UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 000-55136
Skye Bioscience, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Nevada | | 45-0692882 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
11250 El Camino Real, Suite 100, San Diego, CA 92130
(Address of principal executive offices) (Zip Code)
(858) 410-0266
(Registrant’s telephone number, including area code)
5910 Pacific Blvd, San Diego, CA 92121
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
None | | None | | None |
Securities registered pursuant to Section 12(g) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.001 | | SKYE | | OTCQB |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 12, 2022,4, 2023, there were 495,925,112971,549,608 shares of the issuer’s $0.001 par value common stock issued and outstanding.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q contain forward-looking statements that are based on management’s current expectations and assumptions and information currently available to management and are subject to risks and uncertainties. If such risks or uncertainties materialize or such assumptions prove incorrect, our business, operating results, financial condition and stock price could be materially and negatively affected. In some cases, you can identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” “would” or the negative of these terms or other comparable terminology. Factors that could cause actual results to differ materially from those currently anticipated include those set forth in the section below titled “Risk Factors,” including, without limitation, risks relating to:
•the results of our research and development activities, including uncertainties relating to the discovery of potential product candidates and the preclinical and clinical testing of our product candidates;
•the timing, progress and results of our clinical studies for SBI-100 Ophthalmic Emulsion (SBI-100 OE) and our estimates regarding the market opportunity for SBI-100 OE if approved;
•the early stage of our product candidates presently under development;
•our near-term need for substantial additional funds in order to continue our operations, and the uncertainty of whether we will be able to obtain the funding we need;
•our ability to obtain and, if obtained, maintain regulatory approval of our current product candidates, and any of our other future product candidates, and any related restrictions, limitations, and/or warnings in the label of any approved product candidate;
•our ability to retain or hire key scientific or management personnel;
•our ability to protect our intellectual property rights that are valuable to our business, including patent and other intellectual property rights;
•our dependence on University of Mississippi, third party manufacturers, suppliers, research organizations, testing laboratories and other potential collaborators;collaborators, including global supply chain disruptions;
•our ability to develop successful sales and marketing capabilities in the future as needed;
•the size and growth of the potential markets for any of our approved product candidates, and the rate and degree of market acceptance of any of our approved product candidates;
•competition in our industry;
•the duration and impactresidual impacts of the novel coronavirus ("COVID-19") pandemic, or responses to thea future pandemic on our business, clinical trials or personnel;
•regulatory developments in the United States and foreign countries;
•expectations regarding whethercurrent pending litigation matters, including the transactions contemplated by the Arrangement Agreement (as defined below) will be consummated, including whether conditions to the consummation of such transactions will be satisfied, or the anticipated timing or closing of the Acquisition (as defined below);Cunning Lawsuit; and
•any other strategicestimates of the costs and financial benefits in connectionexpenses associated with the Arrangement Agreement (as defined below), including any anticipated future resultswind-down of EHT's former business and pro-forma financial information relatingthe estimated value to be received by the Company with respect to the resulting issuer.potential sale and collection of any remaining EHT assets.
We operate in a rapidly changing environment and new risks emerge from time to time. As a result, it is not possible for our management to predict all risks, including the residual impacts of the COVID-19 outbreakpandemic, the current global economic environment, including the impacts of the high inflationary environment, and associated business disruptions andsuch as delayed clinical trials, and laboratory resources and supply chain limitations, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements included in this report speak only as of the date hereof, and except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | (Unaudited) | | (Note 2) | | (Unaudited) | | (Note 2) |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets | Current assets | | Current assets | |
Cash | $ | 2,929,895 | | | $ | 8,983,007 | | |
Cash and cash equivalents | | Cash and cash equivalents | $ | 553,443 | | | $ | 1,244,527 | |
Restricted cash | Restricted cash | 4,573 | | | 4,571 | | Restricted cash | 4,591 | | | 4,580 | |
Prepaid expenses | Prepaid expenses | 871,428 | | | 554,217 | | Prepaid expenses | 270,539 | | | 780,807 | |
Prepaid expenses - related party | — | | | 13,432 | | |
Deferred asset acquisition costs | 842,193 | | | — | | |
| Assets held for sale | | Assets held for sale | — | | | 6,432,216 | |
Other current assets | Other current assets | 113,187 | | | 56,870 | | Other current assets | 1,064,114 | | | 481,588 | |
Other current assets - related party | 12,655 | | | — | | |
Total current assets | Total current assets | 4,773,931 | | | 9,612,097 | | Total current assets | 1,892,687 | | | 8,943,718 | |
| Property and equipment, net | 74,929 | | | 87,710 | | |
Property, plant and equipment, net | | Property, plant and equipment, net | 64,395 | | | 87,854 | |
Operating lease right-of-use asset | Operating lease right-of-use asset | 110,304 | | | 146,972 | | Operating lease right-of-use asset | 270,553 | | | 71,191 | |
Other asset | 8,309 | | | 8,309 | | |
Other assets | | Other assets | 8,309 | | | 8,309 | |
Total assets | Total assets | $ | 4,967,473 | | | $ | 9,855,088 | | Total assets | $ | 2,235,944 | | | $ | 9,111,072 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
Current liabilities | Current liabilities | | Current liabilities | |
Accounts payable | Accounts payable | $ | 1,443,043 | | | $ | 897,880 | | Accounts payable | $ | 1,551,510 | | | $ | 1,669,997 | |
Accounts payable - related parties | Accounts payable - related parties | 107,237 | | | 2,130 | | Accounts payable - related parties | 108,301 | | | 124,901 | |
Accrued interest - related party | Accrued interest - related party | 261,647 | | | 174,911 | | Accrued interest - related party | — | | | 15,814 | |
Accrued payroll liabilities | Accrued payroll liabilities | 350,248 | | | 344,450 | | Accrued payroll liabilities | 913,932 | | | 657,734 | |
Insurance premium loan payable | Insurance premium loan payable | 122,461 | | | — | | Insurance premium loan payable | 90,615 | | | 55,451 | |
Other current liabilities | Other current liabilities | 511,257 | | | 375,842 | | Other current liabilities | 849,333 | | | 1,366,994 | |
Other current liabilities - related party | 55,668 | | | — | | |
Derivative liability | 6,554 | | | 59,732 | | |
Multi-draw credit agreement - related party | 450,000 | | | 450,000 | | |
Convertible multi-draw credit agreement - related party, net of discount | 1,839,830 | | | 1,524,905 | | |
Other current liabilities - related parties | | Other current liabilities - related parties | 1,772 | | | 95,850 | |
Estimate for legal contingency | | Estimate for legal contingency | 6,235,639 | | | 6,205,310 | |
Convertible multi-draw credit agreement - related party | | Convertible multi-draw credit agreement - related party | — | | | 1,848,375 | |
Operating lease liability, current portion | Operating lease liability, current portion | 88,928 | | | 82,372 | | Operating lease liability, current portion | 65,452 | | | 78,700 | |
Total current liabilities | Total current liabilities | 5,236,873 | | | 3,912,222 | | Total current liabilities | 9,816,554 | | | 12,119,126 | |
| Non-current liabilities | | Non-current liabilities | |
Operating lease liability, net of current portion | | Operating lease liability, net of current portion | 208,588 | | | — | |
Total liabilities | | Total liabilities | 10,025,142 | | | 12,119,126 | |
| Commitments and contingencies (Note 12) | | Commitments and contingencies (Note 12) | |
|
| | | | | | | | | | | |
Non-current liabilities | | | |
Operating lease liability, net of current portion | 32,422 | | | 78,700 | |
Total liabilities | 5,269,295 | | | 3,990,922 | |
| | | |
Commitments and contingencies (Note 10) | 0 | | 0 |
| | | |
Stockholders’ equity | | | |
Preferred stock, $0.001 par value; 50,000,000 shares authorized at June 30, 2022 and December 31, 2021; no shares issued and outstanding at June 30, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.001 par value; 5,000,000,000 shares authorized at June 30, 2022 and December 31, 2021; 495,925,112 and 476,108,445 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 495,925 | | | 476,108 | |
Additional paid-in-capital | 52,921,093 | | | 52,644,221 | |
Accumulated deficit | (53,718,840) | | | (47,256,163) | |
Total stockholders’ (deficit) equity | (301,822) | | | 5,864,166 | |
Total liabilities and stockholders’ equity | $ | 4,967,473 | | | $ | 9,855,088 | |
| | | |
| | | | | | | | | | | |
Stockholders’ deficit | | | |
Preferred stock, $0.001 par value; 50,000,000 shares authorized at June 30, 2023 and December 31, 2022; no shares issued and outstanding at June 30, 2023 and December 31, 2022 | — | | | — | |
Common stock, $0.001 par value; 5,000,000,000 shares authorized at June 30, 2023 and December 31, 2022; 971,549,608 and 913,528,958 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 971,549 | | | 913,528 | |
Additional paid-in-capital | 66,256,038 | | | 62,816,183 | |
Accumulated deficit | (75,016,785) | | | (66,737,765) | |
Total stockholders’ deficit | (7,789,198) | | | (3,008,054) | |
Total liabilities and stockholders’ deficit | $ | 2,235,944 | | | $ | 9,111,072 | |
| | | |
See accompanying notes to the condensed consolidated financial statements.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSOPERATIONS
(UNAUDITED)
| | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 | |
Operating expenses | Operating expenses | | | | | | | | | Operating expenses | | | | | | | | |
Research and development | Research and development | $ | 1,427,154 | | | $ | 880,672 | | | $ | 2,692,807 | | | $ | 1,490,328 | | | Research and development | $ | 1,788,434 | | | $ | 1,427,154 | | | $ | 2,973,314 | | | $ | 2,692,807 | | |
General and administrative | General and administrative | 1,791,206 | | | 949,002 | | | 3,413,575 | | | 2,076,608 | | | General and administrative | 1,206,405 | | | 1,791,206 | | | 3,121,683 | | | 3,413,575 | | |
Estimated legal contingency | | Estimated legal contingency | (151,842) | | | — | | | (151,842) | | | — | | |
Total operating expenses | Total operating expenses | 3,218,360 | | | 1,829,674 | | | 6,106,382 | | | 3,566,936 | | | Total operating expenses | 2,842,997 | | | 3,218,360 | | | 5,943,155 | | | 6,106,382 | | |
| Operating loss | Operating loss | (3,218,360) | | | (1,829,674) | | | (6,106,382) | | | (3,566,936) | | | Operating loss | (2,842,997) | | | (3,218,360) | | | (5,943,155) | | | (6,106,382) | | |
| Other expense (income) | | | |
Other expense | | Other expense | | |
Change in fair value of derivative liability | Change in fair value of derivative liability | (9,523) | | | 120,648 | | | (53,178) | | | 358,998 | | | Change in fair value of derivative liability | — | | | (9,523) | | | (3) | | | (53,178) | | |
Interest expense | Interest expense | 205,300 | | | 190,058 | | | 404,332 | | | 374,963 | | | Interest expense | 186,429 | | | 205,300 | | | 204,828 | | | 404,332 | | |
Gain on forgiveness of PPP loan | — | | | (117,953) | | | — | | | (117,953) | | | |
Interest income | | Interest income | (8,598) | | | — | | | (33,112) | | | — | | |
Loss from asset sale | | Loss from asset sale | — | | | — | | | 307,086 | | | — | | |
Debt conversion inducement expense | | Debt conversion inducement expense | — | | | — | | | 1,383,285 | | | — | | |
Wind-down costs | | Wind-down costs | 87,072 | | | — | | | 470,181 | | | — | | |
| Total other expense, net | Total other expense, net | 195,777 | | | 192,753 | | | 351,154 | | | 616,008 | | | Total other expense, net | 264,903 | | | 195,777 | | | 2,332,265 | | | 351,154 | | |
| Loss before income taxes | Loss before income taxes | (3,414,137) | | | (2,022,427) | | | (6,457,536) | | | (4,182,944) | | | Loss before income taxes | (3,107,900) | | | (3,414,137) | | | (8,275,420) | | | (6,457,536) | | |
| Provision for income taxes | Provision for income taxes | 5,141 | | | 1,600 | | | 5,141 | | | 1,600 | | | Provision for income taxes | 3,600 | | | 5,141 | | | 3,600 | | | 5,141 | | |
| Net loss and comprehensive loss | $ | (3,419,278) | | | $ | (2,024,027) | | | $ | (6,462,677) | | | $ | (4,184,544) | | | |
Net loss | | Net loss | $ | (3,111,500) | | | $ | (3,419,278) | | | $ | (8,279,020) | | | $ | (6,462,677) | | |
| Loss per common share: | Loss per common share: | | | Loss per common share: | | |
Basic | Basic | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | | Basic | $ | — | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | |
Diluted | Diluted | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | | Diluted | $ | — | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | |
| Weighted average shares of common stock outstanding used to compute earnings per share: | Weighted average shares of common stock outstanding used to compute earnings per share: | | | Weighted average shares of common stock outstanding used to compute earnings per share: | | |
Basic | Basic | 495,925,112 | | | 378,427,575 | | | 495,874,560 | | | 357,770,295 | | | Basic | 971,549,608 | | | 495,925,112 | | | 956,804,028 | | | 495,874,560 | | |
Diluted | Diluted | 495,925,112 | | | 378,427,575 | | | 495,874,560 | | | 357,770,295 | | | Diluted | 971,549,608 | | | 495,925,112 | | | 956,804,028 | | | 495,874,560 | | |
See accompanying notes to the condensed consolidated financial statements.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | For the Six Months Ended June 30, | | For the Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net loss | Net loss | $ | (6,462,677) | | | $ | (4,184,544) | | Net loss | $ | (8,279,020) | | | $ | (6,462,677) | |
Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
Depreciation and amortization | Depreciation and amortization | 54,661 | | | 1,948 | | Depreciation and amortization | 67,091 | | | 54,661 | |
Stock-based compensation expense | Stock-based compensation expense | 281,722 | | | 258,279 | | Stock-based compensation expense | 234,450 | | | 281,722 | |
Change in fair value of derivative liabilities | (53,178) | | | 358,998 | | |
Change in fair value of derivative liability | | Change in fair value of derivative liability | (3) | | | (53,178) | |
Amortization of debt discount | Amortization of debt discount | 314,925 | | | 287,781 | | Amortization of debt discount | — | | | 314,925 | |
Gain on forgiveness of PPP loan | — | | | (117,953) | | |
Estimate for legal contingency | | Estimate for legal contingency | 30,329 | | | — | |
Loss from divestiture of asset | | Loss from divestiture of asset | 307,086 | | | — | |
Debt conversion inducement expense | | Debt conversion inducement expense | 1,383,285 | | | — | |
Accrued interest conversion expense | | Accrued interest conversion expense | 15,952 | | | — | |
Foreign currency remeasurement gain | | Foreign currency remeasurement gain | (45,350) | | | — | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Prepaid expenses | Prepaid expenses | (41,674) | | | (72,427) | | Prepaid expenses | 714,152 | | | (41,674) | |
Prepaid expenses - related party | Prepaid expenses - related party | 13,432 | | | (14,805) | | Prepaid expenses - related party | — | | | 13,432 | |
Other current asset | (56,317) | | | — | | |
Other current assets | | Other current assets | (432,975) | | | (56,316) | |
Other current assets - related party | Other current assets - related party | (12,655) | | | — | | Other current assets - related party | — | | | (12,655) | |
Other assets - related party | — | | | (4,000) | | |
| Accounts payable | Accounts payable | (34,022) | | | 17,799 | | Accounts payable | (118,487) | | | (34,022) | |
Accounts payable - related parties | Accounts payable - related parties | 105,107 | | | (1,994) | | Accounts payable - related parties | (16,600) | | | 105,107 | |
Accrued interest - related party | Accrued interest - related party | 86,736 | | | 42,650 | | Accrued interest - related party | — | | | 86,736 | |
Accrued payroll liabilities | Accrued payroll liabilities | 5,798 | | | 50,960 | | Accrued payroll liabilities | 256,198 | | | 5,798 | |
Operating lease liability | Operating lease liability | (39,722) | | | — | | Operating lease liability | (45,794) | | | (39,722) | |
Other current liabilities | Other current liabilities | (33,764) | | | 357,819 | | Other current liabilities | (28,995) | | | (33,764) | |
Other current liabilities - related party | 55,668 | | | — | | |
Other current liabilities - related parties | | Other current liabilities - related parties | (94,078) | | | 55,668 | |
Net cash used in operating activities | Net cash used in operating activities | (5,815,960) | | | (3,019,489) | | Net cash used in operating activities | (6,052,759) | | | (5,815,959) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | Cash flows from investing activities: | |
Proceeds from asset sale, net of legal expenses | | Proceeds from asset sale, net of legal expenses | 5,532,266 | | | — | |
Asset acquisition costs | Asset acquisition costs | (80,830) | | | — | | Asset acquisition costs | — | | | (80,830) | |
Purchase of property and equipment | Purchase of property and equipment | (5,212) | | | (10,170) | | Purchase of property and equipment | (1,860) | | | (5,212) | |
Net cash used in investing activities | (86,042) | | | (10,170) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 5,530,406 | | | (86,042) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | Cash flows from financing activities: | |
| Proceeds from common stock warrant exercises | — | | | 5,730,000 | | |
| Proceeds from pre-funded warrant exercises | Proceeds from pre-funded warrant exercises | 1,967 | | | 11,800 | | Proceeds from pre-funded warrant exercises | — | | | 1,967 | |
Proceeds from stock option exercises | — | | | 4,783 | | |
| Repayment of insurance premium loan payable | Repayment of insurance premium loan payable | (153,076) | | | — | | Repayment of insurance premium loan payable | (168,720) | | | (153,076) | |
Net cash (used in) provided by financing activities | (151,109) | | | 5,746,583 | | |
Net cash used in financing activities | | Net cash used in financing activities | (168,720) | | | (151,109) | |
| Net (decrease) increase in cash and restricted cash | (6,053,110) | | | 2,716,924 | | |
| Cash and restricted cash, beginning of period | $ | 8,987,578 | | | $ | 2,473,976 | | |
| Cash and restricted cash, end of period | $ | 2,934,468 | | | $ | 5,190,900 | | |
|
| Net increase (decrease) in cash and restricted cash | | Net increase (decrease) in cash and restricted cash | (691,073) | | | (6,053,110) | |
| Cash, cash equivalents and restricted cash, beginning of period | | Cash, cash equivalents and restricted cash, beginning of period | $ | 1,249,107 | | | $ | 8,987,578 | |
| Cash, cash equivalents and restricted cash, end of period | | Cash, cash equivalents and restricted cash, end of period | $ | 558,034 | | | $ | 2,934,468 | |
| Supplemental disclosures of cash-flow information: | Supplemental disclosures of cash-flow information: | | Supplemental disclosures of cash-flow information: | |
Reconciliation of cash and restricted cash: | | |
Cash | $ | 2,929,895 | | | $ | 5,186,331 | | |
Reconciliation of cash, cash equivalents and restricted cash: | | Reconciliation of cash, cash equivalents and restricted cash: | |
Cash and cash equivalents | | Cash and cash equivalents | $ | 553,443 | | | $ | 2,929,895 | |
Restricted cash | Restricted cash | 4,573 | | | 4,569 | | Restricted cash | 4,591 | | | 4,573 | |
Total cash and restricted cash shown in the consolidated statements of cash flows | $ | 2,934,468 | | | $ | 5,190,900 | | |
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | | Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 558,034 | | | $ | 2,934,468 | |
| Cash paid during the period for: | Cash paid during the period for: | | Cash paid during the period for: | |
Interest | Interest | $ | 2,669 | | | $ | 44,087 | | Interest | $ | 8,533 | | | $ | 2,669 | |
Income taxes | Income taxes | 5,141 | | | 1,600 | | Income taxes | 8,741 | | | 5,141 | |
| Supplemental disclosures of non-cash financing activities: | Supplemental disclosures of non-cash financing activities: | | Supplemental disclosures of non-cash financing activities: | |
| Common stock warrant exercises | | Common stock warrant exercises | $ | 282,905 | | | $ | — | |
Conversion of multi-draw credit agreement | | Conversion of multi-draw credit agreement | 1,565,470 | | | — | |
Conversion of accrued interest due to related party | | Conversion of accrued interest due to related party | 31,766 | | | — | |
Asset acquisition costs in other current liabilities and accounts payable | Asset acquisition costs in other current liabilities and accounts payable | $ | 761,364 | | | $ | — | | Asset acquisition costs in other current liabilities and accounts payable | — | | | 761,364 | |
Financing of insurance premium | Financing of insurance premium | 275,537 | | | — | | Financing of insurance premium | 203,884 | | | 275,537 | |
Release of share liability to additional paid-in-capital | Release of share liability to additional paid-in-capital | 13,000 | | | — | | Release of share liability to additional paid-in-capital | — | | | 13,000 | |
Right of use asset obtained in exchange for operating lease liabilities | | Right of use asset obtained in exchange for operating lease liabilities | 241,134 | | | — | |
| |
See accompanying notes to the condensed consolidated financial statements.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (DEFICIT)
(UNAUDITED)
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Shares | | Amounts | | | |
Balance, January 1, 2022 | 476,108,445 | | | $ | 476,108 | | | $ | 52,644,221 | | | $ | (47,256,163) | | | $ | 5,864,166 | |
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Stock-based compensation expense | 150,000 | | | 150 | | | 150,208 | | | — | | | 150,358 | |
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Exercise of pre-funded warrants | 19,666,667 | | | 19,667 | | | (17,700) | | | — | | | 1,967 | |
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Net loss for the three months ended March 31, 2022 | — | | | — | | | — | | | (3,043,399) | | | (3,043,399) | |
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Balance, March 31, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 52,776,729 | | | $ | (50,299,562) | | | $ | 2,973,092 | |
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Stock-based compensation expense | — | | | — | | | 144,364 | | | — | | | 144,364 | |
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Net loss for the three months ended June 30, 2022 | — | | | — | | | — | | | (3,419,278) | | | (3,419,278) | |
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Balance, June 30, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 52,921,093 | | | $ | (53,718,840) | | | $ | (301,822) | |
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Deficit |
| Shares | | Amounts | | | |
Balance, January 1, 2023 | 913,528,958 | | | $ | 913,528 | | | $ | 62,816,183 | | | $ | (66,737,765) | | | $ | (3,008,054) | |
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Stock-based compensation expense | — | | | — | | | 131,579 | | | — | | | 131,579 | |
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Exercise of common stock warrants | 16,641,486 | | | 16,642 | | | 266,263 | | | — | | | 282,905 | |
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Conversion of multi-draw credit agreement - related party and accrued interest | 41,379,164 | | | 41,379 | | | 2,939,142 | | | — | | | 2,980,521 | |
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Net loss for the three months ended March 31, 2023 | — | | | — | | | — | | | (5,167,520) | | | (5,167,520) | |
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Balance, March 31, 2023 | 971,549,608 | | | $ | 971,549 | | | $ | 66,153,167 | | | $ | (71,905,285) | | | $ | (4,780,569) | |
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Stock-based compensation expense | — | | | — | | | 102,871 | | | — | | | 102,871 | |
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Net loss for the three months ended June 30, 2023 | — | | | — | | | — | | | (3,111,500) | | | (3,111,500) | |
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Balance, June 30, 2023 | 971,549,608 | | | $ | 971,549 | | | $ | 66,256,038 | | | $ | (75,016,785) | | | $ | (7,789,198) | |
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amounts | | | |
Balance, Balance, January 1, 2021 | 288,074,415 | | | $ | 288,074 | | | $ | 38,896,693 | | | $ | (38,733,981) | | | $ | 450,786 | |
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Stock-based compensation expense | 600,000 | | | 600 | | | 145,980 | | | — | | | 146,580 | |
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Exercise of common stock warrants | 67,166,667 | | | 67,167 | | | 3,962,833 | | | — | | | 4,030,000 | |
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Exercise of pre-funded warrants | 11,800,000 | | | 11,800 | | | — | | | — | | | 11,800 | |
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Net loss for the three months ended March 31, 2021 | — | | | — | | | — | | | (2,160,517) | | | (2,160,517) | |
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Balance, March 31, 2021 | 367,641,082 | | | $ | 367,641 | | | $ | 43,005,506 | | | $ | (40,894,498) | | | $ | 2,478,649 | |
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Stock-based compensation expense | — | | | — | | | 111,699 | | | — | | | 111,699 | |
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Exercise of common stock options | 106,250 | | | 107 | | | 4,676 | | | — | | | 4,783 | |
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Exercise of common stock warrants | 28,333,334 | | | 28,333 | | | 1,671,667 | | | — | | | 1,700,000 | |
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Net loss for the three months ended June 30, 2021 | — | | | — | | | — | | | (2,024,027) | | | (2,024,027) | |
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Balance, June 30, 2021 | 396,080,666 | | | $ | 396,081 | | | $ | 44,793,548 | | | $ | (42,918,525) | | | $ | 2,271,104 | |
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| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| Shares | | Amounts | | | |
Balance, January 1, 2022 | 476,108,445 | | | $ | 476,108 | | | $ | 52,644,221 | | | $ | (47,256,163) | | | $ | 5,864,166 | |
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Stock-based compensation expense | 150,000 | | | 150 | | | 150,208 | | | — | | | 150,358 | |
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Exercise of pre-funded warrants | 19,666,667 | | | 19,667 | | | (17,700) | | | — | | | 1,967 | |
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Net loss for the three months ended March 31, 2022 | — | | | — | | | — | | | (3,043,399) | | | (3,043,399) | |
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Balance, March 31, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 52,776,729 | | | $ | (50,299,562) | | | $ | 2,973,092 | |
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Stock-based compensation expense | — | | | — | | | 144,364 | | | — | | | 144,364 | |
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Net loss for the three months ended June 30, 2022 | — | | | — | | | — | | | (3,419,278) | | | (3,419,278) | |
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Balance, June 30, 2022 | 495,925,112 | | | $ | 495,925 | | | $ | 52,921,093 | | | $ | (53,718,840) | | | $ | (301,822) | |
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See accompanying notes to the condensed consolidated financial statements.
SKYE BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Operations and Business Activities
Nature of Operations
Skye Bioscience, Inc. (the “Company” or “Skye”) was initially incorporated in Nevada on March 16, 2011 as Load Guard Logistics, Inc. On October 31, 2014, the Company closed a reverse merger transaction (the “Merger”) pursuant to which Nemus, a California corporation (“Nemus Sub”), became the Company’s wholly owned subsidiary, and the Company assumed the operations of Nemus Sub. Nemus Sub was incorporated in the State of California on July 17, 2012. On November 3, 2014, the Company changed its name to Nemus Bioscience, Inc. by merging with Nemus Sub to form a Nevada company.
Effective March 25, 2019, the Company changed its name from Nemus Bioscience, Inc. to Emerald Bioscience, Inc. Effective January 19, 2021, the Company changed its name from Emerald Bioscience, Inc. to Skye Bioscience, Inc.
In August 2019, the Company formed a new subsidiary in Australia, SKYE Bioscience Pty Ltd. (formerly "EMBI Australia Pty Ltd."), an Australian proprietary limited company ("SKYE Bioscience Australia"), in order to qualify for the Australian government’s research and development tax credit for research and development dollars spent in Australia. The primary purpose of SKYE Bioscience Australia is to conduct clinical trials for the Company’s product candidates.
2011. The Company is a preclinicalclinical stage pharmaceutical company locatedfocused on the discovery, development and commercialization of novel classes of therapeutic drugs to modulate the endocannabinoid system, which has been shown to play a vital role in San Diego, California that researches, developsoverall human health and, plans to commercialize cannabinoid derivativesnotably, in multiple ocular indications. We are developing drugs with novel mechanisms of action through itsour own directed research efforts and through severalmultiple license agreements with the University of Mississippi ("UM").
agreements.
On May 11, 2022, the Company entered into an Arrangement Agreement, as amended on June 14, 2022, and July 15, 2022 and October 14, 2022 (the “Arrangement Agreement”) with Emerald Health Therapeutics, Inc., a corporation existing under the laws of the Province of British Columbia, Canada (“EHT”), pursuant to a plan of arrangement under the Business Corporations Act (British Columbia) (the “Acquisition”) (Note 3). Subject toOn November 10, 2022, the terms and conditions set forth inCompany completed the Arrangement Agreement, eachAcquisition. Each share of EHT common stock outstanding immediately prior to the effective time of the Arrangement (other than the shares held by EHT dissenting shareholders) shall beAcquisition was transferred to the Company in exchange for 1.95 shares of Company common stock (the “Exchange Ratio”).
In addition, on November 10, 2022, EHT entered into a share purchase agreement with a third party for the sale of EHT's subsidiary, Verdélite Sciences, Inc. ("VDL") for an aggregate purchase price of $9,451,233, subject to certain adjustments (the “Verdélite SPA"). The sale of VDL closed on February 9, 2023 and completes the divestiture of EHT's most significant asset (Note 3).
As of June 30, 2022,2023, the Company has devoted substantially all its efforts to securing product licenses, carrying out its own research and development, preparing for and conducting clinical trials, building infrastructure and raising capital. The Company has not yet realized revenue from its planned principal operations and is a number of years away from potentially being able to do so.
Liquidity and Going Concern
The Company has incurred operating losses and negative cash flows from operations since inception and as of June 30, 2022,2023, had a working capital deficit of $462,942$7,923,867 and an accumulated deficit of $53,718,840.$75,016,785. As of June 30, 2022,2023, the Company had unrestricted cash in the amount of $2,929,895.$553,443. For the three and six months ended June 30, 20222023 and 2021,2022, the Company incurred losses from operations of $2,842,997 and $3,218,360, and $1,829,674,$5,943,155 and 6,106,382 and 3,566,936,$6,106,382, respectively. For the three and six months ended June 30, 20222023 and 2021,2022, the Company incurred net losses of $3,111,500 and $3,419,278, and $2,024,027,$8,279,020 and $6,462,677, and $4,184,544, respectively. The Company expects to continue to incur significant losses through the end of 20222023 and expects to incur significant losses and negative cash flows from operations in the future.
The Company’s continued existence is dependent on its ability to raise sufficient additional funding to cover operating expenses and to carry out its research and development activities. During the quartersix months ended June 30, 2022,2023, management has implemented cost cutting measures to extend its cash runway while searching for additional financing. These measures have included the Company expended significant resourcesdeferral of payments to employees, the postponement of certain nonclinical studies, a hold on non-essential travel and hiring, and the acquisitiondeferral of EHT and as it approaches the initiation of its first clinical trial in late 2022 has increased research and development spending. These two factors, among others, have resulted in an overall increase in cash used in operating activities.certain operational contracts. Based on the Company’s expected cash requirements, without obtaining additionalimmediate near term funding, by the end of the third quarter of 2022, management believes that the Companyit will not have enough funds to continue clinical studies and pay down its related party debt.or operations. These conditions, including the uncertainty of our ability to successfully resolve our litigation with Cunning (as described below), give rise to substantial doubt as to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company is pursuingDuring the acquisition of EHT due to the cash and real estate that it expects to acquire as a result of the Acquisition (Note 3). Management expects that the Acquisition will provide funding forquarter ended June 30, 2023, the Company into at least the second quarter of 2023, which management expects will allow Skye to completemet its Phase 1 clinical trial and commence Phase 2 clinical trial. However, the Acquisition is expected to close no earlier than October 15, 2022. Therefore, in order to satisfy the Company's cash flow requirements through the closing of the Acquisition, the Company is exploring interim financing solutions to bridge the Company's operational funding requirements duringthrough its cost cutting measures, including the pre-closing period, is managingtermination of consulting agreements. In 2023, the timingCompany will continue with the liquidation of its vendor paymentsEHT's assets, including the sale of the real-estate held by Avalite Sciences, Inc. ("AVI") and has continued to consider other interim funding alternatives.explore additional financing options. However, the Company cannot provide any assurances that such additional funds will be available on reasonable terms in sufficient time for us to continue operations, or at all. If the Company raises additional funds by issuing equity securities, dilution to existing stockholders would result.
Further, in January 2023, the Company was subject to an unfavorable outcome in a lawsuit with a former employee which resulted in the recognition of an estimated legal contingency of $6,205,310. The Company strongly believes that this case was incorrectly decided as to liability, the amount of compensatory damages, and the appropriateness and amount of punitive damages. The Company intends to vigorously challenge the verdict in the trial court and appeal and pursue reimbursement under its existing insurance policies. However, the outcome of the litigation and the amount recoverable under its existing insurance policies, if any, is inherently uncertain (Note 12). The legal contingency that the Company recorded in connection with the jury verdict has had a significant negative effect on our business, including our ability to obtain funding. If the Company is unable to reduce the verdict prior to the rendering of a final judgment by the court or to reach a reasonable settlement with Ms. Cunning, the Company would be liable to pay substantial damages in excess of the Company's liquid assets. In addition, in connection with certain post-trial motions and an appeal, the court granted the Company's request for a stay of enforcement of the judgment pending post-trial motions and appeal conditioned on the Company posting a bond in the amount of $9,080,202 by August 10, 2023. For a further description of this litigation, see Note 12, "General Litigation and Disputes - Wendy Cunning vs. Skye Bioscience, Inc." to the accompanying Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Concurrent with the Cunning Lawsuit, the Company brought a lawsuit against its D&O carrier, Partner RE, challenging the previous denial of coverage and seeking damages and an order that Partner RE is obligated to reimburse the Company for the defense fees and costs incurred in the defense of the Cunning Lawsuit and requiring Partner RE to indemnify the Company for any settlement or judgment in the Cunning Lawsuit. On April 17, 2023, PartnerRe filed a motion to dismiss the Company's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). On June 20, 2023, the judge issued a final ruling in favor of the Company and denied Partner Re's motion to dismiss the lawsuit. In the ruling, the Court rejected Partner Re's primary basis for denying coverage. Based on this outcome, the Company is pursuing up to $5,000,000 in coverage less the deductible, to cover legal expenses incurred and the final verdict or settlement. For a further description of this litigation, see Note 12, "General Litigation and Disputes - Skye Bioscience, Inc. vs. Partner Re Ireland Insurance" to the accompanying Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
On October 5, 2018, the Company entered into a Multi-Draw Credit Agreement (the “Credit Agreement”) withFebruary 16, 2023, Emerald Health Sciences ("Sciences"), a related party (Note 9). On April 29, 2020,11) exercised all of its outstanding warrants and agreed to offset the Company entered into anremaining principal balance plus accrued interest outstanding under the Amended and Restated Multi-Draw Credit Agreement (the “Amended Credit Agreement”) with Sciences.by the aggregate exercise price of $282,905 before converting the remaining balance of the Amended Credit Agreement in the amount of $1,597,236 (Notes 5 & 6). As of June 30, 2022,2023, Sciences has no outstanding warrants or debt with the Company.
Subsequent to the period ended June 30, 2023, on July 24, 2023, the Company had an outstanding principal balance of $2,464,500 under the Amended Credit Agreement. Effective September 15, 2021, the disbursement line under the Amended Credit Agreement was closed and it no longer serves asentered into a potential source of liquidity to the Company. The outstanding advances plus accrued interest under the Amended Credit Agreement are due on October 5, 2022 (See Note 5).
In December 2019, a novel strain of coronavirus ("COVID-19") emerged in Wuhan, China. Since then, it has spread to the United States, the European Union, and Australia, where the Company has operations and conducts laboratory research and plans to conduct its clinical studies. The effects of COVID-19 could continue to impact the Company's ability to operate as a going concern and maintain sufficient liquidity to continue operations. The impact of COVID-19 on companies is evolving rapidly and its future effects are uncertain.
During the second quarter of 2022, the Company was indirectly impacted by a cyberattack on the contract manufacturer for its Phase 1 clinical trial material. This disruption delayed the Company's production timeline and the anticipated initiation of enrollmentloan agreement in the Company's Phase 1 clinical studyprincipal amount of $250,000 (the “Bridge Loan”) with MFDI, LLC. The Bridge Loan was obtained in order to provide bridge financing for SBI-100 Ophthalmic Emulsion ("SBI-100 OE")the business to the fourth quartersecure additional strategic financing (Note 13). The bridge loan bears interest at a rate of 2022. The overall potential delay9.5% per annum and is payable in the Company's drug product research and development from these types of incidents is unknown, but the Company's operations and financial condition will likely continue to suffer in the event of continued business interruptions, supply chain issues, delayed clinical trials, production or a lack of laboratory resources due to the pandemic and other global conditions.
30 days.
It is possible that the Company may encounter other similar issues relating COVID-19to supply chain inefficiencies, a lack of production or the cyberattacklaboratory resources, global economic and political conditions, pandemics or cyberattacks that could cause business disruptions and clinical trial delays which will need to be managed in the future. The factors to take into account in going concern judgements and financial projections include travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of service providers and the general economy.
The Company does not believe that inflation has made adjustmentshad a material impact on its operating results during the periods presented. However, inflation, led by supply chain constraints, federal stimulus funding, increases to its operations designedhousehold savings, and the sudden macroeconomic shift in activity levels arising from the loosening or removal of many government restrictions and the broader availability of COVID-19 vaccines has had and may continue to keep its employees safehave an impact on general and comply with federal, stateadministrative costs such as professional fees, employee costs and local guidelines. The extenttravel costs, and may in the future adversely affect the Company's operating results. In addition, increased inflation has had and may continue to have an effect on interest rates. Increased interest rates may adversely affect the terms under which COVID-19 may further impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In response to COVID-19, the United States government has passed legislation and taken other actions to provide financial relief to companies and other organizations affected by the pandemic.
Company can obtain any potential additional funding.
Notably, the Company relies on third party manufacturers to produce its product candidates. The manufacturing of SBI-100 OE is conducted in the United States.States and Europe. Formulation of the eye drop for testingclinical trials is also performedbeing conducted in the United States but can relyEurope and relies on regulatory-accepted excipients that can be sourced from countries outside the United States. In connection withSince the COVID-19 pandemic, there could possibly be an impact onglobal supply chain disruptions have become more common and the Company may encounter future issues related to sourcing materials that are part of the eye drop formulation or manufacturing process, as well as impacting volunteer and/or patient recruitment in Australia for clinical studies. The location
After considering the plans to alleviate substantial doubt, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying Unaudited Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Basis of Presentation
In the opinion of management, the accompanying Unaudited Interim Condensed Consolidated Financial Statements have been prepared on a consistent basis with the Company’s Audited Consolidated Financial Statements as of and for the year ended December 31, 2021,2022, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. The Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and therefore, omit certain information and footnote disclosures necessary to present the financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”).
The results of operations for the three and six months ended June 30, 20222023 are not necessarily indicative of the results to be expected for the year ending December 31, 20222023 or any future periods. The Condensed Consolidated Balance Sheet as of December 31, 20212022 was derived from the Company’s audited financial statements as of December 31, 2021,2022, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2022.31, 2023. The Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, which includes a broader discussion of the Company’s business and the risks inherent therein.
Certain reclassifications have been made to the amounts in prior periods to conform to the current period’s presentation, primarily the separate classification of prepaid expenses, other current assets, insurance premium loan payable and other current liabilities. Such reclassifications did not have a material impact on the Unaudited Condensed Financial Statements.
Assets Held for Sale
On November 10, 2022, the Company completed the Acquisition of EHT in accordance with the Arrangement Agreement. At the time of the Acquisition there were arrangements in place to sell the acquired assets and liabilities that comprised of two of EHT's subsidiaries, Emerald Health Therapeutics Canada, Inc. ("EHTC") and VDL. As a result, EHTC and VDL were considered held for sale since the Acquisition and the Company has classified the associated assets of VDL as held for sale on the Condensed Consolidated Balance Sheets and the period costs related to both EHTC and VDL have been presented as wind-down costs in the Consolidated Statements of Operations. EHTC was divested on December 28, 2022 and VDL was divested on February 9, 2023 (see Note 3). During the quarter ended June 30, 2023 the Board approved a plan to pursue the sale of the real-estate held by AVI, which is substantially the only asset held by AVI. Assets meeting the held for sale criteria are classified as held for sale on the Condensed Consolidated Balance Sheets in subsequent periods until sold.
Assets that meet the held for sale criteria are held for sale and reported at the lower of their carrying value or their fair value, less estimated costs to sell. Changes in fair value are recorded as a gain or loss in the results of operations but not to exceed the original carrying value. Due to the asset acquisition accounting on the date of the Acquisition AVI had no initial carrying value.
Derecognition of Nonfinancial Assets
The Company generally accounts for sales of nonfinancial assets that are outside the scope of our ordinary activities under ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. Pursuant to ASC 610-20, the Company applies the guidance in ASC 606 to determine if a contract exists, identify the distinct nonfinancial assets, and determine when control transfers and, therefore, when to derecognize the nonfinancial asset. Additionally, the Company applies the measurement principles of ASC 606 to determine the amount of consideration, if any, to include in the calculation of the gain or loss for the sale of the nonfinancial asset. Refer to Note 3 for further information.
Principles of Consolidation
The accompanying consolidated financial statements as of June 30, 2023 include the accounts of the Company and its wholly owned subsidiaries SKYE Bioscience AustraliaPty Ltd (“SKYE Bioscience Australia“), EHT, AVI, and Nemus Sub. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Unaudited Condensed Consolidated Financial Statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates and judgements as to the appropriate carrying values of equity instruments, derivative liabilities, debt with embedded features, estimates related to the Company's estimation of the percentage of completion under its research and development contracts, contingent legal liabilities, fair value of assets acquired, and the valuation of stock based compensation awards, which are not readily apparent from other sources.
Risks and Uncertainties
The Company’s operations are subject to a number of risks and uncertainties, including but not limited to, the need to obtain immediate funding to continue operations, changes in the general economy, the size and growth of the potential markets for any of the Company’s product candidates, uncertainties related to the impact of COVID-19current global environment, including economic factors such as inflation, and risks related to the global supply chain disruptions (Note 1), risks related to operating primarily in a virtual environment, results of research and development activities, uncertainties surrounding regulatory developments in the United States, Canada, the European Union, and Australia and the Company’s ability to attract new funding.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined asAs noted above, in January 2023, the exchange price that would be received forCompany was subject to an asset or paid to transferunfavorable outcome in a liability (the “exit price”)lawsuit with a former employee which resulted in the principal or most advantageous market forrecognition of an estimated legal contingency of $6,205,310. The Company intends to vigorously challenge the asset or liabilityverdict in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximizetrial court and appeal and pursue reimbursement under its existing insurance policies. However, the useoutcome of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy based on three levels of inputs, of which the first two are considered observable,litigation and the lastamount recoverable under its existing insurance policies, if any, is considered unobservable, is used to measure fair value:
Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources such as quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to determininginherently uncertain (Note 12). Furthermore, the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The carrying values of the Company’s financial instruments, with the exception of the derivative liabilities, approximate their fair value due to their short maturities. The derivative liabilities are valued on a recurring basis utilizing Level 3 inputs (Note 4).
Convertible Instruments
The Company accounts for hybrid contracts with embedded conversion features in accordance with ASC 815, Derivatives and Hedging Activities (“ASC 815”), which requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible debt instruments with embedded conversion features in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) if it is determined that the conversion feature should not be bifurcated from their host instruments. Under ASC 470-20,legal contingency the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the difference between the fair value of the underlying common stock at the commitment date and the embedded effective conversion price. When the Company determines that the embedded conversion option should be bifurcated from its host instrument, the embedded feature is accounted for in accordance with ASC 815. Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract is allocated to the fair value of the derivative. The derivative is subsequently recorded at fair value at each reporting date based on current fair value, with the changes in fair value reported in the results of operations.
The Company also follows ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) when evaluating the accounting for its hybrid instruments. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception (for example, a payable settled with a variable number of the issuer’s equity shares); (b) variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor’s S&P 500 Index and settled with a variable number of the issuer’s equity shares); or (c) variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled). Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date with a re-measurement reported in other expense (income), net in the accompanying Condensed Consolidated Statements of Comprehensive Loss.
When determining the short-term vs. long-term classification of derivative liabilities, the Company first evaluates the instruments’ exercise provisions. Generally, if a derivative is a liability and exercisable within one year, it will be classified as short-term. However, because of the unique provisions and circumstances that may impact the accounting for derivative instruments, the Company carefully evaluates all factors that could potentially restrict the instrument from being exercised or create a situation where exercise would be considered remote. The Company re-evaluates its derivative liabilities at each reporting period end and makes updates for any changes in facts and circumstances that may impact classification.
Warrants Issued in Connection with Financings
The Company generally accounts for warrants issued in connection with debtthe jury verdict and equity financingsthe uncertainty as to the Company's ability to reduce the verdict prior to the rendering of a componentfinal judgment by the court or to reach a reasonable settlement with Ms. Cunning could limit our ability to raise new capital from investors, and expand the Company's therapeutic pipeline, both of equity, unlesswhich are needed to operate the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility thatbusiness and the Company may needwould be liable to settle the warrantspay substantial damages in cash. For warrants issued with a conditional obligation to issue a variable number of shares or the deemed possibility of a cash settlement, the Company records the fair valueexcess of the warrants as a liability at each balance sheet date and records changes in fair value in other expense (income), net in the Condensed Consolidated Statements of Comprehensive Loss.
Debt Issuance Costs and Interest
Discounts related to bifurcated derivatives, freestanding instruments issued in bundled transactions and issuance costs are recorded as a reduction to the carrying value of the debt and amortized over the life of the debt using the effective interest method. The Company makes changes to the effective interest rate, as necessary, on a prospective basis. For debt facilities that provide for multiple advances, the Company initially defers any issuance costs until the first advance is made and then amortizes the costs over the life of the facility.
Research and Development Expenses and Licensed Technology
Research and development costs are expensed when incurred. These costs may consist of external research and development expenses incurred under agreements with third-party contract research organizations and investigative sites, third-party manufacturing organizations and consultants, license fees, employee-related expenses, which include salaries and benefits for the personnel involved in the Company’s preclinical drug development activities, other expenses and equipment and laboratory supplies.
Costs incurred for the rights to use licensed technologies in the research and development process, including licensing fees and milestone payments, are charged to research and development expense as incurred in situations where the Company has not identified an alternative future use for the acquired rights, and are capitalized in situations where there is an identified alternative future use. None of the costs associated with the use of licensed technologies have been capitalized to date.
Company's liquid assets.
Stock-Based Compensation Expense
Stock-based compensation expense is estimated at the grant date based on the fair value of the award, and the fair value is recognized as expense ratably over the vesting period with forfeitures accounted for as they occur. Upon the exercise of stock option awards, the Company's policy is to issue new shares of its common stock. The Company uses the Black-Scholes valuation method for estimating the grant date fair value of stock options using the following assumptions:
•Volatility - Expected volatility is estimated using the historical stock price performance over the expected term of the award.
•Expected term - The expected term is based on a simplified method which defines the life as the weighted average of the contractual term of the options and the vesting period for each award.
•Risk-free rate - The risk-free interest rate for the expected term of the option is based on the average market rate on U.S. Treasury securities in effect during the period in which the awards were granted.
•Dividends - The dividend yield assumption is based on the Company’s history and expectation of paying no dividends in the foreseeable future.
The Company accounts for liability-classified stock option awards (“liability options”) under ASC 718 - Compensation - Stock Compensation (“ASC 718”), under which the Company accounts for its awards containing other conditions as liability classified instruments. Liability options are initially recognized at fair value in stock-compensation expense and subsequently
re-measured to their fair values at each reporting date with changes in the fair value recognized in share-based compensation expense or additional paid-in capital upon settlement or cancellation.
Loss Per Common Share
The Company applies ASC No. 260, Earnings per Share in calculating its basic and diluted loss per common share. Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted loss per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock, restricted stock subject to vesting, warrants to purchase common stock and common shares underlying convertible debt instruments are considered to be common stock equivalents.
The computations of basic and diluted In periods with a reported net loss, per common share are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, (Unaudited) | | Six Months Ended June 30, (Unaudited) |
| 2022 | | 2021 | | 2022 | | 2021 |
Basic and diluted loss per share: | | | | | | | |
Net loss | $ | (3,419,278) | | | $ | (2,024,027) | | | $ | (6,462,677) | | | $ | (4,184,544) | |
Weighted average common shares outstanding – basic and diluted | 495,925,112 | | | 378,427,575 | | | 495,874,560 | | | 357,770,295 | |
Loss per share - basic and diluted | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | | | $ | (0.01) | |
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The following outstanding shares ofsuch common stock equivalents wereare excluded from the computationcalculation of diluted net loss per share of common stock forif their effect is anti-dilutive. For additional information regarding the periods presented because including them would have been anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, (Unaudited) | | Six Months Ended June 30, (Unaudited) |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock options | 37,755,000 | | | 21,850,000 | | | 37,755,000 | | | 21,850,000 | |
Common shares underlying convertible debt | 5,570,932 | | | 5,213,498 | | | 5,570,932 | | | 5,213,498 | |
Warrants | 136,187,225 | | | 50,213,334 | | | 136,187,225 | | | 50,213,334 | |
Unvested restricted stock units | 4,000,000 | | | — | | | 4,000,000 | | | — | |
Asset Acquisition
The Company evaluates acquisitions of assets and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen is met, the transaction is accounted for as an asset acquisition. If the screen is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the definition of a business. Significant judgment is required in the application of the screen test to determine whether an acquisition is a business combination or an acquisition of assets.
For asset acquisitions, a cost accumulation model is used to determine the cost of an asset acquisition. Common stock issued as consideration in an asset acquisition is generally measured based on the acquisition date fair value of the equity interests issued. Direct transaction costs are recognized as part of the cost of an asset acquisition. The Company also evaluates which elements of a transaction should be accounted for as a part of an asset acquisition and which should be accounted for separately. Consideration deposited into escrow accounts are evaluated to determine whether it should be included as part of the cost of an asset acquisition or accounted for as contingent consideration. Amounts held in escrow where we have legal title to such balances but where such accounts are not held in the Company's name, are recorded on a gross basis as an asset with a corresponding liability in our condensed consolidated balance sheet.
loss per share (see Note 9)
The cost of an asset acquisition, including transaction costs, are allocated to identifiable assets acquired and liabilities assumed based on a relative fair value basis. Goodwill is not recognized in an asset acquisition. Any difference between the cost of an asset acquisition and the fair value of the net assets acquired is allocated to the non-monetary identifiable assets based on their relative fair values. However, as of the date of acquisition, if certain assets are carried at fair value under other applicable GAAP the consideration is first allocated to those assets with the remainder allocated to the non-monetary identifiable assets based on relative fair value basis.
Government Assistance
The Company early adopted ASU 2021-10 Government Assistance on January 1, 2022. The Company accounts for the tax rebates received from the Australian Taxation Office ("ATO") under such guidance. The Company accounts for the rebates that it receives under the AusIndustry research and development tax incentive program under the income recognition model of IAS 20. Under this model, when there is reasonable assurance that the rebate will be received, the Company recognizes the income from the tax rebate as an offset to research and development expense during the period which the benefit applies to the research and development costs incurred. The Company did not receive any tax rebates under the AusIndustry incentive program during the three and six months ended June 30, 2023 and June 30, 2022 related to incentives earned in the prior year. As of June 30, 20222023 and December 31, 2021,2022, the Company has recognized $110,882$613,940 and $44,616,$179,687, respectively, in other current assets in its Condensed Consolidated Balance Sheets.
Commitments and Contingencies
The Company follows ASC 440, Commitments and ASC 450, Contingencies, subtopic 450-20 to report accounting for contingencies and commitments respectively. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur.
The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Based upon information available at this time, management believes that the current litigation matter related to the Cunning lawsuit will have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows. Refer to Note 12 for additional information.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods beginning after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in fiscal periods ending after December 15, 2020. Upon implementation, the Company may use either a modified retrospective or full retrospective method of adoption. The adoption of ASU 2020-06 will, impact the way the Company calculates its (loss) earnings per share, result in expanded disclosures around convertible instruments and remove the requirement to assess and record beneficial conversion features. The Company currently plans to adopt the provisions of this ASU on the effective date. However, it reserves the right to early adopt these provisions.date using a modified retrospective method of adoption.
3. Acquisition of Emerald Health Therapeutics, Inc.
On May 11, 2022, the Company and EHT entered into anthe Arrangement Agreement, as subsequently amended on June 14, 2022, and July 15, 2022 pursuant to which Skye will acquire all of the issued and outstanding shares ofOctober 14, 2022 with EHT, pursuant to a plan of arrangement under the Business Corporations Act of British Columbia. As of June 30,(British Columbia). The Acquisition was consummated on November 10, 2022 EHT was a related party of the Company due to the investments by Sciences in both Skye and EHT (Notes 9 & 11)(the "Closing Date").
Under the Arrangement Agreement, the Company will issue each EHT shareholder (other than the shares held by EHT dissenting shareholders) 1.95 shares of Skye common stock, for each share of EHT common stock outstanding as of the closing date of the Acquisition. As of June 30, 2022, it is expected that the Company will issue 416,270,585 shares of stock as consideration in the Acquisition and no fractional shares of Skye Common Stock will be issued. It is expected that, for U.S. and Canadian federal income tax purposes, the Acquisition shall constitute a taxable exchange by the EHT shareholders of EHT Shares for Skye Common Stock. In addition, all outstanding stock options and warrants of EHT will be exchanged for replacement options and warrants of Skye on identical terms, as adjusted in accordance with the Exchange Ratio.
The obligations of Skye and EHT to consummate the Arrangement are subject to certain conditions, including, but not limited to the following:
a.obtaining the required approvals of Skye’s and EHT’s shareholders;
b.obtaining an interim order and final order from the Supreme Court of British Columbia approving the Acquisition;
c.the absence of any injunction or similar restraint prohibiting or making illegal the consummation of the Acquisition or any of the other transactions contemplated by the Arrangement Agreement;
d.no material adverse effect having occurred;
e.subject to certain materiality exceptions, the accuracy of the representations and warranties of each party;
f.the performance in all material respects by each party of its obligations under the Arrangement Agreement;
g.the conditional approval by the Canadian Stock Exchange (“CSE”) of the listing of Skye Common Stock and the common stock, options or warrants to be issued to in connection with the Arrangement; and
h.the EHT shareholders shall not have exercised dissent rights in respect of more than 5% of the outstanding EHT shares.
The Company is currently evaluating the expected accounting for the transaction and expects that the Acquisition will be accounted for as an asset acquisition due to the wind-down state of EHT (Note 1). The primary purpose of the Acquisition iswas to utilize EHT's remaining cash and cash equivalents and liquidate the primary real estate asset owned by EHT in order to fund the Company's operations. In addition, EHT owns a vacant laboratory facility that is fully-licensed to handle controlled substances under Canadian regulations, whichcurrently in the final stages of liquidating substantially all of its remaining assets, including AVI (Note 13). As of June 30, 2023, the Company is currently evaluating for research and development activities and to support certain manufacturing capabilities.has divested both of EHT's former operating entities. In negotiating the Exchange Ratio, the Company performed a review of EHT's assets and the costs expected to wind down operations. The remaining wind-down costs consist primarily of legal fees related to divesting of EHT’s assets and post-closing general corporate matters, other professional fees for accounting and tax, tax payments, insurance, contract termination costs and operational costs through the cease operations date at each site. As of June 30, 2023, the Company estimates that EHT will incur an additional $179,660 in wind-down costs. However, there isare inherent riskrisks and uncertaintyuncertainties around what the ultimate liquidation value of EHT.
Divestiture of VDL
On November 10, 2022, EHT will be.and C3, a third-party, entered into the Verdélite SPA, as amended, effective November 8, 2022, pursuant to which C3 would acquire all of the outstanding shares of VDL, the holder of EHT's most significant real estate asset.
TheOn February 9, 2023, upon closing the transactions contemplated by the Verdélite SPA, the Company sold all of the outstanding shares of VDL for an aggregate purchase price of approximately $9,451,233. Prior to closing the Acquisition, is anticipated to closeEHT received a $557,705 cash deposit, which was considered in the fourth quartersale as of 2022. Asthe closing date. Upon closing, the Company received gross proceeds, net of Junelegal and advisory fees as of the closing date of $5,532,266. The remainder of the purchase price will be paid as follows: (i) $377,100 will be payable in five (5) equal monthly installments payable on the last day of each month beginning on December 31, 2023 and ending April 30, 2022,2024, with interest in accordance with the terms of the Verdélite SPA and (ii) $2,828,250 will be payable in three (3) equal installments on each of the 18-month, 30-month, and 42-month anniversaries of the VDL Closing Date, with interest in accordance with the terms of the Verdélite SPA. The Company recognized the sale of VDL when control transferred on February 9, 2023. In accordance with recognition guidance, the Company has deferred $842,193determined to fully reserve for the remaining receivables and will record a gain on the sale when additional cash payments are received. For the six months ended June 30, 2023, the Company has recorded a loss on sale of $307,086 based on the difference between the carrying amount of the assets sold and the net cash proceeds.
Sale of AVI
On April 10, 2023, the Board approved a plan to sell AVI. AVI was listed for sale in May 2023 and the Company expects that the facility will be disposed of by either share transfer or asset acquisition costs.sale by the end of the year. However, there are inherent uncertainties around the timing and realizable value of the disposal due to various market factors.
4. Other Current Assets and Liabilities
Other current assets consist of the following:
| | | | | | | | | | | |
| As of June 30, 2023 | | As of December 31, 2022 |
AusIndustry incentive | $ | 613,940 | | | $ | 179,687 | |
Other tax receivables | 133,518 | | | — | |
Short-term deposits | 282,910 | | | 282,740 | |
Total other current assets | 33,746 | | | 19,161 | |
| $ | 1,064,114 | | | $ | 481,588 | |
Other current liabilities consist of the following:
| | | | | | | | | | | |
| As of June 30, 2023 | | As of December 31, 2022 |
Research and development costs | $ | 129,044 | | | $ | 40,597 | |
Legal fees | 225,254 | | | 227,350 | |
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Deposit - Verdélite SPA | — | | | 553,800 | |
Acquisition related contingent liability | 188,231 | | | 134,896 | |
Total other accrued liabilities | 306,804 | | | 410,351 | |
| $ | 849,333 | | | $ | 1,366,994 | |
5. Warrants and Derivative Liabilities
There are significant judgements and estimates inherent in the determination of the fair value of the Company’s warrants and derivative liabilities.warrants. These judgements and estimates include assumptions regarding the Company’s future operating performance the time to completing a liquidity event, if applicable, and the determination of the appropriate valuation methods. If the Company had made different assumptions, the fair value of the warrants and derivative liabilities could have been significantly different (See Note(Note 2).
Warrants
Warrants vested and outstanding as of June 30, 20222023 are summarized as follows:
| Source | Source | | Exercise Price | | Term (Years) | | Number of Warrants Outstanding | Source | | Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Number of Warrants Outstanding |
Pre 2015 Common Stock Warrants | | $ | 1.00 | | | 10 | | 1,110,000 | | |
2015 Common Stock Warrants | 2015 Common Stock Warrants | | 5.00 | | | 10 | | 100,000 | | 2015 Common Stock Warrants | | $ | 5.00 | | | 1.82 | | 100,000 | |
2016 Common Stock Warrants to Service Providers | 2016 Common Stock Warrants to Service Providers | | 1.15 | | | 10 | | 40,000 | | 2016 Common Stock Warrants to Service Providers | | 1.15 | | | 3.34 | | 40,000 | |
2018 Emerald Financing Warrants | | 0.10 | | | 5 | | 3,400,000 | | |
Emerald Multi-Draw Credit Agreement Warrants | | 0.50 | | | 5 | | 7,500,000 | | |
2019 Common Stock Warrants | 2019 Common Stock Warrants | | 0.35 | | | 5 | | 8,000,000 | | 2019 Common Stock Warrants | | 0.35 | | | 1.40 | | 8,000,000 | |
2020 Common Stock Warrants to Placement Agent | 2020 Common Stock Warrants to Placement Agent | | 0.08 | | | 5 | | 8,166,667 | | 2020 Common Stock Warrants to Placement Agent | | 0.08 | | | 2.09 | | 8,166,667 | |
2021 Inducement Warrants | 2021 Inducement Warrants | | 0.15 | | | 5 | | 21,166,667 | | 2021 Inducement Warrants | | 0.15 | | | 3.07 | | 21,166,667 | |
2021 Inducement Warrants to Placement Agent | 2021 Inducement Warrants to Placement Agent | | 0.19 | | | 5 | | 1,481,667 | | 2021 Inducement Warrants to Placement Agent | | 0.19 | | | 3.07 | | 1,481,667 | |
2021 Common Stock Warrants | 2021 Common Stock Warrants | | 0.09 | | | 5 | | 77,777,779 | | 2021 Common Stock Warrants | | 0.09 | | | 3.25 | | 77,777,779 | |
2021 Common Stock Warrants to Placement Agent | 2021 Common Stock Warrants to Placement Agent | | 0.11 | | | 5 | | 5,444,445 | | 2021 Common Stock Warrants to Placement Agent | | 0.11 | | | 3.25 | | 5,444,445 | |
2022 Common Stock Warrants to Service Provider | 2022 Common Stock Warrants to Service Provider | | 0.04 | | | 2 | | 2,000,000 | | 2022 Common Stock Warrants to Service Provider | | 0.04 | | | 0.76 | | 2,000,000 | |
Total warrants outstanding as of June 30, 2022 | | | | | | 136,187,225 | | |
November 2019 EHT Common Stock Warrants | | November 2019 EHT Common Stock Warrants | | 0.29 | | | 1.42 | | 8,552,630 | |
November 2019 EHT Common Stock Warrants | | November 2019 EHT Common Stock Warrants | | 0.15 | | | 1.50 | | 945,750 | |
December 2019 EHT Common Stock Warrants | | December 2019 EHT Common Stock Warrants | | 0.15 | | | 1.61 | | 20,172,409 | |
Total warrants outstanding as of June 30, 2023 | | Total warrants outstanding as of June 30, 2023 | | | | | | 153,848,014 | |
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As of June 30, 2022,2023, all of the Company's warrants are fully vested.
February 2023 Sciences Warrant Exercises
Effective February 16, 2023, Company and Emerald entered into a Master Transaction Agreement (the "MTA"). Under the MTA, Emerald agreed to exercise 16,641,486 common stock warrants at $0.017 per share (the "MTA Warrants"). Under the MTA, the parties agreed that the aggregate proceeds from the exercise of the MTA Warrants of $282,905 was to be paid through a reduction of the Amended Credit Agreement owed by the Company to Sciences (Note 6). On February 22, 2023, the Company issued 16,641,486 shares of common stock to Emerald in connection with the exceptionexercise of the "2022 Common StockMTA Warrants to Service Provider."
2022 Common Stock Warrants Issued to a Service Provider
On April 1, 2022, the Company granted 2,000,000 equity classified warrants with a fair value of $35,688 to a service provider at an exercise price of $0.04 per share. The warrants vest monthly over one year and expire on April 1, 2024. Refer to Note 7 for the summary of stock-based compensation expense.
As of the date of grant, the Company valued the warrants with a Black-Scholes valuation method using the following assumptions:
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| April 1, 2022 Date of Issuance |
Dividend yield | — | % |
Volatility factor | 118.5 | % |
Risk-free interest rate | 1.92 | % |
Expected term (years) | 1.27 |
Underlying common stock price | $ | 0.04 | |
(Note 5).
Derivative Liability
During the six months ended June 30, 2023, the warrant shares underlying the Emerald Financing - warrant liability expired unexercised and the decrease in fair value during the three months ended June 30, 2023 was nominal.
The following tables summarizetable summarizes the activity of the derivative liability for the periodsperiod indicated:
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| Six Months Ended June 30, 2022 |
| December 31, 2021 Fair Value of Derivative Liability | | Fair Value of Derivative Liability | | Change in Fair Value of Derivative Liability | | Reclassification of Derivative to Equity | | June 30, 2022 Fair Value of Derivative Liability |
Emerald Financing - warrant liability | $ | 59,732 | | | $ | — | | | $ | (53,178) | | | $ | — | | | $ | 6,554 | |
Current balance of derivative liability | $ | 59,732 | | | $ | — | | | $ | (53,178) | | | $ | — | | | $ | 6,554 | |
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| | | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2022 |
| | December 31, 2020 Fair Value of Derivative Liability | | Fair Value of Derivative Liability | | Change in Fair Value of Derivative Liability | | Reclassification of Derivative to Equity | | June 30, 2021 Fair Value of Derivative Liability | | December 31, 2021 Fair Value of Derivative Liability | | Fair Value of Derivative Liability | | Change in Fair Value of Derivative Liability | | Reclassification of Derivative to Equity | | June 30, 2022 Fair Value of Derivative Liability |
Emerald Financing - warrant liability | Emerald Financing - warrant liability | $ | 38,567 | | | $ | — | | | $ | 358,998 | | | $ | — | | | $ | 397,565 | | Emerald Financing - warrant liability | $ | 59,732 | | | $ | — | | | $ | (53,178) | | | $ | — | | | $ | 6,554 | |
Total derivative liability | Total derivative liability | $ | 38,567 | | | $ | — | | | $ | 358,998 | | | $ | — | | | $ | 397,565 | | Total derivative liability | $ | 59,732 | | | $ | — | | | $ | (53,178) | | | $ | — | | | $ | 6,554 | |
Emerald Financing Warrant Liability
The Emerald Financing Warrants were issued during 2018 in connection with the Emerald Financing, and originally contained a price protection feature. In connection with the August 2020 Financing, the exercise price was permanently set to $0.10. The warrants containcontained a contingent put option ifin the Company undergoesevent of a subsequent financing that resultsresulting in a change in control. The warrant holders also havehad the right to participate in certain subsequent financing transactions on an as-if converted basis.
The Company reviewed the warrants for liability or equity classification under the guidance of ASC 480-10, Distinguishing Liabilities from Equity, and concluded that the warrants should be classified as a liability and re-measured to fair value at the end of each reporting period. The Company also reviewed the warrants under ASC 815, Derivatives and Hedging/Contracts in Entity’s Own Equity, and determined that the warrants also meet the definition of a derivative. With the assistance of a third party valuation specialist, the Company valued the warrant liabilities utilizing the Monte Carlo valuation method pursuant to the accounting guidance of ASC 820-10, Fair Value Measurements. Beginning March 31 2021, the Company changed its valuation model for the Emerald Financing Warrant Liability to a Black-Scholes valuation method, as it was determined that a more simplistic model such as the Black-Scholes valuation method yields a substantially similar result as a Monte Carlo simulation due to the Company's current assumptions.
The warrant liability is valued at the balance sheet datesdate using the following assumptions:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Dividend yield | — | % | | — | % |
Volatility factor | 99.0 | % | | 126.5 | % |
Risk-free interest rate | 2.59 | % | | 0.43 | % |
Expected term (years) | 0.63 | | 1.13 |
Underlying common stock price | $ | 0.04 | | | $ | 0.05 | |
| | | | | | | | |
| | December 31, 2022 |
Dividend yield | | — | % |
Volatility factor | | 140.83 | % |
Risk-free interest rate | | 4.21 | % |
Expected term (years) | | 0.13 |
Underlying common stock price | | $ | 0.02 | |
5.6. Debt
Multi-Draw Credit Agreement- Related Party
The Company’s Debt with Sciences consists of the following:
| | | | | | | | | | | | | | | | | |
| Conversion Price | | As of June 30, 2022 | | As of December 31, 2021 |
Total principal value of convertible debt—related party | $ | 0.40 | | | $ | 2,014,500 | | | $ | 2,014,500 | |
Unamortized debt discount | | | (173,616) | | | (487,668) | |
Unamortized debt issuance costs | | | (1,054) | | | (1,927) | |
Carrying value of total convertible debt - related party | | | 1,839,830 | | | 1,524,905 | |
Total principal value of non-convertible debt—related party | n/a | | 450,000 | | | 450,000 | |
Total carrying value of advances under the multi-draw credit agreement | | | $ | 2,289,830 | | | $ | 1,974,905 | |
On October 5, 2018, the Company entered into the Credit Agreement with Sciences, a related party (See Note 9)(Note 11). OnBetween April 29, 2020 the Company entered into the Amended Credit Agreement with Sciences, which amends and restates the Credit Agreement. For all pre-existing and new advances, the Amended Credit Agreement removed the change in control as an event of default. The amendments to the pre-existing advances were accounted for as a modification.
On March 29, 2021, the Company amendedand Sciences entered into a series of Amendments until the Amended Credit Agreement to defer interest payments through the earlier of maturity or prepayment of the principal balance. Ondisbursement line was closed on September 15, 2021, the Company further amended the Amended Credit Agreement to close the disbursement line.2021. The amendments were considered a modificationmodifications for accounting purposes.
Advances under the Amended Credit Agreement arewere unsecured and bearaccrued interest at an annual rate of 7% and mature on October 5, 2022. At Sciences’ election,. The maturity date of the Amended Credit Agreement was extended to the earlier of (a) five business days after the closing of the sale of VDL (b) February 28, 2023 or (c) the Termination Date (as such term is defined in the Amended Credit Agreement). The terms of the Amended Credit Agreement provided that convertible advances and unpaid interest may be converted into common stock at the applicable fixed conversion price of the underlying advance, subject to customary adjustments for stock splits, stock dividends, recapitalizations, etc.
The Effective February 16, 2023, upon entering the MTA, the remaining principal balance plus accrued interest was offset by the aggregate exercise price of $282,905 from the exercise of the MTA Warrants (Note 5) and the Company induced conversion by reducing the conversion price of the Amended Credit Agreement provides for customary eventsfrom $0.40 to $0.0386. The remaining balance of default which may result in the acceleration$1,597,236 was converted into 41,379,164 shares of the maturity of the advances in addition to, but not limited to, cross acceleration to certain other indebtednesscommon stock of the Company. In the case of an event of default arising from specified events of bankruptcy or insolvency or reorganization, all outstanding advances will become due and payable immediately without further action or notice. If any other event of default under the Amended Credit Agreement occurs or is continuing, Sciences may, by written notice, terminate its commitment to make any advances and/or declare all the advances, including accrued interest, payable due immediately. If any amount under the Amended Credit Agreement is not paid when due, such overdue amount shall bear interest at an annual default interest rate of the applicable rate plus 10%, until such amount is paid in full.
In connection with each advance under the Amended Credit Agreement,induced conversion, the Company has agreed to issue to Sciences warrants to purchase sharesrecorded a debt conversion inducement expense of common stock in an amount$1,383,285 equal to 50% of the number of shares of common stock that each advance may be converted into. The warrants have a term of five years and are immediately exercisable upon issuance. Under the Amended Credit Agreement, Sciences may issue notice that no warrants will be granted at the time of the advance request. The warrants issued under the Credit Agreement have an exercise price of $0.50 per share. The exercise prices are subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events or upon any distributions of assets, including cash, stock or other property to the Company’s stockholders (See Note 4).
As of June 30, 2022, the unamortized debt discount on the convertible advances will be amortized over a remaining period of approximately 0.27 years. As of June 30, 2022, the fair value of the incremental shares underlyingissued upon conversion.
Following the convertible advances underissuance of shares described above, the Amended Credit Agreement was $176,269. Asterminated in its entirety per the terms of June 30, 2022, the if-converted value did not exceedMTA. Additionally, under the principal balance.MTA, Sciences agreed to use its best efforts to transfer all of the common stock of the Company held by Sciences to its shareholders on a pro-rata basis at or immediately prior to the Company's listing to a nationally recognized stock exchange, subject to compliance with applicable securities laws.
Insurance premium loan payable
On February 28, 2022,2023, the Company entered into an annual financing arrangement for a portion of its Directors and Officers Insurance Policy (the “D&O Insurance”) with Marsh & McLennanFirst Insurance Funding in an amount of $275,537.$203,884. The loan is payable in equal monthly installments of $31,149,$22,654, matures on October 28, 20222023 and bears interest at a rate 4.17%4.24% per annum. As of June 30, 2022,2023, a total of $200,912$118,932 and $122,461,$90,615, remains financed in prepaid expenses and loansinsurance premium loan payable, respectively.
Interest Expense
The Company’s interest expense consists of the following:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Related party interest expense – stated rate | Related party interest expense – stated rate | $ | 43,608 | | | $ | 43,608 | | | $ | 86,737 | | | $ | 86,737 | | Related party interest expense – stated rate | $ | — | | | $ | 43,608 | | | $ | 15,952 | | | $ | 86,737 | |
Insurance premium loan payable - stated rate | 1,603 | | | 159 | | | 2,669 | | | 445 | | |
Insurance premium loan payable – stated rate | | Insurance premium loan payable – stated rate | 2,162 | | | 1,603 | | | 3,603 | | | 2,669 | |
Legal judgment interest expense | | Legal judgment interest expense | 182,171 | | | — | | | 182,171 | | | — | |
Other interest expense | | Other interest expense | 2,096 | | | — | | | 3,102 | | | — | |
Non-cash interest expense: | Non-cash interest expense: | | Non-cash interest expense: | |
Amortization of debt discount | Amortization of debt discount | 159,645 | | | 145,885 | | | 314,052 | | | 286,982 | | Amortization of debt discount | — | | | 159,645 | | | — | | | 314,052 | |
Amortization of transaction costs | Amortization of transaction costs | 444 | | | 406 | | | 874 | | | 799 | | Amortization of transaction costs | — | | | 444 | | | — | | | 874 | |
| | $ | 205,300 | | | $ | 190,058 | | | $ | 404,332 | | | $ | 374,963 | | | $ | 186,429 | | | $ | 205,300 | | | $ | 204,828 | | | $ | 404,332 | |
6.7. Stockholders’ Equity and Capitalization
Warrant Exercises
During the six months ended June 30, 2022, 19,666,667 pre-funded2023, 16,641,486 of the outstanding stock warrants held by Sciences in conjunction with the MTA, with an intrinsic value of $1,178,033$332,830 were exercised in exchange for 19,666,66716,641,486 shares of common stock for gross proceeds of $1,967.$282,905 (Note 5).
Induced Conversion of Amended Credit Agreement
Common Stock Issuance
On March 2, 2022,During the six months ended June 30, 2023, the Company released 150,000issued 41,379,164 shares of common stock to Sciences. The shares were issued in conjunction with the MTA, in exchange for the remaining principal balance plus accrued interest less the aggregate exercise price of $282,905 from the exercise of the MTA Warrants in the amount of $1,597,236 at a service providerconversion price of $0.0386 (Note 7)5).
7.8. Stock-Based Compensation
Stock Incentive Plan
On October 31, 2014, the Board of Directors approved the Company’s 2014 Omnibus Incentive Plan (the “2014 Plan”). The share reserve under the 2014 Plan equals 10% of the number of issued and outstanding shares of common stock of the Company on an evergreen basis. In August 2020, the Company approved Amendment No. 2 to the 2014 Plan, which increased the share reserve by an additional 7,876,835 shares over the 10% of the number of issued and outstanding shares of common stock, and removed certain restrictions on the number of shares of common stock and the amount of cash-based awards up to which participants of the 2014 Plan can receive in a calendar year.
On June 14, 2022, in connection with the Acquisition, the Board approved the 2014 Amended and Restated Omnibus Incentive Plan (the “2014 Amended and Restated Plan”) which replaced the 2014 Plan in its entirety. The 2014 Amended and Restated Plan, among other things, fixed the number of shares that can be issued under the plan to 91,219,570, provided that each January 1 beginning in 2023 and ending on (and including) January 1, 2032 the number of shares will increase by 5% of the outstanding shares of Common Stock as of the prior December 31, unless the Board of Directors of the Company decides to a lesser increase.
On September 30, 2022, the Amended and Restated 2014 Plan was further amended to comply with Canadian securities rulesapproved by the shareholders. The 2014 Amended and is subject to shareholder approval. The 2014Restated Plan authorizes the issuance of awards including stock options, stock appreciation rights, restricted stock, stock units and performance units to employees, directors, and consultants of the Company. As of June 30, 2022,2023, the Company had 13,764,59592,970,517 shares available for future grant under the 2014 Plan.
Stock Options
The following is a summary of option activities under the Company’s 2014 Plan for the six months ended June 30, 2022:2023:
| | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | | Number of Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value* |
Outstanding, December 31, 2021 | 35,405,000 | | | $ | 0.07 | | | 9.08 | | $ | 134,750 | | |
Outstanding, December 31, 2022 | | Outstanding, December 31, 2022 | 42,995,062 | | | $ | 0.18 | | | 7.14 | | $ | — | |
| Granted | Granted | 4,350,000 | | | 0.04 | | | Granted | 5,100,000 | | | 0.02 | | | — | |
Exercised | Exercised | — | | | — | | | Exercised | — | | | — | | |
Cancelled | Cancelled | (321,250) | | | 0.06 | | | Cancelled | (6,701,186) | | | 0.35 | | |
Forfeited | Forfeited | (1,678,750) | | | 0.08 | | | Forfeited | (3,418,126) | | | 0.15 | | |
Outstanding, June 30, 2022 | 37,755,000 | | | $ | 0.07 | | | 8.7 | | $ | — | | |
Exercisable, June 30, 2022 | 12,066,250 | | | $ | 0.08 | | | 8.02 | | $ | — | | |
Outstanding, June 30, 2023 | | Outstanding, June 30, 2023 | 37,975,750 | | | $ | 0.14 | | | 7.21 | | $ | — | |
Exercisable, June 30, 2023 | | Exercisable, June 30, 2023 | 25,516,916 | | | $ | 0.19 | | | 6.59 | | $ | — | |
|
*The aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the stock options at June 30, 2023 for those stock options for which the quoted market price was in excess of the exercise price ("in-the-money options").
The weighted-average grant-date fair value of stock options granted during the three and six months ended June 30, 20222023, was $0.04.$0.02.
The fair value of the Company's stock option grants were estimated on the date of grant using the Black-Scholes option-pricing model under the following assumptions:
| | | | | |
| Six Months Ended June 30, 20222023 |
Dividend yield | — | % |
Volatility factor | 126.3123.3 - 132.6%127.0% |
Risk-free interest rate | 2.893.86 - 3.60%3.99% |
Expected term (years) | 5.005.27 - 6.08 |
Stock Option Awards with Performance and Other Conditions
During the three and six months ended June 30, 2022, the Company granted 4,000,000 stock options with an exercise price of $0.04 which include a combination of performance vesting conditions and other vesting conditions pursuant to a consulting agreement entered with Mr. Jim Heppell, a former director of Skye and related party of the Company (Note 9). The vesting conditions of the stock option award provide that 50% of the options are vested upon grant and the remaining 50% will vest upon the sale of a real estate asset held by EHT at an amount greater than or equal to an amount specified in the agreement. None of the options are exercisable until the Acquisition is consummated, which is not deemed probable as of June 30, 2022, (Note 3). The conditions related to the sale of EHT's real estate are considered other conditions and the condition related to the closing of the Acquisition is considered a performance condition. When a performance condition is deemed to be probable of achievement, time-based vesting and recognition of stock-based compensation expense commences.
As a result, no share-based compensation expense will be recognized for these stock options until the performance condition is considered to be probable. As of June 30, 2022, the Company has determined that the closing of the Acquisition is not deemed probable, as the consummation of the Acquisition is not solely within the control of the Company.
As of June 30, 2022, the Company has included $73,368 related to the first tranche of these awards in total unrecognized stock-based compensation expense below. The Company has evaluated the second tranche and has determined that due to the other conditions contained in these awards that they will be recorded as liability options once the Acquisition is deemed probable and will be remeasured through their settlement date or cancellation.
Restricted Stock Units
On December 14, 2021, the Company granted restricted stock units (“RSUs”) to its executive management team. The RSUs cliff vest 33% per year on the anniversary of the grant date over a three year period. As of June 30, 2022, 4,000,0002023, 2,666,668 RSUs with a weighted average grant date fair value of $0.06 per share remain unvested.
Awards Granted Outside the 2014 Plan
The following is a summary of restricted stock activity outside of the Company’s 2014 Plan during the six months ended June 30, 2022:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Unvested, December 31, 2021 | 150,000 | | | $ | 0.13 | |
| | | |
| | | |
Released | (150,000) | | | 0.13 | |
Unvested, June 30, 2022 | — | | | $ | — | |
Stock-Based Compensation Expense
The Company recognizes stock-based compensation expense using the straight-line method over the requisite service period. The Company recognized stock-based compensation expense, including compensation expense for warrants with vesting provisions issued to a service provider (Note 4)5), and the RSUs discussed above, in its Unaudited Condensed Consolidated Statements of Comprehensive LossOperations as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Research and development | Research and development | $ | 21,955 | | | $ | 13,612 | | | $ | 40,541 | | | $ | 19,363 | | Research and development | $ | 12,533 | | | $ | 21,955 | | | $ | 57,001 | | | $ | 40,541 | |
General and administrative | General and administrative | 122,409 | | | 98,087 | | | 241,181 | | | 238,916 | | General and administrative | 90,338 | | | 122,409 | | | 177,449 | | | 241,181 | |
| | $ | 144,364 | | | $ | 111,699 | | | $ | 281,722 | | | $ | 258,279 | | | $ | 102,871 | | | $ | 144,364 | | | $ | 234,450 | | | $ | 281,722 | |
The total amount of unrecognized compensation cost was $1,381,837$719,694 as of June 30, 2022.2023. This amount will be recognized over a weighted average period of 2.731.55 years years.
2022 Employee9. Loss Per Share of Common Stock Purchase Plan
In June 2022,The following tables are a reconciliation of the Company's boardnumerators and denominators used in the calculation of directors approved the 2022 Employee Stock Purchase Plan (the "ESPP"). Under which the Company will offer eligible employees the option to purchasebasic and diluted net loss per share computations:
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, (Unaudited) |
| | | | | 2023 | | 2022 |
Basic EPS and diluted EPS: | | | | | | | |
| | | | | | | |
Loss (Numerator) | | | | | | | |
Net loss | | | | | $ | (8,279,020) | | | $ | (6,462,677) | |
| | | | | | | |
Shares (Denominator) | | | | | | | |
Weighted average common shares outstanding | | | | | 956,804,028 | | | 495,874,560 | |
Per-Share Amount | | | | | $ | (0.01) | | | $ | (0.01) | |
The following outstanding shares of common stock at a 15% discount toequivalents were excluded from the lowercomputation of diluted net loss per share of common stock for the market value of the stock at the beginning or end of each participation period under the terms of the ESPP. Total individual purchases in any year are limited to 15% of compensation. The ESPP is currently awaiting shareholder approval.periods presented because including them would have been anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, (Unaudited) | | Six Months Ended June 30, (Unaudited) |
| 2023 | | 2022 | | 2023 | | 2022 |
Stock options | 37,975,750 | | | 37,755,000 | | | 37,975,750 | | | 37,755,000 | |
Common shares underlying convertible debt | — | | | 5,570,932 | | | — | | | 5,570,932 | |
Warrants | 153,848,014 | | | 136,187,225 | | | 153,848,014 | | | 136,187,225 | |
Unvested restricted stock units | 2,666,668 | | | 4,000,000 | | | 2,666,668 | | | 4,000,000 | |
8.10. Significant Contracts - University of Mississippi
UM 5050 and UM 8930 License Agreements
In July 2018, the Company renewed its ocular licenses for UM 5050 and UM 8930. On May 24, 2019, the ocular delivery licenses were replaced by “all fields of use” licenses for both UM 5050 and UM 8930 (collectively, the “License Agreements”). Pursuant to the License Agreements, UM granted the Company an exclusive, perpetual license, including, with the prior written consent of UM, not to be unreasonably withheld, the right to sublicense, the intellectual property related to UM 5050 and UM 8930 for all fields of use.
The License Agreements contain certain milestone payments, royalty and sublicensing fees payable by the Company, as defined therein. Each License Agreement provides for an annual maintenance fee of $75,000 payable on the anniversary of the effective date. The Company made upfront payments for UM 5050 and UM 8930 of $100,000 and $200,000, respectively. In addition, in March 2020, the Company was notified by the United States Patent and Trademark Office that a notice of allowance was issued for the proprietary molecule under the UM 8930 License Agreement. As a result, the Company paid UM a fee of $200,000. The milestone payments payable for each license are as follows:
i)$100,000 paid within 30 days following the submission of the first Investigational New Drug (“IND”) application to the Food and Drug Administration or an equivalent application to a regulatory agency anywhere in the world, for a product;
ii)$200,000 paid within 30 days following the first submission of a New Drug Application (“NDA”), or an equivalent application to a regulatory agency anywhere in the world, for each product that is administered in a different route of administration from that of the earlier submitted product(s); and
iii)$400,000 paid within 30 days following the approval of an NDA, or an equivalent application to a regulatory agency anywhere in the world, for each product that is administered in a different route of administration from that of the early approved product(s).
The royalty percentage due on net sales under each License Agreement is in the mid-single digits. The Company must also pay to UM a portion of all licensing fees received from any sublicensees, subject to a minimum royalty on net sales, and the Company is required to reimburse patent costs incurred by UM related to the licensed products. The royalty obligations apply by country and by licensed product, and end upon the later of the date that no valid claim of a licensed patent covers a licensed product in a given country, or ten years after the first commercial sale of such licensed product in such country.
Each License Agreement continues, unless terminated, until the later of the expiration of the last to expire of the patents or patent applications within the licensed technology, and the expiration of the Company’s payment obligations under such License Agreement. UM may terminate each License Agreement, by giving written notice of termination, upon the Company’s material breach of such License Agreement, including failure to make payments or satisfy covenants, representations or warranties without cure, noncompliance, a bankruptcy event, the Company’s dissolution or cessation of operations, the Company’s failure to make reasonable efforts to commercialize at least one product or failure to keep at least one product on the market after the first commercial sale for a continuous period of one year, other than for reasons outside the Company’s control, or the Company’s failure to meet certain pre-established development milestones. The Company may terminate each License Agreement upon 60 days’ written notice to UM.
As of June 30, 2022,2023, the Company has paid the fee due for the notice of patent allowance for the proprietary molecule under the UM 8930 License Agreement. In July 2022, the Company met milestone i) above under its UM 5050 license agreement upon submission of our application for authorization to conduct the Company's Phase 1 trial of SBI-100 OE to the Therapeutic Goods Administration in Australia. As of June 30, 2022, NaN2023, none of the other milestones under these license agreements have been met (Note 11).
UM 5070 License Agreement
In January 2017, the Company entered into a license agreement with UM pursuant to which UM granted the Company an exclusive, perpetual license, including the right to sublicense, to intellectual property related to a platform of cannabinoid-based molecules ("UM 5070"), to research, develop and commercialize products for the treatment of infectious diseases.
The Company paid UM an upfront license fee of $65,000 under the license agreement. Under the license agreement, the Company is also responsible for annual maintenance fees of $25,000 that will be credited against any royalties incurred, contingent milestone payments upon achievement of development and regulatory milestones, and royalties on net sales of licensed products sold for commercial use. The aggregate milestone payments due under the license agreement if all the milestones are achieved is $700,000 and the royalty percentage due on net sales is in the mid-single digits. The Company must also pay to UM a percentage of all licensing fees it receives from any sublicensees, subject to a minimum royalty on net sales by such sublicensees. The Company’s royalty obligations apply on a country by country and licensed product by licensed product basis, and end upon the later of the date that no valid claim of a licensed patent covers a licensed product in a given country, and ten years after first commercial sale of such licensed product in such country.
As of June 30, 2022, none of the milestones under this license agreement have been met and the agreement was terminated effective January 8, 2022 pursuant to a termination notice provided to UM by the Company on November 9, 2021.met.
9.11. Related Party Matters
Emerald Health Sciences
In January 2018, the Company entered into a securities purchase agreement with Sciences pursuant to which Sciences purchased a majority of the equity interest in the Company, resulting in a change in control (the "Emerald Financing"). While Sciences no longer maintains a controlling interest in the Company, it holds a significant equity interest asof 17.4%. As of June 30, 2022 and has provided the Company with financing under2023, the Amended Credit Agreement (Note 5).
On December 19, 2019,has been extinguished and all of the Company entered into an Independent Contractor Services Agreement with Dr. Avtar Dhillon, at the time a member ofwarrants held by Sciences Board of Directors and its CEO,were exercised pursuant to which Dr. Dhillon provided ongoing corporate finance and strategic business advisory services to the Company. In exchange for his services, Dr. Dhillon received a fee of $10,000 per month for his services.MTA (Notes 5 & 6).
On September 14, 2021, Dr. Dhillon provided his notice to terminate the Independent Contractor Services Agreement, with an effective termination date of October 14, 2021. As of October 14, 2021, the Company no longer has any obligations or business relationship with Dr. Dhillon. No expenses were incurred under this agreement during the three months and six months ended June 30, 2022. Under this agreement, for the three and six months ended June 30, 2021, the Company incurred fees of $30,000 and $60,000, respectively.
On May 18, 2022, Jim Heppell resigned from the Company's boardBoard of directorsDirectors and concurrently entered into a consulting agreement with the Company pursuant to which Mr. Heppell will provideprovided services mutually agreed upon bywith the Company. The consulting agreement hashad an initial minimum term of one-year and will be automatically renewed for a one-year period on the anniversary of the contract unless terminated with 60 days' notice.one-year. Under the consulting agreement, Mr. Heppell iswas entitled to a monthly fee of $6,300, which will bewas increased to $16,600 per month upon the closing of the Acquisition. The consulting agreement providesprovided Mr. Heppell with a termination payment in an amountof $74,700 on March 1, 2023, equal to the monthly fees through the then-remaining term of the agreement if Mr. Heppell’s engagement iswas terminated by the Company without cause. In addition, Mr. Heppell was awarded 4,000,000 stock options which are subject to certain performance and other conditions (Note 7).conditions. On February 9, 2023, the Company provided notice and terminated the consulting agreement with Mr. Heppell effective March 11, 2023. During the six months ended June 30, 2023, the first tranche of stock options issued to Mr. Heppell were cancelled, unexercised, and the second tranche of stock options were cancelled upon the closing of the Verdélite SPA. The Company has accounted for the consulting contract as an in-substance severance arrangement and recognized $75,600 in severance expense duringarrangement. During the three and six months ended June 30, 2022. The accrual for Mr. Heppell's2023 no severance will be adjusted to include the increased fee payments when the Company determines that the closing of the Acquisition is probable.expense was recognized. As of June 30, 2022,2023, the Company recognized $6,300, in accounts payable under this consulting agreement.no longer has any obligations or business relationship with Mr. Heppell.
As of June 30, 2022,Effective March 10, 2023, Mr. Heppell is a board memberwas removed from the Board of Emerald Health Pharmaceuticals, Inc.Sciences and EHT (Note 3). As of June 30, 2022,no longer serves as Sciences owns 23%, 48%, and 18% of the Company, Emerald Health Pharmaceuticals, Inc. and EHT, respectively. As of June 30, 2022, Mr. Heppell is also a board member and the CEO of Sciences. Mr. Heppell also served on VivaCell's board until he tendered his resignation on January 10, 2022.
VivaCell Biotechnology España, S.L.U (formerly known as Emerald Health Biotechnology España, S.L.U.)
In January 2021 and April 2021, the Company entered into 2two separate Collaborative Research Agreements pursuant to a Master Services Agreement with VivaCell Biotechnology España, S.L.U ("VivaCell"), a research and development entity with substantial expertise in cannabinoid science and a subsidiary of Emerald Health Research, Inc., which is 100% owned-owned by Sciences. Under the Collaborative Research Agreements, VivaCell will provide research and development services pursuant to agreed-upon project plans for the research and development of SBI-200 and the preclinical development services for novel derivatives. The term of each agreement is initially for a one-year period. The agreements will terminate upon delivery and acceptance of the final deliverables under the project plans or if either party is in breach of the terms of the contract and such breach remains uncured for 45 days. Payment for services are based on the negotiated amounts for the completion of agreed upon objectives as provided in the Collaborative Research Agreements. ForThe Company did not incur any expenses for the three and six months ended June 30, 2022 and 2021, the Company incurred $48,908 and $73,678, respectively, in expenses under the Collaborative Research Agreements.2023. For the three and six months ended June 30, 2022, and 2021, the Company incurred $87,926$48,908 and $143,278,$87,926, respectively, in expenses under the Collaborative Research Agreements. As of June 30, 2022 and December 31, 2021,2022, the Company has recognized prepaid asset in the amount of $0 and $8,056, respectively.$8,056.
On October 11,In 2021, the Company entered into an Exclusive Sponsored Research Agreement (the “ESRA”) with VivaCell to fund certain research and development programs which are of mutual interest to both the Company and VivaCell.programs. The Company will have the right to use all data, products, and information, including intellectual property, which are generated in the performance of the research under each and all projects funded by the
Company pursuant to the ESRA, andESRA. VivaCell assigns and agrees to assign to the Company all rights to any intellectual property created or reduced-to-practice under or as a part of a project funded by the Company pursuant to the ESRA.
The Company has agreed to pay to VivaCell a royalty based on any and all licensing revenue or other consideration paid to the Company by a third-party licensee, assignee or purchaser of intellectual property rights created under the ESRA. In addition, upon a change of control transaction, the Company has agreed to pay an amount equal to the royalty percentage multiplied by the fair value of the intellectual property created under the ESRA. Pursuant to the ESRA, VivaCell will provide a budget to be approved by the Company for each project, and the Company will make payments in accordance with the approved budget and pay an annual retainer to VivaCell of $200,000 per year. For the three and six months ended June 30, 2023 and June 30, 2022, the Company incurred $0 and $50,000, and $50,000 and $100,000, respectively, in research and development expenses related to the retainer under the ESRA. As of June 30, 20222023, and December 31, 2021,2022, the Company has recognized $50,000 and $5,376$50,000 in accounts payable and prepaid expense,- related parties, respectively, related to the retainer under the ESRA.
The initial term of the agreement is one-year, with automatic renewal for successive one-year terms unless either party terminates upon 60 days' prior written notice to the other party pursuant to the ESRA.
On March 1, 2022, the Company entered into a research project with VivaCell under the ESRA Agreement for the development of a screening platform for anteroposterior ocular diseases. The project budget is $190,500. For the three and six months ended June 30, 2023 and June 30, 2022, the Company incurred $10,967 and $39,167, $103,913 and $120,000, respectively of research and development expenses under the ESRA. As of June 30, 2023 and December 31, 2022, the Company recognized $55,668,$0 and $7,835, in accrued expense related to the first research project. As of June 30, 2022, the Company recognized $48,249,other current liabilities, $47,001 and $47,001 , in accounts payablepayable- related parties under this agreement.
On May 8, 2023, the Company terminated the ESRA effective March 31, 2023 and Vivacell waived the required notice period under the ESRA.
Management conflictsConflicts
AsUntil the date of June 30, 2022,the Acquisition, the Company's CEO, Punit Dhillon, iswas a board member of the Company Emerald Health Pharmaceuticals, Inc. and EHT (Note 3). Mr. Dhillon also served as a board member of Sciences and VivaCell until he tendered his resignation from such boards on August 10, 2020 and September 22, 2021, respectively.
On February 28, 2022, the Company entered into a standard consulting agreement with the CEO's brother. Compensation under the agreement is for a rate of approximately $78$73 per hour. The consulting agreement may be terminated by either party upon providing 15 days of advance notice. For the three and six months ended June 30, 2023 and June 30, 2022, the Company incurred $11,686 and $32,369, and $10,779 and $19,374, respectively, ofin consulting expenses in general and administrative expenses under this agreement. As of June 30, 2023 and December 31, 2022, the Company recognized $2,688,$1,772 and $12,511, in accounts payable underother current liabilities. Effective June 30, 2023, this consulting agreement.
10.12. Commitments and Contingencies
Office Lease
The Company leases office space for its corporate headquarters, located at 11250 El Camino Real, Suite 100 San Diego, California 92130. The original lease isterm was effective from September 1, 2021 through October 31, 2023 and containscontained a renewal option for a two-year extension after the current expiration date. TheAt the commencement date, the Company doesdid not expect thatto exercise the renewal option, will be exercised, and has therefore excluded the option from the calculation of the right of use asset and lease liability. The lease provides for two months of rent abatement and the initial monthly rent is $8,067 per month with annual increases of 3% commencing on November 1, 2022. The lease includesincluded non-lease components (i.e., property management costs) that are paid separately from rent, based on actual costs incurred, and therefore were not included in the right-of-use asset and lease liability but are reflected as an expense in the period incurred. In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate based on the lease term.
The Company entered into an amended and restated lease agreement on June 27, 2023 for its corporate headquarters, extending the lease term to 62 months, retroactive to September 1, 2021 through October 31, 2026. The Company treated the amended and restated lease agreement as a single modified lease.
For the three and six months ended June 30, 2023 and 2022 lease expense comprised of $22,675 and $45,834, $22,675 and $45,350, respectively in lease cost from the Company's non-cancellable operating lease.
The remaining lease term and discount rate related to the operating lease are presented in the following table:
| | | | | |
| June 30, 20222023 |
Weighted-average remaining term – operating lease (in years)
| 1.333.33 |
Weighted-average discount rate – operating lease
| 1215 | % |
Future minimum lease payments as of June 30, 20222023 are presented in the following table:
| | | | | |
Year: | |
| |
2022 (remaining six months) | 48,888 | |
2023 | 83,093 | |
Total future minimum lease payments: | 131,981 | |
Less imputed interest | (10,631) | |
Total | $ | 121,350 | |
| | | | | |
Year: | |
| |
| |
2023 | $ | 50,354 | |
2024 | 103,216 | |
2025 | 106,313 | |
2026 | 90,797 | |
Total future minimum lease payments: | 350,680 | |
Less imputed interest | (76,640) | |
Total | $ | 274,040 | |
Reported as:
| | | | | |
Operating lease liability | $ | 88,92865,452 | |
Operating lease liability, net of current portion | 32,422208,588 | |
Total lease liability | $ | 121,350274,040 | |
General Litigation and Disputes
From time to time, in the normal course of operations, the Company may be a party to litigation and other dispute matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable outcome to any legal matter, if material, could have a materially adverse effect on the Company’s operations or financial position, liquidity or results of operations.
Wendy Cunning vs Skye Bioscience, Inc.
As of June 30, 2022, theThe Company is a party to a legal proceeding with a former employee alleging, among other things, wrongful termination. While there istermination, violation of whistleblower protections under the Sarbanes-Oxley Act of 2002 and retaliation under California law against the Company relating to certain actions and events that occurred with the Company's former management during the employee's employment term from March 2018 to July 2019. The case, entitled Wendy Cunning vs Skye Bioscience, Inc., was filed in U.S. District Court (the "District Court") for the Central District of California (the “Cunning Lawsuit”). On January 18, 2023, a reasonable possibilityjury rendered a verdict in favor of Ms. Cunning and awarded her $512,500 in economic damages (e.g., lost earnings, future earnings and interest), $840,960 in non-economic damages (e.g., emotional distress) and $3,500,000 in punitive damages. On February 13, 2023, the Company received the final judgment on the special verdict (the "Final Judgment") from the District Court.
In March of 2023, the Company filed post-trial motions with the District Court seeking judgment as a matter of law, a new trial, and/or a reduction of the judgment. The District Court has taken these motions under submission. Additionally, in March of 2023, the Company appealed the judgment in the action. The Court of Appeals has ordered the remainder of the appeal to be kept in abeyance pending resolution of the Company’s post-trial motions by the District Court.
On August 2, 2023, the District Court ruled on the plaintiff's motion for attorney fees and awarded the plaintiff $1,200,008. Based on this order, the Company reduced the aggregate estimate for the legal contingency by $151,842, the difference between the attorney fees awarded by the District Court and the Company's previous estimate.
Additionally, on August 2, 2023, the District Court granted the Company's request for a stay of enforcement of the Final Judgment pending post-trial motions and appeal conditioned on the Company posting a bond in the amount of $9,080,202 by August 10, 2023.
The Company strongly believes that this case was incorrectly decided as to liability, the amount of compensatory damages, and the appropriateness and amount of punitive damages. The Company intends to challenge the verdict in the trial court and appeal and pursue reimbursement under its existing insurance policies, but given the jury verdict, the Company has determined that a loss mayis probable and accordingly have been incurred, due torecorded a legal contingency expense and a current balance sheet liability for the stage of the proceedings as of June 30, 2022, the Company is unable to make an estimate as to thetotal amount of the contingency, asjury verdict. The Company has recorded an aggregate estimate for the legal proceeding remains incontingency of $6,053,468 plus accrued interest of $182,171 at an annual interest rate of 10.0%, which is determined by the discovery phase. The CompanySuperior Court of California. Depending on the judge's final order on the post trial motions and appeal, it is expensingreasonably possible that the legal costs relatedcontingency booked could materially change after the issuance of these financials.
For the six months ended June 30, 2023 the Company recorded interest expense of $182,171, which is reflected as an increase to this proceeding as incurred.
the estimated legal contingency on the Condensed Consolidated Balance Sheet (Note 6).
Skye Bioscience, Inc. vs Partner Re Ireland Insurance
In February 2023, the Company brought a suit against the Company's D&O carrier, Partner RE Ireland Insurance DAC ("Partner Re"), bringing claims for (a) breach of contract, (2) tortious breach of the implied covenant of good faith and fair dealing and (3) declaratory relief that Partner Re is obligated to reimburse the Company for the defense fees and costs incurred in defense of the Cunning Lawsuit and must indemnify the Company for any settlement or judgment in the Cunning Lawsuit. The Company's allegations arise out of Partner Re's refusal to reimburse the Company for costs incurred by the Company in defending the Cunning Lawsuit. The case, entitled Skye Bioscience, Inc., v. Partner Re Ireland Insurance DAC, was filed in the United Stated District Court for the Central District of California.
11. Subsequent EventsOn April 17, 2023, PartnerRe filed a motion to dismiss the Company's complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). On June 20, 2023, the judge issued a final ruling in favor of the Company and denied Partner Re's motion to dismiss the Company's lawsuit. In its ruling, the Court rejected Partner Re's primary basis for denying coverage.
Related Party MattersBased on the outcome, the Company is pursuing up to $5,000,000 in coverage less the deductible to cover legal expenses incurred and the final verdict or settlement of the Cunning Lawsuit.
13. Subsequent Events
On July 8, 2022, Sciences distributed its shareholdings in EHT to24, 2023, the individual shareholders of Sciences in the form of a return of capital. As a result, there is no longer a common ownership interest by Sciences in both Skye and EHT (Note 3).
On July 11, 2022, the Company and EHT entered into a consultingloan agreement pursuantin the principal amount of $250,000 (the “Bridge Loan”) with MFDI, LLC. The Bridge Loan was obtained in order to which representativesprovide bridge financing for the business to secure additional strategic financing. The bridge loan bears interest at a rate of 9.5% per annum and is payable in 30 days.
On August 2, 2023, the Company will provide administrative assistance to EHT to assist EHT in satisfying its financial reporting, operational and regulatory obligations. EHT will payreceived the final order from the District Court awarding the plaintiff reimbursement of attorney's fees of $1,200,008. Based on this order, the Company $150reduced the aggregate estimate for each hour of services provided by the Company. The term of the consulting agreement ends on the date of the closing or termination of the Arrangement Agreement, and both EHT and the Company can terminate such agreement upon thirty (30) days' notice. The consulting agreement has an effective date of May 12, 2022 andlegal contingency as of June 30, 2022,2023 by $151,842, for the difference in attorney fees.
Additionally, on August 2, 2023, the District Court granted the Company's request for a stay of enforcement of the Final Judgment pending post-trial motions and appeal conditioned on the Company has recordedposting a receivable of $12,655 in other current assets - related partybond in the Condensed Consolidated Balance Sheets.
On July 15, 2022, the Company and EHT entered into the second amendment to the Arrangement Agreement to extend the outside dateamount of the closing of the acquisition to November 15, 2022 in the event that the parties encounter regulatory delays.
Significant Contracts
In July 2022, we triggered the first $100,000 milestone payment under our UM 5050 license agreement upon submission of our application for authorization to conduct the Company's Phase 1 trial of SBI-100 OE to the Therapeutic Goods Administration in Australia.$9,080,202 by August 10, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statementscondensed consolidated financial statements (unaudited) for the three and six months ended June 30, 2023 and 2022 and 2021 (unaudited)together with the notes thereto and the consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, together with the notes thereto.2022. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.
Unless otherwise provided in this Quarterly Report, references to “we,” “us,” “our” and “Skye Bioscience”“Skye” in this discussion and analysis refer to Skye Bioscience, Inc., a Nevada corporation, formerly known as Emerald Bioscience, Inc., together with its wholly owned subsidiaries, Nemus, a California corporation, and SKYE Bioscience Pty Ltd. (formerly known as "EMBI Australia Pty Ltd."Ltd ("SKYE Bioscience Australia"), an Australian proprietary limited company.
company, Emerald Health Therapeutics, Inc. ("EHT"), Avalite Sciences, Inc. ("AVI"), and Verdélite Sciences, Inc. ("VDL") through date of disposition.
About Skye Bioscience, Inc.
We were incorporated in the State of Nevada on March 16, 2011. We are a preclinicalclinical stage pharmaceutical company focused on the discovery, development and commercialization of a novel classclasses of cannabinoid derivativestherapeutic drugs to modulate the endocannabinoid system, which has been shown to play a vital role in overall human health and, notably, in multiple ocular indications. We are developing drugs with novel cannabinoid derivativesmechanisms of action for pharmaceutical application through our own directed research efforts and multiple license agreements.
Effective January 19, 2021, we changed Since dosing the participants of the first cohort of our name from Emerald Bioscience, Inc. to Skye Bioscience, Inc. Our common stock is quoted on the OTCQB under the symbol "SKYE". Previously, it traded under the symbol "EMBI".
In August 2019, we formed a new subsidiaryPhase 1 clinical study of our lead drug, SBI-100 Ophthalmic Emulsion, in Australia SKYE Bioscience Australia, in orderDecember 2022, in June 2023 we completed the planned enrollment of this study. In this randomized, double-masked, placebo-controlled study there were single and multiple ascending dose arms assessing different concentrations of SBI-100 OE as well as placebo. We subsequently reported that SBI-100 OE met the primary endpoint and was safe and well-tolerated, with no serious adverse events. Related to qualifyour planned Phase 2a clinical study, we received the United States FDA's authorization of our Investigational New Drug application for SBI-100 OE for the Australian government’s research and development tax credit for research and development dollars spent in Australia. The primary purposetreatment of SKYE Bioscience Australia isglaucoma, which enables us to conduct clinical trials forin the United States. Additionally, we have Investigational Review Board study level approval and site approvals of our drug product candidates. Weclinical trial protocol, we have retained Novotech as ourLexitas Pharma Services, a specialized ophthalmic-focused contract research organization, "CRO"to support the clinical trial and NextPharma Oy, our contract manufacturer in Finland, has completed production of placebo and SBI-100 OE and filling of the clinical trial materials into single-use vials. We have received approval from the Research Advisory Panel of California which is required to utilize SBI-100 OE at study sites in California for the Phase 2a clinical study. We are waiting for our clinical trial sites to receive U.S. DEA permits to handle SBI-100 OE and we are completing other final preparatory steps for the Phase 2a clinical trial. We expect to commence our Phase 1 trial2a site initiation process in the third quarter of 2023 and first patient dosing early in the fourth quarter of 2022.
On May 11, 2022, we entered into an Arrangement Agreement (the “Arrangement Agreement”) with Emerald Health Therapeutics, Inc., a corporation existing under the laws of the Province of British Columbia, Canada (“EHT”), pursuant to which we will acquire all of the issued and outstanding common shares of EHT on a basis of 1.95 shares of our common stock per outstanding share of EHT common stock (the “Acquisition”). EHT is currently undergoing a realization process to wind down all prior operations and liquidate substantially all of its remaining assets. We expect this strategic opportunity to be a pivotal financing event for our business allowing us to extend our cash runway into at least the second quarter of 2023 and obtain meaningful clinical data. In addition, EHT has a lab facility which we are currently evaluating to determine whether it is practical to bring certain aspects of our research and development activities in house.2023.
Our Product Candidates and Significant Contracts
Refer to our more recent Form 10-K filed with the Securities Exchange Commission for information regarding our product candidates and significant contracts.
UM 5050
General Trends and UM 8930 License AgreementsOutlook
As the first and only company in the market today to complete Phase 1 clinical trials targeting the endocannabinoid receptor ("CB1") receptor to reduce intraocular pressure (“IOP”) in glaucoma, with positive safety reviews through all six cohorts of Phase 1, Skye is leading the competition in this class of medicine. While Skye continues to develop SBI-100 OE to demonstrate that this new MOA is safe and effectively lowers IOP, we expect growing excitement and receptivity towards future partnering outreach, and eventual commercialization efforts given successful Phase 2 and 3 clinical trials and FDA approval.
We hold license agreementsThe glaucoma market is projected to grow at a 6.5% CAGR from 2021 to 2028, reaching an estimated value of $10.6 billion. Key drivers include the aging global population, increased disease awareness, and advancements in diagnostic techniques and therapeutics. Collectively, there has been relatively modest development of novel therapeutics to treat glaucoma with Universitya trend towards generics and fixed combinations with agents already in the market. The addition of Mississippi ("UM") for UM 5050 and UM 8930 for "all fieldsa new class of use" (collectively, the “License Agreements”). Pursuantglaucoma therapeutics to the License Agreements, UM granted us an exclusive license including, withcurrent market landscape would provide another treatment option for physicians. The glaucoma arena continues to provide opportunity for new therapeutics given that existing drugs that can be very effective in lowering IOP cannot always sustain this efficacy over long periods of time. Patient tolerance to a particular drug’s mechanism of action often results in declining impacts on IOP. The same classes of drugs have been the prior written consentprimary prescribed medicines for decades and development of UM, the right to sublicense the intellectual property related to UM 5050 and UM 8930 for all fieldsdrugs using new mechanisms of use. All fields of use means no restrictions on use of the underlying inventions, including developing UM 5050 and UM 8930 to treat any disease through any form of delivery under the License Agreements.action ("MOA") is very limited.
The exclusive license for our lead compound,Skye’s SBI-100 Ophthalmic Emulsion ("SBI-100 OE"),targets the CB1 receptor. The high expression of CB1 receptor in the eye makes it a cannabinoid receptor type 1 ("CBR1") agonist,strong target for a therapeutic medicine focused on reducing IOP, which is a key related factor in glaucoma, and it represents a clearly distinct MOA compared to those used by approved glaucoma drugs and the majority of drugs under UM 5050 is expected to allow us to explore related uses for the active moiety of SBI-100 OE. Independent in vitro and in vivo studies have demonstrated the potential use of SBI-100 OE in a variety of potential indications based on the ability of CBR1 agonists to act as an anti-inflammatory, anti-fibrotic and/or inhibitor of neovascularization. The Company has generated data related to these effects using an ex vivo human tissue model of the eye. SBI-100 OE is designed to enhance the pharmacokinetics and pharmacodynamics of the active part of the molecule once introduced into the body through various routes of administration being considered by the development team.
The exclusive license of SBI-200, a novel cannabinoid receptor ("CBR") modulator, under UM 8930, is expected to allow us to explore uses in ophthalmic disorders as well as expanded research and development into organ systems outside ofdevelopment.
ophthalmology. Potential therapeutic areas beyond ophthalmic indications for SBI-200 may include the central nervous system, gastrointestinal tract, endocrine/metabolic system, reproductive system, or as yet unrecognized opportunities. We have developed strategic collaborations to identify and advance these applications.
SBI-100 Ophthalmic Emulsion (SBI-100 OE)
Our lead compound, SBI-100 OE, is initially being developed to treat ocular disease. The first-in-human Phase 1 trial are expected to be conducted in healthy volunteers in Australia to evaluate the safety, tolerability, pharmacokinetics and pharmacodynamics of SBI-100 OE. We are eligible under the AusIndustry research and development tax incentive program to obtain a cash incentive from the Australian Taxation Office. The tax incentive is available to us based on specific criteria with which we must comply and is based on our eligible research and development spend in Australia. The Company may be eligible for either a 43.5% refundable tax offset if it has aggregate turnover of less than $20 million per annum or a 38.5% non-refundable tax offset of eligible research and development expenditure up to $100 million if it has annual turnover of $20 million or more per annum.
We are focused on clinical enabling activities, notably, formulation and manufacturing of drug product supply for our first-in-human Phase 1 clinical trial, and completing validation of a pharmacokinetic assay for human samples to support our clinical studies. The manufacturing of SBI-100 OE is conducted in the United States. Formulation of the eye drop for testing is also performed in the United States but we rely on excipients that can be sourced from countries outside the United States, such as China. Due to the continuing effects of the COVID-19 pandemic, there could possibly be a negative impact on our ability to source materials that are part of the eye drop formulation, as well as negative impacts to our volunteer and/or patient recruitment in Australia for clinical studies.
Subsequent to the initiation of the Phase 1 study, we intend to file an investigational new drug ("IND") application with the United States Food and Drug Administration ("FDA") to study SBI-100 OE in a Phase 2 randomized, controlled, double-masked clinical trial in patients with glaucoma or ocular hypertension to obtain additional data to determine whether the topical delivery of SBI-100 OE is safe and well-tolerated, and whether intraocular pressure is markedly different between patients treated with SBI-100 OE and the placebo. Design of the Phase 2 clinical trial will be dependent upon the advice of our clinical advisory board, the FDA and other regulatory bodies.
SBI-200
We have initiated research activities to explore the utility of SBI-200. Early studies of SBI-200 demonstrated analgesic, anti-inflammation, anti-fibrotic and anti-seizure properties, including the potential treatment and management of several eye diseases, such as uveitis, dry eye syndrome, macular degeneration and diabetic retinopathy. Data we presented at the American Association of Pharmaceutical Scientists ("AAPS") meeting held in November 2017 revealed that an early ocular formulation of SBI-200 was able to penetrate multiple compartments of the eye, including reaching the retina and the optic nerve. Further testing will be conducted to further evaluate the possible utility of this compound as a therapeutic agent and we continue to advance our research studies related to SBI-200 to explore different therapeutic applications.
General Trends and Outlook
COVID-19 related
The evolving COVID-19 pandemic has prompted governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of business, quarantines, and shelter-in-place orders. The COVID-19 pandemic has significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have affected, and could in the future, materially impact the Company's business, results of operations, financial condition and stock price.
As we approach the start of our Phase 1 clinical study in Australia, the ultimate impact on us is unknown. However, we expect that our contract research organizations ("CROs") could experience setbacks during clinical trials from reduced capacity for safety monitoring due to on-site social distancing, reductions in the participant pool or staffing due to vaccination requirements or patients testing positive for COVID-19 prior to enrollment or dosing in the study. To mitigate operational risk our CRO has a COVID Emergency Management Committee in place to assess the various health and government recommendations, advice, potential risks, and impacts so that proactive measures may be taken, as needed, such as remote patient monitoring.
The majority of our workforce continues to be and was remote prior to the COVID-19 pandemic, and therefore our employees have seen little disruption as a result of the COVID-19 pandemic. However, employee safety and well-being is of paramount importance to us in any year and continues to be of particular focus in 2022 in light of the continuing and evolving COVID-19
pandemic. In response to the pandemic, we have supported our employees and government efforts to curb the COVID-19 pandemic through safety and communication efforts and investments, which include:
•Aligning onsite policies to local guidelines and regulation;
•Continuing to provide and promote flexibility for onsite employees to reduce density at our facility;
The full extent of the future impact of the COVID-19 pandemic on the Company's operational and financial performance is currently uncertain and will depend on many factors outside of our control, including, without limitation, the timing, extent, trajectory, and the duration of the pandemic; the availability, distribution, acceptance and effectiveness of vaccines, particularly against new variants; the imposition of protecting public safety measures, and the impact of the pandemic on any local operations across the United States, European Union, and Australia, where we have operations and conduct laboratory research and clinical studies.
During the second quarter of 2022, we were indirectly impacted by a cyberattack on our Phase 1 clinical supply contract manufacturer. This disruption delayed our production timeline and the anticipated initiation of enrollment in our Phase 1 clinical studies for SBI-100 Ophthalmic Emulsion ("SBI-100 OE") to the fourth quarter of 2022. The overall potential delay in our drug product research and development from these types of incidents is unknown, but our operations and financial condition will likely continue to suffer in the event of continued business interruptions, supply chain issues, delayed clinical trials, production or a lack of laboratory resources due to the pandemic and other global conditions. It is possible that we may encounter other similar issues relating to the current situation that will need to be managed in the future. The factors to take into account in going concern judgements and financial projections include travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of service providers and the general economy.
Financial Overview
We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue development activities to support our product candidates through clinical trials. As a result, we expect to continue to incur operating losses and negative cash flows until our product candidates gain market acceptance and generate significant revenues.
We have incurred operating losses and negative cash flows from operations since inception and as
As of June 30, 2022,2023, we had a working capital deficit of $462,942$7,923,867 and an accumulated deficit of $53,718,840.$75,016,785. As of June 30, 2022,2023, we had unrestricted cash in the amount of $2,929,895.$553,443. For the three and six months ended June 30, 20222023 and 2021,2022, we incurred losses from operations of $3,218,360$5,943,155 and $1,829,674, and 6,106,382 and 3,566,936,$6,106,382, respectively. For the three and six months ended June 30, 20222023 and 2021,2022, we incurred net losses of $3,111,500 and $3,419,278, and $2,024,027,$8,279,020 and $6,462,677, and $4,184,544, respectively. We expect to continue to incur significant losses through 20222023 and expectsexpect to incur significant losses and negative cash flows from operations in the future.
We have a near-term need for substantial additional funds in order to continue our operations, and it is uncertain whether we will be able to obtain the funding we need.
See “Liquidity and Capital Resources” in this MD&A for further information.
Critical Accounting Policies and Estimates
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgements, including those related to accrued expenses, the percentage of completion as it relates to our clinical accruals, financing operations, contingencies, the fair value of assets acquired in the acquisition, and litigation. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our condensed consolidated financial statements include estimates and judgements as to the appropriate carrying valuesvalue of our equity instruments, derivative liability, debt with embedded features, clinical accrualscertain assets and the valuation of our stock based compensation awards,liabilities which are not readily apparent from other sources. We considerbelieve that certain accounting policies related to fair value measurements, convertible instruments, warrants issued in connection with financings, stock-based compensation expense, loss per common share, commitments and earnings per sharecontingencies, asset acquisition, and assets held for sale to be critical accounting policies that require the use of significant judgements and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions.
Management assessed the critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 and included a new "Asset Acquisition" policy note and made updates to its "Stock-based Compensation" policy note which are critical to its accounting policies and estimates during the six months ended June 30, 2022 (Note 2).
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on recently issued accounting pronouncements and recently adopted accounting pronouncements. While we expect certain recently adopted accounting pronouncements to impact our estimates in future periods, the impact upon adoption was not significant to our current estimates and operations.
Results of Operations
Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our clinical trials, our research and development efforts, variations in the level of expenditures related to investor relations and seeking new sources of capital, debt service obligations during any given period, and the uncertainty as to the extent and magnitude of the impactresidual global impacts from the COVID-19 pandemic.pandemic such as supply chain disruptions and inflation. Results of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.
ThreeFor the three months ended June 30, 20222023 and 2021
2022
Research and Development Expenses
Research and development expenses included the following:
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| • | employee-related expenses, which include salaries, benefits and stock-based compensation; |
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| • | payments to third party contract research organizations and investigative sites; and |
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| • | payments to third party manufacturing organizations and consultants. |
We expect to incur future research and development expenditures to support our preclinical and clinical studies. Preclinical activities include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess safety and efficacy. Our application to administerClinical studies include our lead drug candidate, SBI-100 OE,Phase 1 study, in human subjects has been submittedAustralia and approval was obtained by Belberry Limited, an Australian Human Research Ethics Committee (HREC) duringour Phase 2 study which the quarter ended June 30, 2022. We have received authorization from the Australian Therapeutics Goods Administrationsite initiation process is expected to commence clinical trialsin the third quarter of 2023 and are awaiting the manufacture and delivery of our drug to our CROfirst patient dosing early in Australia to do so. We expect to initiate enrollment in our first-in-human study during the fourth quarter of 2022.
2023.
Below is a summary of our research and development expenses during the three months ended June 30, 20222023 and 2021:2022:
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| | Three Months Ended June 30, |
| | 2022 | | 2021 | | $ Change 2022 vs. 2021 | | % Change 2022 vs. 2021 |
Research and development expenses | | $ | 1,427,154 | | | $ | 880,672 | | | $ | 546,482 | | | 62 | % |
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| | Three Months Ended June 30, |
| | 2023 | | 2022 | | $ Change 2023 vs. 2022 | | % Change 2023 vs. 2022 |
Research and development expenses | | $ | 1,788,434 | | | $ | 1,427,154 | | | $ | 361,280 | | | 25 | % |
Research and development expenses for the three months ended June 30, 20222023 increased by $546,482$361,280 as compared to the three months ended June 30, 2021.2022. The increaseincreases in research and development expenses waswere primarily due to anincreases of $361,523 in clinical contract costs and $52,275 in salaries related to higher headcount and the onboarding of our Chief Scientific Officer in December 2022. The increase in contract researchclinical costs was due to completion of API manufacturing, toxicity, and development activities, including amounts paid tovalidation testing and the enrollment of the final cohort in our contract research organization,Phase 1 clinical trial. These increases were offset by decreases of approximately $237,000, increases$40,120 and $27,404 in consulting and lab supplies, and materials of $28,000 and an increase in compensation cost of approximately $240,000 due to bonus expense and additional headcount from the addition of regulatory and development personnel.
respectively.
General and Administrative Expenses
Below is a summary ofTotal general and administrative expenses for the three months ended June 30, 2023 and 2022, and 2021:were as follows:
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| | Three Months Ended June 30, |
| | 2022 | | 2021 | | $ Change 2022 vs. 2021 | | % Change 2022 vs. 2021 |
General and administrative expenses | | $ | 1,791,206 | | | $ | 949,002 | | | $ | 842,204 | | | 89 | % |
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| | Three Months Ended June 30, |
| | 2023 | | 2022 | | $ Change 2023 vs. 2022 | | % Change 2023 vs. 2022 |
General and administrative expenses | | $ | 1,206,405 | | | $ | 1,791,206 | | | $ | (584,801) | | | (33) | % |
General and administrative expenses for the three months ended June 30, 2022 increased2023 decreased by $842,204$584,801 as compared to the three months ended June 30, 2021.2022. The increasedecrease in general and administrative expenses was primarily due to an increasea decrease of $177,642 in employee wagespayroll costs driven by a decrease in severance expense and bonuses, a decrease of $53,863 in board fees, a decrease of approximately $439,000$281,281 in professional fees due to higher legal fees in the prior period related to the hiringCunning Lawsuit and Acquisition and decreases in general business expenses of our chief financial officer, Acquisition related bonus payments$67,205 and the addition of two board members, an increase in professionalinvestor relations fees of approximately $425,000 related primarily to$20,537. The remaining decreases comprised of facility costs, associated with general legal fees, an increase in software expenseinsurance and travel.
Other Expense (Income)
Below is a summary ofTotal other expense (income) duringfor the three months ended June 30, 2023 and 2022, was as follows:
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| | Three Months Ended June 30, |
| | 2023 | | 2022 | | $ Change 2023 vs. 2022 | | % Change 2023 vs. 2022 |
Change in fair value of derivative liability | | $ | — | | | $ | (9,523) | | | $ | 9,523 | | | (100) | % |
Interest expense | | 186,429 | | | 205,300 | | | (18,871) | | | (9) | |
Interest income | | (8,598) | | | — | | | (8,598) | | | — | |
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Wind-down costs | | 87,072 | | | — | | | 87,072 | | | — | |
Total other expense | | $ | 264,903 | | | $ | 195,777 | | | $ | 69,126 | | | 35 | % |
For the three months ended June 30, 2023, we had net other expense of $264,903 related primarily to interest expense for the Cunning Litigation and 2021:
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| | Three Months Ended June 30, |
| | 2022 | | 2021 | | $ Change 2022 vs. 2021 | | % Change 2022 vs. 2021 |
Change in fair value of derivative liabilities | | $ | (9,523) | | | $ | 120,648 | | | $ | (130,171) | | | (108) | % |
Interest expense | | 205,300 | | | 190,058 | | | 15,242 | | | 8 | % |
Gain on forgiveness of PPP loan | | — | | | (117,953) | | | 117,953 | | | 100 | % |
Total other expense | | $ | 195,777 | | | $ | 192,753 | | | $ | 3,024 | | | 2 | % |
to costs incurred in the wind-down of EHT. The conversion of the Amended Credit Agreement in February of 2023 also resulted in lower interest expense when comparing the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The derivative liability expired during the first quarter of 2023.
For the three months ended June 30, 2022, we had net other expense of $195,777 related to interest expense and athe primary reason for the gain from the change in fair value of our warrant liability. When comparing the three months ended June 30, 2022 and 2021, total other expense remained relatively constant. However, during the three months ended June 30, 2021, we recognized a gain from the forgiveness of our PPP loan which was offset by a loss from the increase in value of our derivative liabilities. Gains and losses fromon the change in fair value of our derivative liabilities arewas due primarily to fluctuationsa decrease in our stock price and our volatility, during each period. The slight increase in interest expense was due to an increase in the amortization of the debt discount on our Amended Credit Agreement for the period ended June 30, 2022, as compared to the period ended June 30, 2021.2022.
SixFor the six months ended June 30, 20222023 and 20212022
Research and DevelopmentExpenses
Research and development expenses included the following:
| | | | | | | | |
| • | employee-related expenses, which include salaries, benefits and stock-based compensation; |
| | | | | | | | |
| • | payments to third party contract research organizations and investigative sites; and |
| | | | | | | | |
| • | payments to third party manufacturing organizations and consultants. |
We expect to incur future research and development expenditures to support our preclinical and clinical studies. Preclinical activities include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess safety and efficacy. Clinical studies include our Phase 1 study, in Australia and and our Phase 2 study which the site initiation process is expected to commence in the third quarter of 2023 and first patient dosing early in the fourth quarter of 2023.
Below is a summary of our research and development expenses during the six months ended June 30, 20222023 and 2021:2022:
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| | Six Months Ended June 30, |
| | 2022 | | 2021 | | $ Change 2022 vs. 2021 | | % Change 2022 vs. 2021 |
Research and development expenses | | $ | 2,692,807 | | | $ | 1,490,328 | | | $ | 1,202,479 | | | 81 | % |
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| | Six Months Ended June 30, |
| | 2023 | | 2022 | | $ Change 2023 vs. 2022 | | % Change 2023 vs. 2022 |
Research and development expenses | | $ | 2,973,314 | | | $ | 2,692,807 | | | $ | 280,507 | | | 10 | % |
Research and development expenses for the six months ended June 30, 20222023 increased by $1,202,479$280,507 as compared to the six months ended June 30, 2021.2022. The increase in research and development expenses was primarily due to an increaseincreases of $342,502 and $135,150 in clinical contract research and development activities, including amounts paidcosts due to our contract research organizationPhase 1 clinical trial and salaries related to higher headcount and the onboarding of approximately $479,000, an increaseour Chief Scientific Officer in December 2022, respectively. These increases were offset by a decrease of $189,729 in consulting fees due to cost cutting measures taken by the Company in the usefirst half of specialized consultants of approximately $170,413, increases in lab supplies and materials of
approximately $36,000 and an increase in compensation cost of approximately $476,000 due to bonus expense and additional headcount from the addition of regulatory and development personnel.
2023.
General and Administrative Expenses
Total general and administrative expenses for the six months ended June 30, 20222023 and 2021,2022, were as follows:
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| | Six Months Ended June 30, |
| | 2022 | | 2021 | | $ Change 2022 vs. 2021 | | % Change 2022 vs. 2021 |
General and administrative expenses | | $ | 3,413,575 | | | $ | 2,076,608 | | | $ | 1,336,967 | | | 64 | % |
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| | Six Months Ended June 30, |
| | 2023 | | 2022 | | $ Change 2023 vs. 2022 | | % Change 2023 vs. 2022 |
General and administrative expenses | | $ | 3,121,683 | | | $ | 3,413,575 | | | $ | (291,892) | | | (9) | % |
General and administrative expenses for the six months ended June 30, 2022 increased2023 decreased by $1,336,967$291,892 as compared to the six months ended June 30, 2021.2022. The increasedecrease in general and administrative expenses was primarily due to a decrease of $126,061 in payroll costs driven by a decrease in severance expense and bonuses, a decrease of $53,470 in board fees, and a decrease of $139,001 in professional fees due to higher legal fees in prior period related to the Cunning Lawsuit and Acquisition. The remaining decreases comprised of facility costs, insurance, marketing and travel. These decreases were offset by an increase in employee wages and boardinvestor relations fees of approximately $589,000 related to the hiring of our chief financial officer$20,334 and the addition of two board members, an increase in professional fees of approximately $815,000 related primarily to preliminary diligence costs associated with the EHT Acquisition which were expensed as incurred during the first quarter, increases inother general legal fees, an increase in software expense of approximately $58,000, and an increase in facilities and rent expense of approximately $61,000. The aggregate increase was offset by decreases of approximately $134,000 and $98,000 in investor relations expenses and consulting expenses, respectively.
business expenses.
Other Expense (Income)
Total other expense (income) for the six months ended June 30, 20222023 and 2021,2022, was as follows:
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| | Six Months Ended June 30, |
| | 2023 | | 2022 | | $ Change 2023 vs. 2022 | | % Change 2023 vs. 2022 |
Change in fair value of derivative liabilities | | $ | (3) | | | $ | (53,178) | | | $ | 53,175 | | | (100) | % |
Interest expense | | 204,828 | | | 404,332 | | | (199,504) | | | (49) | |
Interest income | | (33,112) | | | — | | | (33,112) | | | — | |
Loss from asset sale | | 307,086 | | | — | | | 307,086 | | | — | |
Debt conversion inducement expense | | 1,383,285 | | | — | | | 1,383,285 | | | — | |
Wind-down costs | | 470,181 | | | — | | | 470,181 | | | — | |
Total other expense | | $ | 2,332,265 | | | $ | 351,154 | | | $ | 1,981,111 | | | 564 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 | | $ Change 2022 vs. 2021 | | % Change 2022 vs. 2021 |
Change in fair value of derivative liabilities | | $ | (53,178) | | | $ | 358,998 | | | $ | (412,176) | | | (115) | % |
Interest expense | | 404,332 | | | 374,963 | | | 29,369 | | | 8 | % |
Gain on forgiveness of PPP loan | | — | | | (117,953) | | | 117,953 | | | 100 | % |
Total other expense | | $ | 351,154 | | | $ | 616,008 | | | $ | (264,854) | | | (43) | % |
For the six months ended June 30, 2023, we had net other expense of $2,332,265 related primarily to the debt conversion inducement expense from the reduction of the conversion price on our Amended Credit Agreement with Sciences which resulted in the conversion of the Amended Credit Agreement in February of 2023. The conversion also resulted in lower interest expense during the period which was also a result of a lower outstanding principal balance on the Amended Credit Agreement when comparing the six months ended June 30, 2023 and 2022, offset by interest expense related to the Cunning Litigation. In addition, we recognized losses related to the wind down of EHT of $470,181 and $307,086 from the divestiture of VDL, the wind-down costs consist primarily of professional fees. The derivative liability expired during the first quarter of 2023.
For the six months ended June 30, 2022, we had net other expense of $351,154 related to interest expense offset in part byand a gain from the change in fair value of derivative liabilities. The primary reason for the gain on the change in fair value of our derivative liabilities was due to thea decrease in our stock price and volatility, for the period ended June 30, 2022 as compared to the period ended June 30, 2021. The increase in interest expense was due to an in increase in the amortization of the debt discount on our Amended Credit Agreement for the period ended June 30, 2022, as compared to the period ended June 30, 2021.
For the six months ended June 30, 2021, we had net other expense of $616,008 related to interest expense and a loss from the change in fair value of derivative liabilities. The primary reason for the loss on the change in fair value of our derivative liabilities was due to a increase in our stock price and volatility, for the period ended June 30, 2021, Other expenses during the period were offset by the gain on debt forgiveness realized from the PPP Loan.
2022.
Liquidity, Going Concern and Capital Resources
Liquidity and Going Concern
We have incurred operating losses and negative cash flows from operations since our inception. inception and as of June 30, 2023, we had a working capital deficit of $7,923,867, an accumulated deficit of $75,016,785, and a stockholders’ deficit of $7,789,198. We had unrestricted cash in the amount of $553,443 as of June 30, 2023, as compared to $1,244,527 as of December 31, 2022. For the six months ended June 30, 2023 and 2022, the Company incurred losses from operations of $5,943,155 and $6,106,382, respectively. For the six months ended June 30, 2023 and 2022, the Company incurred net losses of $8,279,020 and $6,462,677, respectively.
We expect to continue to incur significant losses and negative cash flows from operations through 20222023 and into the foreseeable future. We anticipate that we will continue to incur net losses in order to advance and develop potential drug candidates in preclinical and clinical
development activities and support our corporate infrastructure, which includes the costs associated with being a public company and raising capital.company. Historically, we have funded our operations primarily through the issuance of equity securities, and borrowings from Sciences.a related party, and strategic transactions.
Our continued existence is dependent on our ability to raise additional funding immediately to cover operating expenses and to carry out our research and development activities. The commencement of our clinical studies in December 2022, have resulted in an increase in our research and development spending and cash used in operating activities. During the latter part of 2022 and insix months ended June 30, 2023, we implemented cost cutting measures to extend our cash runway while searching for additional financing. These measures have included, the deferral of payments to our employees, the cancellation of certain non-clinical studies, a hold on non-essential travel, a hiring freeze and the deferral of certain operational contracts. Based on our expected cash requirements, without obtaining near term funding, we will not have enough funds to continue clinical studies or operations.
We expect to fund our operations throughcollect the strategic Acquisitionremainder of EHT and subsequent liquidationthe value from the divestiture of EHT's assets. Management expects that this funding opportunity will finance the Company at leastassets through the second quarter of 2023 which will allow Skye to complete its Phase 1 trial2026. However, there are significant risks and commence Phase 2 trial. However, the Acquisition is expected to close no earlier than October 15, 2022. Therefore, in order to satisfy our cash flow requirements through the Acquisition date, we are exploring interim financing solutions to bridge our operational funding requirements during the pre-close period, are managinguncertainties around the timing of our vendorthese payments and have continuedultimate realization of these assets. In 2023, we initiated a search to consider other interim funding alternatives.find a buyer for AVI and explored additional financing options. However, we cannot provide any assurances that such additional funds will be available on reasonable terms, or at all. If we raise additional funds by issuing equity securities, dilution to existing stockholders would result.
Further, in January 2023, we were subject to an unfavorable outcome in a lawsuit with a former employee which resulted in the recognition of an estimated legal contingency of $6,205,310. We strongly believe that this case was incorrectly decided as to liability, the amount of compensatory damages, and the appropriateness and amount of punitive damages. We intend to vigorously challenge the verdict in the trial court and appeal and pursue reimbursement under our insurance policy. However, the outcome of the litigation and the amount recoverable under an insurance policy that was in place at the time of the claim, if any, is inherently uncertain. In addition, in connection with certain post-trial motions and an appeal, the court granted the Company's request for a stay of enforcement of the judgment pending post-trial motions and appeal conditioned on the Company posting a bond in the amount of $9,080,202 by August 10, 2023. For a further description of this litigation, see Note 12, "General Litigation and Disputes - Wendy Cunning vs. Skye Bioscience, Inc." to the accompanying Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Concurrent with the Cunning Lawsuit, we brought a lawsuit against our D&O carrier, Partner RE, challenging the previous denial and seeking damages and an order that Partner RE is obligated to reimburse us for the defense fees and costs incurred in the defense of the Cunning Lawsuit and requiring Partner RE to indemnify us for any settlement or judgment in the Cunning Lawsuit. On April 17, 2023, PartnerRe filed a motion to dismiss our complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). On June 20, 2023, the judge issued a final ruling in favor of us and denied Partner Re's motion to dismiss the lawsuit. In the ruling, the Court rejected Partner Re's primary basis for denying coverage. Based on this outcome, we are pursuing up to $5,000,000 in coverage less the deductible, to cover legal expenses incurred and the final verdict or settlement. For a further description of this litigation, see Note 12, "General Litigation and Disputes - Skye Bioscience, Inc. vs. Partner Re Ireland Insurance" to the accompanying Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
On October 5, 2018, we secured aFebruary 16, 2023, Sciences exercised all of its outstanding warrants and agreed to offset the remaining principal balance plus accrued interest outstanding under the Amended and Restated Multi-Draw Credit Agreement with Sciences, that provided us with a credit facility(the “Amended Credit Agreement”) by the aggregate exercise price of up to $20,000,000. On April 29, 2020, we entered into$282,905 before converting the first amendment to the Credit Agreement with Sciences, which amended and restated the Credit Agreement. On March 29, 2021, we entered the second amendment toremaining balance of the Amended Credit Agreement to defer interest payments untilin the earlieramount of maturity or prepayment of the principal balance. Effective September 15, 2021, the disbursement line under the credit facility was closed and the Amended Credit Agreement no longer serves as a potential source of liquidity to the Company. The outstanding principal advances of $2,464,500 under the Amended Credit Agreement bear interest at 7% per annum and mature on October 5, 2022.
$1,597,236. As of June 30, 2022, we had an accumulated deficit of $53,718,840, stockholders’ deficit of $301,822 and a working capital deficit of $462,942. We had unrestricted cash of $2,929,895 as of June 30, 2022, as compared2023, Sciences has no outstanding warrants or debt with the us.
Subsequent to $8,983,007 as of December 31, 2021. The decrease was attributable to operating cash burn during the six monthsperiod ended June 30, 2022, which2023, on July 24, 2023, we entered into a loan agreement in the principal amount of $250,000 with MFDI, LLC. The Bridge Loan was accelerated dueobtained in order to Acquisition relatedprovide bridge financing for the us to secure additional strategic financing, see Note 13. The bridge loan bears interest at a rate of 9.5% per annum and is payable in 30 days.
It is possible that we may encounter issues relating to supply chain inefficiencies, a lack of production or laboratory resources, global economic and political conditions, pandemics or cyberattacks that could cause business disruptions and clinical trial delays that affect our liquidity and financing requirements. The factors management takes into account when developing going concern judgements and financial projections may include the impact of travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of service providers and the general economy.
We do not believe that inflation has had a material impact on its operating results during the periods presented. However, inflation, led by supply chain constraints, federal stimulus funding, increases to household savings, and the sudden macroeconomic shift in activity levels arising from the loosening or removal of many government restrictions and the broader availability of COVID-19 vaccines, has had, and may continue to have, an impact on general and administrative costs such as professional fees, employee costs and increasestravel costs, and may in the future adversely affect the our researchoperating results. In addition, increased inflation has had, and development expenses asmay continue to have, an effect on interest rates. Increased interest rates may adversely affect the terms under which we approachcan obtain, any potential additional funding.
Notably, we rely on third party manufacturers to produce its product candidates. The manufacturing of SBI-100 OE is conducted in the United States and Europe. Formulation of the eye drop for testing is also performed in the United States but can rely on regulatory-accepted excipients that can be sourced from countries outside the United States. Since the COVID-19 pandemic, global supply chain disruptions have become more common and the Company may encounter future issues related to sourcing materials that are part of the eye drop formulation or manufacturing process.
Based on our Phase 1 clinical study. Without additionalexpected cash requirements, without obtaining immediate near term funding, management believes that we will not have enough funds to continue clinical studies or other operations.
Because we don't have enough funds to meet our obligations and continue our preclinical and clinical studies beyond one year after the date the Unaudited Condensed Consolidated Financial Statements are issued. These conditions indicate it is probable that there is substantial doubt as toissued, our ability to continue as a going concern, unless we are able to raise sufficient capital to continue our operations.
Our independent registered public accounting firm has issued a report on our audited consolidated financial statements as of and for the year ended December 31, 20212022, that included an explanatory paragraph referring to our recurring operating losses and expressing substantial doubt in our ability to continue as a going concern. Our Unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our Unaudited Condensed Consolidated Financial Statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
Cash Flows
The following is a summary of our cash flows for the periods indicated and has been derived from our Unaudited Condensed Consolidated Financial Statements which are included elsewhere in this Form 10-Q:
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Net cash used in operating activities | | $ | (5,815,960) | | | $ | (3,019,489) | |
Net cash used in investing activities | | (86,042) | | | (10,170) | |
Net cash (used in) provided by financing activities | | (151,109) | | | 5,746,583 | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | June 30, 2023 | | June 30, 2022 |
Net cash used in operating activities | | $ | (6,052,759) | | | $ | (5,815,959) | |
Net cash provided by (used in) investing activities | | 5,530,406 | | | (86,042) | |
Net cash used in financing activities | | (168,720) | | | (151,109) | |
Cash Flows from Operating Activities
The primary use of cash for our operating activities during the period was to fund research development activities for our preclinical and clinical product candidates and general and administrative activities. Our cash used in operating activities also reflected changes in our working capital, net of adjustments for non-cash charges, such as stock-based compensation, non-cash interest
VDL, debt conversion inducement expense related toand the amortizationforeign currency impact from the translation of our debt discounts on our related party Amended Credit Agreement, fair value adjustments related to our warrant liability and depreciation and amortization.
international subsidiaries financial statements.
Cash used in operating activities of $5,815,960$6,052,759 during the six months ended June 30, 2023, reflected a net loss of $8,279,020, partially offset by aggregate non-cash charges of $1,992,840 and included a $233,421 net change in our operating assets and liabilities.
Non-cash charges included $234,450 for stock-based compensation expense, $307,086 for a non-cash loss on the divestiture of VDL, a $1,383,285 for a non-cash debt conversion inducement expense, and $67,091 in depreciation and amortization of property and equipment. The net change in our operating assets and liabilities included a $133,125 increase in our accrued expenses and other current liabilities and a $135,087 decrease in our accounts payable, offset by a $281,177 increase in our prepaid expense and other current assets.
Cash used in operating activities of $5,815,959 during the six months ended June 30, 2022, reflected a net loss of $6,462,677, partially offset by aggregate non-cash charges of $598,130 and included a $48,587$48,588 net change in our operating assets and liabilities.
Non-cash charges included $281,722 for stock-based compensation expense, $314,925 for non-cash interest expense from the amortization of the debt discount on the multi-draw credit facility – related party, $54,661 in depreciation and amortization of property and equipment, and $53,178 for a $53,178 gain from the decreasechange in fair value of our warrant liability and $54,661 in depreciation and amortization.liability. The net change in our operating assets and liabilities included a $97,213 decrease in our prepaid expense and other current assets, a $71,085 increase in accounts payable and a $114,438 increase in our accrued expense and other current liabilities and a $71,085 increase in our accounts payable.
Cash used in operating activities of $3,019,489 during the six months ended June 30, 2021, reflected a net loss of $4,184,544, partially offset by aggregate non-cash charges of $789,053 and included a $376,002 net change in our operating assets and liabilities. Non-cash charges included $258,279 for stock-based compensation expense, $287,781 non-cash interest expense from the amortization of the debt discount on the multi-draw credit facility – related party, a $358,998 loss from the increase in fair value of our warrant liability and a $117,953 gain from the forgiveness of the PPP Loan. The net change in our operating assets and liabilities included a $72,427 increase in our prepaid expense and other current assets, and a $451,429 increase in our accrued expense and other current liabilities.
Cash Flows from Investing Activities
Our investing activities consist of our capital expenditures in relation to the purchase of property plant and equipment and costs incurredproceeds received in connection with the acquisitiondivestiture of EHT. VDL. During the six months ended June 30, 2023 the Company
purchased $1,860 in machinery office equipment. During the six months ended June 30, 2023, the Company received $5,532,266 in proceeds related to the divestiture of VDL.
During the six months ended June 30, 2022, our investing activities have consisted entirely of our capital expenditures in relation to the purchase of property and 2021, the Company purchased $5,212 and $10,170 in machinery office equipment, respectively. During the six months ended June 30, 2022, the Company made $80,830 in payments for acquisition transaction costs.
equipment.
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect proceeds from the sale of our securities and debt financings.loan repayments.
During the six months ended June 30, 2023, cash used in financing activities included a $168,720 repayment on the our insurance premium loan payable.
During the six months ended June 30, 2022, cash used in financing activities included $1,967 in proceeds received in connection with the exercise of pre-funded warrants and a $153,076 repayment on the our insurance premium loan payable.
During the six months ended June 30, 2021, cash provided by financing activities included $5,741,800 in proceeds received in connection with the exercise of warrants and $4,783 received from employee stock option exercises.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures. We maintain controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any control and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily is required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures.
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022.2023. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective at a the reasonable assurance level.
Changes in internal controls. Management determined there were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no otherFor a description of material developments with respect to previously reported legal proceedings, discussedsee Note 12, "General Litigation and Disputes" to the accompanying Unaudited Condensed Consolidated Financial Statements included in our Annualthis Quarterly Report on Form 10-K for the year ended December 31, 2021.10-Q.
Item 1A. Risk Factors.
Not required because we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
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2.1 | |
2.2 | |
2.3 | |
3.1 | |
3.2 | |
4.1*10.1* | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5* | |
10.6* | |
31.1* | |
31.2* | |
32.1* | |
32.2* | |
101 | The following materials from the Skye Biosciences, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2022,2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets (Unaudited), (ii) Condensed Consolidated Statements of Comprehensive LossOperations (Unaudited), (iii) Condensed Consolidated Statements of Cash Flows (Unaudited), (iv) Condensed Consolidated Statements of Stockholders’ EquityDeficit (Unaudited), and (v) related Notes to the Unaudited Condensed Consolidated Financial Statements. |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
________
(*)Filed herewith.
+ Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted exhibits or schedules upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Skye Bioscience, Inc., a Nevada corporation |
| | |
August 15, 20227, 2023 | By: | /s/ Punit Dhillon |
| | Punit Dhillon |
| Its: | Chief Executive Officer, Secretary, Chairman of the Board, and Director (Principal Executive Officer) |
| | |
August 15, 20227, 2023 | By: | /s/ Kaitlyn Arsenault |
| | Kaitlyn Arsenault |
| Its: | Chief Financial Officer (Principal Financial and Accounting Officer) |