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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 6 Months Ended
Jun. 30, 2023
Accounting Policies [Abstract]  
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principal of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. Management’s opinion is that all adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2022, and related notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023 and subsequently amended on Form 10-K/A Amendment No. 1 filed with the SEC on June 9, 2023 (as amended, the “Annual Report”).

 

The Company’s significant accounting policies and recent accounting standards are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2022. There were no significant changes to these accounting policies during the three and six months ended June 30, 2023.

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and expenses during the periods reported. By their nature, these estimates are subject to measurement uncertainty and the effects on the financial statements of changes in such estimates in future periods could be significant. Significant areas requiring management’s estimates and assumptions include determining the fair value of transactions involving common stock and the valuation of stock-based compensation, accruals associated with third party providers supporting research and development efforts, and estimated fair values of long lived assets used to record impairment charges related to intangible assets. Actual results could differ from those estimates.

 

Foreign Currency Translation

 

From inception through June 30, 2023, the reporting currency of the Company was the United States dollar while the functional currency of certain of the Company’s subsidiaries were the Canadian dollar and Australian dollar. For the reporting periods ended June 30, 2023 and 2022, the Company engaged in a number of transactions denominated in Canadian dollars and Australian dollars. As a result, the Company is subject to exposure from changes in the exchange rates of the Canadian dollar and Australian dollar against the United States dollar.

 

The Company translates the assets and liabilities of its Canadian subsidiaries and Australian subsidiary into the United States dollar at the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at the average exchange rate in effect during each monthly period. Unrealized translation gains and losses are recorded as foreign currency translation gain (loss), which is included in the condensed consolidated statements of shareholders’ equity as a component of accumulated other comprehensive loss.

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company has not entered into any financial derivative instruments that expose it to material market risk, including any instruments designed to hedge the impact of foreign currency exposures. The Company may, however, hedge such exposure to foreign currency exchange fluctuations in the future.

 

Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in other comprehensive loss in the condensed consolidated statements of operations and comprehensive loss as incurred.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times, may exceed the federal depository insurance coverage of $250,000 in the United States and Australia and $100,000 in Canada. The Company has not experienced losses on these accounts, and management believes the Company is not exposed to significant risks on such accounts. As of June 30, 2023, the Company had greater than $250,000 at United States financial institutions.

 

Warrant Liability and Investment Options

 

The Company evaluates all of its financial instruments, including issued stock purchase warrants and investment options, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company accounts for warrants and investment options for shares of the Company’s common stock that are not indexed to its own stock as derivative liabilities at fair value on the unaudited condensed consolidated balance sheets. The Company accounts for common stock warrants and investment options with put options as liabilities under ASC 480. Such warrants and investment options are subject to remeasurement at each unaudited condensed consolidated balance sheet date and any change in fair value is recognized as a component of other expense on the unaudited condensed consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of such common stock warrants and investment options. At that time, the portion of the warrant liability and investment options related to such common stock warrants will be reclassified to additional paid-in capital.

 

Derivative Liability

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC 815. For derivative financial instruments that are accounted for as assets or liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the unaudited condensed consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as assets or liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the unaudited condensed consolidated balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.

 

Income Taxes

 

The Company files U.S. federal and state returns. The Company’s foreign subsidiary also files a local tax return in their local jurisdiction. From a U.S. federal, state, and Canadian perspective, the years that remain open to examination are consistent with each jurisdiction’s statute of limitations.

 

 

 ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). The computation of basic net loss per share for the three and six months ended June 30, 2023 and 2022 excludes potentially dilutive securities. The computations of net loss per share for each period presented is the same for both basic and fully diluted. In accordance with ASC 260 “Earnings per Share” (“ASC 260”), penny warrants were included in the calculation of weighted average shares outstanding for the purposes of calculating basic and diluted earnings per share.

 

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share the three and six months ended June 30, 2023 and 2022 because the effect of their inclusion would have been anti-dilutive.

 

  

For the three and six months ended June 30, 2023

  

For the three and six months ended June 30, 2022

 
Warrants to purchase shares of common stock   655,463    655,463 
Restricted stock units - vested and unissued   55,622    56,071 
Restricted stock units - unvested   180,115    94,550 
Restricted stock awards - vested and unissued   708    909 
Restricted stock awards - unvested   —    65 
Investment options to purchase shares of common stock   1,070,000    — 
Options to purchase shares of common stock   36,579    22,829 
Total potentially dilutive securities   1,998,487    829,887 

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

 

Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.

 

Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 - Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

 

For certain financial instruments, including cash and accounts payable, the carrying amounts approximate their fair values as of June 30, 2023, and December 31, 2022 because of their short-term nature.

 

The following table provides the financial liabilities measured on a recurring basis and reported at fair value on the balance sheet as of June 30, 2023, and December 31, 2022, and indicates the fair value of the valuation inputs the Company utilized to determine such fair value of warrant liabilities, derivative liability, and investment options:

 

 

 ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   Level   June 30, 2023   December 31, 2022 
Warrant liabilities - January 2021 Warrants  3   $145   $81 
Warrant liabilities - February 2021 Warrants  3    147    79 
Warrant liabilities - February 2022 Warrants  3    368,087    185,055 
Fair value of warrant liability      $368,379   $185,215 

 

   Level   June 30, 2023   December 31, 2022 
Derivative liability - May 2022  3   $—   $727,000 
Fair value of derivative liability      $—   $727,000 

 

   Level   June 30, 2023   December 31, 2022 
H.C. Wainwright & Co., LLC investment options  3   $84,812   $44,904 
RD investment options  3    648,312    302,289 
PIPE investment options  3    1,080,520    503,815 
Fair value of investment option liability      $1,813,644   $851,008 

 

The warrant liabilities, derivative liability, and investment options are all classified as Level 3, for which there is no current market for these securities such as the determination of fair value requires significant judgment or estimation. Changes in fair value measurement categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

Subsequent measurement

 

The following table presents the changes in fair value of the warrant liabilities, derivative liability, and investment options that are classified as Level 3:

 

   Total Warrant Liabilities 
Fair value as of December 31, 2022  $185,215 
Change in fair value   183,164 
Fair value as of June 30, 2023  $368,379 

 

   Total Derivative Liability 
Fair value as of December 31, 2022  $727,000 
Change in fair value arising from redemption of Akos Series A Preferred Stock - See Note 8   (727,000)
Fair value of derivative liability as of June 30, 2023  $— 

 

   Total Investment Option Liability 
Fair value as of December 31, 2022  $851,008 
Change in fair value   962,636 
Fair value of investment option liability as of June 30, 2023  $1,813,644 

 

 

ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The key inputs into the Black Scholes valuation model for the Level 3 valuations of the warrant liabilities as of June 30, 2023 are below:

 

   January 2021 Warrants   February 2021 Warrants   February 2022 Warrants   February 2022 Post-Modification Warrants 
Term (years)   2.5    2.6    3.6    4.6 
Stock price  $3.37   $3.37   $3.37   $3.37 
Exercise price  $247.50   $245.00   $27.50   $7.78 
Dividend yield   —%   —%   —%   —%
Expected volatility   80.0%   79.0%   76.0%   87.0%
Risk free interest rate   4.70%   4.60%   4.40%   4.20%
Number of warrants   36,429    34,281    338,000    122,000 
Value (per share)  $—   $—   $0.45   $1.78 

 

The key inputs into the Black Scholes valuation model for the Level 3 valuations of the investment options as of June 30, 2023 are below:

 

   H.C. Wainwright & Co., LLC Options   RD Offering Options   PIPE Offering Options 
Term (years)   4.1    4.6    4.6 
Stock price  $3.37   $3.37   $3.37 
Exercise price  $10.00   $7.78   $7.78 
Dividend yield   —%   —%   —%
Expected volatility   77.0%   85.0%   85.0%
Risk free interest rate   4.30%   4.20%   4.20%
Number of investment options   70,000    375,000    625,000 
Value (per share)  $1.21   $1.73   $1.73 

 

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

 

   May 2022 Derivative Liability 
Principal  $— 
Dividend rate   —%
Market rate   —%

 

At the date of the redemption of the of Akos Series A Preferred Stock in May 2023, the derivative liability fair value was $0 due to the probability of a spin-off occurring was zero. See Note 8

 

Redeemable Non-controlling Interest

 

In connection with the issuance of Akos Series A Preferred Stock, the Akos Purchase Agreement (as defined below in Note 8) and certificate of designation contain a put right guaranteed by the Company as defined in Note 8. Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. As a result of this feature, the Company recorded the non-controlling interests as redeemable non-controlling interests and classified them in mezzanine equity within its unaudited condensed consolidated balance sheet initially at its acquisition-date estimated redemption value or fair value. In addition, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument by accreting the embedded derivative at each reporting period over 12 months.

 

In May 2023, pursuant to the Akos Series A Preferred Certificate of Designations, the holders of the Akos Series A Preferred Stock exercised the Put Right (as defined below) requiring Akos to force redemption of all of the Akos Series A Preferred Stock. See Note 8.

 

Segment Reporting

 

The Company determines its reporting units in accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”). The Company evaluates a reporting unit by first identifying its operating segments under ASC 280. The Company then evaluates each operating segment to determine if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable, when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically similar and, if so, the operating segments are aggregated. The Company has multiple operations related to psychedelics and cannabinoids. Both of these operations exist under one reporting unit: Enveric. The Company has one operating segment and reporting unit. The Company is organized and operated as one business. Management reviews its business as a single operating segment, using financial and other information rendered meaningful only by the fact that such information is presented and reviewed in the aggregate.

 

 

 ENVERIC BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, and should be applied on a full or modified retrospective basis. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company early adopted ASU 2020-06 effective January 1, 2023, and has determined that the adoption of this guidance had no impact on its condensed consolidated financial statements.