UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
Form 10-Q
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
AMERI Holdings, Inc.For the quarterly period ended: September 30, 2021
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) | (I.R.S. Employer Identification No.) |
4851 Tamiami Trail N, Suite Naples, FL | ||
| (Address of principal executive offices) | (Zip Code) |
(239) 302-1707
(Registrant’s telephone number, including area code: (770) 935-4152code)
Not applicableSecurities registered under section 12(b) of the Act:
(Former name, former address, and former fiscal year, if changed since last report)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.01 par value per share | ENVB | The NasdaqStock Market LLC |
Securities registered under section 12(g) of the Act:
| Title of class |
| Series B Preferred Stock |
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 [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section S–T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratednon–accelerated filer, a smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-212b–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 7(a)(2)(B)13(a) of the SecuritiesExchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b–2 of the Exchange Act).
Yes [ ] ☐ No [X]☒
Securities registered pursuant to Section 12(b) of the Act:
As of November 13, 2020, 7,491,5449, 2021, there were shares of the registrant’s common stock, were$0.01 par value per share, issued and outstanding.
AMERI Holdings, Inc.
QUARTERLY REPORT ON ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
AMERI HOLDINGS, INC.
UNAUDITED ENVERIC BIOSCIENCES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| September 30, 2020 | December 31, 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 2,840,097 | 431,400 | ||||||
| Accounts receivable | 7,563,451 | 6,384,148 | ||||||
| Other current assets | 901,451 | 783,606 | ||||||
| Total current assets | 11,304,999 | 7,599,154 | ||||||
| Other assets: | ||||||||
| Property and equipment, net | 91,289 | 83,128 | ||||||
| Intangible assets, net | 1,950,766 | 3,584,221 | ||||||
| Acquired goodwill | 13,729,770 | 13,729,770 | ||||||
| Operating lease right of use asset, net | 874,606 | 286,163 | ||||||
| Deferred income tax assets, net | 42,181 | 8,879 | ||||||
| Total other assets | 16,688,612 | 17,692,161 | ||||||
| Total assets | 27,993,611 | 25,291,315 | ||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Line of credit | 3,097,009 | 2,881,061 | ||||||
| Accounts payable | 4,580,079 | 4,696,352 | ||||||
| Other accrued expenses | 1,910,601 | 1,989,894 | ||||||
| Operating lease liability | 208,663 | 120,052 | ||||||
| PPP Loan | 1,729,600 | - | ||||||
| EID Loan, current portion | 2,924 | - | ||||||
| Convertible notes | 1,000,000 | |||||||
| Consideration payable – cash | - | 2,496,000 | ||||||
| Debenture Liability | 1,818,321 | - | ||||||
| Dividend payable | 645,425 | 320,298 | ||||||
| Total current liabilities | 13,992,622 | 13,503,657 | ||||||
| Long term liabilities: | ||||||||
| Operating lease liability, net | 678,272 | 169,897 | ||||||
| EID Loan, net of current portion | 146,976 | - | ||||||
| Short term Loans | - | 1,000,000 | ||||||
| Total long term liabilities | 825,248 | 1,169,897 | ||||||
| Total liabilities | 14,817,870 | 14,673,554 | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.01 par value; 1,000,000 authorized, 424,938 issued and outstanding as of September 30, 2020 and December 31, 2019. | 4,249 | 4,249 | ||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized, 5,737,001 and 2,522,095 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 57,370 | 25,221 | ||||||
| Additional paid-in capital | 58,218,620 | 51,040,296 | ||||||
| Accumulated deficit | (45,156,263 | ) | (40,512,017 | ) | ||||
| Accumulated other comprehensive income (loss) | 51,765 | 60,012 | ||||||
| Total stockholders’ equity | 13,175,741 | 10,617,761 | ||||||
| Total liabilities and stockholders’ equity | 27,993,611 | 25,291,315 | ||||||
September 30, 2021 | December 31, 2020 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 21,448,426 | $ | 1,578,460 | ||||
| Prepaid expenses and other current assets | 833,116 | 700,710 | ||||||
| Total current assets | 22,281,542 | 2,279,170 | ||||||
| Non-Current Assets | ||||||||
| Fixed assets, net of accumulated depreciation of $2,240 and $-0- as of September 30, 2021 and December 31, 2020, respectively | 140,568 | — | ||||||
| Intangible assets, net of accumulated amortization of $592,700 and $126,968 as of September 30, 2021 and December 31, 2020, respectively | 38,273,667 | 1,817,721 | ||||||
| Goodwill | 9,061,927 | — | ||||||
| Total assets | $ | 69,757,704 | $ | 4,096,891 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 2,162,812 | $ | 681,250 | ||||
| Total current liabilities | 2,162,812 | 681,250 | ||||||
| Deferred tax liability | 9,061,927 | |||||||
| Warrant liability | 3,166,116 | - | ||||||
| Total liabilities | $ | 14,390,855 | $ | 681,250 | ||||
| Commitments and Contingencies | - | |||||||
| Shareholders’ Equity | ||||||||
| Preferred Stock, $par value, shares authorized, and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | $ | - | $ | 32,754 | ||||
| Common stock, $par value, shares authorized, and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 313,836 | 100,951 | ||||||
| Additional paid-in capital | 73,869,289 | 15,222,770 | ||||||
| Accumulated deficit | (18,630,963 | ) | (11,759,557 | ) | ||||
| Accumulated other comprehensive loss | (185,313 | ) | (181,277 | ) | ||||
| Total shareholders’ equity | 55,366,849 | 3,415,641 | ||||||
| Total Liabilities and shareholders’ equity | $ | 69,757,704 | $ | 4,096,891 | ||||
SeeThe accompanying notes to theare an integral part of these unaudited condensed consolidated financial statements.statements
AMERI HOLDINGS,ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)LOSS
(UNAUDITED)
| Three Months Sep 30,2020 | Three Months Sep 30,2019 | Nine Months Sep 30,2020 | Nine Months Sep 30,2019 | |||||||||||||
| Revenue | 8,483,030 | 9,148,857 | 26,340,499 | 30,850,110 | ||||||||||||
| Cost of revenue | 6,595,533 | 7,249,406 | 20,753,306 | 24,428,520 | ||||||||||||
| Gross profit | 1,887,497 | 1,899,451 | 5,587,193 | 6,421,590 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, General and administration | 2,449,919 | 2,902,401 | 7,845,160 | 9,075,751 | ||||||||||||
| Depreciation and amortization | 556,333 | 562,050 | 1,649,819 | 1,685,637 | ||||||||||||
| Operating expenses | 3,006,252 | 3,464,451 | 9,494,979 | 10,761,388 | ||||||||||||
| Operating Income (loss) | (1,118,755 | ) | (1,565,000 | ) | (3,907,786 | ) | (4,339,798 | ) | ||||||||
| Interest benefit (expenses) | 128,842 | (252,648 | ) | (403,506 | ) | (551,862 | ) | |||||||||
| Changes in fair value of warrant liability | - | 1,857,889 | - | 1,796,174 | ||||||||||||
| Others, net | 882 | (9 | ) | 3,693 | 4,557 | |||||||||||
| Income (loss) before income taxes | (989,031 | ) | 40,232 | (4,307,599 | ) | (3,090,929 | ) | |||||||||
| Income tax benefit (expenses) | 27,857 | 1,067 | (11,520 | ) | 15,688 | |||||||||||
| Income (loss) after income taxes | (961,174 | ) | 41,299 | (4,319,119 | ) | (3,075,241 | ) | |||||||||
| Net income attributable to non-controlling interest | ||||||||||||||||
| Net Income (loss) attributable to the Company | (961,174 | ) | 41,299 | (4,319,119 | ) | (3,075,241 | ) | |||||||||
| Dividend on preferred stock | (109,457 | ) | (106,765 | ) | (325,127 | ) | (318,704 | ) | ||||||||
| Net Income (loss) attributable to common stock holders | (1,070,631 | ) | (65,466 | ) | (4,644,246 | ) | (3,393,945 | ) | ||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Foreign exchange translation | 11,902 | (17,979 | ) | (8,247 | ) | (17,406 | ) | |||||||||
| Total Comprehensive Income (loss) | (1,058,729 | ) | (83,445 | ) | (4,652,493 | ) | (3,411,351 | ) | ||||||||
| Basic income (loss) per share | (0.20 | ) | (0.03 | ) | (1.11 | ) | (1.70 | ) | ||||||||
| Diluted income (loss) per share | (0.20 | ) | (0.03 | ) | (1.11 | ) | (1.70 | ) | ||||||||
| Basic weighted average number of common shares outstanding | 5,289,099 | 2,113,227 | 4,172,526 | 1,999,390 | ||||||||||||
| Diluted weighted average number of common shares outstanding | 5,289,099 | 2,113,227 | 4,172,526 | 1,999,390 | ||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development costs | $ | 1,219,339 | $ | 63,302 | $ | 2,295,826 | $ | 134,259 | ||||||||
| General and administrative expenses | 2,123,834 | 426,532 | 10,864,696 | 1,959,785 | ||||||||||||
| Depreciation and amortization | 173,696 | - | 484,355 | - | ||||||||||||
| Total operating expenses | 3,516,869 | 489,834 | 13,644,877 | 2,094,044 | ||||||||||||
| Loss from Operations | (3,516,869 | ) | (489,834 | ) | (13,644,877 | ) | (2,094,044 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (370 | ) | (75,501 | ) | (5,191 | ) | (388,143 | ) | ||||||||
| Change in fair value of warrant liabilities | 804,833 | - | 7,077,376 | |||||||||||||
| Inducement expense | - | - | (298,714 | ) | ||||||||||||
| Total other income (expense) | 804,463 | (75,501 | ) | 6,773,471 | (388,143 | ) | ||||||||||
| Net Loss | (2,712,406 | ) | (565,335 | ) | (6,871,406 | ) | (2,482,187 | ) | ||||||||
| Other comprehensive gain (loss) | ||||||||||||||||
| Foreign currency translation | (6,510 | ) | (7,310 | ) | (4,036 | ) | (30,077 | ) | ||||||||
| Comprehensive loss | $ | (2,718,916 | ) | $ | (572,645 | ) | $ | (6,875,442 | ) | $ | (2,512,264 | ) | ||||
| Net loss per share – basic and diluted | $ | (0.12 | ) | $ | (0.10 | ) | $ | (0.34 | ) | $ | (0.43 | ) | ||||
| Weighted average shares outstanding, basic and diluted | 23,142,780 | 5,861,727 | 20,325,782 | 5,733,360 | ||||||||||||
SeeThe accompanying notes to theare an integral part of these unaudited condensed consolidated financial statements.statements
AMERI HOLDINGS,ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
STATEMENTCONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERSHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||
| Shares | Par Value at $0.01 | Shares | Par Value at $0.01 | Additional paid-in capital | Foreign Currency Translation Reserve | Retained earnings | Total stockholders’ equity | |||||||||||||||||||||||||
| Balance at Dec 31, 2018 | 1,693,165 | $ | 16,932 | 420,720 | $ | 4,207 | $ | 45,129,214 | $ | 86,997 | $ | (34,478,253 | ) | $ | 10,759,097 | |||||||||||||||||
| Net Loss for the period | (3,393,944 | ) | (3,393,944 | ) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (17,406 | ) | (17,406 | ) | ||||||||||||||||||||||||||||
| Shares Issued towards earnouts | 131,570 | 1,316 | 603,907 | 605,223 | ||||||||||||||||||||||||||||
| Exercise of Warrants (PIPE series A&B) | 688,096 | 6,881 | 4,586,936 | 4,593,817 | ||||||||||||||||||||||||||||
| Preferred stock issued | 4,208 | 42 | 210,358 | 210,400 | ||||||||||||||||||||||||||||
| Stock Compensation expenses | 490,175 | 490,175 | ||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 2,512,832 | $ | 25,129 | 424,928 | $ | 4,249 | $ | 51,020,591 | $ | 69,591 | $ | (37,872,197 | ) | $ | 13,247,363 | |||||||||||||||||
| Balance at December 31, 2019 | 2,522,095 | $ | 25,221 | 424,938 | $ | 4,249 | $ | 51,040,296 | $ | 60,012 | $ | (40,512,017 | ) | $ | 10,617,761 | |||||||||||||||||
| Net Loss for the period | (4,644,246 | ) | (4,644,246 | ) | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (8,247 | ) | (8,247 | ) | ||||||||||||||||||||||||||||
| Stock Compensation expenses | 49,474 | 49,474 | ||||||||||||||||||||||||||||||
| Shares Issued for Extinguishment of liability | 2,352,406 | 23,524 | 5,412,475 | 5,435,999 | ||||||||||||||||||||||||||||
| Rights Issue of Shares | 862,500 | 8,625 | 1,716,375 | 1,725,000 | ||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 5,737,001 | $ | 57,370 | 424,938 | $ | 4,249 | $ | 58,218,620 | $ | 51,765 | $ | (45,156,263 | ) | $ | 13,175,741 | |||||||||||||||||
(UNAUDITED)
| Series B Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||
| Balance as of December 31, 2019 | - | - | 5,573,915 | $ | 55,739 | $ | 3,039,163 | $ | (4,894,881 | ) | $ | (11,622 | ) | $ | (1,811,601 | ) | ||||||||||
| Common stock issued for accounts payable | 85,942 | 859 | 172,623 | 173,482 | ||||||||||||||||||||||
| Warrants issued in conjunction with notes payable | 32,149 | 32,149 | ||||||||||||||||||||||||
| Beneficial conversion feature issued with note payable | 17,851 | 17,851 | ||||||||||||||||||||||||
| January 2021 registered direct offering | ||||||||||||||||||||||||||
| January 2021 registered direct offering,shares | ||||||||||||||||||||||||||
| February 2021 registered direct offering | ||||||||||||||||||||||||||
| February 2021 registered direct offering,shares | ||||||||||||||||||||||||||
| Consideration paid pursuant to amalgamation agreement | - | |||||||||||||||||||||||||
| Consideration paid pursuant to amalgamation agreement,shares | ||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||
| Non-cash compensation from issuance of stock options | ||||||||||||||||||||||||||
| Reserve for Ameri warrant liabilities | ||||||||||||||||||||||||||
| Induced conversion of stock options into restricted stock awards | ||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock | ||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock,shares | ||||||||||||||||||||||||||
| Conversion of stock options into restricted stock | ||||||||||||||||||||||||||
| Conversion of stock options into restricted stock,shares | ||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||
| Exercise of warrants,shares | ||||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||||
| Exercise of options,shares | ||||||||||||||||||||||||||
| Stock issued for service | ||||||||||||||||||||||||||
| Stock issued for service, shares | ||||||||||||||||||||||||||
| Foreign exchange loss | (12,698 | ) | (12,698 | ) | ||||||||||||||||||||||
| Net loss | - | - | (1,098,461 | ) | (1,098,461 | ) | ||||||||||||||||||||
| Balance as of March 31, 2020 | - | - | 5,659,857 | $ | 56,598 | $ | 3,261,786 | $ | (5,993,342 | ) | $ | (24,320 | ) | $ | (2,699,278 | ) | ||||||||||
| Common stock issued in conjunction with note payable modification | 12,167 | 122 | 45,603 | 45,725 | ||||||||||||||||||||||
| Foreign exchange loss | (10,069 | ) | (10,069 | ) | ||||||||||||||||||||||
| Net loss | - | - | (818,391 | ) | (818,391 | ) | ||||||||||||||||||||
| Balance as of June 30, 2020 | - | - | 5,672,024 | $ | 56,720 | $ | 3,307,389 | $ | (6,811,733 | ) | $ | (34,389 | ) | $ | (3,482,013 | ) | ||||||||||
| Private equity placement | 36,871 | 369 | 227,131 | 227,500 | ||||||||||||||||||||||
| Conversion of related party advance and notes payable | 239,325 | 2,393 | 235,607 | 238,000 | ||||||||||||||||||||||
| Foreign exchange loss | (7,310 | ) | (7,310 | ) | ||||||||||||||||||||||
| Net loss | - | - | (565,335 | ) | (565,335 | ) | ||||||||||||||||||||
| Balance as of September 30, 2020 | - | - | 5,948,220 | $ | 59,482 | $ | 3,770,127 | $ | (7,377,068 | ) | $ | (41,699 | ) | $ | (3,589,158 | ) | ||||||||||
(continued on next page)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
AMERI HOLDINGS,ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
(Continued from prior page)
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||
Series B Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||
| Balance as of December 31, 2020 | 3,275,407 | $ | 32,754 | 10,095,109 | $ | 100,951 | $ | 15,222,770 | $ | (11,759,557 | ) | $ | (181,277 | ) | $ | 3,415,641 | ||||||||||||||||
| January 2021 registered direct offering, net | - | - | 2,221,334 | 22,213 | 4,594,874 | 4,617,087 | ||||||||||||||||||||||||||
| February 2021 registered direct offering , net | 3,007,026 | 30,070 | 6,986,331 | 7,016,401 | ||||||||||||||||||||||||||||
| Stock based compensation | 3,591,565 | 3,591,565 | ||||||||||||||||||||||||||||||
| Induced conversion of stock options into restricted stock awards | 298,714 | 298,714 | ||||||||||||||||||||||||||||||
| Conversion of Series B Preferred Stock | (3,275,407 | ) | (32,754 | ) | 3,275,407 | 32,754 | - | |||||||||||||||||||||||||
| Exercise of warrants, net | 851,099 | 8,511 | 3,258,734 | 3,267,245 | ||||||||||||||||||||||||||||
| Foreign exchange gain | 35,736 | 35,736 | ||||||||||||||||||||||||||||||
| Net loss | (3,250,711 | ) | (3,250,711 | ) | ||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | - | - | 19,449,975 | $ | 194,499 | $ | 33,952,988 | $ | (15,010,268 | ) | $ | (145,541 | ) | $ | 18,991,678 | |||||||||||||||||
| Stock based compensation | - | - | 717,466 | 717,466 | ||||||||||||||||||||||||||||
| Stock issued for services | 141 | 33,326 | 33,467 | |||||||||||||||||||||||||||||
| Conversion of stock options into restricted stock | 42,125 | 421 | (421 | ) | - | |||||||||||||||||||||||||||
| Exercise of warrants | 1,791,948 | 17,921 | 7 | 17,928 | ||||||||||||||||||||||||||||
| Exercise of options | 134,246 | 1,342 | (1,342 | ) | - | |||||||||||||||||||||||||||
| Foreign exchange loss | (33,262 | ) | (33,262 | ) | ||||||||||||||||||||||||||||
| Net loss | (908,289 | ) | (908,289 | ) | ||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | - | - | 21,432,415 | $ | 214,324 | $ | 34,702,024 | $ | (15,918,557 | ) | $ | (178,803 | ) | $ | 18,818,988 | |||||||||||||||||
| Consideration paid pursuant to amalgamation agreement | - | - | 9,951,217 | 99,512 | 38,942,770 | 39,042,282 | ||||||||||||||||||||||||||
| Stock based compensation | 486,986 | 486,986 | ||||||||||||||||||||||||||||||
| Reserve for Ameri warrant liabilities | (262,491 | ) | (262,491 | ) | ||||||||||||||||||||||||||||
| Foreign exchange loss | (6,510 | ) | (6,510 | ) | ||||||||||||||||||||||||||||
| Net loss | (2,712,406 | ) | (2,712,406 | ) | ||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | - | - | 31,383,632 | $ | 313,836 | $ | 73,869,289 | $ | (18,630,963 | ) | $ | (185,313 | ) | $ | 55,366,849 | |||||||||||||||||
The accompanying notes are an integral part of these audited condensed consolidated financial statements
| -6- |
ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| September 30 | ||||||||
| 2020 | 2019 | |||||||
| Cash flow from operating activities | ||||||||
| Net Income (Loss) | (4,652,493 | ) | (3,327,905 | ) | ||||
| Adjustment to reconcile comprehensive income/(loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | 1,649,819 | 1,123,587 | ||||||
| Non-cash expenses | 6,117 | |||||||
| Provision for Preference dividend | 325,127 | 211,939 | ||||||
| Changes in fair value of warrants | - | 61,715 | ||||||
| Stock, option, restricted stock unit and warrant expense | 49,474 | 490,175 | ||||||
| Foreign exchange translation adjustment | (8,247 | ) | 573 | |||||
| Provision for Income taxes ( net of deferred income taxes) | (8,940 | ) | (14,622 | ) | ||||
| Loss on sale of fixed assets | 21,611 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts receivable | (1,179,303 | ) | (673,381 | ) | ||||
| Other current assets | (117,845 | ) | (1,388 | ) | ||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued expenses | 56,085 | 655,151 | ||||||
| Net cash provided by (used in) operating activities | (3,858,595 | ) | (1,474,156 | ) | ||||
| Cash flow from investing activities | ||||||||
| Purchase of fixed assets | (46,136 | ) | (27,698 | ) | ||||
| Acquisition consideration | - | (200,000 | ) | |||||
| Net cash used in investing activities | (46,136 | ) | (227,698 | ) | ||||
| Cash flow from financing activities | ||||||||
| Proceeds from bank loan and convertible notes, net | 4,588,427 | (191,762 | ) | |||||
| Proceeds from issuance of common shares, net | 1,725,000 | 2,123,425 | ||||||
| Net cash provided by financing activities | 6,313,427 | 1,931,663 | ||||||
| Net increase (decrease) in cash and cash equivalents | 2,408,697 | 229,809 | ||||||
| Cash and cash equivalents as at beginning of the period | 431,400 | 1,371,331 | ||||||
| Cash at the end of the period | 2,840,097 | 1,601,140 | ||||||
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (6,871,406 | ) | $ | (2,482,187 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Amortization of debt discount | - | 285,858 | ||||||
| Accrued interest | - | 102,285 | ||||||
| Change in fair value of warrant liability | (7,077,376 | ) | - | |||||
| Stock and option based compensation | 4,829,484 | - | ||||||
| Inducement expense | 298,714 | - | ||||||
| Depreciation and amortization expense | 484,355 | - | ||||||
| Change in operating assets and liabilities | ||||||||
| Prepaid expenses and other current assets | 320,123 | (1,841 | ) | |||||
| Accounts payable and accrued liabilities | 625,748 | 522,162 | ||||||
| Due from related party | - | (65,075 | ) | |||||
| Net cash used in operating activities | (7,390,358 | ) | (1,638,798 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of Diverse Bio license agreement | (675,000 | ) | - | |||||
| Cash accretive acquisition of MagicMed | 3,055,327 | - | ||||||
| Net cash provided by investing activities | 2,380,327 | - | ||||||
| Cash Flows From Financing Activities: | ||||||||
| Proceeds from sale of common stock and warrants, net of offering costs | 21,614,488 | 227,500 | ||||||
| Proceeds from convertible notes payable | - | 50,000 | ||||||
| Proceeds from note payable | - | 1,812,410 | ||||||
| Repayment of note payable | - | (157,714 | ) | |||||
| Proceeds from warrant exercises, net of fees | 3,285,164 | - | ||||||
| Net cash provided by financing activities | 24,899,652 | 1,932,196 | ||||||
| Effect of foreign exchange rate on cash | (19,655 | ) | 3,786 | |||||
| Net increase in cash | 19,869,966 | 297,184 | ||||||
| Cash - Beginning of period | 1,578,460 | 43,714 | ||||||
| Cash - End of period | $ | 21,448,426 | $ | 340,898 | ||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Issuance of Common Stock pursuant to MagicMed amalgamation | $ | 39,042,282 | $ | - | ||||
| Deferred tax liability incurred due to MagicMed amalgamation | $ | 9,061,927 | $ | - | ||||
| Conversion of preferred stock to common stock$ | $ | 32,754 | $ | - | ||||
| Fair value of warrants issued | $ | 9,981,000 | $ | - | ||||
| Fair value of Ameri warrants | $ | 262,492 | $ | - | ||||
| Beneficial conversion feature issued with note payable | $ | - | $ | 17,851 | ||||
| Warrants issued in conjunction with notes payable issuances | $ | - | $ | 32,149 | ||||
| Common stock issued for accounts payable | $ | - | $ | 173,482 | ||||
| Common stock issued in conjunction with note payable modification | $ | - | $ | 45,725 | ||||
| Conversion of related party advances and notes payable into common stock | $ | - | $ | 238,000 | ||||
| Cash paid for interest | $ | 5,191 | $ | 388,143 | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
SeeThe accompanying notes to theare an integral part of these unaudited condensed consolidated financial statements.statements
AMERI HOLDINGS, INC.Enveric Biosciences, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNotes to Unaudited Condensed Consolidated Financial Statements
SEPTEMBER 30, 2020
NOTE 1 - BUSINESS
NOTE 1. DESCRIPTION OF BUSINESS:
Nature of operations
AMERI
Enveric Biosciences, Inc. (“Enveric Biosciences, Inc.” “Enveric” or the “Company”) (formerly known as Ameri Holdings, Inc.) (“AMERI”, the “Company”, “we” or “our”Ameri”) is a pharmaceutical company that, through the operationsdeveloping innovative, evidence-based cannabinoid medicines. The head office of its eleven subsidiaries, provides SAP TM cloud and digital enterprise services to clients worldwide. Headquartered in Alpharetta, Georgia, we typically go to market both vertically by industry and horizontally by product/technology specialties and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to improve process, reduce costs and increase revenue through the judicious use of technology. The Company earns almost all of its revenue from North America. The Company takes the position that all of its businesses operate as a single segment.
On January 10, 2020, we and Ameri100 Inc. (“Buyer”) entered into a Stock Purchase Agreement (the “Agreement”) pursuant to which, among other things and subject to the satisfaction or waiver of specified conditions, the Company will sell to Buyer and Buyer will purchase from the Company one hundred percent (100%) of the outstanding equity interests (the “Purchased Shares”) of Ameri100 Holdco, Inc. (“Holdco”) (the “Spin-Off”).is located in Naples, Florida.
On January 10, 2020, the Company entered into an Amalgamation Agreement (as amended on May 6, 2020, the “Amalgamation2020), (the “Jay Pharma Amalgamation Agreement”) with Jay Pharma Merger Sub, Inc., a company organized under the laws of Canada and a wholly-ownedwholly owned subsidiary of the Company (“Merger Sub”), Jay Pharma Inc., a company organized under the laws of Canada (“Jay Pharma”), Jay Pharma ExchangeCo., Inc. a company organized under the laws of British Columbia and a wholly-ownedwholly owned subsidiary of the Company (“ExchangeCo”), and Barry Kostiner, as the Company Representative, which providesprovided that, among other things, Merger Sub and Jay Pharma willwould be amalgamated and willwould continue as one corporation (“Amalco”), with Amalco continuing as a direct wholly-ownedwholly owned subsidiary of ExchangeCo and an indirect wholly-ownedwholly owned subsidiary of Ameri, on the terms and conditions set forth in the Jay Pharma Amalgamation Agreement. On August 12, 2020, the Company, Jay Pharma and certain other signatories thereto entered into a tender agreement (as may be amended from time to time, the(the “Tender Agreement”), which providesprovided that, among other things, Ameri willwould make a tender offer (such offer, as it may be amended or supplemented from time to time as permitted under the Tender Agreement, the(the “Offer”) to purchase all of the outstanding common shares of Jay Pharma for the number of shares of Resulting IssuerEnveric common stock equal to the exchange ratio set forth in the Tender Agreement, and Jay Pharma willwould become a wholly-owned subsidiary of Ameri, on the terms and conditions set forth in the Tender Agreement. The Tender Agreement terminatesterminated and replacesreplaced in its entirety the Jay Pharma Amalgamation Agreement. On December 30, 2020, the Company, Jay Pharma, Merger Sub, and ExchangeCo completed the Offer and Jay Pharma became a wholly owned subsidiary of the Company. The transaction was treated as a reverse acquisition and recapitalization and accordingly, the historical financial statements prior to the date of the business combination in these unaudited condensed consolidated financial statements are those of Jay Pharma.
On May 24, 2021, the Company entered into an Amalgamation Agreement (the “Amalgamation Agreement”) with 1306432 B.C. Ltd., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of the Company (“HoldCo”), 1306436 B.C. Ltd., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of HoldCo (“Purchaser”), and MagicMed Industries Inc., a corporation existing under the laws of the Province of British Columbia (“MagicMed”), pursuant to which, among other things, the Company, indirectly through Purchaser, acquired all of the outstanding securities of MagicMed in exchange for securities of the Company by way of an amalgamation under the British Columbia Business Corporations Act, upon the terms and conditions set forth in the Amalgamation Agreement, such that, upon completion of the Amalgamation (as defined herein), the amalgamated corporation (“Amalco”) will be an indirect wholly-owned subsidiary of the Company. The Amalgamation was completed on September 16, 2021.
At the effective time of the Amalgamation (the “Effective Time”), holders of outstanding common shares of MagicMed (the “MagicMed Shares”) received such number of shares of common stock of the Company (“Company Shares”) representing, together with the Company Shares issuable upon exercise of the Warrants and the Converted Options (each as defined herein), approximately % of the issued and outstanding Company Shares (on a fully-diluted basis). The MagicMed Shares were initially converted into Amalco Redeemable Preferred Shares (as defined in the Amalgamation Agreement), which immediately following the Amalgamation were redeemed for of a Company Share. Following such redemption, the shareholders of MagicMed received additional Company Shares equal to the product of the Exchange Ratio (as defined in the Amalgamation Agreement) multiplied by the number of MagicMed Shares held by each such shareholder. Additionally, following the Effective Time (i) each outstanding MagicMed stock option was converted into and became an option to purchase (the “Converted Options”) the number of Company Shares equal to the Exchange Ratio multiplied by the number of MagicMed Shares subject to such MagicMed stock option, and (ii) each holder of an outstanding MagicMed warrant (including Company Broker Warrants (as defined in the Amalgamation Agreement), the “Warrants”) received upon exercise of such Warrant that number of Company Shares which the holder would have been entitled to receive as a result of the Amalgamation if, immediately prior to the date of the Amalgamation (the “Effective Date”), such holder had been the registered holder of the number of MagicMed Shares to which such holder would have been entitled if such holder had exercised such holder’s Warrants immediately prior to the Effective Time (the foregoing collectively, the “Amalgamation”). In aggregate, holders of MagicMed Shares received Company Shares, representing approximately % of the Company Shares following the consummation of the Amalgamation. The maximum number of Company Shares to be issued by the Company as in respect of the Warrants and Converted Options shall not exceed Company Shares.
The aggregate number of Company Shares that the Company issued in connection with the Amalgamation (collectively, the “Share Consideration”) was in excess of % of the Company’s pre-transaction outstanding Company Shares. Accordingly, the Company sought and received stockholder approval of the issuance of the Share Consideration in the Amalgamation in accordance with the NASDAQ Listing Rules.
Pursuant to the terms of the Amalgamation Agreement, the Company appointed, effective as of the Effective Time two individuals selected by MagicMed to the Company Board of Directors, Dr. Joseph Tucker and Dr. Brad Thompson.
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Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Amalgamation Agreement contained representations and warranties, closing deliveries and indemnification provisions customary for a transaction of this nature. The closing of the Amalgamation was conditioned upon, among other things, (i) the Share Consideration being approved for listing on Nasdaq, (ii) the effectiveness of a Registration Statement on Form S-4 registering the Share Consideration and (iii) the approval (a) of the MagicMed stockholders of the Amalgamation and (b) of the Company’s stockholders of each of the Amalgamation and the issuance of the Share Consideration in the Amalgamation. The closing of the Amalgamation occurred on September 16, 2021.
MagicMed Industries develops and commercializes psychedelic-derived pharmaceutical candidates. MagicMed’s psychedelic derivatives library, the Psybrary™, is an essential building block from which industry can develop new patented products. The initial focus of the Psybrary™ is on psilocybin and DMT derivatives, and it is then expected to be expanded to other psychedelics.
As of September 30, 2021, the accounting for the Amalgamation with MagicMed is provisional pending the calculation of the final purchase price, finalization of the opening balances sheet, the final valuation report, and allocation of the total consideration transferred.
Liquidity and Going ConcernLIQUIDITY AND OTHER UNCERTANTIES
The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”), which contemplate continuation of the Company as a going concern. The Company is in a development stage and has incurred net losses each year since inception and has experienced negative cash flows from operations in each year since inception. The net loss for the nine months ended September 30, 2020 was $4.6 millioninception and thehas an accumulated deficit was $45.1 millionof approximately $18,630,963 as of September 30, 2020. The Company’s ongoing losses have had a significant negative impact2021. Based on the Company’s financial positioncurrent development plans and liquidity. Theother operating requirements, the Company has also been historically reliantbelieves that the existing cash on loans from related parties, loans from third parties and sales of equity securitieshand at September 30, 2021 is sufficient to fund operations working capitalfor at least the next twelve months following the filing of these unaudited condensed consolidated financial statements.
During 2020 and complete acquisitions. To increase revenues, our operating expenses are likely to continue to growcontinuing into 2021, the world has been, and as a result, we will need to generate significant additional revenues to cover such expenses. We expect our primary sources of cashcontinues to be, customer collectionsimpacted by the novel coronavirus (COVID-19) pandemic. COVID-19 (including its variants and external financing. We alsomutations) and measures to prevent its spread impacted our business in a number of ways. The impact of these disruptions and the extent of their adverse impact on our financial and operating results will be dictated by the length of time that such disruptions continue, to workwhich will, in turn, depend on cost reductions,the currently unknowable duration and we have initiated steps to reduce our overhead to improve cash savings. We may raise additional capital through the sale of equity or debt securities or borrowings from financial institutions or third parties or a combinationseverity of the foregoing. Capital raised will be usedimpacts of COVID-19, and among other things, the impact of governmental actions imposed in response to implement our business plan, grow current operations, make acquisitions or start new vertical businesses among someCOVID-19 and individuals’ and companies’ risk tolerance regarding health matters going forward and developing strain mutations.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of the possible uses.Presentation and Principal of Consolidation
One of the Company’s largest customers has terminated the majority of its work as a result of COVID-19. This customer has accounted in the past for annual revenues of between $5 to $7 million dollars. The impact on this quarter is a reduction of approximately $1.5 million in revenue.
As a result of funding from the Small Business Association as well as sales of securities, the Company believes it has adequate cash reserves to cover expected working capital needs over the next 12 months.
Our financial statements as of September 30, 2020 have been prepared under the assumption that we will continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funding through the issuance of equity or debt securities, as well as to attain further operating efficiencies and, ultimately, to generate additional revenues. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Although the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The foregoing conditions raise substantial doubt about our ability to continue as a going concern.
NOTE 2. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP for interim financial information and Article 108 of Regulation S-X underS-X. Accordingly, they do not include all of the Securities Exchange Act of 1934, as amended. Certain information and disclosure notes normally included in annualfootnotes required by U.S. GAAP for complete financial statements prepared in accordance with accounting principles generally accepted in the United Statesstatements. Management’s opinion is that all adjustments (consisting of Americanormal accruals) considered necessary for a fair presentation have been omitted pursuant to those rulesincluded. Operating results for the three and regulations, although we believenine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the disclosures made are adequate to ensure the information presented is not misleading.
The accompanyingyear ending December 31, 2021. These unaudited condensed consolidated financial statements reflect all adjustments (which were of a normal, recurring nature) that,should be read in conjunction with the consolidated financial statements for the year ended December 31, 2020 and related notes thereto included in the opinionCompany’s Annual Report on Form 10-K filed with the SEC on April 1, 2021. The unaudited condensed consolidated financial statements represent the consolidation of management, are necessary to present fairly our financial position, results of operationsthe Company and cash flows as of and for the interim periods presented.its subsidiaries in conformity with U.S. GAAP. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the accompanying unaudited condensed consolidated financial statements.
Our comprehensive income (loss) consistsstatements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of net income (loss) plus or minus any periodic currency translation adjustments.
The results forassets and liabilities at the interim periods presented are not necessarily indicativedate of the results expected for any future period. The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K forexpenses during the fiscal year ended December 31, 2019.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. This ASU requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures relatedperiods reported. By their nature, these estimates are subject to credit risks. For available-for-sale debt securities with unrealized losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted, and requires adoption using a modified retrospective approach, with certain exceptions. Based on the composition of the Company’s investment portfolio as of December 31, 2019, current market conditions and historical credit loss activity, the adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements. Additionally, for trade receivables, due to their short durationmeasurement uncertainty and the credit profile of the Company’s customers, the effect of transitioning from the incurred losses model to the expected losses model is not expected to be material.
In June 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic718): Improvements to Nonemployee Share-Based Payment Accounting. Under the new standard, companies will no longer be required to value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant-date under ASC 718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers (as described above under “Revenue Recognition”). The Company adopted the new standard during the year ended December 31, 2019 and the adoption did not have a material effect on the consolidated financial statements and related disclosures.
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. This ASU removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements:
(1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted.
In January 2017, the FASB issued ASU No. 2017-04, simplifying the Test for Goodwill Impairment. Under this new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. Based on the Company’s preliminary assessment of the foregoing update, it does not anticipate such update will have a material impact its financial statements.
Standards Implemented
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605).” This ASU requires an entity to recognize revenue when goods are transferred, or services are provided to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This ASU also requires disclosures enabling users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606), deferral of the Effective Date.” With the issuance of ASU 2015-14, the new revenue guidance ASU 2014-09 will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, using one of two prescribed retrospective methods. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customer (Topic 606), Identifying Performance Obligations and Licensing.” The guidance is applicable from the date of applicability of ASU 2014-09. This ASU finalizes the amendments to the guidance on the new revenue standard on the identification of performance obligations and accounting for licenses of intellectual property. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements (Topic 606)” which is applicable from the date of applicability of ASU 2014-09. This guidance provides optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. In May 2016, FASB issued ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients”. This amendment clarified certain aspects of Topic 606 and will be applicable from the date of applicability of ASU 2014-09. The Company has implemented the above standard.
In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements.
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and analyzed the lease for a right of use (“ROU”) asset and liability to be recorded on the consolidated balance sheet related to the operating lease for its office space. Results for the year ended December 31, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the legacy accounting guidance under ASC Topic 840, Leases.
As part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to:
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company adopted the standard during the year ended December 31, 2018 and the adoption did not have a material effect on its consolidated financial statements and disclosures.
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company adopted the new standard during the year ended December 31, 2019 and the adoption did not have a material effect on the consolidated financial statements and related disclosures.
In June 2018, the FASB issued Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic718): Improvements to Nonemployee Share-Based Payment Accounting. Under the new standard, companies will no longer be required to value non-employee awards differently from employee awards. Companies will value all equity classified awards at their grant-date under ASC 718 and forgo revaluing the award after the grant date. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers (as described above under “Revenue Recognition”). The Company adopted the new standard during the year ended December 31, 2019 and the adoption did not have a material effect on the consolidated financial statements and related disclosures.
Recent issued 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in Update No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently in the process of determining the effect that the adoption will have on its financial position and results of operations.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company is evaluating the impact that the amendments of this standard would have on the Company’s consolidated financial statements
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements.
Management has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impacteffects 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 Company.fair value of transactions involving common stock and the valuation of stock-based compensation, accruals associated with third party providers supporting research and development efforts, estimated fair values of long lives assets used to record impairment charges related to intangible assets, acquired in-process research and development (“IPR&D), and goodwill, and allocation of purchase price in business acquisitions. Actual results could differ from those estimates.
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Subsequent Events.
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Foreign Currency Translation
From inception through December 31, 2020, the reporting currency of the Company was the United States dollar while the functional currency of the Company was the Canadian dollar. From January 1, 2021 through September 30, 2021, the reporting currency of the Company remained the United States dollar, with a portion of transactions being denominated in Canadian dollars. As a result, the Company is subject to exposure from changes in the exchange rates of the Canadian dollar and the U.S. dollar.
The Company 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 exposureto foreign currency exchange fluctuations in the future.
Warrant Liability
The Company evaluates subsequent eventsall of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and transactionsFASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company accounts for warrants for shares of the Company’s common stock that occur afterare not indexed to its own stock as derivative liabilities at fair value on the unaudited condensed consolidated balance sheet datesheet. The Company accounts for potential recognition or disclosure. Any material events that occur between thecommon stock warrants with put options as liabilities under ASC 480. Such warrants are subject to remeasurement at each unaudited condensed consolidated balance sheet date and any change in fair value is recognized as a component of other expense on the dateunaudited condensed consolidated statement of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of such common stock warrants. At that time, the financial statements were issued are disclosed as subsequent events, whileportion of the financial statements are adjustedwarrant liability related to reflect any conditions that existed atsuch common stock warrants will be reclassified to additional paid-in capital.
Offering Costs
The Company allocates offering costs to the balance sheet date.
NOTE 3. BUSINESS COMBINATIONS:
Acquisitiondifferent components of Ameri Georgia
On November 20, 2015, we completed the acquisition of Bellsoft, Inc.,capital raise on a consulting company based in Lawrenceville, Georgia, which specializes in SAP software, business intelligence, data warehousing and other enterprise resource planning services. Following the acquisition, the name of Bellsoft, Inc. was changed to Ameri100 Georgia Inc. (“Ameri Georgia”). Ameri Georgia has operations in the United States, Canada and India.
The total purchase price of $9.9 million waspro rata basis. Any offering costs allocated to net working capital of $4.6 million, intangibles of $1.8 million, taking into consideration projected revenue from the acquired list of Ameri Georgia customers over a period of three years, and goodwill. The excess of total purchase price over the net working capital and intangibles allocations has beencommon stock are charged directly to additional paid-in capital. Any offering costs allocated to goodwill.
On January 17, 2018, we completed all payment obligationswarrant liabilities are charged to general and administrative expenses on the former shareholders of Ameri Georgia in connection with the Ameri Georgia share purchase agreement, and we have no further payment obligations pursuant thereto.
Acquisition of Bigtech Software Private Limited
On June 23, 2016, we entered into a definitive agreement to purchase Bigtech Software Private Limited (“Bigtech”), a pure-play SAP services company providing a wide range of SAP services including turnkey implementations, application management, training and basis ABAP support. Based in Bangalore, India, Bigtech offers SAP services to improve business operations at companies of all sizes and verticals.
The acquisition of Bigtech was effective as of July 1, 2016, and the total consideration for the acquisition of Bigtech was $850,000.
Bigtech’s financial results are included in ourCompany’s unaudited condensed consolidated financial results starting July 1, 2016. The Bigtech acquisition did not constitute a significant acquisition forstatement of operations.
Basic net loss per share is computed by dividing net loss by the Company for purposesweighted average number of Regulation S-X. The valuation of Bigtech was made on the basis of its projected revenues.
Acquisition of Virtuoso
On July 22, 2016, we acquired all of the outstanding membership interests of Virtuoso, L.L.C. (“Virtuoso”), a Kansas limited liability company, pursuant to the terms of an Agreement of Merger and Plan of Reorganization, by and among us, Virtuoso Acquisition Inc., Ameri100 Virtuoso Inc., Virtuoso and the sole member of Virtuoso (the “Sole Member”). Virtuoso is an SAP consulting firm specialized in providing services on SAP S/4 HANA finance, enterprise mobility and cloud migration and is based in Leawood, Kansas. In connection with the merger, Virtuoso’s name was changed to Ameri100 Virtuoso Inc. The Virtuoso acquisition did not constitute a significant acquisition for the Company for purposes of Regulation S-X.
The total purchase price of $1.8 million was allocated to intangibles of $0.9 million, taking into consideration projected revenue from the acquired list of Virtuoso customers over a period of three years, and the balance was allocated to goodwill. The Virtuoso earn-out payments for 2016 amounted to $0.06 million in cash and 12,408 shares of common stock which were delivered to the Sole Memberoutstanding during the twelve months ended December 31, 2017.
Acquisition of Ameri Arizona
On July 29, 2016, we acquired 100% of the membership interests of DC&M Partners, L.L.C. (“Ameri Arizona”), an Arizona limited liability company, pursuant to the terms of a Membership Interest Purchase Agreement by and among us, Ameri Arizona, all of the members of Ameri Arizona, Giri Devanur and Srinidhi “Dev” Devanur, our former President and Chief Executive Officer and current Executive Chairman, respectively. In July 2017, the name of DC&M Partners, L.L.C. was changed to Ameri100 Arizona LLC. Ameri Arizona is an SAP consulting company headquartered in Chandler, Arizona. Ameri Arizona provides its clients with a wide range of information technology development, consultancy and management services with an emphasis on the design, build and rollout of SAP implementations and related products.
The aggregate purchase price for the acquisition of Ameri Arizona was $15.8 million. The total purchase price of $15.8 million was allocated to intangibles of $5.4 million, taking into consideration projected revenue from the acquired list of Ameri Arizona customers over a period of three years, and the balance was allocated to goodwill. In August 2018, the Company resolved the payment of all earn-out payments to the former members of Ameri Arizona pursuant to the Ameri Arizona membership interest purchase agreement, and the Company has no further payment obligations with respect to any Ameri Arizona earn-out.
As of the date of this report, the aggregate of $1,000,000 in consideration payable by cash to Lucid Solutions Inc. and Houskens LLC in connection with the Ameri100 Arizona acquisition has been taken over as per the Exchange Agreement dated June 3, 2020. See Note 10 to our unaudited condensed consolidated financial statements for additional information.
Acquisition of Ameri California
On March 10, 2017, we acquired 100% of the shares of ATCG Technology Solutions, Inc. (“Ameri California”), a Delaware corporation, pursuant to the terms of a Share Purchase Agreement among the Company, Ameri California, all of the stockholders of Ameri California (the “Stockholders”), and the Stockholders’ representative. In July 2017, the name of ATCG Technology Solutions, Inc. was changed to Ameri100 California Inc. Ameri California provides U.S. domestic, offshore and onsite SAP consulting services and has its main office in Folsom, California. Ameri California specializes in providing SAP Hybris, SAP Success Factors and business intelligence services.
The aggregate purchase price for the acquisition of Ameri California was $8.8 million. The total purchase price of $8.8 million was allocated to intangibles of $3.8 million, taking into consideration projected revenue from the acquired list of Ameri California customers over a period of three years, and goodwill. The excess of total purchase price over the intangibles allocation has been allocated to goodwill.
Presented below is the summary of the foregoing acquisitions:
Allocation of purchase price in millions of U.S. dollars
| Ameri | Ameri | Ameri | ||||||||||||||||||
| Asset Component | Georgia | Bigtech | Virtuoso | Arizona | California | |||||||||||||||
| Intangible Assets | 1.8 | 0.6 | 0.9 | 5.4 | 3.8 | |||||||||||||||
| Goodwill | 3.5 | 0.3 | 0.9 | 10.4 | 5.0 | |||||||||||||||
| Working Capital | ||||||||||||||||||||
| Current Assets | ||||||||||||||||||||
| Cash | 1.4 | - | - | - | - | |||||||||||||||
| Accounts Receivable | 5.6 | - | - | - | - | |||||||||||||||
| Other Assets | 0.2 | - | - | - | - | |||||||||||||||
| 7.3 | - | - | - | - | ||||||||||||||||
| Current Liabilities | ||||||||||||||||||||
| Accounts Payable | 1.3 | - | - | - | - | |||||||||||||||
| Accrued Expenses & Other Current Liabilities | 1.3 | - | - | - | - | |||||||||||||||
| 2.7 | - | - | - | - | ||||||||||||||||
| Net Working Capital Acquired | 4.6 | - | - | - | - | |||||||||||||||
| Total Purchase Price | 9.9 | 0.9 | 1.8 | 15.8 | 8.8 | |||||||||||||||
NOTE 4. REVENUE RECOGNITION:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients. This update clarifies the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in ASU 2014-09. In September 2017, the FASB issued additional amendments providing clarification and implementation guidance.
The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which would require a cumulative effect adjustment for initially applying the new revenue standard as an adjustment to the opening balance of retainedperiod. Diluted earnings and the comparative information would not require to be restated and continue to be reported under the accounting standards in effect for those periods.
The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. We recognize revenues as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled.
To achieve this core principle, the Company applies the following five steps:
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of December 31, 2019 contained a significant financing component.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
Disaggregation of Revenue from Entities. The following table disaggregates gross revenue by entity for the nine months ended September 30, 2020 and 2019:
| For Nine Months Ended | ||||||||
| September 30, 2020 | September 30, 2019 | |||||||
| ATGC India | $ | 117,043 | $ | 246,594 | ||||
| Ameri 100 California | 10,025,993 | 8,270,065 | ||||||
| Ameri 100 Arizona | 2,728,199 | 6,202,325 | ||||||
| Ameri 100 Canada | 275,508 | 516,372 | ||||||
| Ameri 100 Georgia | 3,897,277 | 9,901,456 | ||||||
| Bigtech Software | 39,138 | 228,767 | ||||||
| Ameri 100 Consulting Pvt Ltd | 260,439 | 82,129 | ||||||
| Ameri Partners | 8,896,902 | 5,402,402 | ||||||
| Total revenue | $ | 26,340,499 | $ | 30,850,110 | ||||
For performance obligations where control is transferred over time, revenues are recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided.
Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered. If our invoicing is not consistent with value delivered, revenues are recognized as the service is performed based on the cost to cost method described above. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information; such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately.
Revenues related to our time-and-materials, transaction-based or volume-based contracts are recognized over the period the services are provided either using an output method such as labor hours, or a method that is otherwise consistent with the way in which value is delivered to the customer.
Revenues also include the reimbursement of out-of-pocket expenses.
We may enter into arrangements that consist of multiple performance obligations. Such arrangements may include any combination of our deliverables. To the extent a contract includes multiple promised deliverables, we apply judgment to determine whether promised deliverables are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised deliverables are accounted for as a combined performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the customer. When not directly observable, we typically estimate standalone selling price by using the expected cost plus a margin approach. We typically establish a standalone selling price range for our deliverables, which is reassessed on a periodic basis or when facts and circumstances change.
We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.
Prior to the adoption of the New Revenue Standard on January 1, 2018, revenues were earned and recognized when all of the following criteria were met: evidence of an arrangement existed, the price was fixed or determinable, the services had been rendered and collectability was reasonably assured. Contingent or incentive revenues were recognized when the contingency was satisfied and we concluded the amounts were earned. Volume discounts were recorded as a reduction of revenues as services were provided. Revenues also included the reimbursement of out-of-pocket expenses.
For the three months ended September 30, 2020 and September 30, 2019, sales to five major customers accounted for approximately 54% and 52% of our total revenue, respectively. For the three months ended September 30, 2020, five of our customers contributed 23%,10%,9%,7% and 6% of our revenue.
For the nine months ended September 30, 2020 and September 30, 2019, sales to five major customers accounted for approximately 47% of our total revenue, respectively.
NOTE 5. INTANGIBLE ASSETS:
The Company’s intangible assets primarily consists of the customer lists it acquired through various acquisitions. We amortize our intangible assets that have finite lives using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization expense was $1.6 million for the nine months ended September 30, 2020 and September 30, 2019. This amortization expense relates to customer lists which expire through 2022.
NOTE 6. GOODWILL:
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in business combinations. The total value of the Company’s goodwill was $13.7 million as of September 30, 2020 and December 31, 2019.
As per Company policy, goodwill impairment tests are conducted on an annual basis and any impairment is reflected in the Company’s Statements of Operations.
NOTE 7. EARNINGS (LOSS) PER SHARE:
Basic income (loss) per share is computed based uponusing the weighted average number of common shares and, if dilutive, potential common shares outstanding forduring the period. When applicable, diluted income (loss) per share is calculated using two approaches. The first approach,Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method, reflects the potential dilution that could occur if outstanding stock options, warrants, restricted stock unitsmethod) and outstanding shares to be awarded to satisfy contingent considerationconvertible notes. The computation of basic net loss per share for the business combinations (collectively, the “Equity Awards”) were exercisedthree and issued. The second approach, the if converted method, reflects the potential dilution of the Equity Awards, the 8% Convertible Unsecured Promissory Notes (the “2017 Notes”) described in Note 10 being exchanged for common stock. Under this method, interest expense, net of tax, if any, associated with the 2017 Notes, up through redemption, is added back to net income attributable to common stockholders and the shares outstanding are increased by the underlying 2017 Notes are considered to be issued.
For the nine months ended September 30, 2021 and 2020 and 2019, no shares related to the issuanceexcludes potentially dilutive securities. The computations of common stock upon exercise of the Equity Awards or the exchange of the 2017 Notes for common stock were considered in the calculation of dilutednet loss per share asfor each period presented is the effect would be anti-dilutive due to net losses attributable to common stockholderssame for both periods.
A reconciliation of net loss attributable to common stockholders and weighted average shares used in computing basic and fully diluted.
| For the Nine Months Ended | ||||||||
| September 30, 2020 | September 30, 2019 | |||||||
| Numerator for basic and diluted income (loss) per share: | ||||||||
| Net income (loss) attributable to common stockholders | $ | (4,644,246 | ) | (3,393,945 | ) | |||
| Numerator for diluted income (loss) per share: | ||||||||
| Net income (loss) attributable to common stockholders - as reported | $ | (4,644,246 | ) | (3,393,945 | ) | |||
| Net income (loss) attributable to common stockholders - after assumed conversions of dilutive | ||||||||
| Shares | $ | (4,644,246 | ) | (3,393,945 | ) | |||
| Denominator for weighted average common shares outstanding: | ||||||||
| Basic shares | 4,172,526 | 1,999,390 | ||||||
| Dilutive effect of Equity Awards | ||||||||
| Dilutive effect of 2017 Notes | - | |||||||
| Diluted shares | 4,172,526 | 1,999,390 | ||||||
| Income (loss) per share – basic: | $ | (1.11 | ) | (1.70 | ) | |||
| Income (loss) per share – diluted: | $ | (1.11 | ) | (1.70 | ) | |||
NOTE 8. INCENTIVE PLAN ITEMS:
Duringfor the three and nine months ended September 30, 2021 and 2020 because the Company has not granted any restricted stock units and stock options to purchase Company’s common stock to key employees or directors outeffect of Company’s 2015 Equity Incentive Award Plan. The company has booked charges of $49,474 as stock compensation expenses for the nine months ended September 30, 2020 and $0.5 million for the nine months ended September 30, 2019.their inclusion would have been anti-dilutive.
SCHEDULE OF POTENTIALLY DILUTIVE SECURITIES
For the three and nine months ended September 30, 2021 | For the three and nine months ended September 30, 2020 | |||||||
| Warrants to purchase shares of common stock | ||||||||
| Convertible notes | ||||||||
| Restricted stock units | ||||||||
| Restricted stock awards | ||||||||
| Options to purchase shares of common stock | ||||||||
| Total potentially dilutive securities | ||||||||
NOTE 9. BANK DEBT:
Enveric Biosciences, Inc. and Subsidiaries
On January 23, 2019, certain subsidiariesNotes to Unaudited Condensed Consolidated Financial Statements
Fair Value Measurement
The Company follows Accounting Standards Codification (“ASC”) 820–10 “Fair Value Measurement” of the Company, including Ameri100 Arizona LLC, Ameri100 Georgia, Inc., Ameri100 California, Inc. and Ameri and Partners, Inc., as borrowers (individually and collectively, “Borrower”Financial Accounting Standards Board’s (“FASB”) entered into a Loan and Security Agreement (the “Loan Agreement”) for a credit facility (the “Credit Facility”) with North Mill Capital LLC, as lender (the “Lender”). The Loan Agreement has an initial term of two years fromAccounting Standards Codification to measure the closing date, with renewal thereafter if Lender, at its option, agrees in writing to extend the term for additional one year periods (the “Term”). The Loan Agreement is collateralized by a first-priority security interest in all of the assets of Borrower. In addition, (i) pursuant to a Corporate Guaranty entered into by the Company in favor of the Lender (the “Corporate Guaranty”), the Company has guaranteed the Borrower’s obligations under the Credit Facility and (ii) pursuant to a Security Agreement entered into between the Company and Lender (the “Security Agreement”), the Company granted a first-priority security interest in allfair value of its assets to Lender.
The Borrowers received an initial advance on January 23, 2019 in an amount of approximately $2.85 million (the “Initial Advance”). Borrowings under the Credit Facility accrue interest at the prime rate (as designated by Wells Fargo Bank, National Association) plus onefinancial instruments and three quarters percentage points (1.75%), but in no event shall the interest rate be less than seven and one-quarter percent (7.25%). Notwithstanding anything to the contrary contained in the Loan Documents, the minimum monthly interest payable by Borrower on the Advances (as defined in the Loan Agreement) in any month shall be calculated based on an average Daily Balance (as defined in the Loan Agreement) of Two Million Dollars ($2,000,000) for such month. For the first year of the Term, Borrower shall pay to Lender a facility fee equal to $50,000, due in equal monthly installments, with additional facility fees due to Lender in the event borrowings exceed certain thresholds and with additional facility fees due and payable in later years or upon later milestones. In addition, Borrower shall pay to Lender a monthly fee (the “Servicing Fee”) in an amount equal to one-eighth percent (.125%) of the average Daily Balance (as defined in the Loan Agreement) during each month on or before the first day of each calendar month during the Term.
Borrower also agreed to certain negative covenants in the Loan Agreement, including that they will not, without the prior written consent of Lender, enter into any extraordinary transactions, dispose of assets, merge, acquire, or consolidate with or into any other business organization or restructure.
As of September 30, 2020, the principal balance and accrued interest under the Credit Facility amounted to $3.1 million.
NOTE 10. CONVERTIBLE NOTES:
On November 25, 2019, the Company entered into a securities purchase agreement with an institutional investor for the sale of a $1,000,000 convertible debenture (the “First Debenture”).
The First Debenture accrued interest at rate of 5% and was due six (6) months from the issue date. The First Debenture was convertible at any time after the issue date into shares of Company’s Common Stock at a price equal to $2.725.
On January 14, 2020, the Company entered into a securities purchase agreement (with the same institutional investor for the sale of a $500,000 convertible debenture (the “Second Debenture” and collectively with the First Debenture, the “Debentures”).
The Second Debenture accrued interest at rate of 5% and was due on the same date as the First Debenture. The Second Debenture was convertible at any time after the issue date into shares of Company’s Common Stock at a price equal to $2.725.
During the nine months ended September 30, 2020 the holders of First Debenture and Second Debenture exercised their rights for conversion into common shares for which the company issued 550,458 common shares. After the conversion, there are no First Debentures or Second Debentures outstanding.
On June 3, 2020 Ameri entered into an Exchange Agreement with Alpha Capital Ansalt (“Alpha”), the holder of certain 8% unsecured convertible notes, which notes were originally issued on ordisclosures about March 7, 2017 (the “2017 Prior Notes”). Pursuant to such Exchange Agreement, Alpha agreed to exchange the 2017 Prior Notes for a new convertible 1% debenture (the “June Debenture”) in the aggregate principal amount of $2,265,342.46, which June Debenture is convertible into shares of common stock of Ameri at a conversion price of $1.75 per share. The June Debenture is due on December 31, 2020. As of September 30, 2020, 828,572 shares of common stock have been issued upon conversions of the June Debenture.
On September 15, 2020, Ameri entered into separate Exchange Agreements with the holders of certain 7.25% secured convertible notes, including Alpha, which notes were originally issued on or about February 24, 2020 (the “2020 Prior Notes”). Pursuant to such Exchange Agreements, the holders agreed to exchange the 2020 Prior Notes for new convertible 7.25% debentures (the “September Debentures” and collectively with the June Debenture, the “Convertible Debentures”) in the aggregate principal amount of $1,002,979 which September Debentures are convertible into shares of Ameri common stock at a conversion price of $1.11 per share. The principal amount of the September Debentures is equal to the principal amount of the 2020 Prior Notes and the accrued interest thereon. The September Debentures are due on the earlier of (i) the effective date of the Offer or (ii) October 31, 2020. As of September 30, 2020, no shares of common stock have been issued upon conversions of the September Debentures.
NOTE 11. LEASES:
The Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated presentfair value of lease payments over the lease term.
The Company’s principal facility is locatedits financial instruments. ASC 820–10 establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase consistency and comparability in Alpharetta, Georgia. The Company also leases office space in various locations with expiration dates between 2016fair value measurements and 2020. In January 2020, the Company entered intorelated disclosures, ASC 820–10 establishes a lease agreement for its Dallas office with expiration date 2027. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisionsfair value hierarchy which require the Company to pay taxes, insurance, maintenance costs, or defined rent increases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $0.2 million and $0.25 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.
The Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company also considered its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating the incremental borrowing rates.
The lease terms include options to extend the leases when it is reasonably certain that the Company will exercise that option. These operating leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.
Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.
The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company recognizes variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred. Rent expense was $0.2 million and $0.25 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. The components of lease expense were as follows:
| ||||
Supplemental balance sheet information related to leases was as follows:
| September 30, 2020 | ||||
| Operating leases: | ||||
| Operating lease ROU assets | $ | 874,606 | ||
| Current operating lease liabilities, included in current liabilities | $ | 208,663 | ||
| Noncurrent operating lease liabilities, included in long-term liabilities | 678,272 | |||
Total operating lease liabilities | $ | 886,935 | ||
Supplemental cash flow and other information related to leases was as follows:
| Nine Months Ended | ||||
| September 30, 2020 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | - | ||
| ROU assets obtained in exchange for lease liabilities: | ||||
| Operating leases | $ | 874,606 | ||
| Weighted average remaining lease term (in years): | 6.75 | |||
| Operating leases | 2.3 | |||
| Weighted average discount rate: | ||||
| Operating leases | 7.25 | % |
Total future minimum payments required under the lease obligations as of September 30, 2020 are as follows:
| Nine Months Ending September 30, | ||||
| 2020 | $ | 181,898 | ||
| 2021 | 192,470 | |||
| 2022 | 81,444 | |||
| 2023 | 91,140 | |||
| 2024 | 101,675 | |||
| Thereafter | 238,308 | |||
| Total lease payments | $ | 886,935 | ||
| Less: amounts representing interest | ||||
| Total lease obligations | $ | 886,935 | ||
NOTE 12. FAIR VALUE MEASUREMENT:
We utilize the following valuation hierarchy for disclosure ofprioritizes the inputs to valuation techniques used to measure fair value. This hierarchy prioritizes the inputsvalue into three (3) broad levels.
The three (3) levels as follows:of fair value hierarchy defined by ASC 820–10 are described below:
| Level 1 | Quoted market prices | |||
| Level 2 | Pricing inputs | |||
| Level 3 | Pricing inputs that are generally unobservable inputs |
AFinancial assets or liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial asset or liability’s classificationassets and liabilities fall within more than one level described above, the hierarchycategorization is determined based uponon the lowest level input that is significant to the fair value measurement.measurement of the instrument.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these instruments.
The Company uses Level 3 of the fair value hierarchy to measure the fair value of its warrant liabilities. The Company revalues such liabilities at every reporting period and recognizes gains or losses as change in fair value of warrant liabilities in the unaudited condensed consolidated statements of operations that are attributable to the change in the fair value of the warrant liabilities.
The following table provides the financial liabilities measured on a recurring basis and reported at fair value on the unaudited condensed consolidated balance sheet as of September 30, 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
SCHEDULE OF FAIR VALUE HIERARCHY OF VALUATION INPUTS ON RECURRING BASIS
| Level | September 30, 2021 | |||||||
| Warrant liabilities – January Warrants | 3 | $ | 1,487,234 | |||||
| Warrant liabilities – February Warrants | 3 | 1,416,391 | ||||||
| Put rights in warrants issued prior to and surviving amalgamation with Ameri | 2 | 262,491 | ||||||
| Fair value as of September 30, 2021 | $ | 3,166,116 | ||||||
The Company had no assets or liabilities measured at fair value on December 31, 2020.
Both the January and February Warrants are 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 analysed each period based on changes in estimates or assumptions and recorded as appropriate.
Initial measurement
SCHEDULE OF BLACK SCHOLES VALUATION MODELS OF WARRANT LIABILITIES
| January Warrants | February Warrants | |||||||
| January 13, 2021 | February 12, 2021 | |||||||
| Term (years) | 5.0 | 5.0 | ||||||
| Stock price | $ | 4.21 | $ | 4.62 | ||||
| Exercise price | $ | 4.95 | $ | 4.90 | ||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| Expected volatility | 84.7 | % | 84.7 | % | ||||
| Risk free interest rate | 0.5 | % | 0.5 | % | ||||
| Number of shares | 1,821,449 | 1,714,005 | ||||||
| Value (per share) | $ | 2.66 | $ | 3.00 | ||||
| -11- |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Subsequent measurement
The following table presents the changes in fair value of the warrant liabilities:
SCHEDULE OF FAIR VALUE OF WARRANT LIABILITIES
| January Warrants | February Warrants | Total Warrant Liability | ||||||||||
| Fair value as of December 31, 2020 | $ | - | $ | - | $ | - | ||||||
| Initial value of warrant liability | 4,846,000 | 5,135,000 | 9,981,000 | �� | ||||||||
| Change in fair value | (3,358,767 | ) | (3,718,609 | ) | (7,077,376 | ) | ||||||
| Fair value of put rights in warrants issued prior to and surviving amalgamation with Ameri | 262,491 | |||||||||||
| Fair value as of September 30, 2021 | $ | 1,487,234 | $ | 1,416,391 | $ | 3,166,116 | ||||||
The key inputs into the Black Scholes valuation model for the Level 3 valuations as of September 30, 2021 are below:
SCHEDULE OF BLACK SCHOLES VALUATION MODELS OF WARRANT LIABILITIES
| January Warrants | February Warrants | |||||||
| Term (years) | 4.3 | 4.3 | ||||||
| Stock price | $ | 2.07 | $ | 2.07 | ||||
| Exercise price | $ | 4.95 | $ | 4.90 | ||||
| Dividend yield | 0.0 | % | 0.0 | % | ||||
| Expected volatility | 77.1 | % | 76.7 | % | ||||
| Risk free interest rate | 0.98 | % | 0.98 | % | ||||
| Number of shares | 1,821,449 | 1,714,005 | ||||||
| Value (per share) | $ | 0.82 | $ | 0.83 | ||||
Certain warrants issued by Ameri prior to the December 30, 2020 amalgamation with the Company, and containing put rights, remain outstanding and operative, with the put rights contained therein representing a liability to the Company classified as Level 2, due to the pricing input per warrant share, prior to adjustment for the reverse split subsequent to issuance of the warrants, and the number of warrant shares being directly observable as of the reporting date.
Business Combinations
The Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) 805 “Business Combinations” using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. For transactions that are business combinations, the Company evaluates the existence of goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. . All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date.
The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using established valuation techniques. A fair value measurement is determined as the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the context of purchase accounting, the determination of fair value often involves significant judgments and estimates by management, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. The estimated fair values reflected in the purchase accounting are subject to management’s judgment.
Intangible Assets
Intangible assets consist of in-process research and development acquired. The intangible assets are valued using the discounted cash flows method. The Company assesses the carrying value of its intangible assets for impairment each year. License agreements are recorded at cost and amortized over the life of the license.
Intangible assets related to acquired IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment. Impairment testing is performed at least annually or when a triggering event occurs that could indicate a potential impairment. If and when development is complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these assets.
| -12- |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Research and Development
Research and development expenses are charged to operations as incurred. Research and development expenses include, among other things, internal and external costs associated with preclinical development, pre-commercialization manufacturing expenses, and clinical trials. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or services provided and the invoices received from its external service providers. In the case of clinical trials, a portion of the estimated cost normally relates to the projected cost to treat a patient in the trials, and this cost is recognized based on the number of patients enrolled in the trial. As actual costs become known, the Company adjusts its accruals accordingly.
Stock-Based Compensation
The Company recognizes compensation expense for all equity-based payments in accordance with ASC 718 “Compensation – Stock Compensation” which addresses the accounting for stock-based payment transactions, requiring such transactions to be accounted for using the fair value method. Awards of shares for property or services are recorded at the more readily measurable of the estimated fair value of the stock award and the estimated fair value of the service. The Company uses the Black-Scholes option-pricing model to determine the grant date fair value of stock-based awards under ASC 718. The estimated fair value is amortized as a charged to earnings on a straight-line basis depending on the terms and conditions of the award, and the nature of the relationship of the recipient of the award to the Company. The Company records the grant date fair value in line with the period over which it was earned. For employees and consultants, this is typically considered to be the vesting period of the award. Under fair value recognition provisions, the Company accounts for forfeitures when they occur. Stock-based compensation expense recognized in the financial statements is reduced by the actual awards forfeited.
Restricted stock units, restricted stock awards, and stock options are granted at the discretion of the Compensation Committee of the Company’s board of directors (the “Board of Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 48-month period.
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 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.
Long Lived Assets
Property and equipment and intangible assets are recorded at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs that do not extend the useful lives of an asset or add new functionality are expensed as incurred. Depreciation and amortization are recorded using the straight-line method over the respective estimated useful lives of the Company’s long-lived assets. The estimated useful lives are typically 3 to 5 years for office furniture and equipment and are depreciated on a straight-line basis. The estimated useful life of the Company’s intellectual property is equal to the term of the related license, if applicable or 10 years and is amortized on a straight-line basis
The Company reviews its long-lived assets for impairment whenever events or changes indicate that the carrying value of the long-lived assets may not be fully recoverable. In cases where the Company does not expect to recover its carrying costs, an impairment charge is recorded. The Company measures and records impairment losses on its long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. Considerable judgment by management is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates.
Goodwill
The Company tests goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that the Company may not be able to recover the carrying amount of the net assets of the reporting unit. The Company has determined that the reporting unit is the entire company, due to the integration of all of the Company’s activities. In evaluating goodwill for impairment, the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. There was 0 impairment of goodwill for the three and nine months ended September 30, 2021.
Income Taxes
The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse.
The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liabilities. In management’s opinion, adequate provisions for income taxes have been made. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. As of September 30, 2021 and December 31, 2020, no liability for unrecognized tax benefits was required to be recorded.
The Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component of operating expenses. There were no amounts accrued for penalties and interest for the years ended December 31, 2020 and 2019. The Company does not expect its uncertain tax positions to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
The Company has identified its United States and Canadian federal tax return, its state and provincial tax returns in Florida, Alberta (Canada) and Ontario (Canada) as its “major” tax jurisdictions. The Company is in the process of filing its corporate tax returns for the years ended December 31, 2020 and December 31, 2019. Net operating losses for these periods will not be available to reduce future taxable income until the returns are filed.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-12, Income Taxes (Topic 740: Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes certain exceptions to the general principles in Topic 740. ASU 2019-12 is effective for the fiscal years beginning after December 15, 2020, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements.” The new accounting rules improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50) that had only been included in the Other Presentation Matters Section (Section 45) of the Codification. Additionally, the new rules also clarify guidance across various topics including defined benefit plans, foreign currency transactions, and interest expense. The new accounting rules were effective for the Company in the first quarter of 2021. The adoption of the new accounting rules did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
| -13- |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments in ASU No. 2021-04 provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. As a result, the Company will not be required to adopt ASU 2021-04 until January 1, 2022. The Company is currently evaluating the impact of the adoption of this principle on the Company’s unaudited condensed consolidated financial statements.
NOTE 3 – INTANGIBLE ASSETS
As of September 30, 2021, the Company’s intangible assets consisted of:
SCHEDULE OF COMPONENTS OF INTANGIBLE ASSETS
| Useful Life | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||
| Skincare Assets and License Agreements | 4 years | $ | 1,944,689 | $ | (508,324 | ) | $ | 1,436,365 | ||||||
| Diverse Bio License Agreement | 4 years | 675,000 | (84,376 | ) | 590,624 | |||||||||
| In process research and development | Indefinite | 36,246,678 | - | 36,246,678 | ||||||||||
| Total | $ | 38,866,367 | $ | (592,700 | ) | $ | 38,273,667 | |||||||
During the three months ended September 30, 2021 and 2020, the Company recognized amortization expense of $170,692 and $0, respectively. During the nine months ended September 30, 2021 and 2020, the Company recognized amortization expense of $481,351 and $0, respectively.
Acquisition of Diverse Bio License Agreement
On March 5, 2021, the Company entered into an Exclusive License Agreement (the “DB Agreement”) with Diverse Biotech, Inc. (“Diverse”), pursuant to which the Company acquired an exclusive, perpetual license to develop five therapeutic candidates (collectively, the “Agents”) with the goal of alleviating the side effects that cancer patients experience. Under the terms of the DB Agreement, Diverse has granted the Company an exclusive license to its intellectual property rights covering the Agents and its products. In exchange, the Company has granted Diverse the right to information relating to the Agents developed for the express purpose of using such information to obtain patent rights, which right terminates upon the issuance or denial of the patent rights.
Under the DB Agreement, the Company will maintain sole responsibility and ownership of the development and commercialization of the Agents and its products. Diverse has agreed not to develop or commercialize any agent or product that would compete with the Agents, or its products containing the Agents, at any time during or after the term of the DB Agreement. If Diverse intends to license, sell, or transfer any other molecules linked with cannabinoids not granted to the Company under the terms of the DB Agreement, the Company will have the first right, but not the obligation, to negotiate an agreement with Diverse for such cannabinoids. The Company has also agreed to pay Diverse an up-front investment payment in the amount of $675,000, as well as a running royalty starting with the first commercial sale by the Company to a third party in an arms’-length transaction.
| -14- |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The term of the DB Agreement shall continue for as long as the Company intends to develop or commercialize the new drugs, unless earlier terminated by either Party. The Agreement may be terminated by either party upon ninety (90) days written notice of an uncured material breach or in the event of bankruptcy or insolvency. In addition, the Company has the right to terminate the DB Agreement at any time upon sixty (60) days’ prior written notice to Diverse.
In process research and development
Please refer to Note 6, Business Combination with MagicMed Industries.
NOTE 4 – 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.
Stockholder Demand Letters
On January 21, 2021, the Company received a stockholder litigation demand letter from the law firm of Purcell Julie & Lefkowitz LLP, on behalf of James Self, a purported stockholder of the Company. The letter demands that the Company (i) deem ineffective the December 30, 2020 amendment to our Amended and Restated Certificate of Incorporation in which the Company effected a one-for-four reverse stock split of its common stock due to the manner in which non-votes by brokers were tabulated, (ii) seek appropriate relief for damages allegedly suffered by the company and its stockholders or seek a valid stockholder approval of the amendment and reverse stock split, and (iii) adopt adequate internal controls to prevent a recurrence of the alleged misconduct. The Company disputes that the amendment was ineffective or that there were any inadequate internal controls related to the same. However, to eliminate any questions about the amendment, the Company ratified the amendment at a special stockholders’ meeting pursuant to Section 204 of the Delaware General Corporation Law. This special stockholders’ meeting occurred on May 14, 2021. On May 14, 2021, the Company filed a certificate of validation with the State of Delaware to ratify the reverse stock split on December 30, 2020. The purported stockholder thereafter agreed that the changes mooted his potential claims, and the Amalgamation successfully closed. The Company paid $65,000 to the purported stockholder’s counsel in connection with the changes effected.
On July 14, 2021, the Company received a stockholder demand letter from the law firm of Rigrodsky Law P.A., on behalf of Matthew Whitfield, a purported stockholder of the Company, alleging that the registration statement (the “Amalgamation Registration Statement”) filed by the Company with the SEC on June 21, 2021 omitted material information with respect to the Amalgamation and requesting that the Company and the Company board of directors provide certain corrective disclosures in an amendment or supplement to the Amalgamation Registration Statement. The Company does not believe the request had merit, but made certain changes to the Amalgamation Registration Statement, which it believes sufficed to answer the purported stockholder’s demands. The purported stockholder thereafter agreed that the changes mooted his potential claims, and the Amalgamation successfully closed. The Company agreed to pay $30,000 to the purported stockholder’s counsel in connection with the changes to the Amalgamation Registration Statement. This amount was accrued as of, and paid subsequent to September 30, 2021.
On July 22, 2021, the Company received a DGCL Section 220 books and records demand letter from the law firm of Kahn Swick & Foti, on behalf of Scott Waller, a purported stockholder of the Company, seeking access to certain books and records of the Company in connection with the process underlying the Amalgamation (as defined herein) and the Company’s engagement of its financial advisors. The Company does not believe the request had merit, but made certain changes to the Amalgamation Registration Statement, which it believes sufficed to answer the purported stockholder’s demands. The purported stockholder thereafter agreed that the changes mooted his potential claims, and the Amalgamation successfully closed. The Company agreed to pay $60,000 to the purported stockholder’s counsel in connection with the changes to the Amalgamation Registration Statement. This amount was accrued as of, and paid subsequent to September 30, 2021.
On September 2, 2021, Vince Mojta (“Plaintiff”), through his attorney, filed a complaint (Mojta v. Enveric Biosciences, Inc., et al., Case No. 1:21-cv-07385 (S.D.N.Y.)) in the United States District Court for the Southern District of New York, against the Company and the members of its board of directors (the “Directors”). The complaint alleged, among other things, that the Amalgamation Registration Statement omitted material information with respect to the Amalgamation. The complaint sought to enjoin the Company from taking any steps to consummate the Amalgamation unless and until certain information was disclosed to the Company’s shareholders before a vote on the Amalgamation and a judgment for damages. The Company believed that the suit was without merit. Plaintiff never served the Company or the Directors with the suit, and the Amalgamation successfully closed. Plaintiff then voluntarily dismissed the suit on October 25, 2021.
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 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 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 September 30, 2021, as a result of the milestone criteria being achieved during three month period ended September 30, 2021. 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 equalling 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.
Agreements with Tikkun
Assignment and Assumption Agreements
On January 10, 2020, Jay Pharma entered into two assignment and assumption agreements, pursuant to which, upon the satisfaction of all closing conditions to the Offer, affiliates of Tikkun Pharma Inc. (“Tikkun”) would assign to Jay Pharma all of such affiliates’ in-licensed and developed rights based on certain Amended and Restated Sublicense Agreements, effective January 12, 2018, pursuant to which Jay Pharma entered into two in-licensing U.S. and rest of world rights to the limited pharmaceutical business (including cancer) from TO Pharmaceuticals USA LLC (“TOP”) and Tikkun Olam IP, LTD (“TOCI”), respectively, each as amended by a First Amendment entered January 10, 2020, with:
(i) TOP and Tikkun regarding all of Tikkun’s (i) in-licensed rights and obligations to commercialize pharmaceutical products related to GVHD under the relevant Sublicense in the U.S. and (ii) certain skincare business and all of Tikkun’s rights related thereto as of the January 10, 2020 effective date. Jay Pharma agreed to issue 8,288,006 common shares of Jay Pharma to Tikkun in exchange for these rights; and
(ii) TOCI and Tikkun regarding all of Tikkun’s in-licensed rights and obligations to commercialize pharmaceutical products related to GVHD under the relevant sublicense anywhere in the world outside the U.S. Jay Pharma agreed to issue 2,072,001 common shares of Jay Pharma to Tikkun in exchange for these rights.
On August 12, 2020, Jay Pharma and the applicable Tikkun affiliates entered into the First Amendment to the Tikkun Agreements, pursuant to which all references to the Original Amalgamation Agreement and the amalgamation were revised to be references to the Tender Agreement and the Offer, as applicable.
On October 2, 2020, Jay Pharma and the applicable Tikkun affiliates entered into the Second Amendment to the Tikkun Agreements, pursuant to which the effective date of the transactions was revised to occur as of October 2, 2020.
License Agreement
Jay Pharma, Tikkun Olam LLC (“TO LLC”) and Tikkun Olam Hemp LLC (“TOH”) entered into a license agreement dated on January 10, 2020, pursuant to which Jay Pharma would acquire certain in-licensed and owned intellectual property rights related to the cannabis products in the United States (presently excluding the state of New York) from TO LLC and TOH, each of which is an affiliate of TO Holdings, in exchange for royalty payments of (i) four percent (4.0%) of net sales of OTC cancer products made via consumer channels; (ii) five percent (5.0%) of net sales of beauty products made via consumer channels; and (iii) three percent (3.0%) of net sales of OTC cancer products made via professional channels, along with a minimum net royalty payment starting in January 1, 2022 and progressively increasing up to a cap of $400,000 maximum each year for the first 10 years, then $600,000 maximum each year for the next 5 years, and an annual maximum cap of $750,000 each year thereafter during the term of the agreement. The licensed intellectual property rights relate to beauty products and OTC cancer products, and branding rights related thereto. The beauty products include any topical or transdermal cannabis-containing or cannabis-derived (including hemp-based) skin care or body care beauty products, and the OTC cancer products means any cancer-related products, in each case excluding those regulated as a drug, medicine, or controlled substance by the FDA or any other relevant governmental authority, such as the USDA.
On August 12, 2020, Jay Pharma, TO LLC and TOH entered into the First Amendment to the License Agreement, pursuant to which all references to the Original Amalgamation Agreement and the amalgamation were revised to be references to the Tender Agreement and the Offer, as applicable.
On October 2, 2020, Jay Pharma, TO LLC and TOH entered into the Second Amendment to the License Agreement, pursuant to which the effective date of the transactions was revised to occur as of October 2, 2020.
| -15- |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 5 - SHARE CAPITAL AND OTHER EQUITY INSTRUMENTS
Offerings
On January 14, 2021, the Company completed an offering of shares of Common Stock and pre-funded warrants at approximately $4.50 per share and a concurrent private placement of warrants to purchase 1,666,019 shares of Common Stock at $per share, exercisable immediately and terminating five years after the date of issuance for gross proceeds of approximately $10,000,000. The net proceeds to the Company after deducting financial advisory fees and other costs and expenses were approximately $8,800,087, with $ of such amount allocated to share capital and $4,846,000 allocated to warrant liability and the remaining $663,000 recorded as an expense.
On February 11, 2021, the Company completed an offering of shares of Common Stock and a concurrent private placement of warrants to purchase 1,503,513 shares of Common Stock at $per share, exercisable immediately and terminating five year from the date of issuance for gross proceeds of approximately $12,800,000. The net proceeds to Enveric from the offering after deducting financial advisory fees and other costs and expenses were approximately $11,624,401, with $ of such amount allocated to share capital and $5,135,000 allocated to warrantliability and the remaining $527,000 recorded as an expense.
Stock Options
| Number of Shares | Weighted Average Exercise Price | Weighted Average Fair Value | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (USD) | ||||||||||||||||
| Outstanding – January 1, 2021 | 929,765 | $ | 1.53 | $ | 2.50 | |||||||||||||||
| Granted | $ | $ | 2.81 | |||||||||||||||||
Options assumed pursuant to acquisition of MagicMed | 973,840 | $ | 1.34 | $ | 1.83 | |||||||||||||||
| Exercised | (143,796 | ) | $ | 0.23 | $ | 5.69 | ||||||||||||||
| Expired forfeited, or cancelled | (692,475 | ) | $ | 1.69 | $ | 1.98 | ||||||||||||||
| Outstanding – September 30, 2021 | 1,147,334 | $ | 1.57 | $ | 2.09 | $ | 730,438 | |||||||||||||
| Exercisable at September 30, 2021 | 931,810 | $ | 1.52 | $ | 2.00 | $ | 550,191 | |||||||||||||
SCHEDULE OF STOCK OPTION ASSUMPTION
| Term (years) | ||||
| Stock price | $ | 3.50 | ||
| Exercise price | $ | 3.50 | ||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Risk free interest rate | % |
The Company’s stock based compensation expense related to stock options for the three months ended September 30, 2021 and 2020 was $and $, respectively. The Company’s stock based compensation expense related to stock options for the nine months ended September 30, 2021 and 2020 was $and $, respectively. As of September 30, 2021, the Company had $in unamortized stock option expense with a weighted average amortization period equal to years
During the first quarter 2021, the Company exchanged options to purchase shares of common stock for restricted stock units and restricted stock awards. In connection with this exchange, the Company recognized $298,714 in inducement expense related to the increase in fair value of the new awards over the old awards, which is included in other expenses on the Company’s unaudited condensed consolidated statement of operations and comprehensive loss.
Restricted Stock Awards
SCHEDULE OF RESTRICTED STOCK UNITS AND AWARDS ACTIVITY
| Number of shares | Weighted average fair value | |||||||
| Non–vested at January 1, 2021 | - | $ | - | |||||
| Granted | 70,986 | $ | 3.84 | |||||
| Vested | (64,334 | ) | $ | 4.24 | ||||
| Non–vested at September 30, 2021 | 6,652 | $ | 2.50 | |||||
For the three months ended September 30, 2021 and 2020, the Company recorded $and $, in stock-based compensation expense related to restricted stock awards, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded $and $, in stock-based compensation expense related to restricted stock awards, respectively. As of September 30, 2021, unamortized stock-based compensation costs related to restricted share awards was $, which will be recognized over a weighted average period of years.
| -16- |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Issuance of Restricted Stock Units
SCHEDULE OF RESTRICTED STOCK UNITS AND AWARDS ACTIVITY
| Number of shares | Weighted average fair value | |||||||
| Non–vested at January 1, 2021 | - | $ | - | |||||
| Granted | 5,775,171 | $ | 3.65 | |||||
| Vested | (1,207,825 | ) | $ | 4.46 | ||||
| Non–vested at September 30, 2021 | 4,567,346 | $ | 3.43 | |||||
For the three months ended September 30, 2021 and 2020, the Company recorded $and $, respectively, in stock-based compensation expense related to restricted stock units, with $included as a component of general and administrative expenses and $included as a component of research and development costs in the unaudited condensed consolidated statement of operations. For the nine months ended September 30, 2021 and 2020, the Company recorded $and $, respectively, in stock-based compensation expense related to restricted stock units, with $included as a component of general and administrative expenses and $included as a component of research and development expenses in the unaudited condensed consolidated statement of operations. As of September 30, 2021, 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 of $6,966,721 which will be recognized upon achievement of specified milestones.
Warrants
The following table summarizes information about shares issuable under warrants outstanding at September 30, 2021:
SCHEDULE OF WARRANTS
| Warrant shares outstanding | Weighted average exercise price (USD) | Weighted average remaining life | Intrinsic value | |||||||||||||
| Outstanding at January 1, 2021 | 3,770,550 | $ | 2.13 | $ | 8,040,836 | |||||||||||
| Issued | 4,146,146 | $ | 4.90 | |||||||||||||
| Assumed pursuant to acquisition of MagicMed | $ | 1.31 | ||||||||||||||
| Exercised | (3,253,714 | ) | $ | 1.10 | ||||||||||||
| Outstanding at September 30, 2021 | 10,576,654 | $ | 2.76 | $ | 5,115,080 | |||||||||||
| Exercisable at September 30, 2021 | 10,576,654 | $ | 2.76 | $ | 5,115,080 | |||||||||||
The warrants assumed pursuant to the acquisition of MagicMed contain certain down round features that would require adjustment to the exercise price upon certain events when the offering price is less than the stated exercise price.
NOTE 6 – AMALGAMATION WITH MAGICMED INDUSTRIES INC.
On May 24, 2021, the Company entered into an Amalgamation Agreement (the “Amalgamation Agreement”) with 1306432 B.C. Ltd., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of the Company (“HoldCo”), 1306436 B.C. Ltd., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of HoldCo (“Purchaser”), and MagicMed Industries Inc., a corporation existing under the laws of the Province of British Columbia (“MagicMed”), pursuant to which, among other things, the Company, indirectly through Purchaser, acquired all of the outstanding securities of MagicMed in exchange for securities of the Company by way of an amalgamation under the British Columbia Business Corporations Act, upon the terms and conditions set forth in the Amalgamation Agreement, such that, upon completion of the Amalgamation (as defined herein), the amalgamated corporation (“Amalco”) will be an indirect wholly-owned subsidiary of the Company. The Amalgamation was completed on September 16, 2021.
At the effective time of the Amalgamation (the “Effective Time”), holders of outstanding common shares of MagicMed (the “MagicMed Shares”) received such number of shares of common stock of the Company (“Company Shares”) representing, together with the Company Shares issuable upon exercise of the Warrants and the Converted Options (each as defined herein), approximately % of the issued and outstanding Company Shares (on a fully-diluted basis). The MagicMed Shares were initially converted into Amalco Redeemable Preferred Shares (as defined in the Amalgamation Agreement), which immediately following the Amalgamation were redeemed for of a Company Share. Following such redemption, the shareholders of MagicMed received additional Company Shares equal to the product of the Exchange Ratio (as defined in the Amalgamation Agreement) multiplied by the number of MagicMed Shares held by each such shareholder. Additionally, following the Effective Time (i) each outstanding MagicMed stock option was converted into and became an option to purchase (the “Converted Options”) the number of Company Shares equal to the Exchange Ratio multiplied by the number of MagicMed Shares subject to such MagicMed stock option, and (ii) each holder of an outstanding MagicMed warrant (including Company Broker Warrants (as defined in the Amalgamation Agreement), the “Warrants”) received upon exercise of such Warrant that number of Company Shares which the holder would have been entitled to receive as a result of the Amalgamation if, immediately prior to the date of the Amalgamation (the “Effective Date”), such holder had been the registered holder of the number of MagicMed Shares to which such holder would have been entitled if such holder had exercised such holder’s Warrants immediately prior to the Effective Time (the foregoing collectively, the “Amalgamation”). In aggregate, holders of MagicMed Shares received Company Shares representing approximately % of the Company Shares following the consummation of the Amalgamation. The maximum number of Company Shares to be issued by the Company as in respect of the Warrants and Converted Options shall not exceed Company Shares.
The aggregate number of Company Shares that the Company issued in connection with the Amalgamation (collectively, the “Share Consideration”) was in excess of % of the Company’s pre-transaction outstanding Company Shares. Accordingly, the Company sought and received stockholder approval of the issuance of the Share Consideration in the Amalgamation in accordance with the NASDAQ Listing Rules.
Pursuant to the terms of the Amalgamation Agreement, the Company appointed, effective as of the Effective Time two individuals selected by MagicMed to the Company Board of Directors, Dr. Joseph Tucker and Dr. Brad Thompson.
The Amalgamation Agreement contained representations and warranties, closing deliveries and indemnification provisions customary for a transaction of this nature. The closing of the Amalgamation was conditioned upon, among other things, (i) the Share Consideration being approved for listing on Nasdaq, (ii) the effectiveness of a Registration Statement on Form S-4 registering the Share Consideration (the “S-4 Registration Statement”) and (iii) the approval (a) of the MagicMed stockholders of the Amalgamation and (b) of the Company’s stockholders of each of the Amalgamation and the issuance of the Share Consideration in the Amalgamation. The closing of the Amalgamation occurred on September 16, 2021.
MagicMed Industries develops and commercializes psychedelic-derived pharmaceutical candidates. MagicMed’s psychedelic derivatives library, the Psybrary™, is an essential building block from which industry can develop new patented products. The initial focus of the Psybrary™ is on psilocybin and DMT derivatives, and it is then expected to be expanded to other psychedelics.
On September 16, 2021, the Company (“Purchaser”), in connection with the Amalgamation Agreement entered into on May 24, 2020, acquired MagicMed Industries Inc., and its wholly owned subsidiary MagicMed USA, Inc. (“MagicMed”), (the “Acquisition”). In exchange for a total purchase price valued at $48,104,210 the Company acquired shares of Common Stock from MagicMed, which represents 100% of the outstanding and issued shares of Common Stock of MagicMed, for equity consideration on the date of closing valued at $27,067,310. The Purchaser also agreed that it would issue Company Shares in lieu of shares of MagicMed Shares for any warrants to purchase MagicMed Shares that were exercised, with the maximum number of Company Shares issuable pursuant to such warrant exercises being 5,913,672. The fair value of the warrants on the closing date of the Amalgamation was $10,724,579. Additionally, the Purchaser agreed that it would issue issued Company Shares in lieu of shares of MagicMed Shares for any options to purchase MagicMed Shares that were exercised, with the maximum number of Company Shares issuable pursuant to such option exercises being. The fair value of the contingent considerationoptions on the closing date of the Amalgamation was estimated using a discounted cash flow technique $, with significant inputs that are not observable$1,250,394included in the market. purchase price and $285,396 to be recognized as expense in the post combination period.
The significant inputs not supported by market activity included our probability assessmentsgoodwill of expected future cash flows$9,061,927 is related to deferred tax liabilitiesarising from the acquisitions duringCompany’s purchase of the earn-out period, appropriately discounted consideringMagicMed Shares.
The following table represents the uncertainties associated with the obligation,preliminary purchase price:
SCHEDULE OF BUSINESS ACQUISITIONS
| Stock (common shares issued) | $ | 27,067,310 | ||
| Fair value of warrants | 10,724,578 | |||
| Fair value of options | 1,250,394 | |||
| Deferred tax liability incurred | 9,061,927 | |||
| Total Purchase Price | $ | 48,104,209 |
| -17- |
Enveric Biosciences, Inc. and calculatedSubsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Acquisition is being accounted for as a business combination in accordance with the respective termsASC 805. The Company has determined preliminary fair values of the shareassets acquired and liabilities assumed in the Acquisition. These values are provisional and subject to change pending the calculation of the final purchase agreements.price, finalization of the opening balance sheet, the final valuation report, and allocation of the total consideration transferred.
No financial instruments were transferred into or out
The Company has made a preliminary allocation of Level 3 classificationthe purchase price of the Acquisition to the assets acquired and the liabilities assumed as of the purchase date.
The following table summarizes the preliminary purchase price allocations relating to the Acquisition:
SCHEDULE OF RECOGNIZED IDENTIFIED ASSETS ACQUIRED AND LIABILITIES ASSUMED
| Description | Fair Value | |||
| Assets acquired: | ||||
| Cash | $ | 3,055,327 | ||
| Prepaid expenses and other current assets | 440,968 | |||
| Government remittances recoverable | 25,607 | |||
| Property and equipment | 143,945 | |||
| Other assets | 11,182 | |||
| In process research and development | 36,246,678 | |||
| Goodwill | 9,061,927 | |||
| Total assets acquired | $ | 48,985,634 | ||
| Liabilities assumed: | ||||
| Accounts payable | $ | 811,961 | ||
| Accrued expenses and other liabilities | 69,464 | |||
| Deferred Tax Liabilities | 9,061,927 | |||
| Total liabilities assumed | 9,943,352 | |||
| Estimated fair value of net assets acquired attributable to the Company | $ | 39,042,282 | ||
The goodwill represents the excess fair value after the allocation to the identifiable net assets, with such being specifically attributable to the deferred tax liabilities incurred. The calculated goodwill is not deductible for tax purposes.
Certain adjustments to the assessed fair values of the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income.
Total acquisition-related costs for the Acquisition incurred by the Company during the period ended September 30, 2020 2021 was approximately $200,000 and year ended December 31, 2019.is included in general and administrative expenses in the Unaudited condensed consolidated statement of operations.
NOTE 13. WARRANTS OUTSTANDING:
HISTORICAL AND PROFORMA FINANCIAL INFORMATION
The amounts of MagicMed’s revenues and net loss included in the Company’s unaudited consolidated condensed statements of operations and comprehensive loss for the period from the acquisition date to September 30, 2021 were $0 and $183,753 respectively. The following warrants were outstandingunaudited proforma financial information presents the consolidated results of operations of the Company and MagicMed for the three and nine months ended September 30, 2021 and September 30, 2020, as if the acquisition had occurred as of the beginning of the first period presented instead of on September 16, 2021. The proforma information does not necessarily reflect the results of operations that would have occurred had the entities been a single company during those periods.
SCHEDUELE OF PROFORMA INFORMATION
For the Three Months Ended September 30, 2020 | For the Nine Months Ended September 30, 2020 | |||||||
| Revenues | $ | - | $ | - | ||||
| Net loss | $ | (862,582 | ) | $ | (2,810,104 | ) |
Enveric Biosciences, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended September 30, 2021 | For the Nine Months Ended September 30, 2021 | |||||||
| Revenues | $ | - | $ | - | ||||
| Net loss | $ | (3,726,677 | ) | $ | (10,922,678 | ) |
NOTE 7 – INCOME TAXES
On September 16, 2021, the Company acquired MagicMed. In connection with the acquisition, the Company recorded intangible assets from in-process research and development valued at $36,246,678, which is amortized for book purposes over its useful life, but without a tax basis, creating a deferred tax liability of $9,061,927. The deferred tax liability will decrease as the intangible assets that created the deferred tax liability are amortized. .. The ultimate realization of the net operating loss is dependent upon future taxable income, if any, of the Company. Based on losses from inception, the Company determined that as of September 30, 2020:
| Exercise Price ($) | Outstanding Warrants | Weighted Average Remaining Contractual life (Years) | Number Exercisable | ||||||||||
| 102.88 | 52,877 | 0.02 | 52,877 | ||||||||||
| 150.00 | 40,000 | 0.03 | 40,000 | ||||||||||
| 37.50 | 200,000 | 2.02 | 200,000 | ||||||||||
| 55.00 | 60,375 | 4.68 | 60,375 | ||||||||||
| 45.75 | 36,665 | 4.85 | 36,665 | ||||||||||
1.83 | 340,448 | 4.85 | 340,448 | ||||||||||
0.001 | 646,094 | 0.25 | 646,094 | ||||||||||
| Total | 1,376.459 | 1,376,459 | |||||||||||
NOTE 14- PREFERRED STOCK
On2021 and December 30, 2016,31, 2020 it is more likely than not that the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Lone Star Value Investors, LP (“LSVI”), pursuant to which a Convertible Note was returned to the Company and cancelled in exchange for 363,611 shares of the Company’s Series A Preferred Stock, which is non-convertible and perpetual preferred stock of the Company. We have issued 61,327 shares as preferred dividends as of September 30, 2020 and the company has 424,938 outstanding shares preferred stock.
A dividend of $217,291 has become due and haswill not yet been paid.
NOTE 15. LOAN FROM PAYCHECK PROTECTION PROGRAM (PPP):
On May 11, 2020, we received proceeds from a loan in the amount of $1,719,600 (the “PPP Loan”) from Sterling National Bank, as lender, pursuant to the Small Business Association Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Loan, which was in the form of a promissory note issued by the Company, matures on May 6, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 6, 2020. The note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Fundsrealize benefits from the PPP Loan may only be used for payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before July 12, 2020.deferred tax assets. The Company intends to use the entire PPP Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as describedwill not record income tax benefits in the CARES Act.
NOTE 16. LOAN FROM U.S. SMALL BUSINESS ADMINISTRATION (EIDL)
On June 18,2020, we have received proceeds from a loan in the amount of $ 149,900 (the “EIDL Loan”) from U.S.Small Business Administration as EIDL Loan pursuant to the Small Business Association Economic Injury Disaster Recovery Loan (the “EIDL Loan”) which was in the form of a Loan Authorization and Agreement executed by the company matures 30 years from the promissory note and bears interest at a rate of 3.75% per annum, Installment payments, including principal and interest of $731 monthly will begin 12 months from the date of promissory note. The balance of principal and interest will be payable 30 years from the date of the promissory note.
NOTE 17. REVISION OF PRIOR YEAR FINANCIAL STATEMENTS
The Company’s corrections of the financial statements as of December 31, 2019 and the year then ended were a result of the adoption of FASB ASU 2016-02 “Leases” (Topic 842) and the implementation of the guidance for a leaseuntil it is determined that was executed as of April 1, 2019.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements it is more likely than not that the Company determined that previously issued financial statements be revisedwill generate sufficient taxable income to reflectrealize the correction of these errors.
deferred income tax assets. As a result of the aforementioned correctionanalysis, the Company determined that a full valuation allowance against the deferred tax assets was required as of accounting errors, the relevant financial statements have been revised as follows:
The following tables summarize the effects of the revisions on the specific items presented in the Company’s historical consolidated financial statements previously included in the Company’s Annual Report for the year endedSeptember 30, 2021 and December 31, 2019:2020, respectively.
| December 31, 2019 | ||||||||||||
| As Previously | ||||||||||||
| Reported | Adjustment | As Revised | ||||||||||
| Balance Sheet | ||||||||||||
| Other Assets | ||||||||||||
| Operating lease right of use asset, net | $ | - | $ | 286,163 | $ | 286,163 | ||||||
| Total Other Assets | 17,405,998 | 286,163 | 17,692,161 | |||||||||
| Total Assets | $ | 25,005,152 | $ | 286,163 | $ | 25,291,315 | ||||||
| Current Liabilities | ||||||||||||
| Current portion – operating lease liability | $ | - | $ | 120,052 | $ | 120,052 | ||||||
| Total Current Liabilities | 14,383,605 | 120,052 | 14,503,657 | |||||||||
| Long-term Liabilities | ||||||||||||
| Operating lease liability, net | - | 169,897 | 169,897 | |||||||||
| Total Long-term Liabilities | - | 169,897 | 169,897 | |||||||||
| Total Liabilities | $ | 14,383,605 | $ | 289,949 | $ | 14,673,554 | ||||||
| Stockholders’ Equity | ||||||||||||
| Accumulated Deficit | $ | (40,508,231 | ) | $ | (3,788 | ) | $ | (40,512,019 | ) | |||
| Total Stockholders’ Equity | 10,621,547 | (3,788 | ) | 10,617,764 | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | 25,005,152 | 286,163 | 25,291,315 | ||||||||
| For the year ended December 31, 2019 | ||||||||||||
| As Previously | ||||||||||||
| Reported | Adjustments | As Revised | ||||||||||
| Statement of Operations | ||||||||||||
| Interest expense | $ | (691,138 | ) | $ | (3,788 | ) | $ | (694,926 | ) | |||
| Total other income (expenses) | 1,109,576 | (3,788 | ) | 1,105,788 | ||||||||
| Loss before income taxes | (5,215,318 | ) | (3,788 | ) | (5,219,106 | ) | ||||||
| Net loss | (5,603,975 | ) | (3,788 | ) | (5,607,763 | ) | ||||||
| Net loss attributable to common stockholders | (6,029,978 | ) | (3,788 | ) | (6,033,766 | ) | ||||||
| Total comprehensive loss | (6,056,963 | ) | (3,788 | ) | (6,060,751 | ) | ||||||
| Comprehensive loss attributable to Company | $ | (6,056,963 | ) | $ | (3,788 | ) | $ | (6,060,751 | ) | |||
| Basic and diluted loss per share | $ | (2.83 | ) | $ | - | $ | (2.83 | ) | ||||
| Statements of Cash Flows | ||||||||||||
| Net loss | $ | (6,029,978 | ) | $ | (3,788 | ) | $ | (6,033,766 | ) | |||
| Amortization of right of use asset | - | 3,788 | 3,788 | |||||||||
| Net Cash Used in Operating Activities | $ | (2,453,123 | ) | $ | - | $ | (2,453,123 | ) | ||||
| For the year ended December 31, 2019 | ||||||||||||
| As Previously | ||||||||||||
| Reported | Adjustments | As Revised | ||||||||||
| Statement of Stockholders’ Deficit | ||||||||||||
| Net loss | $ | (6,029,978 | ) | $ | (3,788 | ) | $ | (6,033,766 | ) | |||
| Accumulated deficit ending balance | $ | (40,508,231 | ) | $ | (3,788 | ) | $ | (40,512,019 | ) | |||
| Total stockholders’ equity ending balance | $ | 10,621,547 | $ | (3,788 | ) | $ | 10,617,764 | |||||
NOTE 18. SUBSEQUENT EVENTS:
As of November 13, 2020, 908,723 shares of common stock have been issued upon conversions of the September Debentures.
As of November 13,2020, 50,224 shares of common stock have been issued upon conversions of the June Debentures
As of November 13, 2020, 646,094 shares of common stock have been issued upon exercise of the Pre-Funded Warrants.
Item 2. Management’s discussion and analysis of financial condition and results of operations
The accompanying unaudited condensed consolidated financial statementsinformation set forth below should be read in conjunction with our auditedthe condensed consolidated financial statements (andand notes thereto)thereto included elsewhere in our Annualthis Quarterly Report on Form 10-K for the year ended December 31, 2019. This10-Q. Unless stated otherwise, references in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” included elsewhere herein.
We use the termsto “us,” “we,” “our,” “us,” “AMERI”or our “Company” and “the Company” in this report tosimilar terms refer to AMERI Holdings, Inc. and its wholly-owned subsidiaries.
Company History
We were incorporated under the laws of the State of Delaware in February 1994 as Spatializer Audio Laboratories, Inc., which was a shell company immediately prior to our completion of a “reverse merger” transaction on May 26, 2015, in which we caused Ameri100 Acquisition,Enveric Biosciences, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners Inc (“Ameri and Partners”corporation.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q (this “Form 10-Q”), a Delaware corporation (the “Merger”). On May 26, 2015, we completed contains forward-looking statements within the Merger, in which we caused Ameri100 Acquisition, Inc., a Delaware corporation and our newly created, wholly owned subsidiary, to be merged with and into Ameri and Partners (doing business as Ameri100), a Delaware corporation. As a resultmeaning of the Merger, Amerisafe 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 Partners became“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 wholly owned operating subsidiary. The Merger was consummated under Delaware law, pursuant to an Agreementcurrent expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of Merger and Plan of Reorganization, datedoperations. These forward-looking statements speak only as of May 26, 2015 (the “Merger Agreement”),the date of this Form 10-Q and in connection with the Merger we changed our name to AMERI Holdings, Inc. We are headquartered in Alpharetta, Georgia.
On January 10, 2020, we entered into the Stock Purchase Agreement with respect to the Spin-Off and the Amalgamation Agreement with respect to the Amalgamation. There is no assurance when or if the amalgamation will be completed. Any delay in completing the amalgamation may substantially reduce the intended benefits that Ameri and Jay Pharma expect to obtain from the amalgamation.
Completion of the amalgamation and spin-off is subject to the satisfaction or waiver of a number of conditions as set forth in the Amalgamation Agreementrisks, uncertainties, and spin-off agreements, including the approval by Ameri’s stockholdersassumptions that could cause actual results to differ materially from our historical experience and Jay Pharma’s shareholders, approval by NASDAQ of Ameri’s application for the listing of common stock in connection with the amalgamation, and other customary closing conditions. There can be no assurance that Ameri and Jay Pharma will be able to satisfy the closing conditionsour present expectations, or that closing conditions of the amalgamation or spin-off beyond their control will be satisfied or waived. If such conditions are not satisfied or waived, the amalgamation and spin-off may not occur or will be delayed, and Ameri and Jay Pharma each may lose some or all of the intended benefits of the amalgamation. In addition, if the Amalgamation Agreement is terminated under certain circumstances, Ameri or Jay Pharma may be required to pay a termination fee of $500,000. Moreover, each of Ameri and Jay Pharma has incurred and expect to continue to incur significant expenses related to the amalgamation, such as legal and accounting fees, some of which must be paid even if the amalgamation is not completed.
Overview
We specialize in delivering SAP cloud, digital and enterprise services to clients worldwide. Our SAP focus allows us to provide technological solutions to a broad and growing base of clients. Our model inverts the conventional global delivery model wherein offshore IT service providers are based abroad and maintain a minimal presence in the United States. With a strong SAP focus, our client partnerships anchor around SAP cloud and digital services. We pursue an acquisition strategy that seeks to disrupt the established business model of offshore IT service providers.
We generate revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into generally fall into two categories: (1) time-and-materials contracts and (2) fixed-price contracts.
When a customer enters into a time-and-materials or fixed-price (or a periodic retainer-based) contract, the revenue is recognized in accordance with the deliverables of each contract. If the deliverables involve separate units of accounting, the consideration from the arrangement is measured and allocated to the separate units, based on vendor specific objective evidence of the value for each deliverable.
The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognizedprojections described under the proportional performance method of accounting. We routinely evaluate whether revenuesections in this Form 10-Q entitled “Risk Factors” and profitability should be recognized in the current period. We estimate the proportional performance on fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
For the three months ended September 30, 2020 and September 30, 2019, sales to five major customers accounted for 54% and 52% of our total revenue, respectively. For the three months ended September 30, 2019, two of our customers have contributed 23% and 10% of our revenue. For the comparable period in 2019, one of our customers contributed 13% of our revenue.
For the nine months ended September 30, 2020 and September 30, 2019, sales to five major customers accounted for 47% and 48% of our total revenue, respectively. Two of our customers contributed 20% and 10% of our revenue for the nine months ended September 30, 2020. For the comparable period in 2019, Two of our customers contributed 19% and 10% of our revenue.
We continue to explore strategic alternatives to improve the market position and profitability of our product and service offerings in the marketplace, generate additional liquidity for the Company, and enhance our valuation. We expect to pursue our goals during the next twelve months through organic growth and through other strategic alternatives. Some of these alternatives have included, and could continue to include, selective acquisitions. The Company has obtained financing and additional capital from the sale of equity and incurrence of indebtedness in the past, and continues to consider capital raising and financing from the sale of various types of equity and incurrence of indebtedness to provide capital for our business plans and operations in the future.
Business Update Regarding COVID-19
During the first quarter of 2020, the spread of a new strain of coronavirus and the disease created by that virus, COVID-19, has created a global pandemic presenting substantial public health and economic challenges around the world. The global pandemic is affecting our employees, communities and business operations, as well as the global economy and financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.
The disclosure in the remainder of this Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)Operations”. These risks and uncertainties include, but are not limited to:
| ● | our dependence on the success of our prospective product candidates, which are in early stages of development and may not reach a particular stage in development, receive regulatory approval or be successfully commercialized; |
| ● | potential difficulties that may delay, suspend, or scale back our efforts to advance additional early research programs through preclinical development and IND application filings and into clinical development; |
| ● | the risk that we may not be able to integrate MagicMed successfully, or that the cost savings, synergies and growth from the Amalgamation may not be fully realized or may take longer to realize than expected; |
| ● | the impact of the novel coronavirus (COVID-19) on our business, including our current plans for product development, as well as any currently ongoing preclinical studies and clinical trials and any future studies or other development or commercialization activities; |
| ● | the limited study on the effects of medical cannabinoids, and 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; |
| ● | 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; |
| ● | the ability to establish or maintain collaborations on the development of therapeutic candidates; |
| ● | the 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 developmental products and working capital and to obtain such funding on commercially reasonable terms; |
| ● | 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; and |
| ● | political, economic, and military instability in Israel which may impede our development programs. |
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item 1A of this Form 10-Q and Part I, Item 1A of the annual report on Form 10-K filed with the SEC on April 1, 2021. 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 an early-development-stage biosciences company that is qualifieddeveloping innovative, evidence-based prescription products and combination therapies containing cannabinoids to address unmet needs in cancer care. We seek to improve the lives of patients suffering from cancer, initially by developing palliative and supportive care products for people suffering from certain side effects of cancer and cancer treatment such as pain or skin irritation. We currently intend to offer such palliative and supportive care products in the disclosureUnited States, following approval through established regulatory pathways.
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We are also aiming to advance a pipeline of novel cannabinoid combination therapies for hard-to-treat cancers, including glioblastoma multiforme (GBM) and several other indications, which are currently being researched.
We intend to bring together leading oncology clinicians and researchers, academic and industry partners so as 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 its proprietary technology as it moves along the regulatory pathway as well as evaluating building a small, targeted selling organization and will potentially utilize a hybrid approach based on the product indication and the market opportunity.
In developing its product candidates, we intend to focus on cannabinoids derived from hemp, other 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. Cannabidiol (CBD) and cannabigerol (CBG), on the other hand, are not psychotropic and are therefore more attractive candidates for translation into therapeutic practice. In the future, we may utilize cannabinoids that are derived from cannabis plants, which may contain THC; however, we only intend to do so in jurisdictions where THC is legal. These product candidates will then be studied through a typical FDA drug approval process.
Tender Offer, Spin-Off and Reverse Stock Split
On December 30, 2020, pursuant to the previously announced Tender Offer Support Agreement and Termination of Amalgamation Agreement dated August 12, 2020 (“Original Amalgamation Agreement”), as amended by that certain Amendment No. 1 to the Tender Offer Support Agreement and Termination of Amalgamation Agreement dated December 18, 2020 (as amended the “Tender Agreement”), the Company completed a tender offer (“Offer”) to purchase all of the outstanding common shares of Jay Pharma, Inc., a Canada corporation and a wholly-owned subsidiary of the Company (“Jay Pharma”), for the number of shares of Company common stock, par value $0.01 per share (“Common Stock”) or Series B Preferred Stock, as applicable, equal to the exchange ratio of 0.8849 (the “Exchange Ratio”), and Jay Pharma became a wholly-owned subsidiary of the Company, on the terms and conditions set forth in the Tender Agreement. In connection with the Offer, the Company changed its name from AMERI Holdings, Inc. to Enveric Biosciences, Inc. The Offer has been accounted for as a “reverse merger” under the acquisition method of accounting for business combinations with Jay Pharma treated as the accounting acquirer of Ameri. As such, the historical financial statements of Jay Pharma have become the historical financial statements of Ameri, or the combined company, and are included in this section on the impacts of COVID-19 and, to the extent that the disclosure in the remainder of this MD&A refers tofiling labeled “Enveric Biosciences, Inc.” As a financial or performance metric that has been affected by a trend or activity, that reference is in addition to any impact discussed in this sectionresult of the impactsOffer, historical common stock, stock options and additional paid-in capital, including share and per share amounts, have been retroactively adjusted to reflect the equity structure of the COVID-19 pandemic. Thecombined company, including the effect of the COVID-19 pandemic is rapidly evolvingExchange Ratio and as such, the information contained herein is accurate asCommon Stock.
Prior to the completion of the date hereof, butOffer, on December 30, 2020, pursuant to a Share Purchase Agreement, Ameri contributed to Ameri100 Inc. (“Private Ameri”) all of the issued and outstanding equity interests of the existing subsidiaries of Ameri, constituting the entire business and operations of Ameri and its subsidiaries, and Private Ameri assumed the liabilities of such subsidiaries. All of the issued and outstanding shares of Series A preferred stock of Ameri were redeemed for an equal number of shares of Series A preferred stock of Private Ameri.
Immediately following the completion of the Offer, on December 30, 2020, the Company effected a 1-for-4 reverse stock split of the issued and outstanding Common Stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the per share exercise price of, and the number of shares of Company Common Stock underlying, our stock options and warrants outstanding immediately prior to the Reverse Stock Split were automatically proportionally adjusted based on the 1-for-4 split ratio in accordance with the terms of such options and warrants, as the case may become outdated duebe. Share and per-share amounts of Common Stock, options and warrants included herein have been adjusted to changing circumstances beyond our present awarenessgive effect to the Reverse Stock Split. The Reverse Stock Split did not alter the par value of the Common Stock, $0.01 per share, or control.
The Company has Implemented work from home policiesmodify any voting rights or other terms of the Common Stock. Unless otherwise noted, the accompanying financial statements and proceduresnotes thereto, including the Exchange Ratio applied to historical Jay Pharma common stock and stock options, give retroactive effect to the Reverse Stock Split for all periods presented.
Amalgamation Agreement with MagicMed Industries Inc.
On May 24, 2021, the Company entered into an Amalgamation Agreement (the “Amalgamation Agreement”) with 1306432 B.C. Ltd., a corporation existing under the laws of its employeesthe Province of British Columbia and consultantsa wholly-owned subsidiary of the Company (“HoldCo”), 1306436 B.C. Ltd., a corporation existing under the laws of the Province of British Columbia and a wholly-owned subsidiary of HoldCo (“Purchaser”), and MagicMed Industries Inc., a corporation existing under the laws of the Province of British Columbia (“MagicMed”), pursuant to which, among other things, the Company, indirectly through Purchaser, acquired all of the outstanding securities of MagicMed in exchange for securities of the Company by way of an amalgamation under the British Columbia Business Corporations Act, upon the terms and conditions set forth in the USAAmalgamation Agreement, such that, upon completion of the Amalgamation (as defined herein), the amalgamated corporation (“Amalco”) will be an indirect wholly-owned subsidiary of the Company. The Amalgamation was completed on September 16, 2021.
At the effective time of the Amalgamation (the “Effective Time”), holders of outstanding common shares of MagicMed (the “MagicMed Shares”) received such number of shares of common stock of the Company (“Company Shares”) representing, together with the Company Shares issuable upon exercise of the Warrants and India. These policiesthe Converted Options (each as defined herein), approximately 36.6% of the issued and procedures will remainoutstanding Company Shares (on a fully-diluted basis). The MagicMed Shares were initially converted into Amalco Redeemable Preferred Shares (as defined in place untilthe Amalgamation Agreement), which immediately following the Amalgamation were redeemed for 0.000001 of a Company Share. Following such timeredemption, the shareholders of MagicMed received additional Company Shares equal to the product of the Exchange Ratio (as defined in the Amalgamation Agreement) multiplied by the number of MagicMed Shares held by each such shareholder. Additionally, following the Effective Time (i) each outstanding MagicMed stock option was converted into and became an option to purchase (the “Converted Options”) the number of Company Shares equal to the Exchange Ratio multiplied by the number of MagicMed Shares subject to such MagicMed stock option, and (ii) each holder of an outstanding MagicMed warrant (including Company Broker Warrants (as defined in the Amalgamation Agreement), the “Warrants”) received upon exercise of such Warrant that number of Company Shares which the local regulatory authorities in each of our locations approves the returnholder would have been entitled to normal business operations. At this time, none of our employees’ health has been impacted by COVID-19.
No clients have gone out of business or filed for bankruptcy, and although there has been a reduction in staffing, no active clients have completely ceased using our servicesreceive as a result of COVID-19. As a direct result of COVID-19 we had significant consultant roll-offs from onethe Amalgamation if, immediately prior to the date of the top US airlinesAmalgamation (the “Effective Date”), such holder had been the registered holder of the number of MagicMed Shares to which such holder would have been entitled if such holder had exercised such holder’s Warrants immediately prior to the Effective Time (the foregoing collectively, the “Amalgamation”). In aggregate, holders of MagicMed Shares received 9,951,237 Company Shares representing approximately 31.7% of the Company Shares following the consummation of the Amalgamation. The maximum number of Company Shares to be issued by the Company as in respect of the Warrants and Converted Options shall not exceed 7,404,101 Company Shares.
The aggregate number of Company Shares that has been onethe Company issued in connection with the Amalgamation (collectively, the “Share Consideration”) was in excess of our top five revenue clients over the last several years. We expect a portion of that business to come back when the US airline business recovers. Additionally, we have seen minor consultant roll-offs from other clients related to COVID-19. One20% of the Company’s largest customers has terminatedpre-transaction outstanding Company Shares. Accordingly, the majorityCompany sought and received stockholder approval of its work as a resultthe issuance of COVID-19. This customer has accountedthe Share Consideration in the past for annual revenuesAmalgamation in accordance with the NASDAQ Listing Rules.
Pursuant to the terms of between $5the Amalgamation Agreement, the Company appointed, effective as of the Effective Time two individuals selected by MagicMed to $7 million dollars. the Company Board of Directors, Dr. Joseph Tucker and Dr. Brad Thompson.
The impact on this quarter is a reduction of approximately $1.5 million in revenue. We have had no projects cancelled due to COVID-19 although we have had some new projects put on hold. We have also had clients notify us they will be slow to pay our billsAmalgamation Agreement contained representations and have some reduced billable hours per week until the economy reopens further. We are at the beginning stages of rebuilding our sales pipelinewarranties, closing deliveries and indemnification provisions customary for a post-COVID economy.transaction of this nature. The closing of the Amalgamation was conditioned upon, among other things, (i) the Share Consideration being approved for listing on Nasdaq, (ii) the effectiveness of a Registration Statement on Form S-4 registering the Share Consideration (the “S-4 Registration Statement”) and (iii) the approval (a) of the MagicMed stockholders of the Amalgamation and (b) of the Company’s stockholders of each of the Amalgamation and the issuance of the Share Consideration in the Amalgamation. The closing of the Amalgamation occurred on September 16, 2021.
Discussion
MagicMed Industries develops and commercializes psychedelic-derived pharmaceutical candidates. MagicMed’s psychedelic derivatives library, the Psybrary™, is an essential building block from which industry can develop new patented products. The initial focus of Business Activitythe Psybrary™ is on psilocybin and DMT derivatives, and it is then expected to be expanded to other psychedelics.
The Company has recently been awarded enterprise IT solutions projects include implementations of i) S/4HANA, SAP’s new enterprise IT platform, ii) Hybris, SAP’s e-commerce platform, and iii) SuccessFactors, SAP’s human resources platform, in addition to the migration of enterprises from on-premises IT infrastructure to the cloud.
Key new business activities in July to September 2020:
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In addition to client initiatives,Recent Developments
Stockholder Demand Letters
On January 21, 2021, the Company has investedreceived a stockholder litigation demand letter from the law firm of Purcell Julie & Lefkowitz LLP, on behalf of James Self, a purported stockholder of the Company. The letter demands that the Company (i) deem ineffective the December 30, 2020 amendment to our Amended and Restated Certificate of Incorporation in continued developmentwhich the Company effected a one-for-four reverse stock split of its common stock due to the manner in which non-votes by brokers were tabulated, (ii) seek appropriate relief for damages allegedly suffered by the company and its stockholders or seek a valid stockholder approval of the amendment and reverse stock split, and (iii) adopt adequate internal technology expertisecontrols to prevent a recurrence of the alleged misconduct. The Company disputes that the amendment was ineffective or that there were any inadequate internal controls related to the same. However, to eliminate any questions about the amendment, the Company ratified the amendment at a special stockholders’ meeting pursuant to Section 204 of the Delaware General Corporation Law. This special stockholders’ meeting occurred on May 14, 2021. On May 14, 2021, the Company filed a certificate of validation with the State of Delaware to ratify the reverse stock split on December 30, 2020. The purported stockholder thereafter agreed that the changes mooted his potential claims, and businessthe Amalgamation successfully closed. The Company paid $65,000 to the purported stockholder’s counsel in connection with the changes effected.
On July 14, 2021, the Company received a stockholder demand letter from the law firm of Rigrodsky Law P.A., on behalf of Matthew Whitfield, a purported stockholder of the Company, alleging that the registration statement (the “Amalgamation Registration Statement”) filed by the Company with the SEC on June 21, 2021 omitted material information with respect to the Amalgamation and requesting that the Company and the Company board of directors provide certain corrective disclosures in an amendment or supplement to the Amalgamation Registration Statement. The Company does not believe the request had merit, but made certain changes to the Amalgamation Registration Statement, which it believes sufficed to answer the purported stockholder’s demands. The purported stockholder thereafter agreed that the changes mooted his potential claims, and the Amalgamation successfully closed. The Company agreed to pay $30,000 to the purported stockholder’s counsel in connection with the changes to the Amalgamation Registration Statement. This amount was accrued as of, and paid subsequent to September 30, 2021
On July 22, 2021, the Company received a DGCL Section 220 books and records demand letter from the law firm of Kahn Swick & Foti, on behalf of Scott Waller, a purported stockholder of the Company, seeking access to certain books and records of the Company in connection with the process efficiency. We have initiatedunderlying the internal implementationAmalgamation (as defined herein) and the Company’s engagement of its financial advisors. The Company does not believe the request had merit, but made certain changes to the Amalgamation Registration Statement, which it believes sufficed to answer the purported stockholder’s demands. The purported stockholder thereafter agreed that the changes mooted his potential claims, and the Amalgamation successfully closed. The Company agreed to pay $60,000 to the purported stockholder’s counsel in connection with the changes to the Amalgamation Registration Statement. This amount was accrued as of, and paid subsequent to September 30, 2021
On September 2, 2021, Vince Mojta (“Plaintiff”), through his attorney, filed a Professional Services Automation suitecomplaint (Mojta v. Enveric Biosciences, Inc., et al., Case No. 1:21-cv-07385 (S.D.N.Y.)) in the United States District Court for the Southern District of New York, against the Company and the members of its board of directors (the “Directors”). The complaint alleged, among other things, that we hope will significantly streamline our business operations.
There isthe Amalgamation Registration Statement omitted material information with respect to the Amalgamation. The complaint sought to enjoin the Company from taking any steps to consummate the Amalgamation unless and until certain information was disclosed to the Company’s shareholders before a continued near-term expectation of negative cashflow as a result of high Selling, General and Administrative expenses and significant expenses associated with building solutions, sales and resource recruiting capabilities. Also, SAP has pushed out its deadline for mandatory migration to S/4HANA past 2025, which is expected to have a near-term negative impactvote on the expansionAmalgamation and a judgment for damages. The Company believed that the suit was without merit. Plaintiff never served the Company or the Directors with the suit, and the Amalgamation successfully closed. Plaintiff then voluntarily dismissed the suit on October 25, 2021.
Key Components of the solutions business. Due to the foregoing and COVID-19 Pandemic, it is expected that our business will fall short of our 2020 revenue goals.
RESULTS OF OPERATIONS
Our Results of Operations for
Operating Expenses
Our operating expenses include research and development, financial statement preparation services, tax compliance, various consulting and director fees, legal services, auditing fees, and stock-based compensation. These expenses have increased in connection with the Three Months Ended September 30, 2020 ComparedCompany’s product development and the Company’s management expects these expenses to continue to increase as the Three Months Ended September 30, 2019 and for the Nine Months Ended September 30, 2020 ComparedCompany continues to the Nine Months Ended September 30, 2019develop its potential product candidates.
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| Three Months Sep 30,2020 | Three Months Sep 30,2019 | Nine Months Sep 30,2020 | Nine Months Sep 30,2019 | |||||||||||||
| Revenue | 8,483,030 | 9,148,857 | 26,340,499 | 30,850,110 | ||||||||||||
| Cost of revenue | 6,595,533 | 7,249,406 | 20,753,306 | 24,428,520 | ||||||||||||
| Gross profit | 1,887,497 | 1,899,451 | 5,587,193 | 6,421,590 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, General and administration | 2,449,919 | 2,902,401 | 7,845,160 | 9,075,751 | ||||||||||||
| Depreciation and amortization | 556,333 | 562,050 | 1,649,819 | 1,685,637 | ||||||||||||
| Operating expenses | 3,006,252 | 3,464,451 | 9,494,979 | 10,761,388 | ||||||||||||
| Operating Income (loss) | (1,118,755 | ) | (1,565,000 | ) | (3,907,786 | ) | (4,339,798 | ) | ||||||||
| Interest benefit (expenses) | 128,842 | (252,648 | ) | (403,506 | ) | (551,862 | ) | |||||||||
| Changes in fair value of warrant liability | - | 1,857,889 | - | 1,796,174 | ||||||||||||
| Others, net | 882 | (9 | ) | 3,693 | 4,557 | |||||||||||
| Income (loss) before income taxes | (989,031 | ) | 40,232 | (4,307,599 | ) | (3,090,929 | ) | |||||||||
| Income tax benefit (expenses) | 27,857 | 1,067 | (11,520 | ) | 15,688 | |||||||||||
| Income (loss) after income taxes | (961,174 | ) | 41,299 | (4,319,119 | ) | (3,075,241 | ) | |||||||||
| Net income attributable to non-controlling interest | ||||||||||||||||
| Net Income (loss) attributable to the Company | (961,174 | ) | 41,299 | (4,319,119 | ) | (3,075,241 | ) | |||||||||
| Dividend on preferred stock | (109,457 | ) | (106,765 | ) | (325,127 | ) | (318,704 | ) | ||||||||
| Net Income (loss) attributable to common stock holders | (1,070,631 | ) | (65,466 | ) | (4,644,246 | ) | (3,393,945 | ) | ||||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||||
| Foreign exchange translation | 11,902 | (17,979 | ) | (8,247 | ) | (17,406 | ) | |||||||||
| Total Comprehensive Income (loss) | (1,058,729 | ) | (83,445 | ) | (4,652,493 | ) | (3,411,351 | ) | ||||||||
| Basic income (loss) per share | (0.20 | ) | (0.03 | ) | (1.11 | ) | (1.70 | ) | ||||||||
| Diluted income (loss) per share | (0.20 | ) | (0.03 | ) | (1.11 | ) | (1.70 | ) | ||||||||
| Basic weighted average number of common shares outstanding | 5,289,099 | 2,113,227 | 4,172,526 | 1,999,390 | ||||||||||||
| Diluted weighted average number of common shares outstanding | 5,289,099 | 2,113,227 | 4,172,526 | 1,999,390 | ||||||||||||
Results of Operations
Revenues
RevenuesThe following table sets forth information comparing the components of net loss for the three months ended September 30, 2020 decreased by $0.7 million, or 7%, as compared to the three months ended September 30, 2019 mainly due to loss of revenue from existing customers due to COVID-19.
For the three months ended September 30, 20202021 and September 30, 2019, sales to five major customers accounted for 54% and 52% of our total revenue, respectively. For the three months ended September 30, 2019, two of our customers have contributed 23% and 10% of our revenue. For the comparable period in 2019, one of our customers contributed 13% of our revenue. We derived most of our revenues from our customers located in North America for the three months ended September 30, 20202020:
Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating expenses | ||||||||
| Research and development | $ | 1,219,339 | $ | 63,302 | ||||
| General and administrative | 2,123,834 | 426,532 | ||||||
| Depreciation and amortization | 173,696 | - | ||||||
| Operating expenses | 3,516,869 | 489,834 | ||||||
| Loss from operations | (3,516,869 | ) | (489,834 | ) | ||||
| Other income (expense) | ||||||||
| Inducement expense | - | - | ||||||
| Change in fair value of warrants | 804,833 | - | ||||||
| Interest Expense | (370 | ) | (75,501 | ) | ||||
| Total other income (expense) | 804,463 | (75,501 | ) | |||||
| Net Loss | (2,712,406 | ) | (565,335 | ) | ||||
| Other comprehensive loss | ||||||||
| Foreign currency translation | (6,510 | ) | (7,310 | ) | ||||
| Comprehensive loss | $ | (2,718,916 | ) | $ | (572,645 | ) | ||
| Net loss per share – basic and diluted | $ | (0.12 | ) | $ | (0.10 | ) | ||
| Weighted average shares outstanding, basic and diluted | 23,142,780 | 5,861,727 | ||||||
Research and September 30, 2019.Development Expense
One of the Company’s largest customers has terminated the majority of its work as a result of COVID-19. This customer has accounted in the past for annual revenues of between $5 to $7 million dollars. The impact on this quarter is a reduction of approximately $1.5 million in revenue.
Revenues for the nine months ended September 30, 2020 decreased by $4.5 million, or 15%, as compared to the nine months ended September 30, 2019 mainly due to loss of revenue from existing customers due to COVID-19.
For the nine months ended September 30, 2020Research and September 30, 2019, sales to five major customers accounted for 47% and 48% of our total revenue, respectively. Two of our customers contributed 20% and 10% of our revenue for the nine months ended September 30, 2020. For the comparable period in 2019, two of our customers contributed 19% and 10% of our revenue. We derived most of our revenues from our customers located in North America for the nine months ended September 30, 2020 and September 30, 2019.
We are expecting a decrease in revenue from existing clients of approximately $3.5 million, as compared to full year revenue of 2019, during the next 12 months due to COVID-19.
Gross Margin
Our gross margin was 22% for the three months ended September 30, 2020 and 21% for the comparable period in 2019.
Our gross margin was 21% for the nine months ended September 30, 2020 and for the comparable period in 2019.
Our target gross margins in future periods are anticipated to be in the range of 20% to 25% based on a mix of project revenues and professional service revenues. However, there is no assurance that we will achieve such anticipated gross margins.
Selling, General and Administration Expenses
Selling, general and administration (“SG&A”) expenses include all costs, including rent costs, which are not directly associated with revenue-generating activities, as well as the non-cash expense for stock-based compensation. These include employee costs, corporate costs and facilities costs. Employee costs include administrative salaries and related employee benefits, travel, recruiting and training costs. Corporate costs include reorganization costs, legal, accounting and outside consulting fees. Facilities costs primarily include rent and communications costs.
SG&A expenses for the three months ended September 30, 2020 were $2.4 million, as compared to $2.9 million for the three months ended September 30, 2019.
SG&A expenses for the nine months ended September 30, 2020 were $7.8 million, as compared to $9.1 million for the nine months ended September 30, 2019.
Depreciation and Amortization
Depreciation and amortization expense amounted to $0.6 million for the three months ended September 30, 2020 and three months ended September 30, 2019 and $1.6 million for the nine months ended September 30, 2020 and $1.7 million for nine months ended September 30, 2019. We capitalized the customer lists acquired during various acquisitions, resulting in increased amortization costs. The customer lists from each acquisition are amortized over a period of 60 months.
Operating Income (Loss)
Our operating loss was $1.1 million for the three months ended September 30, 2020, as compared to $1.6 million for the three months ended September 30, 2019.
Our operating loss was $3.9 million for the nine months ended September 30, 2020 and $4.3 million for the nine months ended September 30, 2019.
We expect the COVID-19 pandemic to negatively impact our operations for the remainder of the fiscal year and for the next twelve months. One of the Company’s largest customers has terminated the majority of its work as a result of COVID-19. This customer has accounted in the past for annual revenues of between $5 to $7 million dollars. The impact on this quarter is a reduction of approximately $1.5 million in revenue.
Interest Expense
Our interestdevelopment expense for the three months ended September 30, 20202021 was $(0.1) million$1,219,339 compared to $63,302 for the comparable period of the prior year, an increase of $1,156,037 or approximately 1,826%. This increase resulted from costs incurred from increased product development activities relating to our CBD combination therapies for treatment of radiation dermatitis and glioblastoma, in the current year, as compared to $0.3 millionthe comparable period of the prior year.
General and Administrative Expenses
General and administrative expenses were $2,123,834 for the three months ended September 30, 2019.2021 as compared to $426,532 for the comparable period of the prior year, representing an increase of $1,897,302, or approximately 398%. The increase was due to stock based compensation costs of $458,308 being incurred in the current quarter with no comparable costs being incurred in the prior year’s comparable period, combined with increased human resource, insurance, legal and regulatory compliance costs as compared to the comparable period of the prior year.
Our interest expenseDepreciation and Amortization
Depreciation and amortization for ninethe three months ended September 30, 20202021 was $0.4 million$173,696, as compared to $0.6 millionzero for the comparable period of the prior year. This expense is related to licenses acquired by the Company subsequent to September 30, 2020, with acquisition of such licenses being a prerequisite for recognition of such amortization expenses as well as depreciation expenses recorded from fixed assets employed in the operations of Enveric Biosciences Canada Inc. since September 16, 2021, the effective date of the Company’s amalgamation with MagicMed.
Change in Fair Value of Warrants
Change in fair value of warrants contributed $804,833 to other income for the three months ended September 30, 2021, as compared to zero for the comparable period of the prior year. This other income (expense) item is related to warrant liabilities which were granted subsequent to September 30, 2020, with the granting of such warrant derivatives being a prerequisite for recognition of such other income (expense). The change in fair value of derivative instruments is determined in large part by the change in the closing price of the Company’s stock at the end of the period, as compared to the beginning of the period, with a strong inverse correlation between the fair value of such derivatives and the trading price of the Company’s common stock.
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Interest Expense
Interest expense for the three months ended September 30, 2021 was $370 compared to $75,501 for the comparable period of the prior year, a decrease of $75,131 or almost 100%. This decrease was primarily due to interest expenses incurred in relation to promissory notes which were effective during the quarter ended September 30, 2020, but retired prior to the quarter ended September 30, 2021, resulting in costs being incurred in the prior year period, but not in the current year period.
Foreign Currency Translation
The Company incurs foreign currency translation gains (losses) as a result of the conversion of Canadian Dollars into United States Dollars for payment and valuation of United States Dollar denominated expenses. Foreign currency translation (loss) was $(6,510) for the three months ended September 30, 2021 as compared to $(7,310) for the comparable period of the prior year, a decrease in other expenses of $800, or approximately 11%. The decrease in this other expense is due to fluctuations in the price of the U.S. Dollar against the Canadian Dollar.
The following table sets forth information comparing the components of net loss for the nine months ended September 30, 2019.2021 and the comparable period in 2020:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating expenses | ||||||||
| Research and development | $ | 2,295,826 | $ | 134,259 | ||||
| General and administrative | 10,864,696 | 1,959,785 | ||||||
| Depreciation and amortization | 484,355 | - | ||||||
| Operating expenses | 13,644,877 | 2,094,044 | ||||||
| Loss from operations | (13,644,877 | ) | (2,094,044 | ) | ||||
| Other income (expense) | ||||||||
| Inducement expense | (298,714 | ) | - | |||||
| Change in fair value of warrants | 7,077,376 | - | ||||||
| Interest Expense | (5,191 | ) | (388,143 | ) | ||||
| Total other income (expense) | 6,773,471 | (388,143 | ) | |||||
| Net Loss | (6,871,406 | ) | (2,482,187 | ) | ||||
| Other comprehensive gain (loss) | ||||||||
| Foreign currency translation | (4,036 | ) | (30,077 | ) | ||||
| Comprehensive loss | $ | (6,875,442 | ) | $ | (2,512,264 | ) | ||
| Net loss per share – basic and diluted | $ | (0.34 | ) | $ | (0.43 | ) | ||
| Weighted average shares outstanding, basic and diluted | 20,325,782 | 5,733,360 | ||||||
LiquidityResearch and Capital ResourcesDevelopment Expense
Our cash positionResearch and development expense for the nine months ended September 30, 2021 was $2,295,826 compared to 134,259 for the comparable period of the prior year, an increase of $2,161,567 or approximately $2.8 million1,610%. This increase resulted from costs incurred from increased product development activities relating to our CBD combination therapies for treatment of radiation dermatitis and glioblastoma, in the current year, as compared to the comparable period of the prior year.
General and Administrative Expenses
General and administrative expenses were $10,864,696, for the nine months ended September 30, 2021 as compared to $1,959,785 for the comparable period of the prior year, representing an increase of $8,904,911, or approximately 454%. This increase was primarily due to stock based compensation costs of $4,592,748 being incurred in the current period with no comparable costs being incurred in the prior year’s comparable period, combined with increased human resource, insurance, legal and regulatory compliance costs, as compared to the comparable period of the prior year.
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Depreciation and Amortization
Amortization of intangible assets for the nine months ended September 30, 2021 was $484,355, as compared to zero for the comparable period of the prior year. This expense is primarily related to licenses acquired by the Company subsequent to September 30, 2020, with acquisition of such licenses being a prerequisite for recognition of such amortization expenses.
Change in Fair Value of Warrants
Change in fair value of warrants contributed $7,077,376 to other income for the nine months ended September 30, 2021, as compared to $0.4 millionzero for the comparable period of the prior year. This other income (expense) item is related to warrant liabilities which were granted subsequent to September 30, 2020, with the granting of such warrant derivatives being a prerequisite for recognition of such other income (expense). The change in fair value of derivative instruments is determined in large part by the change in the closing price of the Company’s stock at the end of the period, as compared to the beginning of December 31, 2019.the period, with a strong inverse correlation between the fair value of such derivatives and the trading price of the Company’s common stock.
Cash usedInterest Expense
Interest expense for operating activitiesthe nine months ended September 30, 2021 was $3.9 million$5,191 compared to $388,143 for the comparable period of the prior year, a decrease of $382,952, or approximately 99%. This decrease was primarily due to interest expenses incurred in relation to promissory notes which were effective during the nine months ended September 30, 2020, and was primarilybut retired prior to the nine months ended September 30, 2021, resulting in costs being incurred in the prior year period, but not in the current year period.
Foreign Currency Translation
The Company incurs foreign currency translation gains (losses) as a result of net changesthe conversion of Canadian Dollars into United States Dollars for payment and valuation of United States Dollar denominated expenses. Foreign currency translation gain (loss) was a loss of $4,036 for the nine months ended September 30, 2021 as compared to a loss of $30,077 for the comparable period of the prior year, a decrease in other loss of $26,041. The decrease in this other loss is due to fluctuations in the price of the U.S. Dollar against the Canadian Dollar.
Liquidity and Capital Resources
The Company has incurred continuing losses from its operations. As of September 30, 2021, the Company had an accumulated deficit of $18,630,963 and working capital requirements. of $20,118,730. Since inception, the Company’s operations have been funded principally through the issuance of debt and equity.
On September 16, 2021, the Company completed the Amalgamation. In connection with the Amalgamation, the Company received $3,055,327 in cash from the MagicMed treasury. As of September 30, 2021, the Company had cash on hand of $21,448,426.
We believe that, as a result of these transactions, we currently have sufficient cash and financing commitments to meet our funding requirements over the next year. Notwithstanding, we expect that we will need to raise additional financing to accomplish our development plan over the next several years. We may seek to obtain additional funding through debt or equity financing in the future. There are no assurances that we will be able to raise capital on terms acceptable to us or at all, or that cash flows generated from our operations will be sufficient to meet our current operating costs. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other factors beyond our control. The COVID-19 pandemic has caused an unstable economic environment globally. Disruptions in the global financial markets may adversely impact the availability and cost of credit, as well as our ability to raise money in the capital markets. Current economic conditions have been and continue to be volatile. Continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our financial condition and operating results.
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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, 2021 and 2020
The following table sets forth a summary of cash flows for the periods presented:
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (7,390,358 | ) | $ | (1,638,798 | ) | ||
| Net cash provided by investing activities | 2,380,327 | - | ||||||
| Net cash provided by financing activities | 24,899,652 | 1,932,196 | ||||||
| Effect of foreign exchange rate on cash | (19,655 | ) | 3,786 | |||||
| Net increase in cash | $ | 19,869,966 | $ | 297,184 | ||||
Operating Activities
Net cash used in investingoperating activities was $0.04 million$7,390,358 during the nine months ended September 30, 2020. Cash provided2021, which consisted primarily of a net loss of $6,841,407, increased by financingnon-cash expenses, totaling a net of $1,464,823, including stock based compensation of $4,829,484, depreciation and amortization expense of $484,355, inducement expense of $298,714, decreased by non-cash income, consisting of change in fair value of warrant derivatives of $7,077,376, and increased by a net of $945,872 due to changes in operating assets and liabilities.
Net cash used in operating activities by loans and rights issue was $6.3 million$1,638,798 during the nine months ended September 30, 2020.2020, which consisted primarily of a net loss of $2,482,187, offset by amortization of note discount of $285,858 and increases in accounts payable and accrued liabilities of $522,162.
Liquidity ConcernsInvesting Activities
As ofNet cash provided by investing activities during the nine months ended September 30, 2020, we had negative working capital2021 was $2,380,328 and consisted of $2.7 million and cash of $2.8 million. Our principal sources$3,055,328 of cash received in connection with the closing of the Amalgamation, offset by $675,000 of cash paid for the acquisition of intellectual property from Diverse Bio.
The Company did not have included bank borrowings,any investing activities during the private placement of shares and net bank borrowings. To increase revenues, our operating expenses are likely to continue to grow and, as a result, we will need to generate significant additional revenues to cover such expenses.
Our financial statements as ofnine months ended September 30, 2020 have been prepared under2020.
Financing Activities
Net cash provided by financing activities was $24,899,652 during the assumption that we will continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funding through the issuancenine months ended September 30, 2021, which consisted primarily of equity or debt securities, as well as to attain further operating efficiencies and, ultimately, to generate additional revenues. Our financial statements do not include any adjustments that might result$21,614,488 in net proceeds from the outcomesale of this uncertainty. Althoughcommon stock and proceeds from the Company believes inexercise of warrants of $3,285,164.
Net cash provided by financing activities was $1,932,196 during the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The foregoing conditions raise substantial doubt about our ability to continue as a going concern.
Available Credit Facility, Borrowings and Repayment of Debt
As of September 30, 2020, we had approximately $3.1 million in borrowings outstanding under our senior secured credit facility (the “Credit Facility”), which provided for up to $8 million in principal for revolving loans (the “Revolving Loans”) for general working capital purposes.
In addition, we have an outstanding aggregate of $815,342.46 million in 1% convertible unsecured debentures (the “1% Debentures”), which were issued to one of accredited investors. The 1% Debentures bear interest at 1% per annum and are convertible at $1.75 per share.
Accounts Receivable
Accounts receivable for the periodnine months ended September 30, 2020, were $7.6 million as compared to $6.4 million as on December 31, 2019which consisted primarily of $50,000 in proceeds from convertible notes payable, $1,812,410 in proceeds from note payable, $227,500 in proceeds from the increase was mainly due to delaysale of common stock and warrants, net of offering costs and a decrease of $157,714 in payment by our customers due to the COVID-19 pandemic.repayment of note payable.
Accounts Payable
Accounts payable for the period ended September 30, 2020 were $4.6 million as compared to $4.7 million as on December 31, 2019. The increase in Accounts payable is due to delay in payments to our vendors.
Accrued Expense
Accrued expenses for the period ended September 30, 2020 were $1.9 million as compared to $2.1 million as on December 31, 2019. These expenses reflect obligations associated with work that has been performed but not yet billed, and will be paid in the 4th quarter. It is a rotational liability associated with the gap in timing between work performed and invoices paid.
Operating Activities
Our largest source of operating cash flows is cash collections from our customers. Our primary uses of cash for operating activities are for personnel-related expenditures, leased facilities and taxes.
Off- BalanceOff-Balance Sheet Arrangements
We doThe Company did not have any off-balance sheet arrangements.financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets, or any obligation arising out of a material variable interest in an unconsolidated entity. The Company does not have any subsidiaries to include or otherwise consolidate into the financial statements. Additionally, the Company does not have interests in, nor relationships with, any special purpose entities.
ImpactCritical 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 3 to its financial statements for the year ended December 31, 2020 and included in the Annual Report on Form 10-K, filed with SEC on April 1, 2021. The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of Inflation
WeAmerica (“U.S. GAAP”) for interim financial information. Accordingly, they do not believe that inflation hadinclude 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 significant impact on our resultsfair presentation of operations for the periods presented. On an ongoing basis, we attempt to minimize any effects of inflation on ourfinancial position and operating results by controlling operating costs and, whenever possible, seeking to ensure that billing rates reflect increases in costs due to inflation.
For all significant foreign operations, the functional currency is the local currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period end. Statements of Operations accounts are translated at the exchange rate prevailing as of the date of the transaction. The gains or losses resulting from such translation are reported under accumulated other comprehensive income (loss) as a separate component of equity. Realized gains and losses from foreign currency transactions arehave been included in other income, net for the periods presented.
Recent Accounting Pronouncements
See Note 2 to ourCompany’s unaudited condensed consolidated financial statementsstatements.
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Warrant Liability
The Company accounts for additional information.
Critical Accounting Policies
Revenue Recognition. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topicswarrants for shares of the ASC.Company’s common stock that are not indexed to its own stock as liabilities at fair value on the unaudited condensed consolidated balance sheet. Such warrants are subject to remeasurement at each unaudited condensed consolidated balance sheet date and any change in fair value is recognized as a component of other expense on the unaudited condensed consolidated statement of operations. The core principleCompany will continue to adjust the liability for changes in fair value until the earlier of the guidance isexercise or expiration of such common stock warrants. At that an entity should recognize revenuetime, the portion of the warrant liability related to depictsuch common stock warrants will be reclassified to additional paid-in capital.
Recent Accounting Standards
Management does not believe that any recently issued, but not yet effective accounting standards, when adopted, will have a material effect on the transfer of promised goods or services to customers in an amount that reflectsaccompanying financial statements, other than those disclosed below.
In December 2019, the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2016-12, Revenue from Contracts with Customers2019-12, Income Taxes (Topic 606)— Narrow-Scope Improvements and Practical Expedients. This update clarifies740: Simplifying the objectives of collectability, sales and other taxes, noncash consideration, contract modifications at transition, completed contracts at transition and technical correction. The amendments in this update affect the guidance in Accounting for Income Taxes (“ASU 2014-09. In September 2017, the FASB issued additional amendments providing clarification and implementation guidance.
The Company adopted this guidance and related amendments as of the first quarter of fiscal 2018, applying the full retrospective transition method. As the underlying principles of the new standard, relating2019-12”), which removes certain exceptions to the measurement of revenue andgeneral principles in Topic 740. ASU 2019-12 is effective for the timing of recognition, are closely alignedfiscal years beginning after December 15, 2020, with the Company’s current business model and practices, theearly adoption permitted. The adoption of ASU 2014-09this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
In addition,October 2020, the adoptionFASB issued ASU 2020-10, “Codification Improvements.” The new accounting rules improve the consistency of ASC 606 did not impact the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings.
We recognize revenues as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenues, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligationsCodification by including all disclosure guidance in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligationsappropriate Disclosure Section (Section 50) that had only been included in the contract, and (5) recognize revenues when a performance obligation is satisfied. We account for a contract when it has approval and commitment from all parties, the rightsOther Presentation Matters Section (Section 45) of the parties are identified, payment terms are identified,Codification. Additionally, the contract has commercial substancenew rules also clarify guidance across various topics including defined benefit plans, foreign currency transactions, and collectability of consideration is probable. We apply judgment in determininginterest expense. The new accounting rules were effective for the customer’s ability and intention to pay based on a variety of factors including the customer’s historical payment experience.
For performance obligations where control is transferred over time, revenues are recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided.
Revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services are recognized as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. Revenues related to fixed-price application maintenance, testing and business process services are recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered. If our invoicing is not consistent with value delivered, revenues are recognized as the service is performed based on the cost to cost method described above. The cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information; such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflectedCompany in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately.
Revenues related to our time-and-materials, transaction-based or volume-based contracts are recognized over the period the services are provided either using an output method such as labor hours, or a method that is otherwise consistent with the way in which value is delivered to the customer.
Revenues also include the reimbursementfirst quarter of out-of-pocket expenses.
We may enter into arrangements that consist of multiple performance obligations. Such arrangements may include any combination of our deliverables. To the extent a contract includes multiple promised deliverables, we apply judgment to determine whether promised deliverables are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised deliverables are accounted for as a combined performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the customer. When not directly observable, we typically estimate standalone selling price by using the expected cost plus a margin approach. We typically establish a standalone selling price range for our deliverables, which is reassessed on a periodic basis or when facts and circumstances change.
We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist.2021. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.
Prior to the adoption of the New Revenue Standard on January 1, 2018, revenues were earned and recognized when all of the following criteria were met: evidence of an arrangement existed, the price was fixed or determinable, the services had been rendered and collectability was reasonably assured. Contingent or incentive revenues were recognized when the contingency was satisfied and we concluded the amounts were earned. Volume discounts were recorded as a reduction of revenues as services were provided. Revenues also included the reimbursement of out-of-pocket expenses.
For the nine months ended September 30, 2020 and September 30, 2019, sales to five major customers accounted for 47% and 48% of our total revenue, respectively. Two of our customers contributed 20% and 10% of our revenue for the nine months ended September 30, 2020. For the comparable period in 2019, Two of our customers contributed 19% and 10% of our revenue.
Stock-Based Compensation. Stock-based compensation expense for awards of equity instruments to employees and non-employee directors is determined based on the grant-date fair value of those awards. We recognize these compensation costs net of an estimated forfeiture rate over the requisite service period of the award. Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.
Warrant Liability. The Company accounts for the warrants issued in July 2018 in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with private placements of securities has been estimated using the warrants quoted market price.
Impairment. Long-lived assets, which include property, plant and equipment, and certain other assets to be held and used by us, are reviewed when events or changes in circumstances indicate that the carrying amount of the assets maynew accounting rules did not be recoverable based on estimated future cash flows. If this assessment indicates that the carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining useful lives, an impairment loss is recognized based on the fair value of the asset.
Income Taxes. We provide for income taxes utilizing the asset and liability method of accounting. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated with a deferred income tax asset will not be realized, a valuation allowance is provided. The effect on deferred income tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Tax benefits earned on employee stock awards in excess of recorded stock-based compensation expense are credited to additional paid-in capital. Our provision for income taxes also includes the impact of provisions established for uncertain income tax positions, as well as the related interest.
Accounts Receivable. We extend credit to clients based upon management’s assessment of their credit-worthiness on an unsecured basis. We provide an allowance for uncollectible accounts based on historical experience and management evaluation of trend analysis. We include any balances that are determined to be uncollectible in allowance for doubtful accounts.
Business Combination. We account for business combinations using the acquisition method, which requires the identification of the acquirer, the determination of the acquisition date and the allocation of the purchase price paid by the acquirer to the identifiable tangible and intangible assets acquired, the liabilities assumed, including any contingent consideration and any non-controlling interest in the acquiree at their acquisition date fair values. Goodwill represents the excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in our consolidated financial statements from the acquisition date.
Goodwill and Purchased Intangibles. We evaluate goodwill and purchased intangible assets for impairment at least annually, or as circumstances warrant. Goodwill is evaluated at the reporting unit level by comparing the fair value of the reporting unit with its carrying amount. For purchased intangible assets, if our annual qualitative assessment indicates possible impairment, we test the assets for impairment by comparing the fair value of such assets to their carrying value. In determining the fair value, we utilize various estimates and assumptions, including discount rates and projections of future cash flows. If an impairment is indicated, a write down to the implied fair value of goodwill or fair value of intangible asset is recorded.
Valuation of Contingent Earn-out Consideration. Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.the Company’s unaudited condensed consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments in ASU No. 2021-04 provides guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, including interim periods within those fiscal years. As a result, the Company will not be required to adopt ASU 2021-04 until January 1, 2022. The Company is currently evaluating the impact of the adoption of this principle on the Company’s unaudited condensed consolidated financial statements.
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. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Foreign Currency TranslationRisk
The reporting currency of the Company is the United States dollar, while the functional currency of our subsidiaries, Enveric Biosciences Canada Inc. and Jay Pharma, Inc., is the Canadian dollar. As a result, the Company is subject to exposure from changes in the exchange rates of the Canadian dollar and the United States dollar.
The Company translateshas 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 financial statements into U.S. Dollars using the year or reporting period end or average exchange rates in accordance with the requirements of ASC 830, Foreign Currency Matters. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented.exposures. The cumulative translation adjustment is includedCompany may, however, hedge such exposure to foreign currency fluctuations in the accumulated other comprehensive gain (loss) within stockholders’ equity (deficit).future.
Special Note Regarding Forward-Looking Information
Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below.
The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance, including statements concerning our 2020 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization, new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “anticipated,” “expectation,” “continued,” “future,” “forward,” “potential,” “estimate,” “estimated,” “forecast,” “project,” “encourage,” “opportunity,” “goal,” “objective,” “could,” “expect,” “expected,” “intend,” “plan,” “planned,” or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-Q.
Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.
Not applicable.Item 3. Quantitative and qualitative disclosures about market risk
From inception through December 31, 2020, the reporting currency of the Company was the United States dollar while the functional currency of the Company was the Canadian dollar. From January 1, 2021 through September 30, 2021, the reporting currency of the Company remained the United States dollar, with a portion of transactions being denominated in Canadian dollars. As a result, the Company is subject to exposure from changes in the exchange rates of the Canadian dollar and the U.S. dollar.
The Company 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
Management’s Report on
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information we are required to be discloseddisclose in our reports filedthat we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified inunder the SEC’s 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 for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurancedisclosures. A material weakness is a deficiency, or combination of achieving the desired control objectives, and our management is required to apply its judgmentdeficiencies, in evaluating the cost-benefit relationship of possible controls and procedures. Because of its inherent limitations, internal control over financial reporting, maysuch that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not preventbe prevented or detect misstatements. Therefore, even those systems determineddetected on a timely basis. The matters that management identified in our Annual Report on Form 10-K for the year ended December 31, 2020, filed on April 1, 2021, continued to be effective can provide only reasonable assurance with respect toexist and were still considered material weaknesses in our internal control over financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.reporting at September 30, 2021.
As required by Ruleparagraph (b) of Rules 13a-15 and 15d-15 under the Securities Exchange Act, of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, we haveour 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 Company’s disclosure controls and procedures. Thisprocedures as of September 30, 2021. Based on this evaluation, was carried out underand in light of the supervision and with the participation ofmaterial weaknesses found in our Company’s management, includinginternal controls over financial reporting, our Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company’s Chief Executive Officer and Chief Financial Officer concluded that our company’s disclosure controls and procedures are improving(as defined in termsparagraph (e) of effectivenessRules 13a-15 and 15d-15 under the Exchange Act) were not effective as of September 30, 2021.
Management’s Remediation Plan
As previously discussed in our Annual Report on Form 10-K for the endyear ended December 31, 2020, filed on April 1, 2021, management had concluded that our internal control over financial reporting was not effective as of December 31, 2020, because management identified inadequate segregation of duties to ensure the period covered by this report as noted belowprocessing, review, and authorization of all transactions, including non-routine transactions resulting in management’s report ondeficiencies, which, in aggregate, amounted to a material weakness in the Company’s internal control over financial reporting. In the past,
As of September 30, 2021, there were effectiveness issues largely duecontrol deficiencies which 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 fact thatmaterial weakness to determine the appropriate remedy and have established procedures for documenting disclosures and disclosure controls.
While we were acquiring privately held companieshave taken certain actions to address the material weaknesses identified, additional measures may be necessary as a partwe work to improve the overall effectiveness of our growth strategy and our control proceduresinternal controls over all acquired subsidiaries were largely manualfinancial reporting.
Changes in nature. However we have deployed all of our business on a consolidated professional services automation platformInternal Control over Financial Reporting
Other than the changes discussed above in the quarter concluding 30-Sep-2020. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies. ThereRemediation 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 the period covered by this reportquarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures are made in accordance with authorizations of management and our directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. As a result of this assessment, our management concluded that, as of September 30, 2020, our internal control over financial reporting was not yet effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This is largely due to the fact that we previously acquired multiple privately held companies as part of our growth strategy and our control procedures over all acquired subsidiaries will not be effective until such time as we are able to fully integrate the acquisition with our company and set processes and procedures for the acquired entities. We are working to improve and harmonize our financial reporting controls and procedures across all of our companies.
This Quarterly Report on Form 10-Q does not include an attestation report of our independent auditors regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent auditors pursuant to temporary rules of the SEC that permit our company to provide only management’s report in this Quarterly Report on Form 10-Q.
Inherent Limitations on Effectiveness of Controls
Internal control over financial reporting has inherent limitations which include but is not limited to the use of independent professionals for advice and guidance, interpretation of existing and/or changing rules and principles, segregation of management duties, scale of organization and personnel factors. Internal control over financial reporting is a process, which involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis, however these inherent limitations are known features of the financial reporting process and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the third quarter ended in 2020 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
PART II -II. OTHER INFORMATION
We are not currently a party to any pendingItem 1. Legal proceedings
The Company is periodically involved in legal proceeding, nor is our property the subject of a pendingproceedings, legal proceeding, that is notactions and claims arising in the ordinary course of businessbusiness. We do not have any pending litigation that, separately or otherwisein the aggregate, would, in the opinion of management, have a material to theadverse effect on our financial conditionposition, results of our business.operations or cash flows.
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Our business, financial condition, results of operations,
Item 1A. Risk factors
Political, economic, and cash flowsmilitary instability in Israel may be impacted by a number of factors, many of which are beyondimpede our control, including those set forth in our Form 10-K, the occurrence of any one ofdevelopment programs, which could have a material adverse effect on our actual results.business.
ThereWe plan to conduct a clinical cancer study consisting of a Phase 1/2 study in Israel of oral synthetic CBD extract, given alone or in combination with clomiphene concurrently with dose-dense temolozomide chemotherapy for patients with recurrent or progressive GBM, designed as an open label, two-arm, randomized prospective study. We are currently waiting on primary approval from the Israeli Ministry of Health, Center for Cannabis (Yakar) to proceed with such study. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. In May 2021, hostilities between Israel and Hamas escalated and there has been no material changescross-border attacks in Israel and Gaza, including rocket attacks targeting Tel Aviv, where some of our key partners for the planned GBM study are located. The ongoing conflict and any hostilities involving Israel or political, economic, and military conditions in Israel and the surrounding region may directly affect our ability to the Risk Factors previously disclosedobtain approvals needed for our GBM study and cause interruptions or delays in our Form 10-K, except as noted below.
Our results of operations couldconducting such study or future studies we may conduct in Israel for an indeterminate time. Any armed conflicts, terrorist activities, or political instability in the future be materially adversely affected by the global coronavirus pandemic (COVID-19).
The global coronavirus pandemic (COVID-19) has created significant volatility in the price ofregion could impeded our common stock, uncertainty in customer demand for our services, and widespread economic disruption. The extent todevelopment programs, which the coronavirus pandemic will impact our business, operations and financial results will depend on numerous factors that are frequently changing or unknown, and that we may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ responses or planned responses to the pandemic; the impact of the pandemic on economic activity and any interventions intended to mitigate decreased economic activity; thecould have a material adverse effect on our customers and customer demand for our products, services, and solutions; our ability to sell and provide our products, services, and solutions, including as a result of travel restrictions, personnel working from home or with diminished technology and communication abilities, and social distancing; the ability of our customers to pay timely, if at all, for our services and solutions with or without discounts requested by our customers; and closures of our and our customers’ offices and facilities. The closure of our customers’ facilities, restrictions that prevent our customers from accessing those facilities or their own customers, and broad disruptions in our customers’ markets and customer base, has disrupted, and could in the future disrupt the demand for our products, services, and solutions and result in, among other things, termination of customer contracts, delays or interruptions in the performance of contracts, losses of revenues, and an increase in bad debts. Customers may also slow or halt decision making, delay planned work, or suspend, terminate, or reduce existing contracts or services. Indeed, one of the Company’s largest customers has terminated the majority of its work as a result of COVID-19. This customer has accounted in the past for annual revenues of between $5 to $7 million dollars. The impact on this quarter is a reduction of approximately $1.5 million in revenue. Travel and immigration restrictions may delay or prevent our personnel from accessing worksites, and work-from-home or remote working arrangements could reduce profitability or increase information security and connectivity vulnerabilities. In addition, when COVID-19-related restrictions on business are eased, our ability to deliver services to our customers could be affected by any outbreak of illness among employees returning to our facilities or to our customers’ facilities. Moreover, there may be additional costs that we will have to incur in connection with further changes to, or a return to, normal operating conditions. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2019, including, but not limited to, those relating to our operations in emerging markets, our ability to execute on our growth strategy through strategic acquisitions, our dependency on third parties for network infrastructure, attracting, hiring, and retaining personnel, the effects on movements in foreign currency exchange rates, and the effects that changes to fiscal, political, regulatory and other federal policies may have on our operations, each of which could materially adversely affect our business, financial condition, results of operations and/or stock price.business.
Except as set forth below or previously reported on a Current Report on Form 8-K, we had no unregisteredItem 2. Unregistered sales of equity securities during the three month period ended June 30, 2020.and use of proceeds
On August 14, 2020, the Company issued warrants to purchase up to 36,664 shares of Common Stock to a FINRA-registered broker-dealer and certain individuals associated with the broker-dealer for services related to our August 2020 financing.None.
The warrants were issued in reliance on an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) thereof.
None.Item 3. Defaults upon senior securities
None.
Item 4. Mine safety disclosures
Not applicable.
NoneItem 5. Other information
None.
INDEX TO EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15 or 15(d) 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 on the 16 day of November, 2020.authorized.
| November 12, 2021 | ||
| By: | /s/ | |
| Chief Executive Officer (Principal Executive Officer) | ||