Enveric Biosciences, Inc. 10-K

Item 7. Management’s discussion and analysis of financial condition and results of operations References to the “Company,” “Enveric” “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. Business Overview We are a biotechnology company dedicated to the development of novel neuroplastogenic small-molecule therapeutics for the treatment of depression, anxiety, and addiction disorders. Leveraging our unique discovery and development platform, the Psybrary™, we have created a robust intellectual property portfolio of new chemical entities for specific mental health indications. Our lead program, the EVM201 Series, comprises next generation synthetic prodrugs of the active metabolite, psilocin. We are developing the first product from the EVM201 Series – EB-002 – for the treatment of psychiatric disorders. We are also advancing its second program, the EVM301 Series – EB 003 – expected to offer a first-in-class, new approach to the treatment of difficult-to-address mental health disorders, mediated by the promotion of neuroplasticity without also inducing hallucinations in the patient. Psychedelics Following our amalgamation with MagicMed completed in September 2021 (the “Amalgamation”), we have continued to pursue the development of MagicMed’s proprietary psychedelic derivatives library, the Psybrary™ which we believe will help us to identify and develop the right drug candidates needed to address mental health challenges, including anxiety. We synthesize novel versions of classic psychedelics, such as psilocybin, DMT, mescaline and MDMA, using a mixture of chemistry and synthetic biology, resulting in the expansion of the Psybrary™, which includes 15 patent families with over a million potential variations and hundreds of synthesized molecules. Within the Psybrary™ we have three different types of molecules, Generation 1 (classic psychedelics), Generation 2 (pro-drugs), and Generation 3 (new chemical entities). The Company has created over 1,000 novel psychedelic molecular compounds and derivatives (“Psychedelic Derivatives”) that are housed in the Psybrary™. Our current focus is develop our lead molecules EB-002 and EB-003 and to out-license other molecules from the Psybrary™. Akos Spin-Off On May 11, 2022, the Company announced plans to transfer and spin-off its cannabinoid clinical development pipeline assets to Akos Biosciences, Inc. (formerly known as Acanna Therapeutics, Inc.), a majority-owned subsidiary of the Company (hereafter referred to as “Akos”), which was incorporated on April 13, 2022, by way of dividend to Enveric shareholders (the “Spin-Off”). As of May 12, 2023, the holders of the Company’s Akos Series A Preferred Stock, par value $0.01 per share (“Akos Series A Preferred Stock”) have exercised this right to force redemption of all of the Akos Series A Preferred Stock for $1,000 per share, plus accrued but unpaid dividends of $52,057 for a total of $1,052,057. The Company made full payment on May 19, 2023. Recent Developments Australian Subsidiary On March 21, 2023, the Company established Enveric Therapeutics, Pty. Ltd. (“Enveric Therapeutics”), an Australia-based subsidiary, to support the Company’s plans to advance its EVM201 Series towards the clinic. Enveric Therapeutics will oversee the Company’s preclinical, clinical, and regulatory activities in Australia, including ongoing interactions with the local Human Research Ethics Committees (HREC) and the Therapeutic Goods Administration (“TGA”), Australia’s regulatory authority. 51 On March 23, 2023, we issued a press release announcing the selection of Australian CRO, Avance Clinical, in preparation for Phase 1 Study of EB-002, our lead candidate targeting the treatment of anxiety disorders. Under the agreement, Avance Clinical will manage the Phase 1 clinical trial of EB-002 in coordination with our newly established Australian subsidiary, Enveric Therapeutics Pty, Ltd. The Phase 1 clinical trial is designed as a multi-cohort, dose-ascending study to measure the safety and tolerability of EB-002. EB-002, a next-generation proprietary psilocin prodrug, has been recognized as a New Chemical Entity (NCE) by Australia’s Therapeutic Goods Administration (TGA) and is currently in preclinical development targeting the treatment of anxiety disorder. The total cost of the Avance Clinical contract is approximately 3,000,000 AUD, which translates to approximately $2,000,000 as of December 31, 2023. As of December 31, 2023, the Company has paid $1,036,940 of the Avance Clinical contract costs and has accrued $523,284 recorded as accrued liabilities and $239,320 as accounts payable. For the year ended December 31, 2023, the Company has expensed $1,751,444 in research and development expenses. On December 28, 2023, we issued a press release announcing the selection of EB-003 as the lead development candidate from our EVM 301 Series. Our next step is to advance EB-003 into formal pre-clinical studies in support of a future IND filing. Reduction in Force/Restructuring In May 2023, the Company entered into a cost reduction plan, including a reduction in force of approximately 35% of its full-time employees to streamline its operations and conserve cash resources. Additionally, contracts with seven consultants that were focused on the Akos cannabinoid spin-out were terminated. The Company recognized severance charges of $453,059 through December 31, 2023. The plan included a focus on progressing the Company’s existing non-cannabinoid pipeline while reducing the rate of spend and managing cash flow. As of December 31, 2023, the Company has completed the reduction in force, with such severance expenses recorded in salaries and wages and legal accounts. On June 16, 2023, the Company entered into a separation agreement with Avani Kanubaddi, the Company’s President and Chief Operating Officer (the “Kanubaddi Separation Agreement”). Mr. Kanubaddi’s 2023 salary and benefits of $550,974 was accrued and will be paid out in twelve equal monthly installments beginning in July 2023. Upon termination, any unvested time-based RSU’s became fully vested. The Company accelerated expense recognized related to these shares that vested upon termination of $231,273. All of the 11,278 market performance-based RSUs previously granted that were subject to the original terms and conditions of Mr. Kanubaddi’s employment agreement were forfeited during the year ended December 31, 2023. Equity Distribution Agreement On September 1, 2023, the Company entered into a Distribution Agreement, with Canaccord Genuity, LLC (“Canaccord”), pursuant to which the Company may offer and sell from time to time, through Canaccord as sales agent and/or principal, shares of common stock of the Company, par value $0.01 per share having an aggregate offering price of up to $10.0 million. Due to the offering limitations applicable to the Company and in accordance with the terms of the Distribution Agreement, the Company may offer common stock having an aggregate gross sales price of up to $2,392,514 pursuant to the prospectus supplement dated September 1, 2023 (the “Prospectus Supplement”). Subject to the terms and conditions of the Distribution Agreement, Canaccord may sell the common stock by any method permitted by law deemed to be an “at-the-market offering”. The Company will pay Canaccord a commission equal to 3.0% of the gross sales price of the common stock sold through Canaccord under the Distribution Agreement and has also agreed to reimburse Canaccord for certain expenses. The Company may also sell common stock to Canaccord as principal for Canaccord’s own account at a price agreed upon at the time of sale. Any sale of common stock to Canaccord as principal would be pursuant to the terms of a separate terms agreement between the Company and Canaccord. During the year ended December 31, 2023, the Company has issued no shares of common stock through the Distribution Agreement. The Inducement Letters (as defined below) prohibit the Company from entering into any variable rate transaction as defined in the Inducement Letters, including the issuance of (1) any variable priced debt or equity securities or (2) transactions whereby the Company may issue securities at a future determined price, such as through an at-the-market offering or an equity line of credit. The variable rate transaction restriction expires after six-months from the closing date of December 28, 2023 for the Inducement Letters for an issuance through an at-the-market offering, and one-year for the remaining variable rate transactions. On March 8, 2024, the Company entered into a series of common stock purchase agreements for the issuance in a registered direct offering of 228,690 shares of the Company’s common stock, par value $0.01 per share to the Holders (as defined below) of the Inducement Warrants (as defined below). The issuance was made in exchange for the permanent and irrevocable waiver of the variable rate transaction limitation solely with respect to the entry into and/or issuance of shares of common stock in an at-the-market offering contained in the Inducement Letters. 52 Equity Line On November 3, 2023, the Company entered into an equity line by entering into a Purchase Agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company may offer and sell from time to time over a 24-month period, shares of common stock of the Company, par value $0.01 per share, to receive gross proceeds of up to $10.0 million. As required under the Purchase Agreement, the Company registered a resale of 1,140,477 shares of our common stock by Lincoln Park on a registration statement on Form S-1 dated November 8, 2023, which was declared effective by the SEC on December 5, 2023. Subject to the SEC rules and regulations, the Company may register additional shares of our common stock for resale with the SEC pursuant to the Purchase Agreement. Warrant Inducements On December 28, 2023, the Company entered into warrant exercise inducement offer letters (the “Inducement Letters”) with certain holders (the “Holders”) of the February 2022 Post-Modification Warrants and RD and PIPE preferred investment options to purchase shares of the Company’s common stock (the “Existing Warrants and Investment Options”) pursuant to which the Holders agreed to exercise for cash their Existing Warrants and Investment Options to purchase 1,122,000 shares of the Company’s common stock, in the aggregate, at a reduced exercised price of $1.37 per share (from an original exercise price of $7.78 per share), in exchange for the Company’s agreement to sell and issue new warrants (the “Inducement Warrants”) to purchase up to 2,244,000 shares of the Company’s common stock (the “Inducement Warrant Shares”), and the Holders to make a cash payment of $0.125 per Inducement Warrant share for total proceeds of $280,500. The Company received aggregate gross proceeds of $1,817,640 from the exercise of the Existing Warrants and Investment Options by the Holders and the sale of the Inducement Warrants on January 2, 2024. As of December 31, 2023, the exercised and unsettled Existing Warrants and Investment Options by the Holders and the sale of the Inducement Warrants are included in the consolidated balance sheet as a subscription receivable. Due to the beneficial ownership limitation provisions, 704,000 shares of Existing Warrants and Investment Options exercised were initially unissued and held in abeyance for the benefit of the Holder until notice is received from the Holder that the shares may be issued in compliance with such limitation. Subsequent to December 31, 2023, the Company issued all 704,000 shares of common stock of the 704,000 shares of Existing Warrants and Investment Options exercised that were held in abeyance due to the beneficial ownership limitation provisions. The Company engaged Roth Capital Partners, LLC (“Roth”) to act as its financial advisor in connection with the transactions summarized above and will pay Roth approximately $144,000 for its services, in addition to reimbursement for certain expenses. Roth was also issued warrants to purchase up to 67,320 shares of common stock. The Roth Warrants have the same terms as the Inducement Warrants. The grant date fair value of these Roth Warrants was estimated to be $77,991 on December 28, 2023 and were charged to additional paid in capital as issuance costs. The Company also incurred legal fees of $17,254 related to the transactions above that were charged to additional paid in capital as issuance costs. Financial Overview We are a pre-revenue biotech company that has to date, not generated any revenues. During the years ended December 31, 2023 and 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 during the year ended December 31, 2023. 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. 53 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 at 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. In January 2024, the Company reduced its discovery team in Calgary and is primarily focused on the development of EBV 002 and EBV 003 pipeline assets. Sixty percent of the staff are focused on these development activities after the reduction in discovery team. 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 stock-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 decrease in the future due to the reduction in force during the year ended December 31, 2023, which is expected to reduce expenses related to salaries and benefits, director and office liability insurance, and other employee-related costs. 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. 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 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 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 an impairment of goodwill of approximately $1.5 million for the year ended December 31, 2022. There was no impairment of intangible assets or goodwill recorded for the year ended December 31, 2023. Stock-Based Compensation A significant portion of our operating expenses is related to stock-based compensation costs. Stock-based compensation costs were approximately $2.2 million and $2.6 million for the years ended December 31, 2023 and 2022, respectively. Stock-based compensation consists of restricted stock units (“RSU”) 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 restricted stock awards (“RSAs”) 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. 54 RSU’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 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 of 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, 2023 and 2022, 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 were recorded during the year ended December 31, 2022, 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. During the year-end December 31, 2023, there were no derivative liabilities issued. During the years ended December 31, 2023 and 2022, an aggregate decrease in value of derivative liabilities of approximately $1.0 million and $7.5 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. The Company accounts for the inducement to exercise warrants in accordance with ASC Subtopic 470-20-40 “Debt with Conversion and Other Options” (“ASC 470-20-40”). ASC 470-20-40 requires the recognition through earnings of an inducement charge equal to the fair value of the consideration delivered in excess of the consideration issuable under the original conversion terms. Therefore, the Company recognized a loss on the warrant inducement for the issuance of new warrants. The inducement warrants were determined to be equity classified and the fair value was determined using the Black-Scholes valuation model. The grant date fair value of the Inducement Warrants was estimated to be $2,599,552 on December 28, 2023 and the proceeds of $280,500, which were received on January 2, 2024, for the issuance of the Inducement Warrants is reflected as inducement expense, within other expenses on the Company’s consolidated statement of operations and comprehensive loss. 55 Results of Operations The following table sets forth information comparing the components of net loss for the years ended December 31, 2023 and 2022: For the Years Ended December 31, 2023 2022 Operating expenses General and administrative $ 8,852,021 $ 11,605,761 Research and development 7,252,437 8,027,773 Impairment of intangible assets and goodwill — 7,453,662 Depreciation and amortization 343,982 327,910 Total operating expenses 16,448,440 27,415,106 Loss from operations (16,448,440 ) (27,415,106 ) Other (expense) income Inducement expense, net (1,848,235 ) — Change in fair value of warrant liabilities 94,396 4,315,236 Change in fair value of investment option liability 208,752 3,472,726 Change in fair value of derivative liability 727,000 (325,000 ) Interest income (expense), net 3,708 (5,249 ) Total other (expense) income (814,379 ) 7,457,713 Net loss before income taxes $ (17,262,819 ) $ (19,957,393 ) Income tax (expense) benefit (28,913 ) 1,486,060 Net loss $ (17,291,732 ) $ (18,471,333 ) 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 in 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. 56 General and Administrative Expenses Our general and administrative expenses decreased to $8,852,021 for the year ended December 31, 2023 from $11,605,761 for the year ended December 31, 2022, a decrease of $2,753,740, or 24%. This change was primarily driven by decreases in insurance expenses of $1,112,059, salaries and wages of $626,573, transaction expenses of $735,043, stock compensation expense of $351,898, marketing expense of $390,851, and legal fees of $532,563. This is offset by an increase in consulting expenses of $381,786, Delaware Franchise Tax expenses of $247,389, and accounting fees of $255,872. The decrease in insurance expense was due to a reduction in director and officer liability insurance related to the Company’s reduction in force and restructuring during the year ended December 31, 2023. The decrease in salaries and wages was due to the reduction in force during the year ended December 31, 2023. The decrease in transaction expenses was due to the expenses related to non-recurring capital raises during the year ended December 31, 2022. The decrease in stock compensation expense was due primarily to a reduction in expense related to restricted stock units as a result of forfeitures and decreased value of new grants as a result of lower stock prices. The decrease in marketing and legal expenses was due to the termination of marketing efforts surrounding the Akos cannabinoid spin-off. The increase in consulting expenses was due to increased outsourcing to contractors as a result of the reduction in force during 2023. The increase in Delaware Franchise Tax expenses was due to taxes and penalty fees related to the 2022 franchise tax return. The increase in accounting fees was due to internal control deficiency remediation efforts related to deficiencies identified in 2022 and technical accounting services related to 2023 transactions. Research and Development Expenses Our research and development expense for the year ended December 31, 2023 was $7,252,437 as compared to $8,027,773 for the year ended December 31, 2022 with a decrease of $775,336, or approximately 10%. This decrease was primarily driven by decreased salaries and wages of 1,608,437, product development of $443,158, and lab expenses of $321,773, and increase in tax incentive of $141,185. This is slightly offset by an increase in CRO costs of $1,674,958. The decrease in salaries and wages was primarily due to the reduction in force as a result of the cost reduction plan that the Company entered into in May 2023 and the increase in CRO costs is due to contract in Australian Subsidiary Research and Development that began in March 2023. Impairment of intangible assets and goodwill There was no impairment of intangible assets and goodwill for the year ended December 31, 2023 as compared to $7,453,662 for the year ended December 31, 2022, as all recognized indefinite lived intangible assets and goodwill were fully impaired as of December 31, 2022. Depreciation and Amortization Expense Depreciation and amortization expense for the year ended December 31, 2023 was $343,982 as compared to $327,910 for the year ended December 31, 2022, with a decrease of $16,072, or approximately 5%. Change in Fair Value of Warrant Liabilities Change in fair value of warrant liabilities for the year ended December 31, 2023 resulted in income of $94,396 as compared to $4,315,236 for the year ended December 31, 2022. The change in fair value of warrant liabilities is significantly influenced by the change in the closing price of common stock at the end of each period, as compared to the closing price of common stock at the beginning of each period with a strong inverse relationship between changes in fair value of warrant liabilities and the trading price of common stock. The significant decrease in the Company’s stock price during the year ended December 31, 2023 compared to the year ended December 31, 2022, resulted in the significant decrease to the change in fair value of warrant liabilities. Change in Fair Value of Investment Option Liability Change in fair value of investment option liability for the year ended December 31, 2023 resulted in income of $208,752 as compared to $3,472,726 for the year ended December 31, 2022. The change in fair value of investment option liability 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 significant decrease in the Company’s stock price during the year ended December 31, 2023 compared to the year ended December 31, 2022, resulted in the significant decrease to the change in fair value of warrant liabilities. 57 Change in Fair Value of Derivative Liability The Company’s change in fair value of derivative liability increased by $1,052,000 for the year ended December 31, 2023, due primarily to the termination of the planned spin-off of Akos and redemption of the underlying preferred stock in May 2023. Inducement Expense Inducement expense was $1,848,235 for the year ended December 31, 2023. The expenses recorded were related to inducement incurred related to the conversion of warrants and investment options that occurred in December 2023. The Company did not incur such expenses in the prior period. Income Tax (Expense) Benefi t Income tax expense was $28,913 for the year ended December 31, 2023, which primarily related to state excise taxes, compared to an income tax benefit of 1,486,060 for the year ended December 31, 2022 or a change of $1,514,973. For the year ended December 31, 2022, the Company recognized a benefit for the reversal of the deferred tax liability for the indefinite lived intangible assets upon impairment, which is the primary reason for the change. Going Concern, Liquidity and Capital Resources The Company has incurred a loss since inception resulting in an accumulated deficit of $96,499,518 as of December 31, 2023 and further losses are anticipated in the development of its business. Further, the Company had operating cash outflows of $14,094,411 for the year ended December 31, 2023. For the year ended December 31, 2023, the Company had a loss from operations of $16,448,440. 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, 2023, the Company had cash of $2,287,977 and working capital of $1,238,027. The Company’s current cash on hand is insufficient to satisfy its operating cash needs for the 12 months following the filing of this Annual Report on Form 10-K. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year after the date the financial statements are issued. Management’s plan to alleviate the conditions that raise substantial doubt include reducing the Company’s rate of spend, managing its cash flow, advancing its programs, and raising additional working capital through public or private equity or debt financings or other sources, which includes the Equity Distribution Agreement with Canaccord for proceeds of up to $2.4 million, the Purchase Agreement with Lincoln Park, and the Inducement Letters and resulting sales of common stock under the Existing Warrants for net cash proceeds of $1.5 million received in January 2024, and the exercise of warrants to purchase 1,954,000 shares of common stock for gross cash proceeds of approximately $2.7 million in February 2024, and may include collaborations with additional third parties as well as disciplined cash spending, to increase the Company’s cash runway. The Inducement Letters included variable rate transaction limitation, which prohibit the issuance of shares under the Purchase Agreement with Lincoln Park until December 28, 2024. Adequate additional financing may not be available to the Company on acceptable terms, or at all. Should the Company be unable to raise sufficient additional capital, the Company may be required to undertake cost-cutting measures including delaying or discontinuing certain operating activities. As a result of these factors, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date of the financial statements. The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Reduction in Force/Restructuring In May 2023, the Company entered into a cost reduction plan, including a reduction in force of approximately 35% of its full-time employees to streamline its operations and conserve cash resources. Additionally, contracts with seven consultants that were focused on the Akos cannabinoid spin-out were terminated. The plan included a focus on progressing the Company’s existing non-cannabinoid pipeline while reducing the rate of spend and managing cash flow. As of December 31, 2023, the Company has completed the reduction in force, with such severance expenses recorded in salaries and wages and legal accounts. The Company recognized severance charges of approximately $1,004,033 through December 31, 2023, with $572,628 of these charges paid and the reversal of Avani Kanubaddi’s 2023 performance bonus of $129,760 as of December 31, 2023. 58 Additionally, on June 16, 2023, the Company entered into the Kanubaddi Separation Agreement with Avani Kanubaddi, the Company’s President and Chief Operating Officer. Upon termination, any unvested time-based RSU’s became fully vested. Mr. Kanubaddi’s 2023 salary and benefits was accrued and were agreed to be paid out in twelve equal monthly installments beginning in July 2023, as well as his 2023 performance bonus in the amount of $129,760. As of December 31, 2023, the performance metrics were not achieved and the accrued bonus was reversed. Cash Flows Since inception, we have primarily used our available cash to fund our product development and operations expenditures. Cash Flows for the Years Ended December 31, 2023 and 2022 The following table sets forth a summary of cash flows for the years presented: For the Years Ended December 31, 2023 2022 Net cash used in operating activities $ (14,094,411 ) $ (17,146,723 ) Net cash provided by (used in) investing activities 11,667 (584,165 ) Net cash (used in) provided by financing activities (1,343,141 ) 18,180,137 Effect of Foreign Exchange Rate on Changes on Cash (10,022 ) (81,364 ) Net (decrease) increase in cash $ (15,435,907 ) $ 367,885 Operating Activities Net cash used in operating activities was $14,094,411 during the year ended December 31, 2023, which consisted primarily of a net loss adjusted for non-cash items of $13,919,661, an increase in prepaid expenses of $6,857, a decrease in accounts payable and accrued liabilities of $103,848, and a decrease in right-of-use operating lease asset and obligation of $64,045. Net cash used in operating activities was $17,146,723 during the year ended December 31, 2022, which consisted primarily of a net loss adjusted for non-cash items of $16,929,063, an increase in prepaid expenses and other current assets of $374,058, an increase in accounts payable and accrued liabilities of $263,686, and a decrease in right-of-use operating lease asset and obligation of $107,288. Investing Activities Net cash provided by investing activities was $11,667 during the year ended December 31, 2023, which consisted of the purchase of property and equipment, offset by proceeds from sale of property and equipment. Net cash used in investing activities was $584,165 during the year ended December 31, 2022, which consisted of the purchase of property and equipment. Financing Activities Net cash used in financing activities was $1,343,141 during the year ended December 31, 2023, which consisted of $1,052,057 from the redemption of Series A Preferred Stock and $291,084 for equity distribution offering costs. 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. 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. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Our most critical accounting estimates include determining the accruals associated with third party providers supporting research and development efforts and the fair value of the inducement warrants. 59 Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing purchase orders, open contracts, reconciling payments and invoices and communicating with our personnel and suppliers to identify services that have been performed on our behalf. It also includes the research and development vendors providing us milestone and percentage completion reports on the statuses within each active purchase order and contract along with estimating the level of service performed and the associated cost incurred for the services when we have not yet been invoiced or otherwise notified of the actual cost. Our vendors invoice us in various ways via advance payments, as contractual milestones are met or monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and adjust if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by clinical, pre-clinical, and CMC vendors in connection with research and development activities for which we have not yet been invoiced. We contract with these vendors to conduct clinical, pre-clinical, or CMC research and development services on our behalf. We base our expenses on our estimates of the services received and efforts expended pursuant to quotes and contracts with the research and development vendors. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred. Fair Value of Inducement Warrants The inducement warrants are measured at estimated fair value using the Black Scholes valuation model. Inherent in this model are assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield. We estimate the volatility of our common stock at the date of issuance based on the historical implied volatility of our own stock price that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the measurement date for a maturity similar to the expected remaining life of the inducement warrants. The expected life of the inducement warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on our historical rate, which we anticipate to remain at zero. The assumptions used in calculating the estimated fair value of the inducement warrants represent our best estimates. However, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the inducement warrants estimated fair value could be materially different. 60