Enveric Biosciences, Inc. 10-K

Item 7. Management’s discussion and analysis of financial condition and results of operations References to the “Company,” “our,” “us,” or “we” in this section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Enveric” refer to Enveric Biosciences, Inc. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements involving risks and uncertainties and should be read together with the “Risk Factors” and the “Cautionary Statement Regarding Forward-Looking Statements” sections of this Annual Report on Form 10-K. Such risks and uncertainties could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. 58 Business Overview We are a biotechnology company dedicated to the development of novel small-molecule therapeutics for the treatment of anxiety, depression, and addiction disorders. We seek to improve the lives of patients suffering from cancer, initially by developing palliative and supportive care products for people suffering from certain side effects of cancer and cancer treatment such as pain or skin irritation. We currently intend to offer such palliative and supportive care products in the United States, following approval through established regulatory pathways. Psychedelics Following our amalgamation with MagicMed completed in September 2021 (the “Amalgamation”), we have continued to pursue the development of MagicMed’s proprietary psychedelic derivatives library, the Psybrary™ which we believe will help us to identify and develop the right drug candidates needed to address mental health challenges, including anxiety. We synthesize novel versions of classic psychedelics, such as psilocybin, N-dimethyltryptamine (DMT), mescaline and MDMA, using a mixture of chemistry and synthetic biology, resulting in the expansion of the Psybrary™, which includes 15 patent families with over a million potential variations and hundreds of synthesized molecules. Within the Psybrary™ we have three different types of molecules, Generation 1 (classic psychedelics), Generation 2 (pro-drugs), and Generation 3 (new chemical entities). The Company is working to add novel psychedelic molecular compounds and derivatives (“Psychedelic Derivatives”) on a regular basis through our work at Enveric Labs in Calgary, Alberta, Canada, where we have a team of PhD scientists with expertise in synthetic biology and chemistry. To date we have created over 500 molecules that are housed in the Psybrary™. We screen newly synthesized molecules in the Psybrary™ through PsyAI™, a proprietary artificial intelligence (AI) tool. Leveraging AI systems is expected to reduce the time and cost of pre-clinical, clinical, and commercial development. We believe it streamlines pharmaceutical design by predicting ideal binding structures of molecules, manufacturing capabilities, and pharmacological effects to help determine ideal drug candidates, tailored to each indication. Each of these molecules that we believe are patentable can then be further screened to see how changes to its makeup alter its effects in order to synthesize additional new molecules. New compounds of sufficient purity are undergoing pharmacological screening, including non-clinical (receptors/cell lines), preclinical (animal), and ultimately clinical (human) evaluations. We intend to utilize our Psybrary™ and the AI tool to categorize and characterize the Psybrary™ substituents to focus on bringing more psychedelics-inspired molecules from discovery to the clinical phase. Cannabinoids We aim to advance a pipeline of novel cannabinoid combination therapies for the side effects of cancer treatments, such as chemotherapy and radiotherapy. We intend to bring together leading oncology clinicians, researchers, academic and industry partners to develop both external proprietary products and a robust internal pipeline of product candidates aimed at improving quality of life and outcomes for cancer patients. We intend to evaluate options to out-license our proprietary technology as it moves along the regulatory pathway. 59 In developing our product candidates, we intend to focus on cannabinoids derived from non-hemp botanical sources, and synthetic materials containing no tetrahydrocannabinol (THC) in order to comply with U.S. federal regulations. Of the potential cannabinoids to be used in therapeutic formulations, THC, which is responsible for the psychoactive properties of marijuana, can result in undesirable mood effects. Selected cannabidiol (CBD) and cannabigerol (CBG) candidates, on the other hand, have amounts of THC well below 0.1% and are not psychotropic and therefore more attractive candidates for translation into therapeutic practice. Drugs with less than 0.1% THC have a history, when approved as drugs by FDA, of being able to be rescheduled by DEA from Schedule I to Schedule V, as in the case of Epidiolex and Marinol. In the future, we may utilize cannabinoids that are derived from cannabis plants, which may contain higher amounts of THC; however, we only intend to do so in jurisdictions where THC is legal. However, synthetic THC is a Schedule I controlled substance; so, the use of any APIs (Active Pharmaceutical Ingredients) containing synthetic THC (or naturally derived THC in concentrations greater than 0.3%) may increase regulatory scrutiny and require additional expenses and authorizations. All current and future product candidates that we are developing or may develop will be tested for safety and efficacy under an IND application and subject to the Food and Drug Administration (“FDA”) pre-market approval process for new drugs. While we continue to pursue the development of our cannabinoid-based product candidates, our principal focus is on the development of psychedelic-based treatments. On May 11, 2022, the Company announced plans to transfer and spin-off its cannabinoid clinical development pipeline assets (the “Spin-Off”) to Akos Biosciences, Inc. (formerly known as Acanna Therapeutics, Inc.), a majority owned subsidiary of the Company (“Akos”). In connection with the Spin-Off, the Company would transfer its cannabinoid clinical development pipeline assets to Akos, while retaining its psychedelics clinical development pipeline assets. Recent Developments Reverse Stock Split On July 14, 2022, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of Delaware to effect a 1-for-50 reverse stock split of the shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), either issued and outstanding or held by the Company as treasury stock, effective as of 4:05 p.m. (New York time) on July 14, 2022 (the “Reverse Stock Split”). The Company held a special meeting of stockholders (the “Special Meeting”), during which the Company’s stockholders approved the amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s common stock at a ratio in the range of 1-for-10 to 1-for-100, with such ratio to be determined by the Company’s board of directors (the “Board”) and included in a public announcement. Following the meeting, the Board determined to effect the Reverse Stock Split at a ratio of 1-for-50 and approved the corresponding final form of the Certificate of Amendment. As a result of the Reverse Stock Split, every 50 shares of issued and outstanding Common Stock were automatically combined into one issued and outstanding share of Common Stock, without any change in the par value per share. No fractional shares were issued as a result of the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the next whole number. The Reverse Stock Split reduced the number of shares of Common Stock outstanding from 52,684,548 shares to 1,054,043 shares. The number of authorized shares of Common Stock under the Certificate of Incorporation remained unchanged at 100,000,000 shares. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the Reverse Stock Split described above. Proportionate adjustments were made to the per share exercise price and the number of shares of Common Stock that may be purchased upon exercise of outstanding stock options granted by the Company, and the number of shares of Common Stock reserved for future issuance under the Company’s 2020 Long-Term Incentive Plan. February 2022 Offering On February 15, 2022, we completed a public offering of 400,000 shares of Common Stock and warrants to purchase up to 400,000 shares of Common Stock for gross proceeds of approximately $10 million, before deducting underwriting discounts and commissions and other offering expenses. A.G.P./Alliance Global Partners acted as sole book-running manager for the offering. In addition, we granted the underwriter a 45-day option to purchase up to an additional 60,000 shares of Common Stock and/or warrants to purchase up to an additional 60,000 shares of Common Stock at the public offering price, which the underwriter has partially exercised for warrants to purchase up to 60,000 shares of Common Stock. All the securities being sold in the offering were offered by Enveric. At closing, we received net proceeds from the offering of approximately $9.1 million, after deducting underwriting discounts and commissions and estimated offering expenses with $5.8 million allocated to equity, $3.6 million to warrant liability and $0.3 million recorded as an expense. 60 Series C Preferred Shares On May 3, 2022, the Board of Directors (the “Board”) declared a dividend of one one-thousandth of a share of the Company’s Series C Preferred Stock (“Series C Preferred Stock”) for each outstanding share of Common Stock held of record as of 5:00 p.m. Eastern Time on May 13, 2022 (the “Record Date”). This dividend was based on the number of outstanding shares of Common Stock prior to the Reverse Stock Split. The outstanding shares of Series C Preferred Stock were entitled to vote together with the outstanding shares of the Company’s Common Stock, as a single class, exclusively with respect to a proposal giving the Board the authority, as it determines appropriate, to implement a reverse stock split within twelve months following the approval of such proposal by the Company’s stockholders (the “Reverse Stock Split Proposal”), as well as any proposal to adjourn any meeting of stockholders called for the purpose of voting on the Reverse Stock Split Proposal (the “Adjournment Proposal”). The Company held a special meeting of stockholders on July 14, 2022 (the “Special Meeting”) for the purpose of voting on, among other proposals, a Reverse Stock Split Proposal and an Adjournment Proposal. All shares of Series C Preferred Stock that were not present in person or by proxy at the Special Meeting were automatically redeemed by the Company immediately prior to the opening of the polls at Special Meeting (the “Initial Redemption”). All shares that were not redeemed pursuant to the Initial Redemption were redeemed automatically upon the approval by the Company’s stockholders of the Reverse Stock Split Proposal at the Special Meeting (the “Subsequent Redemption” and, together with the Initial Redemption, the “Redemption”). Each share of Series C Preferred Stock was entitled to receive $0.10 in cash for each 10 whole shares of Series C Preferred Stock immediately prior to the Redemption. As of August 12, 2022, both the Initial Redemption and the Subsequent Redemption occurred. As a result, as of December 31, 2022, no shares of Series C Preferred Stock remain outstanding. The Company was not solely in control of redemption of the shares since the holders had the option of deciding whether to return a proxy card for the Special Meeting, which determine whether a given holder’s shares of Series C Preferred Stock were redeemed in the Initial Redemption or the Subsequent Redemption. Since the redemption of the Series C Preferred Stock was not solely in the control of the Company, the preferred shares are classified within temporary equity in the Company’s consolidated balance sheets. The preferred shares were initially measured at redemption value. As of December 31, 2022, no shares of Series C Preferred Stock are outstanding. Spin-Off and Related Private Placement In connection with the planned Spin-Off, on May 5, 2022, Akos and the Company entered into a Securities Purchase Agreement (the “Akos Purchase Agreement”) with an accredited investor (the “Akos Investor”), pursuant to which Akos agreed to sell up to an aggregate of 5,000 shares of Akos’ Series A Convertible Preferred Stock, par value $0.01 per share (the “Akos Series A Preferred Stock”), at price of $1,000 per share, and warrants (the “Akos Warrants”) to purchase shares of Akos’ common stock, par value $0.01 per share (the “Akos Common Stock”), for an aggregate purchase price of up to $5,000,000 (the “Akos Private Placement”). The Akos Purchase Agreement is guaranteed by the Company. Pursuant to the Akos Purchase Agreement, Akos has issued 1,000 shares of the Akos Series A Preferred Stock to the Akos Investor in exchange for $1,000,000 on May 5, 2022. The additional $4,000,000 will be received on or immediately prior to the Spin-Off. The issuance of the Akos Series A Preferred Stock results in a non-controlling interest (“NCI”) (see Note 2). Palladium Capital Advisors, LLC (“Palladium”) acted as placement agent for the Private Placement. Pursuant to the Akos Purchase Agreement, Akos has agreed to pay Palladium a fee equal to 9% of the aggregate gross proceeds raised from the sale of the shares of the Akos Series A Preferred Stock and a non-accountable expense allowance of 1% of the aggregate gross proceeds raised the sale of the Akos Series A Preferred Stock in the Akos Private Placement. The fee due in connection with the Akos Private Placement shall be paid to Palladium in the form of convertible preferred stock and warrants on similar terms to the securities issued in the Akos Private Placement. As of December 31, 2022, there have been no accruals recorded for the fees or warrants since the closing of the spin-off is not probable. Palladium is also entitled to warrants to purchase Akos Common Stock in an amount up to 8% of the number of shares of Akos Common Stock underlying the shares issuable upon conversion of the Akos Series A Preferred Stock. 61 Under the Certificate of the Designations, Preferences and Rights of Series A Convertible Preferred Stock of Akos (the “Akos Series A Preferred Certificate of Designations”), on or immediately prior to the completion of the Spin-Off, the outstanding Akos Series A Preferred Stock will be automatically converted into a number of shares of Akos Common Stock equal to 25% of the then issued and outstanding Akos Common Stock, subject to the Beneficial Ownership Limitation (as defined below). The Akos Series A Preferred Certificate of Designations provides that upon the earlier of (i) the one-year anniversary of May 5, 2022, and only in the event that the Spin-Off has not occurred; or (ii) such time that Akos and the Company have abandoned the Spin-Off or the Company is no longer pursuing the Spin-Off in good faith, the holders of the Akos Series A Preferred Stock shall have the right (the “Put Right”), but not the obligation, to cause Akos to purchase all or a portion of the Akos Series A Preferred Stock for a purchase price equal to $1,000 per share, subject to certain adjustments as set forth in the Akos Series A Preferred Certificate of Designations (the “Stated Value”), plus all the accrued but unpaid dividends per share. Pursuant to the Akos Purchase Agreement, the Company has guaranteed the payment of the purchase price for the shares purchased under the Put Right. In addition, after the one-year anniversary of May 5, 2022, and only in the event that the Spin-Off has not occurred and Akos is not in material default of any of the transaction documents, Akos may, at its option, at any time and from time to time, redeem the outstanding shares of Akos Series A Preferred Stock, in whole or in part, for a purchase price equal to the aggregate Stated Value of the shares of Akos Series A Preferred Stock being redeemed and the accrued and unpaid dividends on such shares. The Akos Series A Preferred Certificate of Designations contains limitations that prevent the holder thereof from acquiring shares of Akos Common Stock upon conversion of the Akos Series A Preferred Stock that would result in the number of shares of Akos Common Stock beneficially owned by such holder and its affiliates exceeding 9.99% of the total number of shares of Akos Common Stock outstanding immediately after giving effect to the conversion (the “Beneficial Ownership Limitation”), except that upon notice from the holder to Akos, the holder may increase or decrease the limit of the amount of ownership of outstanding shares of Akos Common Stock after converting the holder’s shares of Akos Series A Preferred Stock, provided that any change in the Beneficial Ownership Limitation shall not be effective until 61 days following notice to Akos. In connection with the Spin-Off, the Company would transfer its cannabinoid clinical development pipeline assets to Akos, while retaining its psychedelics clinical development pipeline assets. As of December 31, 2022, there is no accrual recorded since the closing of the spin-off is not probable. Amendment to 2020 Long-Term Incentive Plan On May 3, 2022, our Board adopted the First Amendment (the “Plan Amendment”) to the Enveric Biosciences, Inc. 2020 Long-Term Incentive Plan (the “Incentive Plan”) to (i) increase the aggregate number of shares available for the grant of awards by 146,083 shares to a total of 200,000 shares, and (ii) add an “evergreen” provision whereby the number of shares authorized for issuance pursuant to awards under the Incentive Plan will be automatically increased on the first trading date immediately following the date the Company issues any share of Common Stock (defined below) to any person or entity, to the extent necessary so that the number of shares of the Company’s Common Stock authorized for issuance under the Incentive Plan will equal the greater of (x) 200,000 shares, and (y) 15% of the total number of shares of the Company’s Common Stock outstanding as of such issuance date. The Plan Amendment was approved by the Company’s stockholders at a special meeting of the Company’s stockholders held on July 14, 2022. July 2022 Offerings On July 22, 2022, the Company entered into a securities purchase agreement (the “Registered Direct Securities Purchase Agreement”) with an institutional investor for the purchase and sale of 116,500 shares of Common Stock, pre-funded warrants to purchase up to 258,500 shares of common stock, and unregistered preferred investment options (the “RD Preferred Investment Options”) to purchase up to 375,000 shares of Common Stock (the “RD Offering”). The gross proceeds from the RD Offering were approximately $3,000,000. Shares of Common Stock and RD Pre-Funded Warrants issued in the RD Offering were offered pursuant to a “shelf” registration statement on Form S-3 previously filed with the SEC on July 2, 2021. Subject to certain ownership limitations, the PIPE Pre-Funded Warrants became immediately exercisable at an exercise price equal to $0.0001 per share of Common Stock. There is not expected to be any trading market for the common warrants issued in the RD Offering. On August 3, 2022, all of the issued RD Pre-Funded Warrants were exercised. Subject to certain ownership limitations, the RD Preferred Investment Options became immediately exercisable at an exercise price equal to $7.78 per share of common stock. The RD Preferred Investment Options are exercisable for five and one-half years from the date of issuance. 62 Concurrently with the RD Offering, the Company entered into a securities purchase agreement (the “PIPE Securities Purchase Agreement”) with institutional investors for the purchase and sale of 116,000 shares of common stock, pre-funded warrants to purchase up to 509,000 shares of Common Stock, and preferred investment options (the “PIPE Preferred Investment Options”) to purchase up to 625,000 shares of the common stock in a private placement (the “PIPE Offering”). The gross proceeds from the PIPE Offering were approximately $5,000,000. Subject to certain ownership limitations, the PIPE Pre-Funded Warrants became immediately exercisable at an exercise price equal to $0.0001 per share of Common Stock. There is not expected to be any trading market for the common warrants issued in the PIPE Offering. All of the issued PIPE Pre-Funded Warrants were exercised on various dates prior to August 18, 2022. Subject to certain ownership limitations, PIPE Preferred Investment Options became immediately exercisable at an exercise price equal to $7.78 per share of common stock. The PIPE Preferred Investment Options are exercisable for five and one-half years from the date of issuance. The RD offering and PIPE Offering closed on July 26, 2022, with aggregate gross proceeds of approximately $8 million. The aggregate net proceeds from the offerings, after deducting the placement agent fees and other estimated offering expenses, were approximately $7.1 million. On July 26, 2022, in connection with the RD Offering and PIPE Offering, the Company issued preferred investment options (the “Placement Agent Preferred Investment Options”) to an entity to purchase up to 70,000 shares of Common Stock for acting as a placement agent. The Placement Agent Preferred Investment Options have substantially the same terms as the RD Preferred Investment Options and the PIPE Preferred Investments Options, except the Placement Agent Preferred Investment Options have an exercise price of $10.00 per share. The Placement Agent Preferred Investment Options are exercisable for five years from the date of issuance. In connection with the RD Offering and the PIPE, the Company entered into Warrant Amendment Agreements (the “Warrant Amendments”) with the investors in both offerings to amend certain existing warrants to purchase up to an aggregate of 122,000 shares of Common Stock that were previously issued to the investors on February 15, 2022, with an exercise price of $27.50 per share and expiration date of February 15, 2027. Pursuant to the Warrant Amendments, the previously issued warrants were amended, effective upon the closing of the offerings, so that the amended warrants have a reduced exercise price of $7.78 per share and expire five and one-half years following the closing of the offerings. The Company determined the fair value of the February 2022 Warrants immediately prior to the Warrant Amendment and the fair value of the amended warrants immediately after the Warrant Amendment. The incremental change in fair value was deemed to be $251,357, which was included as equity issuance costs related to the RD and PIPE financing transactions. Financial Overview We are a pre-revenue biotech company that has to date, not generated any revenues. During the year ended December 31, 2022, we raised approximately $18.2 million from the sales of Common Stock, warrants, preferred investment options, and redeemable non-controlling interest, and from proceeds realized from the exercise of cash warrants. These amounts were the primary source of funds upon which our operations were financed. Research and Development Expenses Research and development expenses consist primarily of costs incurred for the research and development of our preclinical product candidates, and include, without limitation: ● employee-related expenses, including salaries, benefits and share-based compensation expense; ● expenses incurred under agreements with contract research organizations, contract manufacturing organizations, and consultants and other entities engaged to support our product research and development activities; ● the cost of acquiring, developing and manufacturing materials and lab supplies used in research and development activities; ● facility, equipment, depreciation and other expenses, which include, without limitation direct and allocated expenses for rent, maintenance of our facilities and equipment, insurance and other supplies; ● costs associated with preclinical activities and regulatory operations, including, without limitation, patent related costs; ● consulting and professional fees associated with research and development activities. 63 We expense research and development costs to operations as incurred. Research and development activities are central to our business model. We utilize a combination of internal and external efforts to advance product development from early-stage work to future clinical trial manufacturing and clinical trial support. External efforts include work with consultants and increasingly substantial work at CROs and CMOs. We support an internal research and development team and our facility in Calgary, Alberta, Canada. To move these programs forward along our development timelines, a large portion (approximately 75%) of our staff are research and development employees. Because of the numerous risks and uncertainties associated with product development, however, we cannot determine with certainty the duration and completion costs of these or other current or future preclinical studies and clinical trials. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. General and Administrative Expenses General and administrative expenses consist principally of salaries, benefits and related costs such as share-based compensation for personnel and consultants in executive, finance, business development, corporate communications and human resource functions, facility costs not otherwise included in research and development expenses, accounting and audit costs, tax compliance costs, SEC compliance costs, investor relation costs, training and conference costs, insurance costs and legal fees. We anticipate that our general and administrative expenses will increase in the future as they relate to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission requirements, director and officer liability insurance, investor relations costs and other costs associated with being a public company. Impairment of Intangible Assets and Goodwill Intangible assets consist of the Psybrary™ and Patent Applications, In Process Research and Development (“IPR&D”) and license agreements. Psybrary™ and Patent Applications intangible assets are valued using the relief from royalty method. The cost of license agreements is amortized over the economic life of the license. The Company assesses the carrying value of its intangible assets for impairment each year. During the year ended December 31, 2021, the Company acquired intangible assets, valued at approximately $35.5 million relating to the Psybrary™ and Patent Applications and IPR&D. Goodwill consists of the excess fair value after the allocation to the identifiable net assets. During the years ended December 31, 2022 and 2021, the Company recorded goodwill in aggregate of approximately $— and $9.8 million, consisting of $— and $9.1 million being specifically attributable to the deferred tax liabilities incurred and $— and $0.8 million relating to the residual intangible asset that generates earnings in excess of a normal return on all other tangible and intangible asset, respectively. The Company performs an annual impairment test of intangible assets and goodwill as of December 31 of each fiscal year. As of December 31, 2022, the Company qualitatively assessed whether it is more likely than not that the respective fair value of the Company’s intangible assets and goodwill is less than its carrying amount. Beginning in the fourth quarter of 2021 and throughout 2022, the Company experienced a sustained decline in the quoted market price of its Common Stock and as a result the Company determined that as of December 31, 2022 and 2021 it was more likely than not that the carrying value of these acquired intangibles exceeded their estimated fair value. Accordingly, the Company performed an impairment analysis as of December 31, 2022 and 2021 using the income approach. This analysis required significant judgments, including primarily the estimation of future development costs, the probability of success in various phases of its development programs, potential post launch cash flows and a risk-adjusted weighted average cost of capital. Pursuant to Accounting Standard Update (“ASU”) 2017-04, the Company recorded an impairment of intangible assets of approximately $6.0 million and $30.5 million, and an impairment of goodwill of approximately $1.5 million and $8.2 million for the years ended December 31, 2022 and 2021, respectively. 64 Stock-Based Compensation A significant portion of our operating expenses is related to stock-based compensation costs. Stock based compensation costs were approximately $2.6 million and $12.6 million for the years ended December 31, 2022 and 2021, respectively. Stock based compensation consists of restricted stock units (“RSU”), restricted stock awards (“RSA”) and options to purchase shares of the Company’s common stock. The Company follows Accounting Standards Codification (“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. The fair value of RSU or RSA awards is determined by the closing price per share of the Company’s common stock on the date of the award. The Company uses the Black-Scholes option pricing model to determine the grant date fair value of options issued. RSU’s and RSA’s may contain vesting conditions that include, without limitation, any or all of the following: immediate vesting, vesting over a defined time period, vesting based on specific volume weighted average price levels being achieved by the Company’s common stock as publicly traded within specified measurement periods, and vesting based on the achievement of specific performance milestones. Options contain vesting conditions that provide for vesting over a defined time period. The fair value of RSU’s, RSA’s and options, is charged to expense, on a straight line basis over the vesting periods defined in the award agreements, except for the fair value which is attributable to achievement a specific performance milestones, which are charged to expense upon achievement of such milestones. Change in fair value of warrant liabilities, investment options and derivative liabilities The Company evaluates all 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. “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The Company accounts for warrants for shares of the Company’s common stock that are not indexed to its own stock as derivative liabilities at fair value on the consolidated balance sheet. The Company adjusts this derivative liability at each reporting period, with the liability recorded on the balance sheet being equal to fair value of such liability on the relevant balance sheet date. Fair value of derivative liabilities is determined in accordance with ASC 820-10 “Fair Value Measurement”. As of December 31, 2022 and 2021, the fair value of the embedded derivative liabilities was determined using weighted-average scenario analysis and the fair value of warrant liabilities was determined using the Black-Scholes valuation model, both of which are level 3 methods, as defined in ASC 820-10. Derivative liabilities with an initial fair value of approximately $8.3 million and $10.0 million were recorded during the years ended December 31, 2022 and 2021, respectively, which were attributable to certain warrants issued as part the Company’s sales of common stock and warrants in February 2022, embedded derivatives issued as part of the Company’s convertible preferred stock issuance in May 2022, and investment options issued in July 2022. All of the derivative liabilities recorded during 2021 were attributable to certain warrants issued as part of the Company’s sales of common stock and warrants in January and February 2021. During the years ended December 31, 2022 and 2021, an aggregate increase in value of derivative liabilities of approximately $7.5 million and $9.3 million, respectively, was recorded, resulting in other income equal to such amount. The fair value of these derivative liabilities has a strong correlation to the price per share of the Company’s common stock as publicly traded. Increases in the Company’s price per share will result in increased derivative liabilities, with a corresponding other expense being recorded in the other income (expense) section of the statement of operations and comprehensive loss. Decreases in the Company’s price per share will result in decreased derivative liabilities, with a corresponding other income being recorded in the other income (expense) section of the statement of operations and comprehensive loss. Key Components of Our Results of Operations Operating Expenses Our operating expenses include, without limitation, research and development, employee compensation and payroll taxes, employee benefits, insurance costs, facility costs, laboratory supplies, office expenses, conference and meeting costs, travel expenses, cyber costs, financial statement preparation services, tax compliance, various consulting and director fees, legal services, auditing fees, stock-based compensation, impairment of intangible assets, depreciation of equipment and amortization of intangible assets. These expenses have increased in connection with the Company’s expanded product development activities which significantly increased as a result of the Amalgamation Agreement in 2021 and the Company’s management expects these expenses to continue at current or increased levels as the Company continues to execute its product development plans. Since the Amalgamation occurred during 2021, the Company incurred a full year of product development activities related to MagicMed during the year ended December 31, 2022. 65 Results of Operations The following table sets forth information comparing the components of net loss for the years ended December 31, 2022 and 2021: For the Years Ended December 31, 2022 2021 Operating expenses General and administrative $ 11,605,761 $ 20,499,052 Research and development 8,027,773 4,788,807 Impairment of intangible assets and goodwill 7,453,662 38,678,918 Depreciation and amortization 327,910 656,643 Total operating expenses 27,415,106 64,623,420 Loss from operations (27,415,106 ) (64,623,420 ) Other income (expense) Inducement expense — (1,125,291 ) Change in fair value of warrant liabilities 4,315,236 9,327,326 Change in fair value of investment option liability 3,472,726 — Change in fair value of derivative liability (325,000 ) — Interest expense (5,249 ) (10,316 ) Total other income 7,457,713 8,191,719 Net loss before income taxes $ (19,957,393 ) $ (56,431,701 ) Income tax benefit 1,486,060 7,454,805 Net loss (18,471,333 ) (48,976,896 ) Less preferred dividends attributable to non-controlling interest 33,014 — Less deemed dividends attributable to accretion of embedded derivative at redemption value 295,976 — Net loss attributable to shareholders (18,800,323 ) (48,976,896 ) Other comprehensive loss Foreign currency translation (505,932 ) 150,475 Comprehensive loss $ (19,306,255 ) $ (48,826,421 ) Net loss per share - basic and diluted $ (13.00 ) $ (103.69 ) Weighted average shares outstanding, basic and diluted 1,446,007 472,343 66 Known Trends or Uncertainties The current inflationary trend existing in the North American economic environment is considered by Management to be reasonably likely to have a material unfavorable impact on results of continuing operations. Higher rates of price inflation, as compared to recent prior levels of price inflation have caused a general increase the cost of labor and materials. In addition, there is an increased risk of the Company experiencing labor shortages as a result of a potential inability to attract and retain human resources due to increased labor costs resulting from the current inflationary environment. General and Administrative Expenses Our general and administrative expenses decreased to $11,605,761 for the year ended December 31, 2022 from $20,499,052 for the year ended December 31, 2021, a decrease of $8,893,291, or 43%. This change was primarily driven by a decrease in stock-based compensation of $10,162,593, a decrease in legal fees of $1,676,798, and other general and administrative expenses of $16,683. This is slightly offset by an increase in professional fees, which consist of audit, accounting, and director fees, of $1,076,415, an increase in transaction expenses related to capital raises of $735,044, an increase in salaries and wages of $379,119, and an increase in marketing expenses of $309,142. The decrease in stock-based compensation is due to two employees who received approximately $10,000,000 in share-based compensation during the year ended December 31, 2021, whose RSU shares were fully vested and expensed during 2021 and received no share-based compensation during the year ended December 31, 2022. The decrease in legal fees is due to the Company incurring a significant amount of legal fees related to the Amalgamation of MagicMed in 2021, which were not incurred during the year ended December 31, 2022. The increase in salaries and wages is due to MagicMed employees earning salaries for a full year during 2022, compared with approximately 3.5 months in 2021 after the Amalgamation of MagicMed occurred. Research and Development Expenses Our research and development expense for the year ended December 31, 2022 was $8,027,773 as compared to $4,788,807 for the year ended December 31, 2021 with an increase of $3,238,966, or approximately 68%. This increase was primarily driven by increased product development activities during the current year, as compared to the prior year, in particular, research relating to psychedelic molecules, activities which the Company was not engaged in during the prior year. In addition, $1,026,907 of stock-based compensation expense was allocated to research and development for the year ended December 31, 2022, compared to $840,644 for the year ended December 31, 2021. Depreciation and Amortization Expense Depreciation and amortization expense for the year ended December 31, 2022 was $327,910 as compared to $656,643 for the year ended December 31, 2021, with a decrease of $328,733, or approximately 50%. The decrease in amortization is due to amortization of approximately $525,476 recorded for the Skincare license during the year ended December 31, 2021. The Skincare license was subsequently fully impaired in the fourth quarter of 2021, resulting in no amortization of the Skincare license during 2022. This decrease was offset by an increase in amortization of the Diverse Bio license of $28,125 during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Since the Diverse Bio license was acquired during 2021, it received a partial year of amortization during the year ended December 31, 2021, compared to a full year of amortization during the year ended December 31, 2022. Change in Fair Value of Warrant Liabilities Change in fair value of warrant liabilities for the year ended December 31, 2022 resulted in income of $4,315,236 as compared to $9,327,326 for the year ended December 31, 2021. The change in fair value of warrant liabilities is significantly influenced by the change in the closing price of Common Stock at the end of each period, as compared to the closing price of Common Stock at the beginning of each period with a strong inverse relationship between changes in fair value of warrant liabilities and the trading price of Common Stock. The stock price of the Company was $2.08 as of December 31, 2022, $46.50 as of December 31, 2021, and $213.00 as of December 31, 2020. The stock price of the Company decreased approximately 96% during the year ended December 31, 2022 compared to a decrease of approximately 78% during the year ended December 31, 2021. The significant change in the Company’s stock price during the year ended December 31, 2022 compared to the year ended December 31, 2021, resulted in the significant decrease to the change in fair value of warrant liabilities. 67 Change in Fair Value of Investment Option Liability Change in fair value of investment option liability for the year ended December 31, 2022 resulted in income of $3,472,726. The Company did not have any outstanding investment option liabilities during the year ended December 31, 2021. The change in fair value is due to the significant decrease in the Company’s stock price between the issuance of the investment option liability and December 31, 2022. The Company’s stock price was $6.33 on July 26, 2022 (the date of issuance) and $2.08 on December 31, 2022, a decrease of approximately 67% during that time. Change in Fair Value of Derivative Liability The Company’s change in fair value of derivative liability increased by $325,000 for the year ended December 31, 2022, due primarily to the announcement of the planned spin-off of Akos and greater probability of completion at December 31, 2022. Inducement Expense Inducement expense was $0 for the year ended December 31, 2022 as compared to $1,125,291 for the year ended December 31, 2021. The expenses recorded in 2021 were related to inducement incurred related to the conversion of warrants and options. The Company did not incur such expenses in the current period. Foreign Currency Translation Our foreign currency translation loss for the year ended December 31, 2022 was $505,932 as compared to a gain of $150,475 for the year ended December 31, 2021. Gains and losses on foreign currency translation result from financial transactions of the Company’s two subsidiaries in Canada being recorded in their functional currency of Canadian dollars and then translated to United States dollars at period end for consolidated reporting by the parent company. Going Concern, Liquidity and Capital Resources The Company has incurred a loss since inception resulting in an accumulated deficit of $79,207,786 as of December 31, 2022 and further losses are anticipated in the development of its business. Further, the Company has operating cash outflows of $17,146,723 for the year ended December 31, 2022. For the year ended December 31, 2022, the Company had a loss from operations of $27,415,106. Since inception, being a research and development company, the Company has not yet generated revenue and the Company has incurred continuing losses from its operations. The Company’s operations have been funded principally through the issuance of debt and equity. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. In assessing the Company’s ability to continue as a going concern, the Company monitors and analyzes its cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments. At December 31, 2022, the Company had cash of $17,723,884 and working capital of $14,435,964. The Company’s current cash on hand is not sufficient enough to satisfy its operating cash needs for the 12 months from the filing of this Annual Report on Form 10-K. The Company believes that it has adequate cash on hand to cover anticipated outlays through December 31, 2023. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year after the date the financial statements are issued. Management’s plan to alleviate the conditions that raise substantial doubt include raising additional working capital through public or private equity or debt financings or other sources, which may include collaborations with third parties as well as disciplined cash spending. Adequate additional financing may not be available to us on acceptable terms, or at all. Should the Company be unable to raise sufficient additional capital, the Company may be required to undertake cost-cutting measures including delaying or discontinuing certain operating activities. As a result of these factors, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 68 Amalgamation with MagicMed (Item 1. Business) On May 24, 2021, the Company entered into the Amalgamation Agreement with Holdco and Purchaser and 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), Amalco will be an indirect wholly-owned subsidiary of the Company. The Amalgamation was completed on September 16, 2021. At the Effective Time, holders of the MagicMed Shares received such number of shares of Common Stock representing, together with the Common Stock issuable upon exercise of the Warrants and the Converted Options (each as defined herein), approximately 36.6% of the issued and outstanding Common Stock (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 0.000001 of a share of Common Stock. Following such redemption, the shareholders of MagicMed received additional Common Stock 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 shares of Common Stock 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 199,025 shares of Common Stock representing approximately 31.7% of the Common Stock following the consummation of the Amalgamation. The maximum number of shares of Common Stock to be issued by the Company as in respect of the Warrants and Converted Options shall not exceed 148,083 shares of Common Stock. The aggregate number of shares of Common Stock that the Company issued in connection with the Amalgamation (collectively, the “Share Consideration”) was in excess of 20% of the Company’s pre-transaction outstanding Common Stock. 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 occurred on September 16, 2021. This transaction was cash accretive to the Company, with an aggregate of $3,055,328 in cash being included in the net assets acquired. Cash Flows Since inception, we have primarily used our available cash to fund our product development and operations expenditures. 69 Cash Flows for the Years Ended December 31, 2022 and 2021 The following table sets forth a summary of cash flows for the years presented: For the Years Ended December 31, 2022 2021 Net cash used in operating activities $ (17,146,723 ) $ (11,457,671 ) Net cash (used in) provided by investing activities (584,165 ) 2,190,609 Net cash provided by financing activities 18,180,137 24,899,659 Effect of foreign exchange rate on cash (81,364 ) 144,942 Net increase in cash $ 367,885 $ 15,777,539 Operating Activities Net cash used in operating activities was $17,146,723 during the year ended December 31, 2022, which consisted primarily of a net loss of $18,471,333, non-cash income related to change in fair value of warrant liabilities of $4,315,236, change in fair value of investment option liability of $3,472,726, non-cash income tax benefit of $1,504,302, offset by adjustments to reconcile net loss to cash used in operating activities, which include, without limitation, impairment of intangible assets and goodwill of $7,453,662, stock-based compensation of $2,620,671, change in fair value of derivative liabilities $325,000, amortization of intangible assets of $168,750, depreciation expense of $159,160, and amortization of right-of-use asset of $107,291, and changes in operating assets consisting of decreases in accounts payable and accrued liabilities of $263,686 and right-of-use liability of $107,288 and an increase in prepaid expenses of $374,058. Net cash used in operating activities was $11,457,671 during the year ended December 31, 2021, which consisted primarily of a net loss of $48,976,896, non-cash income related to change in fair value of warrant liability of $9,327,326, and non-cash income tax benefits of $7,454,805, offset by adjustments to reconcile net loss to cash used in operating activities, which include, without limitation, impairment of intangible assets of $38,678,918, stock and options based compensation of $12,597,001, amortization of intangible assets of $643,333 and inducement expense of $1,125,291 and changes in operating assets consisting of decreases in prepaid expenses and other current assets of $826,837 and increases in accounts payable and accrued liabilities of $383,199. Investing Activities Net cash used in investing activities was $584,165 during the year ended December 31, 2022, which consisted of the purchase of property and equipment. Net cash provided by investing activities was $2,190,609 during the year ended December 31, 2021, which consisted of cash accretive acquisition of MagicMed of $3,055,328, offset by the acquisition of intellectual property from Diverse Biotech, Inc. of $675,000 and $189,719 cash used in property and equipment purchases. Financing Activities Net cash provided by financing activities was $18,180,137 during the year ended December 31, 2022, which consisted of $17,222,099 in net proceeds from the sale of Common Stock and warrants and warrant exercises, net of fees, and proceeds from the sale of redeemable non-controlling interest, net of offering costs, of $958,038. Net cash provided by financing activities was $24,899,659 during the year ended December 31, 2021, which consisted of $21,614,488 in cash provided from the sales of Common Stock and $3,285,171 in cash provided by the exercise of cash warrants. Critical Accounting Policies and Significant Judgments and Estimates Critical Accounting Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, costs and expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. 70 Our most significant estimates include determining the fair value of transactions involving common stock and the valuation of stock-based compensation, accruals associated with third party providers supporting research and development efforts, estimated fair values of long lives assets used to record impairment charges related to intangible assets, acquired in-process research and development (“IPR&D”) and goodwill, accounting for preferred stock derivatives and non-controlling interest, and allocation of purchase price in business acquisitions. Our actual results may differ from these estimates under different assumptions and conditions. 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 $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 December 31, 2022, the Company had greater than $250,000 and $100,000 at US and Canadian financial institutions, respectively. Warrant Liability and Preferred Investment Options The Company accounts for warrants and preferred investment options for shares of the Company’s common stock that are not indexed to its own stock as liabilities at fair value on the balance sheet. Such warrants and preferred investment options are subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of other expense on the statement of operations and comprehensive loss. 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 preferred investment options. At that time, the portion of the liability related to such common stock warrants and preferred investment options will be reclassified to additional paid-in capital. Redeemable Non-controlling Interest Applicable accounting guidance requires an equity instrument that is redeemable for cash or other assets to be classified outside of permanent equity if it is redeemable (a) at a fixed or determinable price on a fixed or determinable date, (b) at the option of the holder, or (c) upon the occurrence of an event that is not solely within the control of the issuer. As a result of this feature, the Company recorded the non-controlling interests as redeemable non-controlling interests and classified them in temporary equity within its 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. Impairment of Intangible Assets The Company tests its intangible assets for impairment at least annually and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others and without limitation: a significant decline in the Company’s expected future cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in legal factors or in the business climate of the Company’s segments; unanticipated competition; and slower growth rates. If the fair value determined is less than the carrying amount, an impairment loss is recognized in operating results. Impairment of 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. 71 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The information required by this Item 8 is included at the end of this Annual Report on Form 10-K beginning on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.