, 2018, the United States Congress passed its omnibus appropriations bill, SJ 1662, which for the
fourth consecutive year contained the RBA language (referred to in 2018 as the Rohrabacher-Leahy Amendment) and continued the
protections for the medical cannabis marketplace and its lawful participants from interference by the DOJ up and through the 2018
appropriations deadline of September 30, 2018. Due to the ambiguity of the Sessions Memo in relation to medical cannabis, there
can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise
compliant with state law.
Until
September 2018, the DOJ is prohibited from expending any funds for the prosecution of medical cannabis businesses operating in
compliance with state and local laws pursuant to the RBA. If the RBA or an equivalent thereof is not successfully amended to the
next or any subsequent federal omnibus spending bill, the protection afforded thereby to U.S. medical cannabis businesses would
lapse, and such businesses would be more at risk to prosecution under federal law. There is a possibility that all amendments
may be banned from federal omnibus spending bills, and if this occurs and the substantive provisions of the RBA are not included
in the base federal omnibus spending bill or other law, these protections would lapse. The Company regularly monitors the regulatory
activities of Congress. Fully 62% of the combined House of Representatives and the Senate represent states with medical marijuana
laws enacted or in process.
If
we decide to proceed with clinical trials using plant-derived cannabinoids, and are conducting those trials in the United States,
we could be subject to risks relating to the enforcement of cannabis laws.
The
Company is operating at a regulatory frontier. The cannabis industry is a new industry that may not succeed.
Should
the federal government in the U.S. change course and decide to prosecute those dealing in medical or other cannabis under applicable
law, there may not be any market for the Company’s products and services in the U.S.
Cannabis
is a new industry subject to extensive regulation, and there can be no assurance that it will grow, flourish or continue to the
extent necessary to permit the Company to succeed. The Company is treating the cannabis industry as a deregulating industry and
to the extent that the Company decides to proceed with clinical trials using plant-derived cannabinoids, it will adjust its future
operations, product and market strategy as the industry develops and matures.
Future
operations in the United States cannabis market may become the subject of heightened scrutiny.
Any
future operations in the United States cannabis market may become the subject of heightened scrutiny by regulators, stock exchanges,
clearing agencies and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect
interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition
of certain restrictions on the Company’s ability to operate in the United States or any other jurisdiction, in addition
to those described herein.
Regulatory
scrutiny of the Company’s industry may negatively impact its ability to raise additional capital.
The
Company’s business activities rely on newly established and/or developing laws and regulations in multiple jurisdictions.
These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect
the Company’s profitability or cause it to cease operations entirely. The cannabis industry may come under scrutiny by the
U.S. FDA, the SEC, the DOJ, the Financial Industry Regulatory Authority or other federal or other applicable state or nongovernmental
regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of
cannabis for medical or non-medical purposes in the U.S. It is impossible to determine the extent of the impact of any new laws,
regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding
the Company’s industry may adversely affect the business and operations of the Company, including without limitation, the
costs to remain compliant with applicable laws and the impairment of its ability to raise additional capital, create a public
trading market in the U.S. or elsewhere for securities of the Company, which could reduce, delay or eliminate any return on investment
in the Company.
State
and local laws and regulations may heavily regulate brands and forms of cannabis products and there is no guarantee that the Company’s
proposed products and brands will be approved for sale and distribution in any state.
States
generally only allow the manufacture, sale and distribution of cannabis products that are grown in that state and may require
advance approval of such products. Certain states and local jurisdictions have promulgated certain requirements for approved cannabis
products based on the form of the product and the concentration of the various cannabinoids in the product. If the Company produces
products that are derived from plant-based (rather than synthetic) cannabinoids, the Company intends to follow the guidelines
and regulations of each applicable state and local jurisdiction in preparing products for sale and distribution, there is no guarantee
that such products will be approved to the extent necessary. If the products are approved, there is a risk that any state or local
jurisdiction may revoke its approval for such products based on changes in laws or regulations or based on its discretion or otherwise.
We
may have difficulties accessing the services of banks in the United States due to the nature of our business.
The
use, sale, or possession of all forms of cannabis in the United States is illegal under federal law. As a Schedule I drug under
the federal Controlled Substances Act of 1970, cannabis is considered to have “no accepted medical use” and
have a high potential for abuse and physical or psychological dependence. As a result, historically many banks have not accepted
for deposit funds from persons/entities that are engaged in cannabis-related businesses, including those engaged in developing
drugs containing cannabinoids such as our Company. As described above, on February 14, 2014, the Financial Crimes Enforcement
Network (“FinCEN”) released guidance to banks “clarifying Bank Secrecy Act expectations for financial institutions
seeking to provide services to cannabis-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 corporations that are in the business of developing drugs
containing cannabinoids, 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. While the Company
has not, to date, experienced any difficulty in opening accounts and otherwise using the services of banks, any changes in this
regard could materially harm our business.
Due
to the classification of cannabis as a Schedule I controlled substance under the CSA, banks and other financial institutions which
service the cannabis industry are at risk of violating certain financial laws, including anti-money laundering statutes.
Because
the manufacture, distribution, and dispensation of cannabis remains illegal under the CSA, banks and other financial institutions
providing services to cannabis-related businesses risk violation of federal anti-money laundering statutes (18 U.S.C. §§
1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the U.S. Bank Secrecy Act. These statutes
can impose criminal liability for engaging in certain financial and monetary transactions with the proceeds of a “specified
unlawful activity” such as distributing controlled substances which are illegal under federal law, including cannabis, and
for failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA.
The Company may also be exposed to the foregoing risks if it produces drugs derived from plant-based (rather than synthetic) cannabinoids.
Any
re-classification of cannabis or changes in U.S. controlled substance laws and regulations may affect the Company’s business.
If
cannabis and/or CBD is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical
benefits of cannabis would most likely be simpler and more accessible; however, if cannabis is re-categorized as a Schedule II
or other controlled substance, the resulting re-classification would result in the requirement for FDA approval if medical claims
are made for any of the Company’s products, such as medical cannabis. As a result, the manufacture, importation, exportation,
domestic distribution, storage, sale and use of such products may be subject to a significant degree of regulation by the DEA.
In that case, the Company may be required to be registered (licensed) to perform these activities and have the security, control,
recordkeeping, reporting and inventory mechanisms required by the DEA to prevent drug loss and diversion. Obtaining the necessary
registrations may result in delay of the manufacturing or distribution of the Company’s anticipated products. The DEA conducts
periodic inspections of certain registered establishments that handle controlled substances. Failure to maintain compliance could
have a material adverse effect on the Company’s business, financial condition and results of operations. The DEA may seek
civil penalties, refuse to renew necessary registrations, or initiate proceedings to restrict, suspend or revoke those registrations.
In certain circumstances, violations could lead to criminal proceedings. Furthermore, if the FDA, DEA, or any other regulatory
authority determines that the Company’s products may have potential for abuse, it may require the Company to generate more
clinical or other data than the Company currently anticipates establishing whether or to what extent the substance has an abuse
potential, which could increase the cost and/or delay the launch of that product.
CBD
is classified as Schedule I controlled substance. The DEA recently published a final rule in the Federal Register creating a new
drug code for “marijuana extracts”.
In
connection with the new drug code, the DEA has determined that all CBD products, regardless of origin, shall be considered Schedule
I controlled substances. The Company is unable to determine what the impact of this will be on its business.
U.S.
federal trademark and patent protection may not be available for the intellectual property of the Company due to the current classification
of cannabis as a Schedule I controlled substance.
As
long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit
of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection
regarding the intellectual property of a business, may not be available to the Company if it determines to produce drugs using
cannabis. As a result, the Company’s intellectual property may never be adequately or sufficiently protected against the
use or misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant
state of flux, the Company can provide no assurance that it will ever obtain any protection of its intellectual property, whether
on a federal, state or local level.
The
Company’s contracts may not be legally enforceable in the United States.
If,
in the future, the Company enters into contracts that involve cannabis and/or other activities that are not legal under U.S. federal
law and in some jurisdictions, the Company may face difficulties in enforcing its contracts in U.S. federal and certain state
courts.