Masters of Dilution (Part 2)

Enveric Biosciences, Inc. (ENVB) Is Issuing Shares Faster than It's Developing Drugs

Yesterday: Part 1 — The Israeli Connection

Back to the Well

That's what happened in May 2010. First, Rayat and his associates amended the company's by-laws to divide the board of directors into three classes. Shareholders could elect only one class per year, and the directors in each class would serve for three years.³⁰ By staggering the directors' terms, Rayat ensured that other shareholders could not elect enough directors in any one year to take control of the board.

Next, in a PIPE facilitated by Palladium, HepaLife sold 9,400,000 units of common stock and warrants for $1,175,000, or $0.125 per unit. Among the buyers were Honig's GRQ Consultants and Stefansky's firm, Harborview.³¹

Simultaneous with the PIPE, HepaLife acquired a company named AquaMed Technologies, Inc., in which Harborview and Honig held sizeable positions. The acquisition required approval from a majority of HepaLife's shareholders. So, Honig, Rayat, and an associate named Ranjit Bhogal pooled their shares--which comprised just over half of HepaLife's total shares outstanding--and signed a stockholder voting agreement. Without votes from any other shareholders, they approved the acquisition.³²

The terms of the acquisition were partial to AquaMed's owners. Each of Honig's preferred shares of AquaMed converted into 100 common shares of HepaLife, giving Honig 11% of HepaLife's total shares outstanding. Unlike other owners of AquaMed's preferred shares, Honig got the right to sell his HepaLife shares immediately after the deal closed.³³

Harborview made out even better. Each of its preferred shares of AquaMed converted into 400 common shares of HepaLife. After the acquisition, Harborview and its two principals owned 49.9% of the company. In addition, Harborview got three out of four seats on the board. The staggered terms Rayat had put in place cemented Harborview's control.

AquaMed made gels that could be placed on adhesive bandages to treat wounds. Healthcare investors were excited about the wound care market and were bidding up stocks that addressed it, such as MiMedx Group (NASDAQ: MDXG). In late 2010, HepaLife changed its name to Alliqua, Inc. and formed a subsidiary focused on wound care.

Shortly afterward, Palladium facilitated a $1 million private placement for the company. The sole investor was Frost Gamma Investments Trust³⁴, which was controlled by an entrepreneur in Miami named Phillip Frost, M.D. Frost was an associate of Honig and, like Honig, was a defendant in the SEC's 2018 pump-and-dump lawsuit. Without admitting or denying the allegations, Frost consented to a permanent injunction and paid $5,523,388 in disgorgement, interest, and penalties.³⁵

In 2005, Frost had sold his generic drug manufacturer Ivax Corp. to an Israeli company named Teva Pharmaceutical Industries Ltd. for $7.4 billion.³⁶ Afterward, Frost served as vice chairman of Teva from 2006 to 2010 and as chairman from 2010 to 2015. In Aug. 2020, the U.S. Dept. of Justice indicted Teva's U.S. subsidiary for conspiring to fix prices, rig bids, and allocate customers for generic drugs since at least May 2013.³⁷

Since 2017, Teva and its current and former directors and officers have been named as defendants in at least 20 securities lawsuits in U.S. federal court, including four class actions. The cases have been consolidated, and the outcome is pending.³⁸ One of the defendants is Allan Oberman, who was President and CEO of Teva Americas Generics from 2012 to 2014. Later, he served as CEO of Concordia International Corp., which, like Teva, ran into legal problems with generic drug pricing.³⁹

In 2019, Oberman was appointed chairman of Jay Pharma. He resigned seven months later after expressing concern about the company's difficulty in obtaining director's and officer's insurance at a reasonable price.⁴⁰ It's not clear why insurers demanded a high premium. They usually do so when they detect high risk.

Past Is Prologue

The merger of Jay Pharma and Ameri was risky from the start. At the end of 2019, neither company had enough cash to last until the merger was completed.⁴¹ The problem was reminiscent of HepaLife in 2008, and so was the solution.

In January 2020, Jay Pharma agreed to two transactions with Alpha Capital. The first was a bridge loan for $1,500,000 at 7% interest in exchange for a note that, right before the merger, would convert into 1,700,458 common shares of Jay Pharma and warrants to purchase an additional 1,700,458 common shares at $1.07 per share. The $1,500,000 was supposed to last Jay Pharma until the merger closed in July 2020.⁴²

Ameri had made a similar deal with Alpha in November 2019. It had borrowed $1,500,000 in exchange for a note. When Ameri was unable to repay the loan in May 2020, Alpha agreed to extend the maturity date for six months--in exchange for a warrant to buy up to 646,094 common shares of Ameri at $0.001 per share.⁴³

By August 2020, the merger had been delayed. Jay Pharma borrowed an additional $500,000 from Alpha in exchange for sweetened terms on its convertible note. Instead of 1,700,458 common shares, the note would convert into 2,522,005 common shares and warrants to purchase 2,378,543 additional common shares at $1.01 per share.⁴⁴

In addition to the bridge loan, Jay Pharma had entered into a stock purchase agreement with Alpha. Simultaneous with the conversion of the note, Alpha would invest $3,500,000 in Jay Pharma in exchange for 3,567,815 common shares and warrants to buy an additional 3,567,815 common shares at $1.07 per share. After the merger, Alpha would exchange its Jay Pharma shares and warrants for, respectively, preferred stock convertible into 3,033,944 common shares of Enveric and warrants to buy an additional 3,033,944 common shares of Enveric at $1.19 per share.⁴⁵

But Alpha wanted even more. So, while it negotiated the bridge loan and investment with Jay Pharma, it made a side deal with Tikkun Pharma, Inc., which was another startup that had sublicensed Tikun Olam's intellectual property from TO Pharmaceuticals. Tikkun Pharma assigned to Jay Pharma its rights to skin care treatments and formulations for developing drugs for graft versus host disease (GVHD). In exchange, Jay Pharma issued 10,360,007 common shares to Tikkun Pharma, which sold 7,774,463 of the shares to Alpha for a nominal price of $10.⁴⁶

For its largesse, Tikkun Pharma would get to convert its remaining 2,585,544 common shares of Jay Pharma into 2,198,656 common shares of Enveric. Alpha would get to convert its 7,774,463 common shares of Jay Pharma into 6,611,129 preferred shares, which were convertible into 6,611,129 common shares of Enveric.

When the merger was completed and Alpha had converted and exercised all its preferred shares and warrants, it stood to own more than 30% of Enveric's common shares outstanding.⁴⁷ Ameri would have to issue 43,362,755 common shares to Jay Pharma's shareholders, including Alpha and Tikkun Pharma.⁴⁸ The issuance would leave Ameri's shareholders owning only 13% of the issued and outstanding equity in Enveric, severely diluting their voting power.

But the dilution didn't end there. On Jan. 12, 2021--two weeks after the merger closed--Enveric agreed to register for resale 1,791,923 common shares issuable upon exercise of Alpha's warrants. Once registered, the shares won't be subject to any lock-up agreement, and Alpha can begin selling them at will. Alpha agreed not to sell more than 10% of the daily trading volume of common stock on the Nasdaq on any given day--unless Enveric's stock price closes above $5.29 for five consecutive days, in which case all bets are off.⁴⁹

On Jan. 13, 2021, Enveric sold 1,610,679 common shares at $4.50 per share and 610,679 pre-funded warrants at $4.49 per warrant with an exercise price of $0.01. In a concurrent private placement, the company sold five-year warrants to purchase 1,666,019 common shares at $4.95 per share, which were exercisable immediately upon issuance. In the prospectus, Enveric warned that anyone who bought the common shares at $4.50 per share would experience immediate dilution of $3.42 per share.⁵⁰

Since debuting at $4.15 on Jan. 5, 2021, shares of Enveric have dropped 8% to close at $3.83 on Jan. 27, 2021. That's 15% below the offering price of the shares sold on Jan. 13, 2021. After the offering, the company's total common shares outstanding increased 19% from 11,595,109 to 13,816,467.⁵¹

As an early-stage biotech startup, Enveric won't generate enough cash flow to fund its operations for years, if ever. To develop its products, it will have to issue more stock. That's okay if the company's valuation increases at a faster rate than its total shares outstanding. But Enveric is obligated to issue 7,839,844 additional shares upon conversion of preferred stock and exercise of warrants and options.⁵² With so many shares coming to market, the company will have to create extraordinary value for its shareholders to gain meaningful returns.


30. "Hepalife Technologies, Inc. Form 8-K/A." EDGAR. Securities and Exchange Commission, May 7, 2010,

31. "Hepalife Technologies, Inc. Form 8-K." EDGAR. Securities and Exchange Commission, May 11, 2010,

32. "Hepalife Technologies, Inc. Form 8-K Ex. 9.1." EDGAR. Securities and Exchange Commission, May 11, 2010,

33. "Hepalife Technologies, Inc. Form 8-K Ex. 2.1." EDGAR. Securities and Exchange Commission, May 11, 2010,

34. "Hepalife Technologies, Inc. Form 8-K Ex. 99.1." EDGAR. Securities and Exchange Commission, Mar. 2, 2011,

35. United States District Court, Southern District of New York. Securities and Exchange Commission v. Barry C. Honig et al. Jan. 10, 2019,

36. "Teva Pharmaceutical Industries Ltd. Form 6-K." EDGAR. Securities and Exchange Commission, Jul. 25, 2005,

37. United States District Court, Eastern District of Pennsylvania. United States of America v. Teva Pharmaceuticals USA, Inc. et al. Aug. 25, 2020,

38. United States District Court, District of Connecticut. Ontario Teachers’ Pension Plan Board et al v. Teva Pharmaceutical Industries Ltd. et al. Sep. 11, 2017,

39. "Concordia International: An In-Depth Look Into AMCo's Drug Price Gouging." Seeking Alpha. Oct. 4, 2016,

40. "Ameri Holdings, Inc. Form S-4." EDGAR. Securities and Exchange Commission, May 27, 2020,

41. "Enveric Biosciences, Inc. Form 8-K/A Ex. 99.1." EDGAR. Securities and Exchange Commission, Jan. 11, 2021,

"Ameri Holdings, Inc. Form 10-K." EDGAR. Securities and Exchange Commission, Dec. 31, 2019,

42. "Ameri Holdings, Inc. Form S-4." EDGAR. Securities and Exchange Commission, May 27, 2020,

43. "Ameri Holdings, Inc. Form 8-K." EDGAR. Securities and Exchange Commission, May 6, 2020,

44. "Ameri Holdings, Inc. Form 424B3." EDGAR. Securities and Exchange Commission, Nov. 13, 2020,

45. Ibid.

46. Ibid.

47. Ibid.

48. "Ameri Holdings, Inc. Form 8-K." EDGAR. Securities and Exchange Commission, Dec. 23, 2020,

49. "Enveric Biosciences, Inc. Form 424B5." EDGAR. Securities and Exchange Commission, Jan. 13, 2021,

50. Ibid.

51. Ibid.

52. Ibid.