NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS
Nature
of Operations
Enveric
Biosciences, Inc. (“Enveric Biosciences, Inc.” “Enveric” or the “Company”) (formerly known as Ameri
Holdings, Inc.) (“Ameri”) is a pharmaceutical company developing innovative, evidence-based cannabinoid medicines. The head
office of the Company is located in Naples, Florida. The Company has the following wholly owned subsidiaries: Jay Pharma Inc. (“Jay
Pharma”), 1306432 B.C. Ltd. (“HoldCo”), MagicMed Industries, Inc. (“MagicMed”), and Enveric Canada. The
Company has an Amalgamation Agreement (“Amalgamation Agreement”) and tender agreement (“Tender Agreement”) with
Jay Pharma, which were entered into in prior years.
On
May 24, 2021, the Company entered into an Amalgamation Agreement (the “Amalgamation Agreement”) with 1306432 B.C. Ltd., a
corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of the Company (“HoldCo”),
1306436 B.C. Ltd., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of HoldCo
(“Purchaser”), and MagicMed Industries Inc., a corporation existing under the laws of the Province of British Columbia (“MagicMed”),
pursuant to which, among other things, the Company, indirectly through Purchaser, acquired all of the outstanding securities of MagicMed
in exchange for securities of the Company by way of an amalgamation under the British Columbia Business Corporations Act, upon the terms
and conditions set forth in the Amalgamation Agreement, such that, upon completion of the Amalgamation (as defined herein), the amalgamated
corporation (“Amalco”) will be an indirect wholly-owned subsidiary of the Company. The Amalgamation was completed on September
16, 2021.
At
the effective time of the Amalgamation (the “Effective Time”), holders of outstanding common shares of MagicMed (the
“MagicMed Shares”) received such number of shares of common stock of the Company (“Company Shares”)
representing, together with the Company Shares issuable upon exercise of the MagicMed Warrants (“MagicMed Warrants”) and
the Converted Options (each as defined herein), approximately 36.6%
of the issued and outstanding Company Shares (on a fully diluted basis). The MagicMed Shares were initially converted into Amalco
Redeemable Preferred Shares (as defined in the Amalgamation Agreement), which immediately following the Amalgamation were redeemed
for 0.00005
of a Company Share. Following such redemption, the shareholders of MagicMed received additional Company Shares equal to the product
of the Exchange Ratio (as defined in the Amalgamation Agreement) multiplied by the number of MagicMed Shares held by each such
shareholder. Additionally, following the Effective Time (i) each outstanding MagicMed stock option was converted into and became an
option to purchase (the “Converted Options”) the number of Company Shares equal to the Exchange Ratio multiplied by the
number of MagicMed Shares subject to such MagicMed stock option, and (ii) each holder of an outstanding MagicMed warrant (including
Company Broker Warrants (as defined in the Amalgamation Agreement), the MagicMed Warrants received upon exercise of such MagicMed
Warrant that number of Company Shares which the holder would have been entitled to receive as a result of the Amalgamation if,
immediately prior to the date of the Amalgamation (the “Effective Date”), such holder had been the registered holder of
the number of MagicMed Shares to which such holder would have been entitled if such holder had exercised such holder’s
MagicMed Warrants immediately prior to the Effective Time (the foregoing collectively, the “Amalgamation”). In
aggregate, holders of MagicMed Shares received 199,025 Company
Shares, representing approximately 31.7%
of the Company Shares following the consummation of the Amalgamation. The maximum number of Company Shares to be issued by the
Company as in respect of the MagicMed Warrants and Converted Options shall not exceed 148,083
Company Shares.
The
aggregate number of Company Shares that the Company issued in connection with the Amalgamation (collectively, the “Share Consideration”)
was in excess of 20% of the Company’s pre-transaction outstanding Company Shares. Accordingly, the Company sought and received
stockholder approval of the issuance of the Share Consideration in the Amalgamation in accordance with the Nasdaq Listing Rules.
Pursuant
to the terms of the Amalgamation Agreement, the Company appointed, effective as of the Effective Time two individuals selected by MagicMed
to the Company Board of Directors, Dr. Joseph Tucker and Dr. Brad Thompson.
The
Amalgamation Agreement contained representations and warranties, closing deliveries and indemnification provisions customary for a transaction
of this nature. The closing of the Amalgamation was conditioned upon, among other things, (i) the Share Consideration being approved
for listing on Nasdaq, (ii) the effectiveness of a Registration Statement on Form S-4 registering the Share Consideration and (iii) the
approval (a) of the MagicMed stockholders of the Amalgamation and (b) of the Company’s stockholders of each of the Amalgamation
and the issuance of the Share Consideration in the Amalgamation. The closing of the Amalgamation occurred on September 16, 2021.
MagicMed
Industries develops and commercializes psychedelic-derived pharmaceutical candidates. MagicMed’s psychedelic derivatives library,
the Psybrary™, is an essential building block from which industry can develop new patented products. The initial focus of the Psybrary™
is on psilocybin and DMT derivatives, and it is then expected to be expanded to other psychedelics.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Akos Spin-Off
On May 11, 2022, the Company announced
plans to transfer and spin-off its cannabinoid clinical development pipeline assets to Akos Biosciences, Inc. (formerly known as Acanna Therapeutics,
Inc.), a majority owned subsidiary of the Company (hereafter referred to as “Akos”), which was incorporated on April 13, 2022, by way of dividend to Enveric shareholders
(the “Spin-Off”). The Spin-Off will be subject to various conditions, including Akos meeting the qualifications for listing
on The Nasdaq Stock Market, and if successful, would result in two standalone public companies. The new company as a result of the Spin-Off
will be referred to as Akos. If the Spin-Off does not occur, the Company has guaranteed the redeemable non-controlling interest (“RNCI”).
On May 5, 2022, the
Company and Akos entered into a Securities Purchase Agreement (the “Akos Purchase Agreement”) with an accredited
investor (the “Akos Investor”), pursuant to which Akos agreed to sell to the Akos Investor up to an aggregate of 5,000
shares of Akos’ Series A Convertible Preferred Stock (the “Akos Series A Preferred Stock”), par value $0.01
per share at a price of $1,000
per share, and warrants (the “Akos Warrants”) to purchase shares of Akos’ common stock (the “Akos Common
Stock”), par value $0.01
per share, for an aggregate purchase price of up to $5,000,000
(the “Akos Private Placement”). Pursuant to the Akos Purchase Agreement, Akos has issued 1,000
shares of the Akos Series A Preferred Stock to the Akos Investor in exchange for $1,000,000
on May 5, 2022.
Reverse Stock Split
On July 14, 2022 the Company
affected a 1-for-50 reverse stock split. All historical share and per share amounts reflected throughout this report have been adjusted to
reflect the Reverse Stock Split.
Liquidity
and Going Concern and Other Uncertainties
The
Company has incurred continuing losses from its operations. As of June 30, 2022, the Company had an accumulated deficit of $68,050,972
and working capital of $17,044,634. Since inception, the Company’s operations have been funded principally through the issuance
of debt and equity. On July 26, 2022, the Company received net proceeds of approximately $7.2 million as a result of multiple offerings
(see Note 9).
The
Company’s material cash requirements consist of working capital to fund capital expenditures incurred at their research facility
in Calgary and their operations, which consist primarily of, without limitation, employee related expenses, product development activities
conducted by third parties, research materials and lab supplies, facility related expenses including rent and maintenance, costs associated
with preclinical studies, patent related costs, costs of regulatory and public company compliance, insurance costs, audit costs, consultants
and legal fees. Additionally, the Company currently utilizes third-party contract CROs to assist with clinical development activities.
If the Company obtains regulatory approval for any of their product candidates, they expect to incur significant expenses to engage third-party
contract CMOs to carry out their clinical manufacturing activities as they do not yet have a commercial organization, and incur significant
expenses related to developing their internal commercialization capability to support product sales, marketing and distribution. The
Company’s current working capital resources are sufficient to fund these material cash requirements for the next twelve months.
The
Company expects to finance future cash needs through public or private equity offerings, debt financings, or business development transactions.
If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate research and development
programs or obtain funds through arrangements with collaborators or others that may require the Company to relinquish rights to certain
pipeline candidates that they might otherwise seek to develop or commercialize independently.
Nasdaq
Notice
On
February 18, 2022, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market indicating
that, based upon the closing bid price of the Company’s common stock for the 30 consecutive business day period between
January 5, 2022, through February 17, 2022, the Company did not meet the minimum bid price of $1.00
per share required for continued listing on The Nasdaq Capital Market (“Nasdaq”) pursuant to Nasdaq Listing Rule
5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days, or until
August 17, 2022 (the “Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing Rule
5810(c)(3)(A).
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On
July 29, 2022, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market stating that for the last ten consecutive business days, from July 15 to July
28, 2022, the closing bid price of the Company’s common stock had been at $1.00 per share or greater. Accordingly, the Company
has regained compliance with Listing Rule 5550(a)(2).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principal of Consolidation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Management’s
opinion is that all adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2022. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements for the year ended December 31, 2021 and related notes thereto included in the Company’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022.
The
Company’s significant accounting policies and recent accounting standards are summarized in Note 2 of the Company’s financial
statements for the year ended December 31, 2021. There were no significant changes to these accounting policies during the three and
six months ended June 30, 2022.
Reclassification
Certain
reclassifications have been made to the prior period financial statements to conform to the current period financial statement presentation.
Certain amounts related to depreciation and amortization from the prior period were reclassified from General and administrative line
item to Depreciation and amortization line item on the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income
(Loss). These reclassifications had no net effect on loss from operations, net loss, or cash flows as previously reported.
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and expenses during
the periods reported. By their nature, these estimates are subject to measurement uncertainty and the effects on the financial statements
of changes in such estimates in future periods could be significant. Significant areas requiring management’s estimates and assumptions
include determining the fair value of transactions involving common stock and the valuation of stock-based compensation, accruals associated
with third party providers supporting research and development efforts, estimated fair values of long lives assets used to record impairment
charges related to intangible assets, acquired in-process research and development (“IPR&D”), and goodwill, and allocation
of purchase price in business acquisitions. Actual results could differ from those estimates.
Foreign
Currency Translation
From
inception through June 30, 2022, the reporting currency of the Company was the United States dollar while the functional currency of
the Company’s subsidiaries was the Canadian dollar. For the reporting periods ended June 30, 2022 and June 30, 2021, the Company
engaged in a number of transactions denominated in Canadian dollars. As a result, the Company is subject to exposure from changes in
the exchange rates of the Canadian dollar and the U.S. dollar.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company translates the assets and liabilities of its Canadian subsidiaries into the U.S. dollar at the exchange rate in effect on the
balance sheet date. Revenues and expenses are translated at the average exchange rate in effect during each monthly period. Unrealized
translation gains and losses are recorded as foreign currency translation gain (loss), which is included in the consolidated statements
of shareholders’ equity as a component of accumulated other comprehensive income (loss).
The
Company has not entered into any financial derivative instruments that expose it to material market risk, including any instruments designed
to hedge the impact of foreign currency exposures. The Company may, however, hedge such exposure to foreign currency exchange fluctuations
in the future.
Adjustments
that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in other comprehensive
income (loss) in the consolidated statements of operations and comprehensive income (loss) as incurred.
Warrant
Liability
The
Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC Topic 815, “Derivatives and Hedging”
(“ASC 815”). The Company accounts for warrants for shares of the Company’s common stock that are not indexed to its
own stock as derivative liabilities at fair value on the unaudited condensed consolidated balance sheets. The Company accounts for common
stock warrants with put options as liabilities under ASC 480. Such warrants are subject to remeasurement at each unaudited condensed
consolidated balance sheet date and any change in fair value is recognized as a component of other expense on the unaudited condensed
consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier
of the exercise or expiration of such common stock warrants. At that time, the portion of the warrant liability related to such common
stock warrants will be reclassified to additional paid-in capital.
Derivative
Liability
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as
embedded derivatives in accordance with ASC 815. For derivative financial instruments that are accounted for as assets or
liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each
reporting date, with changes in the fair value reported in the unaudited condensed consolidated statements of operations. The
classification of derivative instruments, including whether such instruments should be recorded as assets or liabilities or as
equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the unaudited condensed
consolidated balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument
could be required within 12 months of the balance sheet date.
Offering
Costs
The
Company allocates offering costs to the different components of the capital raise on a pro rata basis. Any offering costs allocated to
common stock are charged directly to additional paid-in capital. Any offering costs allocated to warrant liabilities are charged to general
and administrative expenses on the Company’s unaudited condensed consolidated statement of operations.
Net
Loss per Share
Basic
net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding
during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). The computation of basic net loss per share for the three and six months ended June 30, 2022 and 2021
excludes potentially dilutive securities. The computations of net loss per share for each period presented is the same for both basic
and fully diluted. In accordance with ASC 260-10-45-13, penny warrants were included in the calculation of weighted average shares outstanding
for purposes of calculating basic and diluted earnings per share.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Potentially
dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share for the three and
six months ended June 30, 2022 and 2021 because the effect of their inclusion would have been anti-dilutive.
SCHEDULE
OF POTENTIALLY DILUTIVE SECURITIES
| |
For the three and six months
ended June 30, 2022 | | |
For the three and six months
ended June 30, 2021 | |
Warrants to purchase shares of common stock | |
| 655,463 | | |
| 91,073 | |
Restricted stock units - vested and unissued | |
| 56,071 | | |
| — | |
Restricted stock units - unvested | |
| 94,550 | | |
| 51,930 | |
Restricted stock awards - vested and unissued | |
| 909 | | |
| — | |
Restricted stock awards - unvested | |
| 65 | | |
| 266 | |
Options to purchase shares of common stock | |
| 22,829 | | |
| 4,512 | |
Total potentially dilutive securities | |
| 829,887 | | |
| 147,781 | |
Fair
Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes
the inputs to valuation methodologies used to measure fair value:
Level
1 - Valuations based on quoted prices for identical assets and liabilities in active markets.
Level
2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data.
Level
3 - Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by
other market participants. These valuations require significant judgment.
For
certain financial instruments, including cash, accounts receivable, and accounts payable, the carrying amounts approximate their fair
values as of June 30, 2022 and December 31, 2021 because of their short-term nature.
The
following table provides the financial liabilities measured on a recurring basis and reported at fair value on the balance sheet as of
June 30, 2022 and indicates the fair value of the valuation inputs the Company utilized to determine such fair value of warrant liabilities
and the derivative liability:
SCHEDULE
OF FAIR VALUE HIERARCHY OF VALUATION INPUTS ON RECURRING BASIS
| |
Level | | |
June 30, 2022 | | |
December 31, 2021 | |
Warrant liabilities - January 2021 Warrants | |
| 3 | | |
$ | 15,138 | | |
$ | 333,471 | |
Warrant liabilities - February 2021 Warrants | |
| 3 | | |
| 14,970 | | |
| 320,203 | |
Warrant liabilities - February 2022 Warrants | |
| 3 | | |
| 1,973,095 | | |
| — | |
Fair value as of June 30, 2022 | |
| | | |
$ | 2,003,203 | | |
$ | 653,674 | |
Warrant liabilities - fair value | |
| | | |
$ | 2,003,203 | | |
$ | 653,674 | |
| |
Level | | |
June 30, 2022 | | |
December 31, 2021 | |
Derivative liability - May 2022 | |
| 3 | | |
$ | 455,000 | | |
$ | — | |
Fair value as of June 30, 2022 | |
| | | |
$ | 455,000 | | |
$ | — | |
Derivative liability - fair value | |
| | | |
$ | 455,000 | | |
$ | — | |
The
warrant liabilities and derivative liability are all classified as Level 3, for which there is no current market for these securities
such as the determination of fair value requires significant judgment or estimation. Changes in fair value measurement categorized within
Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Initial
measurement
The
Company established the initial fair value of its warrant liabilities at the respective dates of issuance. The Company used a Black Scholes
valuation model in order to determine their value. The key inputs into the Black Scholes valuation model for the initial valuations of
the warrant liabilities are below:
SCHEDULE
OF BLACK SCHOLES VALUATION MODELS OF WARRANT LIABILITIES
| |
February 2022 Warrants | |
| |
February 15, 2022 | |
Term (years) | |
| 5.0 | |
Stock price | |
$ | 15.75 | |
Exercise price | |
$ | 27.50 | |
Dividend yield | |
| — | % |
Expected volatility | |
| 74.1 | % |
Risk free interest rate | |
| 1.9 | % |
| |
| | |
Number of warrants | |
| 460,000 | |
Value (per share) | |
$ | 8.00 | |
The Company established
the initial fair value of its derivative liability at the respective date of issuance. The Company used a Weighted Expected Return valuation
model in order to determine their value. The key inputs into the Weighted Expected Return valuation model for the initial valuations of
the warrant liabilities are below:
| |
May 2022 Derivative Liability | |
| |
May 5, 2022 | |
Principal | |
$ | 1,000,000 | |
Dividend rate | |
| 5.0 | % |
Market rate | |
| 4.4 | % |
Subsequent
measurement
The
following table presents the changes in fair value of the warrant liabilities and derivative liability:
SCHEDULE
OF FAIR VALUE OF WARRANT LIABILITIES AND DERIVATIVE LIABILITY
| |
Total Warrant Liabilities | |
Fair value as of December 31, 2021 | |
$ | 653,674 | |
Issuance of February 2022 warrants | |
| 3,595,420 | |
Change in fair value | |
| (2,245,891 | ) |
Fair value as of June 30, 2022 | |
$ | 2,003,203 | |
| |
Total Derivative Liability | |
Fair value as of December 31, 2021 | |
$ |
— | |
Issuance of May 2022 convertible preferred stock | |
| 402,000 | |
Change in fair value | |
| 53,000 | |
Fair value as of June 30, 2022 | |
$ | 455,000 | |
The
key inputs into the Black Scholes valuation model for the Level 3 valuations of the warrant liabilities as of June 30, 2022 are below:
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE
OF BLACK SCHOLES VALUATION MODELS OF WARRANT LIABILITIES
| |
January 2021 Warrants | | |
February 2021 Warrants | | |
February 2022 Warrants | |
Term (years) | |
| 3.5 | | |
| 3.6 | | |
| 4.6 | |
Stock price | |
$ | 10.70 | | |
$ | 10.70 | | |
$ | 10.70 | |
Exercise price | |
$ | 247.50 | | |
$ | 245.00 | | |
$ | 27.50 | |
Dividend yield | |
| — | % | |
| — | % | |
| — | % |
Expected volatility | |
| 78.2 | % | |
| 77.7 | % | |
| 74.3 | % |
Risk free interest rate | |
| 3.00 | % | |
| 3.00 | % | |
| 3.01 | % |
| |
| | | |
| | | |
| | |
Number of warrants | |
| 36,429 | | |
| 34,281 | | |
| 460,000 | |
Value (per share) | |
$ | 0.42 | | |
$ | 0.44 | | |
$ | 4.29 | |
The
key inputs into the Weighted Expected Return valuation model for the Level 3 valuations of the derivative liability as of June 30,
2022 are below:
| |
May
2022 Derivative Liability | |
Principal | |
$ | 1,000,000 | |
Dividend rate | |
| 5.0 | % |
Market rate | |
| 6.8 | % |
Leases
Operating
lease assets are included within right-of-use operating lease asset and operating lease liabilities are included in current portion of
right-of-use operating lease obligation and non-current portion of right-of-use operating lease obligation on the consolidated balance
sheet as of June 30, 2022. The Company has elected not to present short-term leases as these leases have a lease term of 12 months or
less at lease inception and do not contain purchase options or renewal terms that the Company is reasonably certain to exercise. All
other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement
date. Because most of the Company’s leases do not provide an implicit rate of return, the Company used an incremental borrowing
rate based on the information available at adoption date in determining the present value of lease payments.
Redeemable
Non-controlling Interest
In
connection with the issuance of Akos Series A Preferred Stock, the Akos Purchase Agreement and certificate of designation contain a
put right guaranteed by the Company as defined in Note 6. Applicable accounting guidance requires an equity instrument that is
redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable
price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely
within the control of the issuer. As a result of this feature, the Company recorded the non-controlling interests as redeemable
non-controlling interests and classified them in temporary equity within its unaudited condensed consolidated balance sheet
initially at its acquisition-date estimated redemption value or fair value. In addition, the Company has elected to recognize
changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument by accreting the embedded
derivative at each reporting period over 12 months.
The
Akos Series A Preferred Certificate of Designations provides that upon the earlier of (i) the one-year anniversary of May 5, 2022, and
only in the event that the Spin-Off has not occurred; or (ii) such time that Akos and the Company have abandoned the Spin-Off or the
Company is no longer pursuing the Spin-Off in good faith, the holders of the Akos Series A Preferred Stock shall have the right (the
“Put Right”), but not the obligation, to cause Akos to purchase all or a portion of the Akos Series A Preferred Stock for
a purchase price equal to $1,000 per share, subject to certain adjustments as set forth in the Akos Series A Preferred Certificate of
Designations, plus all the accrued but unpaid dividends per share. Pursuant to the Akos Purchase Agreement, the Company has guaranteed
the payment of the purchase price for the shares purchased under the Put Right.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment
Reporting
The
Company determines its reporting units in accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”). The
Company evaluates a reporting unit by first identifying its operating segments under ASC 280. The Company then evaluates each operating
segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment
that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more
reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines
if the segments are economically similar and, if so, the operating segments are aggregated. The Company has multiple operations related to psychedelics and cannabinoids. Both of these operations exist under
one reporting unit: Enveric. The Company has one operating segment and
reporting unit. The Company is organized and operated as one business. Management reviews its business as a single operating segment,
using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate.
3.
INTANGIBLE ASSETS AND GOODWILL
As
of June 30, 2022, the Company’s intangible assets consisted of:
SCHEDULE
OF GOODWILL INDEFINITE AND FINITE LIVED INTANGIBLE ASSETS
Goodwill | |
| | |
Balance at December 31, 2021 | |
$ | 1,587,634 | |
Loss on currency translation | |
| (25,691 | ) |
Balance at June 30, 2022 | |
$ | 1,561,943 | |
| |
| | |
Indefinite lived intangible assets | |
| | |
Balance at December 31, 2021 | |
$ | 6,375,492 | |
Loss on currency translation | |
| (103,167 | ) |
Balance at June 30, 2022 | |
$ | 6,272,325 | |
| |
| | |
Definite lived intangible assets | |
| | |
Balance at December 31, 2021 | |
$ | 548,436 | |
Amortization | |
| (84,375 | ) |
Balance at June 30, 2022 | |
$ | 464,061 | |
For
goodwill, identified indefinite lived assets, and identified definite lived intangible assets, there was no impairment expense during
the three and six months ended June 30, 2022 and 2021. For identified definite lived intangible assets, amortization expense amounted
to $42,187 and $174,019 during the three months ended June 30, 2022 and 2021, respectively. For identified definite lived intangible
assets, amortization expense amounted to $84,375 and $310,659 during the six months ended June 30, 2022 and 2021, respectively.
The
Company amortizes definite lived intangible assets on a straight-line basis over their estimated useful lives. Amortization expense
of identified intangible assets based on the carrying amount as of June 30, 2022 is as follows:
SCHEDULE
OF FINITE LIVED INTANGIBLE ASSETS AMORTIZATION EXPENSES
Year ending December 31, | | |
| |
2022 (excluding the six months ended June 30) | | |
$ | 84,375 | |
2023 | | |
| 168,750 | |
2024 | | |
| 168,750 | |
2025 | | |
| 42,186 | |
Finite
lived Assets Amortization Expense | | |
$ | 464,061 | |
ENVERIC BIOSCIENCES,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4.
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following assets which are located in Calgary, Canada and placed in service by Enveric Biosciences Canada,
Inc (“EBCI”), with all amounts translated into U.S. dollars:
SCHEDULE
OF PROPERTY PLANT AND EQUIPMENT NET OF ACCUMULATED DEPRECIATION
| |
June 30, 2022 | | |
December 31, 2021 | |
Lab equipment | |
$ | 863,650 | | |
$ | 310,957 | |
Computer equipment | |
| 16,154 | | |
| 10,818 | |
Property
and Equipment, gross | |
| | | |
| | |
Less: Accumulated depreciation | |
| (96,348 | ) | |
| (27,345 | ) |
Property and equipment, net of accumulated depreciation | |
$ | 783,456 | | |
$ | 294,430 | |
Depreciation
expense was $43,315 and $— for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense was $70,392 and
$— for the six months ended June 30, 2022 and 2021, respectively.
5.
SHARE CAPITAL AND OTHER EQUITY INSTRUMENTS
Authorized
Capital
The
holders of the Company’s common stock are entitled to one vote per share. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of legally available funds. Upon the liquidation, dissolution,
or winding up of the Company, holders of common stock are entitled to share ratably in all assets of the Company that are legally available
for distribution. As of June 30, 2022, 100,000,000 shares of common stock were authorized under the Company’s articles of incorporation.
On
December 30, 2020, the Company amended its articles of incorporation to designate and authorize 20,000,000 shares of preferred stock.
The Company issued Series B preferred stock (“Series B Preferred Stock), which has a certificate of designation authorizing issuance
of 3,600,000 preferred shares. During the three months ended March 31, 2021, holders of an aggregate of 65,509 shares of Series B Preferred
Stock converted their shares into 65,509 shares of common stock. Following those conversions, no Series B Preferred stock shares remain
outstanding.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Series
C Preferred Shares
On May 3, 2022, the Board
of Directors (the “Board”) declared a dividend of one one-thousandth of a share of the Company’s Series C Preferred
Stock (“Series C Preferred Stock”) for each outstanding share of the Company’s Common Stock (the “Common Stock”)
held of record as of 5:00 p.m. Eastern Time on May 13, 2022 (the “Record Date”). This dividend was based on the number of
outstanding shares of Common Stock prior to the Reverse Stock Split. The outstanding shares of Series C Preferred Stock were entitled
to vote together with the outstanding shares of the Company’s Common Stock, as a single class, exclusively with respect to a proposal
giving the Board the authority, as it determines appropriate, to implement a reverse stock split within twelve months following the approval
of such proposal by the Company’s stockholders (the “Reverse Stock Split Proposal”), as well as any proposal to adjourn
any meeting of stockholders called for the purpose of voting on the Reverse Stock Split Proposal (the “Adjournment Proposal”).
The Company held a special meeting of stockholders on July 14, 2022 (the “Special Meeting”) for the purpose
of voting on, among other proposals, a Reverse Stock Split Proposal and an Adjournment Proposal. All shares of Series C Preferred Stock
that were not present in person or by proxy at the Special Meeting were automatically redeemed by the Company immediately prior to the
opening of the polls at Special Meeting (the “Initial Redemption”). All shares that were not redeemed pursuant to the Initial
Redemption were redeemed automatically upon the approval by the Company’s stockholders of the Reverse Stock Split Proposal at the
Special Meeting (the “Subsequent Redemption” and, together with the Initial Redemption, the “Redemption”). Each
share of Series C Preferred Stock was entitled to receive $0.10 in cash for each 10 whole shares of Series C Preferred Stock
immediately prior to the Redemption. As of June 30, 2022, there were 52,684.548 shares of Series C Preferred Stock issued and
outstanding. As of August 12, 2022, both the Initial Redemption and the Subsequent Redemption have occurred. As a result,
no shares of Series C Preferred Stock remain outstanding.
The Company was not solely in control of redemption of the shares since
the holders had the option of deciding whether to return a proxy card for the Special Meeting, which determined whether a given holder’s
shares of Series C Preferred Stock were redeemed in the Initial Redemption or the Subsequent Redemption. Since the redemption of the Series
C Preferred Stock was not solely in the control of the Company, the preferred shares are classified within temporary equity in the Company’s
unaudited condensed consolidated balance sheets. The
preferred shares were initially measured at redemption value. The value of the preferred shares as of June 30, 2022 is $527.
ENVERIC BIOSCIENCES,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Common
Stock Activity
On
February 15, 2022, the Company completed a public offering of 400,000 shares of Common Stock and warrants to purchase up to 400,000 shares
of Common Stock for gross proceeds of approximately $10 million, before deducting underwriting discounts and commissions and other offering
expenses. A.G.P./Alliance Global Partners acted as sole book-running manager for the offering. In addition, Enveric granted the underwriter
a 45-day option to purchase up to an additional 60,000 shares of Common Stock and/or warrants to purchase up to an additional 60,000
shares of Common Stock at the public offering price, which the underwriter has partially exercised for warrants to purchase up to 60,000
shares of common stock. At closing, Enveric received net proceeds from the offering of approximately $9.1 million, after deducting underwriting
discounts and commissions and estimated offering expenses with $5.8 million allocated to equity, $3.6 million to warrant liability and
the remaining $0.3 million recorded as an expense.
During
the six months ended June 30, 2022, a total of 2,122 shares of Common Stock were issued pursuant to the conversion of restricted stock
units.
Stock
Options
A
summary of activity under the Company’s incentive plan for the six months ended June 30, 2022 is presented below:
SCHEDULE OF STOCK OPTION
| | |
Number of Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Grant Date Fair Value | | |
Weighted Average Remaining Contractual Term (years) | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2021 | | |
| 23,829 | | |
$ | 79.00 | | |
$ | 103.50 | | |
| 5.3 | | |
$ | 34,333 | |
Forfeited | | |
| (1,000 | ) | |
$ | 175.00 | | |
$ | 140.50 | | |
| — | | |
| — | |
Outstanding at June 30, 2022 | | |
| 22,829 | | |
$ | 75.00 | | |
$ | 101.50 | | |
| 4.6 | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
Exercisable at June 30, 2022 | | |
| 19,540 | | |
$ | 75.00 | | |
$ | 100.50 | | |
| 4.0 | | |
$ | — | |
The
Company’s stock-based compensation expense, recorded within general and administrative expense, related to stock options for the
three months ended June 30, 2022 and 2021 was $48,697 and $—, respectively. The Company’s stock-based compensation expense,
recorded within general and administrative expense, related to stock options for the six months ended June 30, 2022 and 2021 was $85,686
and $—, respectively. As of June 30, 2022, the Company had $271,198 in unamortized stock option expense, which will be recognized
over a weighted average period of 1.6 years.
During
the six months ended June 30, 2021, the Company exchanged options to purchase 11,209 shares of common stock for 6,509 restricted stock
units and 843 restricted stock awards. In connection with this exchange, the Company recognized $298,714 in inducement expense related
to the increase in fair value of the new awards over the old awards, which is included in other expenses on the Company’s consolidated
statement of operations and comprehensive income (loss).
Restricted
Stock Awards
The
Company’s activity in restricted common stock was as follows for the six months ended June 30, 2022:
SCHEDULE OF RESTRICTED STOCK UNITS AND AWARDS ACTIVITY
| | |
Number of shares | | |
Weighted average
fair value | |
Non-vested at December 31, 2021 | | |
| 1,031 | | |
$ | 141.50 | |
Granted | | |
| 37,445 | | |
$ | 33.5 | |
Forfeited | | |
| (700 | ) | |
$ | 146.50 | |
Vested | | |
| (266 | ) | |
$ | 138.68 | |
Non-vested at June 30, 2022 | | |
| 65 | | |
$ | 96.50 | |
For
the three months ended June 30, 2022 and 2021, the Company recorded $6,250 and $24,003, respectively, in stock-based compensation expense
within general and administrative expense, related to restricted stock awards. For the six months ended June 30, 2022 and 2021, the Company
recorded $18,113 and $56,114, respectively, in stock-based compensation expense within general and administrative expense, related to
restricted stock awards. As of June 30, 2022, unamortized stock-based compensation costs related to restricted share awards was $6,250,
which will be recognized over a weighted average period of 0.3 years. The balance of Common Shares related to the vested restricted stock
awards as of June 30, 2022 will be issued during the 2022 calendar year. There are 909 vested and unissued shares of restricted stock
awards as of June 30, 2022.
ENVERIC
BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Issuance
of Restricted Stock Units
The
Company’s activity in restricted stock units was as follows for the six months ended June 30, 2022:
SCHEDULE OF RESTRICTED STOCK UNITS AND AWARDS ACTIVITY
| |
Number of shares | | |
Weighted average fair value | |
Non-vested at December 31, 2021 | |
| 62,013 | | |
$ | 126 | |
Granted | |
| 37,445 | | |
$ | 33.5 | |
Forfeited | |
| (2,696 | ) | |
$ | 199.5 | |
Vested | |
| (2,212 | ) | |
$ | 199.5 | |
Non-vested at June 30, 2022 | |
| 94,550 | | |
$ | 87.36 | |
For
the three months ended June 30, 2022 and 2021, the Company recorded $622,596 and $748,603, respectively, in stock-based compensation
expense related to restricted stock units. For the six months ended June 30, 2022 and 2021, the Company recorded $1,342,363 and $4,307,826,
respectively, in stock-based compensation expense related to restricted stock units, which is a component of general and administrative
expenses in the condensed consolidated statement of operations. As of June 30, 2022, the Company had unamortized stock-based compensation
costs related to restricted stock units of $6,448,238 which will be recognized over a weighted average period of 3.2 years and unamortized
stock-based costs related to restricted stock units. As of June 30, 2022, 2,212 shares of Common Stock have been issued in relation to
vested restricted stock units and 56,071 restricted stock units are vested without shares of Common Stock being issued.
The
following table summarizes the Company’s recognition of stock-based compensation for restricted stock units for the following periods:
SCHEDULE OF STOCK-BASED COMPENSATION FOR RESTRICTED STOCK UNITS
| |
| | | |
| | | |
| | | |
| | |
| |
Three months ended June 30, | | |
Six months ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Stock-based compensation for RSU | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
$ | 358,818 | | |
$ | 783,045 | | |
$ | 717,636 | | |
$ | 4,342,498 | |
Research and development | |
| 263,778 | | |
| — | | |
| 624,727 | | |
| — | |
Total | |
$ | 622,596 | | |
$ | 783,045 | | |
$ | 1,342,363 | | |
$ | 4,342,498 | |
Stock-based compensation | |
$ | 622,596 | | |
$ | 783,045 | | |
$ | 1,342,363 | | |
$ | 4,342,498 | |
Warrants
On
February 11, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with
A.G.P./Alliance Global Partners (the “Underwriter”). Pursuant to the Underwriting Agreement, the Company agreed to sell,
in a firm commitment offering, 400,000 shares
of the Company’s Common Stock and accompanying warrants to purchase up to an aggregate of 400,000 shares
of its common stock (“February 2022 Warrants”), as well as up to 60,000 additional
shares of common stock and/or warrants to purchase an aggregate of up to 60,000 shares
of its common stock that may be purchased by the Underwriter pursuant to a 45-day option granted to the Underwriter by the Company
(the “Offering”). Each share of common stock was sold together with a common warrant to purchase one share of
common stock, at an exercise price of $27.50 per
share. Such common warrants were immediately exercisable and will expire five years from the date of issuance. There is not expected
to be any trading market for the common warrants issued in the Offering. The combined public offering price of each share of common
stock and accompanying common warrant sold in the Offering was $25.00.
On February 14, 2022, the Underwriter exercised its option to purchase an additional 60,000 warrants.
ENVERIC BIOSCIENCES,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes information about shares issuable under warrants outstanding at June 30, 2022:
SCHEDULE OF WARRANTS
| |
Warrant shares outstanding | | |
Weighted average exercise price | | |
Weighted average remaining life | | |
Intrinsic value | |
Outstanding at December 31, 2021 | |
| 195,463 | | |
$ | 131.00 | | |
| 3.4 | | |
$ | 801,024 | |
Issued | |
| 460,000 | | |
$ | 27.50 | | |
| 4.6 | | |
$ | — | |
Outstanding at June 30, 2022 | |
| 655,463 | | |
$ | 58.36 | | |
| 4.1 | | |
$ | 21,437 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at June 30, 2022 | |
| 655,463 | | |
| 58.36 | | |
| 4.1 | | |
| 21,437 | |
The
warrants assumed pursuant to the acquisition of MagicMed contain certain down round features, which were not triggered by the February
2022 public offering, which would require adjustment to the exercise price upon certain events when the offering price is less than the
stated exercise price.
6. REDEEMABLE
NON-CONTROLLING INTEREST
Spin-Off and Related Private Placement
In connection with the
planned Spin-Off, on May 5, 2022, Akos and the Company entered into the Akos Purchase Agreement with the Akos Investor, pursuant to
which Akos agreed to sell up to an aggregate of 5,000
shares of Akos Series A Preferred Stock, at price of $1,000
per share, and Akos Warrants to purchase shares of Akos’ common stock, par value $0.01
per share (the “Akos Common Stock”), for an aggregate purchase price of up to $5,000,000.
The Akos Purchase Agreement is guaranteed by the Company. Pursuant to the Akos Purchase Agreement, Akos has issued 1,000
shares of the Akos Series A Preferred Stock to the Akos Investor in exchange for $1,000,000
on May 5, 2022. The additional $4,000,000
will be received on or immediately prior to the Spin-Off. The issuance of the Akos Series A Preferred Stock results in RNCI (see
Note 2). Palladium Capital Advisors, LLC (“Palladium”) acted as placement agent for the Akos Private Placement. Pursuant
to the Akos Purchase Agreement, Akos has agreed to pay Palladium a fee equal to 9% of the aggregate gross proceeds raised from the
sale of the shares of the Akos Series A Preferred Stock and a non-accountable expense allowance of 1% of the aggregate gross
proceeds raised the sale of the Akos Series A Preferred Stock in the Akos Private Placement. The fee due in connection with the Akos
Private Placement shall be paid to Palladium in the form of convertible preferred stock and warrants on similar terms to the
securities issued in the Akos Private Placement. As of June 30, 2022, there have been no accruals recorded for the fees or
warrants since the closing of the spin-off is not probable. Palladium is also entitled to warrants to purchase Akos Common Stock in
an amount up to 8%
of the number of shares of Akos Common Stock underlying the shares issuable upon conversion of the Akos Series A Preferred
Stock.
Terms of Akos Series A Preferred Stock
Under the Certificate
of the Designations, Preferences and Rights of Series A Convertible Preferred Stock of Akos (the “Akos Series A Preferred
Certificate of Designations”), on or immediately prior to the completion of the spin-off of Akos into an independent,
separately traded public company listed on The Nasdaq Stock Market, the outstanding Akos Series A Preferred Stock will be
automatically converted into a number of shares of Akos Common Stock equal to 25%
of the then issued and outstanding Akos Common Stock, subject to the Beneficial Ownership Limitation (as defined in the Akos
Purchase Agreement). Cumulative dividends on each share of Akos Series A Preferred Stock accrue at the rate of 5%
annually.
The Akos Series A Preferred Certificate of Designations provides that upon the earlier of (i)
the one-year anniversary of May 5, 2022, and only in the event that the Spin-Off has not occurred; or (ii) such time that Akos and the
Company have abandoned the Spin-Off or the Company is no longer pursuing the Spin-Off in good faith, the holders of the Akos Series A
Preferred Stock shall have the right (the “Put Right”), but not the obligation, to cause Akos to purchase all or a portion
of the Akos Series A Preferred Stock for a purchase price equal to $1,000 per share, subject to certain adjustments as set forth in the
Akos Series A Preferred Certificate of Designations (the “Stated Value”), plus all the accrued but unpaid dividends per share.
In addition, after the one-year anniversary of May 5, 2022, and only in the event that the Spin-Off has not occurred and Akos is not
in material default of any of the transaction documents, Akos may, at its option, at any time and from time to time, redeem the outstanding
shares of Akos Series A Preferred Stock, in whole or in part, for a purchase price equal to the aggregate Stated Value of the shares
of Akos Series A Preferred Stock being redeemed and the accrued and unpaid dividends on such shares. Pursuant to the Akos Purchase Agreement,
the Company has guaranteed the payment of the purchase price for the shares purchased under the Put Right.
The Akos Series A Preferred
Certificate of Designations contains limitations that prevent the holder thereof from acquiring shares of Akos Common Stock upon conversion
of the Akos Series A Preferred Stock that would result in the number of shares of Akos Common Stock beneficially owned by such holder
and its affiliates exceeding 9.99% of the total number of shares of Akos Common Stock outstanding immediately after giving effect to the
conversion (the “Beneficial Ownership Limitation”), except that upon notice from the holder to Akos, the holder may increase
or decrease the limit of the amount of ownership of outstanding shares of Akos Common Stock after converting the holder’s shares
of Akos Series A Preferred Stock, provided that any change in the Beneficial Ownership Limitation shall not be effective until 61 days
following notice to Akos.
ENVERIC BIOSCIENCES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Akos Series A Preferred Stock
Since the shares of Akos Series
A Preferred Stock are redeemable at the option of the holder and the redemption is not solely in the control of the Company, the shares
of Akos Series A Preferred Stock are accounted for as a redeemable non-controlling interest and classified within temporary equity in
the Company’s consolidated balance sheets. The redeemable non-controlling interest was initially measured at fair value. Dividends
on the shares of Akos Series A Preferred Stock are recognized as preferred dividends attributable to redeemable non-controlling interest
in the Company’s unaudited condensed consolidated statement of operations.
The table below presents the reconciliation
of changes in redeemable non-controlling interest:
SCHEDULE
OF RECONCILIATION CHANGE IN REDEEMBALE NONCONTROLLING INTEREST
Balance at December 31, 2021 | |
$ | — | |
Redeemable non-controlling interest, net of $402,000
embedded derivative and net of issuance costs of $41,962 | |
| 556,038 | |
Preferred dividends attributable to redeemable non-controlling interest | |
| 7,808 | |
Accretion of embedded derivative and transaction costs to redemption value | |
| 73,994 | |
Balance at June 30, 2022 | |
$ | 637,840 | |
As of June 30, 2022,
the redemption value of the redeemable non-controlling interest is $1,000,000 plus cumulative dividends which accrue at the rate of 5%
annually, or approximately $1,008,000. The Company has guaranteed this redemption on behalf of Akos.
7.
COMMITMENTS AND CONTINGENCIES
The
Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business. Management
believes that the outcome of such legal proceedings, legal actions and claims will not have a significant adverse effect on the Company’s
financial position, results of operations or cash flows.
Development
and Clinical Supply Agreement
On
February 22, 2021, the Company entered into a Development and Clinical Supply Agreement (the “PureForm Agreement”) with PureForm
Global, Inc. (“PureForm”), pursuant to which PureForm will be the exclusive provider of synthetic cannabidiol (“API”)
for the Company’s development plans for cancer treatment and supportive care. Under the terms of the PureForm Agreement, PureForm
has granted the Company the exclusive right to purchase API and related product for cancer treatment and supportive care during the term
of the Agreement (contingent upon an initial minimum order of 1 kilogram during the first thirty (30) days from the effective date) and
has agreed to manufacture, package and test the API and related product in accordance with specifications established by the parties.
All inventions that are developed jointly by the parties in the course of performing activities under the PureForm Agreement will be
owned jointly by the parties in accordance with applicable law; however, if the Company funds additional research and development efforts
by PureForm, the parties may enter into a further agreement whereby PureForm would assign any resulting inventions or technical information
to the Company.
The
initial term of the PureForm Agreement is three (3) years commencing on the effective date of the PureForm Agreement, subject to
extension by mutual agreement of the parties. The PureForm Agreement may be terminated by either party upon thirty (30) days written
notice of an uncured material breach or immediately in the event of bankruptcy or insolvency. The PureForm Agreement contains, among
other provisions, representation and warranties, indemnification obligations and confidentiality provisions in favor of each party
that are customary for an agreement of this nature.
The
Company has met the minimum purchase requirement of 1 kilogram during the first thirty days of the PureForm Agreement’s effectiveness.
Purchase
agreement with Prof. Zvi Vogel and Dr. Ilana Nathan
On
December 26, 2017, Jay Pharma entered into a purchase agreement with Prof. Zvi Vogel and Dr. Ilana Nathan (the “Vogel-Nathan Purchase
Agreement”), pursuant to which Jay Pharma was assigned ownership rights to certain patents, which were filed and unissued as of
the date of the Vogel-Nathan Purchase Agreement. The Vogel-Nathan Purchase Agreement includes a commitment to pay a one-time milestone
totaling $200,000 upon the issuance of a utility patent in the United States or by the European Patent Office, as defined in the agreement.
The Company has accrued such amount as of December 31, 2021, as a result of the milestone criteria being achieved. Payment was made during
January 2022. In addition, a milestone payment totaling $300,000 is due upon initiation of a Phase II(b) study. Research activities related
to the relevant patents are still in pre-clinical stage, and accordingly, this milestone has not been achieved. The Vogel-Nathan Purchase
Agreement contains a commitment for payment of royalties equaling 2% of the first $20 million in net sales derived from the commercialization
of products utilizing the relevant patent. As these products are still in the preclinical phase of development, no royalties have been
earned.
ENVERIC BIOSCIENCES,
INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Agreement
with Tikkun
License
Agreement
Jay
Pharma, Tikkun Olam LLC (“TO LLC”) and Tikkun Olam Hemp LLC (“TOH”) entered into a license agreement dated
on January 10, 2020, pursuant to which Jay Pharma would acquire certain in-licensed and owned intellectual property rights related
to the cannabis products in the United States (presently excluding the state of New York) from TO LLC and TOH, each of which is an
affiliate of TO Holdings Group LLC, in exchange for royalty payments of (i) four percent (4.0%) of net sales of OTC cancer products made via
consumer channels; and (ii) five percent (5.0%) of net sales of beauty products made via consumer channels; and (iii) three percent
(3.0%) of net sales of OTC cancer products made via professional channels, along with a minimum net royalty payment starting in
January 1, 2022 and progressively increasing up to a cap of $400,000 maximum each year for the first 10 years, then $600,000 maximum
each year for the next 5 years, and an annual maximum cap of $750,000 each year thereafter during the term of the agreement.
The licensed intellectual property rights relate to beauty products and OTC cancer products, and branding rights related thereto.
The beauty products include any topical or transdermal cannabis-containing or cannabis-derived (including hemp-based) skin care or
body care beauty products, and the OTC cancer products means any cancer-related products, in each case excluding those regulated as
a drug, medicine, or controlled substance by the FDA or any other relevant governmental authority, such as the USDA.
On
August 12, 2020, Jay Pharma, TO LLC and TOH entered into the First Amendment to the License Agreement, pursuant to which all references
to the Original Amalgamation Agreement and the amalgamation were revised to be references to the Tender Agreement and the Offer, as applicable.
On
October 2, 2020, Jay Pharma, TO LLC and TOH entered into the Second Amendment to the License Agreement, pursuant to which the effective
date of the transactions was revised to occur as of October 2, 2020.
8.
INCOME TAXES
On
September 16, 2021, the Company acquired MagicMed. In connection with the acquisition, the Company recorded intangible assets from IPR&D
valued at $35,500,000, which would be tested for impairment for book purposes, but without a tax basis, creating a deferred tax liability
of $9,061,927. The deferred tax liability decreased to $1,607,122 due to an impairment on intangible assets of $29,048,164 and an impairment
of goodwill of $8,225,862 for the year ended December 31, 2021. As of June
30, 2022, the balance of the deferred tax liability is $1,630,552.
9.
SUBSEQUENT EVENTS
Amendment to 2020 Long-Term Incentive Plan
On May 3, 2022, our Board
adopted the First Amendment (the “Plan Amendment”) to the Enveric Biosciences, Inc. 2020 Long-Term Incentive Plan (the “Incentive
Plan”) to (i) increase the aggregate number of shares available for the grant of awards by 146,083 shares to a total of 200,000
shares, and (ii) add an “evergreen” provision whereby the number of shares authorized for issuance pursuant to awards under
the Incentive Plan will be automatically increased on the first trading date immediately following the date the Company issues any share
of Common Stock (defined below) to any person or entity, to the extent necessary so that the number of shares of the Company’s Common
Stock authorized for issuance under the Incentive Plan will equal the greater of (x) 200,000 shares, and (y) 15% of the total number of
shares of the Company’s Common Stock outstanding as of such issuance date. The Plan Amendment was approved by the Company’s
stockholders at a special meeting of the Company’s stockholders held on July 14, 2022.
July
2022 Offerings
On
July 22, 2022, the Company entered into a securities purchase agreement (the “Registered Direct Securities Purchase
Agreement”) with an institutional investor for the purchase and sale of 116,500
shares of the Company’s common stock (“Common Stock”), pre-funded warrants to purchase up to 258,500
shares of Common Stock (the “RD Pre-Funded Warrants”), and unregistered preferred investment options (the “RD
Preferred Investment Options”) to purchase up to 375,000
shares of Common Stock (the “RD Offering”). The combined purchase price for one share of Common Stock and associated RD
Preferred Investment Option was $8.00,
and the combined purchase price for a RD Pre-Funded Warrant and associated RD Preferred Investment Option was $7.9999.
The RD Preferred Investment Options have an exercise price of $7.78
per share, were immediately exercisable, and will expire five and one-half years from the date of issuance. Shares of Common Stock
and RD Pre-Funded Warrants issued in the RD Offering were offered pursuant to a “shelf” registration statement on Form
S-3 (File No. 333-257690) previously filed with the Securities and Exchange Commission (the “SEC”) on July 2, 2021 and
declared effective by the SEC on July 9, 2021, and a prospectus supplement, dated July 22, 2022, to the shelf registration
statement, filed with the SEC on July 26, 2022. The gross proceeds from RD Offering was approximately $3,000,000.
Concurrently
with the RD Offering, the Company entered into a securities purchase agreement (the “PIPE Securities Purchase Agreement”)
with institutional investors for the purchase and sale of 116,000 shares of Common Stock, pre-funded warrants to purchase up to 509,000
shares of Common Stock (the “PIPE Pre-Funded Warrants”), and preferred investment options (the “PIPE Preferred Investment
Options”) to purchase up to 625,000 shares of the Common Stock in a private placement (the “PIPE”).
The
combined purchase price for one share of Common Stock and associated PIPE Preferred Investment Option was $8.00,
and the combined purchase price for a PIPE Pre-Funded Warrant and associated PIPE Preferred Investment Option was $7.9999.
The PIPE Preferred Investment Options have an exercise price of $7.78
per share, were immediately exercisable, and will expire five and one-half years from the date of issuance. The gross proceeds from
the PIPE was approximately $5,000,000.
Concurrently with the RD Offering
and the PIPE, the Company entered into Warrant Amendment Agreements (the “Warrant Amendments”) with the investors in both
offerings to amend certain existing warrants to purchase up to an aggregate of 122,000 shares of Common Stock that were previously issued
to the investors, with an exercise price of $27.50 per share and expiration date of February 15, 2027. Pursuant to the Warrant Amendments,
the previously issued warrants were amended, effective upon the closing of the offerings, so that the amended warrants have a reduced
exercise price of $7.78 per share and expire five and one-half years following the closing of the offerings.
H.C. Wainwright & Co.,
LLC (“Wainwright”) acted as the exclusive placement agent for the RD Offering and the PIPE, pursuant to the engagement letter
with the Company, dated as of July 11, 2022. Upon closing of the offerings, the Company paid Wainwright a cash transaction fee equal to
7.0% of the aggregate gross proceeds to us from the offerings and reimbursement of certain expenses. The Company also issued Wainwright
preferred investment options to purchase 70,000 shares of Common Stock (the “Wainwright Warrants”). The Wainwright Warrants
have substantially the same terms as the RD Preferred Investment Options and the PIPE Preferred Investments Options, except that the Wainwright
Warrants have an exercise price of $10.00 per share and will expire five years after the commencement of sales of the offerings.
The
RD Offering and the PIPE closed on July 26, 2022. The Company intends to use the net proceeds of approximately $7.2 million received
from the offerings for general working capital purposes.
Departure of Directors or Certain Officers
On August 11, 2022, Carter J. Ward notified the Company of his intent to leave the Company and resign from his position
as Chief Financial Officer, Principal Financial and Accounting Officer to pursue another opportunity. Mr. Ward’s last day with the
Company will be September 9, 2022. Mr. Ward’s resignation was not the result of any disagreement regarding any matter relating to the
Company’s operations, policies, or practices.