Item 1A. Risk Factors
You should consider carefully the risks and uncertainties
described below, together with all of the other information in our Annual Report on Form 10-K. If any of the following risks are
realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. The
risks described below are not the only risks facing the Company. Risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our business, financial condition, results of operations and prospects.
Risks Related to Our Company and Business
Our independent auditors have expressed substantial doubt
about our ability to continue operating as a going concern, which could prevent us from obtaining new financing on reasonable terms
or at all.
Our independent registered public accountants have expressed
substantial doubt about our ability to continue as a going concern. This opinion could materially limit our ability to raise additional
funds by issuing new debt or equity securities or otherwise. If we fail to raise sufficient capital when needed, we will not be
able to complete our proposed business. As a result, we may have to liquidate our business and investors may lose their investments.
Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our plan of operations described
otherwise herein, obtain financing and eventually attain profitable operations. Investors should consider our independent registered
public accountant’s comments when deciding whether to invest in the Cannabics Pharmaceuticals Inc.
We have not generated any significant revenue since our
inception and we may never achieve profitability.
We are an early stage biotechnology company and have not generated
any significant revenue since we commenced our present operations in April 2014. At the present time, Cannabics Pharmaceuticals
Inc. SR is the only product that we have commercialized. To date, we have financed our operations primarily through private placements
of common stock, warrants, and direct equity investments. As we continue our research and development in cannabinoid-based diagnostics,
our expenses are expected to increase significantly. Accordingly, we will need to generate significant revenue to achieve profitability.
Even as we begin to commercialize our technologies, we expect our losses to continue as a result of ongoing research and development
expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total
assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with product development and
commercialization efforts, we are unable to predict at what stage the Company will become profitable. We may never become profitable.
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If
we are unable to achieve and then maintain profitability, our business, financial condition and results of operations will be negatively
affected and the market value of our common stock will decline.
Since we have a limited operating history in our business,
it is difficult for potential investors to evaluate our business.
We commenced operations as a biotechnology
company in April 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 Cannabics Pharmaceuticals Inc. 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.
Cannabics Pharmaceuticals Inc. has not yet generated meaningful
revenue and will require additional capital to continue its research and development activities, conduct clinical trials, commercialize
its products and otherwise fund its 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.
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 entirely upon the research, development
and commercialization of cannabinoid-based technologies for the detection and treatment of cancer. Our success is dependent upon
the viability of this technology and the development of cancer diagnostics and therapies.
Neither we nor any other company has received regulatory approval
from the United States Food and Drug Administration (the “FDA”) to market any diagnostics or therapeutics 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.
The scientific evidence underlying the feasibility of developing
cannabinoid-based technologies for the detection and treatment of cancer is both preliminary and limited. In 2017, an
committee of the National Academies of Sciences, Engineering, and Medicine determined that while there is conclusive or substantial
evidence that oral cannabinoids are effective antiemetics in the treatment of chemotherapy-induced nausea and vomiting, there was
insufficient evidence to make any statement about the efficacy of cannabinoids as a treatment for cancer. The
went on to state that further clinical research into the anti-cancer effects of cannabinoids needs to be conducted.
If our cannabinoid technology is found to be ineffective or
unsafe in humans, or if it never receives regulatory approval for commercialization, we may never be able bring our product candidates
to market and may never become profitable. Further, our current business strategy, including all of our research and development,
is focused on utilizing cannabinoid technology to detect and treat cancer. This lack of diversification increases the risk associated
with the ownership of our common stock. If we are unsuccessful in developing and commercializing our cannabinoid-based technology
and its application to the detection and treatment of cancer, 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 products and product candidates, we may never become profitable, which would have a material
adverse effect on our business, results of operations and financial condition.
Our success depends upon our ability to retain our senior
management and our ability to attract, retain and motivate other qualified personnel.
We are an early stage biotechnology company. At current, we
have two employees and several key consultants. Our success materially depends upon the efforts of our management and other key
personnel, including but not limited to Dr. Eyal Ballan, our Chief Technology Officer and Director. If we lose the services of
Dr. Ballan or any other executive officers or significant employees, our business would likely be materially and adversely affected.
At this time, we do not currently have “key man” life insurance for Dr. Ballan or any other executive officer.
Because of the specialized scientific and managerial nature
of our business, we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel.
The competition for qualified personnel in the biotechnology industry is intense. Due to this intense competition, we may be unable
to continue to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement
personnel. Any difficulties in obtaining and retaining qualified officers, employees and consultants could have a material adverse
effect on our operations.
The relative lack of public company experience by our management
team may put us at a competitive disadvantage.
As a company with a class of securities registered under the
United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are subject to reporting and other
legal, accounting, corporate governance, and regulatory requirements imposed by the Exchange Act and rules and regulations promulgated
under the Exchange Act. With the exception of our CFO, Uri Ben-Or, our management team lacks significant public company experience,
which could impair our ability to comply with these legal, accounting, and regulatory requirements. Such responsibilities include
complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able
to implement and effect programs and policies in an effective and timely manner that adequately respond to such increased legal
and regulatory compliance and reporting requirements. Our failure to do so could lead to the imposition of fines and penalties
and further result in the deterioration of our business.
If we are unable to enter into acceptable sales, marketing
and distribution arrangements with third parties or establish sales, marketing and distribution capabilities, we may not be successful
in commercializing any product candidate that we develop if and when a product candidate is approved.
We do not have any sales, marketing or distribution infrastructure
and have no experience in the commercialization of biotechnology. To achieve commercial success for any product, we must develop
a sales and marketing organization, outsource these functions to third parties or license our products to others.
In the United States, we intend to only commercialize our products
by licensing them to organizations having greater resources and experience than we do, though there can be no assurance that such
licensing efforts will be successful, or that we will be able to license any future products on satisfactory terms, or at all.
We do not presently have any other agreement or arrangement for the commercialization of our products in the United States or elsewhere.
While we generally intend to adopt a licensing model for the
commercialization of our products, we may seek one or more strategic partners for commercialization of our products outside the
United States. As a result of entering into arrangements with third parties to perform sales, marketing and distribution services,
our product revenue or the profitability of our product revenue may be lower, perhaps substantially lower, than if we were to directly
market and sell products in those markets. Furthermore, we may be unsuccessful in entering into the necessary arrangements with
third parties or may be unable to do so on terms that are favorable to us. In addition, we may have little or no control over such
third parties and any of them may fail to devote the necessary resources and attention to sell and market our product candidates
If we do not license our products or outsource our commercialization
efforts, we will be required to develop our own sales, marketing and distribution capabilities, which will require substantial
resources and will be time-consuming, and could delay any product launch. Moreover, we may not be able to hire or retain a sales
force that is sufficient in size or has adequate expertise in the consumer health markets that we plan to target. If we are unable
to establish or retain a sales force and marketing and distribution capabilities, our operating results may be adversely affected.
If we do not successfully license our products or establish sales and marketing capabilities, either on our own or in collaboration
with third parties, it is likely that we will be unable to commercialize any of our products.
We face intense competition, often from companies with
greater resources and experience than we have, which may result in others developing or commercializing competing products before
us or more successfully.
The market for cancer diagnostics and therapies is intensely
competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry
participants. Our competitors include large multinational corporations and their operating units, including Abbott Laboratories
Inc., Cepheid Inc., Philips, GE Healthcare, Siemens, Gen-Probe Incorporated, MDxHealth SA, EpiGenomics AG, Roche Diagnostics, Exact
Sciences Corporation, Sequenom, Inc. and several others. We also compete against pharmaceutical companies, specialty pharmaceutical
companies and biotechnology companies worldwide, as well as smaller and other early-stage companies. Other potential competitors
include academic institutions, government agencies and other public and private research organizations that conduct research, seek
patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization.
Many of our competitors and potential competitors have or will
have substantially greater financial, technological, managerial and research and development resources and experience than we have,
and many have been engaged in the biotechnology industry for a much longer time than we have. Many of our competitors spend significantly
more funds on research, development, promotion and sale of new and existing products than we do, and may therefore be able to react
more quickly to new or emerging technologies, shifting market conditions and regulatory changes.
There can be no assurance that any of our current or future
products and technologies will have a competitive advantage in the marketplace, or that they will remain competitive following
the introduction of competing products or technologies. Our commercial opportunity could be reduced or eliminated if our competitors
develop and commercialize products that are safer, more effective, more convenient or less expensive. There can be no assurance
that we will be successful in the face of increasing competition from new technologies or products introduced by existing companies
in the industry or by new companies entering the market.
If we are unable to compete successfully, there may be a material
and adverse effect on our business, financial condition and results of operations.
If the marketplace does not accept the products in our
development pipeline or any other diagnostic products we might develop, we may be unable to generate sufficient revenue to sustain
and grow our business.
Even if we are able to successfully develop and obtain regulatory
approval of a product candidate, our ability to generate significant revenue will depend on the acceptance of our products by physicians
and patients. Physicians, hospitals, clinical laboratories, researchers or others in the healthcare industry may not use our current
or future diagnostic product candidates unless they are determined to be an effective and cost-efficient means of detecting and
diagnosing cancer. Market acceptance of our current or future therapeutic products will depend on a number of factors, including
the indication statement and warnings approved by regulatory authorities in the product label, continued demonstration of efficacy
and safety in commercial use, physicians’ willingness to prescribe the product, reimbursement from third-party payers such
as government healthcare systems and insurance companies, the price of the product, the nature of any post-approval risk management
plans mandated by regulatory authorities, competition, marketing and distribution support. In addition, we will need to expend
a significant amount of resources on marketing and educational efforts to create awareness of our products and to encourage their
acceptance and adoption. If the market for our products does not develop sufficiently or the products are not accepted, our revenue
potential will be harmed.
We do not presently have any product liability insurance
coverage and there is no assurance that we will be able to obtain such insurance at an affordable price or that it will be sufficient
to cover all liabilities that we may incur.
We are exposed to potential product
liability risks that are inherent in the testing, manufacturing and marketing of cancer diagnostics, pharmaceuticals and dietary
supplements. While we do not presently carry any product liability insurance coverage, we intend to obtain such insurance in amounts
we believe to be commercially reasonable for our current level of activity and exposure. There is no assurance, however, that we
will be able to obtain or maintain insurance coverage that will be adequate to cover our potential liabilities, or that premiums
will be commercially justifiable. Furthermore, insurance that might otherwise be readily available, may be more difficult for us
to find and more expensive because we work with medicinal cannabis. If we are the subject of a successful product liability claim
that exceeds the limits of, or is not otherwise covered by our insurance, or if we incur such liability at a time when we are not
able to obtain liability insurance, we may incur substantial charges that adversely affect our earnings and require the commitment
of capital resources that might otherwise be available for the development and commercial launch of our product programs.
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 finished products. 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 products by obtaining and defending patents. These risks and uncertainties include
patents that may be issued or licensed may be challenged, invalidated, or circumvented, or otherwise may not provide any competitive
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;
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;
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.
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 United States Patent and Trademark Office (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. If another party has also
filed a patent application or been issued a patent relating to an invention or technology claimed by us in pending applications,
we may be required to participate in an interference proceeding declared by the USPTO to determine priority of invention, which
could result in substantial uncertainties and costs, even if the eventual outcome were favorable to us. We could also 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 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 might claim that we are using inventions claimed
by their patents and might 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 lawsuits are expensive and would consume time and other resources. 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
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 products, technologies or other matters.
Failure in our information technology or storage systems
could significantly disrupt our operations and our research and development efforts, which could adversely impact our revenues,
as well as our research, development and commercialization efforts.
Our ability to execute our business strategy depends, in part,
on the continued and uninterrupted performance of our information technology (“IT”), systems, which support our operations
and our research and development efforts, as well as our storage systems. Due to the sophisticated nature of the technology we
use in our products and service offerings, we are substantially dependent on our IT systems. IT systems are vulnerable to damage
from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover,
despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins,
computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems
that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data,
could adversely affect our ability to operate our business.
We will need to grow the size of our organization, and
we may experience difficulties in managing any growth we may achieve.
As of this date, we have two full-time employees. As our development
and commercialization plans and strategies progress, we expect to need additional research, development, managerial, operational,
sales, marketing, financial, accounting, legal and other resources. Future growth would impose significant added responsibilities
on our management, which may not be able to accommodate those added responsibilities. If we fail to effectively manage our future
growth, it could delay the execution of our business plan and disrupt our operations.
We are subject to financial reporting and other requirements
that place significant demands on our resources.
We are subject to reporting and other obligations under the
Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section
404 requires us to conduct an annual management assessment of the effectiveness of our internal controls over financial reporting.
These reporting and other obligations place significant demands on our management, administrative, operational, internal audit
and accounting resources. The costs of preparing and filing annual and quarterly reports, proxy statements and other information
with the SEC and furnishing audit reports to stockholders causes our expenses to be higher than they would be if we remained a
privately-held company. 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.
Our disclosure controls and procedures and internal controls
over financial reporting were determined not to be effective for the prior fiscal year ended August 31, 2016, and may not be effective
in future periods.
Effective internal controls are necessary for us to provide
reasonable assurance with respect to our financial reports and to effectively prevent fraud. If we cannot provide reasonable assurance
with respect to our financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Pursuant
to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal control over financial reporting,
including management’s assessment of the effectiveness of such control. Internal control over financial reporting may not
prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention
or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect
to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of
internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain
the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience
difficulties in their implementation, our business and operating results could be adversely impacted, we could fail to meet our
reporting obligations, and our business and stock price could be adversely affected.
At August 31, 2016, our Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) and concluded that, subject to the inherent limitations identified in Item 9A of
Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2016, our disclosure controls and procedures were
not effective due to the existence of material weaknesses in our internal control over financial reporting arising from inadequate
segregation of duties over authorization, review and recording of transactions, as well as the financial reporting of such transactions,
the lack of an audit committee, insufficient documentation of review procedures and insufficient information technology procedures.
Our independent auditors issued an adverse attestation report regarding the effectiveness of our internal control over financial
reporting as at August 31, 2016.
We believe we have taken appropriate and reasonable steps to
make the necessary improvements to remediate these deficiencies, however we cannot be certain that our remediation efforts will
ensure that our management designs, implements and maintains adequate controls over our financial processes and reporting in the
future or that the changes made will be sufficient to address and eliminate the material weaknesses previously identified. Our
inability to remedy any additional deficiencies or material weaknesses that may be identified in the future could, among other
things, have a material adverse effect on our business, results of operations and financial condition, as well as impair our ability
to meet our quarterly, annual and other reporting requirements under the Exchange Act in a timely manner, and require us to incur
additional costs or to divert management resources.
Risks Related to Cannabis
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 candidates in countries in the near future or perhaps at all if the laws and regulations in those countries
do not change.
Regarding the US, any cannabinoid-based diagnostic product candidate
that we may develop, 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, 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 cannabis-based medical diagnostics and therapies 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 and therapies. 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
Cannabis remains illegal under US 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.
While a bio-technology cancer research company, our science
is dependent upon 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 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 various state laws where so permitted.
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 research and science industry, the CARERS Act has not yet been adopted, and the Rohrabacher-Farr Amendment,
being an amendment to an appropriations bill, must be renewed annually. The currently enacted Commerce, Justice, Science, and Related
Agencies Act, which includes the Rohrabacher-Farr Amendment, is effective, by passage of a short-term continuing resolution, through
April 28, 2017. The federal government could at any time change its enforcement priorities against the cannabis industry. Although
we do not grow or distribute cannabis, our current and planned business operations involve licensing of IP related to cannabinoids,
and any such change in enforcement priorities could render such operations unprofitable or even prohibit such operations.
Our ability to earn revenue through licensing our IP candidates
in the United States is dependent on additional states legalizing medical marijuana.
We are engaged in the business developing and commercializing
cannabinoid-based diagnostics for the detection and treatment of cancer. Our ability to commercialize our diagnostic candidates
in the United States is dependent upon the continued progress of legislative authorization of cannabis at the state level for medical
purposes and, in certain states, 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. The legislative process normally encounters set-backs
before achieving success. While there may be ample public support for legislative proposals, there must be political will 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 cannabis for medical purposes, which would limit the market for our products
and negatively impact our business and revenues.
Changes in consumer preferences and acceptance of medical
cannabis, or any negative trends, will adversely affect our business.
Our business is substantially dependent on market acceptance
of medical cannabis diagnostics. Market perception of medical cannabis can be significantly influenced by a number of social, political
and economic factors that are beyond our control, including scientific research or findings, regulatory investigations, litigation,
media attention and other publicity regarding such diagnostics and treatments. There can be no assurance that future scientific
research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable
to the market for any of our current or future cannabinoid-based diagnostics or therapies. Future research reports, findings, regulatory
proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier
research reports, findings or publicity could have a material adverse effect on the demand for our products, as well as our business,
results of operations, financial condition and cash flows.
We believe that as cannabis-based biotechnology becomes more
widely accepted by the US medical community and the public at large, the stigma associated with medical cannabis will moderate
and, as a result, consumer demand will likely continue to grow. There is, however, no assurance that such increase in demand will
occur, that we will benefit from any demand increase or that our business will ever become profitable. 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 medical cannabis will adversely affect our business prospects.
We also believe that large, well-funded pharmaceutical and other
related businesses and industries may have economic reasons to oppose cannabinoid-based therapies. 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 by the pharmaceutical
lobby to halt or delay the newly developing medical cannabis diagnostics industry could have a detrimental impact on our business.
Risks Related to Diagnostic Product Development
If we fail to successfully develop and commercialize diagnostics,
pharmaceutical or therapies, we may be unable to execute our plan of operations.
Our current business strategy focuses on discovering, developing
and commercializing cannabinoid-based diagnostics, anti-cancer pharmaceuticals and palliative therapies. The success of our business
will depend upon our ability to fully develop and commercialize the diagnostics and therapeutic product candidates in our current
development pipeline as well as to continue the discovery and development of other diagnostics and IP.
Prior to commercializing our product candidates, we will be
required to undertake time-consuming and costly development activities with uncertain outcomes, including conducting clinical studies
and obtaining regulatory clearance or approval in Israel, the United States, the European Union and other countries where we may
develop and market our product candidates. Delays in obtaining approvals and clearances could have material adverse effects on
us and our ability to fully carry out our plan of operations. We have limited experience in taking products through these processes
and there are considerable risks involved in these activities. The science and methods that we are employing are innovative and
complex, and it is possible that our development programs will ultimately not yield products suitable for commercialization or
government approval. Product candidates that appear promising in early development may fail to be validated in subsequent studies,
and even if we achieve positive results, we may still fail to obtain the necessary regulatory clearances or approvals. Few research
and development projects result in commercial products, and perceived viability in early clinical studies often is not replicated
in later studies. At any point, we may abandon development of a product candidate, or we may be required to expend considerable
resources obtaining additional clinical and nonclinical data, which would adversely impact the timing for generating potential
revenue from those products. Further, our ability to develop and launch product candidates is dependent on our receipt of substantial
additional funding. If our discovery and development programs yield fewer commercial product candidates than we expect, we may
be unable to execute our business plan, and our business, financial condition and results of operations may be adversely affected.
If we fail to maintain or establish satisfactory arrangements
for the supply of raw materials or the manufacture of our product candidates for preclinical or clinical trials, or if we experience
an interruption of supply, we might not have sufficient quantities of our product candidates at an acceptable cost, which could
delay, prevent or impair our development or commercialization efforts.
We do not produce medical cannabis, and therefore our ability
to research, develop and commercialize our cannabinoid-based diagnostics and therapeutic product candidates is dependent upon a
sufficient supply of medical cannabis strains. Any significant interruption or negative change in the availability or economics
of the supply chain for medical cannabis could materially impact our business, financial condition and operating results. Some
strains of medical cannabis may only be available from a single supplier or a limited group of suppliers. If a sole source supplier
were to go out of business, we might be unable to find a replacement source in a timely manner or at all. If a sole source supplier
were to be acquired by a competitor, that competitor might elect not to supply us. Any inability to secure required supplies of
medical cannabis or to do so on appropriate terms could have a materially adverse impact on our business, financial condition and
Our clinical diagnostics may never be validated.
The FDA regulates the sale and distribution, in interstate commerce,
diagnostic test kits, reagents and instruments used to perform diagnostic testing. To the extent that any diagnostic
test we develop is regarded as an
diagnostic test rather than as a Laboratory Developed Test (“LDT”),
we will be subject to increased FDA regulation that will delay and add to the cost of commercialization of our diagnostic product
candidates, which will have a material adverse effect on our business, results of operations and financial condition.
We are also subject to the United States Clinical Laboratory
Improvement Amendments of 1988 (“CLIA”), federal regulatory standards that apply to all clinical laboratories that
perform testing on specimens derived from humans in the United States for the purpose of providing information for the diagnosis,
prevention or treatment of disease. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United
States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency
testing, patient test management, quality control, quality assurance and inspections. Accreditation by the College of American
Pathologists (“CAP”), one of six CLIA-approved accreditation organizations, is sufficient to satisfy the requirements
The validation for CLIA or CAP is a two-step process. The first
step is optimization of all of the steps of the test protocol to show that the test is able to produce repeatable and consistent
results. The second step is the clinical validation, in which statistically significant sensitivity and specificity of the test
on the appropriate human samples are determined. Overall, the purpose of the validation process is to determine the accuracy, precision,
sensitivity and specificity of the test. The time and cost to complete the validation process can vary widely, and it is possible
that we would be unable to complete the validation process along the timeline and within the budget as planned.
As of this date, our clinical diagnostics have not yet been
validated for commercialization in a CLIA or CAP laboratory, and we have not yet begun the validation process. We may be unable
to enter into an agreement with a CLIA or CAP laboratory on favorable terms, or at all. Although we may be able to validate the
tests, they might have sensitivity and specificity that is insufficient to bring the product to market. Any delays or incurrence
of greater costs than budgeted in validating these tests may have a material adverse effect on our business, results of operations
and financial condition.
The Federal Food and Drug Administration may impose additional
regulatory obligations and costs upon the development of our diagnostics.
On October 3, 2014, the FDA issued draft guidance regarding
oversight of LDTs, titled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs).” According to this
guidance, the FDA plans to take a phased-in risk-based approach to regulating LDTs. The FDA plans to phase in enforcement of LTD
premarket review, quality system oversight and adverse event reporting over a number of years. The FDA would require that laboratories
providing LDTs, subject to certain limited exemptions, within six months after the guidance documents are finalized to comply with
(i) either a new notification procedure in which the laboratory must provide the FDA with certain basic information about each
LDT offered by their laboratory or the FDA’s device registration and listing requirements, and (ii) the medical device reporting,
or MDR, requirements for LDTs offered by that laboratory. Under this new risk-based approach, it is possible that some level of
pre-market review may be required for our LDTs, which may require us to obtain additional clinical data.
The FDA draft guidance was subject to public comment until February
2, 2015. On January 13, 2017, the FDA issued a discussion paper on LDTs that does not represent the formal position of FDA and
is not enforceable, but is intended to advance public discussion on future LDT oversight. At the present time, we cannot assess
what the additional costs and regulatory burdens of any FDA final guidance or FDA enforcement will be, or the impact it may have
on our business and operations.
If the FDA requires us to seek clearance or approval for any
of our diagnostic products (as opposed to simply licensing our technology to a CLIA lab), we may not be able to obtain such approvals
on a timely basis, or at all. The cost of conducting clinical trials and otherwise developing data and information to support any
applications may be significant. Failure to comply with applicable regulatory requirements of the FDA could result in enforcement
action, including receiving untitled or warning letters, fines, injunctions, or civil or criminal penalties. In addition, we could
be subject to a recall or seizure of products, operating restrictions, partial suspension or total shutdown of production. Any
such enforcement action would have a material adverse effect on our business, financial condition and operations.
Changes in laws and regulations concerning clinical diagnostic
tests may adversely affect our business, financial condition and results of operations.
The clinical laboratory testing industry is highly regulated,
and failure to comply with applicable regulatory, supervisory or licensing requirements may adversely affect our business, financial
condition and results of operations. In particular, the laws and regulations governing the marketing and research of clinical diagnostic
testing are extremely complex and in many instances there are no clear regulatory or judicial interpretations of these laws and
regulations, which increase the risk that we may be found to be in violation of these laws.
The regulatory environment in which we operate may change significantly
and adversely in the future. The molecular diagnostics industry as a whole is a growing industry and regulatory agencies such as
the FDA may also apply heightened scrutiny to new developments in the field of molecular diagnostics. Should we be deemed to not
be in compliance with regulatory requirements or any changes thereto, we may be subject to sanctions which could include required
changes to our operations, adverse publicity, substantial financial penalties and criminal proceedings. Any change in the laws
and the regulations relating to our business, whether in the form of new or amended laws or regulations or regulatory policies,
or the application of any of the above, may adversely affect our business, financial condition and results of operations by increasing
our costs to comply with the new laws or constraining our ability to develop, market and commercialize our diagnostic tests.
For example, a development affecting our industry is the increased
enforcement of the federal False Claims Act and, in particular, actions brought pursuant to the False Claims Act's "whistleblower"
" provisions. The False Claims Act imposes liability on any person or entity that, among other things,
knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payer program.
provisions of the False Claims Act allow a private individual to bring civil actions on behalf of the federal
government for violations of the False Claims Act and permit such individuals to share in any amounts paid by the defendant to
the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it is subject to mandatory
damages of three times the actual damages sustained by the government, plus mandatory civil penalties ranging from $5,500 to $11,000
for each false claim. In addition, various states have enacted false claim laws analogous to the federal False Claims Act, and
in some cases go even further because many of these state laws apply where a claim is submitted to any third-party payer and not
merely a governmental payer program.
In addition, there has been a recent trend of increased U.S.
federal and state regulation of payments made to physicians, which are governed by laws and regulations including the Stark Law.
Among other requirements, the Stark Law requires laboratories to track, and places a cap on, non-monetary compensation provided
to referring physicians. While we have a compliance plan to address compliance with applicable fraud and abuse laws and regulations,
the evolving commercial compliance environment and the need to build and maintain robust and expandable systems to comply with
multiple jurisdictions with different compliance and reporting requirements increases the possibility that we could violate one
or more of these requirements.
All of our diagnostics and therapeutic product candidates
are in clinical and preclinical development, the validation of which may not be successful and may be subject to delays, which
would have a material adverse effect on our business, results of operation and financial condition.
To date, we have devoted our resources towards developing the
technology upon which we are building our clinical diagnostics and therapeutic product candidates. Our clinical diagnostic product
candidates have yet to be validated and our clinical therapeutic product candidates are currently in a preclinical development
phase. As of this date, only Cannabics SR, our non-pharmaceutical palliative therapy, has been commercialized.
We may be unable to successfully complete the clinical validation
process for our diagnostic product candidates due to several factors, including our ability to acquire enough samples for full
validation and the procurement of materials necessary to conduct testing.
We may not be able to successfully complete the preclinical
testing necessary to advance our therapeutic product candidates into clinical development, including animal pharmacology and toxicity
studies. The results of any preclinical work may indicate that our therapeutic product candidates do not have the safety or efficacy
necessary to file an Investigational New Drug (“IND”) with the FDA in order to move our product on to the clinical
Once we initiate the clinical development of our product candidates,
it may be difficult to identify and qualify patients to participate in future clinical trials for our product candidates, and the
timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing as well as completion
of required follow-up periods. If patients are unwilling to participate in our clinical trials due to concerns over the safety
of the product candidate or for other reasons, the timeline for conducting the trials and obtaining regulatory approval may be
delayed. Furthermore, we may also compete for patients with other companies conducting similar clinical trials. Any delays in our
future clinical trials could result in increased costs, delays in product development or termination of the clinical trials altogether.
Any of these events could have a material adverse effect on
our business, results of operations and financial condition.
We may fail to demonstrate the safety and efficacy of our
therapeutic product candidates in accordance with regulatory standards and may incur delays and substantial costs in our clinical
In order to commercialize our therapeutic product candidates,
we must conduct extensive clinical trials demonstrating the safety and efficacy of our product candidates in humans. The clinical
testing process is expensive, difficult to design and implement, takes many years to complete and is unpredictable in both its
duration and outcome. A failure of one or more clinical trials can occur at any stage of testing. There is a high failure rate
for drugs and biological products proceeding through clinical trials. The research, testing, manufacturing, labeling, packaging,
storage, approval, sale, marketing, advertising and promotion, pricing, export, import and distribution of drug products are subject
to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations
differ from country to country. We are not permitted to market our therapeutic product candidates as a prescription pharmaceutical
product in the United States until we receive approval of a New Drug Application (“NDA”), from the FDA, or in any foreign
countries until we receive the requisite approval from such countries. In the United States, the FDA generally requires the completion
of pre-clinical testing and clinical trials of each drug to establish its safety and efficacy and extensive pharmaceutical development
to ensure its quality before an NDA is approved. Regulatory authorities in other jurisdictions impose similar requirements. Of
the large number of drugs in development, only a small percentage result in the submission of an NDA to the FDA and even fewer
are eventually approved for commercialization. We have not submitted an NDA to the FDA or comparable applications to other regulatory
authorities. Preclinical and clinical data is often susceptible to varying interpretations and types of analyses and regulatory
authorities may fail to approve our product. In addition, even if we successfully complete early clinical trials, such results
may not be indicative of the success or results of our later clinical trials.
Our successful completion of clinical trials may be materially
adversely affected by many factors, including:
ineffective trial design and disagreement with the FDA on final trial design;
imposition of a clinical hold following an inspection of our clinical trial operations by the FDA or other regulatory authorities;
difficulties or delays in reaching an agreement with a contract research organization, and clinical trial sites;
delays in obtaining required institutional review board approval for each trial site;
data collected from clinical trials may not be sufficient to support the submission of a NDA or other submission or to obtain
regulatory approval in the United States or elsewhere;
delays or difficulties in recruiting suitable patients to participate in clinical trials;
delays in manufacturing or delivering products and materials to clinical trial sites;
delays or difficulties caused by lack of patient adherence to treatment or post-treatment follow-up;
delays caused by patients dropping out of a trial and the need for recruiting additional patients; and
delays caused by clinical sites dropping out of the trial and the time required to recruit a new site.
Any of these delays or difficulties could cause us to be delayed
in obtaining marketing approval from regulatory authorities, if at all, or allow us to obtain approval for specific indications
or patient populations that are not as broad as currently targeted. In addition, such delays or difficulties may cause our development
costs or our time to bring our product candidates to market to increase, may weaken our competitive positioning in the market and
may have a material adverse effect on our business, results of operations and financial condition.
We cannot predict if or when we will receive regulatory
approval to commercialize a therapeutic product candidate.
We cannot commercialize a therapeutic product candidate until
the appropriate regulatory authorities, such as the FDA or a state regulating authority, have reviewed and approved the product
candidate. Even if our therapeutic product candidates demonstrate safety and efficacy in clinical trials, regulatory agencies may
not complete their review processes in a timely manner, and we may not be able to obtain timely regulatory approval. We may never
be able to receive regulatory approval for our therapeutic product candidates at all. Additional delays may result if an FDA advisory
committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays
or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory
agency policy during the period of product development, clinical trials and the review process. Regulatory agencies may also approve
a product candidate for fewer or more limited indications than requested or may grant approval subject to the performance of post-marketing
studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful
commercialization of our product candidates. Delays or failure to obtain necessary regulatory approvals could have a material adverse
effect on our business, results of operations and financial condition.
Even if we obtain regulatory approval for a therapeutic
product candidate, we will remain subject to extensive regulatory scrutiny.
Even if we obtain regulatory approval in the United States for
our therapeutic product candidates, the FDA and other appropriate regulatory agencies may still impose significant restrictions
or delays, including restriction of patient population or indications or additional costly studies. Any changes to the approved
product or its labeling or manufacturing process would require FDA approval. Any advertisements or promotions must comply with
FDA regulations and are subject to FDA review as well as state and federal laws. Drug product manufacturers are subject to continual
review and inspection by the FDA and other regulatory authorities to comply with Current Good Manufacturing Practice standards.
If the FDA or other regulatory authority finds previously undiscovered compliance issues with products, such as unanticipated adverse
effects or issues with the manufacturing facility, the FDA or other regulatory authority may:
issue a warning letter asserting that we are in violation of law;
impose civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend currently ongoing clinical trials;
refuse any pending applications;
prohibit us from entering into beneficial or necessary contracts such as supply or government contracts.
Any government investigation of alleged violations of law could
require us to expend significant time and resources in response, could result in litigation and litigation-related expense and
could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize
our therapeutic product candidates and generate revenue, which would have a material adverse effect on our business, results of
operations and financial condition.
In addition, even if we obtain regulatory approvals, the timing
or scope of any approvals may prohibit or reduce our ability to commercialize our therapeutic product candidates successfully.
For example, if the approval process takes too long, we may miss market opportunities and give other companies the ability to develop
competing products or establish market dominance. Any regulatory approval that we ultimately obtain may be limited or subject to
restrictions or post-approval commitments that render our products not commercially viable. For example, regulatory authorities
may approve our therapeutic product candidates for fewer or more limited indications than we request, may not approve the price
we intend to charge for our therapeutic product candidates, may grant approval contingent on the performance of costly post-marketing
clinical trials, or may approve our therapeutic product candidates with a label that does not include the labeling claims necessary
or desirable for the successful commercialization of that indication. Further, the FDA may place conditions on approvals including
potential requirements or risk management plans and the requirement for a Risk Evaluation and Mitigation Strategy (“REMS”)
to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed REMS;
the FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician communication
plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization
tools. Any of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or
dispensing of our therapeutic product candidates. Moreover, product approvals may be withdrawn for non-compliance with regulatory
standards or if problems occur following the initial marketing of the product. Any of the foregoing scenarios could materially
harm the commercial success of our product candidates and have a material adverse effect on our business, results of operations
and financial condition.
We may fail to obtain orphan drug status for our therapeutic
We intend to seek orphan drug status from the FDA for those
anti-cancer therapeutic product candidates we are presently developing to the extent such product candidates are developed for
ovarian cancer. Ovarian cancer therapies are eligible for orphan drug status under the Orphan Drug Act of 1983. The orphan drug
status gives the manufacturer specific financial incentives to develop a pharmacological agent. If a product that has an orphan
drug designation receives the first FDA approval for the disease for which it has such designation, the product is entitled to
orphan drug exclusivity, which means that the FDA may not approve any other applications to market the same medication for the
same indication, except in very limited circumstances, for seven years. Failure to obtain an orphan drug designation for our product
candidates may have a material adverse effect on our business, results of operations and financial condition.
Any of our therapeutic product candidates may cause adverse
effects or have properties that could delay or prevent their regulatory approval or limit the scope of any specific indications
or market acceptance.
Adverse events caused by our therapeutic product candidates
could cause interruptions, delays or the halting of our clinical trials. If adverse effects are observed in any clinical trials
for our therapeutic product candidates, we may be unable to obtain timely, or any, regulatory approval of our therapeutic product
candidates. Adverse effects caused by our therapeutic product candidates could also subject us to litigation and liability, which
could have a material adverse effect on our business, results of operations and financial condition.
In addition, if any of our therapeutic product candidates are
approved for commercialization and are found to cause serious or unpredicted side effects, serious consequences may result, including
but not limited to, the withdrawal of marketing approval by regulatory authorities, restrictions on distribution by regulatory
authorities, the need to conduct additional clinical trials, litigation and potential liability for personal injury to patients
and damage to our reputation. Furthermore, our ability to achieve and maintain profitability may be permanently impaired. Any of
these events could have a material adverse effect on our business, results of operations and financial condition.
Our dietary supplements are
subject to government regulation, both in the United States and internationally, which could increase our costs significantly and
limit or prevent the sale of our dietary supplements.
The manufacture, packaging, labeling, advertising, promotion,
distribution and sale of any Cannabics Pharmaceuticals product that we may develop and commercialize is subject to regulation by
numerous national and local governmental agencies in the United States and other countries, including the FDA and Federal Trade
Commission in the United States, and the Ministry of Health in Israel. Failure to comply with these regulatory requirements may
result in various types of penalties or fines. These include injunctions, product withdrawals, recalls, product seizures, fines
and criminal prosecutions. Individual states also regulate dietary supplements. A U.S. state may interpret claims or products presumptively
valid under federal law as illegal under that state’s regulations. In markets outside the United States, we will likely be
required to obtain approvals, licenses, or certifications from a country’s ministry of health or comparable agency, as well
as labeling and packaging regulations, all of which vary from country to country. Approvals or licensing may be conditioned on
reformulation of products or may be unavailable with respect to certain products or product ingredients. Any of these government
agencies, as well as legislative bodies, can change existing regulations, or impose new ones, or could take aggressive measures,
causing or contributing to a variety of negative consequences, including:
requirements for the reformulation of certain or all products to meet new standards;
the recall or discontinuance of certain or all products;
additional record keeping;
expanded documentation of the properties of certain or all products;
expanded or different labeling;
adverse event tracking and reporting; and
additional scientific substantiation.
Any or all of these requirements could have a material adverse
effect on us. There can be no assurance that the regulatory environment in which we operate will not change or that such regulatory
environment, or any specific action taken against us, will not result in a material adverse effect on us.
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 cannabinoid-based
products may depend on how the healthcare systems of the United States, the European Union and other governments provide coverage
or reimbursement. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include
both government sponsored healthcare and private insurance. To obtain reimbursement or pricing approval in some countries, we may
be required to produce clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our
products to other available therapies. We may not obtain international reimbursement or pricing approvals in a timely manner, if
at all. Our failure to receive international reimbursement or pricing approvals would negatively impact market acceptance of our
products in the international markets in which those approvals are sought.
We believe that future reimbursement may
be subject to increased restrictions in the United States, the European Union and in other international markets. There is increasing
pressure by governments worldwide to contain health care costs by limiting both the coverage and the level of reimbursement for
therapeutic products and by refusing, in some cases, to provide any coverage for products that have not been approved by the relevant
regulatory agency. Future legislation, regulation or reimbursement policies of third party payers may adversely affect the demand
for our product candidates currently under development and limit our ability to sell our product candidates on a profitable basis.
In addition, third party payers continually attempt to contain or reduce the costs of healthcare by challenging the prices charged
for healthcare products and services. If reimbursement for our products is unavailable or limited in scope or amount or if pricing
is set at unsatisfactory levels, market acceptance of our products candidates will be impaired and future revenues, if any, will
be adversely affected.
Risks Related to Our Dependence on Third Parties
We rely and expect to continue to rely heavily on third
parties to conduct our preclinical studies and clinical trials, and those third parties may not perform satisfactorily, including
failing to meet deadlines for the completion of such studies and trials.
We do not have in-house research facilities and, as a consequence,
we must currently rely on third parties to conduct our clinical trials. We expect to continue to rely heavily on third parties,
such as contract research organizations, clinical data management organizations, medical institutions, clinical investigators and
others to conduct our clinical trials. Our agreements with these third parties generally allow the third party to terminate our
agreement with them at any time. If we are required to enter into alternative arrangements because of any such termination, the
introduction of our product candidates to market could be delayed.
Our reliance on third parties for research and development will
reduce our control over such activities but will not relieve us of our responsibilities. Likewise, our reliance on third parties
whom we do not control does not relieve us of our responsibility to comply with regulatory requirements to use Current Good Clinical
Practice standards when conducting, recording and reporting the results of clinical trials in order to ensure that data and reported
results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. We are
also required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsored database
of regulatory agencies within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal
The third parties on whom we rely may also have relationships
with other entities, some of whom may be our competitors. If these third parties do not successfully carry out their contractual
duties, meet expected deadlines or conduct our clinical trials in accordance with the requirements of a regulatory agency or our
stated protocols, we will not be able to obtain, or may be delayed in obtaining, marketing approvals for our product candidates
and will not be able to, or may be delayed in our efforts to, successfully commercialize our product candidates.
Collaboration agreements that we may enter into in the
future may not be successful, which could adversely affect our ability to develop and commercialize our diagnostics and therapeutic
We may enter into collaboration agreements with pharmaceutical
companies and biotechnology institutions for the development or commercialization of our cannabinoid-based diagnostics and therapeutic
product candidates, 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 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
Our business model is substantially dependent on third
party licensees to market and sell our products, which will subject us to a number of risks.
We depend on third party licensees to sell, market, and service
our products and current and future products in our intended markets. We are subject to a number of risks associated with reliance
upon third party licensees, including:
lack of day-to-day control over the activities of licensees;
third party licensees may not commit the necessary resources to market and sell our current and future products to our level
third party licensees may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements
in a manner unfavorable to us; and
disagreements with our future licensees could result in costly and time-consuming litigation or arbitration which we could
be required to conduct in jurisdictions with which we are not familiar.
If we fail to establish and maintain satisfactory relationships
with our future third party licensees, our revenue and market share may not grow as anticipated, and we could be subject to unexpected
costs which could harm our results of operations and financial condition.
Risks Related To Operating In Israel
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 have only conducted our research in Israel and,
in fact, have limited our operations to Israel. The biotechnologies that 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 Ministry of Health, Israel Medical Cannabis Unit (“IMCU”),
basis. We have obtained all IMCU licenses that are necessary for us to carry out our research. Even though
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 candidates as we intend or at all.
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.
We expect that our results of operations will be subject
to fluctuations in currency exchange rates because a substantial portion of our anticipated revenue will be generated in U.S. dollars
and Euros while a significant portion of our expenses will be incurred in New Israeli Shekels.
We expect a substantial portion of our revenue will be generated
in U.S. dollars and Euros, while a significant portion of our expenses, principally salaries and related personnel expenses, is
paid in New Israeli Shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the Euro or the U.S. dollar, or that the timing of this devaluation will lag behind
inflation in Israel. Because inflation has the effect of increasing the U.S. dollar and Euro costs of our operations, it would
therefore have an adverse effect on our dollar-measured results of operations. The value of the NIS, against the Euro, the U.S.
dollar, and other currencies may fluctuate and is affected by, among other things, changes in Israel’s political and economic
conditions. Any significant revaluation of the NIS may materially and adversely affect our cash flows, revenues and financial condition.
Fluctuations in the NIS exchange rate, or even the appearance of instability in such exchange rate, could adversely affect our
ability to operate our business.
We may not be able to enforce covenants not-to-compete
under current Israeli law.
We have non-competition agreements with most of our employees,
all of which are governed by Israeli law. These agreements generally prohibit our employees from competing with us or working for
our competitors for a specified period following termination of their employment. However, Israeli courts are reluctant to enforce
non-compete undertakings of former employees and tend, if at all, to enforce those provisions for relatively brief periods of time
in restricted geographical areas and only when the employee has unique value specific to that employer’s business and not
just regarding the professional development of the employee. Any such inability to enforce non-compete covenants may cause us to
lose any competitive advantage arising from confidential information known to such former employees.
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
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 Stock
There can be no assurance of an active, liquid and orderly
trading market for our common stock or that investors will be able to sell their shares of common stock.
At present, our common stock is quoted on the OTCQB tier of
the marketplace maintained by OTC Markets Group Inc., under the symbol “CNBX.” There is only a limited, liquid public
trading market for our common stock. There can be no assurance that a liquid market for our common stock will continue. 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 is no assurance that any such
awareness will be generated or sustained. Therefore, 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. Moreover, 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. 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.
The price of our common stock is volatile, and the value
of your investment could decline.
The market price of our common stock has been highly volatile.
Between September 1, 2016, and April 7, 2017, the sales price of our stock on the OTCQB ranged from a low of $0.04 per share to
a high of $7.60 per share. Accordingly, it is difficult to forecast the future performance of our common stock. The market price
of our common stock may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control
and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment
in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
technological innovations or new products and services by us or our competitors;
regulatory developments at the federal, state or local level;
additions or departures of key personnel;
our ability to execute our business plan;
operating results that fall below expectations;
loss of any strategic relationship;
economic, political and other external factors; and
period-to-period fluctuations in our financial results.
The stock market generally and in particular, the market for
stocks of biotechnology companies with lower market capitalizations, like us, have from time to time experienced, and likely will
again experience significant price and volume fluctuations that are unrelated to the operating performance of a particular company.
The trading price of our common stock might decline in reaction to events that affect other companies in our industry, even if
these events do not directly affect us.
Periods of volatility in the market price of a company’s
securities have often been followed by securities class action litigation against that company. If our stock price continues to
be volatile, we may become the target of securities litigation, which could result in substantial costs and divert our management’s
attention and resources from our business. This could have a material adverse effect on our business, operating results and financial
We may never pay any dividends to our shareholders.
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, our stockholders
must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future
gains on their investment.
Our principal stockholders and management own a significant
percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
As of February 28, 2017, Cannabics Inc., a Delaware corporation,
owns 77% of our common stock. Our Chief Executive Officer and our Chief Technical Officer, who are both also directors, collectively
own 39.35% of Cannabics Inc., and therefore have substantial influence over it. Accordingly, Cannabics Pharmaceuticals Inc., (and
our management) may be able to control the outcome of stockholder votes, including votes concerning the election of directors,
amendment of our organizational documents, approval of mergers, sales of assets and other significant corporate transactions. This
concentration of ownership in Cannabics Inc. (and our management) may have the effect of delaying or preventing a change in our
management and voting control of Cannabics Inc., including preventing or discouraging unsolicited acquisition proposals or offers
for our common stock that some of our stockholders may believe is in their best interest.
We may issue shares of preferred stock with greater rights
than our common stock, which may entrench management and result in dilution of our stockholders' investment.
Our Articles of Incorporation authorize the issuance of up to
100 million shares of preferred stock, par value $0.0001 per share. The authorized but unissued preferred stock may be issued by
our board of directors from time to time on any number of occasions, without stockholder approval, as one or more separate series
of shares comprised of any number of the authorized but unissued shares of preferred stock, designated by resolution of our board
of directors stating the name and number of shares of each series and setting forth separately for such series the relative rights,
privileges and preferences thereof, including, if any, the: (i) rate of dividends payable thereon; (ii) price, terms and conditions
of redemption; (iii) voluntary and involuntary liquidation preferences; (iv) provisions of a sinking fund for redemption or repurchase;
(v) terms of conversion to common stock, including conversion price, and (vi) voting rights. Such preferred stock may enable our
board of directors to hinder or discourage any attempt to gain control of Cannabics Pharmaceuticals Inc. by a merger, tender offer
at a control premium price, proxy contest or otherwise. Consequently, the preferred stock could entrench our management. The market
price of our common stock could be depressed by the existence of the preferred stock.
Nevada law and certain provisions of our Articles of Incorporation
and bylaws may discourage mergers and other transactions.
Provisions of Nevada law, such as its business combination statute,
and certain provisions of our Articles of Incorporation and by-laws could make it more difficult for someone to acquire control
of Cannabics Pharmaceuticals Inc. and limit the price that certain investors might be willing to pay for shares of our common stock.
These provisions may make it more difficult for stockholders to take certain corporate actions and could delay or prevent someone
from acquiring our business. The provisions could be beneficial to our management and the board of directors in a hostile tender
offer, and could have an adverse impact on stockholders who might want to participate in such tender offer, or who might want to
replace some or all of the members of the board of directors.
Our common stock may be subject to penny stock rules, which
may make it more difficult for our investors to sell their common stock.
Our common stock is presently considered to be a "penny
stock" and is subject to SEC rules and regulations that impose limitations upon the manner in which such shares may be publicly
traded, and regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks generally
are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities
is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock
not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks
and the 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 in the transaction, and monthly account statements
showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock, the broker-dealer 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. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny
stock rules which may increase the difficulty investors may experience in attempting to liquidate such securities. These requirements
could also hamper our ability to raise funds in the primary market for our shares of common stock.