# Enveric Biosciences, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Enveric Biosciences, Inc.](/companies/envb.md) (CIK 890821)
- Form: 10-Q
- Filed: 2023-11-13
- Accepted by EDGAR: Nov 13, 2023, 16:06 ET
- Period: 2023-09-30
- Accession: 0001493152-23-040493
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/890821/000149315223040493/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/890821/000149315223040493/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $1.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $5.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$3.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$14.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $6.6k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $6.6k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$2.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$13.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$1.30 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$6.62 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$1.30 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$6.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 2,164,656 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 2,117,153 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$12.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $5.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $4.3m | us-gaap:Cash |
| Current assets | at 2023-09-30 | $5.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $6.6m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $4.2m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | $2.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,829 characters.

*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.

21

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.

#### 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.

#### 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.

### 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:

| Operating expenses | For the Three Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| 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.

### 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:

| Operating expenses | For the Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| 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.

### 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.

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.

## Market risk

As filed, 854 characters.

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.

## Controls and procedures

As filed, 3,556 characters.

### 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.

## Risk factors

As filed, 923 characters.

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.

Filed Nov 13, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-040493. Last ingested by Listed: Nov 3, 2026, 18:51 ET. No prices; not investment advice.