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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended: September 30, 2022

 

OR

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ___ to ___

Commission File Number 001-38286

 

ENVERIC BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   95-4484725

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

4851 Tamiami Trail N, Suite 200

Naples, FL

  34103
(Address of principal executive offices)   (Zip code)

 

(239) 302-1707

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.01 par value per share   ENVB   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of November 11, 2022, there were 2,078,271 shares outstanding of Registrant’s Common Stock (par value $0.01 per share).

 

 

 

 

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

 

FORM 10-Q

 

TABLE OF CONTENTS

 

    Page
  PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements  
  Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 2
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021 3
  Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 4-5
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 34
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 37
  Signatures 39

 

1

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30, 2022     December 31, 2021  
    (unaudited)        
ASSETS                
Current assets:                
Cash   $ 21,201,005     $ 17,355,999  
Prepaid expenses and other current assets     1,065,795       380,838  
Total current assets     22,266,800       17,736,837  
                 
Other assets:                
Property and equipment, net     712,944       294,430  
Right-of-use operating lease asset     88,768       176,304  
Intangible assets, net     6,318,509       6,923,928  
Goodwill     1,468,389       1,587,634  
Total other assets     8,588,610       8,982,296  
Total assets   $ 30,855,410     $ 26,719,133  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 710,314     $ 683,393  
Accrued liabilities     1,113,145       1,292,721  
Current portion of right-of-use operating lease obligation     88,769       107,442  
Derivative liability     686,000        
Total current liabilities     2,598,228       2,083,556  
                 
Non-current liabilities:                
Non-current portion of right-of-use operating lease obligation           68,861  
Deferred tax liability     1,486,413       1,607,122  
Investment option liability     2,514,112        
Warrant liability     654,937       653,674  
Total non-current liabilities     4,655,462       2,329,657  
Total liabilities   $ 7,253,690     $ 4,413,213  
                 
Commitments and contingencies (Note 7)     -        -   
                 
Mezzanine equity                
Redeemable non-controlling interest     761,434        
Total mezzanine equity     761,434        
                 
Shareholders’ equity                
Preferred stock, $0.01 par value, 20,000,000 shares authorized; Series B preferred stock, $0.01 par value, 3,600,000 shares authorized, 0 shares issued and outstanding as of September 30, 2022 and December 31, 2021            
Common stock, $0.01 par value, 100,000,000 shares authorized, 2,078,271 and 651,921 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively     20,782       6,519  
Additional paid-in capital     93,989,885       83,066,656  
Accumulated deficit     (70,529,884 )     (60,736,453 )
Accumulated other comprehensive loss     (640,497 )     (30,802 )
Total shareholders’ equity     22,840,286       22,305,920  
Total liabilities, mezzanine equity, and shareholders’ equity   $ 30,855,410     $ 26,719,133  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

2

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    2022     2021     2022     2021  
    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2022     2021     2022     2021  
Operating expenses                                
General and administrative   $ 3,514,547     $ 2,123,834     $ 8,783,619     $ 10,864,696  
Research and development     2,055,656       1,219,339       6,134,421       2,295,826  
Depreciation and amortization     86,646       173,696       241,413       484,355  
Total operating expenses     5,656,849       3,516,869       15,159,453       13,644,877  
                                 
Loss from operations     (5,656,849 )     (3,516,869 )     (15,159,453 )     (13,644,877 )
                                 
Other income (expense)                                
Inducement expense                       (298,714 )
Change in fair value of warrant liabilities     1,599,623       804,833       3,845,514       7,077,376  
Change in fair value of investment option liability     1,809,622             1,809,622        
Change in fair value of derivative liability     (231,000 )           (284,000 )      
Interest expense     (308 )     (370 )     (5,114 )     (5,191 )
Total other income     3,177,937       804,463       5,366,022       6,773,471  
                                 
Net loss   $ (2,478,912 )   $ (2,712,406 )   $ (9,793,431 )   $ (6,871,406 )
Less preferred dividends attributable to non-controlling interest     12,603             20,411        
Less deemed dividends attributable to accretion of embedded derivative at redemption value     110,991             184,985        
Net loss attributable to shareholders     (2,602,506 )     (2,712,406 )     (9,998,827 )     (6,871,406 )
                                 
Other comprehensive loss                                
Foreign currency translation     (417,390 )     (6,510 )     (609,695 )     (4,036 )
                                 
Comprehensive loss   $ (3,019,896 )   $ (2,718,916 )   $ (10,608,522 )   $ (6,875,442 )
                                 
Net loss per share - basic and diluted   $ (1.46 )   $ (5.91 )   $ (8.11 )   $ (16.64 )
                                 
Weighted average shares outstanding, basic and diluted     1,787,235       459,289       1,232,936       413,063  

  

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

3

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY (DEFICIT) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

 

    Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Total  
          Series B Preferred Stock     Common Stock     Additional Paid-In     Accumulated     Accumulated Other Comprehensive        
          Shares     Amount     Shares     Amount     Capital     Deficit     Income (Loss)     Total  
Balance at January 1, 2021   - - -   3,275,407     $ 32,754       202,249     $ 2,022     $ 15,321,699     $ (11,759,557 )   $ (181,277 )   $ 3,415,641  
January 2021 registered direct offering, net of offering costs                       44,427       444       4,616,643                   4,617,087  
February 2021 registered direct offering, net of offering costs                       60,141       601       7,015,800                   7,016,401  
Stock-based compensation                                   3,591,565                   3,591,565  
Induced conversion of stock options into restricted stock awards                                   298,714                   298,714  
Conversion of Series B Preferred Stock           (3,275,407 )     (32,754 )     65,509       655       32,099                    
Exercise of warrants                       17,022       170       3,267,075                   3,267,245  
Foreign exchange translation gain                                               35,736       35,736  
Net loss   - - -                                 (3,250,711 )           (3,250,711 )
Balance at March 31, 2021   - - -       $       389,348     $ 3,892     $ 34,143,595     $ (15,010,268 )   $ (145,541 )   $ 18,991,678  
Stock-based compensation                       283       3       750,930                   750,933  
Conversion of stock options into restricted stock                       843       8       (8 )                  
Exercise of warrants                       35,839       358       17,570                   17,928  
Exercise of options                       2,685       27       (27 )                  
Foreign exchange translation loss                                               (33,262 )     (33,262 )
Net loss   - - -                                 (908,289 )           (908,289 )
Balance at June 30, 2021   - - -       $       428,998     $ 4,288     $ 34,912,060     $ (15,918,557 )   $ (178,803 )   $ 18,818,988  
Consideration paid pursuant to amalgamation agreement                       199,025       1,990       39,040,292                   39,042,282  
Stock-based compensation                                   486,986                   486,986  
Reserve for Ameri warrant liabilities                                   (262,491 )                 (262,491 )
Foreign exchange translation loss                                               (6,510 )     (6,510 )
Net loss   - - -                                 (2,712,406 )           (2,712,406 )
Balance at September 30, 2021   - - -       $       628,023     $ 6,278     $ 74,176,847     $ (18,630,963 )   $ (185,313 )   $ 55,366,849  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

4

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY (DEFICIT) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

 

    Shares     Amount     Shares     Amount     Equity   Shares     Amount     Capital     Deficit     Income     Equity  
    Series C Redeemable Preferred Stock     Redeemable Non-controlling Interest     Total Mezzanine     Common Stock     Additional Paid-In     Accumulated     Accumulated Other Comprehensive     Total Shareholders’  
    Shares     Amount     Shares     Amount     Equity     Shares     Amount     Capital     Deficit     Income     Equity  
Balance at January 1, 2022         $           $     $ -      651,921     $ 6,519     $ 83,066,656     $ (60,736,453 )   $ (30,802 )   $ 22,305,920  
February 2022 registered direct offering, net of offering costs                                   400,000       4,000       5,798,464                   5,802,464  
Stock-based compensation                                               768,619                   768,619  
Conversion of RSUs into common shares                                   899       9       (9 )                  
Foreign currency translation gain                                                           88,709       88,709  
Net loss                              -                       (4,524,014 )           (4,524,014 )
Balance at March 31, 2022         $           $     $  -     1,052,820     $ 10,528     $ 89,633,730     $ (65,260,467 )   $ 57,907     $ 24,441,698  
Stock-based compensation                                               677,543                   677,543  
Redeemable non-controlling interest, net of $402,000 embedded derivative and net of issuance costs of $41,962                 1,000       556,038       556,038                                      
Issuance of redeemable Series C preferred stock     52,685       527                   527                   (527 )                 (527 )
Preferred dividends attributable to redeemable non-controlling interest                       7,808       7,808                   (7,808 )                 (7,808 )
Accretion of embedded derivative to redemption value                       73,994       73,994                   (73,994 )                 (73,994 )
Conversion of RSAs into common shares                                   1,223       12       (12 )                  
Foreign exchange translation loss                                                           (281,014 )     (281,014 )
Net loss                              -                       (2,790,505 )           (2,790,505 )
Balance at June 30, 2022     52,685     $ 527       1,000     $ 637,840     $ 638,367  -     1,054,043     $ 10,540     $ 90,228,932     $ (68,050,972 )   $ (223,107 )   $ 21,965,393  
Stock-based compensation                                               645,137                   645,137  
July 2022 registered direct offering, PIPE offering, modification of warrants and exercise of pre-funded warrants, net of offering costs                                   1,000,000       10,000       3,239,125                   3,249,125  
Issuance of rounded shares as a result of the reverse stock split                                   24,228       242       (242                  
Preferred dividends attributable to redeemable non-controlling interest                       12,603       12,603                   (12,603 )                 (12,603 )
Accretion of embedded derivative to redemption value                       110,991       110,991                   (110,991 )                 (110,991 )
Redemption of Series C preferred stock     (52,685 )     (527 )                 (527 )-                 527                   527  
Foreign exchange translation loss                                                           (417,390 )     (417,390 )
Net loss                              -                       (2,478,912 )           (2,478,912 )
Balance at September 30, 2022         $       1,000     $ 761,434     $ 761,434  -     2,078,271     $ 20,782     $ 93,989,885     $ (70,529,884 )   $ (640,497 )   $ 22,840,286  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

5

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    2022     2021  
    For the Nine Months Ended September 30,  
    2022     2021  
Cash Flows From Operating Activities:                
Net loss   $ (9,793,431 )   $ (6,871,406 )
Adjustments to reconcile net loss to cash used in operating activities                
Change in fair value of warrant liability     (3,845,514 )     (7,077,376 )
Change in fair value of investment option liability     (1,809,622 )      
Change in fair value of derivative liability     284,000        
Stock-based compensation     2,091,299       4,829,484  
Inducement expense           298,714  
Amortization of right-of-use asset     103,365        
Amortization of intangible assets     126,563       482,115  
Depreciation expense     114,850       2,240  
Change in operating assets and liabilities:                
Prepaid expenses and other current assets     (758,419 )     320,123  
Accounts payable and accrued liabilities     (106,675 )     625,748  
Right-of-use operating lease liability     (91,022 )      
Net cash used in operating activities     (13,684,606 )     (7,390,358 )
                 
Cash Flows From Investing Activities:                
Purchases of property and equipment     (577,972 )      
Purchase of Diverse Bio license agreement           (675,000 )
Cash accretive acquisition of MagicMed           3,055,327  
Net cash (used in) provided by investing activities     (577,972 )     2,380,327  
                 
Cash Flows From Financing Activities:                
Proceeds from sale of common stock, warrants, and investment options, net of offering costs     17,222,100       21,614,488  
Proceeds from the sale of redeemable non-controlling interest, net of offering costs (see Note 6)     958,038        
Proceeds from warrant exercises, net of fees           3,285,164  
Net cash provided by financing activities     18,180,138       24,899,652  
                 
Effect of foreign exchange rate on cash     (72,554 )     (19,655 )
                 
Net increase in cash     3,845,006       19,869,966  
Cash at beginning of period     17,355,999       1,578,460  
Cash at end of period   $ 21,201,005     $ 21,448,426  
                 
Supplemental disclosure of cash and non-cash transactions:                
Cash paid for interest   $ 5,114     $ 5,191  
Income taxes paid   $     $  
Investment options issued in conjunction with common stock issuance   $ 4,323,734     $  
Modification of warrants as part of share capital raise   $ 251,357     $  
Warrants issued in conjunction with common stock issuance   $ 3,595,420     $  
Issuance of embedded derivative   $ 402,000     $  
Preferred dividends attributable to redeemable non-controlling interest   $ 20,411     $  
Accretion of embedded derivative to redemption value   $ 184,985     $  
Issuance of Common Stock pursuant to MagicMed amalgamation   $     $ 39,042,282  
Deferred tax liability incurred due to MagicMed amalgamation   $     $ 9,061,927  
Conversion of preferred stock to common stock   $     $ 32,754  
Fair value of warrants issued   $     $ 9,981,000  
Fair value of Ameri warrants   $     $ 262,492  

 

See the accompanying notes to the unaudited condensed consolidated financial statements.

 

6

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

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.

 

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.

 

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 Other Uncertainties

 

For the nine months ended September 30, 2022, the Company had a loss from operations of $15,159,453 and net cash used in operating activities of $13,684,606. As of September 30, 2022, the Company had an accumulated deficit of $70,529,884. Since inception, being a research and development company, the Company has not yet generated revenue and the Company has incurred continuing losses from its operations. The Company’s operations have been funded principally through the issuance of debt and equity.

 

In assessing the Company’s ability to continue as a going concern, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. At September 30, 2022, the Company had cash of $21,201,005 and working capital of $19,668,572. The Company’s cash on hand at the filing date is estimated to be sufficient to fund operations, however, there can be no guarantee that the conditions will not change and that the Company will require additional funding, which may not be available on acceptable terms or at all, in which case significant delays or cost increases may result in material disruption to the Company’s operations. In such case, the Company would be required to delay, scale back or eliminate some or all of its research and development programs, which would likely have a material adverse effect on the Company and its financial statements.

 

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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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).

 

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 nine months ended September 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 nine months ended September 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.

 

8

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 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 September 30, 2022 and September 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.

 

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 and Investment Options

 

The Company evaluates all of its financial instruments, including issued stock purchase warrants and investment options, 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 and investment options 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 and investment options with put options as liabilities under ASC 480. Such warrants and investment options 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 and investment options. At that time, the portion of the warrant liability and investment options related to such common stock warrants will be reclassified to additional paid-in capital.

 

Modification of Warrants

 

A change in any of the terms or conditions of warrants is accounted for as a modification. For a warrant modification accounted for under ASC 815, the effect of a modification shall be measured as the difference between the fair value of the modified warrant over the fair value of the original warrant immediately before its terms are modified, measured based on the fair value of the shares and other pertinent factors at the modification date. The accounting for incremental fair value of warrants is based on the specific facts and circumstances related to the modification. When a modification is directly attributable to equity offerings, the incremental change in fair value of the warrants are accounted for as equity issuance costs.

 

9

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 nine months ended September 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.

 

During the three and nine months ended September 30, 2022 the Company issued 767,500 pre-funded common stock warrants, which were exercised on various dates during the three and nine months ended September 30, 2022. The pre-funded common stock warrants became exercisable on July 26, 2022 based on the terms and conditions of the agreements. As the pre-funded common stock warrants are exercisable for $0.0001, these shares are considered outstanding common shares and are included in the computation of basic and diluted Earnings Per Share as the exercise of the pre-funded common stock warrants is virtually assured. The Company included these pre-funded common stock warrants in basic and diluted earnings per share when all conditions were met on July 26, 2022.

 

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share for the three and nine months ended September 30, 2022 and 2021 because the effect of their inclusion would have been anti-dilutive.

 

    For the three and
nine months ended
September 30, 2022
    For the three and
nine months ended
September 30, 2021
 
Warrants to purchase shares of common stock     655,463       211,534  
Restricted stock units - vested and unissued     61,428        
Restricted stock units - unvested     65,117       115,504  
Restricted stock awards - vested and unissued     974        
Restricted stock awards - unvested           578  
Investment options to purchase shares of common stock     1,070,000        
Options to purchase shares of common stock     22,829       22,947  
Total potentially dilutive securities     1,875,811       350,563  

 

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.

 

10

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 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 September 30, 2022 and indicates the fair value of the valuation inputs the Company utilized to determine such fair value of warrant liabilities, derivative liability, and investment options:

  

    Level     September 30, 2022     December 31, 2021  
Warrant liabilities - January 2021 Warrants     3     $ 1,011     $ 333,471  
Warrant liabilities - February 2021 Warrants     3       1,101       320,203  
Warrant liabilities - February 2022 Warrants     3       652,825        
Fair value as of September 30, 2022           $ 654,937     $ 653,674  

 

    Level     September 30, 2022     December 31, 2021  
Derivative liability - May 2022     3     $ 686,000     $  
Fair value as of September 30, 2022         $ 686,000     $  

 

    Level     September 30, 2022     December 31, 2021  
Wainwright investment options     3     $ 139,314     $  
RD investment options     3       890,549        
PIPE investment options     3       1,484,249        
Fair value as of September 30, 2022           $ 2,514,112     $  

 

The warrant liabilities, derivative liability, and investment options 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.

 

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:

 

    February 2022 Warrants     February 2022 Post-Modification Warrants  
    February 15, 2022     July 26, 2022  
Term (years)     5.0       5.5  
Stock price   $ 15.75     $ 6.33  
Exercise price   $ 27.50     $ 7.78  
Dividend yield     %     %
Expected volatility     74.1 %     80.0 %
Risk free interest rate     1.9 %     2.9 %
             
Number of warrants     460,000       122,000  
Value (per share)   $ 8.00     $ 4.07  

 

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 %

 

11

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company established the initial fair value of its investment options 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 investment options are below:

 

    Wainwright Options     RD Options     PIPE Options  
    July 26, 2022     July 26, 2022     July 26, 2022  
Term (years)     5.0       5.5       5.5  
Stock price   $ 6.33     $ 6.33     $ 6.33  
Exercise price   $ 10.00     $ 7.78     $ 7.78  
Dividend yield     %     %     %
Expected volatility     80.0 %     80.0 %     80.0 %
Risk free interest rate     2.9 %     2.9 %     2.9 %
                         
Number of investment options     70,000       375,000       625,000  
Value (per share)   $ 3.60     $ 4.07     $ 4.07  

 

Subsequent measurement

 

The following table presents the changes in fair value of the warrant liabilities, derivative liability, and investment options:

 

    Total Warrant Liabilities  
Fair value as of December 31, 2021   $ 653,674  
Issuance of February 2022 warrants     3,595,420  
Issuance     3,595,420  
Change in fair value due to modification of February 2022 warrants as part of July 2022 raise     251,357  
Change in fair value     (3,845,514 )
Fair value as of September 30, 2022   $ 654,937  

 

    Total Derivative Liability  
Fair value as of December 31, 2021   $  
Issuance of May 2022 convertible preferred stock     402,000  
Change in fair value     284,000  
Fair value as of September 30, 2022   $ 686,000  

 

    Total Investment Options  
Fair value as of December 31, 2021   $  
Issuance of July 2022 investment options     4,323,734  
Change in fair value     (1,809,622 )
Fair value as of September 30, 2022   $ 2,514,112  

 

12

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The key inputs into the Black Scholes valuation model for the Level 3 valuations of the warrant liabilities as of September 30, 2022 are below:

 

    January 2021 Warrants     February 2021 Warrants     February 2022 Warrants     February 2022 Post-Modification Warrants  
Term (years)     3.3       3.4       4.4       5.3  
Stock price   $ 4.22     $ 4.22     $ 4.22     $ 4.22  
Exercise price   $ 247.50     $ 245.00     $ 27.50     $ 7.78  
Dividend yield     %     %     %     %
Expected volatility     78.0 %     78.0 %     80.0 %     79.0 %
Risk free interest rate     4.20 %     4.20 %     4.10 %     4.00 %
                                 
Number of warrants     36,429       34,281       338,000       122,000  
Value (per share)   $ 0.03     $ 0.03     $ 1.07     $ 2.37  

 

The key inputs into the Weighted Expected Return valuation model for the Level 3 valuations of the derivative liability as of September 30, 2022 are below:

 

    May 2022 Derivative Liability  
Principal   $ 1,000,000  
Dividend rate     5.0 %
Market rate     6.8 %

 

The key inputs into the Black Scholes valuation model for the Level 3 valuations of the investment options as of September 30, 2022 are below:

 

    Wainwright Options     RD Options     PIPE Options  
Term (years)     4.8       5.3       5.3  
Stock price   $ 4.22     $ 4.22     $ 4.22  
Exercise price   $ 10.00     $ 7.78     $ 7.78  
Dividend yield     %     %     %
Expected volatility     78.0 %     79.0 %     79.0 %
Risk free interest rate     4.10 %     4.00 %     4.00 %
                         
Number of investment options     70,000       375,000       625,000  
Value (per share)   $ 1.99     $ 2.37     $ 2.37  

 

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 September 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.

 

13

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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 September 30, 2022, the Company’s intangible assets consisted of:

 

Goodwill        
Balance at December 31, 2021   $ 1,587,634  
Loss on currency translation     (119,245 )
Balance at September 30, 2022   $ 1,468,389  
         
Indefinite lived intangible assets        
Balance at December 31, 2021   $ 6,375,492  
Loss on currency translation     (478,856 )
Balance at September 30, 2022   $ 5,896,636  
         
Definite lived intangible assets        
Balance at December 31, 2021   $ 548,436  
Amortization     (126,563 )
Balance at September 30, 2022   $ 421,873  

 

For goodwill, identified indefinite lived assets, and identified definite lived intangible assets, there was no impairment expense during the three and nine months ended September 30, 2022 and 2021. For identified definite lived intangible assets, amortization expense amounted to $42,187 and $170,692 during the three months ended September 30, 2022 and 2021, respectively. For identified definite lived intangible assets, amortization expense amounted to $126,563 and $482,115 during the nine months ended September 30, 2022 and 2021, respectively.

 

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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 30, 2022 is as follows:

 

Year ending December 31,      
2022 (excluding the nine months ended September 30)   $ 42,187  
2023     168,750  
2024     168,750  
2025     42,186  
Finite lived Assets Amortization Expense    $ 421,873  

 

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:

 

    September 30, 2022     December 31, 2021  
Lab equipment   $ 819,988     $ 310,957  
Computer equipment     24,841       10,818  
Property and Equipment, gross                
Less: Accumulated depreciation     (131,885 )     (27,345 )
Property and equipment, net of accumulated depreciation   $ 712,944     $ 294,430  

 

Depreciation expense was $44,458 and $2,240 for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense was $114,850 and $2,240 for the nine months ended September 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 September 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.

 

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”).

 

15

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 September 30, 2022, both the Initial Redemption and the Subsequent Redemption have occurred. As a result, no shares of Series C Preferred Stock remain outstanding.

 

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.

 

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, 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 gross proceeds from the RD Offering were approximately $3,000,000. Subject to certain ownership limitations, the RD Pre-Funded Warrants became immediately exercisable at an exercise price equal to $0.0001 per share of common stock. On August 3, 2022, all of the issued RD Pre-Funded Warrants were exercised.

 

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 Offering”). The gross proceeds from the PIPE Offering were approximately $5,000,000. Subject to certain ownership limitations, the PIPE Pre-Funded Warrants became immediately exercisable at an exercise price equal to $0.0001 per share of common stock. All of the issued PIPE Pre-Funded Warrants were exercised on various dates prior to August 18, 2022.

 

The RD offering and PIPE Offering closed on July 26, 2022, with aggregate gross proceeds of approximately $8 million. The aggregate net proceeds from the offerings, after deducting the placement agent fees and other estimated offering expenses, were approximately $7.1 million with $3.2 million allocated to equity, $4.3 million to investment option liability, and the remaining $0.4 million recorded as an expense.

 

During the nine months ended September 30, 2022, a total of 2,122 shares of Common Stock were issued pursuant to the conversion of restricted stock units.

 

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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Stock Options

 

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.

 

A summary of activity under the Company’s incentive plan for the nine months ended September 30, 2022 is presented below:

 

    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 September 30, 2022     22,829     $ 75.00     $ 101.50       4.3     $  
                                         
Exercisable at September 30, 2022     19,690     $ 74.93     $ 101.00       3.8     $  

 

The Company’s stock based compensation expense, recorded within general and administrative expense, related to stock options for the three months ended September 30, 2022 and 2021 was $48,697 and $4,683, respectively. The Company’s stock based compensation expense, recorded within general and administrative expense, related to stock options for the nine months ended September 30, 2022 and 2021 was $134,383 and $4,683, respectively. As of September 30, 2022, the Company had $222,501 in unamortized stock option expense, which will be recognized over a weighted average period of 1.3 years.

 

During the nine months ended September 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 nine months ended September 30, 2022:

 

    Number of shares     Weighted average fair value  
Non-vested at December 31, 2021     1,031     $ 141.50  
Forfeited     (700 )   $ 146.50  
Vested     (331 )   $ 130.40  
Non-vested at September 30, 2022         $  

 

For the three months ended September 30, 2022 and 2021, the Company recorded $6,250 and $23,995, respectively, in stock-based compensation expense within general and administrative expense, related to restricted stock awards. For the nine months ended September 30, 2022 and 2021, the Company recorded $24,363 and $80,109, respectively, in stock-based compensation expense within general and administrative expense, related to restricted stock awards. As of September 30, 2022, there were no unamortized stock-based compensation costs related to restricted share awards. The balance of Common Shares related to the vested restricted stock awards as of September 30, 2022 will be issued during the 2022 calendar year. There are 974 vested and unissued shares of restricted stock awards as of September 30, 2022.

 

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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 nine months ended September 30, 2022:

 

    Number of shares     Weighted average fair value  
Non-vested at December 31, 2021     62,013     $ 126.00  
Granted     37,445     $ 33.50  
Forfeited     (26,772 )   $ 79.64  
Vested     (7,569 )   $ 140.60  
Non-vested at September 30, 2022     65,117     $ 92.02  

 

For the three months ended September 30, 2022 and 2021, the Company recorded $590,190 and $458,308, respectively, in stock-based compensation expense related to restricted stock units. For the nine months ended September 30, 2022 and 2021, the Company recorded $1,932,553 and $4,710,225, respectively, in stock-based compensation expense related to restricted stock units, which is a component of both general and administrative and research and development expenses in the unaudited condensed consolidated statement of operations.

 

As of September 30, 2022, the Company had unamortized stock-based compensation costs related to restricted stock units of $5,858,048 which will be recognized over a weighted average period of 3.0 years and unamortized stock-based costs related to restricted stock units which will be recognized upon achievement of specified milestones.

 

As of September 30, 2022, 1,856 shares of Common Stock have been issued in relation to vested restricted stock units and 61,428 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:

 

Stock-based compensation for RSU   2022     2021     2022     2021  
    Three months ended September 30,     Nine months ended September 30,  
Stock-based compensation for RSU   2022     2021     2022     2021  
General and administrative   $ 357,756     $ 315,929     $ 1,138,080     $ 4,592,748  
Research and development     232,434       118,474       794,473       118,474  
Total   $ 590,190     $ 434,403     $ 1,932,553     $ 4,711,222  

 

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.

 

In connection with the Registered Direct (“RD”) Offering and the Private Investment in Public Entity (“PIPE”) Offering entered into on July 22, 2022, the Company entered into Warrant Amendment (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 (subsequent to the 1-for-50 reverse stock split that occurred on July 14, 2022) 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. In connection with this transaction, the Company determined the fair value of the February 2022 Warrants immediately prior to the Warrant Amendment and the fair value of the amended warrants immediately after the Warrant Amendment. The incremental change in fair value was deemed to be $251,357, which was included as equity issuance costs related to the RD and PIPE financing transactions.

 

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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Preferred Investment Options

 

In connection with the Registered Direct Securities Purchase Agreement the Company issued unregistered preferred investment options to purchase up to 375,000 shares of common stock. Subject to certain ownership limitations, the RD Preferred Investment Options became immediately exercisable at an exercise price equal to $7.78 per share of common stock. The RD Preferred Investment Options are exercisable for five and one-half years from the date of issuance.

 

In connection with the PIPE Securities Purchase Agreement the Company issued unregistered preferred investment options to purchase up to 625,000 shares of the common stock. Subject to certain ownership limitations, PIPE Preferred Investment Options became immediately exercisable at an exercise price equal to $7.78 per share of common stock. The PIPE Preferred Investment Options are exercisable for five and one-half years from the date of issuance

 

On July 26, 2022, in connection with the RD Offering and PIPE Offering, the Company issued preferred investment options (the “Placement Agent Preferred Investment Options”) to an entity to purchase up to 70,000 shares of the common stock for acting as a placement agent. The Placement Agent Preferred Investment Options have substantially the same terms as the RD Preferred Investment Options and the PIPE Preferred Investments Options, except the Placement Agent Preferred Investment Options have an exercise price of $10.00 per share. The Placement Agent Preferred Investment Options are exercisable for five years from the date of the commencement of the RD Offering and PIPE Offering.

 

The following table summarizes information about shares issuable under warrants outstanding at September 30, 2022:

 

    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     1,227,500     $ 10.31             $  
Exercised     (767,500 )   $           $  
Outstanding at September 30, 2022     655,463     $ 58.36       3.8     $ 5,514  
                                 
Exercisable at September 30, 2022     655,463     $ 58.36       3.8     $ 5,514  

 

The warrants assumed pursuant to the acquisition of MagicMed contain certain down round features, which were not triggered by the February 2022 public offering or the July 2022 public offering, that would require adjustment to the exercise price upon certain events when the offering price is less than the stated exercise price.

 

The following table summarizes information about investment options outstanding at September 30, 2022:

 

    Investment options outstanding     Weighted average exercise price     Weighted average remaining life     Intrinsic value  
Outstanding at January 1, 2021         $           $  
Issued     1,070,000     $ 7.93       5.5        
Outstanding at September 30, 2021     1,070,000     $ 7.93       5.3     $  
                                 
Exercisable at September 30, 2021     1,070,000     $ 7.93       5.3     $  

 

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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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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:

 

Balance at December 31, 2021   $  
Redeemable non-controlling interest, net of initial value embedded derivative of $402,000 and net of issuance costs of $41,962     556,038  
Preferred dividends attributable to redeemable non-controlling interest     20,411  
Accretion of embedded derivative and transaction costs to redemption value     184,985  
Balance at September 30, 2022   $ 761,434  

 

As of September 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 $1,020,000. 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.

 

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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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.

 

Other Consulting and Vendor Agreements

 

The Company has entered into a number of agreements and work orders for future consulting, clinical trial support, and testing services, with terms ranging between 1 and 15 months. These agreements, in aggregate, commit the Company to approximately $2.4 million in future cash.

 

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 September 30, 2022, the balance of the deferred tax liability is $1,486,413.

 

22

 

 

Item 2. Management’s discussion and analysis of financial condition and results of operations

 

The information set forth below should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “us,” “we,” “our,” or our “Company” and similar terms refer to Enveric Biosciences, Inc., a Delaware corporation.

 

Cautionary Note Regarding Forward-Looking Statements

 

This quarterly report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,” “plans,” “seeks,” “projects,” “targets,” and “would” or the negative of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, but are not limited to, future financial and operating results, the company’s plans, objectives, expectations and intentions and other statements that are not historical facts. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations, or projections described under the sections in this Form 10-Q entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These risks and uncertainties include, but are not limited to:

 

  our dependence on the success of our prospective product candidates, which are in early stages of development and may not reach a particular stage in development, receive regulatory approval or be successfully commercialized;
  potential difficulties that may delay, suspend, or scale back our efforts to advance additional early research programs through preclinical development and investigational new drug (“IND”) application filings and into clinical development;
  the risk that the cost savings, synergies and growth from our combination with MagicMed Industries Inc. and the successful use of the rights and technologies acquired in the combination may not be fully realized or may take longer to realize than expected;
  the impact of the novel coronavirus (COVID-19) on our business, including our current plans for product development, as well as any currently ongoing preclinical studies and clinical trials and any future studies or other development or commercialization activities;
  the limited study on the effects of medical cannabinoids and psychedelics, and the chance that future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing, and social acceptance of cannabinoids or psychedelics;
  the expensive, time-consuming, and uncertain nature of clinical trials, which are susceptible to change, delays, termination, and differing interpretations;
  the ability to establish that potential products are efficacious or safe in preclinical or clinical trials;
  the fact that our current and future preclinical and clinical studies may be conducted outside the United States, and the United States Food and Drug Administration may not accept data from such studies to support any new drug applications we may submit after completing the applicable developmental and regulatory prerequisites;
  our ability to effectively and efficiently build, maintain and legally protect our molecular derivatives library so that it can be an essential building block from which those in the biotech industry can develop new patented products;
  our ability to establish or maintain collaborations on the development of therapeutic candidates;
  our ability to obtain appropriate or necessary governmental approvals to market potential products;
  our ability to manufacture product candidates on a commercial scale or in collaborations with third parties;
  our significant and increasing liquidity needs and potential requirements for additional funding;
  our ability to obtain future funding for developing products and working capital and to obtain such funding on commercially reasonable terms;
  legislative changes related to and affecting the healthcare system, including, without limitation, changes and proposed changes to the Patient Protection and Affordable Care Act (“PPACA”);
  the intense competition we face, often from companies with greater resources and experience than us;
  our ability to retain key executives and scientists;
  the ability to secure and enforce legal rights related to our products, including intellectual property rights and patent protection;
  political, economic, and military instability in Israel which may impede our development programs;
  our ability to successfully spin off our cannabinoid assets;
  the effect that the reverse stock split of our common stock effected on July 14, 2022 may have on the price of our common stock; and
  our success at managing the risks involved in the foregoing.

 

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item 1A of this Form 10-Q and Part I, Item 1A of the annual report on Form 10-K filed with the SEC on March 31, 2022. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise, except as required by law.

 

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Business Overview

 

We are a biotechnology company dedicated to the development of novel small-molecule therapeutics for the treatment of anxiety, depression, and addiction disorders. We seek to improve the lives of patients suffering from cancer, initially by developing palliative and supportive care products for people suffering from certain side effects of cancer and cancer treatment such as pain or skin irritation. We currently intend to offer such palliative and supportive care products in the United States, following approval through established regulatory pathways.

 

Psychedelics

 

Following our amalgamation with MagicMed completed in September 2021 (the “Amalgamation”), we have continued to pursue the development of MagicMed’s proprietary psychedelic derivatives library, the Psybrary™ which we believe will help us to identify and develop the right drug candidates needed to address mental health challenges, including cancer-related distress. We synthesize novel versions of classic psychedelics, such as psilocybin, N-dimethyltryptamine (DMT), mescaline and MDMA, using a mixture of chemistry and synthetic biology, resulting in the expansion of the Psybrary™, which includes 15 patent families with over a million potential variations and hundreds of synthesized molecules. Within the Psybrary™ we have three different types of molecules, Generation 1 (classic psychedelics), Generation 2 (pro-drugs), and Generation 3 (new chemical entities). The Company is working to add novel psychedelic molecular compounds and derivatives (“Psychedelic Derivatives”) on a regular basis through our work at Enveric Labs in Calgary, Alberta, Canada, where we have a team of PhD scientists with expertise in synthetic biology and chemistry. To date we have created over 500 molecules that are housed in the Psybrary.

 

We screen newly synthesized molecules in the Psybrary™ through PsyAI™, a proprietary artificial intelligence (AI) tool. Leveraging AI systems is expected to reduce the time and cost of pre-clinical, clinical, and commercial development. We believe it streamlines pharmaceutical design by predicting ideal binding structures of molecules, manufacturing capabilities, and pharmacological effects to help determine ideal drug candidates, tailored to each indication. Each of these molecules that we believe are patentable can then be further screened to see how changes to its makeup alter its effects in order to synthesize additional new molecules. New compounds of sufficient purity are undergoing pharmacological screening, including non-clinical (receptors/cell lines), preclinical (animal), and ultimately clinical (human) evaluations. We intend to utilize our Psybrary™ and the AI tool to categorize and characterize the Psybrary™ substituents to focus on bringing more psychedelics-inspired molecules from discovery to the clinical phase.

 

Cannabinoids

 

We are also aiming to advance a pipeline of novel cannabinoid combination therapies for the side effects of cancer treatments, such as chemotherapy and radiotherapy.

 

We intend to bring together leading oncology clinicians, researchers, academic and industry partners to develop both external proprietary products and a robust internal pipeline of product candidates aimed at improving quality of life and outcomes for cancer patients. We intend to evaluate options to out-license our proprietary technology as it moves along the regulatory pathway.

 

In developing our product candidates, we intend to focus on cannabinoids derived from non-hemp botanical sources, and synthetic materials containing no tetrahydrocannabinol (THC) in order to comply with U.S. federal regulations. Of the potential cannabinoids to be used in therapeutic formulations, THC, which is responsible for the psychoactive properties of marijuana, can result in undesirable mood effects. Selected cannabidiol (CBD) and cannabigerol (CBG) candidates, on the other hand, have amounts of THC well below 0.1% and are not psychotropic and therefore more attractive candidates for translation into therapeutic practice. Drugs with less than 0.1% THC have a history, when approved as drugs by FDA, of being able to be rescheduled by DEA from Schedule I to Schedule V, as in the case of Epidiolex and Marinol. In the future, we may utilize cannabinoids that are derived from cannabis plants, which may contain higher amounts of THC; however, we only intend to do so in jurisdictions where THC is legal. However, synthetic THC is a Schedule I controlled substance; so, the use of any APIs (Active Pharmaceutical Ingredients) containing synthetic THC (or naturally derived THC in concentrations greater than 0.3%) may increase regulatory scrutiny and require additional expenses and authorizations. All current and future product candidates that we are developing or may develop will be tested for safety and efficacy under an IND application and subject to the Food and Drug Administration (“FDA”) pre-market approval process for new drugs.

 

While we continue to pursue the development of our cannabinoid-based product candidates, our principal focus is on the development of psychedelic-based treatments.

 

On May 11, 2022, the Company announced plans to transfer and spin-off its cannabinoid clinical development pipeline assets (the “Spin-Off”) to Akos Biosciences, Inc. (formerly known as Acanna Therapeutics, Inc.), a majority owned subsidiary of the Company (“Akos”). In connection with the Spin-Off, the Company would transfer its cannabinoid clinical development pipeline assets to Akos, while retaining its psychedelics clinical development pipeline assets.

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Recent Developments

 

Reverse Stock Split

 

On July 14, 2022, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of Delaware to effect a 1-for-50 reverse stock split of the shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), either issued and outstanding or held by the Company as treasury stock, effective as of 4:05 p.m. (New York time) on July 14, 2022 (the “Reverse Stock Split”). The Company held a special meeting of stockholders (the “Special Meeting”), during which the Company’s stockholders approved the amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s common stock at a ratio in the range of 1-for-10 to 1-for-100, with such ratio to be determined by the Company’s board of directors (the “Board”) and included in a public announcement. Following the meeting, the Board determined to effect the Reverse Stock Split at a ratio of 1-for-50 and approved the corresponding final form of the Certificate of Amendment.

 

As a result of the Reverse Stock Split, every 50 shares of issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share. No fractional shares were issued as a result of the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the next whole number. The Reverse Stock Split reduced the number of shares of Common Stock outstanding from 52,684,548 shares to 1,054,043 shares. The number of authorized shares of Common Stock under the Certificate of Incorporation remained unchanged at 100,000,000 shares. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the Reverse Stock Split described above.

 

Proportionate adjustments were made to the per share exercise price and the number of shares of Common Stock that may be purchased upon exercise of outstanding stock options granted by the Company, and the number of shares of Common Stock reserved for future issuance under the Company’s 2020 Long-Term Incentive Plan.

 

February 2022 Offering

 

On February 15, 2022, we completed a public offering of 400,000 shares of Common Stock and warrants to purchase up to 20,000,000 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, we 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, we 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.

 

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 August 12, 2022, both the Initial Redemption and the Subsequent Redemption occurred. As a result, as of September 30, 2022, no shares of Series C Preferred Stock remain outstanding.

 

25

 

 

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 determine 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. As of September 30, 2022, no shares of Series C Preferred Stock are outstanding.

 

Spin-Off and Related Private Placement

 

In connection with the planned Spin-Off, on May 5, 2022, Akos and the Company entered into a Securities Purchase Agreement (the “Akos Purchase Agreement”) with an accredited investor (the “Akos Investor”), pursuant to which Akos agreed to sell up to an aggregate of 5,000 shares of Akos’ Series A Convertible Preferred Stock, par value $0.01 per share (the “Akos Series A Preferred Stock”), at price of $1,000 per share, and warrants (the “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 Private Placement”). 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 a non-controlling interest (“NCI”) (see Note 2). Palladium Capital Advisors, LLC (“Palladium”) acted as placement agent for the 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 September 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.

 

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, 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 below).

 

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. Pursuant to the Akos Purchase Agreement, the Company has guaranteed the payment of the purchase price for the shares purchased under the Put Right. 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. 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.

 

In connection with the Spin-Off, the Company would transfer its cannabinoid clinical development pipeline assets to Akos, while retaining its psychedelics clinical development pipeline assets. As of September 30, 2022, there is no accrual recorded since the closing of the spin-off is not probable.

 

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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, pre-funded warrants to purchase up to 258,500 shares of common stock, and unregistered preferred investment options (the “RD Preferred Investment Options”) to purchase up to 375,000 shares of common stock (the “RD Offering”). The gross proceeds from the RD Offering were approximately $3,000,000. 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 previously filed with the SEC on July 2, 2021. Subject to certain ownership limitations, the PIPE Pre-Funded Warrants became immediately exercisable at an exercise price equal to $0.0001 per share of common stock. There is not expected to be any trading market for the common warrants issued in the RD Offering. On August 3, 2022, all of the issued RD Pre-Funded Warrants were exercised. Subject to certain ownership limitations, the RD Preferred Investment Options became immediately exercisable at an exercise price equal to $7.78 per share of common stock. The RD Preferred Investment Options are exercisable for five and one-half years from the date of issuance.

 

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, 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 Offering”). The gross proceeds from the PIPE Offering were approximately $5,000,000. Subject to certain ownership limitations, the PIPE Pre-Funded Warrants became immediately exercisable at an exercise price equal to $0.0001 per share of common stock. There is not expected to be any trading market for the common warrants issued in the PIPE Offering. All of the issued PIPE Pre-Funded Warrants were exercised on various dates prior to August 18, 2022. Subject to certain ownership limitations, PIPE Preferred Investment Options became immediately exercisable at an exercise price equal to $7.78 per share of common stock. The PIPE Preferred Investment Options are exercisable for five and one-half years from the date of issuance.

 

The RD offering and PIPE Offering closed on July 26, 2022, with aggregate gross proceeds of approximately $8 million. The aggregate net proceeds from the offerings, after deducting the placement agent fees and other estimated offering expenses, were approximately $7.1 million.

 

On July 26, 2022, in connection with the RD Offering and PIPE Offering, the Company issued preferred investment options (the “Placement Agent Preferred Investment Options”) to an entity to purchase up to 70,000 shares of the common stock for acting as a placement agent. The Placement Agent Preferred Investment Options have substantially the same terms as the RD Preferred Investment Options and the PIPE Preferred Investments Options, except the Placement Agent Preferred Investment Options have an exercise price of $10.00 per share. The Placement Agent Preferred Investment Options are exercisable for five years from the date of issuance.

 

In connection 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 on February 15, 2022, 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. The Company determined the fair value of the February 2022 Warrants immediately prior to the Warrant Amendment and the fair value of the amended warrants immediately after the Warrant Amendment. The incremental change in fair value was deemed to be $251,357, which was included as equity issuance costs related to the RD and PIPE financing transactions.

 

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Results of Operations

 

The following table sets forth information comparing the components of net loss for the three months ended September 30, 2022 and 2021:

 

    For the Three Months Ended September 30,  
    2022     2021  
Operating expenses                
General and administrative   $ 3,514,547     $ 2,123,834  
Research and development     2,055,656       1,219,339  
Depreciation and amortization     86,646       173,696  
Total operating expenses     5,656,849       3,516,869  
                 
Loss from operations     (5,656,849 )     (3,516,869 )
                 
Other income (expense)                
Change in fair value of warrant liabilities     1,599,623       804,833  
Change in fair value of investment option liability     1,809,622        
Change in fair value of derivative liability     (231,000 )      
Interest expense     (308 )     (370 )
Total other income     3,177,937       804,463  
                 
Net loss     (2,478,912 )     (2,712,406 )
Less preferred dividends attributable to non-controlling interest     12,603        
Less deemed dividends attributable to accretion of embedded derivative at redemption value     110,991        
Net loss attributable to shareholders     (2,602,506 )     (2,712,406 )
                 
Other comprehensive loss                
Foreign currency translation     (417,390 )     (6,510 )
                 
Comprehensive loss   $ (3,019,896 )   $ (2,718,916 )
                 
Net loss per share - basic and diluted   $ (1.46 )   $ (5.91 )
                 
Weighted average shares outstanding, basic and diluted     1,787,235       459,289  

 

General and Administrative Expenses

 

Our general and administrative expenses increased to $3,514,547 for the three months ended September 30, 2022 from $2,123,834 for the three months ended September 30, 2021, an increase of $1,390,713, or 65%. This change was primarily driven by an increase in marketing fees of $143,578, an increase in professional fees of $234,911, and an increase in transaction expenses from equity offerings of $704,092.

 

Research and Development Expenses

 

Our research and development expense for the three months ended September 30, 2022 was $2,055,656 compared to $1,219,339 for the three months ended September 30, 2021 an increase of $836,317, or 69%. This increase was primarily driven by increased product development activities during the current year, as compared to the prior year, in particular, research relating to psychedelic molecules, activities which the Company was not engaged in during the comparable period of the prior year. In addition, there was an increase in research and development stock-based compensation of $113,960 during the three months ended September 30, 2022 as compared to the same period in 2021.

 

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Depreciation and Amortization Expense

 

Depreciation and amortization expense for the three months ended September 30, 2022 was $86,646 as compared to $173,696 for the three months ended September 30, 2021, a decrease of $87,050, or approximately 50%. The decrease in amortization is due to amortization of approximately $128,511 recorded for the Skincare license during the three months ended September 30, 2021. The Skincare license was subsequently fully impaired in the fourth quarter of 2021, resulting in no amortization of the Skincare license during 2022. This decrease was offset by an increase in depreciation of $42,218 during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

 

Change in Fair Value of Warrant Liabilities

 

The Company’s change in fair value warrant liabilities was increased by $794,790 for the three months ended September 30, 2022 as compared to for the three months ended September 30, 2021, due primarily to a decrease in the Company’s stock price in the current period.

 

Change in Fair Value of Investment Option Liability

 

The Company’s change in fair value of investment option liability was $1,809,622 for the three months ended September 30, 2022. The Company did not have any outstanding investment option liabilities during the three months ended September 30, 2021. The change in fair value is due to the significant decrease in the Company’s stock price between the issuance of the investment option liability and September 30, 2022. The Company’s stock price was $6.33 on July 26, 2022 (the date of issuance) and $4.22 on September 30, 2022, a decrease of approximately 33% during that time.

 

Change in Fair Value of Derivative Liability

 

The Company’s change in fair value of derivative liability increased by $231,000 for the three months ended September 30, 2022 as compared to for the three months ended September 30, 2021, due primarily to the announcement of the planned spin-off of Akos.

 

Foreign Currency Translation

 

Our foreign currency translation loss was $417,390 for the three months ended September 30, 2022 as compared to a loss of $6,510 for the three months ended September 30, 2021, for a change in loss of $410,880. The increase in foreign exchange loss is primarily due to the U.S. Dollar fluctuating against the Canadian Dollar and the conversion of the Canadian Dollars into United States Dollars for payment of United States Dollar denominated expenses. In addition, the Company engaged in a significantly higher number of transactions denominated in Canadian dollars during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, resulting in a much larger effect of foreign currency translation on the Company’s operations.

 

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The following table sets forth information comparing the components of net loss for the nine months ended September 30, 2022 and the comparable period in 2021:

 

    For the Nine Months Ended September 30,  
    2022     2021  
Operating expenses                
General and administrative   $ 8,783,619     $ 10,864,696  
Research and development     6,134,421       2,295,826  
Depreciation and amortization     241,413       484,355  
Total operating expenses     15,159,453       13,644,877  
                 
Loss from operations     (15,159,453 )     (13,644,877 )
                 
Other income (expense)                
Inducement expense           (298,714 )
Change in fair value of warrant liabilities     3,845,514       7,077,376  
Change in fair value of investment option liability     1,809,622        
Change in fair value of derivative liability     (284,000 )      
Interest expense     (5,114 )     (5,191 )
Total other income     5,366,022       6,773,471  
                 
Net loss   $ (9,793,431 )   $ (6,871,406 )
Less preferred dividends attributable to non-controlling interest     20,411        
Less deemed dividends attributable to accretion of embedded derivative at redemption value     184,985        
Net loss attributable to shareholders     (9,998,827 )     (6,871,406 )