ITEM
1. DESCRIPTION OF BUSINESS
Overview
We
are an early stage medical cannabis research and development company that applies conventional pharmaceutical research protocols
and disciplines to the field of medical cannabis with the objective of establishing a leadership position in the research and
development of medical cannabis therapies, products and delivery technologies. We are currently engaged in the research and development
and have conducted trials on the efficacy of cannabis-based medical products (the “Cannabis-Based Medical Products”)
commencing with our cannabis-based topical cream for the treatment of psoriasis. In addition, we also are pursuing the use of
our Cannabis-Based Medical Products for the treatment of multiple myeloma, post-traumatic stress disorder (“PTSD”),
chronic pain and fibromyalgia, and have made significant advancements in the development of a cannabis soluble tablet delivery
system that could have applications for other indications. We are also capable of providing consulting and advisory services to
governmental and private entities to assist them with developing and implementing tailor-made, comprehensive medical cannabis
programs, although we have not generated any revenues from such services to date.
We
have been engaged in research and development and consulting and advisory activities through our wholly-owned Israeli subsidiary,
One World Cannabis Ltd since July 2014. To date, we have entered into binding agreements with major hospitals and medical research
facilities in Israel for the purpose of conducting research studies and trials related to the development and use of Cannabis-Based
Medical Products for the treatment of multiple myeloma, psoriasis, PTSD, chronic pain and fibromyalgia, and for the development
of a cannabis soluble tablet delivery system. We recently announced promising clinical results from the testing of our cannabis-based
topical cream for the treatment of psoriasis, an autoimmune disease that causes red, scaly patches to appear on the skin. Skin
cells in patients with psoriasis grow at an abnormally fast rate, causing a buildup of lesions that tend to burn and itch. While
the real cause of psoriasis is not known, genetics are believed to play a major role in its development. According to the American
Academy of Dermatology, psoriasis affects about 3% of the world’s population and 7.5 million people in the United States.
History
and Former Operations
In
2008, we acquired a patent relating to our electromagnetic percussion device (the “Device”). In March 2013, we entered
into a manufacturing and distribution agreement with GUMI Tel Aviv Ltd. (“GUMI”), a technology company engaged in
the manufacture and sale of industrial equipment, to develop, manufacture and market the Device. To date, we have not derived
any revenues from GUMI’s marketing efforts. We abandoned this line of business in 2015 and in February 2016 terminated our
agreement with GUMI, executing mutual general releases.
We
were incorporated in Delaware on March 7, 2008 under the name Dynamic Applications Corp. We changed our name to OWC Pharmaceutical
Research Corp. on December 9, 2014. We formed our wholly owned subsidiary One World Cannabis Ltd in Israel on July 6, 2014. Our
principal executive offices are located at 2 Ben Gurion St. Ramat Gan, Israel 5257334 and our telephone number is 972 (0) 72-260-8004.
Recent
Developments
On
September 28, 2016, we entered into a loan agreement (the “Loan Agreement”) with Medmar LLC (“Medmar”),
pursuant to which Medmar agreed to loan us a total of $300,000 (the “Loan”) on a non-interest bearing basis, with
no conversion rights. The Loan is due in 36 months from September 22, 2016 (the “Effective Date”), and repayment would
have been made only by a set off of royalties payable by Medmar to us as follows: (i) prior to the full repayment of the Loan,
which we may prepay at any time, if and to the extent Medmar is required to pay any royalties to us under a License Agreement
dated March 17, 2016, Medmar shall set off such royalties from the outstanding principal balance of the Loan; (ii) we shall not
be required to pay the Loan other than through the set off from the royalties; and (iii) the Loan is a non-recourse loan, meaning
that if and to the extent that the royalties are insufficient for any reason in order to fully repay the Loan, Medmar waived any
right and/or claim to any deficiency.
In
addition, the Loan Agreement also provided that: (i) subject to Medmar funding the entire Loan, Medmar shall receive the exclusive
right to manufacture, produce, publicize, promote and market our Licensed Products (as defined in the above-referenced License
Agreement) in any state in the U.S., subject to a new license agreement to be negotiated and signed between the parties with respect
to each and every state; (ii) the rights to be granted to Medmar under (i) above shall expire within three (3) years subject to
certain conditions and limitations; and (iii) the right of first refusal agreement between the parties that was executed on February
8, 2016 providing Medmar certain rights in connection with the commercialization of Licensed Products in the States of Hawaii
and Pennsylvania be terminated.
On
April 21, 2017, we provided written notice to Medmar regarding our determination to prepay the loan in the principal amount of
$300,000. Pursuant to Sections 4 and 5.3 of the Loan Agreement and based upon the full repayment of the non-recourse, non-interest
bearing and non-convertible loan, we have elected to exercise what we believes is our absolute right to terminate certain distribution
rights granted to Medmar under the loan agreement.
On
November 27, 2016, we entered into a license agreement (the “License Agreement”) with Emilia Cosmetics Ltd. (“Emilia”),
a world-leading company in the field of development, production, manufacturing and packaging of health and beauty products including
for treatment of human skin disease.
Prior
to entering into the License Agreement, Emilia and the Company (the “Parties”) conducted a “Development and
Evaluation Program” (as defined in the License Agreement) for the development of a specific product comprising Emilia’s
formulation with certain medical cannabis extract provided by us for topical treatment of psoriasis.
Pursuant
to the License Agreement, Emilia granted a limited license to us with respect to Emilia’s licensed intellectual property
(the “Emilia Intellectual Property”) to be developed and commercialized worldwide in the topical treatment of psoriasis
in humans with our product and upon the successful achievement of the trial, Emilia will grant us an exclusive, worldwide, transferable,
royalty-bearing license, with the right to grant sublicenses, to use, sell and commercially exploit the Emilia Intellectual Property
(the “Emilia License”). In consideration for the Emilia License, from and after the first commercial sales of our
product, we shall pay to Emilia a royalty at the rate of ten (10%) percent of net sales during a ten-year term beginning upon
the first commercial sale. In the event the sale of the Licensed Product during the royalty term reaches the minimum sales targets
mutually agreed by the Parties as set forth in the License Agreement, the royalty term will extend to an additional five (5) year
term. The trial was completed in May 2016 and as a result we became the exclusive licensee of the Emilia Intellectual Property.
On
December 29, 2016, we entered into a research agreement (the “Research Agreement”) with the Medical Research Infrastructure
Development and Health Services Fund of the Chaim Sheba Medical Center, a non-profit organization incorporated under the laws
of the State of Israel (the “Fund”).
Pursuant
to the Research Agreement, the Fund shall perform a Phase I, placebo controlled, maximal dose study (the “Study”)
to determine the safety, tolerability of topical cream containing Medical Grade Cannabis (“MGC” or the “Study
Drug”) in healthy volunteers, employing the services of Dr. Aviv Barzilay, Director of the Department of Dermatology at
Chaim Sheba Medical Center, to lead the Study (the “Investigator”). The Study shall be conducted in compliance with
the following, as defined in the Research Agreement: (1) the Protocol; (2) the Ministry Guidelines; (3) the instructions and terms
specified in the Helsinki Committee’s approval; (4) the ICH-GCP; (5) the Helsinki Declarations; (6) the applicable laws,
rules and regulations regulating such studies which are applicable in Israel (the “Applicable Laws”); and (7) written
instructions and prescriptions issued by us and governing the administration of the Study Drug.
We
have undertaken to pay the Fund the amounts specified in the payment schedule set forth in the Research Agreement.
On
February 1, 2017, following encouraging results that have been achieved at the mid-point of the psoriasis-related study conducted
by us with an Israeli research institute, our Board of Directors and our management and scientific personnel have determined to
extend the size and scope of the Study for the purpose of, among other things, checking the biological markers that have been
generated to date with respect to the treatment of psoriasis (proliferation/inhibition and several interleukins).
On
March 20, 2017, we announced the promising preliminary results from the pre-clinical efficacy testing of our cannabinoid-based
topical cream for treating psoriasis, reporting significant reduction of several inflammation markers specific to psoriasis. We
anticipated that the topical cream will be market-ready during the second fiscal quarter of 2017 and, subject to regulatory approvals
from applicable jurisdictions and the Study completion, the topical cream should be available for use by those who suffer from
psoriasis in the near term. We expect to complete the Phase I study for our topical cream during the next three to six months
and start looking for strategic partners in different countries.
On
April 5, 2017, we announced that as a result of the promising preliminary results from the preclinical efficacy testing of its
cannabinoid-based topical cream for treating psoriasis, reporting significant reduction of several inflammation markers specific
to psoriasis, we have received expressions of scientific and medical interest, world-wide, for its cannabinoid-based topical cream
for treating psoriasis. We have expanded the size and scope of our clinical studies and, as previously announced, anticipates
that subject to pending regulatory approvals from applicable jurisdictions, the topical cream should be available for use by those
who suffer from psoriasis in the near term.
On
May 3, 2017, we published a press release titled “OWC Pharmaceutical Research Announces Update on Multiple Myeloma Study,”
reporting our intention to continue our testing and study of our cannabinoid-based therapies on the treatment of multiple myeloma.
The
next phase of the study, which is based upon the promising results of our earlier in-vitro studies of our unique formula of cannabinoid-based
therapies targeting cells, is to investigate the doses and diverse delivery systems, to best determine the most effective dosages
for the future planned study on human patients, pending receipt of regulatory approvals. We completed a preclinical study during
the third fiscal quarter of 2017. The study was conducted under a service agreement with the Fund. We are currently negotiating
a license and research agreement with the Fund for further studies. We are evaluating the preclinical results and expects to resume
the study during third fiscal quarter of 2018, subject to sufficient capital funding.
Dr.
Yehuda Baruch, our Chief Medical Officer and Director of Research and Regulatory Affairs, stated that this unique study, which
we designed to pursue and secure orphan designation status from the United States Food and Drug Administration (the “FDA”),
will hopefully open ways to improve the quality of life of multiple myeloma patients while at the same time potentially enhance
response to various multiple myeloma treatment regimes.
On
May 31, 2017, we announced that we signed an agreement with Mediq Innovation Partners (“Mediq”), a German-based company
with extensive experiences, knowledge and a successful track record in enabling Israel-based companies to penetrate the European
markets. We engaged Mediq to consult in marketing our products and conduct research in Germany. Mediq prepared a “road map”
that will guide us in our penetration to the European Union market.
On
June 26, 2017, we announced that we had filed a patent application with the United States Patent and Trademark Office (the “USPTO”)
for our active cannabinoid-based topical cream. This new patent application follows the previously filed “provisional”
patent application. The added protection that this patent application should provide that our intellectual property will enable
us to accelerate our ongoing discussions and negotiations regarding scientific, medical and commercial collaboration, based upon
the fact that our topical cream is ready for marketing and commercial exploitation. To date, we have not yet received a response
to our patent application.
On
August 1, 2017 we entered into a service agreement with PharmItBe Ltd (“PharmItBe”) for the development process of
the second generation of our cannabis soluble tablet delivery system and preparing the tablet for clinical trials. The development
cost amounted to approximately $100,000.
On
November 8, 201
7
, we granted a Certificate of Patent, #2015101908 (the “Innovation Patent”) from the Commissioner
of Patents, Commonwealth of Australia, for the our proprietary cream for the treatment of skin disorders. Pre-clinical results
of our skin cream strongly indicate that it may lower various inflammatory markers by up to 70% and inhibit Keratocytes proliferation,
a manifestation of various skin disorders, especially psoriasis. A human safety study for our cream is currently ongoing. We believe
that the Innovation Patent granted in Australia, valid for a term of 8 years, should be followed by additional patent grants in
other jurisdictions and should afford protection and competitive advantage to us, subsequent to efficacy trials to be performed
in 2018, to manufacture, distribute and sell our Cannabis-Based Medical Products wherever there exists a lawful medical cannabis
market.
On
December 20, 2017, we announced that we received a new permit from the Israel Medical Cannabis Agency (“IMCA”)
to proceed with the safety study of our cannabis soluble tablet delivery system. The study protocol has been submitted and approved
by the Institutional Review Board (“IRB”) at Tel Aviv Sourasky Medical Center (“Sourasky”) and has been
approved by them. We are now waiting for the approval by the central Israeli Review Board. The study is scheduled to start in
the second fiscal quarter of 2018.
Our
goal is to become a leader in the research and development of cannabis-based medical drugs and treatments. To achieve our goal,
we plan to focus our activities on the following areas:
Our
Research and Development Activities
Since
2014, our focus has been on researching and developing cannabis-based formulations for the treatment of multiple myeloma, psoriasis,
PTSD, chronic pain and fibromyalgia, as well as developing a cannabis soluble tablet delivery system. We believe a significant
need remains for novel oral and safe drugs for patients who do not respond to existing therapies or for whom these therapies are
unsuitable. Our research and development is focused primarily on exploring several formulations containing active compounds from
the cannabis plant, including (but not limited to) the cannabinoids cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”),
and identifying potential therapeutic applications of the synergistic effects of these active compounds. The synergistic contributions
of our formulations have not yet been fully-researched and scientifically demonstrated and that is the purpose of the studies
we have been conducting in collaboration with major Israeli health institutions as discussed more fully below.
We
aim to standardize the formulations of our Cannabis-Based Medical Products across the extracts as a whole, not simply by reference
to their key active components (CBD and/or THC). Although there are existing reports and studies on CBD and THC, our formulations
upon completion are expected to possibly contain several additional active compounds from the cannabis plant that have not been
as well studied to date by others. Our formulations must be fully-researched and documented in order to verify their efficacy
at treating indications, the appropriate dosage levels and the appropriate methods of administration. As we continue to experience
promising results through research and development, we intend to produce pharmaceutical-grade cannabinoid-based products and treatments
standardized in composition, formulation and dose, administered by means of an appropriate and efficient delivery system, and
tested in properly controlled pre-clinical and clinical studies. During the years ended December 31, 201
7
and 201
6
,
we spent $441,203 and $141,858 on research and development, respectively.
We
are continuing to conduct our research, led by internationally renowned investigators, at the facilities of leading Israeli hospitals
and scientific institutions. Dr. Yehuda Baruch, our Chief Medical and Regulatory Affairs Officer,
Dr.
Oron Yacoby Zeevi, our newly-appointed Chief Science Officer,
and Alon Sinai, our Chief Operating Officer, will monitor
the studies. Our team of specialists also includes Dr. Miri Sani our regulatory adviser and Dr. Sharon Rozenblat, who is a Senior
Science Advisor to the Scientific Advisory Board and Dr. Merav Leiba, also our Senior Science Advisor.
We
acquire the cannabis needed for our research activities from G.K. Medical Cannabis Ltd, Canndoc Ltd or IMC Medical Cannabis Ltd,
all government-licensed Israeli medical cannabis growers.
Research
and Development
Our
research and development continues to be focused primarily on exploring several formulations containing active compounds from
the cannabis plant, including but not limited to the cannabinoids CBD and THC, and identifying potential therapeutic applications
of the synergistic effects of these active compounds. The synergistic contributions of our formulations have not been scientifically
researched and demonstrated in a preclinical model concerning our topical cream formulation. We aim to standardize the formulations
across the extracts as a whole, not simply by reference to their key active components (CBD and/or THC). In addition, we are developing
unique delivery systems for our pharmaceutical grade products.
Although
there are existing reports and studies on CBD and THC, our formulations will contain several other active compounds from the cannabis
plant, that must be fully researched and documented in order to verify their effectiveness in specific indications, at what doses
and which method of administration will be the most appropriate and effective.
We
plan to produce pharmaceutical-grade cannabinoid-based products and treatments that will be standardized in composition, formulation
and dose, administered by means of an appropriate and efficient delivery system, and tested in properly controlled pre-clinical
and clinical studies. We plan to conduct our research, led by internationally renowned investigators, at the facilities of leading
Israeli hospitals and scientific institutions. We will adhere to legislation, rules and guidelines regarding the investigations.
To
date, we have signed three research collaboration and license agreements as well as service agreements with Sheba Academic Medical
Center in Tel Hashomer, Israel (“Sheba”), with respect to two potential indications. Sheba is a university-affiliated
hospital that serves as Israel’s national medical center and is one of the leading integrated medical centers in the Middle
East. Within the framework of the abovementioned agreements with Sheba, as well as other potentially negotiated agreements, we
intend to initiate two studies at the Sheba facilities to explore the effect of two formulations, all based on active ingredients
in the cannabis extracts, on multiple myeloma and psoriasis.
Pursuant
to the Research Agreement, the Fund is performing the Study to determine the safety and tolerability of topical cream containing
MGC in healthy volunteers. Dr. Aviv Barzilay is leading the Study. The Study, as defined in the Research Agreement is conducted
in compliance with the following: (1) the Protocol; (2) the Ministry Guidelines; (3) the instructions and terms specified in the
IRB approval; (4) the ICH-GCP; (5) the IRB Declarations; (6) the Applicable Laws; and (7) written instructions and prescriptions
issued by us and the governing the administration of the Study Drug.
On
February 1, 2017, following the very encouraging results that we achieved at the mid-point of a psoriasis-related study conducted
by us with an Israeli research institute, we are determined to extend the size and scope of the study for the purpose, among other
parameters, of checking the biological markers that have been generated to date with respect to the treatment of psoriasis (proliferation/
inhibition and several interleukins) which was conducted by such institute. Such trial results concluded that application of our
unique active cannabinoid-based topical cream formulation, indicated up to 70% improvement in a variety of inflammation markers
directly associated with Psoriasis and inhibition of proliferation.
The
Study of our topical Psoriasis ointment is ongoing at the dermatologic department at Sheba’s hospital and should be completed
during the second fiscal quarter of 2018.
To
date, our intellectual property portfolio comprises nine patent families and includes 31 filings in selected domains at various
stages from the Patent Cooperation Treaty (“PCT”) filings, National Phase filings and Continuations in Part (CIP).
Two of the patent families are in the field of Multiple Myeloma and the other families are in the fields of pharmaceutical emulsions,
fibromyalgia, migraine, sexual function and skin disorders. These filings encompass pharmaceutical compositions and devices in
these fields.
The
national phase is the second of the two main phases of the PCT procedure. It follows the international phase and consists in the
processing of the international application before each office of or acting for a contracting state of the PCT that has been designated
in the international application. Assuming the successful completion of the clinical trials, of which there can be no assurance,
we believe that we will be able to retain the intellectual property rights and secure patent protection for our proprietary developments.
While
we retain full ownership on our intellectual property rights that we conceived prior to the signing of the research collaboration
and license agreements with Sheba Academic Medical Center, the psoriasis agreement with Sheba provide that all intellectual property
that is conceived during the course of the research is to be jointly owned by Sheba and us.
Pursuant
to a collaboration agreement, we were expected to pay Sheba $170,000 for conducting the multiple myeloma trial between the third
fiscal quarter of 2015 and the second fiscal quarter of 2016. As of December 31, 2017, we have paid Sheba $65,669 as per Sheba’s
payment requests. Pursuant to a collaboration agreement, we are obliged to pay Sheba $170,000 throughout 2017 and 2018 for conducting
the Study for the cream for treatment of psoriasis. As of December 31, 2017, we have paid Sheba $13,903 as per Sheba’s payment
requests and in January 2018, we paid an additional sum of $29,163.
At
present, we use our available working capital to fund these studies. However, we expect that we will need to raise additional
funding prior to or when our clinical studies are commenced.
Research
and Development Status
The
following table summarizes the stages of development for each of our current Cannabis-Based Medical Products prospects:
Target
Indication
|
Collaborator
|
Status
|
Multiple
Myeloma
|
Sheba
|
1. Entered
into a research agreement for in vitro and in vivo studies.
2. Completed
initial in vitro studies.
3. Drafted
a clinical trial protocol synopsis to assist in preparing an application for orphan drug status designation.
4. Expect
to negotiate agreement and submit a clinical trial protocol to the IRB and receive its approval to commence a clinical
study.
5. Intend
to commence a clinical study referred to in (4) above in the second half of 2018.
|
Psoriasis
|
Sheba
|
Entered
into the Research Agreement.
Received
IRB approval for the Sheba Study.
Phase
I safety study has started
|
Psoriasis
|
Emilia
|
1. Entered
into a nonbinding Memorandum of Understanding for the development, manufacture and marketing
of the Psoriasis Cream.
2. Completed
the development of the Psoriasis Cream in the first fiscal quarter of 2016.
3. Entered
into the License Agreement, Emilia granted a limited license to us with respect to Emilia’s licensed intellectual
property to be developed and commercialized worldwide in the topical treatment of psoriasis in humans with ours and the
Emilia Product.
|
Fibromyalgia
|
|
1. Drafted
a clinical trial protocol synopsis.
|
New
delivery system – cannabis soluble tablet
|
G.C.
Group Ltd.
|
1. Completed
a proof of concept of a soluble tablet to test the fabric, durability, solidification
and other features of the tablet.
|
|
PharmItBe
|
2. Develop
a second generation of our soluble tablet, preparing the tablet for clinical studies expected in the second fiscal quarter
of 2018
|
Our
Investigation on Multiple Myeloma
Dr.
Merav Leiba, Head of Multiple Myeloma Outpatient Clinic and Multiple Myeloma Research Lab at Sheba’s Hematology Institute,
led the in vitro tests on multiple myeloma. Dr. Leiba, a specialist in Internal Medicine and Hematology, was a postdoctoral fellow
at the Jerome Lipper Multiple Myeloma Center at Dana Farber Cancer Institute, Boston, Massachusetts (2006-2008). Dr. Leiba has
participated in numerous clinical and investigational studies aimed at developing novel drugs for multiple myeloma.
Our
test results on multiple myeloma cells studied in vitro, which we announced on June 17, 2015, led us to proceed with further pre-clinical
studies (safety and toxicity, PK, PD) of our formulation, to assess the scientific merit for further development as an investigational
new drug. Whilst we are encouraged by the results of the limited in vitro tests, there can be no assurance that any clinical trial
will result in commercially viable products or treatments.
Clinical
trials are expensive, time consuming and difficult to design and implement. We, as well as the regulatory authorities in Israel
and elsewhere, such as an IRB committee), Israel Medical Cannabis Unit (the “IMCU”), or the FDA, may suspend, delay
or terminate our clinical trials at any time, may require us, for various reasons, to conduct additional clinical trials, or may
require a particular clinical trial to continue for a longer duration than originally planned, including, among others:
|
●
|
lack
of effectiveness of any formulation or delivery system during clinical trials;
|
|
●
|
discovery
of serious or unexpected toxicities or side effects experienced by trial participants or other safety issues;
|
|
●
|
slower
than expected rates of subject recruitment and enrollment rates in clinical trials;
|
|
●
|
delays
or inability in manufacturing or obtaining sufficient quantities of materials for use in clinical trials due to regulatory
and manufacturing constraints;
|
|
●
|
delays
in obtaining regulatory authorization to commence a trial, including IRB approvals, licenses required for obtaining and using
cannabis for research, either before or after a trial is commenced;
|
|
●
|
unfavorable
results from ongoing pre-clinical studies and clinical trials.
|
|
●
|
patients
or investigators failing to comply with study protocols;
|
|
●
|
patients
failing to return for post-treatment follow-up at the expected rate;
|
|
●
|
sites
participating in an ongoing clinical study withdraw, requiring us to engage new sites;
|
|
●
|
third-party
clinical investigators decline to participate in our clinical studies, do not perform the clinical studies on the anticipated
schedule, or act in ways inconsistent with the established investigator agreement, clinical study protocol, good clinical
practices, and other IRB requirements;
|
|
●
|
third-party
entities do not perform data collection and analysis in a timely or accurate manner or at all;
|
|
●
|
regulatory
inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies;
|
Any
of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Consulting
Services
We
believe that the complexity of the medical cannabis programs has created a demand for consulting and advisory services in different
aspects of the medical cannabis industry. Our services are designed to help government officials, policy-makers and regulatory
agencies develop and implement tailor-made comprehensive medical cannabis programs. In addition, we offer medical cannabis regulatory
compliance services and patient-care consultancy services.
Our
initial activities to secure consulting contracts will be in member states of the European Union and states of the United States
that allow for public medical cannabis programs in compliance with applicable laws.
Our
management has the expertise in designing training programs for physicians, caregivers, and researches that are essential to the
establishment of a successful, patient-focused medical cannabis program. By working with policy-makers, government officials,
public agencies, and privately-owned businesses, we believe we can also raise the public’s awareness of the benefits of
cannabis-based treatments and products.
Market
Opportunity
According
to the American Academy of Dermatology, psoriasis affects about 3% of the world’s population and 7.5 million people in the
United States. In addition, according to 2014 edition of the Marijuana Business Factbook, U.S. retail sales of medical cannabis
are expected to rise significantly over the next five years from an estimated $2.2 billion in 2014 to $8.2 billion in 2018. We
believe that cannabis-based formulations have the potential to effectively treat multiple myeloma, psoriasis, PTSD, chronic pain
and fibromyalgia.
Controlled
substance legislation differs between countries (and jurisdictions within those countries) and legislation in certain countries
may restrict or limit our ability to distribute or sell our products. We believe that the United States will represent a major
market for our Cannabis-Based Medical Product prospects due, in large part, to state level legislation allowing comprehensive
public medical cannabis programs. A total of 28 states, the District of Columbia and Guam now allow for comprehensive public medical
cannabis programs. Recently approved efforts in 16 states allow use of “low THC, high CBD” products for medical reasons
in limited situations.
In
Europe, medical cannabis programs regulatory frameworks exist in several countries, such as the Netherlands, Italy, Germany, Finland
and the Czech Republic. It can also be expected that there will be policy changes in the member countries of the European Union
concerning the medical use of cannabis and cannabis-based products. We believe that there will be rising demand for cannabis derived
medical products and that future growth is expected to be driven by favorable changes in legislation and demographic factors.
Multiple
myeloma is a hematological (blood) cancer that develops in the plasma cells found in bone marrow. Plasma cells are a type of white
blood cell responsible for producing antibodies (immunoglobulins) which are critical for maintaining the body’s immune system.
Through a complex, multi-step process, healthy plasma cells transform into malignant myeloma cells. Myeloma cells result in the
production of abnormal antibodies, or M proteins. The M proteins offer no benefit to the body, and as the amount of M protein
increases, it crowds out normally functioning immunoglobulins. This ultimately causes multiple myeloma symptoms such as bone damage
or kidney problems. Multiple myeloma is considered to be incurable but treatable. Remissions may be induced with steroids, chemotherapy,
proteasome inhibitors, immunomodulatory drugs such as thalidomide or lenalidomide, and stem cell transplants. Radiation therapy
is sometimes used to reduce pain from bone lesions. According to the American Cancer Society, in the United States the lifetime
risk of getting multiple myeloma is 1 in 143 and it is estimated that 30,330 new cases will be diagnosed in 2016.
Fibromyalgia
is a chronic health problem that causes pain throughout the body and other symptoms such as fatigue and cognitive (memory or thought)
problems. According to the National Fibromyalgia Association the disorder affects an estimated ten million people in the United
States and an estimated 3 to 6% of the world population. There is no known cure and a variety of prescription medications are
often used to reduce pain levels and improve sleep. On June 21, 2007, the FDA approved Lyrica (pregabalin) as the first drug to
treat fibromyalgia. Cymbalta (duloxetine HCl) was approved in June 2008 and Savella (milnacipranHCl) was approved in January 2009,
both of which are now generic formulations no longer under patent protection.
Psoriasis
is a skin condition that affects 2% to 3% of the general population according to the National Psoriasis Foundation. The disease
is manifested by scaly plaques on the skin and in the severe form has a major effect on the physical and emotional well-being
of the patients. Topical agents are typically used for mild disease, phototherapy for moderate disease, and systemic agents for
severe disease. For moderate to severe cases, systemic biologic drugs, delivered via IV, have dominated the market. According
to the National Psoriasis Foundation, common side effects of biologics include respiratory infections, flu-like symptoms, and
injection site reactions while rare side effects include serious nervous system disorders, such as multiple sclerosis, seizures,
or inflammation of the nerves of the eyes, blood disorders, and certain types of cancer. According to Global Data, the psoriasis
treatment market was worth $3.6 billion in 2010 and is forecast to grow to $6.7 billion by 2018. The current common treatments
for psoriasis include topical and systemic drugs, steroids, immunosuppressive drugs such as Cyclosporine A (by Novartis),
methotrexate
or MTX and biological drugs such as Enbrel (by Amgen), Amevive (by Biogen but whose patent expired in 2013) and Ustakinumabn
(by Janssen Immunology).
Our
Medmar Agreements
On
October 11, 2015, we entered into a memorandum of understanding with Medmar for the purpose of granting an exclusive, non-transferable,
royalty-bearing license, to manufacture, produce, publicize, promote and market the licensed products described therein in the
State of Hawaii and the State of Pennsylvania, pursuant to which Medmar has paid us $100,000. On February 8, 2016, we entered
into a right of first refusal agreement with Medmar II, an affiliate of Medmar, granting Medmar certain rights in connection with
the commercialization of our Cannabis-Based Medical Products in other states in the USA, pursuant to which Medmar has paid $50,000.
On
March 17, 2016, we entered into a consulting and license agreement with Medmar pursuant to which we granted to Medmar an exclusive,
non-transferable, royalty-bearing license, to manufacture, produce, publicize, promote and market the certain of our products
(as defined in the license agreement) in the State of Maryland, against payment by Medmar to us of a royalty.
On
September 28, 2016, we entered into a non-recourse loan agreement with Medmar pursuant to which Medmar agreed to loan us a total
of $300,000 in installments of $50,000 each on a non-interest bearing basis with no conversion rights. The loan, which was made
on a non-recourse basis, which permitted prepayment at any time, was due 36 months from the date of the loan and the obligation
to repay shall be made only by the set-off of royalties payable by Medmar to us, if and only to the extent Medmar is required
to pay any royalties to us under the March 17, 2016 license agreement referenced above. To the extent that the royalties payable
to us under the license agreement shall be insufficient to repay the loan, for any reason whatsoever, Medmar agreed to waive any
repayment rights and/or any claim for any such deficiency. $250,000 of the loan proceeds were funded before the year-ended December
31, 2016 and the last tranche of $50,000 was funded in February 2017 by Medmar.
On
April 21, 2017, we provided written notice on Medmar of its determination to prepay the loan by Medmar in the principal amount
of $300,000. Reference is made to our Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on May
3, 2017 as well as to the Forms 8-K filed September 30, 2016 and to the loan agreement between us and Medmar, filed as Exhibit
10.9 to the September 30, 2016 Form 8-K. Pursuant to Sections 4 and 5.3 of the loan agreement and based upon the full repayment
of the non-recourse, non-interest bearing and non-convertible loan, we exercised our absolute right to terminate distribution
rights granted to Medmar under the loan agreement .
Marketing
and Sales
We
do not currently have any marketing or sales capabilities. We intend to license to, or enter strategic alliances with, larger
companies in the pharmaceutical business, which are equipped to market and/or sell our products, if any, through their well-developed
marketing capabilities and distribution networks. We intend to out-license some or all our patent rights to more than one party
to achieve the fullest development, marketing and distribution of any products we develop.
Our
Strengths
Notwithstanding
the fact that we have only commenced our cannabis-based medical research, we believe that we offer the following key characteristics
in our approach to developing our Cannabis-Based Medical Product prospects:
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Our
leading medical professionals are recognized leaders in medical cannabis treatments
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We
received approval from the Israeli IRB for an in vitro clinical study for the treatment of multiple myeloma;
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We
have already filed 9 patent families and includes 31 filings in selected domains;
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We
have entered into three research and license agreements with Sheba to conduct research on two indicators;
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Understanding
governmental regulation is a prerequisite for success in our industry and our team has substantial knowledge and experience
with respect to the rules of drug development and medical cannabis programs; and
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Our
scientific team has many years of experience in diverse but relevant disciplines, including medical research and regulatory
affairs, as well as extensive cannabis-related issues experience.
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Intellectual
Property
Our
success depends in significant part on our ability to protect the proprietary nature of our Cannabis-Based Medical Product prospects,
technology and know-how, to operate without infringing on the proprietary rights of others, and to defend challenges and oppositions
from others and prevent others from infringing on our proprietary rights, including our provisional patents described below. We
have not acquired any intellectual property from Dr. Baruch or Mr. Sinai. Rather, they have brought to us their wealth of know-how
in matters related to medical cannabis, based upon their many years of experience in the medical field as well as Dr. Baruch’s
service leading the Medical Cannabis Unit of the Israeli Ministry of Health.
We
plan to continue to seek patent protection in the United States and other countries for our proprietary technologies. To date,
our intellectual property portfolio comprises 9 patent families and includes 31 filings in selected domains at various stages
from PCT filings, National Phase filings and CIP. Two of the patent families are in the field of multiple myeloma and the other
families are in the fields of pharmaceutical emulsions, fibromyalgia, migraine, sexual function and skin disorders. These filings
encompass pharmaceutical compositions and devices in these fields.
We
anticipate that we will file additional patent applications in conjunction with our research, testing, and development of our
Cannabis-Based Medical Product prospects.
Our
policy is to seek patent protection for the technology, inventions and improvements that we consider important to the development
of our business, but only in those cases where we believe that the costs of obtaining patent protection is justified by the commercial
potential of the technology, and typically only in those jurisdictions that we believe present significant commercial opportunities.
Competition
We
face competition from larger companies that are or may be in the process of offering similar products to ours. Many of our current
and potential competitors have longer operating histories, significantly greater financial, marketing and other resources than
we may be expected to have.
Competitors
may include major pharmaceutical and biotechnology companies and public and private research institutions. Management cannot be
certain that we will be able to compete against current or future competitors or that competitive pressure will not seriously
harm our business prospects. These competitors may be able to react to market changes, respond more rapidly to new regulations
or allocate greater resources to the development and promotion of their products than we can.
Furthermore,
some of these competitors may make acquisitions or establish collaborative relationships among themselves to increase their ability
to rapidly gain market share. Large pharmaceutical companies may eventually enter the market.
Given
the rapid changes affecting the global, national, and regional economies in general and cannabis-related medical research and
development in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Time-to-market
is an important factor and our success will depend on our ability to develop innovative products that will be accepted by patients.
Our
success will also depend on our ability to respond quickly to, among other things, changes in the economy, market conditions,
and competitive pressures. Any failure to anticipate or respond adequately to such changes could have a material effect on our
financial condition, operating results, liquidity, cash flow and our operational performance.
There
can be given no assurance that any of our on Cannabis-Based Medical Products will obtain regulatory approval in the US or in other
markets that we intent to market such products.
Employees
We
presently have no full-time employees. Our Chief Executive Officer and Chief Operating Officer are employed under service agreements
with us. Our officers and directors are expected to dedicate approximately 60% of their professional time to our business until
such time that we receive regulatory approval of any Cannabis-Based Medical Product prospects. Our subsidiary currently have five
employees and conduct our medical research through collaboration agreements with third parties.
Government
Laws and Regulations Relating to the Cannabis Industry
Israel
To
date, our research and development activities have been conducted in and limited to Israel. The cannabis-based products we are
developing contain controlled substance (cannabis) as defined in the Israeli Dangerous Drugs Ordinance [New Version], 5733 - 1973.
In Israel, licenses to cultivate, possess and to use cannabis for medical research are granted by the Ministry of Health, IMCA
- Israel Medical Cannabis Ajency, on an ad-hoc basis. We obtained necessary IMCA licenses in order to carry out the research in
collaboration with Sheba Academic Medical Center, G.C. Group, Emilia, Dead Sea Labs and the Technion Israel Institute of Technology
(“Technion”). We are acquiring the cannabis needed for our research activities from G.K. Medical Cannabis, Canndoc
or IMC, all government-licensed Israeli medical cannabis growers. Currently we have licenses in order to continue our activities
in collaboration with Sheba Academic Medical Center, PharmItBe, Pharmaceed and the Technion. We have applied for additional license
for a phase I study we are starting in the second fiscal quarter in Sourasky hospital for the safety of our cannabis soluble tablet
delivery system.
Although
we have been successful in obtaining a license to use cannabis for medical research, there can be no assurance that we will be
able to continue to maintain this license in the future.
United
States
In
the event that we seek to conduct any product-related activities in the United States in the future, the research and development,
manufacturing, distribution and sale of our product prospects will become subject to the United States’ Federal Controlled
Substances Act of 1970 (the “CSA”) and regulations promulgated thereunder. Under the CSA, Cannabis sativa, or botanical
marijuana, is a Schedule I controlled substance, meaning that it has no medical use and is subject to the highest level of Drug
Enforcement Agency (DEA) restrictions and enforcement. However, the FDA has the authority to review drugs derived from botanical
marijuana to determine whether they are safe and effective for a legitimate medical use. If the FDA approves a drug derived from
a substance appearing on the controlled substance schedules, the FDA may provide scientific guidance as to the schedule on which
the ultimate drug product should be placed. The CSA requires FDA to consider the following eight factors when making a scheduling
recommendation (21 U.S.C. § 811(c)):
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1.
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Actual
or relative potential for abuse
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2.
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Scientific
evidence of pharmacological effect
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3.
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Current
scientific knowledge regarding the substance
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4.
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History
and current pattern of abuse
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5.
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Scope,
duration, and significance of abuse
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6.
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Risk
to public health
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7.
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Psychic
or physiological dependence liability
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8.
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Immediate
precursor of a substance already controlled
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In
general, FDA approval of a new drug application, or NDA, for a substance is considered adequate evidence of an “accepted
medical use” under the CSA. However, United States case law dictates that substances without an FDA-approved new drug application,
or NDA, must meet the following criteria to have a “currently accepted medical use” making such substances eligible
for listing on Schedules II-V (57 Fed. Reg. 10,499, 10,504-06 (Mar. 26, 1992):
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1.
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The
drug product’s chemistry is known and reproducible
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2.
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There
are adequate studies demonstrating the drug’s safety
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3.
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There
are adequate and well-controlled studies proving the drug’s efficacy
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4.
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The
drug is accepted by qualified experts
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5.
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Relevant
scientific evidence on the drug is widely available
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The
FDA has not approved marijuana for any medical indication and has not yet approved any drug product derived or isolated from botanical
marijuana. However, the FDA has previously approved two drug products containing a chemically synthesized version of a substance
present in the marijuana plant and one drug product containing a synthetic substance that is not found in the marijuana plant
but that has chemical activity similar to compounds derived from marijuana.
If
approved by the FDA, we anticipate that our products will be listed by the DEA as a Schedule II or III controlled substance. Consequently,
the manufacture, importation, exportation, domestic distribution, storage, sale and legitimate use of our future products will
very likely be subject to a significant degree of regulation by the DEA.
In
addition to federal scheduling and control, individual states have enacted controlled substance laws and regulations. Although
state-controlled substances laws often mirror federal law, because the states are separate jurisdictions, they may separately
schedule certain products. In the case of marijuana, while United States federal law totally prohibits the use, distribution,
growing, and possession of marijuana, individual states have enacted laws permitting the use and distribution of marijuana for
medical purposes. To date, a total of 29 states, the District of Columbia, Guam, and Puerto Rico have laws allowing medical use
of marijuana and 20 states, Guam, and Puerto Rico have enacted comprehensive public medical cannabis programs, meaning that they
(1) provide protection from criminal penalties related to medical use of marijuana, (2) provide access to marijuana via home cultivation,
dispensaries, or other system, (3) allow a variety of marijuana strains, and (4) permits smoking or vaporization of the marijuana
plant or an extract therefrom. In addition, 17 states allow use of “low THC, high cannabidiol (CBD)” products for
medical reasons in limited situations. Each state that has established a medical marijuana program (with the exception of California)
has also enacted laws restricting participation to patients with specific medical conditions who have received an explicit recommendation
or referral for treatment of the condition with medical marijuana from one or more physicians. Common restrictions include patients
with cancer, glaucoma, HIV, AIDS, or any chronic disease causing cachexia, severe pain, severe nausea, seizures, or persistent
muscle spasms (including treatment for such diseases which may cause any of these conditions). In addition, while state laws authorize
qualified individuals to smoke or vaporize marijuana for medical purposes, it is not clear that other uses of marijuana or its
extracts or derivatives (e.g., topical or edible) are permitted for medical use.
As
of the date of this filing, we have provided consulting services to a medical marijuana program with locations in Hawaii and Pennsylvania.
We do not grow or distribute cannabis. However, our providing of ancillary products and services to state-approved programs could
be deemed to be aiding and abetting illegal activities, a violation of federal law. Where applicable, we will apply for state
licenses that are necessary to conduct our business in compliance with local laws.
Enforcement
of United States Federal Laws
We
intend to conduct rigorous due diligence to verify the legality of all activities that we engage in. We realize that there is
a discrepancy between the laws in some states, which permit the distribution and sale of marijuana for medical purposes, from
federal law that prohibits any such activities. As discussed above, the CSA makes it illegal under federal law to manufacture,
distribute, or dispense cannabis. Many states impose and enforce similar prohibitions. Notwithstanding the federal ban, as of
the date of this filing, 29 states, the District of Columbia, Guam, and Puerto Rico have legalized certain cannabis-related activity.
However, with respect to our products, compliance with state laws provides little protection from prosecution under federal laws
at the discretion of the various United States Attorney offices, which are part of the U.S. Department of Justice (DOJ).
From
2009 to 2014, the DOJ issued a series of official memoranda setting the agency’s enforcement policies relative to state
programs legalizing medical use of marijuana. The most prominent of these documents was issued by Deputy Attorney General James
Cole on August 29, 2013 (the Cole Memo), which reiterated DOJ’s authority to prosecute violations of federal laws relating
to marijuana and outlined specific marijuana enforcement priorities, such as preventing distribution to minors and preventing
revenues from marijuana sales from reaching criminal organizations. The Cole Memo also outlined a general policy that DOJ would
defer on ordinary enforcement matters if a state had established regulatory and enforcement systems addressing potential risks
and other law enforcement interests related to marijuana.
However,
on January 4, 2018, the DOJ rescinded all marijuana enforcement memoranda issued by the agency between 2009 and 2014, including
the Cole Memo. The January 4 memorandum states that the CSA prohibits cultivation, distribution, and possession of marijuana and
that such activities can also lead to prosecution under the money laundering statutes (18 U.S.C. §§ 1956-57), the unlicensed
money transmitter statute (18 U.S.C. § 1960), and the Bank Secrecy Act or BSA (31 U.S.C. § 5318). In addition, the memorandum
directs all United States Attorneys to enforce federal law and 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” (Office of the Attorney General, Memorandum for All United
States Attorneys RE: Marijuana Enforcement (Jan. 4, 2018)).
The
January 4 memorandum demonstrates that DOJ’s current enforcement policy puts all companies with operations relating to the
cultivation, distribution, and sale of marijuana and products derived from marijuana at risk of prosecution, even if such companies
comply with state laws allowing these activities. However, it is still unclear whether United States Attorneys will aggressively
pursue companies operating in states that have legalized certain distribution and sale of marijuana, or how the DOJ’s policy
will affect any drug derived from botanical marijuana that is approved by FDA.
FinCEN
Since
the use of cannabis is illegal under federal law, we or our consulting clients may have difficulty acquiring or maintaining bank
accounts in the United States. The Financial Crimes Enforcement Network (“FinCEN”) provided guidance on February 14,
2014 about how financial institutions can provide services to cannabis-related businesses consistent with their obligations under
the BSA. In general, a financial institutions decision to open, close, or refuse any account or relationship should be based on
multiple factors specific to that institution. These factors may include business objectives, an evaluation of the risks associated
with offering particular products or services, and capacity to manage those risks effectively. The FinCEN guidance describes thorough
due diligence as a critical aspect of this assessment for customers with marijuana-related business.
FinCEN
advises financial institutions to conduct customer due diligence for cannabis-related businesses that includes: (1) verifying
with the appropriate state authorities whether the business is duly licensed and registered; (2) reviewing the license application
(and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business;
(3) requesting from state licensing and enforcement authorities available information about the business and related parties;
(4) developing an understanding of the normal and expected activity for the business, including the types of products to be sold
and the type of customers to be served (e.g., medical versus recreational customers); (5) ongoing monitoring of publicly available
sources for adverse information about the business and related parties; (6) ongoing monitoring for suspicious activity, including
for any of the red flags described in the FinCEN guidance; and (7) refreshing information obtained as part of customer due diligence
on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained about such
customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing
authorities, where states make such information available.
Europe
Approximately
250 substances, including cannabis, are listed in the Schedules annexed to the United Nations Single Convention on Narcotic Drugs
(New York, 1961, amended 1972), the Convention on Psychotropic Substances (Vienna, 1971) and the Convention against Illicit Traffic
in Narcotic Drugs and Psychotropic Substances (introducing control on precursors) (Vienna, 1988). The purpose of these listings
is to control and limit the use of these drugs according to a classification of their therapeutic value, risk of abuse and health
dangers, and to minimize the diversion of precursor chemicals to illegal drug manufacturers. The 1961 UN Single Convention on
Narcotic Drugs, as amended in 1972 classifies cannabis as Schedule I (“substances with addictive properties, presenting
a serious risk of abuse”) and as Schedule IV (“the most dangerous substances, already listed in Schedule I, which
are particularly harmful and of extremely limited medical or therapeutic value”) narcotic drug. The 1971 UN Convention on
Psychotropic Substances classifies THC - the principal psychoactive cannabinoid of cannabis - as schedule I psychotropic substance
(Substances presenting a high risk of abuse, posing a particularly, serious threat to public health which are of very little or
no therapeutic value).
Most
countries in Europe are parties to these conventions, which govern international trade and domestic control of these substances,
including cannabis. They may interpret and implement their obligations in a way that creates a legal obstacle to our obtaining
manufacturing and/or marketing approval for our products in those countries or to providing consulting services in those countries.
These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit our products to be
manufactured and/or marketed, or for us to provide consulting services, or achieving such amendments to the laws and regulations
may take a prolonged period. While some countries in Europe such as the United Kingdom, Germany, the Czech Republic, France, Romania,
and Finland have decriminalized cannabis or permit its use for medical purposes, no country has completely legalized it.
Regulations
Related to the Drug Regulatory Process
We
operate in a highly controlled regulatory environment. Stringent regulations establish requirements relating to analytical, toxicological
and clinical standards and protocols in respect of the testing of pharmaceuticals. Regulations also cover research, development,
manufacturing and reporting procedures, both pre- and post-approval. Failure to comply with regulations can result in stringent
sanctions, including product recalls, withdrawal of approvals, seizure of products and criminal prosecution. Further, many countries
have stringent regulations relating to the possession and use of cannabis.
Before
obtaining regulatory approvals for the commercial sale of our future product candidates, we must demonstrate through preclinical
studies and clinical trials that our product candidates are safe and effective. Historically, the results from preclinical studies
and early clinical trials often have not accurately predicted results of later clinical trials. In addition, a number of pharmaceutical
products have shown promising results in clinical trials but subsequently failed to establish sufficient safety and efficacy results
to obtain necessary regulatory approvals. We expect to incur substantial expense for, and devote a significant amount of time
to, preclinical studies and clinical trials. Many factors can delay the commencement and rate of completion of clinical trials,
including the inability to recruit patients at the expected rate, the inability to follow patients adequately after treatment,
the failure to manufacture sufficient quantities of materials used for clinical trials, and the emergence of unforeseen safety
issues and governmental and regulatory delays. If a product candidate fails to demonstrate safety and efficacy in clinical trials,
this failure may delay development of other product candidates and hinder our ability to conduct related preclinical studies and
clinical trials. Additionally, as a result of these failures, we may also be unable to obtain additional financing.
Governmental
authorities in all major markets require that a new pharmaceutical product be approved or exempted from approval before it is
marketed, and have established high standards for technical appraisal, which can result in an expensive and lengthy approval process.
The time to obtain approval varies by country and some products are never approved. The lengthy process of conducting clinical
trials, seeking approval and the subsequent compliance with applicable statutes and regulations, if approval is obtained, are
very costly and require the expenditure of substantial resources.
A
summary of the Israeli, U.S. and EU regulatory processes follow below:
Israel
In
order to conduct clinical testing on humans in Israel, special authorization must first be obtained from the ethics committee
and general manager of the institution in which the clinical studies are scheduled to be conducted, as required under the Guidelines
for Clinical Trials in Human Subjects implemented pursuant to the Israeli Public Health Regulations (Clinical Trials in Human
Subjects), as amended from time to time, and other applicable legislation. These regulations also require authorization from the
Israeli Ministry of Health, except in certain circumstances, and in the case of genetic trials, special fertility trials and similar
trials, an additional authorization of the overseeing institutional ethics committee. The institutional ethics committee must,
among other things, evaluate the anticipated benefits that are likely to be derived from the project to determine if it justifies
the risks and inconvenience to be inflicted on the human subjects, and the committee must ensure that adequate protection exists
for the rights and safety of the participants as well as the accuracy of the information gathered in the course of the clinical
testing. Since, at this time, we intend to perform all of the clinical studies in Israel, we will be required to obtain authorization
from the ethics committee and general manager of each institution in which we intend to conduct our clinical trials, and in most
cases, from the Israeli Ministry of Health.
Israel’s
Ministry of Health, which regulates medical testing, has adopted protocols that correspond, generally, to those of the FDA and
the European Medicines Agency (the “EMA”), making it comparatively straightforward for studies conducted in Israel
to satisfy FDA and the EMA requirements, thereby enabling medical technologies subjected to clinical trials in Israel to reach
U.S. and EU commercial markets in an expedited fashion. Many members of Israel’s medical community have earned international
prestige in their chosen fields of expertise and routinely collaborate, teach and lecture at leading medical centers throughout
the world. Israel also has free trade agreements with the United States and the European Union.
Currently
we do not conduct any product-related activities such as research, development, manufacturing or marketing activities outside
of Israel, nor do we expect to for the foreseeable future.
United
States
In
the United States, the Public Health Service Act and the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the safety and effectiveness
standards for our products and the raw materials and components used in the production of, testing, manufacture, labeling, storage,
record keeping, approval, advertising and promotion of product candidates on a product-by-product basis.
Preclinical
tests include in vitro and in vivo evaluation of the product candidate, its chemistry, formulation and stability, and animal studies
to assess potential safety and efficacy. Certain preclinical tests must be conducted in compliance with good laboratory practice
regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies, requiring them to be replicated.
After laboratory analysis and preclinical testing, testing, a sponsor files an Investigational New Drug application, or IND, to
begin human testing. Typically, a manufacturer conducts a three-phase human clinical testing program which itself is subject to
numerous laws and regulatory requirements, including adequate monitoring, reporting, record keeping and informed consent. In Phase
1, small clinical trials are conducted to determine the safety and proper dose ranges of product candidates. In Phase 2, clinical
trials are conducted to assess safety and gain preliminary evidence of the efficacy of product candidates. In Phase 3, 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 1, Phase 2 or Phase 3 testing within any specific period, if at all. Furthermore, the FDA, the Institutional Review
Board responsible for approving and monitoring the clinical trials at a given site, the Data Safety Monitoring Board, where one
is used, or we may suspend the clinical trials at any time on various grounds, including a finding that subjects or patients are
exposed to unacceptable health risk.
If
the clinical data from these clinical trials (Phases 1, 2 and 3) are deemed to support the safety and effectiveness of the candidate
product for its intended use, then we may proceed to seek to file with the FDA, a New Drug Application, or NDA, seeking approval
to market a new drug for one or more specified intended uses. We have not completed our clinical trials for any candidate product
for any intended use and therefore, we cannot ascertain whether the clinical data will support and justify filing an NDA. Nevertheless,
if and when we are able to ascertain that the clinical data supports and justifies filing an NDA, we intend to make such appropriate
filings.
The
purpose of the NDA is to provide the FDA with sufficient information so that it can assess whether it ought to approve the candidate
product for marketing for specific intended uses. The fact that the FDA has designated a drug as an orphan drug for a particular
intended use does not mean that the drug has been approved for marketing. Marketing and commercialization of a drug is permitted
only after FDA approves an NDA for the drug. A request for orphan drug status must be filed before the NDA is filed. The orphan
drug designation, though, provides certain benefits, including a seven-year period of market exclusivity subject to certain exceptions.
The
NDA normally contains, among other things, sections describing the chemistry, manufacturing, and controls, non-clinical pharmacology
and toxicology, human pharmacokinetics and bioavailability, microbiology, the results of the clinical trials, and the proposed
labeling which contains, among other things, the intended uses of the candidate product.
We
cannot take any action to market any new drug or biologic product in the United States until our marketing application has been
approved by the FDA. The FDA has substantial discretion over the approval process and may disagree with our interpretation of
the data submitted. The process may be significantly extended by requests for additional information or clarification regarding
information already provided. As part of this review, the FDA may refer the application to an appropriate advisory committee,
typically a panel of clinicians. Satisfaction of these and other regulatory requirements typically takes several years, and the
actual time required may vary substantially based upon the type, complexity and novelty of the product. Government regulation
may delay or prevent marketing of potential products for a considerable period and impose costly procedures on our activities.
We cannot be certain that the FDA or other regulatory agencies will approve any of our products on a timely basis, if at all.
Success in preclinical or early stage clinical trials does not assure success in later-stage clinical trials. Even if a product
receives regulatory approval, the approval may be significantly limited to specific indications or uses and these limitations
may adversely affect the commercial viability of the product. Delays in obtaining, or failures to obtain regulatory approvals,
would have a material adverse effect on our business.
Even
after we obtain FDA approval, we may be required to conduct further clinical trials (i.e., Phase 4 trials) and provide additional
data on safety and effectiveness. We are also required to gain separate approval for the use of an approved product as a treatment
for indications other than those initially approved. In addition, side effects or adverse events that are reported during clinical
trials can delay, impede or prevent marketing approval. Similarly, adverse events that are reported after marketing approval can
result in additional limitations being placed on the product’s use and, potentially, withdrawal of the product from the
market. Any adverse event, either before or after marketing approval, can result in product liability claims against us.
Under
the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition—generally
a disease or condition with a prevalence of fewer than 200,000 individuals in the United States. Orphan drug designation must
be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its
potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active
ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period
in the United States for that product candidate, for that indication. During the seven-year exclusivity period, the FDA may not
approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing
of clinical superiority to the product candidate 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. Among
the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.
Although
we currently have no approvals to market our products from the FDA, if we obtain regulatory approval for any of our product prospects,
we will be required to comply with post-approval regulatory requirements, including any post-approval requirements that the FDA
may have imposed as a condition of approval. We will be required to report certain adverse reactions and production problems to
the FDA, provide updated safety and efficacy information and comply with requirements concerning advertising and promotional labeling
requirements. We, as well as certain of our partners or subcontractors, will be required to register our facilities with the FDA
and certain state agencies, and will be subject to periodic unannounced inspections by the FDA and certain state agencies for
compliance with ongoing regulatory requirements, including current good manufacturing, or cGMP, regulations, which impose certain
procedural and documentation requirements upon drug manufacturers. Accordingly, we must continue to expend time, money and effort
in the areas of production and quality control to maintain compliance with cGMP regulations and other regulatory requirements.
Our
products may also be subject to official lot release, meaning that we will be required to perform certain tests on each lot of
the product before it is released for distribution. If the product is subject to official release, we must submit samples of each
lot, together with a release protocol showing a summary of the history of manufacture of the lot and the results of all tests
performed on the lot, to the FDA. The FDA may in addition perform certain confirmatory tests on lots of some products before releasing
the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety, purity, potency, and effectiveness
of pharmaceutical products.
Once
an approval is granted, the FDA may withdraw the approval if we do not maintain compliance with regulatory requirements and standards
or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including
adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements,
may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical
trials to assess new safety risks; or imposition of distribution or other restrictions under a Risk Evaluation and Mitigation
Strategy, or REMS, program. Other potential consequences include, among other things:
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restrictions
on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
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fines,
warning letters or holds on post-approval clinical trials;
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refusal
of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license
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approvals;
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product
seizure or detention, or refusal to permit the import or export of products; or
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injunctions
or the imposition of civil or criminal penalties.
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The
FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be
promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies
actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly
promoted off-label uses may be subject to significant liability.
We
may also be subject to various federal, state and international laws pertaining to health care “fraud and abuse,”
including anti-kickback laws and false claims laws. The federal Anti-kickback law, which governs federal healthcare programs (e.g.,
Medicare, Medicaid), makes it illegal to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral
of business, including the purchase or prescription of a particular drug. Many states have similar laws that are not restricted
to federal healthcare programs. Federal and state false claims laws prohibit anyone from knowingly and willingly presenting, or
causing to be presented for payment to third party payers (including Medicare and Medicaid), claims for reimbursement, including
claims for the sale of drugs or services, that are false or fraudulent, claims for items or services not provided as claimed,
or claims for medically unnecessary items or services. If the government or a whistleblower were to allege that we violated these
laws there could be a material adverse effect on us, including our stock price. Even an unsuccessful challenge could cause adverse
publicity and be costly to respond to, which could have a materially adverse effect on our business, results of operations and
financial condition. A finding of liability under these laws can have significant adverse financial implications for us and can
result in payment of large penalties and possible exclusion from federal healthcare programs. We will consult counsel concerning
the potential application of these and other laws to our business and our sales, marketing and other activities and will make
good faith efforts to comply with them. However, given their broad reach and the increasing attention given by law enforcement
authorities, we cannot assure you that some of our activities will not be challenged or deemed to violate some of these laws.
European
Economic Area
Although
we are not currently seeking regulatory approval in the EU, we or our potential future licensees may do so in the future. As such,
a summary of the EU regulatory processes follows below.
A
medicinal product may only be placed on the market in the European Economic Area (the “EEA”), composed of the 27 EU
member states, plus Norway, Iceland and Lichtenstein, when a marketing authorization has been issued by the competent authority
of a member state pursuant to Directive 2001/83/EC (as recently amended by Directive 2004/27/EC), or an authorization has been
granted under the centralized procedure in accordance with Regulation (EC) No. 726/2004 or its predecessor, Regulation 2309/93.
There are essentially three community procedures created under prevailing European pharmaceutical legislation that, if successfully
completed, allow an applicant to place a medicinal product on the market in the EEA.
Centralized
Procedure
Regulation
726/2004/EC now governs the centralized procedure when a marketing authorization is granted by the European Commission, acting
in its capacity as the European Licensing Authority on the advice of the EMA. That authorization is valid throughout the entire
community and directly or (as to Norway, Iceland and Liechtenstein) indirectly allows the applicant to place the product on the
market in all member states of the EEA. The EMA is the administrative body responsible for coordinating the existing scientific
resources available in the member states for evaluation, supervision and pharmacovigilance of medicinal products. Certain medicinal
products, as described in the Annex to Regulation 726/2004, must be authorized centrally. These are products that are developed
by means of a biotechnological process in accordance with Paragraph 1 to the Annex to the Regulation. Medicinal products for human
use containing a new active substance for which the therapeutic indication is the treatment of acquired immune deficiency syndrome,
or AIDS, cancer, neurodegenerative disorder or diabetes must also be authorized centrally. Starting on May 20, 2008, the mandatory
centralized procedure was extended to autoimmune diseases and other immune dysfunctions and viral diseases. Finally, all medicinal
products that are designated as orphan medicinal products pursuant to Regulation 141/2000 must be authorized under the centralized
procedure. An applicant may also opt for assessment through the centralized procedure if it can show that the medicinal product
constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization centrally is in
the interests of patients at the community level. For each application submitted to the EMA for scientific assessment, the EMA
is required to ensure that the opinion of the Committee for Medicinal Products for Human Use (the “CHMP”), is given
within 210 days after receipt of a valid application. This 210 days period does not include the time that the applicant to answer
any questions raised during the application procedure, the so-called ‘clock stop’ period. If the opinion is positive,
the EMA is required to send the opinion to the European Commission, which is responsible for preparing the draft decision granting
a marketing authorization. This draft decision may differ from the CHMP opinion, stating reasons for diverging for the CHMP opinion.
The draft decision is sent to the applicant and the member states, after which the European Commission takes a final decision.
If the initial opinion of the CHMP is negative, the applicant is afforded an opportunity to seek a re-examination of the opinion.
The CHMP is required to re-examine its opinion within 60 days following receipt of the request by the applicant. All CHMP refusals
and the reasons for refusal are made public on the EMA website. Without a centralized marketing authorization it is prohibited
to place a medicinal product that must be authorized centrally on the market in the EU.
Mutual
Recognition and Decentralized Procedures
With
the exception of products that are authorized centrally, the competent authorities of the member states are responsible for granting
marketing authorizations for medicinal products placed on their national markets. If the applicant for a marketing authorization
intends to market the same medicinal product in more than one member state, the applicant may seek an authorization progressively
in the community under the mutual recognition or decentralized procedure. Mutual recognition is used if the medicinal product
has already been authorized in a member state. In this case, the holder of this marketing authorization requests the member state
where the authorization has been granted to act as reference member state by preparing an updated assessment report that is then
used to facilitate mutual recognition of the existing authorization in the other member states in which approval is sought (the
so-called concerned member state(s)). The reference member state must prepare an updated assessment report within 90 days of receipt
of a valid application. This report together with the approved Summary of Product Characteristics (“SmPC”) (which
sets out the conditions of use of the product), and a labeling and package leaflet are sent to the concerned member states for
their consideration. The concerned member states are required to approve the assessment report, the SmPC and the labeling and
package leaflet within 90 days of receipt of these documents. The total procedural time is 180 days.
The
decentralized procedure is used in cases where the medicinal product has not received a marketing authorization in the EU at the
time of application. The applicant requests a member state of its choice to act as reference member state to prepare an assessment
report that is then used to facilitate agreement with the concerned member states and the grant of a national marketing authorization
in all of these member states. In this procedure, the reference member state must prepare, for consideration by the concerned
member states, the draft assessment report, a draft SmPC and a draft of the labeling and package leaflet within 120 days after
receipt of a valid application. As in the case of mutual recognition, the concerned member states are required to approve these
documents within 90 days of their receipt.
For
both mutual recognition and decentralized procedures, if a concerned member state objects to the grant of a marketing authorization
on the grounds of a potential serious risk to public health, it may raise a reasoned objection with the reference member state.
The points of disagreement are in the first instance referred to the Co-ordination Group on Mutual Recognition and Decentralized
Procedures, to reach an agreement within 60 days of the communication of the points of disagreement. If member states fail to
reach an agreement, then the matter is referred to the EMA and CHMP for arbitration. The CHMP is required to deliver a reasoned
opinion within 60 days of the date on which the matter is referred. The scientific opinion adopted by the CHMP forms the basis
for a binding European Commission decision.
Irrespective
of whether the medicinal product is assessed centrally, de-centrally or through a process of mutual recognition, the medicinal
product must be manufactured in accordance with the principles of good manufacturing practice as set out in Directive 2003/94/EC
and Volume 4 of the rules governing medicinal products in the European community. Moreover, community law requires the clinical
results in support of clinical safety and efficacy based upon clinical trials conducted in the European community to be in compliance
with the requirements of Directive 2001/20/EC, which implements good clinical practice in the conduct of clinical trials on medicinal
products for human use. Clinical trials conducted outside the European community and used to support applications for marketing
within the EU must have been conducted in a way consistent with the principles set out in Directive 2001/20/EC. The conduct of
a clinical trial in the EU requires, pursuant to Directive 2001/20/EC, authorization by the relevant national competent authority
where a trial takes place, and an ethics committee to have issued a favorable opinion in relation to the arrangements for the
trial. It also requires that the sponsor of the trial, or a person authorized to act on his behalf in relation to the trial, be
established in the community.
National
Procedure
This
procedure is available for medicinal products that do not fall within the scope of mandatory centralized authorization and are
intended for use in only one EU member state. Specific procedures and timelines differ between member states, but the duration
of the procedure is generally 210 days and based on a risk/efficacy assessment by the competent authority of the member state
concerned, followed by determination of SmPC, package leaflet and label text/layout and subsequently grant of the marketing authorization.
Marketing authorizations granted on this basis are not mutually recognized by other member states.
There
are various types of applications for marketing authorizations:
Full
Applications. A full application is one that is made under any of the community procedures described above and “stands alone”
in the sense that it contains all of the particulars and information required by Article 8(3) of Directive 2001/83 (as amended)
to allow the competent authority to assess the quality, safety and efficacy of the product and in particular the balance between
benefit and risk. Article 8(3)(l) in particular refers to the need to present the results of the applicant’s research on
(i) pharmaceutical (physical-chemical, biological or microbiological) tests, (ii) preclinical (toxicological and pharmacological)
studies and (iii) clinical trials in humans. The nature of these tests, studies and trials is explained in more detail in Annex
I to Directive 2001/83/EC. Full applications would be required for products containing new active substances not previously approved
by the competent authority, but may also be made for other products.
Abridged
Applications. Article 10 of Directive 2001/83/EC contains exemptions from the requirement that the applicant provide the results
of its own preclinical and clinical research. There are three regulatory routes for an applicant to seek an exemption from providing
such results, namely (i) cross-referral to an innovator’s results without consent of the innovator, (ii) well established
use according to published literature and (iii) consent to refer to an existing dossier of research results filed by a previous
applicant.
Cross-referral
to Innovator’s Data
Articles
10(1) and 10(2)(b) of Directive 2001/83/EC provide the legal basis for an applicant to seek a marketing authorization on the basis
that its product is a generic medicinal product (a copy) of a reference medicinal product that has already been authorized, in
accordance with community provisions. A reference product is, in principle, an original product granted an authorization on the
basis of a full dossier of particulars and information. This is the main exemption used by generic manufacturers for obtaining
a marketing authorization for a copy product. The generic applicant is not required to provide the results of preclinical studies
and of clinical trials if its product meets the definition of a generic medicinal product and the applicable regulatory results
protection period for the results submitted by the innovator has expired. A generic medicinal product is defined as a medicinal
product:
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having
the same qualitative and quantitative composition in active substance as the reference medicinal product;
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having
the same pharmaceutical form as the reference medicinal product; and
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whose
bioequivalence with the reference medicinal product has been demonstrated by appropriate bioavailability studies.
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Applications
in respect of a generic medicinal product cannot be made before the expiry of the protection period. Where the reference product
was granted a national marketing authorization pursuant to an application made before October 30, 2005, the protection period
is either 6 years or 10 years, depending upon the election of the particular member state concerned. Where the reference product
was granted a marketing authorization centrally, pursuant to an application made before November 20, 2005, the protection period
is 10 years. For applications made after these dates, Regulation 726/2004 and amendments to Directive 2001/83/EC provide for a
harmonized protection period regardless of the approval route utilized. The harmonized protection period is in total 10 years,
including eight years of research data protection and two years of marketing protection. The effect is that the originator’s
results can be the subject of a cross-referral application after eight years, but any resulting authorization cannot be exploited
for a further two years. The rationale of this procedure is not that the competent authority does not have before it relevant
tests and trials upon which to assess the efficacy and safety of the generic product, but that the relevant particulars can, if
the research data protection period has expired, be found on the originator’s file and used for assessment of the generic
medicinal product. The 10-year protection period can be extended to 11 years where, in the first eight years, post-authorization,
the holder of the authorization obtains approval for a new indication assessed as offering a significant clinical benefit in comparison
with existing products.
If
the copy product does not meet the definition of a generic medicinal product or if certain types of changes occur in the active
substance(s) or in the therapeutic indications, strength, pharmaceutical form or route of administration in relation to the reference
medicinal product, Article 10(3) of Directive 2001/83/EC provides that the results of the appropriate preclinical studies or clinical
trials must be provided by the applicant.
Well-Established
Medicinal Use
Under
Article 10a of Directive 2001/83/EC, an applicant may, in substitution for the results of its own preclinical and clinical research,
present detailed references to published literature demonstrating that the active substance(s) of a product have a well-established
medicinal use within the community with recognized efficacy and an acceptable level of safety. The applicant is entitled to refer
to a variety of different types of literature, including reports of clinical trials with the same active substance(s) and epidemiological
studies that indicate that the constituent or constituents of the product have an acceptable safety/efficacy profile for a particular
indication. However, use of the published literature exemption is restricted by stating that in no circumstances will constituents
be treated as having a well-established use if they have been used for less than 10 years from the first systematic and documented
use of the substance as a medicinal product in the EU. Even after 10 years’ systematic use, the threshold for well-established
medicinal use might not be met. European pharmaceutical law requires the competent authorities to consider among other factors
the period over which a substance has been used, the amount of patient use of the substance, the degree of scientific interest
in the use of the substance (as reflected in the scientific literature) and the coherence (consistency) of all the scientific
assessments made in the literature. For this reason, different substances may reach the threshold for well-established use after
different periods, but the minimum period is 10 years. If the applicant seeks approval of an entirely new therapeutic use compared
with that to which the published literature refers, additional preclinical and/or clinical results would have to be provided.
Informed
Consent
Under
Article 10c of Directive 2001/83/EC, following the grant of a marketing authorization the holder of such authorization may consent
to a competent authority utilizing the pharmaceutical, preclinical and clinical documentation that it submitted to obtain approval
for a medicinal product to assess a subsequent application relating to a medicinal product possessing the same qualitative and
quantitative composition with respect to the active substances and the same pharmaceutical form.
Law
Relating to Pediatric Research
Regulation
(EC) 1901/2006 (as amended by Regulation (EC) 1902/2006) was adopted on December 12, 2006. This Regulation governs the development
of medicinal products for human use in order to meet the specific therapeutic needs of the pediatric population. It requires any
application for marketing authorization made after July 26, 2008 in respect of a product not authorized in the European Community
on January 26, 2007 (the time the Regulation entered into force), to include the results of all studies performed and details
of all information collected in compliance with a pediatric investigation plan agreed by the Pediatric Committee of the EMA, unless
the product is subject to an agreed waiver or deferral or unless the product is excluded from the scope of Regulation 1902/2006
(generics, hybrid medicinal products, biosimilars, homeopathic and traditional (herbal) medicinal products and medicinal products
containing one or more active substances of well-established medicinal use). Waivers can be granted in certain circumstances where
pediatric studies are not required or desirable. Deferrals can be granted in certain circumstances where the initiation or completion
of pediatric studies should be deferred until appropriate studies in adults have been performed. Moreover, this regulation imposes
the same obligation from January 26, 2009 on an applicant seeking approval of a new indication, pharmaceutical form or route of
administration for a product already authorized and still protected by a supplementary protection certificate granted under Regulation
EC 469/2009 and its precursor (EEC) 1768/92 or by a patent that qualifies for the granting of such a supplementary protection
certificate. The pediatric Regulation 1901/2006 also provides, subject to certain conditions, a reward for performing such pediatric
studies, regardless of whether the pediatric results provided resulted in the grant of a pediatric indication. This reward comes
in the form of an extension of six months to the supplementary protection certificate granted in respect of the product, unless
the product is subject to orphan drug designation, in which case the 10-year market exclusivity period for such orphan products
is extended to 12 years. If any of the non-centralized procedures for marketing authorization have been used, the six-month extension
of the supplementary protection certificate is only granted if the medicinal product is authorized in all member states.
Post-authorization
Obligations
In
the pre-authorization phase the applicant must provide a detailed pharmacovigilance plan that it intends to implement post-authorization.
An authorization to market a medicinal product in the EU carries with it an obligation to comply with many post-authorization
organizational and behavioral regulations relating to the marketing and other activities of authorization holders. These include
requirements relating to post-authorization efficacy studies, post-authorization safety studies, adverse event reporting and other
pharmacovigilance requirements, advertising, packaging and labeling, patient package leaflets, distribution and wholesale dealing.
The regulations frequently operate within a criminal law framework and failure to comply with the requirements may not only affect
the authorization, but also can lead to financial and other sanctions levied on the company in question and responsible officers.
As a result of the currently on-going overhaul of EU pharmacovigilance legislation the financial and organizational burden on
market authorization holders will increase significantly, such as the obligation to maintain a pharmacovigilance system master
file that applies to all holders of marketing authorizations granted in accordance with Directive 2001/83/EC or Regulation (EC)
No 726/2004. Marketing authorization holders must furthermore collect data on adverse events associated with use of the authorized
product outside the scope of the authorization. Pharmacovigilance for biological products and medicines with a new active substance
will be strengthened by subjecting their authorization to additional monitoring activities. The EU is currently in the process
of issuing implementing regulations for the new pharmacovigilance framework.
Any
authorization granted by member state authorities, which within three years of its granting is not followed by the actual placing
on the market of the authorized product in the authorizing member state ceases to be valid. When an authorized product previously
placed on the market in the authorizing member state is no longer actually present on the market for a period of three consecutive
years, the authorization for that product shall cease to be valid. The same two three year periods apply to authorizations granted
by the European Commission based on the centralized procedure.
ITEM
1A. RISK FACTORS
Risks
Related to Our Business, Financial Position and Capital Requirements
We
are an early-stage biopharmaceutical medical cannabis research and development company with a history of losses, and we expect
to continue to incur losses for the foreseeable future, and we may never achieve or maintain profitability.
We
are an early-stage biopharmaceutical medical cannabis research and development company focused on the research and development
of medical cannabis therapies, products and delivery technologies and we have incurred significant operating losses since we commenced
our present operations in July 2014. Our net loss was approximately $4.5 million and $2.4 million for the fiscal years ended December
31, 2017 and 2016, respectively. As of December 31, 2017, we had an accumulated deficit of approximately $14.5 million. To date,
we have not generated any product revenue. Substantially all of our losses have resulted from expenses incurred in connection
with our research and development programs and from general and administrative costs associated with our operations. We have no
products on the market and expect that it will be many years, if ever, before we have a product candidate ready for commercialization.
We
have not generated, and may not 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,
the regulatory review process for product prospects, and the development of manufacturing and marketing capabilities for any product
prospects approved for commercial sale. The amount of our potential future losses is uncertain. To achieve profitability, we must
successfully develop product prospects, obtain regulatory approvals to market and commercialize product prospects, manufacture
any approved product prospects on commercially reasonable terms, establish a sales and marketing organization or suitable third-party
alternatives for any approved product prospects and raise sufficient funds to finance our business activities. We may never succeed
in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our
failure to become and remain profitable would decrease our value and could impair our ability to raise capital, maintain our research
and development efforts, expand our business or continue our operations. A decline in our value could also cause our stockholders
to lose all or part of their investment.
Since
we have a limited operating history in our business, it is difficult for potential investors to evaluate our business.
Our
business involves two distinct operations: (i) conducting scientific research and development in collaboration with leading universities
and institutions in Israel on the use of cannabis for medical treatment and (ii) providing consulting services to assist clients
with establishing their own medical cannabis treatment programs. We commenced operations as a medical cannabis research and development
company in July 2014, and therefore have a relatively short operating history upon which an evaluation of our future success or
failure can objectively be made. Our business is a highly speculative undertaking and involves a substantial degree of risk. We
have not demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by early-stage
companies in new and rapidly evolving competitive fields, including under-capitalization, cash shortages, limitations with respect
to personnel, financial, and other resources and lack of revenue. The likelihood of our success must be considered in light of
the early stage of our operations. There is no assurance that our business will ever be successful or that we will be able to
attain profitability. Any failure by us to report profits may adversely affect the price of our Common Stock.
We
will need to raise additional capital to meet our business requirements in the future, which may be costly or difficult to obtain
and could dilute our stockholders’ ownership interests.
We
have not yet generated significant revenue and will require additional capital to continue our research and development activities,
conduct clinical trials, commercialize our products and otherwise fund our operations. Our ability to secure required financing
will depend in part upon investor perception of our ability to create a successful business. Capital market conditions and other
factors beyond our control may also play important roles in our ability to raise capital. There can be no assurance that debt
or equity financing will be available or sufficient for our requirements or for other corporate purposes, or if debt or equity
financing is available, that it will be on terms acceptable to us. Moreover, future activities may require us to alter our capitalization
significantly. Our inability to access sufficient capital for our operations could have a material adverse effect on our financial
condition, results of operations and prospects. If we are unable to obtain additional funding as needed, we may be required to
reduce the scope of our research and development activities, which could harm our business plan, financial condition and operating
results, or we may be required to cease our operations entirely, in which case, our investors will lose all of their investment.
Any
additional capital raised through the sale of equity or equity-backed securities may dilute our stockholders’ ownership
percentages and could also result in a decrease in the market value of our equity securities. The terms of any securities issued
by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights
and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of our securities
then outstanding. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities
and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue
business opportunities. In addition, we may incur substantial costs in pursuing future capital financing, including investment
banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs.
We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes
and warrants, which may have an adverse impact on our financial condition.
Our
involvement in the cannabis industry may make it difficult to obtain insurance coverage.
In
the event that we decide to commence business operations in the U.S., of which there can be no assurance, obtaining and maintaining
necessary insurance coverage, for such things as workers compensation, general liability, product liability and directors and
officers insurance, may be more difficult and/or expensive for us to find because we are involved in the cannabis industry. There
can be no assurance that we will be able to find such insurance in the near future, if needed, or that the cost of coverage will
be affordable or cost-effective. If, either because of unavailability or cost prohibitive reasons, we are compelled to operate
without insurance coverage, we may be prevented from entering certain business sectors, experience inhibited growth potential
and/or be exposed to additional risks and financial liabilities.
Our
independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern.
The
audited financial statements included in this annual report have been prepared assuming that we will continue as a going concern
and do not include any adjustments that might result if we cease to continue as a going concern. We believe that in order to continue
as a going concern, including the costs of being a public company, we will need approximately $260,000 per year simply to cover
our administrative, legal and accounting fees. We have incurred significant losses since our inception. We have funded these losses
primarily through the sale of restricted shares of our Common Stock, grant of restricted shares for services and the issuance
of convertible notes, which have subsequently been converted into restricted shares of Common Stock.
Based
on our financial history and other factors described in the audited financial statements as of and for the year ended December
31, 2017, our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a
going concern in its report on the financial statements and elsewhere in the financial statements. To date, we have not generated
significant revenues and we do not anticipate generating any significant revenues in 2018.
Notwithstanding
our success in raising $1.9 million from the sale of our securities in 2017, there can be no assurance that we will be able to
continue to raise equity and/or debt capital from investors on terms and conditions satisfactory to us, or otherwise, and/or have
adequate capital resources required by us to fund our current and future planned operations. If we are unable to obtain adequate
capital resources to fund operations, we may be required to delay, scale back or eliminate some or all of our plan of operations,
which may have a material adverse effect on our business, results of operations and ability to continue as a going concern.
Our
proprietary information, or that of our customers, suppliers and business partners, may be lost or we may suffer security breaches.
In
the ordinary course of our business, we collect and store sensitive data, including intellectual property, clinical trial data,
our proprietary business information and that of our suppliers and business partners, and personally identifiable information
of our employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information
is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Although to our knowledge we have not
experienced any such material security breach to date, any such breach could compromise our networks and the information stored
there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result
in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disrupt
our operations, damage our reputation, and cause a loss of confidence in our products and our ability to conduct clinical trials,
which could adversely affect our business and reputation and lead to delays in gaining regulatory approvals for our Cannabis-Based
Medical Product prospects. Although we maintain business interruption insurance coverage, our insurance might not cover all losses
from any future breaches of our systems.
Significant
disruptions of information technology systems or security breaches could adversely affect our business.
We
are increasingly dependent upon information technology systems, infrastructure and data to operate our business. In the ordinary
course of business, we collect, store and transmit large amounts of confidential information (including, among other things, trade
secrets or other intellectual property, proprietary business information and personal information). It is critical that we do
so in a secure manner to maintain the confidentiality and integrity of such confidential information. We also have outsourced
elements of our operations to third parties, and as a result we manage a number of third-party vendors who may or could have access
to our confidential information. The size and complexity of our information technology systems, and those of third-party vendors
with whom we contract, and the large amounts of confidential information stored on those systems, make such systems vulnerable
to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third-party vendors,
and/or business partners, or from cyber-attacks by malicious third parties. Cyber-attacks are increasing in their frequency, sophistication
and intensity, and have become increasingly difficult to detect. Cyber-attacks could include the deployment of harmful malware,
ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality,
integrity and availability of information.
Significant
disruptions of our information technology systems, or those of our third-party vendors, or security breaches could adversely affect
our business operations and/or result in the loss, misappropriation and/or unauthorized access, use or disclosure of, or the prevention
of access to, confidential information, including, among other things, trade secrets or other intellectual property, proprietary
business information and personal information, and could result in financial, legal, business and reputational harm to us. For
example, any such event that leads to unauthorized access, use or disclosure of personal information, including personal information
regarding our patients or employees, could harm our reputation, require us to comply with federal and/or state breach notification
laws and foreign law equivalents, and otherwise subject us to liability under laws and regulations that protect the privacy and
security of personal information. Security breaches and other inappropriate access can be difficult to detect, and any delay in
identifying them may lead to increased harm of the type described above. While we have implemented security measures to protect
our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions
or security breaches that could adversely affect our business.
The
estimates and judgments we make, or the assumptions on which we rely, in preparing our consolidated financial statements could
prove inaccurate.
Our
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges accrued by us and related
disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances. We cannot assure, however, that our estimates, or the assumptions underlying
them, will not change over time or otherwise prove inaccurate. For example, our estimates as they relate to anticipated timelines
and milestones for our clinical trials or preclinical development or other financial measurements may prove to be inaccurate.
If this is the case, we may be required to re-estimate our plans or restate our consolidated financial statements, which could,
in turn, subject us to securities class action litigation. Defending against such potential litigation relating to a restatement
of our consolidated financial statements would be expensive and would require significant attention and resources of our management.
Moreover, our insurance to cover our obligations with respect to the ultimate resolution of any such litigation may be inadequate.
As a result of these factors, any such potential litigation could have a material adverse effect on our financial results, harm
our business, and cause our share price to decline.
Risks
Related to Our Product Development, Our Services and the Medical Cannabis Industry
We
are highly dependent on the success of cannabinoid technology, and we may not be able to develop the technology, successfully
obtain regulatory or marketing approval for, or successfully commercialize, our products or product candidates.
Our
business is focused upon the research and development of medical cannabis therapies, products and delivery technologies. Our success
is dependent upon the viability of the development of medical cannabis therapies, products and delivery technologies.
Neither
we nor any other company has received regulatory approval from the FDA to market any therapeutics, products or delivery technologies
based on botanical cannabinoids, though the FDA has approved two drugs that contain a synthetic substance that acts similarly
to cannabis compounds but is not present in the cannabis plant. Further, the scientific evidence underlying the feasibility of
developing medical cannabis therapies, products and delivery technologies is both preliminary and limited.
If
our Cannabis-Based Medical product prospects are found to be ineffective or unsafe in humans, or if the never receive regulatory
approval for commercialization, we may never be able bring our Cannabis-Based Medical Products prospects to market and may never
become profitable. Further, our current business strategy, including all of our research and development, is primarily focused
on utilizing cannabinoid technology to develop medical cannabis therapies, products and delivery technologies. This lack of diversification
increases the risk associated with the ownership of our Common Stock. If we are unsuccessful in developing and commercializing
our Cannabis-Based Medical product prospects, we may be required to alter our scope and direction and steer away from the intellectual
property we have developed as well as the core capabilities of our management team and advisory board. Without successful commercialization
of our Cannabis-Based Medical product prospects, we may never become profitable, which would have a material adverse effect on
our business, results of operations and financial condition.
Laws
and regulations affecting therapeutic uses of marijuana are constantly evolving.
The
constant evolution of laws and regulations affecting the research and development of cannabis-based medical products and treatments
could detrimentally affect our business. Laws and regulations related to the therapeutic uses of marijuana are subject to changing
interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees and ultimately
require us to alter our business plan. Furthermore, violations or alleged violation of these laws could disrupt our business and
result in a material adverse effect on our operations. In addition, we cannot predict the nature of any future laws, regulations,
interpretations or applications of laws and regulations and it is possible that new laws and regulations may be enacted in the
future that will be directly applicable to our business.
The
FDA has not approved the whole-plant extract of cannabis as a safe and effective drug for any indication.
Although
the FDA has not approved any drug product containing or derived from botanical cannabis, the FDA is aware that there is considerable
interest in its use to attempt to treat a number of medical conditions. Before conducting testing in humans of a drug that has
not been approved by the FDA, we will need to submit an investigational new drug (IND) application, which is reviewed by the FDA.
Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions,
such as FDA refusal to approve pending NDAs, warning or untitled letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines, civil penalties and criminal prosecution. We cannot predict how
FDA would regulate any drug based on or derived from botanical cannabis or what restrictions would apply once approved.
Clinical
trials of cannabis-based medical products and treatments are novel terrain with very limited or non-existing clinical trials history;
we face a significant risk that the trials will not result in commercially viable products and treatments.
At
present, there is no documented history of clinical trials from which we can derive any scientific conclusions, or prove that
our present assumptions for the current and planned research are scientifically compelling. The results from our 2015 in vitro
studies on the effect of a formulation comprised of Cannabidiol (CBD) and tetrahydrocannabinol (THC) on multiple myeloma cells
studied outside their normal biological context indicated a 100% mortality rate of myeloma cells in 60% of the cultured cells
within a 24 to 48 hour period, and highlight the potential abilities of cannabis oil extract to successfully fight multiple myeloma
cancer cells and, hopefully treat multiple myeloma in patients, when and if approved. While we are encouraged by the results of
the limited in vitro tests, there can be no assurance that any clinical trial will result in commercially viable products or treatments.
Clinical
trials are expensive, time consuming and difficult to design and implement. Failure can occur at any time during the clinical
study process. The results of preclinical studies and early clinical studies of our product candidates may not be predictive of
the results of later-stage clinical studies. Product candidates that have shown promising results in early-stage clinical studies
may still suffer significant setbacks in subsequent advanced clinical studies. There is a high failure rate for drugs proceeding
through clinical studies, and product candidates in later stages of clinical studies may fail to show the desired safety and efficacy
traits despite having progressed satisfactorily through preclinical studies and initial clinical studies. A number of companies
in the pharmaceutical industry have suffered significant setbacks in advanced clinical studies due to lack of efficacy or adverse
safety profiles, notwithstanding promising results in earlier studies. Moreover, preclinical and clinical data are often susceptible
to varying interpretations and analyses. We do not know whether any Phase I, Phase II, Phase III or other clinical studies we
may conduct will demonstrate consistent or adequate efficacy and safety sufficient to obtain regulatory approval to market our
product candidates. We, as well as the regulatory authorities in Israel and elsewhere, such as an IRB (Helsinki committee), IMCU
- Israel Medical Cannabis Unit, or the FDA, may suspend, delay or terminate our clinical trials at any time, may require us, for
various reasons, to conduct additional clinical trials, or may require a particular clinical trial to continue for a longer duration
than originally planned, including, among others:
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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 IRB approvals, licenses required for obtaining and using
cannabis 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 Institutional Review Board 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.
We
may find it difficult to enroll patients in our clinical studies. Difficulty in enrolling patients could delay or prevent clinical
studies of our product candidates.
Identifying
and qualifying patients to participate in clinical studies of our product prospects is critical to our success. The timing of
our clinical studies depends in part on the speed at which we can recruit patients to participate in testing our product prospects,
and we may experience delays in our clinical studies if we encounter difficulties in enrollment.
Additionally,
the process of finding patients may prove costly. We also may not be able to identify, recruit and enroll a sufficient number
of patients to complete our clinical studies because of the perceived risks and benefits of the product prospects under study,
the availability and efficacy of competing therapies and clinical studies, the proximity and availability of clinical study sites
for prospective patients and the patient referral practices of physicians. If patients are unwilling to participate in our studies
for any reason, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential product
prospects will be delayed.
If
we experience delays in the completion or termination of any clinical study of our product prospects, the commercial prospects
of our product prospects will be harmed, and our ability to generate revenue from any of these product prospects could be delayed
or prevented. In addition, any delays in completing our clinical studies will increase our costs, slow down our product candidate
development and approval process and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences
may harm our business, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to,
a delay in the commencement or completion of clinical studies may also ultimately lead to the denial of regulatory approval of
our product prospects.
In
respect of our product candidates targeting rare indications, orphan drug exclusivity may afford limited protection, and if another
party obtains orphan drug exclusivity for the drugs and indications we are targeting, we may be precluded from commercializing
our product candidates in those indications during that period of exclusivity.
We
are seeking to obtain an orphan designation for some of our product candidates in the United States and in Europe. Under the Orphan
Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, defined,
in part, as a patient population of fewer than 200,000 in the United States, or a patient population greater than 200,000 in the
United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the
United States. In the European Union, the EMA’s Committee for Orphan Medicinal Products (COMP), grants orphan drug designation
to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically
debilitating condition affecting not more than five in 10,000 persons in the European Union community. Additionally, designation
is granted for products 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, the first NDA applicant with an orphan drug designation for a particular active moiety to treat a specific
disease or condition that receives FDA approval is entitled to a seven-year exclusive marketing period in the United States for
that product candidate, for that indication. In the European Union, orphan drug designation also entitles a party to financial
incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted 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 product is sufficiently profitable not to justify maintenance of market exclusivity.
There
is no assurance that we will successfully obtain orphan drug designation for any rare disease or condition indications or that
we will receive the full benefit of orphan exclusivity upon approval of any of our product prospects for which we obtain orphan
drug designation.
Failure
to secure the necessary Israeli licenses to use cannabis for medical research could limit our ability to execute our research
and development activities, delay the launch of our products and adversely affect the results of our business operations.
To
date, we are only conducting our research in Israel and, in fact, have limited our activities to Israel. The medical products
we are developing contain cannabis, a “controlled substance” as defined in the Israeli Dangerous Drugs Ordinance [New
Version], 5733 - 1973. In Israel, licenses to cultivate, possess and to use cannabis for medical research are granted by the IMCA,
on an ad-hoc basis. We acquire the cannabis needed for our research activities from G.K. Medical Cannabis Ltd, Canndoc Ltd or
IMC Medical Cannabis Ltd, all government-licensed Israeli medical cannabis growers. We obtained necessary IMCA licenses in order
to carry out the research in collaboration with Sheba, G.C. Group, Emilia, Dead Sea Labs and the Technion. Currently we have licenses
in order to continue our activities in collaboration with Sheba Academic Medical Center, PharmItBe, Pharmaceed Ltd and the Technion
R&D Foundation Ltd. We have applied for additional license for a phase I study we are starting in the second fiscal quarter
of 2018 in Sourasky hospital for the safety of our cannabis soluble tablet delivery system.
Although
we have an established track record of successfully obtaining the requisite licenses as required, there can be no assurance that
we will continue to be able to secure licenses in the future. If we fail to comply with Israeli rules and regulations related
to the licensing of cannabis, we may not be able to research and develop our product prospects as we intend or at all. If we are
unsuccessful in obtaining the requisite licenses, we may never become profitable, which would have a material adverse effect on
our business, results of operations and financial condition.
Our
failure to comply with controlled substance legislation could restrict or harm our ability to develop and commercialize our products.
Our
business is, and will be, subject to wide-ranging laws and regulations of Israel, the United States (federal and state), the European
Community and other governments in each of the countries where we may develop and market our products. We must comply with all
regulatory requirements if we expect to be successful.
Most
countries are parties to the Single Convention on Narcotic Drugs of 1961 as amended by the 1972 Protocol, which governs international
trade and domestic control of narcotic substances, including cannabis extracts. Countries may interpret and implement their treaty
obligations in a way that creates a legal obstacle to us obtaining marketing approval in those countries for any cannabinoid-based
products we develop. These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit
our products to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time. In
the case of countries with similar obstacles, we would be unable to market our product prospects in countries in the near future
or perhaps at all if the laws and regulations in those countries do not change.
Any
cannabinoid-based product prospect that we may develop for use in the United States, will be subject to U.S. controlled substance
laws and regulations that will require us, along with our collaborators and licensees, to expend time, money and effort in all
areas of regulatory compliance, including, if applicable, manufacturing, production, quality control and assurance and clinical
trials. Any failure to comply with these laws and regulations, or the cost of compliance with these laws and regulations, could
adversely affect the results of our business operations and our financial condition.
The
constant evolution of laws and regulations affecting the research and development of medical cannabis therapies, products and
delivery technologies could detrimentally affect our business. Laws and regulations related to the therapeutic uses of cannabis
are subject to changing interpretations. These changes may require us to incur substantial costs associated with legal and compliance
fees and ultimately require us to alter our business plan. Furthermore, violations or alleged violation of these laws could disrupt
our business and result in a material adverse effect on our operations, including our ability to conduct clinical trials that
are prerequisite to our ability to commercialize our Cannabis-Based Medical Products. 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.
Cannabis
remains illegal under U.S. federal law, and any change in the enforcement priorities of the federal government could render our
current and planned future operations unprofitable or even prohibit such operations.
We
are a biotechnology company focused on the research and development of medical cannabis therapies, products and delivery technologies.
The commercial viability of our medical cannabis therapies, products and delivery technologies in the United States depends, in
part, on state laws and regulations; however, Cannabis remains illegal under federal law.
The
United States federal government regulates drugs through the Controlled Substances Act, which places controlled substances, including
cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as
having a high potential for abuse and no currently accepted medical use in treatment in the United States. No prescriptions may
be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement
Administration. Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend
its use under the First Amendment.
Currently,
twenty-eight U.S. states and the District of Columbia allow the use of medical cannabis. Eight states and the District of Columbia
also allow its recreational use. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis
industry under the laws of these states is in conflict with the Federal Controlled Substances Act, which makes cannabis use and
possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right
to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis pre-empts
state laws that legalize its use.
In
2014, the United States House of Representatives passed an amendment (the “Rohrabacher-Farr Amendment”) to the Commerce,
Justice, Science, and Related Agencies Appropriations Bill, which funds the United States Department of Justice (the “DOJ”).
The Rohrabacher-Farr Amendment prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing
such laws. In August 2016, a Ninth Circuit federal appeals court ruled in
United States v. McIntosh
that the Rohrabacher-Farr
Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided
that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate
Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to
regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled
Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to
one that has recognized medical uses.
Although
these developments have been met with a certain amount of optimism in the scientific community, the CARERS Act has not yet been
adopted, and the Rohrabacher-Farr Amendment, being an amendment to an appropriations bill, must be renewed annually. On March
23, 2018, President Trump signed the Consolidated Appropriations Act of 2018 into law, which included the Rohrabacher-Blumenthal
Amendment, an extension of the Rohrabacher-Farr Amendment, and will be in effect through September 30, 2018. The federal government
could at any time change its enforcement priorities against the cannabis industry. We do not grow or distribute cannabis, but
our current and planned business operations involve licensing cannabinoid-based products and technology. Any change in enforcement
priorities could render such operations unprofitable or even prohibit such operations.
If
we choose to distribute our future products in the United States, we will be subject to controlled substance laws and regulations;
failure to receive necessary approvals may delay the launch of our products and failure to comply with these laws and regulations
may adversely affect the results of our business operations.
Our
future products will contain controlled substances as defined in the CSA. Controlled substances that are pharmaceutical products
are subject to a high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing
quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies
controlled substances into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances by definition have a
high potential for abuse, have no currently “accepted medical use” in the United States, lack accepted safety for
use under medical supervision, and may not be prescribed, marketed or sold in the United States. Pharmaceutical products approved
for use in the United States may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the
highest potential for abuse or dependence and Schedule V substances the lowest relative risk of abuse among such substances. Schedule
I and II drugs are subject to the strictest controls under the CSA, including manufacturing and procurement quotas, security requirements
and criteria for importation. In addition, dispensing of Schedule II drugs is further restricted. For example, they may not be
refilled without a new prescription.
While
Cannabis is a Schedule I controlled substance, products approved for medical use in the United States that contain Cannabis or
Cannabis extracts would likely be placed in Schedules II - V, depending on FDA’s scheduling recommendation. If and when
our product prospects receive FDA approval, the DEA will make a scheduling determination based on FDA’s scientific guidance
and place it in a schedule other than Schedule I in order for it to be prescribed to patients in the United States. If approved
by the FDA, we expect the finished dosage forms of our product prospects to be listed by the DEA as a Schedule II or III controlled
substance. Consequently, their manufacture, importation, exportation, domestic distribution, storage, sale and legitimate use
will be subject to a significant degree of regulation by the DEA. The scheduling process may take one or more years beyond FDA
approval, thereby significantly delaying the launch of our product prospects. Furthermore, if the FDA, DEA or any foreign regulatory
authority determines that product prospects may have potential for abuse, it may require us to generate more clinical data than
that which is currently anticipated, which could increase the cost and/or delay the launch of our product prospects.
We
expect that our product prospects will be scheduled as Schedule II or III, as a result of which we will also need to identify
wholesale distributors with the appropriate DEA registrations and authority to distribute the products to pharmacies and other
healthcare providers, and these distributors would need to obtain Schedule II or III distribution licenses. The failure to obtain,
or delay in obtaining, or the loss of any of those registrations could result in increased costs to us. If a product prospect
is a Schedule II drug, pharmacies would be required to, among other things, maintain enhanced security with alarms and monitoring
systems and they must adhere to recordkeeping and inventory requirements. This may discourage some pharmacies from carrying the
product. Furthermore, state and federal enforcement actions, regulatory requirements, and legislation intended to reduce prescription
drug abuse, such as the requirement that physicians consult a state prescription drug monitoring program, may make physicians
less willing to prescribe, and pharmacies to dispense, Schedule II products.
We
may manufacture the commercial supply of our product prospects outside of the United States. If a Product Prospect is approved
by the FDA and classified as a Schedule II or III substance, an importer can import for commercial purposes if it obtains from
the DEA an importer registration and files an application with the DEA for an import permit for each import. The DEA provides
annual assessments/estimates to the International Narcotics Control Board which guides the DEA in the amounts of controlled substances
that the DEA authorizes to be imported. The failure to identify an importer or obtain the necessary import authority, including
specific quantities, could affect the availability of a Product Prospect and have a material adverse effect on our business, results
of operations and financial condition. In addition, an application for a Schedule II importer registration must be published in
the Federal Register, and there is a waiting period for third party comments to be submitted.
Individual
states have also established controlled substance laws and regulations. Though state-controlled substance laws often mirror federal
law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states
automatically schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of such product. We, our potential future partners, and
future distributors would also need to obtain separate state registrations, permits or licenses in order to be able to obtain,
handle, and distribute controlled substances for clinical trials or commercial sale, and failure to meet applicable regulatory
requirements could lead to enforcement and sanctions by the states in addition to those from the DEA or otherwise arising under
federal law.
Our
ability to provide consulting services in the United States is dependent on additional states legalizing medical marijuana.
While
continuing with scientific investigations into medical effects and benefits of cannabis, we anticipate that it will begin generating
revenue through providing consulting services related to medical marijuana programs. As of the date of this filing, we have provided
consulting services to a medical marijuana program with locations in Hawaii and Pennsylvania, but has no other agreements, arrangements,
or understandings, either written or oral, to provide consulting services related to public or private medical marijuana programs.
We have little information on the potential market for or commercial viability of such consulting services or the entities that
would compete with us for provision of such services.
Continued
development of the medical marijuana market is dependent upon continued legislative authorization of marijuana at the state level
for medical purposes and, in certain states, including California, based on the specifics of the legislation passed in that state.
Any number of factors could slow or halt the progress. Furthermore, progress, while encouraging, is not assured, and the process
normally encounters set-backs before achieving success. While there may be ample public support for legislative proposals, key
support must be created in the legislative committee or a bill may never advance to a vote. Numerous factors impact the legislative
process. Any one of these factors could slow or halt the progress and adoption of marijuana for medical purposes, which would
limit the market for our services and products and negatively impact our business and revenues.
If
we choose to engage in research and development in the United States, controlled substance legislation may restrict or limit our
ability to research, manufacture and develop a commercial market for our products.
Clinical
research with cannabis involving human subjects is heavily regulated in the US and involves coordination with multiple federal
agencies, including the FDA, the DEA, and the National Institute on Drug Abuse (NIDA). All cannabis supplies for clinical research
must be obtained through the NIDA, which limits the amounts and strains of cannabis available for research. Although the DEA published
a notice in August 2016 that it would consider applications from independent cannabis growers to supply cannabis for clinical
research, the DEA has not yet approved any additional suppliers.
As
of the date of this filing, we do not have any ongoing research studies involving cannabis or any of the product prospects in
the US.
If
we choose to engage in research and development or consulting activities in Europe, controlled substance legislation may restrict
or limit our ability to provide consulting services or to research, manufacture and develop a commercial market for our products.
Approximately
250 substances, including cannabis, are listed in the Schedules annexed to the United Nations Single Convention on Narcotic Drugs
(New York, 1961, amended 1972), the Convention on Psychotropic Substances (Vienna, 1971) and the Convention against Illicit Traffic
in Narcotic Drugs and Psychotropic Substances (introducing control on precursors) (Vienna, 1988). The purpose of these listings
is to control and limit the use of these drugs according to a classification of their therapeutic value, risk of abuse and health
dangers, and to minimize the diversion of precursor chemicals to illegal drug manufacturers. The 1961 UN Single Convention on
Narcotic Drugs, as amended in 1972 classifies cannabis as Schedule I (“substances with addictive properties, presenting
a serious risk of abuse”) and as Schedule IV (“the most dangerous substances, already listed in Schedule I, which
are particularly harmful and of extremely limited medical or therapeutic value”) narcotic drug. The 1971 UN Convention on
Psychotropic Substances classifies THC - the principal psychoactive cannabinoid of cannabis - as schedule I psychotropic substance
(Substances presenting a high risk of abuse, posing a particularly, serious threat to public health which are of very little or
no therapeutic value). Most countries in Europe are parties to these conventions, which govern international trade and domestic
control of these substances, including cannabis. They may interpret and implement their obligations in a way that creates a legal
obstacle to our obtaining manufacturing and/or marketing approval for our products in those countries. These countries may not
be willing or able to amend or otherwise modify their laws and regulations to permit our products to be manufactured and/or marketed,
or achieving such amendments to the laws and regulations may take a prolonged period of time.
Changes
in legislation or regulation in the health care systems in the United States and foreign jurisdictions may affect us.
Our
ability to successfully commercialize our cannabis-based medical products and treatments may depend on how Israel, the US and
other respective governments and/or health administrations provide coverage and/or reimbursements for our cannabis-based product
prospects and treatments. The ongoing efforts of governments, insurance companies, and other participants in the health care services
industry to trim health care costs may adversely affect our ability to achieve profitability.
In
the US to date, the FDA has not approved a drug product based on botanical marijuana or a derivative or extract from botanical
marijuana. In addition, the US federal government has maintained strict prohibitions on the use, cultivation, distribution, sale,
and possession of marijuana and products derived from marijuana. While 29 states have enacted laws permitting medical use of marijuana
for qualified patients, states laws do not necessarily allow use of medical products derived from marijuana unless otherwise approved
by FDA for specific medical indications. If the laws, regulations, and enforcement policies at the federal and state level do
not change, we may not be able to market our products in the US without significant risk of enforcement action.
In
certain foreign markets, including major markets in the European Union, pricing of prescription pharmaceuticals is subject to
governmental control. Price negotiations with governmental authorities may range from 6 to 12 months or longer after the receipt
of regulatory marketing approval for a product. Our business could be detrimentally effected if reimbursements of our cannabis-based
products is unavailable or limited if pricing is set at unacceptable levels.
Changes
in consumer preferences and acceptance of cannabis-based medical products and treatments and any negative trends will adversely
affect our business.
We
are substantially dependent on continued market acceptance and proliferation of cannabis-based medical products and treatments.
We believe that as cannabis-based products and treatments become more widely accepted by the medical/scientific communities and
the public at large, the stigma associated with cannabis-based medical products and treatments will moderate and, as a result,
consumer demand will likely continue to grow. However, we cannot predict the future growth rate and size of the market, assuming
that the regulatory climate permits, of which there can be no assurance. Any negative outlook on cannabis-based medical products
will adversely affect our business prospects.
In
addition, we believe that large, well-funded pharmaceutical and other related businesses and industries may have a strong economic
reasons to be in strong opposition to cannabis-based medical products. We believe that the pharmaceutical industry may not easily
surrender control of any product, such as cannabis-based products, that could generate significant revenue. The pharmaceutical
industry is well-funded with a strong and experienced lobby presence at both the federal and state levels as well as internationally,
that surpasses financial resources of the current group of medical cannabis research and development companies. Any effort the
pharmaceutical lobby could or might undertake to halt or delay the newly developing medical cannabis industry could have a detrimental
impact on our business.
These
pressures could also limit or restrict the introduction and marketing of any such product. Adverse publicity from cannabis misuse
or adverse side effects from cannabis or other cannabinoid products may adversely affect the commercial success or marketability.
The nature of our business attracts and may be expected to continue to attract a high level of public and media interest and,
in the event of any related adverse publicity, we may not succeed in monetizing our products.
We
are entering a potentially highly competitive market.
Demand
for medical cannabis-based products is dependent on a number of social, political and economic factors that are beyond our control.
While we believe that demand for such medical products will continue to grow, there is no assurance that such increase in demand
will happen, that we will benefit from any demand increase or that our business, in fact, will ever become profitable.
The
emerging markets for cannabis-related medical research and development is and will likely remain both competitive and evolve into
becoming even more so. In particular, we face strong competition from larger and better funded companies that may be in the process
of offering similar products and treatments that we intend to offer. Many of our current and potential competitors have longer
operating histories, significantly greater financial, marketing and other resources than we may be expected to have for the foreseeable
future.
These
competitors may be able to react to market changes quicker, respond more rapidly to new regulations and/or allocate greater resources
to the development and promotion of their products than we can. Furthermore, some of these competitors may make acquisitions or
establish collaborative relationships among themselves or with third parties to increase their ability to rapidly gain market
share.
Given
the rapid changes affecting the cannabis-related medical research and development industry, we may not be able to create and maintain
a competitive advantage in the marketplace. Our success will depend on our ability to develop innovative cannabis-related products
and treatments working with our university and institutional partners that will be accepted, especially with ever-changing legal
and regulatory environment. Our success will depend on our ability to respond to, among other things, changes in the economy,
market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have
a material adverse effect on our financial condition, operating results, liquidity, cash flow and our operational performance.
Our
failure to comply with existing and potential future laws and regulations relating to drug development could harm our plan of
operations.
Our
business is, and will be, subject to wide-ranging, existing laws and regulations of the State of Israel, the U.S. (federal and
states), and other governments in each of the countries we may develop and market our product prospects. We must comply with as
many regulatory requirements as possible if we expect to be successful.
If
any of our cannabis-based product prospects and treatments is approved in the United States, it will be subject to ongoing regulatory
requirements including federal and state requirements. As a result, we and our collaborators and/or joint venture partners must
continue to expend time, money and effort in all areas of regulatory compliance, including, if applicable, manufacturing, production,
quality control and assurance and, of upmost importance, clinical trials. To date, the FDA has not approved cannabis as a safe
and effective drug for any indication and has not approved a drug based on botanical cannabis or a derivative or extract from
botanical cannabis. We cannot predict how FDA would regulate such a drug or what restrictions would apply once approved. It is
very likely that the DEA would add any such drug product to a controlled substance schedule which carries significant restrictions.
We will also be required to report certain adverse reactions and production problems, if any and applicable, to the FDA, and to
comply with advertising and promotion requirements for our cannabis-based product prospects and treatments.
Any
failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to conduct clinical
trials, which are prerequisite to our ability to commercialize our cannabis-based medical products and related treatments. If
regulatory sanctions are applied or if regulatory approval, once obtained, is for any reason withdrawn, the value of our business
and our operating results could be materially adversely affected.
State
and municipal governments in which we provide consulting services or seek to provide consulting services may have, or may adopt
laws that adversely affect our ability to do business.
While
the federal government has the right to regulate and criminalize marijuana, which it has in fact done, state and municipal governments
may adopt additional laws and regulations that further criminalize or negatively affect marijuana businesses. States that currently
have laws that decriminalize or legalize certain aspects of marijuana, such as medical marijuana, could in the future, reverse
course and adopt new laws that further criminalize or negatively affect marijuana businesses. Additionally, municipal governments
in these states may have laws that adversely affect marijuana businesses, even though there are no such laws at the state level.
For example, municipal governments may have zoning laws that restrict where marijuana operations can be located and the manner
and size of which they can expand and operate. These municipal laws, like the federal laws, may adversely affect our ability to
do business, and adverse enforcement actions under these laws may lead to costly litigation and a closure of the businesses with
which we have contracts or royalty-fee structures in place, in turn, affecting our own business. Moreover, if additional states
do not adopt laws that legalize certain aspects of the marijuana industry, we may not be able to expand our business in the manner
in which we prefer.
Also,
given the complexity and rapid change of the federal, state and local laws pertaining to marijuana, we may incur substantial legal
costs associated with complying with these laws and in acquiring the necessary state and local licenses required by our business
endeavors. For example, some states permit entities to enter into joint venture relationships with individual license holders
that provide for revenue sharing arrangements. In other states, revenue sharing is not permitted, and we will accept fee-for-service
arrangement on a cost-plus basis for our services. State and municipal governments may also limit the number of specialized licenses
available or apply stringent compliance requirements necessary to maintain the license. These developments may limit our ability
to expand our negatively affect our business model.
The
businesses for which we plan to provide consulting services may have difficulty accessing the services of banks in the United
States, which may make it difficult for them to purchase our products and services.
As
discussed above, the use of marijuana is illegal under federal law. Therefore, there is a strong argument that banks cannot accept
for deposit funds from the drug trade and therefore cannot do business with our clients that operate medical marijuana programs.
On February 14, 2014, the U.S. Department of the Treasury, FinCEN released guidance to banks “clarifying Bank Secrecy Act
(“BSA”) expectations for financial institutions seeking to provide services to marijuana-related businesses.”
In addition, U.S. Rep. Jared Polis (D-CO) has stated he will seek an amendment to banking regulations and laws in order to allow
banks to transact business with state-authorized medical marijuana treatment programs. While these are positive developments,
there can be no assurance this legislation will be successful, or that, even with the FinCEN guidance, banks will decide to do
business with medical marijuana retailers, or that, in the absence of actual legislation, state and federal banking regulators
will not strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal
law. The inability of potential clients in our target markets to open accounts and otherwise use the services of banks may make
it difficult for such potential clients to purchase our products and services and could materially harm our business.
Risks
Related to Our Dependence on Third Parties
We
depend substantially on collaboration with our research and development partners.
We
do not have in-house research facilities and, as a consequence, we must rely on collaboration agreements with industry partners,
as well as leading academic medical centers, in order to develop, research, produce and commercialize our novel cannabinoid-based
therapies targeting a variety of different indications and effectively help patients in need.
Dr.
Yehuda Baruch, our
Chief Medical and Regulatory Affairs Officer
and our Director of Research
and Regulatory Affairs, who is highly qualified by both training and experience, is monitoring the progress of the investigation
and research of our medical cannabis development. We are also dependent upon
Dr. Oron Yacoby Zeevi,
our newly-appointed Chief Scientific Officer, who has more than 20 years of extensive scientific experience with both private
and publicly listed companies in the biopharmaceutical industry.
In addition, Alon Sinai, our Chief Operating Officer,
serves as our key liaison with our collaboration partners at the major Israeli hospitals and medical centers.
To
date, we have signed three research collaboration and license agreements with Sheba. Sheba is a university-affiliated hospital
that serves as one of Israel’s national medical centers and is one of the leading integrated medical centers in the Middle
East. Within the framework of the agreements with Sheba, we will initiate two studies at the Sheba facilities to explore the effect
of three formulations, all based on active ingredients in the cannabis extracts, on multiple myeloma and psoriasis.
On
April 5, 2017, we announced that as a result of the promising preliminary results from the preclinical efficacy testing of its
cannabinoid-based topical cream for treating psoriasis, reporting significant reduction of several inflammation markers specific
to psoriasis, we have received expressions of scientific and medical interest, world-wide, for its cannabinoid-based topical cream
for treating psoriasis. We have expanded the size and scope of its clinical studies and, as previously announced, anticipates
that subject to pending regulatory approvals from applicable jurisdictions, the topical cream should be available for use by those
who suffer from psoriasis in the near term. The study had been done by the Dead Sea Labs.
In
August 6, 2015, we signed a nonbinding Memorandum of Understanding with Emilia, for the development, manufacture and marketing
of a cannabinoid-based topical cream to treat psoriasis. We entered into a binding agreement with Emilia Cosmetics, which set
forth all terms, in the fourth fiscal quarter of 2016. We completed the development process in the fourth fiscal quarter of 2016
and then initiated a phase I Study at the Sheba facilities to explore the efficacy of the topical cream on psoriasis. However,
we do not know if our expectations with respect to the development process will be fulfilled in a timely manner, if at all, or
if the costs of development will exceed our anticipation.
While
we retain full ownership of our intellectual property, or other proprietary rights and trade secrets that were conceived prior
to entry into the agreements with Sheba, our psoriasis- and fibromyalgia-related research agreements with Sheba provide that all
intellectual property and other rights that are conceived during the collaboration will be jointly owned by Sheba and us.
Collaboration
agreements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and
commercialize cannabis-based medical products.
We
may also enter into collaboration agreements with pharmaceutical companies and/or biotechnology institutions for the development
or commercialization of our cannabis-based medical product prospects and treatments, which agreements may contain provisions based
upon, among other things, the merits of retaining certain rights. We will face significant competition in seeking appropriate
collaborators and in negotiating agreements at acceptable terms, if at all. We may not be successful in our efforts to enter,
implement and maintain collaboration agreements. Disagreements stemming from collaboration agreements concerning development,
intellectual property, regulatory or commercialization matters can lead to delays and, in some cases, termination of our collaboration
agreements or otherwise result in the potentially significant costs and fees in seeking to enforce or protect our rights, if any.
Any such disagreements can be difficult if, in fact, neither of the parties has final decision making authority. The resulting
outcome of any disputes and/or disagreements would in all likelihood adversely affect our business.
Data
provided by collaborators and others upon which we rely that has not been independently verified could turn out to be false, misleading,
or incomplete.
We
rely on third-party vendors, scientists, and collaborators to provide us with significant data and other information related to
our projects, clinical trials, and our business. If such third parties provide inaccurate, misleading, or incomplete data, our
business, prospects, and results of operations could be materially adversely affected.
We
depend on a limited number of suppliers for materials and components required to manufacture our product prospects. The loss of
these suppliers, or their failure to supply us on a timely basis, could cause delays in our current and future capacity and adversely
affect our business.
We
depend on a limited number of suppliers for the materials and components required to manufacture our product prospects. As a result,
we may not be able to obtain sufficient quantities of critical materials and components in the future. A delay or interruption
by our suppliers may also harm our business, results of operations and financial condition.
In
addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in
meeting demand in the event we must switch to a new supplier. The time and effort to qualify for and, in some cases, obtain regulatory
approval for a new supplier could result in additional costs, diversion of resources or reduced manufacturing yields, any of which
would negatively impact our operating results. Our dependence on single-source suppliers exposes us to numerous risks, including
the following: our suppliers may cease or reduce production or deliveries, raise prices or renegotiate terms; our suppliers may
become insolvent or cease trading; we may be unable to locate a suitable replacement supplier on acceptable terms or on a timely
basis, or at all; and delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to
our competitors for future needs.
We
rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize
our product candidates.
We
rely on contract research organizations (“CROs”), clinical data management organizations and consultants to design,
conduct, supervise and monitor our preclinical studies and clinical trials. We and our CROs are required to comply with various
regulations, including Good Clinical Practice (“GCP”) requirements, which are enforced by regulatory agencies, including
the FDA, and guidelines of the Competent Authorities of Member States of the EEA and comparable foreign 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. Regulatory authorities ensure compliance with these requirements through periodic inspections of trial
sponsors, principal investigators and trial sites. Our reliance on third parties that we do not control does not relieve us of
these responsibilities and requirements. If we or any of our CROs fail to comply with applicable requirements, the clinical data
generated in our clinical trials may be deemed unreliable and the FDA, the European Commission or other comparable foreign regulatory
authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure
you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials
comply with such requirements. In addition, our clinical trials must be conducted with products produced under current Good Manufacturing
Practices (“cGMP”) requirements, which mandate, among other things, the methods, facilities and controls used in manufacturing,
processing and packaging of a drug product to ensure its safety and identity. Failure to comply with these regulations may require
us to repeat preclinical studies and clinical trials, which would delay the regulatory approval process.
Our
CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether
or not they devote sufficient time and resources to our ongoing clinical and preclinical programs. If CROs do not successfully
carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the clinical data
they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons,
our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully
commercialize our product candidates. As a result, our operations and the commercial prospects for our product candidates would
be harmed, our costs could increase and our ability to generate revenue could be delayed or reduced. In addition, operations of
our CROs could be affected by earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes,
typhoons, fires, extreme weather conditions, medical epidemics, terror attacks and other natural or man-made disasters or business
interruptions. If their facilities are unable to operate because of an accident or incident, even for a short period of time,
some or all of our research and development programs may be harmed or delayed and our operations and financial condition could
suffer.
Because
we have relied on third parties, our internal capacity to perform these functions is 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-party service providers requires us to disclose our proprietary information to these parties,
which could increase the risk that this information will be misappropriated. We currently have a small number of employees, which
limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable
to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely
affected. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar
challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business,
financial condition and prospects.
We
rely on third-party manufacturers to produce preclinical and clinical supplies, and intend to rely on third-party manufacturers
for commercial supplies, of our approved product prospects, if approved.
We
rely on third parties to manufacture our product prospects. We do not own manufacturing facilities. Any replacement of our manufacturers
could require significant effort and expertise because there may be a limited number of qualified manufacturers.
The
manufacturing process for our product prospects is subject to review by the FDA, EMA, DEA and other foreign regulatory authorities.
Manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required
by regulatory authorities in order to comply with regulatory standards such as cGMP. In addition, our manufacturers must ensure
consistency among batches, including preclinical, clinical and, if approved, marketing batches. Demonstrating such consistency
may require typical manufacturing controls as well as clinical data. Our manufacturers must also ensure that our batches conform
to complex release specifications. Further, manufacturers of controlled substances must obtain and maintain necessary DEA and
state registrations and registrations with applicable foreign regulatory authorities, and must establish and maintain processes
to ensure compliance with DEA and state requirements and requirements of applicable foreign regulatory authorities governing,
among other things, the storage, handling, security, recordkeeping and reporting for controlled substances. In the event that
any of our manufacturers fails to comply with such requirements or to perform its obligations to us in relation to quality, timing
or otherwise, or if their operations become limited or interrupted for other reasons, we may be forced to manufacture the materials
ourselves, for which we currently do not have the capabilities or resources, or enter into an agreement with another third party,
which we may not be able to do on reasonable terms, if at all. In some cases, the technical skills or technology required to manufacture
our product prospects may be unique or proprietary to the original manufacturer and we may have difficulty, or there may be contractual
restrictions prohibiting us from, transferring such skills or technology to another third party and a feasible alternative may
not exist. These factors would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer
in order to have another third party manufacture our product candidates. If we are required to change manufacturers for any reason,
we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards
and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively
affect our ability to develop product prospects in a timely manner or within budget.
We
expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product prospect. To the extent
that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties
to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related
to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product prospects, or to
do so on commercially reasonable terms, we may not be able to develop and commercialize our product prospects successfully. Our
or a third party’s failure to execute on our manufacturing requirements could adversely affect our business in a number
of ways, including:
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an
inability to initiate or continue preclinical studies or clinical trials of product prospects under development;
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delay
in submitting regulatory applications, or receiving regulatory approvals, for product prospects;
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loss
of the cooperation of a collaborator;
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subjecting
our product prospects to additional inspections by regulatory authorities; and
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in
the event of approval to market and commercialize a product prospect, the withdrawal of such approval and/or an inability
to meet commercial demands for our products.
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In
addition, our ability to obtain materials from these manufacturers could be disrupted if the operations of these manufacturers
are affected by earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires,
extreme weather conditions, medical epidemics, terror attacks and other natural or man-made disasters or business interruptions.
If their facilities are unable to operate because of an accident or incident, even for a short period of time, some or all of
our research and development programs may be harmed or delayed and our operations and financial condition could suffer. Our third-party
manufacturers also may use hazardous materials, including chemicals and compounds that could be dangerous to human health and
safety or the environment, and their operations may also produce hazardous waste products. In the event of contamination or injury,
our third-party manufacturers could be held liable for damages or be penalized with fines in an amount exceeding their resources,
which could result in our clinical trials or regulatory approvals being delayed or suspended.
If
we are unable to develop sales, marketing and distribution capabilities or enter into agreements with third parties to perform
these functions on acceptable terms, we may be unable to generate revenue.
We
do not currently have any sales, marketing or distribution capabilities. If any of our Cannabis-Based Medical Products prospects
are approved, we will need to develop internal sales, marketing and distribution capabilities to commercialize such products,
which would be expensive and time-consuming, or enter into collaborations with third parties to perform these services. If we
decide to market our products directly, we will need to commit significant financial and managerial resources to develop a marketing
and sales force with technical expertise and supporting distribution, administration and compliance capabilities. If we rely on
third parties with such capabilities to market our products or decide to co-promote products with collaborators, we will need
to establish and maintain marketing and distribution arrangements with third parties, and there can be no assurance that we will
be able to enter into such arrangements on acceptable terms or at all. In entering into third-party marketing or distribution
arrangements, any revenue we receive will depend upon the efforts of the third parties and there can be no assurance that such
third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance of any
approved product. If we are not successful in commercializing any product approved in the future, either on our own or through
third parties, our business, financial condition and results of operations could be materially adversely affected.
Risks
Related to Intellectual Property
If
we fail to protect our intellectual property rights, our ability to pursue the development of our technologies and products would
be negatively affected.
Our
success will depend in part on our ability to protect our intellectual property. This is done, in part, by obtaining patents and
trademarks and then maintaining adequate protection of our technologies, tradenames and products. If we do not adequately protect
our intellectual property, competitors may be able to use our technologies to produce and market products in direct competition
with us and erode our competitive advantage. Some foreign countries lack rules and methods for defending intellectual property
rights and do not protect proprietary rights to the same extent as the United States. Many companies have had difficulty protecting
their proprietary rights in these foreign countries. We may not be able to prevent misappropriation of our proprietary rights.
We
are currently seeking patent protection for several processes and products prospects. However, the patent process is subject to
numerous risks and uncertainties, and there can be no assurance that we will be successful in protecting our product prospects
by obtaining and defending patents. These risks and uncertainties include the following:
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patents
that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive
advantage;
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our
competitors, many of which have substantially greater resources than us and many of which have made significant investments
in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our
ability to make, use, and sell our products and product candidates either in the United States or in international markets;
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there
may be significant pressure on the United States government and other international governmental bodies to limit the scope
of patent protection both inside and outside the United States for treatments that prove successful as a matter of public
policy regarding worldwide health concerns;
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countries
other than the United States may have less restrictive patent laws than those upheld by United States courts, allowing foreign
competitors the ability to exploit these laws to create, develop, and market competing products.
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Any
patents issued to us may not provide us with meaningful protection, and third parties may challenge, circumvent or narrow them.
Third parties may also independently develop products similar to our products or product candidates, duplicate our unpatented
product or product candidates, and design around any patents on product candidates we may develop.
Additionally,
extensive time is required for development, testing and regulatory review of product candidates. While extension of a patent term
due to regulatory delays may be available, it is possible that before any of our product candidates can be commercialized, any
related patent, even with an extension, may expire or remain in force for only a short period following commercialization, thereby
reducing any advantages of the patent.
In
addition, the USPTO, and patent offices in other jurisdictions have often required that patent applications concerning biotechnology-related
inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application,
thereby limiting the scope of protection against competitive challenges. Thus, even if we or our licensors are able to obtain
patents, the patents may be substantially narrower than anticipated.
In
addition to patents, we rely on a combination of trade secrets, confidentiality, nondisclosure and other contractual provisions,
and security measures to protect our confidential and proprietary information. These measures may not adequately protect our trade
secrets or other proprietary information. If they do not adequately protect our rights, third parties could use our technology,
and we could lose any competitive advantage we may have. In addition, others may independently develop similar proprietary information
or techniques or otherwise gain access to our trade secrets, which could impair any competitive advantage we may have.
Costly
litigation may be necessary to protect our intellectual property rights and we may be subject to claims alleging the violation
of the intellectual property rights of others.
We
may face significant expense and liability as a result of litigation or other proceedings relating to patents and other intellectual
property rights of others. In the event that another party has also filed a patent application or been issued a patent relating
to an invention or technology claimed by us in pending applications, we may be required to participate in an interference proceeding
declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs for us, even
if the eventual outcome were favorable to us. We, or our licensors, also could be required to participate in interference proceedings
involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require
us to cease using the technology or to license rights from prevailing third parties.
The
cost to us of any patent litigation or other proceeding relating to our licensed patents or patent applications, even if resolved
in our favor, could be substantial. Our ability to enforce our patent protection could be limited by our financial resources,
and may be subject to lengthy delays.
A
third party may claim that we are using inventions claimed by their patents and may go to court to stop us from engaging in our
normal operations and activities, such as research, development and the sale of any future products. Such claims, whether or not
meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions,
temporary restraining orders and/or require the payment of damages. There is a risk that the court will decide that we are infringing
the third party’s patents and will order us to stop the activities claimed by the patents, redesign our products or processes
to avoid infringement or obtain licenses (which may not be available on commercially reasonable terms). In addition, there is
a risk that a court will order us to pay the other party damages for having infringed their patents.
Moreover,
there is no guarantee that any prevailing patent owner would offer us a license so that we could continue to engage in activities
claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In
addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to
our product candidates, technologies or other matters.
We
rely on confidentiality agreements that could be breached and may be difficult to enforce, which could result in third parties
using our intellectual property, trade secrets and/or proprietary information to compete against us.
Although
we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the
non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and
assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we
employ them, the agreements can be difficult and costly to enforce. Although we seek to obtain these types of agreements from
our contractors, consultants, advisors and research collaborators, to the extent that employees and consultants utilize or independently
develop intellectual property in connection with any of our projects, disputes may arise as to the intellectual property rights
associated with our products. If a dispute arises, a court may determine that the right belongs to a third party. In addition,
enforcement of our rights can be costly and unpredictable.
We
also rely on trade secrets to protect our proprietary know-how and technologies, especially where we do not believe patent protection
is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with
our current and former employees, consultants, outside scientific collaborators, sponsored researchers, contract manufacturers,
vendors and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively
prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure
of confidential information. In addition, we cannot guarantee that we have executed these agreements with each party that may
have or have had access to our trade secrets. Any party with whom we or they have executed such an agreement may breach that agreement
and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for
such breaches.
Enforcing
a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the
outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect
trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have
no right to prevent them, or those to whom they disclose such trade secrets, from using that technology or information to compete
with us. If any of our trade secrets or proprietary information were to be disclosed to or independently developed by a competitor
or other third-party, our competitive position would be harmed.
We
may desire to, or be forced to, seek additional licenses to use intellectual property owned by third parties, and such licenses
may not be available on commercially reasonable terms or at all.
Third
parties may also hold intellectual property, including patent rights that are important or necessary to the development of our
drug candidates, in which case we would need to obtain a license from that third party or develop a different formulation of the
product that does not infringe upon the applicable intellectual property, which may not be possible. Additionally, we may identify
drug candidates that we believe are promising and whose development and other intellectual property rights are held by third parties.
In such a case, we may desire to seek a license to pursue the development of those drug candidates. Any license that we may desire
to obtain or that we may be forced to pursue may not be available when needed on commercially reasonable terms or at all. Any
inability to secure a license that we need or desire could have a material adverse effect on our business, financial condition
and prospects.
Risks
Related to Management and Personnel
If
we are unable to hire and retain key personnel, we may not be able to implement our business plan and our business may fail.
Our
future success depends, to a significant extent, on our ability to attract, train and retain capable scientists and physicians,
enter into collaboration agreements for our research and managerial personnel. Recruiting and retaining capable personnel, particularly
those with expertise with medical research, is vital to our success. If we are unable to attract and retain qualified employees,
our business may fail and our investors could lose their entire investment.
At
present, we believe to have the necessary key personal to carry out our business plans but there can be no assurance that our
beliefs prove unfounded. If we are unable to hire and retain key personnel, our business will be materially adversely affected.
Our
future success is dependent, in part, on the performance and continued service of Dr. Yehuda Baruch, our Chief Medical and Regulatory
Affairs Officer and Alon Sinai, our Chief Operating Officer.
We
are dependent to a great deal on Dr. Yehuda Baruch, our Chief Medical and Regulatory Affairs Officer, to conduct and oversee our
clinical studies. Dr. Baruch is expected to handle all aspects of our medical and research related to developing our product prospects
and regulatory affairs. We are also dependent on the services of Alon Sinai, our Chief Operating Officer, in negotiating and serving
as our liaison with our collaboration partners at major Israeli medical centers. The loss of Dr. Baruch’s services and those
of Mr. Sinai could have a material adverse effect on our operations and prospects. At this time, we do not currently have “key
man” life insurance for Dr. Baruch, Dr. Yacobi-Zeevi or Mr. Sinai.
Our
employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements,
which could subject us to significant liability and harm our reputation.
We
are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply
with FDA regulations, provide accurate information to the FDA, comply with applicable manufacturing standards, comply with other
federal and state laws and regulations, report information or data accurately or disclose unauthorized activities to us. Employee
misconduct could also involve the improper use of information, including information obtained in the course of clinical trials,
or illegal appropriation of drug product, which could result in government investigations and serious harm to our reputation.
We have not yet adopted a code of business conduct and ethics and it is not always possible to identify and deter employee misconduct.
The precautions we take to detect and prevent these prohibited activities may not be effective in controlling unknown or unmanaged
risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be
in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of
significant fines or other sanctions.
Risks
Related to Operating in Israel
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could
result in litigation and adversely affect our business.
A
significant portion of our intellectual property has been developed by our Israeli employees in the course of their employment
for us. Under the Israeli Patent Law, 5727-1967 (the “Israeli Patent Law”), inventions conceived of by an employee
during the term and as part of the scope of his or her employment with a company are regarded as “service inventions,”
which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention
rights. The Israeli Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli
Compensation and Royalties Committee (the “C&R Committee”), a body constituted under the Israeli Patent Law, shall
determine whether the employee is entitled to remuneration for his or her inventions. The C&R Committee (decisions of which
have been upheld by the Israeli Supreme Court) has held that employees may be entitled to remuneration for their service inventions
despite having specifically waived any such rights. Further, the C&R Committee has not yet set specific guidelines regarding
the method for calculating this remuneration or the criteria or circumstances under which an employee’s waiver of his or
her right to remuneration will be disregarded. We generally enter into intellectual property assignment agreements with our employees
pursuant to which such employees assign to us all rights to any inventions created in the scope of their employment or engagement
with us. Although our employees have agreed to assign to us service invention rights and have specifically waived their right
to receive any special remuneration for such assignment beyond their regular salary and benefits, we may face claims demanding
remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional
remuneration or royalties to our current or former employees, or be forced to litigate such claims, which could negatively affect
our business.
It
may be difficult for investors in the United States to enforce any judgments obtained against us or some of our directors or officers.
The
majority of our assets are located outside the United States. In addition, certain of our officers are nationals or residents
of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside
the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against
us or any of our non-U.S. officers, including judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. It may also be difficult to assert claims under United States securities law in actions
originally instituted outside of the United States. Moreover, Israeli courts may refuse to hear a United States securities law
claim because Israeli courts may not be the most appropriate forums in which to bring such a claim. Even if an Israeli court agrees
to hear a claim, it may determine that Israeli law, and not U.S. law, is applicable to the claim. Further, if U.S. law is found
to be applicable, certain content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process,
and certain matters of procedure would still be governed by Israeli law. Consequently, our investors may be effectively prevented
from pursuing remedies under U.S. federal and state securities laws against us or any of our non-U.S. directors or officers.
If
there are significant shifts in the political, economic and military conditions in Israel and its neighbors, it could have a material
adverse effect on our business relationships and profitability.
All
of our research facilities and certain of our key personnel are located in Israel. Our business is directly affected by the political,
economic and military conditions in Israel and its neighbors. Since the establishment of the State of Israel in 1948, a number
of armed conflicts have occurred between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity,
has caused security and economic problems in Israel. Although Israel has entered into peace treaties with Egypt and Jordan, and
various agreements with the Palestinian Authority, there has been a marked increase in violence, civil unrest and hostility, including
armed clashes, between the State of Israel and the Palestinians since September 2000. The establishment in 2006 of a government
in the Gaza Strip by representatives of the Hamas militant group has created heightened unrest and uncertainty in the region.
In mid-2006, Israel engaged in an armed conflict with Hezbollah, a Shiite Islamist militia group based in Lebanon, and in June
2007, there was an escalation in violence in the Gaza Strip. From December 2008 through January 2009 and again in November and
December 2012, Israel engaged in an armed conflict with Hamas, which involved missile strikes against civilian targets in various
parts of Israel and negatively affected business conditions in Israel. In July 2014, Israel launched an additional operation against
Hamas operatives in the Gaza strip in response to Palestinian groups launching rockets at Israel. Recent political uprisings and
social unrest in Syria are affecting its political stability, which has led to the deterioration of the political relationship
between Syria and Israel and have raised new concerns regarding security in the region and the potential for armed conflict. Similar
civil unrest and political turbulence is currently ongoing in many countries in the region. The continued political instability
and hostilities between Israel and its neighbors and any future armed conflict, terrorist activity or political instability in
the region could adversely affect our operations in Israel and adversely affect the market price of our shares of Common Stock.
In addition, several countries restrict doing business with Israel and Israeli companies have been and are today subjected to
economic boycotts. The interruption or curtailment of trade between Israel and its present trading partners could adversely affect
our business, financial condition and results of operations.
Risks
Related to Our Common Stock
There
can be no assurance of a liquid public trading market for our Common Stock or whether investors will be able to readily be able
to sell their shares of Common Stock.
At
present, our Common Stock is subject to quotation on the OTCQB market under the symbol “OWCP”. There is only a limited,
liquid public trading market for our Common Stock and there can be no assurance that a more liquid market will ever develop or
be sustained. Market liquidity will depend on the perception of our business and any steps that our management might take to bring
public awareness of our business to the investing public within the parameters of the federal securities laws. There can be given
no assurance that there will be any awareness generated or sustained. Consequently, investors may not be able to liquidate their
investment or liquidate it at a price paid by investors equal to or greater than their initial investment in our Common Stock.
As a result, holders of our Common Stock may not find purchasers for their shares should they to decide to sell the Common Stock
held by them at any particular time if ever. Consequently, our Common Stock should be purchased only by investors who have no
immediate need for liquidity in their investment and who can hold our Common Stock, possibly for a prolonged period of time.
Our
shares of Common Stock are thinly traded, so stockholders may be unable to sell at or near ask prices or at all if they need to
sell shares to raise money or otherwise desire to liquidate their shares.
Our
Common Stock is “thinly-traded,” meaning that the number of persons interested in purchasing our Common Stock at or
near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors,
including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors
and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several
days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We
cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop
or be sustained, or that current trading levels will be sustained.
In
the event an active trading market develops for our Common Stock, the market price may, from time-to-time, be volatile.
In
the event an active trading market develops for our Common Stock, the market price of our Common Stock may be highly volatile,
as is the market for securities subject to quotation on OTC Markets in particular. Some of the factors that may materially affect
the market price of our Common Stock are beyond our control, such as changes in conditions or trends in the industry in which
we operate, general market and economic conditions in the United States and world-wide as well as the number of our shares of
Common Stock being purchased and sold at any particular time. These factors may materially adversely affect the market price of
our Common Stock, regardless of our historic business performance or future prospects. In addition, the public stock markets have
experienced and may be expected to experience extreme price and trading volume volatility. This volatility has significantly affected
the market prices of securities of many companies for reasons frequently unrelated to their operating performance. These market
fluctuations may adversely affect the market price of our Common Stock.
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 Securities Act, could adversely affect the market price of our Common Stock. As of December 31, 2017, we
had 147,758,908 shares of Common Stock outstanding, of which 15,744,246 shares of Common Stock are restricted and are subject
to the resale provisions of Rule 144 and Regulations D and S under the united States federal securities laws and the rules and
regulations promulgated by the SEC thereunder. As restrictions on resale of other shares of Common Stock expire, pursuant to the
provisions of Rule 144 or otherwise, the market price could drop significantly if the holders of these restricted shares sell
them or are perceived by the market as intending to sell them at any given date or over any particular period of time. When restrictions
on resale lapse, and if holders of previously restricted securities sell a large number of shares pursuant to Rule 144 under the
Securities Act, they could adversely affect the market price for our Common Stock, which such adverse affect could be sustained
and over which we have no control.
You
will experience dilution of your ownership interest because of the future issuance of additional shares of our Common Stock or
our preferred stock.
In
the future, we may issue our authorized but previously unissued equity securities, including shares of our Common Stock, resulting
in the dilution of the ownership interests of our present shareholders. We are authorized to issue an aggregate of 500,000,000
shares of Common Stock, par value $0.00001 per share and 20,000,000 shares of preferred stock, par value $0.00001 (the “Preferred
Stock”), of which 147,758,908 shares are outstanding at April 16, 2018. In addition, current holders of our Common
Stock will experience dilution in their equity ownership from the exercise of outstanding Common Stock purchase warrants and stock
options granted under our 2016 Employees Stock Option Plan (the “2016 ESOP”).
We
may also issue additional shares of our Common Stock, warrants or other securities that are convertible into or exercisable for
the purchase of shares of our Common Stock in connection with hiring and/or retaining employees or consultants, future acquisitions,
future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional
shares of our Common Stock or other securities, for any reason including those stated above, may have a negative impact on the
market price of our Common Stock. There can be no assurance that the issuance of any additional shares of Common Stock, warrants
or other convertible securities may not be at a price (or exercise prices) below the then prevailing price at which shares of
our Common Stock will be quoted on the OTCQB Market.
We
may never pay any dividends to our shareholders and capital appreciation, if any, of our Common Stock may be your sole source
of gain on your investment.
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, capital appreciation, if any, of our Common Stock may be your sole source
of gain on your investment for the foreseeable future.
Insiders
own a significant percentage of the shares of our Common Stock, which may limit your ability to influence corporate matters.
Our
directors and executive officers and present shareholders holding more than 5% of our Common Stock beneficially own a signficiant
percentage of our Common Stock on a fully diluted basis. Accordingly, if these shareholders were to choose to act together, they
could have a significant influence over all matters requiring shareholder approval, including the election of directors and approval
of significant corporate transactions, such as a merger or other sale of our Company or all or a significant percentage of our
assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying
or preventing a third party from acquiring control over us.
Security
Ownership of Certain Beneficial Owners and Management.
We
cannot assure you that the interests of our management and affiliated persons will coincide with the interests of the investors.
So long as our management and affiliated persons collectively controls a significant portion of our Common Stock, these individuals
and/or entities controlled by them, will continue to collectively be able to strongly influence or effectively control our decisions.
We
have broad discretion in how we use our cash, cash equivalents and marketable securities, including the net proceeds from our
collaborations, public and private securities offerings, and may not use these financial resources effectively, which could affect
our results of operations and cause our stock price to decline.
Our
management has considerable discretion in the application of our cash, cash equivalents and marketable securities, including the
fees and milestone payments from our collaborations and the net proceeds of our securities offerings. We intend to use the cash,
cash equivalents and marketable securities to advance our product prospects and for working capital and other general corporate
purposes, which may include the hiring of additional personnel and capital expenditures. As a result, investors will be relying
upon management’s judgment with only limited information about our specific intentions for the use of the cash, cash equivalents
and marketable securities. We may use the cash, cash equivalents and marketable securities for purposes that do not yield a significant
return or any return at all for our stockholders. In addition, pending their use, we may invest the financial resources from our
collaborations and securities offerings in a manner that does not produce income or that loses value.
Anti-takeover
provisions of the Delaware General Corporation Law may discourage or prevent a change of control, even if an acquisition would
be beneficial to our shareholders, which could reduce our stock price.
We
are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations
with shareholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate
of incorporation, amended and restated bylaws and Delaware law could make it more difficult for shareholders or potential acquirers
to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including
a merger, tender offer or proxy contest involving our Company. Any delay or prevention of a change of control transaction or changes
in our board of directors could cause the market price of our Common Stock to decline.
State
Blue Sky registration and potential limitations on resale of our Common Stock.
The
holders of our shares of Common Stock and those persons who desire to purchase our Common Stock in any trading market that might
develop, should be aware that there may be state blue-sky law restrictions upon the ability of investors to resell our securities.
Accordingly, investors should consider the secondary market for our securities to be a limited one.
It
is the present intention of management after the active commencement of operations of our clinical cannabis research and development
to seek coverage and publication of information regarding the Company in an accepted publication manual, which permits a manual
exemption. The manual exemption permits a security to be distributed in a particular state without being registered if the company
issuing the security has a listing for that security in a securities manual recognized by the state.
However,
it is not enough for the security to be listed in a recognized manual. The listing entry must contain (1) the names of issuer’s
officers, and directors, (2) an issuer’s balance sheet, and (3) a profit and loss statement for either the fiscal year preceding
the balance sheet or for the most recent fiscal year of operations. Furthermore, the manual exemption is a non-issuer exemption
restricted to secondary trading transactions, making it unavailable for issuers selling newly issued securities.
Most
of the accepted manuals are those published in Standard and Poor’s, Moody’s Investor Service, Fitch’s Investment
Service, and Best’s Insurance Reports, and many states expressly recognize these manuals. A smaller number of states declare
that they “recognize securities manuals” but do not specify the recognized manuals. The following states do not have
any provisions and therefore do not expressly recognize the manual exemption: Alabama, Georgia, Illinois, Kentucky, Louisiana,
Montana, South Dakota, Tennessee, Vermont and Wisconsin.
Despite
our efforts and intentions, we may not be successful in obtaining coverage and publication of information regarding the Company
in an accepted publication manual, thereby failing to obtain a manual exemption for our Common Stock.
Our
Common Stock is considered a Penny Stock, which may be subject to restrictions on marketability, so you may not be able to sell
your shares.
We
may be subject now and in the future to the penny stock rules if our shares of Common Stock sell below $5.00 per share. Penny
stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver
a standardized risk disclosure document prepared by the SEC which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson, and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information must be given to the customer orally or in writing prior to completing the transaction and must be given
to the customer in writing before or with the customer’s confirmation.
In
addition, the penny stock rules require that prior to a transaction, the broker dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
The penny stock rules are burdensome and may reduce purchases of any Offerings and reduce the trading activity for shares of our
Common Stock. As long as our shares of Common Stock are subject to the penny stock rules, the holders of such shares of Common
Stock may find it more difficult to sell their securities.
Reporting
requirements under the Exchange Act and compliance with the Sarbanes-Oxley Act of 2002, including establishing and maintaining
acceptable internal controls over financial reporting, are costly and may increase substantially.
The
rules and regulations of the SEC require a public company to prepare and file periodic reports under the Exchange Act, which will
require that the company engage legal, accounting, auditing and other professional service providers. The engagement of such services
is costly and continuing. Additionally, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among
other things, that we design, implement and maintain adequate internal controls and procedures over financial reporting. The costs
of complying with the Sarbanes-Oxley Act and the limited technically qualified personnel we have may make it difficult for us
to design, implement and maintain adequate internal controls over financial reporting. We expect these costs to be increased
as our operations increase in scope and magnitude. In the event that we fail to maintain an effective system of internal controls
or discover material weaknesses in our internal controls, we may not be able to produce reliable financial reports and/or discover
and report fraud, which may harm our overall financial condition and result in loss of investor confidence and a decline in our
share price.
As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act
of 2010 and other applicable securities rules and regulations. Our legal and financial compliance costs related to these rules
and regulations may increase, make some activities more difficult, time-consuming or costly and increase demand on our systems
and resources. The Exchange Act requires, among other things, that we file annual and quarterly, and, from time-to-time, current
reports with respect to our business and operating results.
We
are working with our legal, independent accounting and financial advisors to identify those areas in which changes should or could
be made to improve our financial and management control systems in order to manage our growth and our legal obligations as a public
company. These areas include corporate governance, corporate control, disclosure controls and procedures and financial reporting
and accounting systems. We have made, and will continue to make, changes in these and other areas, if and when any perceived deficiencies
are discovered. However, we anticipate that the expenses associated with being a reporting public company are expected to be both
material and continuing. We estimate that the aggregate cost of legal services; accounting and audit functions; personnel, such
as a chief financial officer familiar with the obligations of public company reporting; and consultants to design and implement
internal controls could be material. In addition, if and when we retain independent directors and/or additional members of senior
management, we may incur additional expenses related to director compensation and/or premiums for directors’ and officers’
liability insurance (“D&O Insurance”), the costs of which we cannot estimate at this time. We may also incur additional
expenses associated with investor relations and similar functions, the cost of which we also cannot estimate at this time. However,
these additional expenses individually, or in the aggregate, may also be expected to be material. In addition, being a public
company could make it more difficult or more costly for us to obtain certain types of insurance, including D&O Insurance,
and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve
on our board of directors, our board committees or as executive officers.
The
increased costs associated with operating as a public company may decrease our net income or increase our net loss, and may cause
us to reduce costs in other areas of our business or increase the prices of our product to offset the effect of such increased
costs. Additionally, if these requirements divert our management’s attention from other business concerns, they could have
a material adverse effect on our business, financial condition and results of operations.
The
material weaknesses in our internal control over financial reporting may until remedied cause errors in our financial statements
or cause our filings with the SEC to not be timely.
We
have identified material weaknesses in our internal control over financial reporting as of the evaluation done by management as
of December 31, 2017. A material weakness is a deficiency, or a combination of deficiencies, in internal controls over financial
reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated
financial statements would not be prevented or detected on a timely basis. If our internal control over financial reporting or
disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement
or our filings may not be timely made with the SEC. Based on the work undertaken and performed by us, however, we believe the
financial statements contained in our reports filed with the SEC are fairly stated in all material respects in accordance with
the generally accepted accounting principles of the United States for each of the periods presented. We intend to implement additional
corporate governance and control measures to strengthen our control environment as we are able, but we may not achieve our desired
objectives. We may identify other material weaknesses and control deficiencies in our internal control over financial reporting
in the future that may require remediation and could result in investors losing confidence in our reported financial information,
which could lead to a decline in our stock price.
Having
availed ourselves of scaled disclosure available to smaller reporting companies, we cannot be certain if such reduced disclosure
will make our Common Stock less attractive to investors.
Under
Section 12b-2 of the Exchange Act, a “smaller reporting company” is a company that is not an investment company, an
asset backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company, and has a public
float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. Similar
to emerging growth companies, smaller reporting companies are permitted to provide simplified executive compensation disclosure
in their filings; they are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered
public accounting firms provide an attestation report on the effectiveness of internal controls over financial reporting; and
they have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required
to provide two years of audited financial statements in annual reports. We are a smaller reporting and are permitted to avail
ourselves of the scaled disclosure requirements available to smaller reporting companies. Decreased disclosure in our SEC filings
as a result of our having availed ourselves of scaled disclosure may make it harder for investors to analyze our results of operations
and financial prospects, which could result in loss of investor confidence and a decline in our share price.
Our
by-laws provide for indemnification of our directors and the purchase of D&O insurance at our expense and limit their potential
or actual liability which may result in a significant cost to us and damage the interests of our shareholders.
Our
By-Laws include provisions that eliminate the personal liability of the directors of the Company for monetary damages to the fullest
extent possible under the laws of the State of Delaware as well as other applicable laws. These provisions eliminate the liability
of directors to the Company and its shareholders for monetary damages arising out of any violation of a director of his fiduciary
duty of due care. Under Delaware law, however, such provisions do not eliminate the personal liability of a director for: (i)
breach of the director’s duty of loyalty; (ii) acts or omissions not in good faith or involving intentional misconduct or
knowing violation of law; (iii) payment of dividends or repurchases of stock other than from lawfully available funds; or (iv)
any transaction from which the director derived an improper benefit. These provisions do not affect a director’s liabilities
under the federal securities laws or the recovery of damages by third parties.
Upon
dissolution of the Company, our stockholders may not recoup all or any portion of their investment.
In
the event of a liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the proceeds and/or assets
of the Company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities will be
distributed to the holders of our Common Stock on a pro rata basis. There can be no assurance that we will have available assets
to pay to the holders of our Common Stock, or any amounts, upon such a liquidation, dissolution or winding-up of the Company.
In this event, our stockholders could lose some or all of their investment.
Our
former advisor and consultant is alleged to have engaged in a securities fraud scheme. Publicity related to this alleged securities
fraud scheme could harm our business, result in loss of investor confidence and a decline in price of our Common Stock.
In
March 2018, the SEC filed a complaint against Jeffrey O. Friedland, a former advisor and stockholder of the Company, alleging
that Mr. Friedland engaged in a securities fraud scheme involving our Common Stock that included a “pump and dump”
strategy; misleading interviews, presentations and emails; and violation of numerous SEC rules and federal securities laws (the
“Friedland Matter”). A copy of that complaint may be found at https://www.sec.gov/litigation/complaints/2018/comp-pr2018-34.pdf.
Neither the Company nor its executive officers and directors were named as defendants in the case. We are unaware of and unable
to predict the length, scope, outcome or impact of the SEC’s investigation. Such conditions create volatility and risk for
holders of our Common Stock and should be considered by investors. Publicity related to the Friedland Matter and any negative
findings or outcomes of the investigation could harm our business and result in loss of investor confidence and a decline in price
of our Common Stock.
We
may expend a substantial amount of time and resources in connection with SEC or stockholder-related inquiries or legal actions
related to an ongoing investigation by the SEC.
In
March 2018, we received a non-public subpoena dated February 16, 2018 issued by the SEC ordering the provision of documents and
related information concerning certain of the issues involved in the Friedland Matter. We are in a process of responding to the
subpoena and intend to fully cooperate with the SEC. We are unaware of and unable to predict the length, scope, outcome or impact
of the SEC’s investigation. As a result, we do not know how the SEC investigation is proceeding, when the investigation
will be concluded, or if we will become involved to a greater extent than merely responding to the subpoena we received. This
may become a material cost to us, distract the time and attention of our officers and directors or divert our resources away from
ongoing research and development programs and result in loss of investor confidence and a decline in price of our Common Stock.