Enveric Biosciences, Inc. - Quarter Report: 2023 September (Form 10-Q)
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, 2023
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 9, 2023, there were shares outstanding of Registrant’s Common Stock (par value $0.01 per share).
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,266,568 | $ | 17,723,884 | ||||
| Prepaid expenses and other current assets | 1,560,354 | 708,053 | ||||||
| Total current assets | 5,826,922 | 18,431,937 | ||||||
| Other assets: | ||||||||
| Property and equipment, net | 539,152 | 677,485 | ||||||
| Right-of-use operating lease asset | 63,817 | |||||||
| Intangible assets, net | 253,120 | 379,686 | ||||||
| Total other assets | 792,272 | 1,120,988 | ||||||
| Total assets | $ | 6,619,194 | $ | 19,552,925 | ||||
| LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,098,233 | $ | 463,275 | ||||
| Accrued liabilities | 1,533,829 | 1,705,655 | ||||||
| Current portion of right-of-use operating lease obligation | 63,820 | |||||||
| Investment option liability | 1,250,929 | 851,008 | ||||||
| Warrant liability | 300,557 | 185,215 | ||||||
| Derivative liability | 727,000 | |||||||
| Total current liabilities | $ | 4,183,548 | $ | 3,995,973 | ||||
| Commitments and contingencies (Note 9) | ||||||||
| Mezzanine equity | ||||||||
| Series C redeemable preferred stock, $ par value, shares authorized, and shares issued and outstanding as of September 30, 2023 and December 31, 2022 | ||||||||
| Redeemable non-controlling interest | 885,028 | |||||||
| Total mezzanine equity | 885,028 | |||||||
| Shareholders’ equity | ||||||||
| Preferred stock, $ par value, shares authorized; Series B preferred stock, $ par value, shares authorized, shares issued and outstanding as of September 30, 2023 and December 31, 2022 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | 21,818 | 20,782 | ||||||
| Additional paid-in capital | 96,013,029 | 94,395,662 | ||||||
| Accumulated deficit | (93,063,582 | ) | (79,207,786 | ) | ||||
| Accumulated other comprehensive loss | (535,619 | ) | (536,734 | ) | ||||
| Total shareholders’ equity | 2,435,646 | 14,671,924 | ||||||
| Total liabilities, mezzanine equity, and shareholders’ equity | $ | 6,619,194 | $ | 19,552,925 | ||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 1 |
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | $ | 2,010,349 | $ | 3,514,547 | $ | 7,921,340 | $ | 8,783,619 | ||||||||
| Research and development | 1,351,750 | 2,055,656 | 5,883,440 | 6,134,421 | ||||||||||||
| Depreciation and amortization | 86,296 | 86,646 | 259,300 | 241,413 | ||||||||||||
| Total operating expenses | 3,448,395 | 5,656,849 | 14,064,080 | 15,159,453 | ||||||||||||
| Loss from operations | (3,448,395 | ) | (5,656,849 | ) | (14,064,080 | ) | (15,159,453 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Change in fair value of warrant liabilities | 67,822 | 1,599,623 | (115,342 | ) | 3,845,514 | |||||||||||
| Change in fair value of investment option liability | 562,715 | 1,809,622 | (399,921 | ) | 1,809,622 | |||||||||||
| Change in fair value of derivative liability | (231,000 | ) | 727,000 | (284,000 | ) | |||||||||||
| Interest income (expense) | 2,237 | (308 | ) | 3,142 | (5,114 | ) | ||||||||||
| Total other income | 632,774 | 3,177,937 | 214,879 | 5,366,022 | ||||||||||||
| Net loss before income taxes | (2,815,621 | ) | (2,478,912 | ) | (13,849,201 | ) | (9,793,431 | ) | ||||||||
| Income tax expense | (6,595 | ) | (6,595 | ) | ||||||||||||
| Net loss | (2,822,216 | ) | (2,478,912 | ) | (13,855,796 | ) | (9,793,431 | ) | ||||||||
| Less preferred dividends attributable to non-controlling interest | 12,603 | 19,041 | 20,411 | |||||||||||||
| Less deemed dividends attributable to accretion of embedded derivative at redemption value | 110,991 | 147,988 | 184,985 | |||||||||||||
| Net loss attributable to shareholders | (2,822,216 | ) | (2,602,506 | ) | (14,022,825 | ) | (9,998,827 | ) | ||||||||
| Other comprehensive loss | ||||||||||||||||
| Foreign currency translation | 10,433 | (417,390 | ) | 1,115 | (609,695 | ) | ||||||||||
| Comprehensive loss | $ | (2,811,783 | ) | $ | (3,019,896 | ) | $ | (14,021,710 | ) | $ | (10,608,522 | ) | ||||
| Net loss per share - basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average shares outstanding, basic and diluted | ||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 2 |
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| Redeemable Non-controlling Interest | Total Mezzanine | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Equity | Shares | Amount | Capital | Deficit | Loss | Equity | ||||||||||||||||||||||||||||
| Balance at January 1, 2023 | 1,000 | $ | 885,028 | $ | 885,028 | 2,078,271 | $ | 20,782 | $ | 94,395,662 | $ | (79,207,786 | ) | $ | (536,734 | ) | $ | 14,671,924 | ||||||||||||||||||
| Stock-based compensation | — | — | 532,835 | 532,835 | ||||||||||||||||||||||||||||||||
| Preferred dividends attributable to redeemable non-controlling interest | — | 12,329 | 12,329 | — | (12,329 | ) | (12,329 | ) | ||||||||||||||||||||||||||||
| Accretion of embedded derivative to redemption value | — | 110,991 | 110,991 | — | (110,991 | ) | (110,991 | ) | ||||||||||||||||||||||||||||
| Foreign exchange translation gain | — | — | 1,968 | 1,968 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | (4,677,527 | ) | (4,677,527 | ) | ||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 1,000 | $ | 1,008,348 | $ | 1,008,348 | 2,078,271 | $ | 20,782 | $ | 94,805,177 | $ | (83,885,313 | ) | $ | (534,766 | ) | $ | 10,405,880 | ||||||||||||||||||
| Stock-based compensation | — | — | 879,738 | 879,738 | ||||||||||||||||||||||||||||||||
| Preferred dividends attributable to redeemable non-controlling interest | — | 6,712 | 6,712 | — | (6,712 | ) | (6,712 | ) | ||||||||||||||||||||||||||||
| Accretion of embedded derivative to redemption value | — | 36,997 | 36,997 | — | (36,997 | ) | (36,997 | ) | ||||||||||||||||||||||||||||
| Redemption of Series A preferred stock | (1,000 | ) | (1,052,057 | ) | (1,052,057 | ) | — | |||||||||||||||||||||||||||||
| Issuance of common shares in exchange for RSU conversions from the reduction in force | — | 63,511 | 635 | (635 | ) | |||||||||||||||||||||||||||||||
| Foreign exchange translation loss | — | — | (11,286 | ) | (11,286 | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | (6,356,053 | ) | (6,356,053 | ) | ||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | 2,141,782 | $ | 21,417 | $ | 95,640,571 | $ | (90,241,366 | ) | $ | (546,052 | ) | $ | 4,874,570 | |||||||||||||||||||||
| Stock-based compensation | — | — | 372,859 | 372,859 | ||||||||||||||||||||||||||||||||
| Issuance of common shares in exchange for RSU conversions | — | 40,130 | 401 | (401 | ) | |||||||||||||||||||||||||||||||
| Foreign exchange translation loss | — | — | 10,433 | 10,433 | ||||||||||||||||||||||||||||||||
| Net loss | — | — | (2,822,216 | ) | (2,822,216 | ) | ||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | 2,181,912 | $ | 21,818 | $ | 96,013,029 | $ | (93,063,582 | ) | $ | (535,619 | ) | $ | 2,435,646 | |||||||||||||||||||||
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
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| Series C 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 (Loss) | 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 | — | — | 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 exchange 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 non-controlling 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 gain | — | — | — | (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 derivatives 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.
| 4 |
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months Ended | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (13,855,796 | ) | $ | (9,793,431 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Change in fair value of warrant liability | 115,342 | (3,845,514 | ) | |||||
| Change in fair value of investment option liability | 399,921 | (1,809,622 | ) | |||||
| Change in fair value of derivative liability | (727,000 | ) | 284,000 | |||||
| Stock-based compensation | 1,785,432 | 2,091,299 | ||||||
| Amortization of right-of-use asset | 64,246 | 103,365 | ||||||
| Amortization of intangible assets | 126,566 | 126,563 | ||||||
| Depreciation expense | 132,734 | 114,850 | ||||||
| Gain on disposal of property and equipment | (4,219 | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | (746,033 | ) | (758,419 | ) | ||||
| Accounts payable and accrued liabilities | 429,688 | (106,675 | ) | |||||
| Right-of-use operating lease liability | (64,244 | ) | (91,022 | ) | ||||
| Net cash used in operating activities | (12,343,363 | ) | (13,684,606 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchases of property and equipment | (5,195 | ) | (577,972 | ) | ||||
| Proceeds from disposal of property and equipment | 16,900 | |||||||
| Net cash provided by (used in) investing activities | 11,705 | (577,972 | ) | |||||
| Cash Flows From Financing Activities: | ||||||||
| Payment for the deferred offering costs from the equity distribution agreement | (105,000 | ) | ||||||
| Proceeds from sale of common stock, warrants, and investment options, net of offering costs | 17,222,100 | |||||||
| Redemption of Series A Preferred Stock (see Note 8) | (1,052,057 | ) | ||||||
| Proceeds from the sale of redeemable non-controlling interest, net of offering | 958,038 | |||||||
| Net cash (used in) provided by financing activities | (1,157,057 | ) | 18,180,138 | |||||
| Effect of foreign exchange rate on cash | 31,399 | (72,554 | ) | |||||
| Net (decrease) increase in cash | (13,457,316 | ) | 3,845,006 | |||||
| Cash at beginning of period | 17,723,884 | 17,355,999 | ||||||
| Cash at end of period | $ | 4,266,568 | $ | 21,201,005 | ||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Cash paid for interest | $ | $ | 5,114 | |||||
| Income taxes paid | $ | 6,595 | $ | |||||
| Warrants issued in conjunction with common stock issuance | $ | $ | 3,595,420 | |||||
| Issuance of embedded derivative | $ | $ | 402,000 | |||||
| Issuance of redeemable non-controlling Series C preferred stock | $ | $ | ||||||
| Offering costs accrued not paid | $ | 20,800 | $ | |||||
| Preferred dividends attributable to redeemable non-controlling interest | $ | 19,041 | $ | 20,411 | ||||
| Accretion of embedded derivative to redemption value | $ | 147,988 | $ | 184,985 | ||||
| Investment options issued in conjunction with common stock issuance | $ | $ | 4,323,734 | |||||
| Modification of warrants as part of share capital raise | $ | $ | 251,357 | |||||
See the accompanying notes to the unaudited condensed consolidated financial statements.
| 5 |
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND LIQUIDITY AND OTHER UNCERTAINTIES
Nature of Operations
Enveric Biosciences, Inc. (“Enveric” or the “Company”) is a biotechnology company developing novel neuroplastogenic small-molecule therapeutics for the treatment of depression, anxiety, and addiction disorders. 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”), Enveric Canada Inc., and Enveric Therapeutics, Pty. Ltd. (“Enveric Therapeutics”).
Leveraging its unique discovery and development platform, The Psybrary™, Enveric has created a robust Intellectual Property portfolio of New Chemical Entities for specific mental health indications. Enveric’s lead program, the EVM201 Series, comprises next generation synthetic prodrugs of the active metabolite, psilocin. Enveric is developing the first product from the EVM201 Series – EB-373 – for the treatment of psychiatric disorders. Enveric is also advancing its second program, the EVM301 Series, expected to offer a first-in-class, new approach to the treatment of difficult-to-address mental health disorders, mediated by the promotion of neuroplasticity without also inducing hallucinations in the patient.
Following the Company’s amalgamation with MagicMed completed in September 2021 (the “Amalgamation”), the Company has continued to pursue the development of MagicMed’s proprietary Psychedelic Derivatives library, the Psybrary™ which the Company believes will help to identify and develop the right drug candidates needed to address mental health challenges, including cancer-related distress. The Company synthesizes novel versions of classic psychedelics, such as psilocybin, 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™ the Company has 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 its work at the Company’s labs in Calgary, Alberta, Canada, where the Company has a team of PhD scientists with expertise in synthetic biology and chemistry. To date the Company has created over 500 molecules that are housed in the Psybrary™.
The Company screens 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. The Company believes 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 the Company believes 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. The Company intends to utilize the 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.
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”). As of May 12, 2023, the holders of the Company’s Akos Series A Preferred Stock, par value $ per share (“Akos Series A Preferred Stock”) have exercised this right to force redemption of all of the Akos Series A Preferred Stock for $ per share, plus accrued but unpaid dividends of $52,057 for a total of $1,052,057. The Company made full payment on May 19, 2023. See Note 8.
Australian Subsidiary
On March 21, 2023, the Company established Enveric Therapeutics, an Australia-based subsidiary, to support the Company’s plans to advance its lead program, the EVM201 Series, comprised of the next generation synthetic prodrugs of the active metabolite, psilocin (“EVM201 Series”), towards the clinic. Enveric Therapeutics will oversee the Company’s preclinical, clinical, and regulatory activities in Australia, including ongoing interactions with the local Human Research Ethics Committees (HREC) and the Therapeutic Goods Administration (TGA), Australia’s regulatory authority.
| 6 |
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Going Concern, Liquidity and Other Uncertainties
The Company has incurred a loss since inception resulting in an accumulated deficit of $93,063,582 as of September 30, 2023, and further losses are anticipated in the development of its business. Further, the Company had operating cash outflows of $12,343,363 for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the Company had a loss from operations of $14,064,080. Since its 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.
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, 2023, the Company had cash of $4,266,568 and working capital of $1,643,374. The Company’s current cash on hand is insufficient to satisfy its operating cash needs for the 12 months following the filing of this Quarterly Report on Form 10-Q. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year after the date the financial statements are issued. Management’s plan to alleviate the conditions that raise substantial doubt include reducing the Company’s rate of spend, managing its cash flow, advancing its programs, and raising additional working capital through public or private equity or debt financings or other sources, which has included the Equity Distribution Agreement with Canaccord for proceeds of up to $2.4 million (see Note 7) and the Purchase Agreement with Lincoln Park (see Note 10), subject to registration, and may include collaborations with additional third parties, as well as disciplined cash spending, to increase the Company’s cash runway. Adequate additional financing may not be available to the Company on acceptable terms, or at all. Should the Company be unable to raise sufficient additional capital, the Company may be required to undertake cost-cutting measures including delaying or discontinuing certain operating activities.
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 research organizations (“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 manufacturing organizations (“CMOs”) to carry out their clinical manufacturing activities as it does not yet have a commercialization infrastructure, and incur significant expenses related to developing its internal commercialization capability to support product sales, marketing and distribution. The Company’s current working capital resources are insufficient to fund these material cash requirements for the next twelve months.
As a result of these factors, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of the financial statements are issued. The Company’s unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Reduction in Force/Restructuring
In May 2023, the Company entered into a cost reduction plan, including a reduction in force of approximately 35% of its full-time employees to streamline its operations and conserve cash resources. Additionally, contracts with seven consultants that were focused on the Akos cannabinoid spin-out were terminated. The Company recognized severance charges of approximately $453,059 through September 30, 2023. The plan included a focus on progressing the Company’s existing non-cannabinoid pipeline while reducing the rate of spend and managing cash flow. In June 2023, the Company completed the reduction in force, with such severance expenses recorded in general and administrative accounts.
On June 16, 2023, the Company entered into a separation agreement with Avani Kanubaddi, the Company’s President and Chief Operating Officer (the “Kanubaddi Separation Agreement”). In accordance with the Kanubaddi Separation Agreement, Mr. Kanubaddi’s outstanding restricted stock units (“RSUs”) will retain their vesting conditions. Mr. Kanubaddi’s 2023 salary and benefits of $550,974 were accrued and will be paid out in twelve equal monthly installments beginning in July 2023. Upon termination, any unvested time-based RSUs became fully vested. The Company accelerated expense recognized related to these shares that vested was $231,273. Of the market performance-based RSUs previously granted, will continue to be subject to the original terms and conditions of Mr. Kanubaddi’s employment agreement and the remainder were forfeited.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Accrued Restructuring Costs | ||||
| January 1, 2023 Beginning balance | $ | |||
| Restructuring costs incurred | 1,004,033 | |||
| Restructuring costs paid | (396,431 | ) | ||
| September 30, 2023 ending balance | $ | 607,602 | ||
Inflation Risks
The Company considers the current inflationary trend existing in the North American economic environment reasonably likely to have a material unfavorable impact on results of continuing operations. Higher rates of price inflation, as compared to recent prior levels of price inflation, have caused a general increase in the cost of labor and materials. In addition, there is an increased risk of the Company experiencing labor shortages due to a potential inability to attract and retain human resources due to increased labor costs resulting from the current inflationary environment.
NOTE 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 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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022, 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, 2023 and subsequently amended on Form 10-K/A Amendment No. 1 filed with the SEC on June 9, 2023 (as amended, the “Annual Report”).
The Company’s significant accounting policies and recent accounting standards are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2022. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2023.
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, and estimated fair values of long lived assets used to record impairment charges related to intangible assets. Actual results could differ from those estimates.
Foreign Currency Translation
From inception through September 30, 2023, the reporting currency of the Company was the United States dollar while the functional currency of certain of the Company’s subsidiaries was the Canadian dollar and Australian dollar. For the reporting periods ended September 30, 2023 and 2022, the Company engaged in a number of transactions denominated in Canadian dollars and Australian dollars. As a result, the Company is subject to exposure from changes in the exchange rates of the Canadian dollar and Australian dollar against the United States dollar.
The Company translates the assets and liabilities of its Canadian subsidiaries and Australian subsidiary into the United States 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 condensed consolidated statements of shareholders’ equity as a component of accumulated other comprehensive loss.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 loss in the condensed consolidated statements of operations and comprehensive loss as incurred.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times, may exceed the federal depository insurance coverage of $250,000 in the United States and Australia and $100,000 in Canada. The Company has not experienced losses on these accounts, and management believes the Company is not exposed to significant risks on such accounts. As of September 30, 2023, the Company had greater than $250,000 at United States financial institutions, less than $250,000 at Australian financial institutions, and greater than $100,000 at Canadian financial institutions.
Deferred Offering Costs
The Company complies with the requirements of ASC Topic 340, Other Assets and Deferred Costs (“ASC 340”) and SAB 5A - Expenses of Offering. Offering costs, which consist mainly of legal, accounting and consulting fees directly attributable to the issuance of an equity contract to be classified in equity are recorded as a reduction in equity. During September 2023, the Company incurred $125,800 in deferred offering costs in connection with the Equity Distribution Agreement (the “Distribution Agreement”), with Canaccord Genuity LLC (“Canaccord”) and the Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”). These deferred offering costs will be proportionately offset against the total proceeds from the issuance of common stock available under the agreements and the Company will expense any remaining balance of deferred offering costs if the agreements are terminated. For the three and nine months ended September 30, 2023, there were no issuances of common stock under the agreements resulting in the deferral of offering costs.
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 “Distinguishing Liabilities from Equity” (“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.
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.
Income Taxes
The Company files U.S. federal and state returns. The Company’s foreign subsidiary also files a local tax return in their local jurisdiction. From a U.S. federal, state, and Canadian perspective, the years that remain open to examination are consistent with each jurisdiction’s statute of limitations.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2023 and 2022 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 “Earnings per Share” (“ASC 260”), penny warrants were included in the calculation of weighted average shares outstanding for the purposes of calculating basic and diluted earnings per share.
| For the three and nine months ended September 30, 2023 | For the three and nine months ended September 30, 2022 | |||||||
| Warrants to purchase shares of common stock | 609,893 | 655,463 | ||||||
| Restricted stock units - vested and unissued | 20,847 | 61,428 | ||||||
| Restricted stock units - unvested | 148,251 | 65,117 | ||||||
| Restricted stock awards - vested and unissued | 974 | |||||||
| Investment options to purchase shares of common stock | 1,070,000 | 1,070,000 | ||||||
| Options to purchase shares of common stock | 31,852 | 22,829 | ||||||
| Total potentially dilutive securities | 1,880,843 | 1,875,811 | ||||||
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
For certain financial instruments, including cash and accounts payable, the carrying amounts approximate their fair values as of September 30, 2023, and December 31, 2022 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, 2023, and December 31, 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, 2023 | December 31, 2022 | ||||||||
| Warrant liabilities - January 2021 Warrants | 3 | $ | 18 | $ | 81 | |||||
| Warrant liabilities - February 2021 Warrants | 3 | 59 | 79 | |||||||
| Warrant liabilities - February 2022 Warrants | 3 | 300,480 | 185,055 | |||||||
| Fair value of warrant liability | $ | 300,557 | $ | 185,215 | ||||||
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Level | September 30, 2023 | December 31, 2022 | ||||||||
| Derivative liability - May 2022 | 3 | $ | $ | 727,000 | ||||||
| Fair value of derivative liability | $ | $ | 727,000 | |||||||
| Level | September 30, 2023 | December 31, 2022 | ||||||||
| H.C. Wainwright & Co., LLC investment options | 3 | $ | 70,521 | $ | 44,904 | |||||
| RD investment options | 3 | 442,653 | 302,289 | |||||||
| PIPE investment options | 3 | 737,755 | 503,815 | |||||||
| Fair value of investment option liability | $ | 1,250,929 | $ | 851,008 | ||||||
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 within other income (expense) on the condensed consolidated statements of operations and comprehensive loss.
Subsequent measurement
The following table presents the changes in fair value of the warrant liabilities, derivative liability, and investment options that are classified as Level 3:
| Total Warrant Liabilities | ||||
| Fair value as of December 31, 2022 | $ | 185,215 | ||
| Change in fair value | 115,342 | |||
| Fair value as of September 30, 2023 | $ | 300,557 | ||
| Total Derivative Liability | ||||
| Fair value as of December 31, 2022 | $ | 727,000 | ||
| Change in fair value arising from redemption of Akos Series A Preferred Stock - See Note 8 | (727,000 | ) | ||
| Fair value of derivative liability as of September 30, 2023 | $ | |||
| Total Investment Option Liability | ||||
| Fair value as of December 31, 2022 | $ | 851,008 | ||
| Change in fair value | 399,921 | |||
| Fair value of investment option liability as of September 30, 2023 | $ | 1,250,929 | ||
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO 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, 2023 are below:
| January 2021 Warrants | February 2021 Warrants | February 2022 Warrants | February 2022 Post-Modification Warrants | |||||||||||||
| Term (years) | 2.3 | 2.4 | 3.4 | 4.3 | ||||||||||||
| Stock price | $ | 2.38 | $ | 2.38 | $ | 2.38 | $ | 2.38 | ||||||||
| Exercise price | $ | 247.50 | $ | 245.00 | $ | 27.50 | $ | 7.78 | ||||||||
| Dividend yield | % | % | % | % | ||||||||||||
| Expected volatility | 80.0 | % | 85.0 | % | 96.0 | % | 94.0 | % | ||||||||
| Risk free interest rate | 5.00 | % | 4.90 | % | 4.80 | % | 4.70 | % | ||||||||
| Number of warrants | 36,429 | 34,281 | 338,000 | 122,000 | ||||||||||||
| Value (per share) | $ | $ | $ | 0.46 | $ | 1.18 | ||||||||||
The key inputs into the Black Scholes valuation model for the Level 3 valuations of the investment options as of September 30, 2023 are below:
| H.C. Wainwright & Co., LLC Options | RD Offering Options | PIPE Offering Options | ||||||||||
| Term (years) | 3.8 | 4.3 | 4.3 | |||||||||
| Stock price | $ | 2.38 | $ | 2.38 | $ | 2.38 | ||||||
| Exercise price | $ | 10.00 | $ | 7.78 | $ | 7.78 | ||||||
| Dividend yield | % | % | % | |||||||||
| Expected volatility | 97.0 | % | 94.0 | % | 94.0 | % | ||||||
| Risk free interest rate | 4.70 | % | 4.70 | % | 4.70 | % | ||||||
| Number of investment options | 70,000 | 375,000 | 625,000 | |||||||||
| Value (per share) | $ | 1.01 | $ | 1.18 | $ | 1.18 | ||||||
The key inputs into the Weighted Expected Return valuation model for the Level 3 valuations of the derivative liability as of redemption, are below:
| May 2022 Derivative Liability | ||||
| Principal | $ | |||
| Dividend rate | % | |||
| Market rate | % |
At the date of the redemption of the of Akos Series A Preferred Stock in May 2023, the derivative liability fair value was $0 due to the probability of a spin-off occurring was zero. See Note 8
Redeemable Non-controlling Interest
In connection with the issuance of Akos Series A Preferred Stock, the Akos Purchase Agreement (as defined below in Note 8) and certificate of designation contain a put right guaranteed by the Company as defined in Note 8. 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 mezzanine 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.
In May 2023, pursuant to the Akos Series A Preferred Certificate of Designations, the holders of the Akos Series A Preferred Stock exercised the Put Right (as defined below) requiring Akos to force redemption of all of the Akos Series A Preferred Stock. See Note 8.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Segment Reporting
The Company determines its reporting units in accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”). The Company evaluates a reporting unit by first identifying its operating segments under ASC 280. The Company then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated. The Company has multiple operations related to psychedelics and cannabinoids. Both of these operations exist under one reporting unit: Enveric. The Company has one operating segment and reporting unit. The Company is organized and operated as one business. Management reviews its business as a single operating segment, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, and should be applied on a full or modified retrospective basis. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company early adopted ASU 2020-06 effective January 1, 2023, and has determined that the adoption of this guidance had no impact on its condensed consolidated financial statements.
NOTE 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of September 30, 2023 and December 31, 2022, the prepaid expenses and other current assets of the Company consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Prepaid research and development | $ | 651,623 | $ | 268,686 | ||||
| Prepaid value-added taxes | 229,909 | 159,782 | ||||||
| Prepaid professional fees | 74,500 | |||||||
| Prepaid insurance | 332,508 | 174,406 | ||||||
| Prepaid other | 146,014 | 105,179 | ||||||
| Deferred offering costs | 125,800 | |||||||
| Total prepaid expenses and other current assets | $ | 1,560,354 | $ | 708,053 | ||||
NOTE 4. INTANGIBLE ASSETS
As of September 30, 2023, the Company’s intangible assets consisted of:
| Definite lived intangible assets | ||||
| Balance at December 31, 2022 | $ | 379,686 | ||
| Amortization | (126,566 | ) | ||
| Balance at September 30, 2023 | $ | 253,120 |
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For identified definite lived intangible assets, there was no impairment expense during the three and nine months ended September 30, 2023 and 2022. For identified definite lived intangible assets, amortization expense amounted to $42,191 during the three months ended September 30, 2023, and 2022, respectively. For identified definite lived intangible assets, amortization expense amounted to $126,566 and $126,563 during the nine months ended September 30, 2023 and 2022.
NOTE 5. 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, 2023 | December 31, 2022 | |||||||
| Lab equipment | $ | 818,460 | $ | 831,123 | ||||
| Computer equipment and leasehold improvements | 27,759 | 25,137 | ||||||
| Less: Accumulated depreciation | (307,067 | ) | (178,775 | ) | ||||
| Property and equipment, net of accumulated depreciation | $ | 539,152 | $ | 677,485 | ||||
Depreciation expense was $44,105 and $44,458 for the three months ended September 30, 2023, and 2022, respectively. Depreciation expense was $132,734 and $114,850 for the nine months ended September 30, 2023 and 2022, respectively.
NOTE 6. ACCRUED LIABILITIES
As of September 30, 2023 and December 31, 2022, the accrued liabilities of the Company consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Product development | $ | 94,663 | $ | 195,104 | ||||
| Accrued salaries and wages | 729,616 | 1,175,963 | ||||||
| Professional fees | 74,499 | 83,255 | ||||||
| Accrued restructuring costs | 607,602 | |||||||
| Accrued franchise taxes | 9,449 | |||||||
| Patent costs | 18,000 | 251,333 | ||||||
| Total accrued expenses | $ | 1,533,829 | $ | 1,705,655 | ||||
NOTE 7. 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, 2023, shares of common stock and shares of Preferred Stock were authorized under the Company’s articles of incorporation.
Equity Distribution Agreement
On September 1, 2023, the Company entered into the Distribution Agreement, with Canaccord, pursuant to which the Company may offer and sell from time to time, through Canaccord as sales agent and/or principal, shares of common stock of the Company, par value $ per share having an aggregate offering price of up to $10.0 million. Due to the offering limitations applicable to the Company and in accordance with the terms of the Distribution Agreement, the Company may offer Common Stock having an aggregate gross sales price of up to $2,392,514 pursuant to the prospectus supplement dated September 1, 2023 (the “Prospectus Supplement”). Subject to the terms and conditions of the Distribution Agreement, Canaccord may sell the Common Stock by any method permitted by law deemed to be an “at-the-market offering”. The Company will pay Canaccord a commission equal to 3.0% of the gross sales price of the Common Stock sold through Canaccord under the Distribution Agreement and has also agreed to reimburse Canaccord for certain expenses. The Company may also sell Common Stock to Canaccord as principal for Canaccord’s own account at a price agreed upon at the time of sale. Any sale of Common Stock to Canaccord as principal would be pursuant to the terms of a separate terms agreement between the Company and Canaccord.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the three and nine months ended September 30, 2023, the Company has issued no shares of common stock through the Distribution Agreement. The Company had capitalized deferred offering costs of $125,800 related to establishing the Distribution Agreement with Canaccord and the Purchase Agreement with Lincoln Park and no reductions to additional paid in capital.
Common Stock Activity
On February 15, 2022, the Company completed a public offering of shares of Common Stock and warrants to purchase up to 400,000 shares of Common Stock for gross proceeds of approximately $10.0 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 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 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 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 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 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 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, 2023, a total of shares of Common Stock were issued pursuant to the conversion of restricted stock units. During the nine months ended September 30, 2022, a total of shares of Common Stock were issued pursuant to the conversion of restricted stock units.
Stock Options
Amendment to 2020 Long-Term Incentive Plan
On May 3, 2022, our board of directors (“Board”) adopted the First Amendment (the “Plan Amendment”) to the Enveric Biosciences, Inc. 2020 Long-Term Incentive Plan (the “Incentive Plan”) to .
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 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, 2022 | 48,329 | $ | 37.05 | $ | 44.82 | $ | ||||||||||||||
| Forfeited | (16,476 | ) | $ | 5.79 | $ | 5.80 | — | $ | — | |||||||||||
| Outstanding at September 30, 2023 | 31,852 | $ | 53.18 | $ | 74.04 | $ | ||||||||||||||
| Exercisable at September 30, 2023 | 24,626 | $ | 63.72 | $ | 86.52 | $ | ||||||||||||||
The Company’s stock-based compensation expense, recorded within general and administrative expense in the condensed consolidated statement of operations and comprehensive loss, related to stock options for the three months ended September 30, 2023, and 2022 was $ and $, 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, 2023 and 2022 was $ and $, respectively. As of September 30, 2023, the Company had $ in unamortized stock option expense, which will be recognized over a weighted average period of year.
Restricted Stock Awards
For the three months ended September 30, 2023, and 2022, the Company recorded $ and $, respectively, in stock-based compensation expense within general and administrative expense, related to restricted stock awards. For the nine months ended September 30, 2023 and 2022, the Company recorded $ and $, respectively, in stock-based compensation expense within general and administrative expense, related to restricted stock awards. As of September 30, 2023, there were no unamortized stock-based compensation costs related to restricted share awards. During the three months ended September 30, 2023, the Company settled the vested and unissued shares for cash of $. As of September 30, 2023, there are vested and unissued shares of restricted stock awards.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO 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, 2023:
| Number of shares | Weighted average fair value | |||||||
| Non-vested at December 31, 2022 | 64,053 | $ | 92.57 | |||||
| Granted | 182,500 | $ | 2.73 | |||||
| Vested | (62,636 | ) | $ | 19.80 | ||||
| Forfeited | (35,666 | ) | $ | 27.45 | ||||
| Non-vested at September 30, 2023 | 148,251 | $ | 28.39 | |||||
For the three months ended September 30, 2023, and 2022, the Company recorded $ and $, respectively, in stock-based compensation expense related to restricted stock units. For the nine months ended September 30, 2023 and 2022, the Company recorded $ and $ 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 condensed consolidated statement of operations and comprehensive loss. As of September 30, 2023, the Company had unamortized stock-based compensation costs related to restricted stock units of $ which will be recognized over a weighted average period of years and unamortized stock-based costs related to restricted stock units which will be recognized upon achievement of specified milestones. As of September 30, 2023, restricted stock units are vested without shares of common stock being issued, with all of these shares due as of September 30, 2023.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Stock-based compensation expense for RSUs: | ||||||||||||||||
| General and administrative | $ | 101,607 | $ | 357,756 | $ | 946,851 | $ | 1,138,080 | ||||||||
| Research and development | 226,646 | 232,434 | 691,514 | 794,473 | ||||||||||||
| Total | $ | 328,253 | $ | 590,190 | $ | 1,638,365 | $ | 1,932,553 | ||||||||
Warrants
The following table summarizes information about shares issuable under warrants outstanding on September 30, 2023:
| Warrant shares outstanding | Weighted average exercise price | Weighted average remaining life | Intrinsic value | |||||||||||||
| Outstanding at December 31, 2022 | 655,463 | $ | 58.36 | $ | 5,514 | |||||||||||
| Expired | (45,570 | ) | $ | 111.50 | — | $ | — | |||||||||
| Outstanding at September 30, 2023 | 609,893 | $ | 50.46 | $ | ||||||||||||
| Exercisable at September 30, 2023 | 609,893 | $ | $ | |||||||||||||
The warrants assumed pursuant to the acquisition of MagicMed contain certain down round features, which were not triggered by the February 2022 public offering and July 2022 RD Offering, that would require adjustment to the exercise price upon certain events when the offering price is less than the stated exercise price.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Preferred Investment Options
The following table summarizes information about investment options outstanding on September 30, 2023:
| Investment options outstanding | Weighted average exercise price | Weighted average remaining life | Intrinsic value | |||||||||||||
| Outstanding at December 31, 2022 | 1,070,000 | $ | 7.93 | $ | — | |||||||||||
| Outstanding at September 30, 2023 | 1,070,000 | $ | 7.93 | $ | — | |||||||||||
| Exercisable at September 30, 2023 | 1,070,000 | $ | $ | — | ||||||||||||
NOTE 8. REDEEMABLE NON-CONTROLLING INTEREST
Spin-Off and Related Private Placement
In connection with the Spin-Off, on May 5, 2022, Akos and the Company entered into 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 shares of Akos Series A Preferred Stock, at price of $ per share, and warrants (the “Akos Warrants”) Akos Warrants to purchase shares of Akos’ common stock, par value $ 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 was guaranteed by the Company. Pursuant to the Akos Purchase Agreement, Akos issued 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 was to 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 had 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 to be paid to Palladium in the form of convertible preferred stock and warrants was on similar terms to the securities issued in the Akos Private Placement. Palladium was 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. As of September 30, 2023, no accruals are required to be recorded for the fees or warrants since the Akos Series A Preferred Stock has been redeemed.
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 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 provided 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 $ 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Redemption of Akos Series A Preferred Stock
In May 2023, pursuant to the Akos Series A Preferred Certificate of Designations, the holders of the Akos Series A Preferred Stock exercised the Put Right requiring Akos to force redemption of all of the Akos Series A Preferred Stock for $ per share, plus accrued but unpaid dividends of approximately $52,000 for a total of approximately $1,052,000. The Company had 20 days following the receipt of the Put Exercise Notice to make the payment and made payment on May 19, 2023. Upon redemption in May 2023, the Company revalued the derivative liability and the Company recognized a change in fair value of the derivative liability on the Company’s condensed consolidated statement of operations during the second quarter of 2023 of $714,000.
The Company, Akos, and the Akos Investor have terminated the Akos Purchase Agreement in connection with the planned Spin-Off and certain registration rights agreement in connection with the Akos Private Placement.
Accounting for Akos Series A Preferred Stock
Since the shares of Akos Series A Preferred Stock were 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 were accounted for as a redeemable non-controlling interest and classified within mezzanine equity in the Company’s condensed consolidated balance sheets. The redeemable non-controlling interest was initially measured at fair value. Dividends on the shares of Akos Series A Preferred Stock were recognized as preferred dividends attributable to redeemable non-controlling interest in the Company’s condensed consolidated statement of operations and comprehensive loss.
The table below presents the reconciliation of changes in redeemable non-controlling interest:
| Balance at December 31, 2022 | $ | 885,028 | ||
| Preferred dividends attributable to redeemable non-controlling interest | 19,041 | |||
| Accretion of embedded derivative and transaction costs associated with Akos Series A Preferred | 147,988 | |||
| Redemption of Akos Series A Preferred Stock | (1,052,057 | ) | ||
| Balance at September 30, 2023 | $ |
In May 2023, the Akos Series A Preferred Stock was redeemed for a total of $1,052,057, and the balance of the redeemable non-controlling interest is $ as of September 30, 2023.
NOTE 9. 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.
Australian Subsidiary Research and Development
On March 23, 2023, the Company issued a press release announcing the selection of Australian CRO, Avance Clinical, in preparation for Phase 1 Study of EB-373, the Company’s lead candidate targeting the treatment of anxiety disorders. Under the agreement, Avance Clinical will manage the Phase 1 clinical trial of EB-373 in coordination with the Company’s newly established Australian subsidiary, Enveric Therapeutics Pty, Ltd. The Phase 1 clinical trial is designed as a multi-cohort, dose-ascending study to measure the safety and tolerability of EB-373. EB-373, a next-generation proprietary psilocin prodrug, has been recognized as a New Chemical Entity (NCE) by Australia’s Therapeutic Goods Administration (TGA) and is currently in preclinical development targeting the treatment of anxiety disorder. The total cost of the Avance Clinical contract is approximately 3,000,000 AUD, which translates to approximately $2,000,000 USD as of September 30, 2023. As of September 30, 2023, the Company has paid approximately $950,997 of the Avance Clinical contract costs and has $549,713 recorded as prepaid assets within prepaid and other current assets on the accompanying condensed consolidated balance sheet. For the three and nine months ended September 30, 2023, the Company has expensed $157,117 and $401,284 in research and development expenses, respectively, within the accompanying condensed consolidated statement of operations.
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ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Development and Clinical Supply Agreement
On February 22, 2021, the Company entered into a Development and Clinical Supply Agreement (the “PureForm Agreement”) with PureForm Global, Inc. (“PureForm”), pursuant to which PureForm will be the exclusive provider of synthetic cannabidiol (“API”) for the Company’s development plans for cancer treatment and supportive care. Under the terms of the PureForm Agreement, PureForm has granted the Company the exclusive right to purchase API and related product for cancer treatment and supportive care during the term of the Agreement (contingent upon an initial minimum order of 1 kilogram during the first thirty (30) days from the effective date) and has agreed to manufacture, package and test the API and related product in accordance with specifications established by the parties. All inventions that are developed jointly by the parties in the course of performing activities under the PureForm Agreement will be owned jointly by the parties in accordance with applicable law; however, if the Company funds additional research and development efforts by PureForm, the parties may enter into a further agreement whereby PureForm would assign any resulting inventions or technical information to the Company.
The initial term of the PureForm Agreement is three (3) years commencing on the effective date of the PureForm Agreement, subject to extension by mutual agreement of the parties. The PureForm Agreement may be terminated by either party upon thirty (30) days written notice of an uncured material breach or immediately in the event of bankruptcy or insolvency. The PureForm Agreement contains, among other provisions, representation and warranties, indemnification obligations and confidentiality provisions in favor of each party that are customary for an agreement of this nature.
The Company has met the minimum purchase requirement of 1 kilogram during the first thirty days of the PureForm Agreement’s effectiveness.
Purchase agreement with Prof. Zvi Vogel and Dr. Ilana Nathan
On December 26, 2017, Jay Pharma entered into a purchase agreement with Prof. Zvi Vogel and Dr. Ilana Nathan (the “Vogel-Nathan Purchase Agreement”), pursuant to which Jay Pharma was assigned ownership rights to certain patents, which were filed and unissued as of the date of the Vogel-Nathan Purchase Agreement. The Vogel-Nathan Purchase Agreement includes a commitment to pay a one-time milestone totaling $200,000 upon the issuance of a utility patent in the United States or by the European Patent Office, as defined in the agreement. The Company has accrued such amount as of December 31, 2021, as a result of the milestone criteria being achieved. Payment was made during January 2022. In addition, a milestone payment totaling $300,000 is due upon initiation of a Phase II(b) study. Research activities related to the relevant patents are still in pre-clinical stage, and accordingly, this milestone has not been achieved. The Vogel-Nathan Purchase Agreement contains a commitment for payment of royalties equaling 2% of the first $20 million in net sales derived from the commercialization of products utilizing the relevant patent. As these products are still in the preclinical phase of development, no royalties have been earned.
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 18 months. These agreements, in aggregate, commit the Company to approximately $1.2 million in future cash payments.
NOTE 10. SUBSEQUENT EVENTS
Lincoln Park Equity Line
On November 3, 2023, the Company entered into a Purchase Agreement and a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $10.0 million of the Company’s common stock, par value $ per share subject to certain limitations and satisfaction of the conditions set forth in the Purchase Agreement.
Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $10.0 million of the Company’s Common Stock (the “Purchase Shares”). However, such sales of Common Stock by the Company, if any, will be subject to important limitations set forth in the Purchase Agreement, including limitations on number of shares that may be sold. Sales may occur from time to time, at the Company’s sole discretion, over the 24-month period commencing on the date that the conditions to Lincoln Park’s purchase obligation set forth in the Purchase Agreement are satisfied, including that a registration statement on Form S-1 covering the resale of the shares of our Common Stock that have been and may be issued to Lincoln Park under the Purchase Agreement, which the Company has filed with the SEC pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus relating thereto is filed with the SEC.
Because the purchase price per share to be paid by Lincoln Park for the shares of Common Stock that we may elect to sell to Lincoln Park under the Purchase Agreement, if any, will fluctuate based on the market prices of our Common Stock at the time we elect to sell shares to Lincoln Park pursuant to the Purchase Agreement, if any, it is not possible for us to predict the number of shares of Common Stock that we will sell to Lincoln Park under the Purchase Agreement, the purchase price per share that Lincoln Park will pay for shares purchased from us under the Purchase Agreement, or the aggregate gross proceeds that we will receive from those purchases by Lincoln Park under the Purchase Agreement.
For additional details, please refer to the Company’s Current Report on Form 8-K filed with the SEC on November 6, 2023.
2020 Long-Term Incentive Plan Amended
On November 2, 2023, the shareholders approved the amendments to the 2020 Long-Term Incentive Plan, which was approved by the Board on August 8, 2023 (the “Amended Incentive Plan”). The Amended Incentive Plan increased the number of authorized shares reserved for issuance under the Amended Incentive Plan to a maximum of , subject to adjustment.
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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 the 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 ongoing 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; | |
| ● | 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 success at managing the risks involved in the foregoing; and | |
| ● | the risk of loss in excess of insurance limitations on funds help in U.S Banking Institutions. |
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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. 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.
Business Overview
We are a biotechnology company dedicated to the development of novel neuroplastogenic small-molecule therapeutics for the treatment of depression, anxiety, and addiction disorders. Leveraging its unique discovery and development platform, The Psybrary™, Enveric has created a robust intellectual property portfolio of New Chemical Entities for specific mental health indications. Enveric’s lead program, the EVM201 Series, comprises next generation synthetic prodrugs of the active metabolite, psilocin. Enveric is developing the first product from the EVM201 Series – EB-373 – for the treatment of psychiatric disorders. Enveric is also advancing its second program, the EVM301 Series, expected to offer a first-in-class, new approach to the treatment of difficult-to-address mental health disorders, mediated by the promotion of neuroplasticity without also inducing hallucinations in the patient.
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 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 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.
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Cannabinoids
We aim 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 the Food and Drug Administration “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 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. The Spin-Off was 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.
In May 2023, pursuant to the Akos Series A Preferred Certificate of Designations, the holders of the Akos Series A Preferred Stock exercised their Put Right requiring Akos to redeem all of the outstanding shares of Akos Series A Preferred Stock for $1,000 per share, plus accrued but unpaid dividends of approximately $52,000 for a total redemption amount of approximately $1,052,000. The Company completed the redemption May 19, 2023. The Company now plans to engage with strategic advisors to identify and pursue alternative routes to capture value from the cannabinoid assets.
Recent Developments
Australian Subsidiary
On March 21, 2023, the Company established Enveric Therapeutics, Pty. Ltd. (“Enveric Therapeutics”), an Australia-based subsidiary, to support the Company’s plans to advance its EVM201 Series towards the clinic. Enveric Therapeutics will oversee the Company’s preclinical, clinical, and regulatory activities in Australia, including ongoing interactions with the local Human Research Ethics Committees (HREC) and the Therapeutic Goods Administration (“TGA”), Australia’s regulatory authority.
On March 23, 2023, the Company issued a press release announcing the selection of Australian CRO, Avance Clinical, in preparation for Phase 1 Study of EB-373, the Company’s lead candidate targeting the treatment of anxiety disorders. Under the agreement, Avance Clinical will manage the Phase 1 clinical trial of EB-373 in coordination with the Company’s newly established Australian subsidiary, Enveric Therapeutics Pty, Ltd. The Phase 1 clinical trial is designed as a multi-cohort, dose-ascending study to measure the safety and tolerability of EB-373. EB-373, a next-generation proprietary psilocin prodrug, has been recognized as a New Chemical Entity (NCE) by Australia’s TGA and is currently in preclinical development targeting the treatment of anxiety disorder. The total cost of the Avance Clinical contract is approximately 3,000,000 AUD, which translates to approximately $2,000,000 as of September 30, 2023. As of September 30, 2023, the Company has paid $950,997 of the Avance Clinical contract costs and has $549,713 recorded as prepaid assets. For the three and nine months ended September 30, 2023, the Company has expensed $157,117 and $401,284 in research and development expenses, respectively.
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Reduction in Force/Restructuring
In May 2023, the Company entered into a cost reduction plan, including a reduction in force of approximately 35% of its full-time employees to streamline its operations and conserve cash resources. Additionally, contracts with seven consultants that were focused on the Akos cannabinoid spin-out were terminated. The Company recognized severance charges of approximately $453,059 through September 30, 2023. The plan included a focus on progressing the Company’s existing non-cannabinoid pipeline while reducing the rate of spend and managing cash flow. As of September 30, 2023, the Company has completed the reduction in force, with such severance expenses recorded in salaries and wages and legal accounts.
On June 16, 2023, the Company entered into a separation agreement with Avani Kanubaddi, the Company’s President and Chief Operating Officer (the “Kanubaddi Separation Agreement”). In accordance with the Kanubaddi Separation Agreement, Mr. Kanubaddi’s outstanding RSUs will retain their vesting conditions. Mr. Kanubaddi’s 2023 salary and benefits of $550,974 was accrued and will be paid out in twelve equal monthly installments beginning in July 2023. Upon termination, any unvested time-based RSU’s became fully vested. The Company accelerated expense recognized related to these shares that vested upon termination of $231,273. Of the 11,278 market performance-based RSUs, 3,759 will continue to be subject to the original terms and conditions of Mr. Kanubaddi’s employment agreement and the remainder were forfeited.
Equity Distribution Agreement
On September 1, 2023, the Company entered into the Distribution Agreement, with Canaccord, pursuant to which the Company may offer and sell from time to time, through Canaccord as sales agent and/or principal, shares of common stock of the Company, par value $0.01 per share having an aggregate offering price of up to $10.0 million. Due to the offering limitations applicable to the Company and in accordance with the terms of the Distribution Agreement, the Company may offer Common Stock having an aggregate gross sales price of up to $2,392,514 pursuant to the prospectus supplement dated September 1, 2023 (the “Prospectus Supplement”). Subject to the terms and conditions of the Distribution Agreement, Canaccord may sell the Common Stock by any method permitted by law deemed to be an “at-the-market offering”. The Company will pay Canaccord a commission equal to 3.0% of the gross sales price of the Common Stock sold through Canaccord under the Distribution Agreement and has also agreed to reimburse Canaccord for certain expenses. The Company may also sell Common Stock to Canaccord as principal for Canaccord’s own account at a price agreed upon at the time of sale. Any sale of Common Stock to Canaccord as principal would be pursuant to the terms of a separate terms agreement between the Company and Canaccord.
During the three and nine months ended September 30, 2023, the Company has issued no shares of common stock through the Distribution Agreement.
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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, 2023, and 2022:
For the Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating expenses | ||||||||
| General and administrative | $ | 2,010,349 | $ | 3,514,547 | ||||
| Research and development | 1,351,750 | 2,055,656 | ||||||
| Depreciation and amortization | 86,296 | 86,646 | ||||||
| Total operating expenses | 3,448,395 | 5,656,849 | ||||||
| Loss from operations | (3,448,395 | ) | (5,656,849 | ) | ||||
| Other income (expense) | ||||||||
| Change in fair value of warrant liabilities | 67,822 | 1,599,623 | ||||||
| Change in fair value of investment option liability | 562,715 | 1,809,622 | ||||||
| Change in fair value of derivative liability | — | (231,000 | ) | |||||
| Interest income (expense) | 2,237 | (308 | ) | |||||
| Total other income | 632,774 | 3,177,937 | ||||||
| Net loss before income taxes | $ | (2,815,621 | ) | $ | (2,478,912 | ) | ||
| Income tax expense | (6,595 | ) | — | |||||
| Net loss | $ | (2,822,216 | ) | $ | (2,478,912 | ) | ||
General and Administrative Expenses
Our general and administrative expenses decreased to $2,010,349 for the three months ended September 30, 2023 from $3,514,547 for the three months ended September 30, 2022, a decrease of $1,504,198, or 43%. This change was primarily driven by a decrease in transaction expenses from liability classified equity offerings of $704,094, stock based compensation of $329,178, directors and officer insurance of $252,097, and marketing of $201,862.
Research and Development Expenses
Our research and development expense for the three months ended September 30, 2023 was $1,351,750 as compared to $2,055,656 for the three months ended September 30, 2022 with a decrease of $703,906, or approximately 34%. This change was primarily driven by the change in strategy and cost reduction plan resulting in a decrease of payroll and consulting fees of $804,023, scientific advisory board fees of $41,198 and product development expense of $151,989, offset by the increase of the Avance clinical contract of $290,797.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended September 30, 2023 was $86,296 as compared to $86,646 for the three months ended September 30, 2022, with a decrease of $350. Depreciation and amortization expense was substantially similar for the three months ended September 30, 2023 compared with the three months ended September 30, 2022.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities for the three months ended September 30, 2023 resulted in income of $67,822 as compared to income of $1,599,623 for the three months ended September 30, 2022. The change in fair value of warrant liabilities is significantly influenced by the change in the closing price of Common Stock at the end of each period, as compared to the closing price of Common Stock at the beginning of each period with a strong inverse relationship between changes in fair value of warrant liabilities and the trading price of Common Stock. The Company’s stock price was $2.38 as of September 30, 2023, $3.37 as of June 30, 2023, $4.22 as of September 30, 2022 and $10.70 as of June 30, 2022. The stock price of the Company decreased approximately 29% during the three months ended September 30, 2023 compared to a decrease of approximately 61% during the three months ended September 30, 2022. The significant percentage change in the Company’s stock price during the three months ended September 30, 2023 compared to the three months ended September 30, 2022, resulted in the increase to the change in fair value of warrant liabilities.
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Change in Fair Value of Investment Option Liability
Change in fair value of investment option liability for the three months ended September 30, 2023 resulted in income of $562,715, as compared to $1,809,622 during the three months ended September 30, 2022. The change in fair value is due to the significant decrease in the Company’s stock price for the three months ended September 30, 2023. The Company’s stock price was $2.38 on September 30, 2023 and $3.37 on June 30, 2023, a decrease of approximately 29% during that time compared to a decrease of approximately 33% during the three months ended September 30, 2022.
Change in Fair Value of Derivative Liability
The Company’s change in fair value of derivative liability expense was $231,000 for the three months ended September 30, 2022, compared to $0 for the three months ended September 30, 2023 due to redemption of the redeemable stock in May 2023 and therefore no probability of occurrence of the Akos spin-off as of September 30, 2023 as compared to June 30, 2023.
The following table sets forth information comparing the components of net loss for the nine months ended September 30, 2023 and 2022:
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating expenses | ||||||||
| General and administrative | $ | 7,921,340 | $ | 8,783,619 | ||||
| Research and development | 5,883,440 | 6,134,421 | ||||||
| Depreciation and amortization | 259,300 | 241,413 | ||||||
| Total operating expenses | 14,064,080 | 15,159,453 | ||||||
| Loss from operations | (14,064,080 | ) | (15,159,453 | ) | ||||
| Other income (expense) | ||||||||
| Change in fair value of warrant liabilities | (115,342 | ) | 3,845,514 | |||||
| Change in fair value of investment option liability | (399,921 | ) | 1,809,622 | |||||
| Change in fair value of derivative liability | 727,000 | (284,000 | ) | |||||
| Interest income (expense) | 3,142 | (5,114 | ) | |||||
| Total other income | 214,879 | 5,366,022 | ||||||
| Net loss before income taxes | $ | (13,849,201 | ) | $ | (9,793,431 | ) | ||
| Income tax expense | (6,595 | ) | — | |||||
| Net loss | $ | (13,855,796 | ) | $ | (9,793,431 | ) | ||
General and Administrative Expenses
Our general and administrative expenses decreased to $7,921,340 for the nine months ended September 30, 2023 from $8,783,619 for the nine months ended September 30, 2022, a decrease of $862,279, or 10%. This change was primarily driven by a decrease in transaction expenses from liability classified equity offerings of $823,970, directors and officers insurance of $780,797, stock based compensation of $202,908 and marketing of $274,814, partially offset by an increase in consulting fees of $626,382, accounting fees of $310,797 and franchise taxes of $307,644.
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Research and Development Expenses
Our research and development expense for the nine months ended September 30, 2023 was $5,883,440 as compared to $6,134,421 for the nine months ended September 30, 2022 with a decrease of $250,981, or approximately 4%. This change was primarily driven by increase of the Avance clinical contract of $646,029 and product development of $141,085 offset by payroll and consulting fees of $1,021,851 for the change in strategy and reduction in workforce as part of the cost reduction plan.
Depreciation and Amortization Expense
Depreciation and amortization expense for the nine months ended September 30, 2023 was $259,300 as compared to $241,413 for the nine months ended September 30, 2022, with an increase of $17,887, or approximately 7%. This increase is due to fixed asset additions during the nine months ended September 30, 2022 which only incurred partial depreciation, compared to a full nine months’ of depreciation during the nine months ended September 30, 2023.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities the nine months ended September 30, 2023 resulted in expense of $115,342 as compared to income of $3,845,514 for the nine months ended September 30, 2022. The change in fair value of warrant liabilities is significantly influenced by the change in the closing price of Common Stock at the end of each period, as compared to the closing price of Common Stock at the beginning of each period with a strong inverse relationship between changes in fair value of warrant liabilities and the trading price of Common Stock. The Company’s stock price per share was $2.38 as of September 30, 2023, $2.08 as of December 31, 2022, $4.22 as of September 30, 2022 and $46.50 as of December 31, 2021. The stock price of the Company increased approximately 14% during the nine months ended September 30, 2023 compared to a decrease of approximately 91% during the nine months ended September 30, 2022. The significant percentage change in the Company’s stock price during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, resulted in the increase to the change in fair value of warrant liabilities.
Change in Fair Value of Investment Option Liability
Change in fair value of investment option liability during the nine months ended September 30, 2023 resulted in expense of $399,921, as compared to $1,809,622 during the nine months ended September 30, 2022. The change in fair value is due to the significant increase in the Company’s stock price the nine months ended September 30, 2023. The Company’s stock price per share was $2.08 on December 31, 2022 and $2.38 on September 30, 2023, an increase of approximately 14% during that time, compared to a decrease of approximately 33% during the nine months ended September 30, 2022. The significant percentage change in the Company’s stock price during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, resulted in the increase to the change in fair value of warrant liabilities.
Change in Fair Value of Derivative Liability
The Company’s change in fair value of derivative liability was expense of $284,000 for the nine months ended September 30, 2022 compared to income of $727,000 for the nine months ended September 30, 2023, due primarily to the May 2023 redemption which ceased the probability of occurrence of the Akos spin-off and Akos Series A Preferred Stock redemption as of September 30, 2023 as compared to December 31, 2022.
Going Concern, Liquidity and Capital Resources
The Company has incurred a loss since inception resulting in an accumulated deficit of $93,063,582 as of September 30, 2023 and further losses are anticipated in the development of its business. Further, the Company had operating cash outflows of $12,343,363 for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the Company had a loss from operations of $14,064,080. 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.
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, 2023, the Company had cash of $4,266,568 and working capital of $1,643,374. The Company’s current cash on hand is insufficient enough to satisfy its operating cash needs for the 12 months following the filing of this Quarterly Report on Form 10-Q. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year after the date the financial statements are issued. Management’s plan to alleviate the conditions that raise substantial doubt include reducing the Company’s rate of spend, managing its cash flow, advancing its programs, and raising additional working capital through public or private equity or debt financings or other sources, which has included the Equity Distribution Agreement with Canaccord for proceeds of up to $2.4 million and the Purchase Agreement with Lincoln Park, which may include collaborations with third parties as well as disciplined cash spending, to increase the Company’s cash runway. Adequate additional financing may not be available to the Company on acceptable terms, or at all. Should the Company be unable to raise sufficient additional capital, the Company may be required to undertake cost-cutting measures including delaying or discontinuing certain operating activities.
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In May 2023, the Company entered into a cost reduction plan, including a reduction in force of approximately 35% of its full-time employees to streamline its operations and conserve cash resources. Additionally, contracts with seven consultants that were focused on the Akos cannabinoid spin-out will be terminated. Additionally, on June 16, 2023, the Company entered into the Kanubaddi Separation Agreement with Avani Kanubaddi, the Company’s President and Chief Operating Officer. In accordance with the Kanubaddi Separation Agreement, Mr. Kanubaddi’s outstanding RSUs will retain their vesting conditions. Mr. Kanubaddi’s 2023 salary and benefits was accrued and will be paid out in twelve equal monthly installments beginning in July 2023. The Company recognized severance charges of approximately $1,004,033 through September 30, 2023, with $396,431 of these charges paid as of September 30, 2023. The plan included a focus on progressing the Company’s existing non-cannabinoid pipeline while reducing the rate of spend and managing cash flow. As of September 30, 2023, the Company has completed the reduction in force, with such severance expenses recorded in salaries and wages and legal accounts.
As a result of these factors, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of the financial statements are issued. The Company’s condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash Flows
Since inception, we have primarily used our available cash to fund our product development and operations expenditures.
Cash Flows for the Nine Months Ended September 30, 2023 and 2022
The following table sets forth a summary of cash flows for the years presented:
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (12,343,363 | ) | $ | (13,684,606 | ) | ||
| Net cash provided by (used in) investing activities | 11,705 | (577,972 | ) | |||||
| Net cash (used in) provided by financing activities | (1,157,057 | ) | 18,180,138 | |||||
| Effect of foreign exchange rate on cash | 31,399 | (72,554 | ) | |||||
| Net (decrease) increase in cash | $ | (13,457,316 | ) | $ | 3,845,006 | |||
Operating Activities
Net cash used in operating activities was $12,343,363 during the nine months ended September 30, 2023, which consisted primarily of a net loss adjusted for non-cash items of $11,962,774, an increase in prepaid expenses of $746,033, and an increase in accounts payable and accrued liabilities of $429,688.
Net cash used in operating activities was $13,684,606 during the nine months ended September 30, 2022, which consisted primarily of a net loss adjusted for non-cash items of $12,728,490, increase in prepaid expenses and other current assets of $758,419, and a decrease in accounts payable and accrued liabilities of $106,675.
Investing Activities
Net cash provided by investing activities was $11,705 during the nine months ended September 30, 2023, which consisted of the purchase of property and equipment, offset by proceeds from sale of property and equipment.
Net cash used in investing activities was $577,972 during the nine months ended September 30, 2022, which consisted of the purchase of property and equipment.
Financing Activities
Net cash used in financing activities was $1,157,057 during the nine months ended September 30, 2023, which consisted of the redemption of redeemable non-controlling interest and payment of deferred offering costs.
Net cash provided by financing activities was $18,180,138 during the nine months ended September 30, 2022, which consisted of $17,222,100 in proceeds from the sale of common stock and warrants and $958,038 in proceeds from the sale of redeemable non-controlling interest.
Critical Accounting Policies and Significant Judgments and Estimates
The Company’s accounting policies are fundamental to understanding its management’s discussion and analysis. The Company’s significant accounting policies are presented in Note 2 to its financial statements for the year ended December 31, 2022, and included in the Annual Report. The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in the Company’s unaudited condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
From inception through September 30, 2023, the Company’s reporting currency is the United States dollar while the functional currency of certain of the Company’s subsidiaries were the Canadian dollar and Australian dollar. For the reporting periods ended September 30, 2023 and September 30, 2022, the Company engaged in a number of transactions denominated in Canadian dollars and Australian dollars. As a result, the Company is subject to exposure from changes in the exchange rates of the Canadian dollar and Australian dollar against the U.S. dollar.
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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The matters that management identified in our Annual Report for the year ended December 31, 2022, continued to exist and were still considered material weaknesses in our internal control over financial reporting at September 30, 2023.
As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive) and Chief Financial Officer (our principal financial officer and principal accounting officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based on this evaluation, and in light of the material weaknesses found in our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective as of September 30, 2023.
Management’s Remediation Plan
As previously discussed in our Annual Report for the year ended December 31, 2022, management had concluded that our internal control over financial reporting was not effective as of December 31, 2022, because management identified inadequate segregation of duties to ensure the processing, review, and authorization of all transactions, including non-routine transactions resulting in deficiencies, which, in aggregate, amounted to a material weakness in the Company’s internal control over financial reporting.
As of September 30, 2023, there were control deficiencies that constituted a material weakness in our internal control over financial reporting. Management has taken, and is taking steps to strengthen our internal control over financial reporting: we have conducted evaluation of the material weakness to determine the appropriate remedy and have established procedures for documenting disclosures and disclosure controls.
While we have taken certain actions to address the material weaknesses identified, additional measures may be necessary as we work to improve the overall effectiveness of our internal controls over financial reporting.
Changes in Internal Control over Financial Reporting
Other than the changes discussed above in the Remediation Plan, there have been no other changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-(f) of the Exchange Act) that occurred during quarter ending September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is periodically involved in legal proceedings, legal actions and claims arising in the ordinary course of business. Other than as described below, we do not have any pending litigation that, separately or in the aggregate, would, in the opinion of management, have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in the Company’s annual report on Form 10-K as filed with the SEC on March 31, 2023, as amended on June 9, 2023 and quarterly reports on Form 10-Q as filed with the SEC on May 15, 2023 and August 11, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations of financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in the Company’s annual report on Form 10-K as filed with the SEC on March 31, 2023, as amended on June 9, 2023 and quarterly reports on Form 10-Q as filed with the SEC on May 15, 2023 and August 11, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
In May 2023, pursuant to the Akos Series A Preferred Certificate of Designations, the holders of the Akos Series A Preferred Stock exercised the Put Right requiring Akos to force redemption of all of the Akos Series A Preferred Stock for $1,000 per share, plus accrued but unpaid dividends of approximately $50,000 for a total of approximately $1,052,057. The Company has 20 days following the receipt of the Put Exercise Notice to make the payment and made payment on May 19, 2023.
The Company, Akos, and the Akos Investor intend to terminate the Akos Purchase Agreement in connection with the planned Spin-Off and that certain registration rights agreement in connection with the Akos Private Placement.
In May 2023, the Company entered into a cost reduction plan, including a reduction in force of approximately 35% of its full-time employees to streamline its operations and conserve cash resources. Additionally, contracts with seven consultants that were focused on the Akos cannabinoid spin-out will be terminated. The Company recognized severance charges of approximately $1,004,033 through September 30, 2023. The plan included a focus on progressing the Company’s existing non-cannabinoid pipeline while reducing the rate of spend and managing cash flow. As of September 30, 2023, the Company has completed the reduction in force, with such severance expenses recorded in salaries and wages and legal accounts.
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Item 6. Exhibits
INDEX TO EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENVERIC BIOSCIENCES, INC | ||
| November 13, 2023 | ||
| By: | /s/ Dr. Joseph Tucker | |
| Dr. Joseph Tucker | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| November 13, 2023 | ||
| By: | /s/ Kevin Coveney | |
| Kevin Coveney | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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