Masters of Dilution

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

During the quiet week between Christmas and New Year's Eve of 2020, two little-known companies completed a reverse merger that attracted little attention. The acquirer, Ameri Holdings, Inc., was an obscure tech company in Alpharetta, Ga. The acquiree, Jay Pharma, Inc., was a privately held startup developing cannabis-based pharmaceuticals in Toronto.

The transaction was typical of reverse mergers. Ameri transferred its assets to a newly formed private company, leaving behind a Nasdaq-listed shell. Jay Pharma took up residence in the empty vessel and changed its name to Enveric Biosciences, Inc. (ENVB 0.00%↑). After a one-to-four reverse split, the company's shares debuted at $4.15 a piece. Just like that, a boring tech stock was transformed into a sexy cannabis stock.

The Nasdaq newcomer brought along some baggage. Before the merger, Enveric's predecessors had issued a smorgasbord of dilutive securities, including warrants to purchase 1,791,923 shares of common stock at $0.01 per share.¹ Although the purchaser of the warrants agreed to limit the number of newly acquired shares it sold per day, a steady stream of sales would nevertheless put downward pressure on Enveric's stock price.

Enveric had sold the warrants to a hedge fund in the tax haven of Lichtenstein named Alpha Capital Anstalt. In 2018, Alpha was one of ten defendants the U.S. Securities and Exchange Commission charged with coordinating a highly profitable pump-and-dump scheme involving three microcap stocks.² Without admitting or denying the allegations, Alpha consented to a permanent injunction and paid $908,259 in disgorgement, interest, and penalties.³

There's no evidence that Enveric is involved in a pump-and-dump scheme or any other violations of securities laws. Selling securities to an investor that has been accused of manipulating stock prices is not illegal. But it is risky, and it's not the only risk associated with this stock.

The Israeli Connection

Jay Pharma was formed in 2018 to develop cancer drugs from cannabis strains owned by an Israeli company named Tikun Olam Ltd. In 2012, Tikun Olam gained notoriety for cultivating a strain that was high in Cannabidiol (CBD) and low in Tetrahydrocannabinol (THC), making it potentially useful for creating pharmaceuticals that have medical benefits without psychoactive effects. Other companies have developed similar strains.

Jay Pharma sublicensed the rights to Tikun Olam's intellectual property from an entity in New York named TO Pharmaceuticals USA, LLC, which was formed in 2015 by Tikun Olam's founder, Ytzchak "Tzachi" Cohen, and a group of co-investors. The sublicense includes exclusive rights to use Tikun Olam's strains and pending patents for cancer-related applications.⁴ In exchange, Jay Pharma issued $652,624 worth of common stock to TO Pharmaceuticals and agreed to issue up to $500,000 worth of common stock to the entity in each future financing.⁵

The long-term value of Tikun Olam's intellectual property to Enveric is uncertain, particularly in the U.S. market. Since 2015, Cohen has submitted nine patent applications to the U.S. Patent and Trademark Office for three of Tikun Olam's strains.⁶ The USPTO has rejected at least one key claim in each application and has assigned an "abandoned" status to eight of the applications after receiving no response from the applicant.⁷ A recurring problem has been failure to account for the parentage of the plants.

Tikun Olam went through a difficult period in its home country shortly after Jay Pharma was founded. In 2018, Israel's Ministry of Health temporarily shut down one of the company's indoor cannabis farms, claiming that it found contamination and forbidden pesticides at the site.⁸ The following year, a district court in Jerusalem ordered Cohen to sell his ownership of Tikun Olam's Israeli operations.

According to Israeli media, the Israel Police told the district court that Cohen was not permitted to own more than 5% of an Israeli cannabis company because of his alleged links to organized crime.⁹ The police have not publicly disclosed any specific allegations or filed charges against Cohen. Israeli cannabis company Cannbit Pharmaceuticals Ltd. (TASE: CNBT) acquired Tikun Olam's Israeli business in 2019 for $26,500,000 in cash and stock and an additional $18,000,000 if the company achieves revenue goals.¹⁰

Neither Tikun Olam nor TO Pharmaceuticals controls Enveric, which has an independent board and management. The company's chairman and CEO, David Johnson, joined Enveric after the reverse merger closed. His resume includes stints at Bristol Myers Squibb, Inc. (BMY 0.00%↑) and ConvaTec, Inc.¹¹ Most recently, he was CEO at Alliqua, Inc. until a debt-fueled acquisition spree ended with the company defaulting on a loan covenant and selling off assets.¹²

In 2018, Alliqua planned to spin off a subsidiary as an independent, Nasdaq-listed company, which was going to execute a reverse merger with TO Pharmaceuticals.¹³ Johnson was slated to serve as CEO of the surviving entity, which was going to be named TO Pharma, LLC. But the deal was canceled after the would-be spinoff company did not meet Nasdaq's listing standards.¹⁴

Johnson was tapped for the CEO job at TO Pharma--and later at Enveric--by David Stefansky, who runs a small merchant bank in New York named Bezalel Partners.¹⁵ Stefansky was an early investor in Jay Pharma.¹⁶ Previously, he had co-founded a private equity firm in New York named HarborView Advisors, LLC, which was an early investor in Alliqua.¹⁷

HarborView belonged to an informal network of investors that included Alpha Capital and several other defendants in the SEC's 2018 pump-and-dump lawsuit.¹⁸ At the center of the network was a stock promoter in Boca Raton, Fla. named Barry Honig, who had a knack for extracting cheap stock from cash-starved microcap companies. A case in point is the company that eventually became Alliqua.

PIPE Dreams

Alliqua began as a company in Boston named HepaLife Technologies, Inc., which was developing an artificial liver system. In 2008, HepaLife's majority shareholder was a stock promoter in Vancouver, B.C. named Harmel Rayat, who frequently co-invested with Honig.¹⁹

In 2000, Rayat had consented to a permanent injunction and paid a $20,000 fine after the SEC charged him with failing to disclose that he was paid to publish promotional statements about 18 stocks.²⁰ In 2003, he consented to a cease-and-desist order from the SEC, which charged him with selling unregistered shares he received for promoting a penny stock.²¹ In both cases, Rayat neither admitted nor denied the allegations.

HepaLife was typical of the names in which Rayat and Honig trafficked. In 2007, the company spent more on advertising and investor relations than it spent on research and development.²² By March 2008, it had no revenues, less than $154,000 in cash, and a burn rate of $386,000 per quarter. Its auditor had expressed doubts about its ability to continue as a going concern.²³

Teetering on the brink of insolvency, HepaLife raised capital in May 2008 through a type of offering called a private investment in public equity (PIPE).²⁴ In a PIPE, accredited investors buy securities from a publicly traded company in a private transaction. The price per security is usually less than the quoted price for the issuer's securities in the public market.

The placement agent for HepaLife's PIPE was an investment bank in Venice, Fla. named Palladium Capital Advisors, LLC, which frequently worked with Honig and his associates.²⁵ Four investors in the PIPE were later defendants in the SEC's 2018 lawsuit: Alpha Capital, Michael Brauser, Melechdavid, Inc., and GRQ Consultants, Inc., which was controlled by Honig.²⁶

The terms of the PIPE were stacked in favor of the investors, who paid $4,530,800, or $0.425 per share, for 12% of the company. The purchase agreement included a provision called a "full ratchet," which is usually reserved for distressed investments. For 12 months after the PIPE, if HepaLife sold shares for less than $0.425 a piece, the company would have to issue enough shares to the PIPE investors to restore the value of their investment to $4,530,800 and return their ownership percentage to 12%.²⁷

What's more, for each share the PIPE investors bought, they received a two-year warrant to buy an additional share for $0.55. The warrants, too, were protected by a 12-month full ratchet in case HepaLife issued more warrants with an exercise price below $0.55.²⁸ HepaLife was required to register the PIPE investors' shares for resale--including the shares issuable upon exercise of the warrants--within 12 months of the deal closing.²⁹

Imagine you were an investor who wanted to buy HepaLife stock after the PIPE. For a year, if you bought newly issued shares from the company for less than $0.425 per share, HepaLife would immediately issue additional shares that would reduce your ownership percentage. When the PIPE investors exercised their warrants, the company would issue even more shares, further diluting your stake. When the PIPE investors sold their shares, the glut of HepaLife stock on the market would likely decrease the value of your holdings.

With so many risks, few investors would buy HepaLife stock in a public offering after the PIPE. Therefore, when HepaLife needed more cash, it would have few alternatives than to return to the private market.

Tomorrow: Part 2 — Back to the Well

Endnotes

1. "Enveric Biosciences, Inc. Form 424B5." EDGAR. Securities and Exchange Commission, Jan. 13, 2021, www.sec.gov/Archives/edgar/data/890821/000149315221000974/form424b5.htm.

2. United States District Court, Southern District of New York. Securities and Exchange Commission v. Barry C. Honig et al. Sep. 7, 2018, www.sec.gov/litigation/complaints/2018/comp-pr2018-182.pdf.

3. United States District Court, Southern District of New York. Securities and Exchange Commission v. Barry C. Honig et al. Feb. 16, 2019, cdn.theactivist.news/wp-content/uploads/2021/01/22212427/Final-Judgment-Consent-Alpha-Capital-Anstalt-2019-0206.pdf.

4. "Aquamed Technologies, Inc. Form S-4 Ex. 10.12." EDGAR. Securities and Exchange Commission, Jan. 9, 2019, www.sec.gov/Archives/edgar/data/0001468929/000114420419001167/tv509486_ex10-12.htm.

5. "Ameri Holdings, Inc. Form S-4." EDGAR. Securities and Exchange Commission, Nov. 10, 2020, www.sec.gov/Archives/edgar/data/890821/000149315220020869/forms-4a.htm.

6. Cohen, Ytzchak, et al., inventors. Cannabis plant named 'Avidekel.' Mar. 10, 2016. U.S. Patent Application 14/757,039. USPTO Patent Application Full-Text and Image Database, appft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.html&r=3&f=G&l=50&d=PG01&p=1&S1=20160073566&OS=20160073566&RS=20160073566.

... Cannabis plant named 'Erez.' Mar. 10, 2016. U.S. Patent Application 14/757,040. USPTO Patent Application Full-Text and Image Database, appft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=3&f=G&l=50&co1=AND&d=PG01&s1=20160073567&OS=20160073567&RS=20160073567.

... Cannabis plant named 'Midnight.' Mar. 10, 2016. U.S. Patent Application 14/757,041. USPTO Patent Application Full-Text and Image Database, appft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.html&r=3&f=G&l=50&d=PG01&p=1&S1=20160073568&OS=20160073568&RS=20160073568.

7. United States Patent and Trademark Office. Non-Final Rejection. Dec. 29, 2016. U.S. Patent Application 14/757,039. USPTO Public Patent Application Information Retrieval, portal.uspto.gov/pair/view/BrowsePdfServlet?objectId=IXAIRRD7RXEAPX0&lang=DINO.

... Abandonment. Sep. 5, 2017. U.S. Patent Application 14/757,039. USPTO Public Patent Application Information Retrieval, portal.uspto.gov/pair/view/BrowsePdfServlet?objectId=J77N4RE8RXEAPX1&lang=DINO.

... Final Rejection. May 16, 2018. U.S. Patent Application 14/757,040. USPTO Public Patent Application Information Retrieval, portal.uspto.gov/pair/view/BrowsePdfServlet?objectId=JH68GGO5RXEAPX0&lang=DINO.

... Abandonment. Dec. 17, 2018. U.S. Patent Application 14/757,040. USPTO Public Patent Application Information Retrieval, portal.uspto.gov/pair/view/BrowsePdfServlet?objectId=JPMSE8O4RXEAPX2&lang=DINO.

... Non-Final Rejection. Jan. 12, 2017. U.S. Patent Application 14/757,041. USPTO Public Patent Application Information Retrieval, portal.uspto.gov/pair/view/BrowsePdfServlet?objectId=JPMSE8O4RXEAPX2&lang=DINO.

... Abandonment. Oct. 5, 2017. U.S. Patent Application 14/757,041. USPTO Public Patent Application Information Retrieval, portal.uspto.gov/pair/view/BrowsePdfServlet?objectId=J8BP94EMRXEAPX2&lang=DINO.

8. Weinreb, Gali. "Health Ministry temporarily closes Tikun Olam cannabis farm." Globes, Nov. 4, 2018, en.globes.co.il/en/article-health-ministry-temporarily-closes-tikun-olam-cannabis-farm-1001259127.

9. ... "Leading Israeli cannabis companies bid for Tikun Olam." Globes, Sep. 15, 2019, en.globes.co.il/en/article-leading-israeli-cannabis-cos-bid-for-tikun-olam-1001300691.

10. ... "Tikun Olam valuation slashed in Cannbit deal." Globes, Nov. 25, 2019, en.globes.co.il/en/article-tikun-olam-valuation-slashed-in-cannbit-deal-1001308467.

11. "David Johnson." LinkedIn, www.linkedin.com/in/david-johnson-235b0224/. Accessed Jan. 24, 2021.

12. "Alliqua BioMedical, Inc. Form 10-Q." EDGAR. Securities and Exchange Commission, Mar. 31, 2018, www.sec.gov/Archives/edgar/data/0001054274/000114420418028208/tv493254_10q.htm.

13. "Alliqua BioMedical, Inc. Form 8-K Ex. 2.1." EDGAR. Securities and Exchange Commission, Nov. 27, 2018, www.sec.gov/Archives/edgar/data/0001054274/000114420418062043/tv508028_ex2-1.htm.

14. "Adynxx, Inc. Form 8-K." EDGAR. Securities and Exchange Commission, Jun. 11, 2019, www.sec.gov/Archives/edgar/data/0001054274/000143774919012178/adyn20190614_8k.htm.

15. "Aquamed Technologies, Inc. Form S-1/A." EDGAR. Securities and Exchange Commission, Apr. 19, 2019, www.sec.gov/Archives/edgar/data/0001468929/000114420419020424/tv517173-s1a.htm.

"Enveric Biosciences, Inc. Form 8-K Ex. 10-1." EDGAR. Securities and Exchange Commission, Jan. 6, 2021, www.sec.gov/Archives/edgar/data/890821/000149315221000336/ex10-1.htm.

16. "AMERI Holdings, Inc. Form S-4." EDGAR. Securities and Exchange Commission, May 27, 2020, www.sec.gov/Archives/edgar/data/890821/000149315220009947/forms-4.htm.

17. "Hepalife Technologies, Inc. Schedule 14A." EDGAR. Securities and Exchange Commission, Nov. 15, 2010, www.sec.gov/Archives/edgar/data/0001054274/000119380510002807/e607716_def14a-hepalife.htm.

18. "Silverstar Holdings Ltd. Form S-3." EDGAR. Securities and Exchange Commission, May 16, 2008, www.sec.gov/Archives/edgar/data/0001003390/000091068008000406/s3-05142008.htm.

"Towerstream Corp. Amendment No. 3 to Form SB-2." EDGAR. Securities and Exchange Commission, Jun. 5, 2007, www.sec.gov/Archives/edgar/data/0001349437/000095013607003962/file1.htm.

"China Armco Metals, Inc. Form S-1." EDGAR. Securities and Exchange Commission, Sep. 10, 2008, www.sec.gov/Archives/edgar/data/0001410711/000121390008001761/fs1_ea3chinaarmco.htm.

19. "Hepalife Technologies, Inc. Form S-1." EDGAR. Securities and Exchange Commission, Jul. 8, 2009, www.sec.gov/Archives/edgar/data/0001054274/000105427409000007/s-1revised.htm.

"Octillion Corp. Form S-1." EDGAR. Securities and Exchange Commission, Mar. 12, 2008, www.sec.gov/Archives/edgar/data/0001071840/000107184008000011/octillionforms1edgarversion.htm.

"Phytomedical Technologies, Inc. Form 424B3." EDGAR. Securities and Exchange Commission, Dec. 4, 2007, www.sec.gov/Archives/edgar/data/0001002422/000100242207000029/f071201pytoformsb2edgarversi.htm.

20. United States District Court, District of Arizona. Securities and Exchange Commission v. EquityAlert.Com, Inc. et al. Aug. 8, 2000, www.sec.gov/litigation/litreleases/lr16662.htm.

21. Securities and Exchange Commission Administrative Proceeding. In the Matter of EquityAlert.com, Inc. et al. Oct. 23, 2003, www.sec.gov/litigation/admin/33-8306.htm.

22. "Hepalife Technologies, Inc. Form 10-K." EDGAR. Securities and Exchange Commission, Dec. 31, 2007, www.sec.gov/Archives/edgar/data/0001054274/000105427408000009/hplf200710kfve.htm.

23. "Hepalife Technologies, Inc. Form 10-Q." EDGAR. Securities and Exchange Commission, Mar. 31, 2008, www.sec.gov/Archives/edgar/data/0001054274/000105427408000010/hplfq12008edgarversion.htm.

24. "Hepalife Technologies, Inc. Form 8-K." EDGAR. Securities and Exchange Commission, May 23, 2008, www.sec.gov/Archives/edgar/data/1054274/000105427408000012/hepalife8kmay2008pp.htm.

25. "Purple Beverage Company, Inc. Form S-1." EDGAR. Securities and Exchange Commission, May 2, 2008, www.sec.gov/Archives/edgar/data/0001178513/000114420408025862/v112516_s1.htm.

"Towerstream Corp. Form SB-2." EDGAR. Securities and Exchange Commission, Mar. 19, 2007, www.sec.gov/Archives/edgar/data/0001349437/000095013607001737/file1.htm.

"International Energy, Inc. Form S-1." EDGAR. Securities and Exchange Commission, Jun. 20, 2008, www.sec.gov/Archives/edgar/data/0001081074/000108107408000016/ieniforms1ev.htm.

26. "Hepalife Technologies, Inc. Form S-1." EDGAR. Securities and Exchange Commission, Jul. 8, 2009, www.sec.gov/Archives/edgar/data/0001054274/000105427409000007/s-1revised.htm.

27. "Hepalife Technologies, Inc. Form 8-K Ex. 10.1." EDGAR. Securities and Exchange Commission, May 23, 2008, www.sec.gov/Archives/edgar/data/1054274/000105427408000012/hplfsubscriptionagreement080.htm.

28. "Hepalife Technologies, Inc. Form 8-K Ex. 10.2." EDGAR. Securities and Exchange Commission, May 23, 2008, www.sec.gov/Archives/edgar/data/1054274/000105427408000012/hplfseriescformofwarrant0805.htm.

29. "Hepalife Technologies, Inc. Form 8-K Ex. 10.3." EDGAR. Securities and Exchange Commission, May 23, 2008, www.sec.gov/Archives/edgar/data/1054274/000105427408000012/hplfregistrationrightsagreem.htm.